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EXCEL - IDEA: XBRL DOCUMENT - AMARILLO BIOSCIENCES INCFinancial_Report.xls
EX-32.1 - EXHIBIT 32.1 9-30-13 - AMARILLO BIOSCIENCES INCexhibit32-1_09302013.htm
EX-31.1B - EXHIBIT 31.1B 9-30-13 - AMARILLO BIOSCIENCES INCexhibit31-1b_09302013.htm
EX-31.1A - EXHIBIT 31.1A 9-30-13 - AMARILLO BIOSCIENCES INCexhibit31-1a_09302013.htm
United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2013

Commission File Number 0-20791

AMARILLO BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)

TEXAS
 
75-1974352
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
     
     
4134 Business Park Drive, Amarillo, Texas 79110
(Address of principal executive offices) (Zip Code)
 
 
(806) 376-1741
(Issuer’s telephone number, including area code)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [√ ] Yes   [ ] No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]
 
Accelerated filer [ ]
Non-accelerated filer [ ] (do not check if smaller reporting company)
 
Smaller reporting company [√]

 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)[ ] Yes   [√] No
 
As of November 13, 2013 there were 73,291,008 shares of the issuer's common stock and 3,262 shares of the issuer’s preferred stock outstanding.
 
 
1

 

AMARILLO BIOSCIENCES, INC.
Debtor and Debtor in Possession

INDEX
   
PAGE NO.
PART I:
FINANCIAL INFORMATION
 
 
ITEM 1.
 
Financial Statements
 
 
 
Balance Sheets– September 30, 2013 and December 31, 2012 (unaudited)
 
3
 
 
Statements of Operations – Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)
4
 
 
Condensed Statements of Cash Flows – Nine Months Ended September 30, 2013 and 2012 (unaudited)
5
 
 
Notes to Financial Statements (unaudited)                                                                                              
6
 
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
9
 
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk.
14
 
ITEM 4.
Controls and Procedures                                                                                              
18
     
PART II:
OTHER INFORMATION
 
 
ITEM 1.
Legal Proceedings                                                                                              
19
 
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
19
 
ITEM 3.
Defaults Upon Senior Securities                                                                                              
19
 
ITEM 4.
Mine Safety Disclosures                                                                                              
19
 
ITEM 5.
Other Information                                                                                              
19
 
ITEM 6.
Exhibits……………………………………………………………
19
 
Signatures
 
 
20

 
2

 
PART I - FINANCIAL INFORMATION

 
ITEM 1.
Financial Statements
Amarillo Biosciences, Inc.
Debtor and Debtor in Possession
Balance Sheets
(unaudited)
 
September 30,
2013
 
December 31,
2012
Assets
       
Current assets:
       
   Cash and cash equivalents
$ 9,105     $ 7,261  
   Prepaid expense and other current assets
  33,885       13,674  
Total current assets
  42,990       20,935  
Patents, net
  96,153       94,100  
Total assets
$ 139,143     $ 115,035  
               
Liabilities and Stockholders' Deficit
             
Current liabilities:
             
   Accounts payable and accrued expenses
$ 329,619     $ 360,353  
   Accrued interest - related parties
  1,039,182       951,442  
   Accrued expenses – related party
  78,360       78,360  
   Derivative liabilities
  -       4,217  
   Notes payable – related parties
  3,339,293       2,847,958  
Total current liabilities
  4,786,454       4,242,330  
Total liabilities
  4,786,454       4,242,330  
               
Commitments and contingencies
             
               
Stockholders' deficit
             
   Preferred stock, $0.01 par value:
             
      Authorized shares – 10,000,000
             
      Issued and outstanding shares –  3,262 at
      September 30, 2013 and December 31, 2012
  33       33  
   Common stock, $0.01par value:
             
      Authorized shares - 100,000,000
             
      Issued and outstanding shares – 73,291,008 at
     September 30, 2013 and 73,554,897 at December 31, 2012
  732,910       735,549  
   Additional paid-in capital
  31,968,516       31,966,377  
   Accumulated deficit
  (37,348,770 )     (36,829,254
)
Total stockholders' deficit
  (4,647,311 )     (4,127,295
)
Total liabilities and stockholders’ deficit
$ 139,143     $ 115,035  
See accompanying notes to financial statements.
 
 
3

 
Amarillo Biosciences, Inc.
Debtor and Debtor in Possession
Statements of Operations
(Unaudited)

   
Three months ended September 30,
   
Nine months ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Revenues:
                       
  Product sales
  $ -     $ 50     $ -     $ 530  
      Total revenues
    -       50       -       530  
 
Cost of revenues:
                               
  Product sales
    -       20       -       212  
      Total cost of revenues
    -       20       -       212  
Gross Margin
    -       30       -       318  
                                 
Operating expenses:
                               
  Research and development expenses
    33,659       70,809       105,450       243,748  
  Selling, general and administrative expenses
    50,793       60,826       302,581       191,614  
     Total operating expenses
    84,452       131,635       408,031       435,362  
                                 
Operating loss
    (84,452 )     (131,605 )     (408,031 )     (435,044 )
                                 
Other income (expense)
                               
  Gain on debt conversion
    -       -       -       15,220  
  Change in fair value of derivatives
    -       15,096       4,217       37,750  
  Interest expense
    (31,101 )     (30,266 )     (91,409 )     (129,442 )
Net loss
    (115,553 )     (146,775 )     (495,223 )     (511,516 )
  Preferred stock dividend
    (8,097 )     (8,097 )     (24,293 )     (22,753 )
Net loss applicable to common shareholders
  $ (123,650 )   $ (154,872 )   $ (519,516 )   $ (534,269 )
                                 
Basic and diluted net  loss per share
  $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.01 )
                                 
Weighted average shares outstanding – basic and diluted
    73,377,059       73,554,897       73,494,966       73,304,993  

See accompanying notes to financial statements.

 
4

 

Amarillo Biosciences, Inc.
Debtor and Debtor in Possession
Condensed Statements of Cash Flows
(Unaudited)

 
Nine months ended September 30,
 
2013
 
2012
       
Net cash used in operating activities
$
(474,912
)
 
$
(384,027
)
               
Cash from investing activities:
             
   Patent expenditures
 
(14,079
)
   
(4,074
)
      Net cash used in investing activities
 
(14,079
)
   
(4,074
)
               
Cash from financing activities:
             
   Proceeds from issuance of note payable related party
 
573,835
     
445,584
 
   Payments on notes payable related party
 
(82,500
)
   
(10,000
)
   Payments on notes payable
 
-
     
(70,000
)
   Proceeds from sale of convertible preferred stock
    -      
20,000
 
   Purchase and cancellation of treasury stock
 
(500)
     
-
 
     Net cash provided by financing activities
 
490,835
     
385,584
 
               
Net change in cash
 
1,844
     
(2,517
)
Cash and cash equivalents at beginning of period
 
7,261
     
2,819
 
Cash and cash equivalents at end of period
$
9,105
   
$
302
 
Supplemental disclosure of cash flow information
             
   Cash paid for interest
$
3,669
   
$
4,654
 
   Cash paid for income taxes
$
-
   
$
-
 
Non-Cash Transactions
             
   Common stock issued for convertible debt
$
-
   
$
74,091
 
   Preferred stock issued for notes payable related party
      and accrued interest
$
-
   
$
110,300
 
   Preferred stock issued for accrued dividends and interest
$
  -    
$
23,578
 
   Reclassification of derivative liability to permanent equity
$
-
   
$
17,035
 
   Forgiveness of accrued salaries
$
-
   
$
278,259
 

See accompanying notes to financial statements.

 
5

 

Amarillo Biosciences, Inc.
Debtor and Debtor in Possession
Notes to Financial Statements
(Unaudited)

1.  
Basis of presentation. The accompanying financial statements, which should be read in conjunction with the financial statements and footnotes included in the Company's Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission, are unaudited, but have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013.

2.  
Financial Condition. Our viability as a company is dependent upon successful commercialization of products resulting from its research and product development activities. However, our inability to commercialize a product has had a profoundly negative impact on the financial condition of the Company.  On October 31, 2013 (the Petition Date), Amarillo Biosciences, Inc. (AMAR, ABI or the Company) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code), in the United States Bankruptcy Court for the Northern District of Texas (the Bankruptcy Court or the Court). The Chapter 11 Case number is 13-20393-11.

No assurance can be given as to the value, if any, that may be ascribed to the Debtor’s various pre-petition liabilities and other securities. The Company cannot predict what the ultimate value of any of its securities may be and it remains too early to determine whether holders of any such securities will receive any distribution in the Debtor’s reorganization. In particular, in most cases under Chapter 11 of the Bankruptcy Code, holders of equity securities receive little or no recovery of value from their investment. Accordingly, the Debtors urge that caution be exercised with respect to existing and future investments in any of these securities or other Debtor claims. On November 4, 2013, the Company’s common stock began trading under the symbol “AMARQ” on the OTCQB marketplace, operated by OTC Markets Group (www.otcmarkets.com).

The Company is currently operating as “a debtor in possession” (DIP) under the jurisdiction of the Bankruptcy Court and the applicable provisions of the Bankruptcy Code. In general, a debtor in possession under the Bankruptcy Code, the Debtor is authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. The Bankruptcy Code enables the Company to continue to operate its business without interruption and the Bankruptcy Court will be asked to grant additional relief covering, among other things, obligations to (i) employees, (ii) taxing authorities, (iii) insurance providers, and (vi) certain vendors deemed critical to the Debtor’s operations.


 
6

 

Under Section 362 of the Bankruptcy Code, the commencement of a Chapter 11 case automatically stays most creditor actions against the Debtor’s property.

Court filings and claims information are available at http://www.upshotservices.com/amarillobiosciences. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Chapter 11 Proceedings” for further information regarding the Chapter 11 Cases. Commercialization of a product or products will require significant development, laboratory and clinical testing and capital investment prior to obtaining regulatory approval to commercially market our product(s).  Continued losses and lack of liquidity indicate that we were having great difficulty being able to continue as a going concern. The ability to continue as a going concern is dependent upon confirmation of an executable Plan of Reorganization by the Court and approval of creditors. A major component of the plan is recapitalization of the Company.

3.
Common Stock.  The shareholders have authorized 100,000,000 shares of voting common shares for issuance.  On September 30, 2013, a total of 80,593,300 shares of common stock were either outstanding (73,291,008) or reserved for issuance upon exercise of options and warrants or conversion of convertible preferred stock (7,302,292).  No common stock was issued during the nine months ended September 30, 2013.

 
On July 12, 2013, ABI and PAN Consulting, Ltd. entered into and executed a Settlement Agreement and Release whereby ABI paid $5,500 in full and final settlement of any and all claims held or asserted by PAN Consulting, Ltd. and PAN Consulting, Ltd. agreed to endorse and deliver to ABI any and all stock certificates evidencing an aggregate of 263,889 shares of ABI common stock.  The terms of the agreement also included termination of the contract executed in 2006 by the parties.

4.
Common Stock Options and Warrants.  As of December 31, 2012 there remained 2,217,817 shares underlying our warrants related to our January 2008 financing arrangement that would have been available for future sale and the sale of these shares may have depressed the market price of our common stock.  In addition the warrants had an anti-dilution ratchet feature that could have caused the number of warrants to increase and the exercise price to decrease if we should have any non exempt stock, option or warrant issuances at less than the $0.0202 per share. The aforementioned warrants expired unexercised and worthless at the close of business on January 8, 2013. In accordance with the terms of the individual agreements, 2,137,000 warrants expired during the nine months ended September 30, 2013.

A summary of the Company’s stock option activity and related information for the nine months ended September 30, 2013 is as follows:

   
Options
   
Price Range
 
Outstanding December 31, 2012
    1,852,792     $ 0.040-0.125  
Granted
    -       -  
Cancelled/Expired
    (100,000 )     0.075  
Exercised
    -       -  
Outstanding September 30, 2013
    1,752,792       0.040-0.125  
Exercisable September 30, 2013
    1,752,792     $ 0.040-0.125  


 
7

 

A summary of the Company’s stock warrant activity and related information for the nine months ended September 30, 2013 is as follows:

   
Warrants
   
Price Range
 
Outstanding December 31, 2012
    6,642,317     $ 0.0202-0.10  
Granted
    -       -  
Cancelled/Expired
    (4,354,817 )     0.0202-0.10  
Exercised
    -       -  
Outstanding September 30, 2013
    2,287,500       0.03-0.04  
Exercisable September 30, 2013
    2,287,500     $ 0.03-0.04  

5.
Convertible Preferred Stock.  The shareholders have authorized 10,000,000 shares of preferred stock shares for issuance. The Board of directors authorized the issuance of up to 10,000 shares of Series 2010-A 10% Convertible Preferred Stock on July 29, 2010.  Each preferred share is convertible into 1,000 common shares ($100 stated value per share divided by $0.10).  Dividends are payable quarterly at 10% per annum in cash or stock at the option of the preferred stock holder.  Stock dividend payments are valued at the higher of $0.10 per share of common stock or the average of the two highest volume weighted average closing prices for the 5 consecutive trading days ending on the trading day that is immediately prior to the dividend payment date.

 
There has been no Series 2010-A 10% Convertible Preferred Stock issued in the first nine months of 2013.
 
 
The Company accrued $24,293 of dividends on preferred stock during the first nine months of 2013.

6.
Notes Payable – Related Party.  Two $1,000,000 notes are payable under an unsecured loan agreement with Hayashibara Biochemical Laboratories, Inc. (“HBL”), a major stockholder, dated July 22, 1999.  Although we are currently in repayment default on the notes, HBL has not demanded payment.

 
On January 10, 2011 a promissory note for the $200,000 was executed with Paul Tibbits, a director, which includes interest at 10% per annum, with no stated maturity date, and no collateral. As of September 30, 2013 this note is still outstanding.

The Company executed a note payable for $100,000, in exchange for accrued salaries of Martin Cummins through October 31, 2012, during the prior year ended December 31, 2012. The Company repaid $82,500 towards the outstanding note payable.  The remaining principal balance is due in monthly payments of $8,500 through November 2013 and one final payment due in December 2013.  The note carries no stated interest rate, and a default interest rate of 10%, and is unsecured. Although the term of the note ends with the last payment in December 2013, Martin Cummins’ employment contract expired on August 31, 2013.

Stephen Chen, ABI CEO, wired the Company money for working capital loans to be used for operations; total cash received through Dr. Chen for 2012 was $547,958.  During 2013 through July 19, 2013, cash received through Dr. Chen was $428,835.  The advances were short term, without due dates, and carry no stated interest rates or any other terms.

 
8

 


On July 19, 2013, the unsecured funds advanced through Dr. Chen ($976,793), were reduced to a promissory note made payable by Amarillo Biosciences, Inc. to the Yang Group, The note was a demand note with no certain due date with an annual interest rate of 23/100 of one percent (.23%) due on unpaid principal from the date of funding. The interest rate was based on the Applicable Federal Rate (AFR) in force for the month in which the note was executed. The note carried a 10% annual interest rate on material, unpaid amounts. There was no penalty for prepayment of outstanding amounts.

On July 25, 2013, the Yang Group began advancing funds under a new promissory note which is secured by substantially all of the assets of the Company. The note is a revolving/advancing note for $300,000 or so much thereof as may from time to time have been advanced. The annual interest rate as to each advance thereunder, is at the short term Applicable Federal Rate (AFR) determined under Section 1274(d) of the Internal Revenue Code of 1986, for the month in which such advance was received. As of September 30, 2013, $145,000 was advanced under the secured note.

7.  
Line of Credit.  We have a line of credit with Wells Fargo for $20,000, with an interest rate of prime rate plus 6.75 percent.  There was an outstanding balance on September 30, 2013 of $18,677 which is included in accounts payable and accrued expenses. The Company filed the Chapter 11 petition on October 31, 2013 at which time the outstanding balance was $18,519.

8.  
Subsequent Events. Subsequent to September 30, 2013 through November 1, 2013, $142,000 has been received from the Yang Group, pursuant to the arrangements described in footnote 6.

For some time, the Company has been researching and contemplating structural changes.  After significant research and serious consideration, the Company filed a voluntary petition for reorganization under Chapter 11 of Title XI of the U.S. Code on October 31, 2013.

ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our financial statements and the notes thereto which appear elsewhere in this report.  The results shown herein are not necessarily indicative of the results to be expected in any future periods.  This discussion contains forward-looking statements based on current expectations, which involve uncertainties.  Actual results and the timing of events could differ materially from the forward-looking statements as a result of a number of factors.  Readers should also carefully review factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission.

Company Goal – FDA Approval and Commercialization of Oral Interferon
Amarillo Biosciences, Inc. (OTCQB: AMARQ) is a leader in the development of low-dose interferon for oral delivery, having completed more than 100 pre-clinical (animal) and human studies related to this technology to date.  Our funding strategy is to seek private placement and pharma partner funding to complete Phase 2 clinical studies, and then to find large pharma partners to fund Phase 3 clinical studies and assist with the regulatory approval process in the United States and Europe.

 
9

 

Intellectual Property
Our portfolio consists of patents with claims that encompass method of use or treatment with interferon and composition of matter and manufacturing.  We currently own or license five patents related to low-dose orally delivered interferon, and one issued patent on our dietary supplement, Maxisal®.

Technology - Non-toxic Interferon
Injectable interferon is FDA-approved to treat some neoplastic, viral and autoimmune diseases.  Many patients experience moderate to severe side effects that result in discontinuance of injectable interferon therapy. Our main product is a natural human interferon alpha delivered into the oral cavity as a lozenge in low (nanogram) doses. The lozenge dissolves in the mouth where interferon binds to surface (mucosal) cells in the mouth and throat resulting in stimulation of immune mechanisms.  Orally delivered interferon has been shown to activate hundreds of immune system genes in the peripheral blood.  Human studies have shown that oral interferon is safe and effective against viral and autoimmune diseases. Oral interferon is given in concentrations 10,000 times less than that usually given by injection. The Company’s low dose formulation results in almost no side effects; high dose injectable interferon causes adverse effects in at least 50% of recipients.

Governmental or FDA approval is required for our principal product.  Our progress toward approval is discussed under each specific indication, below.

Influenza
Influenza, commonly referred to as “the flu,” is an infectious disease caused by RNA viruses of the family Orthomyxoviridae, which affects birds and mammals. The most common symptoms of the disease are chills, fever, sore throat, muscle pains, severe headache, coughing, weakness/fatigue and general discomfort. Influenza spreads around the world in seasonal epidemics, resulting in the deaths of between 250,000 and 500,000 people every year, and up to millions in some pandemic years. On average 41,400 people died each year in the United States between 1979 and 2001 from influenza. Two publications in the April 2009 issue of the Journal of Virology report that interferon placed in the nose of guinea pigs or ferrets significantly suppresses replication of influenza virus.  These publications reinforce the Company’s view that low-dose interferon is protective against influenza.

Further support of the efficacy of oral interferon against influenza was generated by The University of Western Australia in a Phase 2 clinical trial with 200 healthy volunteers during the 2009 winter cold/flu season in Australia.  Among those study participants who were confirmed to have a respiratory infection, 76.2% of the placebo group reported moderate to severe cold and flu symptoms, compared to only 23.8% of the participants in the interferon-alpha group (p<0.01). This finding indicates that, while it did not reduce the infection rate, daily use of interferon-alpha lozenges did significantly reduce the frequency of moderate to severe viral respiratory illness. Full study results have been accepted for publication in an upcoming issue of the journal, Influenza and Other Respiratory Viruses.

In January 2011, the Company along with its international development partner CytoPharm, Inc.  (CP) launched an influenza treatment study in Taiwan with the target of enrolling up to 60 patients being treated with Tamiflu for influenza A infection of less than 48 hours’ duration. Half of the enrolled flu patients were randomly assigned to co-treatment with oral IFN or placebo. The aim of the study was to examine whether the combination of oral IFN and Tamiflu is superior to Tamiflu alone in the treatment of influenza illness. Results are expected in the near future.

 
10

 


Hepatitis C
Hepatitis C is an infectious disease affecting primarily the liver, caused by the hepatitis C virus (HCV). The infection is often asymptomatic, but chronic infection can lead to scarring of the liver and ultimately to cirrhosis. In some cases, those with cirrhosis will go on to develop liver failure, liver cancer or life-threatening esophageal and gastric varices. HCV is spread primarily by blood-to-blood contact associated with intravenous drug use, poorly sterilized medical equipment and transfusions. An estimated 130–170 million people worldwide are infected with hepatitis C.

ABI and CP conducted a Phase 2 study of oral interferon treatment of hepatitis C virus-infected patients which was completed in Taiwan in late 2011.  The study explored the ability of oral interferon to reduce virologic relapse in patients who have completed standard therapy with pegylated interferon plus Ribavirin.  Up to 50% of patients with certain genotypes of HCV relapse after receiving standard therapy, so reducing this relapse rate would have represented a major breakthrough in the management of HCV. The results of the study indicate that, although the primary endpoint was not achieved, subjects with mild liver fibrosis, as suggested by low FibroIndex scores at study entry, had a reduced rate of relapse (12%) when treated once daily with oral interferon-alpha lozenges compared to subjects in the placebo group (32%).

It was noted that 60% of the study subjects had a low platelet count (thrombocytopenia) at baseline. This was likely due to the high-dose injectable interferon-alpha treatment they received immediately prior to study entry. Interestingly, it was observed that subjects treated once per day with orally administered interferon-alpha had nearly twice the rate of platelet count normalization (81%) as subjects given placebo (42%), which was statistically significant at P=0.005. In order to confirm this effect prospectively in a larger group of HCV patients and to explore the application of oral IFNa to other indications involving thrombocytopenia, additional studies must be performed.  However, the loss of the source of human IFNa makes it impossible to conduct those studies.  The inability to find a source of IFNa and the difficulty in finding financing for the studies will indefinitely obstruct the forward progress of this discovery and have a very negative impact on the continuation of the Company as a going concern.

Strategic Alliance with Bumimedic
In January 2006, a license and distribution agreement was executed with Bumimedic (Malaysia) Sdn. Bhd, a Malaysian pharmaceutical company that is a part of the Antah HealthCare Group, to market our low-dose interferon (natural human IFN) in Malaysia.  Given the termination notice received from HBC, it is likely that the agreement with Bumimedic will be terminated as the Company can no longer supply Bumimedic with natural human IFN produced by Hayashibara.

Strategic Alliance with Intas Pharmaceuticals
On January 7, 2010, the Company entered into a License and Supply Agreement with Intas Pharmaceuticals Ltd., an India-based pharmaceutical company with three decades of experience in the healthcare industry and a global presence in 42 countries worldwide. Given the termination notice received from HBC, it is likely that the agreement with Intas will be terminated as the Company can no longer supply Intas with natural human IFN produced by Hayashibara.

Strategic Alliance with CytoPharm

On May 15, 2013, the Company entered into a CIT Patents Agreement with CytoPharm, Inc. (CP) a former licensee for oral IFN technology in Taiwan and China. This agreement establishes the

 
11

 

ownership, inventorship, prosecution, maintenance, use and commercialization of a patent regarding treatment of thrombocytopenia with oral IFN that developed out of a study conducted by CP under a previous License and Supply Agreement.

Equity Funding.  There have been no sales of stock in the first nine months of 2013.

Results of Operations for Quarter Ended September 30, 2013 and 2012:

Revenues.  During the quarter ended September 30, 2013, there were no dietary supplement sales generated compared to $50 for the quarter ended September 30, 2012, a decrease of $50 (100%).  During the quarters ended September 30, 2013 and September 30, 2012, no ACM sales were generated.

Research and Development Expenses. Research and development expenses of $33,659 were incurred for the quarter ended September 30, 2013, compared to $70,809 for the quarter ended September 30, 2012, a decrease of $37,150 (52%).  The amount was lower in 2013 than 2012 due to less research and development personnel costs.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses of $50,793 were incurred for the third quarter in 2013, compared to $60,826 for the third quarter of 2012, a decrease of $10,033 (16%).  This decrease was mostly due to lower personnel costs and reduced professional fees.

Changes in Fair Value of Derivative Instruments.  There was no derivative gain for the third quarter ended September 30, 2013 because the underlying securities (warrants) expired unexercised and worthless at the close of business on January 8, 2013.  The underlying securities were the warrants owned by Warrant Strategies, Inc. which originally were part of the Firebird transaction of 2008.  There are no more securities in existence from that transaction.  For the third quarter of 2013, the net derivative gain/loss was $0 compared to $15,096 decrease for the same period in 2012 which represents a net decrease of $15,096 (100%). 

Operating Loss.  In the three month period ended September 30, 2013, the Company's operating loss was $84,452 compared to an operating loss for the three month period ended September, 2012 of $131,605, a decrease of $47,153 (36%).  The operating loss was lower mostly because of decreased salaries in 2013.

Other Income.  During the three month period ended September 30, 2013 and September 30, 2012, no interest or miscellaneous income was generated. Interest expense for the period was $31,101 as compared to $30,266 for the previous year, an increase of $835.

Net Loss. In the three month period ended September 30, 2013, the Company's net loss was $115,553 compared to net loss of $146,775 for the three month period ended September 30, 2012, a $31,222 (21%) decrease in net loss.

Results of Operations for the Nine Months Ended September 30, 2013 and September 30, 2012.

Revenues.  During the nine months ended September 30, 2013 there were no sales of dietary supplements compared to $530 for the nine months ended September 30, 2012, a decrease of $530 (100%).  During the nine months ended September 30, 2013, and September 30, 2012 there were no ACM sales.

 
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Research and Development Expenses. Research and development expenses of $105,450 were incurred for the nine month period ended September 30, 2013, compared to $243,748 for the nine month period ended September 30, 2012, a decrease of $138,298 (57%).  The amount was lower in 2013 than 2012 due to less R&D personnel costs.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses of $302,581 were incurred for the first nine months of 2013, compared to $191,614 for the first nine months of 2012, an increase of $110,967 (58%).  This increase was mostly due to higher travel expenses, D&O insurance, consultant expense, legal and patent expenditures, and professional fees.

Operating Loss.  In the nine month period ended September 30, 2013, the Company's operating loss was $408,031 compared to an operating loss for the nine month period ended September 30, 2012 of $435,044, a decrease of $27,013 (6%).

Change in Fair Value of Derivative Instruments.  Change in fair value of derivative instruments was realized as a $4,217 gain in the nine months ended September 30, 2013 compared to $37,750 gain in the nine months ended September 30, 2012 which represents a net decrease of $33,533 (89%).

Interest Expense.  During the nine month period ended September 30, 2013, interest expense was $91,409; compared to $129,442 for the nine month period ended September 30, 2012.   In 2012 we incurred interest on Tibbits’ notes payable and interest on unpaid dividends for 2012 through February 8, 2012, when outstanding notes were converted to shares of preferred stock. There was a significant interest expense attributed to the convertible Asher/Hope note #2 in 2012, where there was no such expense in 2013.

Net Loss. In the nine months ended September 30, 2013, the Company's net loss was $495,223 compared to a net loss for the nine months ended September 30, 2012 of $511,516 a $16,293 (3%) decrease.

Liquidity Needs. At September 30, 2013, we had available cash of $9,105, and had a working capital deficit of $4,743,464. Negative cash flow from operating activities plus equipment purchases, software purchases and patent filings (burn rate) is approximately $50,000 per month.  Continued losses and lack of liquidity indicate that we are having great difficulty being able to continue as a going concern for a reasonable period of time. The ability to continue as a going concern is dependent upon confirmation of a Plan of Reorganization and successful emergence from Chapter 11 Bankruptcy which includes interim and permanent financing.

There can be no assurance that we will be successful in our efforts to reorganize the Company.  If we are not successful in our efforts to reorganize, we will be forced to cease operations.

Forward-Looking Statements: Certain statements made in throughout this document are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance, achievements, costs or expenses and may contain words such as "believe," "anticipate," "expect," "estimate," "project," "budget," or words or phrases of similar meaning.  Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those projected in the forward-looking statements.  Such risks and uncertainties are detailed from time to time in reports filed by the Company with the Securities and Exchange Commission, including Forms 8-K, 10-Q and 10-K and include among
 
 
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others the following: promulgation and implementation of regulations by the U.S. Food and Drug Administration ("FDA"); promulgation and implementation of regulations by foreign governmental instrumentalities with functions similar to those of the FDA; costs of research and development and clinical trials, including without limitation, costs of clinical supplies, packaging and inserts, patient recruitment, trial monitoring, trial evaluation and publication; and possible difficulties in enrolling a sufficient number of qualified patients for certain clinical trials.  The Company is also dependent upon a broad range of general economic and financial risks, such as possible increases in the costs of employing and/or retaining qualified personnel and consultants and possible inflation which might affect the Company's ability to remain within its budget forecasts. The principal uncertainties to which the Company is presently subject are its inability to ensure that the results of trials performed by the Company will be sufficiently favorable to ensure eventual regulatory approval for commercial sales, its inability to accurately budget at this time the possible costs associated with hiring and retaining of additional personnel, uncertainties regarding the terms and timing of one or more commercial partner agreements and its ability to continue as a going concern.

The risks cited here are not exhaustive. Other sections of this report may include additional factors which could adversely impact the Company's business and future operations. Moreover, the Company is engaged in a very competitive and rapidly changing industry.

New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company's business, or the extent to which any factor or combination of factors may cause actual results to differ materially from those projected in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual future events.

ITEM 3.                      Quantitative and Qualitative Disclosures About Market Risk.

Chapter 11 Reorganization Risks.
We filed for reorganization under Chapter 11 of the Bankruptcy Code on October 31, 2013 and are subject to the risks and uncertainties associated with the Chapter 11 Cases.

For the duration of our Chapter 11 Cases, our operations, including our ability to execute our business plan, are subject to the risks and uncertainties associated with bankruptcy. Risks and uncertainties associated with our Chapter 11 Cases include the following:
 
 
our creditors or other third parties may take actions or make decisions that are inconsistent with and detrimental to the plans we believe to be in the best interests of the Company;

 
we may be unable to obtain court approval with respect to certain matters in the Chapter 11 Cases from time to time;

 
the court may not agree with our objections to positions taken by other parties;

 
we may not be able to confirm and consummate a Chapter 11 plan of reorganization or may be delayed in doing so;


 
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we may not be able to obtain and maintain normal credit terms with vendors, strategic partners and service providers;

 
we may not be able to continue to invest in our products and services, which could hurt our competitiveness;

 
we may not be able to enter into or maintain contracts that are critical to our operations at competitive rates and terms, if at all;

 
we may be exposed to risks associated with third parties seeking and obtaining court approval to (i) terminate or shorten our exclusivity period to propose and confirm a plan of reorganization, (ii) appoint a Chapter 11 trustee or (iii) convert the cases to Chapter 7 liquidation cases; and

These risks and uncertainties could affect our business and operations in various ways. For example, negative events, the positions we take in court, or publicity associated with our Chapter 11 Case could adversely affect our relationships with vendors and partners which in turn could adversely affect our operations and financial condition, particularly if the Chapter 11 Case is protracted. Because of the risks and uncertainties associated with our Chapter 11 Case, the ultimate impact of events that occur during these proceedings will have on our business, financial condition and results of operations cannot be accurately predicted or quantified. If any one or more of these risks materializes, it could affect our ability to continue as a going concern.

Operating under Chapter 11 may restrict our ability to pursue our business strategies.

Under Chapter 11, transactions outside the ordinary course of business will be subject to the prior approval of the Bankruptcy Court, which may limit our ability to respond in a timely manner to certain events or take advantage of certain opportunities. We must obtain Bankruptcy Court approval to, among other things:
 
 
engage in certain transactions with our vendors;

 
buy or sell assets outside the ordinary course of business;

 
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

 
borrow for our operations, investments or other capital needs or to engage in other business activities that would be in our interest.

We may not be able to adequately protect and maintain our intellectual property.  Our success will depend in part on our ability to protect and maintain our patents, intellectual property rights and licensing arrangements for our products and technology.  We currently own or license five patents related to orally-delivered low dose interferon, and one issued patent on our dietary supplement, Maxisal®.  No assurance can be given that such licenses or rights used by us will not be challenged, infringed or circumvented or that the rights granted thereunder will provide competitive advantages to us. Furthermore, there can be no assurance that we will be able to remain in compliance with our existing or future licensing arrangements. Consequently, there may be a risk that licensing arrangements are withdrawn with no penalties to the licensee or compensation to us.

 
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We rely on third parties for the supply, manufacture and distribution of our products.  Third parties manufacture and distribute all of our products. Our reliance on third parties such as HBL (HBC) has left us without a source of natural human interferon which seriously jeopardizes our ability to leverage our core technology.  The Company has been forced to diligently search for a new supply of interferon. Developing a new source of interferon will be very costly and time consuming which will have a profoundly negative impact on the Company’s continuing operations. We do not currently have manufacturing facilities or personnel to independently manufacture our products; therefore, third parties would have to manufacture and distribute all of our products.  Licensed distributors located in the United States and internationally, would be required to distribute the products.  Except for any contractual rights and remedies that we might have with potential manufacturers and distributors, we would have no control over the availability of our products, their quality or cost or the actual distribution of our products. If for any reason we were unable to obtain or retain third-party manufacturers and distributors on commercially acceptable terms, we would not be able to produce and distribute our products as planned.  If delays or difficulties were encountered with contract manufacturers in producing or packaging products or with a distributor in distributing our products, the production, distribution, marketing and subsequent sales of these products would be adversely affected, and we would then have to seek alternative sources of supply or distribution or abandon or sell product lines on unsatisfactory terms or even discontinue sales entirely. We may not be able to enter into alternative supply, production or distribution arrangements on commercially acceptable terms, if at all. There can be no assurance that the manufacturer that we have engaged will be able to provide sufficient quantities of these products or that the products supplied will meet with our specifications or that our distributor will be able to distribute our products in accordance with our requirements.

Sales revenue, sublicense fees and royalty income are currently nonexistent.  Historically, the Company’s primary focus has been to achieve FDA approval of oral interferon for one or more disease indications.  We do not expect any significant sales or royalty revenue in the next several years. We operate at a net loss and current liabilities exceed current assets by $4,743,464 as of September 30, 2013.  Most of the $4,786,454 of current liabilities includes the amount owed to HBL for $2 million in two notes plus $998,609 of accrued interest; $200,000 in loans plus $40,573 accrued interest owed to a Director, and $43,812 of accrued salaries and $1,139,292 notes payable owed to current and past officers.

We are dependent on certain key existing and future personnel.  Our ability to continue operations will depend, to a large degree, upon the efforts and abilities of our officers and key management employees such as Stephen T. Chen, President, Chairman and Chief Executive Officer, and Bernard Cohen, our Vice President and Chief Financial Officer. The loss of the services of one or more of our key employees would have a material adverse effect on our operations. We do not currently maintain key man life insurance on any of our key employees. In addition, as our business plan is implemented, we will need to recruit and retain additional management and key employees in virtually all phases of our operations. We cannot offer assurance that we will be able to successfully attract and retain key personnel. From time to time we contract consultants to advise on certain projects. Currently the Company has a consulting contract with Joseph M. Cummins, former President and Chief Operating Officer.

If we do not successfully develop, acquire or license new drugs we will not be able to continue operations.  We must invest substantial time, resources and capital in identifying and developing new drugs, dosage and delivery systems, either on our own or by acquiring and licensing such products from third parties. Our growth depends, in part, on our success in such process.  If we are

 
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unable to either develop new products on our own or acquire licenses for new products from third parties, our ability to grow revenues and market share will be adversely affected. In addition, we will not be able to recover our investment in the development of new drugs, given that projects may be interrupted, unsuccessful, not as profitable as initially contemplated or we were not be able to obtain necessary financing for such development. Similarly, there is no assurance that we can successfully secure such rights from third parties on an economically feasible basis.

Our competitors are much larger and more experienced than we are and, even if we complete the development of our drugs, we may not be able to successfully compete with them.  The pharmaceutical industry is highly competitive.  Our biologics and low-dose oral interferon alpha applications compete with high dose injectable interferon manufactured by Roche, InterMune, Serano, Biogen, Berlex and Hemispherx and others.  High dose injectable interferon has been widely accepted by the medical community for many years.  Companies who manufacture injectable interferon alpha applications are more established than we are and have far greater financial, technical, research and development, sales and marketing, administrative and other resources than we do.  Even if we successfully complete the development of our tests, we may not be able to compete effectively with these much larger companies and their more established products.

We have been the subject of a going concern opinion by our independent auditors who have raised substantial doubt as to our ability to continue as a going concern.  Our Independent Registered Public Accounting Firm has added an explanatory paragraph to their audit opinion issued in connection with our financial statements which states that our recurring losses from operations and the need to raise additional financing in order to execute our business plan raise substantial doubt about our ability to continue as a going concern.  We incurred a net loss of $495,223 for the nine months ended September 30, 2013 and a net loss of $511,516 for the nine months ended September 30, 2012.  The operating loss for the nine months ended September 30, 2013 was $408,031.  In addition, as of September 30, 2013 we had an accumulated deficit of $37,348,770. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustment that might result from the outcome of this uncertainty. Assurances cannot be given that adequate financing can be obtained to meet our capital needs. We have already significantly curtailed operations, and if we are not successful in our efforts to reorganize the Company, we will be forced to cease operations.

Risks Related to our Common Stock.  There is only a limited market for our common stock and the price of our common stock may be affected by factors that are unrelated to the performance of our business.  If any of the risks described in these Risk Factors or other unseen risks are realized, the market price of our common stock could be materially adversely affected.  Additionally, market prices for securities of biotechnology and diagnostic companies have historically been very volatile.  The market for these securities has from time to time experienced significant price and volume fluctuations for reasons that are unrelated to the operating performance of any one company.  In particular, and in addition to the other risks described elsewhere in these Risk Factors, the following factors can adversely affect the market price of our common stock:

 
·
announcements of technological innovation or improved or new diagnostic products by others;
 
·
general market conditions;
 
·
changes in government regulation or patent decisions;
 
·
changes in insurance reimbursement practices or policies for diagnostic products.

 
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Our common shares have traded on the Over the Counter Bulletin Board at prices below $5.00 for several years. As a result, our shares are characterized as “penny stocks” which could adversely affect the market liquidity of our common stock.  The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. Securities and Exchange Commission regulations generally define a penny stock to be an equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on NASDAQ or a national securities exchange and any equity security issued by an issuer that has:
 
 
·
net tangible assets in excess of $2,000,000, if such issuer has been in continuous operation for three years;
 
·
net tangible assets in excess of $5,000,000, if such issuer has been in continuous operation for less than three years; or
 
·
average revenue of at least $6,000,000, for the last three years.
 
Unless an exception is available, the regulations require, prior to any transaction involving a penny stock that a disclosure schedule explaining the penny stock market and the risks associated therewith is delivered to a prospective purchaser of the penny stock. We currently do not qualify for an exception, and, therefore, our common stock is considered to be penny stock and is subject to these requirements.  The penny stock regulations adversely affect the market liquidity of our common shares by limiting the ability of broker/dealers to trade the shares and the ability of purchasers of our common shares to sell in the secondary market.  In addition, certain institutions and investors will not invest in penny stocks.

There were no restricted shares of our common stock issued during the nine months ended September 30, 2013. The number of shares of restricted stock issued prior to September 1, 2012 that has been held for at least nine months and hasn’t had the legends removed to become freely tradable under Rule 144 or 144(k) is not known.

ITEM 4.                      Controls and Procedures
 
As required by Rule 13a-15 under the Exchange Act, we have carried out an evaluation of the effectiveness of the design and operation of our company’s disclosure controls and procedures as of the end of the period covered by this quarterly report, being September 30, 2013. This evaluation was carried out under the supervision and with the participation of our company’s management, including our company’s chairman of the board and chief executive officer, Dr. Stephen T. Chen and chief financial officer, Bernard Cohen. Our company’s disclosure controls and procedures are effective as at the end of the period covered by this report. There have been no significant changes in our company’s internal controls or in other factors, which could significantly affect internal controls subsequent to the date we carried out our evaluation.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Exchange Act is accumulated and communicated to management, including our company’s president and chief executive officer as appropriate, to allow timely decisions regarding required disclosure.

There have been no changes in internal controls over financial reporting during 2013.

 
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PART II - OTHER INFORMATION

ITEM 1.                      Legal Proceeding.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. As of the date of this report, we were not aware of any such legal proceedings or claims against us.

ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
In the nine months ended September 30, 2013, there were no sales of stock.

ITEM 3.
Defaults Upon Senior Securities.
 
None, other than set forth in Note 6 to Financial Statements, “Notes Payable”, under Part I, Item 1, above, regarding non-payment of the HBL Notes.

ITEM 4.
Mine Safety Disclosures.
Not applicable

ITEM.5.
Other Information.
None

ITEM 6.
Exhibits.
 
None


 
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SIGNATURES
 
Pursuant to the requirements of Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
   AMARILLO BIOSCIENCES, INC.
 
 
Date:   November 13, 2013
 
   By:   /s/ Stephen Chen
Stephen Chen, Chairman of the Board,
and Chief Executive Officer
 
Date:   November 13, 2013
 
   By:   /s/ Bernard Cohen
Bernard Cohen, Vice President,
Chief Financial Officer

 
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