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  **U.S. SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549****FORM 10-QSB**(Mark One)   þ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934****For the quarterly period ended September 30, 2005**   o **TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****For the transition period from                      to                     ****Commission File Number 0-27689****AMDL, Inc.**** **(Exact name of small business issuer as specified in its charter)   Delaware 33-0413161   (State or other jurisdiction (IRS Employerof incorporation or organization) Identification No.)   2492 Walnut Avenue, Suite 100, Tustin, California 92780 (Address of principal executive offices)(714) 505-4460 (Issuer’s telephone number)   Not Applicable (Former name, former address and former fiscal year, if changed since last report)     Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) ofthe Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filing requirements for thepast 90 days.Yes þ       No o     Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act). Yes o No þ     As of November 10, 2005 the Company had 27,313,080 shares of its $.001 par value common stockissued and outstanding.  
 

       PAGE PART I — FINANCIAL INFORMATION  2 Item 1. Financial Statements    Balance Sheet at September 30, 2005 (unaudited)  2 Unaudited Statements of Operations for the three and ninemonths ended September 30, 2005 and 2004  3 Unaudited Statements of Cash Flows for the ninemonths ended September 30, 2005 and 2004  4 Notes to Condensed Financial Statements (unaudited)  5 Item 2. Management’s Discussion and Analysis  15 Item 3. Controls and Procedures  20 PART II — OTHER INFORMATION  21  EXHIBIT 31.1 EXHIBIT 31.2 EXHIBIT 32.1 EXHIBIT 32.2
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**PART I — FINANCIAL INFORMATION****Item 1. Financial Statements****AMDL, INC.****BALANCE SHEET**       **September 30,**   **2005**   (Unaudited) ASSETS    Current assets:    Cash and cash equivalents $1,930,800 Inventories  80,134 Prepaid expenses and other current assets  73,422     Total current assets  2,084,356      Intellectual property, net  1,583,333 Equipment, net  17,602 Other assets  5,757       $3,691,048          LIABILITIES AND STOCKHOLDERS’ EQUITY    Current liabilities:    Accounts payable and accrued expenses $47,275 Accrued payroll and related expenses  106,244     Total current liabilities  153,519      Commitments and contingencies         Stockholders’ equity:    Preferred stock, $0.001 par value; 10,000,000shares authorized; no shares issued andoutstanding  — Common stock, $0.001 par value; 50,000,000 sharesauthorized; 27,313,080 shares issued andoutstanding  27,313 Additional paid-in capital  31,644,301 Prepaid consulting  (144,655)Accumulated deficit  (27,989,430)    Total stockholders’ equity  3,537,529       $3,691,048     See accompanying notes to financial statements.
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**AMDL, INC.****STATEMENTS OF OPERATIONS****(Unaudited)**                   **Three Months Ended**  **Nine Months Ended**   **September 30,**  **September 30,**   **2005**  **2004**  **2005**  **2004** Net revenues $10,250  $25,964  $49,675  $173,982                  Cost of sales  2,828   5,150   10,245   67,804                               Gross profit  7,422   20,814   39,430   106,178                               Operating expenses:                Research and development  73,877   41,893   232,495   231,469 General and administrative  609,471   625,304   1,662,241   1,857,891                 683,348   667,197   1,894,736   2,089,360                               Loss from operations  (675,926)  (646,383)  (1,855,306)  (1,983,182)                 Other income:                Interest income  9,100   7,152   26,926   20,211                               Net loss $(666,826) $(639,231) $(1,828,380) $(1,962,971)                              Basic and diluted lossper share $(0.03) $(0.03) $(0.08) $(0.09)                              Weighted average commonshares outstanding,basic and diluted  25,435,398   21,892,748   24,239,795   21,681,564              See accompanying notes to financial statements.
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**AMDL, INC.****STATEMENTS OF CASH FLOWS****(Unaudited)**           **Nine Months Ended**   **September 30,**   **2005**  **2004** Cash flows from operating activities:        Net loss $(1,828,380) $(1,962,971)Adjustments to reconcile net loss to net cash used in operating activities:        Depreciation and amortization  80,465   81,584 Fair market value of common stock issued for services  244,178   247,350 Fair market value of options and warrants issued for services  15,167   76,783 Changes in operating assets and liabilities:        Accounts receivable  —   150,627 Inventories  (12,099)  (7,520)Prepaid expenses and other current assets  (21,221)  (43,080)Accounts payable and accrued expenses  (36,486)  (86,039)Accrued payroll and related expenses  24,632   14,225                 Net cash used in operating activities  (1,533,744)  (1,529,041)                Cash flows used in investing activities:        Purchase of equipment  (9,179)  (789)                Cash flows from financing activities:        Proceeds from issuance of common stock,net of offering costs of $138,814 in 2005 and$295,766 in 2004  868,186   1,830,074 Proceeds from exercise of stock options  —   162,303                 Net cash provided by financing activities  868,186   1,992,377                 Net change in cash and cash equivalents  (674,737)  462,547          Cash and cash equivalents at beginning of period  2,605,537   1,708,886                 Cash and cash equivalents at end of period $1,930,800  $2,171,433                 Supplemental disclosure of cash flow information:        Cash paid during the period for:        Interest $—  $—        Income taxes $—  $—        See accompanying notes to condensed financial statements.
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**AMDL, INC.****NOTES TO CONDENSED FINANCIAL STATEMENTS****(Unaudited)****For the Periods Ended September 30, 2005 and 2004****NOTE 1 – MANAGEMENT’S REPRESENTATION**The financial statements included herein have been prepared by AMDL, Inc. (the “Company”), withoutaudit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission.Certain information normally included in the financial statements prepared in accordance withaccounting principles generally accepted in the United States of America has been omitted pursuantto such rules and regulations. However, the Company believes that the disclosures are adequate tomake the information presented not misleading. In the opinion of management, all adjustments(consisting primarily of normal recurring accruals) considered necessary for a fair presentationhave been included.Operating results for the three and nine months ended September 30, 2005 are not necessarilyindicative of the results that may be expected for the year ending December 31, 2005. It issuggested that the financial statements be read in conjunction with the audited financialstatements and notes thereto for the year ended December 31, 2004 included in the Company’s AnnualReport on Form 10-KSB and Form 10-KSB/A for such year.**NOTE 2 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**AMDL, Inc.’s predecessor was incorporated May 13, 1988 and the Company reorganized as a Delawarecorporation on June 7, 1989.Since inception, the Company has primarily been engaged in the commercial development of and theobtaining of various governmental regulatory approvals for the marketing of its proprietarydiagnostic tumor-marker test kit (DR-70®) to detect the presence of multiple types ofcancer. The Company’s product line also includes a selection of diagnostic test kits for severaltypes of cancer, infectious diseases, endocrinology, diabetes, nephrology and allergy.**Going Concern**The accompanying financial statements have been prepared assuming the Company will continue as agoing concern, which contemplates, among other things, the realization of assets and satisfactionof liabilities in the normal course of business. The Company has incurred significant continuinglosses from operations through September 30, 2005. As of November 10, 2005, our cash on hand wasapproximately **$**1,782,000 and cash is being depleted at the rate of approximately $175,000 permonth. Assuming (i) the current level of revenue from the sale of DR-70® kits does notincrease in the near future, (ii) the Company does not require new cancer samples to satisfy theFDA concerns on its pending 510(k) application; (iii) the Company does not conduct any full scaleclinical trials for DR-70® or its combination immunogene therapy technology, and (iv) nooutstanding warrants are exercised, the amount of cash on hand is expected to be sufficient to meetits projected operating expenses through August 2006.The Company’s near and long-term operating strategies focus on obtaining FDA approval forDR-70® and seeking a large pharmaceutical partner for the combination immunogene therapytechnology currently owned by the Company. The Company’s only source of additional funds to meetcontinuing operating expenses after August 2006 or to conduct clinical trials which may be requiredto receive FDA approval is the sale of securities. In response to the Company’s current financialcondition and as a part of its ongoing corporate strategy, the Company is pursuing additionalequity financing intended to increase liquidity and better position the Company for future growth.The Company has contacted investment bankers and institutional investors to sell securities, but nodefinitive arrangements to raise additional capital are in place. There can be no assurances thatthe Company will be successful in raising any additional funds.In addition, the Company no longer meets the standards for a continued listing on AMEX, and AMEXmay take action to delist our stock. Delisting from AMEX may impact our ability to raise capitalin the future. These items, among other matters, raise substantial doubt about the Company’sability to continue as a going concern. The financial statements do not include any adjustmentsrelated to recoverability and classification of assets or the amount and classification ofliabilities that might result should the Company be unable to continue as a going concern.
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**AMDL, INC.****NOTES TO CONDENSED FINANCIAL STATEMENTS****(Unaudited)****For the Periods Ended September 30, 2005 and 2004****Revenue Recognition**Product sales revenue is recognized upon passage of title to customers, typically upon shipment ofproduct. Any provision for discounts and estimated returns are accounted for in the period therelated revenue is recorded.**Advertising**The Company expenses the cost of advertising when incurred as a component of general andadministrative expenses. No advertising costs were incurred for the nine months ended September30, 2005 or 2004.**Research and Development**Internal research and development costs are expensed as incurred. Third party research anddevelopment costs are expensed when the contracted work has been performed or as milestone resultshave been achieved.**Cash Equivalents**The Company considers all highly liquid investments with original maturities of three months orless when purchased to be cash equivalents.**Inventories**Inventories, which consist primarily of raw materials and related materials, are stated at thelower of cost or market with cost determined on a first-in, first-out (FIFO) basis. The Companyregularly monitors inventories for excess or obsolete items and makes any valuation correctionswhen such adjustments are needed. Once established, write-downs are considered permanentadjustments to the cost basis of the obsolete or excess inventories.**Equipment**Equipment is stated at cost. Depreciation is computed using the straight-line method overestimated useful lives of three to ten years.Betterments, renewals, and extraordinary repairs that extend the lives of the assets arecapitalized; other repairs and maintenance charges are expensed as incurred. The cost and relatedaccumulated depreciation applicable to assets retired are removed from the accounts, and the gainor loss on disposition is recognized in current operations.**Intangible Assets**The Company has expended funds for patents that are in various stages of the filing approvalprocess. During the nine months ended September 30, 2005 and 2004, the Company expendedapproximately $11,187 and $14,280, respectively, on patents. The Company elected to expense theseexpenditures immediately due to their uncertain realizability.In August 2001, the Company acquired intellectual property rights and an assignment of a US patentapplication for combination immunogene therapy technology for $2,000,000. The technology waspurchased from Dr. Lung-Ji Chang, who developed it while at the University of Alberta, Edmonton,Canada. The $2,000,000 acquisition price is being amortized over the expected useful life of thetechnology, which the Company originally determined to be 20 years from the date of acquisition,based upon an estimate of three years to perfect the patent plus 17 years of patent life. Patentapproval for eight original claims related to the CIT technology was obtained in May 2004 and acontinuation patent application was filed in 2004 for a number of additional claims. The Companyrecorded amortization expense of $75,000 for each of the nine month periods ended September 30,2005 and 2004.
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**AMDL, INC.****NOTES TO CONDENSED FINANCIAL STATEMENTS****(Unaudited)****For the Periods Ended September 30, 2005 and 2004****Impairment of Long-Lived Assets**The Company’s long-lived assets consist of its intellectual property and its property andequipment. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets,” the Company evaluates the carrying value of itslong-lived assets for impairment whenever events or changes in circumstances indicate that suchcarrying values may not be recoverable. The Company uses its bestjudgment based on the facts and circumstances relating to its business when determining whether anysignificant factors exist. Factors the Company considers important that could indicate the needfor an impairment review include the following: **•** significant under performance relative to expected historical or projected future operating results;  **•** market projections for cancer technologies;  **•** 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; and  **•** potential for strategic partnerships for the development of its patented technology.When the Company determines that the carrying value of long-lived assets may not be recoverablebased upon the existence of one or more of the above indicators of impairment, the Company’smanagement performs an undiscounted cash flow analysis to determine if impairment exists. Ifimpairment exists, the Company measures the impairment based on the difference between the asset’scarrying amount and its fair value, and the impairment is charged to operations in the period inwhich the long-lived asset impairment is determined by management. Based on its analysis, theCompany believes that no significant indicators of impairment existed at December 31, 2004. Therecan be no assurance, however, that market conditions will allow us to realize the value of ourtechnologies and prevent future long-lived asset impairment.**Common Stock Issued for Services Rendered**The Company periodically issues common stock for services rendered. Common stock issued is valuedat the estimated fair market value, as determined by management and the board of directors of theCompany. Management and the board of directors consider market price quotations; recent stockoffering prices and other factors in determining fair market value for purposes of valuing thecommon stock.**Risks and Uncertainties**The Company’s proprietary test kit is deemed a medical device or biologic, and as such is governedby the Federal Food and Drug and Cosmetics Act and by the regulations of state agencies andvarious foreign government agencies. Currently, the Company is not permitted to sellDR-70â in the United States, although the Company is in the process of seekingregulatory approval. The Company has received regulatory approval from various foreigngovernments to sell its products and is in the process of obtaining regulatory approval in otherforeign markets. There can be no assurance that the Company will maintain the regulatoryapprovals required to market its products or that they will not be withdrawn.Prior to May 2002, our focus was on obtaining foreign distributors for our DR-70® kit.In May 2002, the Company decided to begin the FDA process under Section 510(k) of the Food, Drugand Cosmetic Act for approval of our intent to market DR-70® as an aid in monitoringpatients with colorectal cancer. The Company conducted clinical trials comparing ourDR-70® to the currently accepted assay, CEA (carcinoembryonic antigen), and submittedthe results to the FDA in September 2003. In January 2004, the FDA responded to our submission.The FDA identified deficiencies in our application and advised our consultant, Diagnostic OncologyCRO, Inc. (DOCRO) that
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**AMDL, INC.****NOTES TO CONDENSED FINANCIAL STATEMENTS****(Unaudited)****For the Periods Ended September 30, 2005 and 2004**based upon the data submitted, the FDA determined that theDR-70® kit was not substantially equivalent to any other device which has gone throughthe 510(k) approval process. The FDA further advised that if the Company had data which itbelieves shows that the DR-70® kit has substantial equivalence, the Company couldsubmit such additional information for the FDA’s consideration. The Company supplied additionaldata and submitted a new application to the FDA proposing that DR-70® be used in tandemwith CEA in monitoring colorectal cancer patients. The FDA has issued a non-substantialequivalence letter, which letter set forth the FDA’s concerns and requested that the Companysubmit additional information in respect of the new application. The Company metwith the FDA in June 2005 to discuss the FDA’s specific concerns necessary for granting approval.The Company will attempt to generate the data the FDA has requested from existing or new cancersamples to support the application, and the Company believes it can provide the data necessary toresolve these concerns. The Company cannot predict the length of time it will take for the FDA toreview the new information or data or whether approval will ultimately be obtained.As soon as the issues with the FDA regarding the colon cancer application for DR-70®are resolved, the Company intends, subject to availability of funds, to start clinical trials touse DR-70®  as a monitor for lung cancer. In 1995, we received approval fromCanada’s Health Protection Agency to market DR-70®  as a lung tumor marker;however, our application with the FDA will seek approval as an aid in monitoring patients withlung cancer.The Company is subject to the risk of failure in maintaining its existing regulatory approvals, inobtaining other regulatory approvals, as well as the delays until receipt of such approvals, ifobtained. Therefore, the Company is subject to substantial business risks and uncertaintiesinherent in such an entity; including the potential of business failure.**Accounting for Stock-Based Compensation**The Company accounts for stock-based compensation issued to employees using the intrinsic valuebased method as prescribed by APB Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB25”). Under the intrinsic value based method, compensation is the excess, if any, of the fairvalue of the stock at the grant date or other measurement date over the amount an employee must payto acquire the stock. Compensation, if any, is recognized over the applicable service period,which is usually the vesting period.In October 1995, the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Thisstandard, if fully adopted, changes the method of accounting for employee stock-based compensationplans to the fair value based method. For stock options and warrants, fair value is determinedusing an option pricing model that takes into account the stock price at the grant date, theexercise price, the expected life of the option or warrant and the annual rate of quarterlydividends. Compensation expense, if any, is recognized over the applicable service period, whichis usually the vesting period.In March 2000, the FASB issued FASB Interpretation No. 44 (“FIN 44”), “Accounting for CertainTransactions Involving Stock Compensation, an interpretation of APB Opinion 25.” FIN 44 clarifiesthe application of APB 25 for (a) the definition of employee for purposes of applying APB 25, (b)the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) theaccounting consequence for various modifications to the terms of a previously fixed stock option oraward, and (d) the accounting for an exchange of stock compensation awards in a businesscombination.The adoption of the accounting methodology of SFAS 123 is optional and the Company has elected tocontinue accounting for stock-based compensation issued to employees using APB 25, as amended byFIN 44; however, pro forma disclosures, as if the Company adopted the cost recognition requirementsunder SFAS 123, are required to be presented (see below). For stock-based compensation issued tonon-employees, the Company values these grants at
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**AMDL, INC.****NOTES TO CONDENSED FINANCIAL STATEMENTS****(Unaudited)****For the Periods Ended September 30, 2005 and 2004**fair value as defined in SFAS 123, FIN 44 andEITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees forAcquiring, or in Conjunction with Selling Goods or Services.”At September 30, 2005, the Company had three stock-based employee compensation plans, which aredescribed more fully in Note 3. The Company accounts for these plans under the recognition andmeasurement principles of APB 25, and related interpretations. No stock-based employeecompensation cost is reflected in the statements of operations, as all options granted under thoseplans had exercise prices equal to the market value of the underlying common stock on the date ofgrant. The following table illustrates the effect on net loss and loss per share if the Companyhad applied the fair value recognition provisions of SFAS 123 to stock-based employee compensationfor each of the three and nine month periods ended September 30, 2005 and 2004.                   **For the Three Months Ended**  **For the Nine Months Ended**   **September 30,**  **September 30,**   **2005**  **2004**  **2005**  **2004** Net loss as reported $(666,826) $(639,231) $(1,828,380) $(1,962,971)                 Deduct: Totalstock-based employeecompensation under fairvalue based method forall awards, net ofrelated tax effects  —   —   (72,000)  (934,400)                              Pro forma net loss $(666,826) $(639,231) $(1,900,380) $(2,897,371)                              Basic and diluted lossper share – as reported $(0.03) $(0.03) $(0.08) $(0.09)                              Basic and diluted lossper share – pro forma $(0.03) $(0.03) $(0.08) $(0.13)             **Basic and Diluted Loss Per Share**Basic earnings (loss) per common share is computed based on the weighted average number of sharesoutstanding for the period. Diluted earnings (loss) per share is computed by dividing net income(loss) by the weighted average shares outstanding assuming all potential dilutive common shareswere issued. Basic and diluted loss per share are the same for the periods presented as the effectof stock options and warrants on loss per share are anti-dilutive and thus not included in thediluted loss per share calculation. However, the impact under the treasury stock method ofdilutive stock options and warrants would have been incremental shares of 239,502 and 618,291 forthe nine months ended September 30, 2005 and 2004, respectively.**Income Taxes**The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109(“SFAS 109”), “Accounting for Income Taxes.” Under SFAS 109, deferred tax assets and liabilitiesare recognized for the future tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and their respective tax bases.Deferred tax assets and liabilities are measured using enacted tax rates
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**AMDL, INC.****NOTES TO CONDENSED FINANCIAL STATEMENTS****(Unaudited)****For the Periods Ended September 30, 2005 and 2004**expected to apply totaxable income in the years in which those temporary differences are expected to be recovered orsettled. A valuation allowance is provided for significant deferred tax assets when it is morelikely than not that such assets will not be recovered.**Use of Estimates**The preparation of financial statements in conformity with accounting principles generally acceptedin the United States of America requires management to make certain estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Significant estimatesmade by management are, among others, realization of accounts receivable and inventories,recoverability of long-lived assets, determination of useful lives of intangibles and valuation ofdeferred tax assets. Actual results could differ from those estimates.**Comprehensive Income**Statement of Financial Accounting Standards No. 130 (“SFAS 130”), “Reporting Comprehensive Income,”establishes standards for reporting and display of comprehensive income and its components in afull set of general-purpose financial statements. SFAS 130 has not impacted the Company’sfinancial position or results of operations as the Company has no items of comprehensive income.**Segments of an Enterprise and Related Information**During the nine months ended September 30, 2005, approximately 92.8% of our sales were to customersin foreign countries. Of the foreign sales, approximately 89.8% were to customers in Korea and10.2% were to customers in Taiwan. During the nine months ended September 30, 2004, approximately27.2% of our sales were to customers in foreign countries. Of the foreign sales, approximately87.6% were to customers in Korea and 12.4% were to customers in Taiwan. All of the Company’sassets are held in the United States and all transactions are denominated in U.S. dollars.**Concentration of Risk**There were no accounts receivable as of September 30, 2005. One foreign customer accounted for83.3% of sales for the nine months ended September 30, 2005. Generally, all sales are prepaid.One domestic customer accounted for 66.5% of sales for the nine months ended September 30, 2004 andno sales in 2005. Sales to this customer were exclusively OEM products and no DR-70®kits. We do not expect to make further sales to this customer.From time to time, the Company maintains cash balances at certain institutions in excess of theFederal Deposit Insurance Corporation limit. As of September 30, 2005, the Company hadapproximately $1,871,000 in excess of this limit.**Recent Accounting Pronouncements**In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”),“Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”SFAS 150 establishes standards for the classification and measurement of certain financialinstruments with characteristics of both liabilities and equity. SFAS 150 also includes requireddisclosures for financial instruments within its scope. For the Company, SFAS 150 was effective forinstruments entered into or modified after May 31, 2003 and otherwise will be effective as ofJanuary 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorilyredeemable financial instruments, SFAS 150 was effective for the Company on January 1, 2005. TheCompany currently does not have any financial instruments that are within the scope of SFAS 150.
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**AMDL, INC.****NOTES TO CONDENSED FINANCIAL STATEMENTS****(Unaudited)****For the Periods Ended September 30, 2005 and 2004**In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, “InventoryCosts, an amendment of ARB No. 43, Chapter 4,” (“SFAS 151”) to clarify the accounting guidancerelated to abnormal amounts of idle facility expense, freight, handling costs and wasted material(spoilage) costs. SFAS 151 specifies that these costs should be recognized as current periodcharges, and that fixed production overhead should be allocated to inventory based on normalcapacity of production facilities. SFAS 151 is effective for fiscal years beginning after September15, 2005. The Company does not expect the adoption of SFAS 151 to have an impact on its financialcondition or results of operations.In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R) whichrequires that companies recognize compensation cost related to share based payment transactions intheir financial statements. Compensation cost is measured based on the grant-date fair value of theequity or liability instruments and will be recognized over the period that an employee providesservice (usually the vesting period) in exchange for the award. This standard replaces SFAS 123,and supersedes APB Opinion No. 25. SFAS 123(R) is effective for the Company beginning January 1,2006. The Company is currently in the process of evaluating the impact of the adoption of SFAS123(R), which will result in additional compensation expense for remaining unvested stock optionsand will be affected by the number of future options granted.In December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets — an amendment ofAPB Opinion No 29, Accounting for Nonmonetary Transactions”. SFAS No. 153 eliminates the exceptionfor non-monetary exchanges of similar productive assets, which were previously required to berecorded on a carryover basis rather than a fair value basis. Instead, this statement providesthat exchanges of non-monetary assets that do not have commercial substance be reported atcarryover basis rather than a fair value basis. A non-monetary exchange is considered to havecommercial substance if the future cash flows of the entity are expected to change significantly asa result of the exchange. The provisions of this statement are effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expectthe adoption of SFAS No. 153 to have an impact on its financial condition or results of operations.**NOTE 3 – STOCK ISSUANCES****Cash Financing Activities**On September 27, 2004, the stockholders of the Company authorized the issuance of 6,500,000 sharesof common stock at a discount of up to 25% below the current market price at the time of issuance.In December 2004, pursuant to the September 27, 2004 authorization, the Company issued 1,606,741shares of common stock to investors as part of a unit offering which generated gross proceeds of$1,237,190 in December 2004. Under the same stockholder authorization, on August 9, 2005, theboard of directors authorized additional Regulation S and Regulation D companion offerings for thesale of up to 3,200,000 units consisting of one share of common stock at a discount of up to 25%below the current market price at the time of issuance and a warrant to purchase one-half share ofcommon stock (a “unit”), to accredited and non-U.S. investors only, in a private placement. Atotal of 2.093,750 shares were sold at $0.32 per share and 1,069,841 shares were sold at $0.315per share, each price representing a discount of 25% from the average of the closing prices forthe five consecutive trading days prior to each of two closing dates. The Company received atotal of $1,007,000 in gross proceeds in the two closings, which closings took place on August 16and August 29, 2005 respectively, for a total of 3,163,591 units. Under the terms of theoffering, investors receive warrants to purchase a number of shares (“Warrant Shares”) of commonstock equal to one-half the total number of shares purchased in the offering. The warrants areexercisable at $0.49 and $0.44 per share, equal to 115% of the average closing price of theCompany’s common stock, as reported by the American Stock Exchange, for the five (5) consecutivetrading days immediately prior to the two closings. Each warrant became exercisable on the dateof issuance and remains exercisable until three years after the respective closing, namely, August16, 2008 or August 29, 2008.In connection with the August 2005 offering, the Company utilized the services of Galileo AssetManagement, S.A., a Swiss corporation for sales to non-U.S. persons, and Havkit Corporation, anNASD member broker-dealer as placement agents for sales in the United States. For their services,Galileo and Havkit received an aggregate of
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**AMDL, INC.****NOTES TO CONDENSED FINANCIAL STATEMENTS****(Unaudited)****For the Periods Ended September 30, 2005 and 2004**$100,700 and warrants to purchase an aggregate of316,359 shares of AMDL common stock. The Company also paid Galileo $30,210, as a three percent(3%) non-accountable expense allowance in connection with the offering, and has also agreed to paya six percent (6%) cash commission upon exercise of the warrants by the purchasers. In addition,the Company incurred additional legal and other costs totaling $7,904 in connection with theoffering. The Company charged all of these cash costs to additional paid-in capital, since theinvestment was treated as a purchase of shares of common stock.The Company filed a Form S-3 registrationstatement and one pre-effective amendment with the Securities andExchange Commission to register 5,786,746 shares of the Company’s common stock consisting of (i)the total of 3,163,591 shares issued to the investors in the August 2005 offering (ii) the1,581,796 shares issuable upon exercise of the related investor warrants and the 316,359 sharesissuable upon exercise of the warrants issued to the placement agents in the offering; (iii) the300,000 shares issued to Boston Financial Partners in April 2005 (see Non-Cash FinancingActivities below); (iv) 350,000 shares to First International Capital Group, Ltd., in July 2005(see Non-Cash Financing Activities below) and (v) the 75,000 shares issuable upon exercise of thewarrants granted to Savannah Capital Management, Inc. in February, May and August 2005 (see Note 4- Stock Options and Warrants below). The Company also agreed that if the registration statementwas not declared effective on or before the earlier of (i) the 120th day following theclosing of the offering, or (ii) the date which is within five (5) business days after the date onwhich the SEC informs the Company in writing (a) that the SEC will not review the registrationstatement, or (b) that the Company may request acceleration of the registration statement, thenthe Company would be obligated to issue as “liquidated damages” to each purchaser, additionalwarrants in an amount equal to 1.5% of the number of Warrant Shares issuable on exercise ofwarrants issued to each purchaser for each 30-day period during which such failure to be declaredeffective had occurred and is continuing, up to a maximum of a total of six percent (6%) of thenumber of Warrant Shares issuable to each purchaser. The Company doesnot expect to issue any additional warrants as liquidated damages.**Non-Cash Financing Activities**On April 11, 2005, the board of directors authorized the issuance of 300,000 shares of common stockto Boston Financial Partners, Inc., a consultant for financial advisory services to be providedfrom April, 11, 2005 through October 31, 2005 and the Company issued the shares on April 13, 2005.The shares were valued at $204,000 based upon the trading price of the common stock on April, 11,2005. Of this amount, $173,400 was charged to general and administrative expense in the ninemonths ended September 30, 2005 and the balance of $30,600 will be charged to general andadministrative expense over the remaining contract period.On July 22, 2005, the board of directors authorized the issuance of 350,000 shares of common stockto First International Capital Group, Ltd., a consultant for financial advisory services to beprovided from July 22, 2005 through January 22, 2006, and the Company issued the shares on July 27,2005. The shares were valued at $182,000 based on the trading price of the common stock on July22, 2005. Of this amount, $70,778 was charged to general and administrative expense in the ninemonths ended September 30, 2005 and the balance of $111,222 will be charged to general andadministrative expense over the remaining contract period.**NOTE 4 — STOCK OPTIONS AND WARRANTS**Effective June 30, 1999, the Company adopted the 1999 Stock Option Plan (the “1999 Plan”). Theshareholders of the Company approved the 1999 Plan on June 28, 2000. Under the 1999 Plan,incentive stock options and nonqualified options may be granted to officers, employees andconsultants of the Company for the purchase of up to 2,000,000 shares of the Company’s commonstock. The exercise price per share under the incentive stock option plan shall not be less than100% of the fair market value per share on the date of grant. The exercise price per share underthe non-qualified stock option plan shall not be less than 85% of the fair market value per shareon the date of grant. Expiration dates for the grants may not exceed 10 years from the date ofgrant. The 1999 Plan terminates on June 30, 2009. Under the terms of the 1999 Plan, the Companygranted non-qualified options to purchase 300,000 shares of the Company’s common stock during thenine months ended September 30, 2005, expiring on June 30, 2009. As of September 30, 2005,1,439,370 options at an average exercise price of $2.18 per share were outstanding
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**AMDL, INC.****NOTES TO CONDENSED FINANCIAL STATEMENTS****(Unaudited)****For the Periods Ended September 30, 2005 and 2004**under the 1999Plan. The Company had 376,261 options available for grant under the 1999 Plan at September 30,2005.On January 25, 2002, the board of directors adopted the 2002 Stock Option Plan (the “2002 Plan”).The shareholders of the Company approved the 2002 Plan on May 10, 2002. Under the 2002 Plan,incentive stock options and nonqualified options may be granted to officers, employees, directorsand independent contractors of the Company for the purchase of up to 1,000,000 shares of theCompany’s common stock. The exercise price per share under the incentive stock option plan shallnot be less than 100% of the fair market value per share on the date of grant. The exercise priceper share under the non-qualified stock option shall be not less than 85% of the fair market valueper share on the date of grant. Expiration dates for the grants may not exceed 10 years from thedate of grant. No options were granted under the 2002 Plan during the nine months ended September30, 2005. All options granted have an exercise price equal to the fair market value at the dateof grant, vest upon grant and expire five years from the date of grant. As of September 30, 2005,938,815 options at an average exercise price of $0.64 per share were outstanding under the 1999Plan. The Company had no options available for grant under the 2002 Plan at September 30, 2005.On February 23, 2004, the board of directors adopted the 2004 Stock Option Plan (the “2004 Plan”).The shareholders of the Company approved the 2004 Plan on September 27, 2004. Under the 2004 Plan,incentive stock options and nonqualified options may be granted to officers, employees, directorsand independent contractors of the Company for the purchase of up to 2,400,000 shares of theCompany’s common stock. The exercise price per share under the incentive stock option plan shallgenerally not be less than 100% of the fair market value per share on the date of grant. Theexercise price per share under the non-qualified stock option shall be not less than 85% of thefair market value per share on the date of grant. Expiration dates for the grants may generallynot exceed 10 years from the date of grant. No options were granted under the 2004 Plan during thenine months ended September 30, 2005. As of December 31, 2004, 1,870,000 options at an averageexercise price of $1.15 per share were outstanding under the 2004 Plan. The Company had 530,000options available for grant under the 2004 Plan at September 30, 2005.On February 17, 2005, the board of directors authorized the issuance of warrants to purchase 25,000shares of common stock and cash payments of $9,000 to Savannah Capital Management, Inc., aconsultant, for investor public relations services to be provided from March 1, 2005 through May31, 2005. The common shares issuable on exercise of the warrants are exercisable at $0.92 pershare. The warrants were valued at $7,000 using the Black-Scholes pricing method and charged togeneral and administrative expense in the nine months ended September 30, 2005.On May 19, 2005, the board of directors authorized the issuance of warrants to purchase 25,000shares of common stock and cash payments of $9,000 to Savannah Capital Management, Inc., aconsultant, for investor public relations services to be provided from June 1, 2005 through August31, 2005. The common shares issuable on exercise of the warrants are exercisable at $0.71 pershare. The warrants were valued at $6,750 using the Black-Scholes pricing method charged togeneral and administrative expense in the nine months ended September 30, 2005.On August 31, 2005, the board of directors authorized the issuance of warrants to purchase 25,000shares of common stock and cash payments of $9,000 to Savannah Capital Management, Inc., aconsultant, for investor public relations services to be provided from September 1, 2005 throughNovember 30, 2005. The common shares issuable on exercise of the warrants are exercisable at $0.39per share. The warrants were valued at $4,250 using the Black-Scholes pricing method. Of thisamount, $1,417 was charged to general and administrative expense in September 2005 and the balanceof $2,833 will be charged to general and administrative expense in the fourth quarter of 2005.In August 2005, the Company issued warrants to purchase a total of 1,898,155 shares in connectionwith the August 2005 private placement offering. (See Note 3 above)
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**AMDL, INC.****NOTES TO CONDENSED FINANCIAL STATEMENTS****(Unaudited)****For the Periods Ended September 30, 2005 and 2004****NOTE 5 — COMMITMENTS AND CONTINGENCIES****Litigation**On February 22, 2002, AcuVector Group, Inc. (“AcuVector”) filed a Statement of Claim in the Courtof Queen’s Bench of Alberta, Judicial District of Edmonton relating to the Company’s combinationimmunogene therapy technology acquired from Dr. Chang in August 2001. The claim alleges damages of$CDN 20 million and seeks injunctive relief against Dr. Chang for, among other things, breach ofcontract and breach of fiduciary duty, and against us for interference with the allegedrelationship between Dr. Chang and AcuVector. The claim for injunctive relief seeks to establishthat the AcuVector license agreement with Dr. Chang is still in effect. The Company performedextensive due diligence to determine that AcuVector had no interest in the technology when theCompany acquired it. The Company is confident that AcuVector’s claims are without merit and thatthe Company will receive a favorable judgment. As the final outcome is not determinable, noaccrual or loss relating to this action is reflected in the accompanying financial statements. IfAcuVector is successful, the Company may be liable for substantial damages, its rights to theintellectual property will be adversely affected, and its future prospects for licensing thetechnology will be significantly impaired.The Company is also defending a companion case filed in the same court by the Governors of theUniversity of Alberta filed against the Company and Dr. Chang in August 2003. The University ofAlberta claims, among other things, that Dr. Chang failed to remit the payment of the University’sportion of the monies paid by the Company to Dr. Chang for the combination immunogene technologypurchased by us from Dr. Chang in 2001. In addition to other claims against Dr. Chang relating toother technologies developed by him while at the University, the University also claims that theCompany conspired with Dr. Chang and interfered with the University’s contractual relations undercertain agreements with Dr. Chang, thereby damaging the University in an amount which is unknown tothe University at this time. The University has not claimed that the Company is not the owner ofthe combination immunogene therapy technology, just that the University has an equitable interesttherein or the revenues therefrom. As the final outcome is not determinable, no accrual or lossrelating to this action is reflected in the accompanying financial statements. If the Universityis successful in these claims, the Company may be liable for substantial damages, its rights to thetechnology will be adversely affected, and its future prospects for exploiting or licensing thecombination immunogene therapy technology will be significantly impaired.In the ordinary course of business, there are other potential claims and lawsuits brought by oragainst the Company. In the opinion of management, the ultimate outcome of these matters will notmaterially affect the Company’s operations or financial position or are covered by insurance.**Indemnities and Guarantees**The Company has executed certain contractual indemnities and guarantees, under which it may berequired to make payments to a guaranteed or indemnified party. The Company also has agreed toindemnify its directors, officers, employees and agents to the maximum extent permitted under thelaws of the State of Delaware. In connection with a certain facility lease, the Company hasindemnified its lessor for certain claims arising from the use of the facilities. The duration ofthe guarantees and indemnities varies, and in many cases is indefinite. These guarantees andindemnities do not provide for any limitation of the maximum potential future payments the Companycould be obligated to make. Historically, the Company has not been obligated to make any paymentsfor these obligations and no liabilities have been recorded for these indemnities and guarantees inthe accompanying balance sheet.
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**Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations****Liquidity and Capital Resources**Total assets decreased to $3,691,048 at September 30, 2005 from $4,403,751 at December 31, 2004.The decrease is a result of cash used in operating activities offset by cash provided by financingactivities.Our total outstanding current liabilities decreased to $153,519 at September 30, 2005 as comparedto $165,373 at December 31, 2004. The decrease resulted from the decrease in general accountspayable offset by an increase in accrued vacation pay.From December 31, 2004 to September 30, 2005, our cash and cash equivalents decreased by $674,737,primarily as a result of cash used in operating activities offset by cash provided by financingactivities. As of November 10, 2005, cash is being depleted at the rate of approximately $175,000per month, excluding possible costs related to (i) the application for approval ofDR-70® by the FDA, (ii) litigation with AcuVector and the University of Alberta and(iii) any expenditures related to further development or attempts to license our CombinationImmunogene Therapy (“CIT”) technology, as no significant expenditures on the CIT technology areanticipated other than fees incurred in furtherance of patent prosecution for the CIT technology.As of November 10, 2005, our cash on hand was approximately **$**1,782,000. Assuming (i) the currentlevel of revenues does not increase in the near future, (ii) we do not require new cancer samplesto satisfy the FDA concerns on our pending 510(k) application; (iii) we do not conduct any fullscale clinical trials, and (iv) no outstanding warrants are exercised, the amount of cash on handis expected to be sufficient to meet our projected operating expenses through August 2006. Ouronly source of additional funds to meet any continuing operating expenses after August 2006 orconduct clinical trials which may be required to receive FDA approval is the sale of oursecurities. We have contacted investment bankers and institutional investors to sell oursecurities, but no definitive arrangements to raise additional capital are in place. There can beno assurances that we will be successful in raising any additional funds.There are significant uncertainties which negatively affect our operations. These are principallyrelated to (i) the absence of a distribution network for our DR-70® kits, (ii) the earlystage of development of our Combination Immunogene Therapy (“CIT”) technology and the need to entera strategic relationship with a larger company capable of completing the development of anyultimate product and the subsequent marketing of such product, and (iii) the absence of anycommitments or firm orders from our distributors. Moreover, there is no assurance as to when, ifever, we will be able to conduct our operations on a profitable basis. Our limited sales to datefor DR-70®, the lack of any purchase requirements in the existing distributionagreements, and absence of FDA approval make it impossible to identify any trends in our businessprospects. There is no assurance we will be able to generate sufficient revenues or sell anyequity securities to generate sufficient funds when needed, or whether such funds, if available,will be obtained on terms satisfactory to us. In addition, if either AcuVector or the Universityof Alberta is successful in their claims, we may be liable for substantial damages, our rights tothe CIT technology will be adversely affected, and our future prospects for licensing the CITtechnology will be significantly impaired. Further, we no longer meet the standards for acontinued listing on AMEX, and AMEX may take action to delist our stock. Delisting from AMEX mayimpact our ability to raise capital in the future. These items, among other matters, raisesubstantial doubt about our ability to continue as a going concern. The financial statements donot include any adjustments related to recoverability and classification of assets or the amountand classification of liabilities that might result should we be unable to continue as a goingconcern.     The Company does not expect to incur any material capital expenditures until sales volumeincreases substantially. Any required future capital expenditures for manufacturing equipment willbe funded out of future revenues or additional equity. The Company does not have any long term orcontingent obligations that must be satisfied.**Critical Accounting Policies**Our financial statements have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. We base our estimates onhistorical experience and on various other assumptions that are believed to be reasonable underthe circumstances, the results of which form the basis of making judgments about the carryingvalues of assets and liabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.
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We believe the following critical accounting policies, among others, affect our more significantjudgments and estimates used in the preparation of our financial statements:*Allowance for Doubtful Accounts*. We maintain allowances for doubtful accounts for estimatedlosses resulting from the inability of our customers to make required payments. The allowance fordoubtful accounts is based on specific identification of customer accounts and our best estimateof the likelihood of potential loss, taking into account such factors as the financial conditionand payment history of major customers. We evaluate the collectibility of our receivables atleast quarterly. If the financial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may be required. Thedifferences could be material and could significantly impact cash flows from operating activities.*Inventory*. We write down our inventory for estimated obsolescence or unmarketable inventory equalto the difference between the cost of inventory and the estimated market value based uponassumptions 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 inventory write-downs may be required and the differences could be material. Suchdifferences might significantly impact cash flows from operating activities. Once established,write-downs are considered permanent adjustments to the cost basis of the obsolete or excessinventories.*Sales Allowances.*A portion of our business is to sell products to distributors who resell theproducts to the end customers. In certain instances, these distributors obtain discounts based onthe contractual terms of these arrangements. Sales discounts are usually based upon the volume ofpurchases or by reference to a specific price in the related distribution agreement. We recognizethe amount of these discounts at the time the sale is recognized. Additionally, sales returnsallowances are estimated based on historical return data, and recorded at the time of sale. Ifthe quality or efficacy of our products deteriorates or market conditions otherwise change, actualdiscounts and returns could be significantly higher than estimated, resulting in potentiallymaterial differences in cash flows from operating activities.*Valuation of Intangibles*. From time to time, we acquire intangible assets that are beneficial toour product development processes. We use our best judgment based on the current facts andcircumstances relating to our business when determining whether any significant factors exists.One of those intangibles is the CIT technology, which we acquired from Dr. Chang. Whenever eventsor changes in circumstances indicate that its carrying amount may not be recoverable, weperiodically are required to evaluate the carrying value of such intangibles, including therelated amortization periods. Whenever events or changes in circumstances indicate that thecarrying value of an intangible asset may not be recoverable, we determine whether there has beenan impairment by comparing the anticipated undiscounted cash flows from the operation and eventualdisposition of the product line with its carrying value. If the undiscounted cash flows are lessthan the carrying value, the amount of the impairment, if any, will be determined by comparing thecarrying value of each intangible asset with its fair value. Fair value is generally based oneither a discounted cash flows analysis or market analysis. Future operating income is based onvarious assumptions, including regulatory approvals, patents being granted, and the type andnature of competing products. Patent approval for eight original claims related to the CITtechnology was obtained in May 2004 and a continuation patent application was filed in 2004 for anumber of additional claims. No regulatory approval has been requested for our CIT technology andwe do not have the funds to conduct the clinical trials which would be required to obtainregulatory approval for our CIT technology. Accordingly we are seeking strategic partner tolicense the CIT technology from us. If we cannot attract a large pharmaceutical company tolicense our CIT technology and conduct the trials required to obtain regulatory approval, or ifregulatory approvals or patents are not obtained or are substantially delayed, or other competingtechnologies are developed and obtain general market acceptance, or market conditions otherwisechange, our CIT technology may have a substantially reduced value, which could be material. Asthe CIT asset represents the largest non-cash asset on our balance sheet, any substantialdeterioration of value would significantly impact our reported financial position and our reportedoperating results.*Deferred Taxes*. We record a valuation allowance to reduce the deferred tax assets to the amountthat is more likely than not to be realized. We have considered estimated future taxable incomeand 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 resultsdiffer favorably from those estimates used, we may be able to realize all or part of our netdeferred tax assets. Such realization could positively impact our operating results and cashflows from operating activities.*Litigation*. We account for litigation losses in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 5, “Accounting for Contingencies.” Under SFAS No. 5, loss contingencyprovisions are recorded for
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probable losses at management’s best estimate of a loss, or when abest estimate cannot be made, a minimum loss contingency amount is recorded. These estimates areoften initially developed substantially earlier than the ultimate loss is known, and the estimatesare refined each accounting period, as additional information is known. Accordingly, we are ofteninitially unable to develop a best estimate of loss; therefore, the minimum amount, which could bezero, is recorded. As information becomes known, either the minimum loss amount is increased or abest estimate can be made, resulting in additional loss provisions. Occasionally, a best estimateamount is changed to a lower amount when events result in an expectation of a more favorableoutcome than previously expected. Due to the nature of current litigation matters, the factorsthat could lead to changes in loss reserves might change quickly and the range of actual lossescould be significant, which could materially impact our results of operations and cash flows fromoperating activities.**Results of Operations****Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004****Net Revenue**. During the three months ended September 30, 2005, the Company generated $10,250 fromproduct sales compared to revenues from product sales for the three months ended September 30, 2004of $25,964, a decrease of $15,714 or 60.5%. The decrease is due to reduced orders for bothDR-70® and for OEM products. Revenues from sales of OEM products for the three monthsended September 30, 2005 were $800 compared to $4,800 for the prior year period, a decrease of$4,000, or 83.3%. All sales of OEM products were to domestic customers in both the current and theprior year periods. Revenues from sales of DR-70® for the three months ended September30, 2005 were $9,450 compared to $21,164 for the three months ended September 30, 2004, a decreaseof $11,714, or 55.3%. Foreign customers accounted for 100.0%, of the DR-70® revenues inthe three months ended September 30, 2005. Domestic customers accounted for $1,089, or 5.2%, andforeign customers accounted for $20,075, or 94.8%, of the DR-70® revenues in the threemonths ended September 30, 2004.The continued low level of DR-70® sales is disappointing to management of the Company.Market acceptance of our DR-70® kits has been slower than originally anticipated, inpart due to the fact that the DR-70® kit has not yet received FDA approval. Under FDArules, the Company is not permitted to market and promote DR-70® while the test isundergoing the FDA submission and review process. In addition, the Company has not concluded anymaterial new distribution agreements.During the balance of 2005, we expect sales of OEM products to be at the same level as experiencedfor the nine months ended September 30, 2005. Until FDA approval is obtained, we expect sales ofDR-70® to remain at current levels and do not expect any significant change in ouroperating results. These statements concerning future sales and operating results areforward-looking statements that involve certain risks and uncertainties which could result in afluctuation of sales above or below those achieved for the nine months ended September 30, 2005 ineach category. Sales could also be negatively impacted by potential competing products and overallmarket acceptance of the Company’s products.**Gross Profit**. Gross profit on product sales decreased by $13,392 or 64.3% to $7,422 for the threemonths ended September 30, 2005, compared to $20,814 for the period ended September 30, 2004. Thedecrease in gross profit was due to a decrease in both OEM product sales and in DR-70®sales. The Company’s gross profit percentage was 72.4% for the three months ended September 30,2005 as compared to 80.2% for the prior year period. The decrease is primarily due to the relativechanges in product sales mix.Assuming the product sales mix remains the same, management anticipates gross profit margins forthe remainder of 2005 to be at levels similar to that of the three months ended September 30, 2005,although gross profit from product sales does not significantly cover the current level of generaland administrative expenses. The statement concerning future gross profit margins is aforward-looking statement that involves certain risks and uncertainties which could result in afluctuation of gross margins below those achieved for the three months ended September 30, 2005.Although the Company believes it provides high-quality products, pricing and gross profit could benegatively impacted by potential competing products and overall market acceptance of the Company’sproducts.**Research and Development.**Research and development expenses for the three months ended September30, 2005 were $73,877 as compared to $41,893 for the three months ended September 30, 2004, anincrease of $31,984, or 76.3%. The increase is due to an increase in the costs associated with ourprincipal consultant and a smallerincrease in the costs associated with our outside consultant, both in connection with our FDAsubmission. There were no material changes in the components of research and development expenses.
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**General and Administrative Expenses**. General and administrative expenses decreased by $15,833 to$609,471 for the three months ended September 30, 2005 as compared to the $625,304 reported for thethree months ended September 30, 2004 due mainly to net decreases in: (i) legal costs of $41,402,primarily related to the AcuVector and University of Alberta actions; (ii) the costs of our annualmeeting and other shareholder costs in the amount of 8,899; and (iii) aborted offering costs of$21,996; offset by (iv) an overall increase of approximately $13,563 in payroll and othercompensation costs; and (v) an increase consulting fees of $45,690, primarily related to theincrease in the value of non-cash compensation. The significant components of general andadministrative expenses for the three months ended September 30, 2005 primarily consist of payroll,taxes and benefits; directors fees; consulting expenses, including financial consulting, investorrelations and public relations; and professional fees, including legal, audit and patent expenses.**Interest Income.**Interest income for the three months ended September 30, 2005 was $9,100, ascompared to $7,152 for the three months ended September 30, 2004. The higher rates of interestearned in 2005 were offset by the lower average cash balance maintained by the Company during thethree months ended September 30, 2005.**Net Loss and Loss from Operations.**As a result of the above, in the three months ended September30, 2005, the Company’s net loss was $666,826 or $(0.03) per share compared to a net loss of$639,231 or $(0.03) per share for the same period in the prior year.**Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004****Net Revenue**. During the nine months ended September 30, 2005, the Company generated $49,675 fromproduct sales compared to revenues from product sales for the nine months ended September 30, 2004of $173,982, a decrease of $124,307 or 71.4%. The decrease is due to the lack of orders for Ketonestrips, historically our principal OEM product. Revenues from sales of OEM products for the ninemonths ended September 30, 2005 were $3,200 compared to $123,465 for the prior year period, adecrease of $120,265, or 97.4%. All sales of OEM products were to domestic customers in both thecurrent year and prior year periods. Revenues from sales of DR-70® for the nine monthsended September 30, 2005 were $46,475 compared to $50,517 for the nine months ended September 30,2004, a decrease of $4,042, or 8.0%. Domestic customers accounted for $400, or 1.0%, and foreigncustomers accounted for $46,075, or 99.0%, of the DR-70® revenues in the nine monthsended September 30, 2005. Domestic customers accounted for $3,267, or 6.5%, and foreign customersaccounted for $47,250, or 93.5%, of the DR-70® revenues in the nine months endedSeptember 30, 2004.The continued low level of DR-70® sales is disappointing to management of the Company.Market acceptance of our DR-70® kits has been slower than originally anticipated, inpart due to the fact that the DR-70® kit has not yet received FDA approval. Under FDArules, the Company is not permitted to market and promote DR-70® while the test isundergoing the FDA submission and review process. In addition, the Company has not concluded anymaterial new distribution agreements.During the balance of 2005, we expect sales of OEM products to be at the same level as experiencedfor the nine months ended September 30, 2005. Until FDA approval is obtained, we expect sales ofDR-70® to remain at current levels and do not expect any significant change in ouroperating results. These statements concerning future sales and operating results areforward-looking statements that involve certain risks and uncertainties which could result in afluctuation of sales above or below those achieved for the nine months ended September 30, 2005 ineach category. Sales could also be negatively impacted by potential competing products and overallmarket acceptance of the Company’s products.**Gross Profit**. Gross profit on product sales decreased by $66,748 or 62.9% to $39,430 for the ninemonths ended September 30, 2005, compared to $106,178 for the period ended September 30, 2004. Thedecrease in gross profit was due to a significant decrease in OEM product sales and a smalldecrease in DR-70® sales. The Company’s gross profit percentage was 79.4% for the ninemonths ended September 30, 2005 as compared to 61.0% for the prior year period. The increase isprimarily due to the relative changes in product sales mix.Assuming the product sales mix remains the same, management anticipates gross profit margins forthe remainder of 2005 to be at levels similar to that of the nine months ended September 30, 2005,although gross profit from product sales does not significantly cover the current level of generaland administrative expenses. The statementconcerning future gross profit margins is a forward-looking statement that involves certain risksand uncertainties which could result in a fluctuation of gross margins below those achieved for thenine months ended September 30, 2005.
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Although the Company believes it provides high-qualityproducts, pricing and gross profit could be negatively impacted by potential competing products andoverall market acceptance of the Company’s products.**Research and Development.**Research and development expenses for the nine months ended September30, 2005 were $232,495 as compared to $231,469 for the nine months ended September 30, 2004, anincrease of $1,026, or 0.4%. The increase is due to an increase in the costs associated with ouroutside consultant in connection with our FDA submission offset by a reduction in the costsassociated with our principal consultant. There were no material changes in the components ofresearch and development expenses.**General and Administrative Expenses**. General and administrative expenses decreased by $195,650 to$1,662,241 for the nine months ended September 30, 2005 as compared to the $1,857,891 reported forthe nine months ended September 30, 2004 due mainly to net decreases in: (i) legal costs of$80,651, primarily related to the AcuVector and University of Alberta actions; (ii) consultingfees of $50,803; (iii) stock exchange fees of $23,205; and (iv) aborted offering costs of $84,297;offset by (v) an overall increase of approximately $54,756 in payroll and other compensation costs;and (vi) an increase in director’s compensation of $28,000. The significant components of generaland administrative expenses for the nine months ended September 30, 2005 primarily consist ofpayroll, taxes and benefits; directors fees; consulting expenses, including financial consulting,investor relations and public relations; and professional fees, including legal, audit and patentexpenses.**Interest Income.**Interest income for the nine months ended September 30, 2005 was $26,926, ascompared to $20,211 for the nine months ended September 30, 2004. The increase of $6,715 is due tothe higher rates of interest earned in 2005 offset, in part, by the lower average cash balancemaintained by the Company during the nine months ended September 30, 2005.**Net Loss and Loss from Operations.**As a result of the above, in the nine months ended September30, 2005, the Company’s net loss was $1,828,380 or $(0.08) per share compared to a net loss of$1,962,971 or $(0.09) per share for the same period in the prior year.**Assets and Liabilities**At September 30, 2005, the Company had total assets of $3,691,048 compared to total assets of$4,403,751 at December 31, 2004. Cash and cash equivalents was $1,930,800 as of September 30,2005, a decrease of $674,737 (38.5%) from the $2,605,537 cash on hand as of December 31, 2004.Cash used in operations was $1,533,744 and cash used to purchase equipment was $9,179, offset bynet cash provided by financing activities in the amount of $868,186. As of November 7, 2005, ourcash on hand was approximately $1,782,000.There were no accounts receivable at September 30, 2005 or at December 31, 2004. Inventoriesincreased $12,099 (17.8%), to $80,134, from the $68,035 at December 31, 2004. The increase ininventories is due to additional manufacturing of DR-70® kits and work in process.Net equipment totaled $17,602 at September 30, 2005 compared to $13,888 at December 31, 2004, anincrease of $3,714 (26.7%). The increase is attributable to the purchase of lab equipment forincreased automation of the manufacturing process in the amount of $5,575 and computer equipment inthe amount of $3,604 during the nine months ended September 30, 2005 less depreciation andamortization in the amount of $5,465 for the period. Intellectual property decreased to $1,583,333at September 30, 2005 from $1,658,333 at December 31, 2004 as the result of amortization in theamount of $75,000 for the nine months ended September 30, 2005.Total liabilities at September 30, 2005 were $153,519, a decrease of $11,854 (7.2%) from the$165,373 at December 31, 2004. Accounts payable and accrued expenses were $47,275 at September 30,2005, a decrease of $36,486 (43.6%) from the $83,761 at December 31, 2004. The decrease isprimarily due to the payment cycle of trade payables. Accrued payroll and related expenses totaled$106,244 at September 30, 2005; an increase of $24,632 compared to $81,612 at December 31, 2004 andis related to an increase in the rate of net accrued vacation earned during the nine months endedSeptember 30, 2005.**Forward Looking Statements**This Form 10-QSB contains forward-looking statements within the meaning of the Private SecuritiesLitigationReform Act of 1995. Such forward-looking statements made by the Company involve known and unknownrisks,
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uncertainties and other factors which may cause the actual results, performance orachievements of the Company to be materially different from any future results, performance orachievements expressed or implied by such forward-looking statements. Factors that could causeactual results to differ materially from the forward looking statements include, but are notlimited to, risks associated with lack of significant operating history, demand for the Company’sproducts, international business operations, dependence on licensees, governmental regulations,technological changes, intense competition and dependence on management. Given theseuncertainties, readers are cautioned not to place undue reliance on such forward-lookingstatements. The Company’s management disclaims any obligation to forward-looking statementscontained herein to reflect any change in the Company’s expectation with regard thereto or anychange in events, conditions, circumstances or assumptions underlying such statements.**Item 3. Controls and Procedures****Evaluation of Disclosure Controls and Procedures**The Company’s chief executive officer and chief financial officer carried out an evaluation of theeffectiveness and operation of the Company’s disclosure controls and procedures. They haveconcluded after evaluating the effectiveness of the Company’s disclosure controls and procedures asof September 30, 2005, that as of such date, the Company’s disclosure controls and procedures wereeffective and designed to ensure that material information relating to the Company would be madeknown to them by others.**Changes in Internal Controls**There have been no significant changes in the Company’s internal controls or in other factors thatcould significantly affect those controls during the three months ended September 30, 2005.
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**PART II — OTHER INFORMATION****Item 1. Legal Proceedings**Inapplicable.**Item 2. Unregistered Sales of Equity Securities**On February 17, 2005, the board of directors of the Company authorized the issuance of warrants topurchase 25,000 shares of common stock and cash payments of $9,000 to Savannah Capital Management,Inc., a consultant, for investor public relations services to be provided from March 1, 2005through May 31, 2005. The common shares issuable upon exercise of the warrants are exercisable at$0.92 per share. The warrants were valued at $7,000 using the Black-Scholes pricing method andcharged to general and administrative expense in the nine months ended September 30, 2005. Therewas no underwriter involved in this issuance.On April 11, 2005, the board of directors authorized the issuance of 300,000 shares of common stockto Boston Financial Partners, Inc., a consultant for financial advisory services to be providedfrom April, 11, 2005 through October 31, 2005 and the Company issued the shares on April 13, 2005.The shares were valued at $204,000 based upon the trading price of the common stock on April, 11,2005. Of this amount, $173,400 was charged to general and administrative expense in the ninemonths ended September 30, 2005 and the balance of $30,600 will be charged to general andadministrative expense over the remaining contract period. There was no underwriter involved inthis issuance.On May 19, 2005, the board of directors of the Company authorized the issuance of warrants topurchase 25,000 shares of common stock and cash payments of $9,000 to Savannah Capital Management,Inc., a consultant, for investor public relations services to be provided from June 1, 2005 throughAugust, 2005. The common shares issuable upon exercise of the warrants are exercisable at $0.71per share. The warrants were valued at $6,750 using the Black-Scholes pricing method and chargedto general and administrative expense in the nine months ended September 30, 2005. There was nounderwriter involved in this issuance.On July 22, 2005, the board of directors authorized the issuance of 350,000 shares of common stockto First International Capital Group, Ltd., a consultant, for strategic investor relations servicesto be provided from July 22, 2005 through January 22, 2006, and the Company issued the shares onJuly 27, 2005. The shares were valued at $182,000 based on the trading price of the common stockon July 22, 2005. Of this amount, $70,778 was charged to general and administrative expense in thenine months ended September 30, 2005 and the balance of $111,222 will be charged to general andadministrative expense over the remaining contract period. There was no underwriter involved inthis issuance.On August 9, 2005, the board of directors authorized additional Regulation S and Regulation Dcompanion private placement offerings for the sale of up to 3,200,000 units consisting of oneshare of common stock at a discount of up to 25% below the current market price at the time ofissuance and a warrant to purchase one-half share of common stock (a “unit”), to accredited andnon-U.S. investors only. A total of 2,093,750 shares were sold at $0.32 per share and 1,069,841shares were sold at $0.315 per share, each price representing a discount of 25% from the averageof the closing prices for the five consecutive trading days prior to each of two closing dates.The Company received a total of $1,007,000 in gross proceeds in the two closings, which closingstook place on August 16 and August 29, 2005, respectively, for a total of 3,163,591 units. Underthe terms of the offering, investors receive warrants to purchase a number of shares (“WarrantShares”) of common stock equal to the one-half the total number of shares purchased in theoffering. The warrants are exercisable at $0.49 and $0.44 per share, equal to 115% of the averageclosing price of the Company’s common stock, as reported by the American Stock Exchange, for thefive (5) consecutive trading days immediately prior to the closings. Each warrant becameexercisable on the date of issuance and remains exercisable until three years after the respectiveclosing, namely, August 16, 2008 or August 29, 2008.In connection with our offering, we utilized the services of Galileo Asset Management, S.A., aSwiss corporation for sales to non-U.S. persons, and Havkit Corporation, an NASD memberbroker-dealer as our placement agent for sales in the United States. For their services, Galileoand Havkit received an aggregate of $100,700 and warrants to purchase an aggregate of 316,359shares of our common stock. We have also paid Galileo $30,210, as a three percent (3%)non-accountable expense allowance in connection with the offering, and we have also agreed to paya six percent (6%) cash commission upon exercise of the warrants by the purchasers. In addition,the Companyincurred additional legal and other costs totaling $7,904 in connection with the offering. TheCompany charged all of these
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cash costs to additional paid-in capital, since the investment wastreated as a purchase of shares of common stock. The common stock was issued pursuant to Section4(2) of the Securities Act.On August 31, 2005, the board of directors authorized the issuance of warrants to purchase 25,000shares of common stock and cash payments of $9,000 to Savannah Capital Management, Inc., aconsultant, for investor public relations services to be provided from September 1, 2005 throughNovember 30, 2005. The common shares issuable on exercise of the warrants are exercisable at $0.39per share. The warrants were valued at $4,250 using the Black-Scholes pricing method. Of thisamount, $1,417 was charged to general and administrative expense in September 2005 and the balanceof $2,833 will be charged to general and administrative expense in the fourth quarter of 2005.There was no underwriter involved in this issuance.**Item 3. Defaults Upon Senior Securities**Inapplicable.**Item 4. Submission of Matters to a Vote of Security Holders**At the annual meeting of our stockholders, held September 26, 2005, the stockholders elected fivedirectors to serve for one year terms or until their successors are duly elected and qualify asfollows:               Shares WithheldNominee/Director Shares for from VotingWilliam M. Thompson  15,476,354   500,471 Gary L. Dreher  15,907,717   69,288 Edward R. Arquilla  15,491,540   485,485 Douglas C. MacLellan  15,464,640   482,365 Marvin E. Rosenthale  15,076,490   950,515 The stockholders approved the proposal to authorize the issuance of up to 5,000,000 shares ofcommon stock below current market prices by a vote of 2,227,640 shares in favor, 967,019 sharesagainst and 119,108 shares abstained from voting.The stockholders did not approve the proposal for the adoption of the 2005 Stock Option Plan by avote of 1,655,355 shares against, 1,434,666 shares in favor and 223,746 shares abstained fromvoting.The stockholders ratified the appointment of Corbin & Company, LLP as our independent registeredpublic accounting firm by a vote of 15,864,024 shares in favor, 21,597 shares against and 91,354shares abstained from voting.**Item 5. Other Information**Based on the Company’s quarterly financial statements for the nine months ended September 30, 2005,the Company no longer meets the stockholders’ equity requirement for continued listing on AMEX.Under AMEX rules, after receipt of a formal notification by AMEX, the Company will have 30 days toprovide AMEX with its plan to bring it in compliance with the AMEX listing requirements, up to 18months to implement such plan, and the Company’s progress will be reviewed periodically by AMEX.The Company believes it will be able to submit and effectuate a satisfactory plan to bring it intocompliance with the AMEX continued listing requirements.**Item 6. Exhibits**  Exhibits 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32.1 Certification Pursuant to 18 U.S.C. §1350 of Chief Executive Officer 32.2 Certification Pursuant to 18 U.S.C. §1350 of Chief Financial Officer
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**SIGNATURES**In accordance with the requirements of the Exchange Act, the Registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.      AMDL, Inc.