U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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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 June 30, 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
.
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
o
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
þ
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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
þ
No
The number of outstanding shares of the registrants common stock on August 1, 2008 was 15,759,516.
AMDL, INC.
INDEX TO FORM 10-Q
i
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMDL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30,
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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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1,611,821
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$
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6,157,493
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Accounts receivable, net
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6,029,455
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2,954,902
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Related party receivable
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644,426
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Inventories
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959,831
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921,135
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Prepaid consulting
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969,935
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872,688
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Prepaid expenses and other current assets
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914,921
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1,248,637
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Total current assets
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11,130,389
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12,154,855
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Property and equipment, net
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12,506,677
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11,672,462
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Intangible assets, net
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5,608,222
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5,615,312
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Other assets
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4,286,632
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3,424,549
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Total assets
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$
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33,531,920
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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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2,532,687
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$
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1,676,347
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Related party payable
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72,840
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62,621
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Deferred revenue
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174,627
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246,758
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Notes payable
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3,120,999
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5,159,939
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Total current liabilities
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5,901,153
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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, $0.001 par value;
100,000,000 shares authorized;
15,756,516 and 15,079,528 shares issued
at June 30, 2008 and December 31, 2007,
respectively; 15,656,516 and 14,979,528
shares outstanding at June 30, 2008 and
December 31, 2007, respectively
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15,657
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14,980
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Additional paid-in capital
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64,027,897
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61,525,001
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Accumulated other comprehensive income
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2,375,873
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1,068,429
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Accumulated deficit
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(38,788,660
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)
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(36,886,897
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)
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Total stockholders equity
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27,630,767
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25,721,513
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Total liabilities and stockholders equity
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$
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33,531,920
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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 GAIN (LOSS)
(Unaudited)
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Three Months Ended June 30
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Six Months Ended June 30
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2008
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2007
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2008
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2007
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Net revenues
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$
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5,780,832
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$
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2,413,501
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$
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9,368,578
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$
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3,837,680
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Cost of sales
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2,877,014
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1,262,049
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4,693,743
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1,959,359
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Gross profit
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2,903,818
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1,151,452
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4,674,835
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1,878,321
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Operating expenses:
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Research and development
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57,052
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1,351
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65,747
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13,127
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Selling, general and administrative
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2,846,344
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3,244,910
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5,714,526
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5,240,545
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2,903,396
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3,246,261
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5,780,273
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5,253,672
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Income (loss) from operations
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422
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(2,094,809
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(1,105,438
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(3,375,351
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Other income (expense):
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Interest and other income
(expense), net
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(2,876
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)
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(549
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(65,500
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3,288
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Interest expense
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(87,049
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)
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(98,107
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)
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(190,106
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)
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(188,964
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Total other expense, net
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(89,925
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)
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(98,656
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(255,606
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(185,676
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Loss before provision for income
taxes
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(89,503
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)
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(2,193,465
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)
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(1,361,044
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(3,561,027
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Provision for income taxes
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340,064
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70,840
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540,719
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88,684
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Net loss
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(429,567
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(2,264,305
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)
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(1,901,763
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)
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(3,649,711
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Other comprehensive loss:
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Foreign currency translation gain
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524,015
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326,733
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1,307,444
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343,336
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Comprehensive gain (loss)
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$
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94,448
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$
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(1,937,572
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)
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$
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(594,319
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)
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$
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(3,306,375
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)
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Basic and diluted loss per common share
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$
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(0.03
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$
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(0.17
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$
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(0.12
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$
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(0.31
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Weighted average common shares
outstanding basic and diluted
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15,564,208
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11,415,045
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15,347,277
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10,751,728
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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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Six Months Ended June 30,
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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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(1,901,763
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)
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$
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(3,649,711
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)
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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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714,078
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633,320
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Fair market value of options granted to employees and directors for
services
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422,168
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1,129,600
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Fair market value of common stock, warrants and options expensed for
services
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1,116,753
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1,190,488
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Provision
for bad debts
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126,754
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913
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Changes in operating assets and liabilities:
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Accounts receivable
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(2,953,059
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)
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319,914
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Related party account with Jade Capital
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(47,375
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)
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Inventories
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12,278
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159,518
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Prepaid consulting, expenses and other assets
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390,081
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(2,598,739
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)
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Accounts payable and accrued expenses
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856,695
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(376,421
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)
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Deferred revenue
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(84,851
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)
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314,762
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Net cash used in operating activities
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(1,348,241
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)
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(2,876,356
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)
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Cash flows from investing activities:
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Deposits for acquisition of plant assets
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(637,421
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)
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Purchase of property and equipment
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(574,263
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)
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(49,088
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)
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Funds advanced to Kangda (note 12)
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(644,426
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)
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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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(1,842,174
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)
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(49,088
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)
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Cash flows from financing activities:
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Payments on notes payable
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(2,282,145
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)
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Proceeds from issuance of common stock, net of cash offering costs of
$139,584 in 2008 and $756,674 in 2007
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860,421
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4,572,837
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Proceeds from the exercise of options
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31,200
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Proceeds from the exercise of warrants
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6,983
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|
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|
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|
|
|
|
|
|
|
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|
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Net cash (used in) provided by financing activities
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|
(1,414,741
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)
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|
4,604,037
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|
|
|
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|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
59,484
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|
|
|
(5,051
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net change in cash and cash equivalents
|
|
|
(4,545,672
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)
|
|
|
1,673,542
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|
|
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|
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|
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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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|
|
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|
|
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents, end of period
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$
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1,611,821
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|
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$
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3,258,515
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|
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|
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Supplemental disclosure of cash flow information:
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|
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|
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Cash paid during the period for interest
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$
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184,960
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|
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$
|
183,765
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|
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|
|
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Cash paid during the period for taxes
|
|
$
|
438,198
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|
|
$
|
|
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|
|
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|
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|
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Supplemental disclosure of non-cash activities:
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Fair market value of common stock recorded as prepaid consulting
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$
|
1,011,000
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|
$
|
1,075,760
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|
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Increase in debt and fixed assets due to purchase price adjustment
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|
$
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|
|
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$
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214,617
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|
|
|
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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 Six Months Ended June 30, 2008 and 2007
NOTE 1 MANAGEMENTS REPRESENTATION
The accompanying condensed consolidated balance sheet as of December 31, 2007, 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 six months ended June 30, 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 condensed 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 (SFAS) 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
AMDL is 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 in the Peoples Republic of China (China or PRC). AMDL currently employs approximately
320 people of which 314 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 (Kangda). 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 PRCs 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
(RMB) and record revenues in RMB, but convert the profits into United States (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.
4
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
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 U.S.
On July 7, 2008, the Company announced that the U.S. Food and Drug Administration (USFDA) issued
a letter of substantial equivalence to an existing predicate device and granted clearance to market
the Elisa Dr-70
®
(FDP) as a safe and effective blood test for monitoring patients who have been
previously diagnosted with colorectal cancer.
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 $1,901,763 and $3,649,711 during the six months ended June 30, 2008 and 2007
respectively, net losses of $429,567 and $2,264,305 during the three months ended June 30, 2008 and
2007, respectively, and had an accumulated deficit of $38,788,660 at June 30, 2008. In addition,
the Company used cash in operations of $1,348,241 and $2,876,356 during the six months ended June
30, 2008 and 2007, respectively. At August 13, 2008, the Company
had cash on hand of approximately $396,000 in U.S. bank accounts and
additional cash in the accounts of JPI and subsidiaries of
approximately $1,100,000. Cash is being depleted from operations in the U.S. at the rate of approximately
$425,000 per month. The foregoing burn rate does not include non-operating extraordinary items,
including payments to pursue drug and test kit product licenses. The Company and JPI are working
diligently on various financing activities that if completed could provide the Companys U.S. and
China operations with up to approximately $14 million in new
financing. The Company is negotiating an expanded credit facility in China of up to $10 million.
Yet, assuming (i) the Company is unable to complete its anticipated financing activities, (ii) the
current level of revenue from the sale of DR-70
®
kits does not increase in the near future, (iii)
JPI does not generate sufficient cash to meet or exceed its cash requirements, (iv) JPI does not
repatriate any cash back to U.S. operations, and (v) no outstanding warrants are exercised, then
the amount of cash on hand is expected to be sufficient to meet the Companys projected operating
expenses through August 2008.
The Companys near and long-term operating strategies focus on (i) obtaining Chinas 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 SFDA approval after June 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, 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 August 4, 2008, AMEX has not yet issued its
final letter stating that the Company is in compliance with the Continued Listing Standards.
5
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
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 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.
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
Jiezheng (formerly known as Shanghai XiangEn) to begin direct distribution of pharmaceutical
products through retail stores. The retail stores are owned by independent third parties who sell
JJBs products at retail to consumers. Shanghai Jiezheng and JPI collaborated with the owners in
re-branding the stores as JPGreen Health and Beauty Clinics.
6
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
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 six months ended June 30, 2008 and 2007, the Company recorded approximately $85,000 and $0,
respectively, 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. Revenues from the sale of JJBs products at the retail store level will be
recognized by the Company at the time products are sold by the retail stores. Through June 30,
2008, the retail stores had not generated any sales of JJBs products, accordingly, no revenues
were recognized in the accompanying consolidated statements of operations.
In order to facilitate the development of the additional JP Green stores, expected to be owned and
operated by the Company, JJB made advances of $594,895 to Shanghai XiangEn. Funds advanced were
intended primarily to purchase equipment needed to establish the retail stores. However, in the
first half of 2008, numerous existing beauty and spa businesses indicated their interest in
becoming JP Green product sellers, without JPIs involvement in direct ownership or management.
Based on the perceived level of interest and the relative low cost of this strategy, the Company
has decided to pursue a strategy of retail distribution through independent, non-branded stores.
In July 2008, Shanghai Jiezheng repaid the Company approximately $148,000 and turned over equipment
that had been purchased in anticipation of the expansion, and in full settlement of amounts
receivable. The equipment was placed in customer store locations to promote sales of the Companys
products.
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 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
7
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
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 June 30, 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 WFOEs 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
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.
As JPI is a British Virgin Island Corporation, 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. The balance at December 31, 2007 was $498,726,
which is included in prepaid expenses and other current assets in the accompanying condensed
consolidated balance sheet. The balance was repaid, and no amount remains outstanding at June 30,
2008. Subsequent transfers of foreign currency to JJB and YYB amounting to approximately $565,000,
related to the repayment of amounts due from Jade, have been transacted through the bank account of
a business owned by an employee of JPI, to allow for conversion to RMB.
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. Prior to July 3, 2008, the Company was not permitted to sell DR-70
®
in
the U.S. 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
8
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
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 revised its strategy regarding USFDA approval of DR-70
®
and the Company
reviewed additional patient data which supports substantial equivalence to CEA.
On January 25, 2007, the Company met with the USFDA to support its Pre-IDE document that included a
new introduction, literature review, the Companys 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 the Companys 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, the Company
responded to each of USFDAs areas of concern. On September 13, 2007, USFDA sent a response letter
to the Companys May 2007 response letter in which they listed four major areas of concern. On
October 5, 2007, the Company submitted its 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, the Company received a letter of deficiency
noting four areas of concern in its application and the application was put on hold pending the
USFDAs receipt of the Companys responses to its concerns. The Company was granted a 180-day
extension to May 12, 2008 to respond in full to the USFDAs concerns, and responded to the USFDAs
concerns by that deadline. On July 3, 2008, the Company received a letter of determination from the
USFDA that the DR-70 ELISA tumor-associated antigen immunoligical test system was substantially
equivalent to the existing predicate device being marketed. The letter grants the Company the
right to market the DR-70 test as a device to monitor patients who have been previously diagnosed
with colorectal cancer.
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 even though USFDA approval has been received,
there can be no assurances that JPI will obtain approval for marketing DR-70
®
in China 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
9
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
calculation. However, the impact under the treasury stock method of dilutive stock options and
warrants would have been incremental shares of 317,558 and 433,940 for the six months ended June
30, 2008 and 2007, respectively and 269,089 and 476,770 for the three months ended June 30, 2008
and 2007, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the U.S. 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 June 30, 2008, the Company had approximately $431,000 in excess of this limit.
Additionally, the Company held approximately $1,080,000 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 $218,143 and $91,389 at June 30, 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.
As of June 30, 2008, one customer comprised 23% of outstanding accounts receivable. No customers
had outstanding accounts receivable in excess of 10% at December 31, 2007. For the six months
ended June 30, 2008, two customers comprised 17% and 12% of net revenues. For the six months ended
June 30, 2007, five customers each comprised more than 10% of revenues.
The majority of the Companys customers are in the pharmaceutical industry. Consequently, there is
a concentration of receivables and revenues within this industry, which is subject to normal credit
risk.
Other
The Company is subject to credit risk as a result of its note receivable from Kangda. See note 12.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (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,
10
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
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 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.
In May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting
Principles
. SFAS 162 identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements. SFAS No. 162 is
effective 60 days following the SECs approval of the Public Company Accounting Oversight Board
amendments to AU Section 411,
The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles
. Management does not currently expect the adoption of SFAS No. 162 to have a
material impact on the consolidated financial statements.
NOTE 3 INVENTORIES
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Raw materials
|
|
$
|
726,577
|
|
|
$
|
620,128
|
|
Work-in-process
|
|
|
20,746
|
|
|
|
17,331
|
|
Finished goods
|
|
|
212,508
|
|
|
|
283,676
|
|
|
|
|
|
|
|
|
|
|
$
|
959,831
|
|
|
$
|
921,135
|
|
|
|
|
|
|
|
|
11
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
NOTE 4 PREPAID EXPENSES, OTHER CURRENT ASSETS, AND OTHER ASSETS
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Material deposits
|
|
$
|
845,823
|
|
|
$
|
617,661
|
|
Receivable from Jiekang
|
|
|
|
|
|
|
498,726
|
|
Due from officers and directors
|
|
|
16,619
|
|
|
|
9,764
|
|
Other
|
|
|
52,479
|
|
|
|
122,486
|
|
|
|
|
|
|
|
|
|
|
$
|
914,921
|
|
|
$
|
1,248,637
|
|
|
|
|
|
|
|
|
As JPI is a British Virgin Island Corporation, 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 existed. Although
the Company still does not have a license to operate in China, funds were returned from Jiekang in
the second quarter of 2008. Subsequent transfers of foreign currency to JJB and YYB amounting to
approximately $565,000, related to the repayment of amounts due from Jade, have been transacted
through the bank account of a business owned by an employee of JPI, to allow for conversion to RMB.
Other assets consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Deposits, primarily product licenses and acquisition of plant assets
|
|
$
|
3,651,628
|
|
|
$
|
2,827,526
|
|
Advance to Shanghai Jiezheng
|
|
|
594,895
|
|
|
|
574,123
|
|
Refundable deposits
|
|
|
40,109
|
|
|
|
22,900
|
|
|
|
|
|
|
|
|
|
|
$
|
4,286,632
|
|
|
$
|
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.
NOTE 5 INTANGIBLE ASSETS
Intangible assets consist of the following at June 30, 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
|
|
|
$
|
(691,667
|
)
|
|
$
|
|
|
|
$
|
1,308,333
|
|
|
|
20
|
|
Production rights
|
|
|
1,916,622
|
|
|
|
(214,959
|
)
|
|
|
149,089
|
|
|
|
1,850,752
|
|
|
|
10
|
|
Land use rights
|
|
|
1,405,829
|
|
|
|
(77,808
|
)
|
|
|
201,220
|
|
|
|
1,529,241
|
|
|
|
33
|
|
Non-compete agreements
|
|
|
324,415
|
|
|
|
(126,391
|
)
|
|
|
31,922
|
|
|
|
229,946
|
|
|
|
5
|
|
Customer relationships
|
|
|
214,328
|
|
|
|
(60,161
|
)
|
|
|
26,130
|
|
|
|
180,297
|
|
|
|
7
|
|
Trade name and logo
|
|
|
530,829
|
|
|
|
(97,989
|
)
|
|
|
76,813
|
|
|
|
509,653
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,392,023
|
|
|
$
|
(1,268,975
|
)
|
|
$
|
485,174
|
|
|
$
|
5,608,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
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
|
|
|
|
509,293
|
|
|
|
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 (CIT) 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 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 CIT 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 $540,719 and $88,684 for the six months ended June 30, 2008
and 2007, respectively, or 40% and 2% of its pre-tax losses for the respective six month periods.
Tax provisions of $340,064 and $70,840 were recorded for the three-month periods ended June 30,
2008 and 2007, or 380% and 3% of pre-tax losses for the respective three month periods. The
difference between the effective tax rates and the 34% federal statutory rate resulted primarily
from losses generated in the U.S. 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 $162,000 and $59,000 has been included in accounts payable
and accrued expenses in the accompanying condensed consolidated balance sheets as of June 30, 2008
and December 31, 2007, respectively.
13
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
NOTE 7 NOTES PAYABLE
At June 30, 2008, the Company had RMB denominated indebtedness equal to $3,120,999 (RMB 21.4
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% 11%
per annum.
The company acquired JPI and its subsidiaries in September 2006 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.
In March 2008, the Company agreed to repay RMB 17.1 million (approximately $2,412,145) of mature
loans to the bank by the second quarter of 2008. The Company made payments totaling RMB 16.2
million ($2,282,145) in the six months ended June 30, 2008. The Company expects to pay the
remaining RMB 0.9 million (approximately $130,000) to the bank in the third quarter of 2008.
In exchange for the repayment commitment, the bank made a non-binding commitment to loan the
Company a minimum of 150% of the repayment, based on a mutual assessment of the financing needs of
the business and subject to availability and underwriting. The
Company is unsure as to whether the bank will be able to perform on this non-binding commitment and the Company is negotiating for other possible
bank financing.
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 CIT 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.
14
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
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 June 30, 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 (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 $2.1
million at June 30, 2008. Such amounts will become due when regulatory approval for the
manufacture of the drugs is received. 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 and six months ended June 30, 2008 and 2007 were insignificant.
The Company has agreed to pay a 5% royalty on net sales of combination gene therapy products
developed from purchased 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.
15
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
Contingent Share Issuance
The terms of the May 12, 2006 Stock Purchase and Sale Agreement with 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.
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 June 30, 2008 and 2007, the Company recorded share-based compensation
expense related to the issuance of stock options to employees and directors of $316,626 and $0,
respectively. For the six months ended June 30, 2008 and 2007, the Company recorded share-based
compensation expense of $422,168 and $1,129,600, respectively. All such compensation expense is
reflected in the accompanying unaudited condensed consolidated statements of operations within
selling, general and administrative expense. 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 six months ended June 30, 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 six months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Expected volatility
|
|
|
248
|
%
|
|
|
353
|
%
|
Expected term
|
|
5 years
|
|
5 years
|
Risk-free interest rate
|
|
|
2.48
|
%
|
|
|
4.92
|
%
|
Dividend yield
|
|
|
|
%
|
|
|
|
%
|
16
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
The weighted-average grant date fair value of employee and director stock options granted during
the six months ended June 30, 2008 and 2007 was $2.98 and $3.53, respectively.
The following is a summary of the changes in stock options outstanding during the six months ended
June 30, 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, June 30, 2008
|
|
|
2,943,236
|
|
|
$
|
3.82
|
|
|
|
2.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Exercisable at June 30, 2008
|
|
|
2,234,906
|
|
|
$
|
3.93
|
|
|
|
2.42
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding at June 30, 2008, considering only options
with positive intrinsic values and based on the closing stock price at June 30, 2008, was $8,900.
At June 30, 2008, total unrecognized stock-based compensation cost related to unvested stock
options was $2,110,833, which is expected to be expensed over a weighted average period of 1.7
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 the U.S., 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.
17
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
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 $756,674, 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 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 $39,584 in other costs. Total costs associated with the second
closing of the December 2007 Offering were $139,584, 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 six
months ended June 30, 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 six months ended June 30, 2007, the
Company charged $20,248 to selling, general and administrative expenses.
18
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
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 six months ended June 30, 2007, the Company charged $204,960 to selling, general
and administrative expenses.
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 six months ended June 30, 2007, the Company recorded $343,000 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 six months ended June 30, 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 six months ended June 30, 2007, the Company
recorded selling, general and administrative expense of $372,400 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 six months ended June 30, 2007, the Company recorded
selling, general and administrative expense of $100,161.
On April 24, 2007, the Board of Directors authorized the issuance of warrants to purchase 25,000
shares of common stock at $3.68 per share to Brookstreet Securities Corporation, a consultant, for
financial advisory services. The warrants were valued at $35,000 using the Black-Scholes option
pricing model which amount was charged to consulting expense in the six months ended June 30, 2007.
The Company issued 10,000 options to a consultant and investor during the six months ended June 30,
2007, which resulted in compensation expense of $35,300, included in general and administrative
expense. The options were valued using the Black-Scholes option pricing model with the following
assumptions: expected volatility of 353%; risk-free interest rate of 4.92%; expected term of one
year; and dividend yield of 0%.
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 six months ended June 30,
2008, the Company recorded selling, general and administrative expense of $408,750 related to the
agreement and the balance of $183,938 is included in prepaid consulting at June 30, 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 six months ended June 30, 2008, the Company recorded general
and administrative expense of $168,000 related to the agreement and the balance of $112,000 is
included in prepaid consulting at June 30, 2008.
19
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
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 six months ended
June 30, 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 $1,011,000 based on the trading price of the common stock
on the measurement date. During the six months ended June 30, 2008, the Company recorded general
and administrative expense of $337,003 related to the agreement and the balance of $673,997 is
included in prepaid consulting at June 30, 2008.
On April 30, 2008, the Company extended the term of warrants to purchase 18,750 shares of common
stock at $3.68 per share to October 31, 2009. The warrants were held by an investor/service
provider. The Company recorded $18,375 in compensation expense related to the term extension,
calculated using the Black Scholes option valuation model with the following assumptions: expected
volatility of 79%; risk-free interest rate of 2.37%; expected term of 1.5 years; and dividend yield
of 0%.
On May 16, 2008,
the Company settled litigation related to the termination of an
agreement regarding a proposed private placement. In connection with the settlement, the Company paid $12,500 in
cash, and issued 25,000 shares of unregistered common stock with a deemed value of $75,000, based
on the ten-day volume weighted-average price of our common stock through May 8, 2008. The value of the cash and shares
issued in the settlement is included in general and administrative expense in the consolidated
statement of operations for the quarter ended June 30, 2008.
On June 17, 2008, the Company entered into an agreement to procure financial consulting services.
In connection with the agreement, the Company granted an option, outside of its existing option
plans, to purchase 150,000 shares of common stock at an exercise price of $3.50. The option, which
was approved by the Companys board of directors, was granted in partial consideration for
financial consulting services, vests over a twelve month period, and expires in five years. The
option was initially valued at $439,500, based on the application of the Black Scholes option
valuation model with the following assumptions: expected volatility of 273%; risk-free interest
rate of 3.66%; expected term of 5 years; and dividend yield of 0%. In accordance with EITF 96-18,
Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjuntion with Selling, Goods or Services
, the option will be periodically revalued through the
vesting period. The value of the option is being expensed over the 36 month term of the consulting
contract. The Company recognized $5,375 of expense in the three and
six month periods ended June
30, 2008.
Warrants
The number of outstanding warrants was 4,832,856 at June 30, 2008. The weighted average exercise
price was $3.99.
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 six
months ended June 30, 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 U.S. there is one segment, sales to distributors and
institutional entities (Corporate).
20
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2008 and 2007
The following is information for the Companys reportable segments for the six months ended June
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China-Wholesale
|
|
China-Direct
|
|
Corporate
|
|
Total
|
Net revenue
|
|
$
|
9,248,064
|
|
|
$
|
84,852
|
|
|
$
|
35,662
|
|
|
$
|
9,368,578
|
|
Gross profit
|
|
$
|
4,563,353
|
|
|
$
|
84,852
|
|
|
$
|
26,630
|
|
|
$
|
4,674,835
|
|
Depreciation
|
|
$
|
446,235
|
|
|
$
|
|
|
|
$
|
4,938
|
|
|
$
|
451,173
|
|
Amortization
|
|
$
|
212,905
|
|
|
$
|
|
|
|
$
|
50,000
|
|
|
$
|
262,905
|
|
Interest expense
|
|
$
|
184,675
|
|
|
$
|
|
|
|
$
|
5,431
|
|
|
$
|
190,106
|
|
Net income (loss)
|
|
$
|
2,813,271
|
|
|
$
|
84,852
|
|
|
$
|
(4,799,886
|
)
|
|
$
|
(1,901,763
|
)
|
Identifiable assets
|
|
$
|
29,797,963
|
|
|
$
|
594,895
|
|
|
$
|
3,139,062
|
|
|
$
|
33,531,920
|
|
Capital expenditures
|
|
$
|
437,836
|
|
|
$
|
|
|
|
$
|
136,427
|
|
|
$
|
574,263
|
|
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 U.S. (Corporate).
The following is information for the Companys reportable segments for the six months ended June
30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China-Wholesale
|
|
Corporate
|
|
Total
|
Net revenue
|
|
$
|
3,777,080
|
|
|
$
|
60,600
|
|
|
$
|
3,837,680
|
|
Gross profit
|
|
$
|
1,825,695
|
|
|
$
|
52,626
|
|
|
$
|
1,878,321
|
|
Depreciation
|
|
$
|
468,807
|
|
|
$
|
3,631
|
|
|
$
|
472,438
|
|
Amortization
|
|
$
|
108,582
|
|
|
$
|
50,000
|
|
|
$
|
158,582
|
|
Interest expense
|
|
$
|
188,964
|
|
|
$
|
|
|
|
$
|
188,964
|
|
Net income (loss)
|
|
$
|
506,339
|
|
|
$
|
(4,156,050
|
)
|
|
$
|
(3,649,711
|
)
|
Capital expenditures
|
|
$
|
36,757
|
|
|
$
|
12,331
|
|
|
$
|
49,088
|
|
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 June 30, 2008 and December 31, 2007, the Company has a payable of $72,840 and $62,621,
respectively to Jade for expenses paid by Jade on behalf of JPI.
At June 30, 2008, the Company has a receivable of $644,426 from Kangda. One of the shareholders of
Kangda is a current key employee of the Company. The receivable relates to taxes resulting from the
Companys 2006 acquisition of JPI that are the responsibility of the seller. JJB made the payment
on behalf of Kangda, the former owner of JJB. Kangda has signed a note payable to JJB which bears
interest at the rate of 6% per annum, and provides for the repayment of amounts due in three equal
monthly installments, starting in September 2008, with interest payable in the last installment.
The note is guaranteed by three employee/shareholders and their pledge of common stock shares that
they control.
At
June 30, 2008, the company has a loan of approximately $22,000
to a former director for JJB. This loan is non-interest bearing and
due on demand.
JPI
relocated to a new office in June 2008. The lease was signed on
May 5, 2008 and is from June 1, 2008 to May 30, 2009.
This agreement was signed on behalf of JPI by Golden Success LTD, a
WFOE which is owned by director of the company. The minimum operating
lease commitment is approximately $32,000.
NOTE 13 SUBSEQUENT EVENTS
On July 1, 2008, the Company announced a letter of intent (LOI) was signed between JPI and
China-based Sichuan ZhiTong Pharmaceutical, Ltd (SZP). SZP is a privately-held China-based
pharmaceutical distribution company that sells and distributes traditional Chinese medicines,
health foods, medical equipment, and generic pharmaceutical products. The previous LOI to purchase
Guangzhou Lazon Pharmacy Co., Ltd, a Guangzhou-based distributor has been terminated based on
information discovered during the due diligence process.
In
May 2008, the Company engaged the services of an investment banker to assist in the placement of
convertible debt securities to provide additional financing for the
company.
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.
Operations of Jade Pharmaceutical 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. 56% of
YYBs products are sold directly to three 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.
22
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. 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. In 2007, JPI developed a cooperative
relationship to take over the management of eight existing beauty product store locations and
re-brand them as JPGreen Health and Beauty Clinics. Then in the first half of 2008, numerous
existing beauty and spa businesses indicated their interest in being either converted to JPGreen
Clinics or in becoming exclusive JP Green product sellers, without JPIs involvement in direct
ownership and or management.
New
Capsule and Cream Formulation of Goodnak Anti-Aging Product
On June 24, 2008 we announced that JPI anticipates releasing during the 3rd quarter of 2008
two new formulations of its popular Goodnak
®
anti-aging skin care product line. In addition to our
high quality injectable formulation, we anticipate offering Goodnak in capsules and an
easy-to-apply lotion. Based on general market information, the proposed pricing for these new
formulations will be approximately US$40.00 per unit, with 60% gross profit margins. We plan to
sell both products through existing distribution channels within the Henan, Sichuan, Guizhou,
Shanxi, Xinjiang, Gansu, Hunnan, Zhejiang, Fujian, Liaoning and Heilongjiang Provinces of China.
Together these regions have a combined population of more than 376 million people. In addition to
China, we believe both products will be good candidates for export to the North American and
European markets.
We
recognize the need for additional China based scientific research on
the benefits of our Goodnak product line. Thus we are in the process
of underwriting the costs associated with the publication of one or
more white papers in the second half of 2008.
Letter of Intent to purchase Sichuan ZhiTong Pharmaceutical, Ltd.
In July 2008, we entered into a letter of intent to purchase Sichuan ZhiTong Pharmaceutical,
Ltd (SZP). SZP is a privately-held China-based pharmaceutical distribution company that sells and
distributes traditional Chinese medicines, health foods, medical equipment, and generic
pharmaceutical products. SZP has been a distributor for the Company since the fourth quarter of
2007, selling the Domperidone anti-emetic product. Under the terms of the LOI, SZP and JPI will
consolidate sales forces and enter into a distribution agreement where SZP will distribute AMDL
pharmaceutical products including GoodNak, Levofloxicin and Ondansetron. AMDL, JPI and SZP have
agreed to retain an independent China-based valuation company to determine the value of SZP. Based
upon the valuation and negotiations between JPI and SZP, an acquisition price will be determined
and acquisition consideration will be allocated that may include cash, common stock of AMDL, and/or
stock options to purchase the common shares of AMDL. It is anticipated that this acquisition will
be complete by the end of the fourth quarter of 2008. We have terminated a previous letter of
intent to purchase Guangzhou Lazon Pharmacy Co., Ltd (GLP), a Guangzhou-based distributor, based
on our due diligence process.
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 commenced as of March 31, 2008, subject to final acceptance of the
technology, 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
23
which was paid on the effective date of the license agreement. For two consecutive thirty (30)
day periods after the effective date, the Company was required to and did remit to MGI additional
non-refundable ten thousand dollar ($10,000) deposits while the Company evaluated the technology,
and an additional payment of twenty thousand dollars ($20,000) is due at the end of the evaluation
period. After the Companys right to perform due diligence expires, if the Company accepts the
technology, the Company is required to pay a final non-refundable two hundred thousand dollar
($200,000) license fee. This $200,000 payment is due in September 2008. 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.
The Company intends to proceed with the license agreement based upon the preliminary findings of
its due diligence investigation. Notwithstanding the foregoing, all deposits paid will remain
non-refundable in the event the Company elects not to proceed.
In consideration for the license and in addition 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 ($750,000).
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 of the
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:
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Pre-Diagnosis of cervical cancer;
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Diagnosis of HPV infection and the genotype of HPV infection;
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Diagnosis for low copy of HPV infection;
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Diagnosis of multiple HPV infections;
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Simple and easy sample collecting;
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Accurate and prompt results; and
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Identifying a total of 24 types of HPV infections.
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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 closing
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 the license agreement.
24
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 sector with sales to the
JPGreen Health and Beauty Clinics.
The current economic and market environment in China may be favorable to us because:
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China is experiencing growth rate of 8 10% per year as measured by the gross
domestic product;
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Chinas pharmaceutical market is forecasted to become the worlds fifth largest by
2010 and the largest by 2050 as reported by PriceWaterhouseCoopers ; and
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The growing demand in China for over the counter pharmaceutical products.
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We plan to achieve our goals by combining our cancer monitoring, new products acquisitions,
and vaccine technology with JPIs China-based pharmaceutical manufacturing, consumer sales,
expanding distribution network and clinical trials expertise.
We believe that the acquisition of JPI has enabled us to:
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gain access to what we believe to be the fastest growing pharmaceutical and consumer
market in the world, China;
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platform to in-license North American drugs for manufacture and sale in China and
through out Asia;
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expand DR-70
®
, combination immunogene therapy (CIT) technologies and HPV test kits
in clinical trials, sales, and marketing into China and Asia; and
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create new opportunities for cancer related product development in China.
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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.
We expect research and development expenditures to increase during the remainder of 2008 due to:
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Additional expenditures for research and development is needed in China for SFDA
approval of DR-70
®
and the possibility of the need for clinical trials in China for SFDA
approval of DR-70
®
, and
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Research and development for manufacturing the MyGene HPV test kit
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During the six months ended June 30, 2008, we spent $65,747 on research and development
related to DR-70
®
, compared to $13,127 for the same period in 2007. These expenditures were
incurred as a result of the need for additional consultants to compile data requested by the USFDA
in the DR-70
®
application process. During the second half of 2008, we expect to incur significant
expenditures for research and development in furtherance of the SFDA application for approval of
DR-70
®
and
research and development needed for the furtherance of the MyGene HPV test kit.
We also expect to make an application to the American Medical
Association for a Current Procedural Terminology
(CPT) code for
DR-70
®
in order to be in a position for
patients to receive insurance and medicare reimbursement for
expenditures on DR-70
®
tests.
25
Liquidity and Capital Resources
Total assets increased $664,742 to $33,531,920 as of June 30, 2008 from $32,867,178 as of
December 31, 2007. This increase was due primarily to increases in accounts receivable, property
and equipment, deposits for acquisition of plant assets, and a related party receivable, offset by
a decrease in cash. In addition, total assets increased due to currency fluctuations.
Our total liabilities decreased 17% to $5,901,153 as of June 30, 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
to the bank in China which was partially offset by an increase in accounts payable and accrued
expenses.
As of June 30, 2008, the Company repaid approximately $2,282,145 of mature loans to the bank.
JPI is currently in negotiations with several China based banks in order to gain a comprehensive
credit facility for up to RMB 68 million (approximately $10 million). This credit facility is
anticipated to be complete in the third quarter.
Funds from a new credit facility 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, expansion of the existing plant for the production of Dosataxal, equipment and
improvements to production lines at YYB and JJB and the purchase of additional pharmaceutical
licenses.
At June 30, 2008, the Company made payments totaling $644,426 on behalf of Kangda, the former
owner of JJB. The receivable relates to taxes resulting from the Companys 2006 acquisition of JPI
that are the responsibility of the seller. Kangda has signed a note payable to the Company which
bears interest at the rate of 6% per annum, and provides for the repayment of amounts due in three
equal monthly installments, starting in September 2008, with interest payable in the last
installment. The note is guaranteed by three employee/shareholders and their pledge of common
stock shares that they control.
From January 1, 2008 to June 30, 2008, our cash
and cash equivalents decreased by $4,545,672
or 74%, primarily due to working capital requirements of JPI, investments in our Chinese
manufacturing facilities, reduction of notes payable to the Chinese bank and general and
administrative expenses incurred by AMDL. Cash usage continues to exceed cash generation. As of
August 13, 2008, cash on hand in U.S. bank accounts was
approximately $396,000 and additional cash is held in the accounts of
JPI and subsidiaries of approximately $1,100,000. Cash is being depleted from
U.S. operations at the rate of approximately $425,000 per month. The foregoing does not include
non-operating extraordinary items. This monthly amount also 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 six months ended June 30, 2008, cash used in operations was $1,348,241, compared to
$2,876,356 cash used in operation for the same period in 2007. The major components were the net
loss of $1,901,763, increase in accounts receivable of $2,826,305 and a related party receivable of
$47,375 offset by non-cash expenses of $422,168 related to the fair value of options granted to
employees and directors, $1,116,753 related to common stock, warrants and options issued to
consultants for services, an increase of $856,695 in accounts payable and accrued expense and
$714,078 for depreciation and amortization.
Cash used in investing activities for the six months ended June 30, 2008 was $1,842,174,
compared to $49,088 cash used in investing activities for the same period in 2007. The major
components were the purchase of property and equipment of $574,263, $637,421 for deposit for
acquisition of plant assets, and $644,426 advanced to Kangda.
Net cash used by financing activities for the six months ended June 30, 2008 was $1,414,741,
compared to $4,604,037 in cash provided by financing activities for the same period in 2007. Net
cash used in financing activities for the six months ended June 30, 2008 primarily consisted of
$2,282,145 for payments on notes payable offset by the net proceeds of $860,421 from the issuance
of common stock and proceeds of $6,983 from the exercise of warrants.
We expect to incur capital expenditures of approximately $3.1 million at our China and U.S.
facilities in the second half of 2008 in the form of additional equipment in the U.S. for the
MyGene HPV test kit and new additional
26
manufacturing lines in China to enable additional products to be manufactured. The capital
expenditures in China are 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 before the end of the third 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 an additional $200,000 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 occurred in the second quarter of 2008 with an anticipated completion date
in the third quarter of 2008. We have incurred approximately $160,000 on the ERP as of July 31,
2008. The total projected cost of the ERP is estimated to be $300,000. We anticipate that this
system will provide the Companys management with far greater oversight of JPIs operations in
China, which is expected to improve the Companies ability to report its results on a more timely
basis.
The Company is working diligently on various financing activities that if completed will
significantly improve the cash positions of both JPI and the Company.
See Going Concern, below, for a discussion of
our financing plans.
Going Concern
Our unaudited condensed consolidated financial statements 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 $1,901,763
and $2,351,754 during the six months ended June 30, 2008 and year ended December 31, 2007,
respectively, and we had an accumulated deficit of $38,788,660 at June 30, 2008.
On August 13, 2008,
we had cash on hand of approximately $396,000 in U.S. bank accounts
and additional cash in the accounts of JPI and subsidiaries of
approximately $1,100,000. Cash is being
depleted from U.S. operations at the rate
of approximately $425,000 per month. The forgoing does not include non-operating extraordinary
items.
We are working diligently on various financing activities that if completed could provide both
our U.S. and China operations with up to approximately
$14 million in new financing. We are negotiating an expanded credit facility in China of up to $10 million. Yet,
assuming (i) we are unable to complete our anticipated financing activities, (ii) the current level
of revenue from the sale of DR-70
®
kits does not increase in the near future, (iii) JPI does not
generate sufficient cash to meet or exceed its cash requirements, (iv) JPI does not repatriate any
cash back to U.S. operations, and (v) no outstanding warrants are exercised, then the amount of
cash on hand is expected to be sufficient to meet our projected operating expenses through August
2008.
Despite
the Companys highly optimistic expectations for the expanded
success of its business, 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 MyGene HPV test kit and the need to enter into
a strategic relationship with a larger company capable of completing the development of any
ultimate CIT 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 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
27
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 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, (iv) funding the research and development of new products
and (v) marketing or licensing DR-70
®
with a large diagnostic enterprise.
Our management recognizes that we must generate additional capital resources to enable it to
conduct clinical trials that may be required to receive SFDA approval and to continue as a going
concern. Our managements plans include seeking new and additional 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, 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.
Despite
the anticipated completion of various financing activities that are
expected to be completed in the third quarter of 2008, 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 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
28
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.
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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 June 30, 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.
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
29
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 upfront fee from the
operator of the retail stores. As of June 30, 2008, there were eight retail stores in operation.
JJB received a one-time, non-refundable upfront fee from each of the sub-operators of the retail
stores. By a supplementary agreement, JJB assigned oversight of the re-branding for 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.
As of June 30, 2007, 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, and are amortizing the fees over the two year period of the management
agreement. All retail stores were opened, and accordingly, we amortized $84,852 of the up-front
fees received as revenues in the accompanying unaudited condensed consolidated statements of
operations and comprehensive income (loss) for the six months ended June 30, 2008. See
Operations
of Jade Pharmaceutical Inc., above, for a discussion of the current status of the China-Direct
Distribution operations.
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
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.
30
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 our 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 six
months ended June 30, 2008.
Results of Operations
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Net Revenues
. During the three months ended June 30, 2008, our aggregate revenues from product
sales increased 140% to $5,780,832 from $2,413,501 for the same period in 2007, and our aggregate
revenues from the amortization of up-front fees was $43,044 as compared to $0 for the same period
in 2007.
Corporate
Net revenues for AMDL-Corporate were $27,442 for the three months ended June 30, 2008,
compared to $46,450 for the same period in 2007. This 41% decrease is due to decreased orders for
the DR-70
®
test kits and OEM products
.
In July 2008, the FDA granted the Company clearance to market the DR-70
®
test kit for
monitoring colorectal cancer. With this clearance, the Company is evaluating various alternative
marketing strategies including licensing agreements with large diagnostic enterprises.
During 2008, we expect sales of OEM products to be at the same level as experienced in 2007.
With USFDA approval of DR-70
®
, we expect sales to increase in late 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 sales below those achieved for six months ended June 30, 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 $5,710,346 for the three months ended June 30, 2008,
compared to $2,367,051 for the same period in 2007. The 141
%
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 171% to $4,807,706 for the three months ended June 30, 2008, as
compared to $1,776,467 for the same period in 2007. This was primarily due to the introduction of
the seven new pharmaceutical products listed below:
|
|
|
Human Placental Histosolution (Goodnak)
|
|
|
|
|
Levofloxacin Lactate and Sodium Chloride Injection
|
31
|
|
|
50% NACL G.S.
|
|
|
|
|
Metronidazole Injection
|
|
|
|
|
Levofloxacin Hydrochloride Injection
|
|
|
|
|
Ondansetron Hydrochloride Injection
|
|
|
|
|
Domperidone Tablet
|
YYBs net revenues increased 115% to $902,640 for the three months ended June 30, 2008, as
compared to $420,395 for the same period in 2007, due to the increase in demand for medical
products in China as well as expansion into new regions.
JPI had $0 revenues for the three months ended June 30, 2008, as compared to $170,189 from
product sales for the same period in 2007.
Results
for the quarter ended June 30, 2008 were lower than our expectations
due to delays in our shipments of Domperidone tablets resulting from
the May 12, 2008 earthquake in Southwestern China.
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, and are currently recognizing the
fees over the two year period of the operating agreement. Net revenue for the three months ended
June 30, 2008 was $43,044 related to amortization of upfront
fees. See Operations of Jade
Pharmaceutical Inc., above, for a discussion of the current status of the China-Direct
Distribution operation.
Gross Profit.
Our gross profit for the three months ended June 30, 2008 increased 152% to
$2,903,818, as compared to $1,151,452 for the same period in 2007. Our Chinese operations
contributed $2,878,611 to our gross profit for the three months ended June 30, 2008, compared to
$1,110,396 for the same period in 2007.
Corporate
AMDLs gross profit decreased 39% to $25,207 for the three months ended June 30, 2008 from
$41,056 for the same period in 2007, due to a reduction in orders for the DR-70
®
kit and OEM
products in the second quarter of 2008.
China-Wholesale
China-Wholesales gross profit was $2,835,567 for the three months ended June 31, 2008, a 155%
increase over the $1,110,396 gross profit for same period in 2007. This increase can be attributed
to increased sales, 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 tablets
with an approximate profit margins 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 higher margin products.
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
32
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 June 30, 2008 was
approximately $43,044, 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 June
30, 2008 was $57,052, compared to $1,351 for the same period in 2007.
Corporate
All research and development costs incurred during the three months ended June 30, 2008 were
incurred by AMDL-Corporate. These costs comprised of funding the necessary research and development
of the DR-70
®
test kit for the USFDA
.
China-Wholesale and China-Direct Distribution
Prior to the purchase of a product license, the product must have approval from the SFDA for
manufacture. Therefore, substantially all research and development costs are incurred by the
licensor.
An increase in research and development costs is 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 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 June 30, 2008 decreased 12% to $2,846,344, as compared to $3,244,910 for the
same period in 2007.
Selling, general and administrative expenses are anticipated to remain at this rate for the
balance of 2008 as we anticipate limited increases in costs for payroll and professional fees.
Additionally, we do not anticipate material additional selling costs for JPI/ China-Wholesale
pharmaceutical sales, as expansion will be pursued through new distribution agreements and
increased sales through the existing distribution base.
Corporate
AMDL-Corporate incurred general and administrative expenses of $2,346,839 for the three months
ended June 30, 2008, as compared to $2,644,694 in the same period in 2007. The primarily
categories are fees paid for accounting and legal services, payroll and payroll related expenses,
investor relations and general and administrative expenses. Also included in general and
administrative expenses were non-cash expenses incurred during the three months ended June 30, 2008
of approximately $589,328 for common stock, warrants and options issued to consultants for
services.
China-Wholesale
China-Wholesale incurred general and administrative expenses of $499,506 for the three months
ended June 30, 2008, as compared to $600,216 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 17% in the three months ended June 30, 2008 when compared to the
same period in 2007.
China-Direct Distribution
China-Direct Distribution did not incur any selling, general and administrative expenses
during the three months ended June 30, 2008 and 2007. See Operations of Jade Pharmaceutical
Inc., above, for a discussion of the current status of the China-Direct Distribution operation.
33
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Net Revenues
. During the six months ended June 30, 2008, our aggregate revenues from product
sales increased 144% to $9,368,578 from $3,837,680 for the same period in 2007, and our aggregate
revenues from the amortization of up-front fees was $84,852 as compared to $0 for the same period
in 2007.
Corporate
Net revenues for AMDL-Corporate were $35,662 for the six months ended June 30, 2008, compared
to $60,600 for the same period in 2007. This 41% 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 six
months ended June 30, 2008.
Market acceptance of our DR-70
®
kits has been slower than originally anticipated, in part,
because up to June 30, 2008 the DR-70
®
kit had not yet received FDA approval and, consequently, all
sales were made outside the United States. In addition, we have not concluded any material new
distribution agreements for the six months ended June 30, 2008.
On July 7, the U.S. Food and Drug Administration (USFDA) issued a letter of substantial
equivalence to an existing predicate device and granted clearance to market the Elisa Dr-70
®
(FDP)
as a safe and effective blood test for monitoring patients who have been previously diagnosed with
colorectal cancer. This action by the USFDA enables us to explore several marketing strategies
which include licensing agreements with larger pharmaceutical companies with established
distribution networks. In addition, now that USFDA has given clearance to market the DR-70
®
, we
have an opportunity to further the application for approval by the SFDA.
With the approval by the USFDA, 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 sales below those achieved for six months ended June 30, 2008.
Sales in 2008 could also be negatively impacted by potential competing products and overall market
acceptance of our products.
China-Wholesale
China-Wholesales net revenues were $9,248,064 for the six months ended June 30, 2008,
compared to $3,777,080 for the same period in 2007. The 145
%
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 170% to $7,698,871 for the six months ended June 30, 2008, as
compared to $2,847,504 for the same period in 2007. This was primarily due to the introduction of
the seven new pharmaceutical products listed below:
|
|
|
Human Placental Histosolution (Goodnak)
|
|
|
|
|
Levofloxacin Lactate and Sodium Chloride Injection
|
|
|
|
|
50% NACL G.S.
|
|
|
|
|
Metronidazole Injection
|
|
|
|
|
Levofloxacin Hydrochloride Injection
|
|
|
|
|
Ondansetron Hydrochloride Injection
|
|
|
|
|
Domperidone Tablets
|
34
|
|
YYBs net revenues increased 104% to $1,549,193 for the six months ended June 30, 2008, as
compared to $759,387 for the same period in 2007, due to the increase in demand for medical
products in China as well as expansion into new regions.
|
JPI had net revenues of $0 from product sales in the six months ended June 30, 2008 , as
compared to $170,189 for the same period in 2007.
China-Wholesales top five selling products for the six months ended June 30, 2008 were:
|
|
|
|
|
|
|
Percent of
|
|
|
Total
|
|
|
China-Wholesale
|
Name
|
|
Sales
|
Domperidone Tablets
|
|
|
44.61
|
%
|
Human Placental Histosolution (Goodnak)
|
|
|
12.16
|
%
|
Diavitamin, Calcium Hydrogen Phosphate and Lysine Tablets
|
|
|
9.92
|
%
|
Levofloxacin Lactate and Sodium Chloride Injection
|
|
|
7.25
|
%
|
Guyanlin Tablets
|
|
|
3.83
|
%
|
|
|
|
|
|
|
|
|
77.77
|
%
|
|
|
|
|
|
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 and are currently recognizing the
fees over the two year period of the operating agreement. Net revenue for the six months ended June
30, 2008 was $84,852 related to amortization of upfront fees. See Operations of Jade
Pharmaceutical Inc., above, for a discussion of the current status of the China-Direct
Distribution operation.
Gross Profit.
Our gross profit for the six months ended June 30, 2008 increased 149% to
$4,674,835, compared to $1,878,321 for the same period in 2007. Our Chinese operations contributed
$4,648,205 to our gross profit for the six months ended June 30, 2008, compared to $1,825,695 for
the same period in 2007.
Corporate
AMDLs gross profit decreased 49% to $26,630 for the six months ended June 30, 2008 from $52,626
for the same period in 2007, due to a reduction in orders for the DR-70
®
kit and OEM products.
China-Wholesale
China-Wholesales gross profit was $4,563,353 for the six months ended June 30, 2008, a 150%
increase over the $1,825,695 gross profit for same period in 2007. This increase can be attributed
to increased sales, 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 higher margins products.
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.
35
China-Direct Distribution
China-Direct Distributions gross profit for the six months ended June 30, 2008 was
approximately $84,852, as compared to $0 for the same period in 2007 as there were no retail
operations during the same period in 2007. See Operations of Jade Pharmaceutical Inc., above, for
a discussion of the current status of the China-Direct Distribution operation.
Research and Development.
Our research and development expense for the six months ended June
30, 2008 was $65,747, compared to $13,127 during the same period in 2007.
Corporate
All research and development costs incurred during the six months ended June 30, 2008 were
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
Prior to the purchase of a product license, the product must have approval from the SFDA for
manufacture. Therefore, substantially all research and development costs are incurred by the
licensor.
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 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
six months ended June 30, 2008 was $5,714,526 as compared to $5,240,545 for the same period in
2007.
Selling, general and administrative expenses are anticipated to remain at this rate for the
balance of 2008 as we anticipate limited increases in costs for payroll and professional fees.
Additionally, we do not anticipate material additional selling costs for JPI/ China-Wholesale
pharmaceutical sales, as expansion will be pursued through new distribution agreements and
increased sales through the existing distribution base.
Corporate
AMDL-Corporate incurred general and administrative expenses of $4,755,731 for the six months
ended June 30, 2008, as compared to $4,157,018 for the same period in 2007 primarily consisting of
an increase of $342,000 in accounting fees, $180,000 in legal fees, and $261,000 in payroll and
payroll taxes offset by a decrease of $85,000 in investor relations, $210,000 in directors fees
and $181,000 in general consulting expense. Also included in general and administrative expenses
were non-cash expenses incurred during the six months ended June 30, 2008 of approximately
$1,116,753 for common stock, warrants and options issued to consultants for services. The increase
in general and administrative expense 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 $958,795 for the six months
ended June 30, 2008, as compared to $1,083,527 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 12% in the six months ended June 30, 2008 when compared to the
same period in 2007.
36
Currently, sales are distributed geographically as follows:
|
|
|
|
|
|
|
Geographic Location China
|
Southeastern
|
|
|
24
|
%
|
Eastern
|
|
|
15
|
%
|
Central
|
|
|
40
|
%
|
Northeastern
|
|
|
20
|
%
|
Southwestern
|
|
|
1
|
%
|
JPIs/ China-Wholesales goal is to expand its distribution network into 36 key Chinese cities
within the near future.
China-Direct Distribution
China-Direct Distribution did not incur any selling, general and administrative expenses
during the six months ended June 30, 2008. See Operations of Jade Pharmaceutical Inc., above,
for a discussion of the current status of the China-Direct Distribution operation.
Other Income and Expense.
Our interest and other income (expense), net for the six months
ended June 30, 2008 was expense of $65,500, compared to income of $3,288 for the same period in
2007. Interest expense was $190,106 for the six months ended June 30, 2008, compared to $188,964
for the same period in 2007. The loss for the six month ended June 30, 2008 was primarily due to
exchange losses resulting from Hong Kong dollar denominated transactions with Jade.
Corporate.
All AMDL-Corporate interest income represents interest paid on deposits held at financial
institutions. Interest income decreased to $1,805 for the six months ended June 30, 2008, compared
to $5,581 to for the same period in 2007, due to the significantly lower average cash balances
maintained by us.
Interest expense for the six months ended June 30, 2008 was $5,431, as compared to $0 for the
same period in 2007.
China-Wholesale
JPI/ China-Wholesale incurred interest expense of $184,675 for the six months ended June 30,
2008, compared to $182,778 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 $1,105,438 and $3,375,351 for the six months ended June 30,
2008 and 2007 respectively. Our consolidated net loss for the six months ended June 30, 2008 was
$1,901,763 or ($0.12) per share, compared to a consolidated net loss of $3,649,711 or ($0.31) 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 decrease in
net loss during the six months ended June 30, 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.
37
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of 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 June 30, 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 not 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.
In the course of continuing our review of the effectiveness of our internal controls over
financial reporting at June 30, 2008, we identified the following issues that individually or in
the aggregate may materially effect our internal controls over financial reporting:
|
|
|
We entered in to a transaction in which our subsidiary advanced funds to a related party without
preparing legal documentation to evidence amounts advanced.
|
|
|
|
|
We do not have adequate controls in place to identify and approve non-recurring
transactions such that the validity and proper accounting can be determined on a timely
basis.
|
|
|
|
|
A lack of clear policy regarding delegated authority has contributed to a lapse in
oversight regarding such transactions.
|
|
|
|
|
We do not have adequate procedures in place to detect related party transactions which
give rise to conflicts of interest.
|
The Company has and/or intends to implement the following remediation plans:
|
|
|
We corrected the lack of proper legal documentation evidencing amounts advanced in the
first quarter of 2008 by obtaining a promissory note from the counterparty.
|
|
|
|
|
We will develop written policies and procedures regarding delegation of authority and
ensure that all employees are aware of the policies.
|
|
|
|
|
We will develop procedures to allow for scrutiny of related party transactions by
uninterested members of management or the board of directors, as appropriate.
|
|
|
|
|
We will develop an internal audit function with direct reporting responsibility to the
board of directors.
|
|
|
|
|
We will enhance the capabilities of our financial control function and reporting mechanisms.
|
For additional 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.
Notwithstanding the material weaknesses discussed above, our management has concluded that the
consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present in
all material respects the Companys financial condition, results of operations, and cash flows for
the period ended June 30, 2008 in conformity with accounting principles generally accepted in the
United States of America.
38
Changes in Internal Control Over Financial Reporting.
Except a set forth above, 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 six months ended June 30, 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
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 was seeking monetary damages for payment of liquidated damages allegedly due Noble in an
amount of $150,000. This claim was settled in June 2008 for $12,500 in cash and 25,000 in
restricted stock valued at $3.00 per share.
On May 14, 2008, an action was brought against us in the Superior Court of the State of
California, County of Orange by a former employee for unfair competition, failure to pay overtime
wages, failure to compensate for missed rest breaks, and failure to compensate for missed meal
breaks. The Company will vigorously defend the claims raised and believe the claims are unfounded.
Although this matter is in the very early stages of litigation, it is not expected that the
outcome will be material to the Company.
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.
39
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 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:
|
|
|
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 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 August 13, 2008 of approximately $396,000
and approximately $1,100,000 in China 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.
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.
The management of JJB was notified by the Chinese Military Department of its intent to annex two of
the three JJBs plants located in Shangrao which are adjacent to a military installation. The
proposed area to be annexed
40
contains the facilities that are used to manufacture large and small volume parenteral solutions,
i.e. those administered by injection, infusion or implantation. Although the militarys interest
appears to be waning, management has lodged claims against surrendering the plant to the Chinese
Military Department, but has not received a response as of yet. If such annexation were to occur,
the expectation is that JJB will be compensated fairly for the facility, although JJB will have to
spend significant time and resources finding another location and restarting those operations. In addition, a new location will likely need to obtain GMP certification. Management has
indicated that, based upon oral communications with the Chinese military authorities in Shangrao,
it is unlikely that any decision will be made by them before early 2009.
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 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 SFDA approval of DR-70
®
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 June 30, 2008, we had warrants outstanding that are currently exercisable for up to an
aggregate of 4,832,856 shares of our common stock at a weighted-average exercise price of $3.99 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 1,199,382 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 2,117,156 shares which were issued at an average exercise price of
$3.71 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
August 13, 2008, we had cash on hand of approximately $396,000
in U.S. bank accounts and additional cash in the accounts of JPI and
subsidiaries of approximately $1,100,000. Cash is being depleted from U.S.
operations at the rate of approximately $425,000 per month. The forgoing does not include
non-operating extraordinary items. We are working diligently on various financing activities that if completed could provide both our
U.S. and China operations with up to approximately $14 million
in new financing. We are negotiating an expanded credit facility in China of up to $10 million. Yet,
assuming (i) we are unable to complete our anticipated financing activities, (ii) the current level
of revenue from the sale of DR-70
®
kits does not increase in the near future, (iii) JPI does not
generate sufficient cash to meet or exceed its cash requirements, (iv) JPI does not repatriate any
cash back to U.S. operations, and (v) no outstanding warrants are exercised, then the amount of
cash on hand is expected to be sufficient to meet our projected operating expenses through August
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 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
41
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.
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 these 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 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.
42
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. 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 and lack
of historical sales, 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 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.
43
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 June 30, 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 June 30, 2008. During its evaluation, our
management identified material weaknesses in our internal control over financial reporting and
other deficiencies as described in Part I Item 4 of our periodic
report on Form 10-Q as of and for the three and six months ended June
30, 2008 and 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 Part I Item 4 of our periodic
report on Form 10-Q as of and for the three and six months ended June
30, 2008 and 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 June 30, 2008 fairly present in all
material respects our financial condition, results in operations and cash flows for the six months
ended June 30, 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 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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44
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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.
45
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 6, 2008, the Company settled litigation related to the
termination of an agreement regarding to a proposed private
placement. In connection with the settlement, the Company paid
$12,500 in cash, and issued 25,000 shares of unregistered common stock with
a deemed value of $75,000, based on the ten-day volume weighted-average price of
our common stock through May 8, 2008. The value of the cash and shares issued in the
settlement is included in general and administrative expense in the consolidated statement
of operations for the quarter ended June 30, 2008. The shares were issued in reliance
on the exemption provided in Section 4(2) of the Securities Act. No brokers were involved
in the settlement of the litigation.
On
June 17, 2008, the Company entered into an agreement to procure financial consulting services.
In connection with the agreement, the Company granted a five year option,
outside of its existing option plans, to purchase 150,000 shares of common
stock at an exercise price of $3.50. The option, which was approved by the Companys
board of directors, was granted in partial consideration for financial consulting services,
vests over a twelve month period, and expires in five years. The
option was granted in reliance on the exemption provided in Section 4(2) of
the Securities Act. The option was initially valued at $439,500, based on the
application of the Black Scholes option valuation model with the following
assumptions: expected volatility of 273%: risk-free interest rate of 3.66%: expected
term of 5 years; and dividend yield of 0%. In accordance with EITF
96-18,
Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling,
Goods or Services
, the option will periodically revalued through the vesting
period. The value of the option is being expensed over the 36 month term of the consulting
contract. The Company recognized $5,375 of expense in the three and six month periods
ended June 30, 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.
ITEM 6. EXHIBITS
(a) Exhibits: See Exhibit Index herein
46
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: August 14, 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: August 14, 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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47
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
|
|
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
|
|
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.)
|
48
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