U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended June 30, 2009.
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from ______ to ______.
Commission File Number: 001-16695
AMDL, INC.
(Exact name of registrant as specified in its charter)
|
|
|
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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|
|
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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)
|
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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
o
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):
|
|
|
|
|
|
|
Large accelerated filer
o
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|
Accelerated filer
o
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|
Non-accelerated filer
o
|
|
Smaller reporting company
þ
|
|
|
|
|
(Do not check if a smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o
Yes
þ
No
The number
of outstanding shares of the registrants common stock on August 18th, 2009 was
17,188,074.
AMDL, INC.
INDEX TO FORM 10-Q
2
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMDL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
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|
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June 30,
|
|
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December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,072,904
|
|
|
$
|
2,287,283
|
|
Accounts receivable, net
|
|
|
6,550,721
|
|
|
|
13,575,534
|
|
Inventories
|
|
|
1,290,934
|
|
|
|
1,563,991
|
|
Prepaid expenses and other current assets
|
|
|
6,242,691
|
|
|
|
1,006,960
|
|
Current assets of discontinued operations
|
|
|
|
|
|
|
1,435,021
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,157,250
|
|
|
|
19,868,789
|
|
Property and equipment, net
|
|
|
9,807,757
|
|
|
|
11,709,508
|
|
Intangible assets, net
|
|
|
4,550,310
|
|
|
|
5,311,568
|
|
Other assets
|
|
|
4,725,385
|
|
|
|
4,072,432
|
|
Non-current assets of discontinued operations
|
|
|
|
|
|
|
1,789,934
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
35,240,702
|
|
|
$
|
42,752,231
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,891,582
|
|
|
$
|
1,675,539
|
|
Accrued salaries and wages
|
|
|
1,179,190
|
|
|
|
822,201
|
|
Income taxes payable
|
|
|
61,768
|
|
|
|
472,860
|
|
Deferred revenue
|
|
|
|
|
|
|
87,538
|
|
Current portion of notes payable
|
|
|
2,666,670
|
|
|
|
2,662,610
|
|
Current liabilities of discontinued operations
|
|
|
|
|
|
|
1,151,515
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,799,209
|
|
|
|
6,872,263
|
|
Other long-term liabilities
|
|
|
373,745
|
|
|
|
353,811
|
|
Notes payable, net of current portion and debt discount
|
|
|
1,554,788
|
|
|
|
581,305
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
7,727,742
|
|
|
|
7,807,379
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 25,000,000 shares authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000 shares authorized; 17,150,174 and 16,006,074
shares issued at June 30, 2009 and December 31, 2008,
respectively; 16,001,904 and
15,826,074 shares outstanding at June 30, 2009 and December 31, 2008, respectively
|
|
|
16,002
|
|
|
|
15,826
|
|
Additional paid-in capital
|
|
|
70,474,045
|
|
|
|
68,192,411
|
|
Accumulated other comprehensive income
|
|
|
2,369,778
|
|
|
|
2,443,452
|
|
Accumulated deficit
|
|
|
(45,346,867
|
)
|
|
|
(35,706,837
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
27,512,958
|
|
|
|
34,944,852
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
35,240,702
|
|
|
$
|
42,752,231
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
AMDL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net revenues
|
|
$
|
3,181,043
|
|
|
$
|
4,878,192
|
|
|
$
|
5,892,780
|
|
|
$
|
7,819,385
|
|
Cost of sales
|
|
|
2,150,405
|
|
|
|
2,459,322
|
|
|
|
3,735,978
|
|
|
|
3,976,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,030,639
|
|
|
|
2,418,870
|
|
|
|
2,156,802
|
|
|
|
3,842,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
332,779
|
|
|
|
57,052
|
|
|
|
425,463
|
|
|
|
65,747
|
|
Selling, general and administrative
|
|
|
3,784,801
|
|
|
|
2,714,487
|
|
|
|
6,375,570
|
|
|
|
5,512,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,114,580
|
|
|
|
2,771,539
|
|
|
|
6,801,033
|
|
|
|
5,578,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(3,086,941
|
)
|
|
|
(352,669
|
)
|
|
|
(4,644,231
|
)
|
|
|
(1,735,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
(36,721
|
)
|
|
|
4,112
|
|
|
|
(72,830
|
)
|
|
|
(80,408
|
)
|
Interest expense
|
|
|
(332,034
|
)
|
|
|
(199,814
|
)
|
|
|
(566,251
|
)
|
|
|
(261,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(368,755
|
)
|
|
|
(195,702
|
)
|
|
|
(639,080
|
)
|
|
|
(342,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(3,455,696
|
)
|
|
|
(548,868
|
)
|
|
|
(5,283,311
|
)
|
|
|
(2,077,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
417,165
|
|
|
|
257,572
|
|
|
|
527,667
|
|
|
|
406,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before discontinued operation
|
|
|
(3,872,861
|
)
|
|
|
(805,943
|
)
|
|
|
(5,810,978
|
)
|
|
|
(2,484,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net
|
|
|
(4,222,696
|
)
|
|
|
376,376
|
|
|
|
(3,975,670
|
)
|
|
|
582,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(8,095,755
|
)
|
|
|
(429,567
|
)
|
|
|
(9,786,648
|
)
|
|
|
(1,901,763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain (loss)
|
|
|
(54
|
)
|
|
|
524,015
|
|
|
|
(42,485
|
)
|
|
|
1,307,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive gain (loss)
|
|
$
|
(8,095,502
|
)
|
|
$
|
,94,448
|
|
|
$
|
(9,744,162
|
)
|
|
$
|
(594,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before discontinued operations
|
|
$
|
(0.24
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.16
|
)
|
Income (loss) from discontinued operations
|
|
$
|
(0.27
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.25
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.51
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
basic and diluted
|
|
|
15,851,815
|
|
|
|
15,564,208
|
|
|
|
15,916,133
|
|
|
|
15,347,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
AMDL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,786,648
|
)
|
|
$
|
(1,901,763
|
)
|
Less: income from discontinued operations
|
|
|
(3,975,670
|
)
|
|
|
582,717
|
|
|
|
|
|
|
|
|
|
|
|
(5,810,978
|
)
|
|
|
(2,484,480
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss before discontinued operations to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,300,413
|
|
|
|
637,931
|
|
Accretion of debt discount and amortization of debt issuance costs
|
|
|
194,291
|
|
|
|
|
|
Fair market value of options granted to employees and directors for services
|
|
|
154,056
|
|
|
|
422,168
|
|
Fair market value of common stock, warrants and options expensed for services
|
|
|
314,310
|
|
|
|
1,116,753
|
|
Fair value adjustment to warrants accounted for as liabilities
|
|
|
35,557
|
|
|
|
|
|
Provision for bad debts
|
|
|
1,932,384
|
|
|
|
148,379
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
5,116,069
|
|
|
|
(2,743,228
|
)
|
Related party account with Jade Capital
|
|
|
|
|
|
|
(47,375
|
)
|
Inventories
|
|
|
275,284
|
|
|
|
82.816
|
|
Prepaid expenses and other assets
|
|
|
(5,674,930
|
)
|
|
|
399,979
|
|
Accounts payable, accrued expenses and accrued salaries and wages
|
|
|
539,155
|
|
|
|
733,327
|
|
Income taxes payable
|
|
|
(412,035
|
)
|
|
|
(20,930
|
)
|
Deferred revenue
|
|
|
(87,720
|
)
|
|
|
(84,851
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities of continuing operations
|
|
|
(2,124,145
|
)
|
|
|
(1,839,511
|
)
|
Net cash provided by operating activities of discontinued operations
|
|
|
1,853,502
|
|
|
|
491,270
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(270,643
|
)
|
|
|
(1,348,241
|
)
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,034,324
|
)
|
|
|
(1,196,775
|
)
|
Funds advanced to Kangda
|
|
|
|
|
|
|
(644,426
|
)
|
Return of amounts advanced on note receivable
|
|
|
|
|
|
|
13,936
|
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations
|
|
|
(2,034,324
|
)
|
|
|
(1,827,265
|
)
|
Net cash used in investing activities of discontinued operations
|
|
|
|
|
|
|
(14,909
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,034,324
|
)
|
|
|
(1,842,174
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of Senior Notes, net of cash issuance costs of $656,426
|
|
|
2,088,593
|
|
|
|
|
|
Payments on notes payable
|
|
|
|
|
|
|
(2,197,969
|
)
|
Proceeds from issuance of common stock, net of cash offering costs of $123,875
|
|
|
|
|
|
|
860,421
|
|
Proceeds from the exercise of warrants
|
|
|
|
|
|
|
6,983
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities of continuing operations
|
|
|
2,088,593
|
|
|
|
(1,414,741
|
)
|
Net cash provided by (used in) financing activities of discontinued operations
|
|
|
|
|
|
|
(84,176
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities of continuing operations
|
|
|
2,088,593
|
|
|
|
(1,414,741
|
)
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
1,996
|
|
|
|
59,484
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(214,379
|
)
|
|
|
(4,545,672
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
2,287,283
|
|
|
|
6,157,493
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
2,072,904
|
|
|
$
|
1,611,821
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
AMDL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2009 and 2008
NOTE 1 MANAGEMENTS REPRESENTATION
The accompanying condensed consolidated balance sheet as of December 31, 2008, which has been
derived from audited financial statements, and the unaudited interim condensed consolidated
financial statements have been prepared by AMDL, Inc. (the Company) in accordance with accounting
principles generally accepted in the United States of America
(GAAP) for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Accordingly, they
do not include all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statement presentation. In the
opinion of management, all adjustments (consisting primarily of normal recurring accruals)
considered necessary for a fair presentation have been included and the disclosures made are
adequate to make the information not misleading.
Operating results for the three and six months ended June 30, 2009 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2009. It is suggested that
these condensed consolidated financial statements be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December 31, 2008 included
in the Companys Annual Report on Form 10-K. The report of the Companys independent registered
public accounting firm on the consolidated financial statements included in Form 10-K contains a
qualification regarding the substantial doubt about the Companys ability to continue as a going
concern.
NOTE 2 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The predecessor to the Company was incorporated May 13, 1988 and the Company reorganized as a
Delaware corporation on June 7, 1989.
Since inception, the Company has primarily been engaged in the commercial development of and
obtaining various governmental regulatory approvals for the marketing of its proprietary diagnostic
tumor-marker test kit (DR-70®) to detect the presence of multiple types of cancer.
On September 28, 2006, the Company acquired 100% of the outstanding shares of Jade Pharmaceutical,
Inc. (JPI). JPI operates primarily through two wholly owned Peoples Republic of China (PRC or
China) based subsidiaries, Jiangxi Bio-Chemical Pharmacy Company Limited (JJB) and Yangbian
Yiqiao Bio-Chemical Pharmacy Company Limited (YYB). Through JPI, the Company manufactures and
distributes generic, homeopathic, and over-the-counter pharmaceutical products, beauty products and
supplements in China.
Discontinued Operations and Dispositions
On January 22, 2009, the Companys board of directors authorized management to sell the operations
of YYB. In accordance with the Financial Accounting Standards Boards (FASB) Statement of
Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of
Long-lived Assets
(SFAS 144), the Company has classified the assets, liabilities, operations and
cash flows of YYB as discontinued operations for all periods presented. The Company
sold YYB in June 2009. No significant activity occurred during the second
quarter of 2009. The sales price was 16 million Rmb to be remitted
directly to the bank holding the mortgage on JJB assets.
Summarized operating results of discontinued operations for the six months ended June 30, 2009 and
2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
2009
|
|
2008
|
Revenue
|
|
$
|
594,839
|
|
|
$
|
1,549,193
|
|
Income before income taxes
|
|
$
|
277,743
|
|
|
$
|
754,359
|
|
6
Included
in loss from discontinued operations, net are income tax expenses of $30,717 and
$134,086 for the six months ended June 30, 2009 and 2008, respectively. YYBs tax rate is 15%
through 2010 in accordance with the Western Region Development Concession Policy of the PRC
government.
The following table summarizes the carrying amount at December 31, 2008 of the
major classes of assets and liabilities of the Companys business classified as discontinued
operations:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
Current assets:
|
|
|
|
|
Accounts receivable, net
|
|
$
|
930,769
|
|
Inventories
|
|
|
423,842
|
|
Other current assets
|
|
|
80,410
|
|
|
|
|
|
|
|
$
|
1,435,021
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
Property and equipment
|
|
$
|
1,742,739
|
|
Other
|
|
|
47,195
|
|
|
|
|
|
|
|
$
|
1,789,934
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
685,360
|
|
Debt
|
|
|
466,155
|
|
|
|
|
|
|
|
$
|
1,151,515
|
|
|
|
|
|
Going Concern
The 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
before discontinued operations of $3,872,861 and $805,943 for the three months ended June 30,
2009 and 2008, respectively, bringing the net losses before discontinued operations to $5,810,978
and 2,484,480 for the six months ended June 30, 2009 and 2008, respectively, and had an accumulated
deficit of $45,346,867 at June 30, 2009. In addition, despite generating cash from financing
activities of $
for the six months ended June 30, 2009, the Company had a net decrease in
cash of $214,379 for the six months ended June 30, 2009.
At August 17, 2009, the Company had cash on hand in the U.S. $16,000. The Companys operations in
China currently generate positive cash from operations, but the availability of any cash from the
Companys operations in China and the timing thereof is uncertain. The Companys receivables in
China have been outstanding for extended periods, and the Company has experienced increased delays
in collection. The Companys U.S. operations currently require
approximately $400,000 per month to
fund the cost associated with its general U.S. corporate functions, payment by corporate of the
salaries of the Companys executives in China, and the expenses related to the further development
of the DR-70 test kit. Assuming (i) JJB does not undertake
significant new activities which require additional capital, (ii) the current level of revenue from
the sale of DR-70 test kits does not increase in the near future, (iii) the Company does not
conduct any full scale clinical trials for the DR-70 test kit or the combination immunogene therapy
(CIT) technology in the U.S. or China, (iv) JPI continues to generate sufficient cash to exceed
its cash requirements, (v) no outstanding warrants are exercised, and (vi) no additional equity or
debt financings are completed, the amount of cash on hand is not expected to be sufficient to meet the
Companys projected operating expenses on a month to month
basis. Accordingly the Company must @@@ addictional ### or equity
financing for its continued operations.
The monthly cash requirement does not include any extraordinary items or expenditures, including
payments to the Mayo Clinic on clinical trials for the DR-70 test kit or expenditures related to
further development of the CIT technology, as no significant expenditures are anticipated other
than the legal fees incurred in furtherance of patent protection for the CIT technology.
Managements near and long-term operating strategies focus on (i) obtaining China State Food and
Drug Administration (SFDA) approval for the DR-70 test kit, (ii) further developing and marketing
of the DR-70 test kit, (iii) funding the growth of JPIs existing products, (iv) seeking a large
pharmaceutical partner for the Companys CIT technology, (v) selling different formulations of
Human Placental Extract (HPE)-based products in the U.S. and internationally, and (vi)
introduction of new products. 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
7
other business transactions that would generate sufficient resources to assure continuation of the
Companys operations and research and development programs.
There are significant risks and uncertainties which could negatively affect the Companys
operations. These are principally related to (i) the absence of a distribution network for the
Companys DR-70 test kits, (ii) the early stage of development of the Companys CIT technology and
the need to enter into a strategic relationship with a larger company capable of completing the
development of any ultimate product line including the subsequent marketing of such product, (iii)
the absence of any commitments or firm orders from the Companys distributors, (iv) possible
disruption in producing products in China as a result of relocation of the Companys facilities
and/or delays or failure in either the Good Manufacturing Process (GMP) recertification process
or the SFDA production license approval process, and (v) credit risks associated with new
distribution agreements in China. The Companys limited sales to date for the DR-70 test kit and
the lack of any purchase requirements in the existing distribution agreements make it impossible to
identify any trends in the Companys business prospects. Moreover, if either AcuVector and/or the
University of Alberta are successful in their claims (See Note 9), the Company may be liable for
substantial damages, the Companys rights to the CIT technology will be adversely affected, and the
Companys future prospects for licensing the CIT technology will be significantly impaired.
The Companys only sources of additional funds to meet continuing operating expenses, fund
additional research and development, complete the acquisition of production rights for new
products, fund additional working capital, and conduct clinical trials which may be required to
receive SFDA approval are the sale of securities, and cash flow generated from JPIs operations.
Management is actively seeking additional debt and/or equity financing, but no assurances can be
given that such financing will be obtained or what the terms thereof will be. Additionally, there
is no assurance as to whether the Company will continue to conduct JPIs operations on a profitable
basis or that JPIs operations will generate positive cash flow. The Company may need to
discontinue a portion or all of its operations if it is unsuccessful in generating positive cash
flow or financing its operations through the issuance of securities.
These items, among others, raise substantial doubt about the Companys ability to continue as a
going concern. The condensed consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of assets or the
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 the Company and its wholly owned subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Significant estimates
made by management are, among others, provisions for doubtful accounts, realizability of
inventories, recoverability of long-lived assets, valuation and useful lives of intangible assets,
and valuation of options, warrants and deferred tax assets. Actual results could differ from those
estimates.
Revenue Recognition
Revenues from the wholesale sales of over-the counter and prescription pharmaceuticals are
recognized when persuasive evidence of an arrangement exists, title and risk of loss have passed to
the buyer, the price is fixed or readily determinable and collection is reasonably assured,
provided the criteria in the Security and SECs Staff Accounting Bulletin
(SAB) No. 101
Revenue Recognition in Financial Statements
, (as amended by SAB No. 104) are met.
In conjunction with the launch of the Companys Nalefen Skin Care HPE products, distributors of the
products were offered limited-time discounts to allow for promotional expenses incurred in the
distribution channel. Distributors are not required to submit proof of the promotional expenses
incurred. The Company accounts for the promotional expenses in accordance with Emerging Issues Task
Force (EITF) Issue No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products)
. Accordingly, the promotional discounts granted in
prior periods were netted against revenue in the condensed consolidated statements of operations
and comprehensive loss. Accounts receivable presented in the accompanying condensed consolidated
balance
JPIs
management has encountered difficulties in the collection of Accounts
receivables from the above distributors. Since collectability is
questionable, a provision for doubtful accounts has been made in the
amount of approximately $2.6 million.
8
sheets have been reduced by the promotional discounts, as customers are permitted by the terms of
the distribution contracts to net the discounts against payments on the related invoices.
JJB signed four new distribution agreement for the distribution of the Good nak beauty series of produces. These distribution agreements include up front
payments for promotion and advertising. As of June 30, 2009, approximately $2.2 million was remitted.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined on an average cost basis which approximates actual cost on a first-in, first-out basis and includes raw materials, labor and manufacturing overhead. At each balance sheet date, the Company evaluates its ending inventories for excess quantities and obsolescence, Among other factors, the Company considers historical demand and forecasted demand in relation to the inventory on hand, market conditions and product life cycles when determining obsolescence and net realizable value. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-dawns are considered permanent adjustments to the cost basis of the excess or obsolete inventories.
Any provision for sales promotion discounts and estimated returns are accounted for in the period
the related sales are recorded. 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.
In accordance with 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 Revenue
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 retail stores as JPGreen Health and Beauty Clinics.
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.
The Company recorded up-front fees of approximately $40,000 as revenues for each of the three
months ended March 31, 2009 and 2008, respectively. 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 decided to abandon the JP Green store concept
and pursue a strategy of retail distribution through independent, non-branded stores. Since the
Company does not expect any significant additional involvement in the operations of the eight
sub-operators, the up-front fees were recorded as revenue during the quarter ended June 30, 2009. Deferred
revenue related to the unamortized up-front fees amounted to $87,538 at December 31, 2008.
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 144, 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 GMP certifications.
|
9
If the Company determines that the carrying values of long-lived assets may not be recoverable
based upon the existence of one or more of the above indicators of impairment, the Companys
management performs an undiscounted cash flow analysis to determine if impairment exists. If
impairment exists, the Company measures the impairment based on the difference between the assets
carrying amount and its fair value, and the impairment is charged to operations in the period in
which the long-lived asset impairment is determined by management. Based on its analysis, the
Company believes that no indicators of impairment of the carrying value of its long-lived assets
existed at June 30, 2009. 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.
Derivative Financial Instruments
The Company applies the provisions of SFAS No. 133,
Accounting for Derivative Instruments and
Hedging Activities
(SFAS 133). Derivatives within the scope of SFAS 133 must be recorded on the
balance sheet at fair value. The Company issued Convertible Debt in September 2008, and recorded a
derivative asset related to the limitation on bonus interest rights held by Convertible Debt
holders in the event of a change in control or bankruptcy. The fair value of the derivative asset
was $125,000 at both June 30, 2009 and December 31, 2008.
Risks and Uncertainties
Manufacturing and Distribution Operations in China
JJB, and Golden Success, a minimally active shell corporation acquired in 2008, operate as
wholly owned foreign enterprises (WFOE) in the PRC. Risks associated with operating as a WFOE
include unlimited liability for claims arising from operations in China and potentially less
favorable treatment from governmental agencies in China than such entities would receive if they
operated through a joint venture with a Chinese partner.
JJB is 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 the Company to incur additional expenditures which could have a material
impact on the Companys condensed consolidated financial position, results of operations and cash
flows.
The value of the RMB fluctuates and is subject to changes in Chinas political and economic
conditions. Historically, the Chinese government has benchmarked the RMB exchange ratio against the
United States dollar, thereby mitigating the associated foreign currency exchange rate fluctuation
risk; however, no assurances can be given that the risks related to currency deviations of the RMB
will not increase in the future. Additionally, the RMB is not freely convertible into foreign
currency. All foreign exchange transactions must take place through authorized institutions and are
subject to various currency exchange, corporate and tax regulations.
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 the DR-70
test kit in the U.S. except on a research use only basis, as regulated by the United States Food
and Drug Administration (USFDA). 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 DR-70 test kit or that they will not be withdrawn.
Prior to May 2002, the Companys focus was on obtaining foreign distributors for its DR-70 test
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 the DR-70 test kit as an aid in
monitoring patients with colorectal cancer. On July 3, 2008, the Company received a letter of
determination from the USFDA that the DR-70 test kit was substantially equivalent to the existing
predicate device being marketed. The letter grants the Company the right to market the DR-70 test
kit as a device to monitor patients who have been previously diagnosed with colorectal cancer.
10
Although the Company has obtained approval from the USFDA to market the then current formulation of
the DR-70 test kit, it has been determined that one of the key components of the DR-70 test kit,
the anti-fibrinogen-HRP is limited in supply and additional quantities cannot be purchased. There
are currently enough DR-70 test kit components to perform approximately 1.2 million individual
tests (31,000 test kits) over the next 12-18 months. Based on current and anticipated orders, this
supply is adequate to fill all orders. The Company now anticipates that it will attempt to locate a
substitute anti-fibrinogen-HRP and perform additional quality assurance testing in order to create
a significant supply of the current version of the DR-70 test kit.
Part of the Companys research and development efforts through 2010 will include the testing and
development of an enhanced and improved version of the DR-70 test kit. Pilot studies show that the
new version could be superior to the current version. The Company has completed negotiations with a
third party to take the lead on necessary clinical studies. It is anticipated that this version
will be submitted to the USFDA in the latter half of 2010.
In June 2007, the Chinese approval process fundamentally changed. Under the new SFDA guidelines,
the SFDA is unlikely to approve the marketing of the DR-70 test kit without one of the following:
approval by the USFDA, sufficient clinical trials in China, or product approval from a country
where the DR-70 test kit 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 of a limited supply formulation of the DR-70 test kit has been received, there can
be no assurances that JPI will obtain approval for marketing the DR-70 test kit in China or what
the timing thereof may be. The estimated time to complete the SFDA approval process is a year and a
half to two years.
In order to comply with the new SFDA guidelines, in September of 2008, the Company retained Jyton &
Emergo Medical Technology, a China based company to:
|
|
|
Compile technical file and prepare clinical protocol;
|
|
|
|
|
Clinical trial preparation and design;
|
|
|
|
|
Clinical trial supervision and monitoring;
|
|
|
|
|
When appropriate, apply for SFDA approval.
|
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.
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, 2009, the Company had no cash balances in excess of this limit.
Additionally, the Company held $1,900,012 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 $2,004,751 and $73,446 at June 30, 2009 and December 31, 2008,
respectively. Although the Company expects to collect amounts due, actual collections may differ
from the estimated amounts.
As of June 30, 2009, amounts due from three customers, each with receivables in excess of 10% of
accounts receivable, comprised 28%, 15% and 15% of outstanding accounts receivable. As of December
31, 2008, amounts due from six customers, each with receivables in excess of 10% of accounts
receivable, comprised 19%, 14%, 13%, 13%, 12% and 12% of outstanding accounts receivable. For the
six months ended June 30, 2009, one customer comprised 11% of net revenues. For the six months
ended June 30, 2008, two customers comprised 17% and 12% of net revenues.
11
Historically, the majority of the Companys customers were in the pharmaceutical industry.
Consequently, there has been a concentration of receivables and revenues within that industry,
which is subject to normal credit risk. Beginning in the third quarter of 2008, the Company entered
into contracts with three new customers and a fourth contract with an existing customer for the
regional distribution of HPE-based beauty products, marketed under the brand name Nalefen, within
China. The new customers specialize in the distribution of cosmetic products and were granted
credit terms of 120 days. There were no significant sales of the beauty products to the new
customers during the six months ended June 30, 2009. Accounts receivable from such customers
represented 20% and 58% of outstanding accounts receivable at June 30, 2009 and December 31, 2008,
respectively. Although the Company has limited history with customers in the cosmetic distribution
industry, management considers the industry to be subject to normal credit risk.
Basic and Diluted Income (Loss) Per Share
Basic net loss per common share from continuing operations is computed based on the
weighted-average number of shares outstanding for the period. Diluted net loss per share from
continuing operations is computed by dividing net loss by the weighted-average shares outstanding
assuming all dilutive potential common shares were issued. In periods of losses from continuing
operations, basic and diluted loss per share before discontinued operations are the same as the
effect of shares issuable upon the conversion of debt and issuable upon the exercise of stock
options and warrants is anti-dilutive. Basic and diluted income per share from discontinued
operations are also the same, as SFAS No. 128,
Earnings Per Share
, requires the use of the
denominator used in the calculation of loss per share from continuing operations in all other
calculations of earnings per share presented, despite the dilutive effect of potential common
shares.
The impact under the treasury stock method of stock options and warrants would have been
incremental shares of none and 374,538 for the three months ended June 30, 2009 and 2008,
respectively. Additionally, 2,204,559 shares of common stock issuable upon conversion of debt would
have been considered in calculating diluted earnings per share for the three and six months ended June 30,
2009, had the inclusion of such shares been dilutive.
Diluted income per share excludes the impact of 10,451,125 and 5,582,814 options and warrants
outstanding or issuable upon the conversion of debt because the exercise price per share for those
options and warrants exceeds the average market price of the Companys common stock during the six
months ended June 30, 2009 and 2008, respectively.
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
207,356
|
|
|
$
|
184,960
|
|
|
|
|
|
|
|
|
Cash paid during the period for taxes
|
|
$
|
736,506
|
|
|
$
|
438,198
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activities:
|
|
|
|
|
|
|
|
|
Warrants issued in connection with Senior Notes, included in debt
issuance costs and debt discount
|
|
$
|
1,853,120
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Reclassification of amounts recorded to additional paid-in capital to
warrant liability, including $110,858 recorded to retained earnings
upon implementation of EITF 07-5, representing the change in value of
the warrants from date of issuance to January 1, 2009
|
|
$
|
209,166
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Reclassification of warrant liability to additional paid-in capital
upon expiration of share adjustment terms
|
|
$
|
133,866
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Fair market value of common stock recorded as prepaid consulting
|
|
|
|
|
|
$
|
1,011,000
|
|
|
|
|
|
|
|
|
|
Fair value of warrants issued for services, included in prepaid expense
|
|
$
|
35,625
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
Inventories
Inventories are valued
at the lower of cost or net realizable value. Cost is determined on an average cost basis which
approximates actual cost on a first-in, first-out basis and includes raw materials, labor and
manufacturing overhead. At each balance sheet date, the Company evaluates its ending inventories
for excess quantities and obsolescence, Among other factors, the Company considers historical
demand and forecasted demand in relation to the inventory on hand, market conditions and
product life cycles when determining obsolescence and net realizable value. Provisions
are made to reduce excess or obsolete inventories to their estimated net realizable
values. Once established, write-dawns are considered permanent adjustments to the
cost basis of the excess or obsolete inventories.
12
and nonfinancial liabilities, except for items that are recognized or disclosed at fair value at
least once a year, to fiscal years beginning after November 15, 2008, and for interim periods
within those fiscal years. The Company adopted SFAS No. 157 for its nonfinancial assets and
liabilities on January 1, 2009. The adoption of SFAS No. 157 had no impact on the Companys
condensed consolidated financial position or results of operations.
In November 2007, the FASBs EITF ratified Issue No. 07-1,
Accounting for Collaborative
Arrangements,
(EITF 07-1) which defines collaborative arrangements and establishes reporting and
disclosure requirements for such arrangements. The Company adopted EITF 07-1 on January 1, 2009.
The adoption of EITF 07-1 had no impact on the Companys condensed consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements An 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. The Company adopted SFAS No. 160 on January 1, 2009. The adoption of SFAS No. 160 did
not have a material impact on the condensed 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 non-contractual 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. The Company adopted SFAS No. 141(R) on January 1, 2009. SFAS No. 141(R) will
impact the Companys condensed consolidated financial statements if and when the Company engages in
a business combination.
In April 2008, the FASB issued Staff Position No. 142-3,
Determination of the Useful Life of
Intangible Assets
(FSP 142-3). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets
. The Company adopted FSP
142-3 on January 1, 2009. The adoption of FSP No. 142-3 had no impact on the Companys condensed
consolidated financial statements.
In May 2008, the FASB issued Staff Position No. APB 14-1 (FSP APB 14-1), which clarifies the
accounting for convertible debt instruments that may be settled fully or partially in cash upon
conversion. FSP APB 14-1 requires entities to separately measure and account for the liability and
equity components of qualifying convertible debt and amortize the value of the equity component to
interest cost over the estimated life of the convertible debt instrument. By amortizing the value
of the equity component, an entity will effectively recognize interest cost at its non-convertible
debt borrowing rate. FSP APB 14-1 also requires re-measurement of the liability and equity
components upon extinguishment of a convertible debt instrument, which may result in a gain or loss
recognized in the financial statements for the extinguishment of the liability component. FSP APB
14-1 requires retrospective application for all instruments that were outstanding during any
periods presented. The Company adopted FSP APB 14-1 on January 1, 2009. The adoption of FSP APB
14-1 had no impact on the Companys condensed consolidated financial statements.
In June 2008, the FASB ratified EITF Issue No. 07-5,
Determining Whether an Instrument (or an
Embedded Feature) Is Indexed to an Entitys Own Stock
(EITF 07-5). EITF 07-5 provides that an
entity should use a two step approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the instruments contingent
exercise and settlement provisions. The Company adopted EITF 07-5 on January 1, 2009. As a result,
the Company reclassified certain warrants as liabilities and recorded a cumulative effect gain of
approximately $111,000 to retained earnings for the decrease in fair value of the warrants at the
date of issuance compared with the fair value at the date of implementation of EITF 07-5.
Adjustment features within the warrants that resulted in liability classification expired prior to
March 31, 2009. As a result, the warrants were reclassified back to equity as of March 31, 2009.
The Company recorded a loss of approximately $36,000 to other expense in the quarter ended March
31, 2009 as a result of adjusting the warrant liability to fair value at the date that the
adjustment features expired.
13
In April 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1,
Interim Disclosures about
Fair Value of Financial Instruments
(FSP FAS 107-1 and APB 28-1), which requires publicly traded
companies to include in their interim financial reports certain disclosures about the carrying
value and fair value of financial instruments previously required only in annual financial
statements and to disclose changes in significant assumptions used to calculate the fair value of
financial instruments. FSP FAS 107-1 and APB 28-1 is effective for all interim reporting periods
ending after June 15, 2009, with early adoption permitted for interim reporting periods ending
after March 15, 2009. The Company is evaluating the effect that FSP FAS 107-1 and APB 28-1 will
have on its disclosures for the second quarter of 2009.
NOTE 3 INVENTORIES
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Raw materials
|
|
$
|
1,024,644
|
|
|
$
|
719,389
|
|
Work-in-process
|
|
|
5,332
|
|
|
|
11,808
|
|
Finished goods
|
|
|
260,959
|
|
|
|
832,794
|
|
|
|
|
|
|
|
|
|
|
$
|
1,290,934
|
|
|
$
|
1,563,991
|
|
|
|
|
|
|
|
|
NOTE 4 PREPAID EXPENSES, OTHER CURRENT ASSETS, AND OTHER ASSETS
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Material deposits
|
|
$
|
1,182,463
|
|
|
$
|
627,390
|
|
Due from officers and directors
|
|
|
12,770
|
|
|
|
9,693
|
|
Current deferred tax asset
|
|
|
|
|
|
|
92,798
|
|
Receivable from sale of YYB
|
|
|
2,337,541
|
|
|
|
|
|
Advertising and sales
|
|
|
2,191,445
|
|
|
|
|
|
Other
|
|
|
518,472
|
|
|
|
277,079
|
|
|
|
|
|
|
|
|
|
|
$
|
6,242,691
|
|
|
$
|
1,006,960
|
|
|
|
|
|
|
|
|
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Deposits, primarily product licenses
|
|
$
|
3,013,055
|
|
|
$
|
3,000,354
|
|
Debt issuance costs (Note 7)
|
|
|
1,550,665
|
|
|
|
906,408
|
|
Convertible Debt derivative
|
|
|
125,000
|
|
|
|
125,000
|
|
Refundable deposits
|
|
|
36,665
|
|
|
|
40,670
|
|
|
|
|
|
|
|
|
|
|
$
|
4,725,385
|
|
|
$
|
4,072,432
|
|
|
|
|
|
|
|
|
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.
14
NOTE 5 INTANGIBLE ASSETS
Intangible assets consist of the following at June 30, 2009 (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Currency
|
|
|
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Translation
|
|
|
Net
|
|
Assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
$
|
2,000,000
|
|
|
$
|
(791,667
|
)
|
|
$
|
|
|
|
$
|
1,208,333
|
|
Production rights
|
|
|
1,916,622
|
|
|
|
(436,783
|
)
|
|
|
169,389
|
|
|
|
1,649,638
|
|
Land use rights
|
|
|
1,354,765
|
|
|
|
(92,854
|
)
|
|
|
(260,299
|
)
|
|
|
1,001,613
|
|
Non-compete agreements
|
|
|
324,415
|
|
|
|
(216,925
|
)
|
|
|
48,789
|
|
|
|
156,159
|
|
Customer relationships
|
|
|
214,328
|
|
|
|
(103,299
|
)
|
|
|
34,421
|
|
|
|
145,451
|
|
Trade name and logo
|
|
|
530,829
|
|
|
|
(172,462
|
)
|
|
|
91,047
|
|
|
|
449,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,340,959
|
|
|
$
|
(1,813,990
|
)
|
|
$
|
83,268
|
|
|
$
|
4,610,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets consist of the following at December 31, 2008 (Audited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Currency
|
|
|
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Translation
|
|
|
Net
|
|
Assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
$
|
2,000,000
|
|
|
$
|
(741,667
|
)
|
|
$
|
|
|
|
$
|
1,258,333
|
|
Production rights
|
|
|
1,916,622
|
|
|
|
(318,986
|
)
|
|
|
154,007
|
|
|
|
1,751,643
|
|
Land use rights
|
|
|
1,354,765
|
|
|
|
(99,094
|
)
|
|
|
209,839
|
|
|
|
1,465,510
|
|
Non-compete agreements
|
|
|
324,415
|
|
|
|
(163,652
|
)
|
|
|
32,483
|
|
|
|
193,246
|
|
Customer relationships
|
|
|
214,328
|
|
|
|
(77,904
|
)
|
|
|
26,569
|
|
|
|
162,993
|
|
Trade name and logo
|
|
|
530,829
|
|
|
|
(129,041
|
)
|
|
|
78,055
|
|
|
|
479,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,340,959
|
|
|
$
|
(1,530,344
|
)
|
|
$
|
500,953
|
|
|
$
|
5,311,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In August 2001, the Company acquired intellectual property rights and an assignment of a US patent
application for its 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 9).
As part of the acquisition of the technology, the Company agreed to pay Dr. Chang a 5% royalty on
net sales of products developed with the Companys CIT technology. The Company has not paid any
royalties to Dr. Chang to date as there have been no sales of such products.
NOTE 6 INCOME TAXES
The Company recorded tax provisions of $417,165 and $257,572 for the three months ended June 30,
2009 and 2008, respectively, or 12% and 10% of its pre-tax losses for the respective periods. The
Company recorded tax provisions of $527,667 and $406,633 for the six months ended June 30, 2009 and
2008, respectively, or 37% and 18% of its pre-tax losses for the respective periods. The difference
between the effective tax rates and the 34% federal statutory rate resulted primarily from losses
generated in the United States with no corresponding tax benefit, due to the full valuation reserve
on net deferred tax assets, and foreign earnings taxed at the rates in effect in local
jurisdictions. The Companys Chinese operations operate under tax holiday and incentive programs.
JJB has been granted a 50% waiver of income taxes for 2008 through 2010.
The Company utilizes the asset and liability method of accounting for income taxes as set forth in
SFAS No. 109,
Accounting for Income Taxes
. As a result of the Companys cumulative losses in the
U.S., management has 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 2005 through 2008 tax years generally remain subject to examination by
federal and most state tax authorities. In China, the 2002 through 2008 tax years generally remain
subject to examination by tax authorities. The Company is not currently under examination for any
tax year by any jurisdiction.
15
Current deferred tax assets of $-0- and $92,798 have been included in prepaid expenses and other
current assets in the condensed consolidated balance sheets as of June 30, 2009 and December 31,
2008, respectively.
NOTE 7 NOTES PAYABLE
Notes payable consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Convertible Debt, net of unamortized discount, inclusive
of bonus interest, of $3,761,588 and $3,762,000 at June 30,
2009 and December 31, 2008, respectively
|
|
$
|
412
|
|
|
$
|
|
|
Senior Notes payable, net of unamortized discount of
$1,946,406 and $496,195 at June 30, 2009 and December 31,
2008, respectively
|
|
|
1,554,788
|
|
|
|
581,305
|
|
Bank debt
|
|
|
2,666,258
|
|
|
|
3,128,765
|
|
|
|
|
|
|
|
|
|
|
|
4,221,458
|
|
|
|
3,710,070
|
|
Less: Bank debt associated with discontinued operations of YYB
|
|
|
|
|
|
|
466,155
|
|
Less: Current portion of long-term debt
|
|
|
2,666,670
|
|
|
|
2,662,610
|
|
|
|
|
|
|
|
|
|
|
$
|
1,554,788
|
|
|
$
|
581,305
|
|
|
|
|
|
|
|
|
Convertible Debt
The significant terms of the Companys convertible debt are described in the notes to the Companys
Annual Report on Form 10-K for the year ended December 31, 2008.
Senior Notes Payable
The significant terms of the Companys Senior Notes Payable (Series 1) are described in the notes to the
Companys Annual Report on Form 10-K for the year ended December 31, 2008. The Series 1 Senior Notes outstanding
at December 31, 2008 mature on the earlier of December 8, 2010 or upon the completion of the
closing of a credit facility or loans by the Company or its subsidiaries with a financial
institution or bank of not less than $8 million in a transaction or series of transactions.
On January 30, 2009, the Company conducted the second and final closing (the Final Closing) of
the 12% (Series 1) Senior Note offering whereby the Company sold an additional $680,000 principal amount of
12% Senior Notes and five year warrants to purchase a total of 544,000 shares of common stock at
$1.13 per share. Accordingly, a total of $1,757,500 in 12% Senior Notes and Warrants to purchase
1,406,000 shares of common stock in the 12% Senior Note Offering were sold in 2008 and 2009. The
Senior Notes issued in January 2009 mature on the earlier of the second anniversary of the closing
date or upon the completion of the closing of a credit facility or loans by the Company or its
subsidiaries with a financial institution or bank of not less than $8 million in a transaction or
series of transactions.
The Company incurred debt issuance costs of $156,376 and debt discounts of $429,760 in association
with the Final Closing of the Senior Notes, (Series 1) including $42,976 and $429,760, respectively, related
to the issuance of 54,400 and 544,000 warrants for the purchase of the Companys common stock at
$1.13 per share, issued to brokers and Senior Note (Series 1) holders, respectively. These warrants were
valued using the Black-Scholes option pricing model, using the following assumptions: (i) no
dividend yield, (ii) weighted-average volatility of 120% (iii) weighted-average risk-free interest
rate of 1.85%, and (iv) weighted-average expected life of 5 years. Those debt issuance costs are
included in other assets in the condensed consolidated balance sheet at June 30, 2009. Debt
issuance costs and debt discount are being amortized over the life of the debt using the effective
interest method.
In connection with the 12% Senior Note (Series 1) offering, the Company agreed to file a registration
statement with the SEC on From S-3 by July 31, 2009 (which was filed on July 2, 2009), covering the secondary offering and resale of
the Warrant Shares sold in the 12% Senior Note offering. In the event the registration statement is
not declared effective prior to October 31, 2009, or the Company does not maintain effectiveness of
the registration statement, the Company must issue additional warrants in an amount equal to 1% of
the warrant shares per month, up to a maximum of 6% (or warrants to purchase up to 56,892 shares),
issuable upon exercise of the warrants subject to registration. Based upon managements
consideration of the likelihood of completing the required registration, the Company has not
accrued any liability related to the additional warrants issuable pursuant to the registration
rights agreement. If it becomes probable that the Company will
16
be required to issue additional warrants, the estimated value of the warrants will be recognized in
earnings pursuant to FSP EITF 00-19-2,
Accounting for Registration Payment Arrangements.
On May 4, 2009, the Company conducted a first closing (First Closing) of a private offering under
Regulation D for the sale to accredited investors of units
consisting of $1,327,250 principal
amount of 12% Series 2 Senior Notes (Series 2 Notes) and five year warrants to purchase a total
of 2,123,600 shares of our common stock at $0.98 per share (the Warrant Shares). Under the terms
of the offering, the exercise price of the Warrant Shares was 115% of the five (5) day volume
weighted average closing price of the Companys common stock on NYSE Alternex US for the five (5)
trading days prior to the date of the First Closing.
In connection with the offer and sale of securities to the purchasers in the First Closing of
the offering, our exclusive placement agent and all participating brokers received aggregate cash
sales commissions of $132,725 and $39,817.50 in non-accountable expenses for services in connection
with the First Closing. In addition, in the First Closing we issued placement agent warrants to our
exclusive placement agent to purchase a total of 212,360 shares, of which warrants to purchase
54,472 shares and warrants to purchase 6,000 shares were assigned to other individuals.
On June 12, 2009, the Company conducted the second closing (the Second Closing) of a private
offering under Regulation D for the sale to accredited investors of units consisting of $468,500
principal amount of 12% Series 2 Senior Notes (Notes) and five year warrants to purchase a total
of 749,600 shares of our common stock at $1.11 per share (the Warrant Shares). Under the terms of
the offering, the exercise price of the Warrant Shares was to be greater of 115% of the five day
weighted average closing prices of our common stock as reported by NYSE Alternext US for the five
trading days ended on June 11, 2009.
In connection with the offer and sale of securities to the purchasers in the offering, our
exclusive placement agent received sales commissions of $46,850 and $14,055 of non-accountable
expenses for services in connection with the Second Closing. In addition, in the Second Closing we
issued placement agent warrants to purchase a total of 74,960 shares, of which our exclusive
placement agent received placement agent warrants to purchase 58,360 shares, and two other brokers
received warrants to purchase 14,992 shares and 1,600 shares, respectively.
Bank Debt
At June 30, 2009 and December 31, 2008, the Company had RMB denominated indebtedness equal to
$2,666,670 (RMB 21.4 million) and $3,128,765 (RMB 21.4 million), respectively, 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 certain assets
of JJB and YYB and bear interest at rates ranging from 5.3%
9.5% per annum. The buyer of YYB has contractually agreed to pay off
the balance of the RMB 16 million obligation secured by a mortgage
on certain land owned by JJB.
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 by JPI of the loans under their original terms through
December 31, 2008, however, this agreement was not formalized in writing.
The RMB 16 million loan term was modified and extended in connection with the
date 8 YYB in June 2009.
17
In March 2008, the Company agreed to repay RMB 17.1 million ($2,412,145) of mature loans to the
bank by the second quarter of 2008. The Company made payments totaling RMB 16.2 million
($2,282,402) in the year ended December 31, 2008. In March, 2009, the Company and the bank agreed
to extend the due date on approximately $2.5 million (RMB 17.2 million) to December 31, 2009. The
remaining $0.6 million, owed primarily by YYB, is due and payable.
Debt Repayment Obligations
The following table sets forth the contractual repayment obligations under the Companys notes
payable, excluding those related to discontinued operations. The table assumes that Convertible
Debt will be repaid at maturity, and excludes interest payments, except for bonus interest payable
under the terms of the Convertible Debt instruments. The table also assumes that maturity of the
Senior Notes will not occur before the two year anniversary of the date of issuance.
|
|
|
|
|
2009
|
|
$
|
2,665,946
|
|
2010
|
|
|
4,998,668
|
|
2011
|
|
|
888,224
|
|
2012
|
|
|
1,431,358
|
|
|
|
|
|
|
|
$
|
9,984,196
|
|
|
|
|
|
NOTE 8 EMPLOYMENT CONTRACT TERMINATION LIABILITY
In October 2008, the Companys former chief executive officer agreed to retire from his employment
with the Company. The Company negotiated a settlement of its employment contract with the former
chief executive under which he received $150,000 upon the effective date of the agreement,
including $25,000 for reimbursement of his legal expenses. In addition the Company agreed to pay
$540,000 in monthly installments of $18,000, commencing January 31, 2009, to continue certain
insurance coverages, and to extend the term of options previously granted which would have expired
shortly after termination of employment. Pursuant to SFAS No. 146,
Accounting for Costs Associated
with Exit or Disposal Activities
, the Company recorded a liability of approximately $517,000 for
the present value of the monthly installments and insurance coverages due under the settlement
agreement. Approximately $214,242 and $237,000 are included in accrued salaries and wages and
$175,696 and $280,000 are included in other long-term liabilities in the accompanying condensed
consolidated balance sheets at June 30, 2009 and
December 31, 2008, respectively. The Company has not made the
$18,000 payment due for July 2009 nor paid the premium on a life insurance
policy on the former officer and is currently in default under this
obligation.
NOTE 9 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 condensed 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 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 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 CIT technology,
just that the University has an equitable interest therein or the revenues there from.
18
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 and its future
prospects for exploiting or licensing the CIT technology will be significantly impaired.
In the ordinary course of business, there are other potential claims and lawsuits brought by or
against the Company. In the opinion of management, the ultimate outcome of these matters will not
materially affect the Companys operations or financial position or are covered by insurance.
Production License Acquisition Agreements
In 2006 and 2007, the Company entered into a $6.7 million purchase commitment with Jiangxi YiBo
Medicine Technology Development Co., Ltd (YiBo) for the acquisition of generic drug production
technical information to be used in the Companys SFDA generic drug applications for ten medicines.
The Company has received regulatory approval for three of the medicines and has made deposits to
YiBo for the remaining seven medicines. The deposits paid to YiBo are refundable if the Company is
unsuccessful in obtaining SFDA manufacturing licenses for the products purchased. When paid, these
amounts will be capitalized and amortized over the expected economic life of the products which are
subject to the production licenses obtained from the SFDA.
Licensing Agreements
The Company has agreed to pay a 5% royalty on net sales of products developed from the Companys
CIT technology. The Company has not paid any royalties to date as there have been no sales of such
products.
Contingent Issuance of Shares Acquisition of JPI
In 2006, pursuant to the Stock Purchase and Sale Agreement (the Purchase Agreement), the Company
acquired 100% of the outstanding shares of JPI from Jade. The terms of the Purchase Agreement
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 and
administered pursuant to an Escrow Agreement. The Escrow Agreement provided that if, within one
year from and after the closing of the Purchase Agreement, Jade or its shareholders demonstrated
that the SFDA had issued a permit or the equivalent regulatory approval for the Company to sell and
distribute the DR-70 test kit in the PRC without qualification, in form and substance satisfactory
to the Company, then the escrow agent would promptly disburse the Escrow Shares to Jade or its
shareholders.
Due to changes in the SFDAs regulatory and administrative processes regarding the approval of both
drug and device applications, approval of the DR-70 test kit by the SFDA has been delayed in ways
that could not have been anticipated at the date of the Purchase Agreement. The Board of Directors
has amended the Escrow Agreement on three occasions, to extend the date by which the SFDAs
approval of the DR-70 test kit must be achieved. The most recent amendment, which became effective
March 24, 2009, provided that if Jade has not notified the escrow agent that the SFDA has issued
the approval to market the DR-70 test kit before March 28, 2010, 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. The shares are included in the number of shares issued as presented
on the face of the accompanying condensed consolidated balance sheets, however, they are not
considered issued for financial accounting purposes. In the event the Escrow Shares are released to
Jade, the Company will record the fair value of the Escrow Shares issued as goodwill.
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
condensed consolidated balance sheets.
19
Tax Matters
The Company is required to file federal and state income tax returns in the United States and
various other income tax returns in foreign jurisdictions. The preparation of these income tax
returns requires the Company to interpret the applicable tax laws and regulations in effect in such
jurisdictions, which could affect the amount of tax paid by the Company. The Company, in
consultation with its tax advisors, bases its income tax returns on interpretations that are
believed to be reasonable under the circumstances. The income tax returns, however, are subject to
routine reviews by the various taxing authorities in the jurisdictions in which the Company files
its income tax returns. As part of these reviews, a taxing authority may disagree with respect to
the interpretations the Company used to calculate its tax liability and therefore require the
Company to pay additional taxes.
Change in Control Severance Plan
On November 15, 2001, the board of directors adopted an Executive Management Change in Control
Severance Pay Plan. The plan covered the persons who at any time during the 90-day period ending on
the date of a change in control (as defined in the plan), were employed by the Company as Chief
Executive Officer and/or president and provided for cash payments upon a change in control. The
Change in Control Severance Pay Plan was terminated in April 2009.
NOTE 10 SHARE-BASED COMPENSATION
The Company has six share-based compensation plans under which it may grant common stock or
incentive and non-qualified stock options to officers, employees, directors and independent
contractors. A detailed description of the Companys share-based compensation plans and option
grants outside the option plans is contained in the notes to the audited December 31, 2008
financial statements.
On January 7, 2009, the Company adopted the 2008-2009 Performance and Equity Incentive Plan
(Performance Plan) whereby up to 1,000,000 shares of the Companys common stock may be issued
under the Performance Plan. The Board of Directors approved the grant of 870,000 shares of the
Companys common stock under the Performance Plan, subject to stockholder approval of the
Performance Plan. The grant of the 870,000 shares is also subject to the attainment of specific
comprehensive income targets during the five quarterly periods beginning with the quarter ended
December 31, 2008. Because stockholder approval of the Performance Plan is required, expense
related to options earned for periods prior to the receipt of such approval will not be recorded
until the approval is obtained. As of June 30, 2009, the Companys stockholders have not approved
the Performance Plan. Of the shares available under the performance plan, 174,000 shares of the
Companys common stock have been earned, and the Income Targets were not met for first quarter 2009
and on June 8, 2009, 223,000 shares that were previously issued under
the Performance Plan were cancelled and returned to treasury. It is unlikely that any of the Income Targets for Q3 and Q4 of 2009
will be met, and accordingly the balance of the shares issued under
the Performance Plan will be cancelled and returned to the treasury
of the Company.
Also, on January 7, 2009, the Company granted 120,000 shares of common stock to the Companys
independent directors, subject to stockholder approval. The grant of the 120,000 shares is based on
performance through 2008. However, because shareholder approval is required, the shares will be
expensed when the approval is obtained. As of June 30, 2009, the Companys stockholders have not
approved this grant of common stock to the Companys independent directors.
For the six months ended June 30, 2009 and 2008, the Company recorded share-based compensation
expense of $154,056 and $422,168, respectively. Substantially all of such compensation expense is
reflected in the accompanying condensed consolidated statements of operations and comprehensive
loss within the selling, general and administrative line item. Share-based compensation expense
recognized in the periods presented is based on awards that have vested or are ultimately expected
to vest. Historically, options have vested upon grant, thus it was not necessary for management to
estimate forfeitures. Options granted in 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
20
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 did not grant options in the six months ended June 30, 2009. 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:
|
|
|
|
|
Expected volatility
|
|
|
111
|
%
|
Expected term
|
|
5 years
|
|
Risk-free interest rate
|
|
|
2.48
|
%
|
Dividend yield
|
|
|
|
%
|
The weighted-average grant date fair value of employee and director stock options granted during
the six months ended June 30, 2008 was $2.98.
The
following is a summary of the changes in stock options outstanding
during the six months
ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Options
|
|
|
Price
|
|
|
Life (Years)
|
|
Outstanding, December 31, 2008
|
|
|
2,757,001
|
|
|
$
|
3.75
|
|
|
|
|
|
Expired
|
|
|
(305,000
|
)
|
|
|
5.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and expected to vest, June 30, 2009
|
|
|
2,452,001
|
|
|
$
|
3.50
|
|
|
|
2.33
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Exercisable at June 30, 2009
|
|
|
2,348,668
|
|
|
$
|
3.50
|
|
|
|
2.27
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding at June 30, 2009, considering only options
with positive intrinsic values and based on the closing stock price, was $0.
At June 30, 2009, total unrecognized stock-based compensation cost related to unvested stock
options was $419,083, which is expected to be expensed over a weighted average period of 0.9 years.
NOTE 11 FINANCING ACTIVITIES
Cash Financing Activities
December 2007 Offering
In December, 2007, the Company conducted the closing of a private placement (December 2007
Offering) of Units. 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 323,626 units at $3.09 per unit and issued warrants to purchase 161,813
shares at an exercise price of $4.74 per share. In connection with the second closing of the
December 2007 Offering, the Company paid a finders fee of $100,000 and other expenses and fees of
$42,729, including $18,854 that were paid subsequent to the first quarter of 2008.
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.
21
Convertible Debt
In September 2008, the Company raised $2,084,401, net of cash issuance costs of $425,599, from the
issuance of Convertible Debt, consisting primarily of broker commissions and legal fees. See Note
7. Additionally, the Company issued broker warrants to purchase 209,166 shares at an exercise price
of $2.69, which were valued at $209,166. The warrants are exercisable after March 15, 2009. The
warrants issued were valued using the Black-Scholes option pricing model with the following
assumptions: expected volatility of 95%; risk-free interest rate of 2.59%; expected term of five
years; and dividend yield of 0%. The warrants were recorded as a component of additional paid-in
capital and debt issuance costs, included in other assets in the accompanying condensed
consolidated balance sheet. The Company has reserved approximately 3,796,000 shares for the
conversion of principal and interest due under the debt, and the shares issuable upon the exercise
of warrants that will be issued upon conversion of the debt.
Senior Notes Warrants
In December 2008, the Company issued warrants to purchase a total of 948,200 shares of the
Companys common stock at an exercise price of $1.00 per share in connection with the first closing
of the Senior Note financing. In January 2009, the Company issued warrants to purchase a total of
598,400 shares of the Companys common stock at an exercise price of $1.13 per share in connection
with the final closing of the Senior Note financing.
In May 2009, The Company issued warrants to purchase a total
as 2,123,600 shares of the Companys common
stock at an exercise price of $0.98 per share
In June 2009, The Company issued warrants to purchase a total of
of 749,600 shares of the Companys common
stock at an exercise price of $1.11 per share
Non-Cash Financing Activities
On September 14, 2007, the Board of Directors authorized the issuance of 250,000 shares of common
stock to First International pursuant to an amendment to the consulting agreement dated July 22,
2005, for financial advisory services to be provided from September 22, 2007 through September 22,
2008. The shares were valued at $817,500 based on the trading price of the common stock on the
measurement date. The Shares were issued pursuant to an exemption under Section 4(2) of the
Securities Act. No underwriter was involved in this issuance. During the three months ended March
31, 2008, the Company recorded selling, general and administrative expense of $204,375 related to
the agreement.
On November 27, 2007, the Board of Directors authorized the issuance of 75,000 shares of common
stock to Boston Financial Partners Inc. pursuant to an amendment to the consulting agreement dated
September 16, 2003, for financial advisory services to be provided from November 1, 2007 through
October 31, 2008. The shares were valued at $336,000 based on the trading price of the common stock
on the measurement date. During the three months ended March 31, 2008, the Company recorded general
and administrative expense of $84,000 related to the agreement.
On November 27, 2007, the Board of Directors authorized the issuance of up to 300,000 shares of
common stock, to be earned at the rate of 25,000 shares per month to Madden Consulting, Inc. for
financial advisory services to be provided from December 26, 2007 through December 26, 2008. The
Company issued 25,000 shares in the three months ended March 31, 2008 that were valued at $104,250
based on the trading price of the common stock on the measurement date. During the three months
ended March 31, 2008, the Company recorded general and administrative expense of $104,250 related
to the agreement and the January 2008 issuance of 25,000 shares. This agreement was terminated on
January 29, 2008 and the remaining obligation to issue 250,000 shares was cancelled.
On February 5, 2008, the Board of Directors authorized the issuance of 300,000 shares of common
stock to LWP1 pursuant to a consulting agreement dated February 3, 2008 for financial advisory
services to be provided from February 3, 2008 through May 3, 2009. The shares are issuable in two
increments of 150,000. The shares vest over a fifteen month period and are being valued monthly as
the shares are earned based on the trading price of the common stock on the monthly anniversary
date. 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
(EITF 96-18), the
shares issued will be periodically valued through the vesting period.
During the six months ended
June 30, 2009 and 2008, the Company recorded general and administrative expense of $55,000 and
$134,800 related to the agreement.
On June 17, 2008, the Company entered into an agreement for financial consulting services. In
connection with the agreement, the Company granted warrants to purchase 150,000 shares of common
stock at an exercise price of $3.50. The warrants, which were approved by the Companys board of
directors, were granted in partial consideration for financial consulting services, vests over a
22
twelve month period, and expire in five years. The warrants were initially valued at $315,000,
based on the application of the Black Scholes option valuation model with the following
assumptions: expected volatility of 95%; average risk-free interest rate of 3.66%; expected term of
5 years; and dividend yield of 0%. In accordance with EITF 96-18, the warrants will be periodically
revalued through the vesting period. As of June 30, 2009, the estimated cumulative value of the
vested and unvested warrants, based on the periodic revaluation, is $116,000. The value of the
vested portion of the warrants is recorded to additional paid in capital and prepaid expense in the
month that vesting occurs. The resulting prepaid asset is being expensed over the 36 month term of
the consulting contract. The Company recognized $121,326 of expense in the quarter ended June 30,
2009 with respect to the warrants.
On January 22, 2009, the Company entered into an agreement with B&D Consulting for investor
relations services through July 7, 2010. The Company granted B&D Consulting 400,000 shares of the
Companys common stock in exchange for services. In accordance with EITF 96-18, the shares issued
will be periodically valued through the vesting period. During the three and six months ended June
30, 2009, the Company recorded general and administrative expense of $42,615 and $72,247,
respectively, related to the agreement.
On March 31, 2009, the Company issued 12,500 shares of the Companys common stock to a consultant
for investor relations services. The Company recorded $10,126 of expense in the quarter ended March
31, 2009 with respect to the shares issued, based on the value of the stock at the date the shares
were earned.
Warrants
A summary of activity with respect to warrants outstanding follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
Outstanding, December 31, 2008
|
|
|
5,252,699
|
|
|
$
|
3.38
|
|
Issued
|
|
|
3,758,920
|
|
|
|
1.03
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2009
|
|
|
7,999,124
|
|
|
$
|
2.35
|
|
|
|
|
|
|
|
|
NOTE 12 SEGMENT REPORTING
The Company evaluates performance based on sales, gross profit and income (loss) before
discontinued operations. In 2009, the Company has two reportable segments: (i) China, which
consists of manufacturing and wholesale distribution of pharmaceutical and cosmetic products to
distributors, hospitals, clinics and similar institutional entities in China, and (ii) Corporate,
which comprises the development of in-vitro diagnostics and the Companys CIT technology, as well
as the development of the Companys HPE-based products for markets outside of China. The 2008
segment information has been restated to eliminate separate reporting for China-Direct, a retail
concept that was under development, but abandoned in favor of an expanded distributor-based
strategy in 2008. The results previously reported for China-Direct have been combined with China.
23
The following is information for the Companys reportable segments for the six months ended June
30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
Corporate
|
|
Total
|
Net revenue
|
|
$
|
3,152,693
|
|
|
$
|
28,350
|
|
|
$
|
3,181,043
|
|
Gross profit
|
|
$
|
1,013,903
|
|
|
$
|
16,737
|
|
|
$
|
1,030,640
|
|
Depreciation
|
|
$
|
263,512
|
|
|
$
|
31,777
|
|
|
$
|
295,289
|
|
Amortization
|
|
$
|
602,684
|
|
|
$
|
50,000
|
|
|
$
|
652,684
|
|
Interest expense
|
|
$
|
55,756
|
|
|
$
|
276,278
|
|
|
$
|
332,034
|
|
Income (loss) before discontinued operations
|
|
$
|
(1,532,428
|
)
|
|
$
|
(2,340,433
|
)
|
|
$
|
(3,872,861
|
)
|
Identifiable assets of continuing operations
|
|
$
|
29,411,505
|
|
|
$
|
3,551,994
|
|
|
$
|
32,963,499
|
|
Capital expenditures
|
|
$
|
849,660
|
|
|
$
|
646
|
|
|
$
|
850,306
|
|
The following is information for the Companys reportable segments for the six months ended June
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
Corporate
|
|
Total
|
Net revenue
|
|
$
|
5,841,360
|
|
|
$
|
51,420
|
|
|
$
|
5,892,780
|
|
Gross profit
|
|
$
|
2,125,072
|
|
|
$
|
31,732
|
|
|
$
|
2,156,804
|
|
Depreciation
|
|
$
|
469,899
|
|
|
$
|
45,678
|
|
|
$
|
515,577
|
|
Amortization
|
|
$
|
709,837
|
|
|
$
|
75,000
|
|
|
$
|
784,837
|
|
Interest expense
|
|
$
|
111,458
|
|
|
$
|
454,793
|
|
|
$
|
566,251
|
|
Income (loss) before discontinued operations
|
|
$
|
(1,133,864
|
)
|
|
$
|
(4,677,114
|
)
|
|
$
|
(5,810,978
|
)
|
Capital expenditures
|
|
$
|
1,661,401
|
|
|
$
|
107,083
|
|
|
$
|
1,768,484
|
|
At December 31, 2008, identifiable assets associated with continuing operations of the China and
Corporate segments totaled $35,803,941 and $3,723,335, respectively, and $39,527,276 in the
aggregate.
Virtually all of the Companys revenues for the three months ended March 31, 2009 and 2008 were
from foreign customers.
NOTE 13 RELATED PARTY TRANSACTIONS
At June 30, 2009 and December 31, 2008, the Company has a receivable of $12,779 and $9,693,
respectively, due from certain former directors of YYB and JJB for advances. These advances are
non-interest bearing and are due on demand.
NOTE 14 SUBSEQUENT EVENTS
On
May 28, 2009, the Company entered into a Settlement Agreement
and Release with Strategic Growth International Inc.
(SGI), a consultant who provided investor relations
services. Under the SGI Settlement Agreement and Release, the Company
agreed to issue 56,000 shares of the Companys common stock to
SGI, which shares are subject to listing approval by the NYSE
Alternext US.
The shares have not yet been approved for listing and have not been
issued. If they are not so approved, the
Company will owe SGI $56,089 for services rendered.
24
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, 2008. 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, 2008. 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.
Overview
The Company
We are an integrated pharmaceutical company with three distinct business divisions that
include: (i) AMDL Diagnostics, (ii) China-based Integrated Pharmaceuticals and (iii) Cancer
Therapeutics. Collectively, these business units focus on the development, manufacturing,
distribution and sales of high quality generic pharmaceuticals, nutritional supplements, cosmetic
and medical diagnostic products in the U.S., China, Korea, Taiwan and other markets throughout the
world. We currently employ approximately 500 people, of which 490 are located in China.
U. S. Operations
AMDL IVD Cancer Diagnostics
DR-70 Test Kit
AMDL was founded in 1987 as a bio-tech research and development firm that had one product, its
proprietary AMDL-ELISA DR-70 (FDP) cancer test kit. AMDL-ELISA DR-70
®
(FDP) is best described as
a simple, non-invasive blood test used for the detection and/or monitoring of 14 different types of
cancer. The AMDL-ELISA DR-70
®
(FDP) is licensed and imported as a non-approved general cancer
screen in Europe, Taiwan, Korea, Australia, Singapore & Vietnam. and approved in Canada for the
detection and monitoring of lung cancer. Most importantly, in nearly all global markets, our DR-70
test, recently rebranded and to be marketed under the name Onko-Sure could be used as a
(non-regulatory approved) general cancer screening test. In regards to the U.S, market, on July 3,
2008, we received a letter of determination from the USFDA that the DR-70 test kit was
substantially equivalent to the existing predicate device, carcinoembryonic antigen, being
marketed. The determination letter grants us the right to market the DR-70 test kit as a device to
monitor patients who have previously been diagnosed with colorectal cancer. We are selling our
DR-70 test kit to reference and clinical laboratories in the U.S. and internationally. In the
fourth quarter of 2008, AMDL formed AMDL Diagnostics, Inc. (ADI) in order to focus resources on the
commercialization of our DR-70 cancer test.
Elleuxe Brand of Premium Anti-Aging Skin Care Products
A variety of cosmetic products were developed by JPI in 2008, based upon their HPE anti-aging
therepudic products. AMDL has reformulated these products for international markets under the brand
name Elleuxe. AMDL currently anticipates the launch of the sales of these U.S. manufactured skin
care products during the fourth quarter 2009. This family of skin care products include:
25
|
|
|
Hydrating Firming Cream (Dry-Mix skin)
|
|
|
|
|
Hydrating Firming Cream (Oily skin)
|
|
|
|
|
Renergie Hydrating Cleanser
|
|
|
|
|
Intense Hydrating Cleanser
|
|
|
|
|
Visable Renewing Hydrating Softener
|
|
|
|
|
Smoothing Renewing Eye Moisturizer
|
New Corporate and Product Brand Launch
On August 22, 2009, AMDL, anticipates receiving shareholder approval in order to change its
name to Radiant Pharmaceuticals Corporation, (Radient Pharma) in order to launch a new brand
identification of the company and its innovative line of promising IVD & Skin Care products. We
anticipate posting a new corporate website which is expected to go live by the end of the 3rd
quarter of 2009. Until this site is up and running, please continue to go to www.amdl.com in order
to gain updated information on our company.
IVD Cancer Research and Development
During the quarter ended June 30, 2009, we spent $332,779 on research and development related
to the DR-70 test kit, as compared to $57,052 for the same period in 2008. These expenditures were
incurred as part of the Companys efforts to improve the existing DR-70 test kit and develop the
next generation DR-70 test kit.
We expect expenditures for research and development to grow in the second half of 2009 due to
additional staff and consultants needed to support an agreement with Mayo Clinic to conduct a
clinical study for the validation of AMDLs next generation version of its USFDA-approved DR-70
test kit and additional development costs associated with entry into new markets. Through this
validation study, AMDL and Mayo Clinic will perform clinical diagnostic testing to compare AMDLs
DR-70 test kit with a newly developed, next generation test. The primary goal of the study is to
determine whether AMDLs next generation DR-70 test kit serves as a higher-performing test to its
existing predicate test and can lead to improved accuracy in the detection of early-stage cancers.
For USFDA regulatory approval on the new test, AMDL intends to perform an additional study to
demonstrate the safety and effectiveness of the next generation test for monitoring colorectal
cancer. The validation study will run for three months and final results are expected in the third
or fourth quarter of 2009. In addition, additional expenses will be incurred for consultants and
laboratories for the reformulation of the HPE-based cosmetics as well as laboratories involved in
testing the safety and effectiveness of the product.
License Agreement with MyGene International, Inc.
On April 3, 2008, we announced that we had entered into an exclusive sublicense (subject to
certain terms and conditions) agreement with MyGene International, Inc. (MGI, USA) for the MyHPV
chip kit, a diagnostic product for screening cervical cancer through in-vitro genotype testing in
women with the Human Papilloma Virus (HPV). The agreement between us and MGI provided for an
exclusive sublicense to use the patents, trademark, and technology in manufacturing, promoting,
marketing, distributing, and selling the MyHPV chip kit in the countries of China (including Hong
Kong), Taiwan, Singapore, Malaysia, Thailand, Cambodia, and Vietnam. This agreement is considered
null and void as of the original date of execution because MGI did not have direct ownership of the
intellectual property necessary to offer the sub-license to AMDL. We explored the opportunity to
become the exclusive distributor of the MyHPV chip kit in the countries noted previously through an
agreement with BIOMEDLAB (BML) of Seoul, South Korea. BML is the manufacturer of the MyHPV chip kit
in South Korea, which has Korean FDA approval for this product. Subsequent to due diligence
regarding market acceptance, price points and ability to commercialize this product in the
aforementioned markets, we have determined that the cost of entry into this market is prohibitive
and decided discontinue development of this project. As such, we have requested refunds of
amounts advanced and have received a partial refund and expect the balance to be paid on or before
year end.
26
China-based Integrated Pharmaceuticals Operations
Through JPI, we manufacture and distribute generic, homeopathic over-the-counter
pharmaceutical products and supplements. JPI manufactures and distributes its products through JJB
and YYB.
During the second quarter AMDL management became aware of internal disputes in China that
resulted in the loss of both operational and financial controls by JPIs management over the
operating entity JJB. These disputes have led to (a) the inability of JPIs management to direct
management at JJB to timely compile the required financial information, (b) inability of JPIs management to
gain access to operational information and/or to direct operations. (c) the sale and/or disposal of
assets without informing AMDLs management or following directives from AMDLs management regarding
internal controls surrounding the sale/disposal of assets and (d) the inability to repatriate funds
of JPI and/or JJB back to the US .
As a result of the loss of control by JPIs management of its operating subsidiaries, AMDLs
management is of the opinion that it is in the best interest of the Company to divest itself of
JPI. The Company is currently working on a plan to monetize its investment in JPI beginning in the
third quarter of 2009.
AMDL Planned Spin-Off of JPI/JJB
As discussed above, we have recently become aware of significant internal disputes between the
management of China operating subsidiaries, JJB and JPI. Although we are currently taking steps to
resolve these issues, we have recently begun discussions to divest and deconsolidate all or a
portion of our China based operations. The management of both JPI and JJB have indicated that they
believe the most prudent path to raising additional capital for our Chinese operating division is
for JJB to complete one or more private placements of equity during the third and fourth quarters
of 2009. They have also indicated that they believe the best path for AMDL to monetize its
investments in JPI and JJB would be for JJB to seek a public listing on the Growth Enterprise
Market (GEM) located in Shenzhen, China during the first half of 2010. AMDLs executive management
and Board are in agreement with JPI and JJBs management on this Spin-off strategy and anticipate
working with JPI and JJB to successfully complete their development plans that are currently
anticipated to provide a path for a potential return for AMDLs shareholders in the future. It is
anticipated that during the third quarter AMDL, JPI, JJB and our China divisional management will
complete various agreements in order for this spin-off process to be commenced. It is currently
anticipated that AMDL, beginning in the 3rd quarter of 2009 will deconsolidate JPI and JJB in its
financial statements and will account for this asset as an investment on its balance sheet. This
deconsolidation accounting treatment is anticipated to create one-time restructuring charges of at
least $14 million. Despite the planned deconsolidation of JPI and JJB, we still believe JPI and JJB
has a promising future. We anticipate that we may be able to sell off a portion or all of our
ownership in JPI and JJB during the next 30 months; alternatively we would seek an exit from our
investment at or after any public listing. We also could retain all or a portion of our equity
stake in JPI and JJB, if ownership continues to look promising. The goal is to gain the best
valuation possible for this strategic asset. Additionally, we also believe that JPI/JJBs business
and brand recognition make it a potential buyout target.
The management of JPI/JJB have indicated that the believe the most prudent path to raising
additional capital for our Chinese operating division is for JJB to complete one or more private
placements of equity during the third and fourth quarters of 2009. They have also indicated that
they believe the best path for AMDL to monetize its investments in JPI/JJB would be for JJB to seek
a public listing on the Growth Enterprise Market (GEM) located in Shenzhen China during the first
half of 2010. AMDLs executive management and Board are in agreement with JPI/JJBs management on
this Spin-off strategy and anticipate working with JPI/JJB to successfully complete their
development plans that are currently anticipated to provide a path for a promising return for
AMDLs shareholders in the future. It is anticipated that during the third quarter AMDL, JPI, JJB
and our China divisional management will complete various agreements in order for this spin-off
process to be commenced. It is currently anticipated that AMDL, beginning in the 3rd quarter of
2009 will de-consolidate JPI/JJB in its financials and will account for this asset as an investment
on its balance sheet.
Post Deconsolidation Business Model
This China operations spin-off process is anticipated to significantly affect our 2009
earnings and sales guidance. AMDL now anticipates recording a loss excluding one-time charges from
the sales of YYB and the deconsolidation of JPI/JJB of approximately $14 million. AMDL currently
anticipates generating approximately $1.1 million in sales from the sales of its Onko-Sure IVD
cancer diagnostic test kits and its Elleuxe brand of skin care products during 2009. These two
business segments are anticipated to be the key products for AMDL in the near future. Sales of
these products in 2010 are anticipated to expand significantly due to the creation of
27
various new 5-year regional distribution agreements that are anticipated to move the IVD
cancer diagnostic test kits and the Elleuxe brand of skin care products into broad commercial
channels in nearly ever market in the world. The success of our distribution strategy is contingent
upon the Company gaining adequate financing during the 3rd quarter of 2009.
Discontinued
Operations and Dispositions
On January 22, 2009, our board of directors authorized management to sell the operations of
YYB. In accordance with SFAS 144, we classified the assets, liabilities, operations and cash flows
of YYB as discontinued operations for all periods presented.
The sale of YYB was completed in June 2009. Shares in YYB were transferred to the buyer (an
individual) in consideration of:
|
|
|
|
The forgiveness of amounts owed to YYB from JJB; and
|
|
|
|
|
The buyer of YYB has contractually agreed to pay off the
balance of the 16 million RMB obligation secured by a mortgage on
certain land owned by JJB.
|
Detailed information regarding the buyers ability to repay the bank has not been
verified. As such, we have reserved 100 percent of the proceeds anticipated to be received from
the buyers agreement to pay the bank and will recognize income upon receipt of funds and pay down
of the debt.
Operations of JJB
JJB manufactures and markets numerous diagnostic, pharmaceutical, nutritional supplement and
cosmetic products. JJB is acquiring production rights for other pharmaceutical products which will
require the approval of the SFDA. Historically, the top selling products in China are HPE-based
Solutions (anti-aging cosmecutical), Domperidone (anti-emetic), Levofloxacin Lactate Injections (IV
antibiotics) and Glucose solutions (pharmaceutical).
Facilities
The SFDA requires that all facilities engaged in the manufacture of pharmaceutical products
obtain GMP certification. In February 2008, JJBs GMP certification expired for the small volume
parenteral solutions injection plant lines that were engaged in manufacturing the Companys HPE
injectible product, Goodnak, and all other small volume parenteral solutions. JJB ceased small
volume parenteral solutions operations at this facility while undertaking $1.5 million in
modifications necessary to bring the facility and its operations into compliance. The renovations
are complete and JJB resumed operation of the parenteral small injectible lines in the second
quarter of 2009.
We were notified by the Chinese Military Department of its intent to annex one of JJBs plants
that is located near a military installation. The proposed area to be annexed contains the
facilities that are used to manufacture large and small volume parenteral
28
solutions, including the production lines for which the Company is attempting to obtain GMP
certification. Discussions regarding annexation are proceeding and we expect that JJB will be
compensated fairly for the transfer of the facility upon annexation. JJB intends to find a new
single center site in Jiangxi Province, China to relocate its operations.
For purposes of reporting the results of discontinued operations, we have assumed that all
products previously manufactured and sold by YYB were sold with the business. We may have to spend
significant time and resources finding, building and equipping the new location and restarting the
relocated operations. In addition, such new facilities will need to obtain GMP certification for
all manufacturing operations.
Marketing and Distribution
JJB has established a marketing program consisting of approximately forty sales managers and a
network of distributors who market JJBs products.
JJB sells directly to hospitals and retail stores and indirectly to other customers through
distributors. One primary distributor has 29 retail outlets throughout China. JJB is developing
educational programs for hospitals, doctors, clinics and distributors with respect to JJBs product
lines. These educational programs are intended to improve sales and promotion of JJBs products.
As resources permit, we anticipate expanding our 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.
New Beauty Formulations of the HPE-Based Anti-Aging Product
During 2008, JJB finalized the formulations of the following HPE-based cosmetic products.
These new products consist of capsules and an easy-to-apply lotion version and are marketed under
the trade name Nalefen Skin Care. These new products complement our existing high quality
injectible and extract formulations. Additionally, the Company has contracted with YiBo to develop
a capsule version of the Goodnak product. We plan to sell both products through both new and
existing distribution channels within the Henan, Sichuan, Guizhou, Shanxi, Xinjiang, Gansu, Hunan,
Zhejiang, Fujian, Liaoning and Heilongjiang Provinces of China. Together these regions have a
combined population of more than 376 million people.
Distribution Channels for Beauty Product Lines
During the third quarter 2008, JJB entered into distribution agreements with four beauty
product distribution companies to open new distribution lines. Sales to these distributors in 2008
consisted primarily of our HPE Solutions. In order to support the development of this channel, the
distribution agreements included an allowance for the promotion and marketing of new
Goodnak/Nalefen line of skin care lotions. This allowance was necessary to develop extensive
distribution of the Nalefen line. In addition to the allowance described above, the Company granted
distributors of the Nalefen line payment terms of 120 days.
In the second quarter of 2009, JPIs management was not been able to collect significant
amounts due from these distributors and future collectability is questionable. Therefore, we have
provided an allowance for bad debts for the entire outstanding balance as of June 30, 2009.
The existing distribution contracts expired and JJB has not renewed the agreements. As a
result, revenue in the second quarter of 2009 was adversely impacted, as there were no sales of HPE
solutions. At this time, we do not anticipate the new lotion formulations will also be sold through
these same distributors. JPIs management has indicated that they have developed various new
distribution relationships with more reliable distributors that will be selling their HPE solutions
in the future.
However, in addition to China, we believe that some of the beauty products will be good
candidates for export to the North American and South American markets. We have completed the
reformulation of the China based formula and will submit to a US laboratory to be tested for safety
and effectiveness. In conjunction with the testing, we are collaborating with an industry
specialist to develop a unique packaging scheme for the market. It is estimated that this process
will be complete by the end of the third quarter of 2009.
29
The Current Chinese Economic and Market Environment
We operate in a challenging economic and regulatory environment that has undergone significant
changes in technology and in patterns of global trade. The current economic and market environment
in China is uncertain. In its January 28, 2009 report, the International Monetary Fund estimated
that Chinas economy will grow at a rate of approximately 6.7 percent in 2009, as measured by the
gross domestic product. In addition, Chinas health care spending is projected to increase by
nearly 40% to $17.3 billion, with a government proposal to bring universal healthcare to 90% of its
1.3 billion citizens by 2011, as reported by the American Free Press. While this data appears
promising, the proposal, however, could result in additional controls over the pricing of certain
drugs which could, in turn, negatively impact our business prospects in China and the carrying
amount of production rights acquired from YiBo.
Research and Development
In the past, JJB entered into joint research and development agreements with outside research
institutes, but all of the prior joint research agreements have expired.
JJB has been in informal discussion with the local government in Nanchang, Jiangxi
Pharmaceutical Research Institute and the Academy of Military Medical Sciences to create a Cancer
Therapeutic & Rapid Test Research and Development base. The laboratory will use the equipment,
facilities and human resources from Jiangxi Pharmaceutical Research institute together with
professional guidance from the Academy of Military Medical Sciences. Discussions are in a
preliminary stage, and the potential impact on our operations cannot be ascertained at this time.
Cancer Therapeutics
In 2001, AMDL acquired the CIT technology, which forms the basis for a proprietary cancer
vaccine. Our CIT technology is a U.S. patented technology (patent issued May 25, 2004). The Cancer
Therapeutics division is engaged in commercializing the CIT technology.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these
condensed 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 condensed consolidated 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. The Company regularly monitors inventories for excess or obsolete items and makes
any valuation corrections when such adjustments are needed. Once established, write-downs are
considered permanent adjustments to the cost basis of the obsolete or excess inventories. We write
down our inventories for estimated obsolescence or unmarketable inventory equal to the difference
between the cost of inventories and the estimated market value based upon assumptions about future
demand, future pricing and market conditions. If actual future demand, future pricing or market
conditions are less favorable than those projected by management, additional write-downs may be
required and the differences could be material. Such differences might significantly impact cash
flows from operating activities.
30
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 SFAS 144, 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;
|
|
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|
|
significant negative industry or economic trends, including legal factors;
|
|
|
|
|
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 GMP certifications.
|
If the Company determines that the carrying values of long-lived assets may not be recoverable
based upon the existence of one or more of the above indicators of impairment, the Companys
management performs an undiscounted cash flow analysis to determine if impairment exists. If
impairment exists, the Company measures the impairment based on the difference between the assets
carrying amount and its fair value, and the impairment is charged to operations in the period in
which the long-lived asset impairment is determined by management. Based on its analysis, the
Company believes that no indicators of impairment of the carrying value of its long-lived assets
existed at June 30, 2009. 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 technologies and prevent future long-lived asset impairment.
Revenue Recognition.
Revenues from the wholesale sales of over-the counter and prescription
pharmaceuticals are recognized when persuasive evidence of an arrangement exists, title and risk of
loss have passed to the buyer, the price is fixed or readily determinable and collection is
reasonably assured, provided the criteria in the Security and Exchange Commissions (SEC) Staff
Accounting Bulletin (SAB) No. 101
Revenue Recognition in Financial Statements
, (as amended by SAB
No. 104) are met.
In conjunction with the launch of the Companys Nalefen Skin Care HPE products, distributors
of the products were offered limited-time discounts to allow for promotional expenses incurred in
the distribution channel. Distributors are not required to submit proof of the promotional expenses
incurred. We account for the promotional expenses in accordance with EITF Issue No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors
Products)
. Accordingly, the promotional discounts granted in prior periods were netted against
revenue in the condensed consolidated statements of operations and comprehensive loss. Accounts
receivable presented in the accompanying condensed consolidated balance sheets have been reduced by
the promotional discounts, as customers are permitted by the terms of the distribution contracts to
net the discounts against payments on the related invoices.
Any provision for sales promotion discounts and estimated returns are accounted for in the
period the related sales are recorded. 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. In accordance with EITF Issue No. 06-3,
How Taxes
Collected from Customers and Remitted to
31
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 condensed consolidated
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 condensed consolidated results of operations and comprehensive loss and cash
flows from operating activities.
Stock-Based Compensation Expense.
All issuances of the Companys 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.
The Company accounts 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.
We account for equity awards issued to employees in accordance with the provisions of SFAS No.
123(R),
Share-Based Payment
(SFAS 123(R)). SFAS 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.
Derivative Financial Instruments.
We apply the provisions of SFAS No. 133,
Accounting for
Derivative Instruments and Hedging Activities
(SFAS 133). Derivatives within the scope of SFAS
133 must be recorded on the balance sheet at fair value. We issued convertible debt in September
2008, and recorded a derivative asset related to the limitation on bonus interest rights held by
convertible debt holders in the event of a change in control or bankruptcy.
Results of Operations
Quarter Ended June 30, 2009 Compared to Quarter Ended June 30, 2008
Net Revenues.
For the quarter ended June 30, 2009, our aggregate net revenues from product
sales decreased 45% to $3,181,043 from $4,878,192 for the same period in 2008.
Corporate
Net revenues for the quarter ended June 30, 2009 for AMDL was $28,350 compared to $27,442 for
the same period in 2008. This increase is due to increased orders for the DR-70 test kits.
32
With USFDA approval of DR-70 test kit, our goal is to enter either exclusive or non-exclusive
distribution agreements for various regions, and due to our overall commercialization efforts, we
expect sales to increase in 2009. We have executed or are in the final stage of negotiating
exclusive/non-exclusive distribution agreements with distributors for the DR-70 test kit. The
proposed agreements would grant our distributor an exclusive right to distribute the DR-70 test kit
within the US, Vietnam, Israel and Latin America. It is anticipated that one or more of the
aforementioned distribution agreements will be in place by the third quarter of 2009.
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 the year ended
December 31, 2008. Sales of DR-70 test kits in 2009 could be negatively impacted by potential
competing products, lack of adequate supply and overall market acceptance of our products.
We are currently unable to conduct a marketing program for the DR-70 test kit to a limited
supply of one of the key components of the DR- 70 test kit. The anti-fibrinogen-HRP is limited in
supply and additional quantities cannot be purchased. We currently have two lots remaining which
are estimated to produce approximately 31,000 kits. Based on our current and anticipated orders,
this supply is adequate to fill all orders.
An integral part of our research and development through 2010 is the testing and development
of an improved version of the DR-70 test kit. The Company is reviewing various alternatives and
believes that a replacement anti-fibrinogen-HRP will be identified, tested and USFDA approved
before the current supply is exhausted.
Pilot studies show that the new version could be superior to the current version. It is
anticipated that this version will be submitted to the USFDA in the latter half of 2010.
China
China net revenues were $3,152,693 for the quarter ended June 30, 2009 as compared to
$4,850,750 for the same period in 2008. This decrease was primarily due:
|
|
|
Management conflicts between JPI and the operating entity JJB;
|
|
|
|
|
The Sale of YYB; and
|
|
|
|
|
The lack of sales of HPE solutions due to the mandatory 5-year cGMP recertification
by the SFDA of JJBs small injectible line and the expiration of contracts with beauty
distributors that sell topical HPE solution.
|
Our China operations began experiencing various conflicts and cohesive management issues
during the second quarter.
AMDLs management has incurred extraordinary expenses such as attorney fees in China and the US,
international travel expenses for AMDLs management and efforts made by members of the board of
directors in attempting to resolve these internal confict and issues without success. This in
part is the reason why it is Managements opinion that AMDL should seek a monetization plan for
its investment in this subsidiary.
The small injectible line received GMP recertification in the second quarter of 2009.
Gross Profit.
The Companys gross profit for the quarter ended June 30, 2009 was $1,030,639 as
compared to $2,418,870 for the quarter ended June 30, 2008. This decline was due to sales of
products with lower margins, the write off products advanced to a customer, and the sale of YYB
Corporate
Gross profit decreased approximately 33.6% to $16,737 for the quarter ended June 30, 2009 from
$25,207 for the quarter ended June 30, 2008 due to increased cost of raw materials and labor.
China
Chinas gross profit was $1,013,902 for the quarter ended June 30, 2009, a 57.6% decrease over
the same period in 2008 where gross profit was $2,393,663. Gross profit as compared to sales
decreased from 49.6% for the quarter ended June 30, 2008 to 32.4% for the quarter ended June 30,
2009. This decrease can be attributed to a change in the product mix which shifted away from those
33
produced on the small injectible manufacturing line and HPE Solutions to other less profitable
products, as well as an increase in the cost of raw materials and an increase in manufacturing
overhead.
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, and
manufacturing equipment, amortization of production rights, utilities and repairs and maintenance.
Research and Development.
In the past, JJB entered into joint research and development
agreements with outside research institutes, but all of the prior joint research agreements have
expired.
All research and development costs incurred during the quarter ended June 30, 2009 were
incurred by AMDL. These costs comprised of funding the necessary research and development of the
current DR-70 test kit and preparing for the next generation DR-70 test kit.
During the quarter ended June 30, 2009, we spent $332,779 on research and development related
to the DR-70 test kit, compared to $57,052 for the same period in 2008.
We expect research and development expenditures to increase during the remainder of 2009 due
to:
|
|
|
The need for research and development for an updated version of the DR-70 test kit in the
US, clinical trials for such tests and funds for ultimate USFDA approval; and
|
|
|
|
|
Research and development for the HPE-based cosmetic product.
|
Selling, General and Administrative Expenses.
Selling
,
general and administrative expenses for
the Company were $3,784,801 for the quarter ended June 30, 2009 as compared to $2,714,487 for the
same period in 2008.
Selling, general and administrative expenses are anticipated to decrease in 2009 as AMDL is
initiating programs to review all contracts and agreements to reduce costs and the sale of YYB.
Corporate
We incurred selling, general and administrative expenses of $1,712,665 for the quarter ended
June 30, 2009 as compared to $2,346,838 for the same period in 2008. Corporate selling, general and
administrative expenses consist primarily of consulting (including financial consulting) and legal
expenses, director and commitment fees, regulatory compliance, professional fees related to patent
protection, payroll, payroll taxes, investor and public relations, professional fees, and stock
exchange and shareholder services expenses. Also included in selling, general and administrative
expenses were non-cash expenses incurred during the quarter ended June 30, 2009 of approximately
$157,000 for options issued to employees and directors and approximately $77,000 for common stock,
options and warrants issued to consultants for services. The decrease in selling, general and
administrative expense incurred is primarily a result of decreases in payroll expenses and
professional fees.
The table below details the major components of selling, general and administrative expenses
incurred at Corporate:
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
2009
|
|
2008
|
Investor relations (including value of warrants/options)
|
|
$
|
244,932
|
|
|
$
|
526,577
|
|
Salary and wages (including value of options)
|
|
$
|
734,646
|
|
|
$
|
756,650
|
|
Directors fees (including value of options)
|
|
$
|
73,720
|
|
|
$
|
170,575
|
|
Consulting fees
|
|
$
|
55,572
|
|
|
$
|
65,608
|
|
Accounting and other professional fees
|
|
$
|
166,478
|
|
|
$
|
251,847
|
|
Legal
|
|
$
|
149,889
|
|
|
$
|
158,480
|
|
34
China
China incurred selling, general and administrative expenses of $2,072,136 for the quarter
ended June 30, 2009 as compared to $367,649 for the same period as in 2008. Major components were
amortization, payroll and related taxes, transportation charges, meals and entertainment and
insurance. Selling, general and administrative expenses increased 314.2% for the quarter ended June
30, 2009 when compared to the same period 2008. The increase is primarily due to expenses for bad
debts of approximately $1,730,000 for the three months ended June 30, 2009.. Accounts receivables
written off represent customers who have not regularly remitted payments and doubt exists as to the
ultimate collectability. JJBs management is still making efforts to collect these accounts
receivables but has decided, based on current information and policy to write these accounts
receivables off.
Interest Expense.
Interest expense for the quarter ended June 30, 2009 and 2008 was $332,034
and $199,814, respectively. The increase relates to interest on our Convertible Debt financing in
September 2008 and the Senior Note financings in December 2008 and January 2009.
Corporate
Interest expense increased to $276,278 for the three months ended June 30, 2009 from $4,526
for the same period in 2008 as a result of the issuance of our 10% Convertible Debt and 12% Senior
Notes.
China
JPI incurred interest expense of $55,756 and $195,288 for the quarter ended June 30, 2009 and
2008, respectively. These expenses represent interest paid to financial institutions in connection
with debt obligations. Approximately $2.3 million of debt was repaid by JPI in 2008, resulting in a
reduction in interest expense in 2009.
Loss before discontinued operations.
As a result of the factors described above, for the
quarter ended June 30, 2009 the Companys loss before discontinued operations was $3,872,861, or
$0.24 per share compared to the quarter ended June 30, 2008 when the Companys loss before
discontinued operations was $429,567, or $0.05 per share.
Results of Discontinued Operations
Summarized operating results of discontinued operations for the three months ended June 30, 2009
and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
Revenue
|
|
$
|
594,839
|
|
|
$
|
646,553
|
|
Income before income taxes
|
|
$
|
277,743
|
|
|
$
|
257,935
|
|
Included in income from discontinued operations, net are income tax expenses of $30,717 and $51,594
for the three months ended March 31, 2009 and 2008, respectively.
The Company sold YYB in June 2009. YYB had no significant operations during the second quarter of
2009. The sales price was 16 million RMB to be remitted directly to
the bank holding the mortgage on land owned by JJB.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Net Revenues.
For the six months ended June 30, 2009, our aggregate net revenues from product
sales decreased 37.1% to $5,892,780 from $7,819,385 for the same period in 2008.
Corporate
Net revenues for the six months ended June 30, 2009 for AMDL was $51,420 compared to $35,662
for the same period in 2008. This increase is due to increased orders for the DR-70 test kits due
to distribution agreements for Vietnam and Canada
With USFDA approval of DR-70 test kit, we expect sales to increase in 2009. We are currently
in discussions with distributors for the DR-70 test kit. The proposed agreements would grant our
distributor an exclusive right to distribute the DR-70 test kit within the Israel, and Latin
America. It is anticipated that one or more distribution agreements will be in place by the third
quarter of 2009.
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 the year ended
December 31, 2008. Sales of DR-70 test kits in 2009 could be negatively impacted by potential
competing products, lack of adequate supply and overall market acceptance of our products.
35
We are currently unable to conduct a marketing program for the DR-70 test kit to a limited
supply of one of the key components of the DR- 70 test kit. The anti-fibrinogen-HRP is limited in
supply and additional quantities cannot be purchased. We currently have two lots remaining which
are estimated to produce approximately 31,000 kits. Based on our current and anticipated orders,
this supply is adequate to fill all orders.
An integral part of our research and development through 2010 is the testing and development
of an improved version of the DR-70 test kit. The Company is reviewing various alternatives and
believes that a replacement anti-fibrinogen-HRP will be identified, tested and USFDA approved
before the current supply is exhausted.
Pilot studies show that the new version could be superior to the current version. It is
anticipated that this version will be submitted to the USFDA in the latter half of 2010.
China
China net revenues were $5,841,360 for the six months ended June 30, 2009 as compared to
$7,783,723 for the same period in 2008 primarily due the lack of sales of HPE solutions due to
cessation of production in the small injectible line, expiration of contracts with beauty
distributors that sell topical HPE solution and sale of YYB.
China sales by product as a percentage of total China sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months ended June 30,
|
|
|
2009
|
|
2008
|
Domperidone Tablet
|
|
|
59.72
|
%
|
|
|
44.61
|
%
|
Compound Benzoic Acid and Camphor Solution
|
|
|
8.99
|
%
|
|
|
0.00
|
%
|
5% GS
|
|
|
4.65
|
%
|
|
|
0.00
|
%
|
GNS
|
|
|
3.58
|
%
|
|
|
0.00
|
%
|
NaCL
|
|
|
3.03
|
%
|
|
|
0.00
|
%
|
Other
|
|
|
2.16
|
%
|
|
|
0.00
|
%
|
Levofloxacin Lactate Injuection
|
|
|
17.86
|
%
|
|
|
7.25
|
%
|
Guyanlin Tablets
|
|
|
0.00
|
%
|
|
|
3.83
|
%
|
HPE Based Products
|
|
|
0.00
|
%
|
|
|
12.16
|
%
|
Diavitamin, Calcium Hydrogen Phosphate and Lysine Tablets
|
|
|
0.00
|
%
|
|
|
9.92
|
%
|
|
|
|
|
|
|
99.99
|
%
|
|
|
77.77
|
%
|
|
|
|
The small injectible line received GMP recertification in the second quarter of 2009.
Gross Profit.
The Companys gross profit for the six months ended June 30, 2009 was $2,156,802
as compared to $3,842,523 for the six months ended June 30, 2008. This decline was due in part to
decline in sales, a decline in HPE solution sales, sale of YYB as well as sales of product with
lower sales margins..
Corporate
Gross profit increased approximately 19.2% to $31,732 for the six months ended June 30, 2009
from $26,630 for the quarter ended June 30, 2008 due to increased sales volume of the DR-70 test
kit offset by increases in cost of raw material and labor.
China
Chinas gross profit was $2,125,070 for the six months ended June 30, 2009, a 53.3% decrease
over the same period in 2008 where gross profit was $3,815,893. Gross profit as compared to sales
decreased from 49.1% for the quarter ended June 30, 2008 to
36
36.6% for the quarter ended June 30, 2009. This decrease can be attributed to a change in the
product mix which shifted away from those produced on the small injectible manufacturing line and
HPE Solutions to other less profitable products, as well as an increase in the cost of raw
materials and an increase in manufacturing overhead.
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, and
manufacturing equipment, amortization of production rights, utilities and repairs and maintenance.
Research and Development.
In the past, JJB entered into joint research and development
agreements with outside research institutes, but all of the prior joint research agreements have
expired.
All research and development costs incurred during the six months ended June 30, 2009 were
incurred by AMDL. These costs comprised of funding the necessary research and development of the
current DR-70 test kit and preparing for the next generation DR-70 test kit.
During the six months ended June 30, 2009, we spent $425,463 on research and development
related to the DR-70 test kit, compared to $65,747 for the same period in 2008.
We expect research and development expenditures to increase during the remainder of 2009 due
to:
|
|
|
The need for research and development for an updated version of the DR-70 test kit in the
US, clinical trials for such tests and funds for ultimate USFDA approval;
|
|
|
|
|
Additional research and development costs incurred in response to questions and requests
by new distribution partners; and
|
|
|
|
|
Research and development for the HPE-based cosmetic product.
|
Selling, General and Administrative Expenses.
Selling
,
general and administrative expenses for
the Company were $6,375,570 for the six months ended June 30, 2009 as compared to $5,512,436 for
the same period in 2008.
Corporate
We incurred selling, general and administrative expenses of $3,757,049 for the six months
ended June 30, 2009 as compared to $4,755,731 for the same period in 2008. Corporate selling,
general and administrative expenses consist primarily of consulting (including financial
consulting) and legal expenses, director and commitment fees, regulatory compliance, professional
fees related to patent protection, payroll, payroll taxes, investor and public relations,
professional fees, and stock exchange and shareholder services expenses. Also included in selling,
general and administrative expenses were non-cash expenses incurred during the six months ended
June 30, 2009 of approximately $154,000 for options issued to employees and directors and
approximately $314,000 for common stock, options and warrants issued to consultants for services.
The decrease in selling, general and administrative expense incurred is primarily a result of
decreases in payroll expenses and professional fees.
The table below details the major components of selling, general and administrative expenses
incurred at Corporate:
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
2009
|
|
2008
|
Investor relations (including value of warrants/options)
|
|
$
|
547,797
|
|
|
$
|
1,054,001
|
|
Salary and wages (including value of options)
|
|
$
|
1,446,979
|
|
|
$
|
1,690,733
|
|
Directors fees (including value of options)
|
|
$
|
170,096
|
|
|
$
|
376,600
|
|
Consulting fees
|
|
$
|
130,296
|
|
|
$
|
116,059
|
|
Accounting and other professional fees
|
|
$
|
492,910
|
|
|
$
|
525,465
|
|
Legal
|
|
$
|
356,113
|
|
|
$
|
332,529
|
|
37
China
China incurred selling, general and administrative expenses of $2,618,521 for the six ended
June 30, 2009 as compared to $756,705 for the same period as in 2008. Major components were
amortization, payroll and related taxes, transportation charges, meals and entertainment, insurance
and provision for bad debts. Selling, general and administrative expenses increased 246.0% for the
six ended June 30, 2009 when compared to the same period 2008. The increase is primarily due to an
increase in bad debt expense of approximately $1,933,000 incurred during the six months ended June
30, 2009. Accounts receivables written off represent customers who have not regularly remitted
payments and doubt exists as to the ultimate collectability. JJBs management is still making
efforts to collect these accounts receivables but has decided, based on current information and
policy to write these accounts receivables off.
Interest Expense.
Interest expense for the six months ended June 30, 2009 and 2008 was
$566,251 and $261,779, respectively. The increase relates to interest on our Convertible Debt
financing in September 2008 and the Senior Note financings in December 2008 and January 2009.
Corporate
Interest expense increased to $454,793 for the six months ended June 30, 2009 from $5,431 for
the same period in 2008 as a result of the issuance of our 10% Convertible Debt and 12% Senior
Notes.
China
JPI incurred interest expense of $111,458 and $256,348 for the quarter ended June 30, 2009 and
2008, respectively. These expenses represent interest paid to financial institutions in connection
with debt obligations. Approximately $2.3 million of debt was repaid by JPI in 2008, resulting in a
reduction in interest expense in 2009.
Loss before discontinued operations.
As a result of the factors described above, for the six
months ended June 30, 2009 the Companys loss before discontinued operations was $5,810,978, or
$0.37 per share compared to the six months ended June 30, 2008 when the Companys loss before
discontinued operations was $1,901,763, or $0.16 per share.
Results of Discontinued Operations
Summarized operating results of discontinued operations for the three months ended June 30, 2009
and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
Revenue
|
|
$
|
594,839
|
|
|
$
|
646,553
|
|
Income before income taxes
|
|
$
|
277,743
|
|
|
$
|
257,935
|
|
Included in income from discontinued operations, net are income tax expenses of $30,717 and $51,594
for the six months ended June 30, 2009 and 2008, respectively.
Liquidity and Capital Resources
From December 31, 2008 to June 30, 2009, our cash and cash equivalents decreased by $214,379,
compared to a net decrease in cash and cash equivalents of $4,545,672 for the six months of 2008.
We continue to attempt to raise additional debt or equity financing as our operations historically
have not produced sufficient cash to offset the cash drain of growth in our pharmaceutical business
and our general operating and administrative expenses. Our US operations require approximately
$400,000 per month. Our China operations may not generate cash flow in the future or such cash
flows may not be available to support the US operations on a timely basis. To the extent that funds
are not available to meet these operating needs, we will have to restrict or discontinue
operations.
Operating activities
. We used $2,124,145 from continuing operating activities in the six
months ended June 30, 2009, compared with cash used in continuing operating activities of
$1,839,511 for the six months ended June 30, 2008 were offset by non-cash expenses, including
depreciation, amortization, debt discount accretion, stock-based compensation to management,
directors and consultants, warrant revaluation and provision for bad debts of $3,931,011 and
$2,325,23 for the respective periods. The Company generated $1,853,502 in cash from discontinued operating
activities from changes in operating assets and liabilities in the six months ended
38
June 30, 2009, as compared to generating working capital from changes in operating assets and
liabilities of $491,270 for the Six months ended June 30, 2008. The decline in our working capital
position from continuing operations is primarily due to entering into distribution agreement where
approximately $2.2 million dollars in advertising costs were prepaid. .
The Company granted 120 day terms to four large customers in the third and fourth quarter of
2008 which accommodation was needed to properly market our Nalefen product line. These agreements
expired in the first quarter of 2009, and we are in the process of negotiating new contracts with
these distributors. JPIs management has encountered severe difficulties in collection of these
receivables and as collection is in doubt, has written off these receivables at June 30, 2008.
JPIs management continues to try and collect these receivables.
As of June 30, 2009, there was approximately $5,600,000 in accounts receivable aging in excess
of 120 days. The majority of these receivables are related to the beauty distributors that were
granted 120 day terms. JPIs Management in China has not been able to collect significant amounts
of outstanding receivables and has therefore increased the allowance for doubtful accounts to
approximately $2,005,000 for the second quarter of 2009. JPIs management remains committed to
closely monitoring the accounts receivable aging and collection efforts. The cessation of revenues
from the HPE solutions while the renegotiations are taking place will have a materially negative
impact on cash flow in the second half of 2009.
JJB has an outstanding loan with ICBC. According to management at JPI and JJB, we are
currently in default, but the bank is working with us to create a compromise. In regards to this
compromise, the purchaser of YYB has directly negotiated with ICBC with our cooperation, wherein
approximate $2.3 million from the sale of YYB will go directly to pay down principle and
interest of the ICBC loan. Based upon this payment, ICBC will extend the repayment of the remaining
portion of the noted and any interest until December 31, 2009.
Investing activities.
We used $2,034,324 in investing activities in the six months ended June
30, 2009 compared with $1,827,265 in the six months ended June 30, 2008. In both periods, we made
expenditures in an effort to regain our GMP certification for JJBs small injectible manufacturing
lines. Renovations necessary for GMP recertification of the facility at JJB are complete and
recertification was received in the second quarter of 2009. In 2009, we also acquired lab and
office equipment for our U.S. facility to support our DR-70 test kit initiatives.
Financing activities.
In the six months ended June 30, 2009, we raised $2,088,593, net of
offering expenses, from the issuance of senior debt.
Future Capital Needs
We expect to incur additional capital expenditures at our U.S. facilities in 2009 in the form
of upgrading our information technology systems, collaboration with the Mayo Clinic, costs
associated with the development of the HPE-based product line, further development of the DR-70
product and upgrading manufacturing lines in Tustin.. It is anticipated that these projects will be
funded primarily through additional debt or equity financing.
There is no assurance we will be able to generate sufficient funds internally or sell any debt
or equity securities to generate sufficient funds for these activities, or whether such funds, if
available, will be obtained on terms satisfactory to us. The Company may need to discontinue or
delay its capital expenditures, research activities and other investments if funds are not
available to support managements operational plans.
China Credit Facilities
When JPI acquired JJB and YYB, KangDa Pharmaceutical Company, a predecessor of JJB, had a
credit facility and bank loan from Industrial and Commercial Bank of China (ICBC) of
approximately RMB 38 million, or $4.7 million, (the KangDa Credit Facility), which was assumed by
JPI through agreement with KangDa. The assumption of the loan was not formalized with the bank,
however, the bank made a verbal agreement to allow the Company to continue under the original terms
of the credit agreement. The loan from ICBC is secured by a pledge of the real property on which
our Chinese manufacturing facilities are located. Currently, approximately $3.1 million is due and
payable on the KangDa Credit Facility. We are currently in default,
but the bank is cooperating with JPIs management to resolve this issue. As part of the resolution, the purchaser of YYB has directly negotiated with the bank, wherein approximately $2.3 million from the sale of YYB will be remitted to pay down principal and interest. Based on this commitment, the bank will extend the remaining portion of the note and interest until December 31, 2009.
The
remaining $0.6 million debt, owed primarily by YYB, is due and payable.
39
Going Concern
The 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 before
discontinued operations of $3,872,861 and $5,810,978 for the six months ended June 30, 2009 and
2008, respectively, and had an accumulated deficit of $45,346,867 at June 30, 2009. In addition,
we used cash from operating activities of continuing operations of $2,124,145 for the six
months ended June 30, 2009, we generated cash in operating activities of discontinued operations of
$1,853,502 during the six months ended June 30, 2009.
On May 4, 2009, we closed the first tranche of our Series 2 note offering, generating net cash
proceeds of $92,900, before legal costs and regulatory fees. A second closing ocurred on June 12,
2009, where the Company sold $468,500 of 12% Series 2 convertible notes. An aggregate of $1,658,250
in notes was sold. At August 17, 2009, we had cash on hand in the U.S. of approximately $16,000.
Cash in China was not included as we are unable to verify deposits and the ability to repatriate
such funds are questionable.Our receivables in China have been outstanding for extended periods,
and we have experienced increased delays in collection. Therefore, in accordance with our
allowance for doubtful accounts policy, have increased our allowance accordingly. Our U.S.
operations currently require approximately $400,000 per month exclusive of interest payments, to
fund the cost associated with our general U.S. corporate functions, payment by corporate of the
salaries of our executives in China, and the expenses related to the further development of the
DR-70 test kit.
Assuming (i) JJB does not undertake significant new activities which require additional
capital, (ii) the current level of revenue from the sale of DR-70 test kits does not increase in
the near future, (iii) we do not conduct any full scale clinical trials for the DR-70 test kit or
our CIT technology in the U.S. or China, (iv) JPI continues to generate sufficient cash to exceed
its cash requirements, (v) no outstanding warrants are exercised, and (vi) no additional equity or
debt financings are completed, the amount of cash on hand is expected to be sufficient to meet our
projected operating expenses on a month to month basis as long as JPI or JJB continues to generate
enough cash from operations that can be timely sent to the U.S. to meet the cash needs of the
Company in the U.S.
The monthly cash requirement does not include any extraordinary items or expenditures,
including payments to the Mayo Clinic on clinical trials for our DR-70 test kit or expenditures
related to further development of our CIT technology, as no significant expenditures are
anticipated other than the legal fees incurred in furtherance of patent protection for the CIT
technology.
Our near and long-term operating strategies focus on (i) obtaining SFDA approval for the DR-70
test kit, (ii) further developing and marketing of DR-70, (iii) seeking a large pharmaceutical
partner for our CIT technology, (iv) selling different formulations of HPE-based products in the
U.S. and internationally and (v) introduction of new products. 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 our technologies, or other business transactions that would generate
sufficient resources to assure continuation of our operations and research and development
programs.
There are significant risks and uncertainties which could negatively affect our operations.
These are principally related to (i) the absence of a distribution network for our DR-70 test kits,
(ii) the early stage of development of our CIT technology and the need to enter into a strategic
relationship with a larger company capable of completing the development of any ultimate product
line including the subsequent marketing of such product, (iii) the absence of any commitments or
firm orders from our distributors, (iv) possible disruption in producing products in China as a
result of relocation of our facilities and/or delays or failure in either the GMP recertification
process or the SFDA production license approval process and (v) credit risks associated with new
distribution agreements in China. Our limited sales to date for the DR-70 test kit and the lack of
any purchase requirements in the existing distribution agreements make it impossible to identify
any trends in our business prospects. Moreover, if either AcuVector and/or the University of
Alberta is successful in their claims, 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.
40
Our only sources of additional funds to meet continuing operating expenses, fund additional
research and development, complete the acquisition of production rights for new products, fund
additional working capital, and conduct clinical trials which may be required to receive SFDA
approval are the sale of securities, and cash flow generated from JPIs operations. We are actively
seeking additional debt or equity financing, but no assurances can be given that such financing
will be obtained or what the terms thereof will be. Additionally, there is no assurance as to
whether we will continue to conduct JPIs operations on a profitable basis or that JPIs operations
will generate positive cash flow. We may need to discontinue a portion or all of its operations if
we are unsuccessful in generating positive cash flow or financing for our operations through the
issuance of securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rate Risk
The functional currency of our Company is United
States dollars (US$). The functional currency of our Companys PRC Operating Entities is the Renminbi, and
PRC is the primary economic environment in which we operate. The value of stockholders investment in our stock will be affected by the foreign exchange rate between US$ and RMB. To the extent we hold assets
denominated in U.S. dollars any appreciation of the RMB against the U.S. dollar could result in a change
to our statement of operations and a reduction in the value of our U.S. dollar denominated assets. On the other
hand, a decline in the value of RMB against the U.S. dollar could reduce the U.S. dollar equivalent amounts of
our financial results, the value of stockholders' investment in our company and the dividends we may pay in
the future, if any, all of which may have a material adverse effect on the price of our stock.
Our exposure to foreign exchange risk primarily
relates to currency gains or losses resulting from timing differences between signing of sales contracts
and settling of these contracts. Furthermore, we translate monetary assets and liabilities denominated in
other currencies into RMB, the functional currency of our operating business. Our results of operations and
cash flow are translated at average exchange rates during the period, and assets and liabilities are
translated at the foreign exchange rate at the end of the period. Translation adjustments resulting
from this process are included in accumulated other comprehensive income in our statement of
shareholders equity. We have not used any forward contracts, currency options or
borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict
the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future.
Interest Rate Risk
Changes in interest rates may affect the interest
paid (or earned) and therefore affect our cash flows
and results of operations. However, we do not believe that this interest rate change risk is significant.
Inflation
Inflation has not had a material impact on the Companys business in recent years.
Currency Exchange Fluctuations
All of the Companys revenues are denominated in
RMB, as are expenses. The value of the RMB-to-US$ and other currencies may fluctuate and is affected by,
among other things, changes in political and economic conditions. Since 1994, the conversion of Renminbi
into foreign currencies, including US$, has been based on rates set by the
Peoples Bank of China, which are set daily based on the previous days inter-bank foreign exchange
market rates and current exchange rates on the world financial markets. Since 1994, the
official exchange rate for the conversion of RRMB to US$ had generally been stable and the
RMB had appreciated slightly against the US$. However, on July 21, 2005, the Chinese
government changed its policy of pegging the value of RMB to the US$. Under the
new policy, RMB may fluctuate within a narrow and managed band against a basket of
certain foreign currencies. Recently there has been increased political pressure
on the Chinese government to decouple the RMB from the US$. At the recent quarterly
regular meeting of Peoples Bank of China, its Currency Policy Committee affirmed the
effects of the reform on RMB exchange rate. Since February 2006, the new currency rate system has been
operated; the currency rate of RMB has become more flexible while basically maintaining stable and the
expectation for a larger appreciation range is shrinking. The Company has never engaged in currency
hedging operations and has no present intention to do so.
Concentration of Credit Risk
Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial
instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause
their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions as described below:
The Companys business is characterized by rapid technological change, new product and service
development, and evolving industry standards and regulations. Inherent in the Companys
business are various risks and uncertainties, including the impact from the volatility of the stock
market, limited operating history, uncertain profitability and the ability to raise additional capital.
Most of the Companys revenue is derived from
China. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory
taxation, restrictions on currency conversion, devaluations of currency or the nationalization or
other expropriation of private enterprises could have a material adverse effect on our
business, results of operations and financial condition.
If the Company is unable to derive any revenues
from China, it would have a significant, financially disruptive effect on the normal operations of the Company.
Seasonality and Quarterly Fluctuations
Our businesses experience fluctuations in
quarterly performance. Traditionally, the first quarter from January to March has a lower number of
sales reflected by our business due to the New Year holidays in China occurring during that period.
This is traditionally a period where business activities are suspended for many people as they begin to prepare for the most
important Chinese festival for the year. In addition, during the third quarter from July to August
our business sees reduced revenues due to the fact that many Chinese workers and families take their annual summer leaves.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure of Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that
material information required to be disclosed by us in the reports we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that the information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation,
under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this report. Based on the
existence of the material weaknesses discussed below under the heading Material Weaknesses our
management, including our Chief Executive Officer and Chief Financial Officer, concluded that our
disclosure controls and procedures were not effective at the reasonable assurance level as of the
end of the period covered by this report.
We do not expect that our disclosure controls and procedures will prevent all errors and all
instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls
and procedures are met. Further, the design of disclosure controls and procedures must reflect the
fact that there are resource constraints, and the benefits must be considered relative to their
costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation
of disclosure controls and procedures can provide absolute assurance that we have detected all our
control deficiencies and instances of fraud, if any. The design of disclosure controls and
procedures also is based partly on certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
Material Weaknesses
In our Managements Report on Internal Control Over Financial Reporting included in our Form 10-K
for the period ended December 31, 2008, management concluded that our internal control over
financial reporting was not effective due to the existence of the material weaknesses as of
December 31, 2008, discussed below. A material weakness is a control deficiency, or a combination
of
41
control deficiencies, that results in more than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be prevented or detected.
a) Shortage of qualified financial reporting personnel with sufficient depth, skills
and experience to apply accounting principles generally accepted in the United States of
America (GAAP).
b) We did not maintain effective controls to ensure there are adequate analysis,
documentation, reconciliation, and review of accounting records and supporting data.
c) 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.
d) We do not have adequate procedures in place to detect related party transactions which
give rise to potential conflicts of interest.
e) A lack of clear policy regarding delegated authority has contributed to a lapse in
corporate oversight regarding such transactions.
The Company has implemented and is in the process of testing the following remediation plans;
1.
Remediation Plan for Material Weaknesses
The material weaknesses described above comprise control deficiencies that we discovered in
the fourth quarter of fiscal year 2008 and during the financial close process for fiscal year 2008.
Beginning and during the first quarter of fiscal 2009, we formulated a remediation plan and
initiated remedial action to address those material weaknesses. We have continued our remediation
actions through the second quarter of 2009 and expect to continue working on our remediation plan
through December 31, 2009, however, because of resource constraints at our US parent company we
have not been able to implement the remediation plans at the speed and to the extent that we would
like. Additionally, internal disputes between our China based management at our subsidiary, JPI
and our indirect subsidiary, JJB during the period covered by this report have further complicated
our ability to implement the remediation plan and may have contributed to a further weakening of
our internal controls and procedures particularly as they relate to our ability to (a) to direct
management at JJB to compile financial information, (b) to gain access to operational information
at JPI (c) and control the sale and/or disposal of assets or implement internal controls
surrounding the sale/disposal of assets by JPI and (d) our ability to repatriate funds back to the
US.
The elements of the remediation plan are as follows:
1. authorized the addition of staff members and outside consultants with appropriate levels
of experience and accounting expertise to the finance department and information technology
department to ensure that there is sufficient depth and experience to implement and monitor
the appropriate level of control procedures related to all of our US and China locations;
2. taken steps to unify the financial reporting of all of our China entities and are in
the initial planning phase of upgrading, where possible, certain of our information technology
systems impacting financial reporting. We are currently planning further integration of
information technology policy and procedures and evaluating them as they impact all our
subsidiaries to provide accurate and complete financial reporting information;
3. hired an accounting manager for our Chinese operating entities who is familiar with
recording transactions in conformity with accounting principles generally accepted in the
United States of America and who reports to the Chief Financial Officer. Management will
monitor the progress of the accounting manager who will manage the process of instituting
additional procedures for future accounting periods that will cause transactions in China to
be reported in a timely manner and according to the appropriate accounting principles;
42
4. purchased and are instituting a company wide accounting software system that will
increase the efficiency of information transfer between JJB, YYB, JPI and AMDL. The
implementation process began in April of 2008 in the United States and will roll out to China
by mid-year 2009.
5. issued policies and procedures regarding the delegation of authority and conducted
training sessions with appropriate individuals at our subsidiary locations. We are monitoring
the implementation of such policies through detailed review of significant transactions on a
quarterly basis.
Additionally, as a result of the internal disputes between management at JPI and JJB, we have
initiated the following additional actions:
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We have passed board of directors resolutions to change the signatures on
certain bank accounts and implement new policies and procedures to ensure that in the
future there are more regular communications, access to relevant documentation, and more
frequent collaboration protocols among our management in China and our accounting
department personnel and Chief Financial Officer.
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We strengthened the period-end closing procedures of our China based operating
subsidiaries by: (i) requiring all significant estimate transactions to be reviewed by
corporate in the US, (ii) ensuring that account reconciliations and analyses for
significant financial statement accounts are reviewed for completeness and accuracy by
qualified accounting personnel in the US, and (iii) continued developing better monitoring
controls for our China based subsidiaries.
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Notwithstanding the material weaknesses discussed above, our management has concluded that the
condensed 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, 2009 in conformity with accounting principles generally
accepted in the United States of America.
Changes in Internal Control Over Financial Reporting.
Except as 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, 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
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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 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 the Company 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 has performed extensive due diligence to
determine that AcuVector had no interest in the technology when the Company acquired it. The
Company has 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. The Company is confident
that AcuVectors claims are without merit and that the Company 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 condensed 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 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 AMDL is not the owner of the CIT technology, just that the
University has an equitable interest therein for the revenues there from. As the final outcome is
not determinable, no accrual or loss relating to this action is reflected in the accompanying
condensed consolidated financial statements. No significant discovery has as 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
August 11, 2009 we received correspondence from counsel to our former CEO, Gary L. Dreher,
alleging that the Company has breached its severance agreement with Mr. Dreher, a copy of which was
filed in our Current Report on Form 8-K filed on November 5, 2008, for our failure to pay Mr.
Drehers monthly severance payment of $18,000 on July 29, 2009, and to pay the premium on a life
insurance policy on Mr. Dreher for the month of July 2009. Mr. Dreher has demanded payment of
$18,000 plus 10% per annum simple interest, together reimbursement of $1,089.15 for the premium
payment of the life insurance policy. Mr. Dreher has not yet instituted any formal proceedings
against the Company for breach of the severance agreement however if we are unable to agree to a
settlement or forbearance of his claim it is likely that he will institute litigation against us.
ITEM 1A. RISK FACTORS
Our business involves significant risks which 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 the DR-70 test kit 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 the DR-70 test kit or the CIT technology that appear promising in the early phases
of development, such as in early animal or human clinical trials, may fail to reach the market for
a number of reasons, such as:
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the product candidate did not demonstrate acceptable clinical trial results even though
it demonstrated positive preclinical trial results;
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the product candidate was not effective in treating a specified condition or illness;
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the product candidate had harmful side effects on humans;
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the necessary regulatory bodies, such as the 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 in multiple jurisdictions for a product varies by jurisdiction and by
product. We cannot predict the length of time to complete necessary clinical trials and obtain
regulatory approval.
Our cash position in the U.S. as of August 17, 2009 of approximately $16,000 is not sufficient
to fully implement all of our various business strategies for the DR-70 test kit or to market the
DR-70 test kit or our HPE-based products internationally by ourselves. Even if we are successful in
obtaining additional financing, and notwithstanding any cash generated from our pharmaceutical
operations in China which may be available to us, our short-term strategies are to engage outside
distributors and license our products to others, although there can be no assurances that our
products can be successfully licensed and/or marketed.
Our operations in China involve significant risk.
JJB, YYB and Golden Success Technologies, Ltd. were formed to operate as WFOEs in China.
During second quarter 2009 all active operations at YYB were terminated due to expiration of its
GMP license and YYB was eventually sold to an independent third party. 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 or could impose additional
regulation on the prices charged for our pharmaceutical products, which could have a material
impact on our condensed consolidated financial position, results of operations and cash flows.
As in the case of JJB, the Chinese government has the right to annex or take facilities it
deems necessary. Currently, a portion of JJBs facility that produces large and small volume
parenteral solutions has been identified for annexation by the Chinese Military Department. The
outcome of this event cannot be predicted at this time, but if the Chinese government takes this
facility, although we expect that JJB will be compensated fairly for the facility, JJB will have to
spend significant time and resources finding another location and restarting those operations in
another area. We intend to consolidate JJB and any operations related to product lines formerly
manufactured by YYB in a single facility in a new location. Such new location will need to obtain
GMP certification. Such annexation, or the threat of such annexation, may negatively impact our
results of operation and financial condition.
The value of the RMB fluctuates and is subject to changes in Chinas political and economic
conditions. Historically, the Chinese government has benchmarked the RMB exchange ratio against the
U.S. dollar, thereby mitigating the associated foreign currency exchange rate fluctuation risk;
however, no assurances can be given that the risks related to currency deviations of the RMB will
not increase in the future. Additionally, the RMB is not freely convertible into foreign currency
and all foreign exchange transactions must take place through authorized institutions.
We may not be able to continue to operate our business if we are unable to attract additional
operating capital.
The current level of our revenues is not sufficient to finance our operations.. Due to the
recent reduction in Chinas operations and limited sales, China did not supplement our
U.S. operating cash needs. Accordingly, our U.S. accounts payable have dramatically increased. We
continue to attempt to raise additional debt or equity financing as our operations do not produce
sufficient cash to offset the cash drain of growth in pharmaceutical sales and our general
operating and administrative expenses. Accordingly, our business and operations are substantially
dependent on our ability to raise additional capital to: (i) finance the costs of SFDA approval for
the DR-
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70 test kit in China; (ii) supply capital to JPI to move JJB to new facilities; (iii) supply
working capital for the expansion of sales and the costs of marketing of new and existing products;
and (iv) fund ongoing selling, general and administrative expenses of our business. If we do not
receive additional financing,., the Company will have to restrict or discontinue certain operations
in both China and the U.S. No assurances can be given that we will raise additional debt or equity
financing or generate enough cash to meet our cash needs in the US to enable us to pay our
continuing obligations when due or to continue to operate our business.
At August
17, 2009, we had cash on hand in the U.S. China of approximately
$16,000. Our US
operations require approximately $425,000 per month to fund the costs associated with our financing
activities; SEC and NYSE reporting; legal and accounting expenses of being a public company; other
general administrative expenses; research and development, regulatory compliance, and distribution
activities related to DR-70 test kit; the operation of a USFDA approved pharmaceutical
manufacturing facility; the development of international distribution of the Companys planned
HPE-based cosmetics product line; and compensation of executive management in the US and China..
Even assuming (i) JJB does not undertake significant new activities which require additional
capital, (ii) the current level of revenue from the sale of DR-70 test kits does not increase in
the near future, (iii) we do not conduct any full scale clinical trials for the DR-70 test kit or
our CIT technology in the U.S. or China, (iv) JPI continues to generate sufficient cash to meet or
exceed its cash requirements, (v) no outstanding warrants are exercised, and (vi) no additional
equity or debt financings are completed, our sources of cash from operations in the U. S. are
insufficient to meet our projected operating expenses on a month to month basis.
We have a significant amout of relatively short term indebtedness and may be unable to satisfy our
obligations to pay interest and principal thereon when due.
As of
August 17, 2009, we have the following approximate amounts of outstanding short term
indebtedness:
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(i)
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$3.1 million in a secured loan with Chinese Industrial Bank of
Commerce bearing interest at 5.3%-9.5% per annum
which is due on or before December 31, 2009. which indebtedness is secured by a mortgage on
one of the JJB factories in Shangro, China;
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(ii)
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$2.56 million in unsecured convertible notes bearing interest at 10% per annum due
September 15, 2010; and
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(iii)
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$3.3 million senior unsecured promissory notes bearing interest at 12% interest
payable quarterly in cash, portions of which principal are due in December 2010 and
the balance of the principal is due at varying dates in early 2011.
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Absent a new financing or series of financings, our current operations do not generate
sufficient cash to pay the interest and principal on these obligations when they become due.
Accordingly, we may default in these obligations in the future.
Disputes between the management of our China operating subsidiaries could lead to a decrease
in our ability to direct our China based operations.
In connection with the preparation of our Form 10-Q for the period ended June 30, 2009, we
became aware of significant disputes between the management of our China based operating
subsidiaries, JPI and JJB, respectively. These disputes have led to (a) the inability of JPIs
management to direct management at JJB to compile financial information on a timely basis; (b)
inability of JPIs management to gain access to operational information and/or direct operations;
(c) sale and/or disposal of assets without informing AMDLs management or following directives from
AMDLs management regarding internal controls surrounding the sale/disposal of assets and; (d) the
inability to repatriate funds back to the US . If we are unable to resolve these issues through
further strengthening of our controls and procedures or otherwise through negotiation between the
parties, it could have a material adverse effect on our ability to direct our operations in China.
Our independent registered public accounting firm has included a going concern paragraph in their
report on our consolidated 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 significant operating loss in 2007, our negative cash flows
from operations through December 31, 2008 and our accumulated deficit at December 31, 2008 and June
30, 2009. 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
46
provide for additional capital resources. Our financial condition and the going concern
emphasis paragraph may also make it more difficult for us to maintain existing customer
relationships and to initiate and secure new customer relationships.
Adverse conditions in the global economy and disruption in financial markets could impair our
revenues and results of operations.
As widely reported, financial markets in the United States, Europe and Asia have been
experiencing extreme disruption in recent months, including, among other things, extreme volatility
in security prices, severely diminished liquidity and credit availability, rating downgrades of
certain investments and declining valuations of others. These conditions have impaired our ability
to access credit markets and finance operations already. There can be no assurance that there will
not be a further deterioration in financial markets and confidence in major economies. We are
impacted by these economic developments, both domestically and globally, as our business requires
additional capital to build inventories and exploit new markets. In addition, the current
tightening of credit in financial markets adversely affects the ability of our customers to obtain
financing for significant purchases and operations, and has resulted in a decrease in orders for
our products, and increases the number of days outstanding of our accounts receivable in China. Our
customers ability to pay for our products may also be impaired, which may lead to an increase in
our allowance for doubtful accounts and write-offs of accounts receivable. We are unable to predict
the likely duration and severity of the current disruption in financial markets and adverse
economic conditions in the U.S., China and other countries. Should these economic conditions result
in us not meeting our revenue objectives, our operating results and financial condition could be
adversely affected.
Our current products cannot be sold in certain countries if we do not obtain and maintain
regulatory approval.
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 any
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
the 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 and purchased
additional production rights in 2007. 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 the 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 which would be required to obtain regulatory approval for our CIT
47
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, our CIT technology 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 condensed consolidated balance
sheet, any substantial deterioration of value would significantly impact our reported condensed
consolidated financial position and our reported condensed consolidated operating results.
Some of the production right intangible assets purchased from YiBo by JPI have not yet
received manufacturing permits or been commercialized. We may have to recognize impairments of some
of these intangible assets in the future.
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 the DR-70 test kit and are reliant on our distributors for sales of our
products.
Prior to the acquisition of JPI, virtually all of our operating revenues came from sales to
two distributors of the DR-70 test kits in foreign countries and from sales to a few domestic
customers of certain OEM products. For the year ended December 31, 2008, and the quarter ended June
30, 2009, virtually all of our revenues in the U.S. were derived from sales of DR-70 test kits.
Historically, we have not received any substantial orders from any of our customers or distributors
of DR-70 test kits. Moreover, none of our distributors or customers is contractually required to
buy any specific number of DR-70 test kits from us. Accordingly, based upon this fact, historical
sales, any projection of future orders or sales of DR-70 test kits is unreliable. In addition, the
amount of DR-70 test kits 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
test kits 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 test kits 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.
48
We do not intend to pay dividends on our common stock in the foreseeable future.
We currently intend to retain any earnings to support our growth strategy and do not
anticipate paying dividends in the foreseeable future.
If we fail to comply with the rules under the Sarbanes-Oxley Act related to accounting controls
and procedures or if the material weaknesses or other deficiencies in our internal accounting
procedures are not remediated, our stock price could decline significantly.
Section 404 of the Sarbanes-Oxley Act required annual management assessments of the
effectiveness of our internal controls over financial reporting commencing December 31, 2007 and
requires a report by our independent registered public accounting firm addressing the effectiveness
of our internal control over financial reporting commencing for the year ending December 31, 2009.
Our management has concluded that the consolidated financial statements included in our Annual
Report on Form 10-K as of December 31, 2008 and 2007 and for the two years ended December 31, 2008,
fairly present in all material respects our consolidated financial condition, results of operations
and cash flows in conformity with accounting principles generally accepted in the U.S.
Our management has evaluated the effectiveness of our internal control over financial
reporting as of December 31, 2008 and 2007 based on the control criteria established in a report
entitled Internal Control Integrated 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 December 31, 2008 and
2007 and continues to be ineffective as of the end of the period covered by this report.During its
evaluation, as of December 31, 2008 our management identified material weaknesses in our internal
control over financial reporting and other deficiencies as described in Item 9A of our Annual
Report on Form 10-K. As a result, our investors could lose confidence in us, which could result in
a decline in our stock price.
49
We are taking steps to remediate our material weaknesses, as described in Item 9A of our
Annual Report on Form 10-K. 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 decline significantly. In addition, we cannot
be certain that additional material weaknesses or other significant deficiencies in our internal
controls will not be discovered in the future.
Our stock price is volatile, which could adversely affect your investment.
Our stock price, like that of other international bio-pharma and/or cancer diagnostic and
treatment companies, is highly volatile. Our stock price may be affected by such factors as:
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clinical trial results;
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product development announcements by us or our competitors;
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regulatory matters;
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announcements in the scientific and research community;
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intellectual property and legal matters;
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broader industry and market trends unrelated to our performance;
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economic markets in Asia; and
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competition in local Chinese markets where we sell JPIs product.
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In addition, if our revenues or operating results in any period fail to meet the investment
communitys expectations, there could be an immediate adverse impact on our stock price.
Our stock price and financing may be adversely affected by outstanding warrants and convertible
securities.
We have a significant number of warrants outstanding and a large amount of convertible notes
which over hang the market for the Companys common
stock. As of June 30, 2009, we had (i)
warrants outstanding that are currently exercisable for up to an
aggregate of 7,999,124 shares of
common stock at a weighted average of $2.35 per share, and (ii) 2,530,917 shares of common stock
potentially issuable on conversion of our 10% convertible notes at
$1.20 per share. The existence of,
and/or exercise of all or a portion of these securities, create a negative and potentially
depressive effect on our stock price because investors recognize that they over hang the market
at this time.
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.
50
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) On May 4, 2009, the Company sold units consisting of $1,327,250 principal amount of 12% Series
2 Senior Notes and five year warrants to purchase a total of 2,123,600 shares of the Companys
common stock at $0.98 per share. In addition, we issued placement agent warrants to purchase a
total of 212,360 shares. The securities were issued to these investors pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act for issuances not involving any
public offering and Rule 506 of Regulation D promulgated thereunder.
On June 12, 2009, the Company sold units consisting of $468,500 principal amount of the Series
2 Senior Notes and the Warrant Shares to purchase a total of 749,600 shares of our common stock at
$1.11 per share. In addition, we issued placement agent warrants to purchase a total of 74,960
shares. The securities were issued to these investors pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act for issuances not involving any public offering and
Rule 506 of Regulation D promulgated thereunder.
(b) Not applicable
(c) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable
(b) Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
On June 25, 2009, an agreement was reached among JJB, YYB and Shangrao Branch of Industrial
and Commercial Bank of China Limited (the Shangrao ICBC). Under this agreement, JJB agreed to
transfer its use right of 6,023 square meter land located at No. 245 Tumen Avenue, Tumen, Yanbian,
Jilin Province China (the Land) and ownership of the real estate on the Land to YYB and YYB
agreed to pay back the loan with principle and interest in a total amount of RMB 16,000,000 owed by
JJB to Shangrao ICBC where the real estate and the Land use right was pledged to (the Loan).
However, JJB will still be liable for the Loan if YYB fails to make such payment.
In addition, on the same day, JPI entered into a share transfer agreement with Kai Liu to
transfer its shares and ownership of YYB to Kai Liu whereby Kai Liu acquired 100% outstanding
shares and all the assets of YYB and agreed to pay off all the debts and loan owed by YYB including
the Loan.
ITEM 6. EXHIBITS
(a) Exhibits: See Exhibit Index herein
51
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 19, 2009
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By:
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/s/ Douglas C. MacLellan
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Douglas C. MacLellan, President and
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Chief Executive Officer (Principal
Executive Officer)
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Date: August 19, 2009
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By:
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/s/ Akio Ariura
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Akio Ariura, Chief Operating
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Officer, Chief Financial Officer
and Secretary (Principal Financial
Officer and Principal Accounting
Officer)
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EXHIBIT INDEX
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Exhibit
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Number
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Description:
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10.50
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YYB Share Transfer Agreement
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10.51
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JJB Real Estate Transfer Repayment Agreement
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (Filed herewith.)
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (Filed herewith.)
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53
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