U. S. SECURITIES AND EXCHANGE COMMISSION
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2008.
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission File Number: 001-16695
AMDL, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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33-0413161
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(State of Incorporation)
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(I.R.S. employer identification no.)
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2492 Walnut Avenue, Suite 100
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Tustin, California
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92780-7039
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code: (714) 505-4460
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.
þ
Yes
o
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):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
þ
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
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Yes
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No
The number of outstanding shares of the registrants common stock on May 12, 2008 was 15,731,516.
AMDL, INC.
INDEX TO FORM 10-Q
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PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMDL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31,
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December 31,
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2008
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2007
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(Unaudited)
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(Audited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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3,569,863
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$
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6,157,493
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Accounts receivable, net
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3,969,825
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2,954,902
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Inventories
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916,586
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921,135
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Prepaid consulting
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955,012
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872,688
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Related party receivable
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562,677
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Prepaid expenses and other current assets
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1,393,989
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1,248,637
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Total current assets
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11,367,952
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12,154,855
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Property and equipment, net
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11,923,196
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11,672,462
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Intangible assets, net
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5,650,676
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5,615,312
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Other assets
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3,825,653
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3,424,549
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Total assets
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$
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32,767,477
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$
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32,867,178
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable and accrued expenses
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$
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1,986,668
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$
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1,676,347
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Related party payable
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62,621
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Deferred revenue
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213,608
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246,758
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Notes payable
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3,936,044
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5,159,939
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Total current liabilities
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6,136,320
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7,145,665
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, $0.001 par value;
25,000,000 shares authorized; none
issued and outstanding
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Common stock, $0.001 par value;
100,000,000 shares authorized;
15,581,516 and 15,079,528 shares issued
at March 31, 2008 and December 31, 2007,
respectively; 15,481,516 and 14,979,528
shares outstanding at March 31, 2008 and
December 31, 2007, respectively
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15,482
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14,980
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Additional paid-in capital
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63,122,907
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61,525,001
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Accumulated other comprehensive income
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1,851,861
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1,068,429
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Accumulated deficit
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(38,359,093
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)
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(36,886,897
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)
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Total stockholders equity
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26,631,157
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25,721,513
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Total liabilities and stockholders equity
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$
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32,767,477
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$
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32,867,178
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See accompanying notes to unaudited condensed consolidated financial statements.
1
AMDL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
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Three Months Ended March 31,
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2008
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2007
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Net revenues
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$
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3,587,746
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$
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1,424,179
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Cost of sales
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1,816,730
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697,310
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Gross profit
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1,771,016
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726,869
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Operating expenses:
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Research and development
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8,695
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11,776
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Selling, general and administrative
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2,868,180
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1,995,635
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2,876,875
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2,007,411
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Loss from operations
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(1,105,859
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(1,280,542
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Other income (expense):
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Interest and other income (expense), net
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(62,625
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3,837
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Interest expense
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(103,056
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(90,857
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Total other income (expense), net
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(165,681
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(87,020
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Loss before provision for income taxes
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(1,271,540
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(1,367,562
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Provision for income taxes
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200,656
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17,844
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Net loss
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(1,472,196
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(1,385,406
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Other comprehensive loss:
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Foreign currency translation gain
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783,432
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16,603
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Comprehensive gain
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$
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(688,764
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$
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(1,368,803
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Basic and diluted loss per common share
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$
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(0.10
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$
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(0.14
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Weighted average common shares outstanding basic and diluted
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15,130,345
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10,095,697
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See accompanying notes to unaudited condensed consolidated financial statements.
2
AMDL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended March 31,
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2008
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2007
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Cash flows from operating activities:
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Net loss
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$
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(1,472,196
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$
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(1,385,406
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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349,754
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183,625
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Fair market value of options granted to employees and directors for
services
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105,542
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Fair market value of common stock, warrants and options expensed for
services
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527,425
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697,168
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Changes in operating assets and liabilities, net of effects of acquisition:
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Accounts receivable
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(881,183
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255,471
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Related party account with Jade Capital
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(614,301
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Inventories
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36,782
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102,515
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Prepaid consulting, expenses and other assets
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(96,798
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(923,806
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Accounts payable and accrued expenses
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274,716
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(64,097
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Customer deposits
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10,835
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Deferred revenue
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(41,807
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Net cash used in operating activities
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(1,812,066
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(1,123,695
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Cash flows from investing activities:
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Deposits for acquisition of plant assets
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(278,719
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Purchase of property and equipment
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(25,114
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(9,306
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Return of advance
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13,936
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Net cash used in investing activities
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(289,897
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(9,306
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Cash flows from financing activities:
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Payments on notes payable
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(1,393,595
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Proceeds from issuance of common stock, net of cash offering costs of $123,875
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876,129
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Proceeds from the exercise of warrants
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6,983
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Net cash used in financing activities
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(510,483
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Effect of exchange rates on cash and cash equivalents
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24,816
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16,603
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Net change in cash and cash equivalents
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(2,587,630
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(1,116,398
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Cash and cash equivalents, beginning of period
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6,157,493
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1,584,973
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Cash and cash equivalents, end of period
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$
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3,569,863
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$
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468,575
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Supplemental disclosure of cash flow information:
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Cash paid during the period for interest
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$
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102,000
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$
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90,719
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Cash paid during the period for taxes
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$
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74,000
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$
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800
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Supplemental disclosure of non-cash activities:
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Value of common stock recorded as prepaid consulting
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$
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505,500
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$
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1,076,100
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See accompanying notes to unaudited condensed consolidated financial statements
3
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
NOTE 1 MANAGEMENTS REPRESENTATION
The accompanying condensed consolidated balance sheet as of March 31, 2008, which has been
derived from audited financial statements, and the unaudited interim condensed consolidated
financial statements have been prepared by AMDL, Inc. (the Company) in accordance with accounting
principles generally accepted in the United States of America for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they
do not include all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statement presentation. In the
opinion of management, all adjustments (consisting primarily of normal recurring accruals)
considered necessary for a fair presentation have been included and the disclosures made are
adequate to make the information not misleading.
Operating results for the three months ended March 31, 2008 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2008. It is suggested that these
unaudited consolidated financial statements be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended December 31, 2007 included in the Companys Annual
Report on Form 10-K/A. The report of independent registered accounting firm on the consolidated financial statements
included in Form 10-K/A contains an explanatory paragraphs regarding the adoption of Statement of
Financial Accounting Standard No. 123(R),
Share-Based Payment
, and a qualification regarding the
Companys ability to continue as a going concern.
NOTE 2 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Basis of Presentation
We are a vertically integrated specialty pharmaceutical company. In combination with our
subsidiary Jade Pharmaceutical Inc. (JPI), the Company engages in the research, development,
manufacture, and marketing of diagnostic, pharmaceutical, nutritional supplement, and cosmetic
products currently in the Peoples Republic of China (China). AMDL currently employs
approximately 320 people of which 311 are located in China.
AMDL was founded in 1987 as a bio-tech research and development firm that had one product, its
proprietary cancer diagnostic test: AMDL-ELISA DR-70
®
(FDP). In 2001, AMDL acquired a proprietary
cancer vaccine Combination Immunogene therapy (CIT). CIT is a US patented technology (patent
issued May 25, 2004). In September 2006, AMDL acquired JPI in order to dramatically broaden AMDLs
business into a multi segmented China-centric pharmaceutical business.
Through JPI, we manufacture and distribute generic, homeopathic, over-the-counter
pharmaceutical products and supplements. JPI manufactures and distributes its products through two
wholly-owned Chinese subsidiaries, Yangbian Yiqiao Bio-Chemical Pharmacy Company Limited (YYB)
and Jiangxi Jiezhong Bio-Chemical Pharmacy Company Limited (JJB). JPI acquired the businesses
currently conducted by YYB and JJB in 2005 along with certain assets and liabilities of a
predecessor to JJB (JiangXi Shangrao KangDa Biochemical Pharmacy Co. Ltd). YYBs facilities are
located in Tuman City, Jilin Province, China and JJB is located in Shangrao, Jiangxi Province,
China. JPI currently manufactures and markets 48 products. Of these products, 24 are JJB branded
generic western drug formulations and there are 24 YYB branded Chinese traditional medicine and
nutritional products. JPI also researching and developing other pharmaceutical products which will
require the approval of the Peoples Republic of China State Federal Drug Agency (SFDA).
Both JJB and YYB are wholly-foreign owned enterprises (WFOEs). WFOEs are limited liability
companies established under Chinese Company Law that are exclusively owned by foreign investors.
WFOEs are used to, among other things: enable local China based entities to carry on business in
China, rather than operate in a representative capacity; acquire land use certificates to own and
operate facilities in China; employ persons in China; hold intellectual property rights; protect
intellectual property and proprietary technology; and issue invoices to their customers in Renminbi
and record revenues in Renminbi, but convert the profits into U.S. dollars for distribution to
their parent company outside China. There are also potential disadvantages of operating as a WFOE,
including, but not limited to, unlimited liability claims arising from the operations in China and
potentially less favorable treatment from governmental agencies than would be afforded to those
entities operating with a Chinese partner.
We also sell OEM products and test kits which are manufactured by others. Our products may be
used by hospital, clinical, research and forensic laboratories and doctors offices to obtain
precise and rapid identification of certain types of cancer and other diseases. Our proprietary
DR-70
®
test kit may be used to assist in the detection of at least 14 different types of
cancer, including: lung (small and non-small cell); stomach; breast; rectal; colon; and liver. As
DR-70
®
is a non-invasive blood test, there are no side effects to the administration of
our test. As with other cancer diagnostic products, false negative and false positive results
could pose a small risk to patient health if their physician is not vigilant in following up on the
DR-70
®
results with other modalities that are standard of care for these patients.
DR-70
®
is not yet available for sale in the United States (U.S.). Our
DR-70
®
test kit cannot be sold in the
U.S.
until we receive premarket approval
for the DR-70
®
from the
U.S.
Food and Drug Administration (USFDA)
.
As more fully discussed below, we have submitted a 510(k) application to the USFDA to obtain
premarket approval for the DR-70
®
as a Class II regulated device and such application is
currently under review by the USFDA.
The unaudited condensed consolidated financials include the results of the Company and its wholly owned subsidiaries.
Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will
continue as a going concern, which contemplates, among other things, the realization of assets and
satisfaction of liabilities in the normal course of business. The Company incurred net losses of
$1,472,196 and $1,385,406 during the three months ended March 31, 2008 and 2007 respectively, and
had an accumulated deficit of $38,359,093 at March 31, 2008. In addition, the Company used cash in
operations of $1,812,066 and $1,123,695 during the three months ended March 31, 2008 and 2007,
respectively. At May 12, 2008, the Company had cash on hand of approximately $2,004,000 and cash is
being depleted from operations at the rate of approximately $445,000 per month. The forgoing does not include non-operating extraordinary items. Assuming (i) the current level of
revenue from the sale of DR-70
®
kits does not increase in the near future, (ii) the
Company does not require new cancer samples to satisfy the United States Food and Drug
Administrations (USFDA) concerns on its pending 510(k) application, (iii) the Company does not
conduct any full scale clinical trials for DR-70
®
or its combination immunogene therapy
technology in the U.S. or China, (iv) JPI generates sufficient cash to meet or exceed its cash
requirements, and (v) no outstanding warrants are exercised, the amount of cash on hand is expected
to be sufficient to meet the Companys projected operating expenses through November 2008.
4
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
The Companys near and long-term operating strategies focus on (i) obtaining USFDA and Chinas
State Food and Drug Administration (SFDA) approval for DR-70
®
, (ii) seeking a large
pharmaceutical partner for our combination immunogene therapy technology, (iii) funding the growth
of JPIs existing products, and (iv) funding the research and development of new products. The
Companys only source of additional funds to meet continuing operating expenses, to fund additional
research and development, or to conduct clinical trials which may be required to receive USFDA
and/or SFDA approval after March 2008 is the sale of securities. Management recognizes that the
Company must generate additional capital resources to enable it to continue as a going concern.
Managements plans include seeking financing, alliances or other partnership agreements with
entities interested in the Companys technologies, or other business transactions that would
generate sufficient resources to assure continuation of the Companys operations and research and
development programs.
The Company is investigating various financing alternatives including loans, but there can be no assurance that
these financing transactions will close or, if closed what the amount or timing thereof will be.
In addition, on September 16, 2005, the American Stock Exchange (AMEX) sent the Company a warning
letter pursuant to Section 1009(a)(i) of the AMEX Company Guide stating that the Company was not in
compliance with the AMEX Continued Listing Standards. The Company remains non-compliant with the
Continued Listing Standards, but AMEX has not taken any definitive action to delist the Company.
Delisting from AMEX may impact the Companys ability to raise capital in the future. In June 2006,
the Company submitted a plan to become compliant with AMEXs continued listing standards, which
plan included the acquisition of JPI. The JPI acquisition closed on September 28, 2006. On
November 10, 2006, AMEX advised the Company that the plan period would remain open until the
Company has been able to demonstrate compliance with the continued listing standards for two
consecutive fiscal quarters. As of May 4, 2008, AMEX has not yet issued its final letter stating
that the Company is in compliance with the Continued Listing Standards.
These items, among others, raise substantial doubt about the Companys ability to continue as a
going concern. The consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or the amount and
classification of liabilities that may result from the outcome of this uncertainty.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts and transactions of AMDL,
Inc. and its wholly owned subsidiary, JPI. Intercompany transactions and balances have been
eliminated in consolidation.
Revenue Recognition
The Company generates revenues from wholesale sales of over-the-counter and prescription
pharmaceuticals, and the direct distribution of pharmaceutical products through retail outlets.
As such, the Company recognizes revenue when persuasive evidence of an arrangement exists, title
transfer has occurred, the price is fixed or readily determinable and collection is reasonably
assured. Product sales revenue is recognized upon passage of title to customers, typically upon
delivery of product. Any provision for discounts and estimated returns are accounted for in the
period the related sales are recorded. The Company records a provision for sales returns and
claims based upon historical experience. Actual returns and claims in any future period may differ
from the Companys estimates.
In accordance with Emerging Issues Task Force (EITF) Issue No. 06-3,
How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross Versus Net Presentation)
, JPIs revenues are reported net of value added taxes
(VAT) collected.
5
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
Wholesale Sales
Revenues from the wholesale sales of over-the counter and prescription pharmaceuticals are
recognized when title and risk of loss have passed to the buyer, provided the criteria in the
Security and Exchange Commissions (SEC) Staff Accounting Bulliten (SAB) No. 101
Revenue
Recognition in Financial Statements
, (as amended by SAB 104) are met. Buyers generally have
limited rights of return, and the Company provides for estimated returns at the time of sale based
on historical experience. Returns from customers historically have not been material. Actual
returns and claims in any future period may differ from the Companys estimates.
Direct Distribution
On June 14, 2007, JPI (through JJB) entered into an agreement and letter of intent with Shanghai
XiangEn Food Company Co. Ltd. (Shanghai XiangEn) to begin direct distribution of pharmaceutical
products through retail stores. The retail stores are operated by independent third parties who
sell JJBs products at retail to consumers. Originally, Shanghai XiangEn would recruit
sub-operators for the retail stores in exchange for a commission. Under the terms of the
original agreement with Shanghai XiangEn, JJB was required to pay commission to Shanghai XiangEn
based on two percent (2%) of the gross sales of the products sold at retail by the sub-operators of
the retail stores. Pursuant to an amended agreement, this commission has been waived in the
future. The statements of operations for the three months ended March 31, 2008 and 2007 contain no
commission expense related to the retail store operations.
In order to facilitate the development of the retail stores, JJB made advances of $582,154 to Shanghai XiangEn. Funds advanced were intended for general
working capital purposes, including leasehold improvements and equipment needed to establish the
Retail Stores.
During 2007, JJB received a one-time, non-refundable up front fee from each of eight sub-operators
of the retail stores in the aggregate amount of $314,762, which will be recognized over the two
year contract period with the sub-operators. The Company deferred recognition of these fees until
the retail stores opened. JJB is amortizing the up-front fees over the two year contract period.
For the three months ended March 31, 2008 and 2007, the Company recorded approximately $40,000 and
$0 of the up-front fees received as revenues.
JJB consigns inventories to the operators of the retail stores for sale to consumers. As a result,
the sub-operators do not take ownership of the inventories at their stores until the products are
sold to the consumer. Revenues from the sale of JJBs products at the retail store level is
recognized by the Company at the time products are sold by the retail stores. Through March 31,
2008, the retail stores had not generated any sales of JJBs products, accordingly, no revenues
were recognized in the accompanying consolidated statements of operations.
Accounting for Shipping and Handling Revenue, Fees and Costs
The Company classifies amounts billed for shipping and handling as revenue in accordance with EITF
Issue No. 00-10,
Accounting for Shipping and Handling Fees and Costs.
Shipping and handling fees
and costs are included in cost of sales.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
,
the Company evaluates the carrying value of its long-lived assets for impairment whenever events or
changes in circumstances indicate that such carrying values may not be recoverable. The Company
uses its best judgment based on the current facts and circumstances relating to its business when
determining whether any significant impairment factors exist. The
6
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
Company considers the following factors or conditions, among others, that could indicate the need
for an impairment review:
|
|
|
significant under performance relative to expected historical or projected future
operating results;
|
|
|
|
|
market projections for cancer research technology;
|
|
|
|
|
its ability to obtain patents, including continuation patents, on technology;
|
|
|
|
|
significant changes in its strategic business objectives and utilization of the assets;
|
|
|
|
|
significant negative industry or economic trends, including legal factors;
|
|
|
|
|
potential for strategic partnerships for the development of its patented technology;
|
|
|
|
|
changing or implementation of rules regarding manufacture or sale of pharmaceuticals in
China; and
|
|
|
|
|
ability to maintain Good Manufacturing Process (GMP) certifications.
|
If the Company determines that the carrying values of long-lived assets may not be recoverable
based upon the existence of one or more of the above indicators of impairment, the Companys
management performs an undiscounted cash flow analysis to determine if impairment exists. If
impairment exists, the Company measures the impairment based on the difference between the assets
carrying amount and its fair value, and the impairment is charged to operations in the period in
which the long-lived asset impairment is determined by management. Based on its analysis, the
Company believes that no indicators of impairment of the carrying value of its long-lived assets
existed at March 31, 2008. There can be no assurance, however, that market conditions will not
change or demand for the Companys products will continue or allow the Company to realize the value
of its long-lived assets and prevent future impairment.
Risks and Uncertainties
Manufacturing and Distribution Operations in China
JJB and YYB operate as wholly owned foreign enterprises (WFOE) in the PRC. Risks associated with
operating as a WFOE include unlimited liability for claims arising from operations in China and
potentially less favorable treatment from governmental agencies in China than JJB and YYB would
receive if JJB and YYB operated through a joint venture with a Chinese partner.
JJB and YYB are subject to the Pharmaceutical Administrative Law, which governs the licensing,
manufacture, marketing and distribution of pharmaceutical products in China and sets penalty
provisions for violations of provisions of the Pharmaceutical Administrative Law. The
Pharmaceutical Administrative Law requires periodic certification of the Companys manufacturing
operations in accordance with Good Manufacturing Process regulations. Compliance with the
certification process or with changes in law may require the Company to incur additional
expenditures which could have a material impact on the Companys consolidated financial position,
results of operations and cash flows.
The value of the RMB fluctuates and is subject to changes in Chinas political and economic
conditions. Historically, the Chinese government has benchmarked the RMB exchange ratio against the
United States dollar, thereby mitigating the associated foreign currency exchange rate fluctuation
risk; however, no assurances can be given that the risks related to currency deviations of the RMB
will not increase in the future. Additionally, the RMB is not freely convertible into foreign
currency and all foreign exchange transactions must take place through authorized institutions.
As JPI is a British Virgin Island Company, it does not have a license to operate in China and is
therefore unable to open a RMB bank account. Accordingly, JPI entered into an agreement with
Shenzhen Jiekang Technologies Ltd (Jiekang) to hold funds as a trustee for JPI even though no
formal trust agreement exists. This type of transaction is common in China and is
7
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
adopted by many overseas companies without an operations license. The balance of the amount at
March 31, 2008 and December 31, 2007 is $427,564 and $498,726, which is included in prepaid expenses and other current
assets in the accompanying unaudited condensed consolidated balance sheet at March 31, 2008 and December 31, 2007, respectively. The Company is unsecured in this
arrangement and accordingly may not be able to recover this amount if Jiekang becomes insolvent or
otherwise unable to pay back the amount due.
As discussed above, the Company has advanced $582,154 for the development of the retail stores to
Shanghai XiangEn in the form of an unsecured advances. The Company may not be able to
recover the amounts advanced if the retail stores are not successfully developed.
Regulatory Environment
The Companys proprietary test kit is deemed a medical device or biologic, and as such is governed
by the Federal Food and Drug and Cosmetics Act and by the regulations of state agencies and various
foreign government agencies. Currently, the Company is not permitted to sell DR-70
®
in
the United States, although the Company is in the process of seeking regulatory approval. The
Company has received regulatory approval from various foreign governments to sell its products and
is in the process of obtaining regulatory approval in other foreign markets. There can be no
assurance that the Company will maintain the regulatory approvals required to market its products
or that they will not be withdrawn.
Prior to May 2002, the Companys focus was on obtaining foreign distributors for its
DR-70
®
kit. In May 2002, the Company decided to begin the USFDA process under Section
510(k) of the Food, Drug and Cosmetic Act for approval of its intent to market DR-70
®
as
an aid in monitoring patients with colorectal cancer. The Company conducted clinical trials
comparing its DR-70
®
to the currently accepted assay, CEA (carcinoembryonic antigen),
and it submitted the results to the USFDA in September 2003. In January 2004, the USFDA responded
to the Companys submission. The USFDA identified deficiencies in the Companys application and
advised its consultant, Diagnostic Oncology CRO, Inc. (DOCRO) that based upon the data submitted,
the USFDA determined that the DR-70
®
kit was not substantially equivalent to any other
device, which has gone through the 510(k) approval process. The USFDA further advised that if the
Company had data which it believes shows that the DR-70
®
kit has substantial
equivalence, it could submit such additional information for the USFDAs consideration. In January
2005, DOCRO supplied additional data and submitted a new application to the USFDA proposing that
DR-70
®
be used in tandem with CEA in monitoring colorectal cancer patients. In June
2005, the USFDA issued a non-substantially equivalent letter and pointed out several areas of
concern regarding the new application for use of DR-70
®
as an adjunctive test with CEA.
Representatives of the Company met with the USFDA to go over their concerns. The Company is
revising its strategy regarding USFDA approval of DR-70
®
and the Company is reviewing
additional patient data which supports substantial equivalence to CEA.
On January 25, 2007, we met with the USFDA to support our Pre-IDE document that included a new
introduction, literature review, our proposed regulatory strategy and detailed characterization
studies of the capture antibody, detection antibody, antigen measured in colorectal serum and other
information. On February 28, 2007, the USFDA sent a Pre-IDE review letter in response to our
Pre-IDE Application and the Pre-IDE meeting in January 2007. In the USFDAs Pre-IDE review letter,
they listed 37 areas of concern. On May 17, 2007, we responded to each of USFDAs areas of
concern. On September 13, 2007, USFDA sent a response letter to our May 2007 response letter in
which they listed four major areas of concern. On October 5, 2007, we submitted our third 510(k)
application in support of the DR-70
®
immunoassay with the following intended
use claim: Testing using the AMDL-ELISA DR-70
®
(FDP) is to be used as an aid
in monitoring the progression of patients who have been previously diagnosed with colorectal
cancer. Results of
DR-70
®
FDP testing should be used in conjunction with other
clinical modalities that are standard of care for monitoring disease progression in these patients. On November 13, 2007, we received a letter of deficiency noting four areas of concern
in our application and our application was put on hold pending the USFDAs receipt of our responses
to its concerns. We were granted a 180-day extension to May 12, 2008 to respond in full to the
USFDAs concerns. We responded to the USFDAs concerns by that deadline. We cannot
predict the length of time it will take for the USFDA to review this responsive documentation or
whether premarket approval will ultimately be obtained. Accordingly, we are subject to the risk of
failure to maintain our existing regulatory approvals, and in obtaining the USFDA regulatory
approval of DR-70
®
, as well as the uncertainty and delay until receipt of such
8
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
approval, if obtained. Therefore, we are subject to substantial business risks and uncertainties
inherent therein, including the potential of business failure.
Previously, JPI submitted an application to the SFDA for approval to market the DR-70
®
test kit in
China. The SFDA has begun the approval process with the DR-70
®
test kit undergoing
standard product review by the Beijing Institute of Medical Device Quality Supervision and
Inspection Center.
In June 2007, the Chinese approval process fundamentally changed. Under the new SFDA guidelines,
the SFDA is unlikely to approve the marketing of DR-70
®
without one of the following: approval by
the USFDA, sufficient clinical trials in China, or product approval from a country where DR-70
®
is
registered and approved for marketing and export. JPI intends to proceed with all of these options
in an attempt to meet the new SFDA guidelines, but there can be no assurances that JPI will obtain
approval for DR-70
®
or what the timing thereof may be.
The Company is subject to the risk of failure in maintaining its existing regulatory approvals, in
obtaining other regulatory approval, as well as the delays until receipt of such approval, if
obtained. Therefore, the Company is subject to substantial business risks and uncertainties
inherent in such an entity, including the potential of business failure.
Basic and Diluted Loss Per Share
Basic loss per common share is computed based on the weighted-average number of shares outstanding
for the period. Diluted loss per share is computed by dividing net loss by the weighted-average
shares outstanding assuming all dilutive potential common shares were issued. Basic and diluted
loss per share are the same as the effect of stock options and warrants on loss per share are
anti-dilutive and thus not included in the diluted loss per share calculation. However, the impact
under the treasury stock method of dilutive stock options and warrants would have been incremental
shares of 374,538 and 390,980 for the three months ended March 31, 2008 and 2007, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Significant estimates
made by management are, among others, provisions for doubtful accounts, realizability of
inventories, recoverability of long-lived assets, valuation and useful lives of intangible assets,
and valuation of options, warrants and deferred tax assets. Actual results could differ from those
estimates.
Concentrations of Credit Risk
Cash
From time to time, the Company maintains cash balances at certain institutions in excess of the
FDIC limit. As of March 31, 2008, the Company had approximately $2,057,000 in excess of this
limit. Additionally, the Company held approximately $1,413,000 in uninsured cash accounts at its
foreign subsidiaries.
Customers
The Company grants credit to customers within the PRC, and does not require collateral. The
Companys ability to collect receivables is affected by economic fluctuations in the geographic
areas and the industry served by the Company. A reserve for uncollectible amounts and estimated
sales returns is provided based on historical experience and a specific analysis of the accounts
which management believes is sufficient. Accounts receivable is net of a reserve of doubtful
accounts and sales returns of $176,344 and $91,389 at March 31, 2008 and December 31, 2007,
respectively. Although the Company expects to collect amounts due, actual collections may differ
from the amounts reflected on the balance sheet.
9
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
As of March 31, 2008, one customer comprised 21% of outstanding accounts receivable. No customers
had outstanding accounts receivable in excess of 10% at December 31, 2007. For the three months
ended March 31, 2008, two customers comprised 18% and 10% of net revenues. For the three months
ended March 31, 2007, no one customer comprised more than 10% of revenues.
The majority of the Companys customers are in the pharmaceutical industry. Consequently, there is
a concentration of receivables within this industry, which is subject to normal credit risk.
Other
The Company is subject to credit risk as a result of its cash management arrangement with Jiekang
(see note 4), its advance from Shanghai XiangEn (see this note above), and its related
party receivable from Jade Capital (see note 12).
Recent Accounting Pronouncements
In September 2006, the FASB adopted SFAS No. 157,
Fair Value Measurements
. SFAS No. 157
establishes a framework for measuring fair value and expands disclosure about fair value
measurements. Specifically, this standard establishes that fair value is a market-based
measurement, not an entity specific measurement. As such, the value measurement should be
determined based on assumptions the market participants would use in pricing an asset or liability,
including, but not limited to assumptions about risk, restrictions on the sale or use of an asset
and the risk of non-performance for a liability. The expanded disclosures include disclosure of
the inputs used to measure fair value and the effect of certain of the measurements on earnings for
the period. SFAS No. 157 was effective for fiscal years beginning after November 15, 2007. FASB
Staff Position No. FAS 157-2 (FSP 157-2),
Effective Date of FASB Statement No. 157
was issued in
February 2008. FSP 157-2 delays the effective date of SFAS No. 157, for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at fair value at least
once a year, to fiscal years beginning after November 15, 2008, and for interim periods within
those fiscal years. The Company has not yet determined the effect adoption of SFAS No. 157 will
have on its consolidated financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities
(SFAS 159). SFAS No. 159 permits companies to choose to measure many
financial instruments and certain other items at fair value. SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is
permitted. The Company has not yet determined if it will elect to apply any of the provisions of
SFAS No. 159 or what the effect of adoption of the statement would have, if any, on its
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
. SFAS No. 141(R) replaces
SFAS No. 141,
Business Combinations.
SFAS No. 141(R) retains the fundamental requirements in SFAS
No. 141 that the acquisition method of accounting be used for all business combinations and for an
acquirer to be identified for each business combination. SFAS No. 141(R) amends the recognition
provisions for assets and liabilities acquired in a business combination, including those arising
from contractual and noncontractual contingencies. SFAS No. 141(R) also amends the recognition
criteria for contingent consideration. In addition, under SFAS No. 141(R), changes in an acquired
entitys deferred tax assets and uncertain tax positions after the measurement period will impact
income tax expense. SFAS No. 141(R) is effective for fiscal years beginning on or after
December 15, 2008. Early adoption is not permitted. Management is currently evaluating the
potential impact of adopting SFAS No. 141(R) on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
StatementsAn Amendment of ARB No. 51
. SFAS No. 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for fiscal
10
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
years beginning on or after December 15, 2008. Management does not currently expect the adoption
of SFAS No. 160 to have a material impact on the consolidated financial statements.
NOTE 3 INVENTORIES
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Raw materials
|
|
$
|
529,783
|
|
|
$
|
620,128
|
|
Work-in-process
|
|
|
7,505
|
|
|
|
17,331
|
|
Finished goods
|
|
|
379,298
|
|
|
|
283,676
|
|
|
|
|
|
|
|
|
|
|
$
|
916,586
|
|
|
$
|
921,135
|
|
|
|
|
|
|
|
|
NOTE 4 PREPAID EXPENSES, OTHER CURRENT ASSETS, AND OTHER ASSETS
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Material deposits
|
|
$
|
867,687
|
|
|
$
|
617,661
|
|
Receivable from Jiekang
|
|
|
427,564
|
|
|
|
498,726
|
|
Due from officers and directors
|
|
|
12,797
|
|
|
|
9,764
|
|
Other
|
|
|
85,941
|
|
|
|
122,486
|
|
|
|
|
|
|
|
|
|
|
$
|
1,393,989
|
|
|
$
|
1,248,637
|
|
|
|
|
|
|
|
|
As JPI is a British Virgin Island Company, it does not have a license to operate in China and is
therefore unable to open a RMB bank account. Accordingly, JPI entered into an agreement with
Jiekang to hold funds as a trustee for JPI even though no
formal trust agreement exists. This type of transaction is common in China and is adopted by many
overseas companies without an operations license. The Company is unsecured in this arrangement and
accordingly may not be able to recover this amount if Jiekang becomes insolvent.
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Deposits, primarily product licenses and acquisition of plant assets
|
|
$
|
3,198,474
|
|
|
$
|
2,827,526
|
|
Refundable deposits
|
|
|
45,025
|
|
|
|
22,900
|
|
Advances
|
|
$
|
582,154
|
|
|
$
|
574,123
|
|
|
|
|
|
|
|
|
|
|
$
|
3,825,653
|
|
|
$
|
3,424,549
|
|
|
|
|
|
|
|
|
Revenues have not yet been generated from the product licenses. At the time commercial sales of
the product begin, the product licenses will be reclassified to intangible assets and amortized to
cost of goods sold using the straight-line method over the estimated useful life of the related
product.
11
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
NOTE 5 INTANGIBLE ASSETS
Intangible assets consist of the following at March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
|
|
|
|
|
|
|
Amort-
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
ization
|
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
|
Period
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Trans-
|
|
|
|
|
|
|
(in
|
|
|
|
Value
|
|
|
Amortization
|
|
|
lation
|
|
|
Net
|
|
|
years)
|
|
Assets subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
$
|
2,000,000
|
|
|
$
|
(666,666
|
)
|
|
$
|
|
|
|
$
|
1,333,334
|
|
|
|
20
|
|
Production rights
|
|
|
1,916,622
|
|
|
|
(163,736
|
)
|
|
|
109,066
|
|
|
|
1,861,952
|
|
|
|
10
|
|
Land use rights
|
|
|
1,405,829
|
|
|
|
(60,977
|
)
|
|
|
168,341
|
|
|
|
1,513,193
|
|
|
|
33
|
|
Non-compete agreements
|
|
|
324,415
|
|
|
|
(108,067
|
)
|
|
|
26,860
|
|
|
|
243,208
|
|
|
|
5
|
|
Customer relationships
|
|
|
214,328
|
|
|
|
(51,435
|
)
|
|
|
22,203
|
|
|
|
185,096
|
|
|
|
7
|
|
Trade name and logo
|
|
|
530,829
|
|
|
|
(82,720
|
)
|
|
|
65,784
|
|
|
|
513,893
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,392,023
|
|
|
$
|
(1,133,601
|
)
|
|
$
|
392,254
|
|
|
$
|
5,650,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets consist of the following at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
|
|
|
|
|
|
|
Amort-
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
ization
|
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
|
Period
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Trans-
|
|
|
|
|
|
|
(in
|
|
|
|
Value
|
|
|
Amortization
|
|
|
lation
|
|
|
Net
|
|
|
years)
|
|
Assets subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
$
|
2,000,000
|
|
|
$
|
(641,667
|
)
|
|
$
|
|
|
|
$
|
1,358,333
|
|
|
|
20
|
|
Production rights
|
|
|
1,916,622
|
|
|
|
(113,985
|
)
|
|
|
38,725
|
|
|
|
1,841,362
|
|
|
|
10
|
|
Land use rights
|
|
|
1,405,829
|
|
|
|
(49,304
|
)
|
|
|
111,644
|
|
|
|
1,468,169
|
|
|
|
33
|
|
Non-compete agreements
|
|
|
324,415
|
|
|
|
(90,269
|
)
|
|
|
17,488
|
|
|
|
251,634
|
|
|
|
5
|
|
Customer relationships
|
|
|
214,328
|
|
|
|
(42,960
|
)
|
|
|
15,153
|
|
|
|
186,521
|
|
|
|
7
|
|
Trade name and logo
|
|
|
530,829
|
|
|
|
(67,888
|
)
|
|
|
46,352
|
|
|
|
509,292
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,392,023
|
|
|
$
|
(1,006,073
|
)
|
|
$
|
229,362
|
|
|
$
|
5,615,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In August 2001, the Company acquired intellectual property rights and an assignment of a US patent
application for combination immunogene therapy technology for $2,000,000. The technology was
purchased from Dr. Lung-Ji Chang, who developed it while at the University of Alberta, Edmonton,
Canada. During 2003, two lawsuits were filed
12
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
challenging the Companys ownership of this intellectual property. The value of the intellectual
property will be diminished if either of the lawsuits is successful (see Note 8).
As part of the acquisition of the technology, the Company agreed to pay Dr. Chang a 5% royalty on
net sales of combination gene therapy products. The Company has not paid any royalties to Dr.
Chang to date as there have been no sales of combination gene therapy products.
NOTE 6 INCOME TAXES
The Company recorded tax provisions of $200,656 and $17,844 for the three months ended March 31,
2008 and March 31, 2007, respectively. The Companys recorded a tax provision of 18% and 1% of its
pre-tax losses for the three months ended March 31, 2008 and March 31, 2007, respectively. The
difference between the effective tax rates and the 34% federal statutory rate resulted primarily
from losses generated in the United States with no corresponding tax benefit, due to the full
valuation reserve on net deferred tax assets, and foreign earnings taxed at the rates in effect in
local jurisdictions. The Companys Chinese operations operate under tax holiday and incentive
programs. JJB has been granted a 100% waiver on corporate income taxes in China for years 2006 and
2007, and a 50% waiver of income taxes for 2008 through 2010. YYBs tax rate is 15% through 2010
in accordance with the Western Region Development Concession Policy of the PRC government.
The Company utilizes the asset and liability method of accounting for income taxes as set forth in
SFAS No. 109. As a result of the Companys cumulative losses in the U.S., we have concluded that a full
valuation allowance should be recorded in the U.S.
The Company files federal, state and foreign income tax returns in jurisdictions with varying
statutes of limitations. The 2004 through 2007 tax years generally remain subject to examination by
federal and most state tax authorities. In China, the 2001 through 2007 tax years generally remain
subject to examination by tax authorities. The Company is not currently under examination for any
tax year by any jurisdiction.
Income taxes payable of approximately $187,000 and $59,000 has been included in accounts payable
and accrued expenses in the accompanying consolidated balance sheets as of March 31, 2008 and
December 31, 2007, respectively.
NOTE 7 NOTES PAYABLE
At March 31, 2008, the Company had RMB denominated indebtedness equal to $3,936,044 (RMB 27.64
million) owed to two financial institutions, representing working capital and construction advances
made to JJB and YYB prior to the Companys acquisition of JPI. These notes are secured by
substantially all the assets of JJB and YYB and bear interest at rates ranging from 5.31% 9.45%
per annum.
The company acquired JPI and subsidiaries from Jade Capital Group Limited (Jade). Prior to Jades purchase of certain assets, including land and buildings, of JiangXi Shangrao
Pharmacy Co. Ltd (Kangda), and the subsequent sale of those assets and liabilities to the
Company, Kangda had bank loans of $5,692,000 secured by the assets transferred to Jade. Pursuant
to an agreement between Jade and Kangda, Jade assumed bank loans of $4,667,000, and Kangda
continued to owe the bank $1,025,000. The loans were not separable or assumable, and therefore
became technically due when the assets of JJB and YYB were acquired. The Company reached a verbal
agreement with the bank to allow repayment of the loans under their original terms, however, this
agreement has not been formalized in writing. The Company has not made payments in accordance with
the original terms, and as of March 31, 2008, a significant portion of the balance was past due.
The remaining balance is due in 2008, according to the terms of the original notes.
In March 2008, the Company agreed to repay RMB 17.1 million (approximately $2,343,000) of mature
loans to the bank by the second quarter of 2008. The Company made payments totaling RMB 10.0
million ($1,393,595) in the three months ended March 31, 2008. The Company expects to pay the
remaining RMB 7.1 million (approximately $1,000,000) to the bank in the second quarter of 2008.
13
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
In exchange for the repayment commitment,
the bank has made a commitment to loan the Company a minimum of 150% of the repayment, based on a
mutual assessment of the financing needs of the business.
NOTE 8 COMMITMENTS AND CONTINGENCIES
Litigation
On February 22, 2002, AcuVector Group, Inc. (AcuVector) filed a Statement of Claim in the Court
of Queens Bench of Alberta, Judicial District of Edmonton relating to the Companys combination
immunogene therapy technology acquired from Dr. Chang in August 2001. The claim alleges damages of
$CDN 20 million and seeks injunctive relief against Dr. Chang for, among other things, breach of
contract and breach of fiduciary duty, and against us for interference with the alleged
relationship between Dr. Chang and AcuVector. The claim for injunctive relief seeks to establish
that the AcuVector license agreement with Dr. Chang is still in effect. The Company performed
extensive due diligence to determine that AcuVector had no interest in the technology when the
Company acquired it. The Company is confident that AcuVectors claims are without merit and that
the Company will receive a favorable result in the case. As the final outcome is not determinable,
no accrual or loss relating to this action is reflected in the accompanying consolidated financial
statements.
The Company is also defending a companion case filed in the same court by the Governors of the
University of Alberta filed against the Company and Dr. Chang in August 2003. The University of
Alberta claims, among other things, that Dr. Chang failed to remit the payment of the Universitys
portion of the monies paid by the Company to Dr. Chang for the combination immunogene technology
purchased by us from Dr. Chang in 2001. In addition to other claims against Dr. Chang relating to
other technologies developed by him while at the University, the University also claims that the
Company conspired with Dr. Chang and interfered with the Universitys contractual relations under
certain agreements with Dr. Chang, thereby damaging the University in an amount which is unknown to
the University at this time. The University has not claimed that the Company is not the owner of
the combination immunogene therapy technology, just that the University has an equitable interest
therein or the revenues therefrom.
If either AcuVector or the University is successful in their claims, the Company may be liable for
substantial damages, its rights to the technology will be adversely affected (see Note 5), and its
future prospects for exploiting or licensing the combination immunogene therapy technology will be
significantly impaired.
In the ordinary course of business, there are other potential claims and lawsuits brought by or
against the Company. In the opinion of management, the ultimate outcome of these matters will not
materially affect the Companys operations or financial position or are covered by insurance.
Suspension of Product Sales
The sale of one of the Companys products, Yuxingcoa, has been temporarily prohibited in the PRC
due to safety concerns. Although the Company considers its products safe, the prohibition will
remain in effect until such time as the government determines the source of the unsafe products.
The PRC authority has allowed the commercial sales of some Yuxingcao products in October 2006 but
not the one produced by the Company. No products have been returned through March 31, 2008.
Management believes there will be no claims from customers on the sale of Yuxingcao as the quality
of the product is not an issue. It is the current policy of the relevant authorities in the PRC to
prohibit the sales of Yuxingcao-related products. No estimate is known at this time for the
resumption of the commercial sales of Yuxingcao.
Licensing Agreements
In 2007, the Company entered into an RMB 48.6 million purchase commitment with Jiangxi Yibo
Medicine Technology Development Co., Ltd (YIBO) for the acquisition of non-exclusive production
rights to ten medicines
14
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
(approximately $6.7 million at commitment date). The Company has begun production of three of the
medicines and has made deposits of $2.9 million to Yibo for the remaining seven medicines. The
Companys remaining obligation to Yibo totals approximately $2.0 million at March 31, 2008. When
paid, these amounts will be capitalized and amortized over the expected economic life of the
production rights granted.
The Company has an agreement to pay royalty fees to JGT Management Services, Ltd., an unrelated
third party, equal to 2.5% of gross sales of DR-70
®
on a quarterly basis. The agreement
expires in August 2008. The Company may elect to pay a $25,000 buy-out fee, subject to acceptance
by JGT. Payments of royalties in the three months ended March 31, 2008 and 2007 were
insignificant.
The Company has agreed to pay a 5% royalty on net sales of combination gene therapy products
developed from purchase intellectual property. The Company has not paid any royalties to date as
there have been no sales of combination gene therapy products.
Indemnities and Guarantees
The Company has executed certain contractual indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party. The Company has agreed to indemnify
its directors, officers, employees and agents to the maximum extent permitted under the laws of the
State of Delaware. In connection with a certain facility lease, the Company has indemnified its
lessor for certain claims arising from the use of the facilities. Pursuant to the Sale and
Purchase Agreement, the Company has indemnified the holders of registrable securities for any
claims or losses resulting from any untrue, allegedly untrue or misleading statement made in a
registration statement, prospectus or similar document. Additionally, the Company has agreed to
indemnify the former owners of JPI against losses up to a maximum of $2,500,000 for damages
resulting from breach of representations or warranties in connection with the JPI acquisition. The
duration of the guarantees and indemnities varies, and in many cases is indefinite. These
guarantees and indemnities do not provide for any limitation of the maximum potential future
payments the Company could be obligated to make. Historically, the Company has not been obligated
to make any payments for these obligations and no liabilities have been recorded for these
indemnities and guarantees in the accompanying consolidated balance sheet.
Contingent Share Issuance
The terms of the May 12, 2006 Stock Purchase and Sale Agreement with Jade Capital Group Limited (Jade) for the
acquisition of JPI provided that additional purchase consideration of 100,000 shares of the
Companys common stock (the Escrow Shares) was deposited in an escrow account held by a third
party escrow agent. The Escrow Agreement required that if, within one year from and after the
closing of the Stock Purchase and Sale Agreement, Jade or its shareholders have demonstrated that
the SFDA has issued a permit or the equivalent regulatory approval for the Company to sell and
distribute DR-70
®
in the PRC without qualification, in form and substance satisfactory
to the Company, then the escrow agent will promptly disburse the Escrow Shares to Jade or its
shareholders.
In light of the administrative changes that have taken place at the SFDA since June 2007, the Board
of Directors on August 10, 2007, extended the required approval date to March 28, 2008. On March
11, 2008, the deadline was further extended to March 28, 2009. If Jade has not notified the escrow
agent that the SFDA has issued the approval to market DR-70
®
before March 28, 2009, or
if the Company disputes that the purported approval is satisfactory, the Escrow Shares shall be
delivered by the escrow agent to the Company for cancellation. In the event the Escrow Shares are
released to Jade, the Company will record the fair value of the 100,000 shares of common stock
issued as goodwill.
15
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
NOTE 9 STOCK OPTIONS
The Company has five stock option plans under which it may grant incentive and non-qualified stock
options to officers, employees, directors and independent contractors. A detailed description of
the Companys option plans and option grants outside the option plans is contained in the notes to
the audited December 31, 2007 financial statements.
For the three months ended March 31, 2008 and 2007, the Company recorded share-based compensation
expense related to the issuance of stock options to employees and directors of $105,542 and $0, respectively. All such compensation expense is reflected in the
accompanying unaudited condensed consolidated statements of operations within the selling, general and
administrative line item. Share-based compensation expense recognized in the periods presented is
based on awards that have vested or are ultimately expected to vest. Historically, options have
vested upon grant, thus it was not necessary for management to estimate forfeitures. Options
granted in the three months ended March 31, 2008 vest ratably over 24 months. Based on historical
turnover rates and the vesting pattern of the options, the Companys management has assumed that
there will be no forfeitures of unvested options.
Summary of Assumptions and Activity
The fair value of stock-based awards to employees and directors is calculated using the
Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions,
including future stock price volatility and expected time to exercise, which greatly affect the
calculated values. The expected volatility is based on the historical volatility of the Companys
stock price. The expected term of options granted is derived from historical data on employee
exercises and post-vesting employment termination behavior. The risk-free rate selected to value
any particular grant is based on the U.S. Treasury rate that corresponds to the pricing term of the
grant effective as of the date of the grant. The Company does not expect to pay dividends in the
foreseeable future, thus the dividend yield is zero. These factors could change in the future,
affecting the determination of stock-based compensation expense in future periods. The Company
used the following weighted-average assumptions in determining fair value of its employee and
director stock options granted in the three months ended March 31, 2008:
|
|
|
|
|
Expected volatility
|
|
|
248
|
%
|
Expected term
|
|
5 years
|
Risk-free interest rate
|
|
|
2.48
|
%
|
Dividend yield
|
|
|
|
%
|
The weighted-average grant date fair value of employee and director stock options granted during
the three months ended March 31, 2008 was $2.98.
The following is a summary of the changes in stock options outstanding during the three months
ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Options
|
|
|
Price
|
|
|
Life (Years)
|
|
Outstanding and expect to vest, December 31, 2007
|
|
|
2,093,236
|
|
|
$
|
3.97
|
|
|
|
|
|
|
Granted
|
|
|
850,000
|
|
|
|
3.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest, March 31, 2008
|
|
|
2,943,236
|
|
|
$
|
3.82
|
|
|
|
3.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Exercisable at March 31, 2008
|
|
|
2,128,656
|
|
|
$
|
3.96
|
|
|
|
2.56
|
|
|
|
|
|
|
|
|
|
|
|
16
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
The aggregate intrinsic value of options outstanding at March 31, 2008, considering only options
vested and exercisable with positive intrinsic values and based on the closing stock price at March 31, 2008, was $417,821.
At March 31, 2008, total unrecognized stock-based compensation cost related to unvested stock
options was $2,427,458, which is expected to be expensed over a weighted average period of 1.9
years.
NOTE 10 STOCKHOLDERS EQUITY
Cash Financing Activities
The Company has funded its operations primarily through a series of Regulation S and Regulation D
companion offerings (the Offerings). The Offerings have historically consisted of units of one
share of common stock and warrants to purchase a number of shares of common stock equal to one-half
the number of shares of common stock included in the units (Units) and units of one share of
common stock and a warrant to purchase one share of common stock. The Units are priced at a
discount of 25% from the average closing prices of the Companys common stock for the five
consecutive trading days prior to the close of the offering, as quoted on the American Stock
Exchange, and the exercise price of the warrants is set at 115% of the average closing price.
Unless otherwise noted below, the warrants issued in the Offerings are exercisable at the date of
issuance and expire three years from issuance.
For all of the Offerings, the Company utilized the placement agent services of Galileo Asset
Management, S.A. (Galileo), a Swiss corporation for sales to non-U.S. persons. In United States,
the Company has utilized the placement agent services of FINRA (formerly NASD) member
broker-dealers Securities Network, LLC (Network) and Spencer Clarke, LLC (Spencer Clarke), and
licensed sub agents working under Spencer Clarke. In addition to commissions and expenses paid to
the Companys placement agents for each of the Offerings, as described below, the Company has
agreed to pay cash commissions of 6% of the gross amount received upon exercise of the warrants by
the purchasers.
April 2007 Offering
In April through June of 2007, the Company conducted two closings of a private placement (the
April 2007 Offering) of Units. The Company received $5,330,378 in aggregate gross proceeds from
the sale of 2,030,620 Units in the April 2007 Offering. The Units were sold at $2.625 per Unit and
the warrants are exercisable at $3.68 per share. Each warrant became exercisable on October 31,
2007 and remains exercisable until October 31, 2010.
In connection with the April 2007 Offering, the Company utilized the services of Galileo and
Network. For their services, Galileo and Network received commissions in an aggregate of $553,539
and warrants to purchase an aggregate of 203,062 shares of the Companys stock. The Company also
paid Galileo a non-accountable expense allowance of $160,000. In addition, the Company incurred
legal and other costs totaling $44,333 in connection with the April 2007 Offering. Total costs
associated with the April 2007 Offering were $757,872, which costs have been netted against the
proceeds received.
After the closing of the April 2007 Offering, the Company filed a registration statement with the
Securities and Exchange Commission to register the shares of the Companys common stock, shares
issuable upon exercise of the
17
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
related investor warrants, and shares issuable upon exercise of the warrants issued to the
placement agents. The registration statement was declared effective on June 29, 2007.
December 2007 Offering
In December, 2007, the Company conducted the closing of a private placement (December 2007
Offering) of Units. The Company received approximately $6,203,200 in aggregate gross proceeds
from the sale of 2,007,508 Units in the December 2007 Offering. The Units were sold at $3.09 per
Unit. The exercise price of the four-year warrants issued as part of the December 2007 Offering
was $4.74 per share.
In connection with the December 2007 Offering, we utilized the placement services of Galileo and
Spencer Clarke. For their services, Galileo and Spencer Clarke received commissions and due
diligence fees of an aggregate of $619,158 and warrants to purchase 200,751 shares of our common
stock. The Company also paid the placement agents a non-accountable expense allowance of $150,000
and incurred $16,750 in other costs in connection with the December 2007 Offering. Total costs
associated with the December 2007 Offering were $785,908, which costs have been netted against the
proceeds received.
After the closing of the December 2007 Offering, the Company filed a registration statement with
the Securities and Exchange Commission to register the shares of the Companys common stock, shares
issuable upon exercise of the related investor warrants, and shares issuable upon exercise of the
warrants issued to the placement agents. The registration statement was declared effective on
April 22, 2008.
On March 5, 2008 the Company conducted the second closing of the December 2007 Offering. In the
second closing the Company received $1,000,000 in aggregate gross proceeds from the sale of a total
of 323,813 Units at $3.09 per unit and issued warrants to purchase 161,813 shares at an exercise
price of $4.74 per share. The Company did not utilize the services of a placement agent, however,
in connection with the second closing of the December 2007 Offering, the Company paid a finders
fee of $100,000, and incurred $23,875 in other costs. Total costs associated with the second
closing of the December 2007 offering were $123,875, which costs have been netted against the
proceeds received.
Non-Cash Financing Activities
On April 20, 2006, the Board of Directors authorized the issuance of up to of 120,000 shares of
common stock to First International, pursuant to an amendment to the consulting agreement dated
July 22, 2005, for financial advisory services to be provided from July 22, 2006 through January
22, 2007. The Company issued 116,000 shares of common stock on May 5, 2006 as consideration for
the services to be provided by First International under the amendment. The shares were valued at
$348,000 based on the trading price of the common stock on the measurement date. During the three
months ended March 31, 2007, the Company recorded general and administrative expense of $37,419,
related to this agreement.
On September 22, 2006, the Board of Directors authorized the issuance of 5,653 shares of common
stock to Aurelius Consulting Group, Inc. as consideration for marketing services provided from
December 22, 2006 through March 21, 2007. The shares were valued at $20,248 based on the trading
price of the common stock on the measurement date. During the three months ended March 31, 2007,
the Company charged $20,248 to selling, general and administrative expenses.
On October 5, 2006, the Board of Directors authorized the issuance of 84,000 shares of common stock
to First International, pursuant to an amendment to the consulting agreement dated July 22, 2005,
for financial advisory services to be provided from January 23, 2007 through March 22, 2007. The
shares were valued at $204,960 based on the trading price of the common stock on the measurement
date. During the three months ended March 31, 2007, the Company charged $204,960 to selling,
general and administrative expenses.
18
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
On October 24, 2006, the Company issued 140,000 shares of common stock to Lynx Consulting Group,
Inc. for consulting services to be performed from October 24, 2006 through April 30, 2007. The shares were valued at
$548,800 based on the trading price of the common stock on the measurement date. During the three
months ended March 31, 2007, the Company recorded $274,400 as selling, general and administrative
expense.
On November 16, 2006, the board of directors authorized the issuance of warrants to purchase 25,000
shares of common stock at an exercise price of $4.52 per share to Savannah for investor public
relations services to be provided from November 16, 2006 through February 15, 2007. The warrants
were valued at $84,000 using the Black-Scholes option pricing model and $42,000 was charged to
selling, general and administrative expense during the three months ended March 31, 2007.
On March 2, 2007, the Board of Directors authorized the issuance of 190,000 shares of common stock
to Boston Financial Partners, Inc. pursuant to an amendment to the consulting agreement dated
September 16, 2003, as consideration for financial advisory services to be provided from March 1,
2007 through September 1, 2007. The shares were valued at $558,600 based on the trading price of
the common stock on the measurement date. During the three months ended March 31, 2007, the
Company recorded selling, general and administrative expense of $93,100 related to the agreement.
Also on March 2, 2007, the Board of Directors authorized the issuance of 150,000 shares of common
stock to First International pursuant to an amendment to the consulting agreement dated July 22,
2005, as consideration for financial advisory services to be provided from March 22, 2007 through
September 22, 2007. The shares were valued at $517,500 based on the trading price of the common
stock on the measurement date. During the three months ended March 31, 2007, the Company recorded
selling, general and administrative expense of $25,041.
On September 14, 2007, the Board of Directors authorized the issuance of 250,000 shares of common
stock to First International pursuant to an amendment to the consulting agreement dated July 22,
2005, for financial advisory services to be provided from September 22, 2007 through September 22,
2008. The shares were valued at $817,500 based on the trading price of the common stock on the
measurement date. The Shares were issued pursuant to an exemption under Section 4(2) of the
Securities Act. No underwriter was involved in this issuance. During the three months ended March
31, 2008, the Company recorded selling, general and administrative expense of $204,375 related to
the agreement and the balance of $388,312 is included in prepaid consulting at March 31, 2008.
On November 27, 2007, the Board of Directors authorized the issuance of 75,000 shares of common
stock to Boston Financial Partners Inc. pursuant to an amendment to the consulting agreement dated
September 16, 2003, for financial advisory services to be provided from November 1, 2007 through
October 31, 2008. The shares were valued at $336,000 based on the trading price of the common
stock on the measurement date. During the three months ended March 31, 2008, the Company recorded
general and administrative expense of $84,000 related to the agreement and the balance of $196,000
is included in prepaid consulting at March 31, 2008.
On November 27, 2007, the Board of Directors authorized the issuance of up to 300,000 shares of
common stock, to be earned at the rate of 25,000 shares per month to Madden Consulting, Inc. for
financial advisory services to be provided from December 26, 2007 through December 26, 2008. The
Company issued 25,000 shares in the three months ended March 31, 2008 that were valued at $104,250
based on the trading price of the common stock on the measurement date. During the three months
ended March 31, 2008, the Company recorded general and administrative expense of $104,250 related
to the agreement and the January 2008 issuance of 25,000 shares. This agreement was terminated on
January 29, 2008 and the remaining obligation to issue 250,000 shares was cancelled.
On February 5, 2008, the Board of Directors authorized the issuance of 300,000 shares of common
stock to LWP1 pursuant to a consulting agreement dated February 3, 2008 for financial advisory
services to be provided from February 3, 2008 through May 3, 2009. The shares are issuable in two
increments of 150,000 and were valued at $1,010,700 based on the trading price of the common stock
on the measurement date. During the three months ended March 31, 2008, the Company recorded
general and administrative expense of $134,800 related to the agreement and the balance of $370,700
related to the initial issuance of 150,000 shares is included in prepaid consulting at March 31,
2008.
Warrants
The number of outstanding warrants was 4,687,306 at March 31, 2008. The weighted average exercise price was $4.01.
19
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
NOTE 11 SEGMENT REPORTING
The Company has adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information.
SFAS No. 131 requires public companies to report information about segments of their
business in their annual financial statements. Virtually all of the Companys revenues for the
three months ended March 31, 2008 and 2007 were from foreign customers.
The Company evaluates performance based on sales, gross profit and net income (loss). The
Company had three reportable segments. In China there are two segments, (i) manufacturing and
wholesale distribution to distributors, hospitals, clinics and similar institutional entities
(China-Wholesale); and (ii) wholesale sales to operators of Jade Healthy Supermarkets which sell
to consumers directly (China-Direct). In the United States there is one segment, sales to
distributors and institutional entities (Corporate).
The following is information for the Companys reportable segments for the three months ended March
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China-Wholesale
|
|
China-Direct
|
|
Corporate
|
|
Total
|
Net revenue
|
|
$
|
3,537,718
|
|
|
$
|
41,808
|
|
|
$
|
8,220
|
|
|
$
|
3,587,746
|
|
Gross profit
|
|
$
|
1,727,785
|
|
|
$
|
41,808
|
|
|
$
|
1,423
|
|
|
$
|
1,771,016
|
|
Depreciation
|
|
$
|
219,896
|
|
|
$
|
|
|
|
$
|
2,328
|
|
|
$
|
222,224
|
|
Amortization
|
|
$
|
102,530
|
|
|
$
|
|
|
|
$
|
25,000
|
|
|
$
|
127,530
|
|
Interest expense
|
|
$
|
102,151
|
|
|
$
|
|
|
|
$
|
905
|
|
|
$
|
103,056
|
|
Net income (loss)
|
|
$
|
903,582
|
|
|
$
|
41,808
|
|
|
$
|
(2,417,586
|
)
|
|
$
|
(1,472,196
|
)
|
Identifiable assets
|
|
$
|
27,532,334
|
|
|
$
|
582,153
|
|
|
$
|
4,652,990
|
|
|
$
|
32,767,477
|
|
Capital expenditures
|
|
$
|
22,808
|
|
|
$
|
|
|
|
$
|
2,306
|
|
|
$
|
25,114
|
|
20
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2008 and 2007
In 2007, the Company had two reportable segments, (i) manufacturing and wholesale distribution to
distributors, hospitals, clinics and similar institutional entities in China (China-Wholesale);
and (ii) sales to distributors and institutional entities in the United States (Corporate).
The following is information for the Companys reportable segments for the three months ended March
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China-Wholesale
|
|
Corporate
|
|
Total
|
Net revenue
|
|
$
|
1,410,029
|
|
|
$
|
14,150
|
|
|
$
|
1,424,179
|
|
Gross profit
|
|
$
|
715,299
|
|
|
$
|
11,570
|
|
|
$
|
726,869
|
|
Depreciation
|
|
$
|
104,947
|
|
|
$
|
1,816
|
|
|
$
|
106,763
|
|
Amortization
|
|
$
|
51,862
|
|
|
$
|
25,000
|
|
|
$
|
76,862
|
|
Interest expense
|
|
$
|
90,857
|
|
|
$
|
|
|
|
$
|
90,857
|
|
Net income (loss)
|
|
$
|
124,337
|
|
|
$
|
(1,509,743
|
)
|
|
$
|
(1,385,406
|
)
|
Capital expenditures
|
|
$
|
9,306
|
|
|
$
|
|
|
|
$
|
9,306
|
|
Identifiable assets associated with the China-Wholesale, China-Direct and Corporate segments
totaled $24,287,399, $574,123 and $8,005,656, respectively, and $32,867,178 in the aggregate at
December 31, 2007,
NOTE 12 RELATED PARTY TRANSACTIONS
At March 31, 2008, the Company has a receivable of $562,677 due from Jade. The receivable is a
result of cash transferred to Jade in the first quarter of 2008, which will be transferred to JJB
and YYB in the second quarter of 2008 in connection with a recapitalization of those entities, as
required by corporate regulation in the PRC. At December 31, 2007, the Company has a payable of
$62,621 to Jade for expenses paid by Jade on behalf of JPI.
NOTE 13 SUBSEQUENT EVENTS
On April 11, 2008, we entered into a Memorandum of Understanding with Zhejiang Huadu Hongying
Beauty Hairdressing Co. Ltd. (Zhejiang-Huadu). Zhejiang-Huadu is the owner of over 200 beauty
stores and a beauty care training school in Zhejiang province which will sell the Goodnak
anti-aging product as well as new products in the Goodnak line.
In May 2008, the Company signed a letter of intent to acquire a distribution company in China,
subject to transaction diligence, negotiation of terms and conditions and the execution of a
definitive agreement. The Company has targeted completion of the transaction in August 2008. In
the interim, the Company and the acquisition target have agreed to negotiate one or more
distribution agreements for the sale and distribution of JJB and YYBs products.
21
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our management intends for this discussion and analysis to provide the reader with information
that will assist in understanding our financial statements, the changes in certain key items in
those financial statements from period to period, and the primary factors that accounted for those
changes, as well as how certain accounting principles affect our financial statements. The
following discussion and analysis should be read in conjunction with our financial statements and
notes thereto included in this report on Form 10-Q and in our Annual Report on Form 10-K for the
year ended December 31, 2007, as amended on Form 10-K/A. Operating results are not necessarily
indicative of results that may occur in future periods.
This report includes various forward-looking statements that are subject to risks and
uncertainties, many of which are beyond our control. Our actual results could differ materially
from those anticipated in these forward looking statements as a result of various factors,
including, but not limited to, risks associated with doing business in China and internationally,
demand for our products, governmental regulation and required licensing of our products and
manufacturing operations, dependence on distributors, foreign currency fluctuation, technological
changes, intense competition and dependence on management and those risks set forth below under
Part II Item 1A Risk Factors and set forth in Part I Item 1A Risk Factors in our Annual
Report on Form 10-K for the year ended December 31, 2007, as amended on Form 10-K/A.
Forward-looking statements discuss matters that are not historical facts and include, but are not
limited to, discussions regarding our operating strategy, sales and marketing strategy, regulatory
strategy, industry, economic conditions, financial condition, liquidity and capital resources and
results of operations. Such statements include, but are not limited to, statements preceded by,
followed by or that otherwise include the words believes, expects, anticipates, intends,
estimates, projects, can, could, may, will, would, or similar expressions. For those
statements, we claim the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995. You should not unduly rely on these
forward-looking statements, which speak only as of the date on which they were made. They give our
expectations regarding the future, but are not guarantees. We undertake no obligation to update
publicly or revise any forward-looking statements, whether because of new information, future
events or otherwise, unless required by law.
Acquisition of Jade Pharmaceuticals Inc.
On September 28, 2006, we acquired 100% of the outstanding shares of Jade Pharmaceutical Inc.
(JPI). JPI has two wholly owned Peoples Republic of China (PRC or China) based
subsidiaries, Yangbian Yiqiao Bio-Chemical Pharmacy Company Limited (YYB) and Jiangxi
Bio-Chemical Pharmacy Company Limited (JJB) that manufacture and distribute pharmaceutical
products in China.
YYB has established a multi-level marketing program of approximately forty sales managers and
engages over 1,000 sales representatives who act as individual marketers of YYBs products. 67%
of YYBs products are sold to four institutional or hospital customers.
Both JJB and YYB are developing educational programs for hospitals, doctors, clinics and
distributors with respect to JJBs and YYBs product lines. These educational programs are
intended to improve sales and promotion of JJBs and YYBs products. Both JJB and YYB sell to
hospitals, retail stores and distributors who act as agents. One primary distributor has 29 retail
outlets throughout the PRC. In addition, JJB and YYB have a dedicated sales team that manages its
own direct sales force and retail outlets all over China.
JPI currently has 75 in house full-time sales people and is expected to increase this number
over the next twelve months to market JPIs new products.
As JJBs and YYBs resources permit, both JJB and YYB anticipate expanding their current
domestic Chinese distribution beyond the cities in which they currently sell through the
utilization of new distribution firms in regions currently not covered by existing distributors or
the in-house sales force.
Sales of JJBs products are approximately 40% to individuals and 60% to institutional or
hospital customers. JJB employs regional sales managers and over three hundred representatives who
contact distributors throughout China.
22
Eighteen distributors purchase products from JJB. Distributors have the right to return product
only if the product is defective.
In order to capitalize on the Chinese interest in anti-aging products, nutritional supplements
and cosmetic products, in July 2007, JPI began direct distribution of similar products through
retail outlets owned and managed by sub-operators known as Jade Healthy Supermarkets. The Jade
Healthy Supermarkets are small retail stores operated by sub-operators who sell JPIs products to
retail consumers. As a result of this experience, JPI has refocused these activities to
concentrate on sales to beauty clinics that can offer anti-aging clinical treatments to its
clients. These clinics are now called JPGreen Health and Beauty Clinics. There are currently
eight existing JPGreen Health and Beauty Clinics (JPGreen Clinics), which are owned by others.
The JPGreen Clinic locations, typically 300-900 square feet in size, are being developed through
in-house store openings and through the acquisition of existing beauty and spa businesses. The
typical JPGreen Clinic is anticipated to generate, on average approximately $400,000 to $700,000 in
annual sales with an average net profit margin of at least 30%. Numerous existing beauty and spa
businesses have indicated their interest in being acquired and converted to JPGreen Health and
Beauty Clinics. We have formed a WFOE to manage the JPGreen Health and Beauty Clinic operations.
Upon receipt of adequate funding, JPI anticipates the management, conversion of existing operations
into or acquisition of approximately 100 JPGreen Health and Beauty Clinics and at least 13
hospital operated therapeutic anti-aging clinic
s
in fiscal year 2008. There can be no assurance
that any of the intended acquisitions are completed or that JPI will receive the necessary funding
to adequately finance the management and operation of JPGreen Health and Beauty Clinics.
Memorandum of Understanding with Zhejiang Huadu Hongying Beauty Hairdressing Co., Ltd
On April 11, 2008, we entered into a Memorandum of Understanding with Zhejiang Huadu Hongying
Beauty Hairdressing Co. Ltd. (Zhejiang-Huadu). Zhejiang-Huadu is the owner of over 200 beauty
stores and a beauty care training school in Zhejiang province which will sell the Goodnak
anti-aging product as well as new products in the Goodnak line.
Letter of Intent to purchase Guangzhou Lazon Pharmacy Co., Ltd.
In May 2008, we entered into a letter of intent to purchase Guangzhou Lazon Pharmacy Co., Ltd
(GLP). GLP currently distributes over 400 products from various manufactures. GLP currently
sells and distributes traditional Chinese medicines, health foods, medical equipment and generic
pharmaceutical products. A mutually agreed valuation firm will be retained to perform a valuation
analysis and other terms and agreements to determine the value of GLP. It is anticipated that JPI
will consolidate sales forces with GLP to take advantage of each Companys distribution network to
penetrate new market territories. It is anticipated that this acquisition will be complete by
August 2008.
License Agreement with Mygene
On February 3, 2008 the Company entered into a five year exclusive license for the Mygene MyHPV Chip
Kit (MyGene HPV Test Kit) a diagnostic reagent for in-vitro testing for Genital Human Papilloma
Virus (HPV) from Mygene International, Inc. (
MGI
), a Utah corporation. MGI owns an
exclusive worldwide license for the MyGene HPV Test Kit, excluding Korea. MGI licensed the MyGene
HPV Test Kit from MyGene Co., Ltd., a Korean company. The license agreement between MGI and the
Company grants us an exclusive sublicense to use the patent, trademark and technology in
manufacturing, promoting, marketing, distributing, and selling the MyGene HPV Test Kit in the
countries of: China (including Hong Kong), Taiwan, Singapore, Malaysia, Thailand, Cambodia and
Vietnam.
This license agreement shall commence as of the March 31, 2008 and the Company has the option of
renewing the license for a single period of five additional years unless either party shall notify
the other party in writing of its election not to renew at least ninety days prior to the
expiration of the initial term, or the Company has failed to pay MGI all license fees and royalty
fees as required by this licensing agreement, in which case the agreement shall terminate.
The license agreement requires the Company to pay an initial license fee of two hundred and fifty
thousand dollars ($250,000), ten thousand dollars ($10,000) of which is due immediately on the
effective date of the license agreement. For three consecutive thirty (30) day periods after the
effective date, the Company is required to remit to MGI additional non-refundable ten thousand
dollar ($10,000) deposits while the Company evaluates the technology. After the Companys right to
perform due diligence for a period of ninety (90) days from the effective date of the license
agreement, if the Company accepts the technology, the Company is required to pay a final
non-refundable twenty thousand dollar ($220,000) deposit. At any time during the first ninety (90)
days from the effective date, the Company has the unconditional right to terminate the license
agreement, at which time the license agreement will be considered terminated. All fees paid will
remain non-refundable in the event the Company elects not to proceed.
23
In consideration for the license and in additional to the deposits, the Company is required to pay
MGI a royalty fee of fifteen percent (15%) on the net sales of the MyGene HPV Test Kits, until such
time as royalty fee payments reach a total of seven hundred and fifty thousand dollars. Once the
Company has paid MGI the seven hundred and fifty thousand dollar ($750,000) minimum threshold
royalty fee payments, the royalty fee will decrease to seven and one half percent on net sales of
the MyGene HPV Test Kit for the remainder of the term The payment of royalty fees on the net sales
shall be payable within thirty days of the end of each calendar quarter.
The MyGene HPV Test Kit
The MyGene HPV Test Kit was approved as a diagnostic reagent for use in Korea by the Korean Food and
Drug Administration (KFDA). The test can diagnose HPV infection and each genotype of HPV at the
same time. The features of MyHPV Chip test include:
|
|
Pre-Diagnosis of cervical cancer;
|
|
|
|
Diagnosis of HPV infection and the genotype of HPV infection;
|
|
|
|
Diagnosis for low copy of HPV infection;
|
|
|
|
Diagnosis of multiple HPV infections;
|
|
|
|
Simple and easy sample collecting;
|
|
|
|
Accurate and prompt results; and
|
|
|
|
Identifying a total of 24 types of HPV infections
|
Regulatory Approval of the MyGene HPV Test Kit
At the Companys sole expense, the Company is required to use its reasonable commercial efforts to
establish manufacturing capabilities and to obtain regulatory approval as necessary and in
accordance with State Federal Drug Administration (SFDA) requirements or appropriate regulatory
requirements for manufacturing in China (including Hong Kong), within one year from the effective
date of the license. The Company is required to use commercially reasonable efforts to obtain all
regulatory market approvals necessary for commercialization of the MyGene HPV Test Kit Product;
launch the sales of the MyGene HPV Test Kit Product within one year; and manufacture or have
manufactured, market, promote and sell the MyGene HPV Test Kit Product throughout the term of the
agreement. In Taiwan, Singapore, Malaysia, Thailand, Cambodia and Vietnam, the Company is required
to obtain all regulatory market approvals necessary for commercialization of the MyGene HPV Test
Kit, launch the sales of the MyGene HPV Test Kit Product within two years, and manufacture or have
manufactured, market, promote and sell the MyGene HPV Test Kit throughout the term of the license
agreement. If the Company has not begun selling the MyGene HPV Test Kit in above noted
territories within the prescribed timelines as specified above due to regulatory delay beyond the
Companys control, and the Company has received MGIs written acceptance of the regulatory delay,
which shall not unreasonably be withheld so long as the Company is making commercially reasonable
efforts toward commercialization, the Company shall not be in default of this Agreement.
Current Economic and Market Environment
We operate in a challenging economic and regulatory environment that has undergone significant
changes in both technology and in patterns of global trade. Our goal is to build a broad-based
international pharmaceutical enterprise while also expanding in the service sector with the JPGreen
Health and Beauty Clinics.
The current economic and market environment in China may be favorable to us because:
|
|
|
China is experiencing growth rate of 8 10% per year as measured by the gross
domestic product;
|
|
|
|
|
Chinas pharmaceutical market is forecasted to become the worlds fifth largest by
2010 and the largest by 2050 as reported by PriceWaterhouseCoopers ; and
|
|
|
|
|
The growing demand in China for over the counter pharmaceutical products.
|
We plan to achieve our goals by combining our cancer detection, new products acquisitions, and
vaccine technology with JPIs China-based pharmaceutical manufacturing, consumer sales, expanding
distribution network and clinical trials expertise.
24
We believe that the acquisition of JPI has enabled us to:
|
|
|
gain access to what we believe to be the fastest growing pharmaceutical and consumer market in the world,
China;
|
|
|
|
|
platform to in-license North American drugs for manufacture and sale in China and
through out Asia;
|
|
|
|
|
expand DR-70®, combination immunogene therapy (CIT) technologies and HPV test kits
in clinical trials, sales, and marketing into China and Asia; and
|
|
|
|
|
create new opportunities for cancer related product development in China.
|
Research and Development
In the past, JJB and YYB entered into joint research and development agreements with outside
research institutes, but all of the prior joint research agreements have expired. JJB and YYB
currently perform all of their own research and development activities on new products at their own
facilities.
We expect research and development expenditures to remain consistent with prior periods until the
second half of 2008 due to:
|
|
|
Most products manufactured by JPI are acquired through the purchase of the product
licenses. As part of the acquisition process, approval for manufacture by the SFDA
must be received prior to payment.
|
|
|
|
|
Research and development costs regarding DR-70® have decreased due to the
reduction in the use of outside consultants and utilization of in-house personnel.
|
During the three months ended March 31, 2008, we spent $8,695 on research and development
related to DR-70®, compared to $11,776 for the same period in 2007. During the first half of 2008,
we do not expect to incur significant expenditures for research and development in furtherance of
the FDA and SFDA application for approval of DR-70®. However, we anticipate increased research and
development expenditures for the second half of 2008 due to procedures necessary for SFDA approval
of the HPV test kit and DR-70® and the FDA approval process for DR-70® in the United States.
Liquidity and Capital Resources
Total assets decreased $99,701 to $32,767,477 as of March 31, 2008 from $32,867,178 as of
December 31, 2007. This increase was due primarily to a decrease in cash offset by increases in accounts receivable, prepaid
consulting and related party receivable. In addition, total assets
increased due to currency fluctuations.
Our total liabilities decreased 14.13% to $6,136,320 as of March 31, 2008 from
$7,145,665 as of December 31, 2007. The primary reason for the decrease is a result of a reduction
in notes payable offset by an increase in accounts payable and accrued expenses.
In March 2008, the Company repaid approximately $1,393,595 of mature loans to the bank . In
exchange for the repayment, the bank has made a commitment to loan the Company a minimum of 150% of
the repayment, based on a mutual assessment of the financing needs of the business. The Company
also submitted the updated appraisal of property and plant to several local Jiangxi banks. The
Company plans to further reduce mature loans by approximately $1,000,000 and replace existing loans
with a new credit facility of $1,500,000 by the end of second quarter 2008.
These funds will be used to fund additional working capital requirements necessary for
continued growth, clinical trials necessary for SFDA approval for CIT, DR-70® and HPV Test Kit, and
the expansion of the existing plant for the production of Dosataxal.
From January 1, 2008 to March 31, 2008, our cash and cash equivalents decreased by
$2,587,630 or 42%, primarily due to working capital requirements of JPI, reduction of
note payable and general and
25
administrative expenses incurred by AMDL. Cash usage continues to exceed cash generation. As
of May 12, 2008, cash on hand was approximately $2,004,000 and cash is being depleted from operations at the rate of
approximately $445,000 per month. The forgoing does not include non-operating extraordinary items. This monthly amount does not include any expenditures related to
further development or attempts to license our CIT technology, as no significant expenditures on
the CIT technology are anticipated other than the legal fees incurred in furtherance of patent
protection for the CIT technology.
For the three months ended March 31, 2008, cash used in operations was $1,812,066, compared to
$1,123,695 cash used in operation for the same period in 2007. The major components were the net
loss of $1,472,196, increase in accounts receivables related party receivable, prepaid consulting
expenses and other assets offset by non-cash expenses of $105,542 related to the fair value of
options granted to employees and directors, $527,425 related to common stock, warrants and options
issued to consultants for services and $349,754 for depreciation and amortization.
Cash used in investing activities for the three months ended March 31, 2008 was $289,897,
compared to $9,306 cash used in investing activities for the same period in 2007. The major
components were the purchase of property and equipment of $25,114 and $278,719 for deposit for
acquisition of plant assets offset by amounts returned on advance on note receivable.
Net cash used by financing activities for the three months ended March 31, 2008 was $510,483,
compared to $0 for the same period in 2007. Net cash used by financing activities for the three
months ended March 31, 2008 primarily consisted of $1,393,595 for payments on note payable offset
by the net proceeds of $876,129 from the issuance of common stock and proceeds of $6,983 from the
exercise of warrants.
On March 5, 2008 the Company conducted the second closing of the December 2007 Offering. In
the second closing the Company received $1,000,000 in aggregate gross proceeds from the sale of a
total of 323,813 Units at $3.09 per unit and issued warrants to purchase 161,813 shares at an
exercise price of $4.74 per share. The Company did not utilize the services of a placement agent,
however, in connection with the second closing of the December 2007 Offering, the Company paid a
finders fee of $100,000, and incurred $23,875 in other costs. Total costs associated with the
second closing of the December 2007 offering were $123,875, which costs have been netted against
the proceeds received.
We expect to incur capital expenditures at our China facility in 2008 in the form of
additional manufacturing lines to enable additional products to be manufactured. This capital
expenditure is necessary to produce newly-licensed products efficiently. It is anticipated that
this capital expenditure will be financed by raising additional capital through the sale of our
equity securities. In addition to the capital expenditures, there will be additional expenditures
in China for additional direct manufacturing staff, additional working capital and for general and
administrative purposes. In addition, the GMP review process has been completed at JJB and
required renovations started at the facilities. Renovations and recertification is expected to be
complete by the end of second quarter of 2008. In anticipation of the plant shutdown and
to minimize any supply disruption to our distributors, JJB purchased at least six months supply of Goodnak.
We expect to expend $220,000 in 2008 in initial licensing fees under the MyGene HPV Test Kit
license agreement and will be obligated to pay royalties for kit sales in the future.
We have initiated the implementation of an Enterprise Reporting System (ERP), the initial
phase of which will network the financial reporting process between JJB, YYB, JPI and AMDL. The
installation of software will occur in the second quarter of 2008 with an anticipated completion
date in the third quarter of 2008. The projected cost of this project is estimated to be $300,000.
Assuming (i) the current level of revenue from the sale of DR-70® kits does not
increase in the near future, (ii) we do not require new cancer samples to satisfy the FDA concerns
on its pending 510(k) application, (iii) we do not conduct any full scale clinical trials for
DR-70® or our CIT technology in the U.S. or China, (iv) JPI generates sufficient cash to
meet or exceed its cash requirements, and (v) no outstanding warrants are exercised, the amount of
cash on hand is expected to be sufficient to meet our projected operating expenses only through
November 2008.
Going Concern
Our consolidated financial statements for the year ended December 31, 2007 have been prepared assuming we will continue as a going
concern, which contemplates, among other things, the realization of assets and satisfaction of
liabilities in the normal course of business. We incurred net losses of $1,472,196 and $1,385,406
during the three months ended March 31, 2008 and
26
year ended December 31, 2007, respectively, and we had an accumulated deficit of $38,359,093 at March 31, 2008. On May
12, 2008, we had cash on hand of approximately $2,004,000, which is being depleted from operations at the rate of
approximately $445,000 per month. The forgoing does not include non-operating extraordinary items.
There are significant uncertainties that negatively affect our operations. These are
principally related to (i) the absence of a distribution network for our DR-70® kits, (ii) the
early stage of development of our CIT technology and the need to enter into a strategic
relationship with a larger company capable of completing the development of any ultimate product
and the subsequent marketing of such product, and (iii) the absence of any commitments or firm
orders from our distributors. Moreover, there is no assurance as to when, if ever, we will be able
to conduct our operations on a profitable basis. Our limited sales to date for DR-70®, the lack of
any purchase requirements in the existing distribution agreements, and absence of FDA approval make
it impossible to identify any trends in our business prospects. There is no assurance we will be
able to generate sufficient revenues or sell any of our equity securities to generate sufficient
funds when needed, or whether such funds, if available, will be obtained on terms satisfactory to
us. In addition, if either AcuVector and/or the University of Alberta are successful in their
claims against us, we may be liable for substantial damages, our rights to the CIT technology will
be adversely affected, and our future prospects for licensing the CIT technology will be
significantly impaired.
Our near and long-term operating strategies focus on (i) obtaining FDA and SFDA approval for
DR-70® and HPV Test Kit, (ii) seeking a large pharmaceutical partner for our CIT technology, (iii)
funding the growth of JPIs existing products, and (iv) funding the research and development of new
products.
Our management recognizes that we must generate additional capital resources to enable it to
conduct clinical trials that may be required to receive FDA and SFDA approval after November 2008
and to continue as a going concern. Our managements plans include seeking financing, alliances or
other partnership agreements with entities interest in our technologies, sales of our equity
securities, or other business transactions that would generate sufficient resources to assure
continuation of our operations and research and development programs.
On September 16, 2005, the American Stock Exchange (AMEX) sent us a warning letter pursuant
to Section 1009(a)(i) of the AMEX Listed Company Guide stating that we were not in compliance with
the AMEX Continued Listing Standards. We remain non-compliant with the Continued Listing
Standards, but AMEX has not taken any definitive action to delist us. In June 2006, we submitted a
plan to become compliant with AMEXs continued listing standards, which plan included the
acquisition of JPI. The JPI acquisition closed on September 28, 2006. On November 10, 2006, AMEX
advised us that the plan period would remain open until we have been able to demonstrate compliance
with the continued listing standards for two consecutive fiscal quarters. AMEX has not yet issued
its final letter stating that we are in compliance with the Continued Listing Standards. Delisting
from AMEX may impact our ability to raise capital in the future.
These items raise substantial doubt about our ability to continue as a going
concern.
Our consolidated financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amount and classification
of liabilities that may result form the outcome of this uncertainty.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these
consolidated financial statements requires us to make estimates and judgments 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 are believed to be reasonable under the circumstances, the results of which
form the basis of making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions and the differences could be material.
We believe the following critical accounting policies, among others, affect our more
significant judgments and estimates used in the preparation of our financial statements:
Allowance for Doubtful Accounts
. We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments. The allowance for
doubtful accounts is based on specific identification of customer accounts and our best estimate of
the likelihood of potential loss, taking into
27
account such factors as the financial condition and
payment history of major customers. We evaluate the collectibility
of our receivables at least quarterly. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances
may be required. The differences could be material and could significantly impact cash flows from
operating activities.
Inventories
. JPI records inventories at the lower of weighted average cost or net realizable
value. Major components of inventories are raw materials, packaging materials, direct labor and
production overhead. AMDLs inventories consist primarily of raw materials and related materials,
and are stated at the lower of cost or market with cost determined on a first-in, first-out
(FIFO) basis. We regularly monitor inventories for excess or obsolete items and make any
valuation corrections when such adjustments are needed. Once established, write-downs are
considered permanent adjustments to the cost basis of the obsolete or excess inventories. We write
down our inventories for estimated obsolescence or unmarketable inventory equal to the difference
between the cost of inventories and the estimated market value based upon assumptions about future
demand, future pricing and market conditions. If actual future demand, future pricing or market
conditions are less favorable than those projected by management, additional write-downs may be
required and the differences could be material. Such differences might significantly impact cash
flows from operating activities.
Sales Allowances
. A portion of our business is to sell products to distributors who resell
the products to end customers. In certain instances, these distributors obtain discounts based on
the contractual terms of these arrangements. Sales discounts are usually based upon the volume of
purchases or by reference to a specific price in the related distribution agreement. We recognize
the amount of these discounts at the time the sale is recognized. Additionally, sales returns
allowances are estimated based on historical return data, and recorded at the time of sale. If the
quality or efficacy of our products deteriorates or market conditions otherwise change, actual
discounts and returns could be significantly higher than estimated, resulting in potentially
material differences in cash flows from operating activities.
Valuation of Intangible Assets
. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
evaluate the carrying value of its long-lived assets for impairment whenever events or changes in
circumstances indicate that such carrying values may not be recoverable. We use its best judgment
based on the current facts and circumstances relating to its business when determining whether any
significant impairment factors exist. We consider the following factors or conditions, among
others, that could indicate the need for an impairment review:
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significant under performance relative to expected historical or projected future
operating results;
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market projections for cancer research technology;
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|
|
its ability to obtain patents, including continuation patents, on technology;
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significant changes in its strategic business objectives and utilization of the assets;
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significant negative industry or economic trends, including legal factors;
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potential for strategic partnerships for the development of its patented technology;
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changing or implementation of rules regarding manufacture or sale of pharmaceuticals in
China; and
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ability to maintain Good Manufacturing Process (GMP) certifications.
|
If we determine that the carrying values of long-lived assets may not be recoverable based
upon the existence of one or more of the above indicators of impairment, our management performs an
undiscounted cash flow analysis to determine if impairment exists. If impairment exists, we
measure the impairment based on the difference between the assets carrying amount and its fair
value, and the impairment is charged to operations in the period in which the long-lived asset
impairment is determined by management. Based on its analysis, we believe that no indicators of
impairment of the carrying value of its long-lived assets existed at March 31, 2008. There can be
no assurance, however, that market conditions will not change or demand for our products will
continue or allow us to realize the value of our technologies and prevent future long-lived asset
impairment.
28
Revenue Recognition
. We generate revenues from wholesale sales of over-the-counter and
prescription pharmaceuticals, and will begin the direct distribution of pharmaceutical products
through our JPGreen Health and Beauty Clinics.
We recognize revenue in accordance with the Securities and Exchange Commissions (SEC) Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as amended by SAB
No. 104. Accordingly, revenue is recognized when all of the following criteria are met: (1)
persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been
rendered, (3) the sellers price to the buyer is fixed and determinable, and (4) collectibility is
reasonably assured.
Wholesale Sales
. Revenues from the wholesale sales of over-the counter and prescription
pharmaceuticals are recognized when title and risk of loss have passed to the buyer and provided
the criteria in SAB No. 101 are met. Buyers generally have limited rights of return, and we
provide for estimated returns at the time of sale based on historical experience. Returns from
customers historically have not been material. Actual returns and claims in any future period may
differ from our estimates.
Direct Distribution
. Commencing in July 2007, JPI began direct distribution of pharmaceutical
products through the Jade Healthy Supermarkets. The Jade Healthy Supermarkets are small retail
stores operated by independent third parties who sell JJBs products at retail to consumers.
Pursuant to these arrangements, JJB receives a one-time, non-refundable up front fee from the
operator of the retail stores. As of March 31, 2008, there were eight retail stores in operation.
JJB received a one-time, non-refundable up front fee from each of the sub-operators of the retail
stores. By a supplementary agreement, JJB assigned all these shops to Shanghai Jiezheng (formerly
known as Shanghai Xiangen) who provided leasehold improvements and equipment to the sub-operators
in the establishment of the Retail Stores, in return, Shanghai Jiezheng will take over all
responsibilities and rights for the stores. All inventories in the retail shops will be consigned
to the operators of the retail stores for sale to consumers. Therefore, the operational results of
the sub-operators will accounted for by Shanghai Jeizheng. Revenues from the sale of JJBs
products at the retail store level will be recognized by us at the time products are sold to
Shanghai Jiezheng.
As of March 31, 2008, we had received $314,762 in upfront fees from Jade Healthy Supermarket
store operators. We deferred recognition of these up-front, non-refundable fees until the retail
stores were opened, at which time we have no further obligations to the store operator. All retail
stores were opened, and accordingly, we amortized $41,808 of the up-front fees received as revenues
and expensed commissions paid to Shanghai Jiezheng for finding sub-operators in the accompanying
Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended
March 31, 2008..
VAT Taxes.
In accordance with Emerging Issues Task Force (EITF) Issue No. 06-3, How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross Versus Net Presentation), JPIs revenues are reported net of value added taxes
(VAT) collected.
Deferred Taxes
. We record a valuation allowance to reduce the deferred tax assets to the
amount that is more likely than not to be realized. We have considered estimated future taxable
income and ongoing tax planning strategies in assessing the amount needed for the valuation
allowance. Based on these estimates, all of our deferred tax assets have been reserved. If actual
results differ favorably from those estimates used, we may be able to realize all or part of our
net deferred tax assets. Such realization could positively impact our operating results and cash
flows from operating activities.
Litigation
. We account for litigation losses in accordance with SFAS No. 5, Accounting for
Contingencies. Under SFAS No. 5, loss contingency provisions are recorded for probable losses at
managements best estimate of a loss, or when a best estimate cannot be made, a minimum loss
contingency amount is recorded. These estimates are often initially developed substantially
earlier than when the ultimate loss is known, and the estimates are refined each accounting period,
as additional information is known. Accordingly, we are often initially unable to develop a best
29
estimate of loss; therefore, the minimum amount, which could be zero, is recorded. As information
becomes known, either the minimum loss amount is increased or a best estimate can be made,
resulting in additional loss provisions.
Occasionally, a best estimate amount is changed to a lower amount when events result in an
expectation of a more favorable outcome than previously expected. Due to the nature of current
litigation matters, the factors that could lead to changes in loss reserves might change quickly
and the range of actual losses could be significant, which could materially impact our results of
operations and cash flows from operating activities.
Stock-Based Compensation Expense
. All issuances of our common stock for non-cash
consideration have been assigned a per share amount equaling either the market value of the shares
issued or the value of consideration received, whichever is more readily determinable. The
majority of non-cash consideration received pertains to services rendered by consultants and others
and has been valued at the market value of the shares on the measurement date.
We account for equity instruments issued to consultants and vendors in exchange for goods and
services in accordance with the provisions of EITF Issue No. 96-18, Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling
Goods or Services, and EITF Issue No. 00-18, Accounting Recognition for Certain Transactions
Involving Equity Instruments Granted to Other than Employees. The measurement date for the fair
value of the equity instruments issued is determined at the earlier of (i) the date at which a
commitment for performance by the consultant or vendor is reached or (ii) the date at which the
consultant or vendors performance is complete. In the case of equity instruments issued to
consultants, the fair value of the equity instrument is recognized over the term of the consulting
agreement.
In accordance with EITF Issue No. 00-18, an asset acquired in exchange for the issuance of
fully vested, non-forfeitable equity instruments should not be presented or classified as an offset
to equity on the grantors balance sheet once the equity instrument is granted for accounting
purposes. Accordingly, we record the fair value of the fully vested, non-forfeitable common stock
issued for future consulting services as prepaid expense in its consolidated balance sheet.
The provisions of SFAS No. 123(R), Share-Based Payment were adopted on January 1, 2006 using
the modified prospective transition method. SFAS No. 123(R) requires a public entity to measure
the cost of employee services received in exchange for an award of equity instruments, including
stock options, based on the grant-date fair value of the award and to recognize the portion
expected to vest as compensation expense over the period the employee is required to provide
service in exchange for the award, usually the vesting period. In March 2005, the SEC issued SAB
No. 107 relating to SFAS No. 123(R). We have applied the provisions of SAB No. 107 in its adoption
of SFAS No. 123(R).
SFAS No. 123(R) requires the cash flows resulting from the tax benefits resulting from tax
deductions in excess of the compensation cost recognized for those options to be classified as
financing cash flows. Due to our loss position, there were no such tax benefits during the three
months ended March 31, 2008.
Results of Operations
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
Net Revenues
. During the three months ended March 31, 2008, our aggregated revenues from
product sales increased 149% to $3,545,938 from $1,424,179 for the same period in 2007, and our
aggregated revenues from the amortization of up-front fees was $41,808 as compared to $0 for
the same period in 2007.
Corporate
Net revenues for AMDL-Corporate were $8,220 for the three months ended March 31, 2008, compared to
$14,150 for the same period in 2007. This 42% decrease is due to decreased orders for the DR-70®
test kits and OEM products
.
The continued low level of DR-70® and OEM product sales is disappointing to our management.
Our existing distributors have not been effective and no new distributors were engaged in the three
months ended March 31, 2008.
30
Market acceptance of our DR-70® kits has been slower than originally
anticipated, in part, because the DR-70® kit has not yet received FDA approval. In addition, we
have not concluded any material new distribution agreements this year
as new potential distributors have experienced similar delays and face similar market acceptance
issues because of the lack of FDA approval.
During 2008, we expect sales of OEM products to be at the same level as experienced in 2007.
Assuming FDA approval of DR-70® sometime in 2008, we expect sales of DR-70® to increase in 2008,
but any such increase in sales is not expected to significantly impact our operating results for
2008. The statement concerning future sales is a forward-looking statement that involves certain
risks and uncertainties which could result in a fluctuation of sales below those achieved for three
months ended March 31, 2008. Sales in 2008 could be negatively impacted by potential competing
products and overall market acceptance of our products.
China-Wholesale
China-Wholesales net revenues were $3,537,718 for the three months ended March 31, 2008,
compared to $1,410,029 for the same period in 2007. The 151
%
increase is primarily due to the
continuing demand for pharmaceutical products in China, new distribution agreements and expansion
into new regions.
JJBs net revenues increased 174% to $2,932,873 for the three months ended March 31, 2008, as
compared to $1,071,034 for the same period in 2007. This was primarily due to the introduction of
the seven new pharmaceutical products listed below:
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Human Placental Histosolution (Goodnak)
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Levofloxacin Lactate and Sodium Chloride Injection
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50% NACL G.S.
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Metronidazole Injection
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Levofloxacin Hydrochloride Injection
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Ondansetron Hydrochloride Injection
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Domperidone Tablet
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YYBs net revenues increased 78% to $604,845 for the three months ended March 31, 2008, as
compared to $338,995 for the same period in 2007, due to the increase in demand for medical
products in China as well as expansion into new regions.
China-Wholesales top five selling products for the three months ended March 31, 2008 were:
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Percent of
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Total
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China-Wholesale
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Name
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Sales
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Domperidone Tablets
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38.97
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%
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Human Placental Histosolution (Goodnak)
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31.15
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%
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Diavitamin, Calcium Hydrogen Phosphate and Lysine Tablets
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12.17
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%
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Levofloxacin Lactate and Sodium Chloride Injection
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5.37
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%
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GNS
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2.70
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%
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90.36
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%
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31
China-Direct Distribution
We received $314,762 in up-front fees from sub-operators of the Jade Healthy Supermarkets. We
deferred recognition of these fees until opening of these stores. Net revenue for the three months
ended March 31, 2008 was $41,808 related to amortization of up front fees.
Gross Profit.
Our gross profit for the three months ended March 31, 2008 increased 144% to
$1,771,016, compared to $726,869 for the same period in 2007. JPI contributed $1,769,593 to our
gross profit for the three months ended March 31, 2008, compared to $715,299 for the same period in
2007.
Corporate
AMDLs gross profit decreased 88% to $1,423 for the three months ended March 31, 2008 from
$11,570 for the same period in 2007, due to a reduction in orders for the DR-70® kit and OEM
products in the first quarter of 2008.
China-Wholesale
China-Wholesales gross profit was $1,727,785 for the three months ended March 31, 2008, a
142% increase over the $715,299 gross profit for same period in 2007. This increase can be
attributed to increased sales and a change in product mix and reduced manufacturing overhead due to
economies of scales resulting from the increase in sales. The change in product mix was
principally due to the increased production and sales of Human Placenta Histosolution (Goodnak) and
Domperidone Tablet with an approximate profit margin of 75% and 71%, respectively.
The major components of cost of sales include raw materials, wages and salary and production
overhead. Production overhead is comprised of depreciation of building, land use rights,
manufacturing equipment, amortization of production rights, utilities and repairs and maintenance.
China-Wholesales gross profit was positively impacted by increased production efficiencies and
manufacturing of products with higher margins.
Management anticipates gross profit margins for China-Wholesale to remain at about the same
level for the year ending December 31, 2008, as was experienced for the year ended December 31,
2007. The statement concerning future gross profit margins is a forward-looking statement that
involves certain risks and uncertainties which could result in a fluctuation of gross margins below
those achieved for the year ended December 31, 2007 especially as the product sales mix changes.
Gross profit could also be negatively impacted by potential competing products and overall market
acceptance of the Companys products.
China-Direct Distribution
China-Direct Distributions gross profit for the three months ended March 31, 2008 was
approximately $41,808, as compared to $0 for the same period in 2007 as there were no retail
operations in the same period in 2007.
Research and Development.
Our research and development expense for the three months ended
March 31, 2008 was $8,695, compared to $11,776 for the same period in 2007.
Corporate
All research and development costs incurred during the three months ended March 31, 2008 was
incurred by AMDL-Corporate. These costs comprised of funding the necessary research and development of the
DR-70® test kit for the FDA
.
China-Wholesale and China-Direct Distribution
JPI/ China-Wholesale currently performs all of its own research and development activities on
new products at their own facilities, but only a nominal amount of research and development was
conducted during the three month period ended March 31, 2008. In addition, prior to the purchase
of a product license, the product must have approval from the SFDA for manufacture. Therefore,
research and development costs are incurred by the seller.
An increase in research and development costs are anticipated for the second half of 2008.
Beginning in June 2007, the Chinese approval process fundamentally changed. Under the new SFDA
guidelines, the SFDA is unlikely to approve the marketing of DR-70® without one of the
following: approval by the USFDA, sufficient clinical
32
trials in China, or product approval from a
country where DR-70® is registered and approved for marketing and export. JPI intends to
proceed with all of these options in an attempt to meet the new SFDA guidelines, but there can be
no assurances that JPI will obtain approval for DR-70® or what the timing thereof may
be.
Selling, General and Administrative Expenses.
Our general and administrative expenses for the
three months ended March 31, 2008 was $2,868,180, as compared to $1,995,635 for the same period in
2007.
Selling, general and administrative expenses are anticipated to increase in 2008 as we
anticipate additional costs for payroll, professional fees and additional costs as JPI/
China-Wholesale pharmaceutical sales expands into new distribution agreements and expands its
distribution base and also due to the expansion of the JPGreen Spa and Clinics.
Corporate
AMDL-Corporate
incurred general and administrative expenses of $2,408,892 for the three months ended
March 31, 2008, as compared to $1,512,324 in the same period in 2007 primarily consisting of an increase of $196,000 in accounting fees, $147,000 in legal fees,
$668,000 in payroll and payroll taxes, $136,000 in directors fees offset by a decrease of $107,000 in investor relations and $148,000 in general consulting expense. Also
included in general and administrative expenses were non-cash expenses incurred during the three
months ended March 31, 2008 of approximately $527,425 for common stock and warrants issued to
consultants for services. The increase is attributable to a significant increase in business activities in China, including corporate governance functions.
China-Wholesale
China-Wholesale incurred general and administrative expenses of $459,288 for the three months
ended March 31, 2008, as compared to $483,311 for the same period in 2007. Major components were
advertising, payroll and related taxes, meals and
entertainment and insurance. Selling, general and administrative expenses decreased 5% in the
three months ended March 31, 2008 when compared to the same period in 2007.
Currently, sales are distributed geographically as follows:
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Geographic Location China
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Southeastern
|
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24
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%
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Eastern
|
|
|
15
|
%
|
Central
|
|
|
40
|
%
|
Northeastern
|
|
|
20
|
%
|
Southwestern
|
|
|
1
|
%
|
JPIs/ China-Wholesales goal is to expand its distribution network into 36 key cities within
the near future.
China-Direct Distribution
China-Direct Distribution did not incur any selling, general and administrative expenses
during the three months ended March 31, 2008
Other Income and Expense.
Our interest and other income (expense), net for the
three months ended March 31, 2008 was income of $62,625, compared to expense of $3,837 for the same period in 2007.
Interest expense was $103,056 for the three months ended March 31, 2008, compared to $90,857 for
the same period in 2007. The losses for the three month ended March 31, 2008 was primarily due exchange losses.
Corporate.
All AMDL-Corporate interest income represents interest paid on deposits held at financial institutions.
Interest income decreased to $895 for the three months ended March 31, 2008, compared to $3,837 to
for the same period in 2007, due to the significantly lower average cash balances maintained by us.
33
Interest expense for the three months ended March 31, 2008 was $905, as compared to $0 for the
same period in 2007.
China-Wholesale
JPI/ China-Wholesale incurred interest expense of $102,151 for the three months ended March
31, 2008, compared to $90,857 for the same period in 2007. These expenses represent interest paid
to financial institutions in connection with debt obligations.
Loss from Operations and Net Loss.
As a result of the factors described above, our
consolidated loss from operations was $1,105,859 and $1,280,542 for the three months ended March 31, 2008 and 2007 respectively. Our
consolidated net loss for the three months ended March 31, 2008 was $1,472,196 or ($0.10) per
share, compared to a consolidated net loss of $1,385,406 or ($0.14) per share for the same period
in 2007.
The decrease in loss from operations was due to an increase in gross profit at JPI
attributable to the change in product mix and efficiencies due to increased sales. The increase in
net loss during the three months ended March 31, 2008 as compared to the same quarter in 2007 was
due to the above factors offset by an increase in other expense and provision for income taxes. The increase in income tax expense is a result of the application of a 50% tax waiver at JJB in 2008, compared to a 100% waiver in 2007.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not
required to provide the information required under this item.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
Our management, with the participation of our principal executive officer and principal
financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2008.
Based on this evaluation, our principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures subject to the limitations described in Form 10-K/A, were effective at the reasonable assurance
level during the period and as of the end of the period covered by this quarterly report to ensure
that information required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the SEC rules and forms and that such information is accumulated and communicated to our
management, including our principal executive officer and our principal financial officer, as
appropriate, to allow timely decisions regarding required disclosures.
34
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended
March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting, other than the following:
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We entered in to a transaction which advanced funds to a related party without preparing legal documentation to evidence amounts advanced.
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We corrected this issue after March 31, 2008, by documenting the advance with a promissory note.
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For more information regarding
the material weakness identified and our remediation plans, we encourage you to read Item 9A Controls and Procedures included in the Annual Report on Form 10-K/A
that we filed with the SEC on April 14, 2008.
AMDL, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 22, 2002, AcuVector Group, Inc. (AcuVector) filed a Statement of Claim in the
Court of Queens Bench of Alberta, Judicial District of Edmonton relating to our CIT technology we
acquired from Dr. Chang in August 2001. The claim alleges damages of $CDN 20 million and seeks
injunctive relief against Dr. Chang for, among other things, breach of contract and breach of
fiduciary duty, and against us for interference with the alleged relationship between Dr. Chang and
AcuVector. The claim for injunctive relief seeks to establish that the AcuVector license agreement
with Dr. Chang is still in effect. We have performed extensive due diligence to determine that
AcuVector had no interest in the technology when we acquired it. We have recently initiated action
to commence discovery in this case, and AcuVector has taken no action to advance the proceedings
since filing the complaint in 2002. We are confident that AcuVectors claims are without merit and
that we will receive a favorable judgment. As the final outcome is not determinable, no accrual or
loss relating to this action is reflected in the accompanying consolidated financial statements.
We are also defending a companion case filed in the same court by the Governors of the
University of Alberta against us and Dr. Chang. The University of Alberta claims, among other
things, that Dr. Chang failed to remit the payment of the Universitys portion of the monies paid
by us to Dr. Chang for the CIT technology purchased by us from Dr. Chang in 2001. In addition to
other claims against Dr. Chang relating to other technologies developed by him while at the
University, the University also claims we conspired with Dr. Chang and interfered with the
Universitys contractual relations under certain agreements with Dr. Chang, thereby damaging the
University in an amount that is unknown to the University at this time. The University has not
claimed that we are not the owner of the CIT technology, just that the University has an equitable
interest therein for the revenues therefrom. As the final outcome is not determinable, no accrual
or loss relating to this action is reflected in the accompanying consolidated financial statements.
No significant discovery has yet been conducted in the case.
Accordingly, if either AcuVector and/or the University is successful in their claims, we may
be liable for substantial damages, our rights to the technology will be adversely affected, and our
future prospects for exploiting or licensing the CIT technology will be significantly impaired.
On March 27, 2008, an action was brought against us in the Superior Court of California,
County of Orange by Noble International Investments, Inc. (Noble), alleging, among other things,
breach of a letter agreement for investment banking services in an offering that was never
commenced. The plaintiff is seeking monetary damages for
35
payment of liquidated damages allegedly
due Noble in an amount of $150,000. We believe that this lawsuit is without merit, that Nobles
claims are unfounded and that the Company has good defenses against the claims asserted by Noble.
We believe (based, in part on the preliminary review of these actions by legal counsel) that
the probable resolution of such actions will not materially affect our consolidated financial
position, results of operations, or our liquidity.
ITEM 1A. RISK FACTORS
Our business involves significant risks that are described below.
Limited product development activities; our product development efforts may not result in
commercial products.
We intend to continue to pursue USFDA and SFDA approval of DR-70® and licensing of our CIT
technology. Due to limited cash resources, we are limited in the number of additional products we
can develop at this time. Successful cancer detection and treatment product development is highly
uncertain, and very few research and development projects produce a commercial product. Product
candidates like DR-70® or our CIT technology that appear promising in the early phases of
development, such as in early animal or human clinical trials, may fail to reach the market for a
number of reasons, such as:
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the product candidate did not demonstrate acceptable clinical trial results even though
it demonstrated positive preclinical trial results;
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the product candidate was not effective in treating a specified condition or illness;
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the product candidate had harmful side effects on humans;
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the necessary regulatory bodies, such as the USFDA or SFDA, did not approve our product
candidate for an intended use;
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the product candidate was not economical for us to manufacture and commercialize; and
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the product candidate is not cost effective in light of existing therapeutics.
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Of course, there may be other factors that prevent us from marketing a product including, but
not limited to, our limited cash resources. We cannot guarantee we will be able to produce
commercially successful products. Further, clinical trial results are frequently susceptible to
varying interpretations by scientists, medical personnel, regulatory personnel, statisticians and
others, which may delay, limit or prevent further clinical development or regulatory approvals of a
product candidate. Also, the length of time that it takes for us to complete clinical trials and
obtain regulatory approval for product marketing may vary by product and by the intended use of a
product. We cannot predict the length of time to complete necessary clinical trials and obtain
regulatory approval.
Our cash position as of May 12, 2008 of approximately $2,004,000 is not sufficient to conduct
significant clinical trials for DR-70® or to market our products internationally by ourselves.
With or without additional financing (or cash generated from our pharmaceutical operations in
China), we will likely engage outside distributors and license our products to others, although
there can be no assurances that our products can be successfully licensed.
Our operations in China involve significant risk.
JJB and YYB operate as WFOEs in China. Risks associated with operating as a WFOE include unlimited liability for claims arising
from operations in China and potentially less favorable treatment from governmental agencies in
China than JJB and YYB would receive if JJB and YYB operated through a joint venture with a Chinese
partner.
36
JJB and YYB are subject to the Pharmaceutical Administrative Law, which governs the licensing,
manufacture, marketing and distribution of pharmaceutical products in China and sets penalty
provisions for violations of provisions of the Pharmaceutical Administrative Law. Compliance with
changes in law may require us to incur
additional expenditures, which could have a material impact on our consolidated financial
position, results of operations and cash flows.
As in the case of JJB, the Chinese government has the right to annex or take facilities it
deems necessary. Currently, a portion of JJBs facility that produces large and small volume
parenteral solutions has been identified for annexation by the Chinese Military Department. JJB
has objected to the Chinese Military Departments annexation. The outcome of this event cannot be
predicted at this time, but if the Chinese government takes this facility, although we expect that
JJB will be compensated fairly for the facility, JJB may have to spend significant time and
resources finding another location and restarting those operations in another area. In addition,
such new location may need to obtain GMP certification. Such annexation, or the threat of such
annexation, may negatively impact our results of operation and financial condition.
The value of the RMB fluctuates and is subject to changes in Chinas political and economic
conditions. Historically, the Chinese government has benchmarked the RMB exchange ratio against
the U.S. dollar, thereby mitigating the associated foreign currency exchange rate fluctuation risk;
however, no assurances can be given that the risks related to currency deviations of the RMB will
not increase in the future. Additionally, the RMB is not freely convertible into foreign currency
and all foreign exchange transactions must take place through authorized institutions.
We may not be able to continue to operate our business if we are unable to attract additional
operating capital.
The current level of our revenues is not sufficient to finance all of our intended operations
on a long-term basis. Currently, our operations do not produce sufficient cash to offset the cash
drain of the USFDA approval process for DR-70® and our other general operating and administrative
expenses. Accordingly, our business and operations are substantially dependent on our ability to
raise additional working capital to: (i) finance the costs of USFDA approval of DR-70® in the U.S.
and SFDA in China; (ii) supply additional working capital to JPI for expansion of manufacturing
capabilities for new and existing products; and (iii) fund ongoing selling, general and
administrative expenses of our business.
As of March 31, 2008, we had warrants outstanding that are currently exercisable for up to an
aggregate of 4,687,306 shares of our common stock at a weighted-average exercise price of $4.01 per
share. Included within that amount are (i) warrants to purchase a total of 1,204,505 shares
(including broker warrants) which were issued at an average exercise price of $4.74 per share in
our December 2007 private placement (ii) an additional 161,813 warrants were issued in February
2008 in connection with the second closing of that private placement in March . (iii) warrants to
purchase a total of 1,205,632 shares at an average exercise price of $3.68 per share which were
issued in connection with private placements that closed in April and May of 2007, and (iv)
warrants to purchase a total of 1,366,319 shares which were issued at an average exercise price of
$4.74 per share in other private placements or compensation arrangements prior to 2007. In
addition, any future equity financing may involve substantial dilution to our stockholders.
On May 12, 2008, we had cash on hand of approximately $2,004,000, which is being depleted from operations at
the rate of approximately $445,000 per month. The forgoing does not include non-operating extraordinary items. Assuming (i) the current level of revenue from the
sale of DR-70® kits does not increase in the near future, (ii) we do not require new cancer samples
to satisfy the USFDA concerns on our pending 510(k) application, (iii) we do not conduct any full
scale clinical trials for DR-70 ® or our CIT technology in the U.S. or China, (iv) JPI generates
sufficient cash to meet or exceed its cash requirements, and (v) no outstanding warrants are
exercised, the amount of cash on hand is expected to be sufficient to meet our projected operating
expenses through November 2008.
Our independent registered public accounting firm has included a going concern paragraph in their
report on our financial statements.
While our independent registered public accounting firm expressed an unqualified opinion on
our consolidated financial statements, our independent registered public accounting firm did
include an explanatory paragraph indicating that there is substantial doubt about our ability to
continue as a going concern due to our working capital deficit and continuing net losses. Our
ability to continue as an operating entity currently depends, in large measure, upon our
37
ability to
generate additional capital resources. In light of this situation, it is not likely that we will
be able to raise equity. While we seek ways to continue to operate by securing additional
financing resources or alliances or other partnership agreements, we do not at this time have any
commitments or agreements that provide for additional capital resources. Our financial condition
and the going concern emphasis paragraph may also make it more difficult for us to maintain
existing customer relationships and to initiate and secure new customer relationships.
Our current products cannot be sold in certain countries if we do not obtain and maintain
regulatory approval.
We conduct research and clinical trials and we manufacture, distribute and market our products
for their approved indications. These activities are subject to extensive regulation by numerous
state and federal governmental authorities in the U.S., such as the USFDA and the Centers for
Medicare and Medicaid Services (formerly Health Care Financing Administration) and the SFDA in
China as well as by certain foreign countries, including some in the European Union. Currently, we
(or our distributors) are required in the U.S. and in foreign countries to obtain approval from
those countries regulatory authorities before we can market and sell our products in those
countries. Obtaining regulatory approval is costly and may take many years, and after it is
obtained, it remains costly to maintain. The USFDA and foreign regulatory agencies have
substantial discretion to terminate clinical trials, require additional testing, delay or withhold
registration and marketing approval and mandate product withdrawals. In addition, later discovery
of unknown problems with our products or manufacturing processes could result in restrictions on
such products and manufacturing processes, including potential withdrawal of the products from the
market. If regulatory authorities determine that we have violated regulations or if they restrict,
suspend or revoke our prior approvals, they could prohibit us from manufacturing or selling our
products until we comply, or indefinitely.
USFDA approval for marketing DR-70® is not assured.
On November 13, 2007, we received a letter of deficiency noting four areas of concern with our
pending 510(k) application for our DR-70® test kit and the application was put on hold pending the
USFDAs receipt of our response to the USFDAs concerns. We were granted an extension to May 12,
2008 to respond in full and filed our response in accordance with our deadline. We revised our application to address the USFDAs
concerns. The USFDAs response to the revised application cannot be anticipated and no assurances
can be given that we will ever receive USFDA clearance for the commercial sale of DR-70® in the
U.S. Furthermore, if USFDA approval is granted, although the approval has no expiration date, if
we are found in violation, the USFDA may impose fines, terminate the approval or seize our
products, at its discretion. In addition, the loss of previously received approvals, or failure to
comply with existing or future regulatory requirements would have a material adverse effect on our
business, financial condition and results of operations.
Our future prospects will be negatively impacted if we are unsuccessful in pending litigation over
our CIT technology.
As noted above, we are engaged in litigation with AcuVector and with the Governors of the
University of Alberta over our CIT technology. Although theses cases are still in the early stages
of discovery, we believe they are without merit and that we will receive a favorable judgment in
both. However, if either AcuVector or the University is successful in their claims, we may be
liable for substantial damages, our rights to the technology will be adversely affected, and our
future prospects for exploiting or licensing the CIT technology will be significantly impaired.
The value of intangible assets may not be equal to their carrying values.
One of our intangible assets includes the CIT technology, which we acquired from Dr. Chang in
August 2001. We also purchased certain intangible assets in our acquisition of JPI. Whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable, we are
required to evaluate the carrying value of such intangibles, including the related amortization
periods. Whenever events or changes in circumstances indicate that the carrying value of an
intangible asset may not be recoverable, we determine whether there has been impairment by
comparing the anticipated undiscounted cash flows from the operation and eventual disposition of
the product line with its carrying value. If the undiscounted cash flows are less than the
carrying value, the amount of the impairment, if any, will be determined by comparing the carrying
value of each intangible asset with its fair value. Fair value is generally based on either a
discounted cash flows analysis or market analysis. Future operating income is based on various
assumptions, including regulatory approvals, patents being granted, and the type and nature of
competing products.
Patent approval for eight original claims related to CIT technology was obtained in May 2004
and a continuation patent application was filed in 2004 for a number of additional claims. No
regulatory approval has been
38
requested for our CIT technology and we do not have the funds to
conduct the clinical trials that would be required to obtain regulatory approval for our CIT
technology. Accordingly, we are seeking a strategic partner to license the CIT technology from us.
If we cannot attract a large pharmaceutical company to license our CIT technology and conduct the
trials required to obtain regulatory approval, or if regulatory approvals or patents are not
obtained or are substantially delayed, or other competing technologies are developed and obtain
general market acceptance, or market conditions otherwise change, CIT and other intangible
technology may have a substantially reduced value, which could
be material. As intangible assets represent a substantial portion of assets in our
consolidated balance sheet, any substantial deterioration of value would significantly impact our
reported consolidated financial position and our reported consolidated operating results.
If our intellectual property positions are challenged, invalidated or circumvented, or if we fail
to prevail in future intellectual property litigation, our business could be adversely affected.
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and
often involve complex legal, scientific and factual questions. To date, there has emerged no
consistent policy regarding breadth of claims allowed in such companies patents. Third parties
may challenge, invalidate or circumvent our patents and patent applications relating to our
products, product candidates and technologies. In addition, our patent positions might not protect
us against competitors with similar products or technologies because competing products or
technologies may not infringe our patents.
We face substantial competition, and others may discover, develop, acquire or commercialize
products before or more successfully than we do.
We operate in a highly competitive environment. Our products compete with other products or
treatments for diseases for which our products may be indicated. Additionally, some of our
competitors market products or are actively engaged in research and development in areas where we
are developing product candidates. Large pharmaceutical corporations have greater clinical,
research, regulatory and marketing resources than we do. In addition, some of our competitors may
have technical or competitive advantages over us for the development of technologies and processes.
These resources may make it difficult for us to compete with them to successfully discover,
develop and market new products.
We have limited sales of DR-70® and are reliant on our distributors for sales of our products.
Prior to the acquisition of JPI, virtually all of our operating revenues have come from sales
to two distributors in foreign countries of DR-70® kits and from sales to a few domestic customers
of our OEM products. For the year ended December 31, 2007, almost all of our revenues were derived
from sales of DR-70® and we had only nominal sales of our OEM products. Historically, we have not
received any substantial orders from any of our customers or distributors of DR-70® or our OEM
products. Moreover, none of our distributors or customers is contractually required to buy any
specific number of DR-70® kits or OEM products from us. Accordingly, based upon this fact,
historical sales, and the uncertainty of USFDA approval for sale of DR-70® in the U.S., any
projection of future orders or sales of DR-70® kits or OEM products are unreliable. In addition,
the amount of DR-70® purchased by our distributors or customers can be adversely affected by a
number of factors, including their budget cycles and the amount of funds available to them for
product promotion and marketing.
JPI is reliant on its distributors for sales of its products.
Most of JPIs products are sold to distributors. JPIs distributors are not required to
purchase any minimum quantity of products; however, many of JPIs distribution agreements are
subject to termination and cancellation if minimum quantities of specified products are not
purchased by the distributors. JPI has never terminated any distributor for failure to meet the
minimum quantity sales targets.
We are subject to risks associated with our foreign distributors.
Our business strategy includes the continued dependence on foreign distributors for our DR-70®
product and local distributors in China for JPIs products. To date, we have not been successful
in generating a significant increase in sales for DR-70® through distribution channels in existing
markets or in developing distribution channels in new markets. We are also subject to the risks
associated with our distributors operations, including: (i) fluctuations in
39
currency exchange
rates; (ii) compliance with local laws and other regulatory requirements; (iii) restrictions on the
repatriation of funds; (iv) inflationary conditions; (v) political and economic instability; (vi)
war or other hostilities; (vii) overlap of tax structures; and (viii) expropriation or
nationalization of assets. The inability to manage these and other risks effectively could
adversely affect our business.
We do not intend to pay dividends on our common stock in the foreseeable future.
We currently intend to retain any earnings to support our growth strategy and do not
anticipate paying dividends in the foreseeable future.
If we fail to comply with the rules under the Sarbanes-Oxley Act related to accounting controls and
procedures or if material weaknesses or other deficiencies are discovered in our internal
accounting procedures, our stock price could decline significantly
.
Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the
effectiveness of our internal controls over financial reporting commencing December 31, 2007 and a
report by our independent registered public accounting firm addressing the effectiveness of our
internal control over financial reporting for the year ending December 31, 2009.
Our management has evaluated the effectiveness of our internal control over financial
reporting as of March 31, 2008 based on the control criteria established in a report entitled
Internal ControlIntegrated Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, our management has concluded that our internal
control over financial reporting was not effective as of March 31, 2008. During its evaluation,
our management identified material weaknesses in our internal control over financial reporting and
other deficiencies as described in Item 9 Part II of our Annual Report on Form 10-K, as amended on
Form 10-K/A. As a result, our investors could lose confidence in us, which could result in a
decline in our stock price.
We are taking steps to remediate our material weaknesses, as described in Item 9 Part II of
our Annual Report on Form 10-K, as amended on Form 10-K/A. If we fail to achieve and maintain the
adequacy of our internal controls, we may not be able to ensure that we can conclude in the future
that we have effective internal controls over financial reporting in accordance with Section 404 of
the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to
revenue recognition, are necessary for us to produce reliable financial reports and are important
to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent
fraud, our business and operating results could be harmed, investors could lose confidence in our
reported financial information, and the trading price of our stock could drop significantly. In
addition, we cannot be certain that additional material weaknesses or significant deficiencies in
our internal controls will not be discovered in the future.
Notwithstanding the deficiencies in our internal control over financial reporting, our
management has concluded that the unaudited condensed consolidated financial statements included in our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2008 fairly present in all material respects
our financial condition, results in operations and cash flows for the three months ended March 31,
2008 in conformity with accounting principles generally accepted in the U.S.
Loss of our listing on the American Stock Exchange could adversely affect the marketability and
price of our shares.
We are not currently in compliance with the standards for continued listing on AMEX, although
AMEX has not yet taken any action to delist our securities. Unless we meet the standards for
continued listing, AMEX could at any time (i) commence a proceeding to delist our securities or
(ii) include us in the list of companies that are not in compliance with AMEXs continued listing
standards and require that the indicator .BC be added as an extension to our symbol which will be
transmitted with any quotation or trade of our shares. In June 2006, we submitted a plan to become
compliant with AMEXs continued listing standards which plan included the acquisition of JPI. The
JPI acquisition closed on September 28, 2006. On November 10, 2006, AMEX advised us that the plan
period would remain open until we have been able to demonstrate compliance with the continued
listing standards for two consecutive fiscal quarters. As of the date hereof, AMEX has not yet
issued its final letter stating that we are in compliance with the Continued Listing Standards.
Delisting from AMEX may impact our ability to raise capital in the future. The loss of listing on
AMEX could adversely affect the marketability and/or price of our shares because some brokers and
other traders might refrain from purchasing or trading our shares if we were delisted or if they
perceived
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that a delisting might occur in the near future. Additionally, delisting from AMEX may
adversely impact our ability to raise capital in the future.
Our stock price is volatile, which could adversely affect your investment.
Our stock price, like that of other international bio-pharma cancer diagnostic and treatment
companies, is highly volatile. Our stock price may be affected by such factors as:
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clinical trial results;
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product development announcements by us or our competitors;
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regulatory matters;
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announcements in the scientific and research community;
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intellectual property and legal matters;
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broader industry and market trends unrelated to our performance;
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economic markets in Asia; and
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competition in local Chinese markets where we sell JPIs product.
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In addition, if our revenues or operating results in any period fail to meet the investment
communitys expectations, there could be an immediate adverse impact on our stock price.
We have limited product liability insurance.
We currently produce products for clinical studies and for investigational purposes. We are
producing our products in commercial sale quantities, which will increase as we receive various
regulatory approvals in the future. There can be no assurance, however, that users will not claim
that effects other than those intended may result from our products, including, but not limited to
claims alleged to be related to incorrect diagnoses leading to improper or lack of treatment in
reliance on test results. In the event that liability claims arise out of allegations of defects
in the design or manufacture of our products, one or more claims for damages may require the
expenditure of funds in defense of such claims or one or more substantial awards of damages against
us, and may have a material adverse effect on us by reason of our inability to defend against or
pay such claims. We carry product liability insurance for any such claims, but only in an amount
equal to $2,000,000 per occurrence, and $2,000,000 aggregate liability, which may be insufficient
to cover all claims that may be made against us.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
All unregistered sales of equity securities during the period of this quarterly report have
been disclosed in our Current Report on Form 8-K filed March 7, 2008.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
(a) Exhibits: See Exhibit Index herein
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AMDL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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AMDL, INC.
(Registrant)
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Date: May 15, 2008
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By:
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/s/ Gary L. Dreher
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Gary L. Dreher, President and
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Chief Executive Officer
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Date: May 15, 2008
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By:
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/s/ Akio Ariura
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Akio Ariura, Chief Financial Officer and
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Secretary (Principal Financial Officer)
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EXHIBIT INDEX
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Exhibit
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Number
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Description:
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31.1
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Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
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31.2
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Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
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32.1
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Certification of Chief Executive Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (Filed herewith.)
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32.2
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Certification of Chief Financial Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (Filed herewith.)
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44
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