Summary of AMDL INC - Yahoo! Finance

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our management intends for this discussion and analysis to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The following discussion and analysis should be read in conjunction with our financial statements and notes thereto included in this report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2007, as amended on Form 10-K/A. Operating results are not necessarily indicative of results that may occur in future periods.
This report includes various forward-looking statements that are subject to risks and uncertainties, many of which are beyond our control. Our actual results could differ materially from those anticipated in these forward looking statements as a result of various factors, including, but not limited to, risks associated with doing business in China and internationally, demand for our products, governmental regulation and required licensing of our products and manufacturing operations, dependence on distributors, foreign currency fluctuation, technological changes, intense competition and dependence on management and those risks set forth below under Part II - Item 1A "Risk Factors" and set forth in Part I - Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007, as amended on Form 10-K/A. Forward-looking statements discuss matters that are not historical facts and include, but are not limited to, discussions regarding our operating strategy, sales and marketing strategy, regulatory strategy, industry, economic conditions, financial condition, liquidity and capital resources and results of operations. Such statements include, but are not limited to, statements preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends," "estimates," "projects," "can," "could," "may," "will," "would," or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not unduly rely on these forward-looking statements, which speak only as of the date on which they were made. They give our expectations regarding the future, but are not guarantees. We undertake no obligation to update publicly or revise any forward-looking statements, whether because of new information, future events or otherwise, unless required by law.
AMDL
We are a vertically integrated pharmaceutical company with three distinct business divisions that include: (i) IV Diagnostics, (ii) Cancer Therapeutics and (iii) China-based integrated pharmaceuticals. 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 491 people; of which 484 are located in China.
AMDL was founded in 1987 as a bio-tech research and development firm that had one product, its proprietary cancer diagnostic test: AMDL- DR-70® (FDP) Immunoasay ("DR-70®"). On July 3, 2008, we received a letter of determination from the USFDA that the DR-70® test system 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 as a device to monitor patients who have previously been diagnosed with colorectal cancer. In 2001, AMDL acquired a proprietary cancer vaccine Combination Immunogene therapy ("CIT"). CIT is a US patented technology (patent issued May 25, 2004).
Operations of Jade Pharmaceutical Inc.
In September 2006, AMDL acquired JPI in order to dramatically broaden AMDL's business into a multi segmented China-centric pharmaceutical business. Through JPI, we manufacture and distribute generic, homeopathic over-the-counter pharmaceutical products and supplements. Beginning in the third quarter of 2008, the Company launched a line of facial creams based on Goodnak, the Company's injectible pharmaceutical product used primarily for cosmetic purposes. JPI manufactures and distributes its products through two wholly-owned Chinese subsidiaries, Yangbian Yiqiao Bio-Chemical Pharmacy Company Limited ("YYB") and Jiangxi Jiezhong Bi-Chemical Pharmacy Company Limited ("JJB").

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JPI and YYB currently manufacture and market 49 diagnostic, pharmaceutical, nutritional supplement and cosmetic products. JPI is also researching and developing other pharmaceutical products which will require the approval of the SFDA. The top selling products in China are Goodnak (anti-aging cosmecutical), Domperidone (anti-emetic, Levofloxacin Lactate and Sodium Chloride Injections (antibiotic) and Glucose solutions (pharmaceutical).
JJB employs regional sales managers and over three hundred representatives who contact hospitals and distributors throughout China. Distributors have the right to return product only if the product is defective.
YYB has established a multi-level marketing program of approximately forty sales managers and engages over 1,000 sales representatives who act as individual marketers of YYB's products. YYB's products are primarily sold directly to three institutional or hospital customers.
Both JJB and YYB are developing educational programs for hospitals, doctors, clinics and distributors with respect to JJB's and YYB's product lines. These educational programs are intended to improve sales and promotion of JJB's and YYB's products. Both JJB and YYB sell to hospitals, retail stores and distributors who act as agents. One primary distributor has 29 retail outlets throughout the PRC. In addition, JJB and YYB have a dedicated sales team that manages its own direct sales force and retail outlets all over China.
JPI currently has 75 in house full-time sales people and is expected to increase this number over the next twelve months to market JPI's new products.
As JJB's and YYB's resources permit, both JJB and YYB anticipate expanding their current domestic Chinese distribution beyond the cities in which they currently sell through the utilization of new distribution firms in regions currently not covered by existing distributors or the in-house sales force. New Capsule and Cream Formulation of Goodnak Anti-Aging Product During the 3rd quarter of 2008 JJB released two new formulations of the popular Goodnak® anti-aging skin care product line. These new products consist of capsules and an easy-to-apply lotion version and are marketed under the trade name "Nalefen Skin Care Lotion". These new products complement our existing high quality injectable formulation.
Based on general market information, after the expiration of a promotional campaign which will terminate in January 2009, the proposed pricing for these new formulations will be approximately $40.00 per unit, with an expected 74% gross profit margin. We plan to sell both products through both new and existing distribution channels within the Henan, Sichuan, Guizhou, Shanxi, Xinjiang, Gansu, Hunnan, Zhejiang, Fujian, Liaoning and Heilongjiang Provinces of China. Together these regions have a combined population of more than 376 million people. In addition to China, we believe both products will be good candidates for export to the North American and European markets.
JJB entered into distribution agreements with several beauty product distribution companies to open new distribution lines. In order to support this effort, the distribution agreements include an allowance for the promotion and marketing of new Goodnak/Nalefen line of skin care lotions. This allowance is equal to 400,000 RMB (approximately $58,400) for every 1,000,000RMB (approximately $146,000) of products ordered, and is earned based on sales over the first six months of the distribution agreements. This allowance was necessary to develop extensive distribution of the as the Nalefen line. In addition to the allowance described above, the Company granted distributors of the Nalefen line payment terms of 120 days. Cash flow during the three months ended September 30, 2008 was adversely affected as a result of the extended terms. The allowances and extended credit terms will continue through January 2009 and accordingly cash flow will continue to be adversely impacted by these terms.
We recognize the need for additional China and US based scientific research on the benefits of our Goodnak product line. Thus we are in the process of underwriting the costs associated with the publication of one or more white papers in the fourth quarter of 2008.

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Letter of Intent to purchase Sichuan ZhiTong Pharmaceutical, Ltd.
In July 2008, we entered into a letter of intent to purchase Sichuan ZhiTong Pharmaceutical, Ltd ("SZP"). SZP is a privately-held China-based pharmaceutical distribution company that sells and distributes traditional Chinese medicines, health foods, medical equipment, and generic pharmaceutical products. SZP has been a distributor for the Company since the fourth quarter of 2007, selling the Domperidone anti-emetic product. Upon completion of due diligence, it was determined that costs of renovations required to maintain cGMP certification as well as certain sales terms requested by SZP would not make the purchase economically viable. As such, the letter of intent was allowed to expire. License Agreement with Mygene International, Inc. On February 3, 2008 the Company entered into (subject to due diligence) a five year exclusive license for the MyHPV Chip Kit, a diagnostic reagent for IV screening for the prevention of cervical cancer through detection of the Genital Human Papilloma Virus ("HPV") from Mygene International, Inc. ("MGI"), a Utah corporation. MGI owns an exclusive worldwide license for the MyHPV Chip Kit, excluding Korea. MGI licensed the MyHPV Chip Kit from MyGene Co., Ltd., a Korean company. The license agreement between MGI and the Company grants us an exclusive sublicense to use the patent, trademark and technology in manufacturing, promoting, marketing, distributing, and selling the MyHPV Chip Kit in the countries of: China (including Hong Kong), Taiwan, Singapore, Malaysia, Thailand, Cambodia and Vietnam. This license agreement commenced as of March 31, 2008, subject to final acceptance of the technology, and the Company has the option of renewing the license for a single period of five additional years unless either party shall notify the other party in writing of its election not to renew at least ninety days prior to the expiration of the initial term, or the Company has failed to pay MGI all license fees and royalty fees as required by this licensing agreement, in which case the agreement shall terminate. The license agreement requires the Company to pay an initial license fee of two hundred and fifty thousand dollars ($250,000), ten thousand dollars ($10,000) of which was paid on the effective date of the license agreement. For two consecutive thirty (30) day periods after the effective date, the Company was required to and did remit to MGI additional non-refundable ten thousand dollar ($10,000) deposits while the Company evaluated the technology, and an additional payment of twenty thousand dollars ($20,000) is due at the end of the evaluation period. After the Company's right to perform due diligence expires, if the Company accepts the technology, the Company is required to pay a final non-refundable two hundred thousand dollar ($200,000) license fee. At any time during the first ninety (90) days from the effective date, the Company has the unconditional right to terminate the license agreement, at which time the license agreement will be considered terminated.
The $200,000 payment which was due in September 2008 was not paid because during due diligence, we discovered potential issues involving the patents which are an integral part of the license agreements. We are trying to remediate these issues with MGI. It is not known how long this process will take. We have remitted an additional refundable $10,000 as a show of good faith that we are committed to moving forward with the license agreement.
In consideration for the license and in addition to the deposits, assuming the patent issues are resolved and the Company accepts the technology, the Company will be required to pay MGI a royalty fee of fifteen percent (15%) on the net sales of the MyHPV Chip Kit, until such time as royalty fee payments reach a total of seven hundred and fifty thousand dollars ($750,000). Once the Company has paid MGI the seven hundred and fifty thousand dollar ($750,000) minimum threshold royalty fee payments, the royalty fee will decrease to seven and one half percent of the net sales of the MyHPV Chip Kit for the remainder of the term. The payment of royalty fees on the net sales shall be payable within thirty days of the end of each calendar quarter. The MyHPV Chip Kit
The MyHPV Chip Kit was approved as a diagnostic reagent for use in Korea by the Korean Food and Drug Administration ("KFDA"). The test can diagnose HPV infection and each genotype of HPV at the same time. The features of MyHPV Chip Kit include:
• Diagnosis of cervical cancer;

• Detection of 24 types of HPV infection and the identity of the specific genotype of HPV infection;

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• Detection of low copy number of HPV infection;

• Detection of the presence of multiple genotypes of HPV infections within the same sample; and

• Accurate and prompt results.

Regulatory Approval of the MyHPV Chip Kit At the Company's sole expense, the Company is required to use its reasonable commercial efforts to establish manufacturing capabilities and to obtain regulatory approval as necessary and in accordance with SFDA requirements or appropriate regulatory requirements for manufacturing in China (including Hong Kong), within one year from the closing date of the license. The Company is required to use commercially reasonable efforts to obtain all regulatory market approvals necessary for commercialization of the MyHPV Chip Kit; launch the sales of the MyHPV Chip Kit within one year; and manufacture or have manufactured, market, promote and sell the MyHPV Chip Kit Product throughout the term of the agreement. In Taiwan, Singapore, Malaysia, Thailand, Cambodia and Vietnam, the Company is required to obtain all regulatory market approvals necessary for commercialization of the MyHPV Chip Kit, launch the sales of the MyHPV Chip Kit within two years, and manufacture or have manufactured, market, promote and sell the MyHPV Chip Kit throughout the term of the license agreement. If the Company has not begun selling the MyHPV Chip Kit in above noted territories within the prescribed timelines as specified above due to regulatory delay beyond the Company's control, and the Company has received MGI's written acceptance of the regulatory delay, which shall not unreasonably be withheld so long as the Company is making commercially reasonable efforts toward commercialization, the Company shall not be in default of the license agreement.
Limitation on Quantity of DR-70® Antibody Although the Company has obtained approval from the USFDA to market the then current formulation of DR-70®, it has been determined that one of the key components of the DR-70®, the Anti-fibrinogen-HRP is limited in supply and additional quantities cannot be purchased. There are currently enough DR-70® test components to perform approximately 1.2 million individual tests (31,000 DR-70® test kits) over the next 12-18 months. Based on our 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 kits.
Part of our 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. We are currently in 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. Current Economic and Market Environment
We operate in a challenging economic and regulatory environment that has undergone significant changes in both technology and in patterns of global trade. Our goal is to build a broad-based international pharmaceutical enterprise while expanding our Goodnak and Nalefen product lines.
The current economic and market environment in China may be favorable to us because:
• China is experiencing growth rate of 8 - 10% per year as measured by the gross domestic product;

• China's pharmaceutical market is forecasted to become the world's fifth largest by 2010 and the largest by 2050 as reported by PriceWaterhouseCoopers ; and

• The growing demand in China for over the counter pharmaceutical products.

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We plan to achieve our goals by combining our cancer monitoring, new products acquisitions, and vaccine technology with JPI's China-based pharmaceutical manufacturing, consumer sales, expanding distribution network and clinical trials expertise.
We believe the acquisition of JPI has enabled us to:
• gain access to what we believe to be the fastest growing pharmaceutical and consumer market in the world, China;

• platform to in-license North American drugs for manufacture and sale in China and throughout Asia;

• expand DR-70®,and MyHPV Chip Kit clinical trials, sales, and marketing into China and Asia; and

• create new opportunities for cancer related product development in China.

Research and Development
In the past, JJB and YYB entered into joint research and development agreements with outside research institutes, but all of the prior joint research agreements have expired.
We expect research and development expenditures to increase during the remainder of 2008 due to:
• Additional expenditures for research and development is needed in China for SFDA approval of DR-70® and the need for clinical trials in China for SFDA approval of DR-70®, and

• 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 manufacturing the MyHPV Chip Kit

During the nine months ended September 30, 2008, we spent $100,779 on research and development related to DR-70® and MyHPV Chip Kit compared to $15,534 for the same period in 2007. During the fourth quarter of 2008, we expect to incur significant expenditures for research and development for approval of DR-70® by the SFDA, additional research necessary for the reformulated version of the DR-70® test kit in the US and research and development needed for the furtherance of the MyHPV Chip Kit. We also expect to make an application to the American Medical Association for a Current Procedural Terminology ("CPT") code for DR-70® in order to be in a position for patients to receive insurance and Medicare reimbursement for expenditures on DR-70® tests. Liquidity and Capital Resources
Total assets increased $7,066,937 to $39,934,115 as of September 30, 2008 from $32,867,178 as of December 31, 2007. This increase was due primarily to increases in accounts receivable, property and equipment, deposits for acquisition of plant assets, production rights, and a related party receivable, offset by a decrease in cash and prepaids. In addition, total assets increased due to currency fluctuations.
Our total liabilities decreased $403,215 to $6,742,450 as of September 30, 2008 from $7,145,665 as of December 31, 2007. The primary reason for the decrease is a result of a reduction in notes payable to the bank in China which was partially offset by an increase in accounts payable and accrued expenses.
As of September 30, 2008, the Company repaid approximately $2,282,145 of mature loans to the bank. JPI is currently in negotiations with several China based banks in order to gain a comprehensive credit facility for up to RMB 68.5 million (approximately $10 million). A portion and/or all of this credit facility is anticipated to be completed by the end of the first quarter of 2009.
Funds from a new credit facility, when and if obtained, will be used to fund additional working capital requirements necessary for continued growth, clinical trials necessary for SFDA approval for DR-70® and the

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MyHPV Chip Kit, expansion of the existing plant for the production of Dosataxal, repayment of outstanding long term notes, equipment and improvements to production lines at YYB and JJB and the purchase of additional pharmaceutical licenses.
At September 30, 2008, the Company has a receivable of $451,038, representing principal and accrued interest relating to a $644,426 note issued by Kangda, the former owner of JJB. The receivable relates to taxes resulting from the Company's 2006 acquisition of JPI that are the responsibility of the seller. JJB made the payments on behalf of Kangda. The note bears interest at the rate of 6% per annum, and provides for the repayment of amounts due in three equal monthly installments, starting in September 2008, with interest payable in the last installment. The note is guaranteed by three employee/shareholders and secured by shares of common stock that they control. As of September 30, 2008, $204,292 of the total amount owed was repaid.
From January 1, 2008 to September 30, 2008, our cash and cash equivalents decreased by $2,800,422 or 45%, primarily due to working capital requirements of JPI, investments in our Chinese manufacturing facilities, reduction of notes payable to the Chinese bank and general and administrative expenses incurred by AMDL. This decrease is net of the effect of financing activities, including net proceeds from a convertible debt offering of $2,125,692. Cash usage continues to exceed cash generation. As of November 3, 2008, cash on hand in U.S. bank accounts was approximately $1,043,000 and additional cash is held in the accounts of JPI and subsidiaries of approximately $1,300,000. Cash is being depleted from U.S. operations at the rate of approximately $450,000 per month. The foregoing does not include non-operating extraordinary items. This monthly amount also does not include any expenditures related to further development or attempts to license our CIT technology, as no significant expenditures on the CIT technology are anticipated other than the legal fees incurred in furtherance of patent protection for the CIT technology.
For the nine months ended September 30, 2008, cash used in operations was $2,471,334, compared to $1,918,816 cash used in operations for the same period in 2007. The major components were the net loss of $332,625, increase in accounts receivable of $7,441,698 and inventories of $215,698 offset by non-cash expenses of $738,794 related to the fair value of options granted to employees and directors, $1,551,249 related to common stock, warrants and options issued to consultants for services, an increase of $1,729,009 in accounts payable and accrued expense and $1,102,178 for depreciation and amortization.
Cash used in investing activities for the nine months ended September 30, 2008 was $1,645,553, compared to $3,287,404 cash used in investing activities for the same period in 2007. The major components were the purchase of property and equipment of $1,374,318 and $635,386 advanced to Kangda offset by a repayment by Kangda of $204,292 and the cash component of a settlement of an advance to Shanghai XianEn of $159,859 for the development of the JPGreen concept that was abandoned in the third quarter of 2008.
Net cash provided by financing activities for the nine months ended September 30, 2008 was $1, 263,498, compared to $4,843,697 in cash provided by financing activities for the same period in 2007. Net cash used in financing activities for the nine months ended September 30, 2008 primarily consisted of $2,282,145 for payments on notes payable offset by the net proceeds of $2,125,692 from the issuance of convertible debt, $860,421 from the issuance of common stock and proceeds of $559,530 from the exercise of warrants.
We expect to incur additional capital expenditures at our China and U.S. facilities in the fourth quarter of 2008 in the form of additional equipment in the U.S. for the MyHPV Chip Kit, upgrading our information technology systems and additional manufacturing lines as well as upgrading existing manufacturing lines in China to enable additional products to be manufactured. The capital expenditures in China are necessary to produce newly-licensed products efficiently. It is anticipated that this capital expenditure will be financed by raising additional capital through the sale of our equity securities and internally generated funds. In addition to the capital expenditures, there will be additional expenditures in China for additional direct manufacturing staff, additional working capital and for general and administrative purposes. In addition, the cGMP review process has been completed at JJB and required renovations completed at the facilities. Renovations and recertification is expected to be complete before the end of the fourth quarter of 2008. Due to unexpected delays in the recertification process, we were unable to produce the Goodnak injectable product during the third quarter of 2008. The decrease in revenues due to the inability to manufacture the Goodnak injectable product was replaced by sales of the Goodnak cream and lotion line of products.
We expect to expend an additional $190,000 in 2008 in initial licensing fees under the MyGene HPV Test Kit license agreement and will be obligated to pay royalties for MyHPV Chip Kit sales in the future.

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We have initiated the implementation of an Enterprise Reporting System (ERP), the initial phase of which will network the financial reporting process between JJB, YYB, JPI and AMDL. The installation of such software occurred in the second quarter of 2008. During the implementation phase of the project, we identified several areas of the software program which needed to be modified for our domestic and international reporting requirements and are working with the vendor to customize these areas. We anticipate this customization to be complete and tested in the first quarter of 2009. We have incurred approximately $160,000 on the ERP as of September 30, 2008. The total projected cost of the ERP is estimated to be $300,000. We anticipate this system will provide the Company's management with far greater oversight of JPI's operations in China, which is expected to improve the Company's ability to report its results on a timely basis.
The Company is working diligently on various financing activities that, if completed, will significantly improve the cash positions of both JPI and the Company. See "Going Concern", below, for a discussion of our financing plans. Going Concern
Our unaudited condensed consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates, among other . . .