Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Ainos, Inc.Financial_Report.xls
EX-32.1 - EXHIBIT 32-1 3-31-2013 - Ainos, Inc.exhibit32-1_03312013.htm
EX-31.1B - EXHIBIT 31-1B 3-31-2013 - Ainos, Inc.exhibit31-1b_03312013.htm
EX-31.1A - EXHIBIT 31-1A 3-31-2013 - Ainos, Inc.exhibit31-1a_03312013.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 March 31, 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 May 13, 2013 there were 73,554,897 shares of the issuer's common stock and 3,262 shares of the issuer’s preferred stock outstanding.


 
1

 

AMARILLO BIOSCIENCES, INC.

INDEX
   
PAGE NO.
PART I:
FINANCIAL INFORMATION
 
 
ITEM 1.
 
Financial Statements
 
 
Balance Sheets– March 31, 2013  (unaudited) and December 31, 2012
 
3
 
Statements of Operations – Three Months Ended March 31, 2013 and 2012 (unaudited)
 
4
 
Condensed Statements of Cash Flows – Three Months Ended March 31, 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
 
8
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk.
 
13
ITEM 4.
Controls and Procedures
                                                                                              
16
     
PART II:
OTHER INFORMATION
 
 
ITEM 1.
Legal Proceedings
 
16
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceed
 
16
ITEM 3.
Defaults Upon Senior Securities 
 
17
ITEM 4.
Mine Safety Disclosures
 
17
ITEM 5.
Other Information
 
17
ITEM 6.
Exhibits……………………………………………………………
 
17
 
Signatures
 
 
18


 
2

 
 
PART I - FINANCIAL INFORMATION

 
ITEM 1.
Financial Statements
Amarillo Biosciences, Inc.
Balance Sheets

 
March 31,
2013
 
December 31,
2012
Assets
  (unaudited)    
Current assets:
     
   Cash and cash equivalents
$
7,355
   
$
7,261
 
   Prepaid expense and other current assets
 
2,361
     
13,674
 
Total current assets
 
9,716
     
20,935
 
Patents, net
 
90,336
     
94,100
 
Total assets
$
100,052
   
$
115,035
 
               
Liabilities and Stockholders' Deficit
             
Current liabilities:
             
   Accounts payable and accrued expenses
$
337,326
   
$
360,353
 
   Accrued interest - related parties
 
980,023
     
951,442
 
   Accrued expenses – related party
 
78,360
     
78,360
 
   Derivative liabilities
 
-
     
4,217
 
   Notes payable – related parties
 
3,026,293
     
2,847,958
 
Total current liabilities
 
4,422,002
     
4,242,330
 
Total liabilities
 
4,422,002
     
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 March  31, 2013 and December 31, 2012
 
33
     
33
 
   Common stock, $0.01par value:
             
      Authorized shares - 100,000,000
             
Issued and outstanding shares – 73,554,897 at March 31, 2013 and 73,554,897 at December 31, 2012
 
735,549
     
735,549
 
   Additional paid-in capital
 
31,966,377
     
31,966,377
 
   Accumulated deficit
 
(37,023,909
)
   
(36,829,254
)
Total stockholders' deficit
 
(4,321,950
)
   
(4,127,295
)
Total liabilities and stockholders’ deficit
$
100,052
   
$
115,035
 
See accompanying notes to financial statements.

 
3

 

Amarillo Biosciences, Inc.
Statements of Operations
(Unaudited)

 
Three months ended
March 31,
   
2013
     
2012
 
Revenues:
             
  Product sales
$
-
   
$
240
 
     Total revenues
 
-
     
240
 
               
Cost of revenues:
             
  Product sales
 
-
     
96
 
      Total cost of revenues
 
-
     
96
 
Gross margin
 
-
     
144
 
               
Operating expenses:
             
  Research and development expenses
 
34,129
     
84,189
 
  Selling, general and administrative expenses
 
127,162
     
73,998
 
     Total operating expenses
 
161,291
     
158,187
 
               
Operating loss
 
(161,291
)
   
(158,043
)
               
Other income (expense):
             
  Gain on debt conversion
 
-
     
15,220
 
  Change in fair value of derivatives
 
4,217
     
(23,631
)
  Interest expense
 
(29,483
)
   
(69,660
)
Net loss
 
(186,557
)
   
(236,114
)
               
Preferred stock dividend
 
(8,098
)
   
(6,558
)
Net loss applicable to common shareholders
$
(194,655
)
 
$
(242,672
)
               
Basic and diluted net loss per average share available to common shareholders
$
(0.00
)
 
$
(0.00
)
               
Weighted average common shares outstanding – basic and diluted
 
73,554,897
     
72,802,438
 

See accompanying notes to financial statements.

 
4

 

Amarillo Biosciences, Inc.
Condensed Statements of Cash Flows
(Unaudited)

 
Three months ended March 31,
 
2013
 
2012
       
Net cash used in operating activities
$
(178,030
)
 
$
(112,297
)
               
Cash flows from investing activities:
             
   Investment in patents
 
(211
)
   
-
 
      Net cash used in investing activities
 
(211
)
   
-
 
               
Cash flows from financing activities:
             
   Proceeds from  notes payable related party
 
198,335
     
192,000
 
   Payments on notes payable related party
 
(20,000)
     
(10,000
)
   Payments on notes payable
 
-
     
(70,000
)
   Proceeds from sale of convertible preferred stock
 
-
     
20,000
 
     Net cash provided by financing activities
 
178,335
     
132,000
 
               
Net change in cash
 
94
     
19,703
 
Cash and cash equivalents at beginning of period
 
7,261
     
2,819
 
Cash and cash equivalents at end of period
$
7,355
   
$
22,522
 
Supplemental disclosure of cash flow information
             
   Cash paid for interest
$
619
   
$
27
 
   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
 

See accompanying notes to financial statements.

 
5

 

Amarillo Biosciences, Inc.
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 months ended March 31, 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. We plan on working with commercial development partners in the United States and in other parts of the world to provide the necessary sales, marketing and distribution infrastructure to successfully commercialize the interferon alpha product for both human and animal applications.  Our products will require significant additional development, laboratory and clinical testing and investment prior to obtaining regulatory approval to commercially market our product(s). Accordingly, for at least the next few years, we will continue to incur research and development and general and administrative expenses and may not generate sufficient revenues from product sales or license fees to support its operations.

 
The Company continues to pursue a broad range of financing alternatives to improve its financial condition. These alternatives may include the sale or issuance of a substantial amount of common stock, common stock warrants or stock options. These financing alternatives could require an increase in the number of authorized shares of the Company’s common stock and result in significant dilution to existing shareholders and, possibly, a change of control of the Company.

3.
Common Stock.  The shareholders have authorized 100,000,000 shares of voting common shares for issuance.  On March 31, 2013, a total of 81,934,189 shares of common stock were either outstanding (73,554,897) or reserved for issuance upon exercise of options and warrants or conversion of convertible preferred stock (8,379,292).  No common stock was issued in the first quarter of 2013.

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 depress the market price of our common stock.  In addition the warrants have an anti-dilution ratchet feature that could cause 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.

 
6

 
A summary of the Company’s stock option activity and related information for the period ended March 31, 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 March 31, 2013
    1,752,792       0.040-0.125  
Exercisable March 31, 2013
    1,752,792     $ 0.040-0.125  
 
A summary of the Company’s stock warrant activity and related information for the period ended March 31, 2013
 
   
Warrants
   
Price Range
 
Outstanding December 31, 2012
    6,642,317     $ 0.0202-0.10  
Granted
    -       -  
Cancelled/Expired
    3,277,817       0.0202-0.10  
Exercised
    -       -  
Outstanding March 31, 2013
    3,364,500       0.03-0.10  
Exercisable March 31, 2012
    3,364,500     $ 0.03-0.10  

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 was no Series 2010-A 10% Convertible Preferred Stock issued in the first quarter of 2013.
 
 
The Company accrued $8,098 of dividends on preferred stock during the first quarter 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 March 31, 2013 this note is still outstanding.

The Company executed a note payable for $100,000, in exchange for accrued salaries through October 31, 2012, during the prior year ended December 31, 2012.  During the current period, the Company repaid $20,000 towards the outstanding note payable and $20,000 in April 2013.  The remaining principal balance is due in monthly payments of $8,500 starting May through November 2013 and one final payment of $500 due in December 2013.  The note carries no stated interest rate, a default interest rate of 10%, and is unsecured.

 
7

 


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 the first quarter of 2013 cash received through Dr. Chen was $198,335.  The working capital loans are short term, without due dates, and carry no stated interest rates or any other terms.

The Company is currently investigating the possibility of structural changes.  The Company has received funds to support operations during the period of investigation under an interim agreement executed by the Company and the Yang Group of Taoyuan, Taiwan.  During this interim period while the final agreement is being negotiated, the funds discussed above are being advanced to Dr. Stephen Chen, ABI CEO.  Dr. Chen then advances the funds to the Company at his discretion.  The Agreement executed by the parties contemplates the execution of comprehensive transaction documents by the Company and one or more Yang Group affiliated entities, upon the completion of ongoing negotiations.  Additional amounts received by the Company under these arrangements are discussed in footnote 8, below.

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 March 31, 2013 of $19,581 which is included in accounts payable and accrued expenses.

8.  
Subsequent Events.  From April 1, 2013 to May 3, 2013, $120,000 has been received from Stephen Chen, ABI CEO, pursuant to the arrangements described in footnote 6. This is a working capital loan to be used for operations.  The working capital loan is short term, without a due date, and carries no stated interest rate or any other terms.

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. (OTCBB: AMAR) 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.

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®.

 
8

 


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, an influenza treatment study was launched 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 will be randomly assigned to co-treatment with oral IFN or placebo. The aim of the study is 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 first half of 2013.

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.

 
9

 


A Phase 2 study of oral interferon treatment of hepatitis C virus-infected patients 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. Follow-up studies are being planned, both to confirm this effect prospectively in a larger group of HCV patients and to explore whether oral interferon is effective in other cases of treatment-induced thrombocytopenia, such as cancer.

Strategic Alliance with HBL
Hayashibara Biochemical Laboratories, Inc. (“HBL”) produced a natural form of human interferon alpha and also developed technology relating to the production of interferon alpha-containing lozenges by which the stability of the interferon alpha can be maintained at room temperature. We believe that the use of such lozenges gives us advantages over competitive technologies in terms of cost, taste and ease of handling.

On March 13, 1992, we entered into a Joint Development and Manufacturing/Supply Agreement with HBL (the “Development Agreement”). As of February 1, 2012, HBL began operating under the name Hayashibara Company, Ltd. (HBC) as a wholly-owned subsidiary of Nagase Corporation. In correspondence received April 23, 2012, HBC informed us that they had decided to permanently halt production of interferon. Written notice was received on September 23, 2012, and the Development Agreement was officially terminated as of December 22, 2012.

The Development Agreement provided us with a source of natural human interferon alpha for use in the Company’s interferon alpha-containing products. Termination of the Development Agreement leaves the Company without a current source of interferon with which to conduct clinical trials. The Company is exploring its options and is talking with alternate suppliers of interferon.

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.

 
10

 


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.

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

Results of Operations for Quarters Ended March 31, 2013 and 2012:

Revenues.  During the quarter ended March 31, 2013 there were no sales of dietary supplements compared to $240 for the quarter ended March 31, 2012, a decrease of $240 (100%).  During the quarters ended March 31, 2013, and March 31, 2012 there were no ACM sales.

Research and Development Expenses. Research and development expenses of $34,129 were incurred for the quarter ended March 31, 2013, compared to $84,189 for the quarter ended March 31, 2012, a decrease of $50,060 (59%).  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 $127,162 were incurred for the first quarter in 2013, compared to $73,998 for the first quarter of 2012, an increase of $53,164 (72%).  This increase was mostly due to higher travel expenses, D&O insurance, consultant expense in the first quarter of 2013.

Net Operating Loss.  In the three-month period ended March 31, 2013, the Company's operating loss was $161,291 compared to an operating loss for the three-month period ended March 31, 2012 of $158,043, a $3,248 increase.

Change in Fair Value of Derivative Instruments.  Change in fair value of derivative instruments was realized as a $4,217 gain in the first quarter of 2013 compared to $23,631 loss in the first quarter of 2012.  The difference between the two periods was $27,848. The derivative gain over the period was due to decreasing: stock price, term to expiration of warrants, exercise price and volatility.

Interest Expense.  During the three-month period ended March 31, 2013, interest expense was $29,483, compared to $69,660 for the three-month period ended March 31, 2012.   In 2012 we accrued interest on Tibbits’ notes payable and interest on unpaid dividends for 2011 and 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 the first quarter of 2013.

Net Loss. In the three-month period ended March 31, 2013, the Company's net loss was $186,557 compared to a net loss for the three-month period ended March 31, 2012 of $236,114 a $49,557 (21%) decrease.

Liquidity Needs. At March 31, 2013, we had available cash of $7,355, and had a working capital deficit of $4,412,286. This includes $43,812 of accrued salaries to an officer; $4,006,316 from loans

 
11

 

($2,000,000) and accrued interest ($953,486 from HBL and $26,537 from a related party); loans for $200,000 from a Director; and loans of $826,293 from related parties. 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 may not be able to continue as a going concern for a reasonable period of time. The ability to continue as a going concern is dependent upon several factors including, but not limited to, the ability to generate sufficient cash flow to meet obligations on a timely basis, obtain additional financing and continue to obtain supplies and services from vendors.

We will need to raise additional funds in order to fully execute our 2013 Plan.  We are presently negotiating with human and animal health commercial development partners in various regions of the world. We believe that one or more of these agreements will be executed during 2013. These agreements could generally include provisions for the commercial partner to pay us a technology access fee, could include payments for a portion of the clinical trial expenses, could include payment obligations to us upon the accomplishment of certain defined tasks and/or could provide for payments relating to the future sales of commercial product. These agreements could be an important source of funds. However, there can be no assurance that we will be successful in obtaining additional funding from human health commercial development partners, institutional or private investors.  If we are not successful in raising additional funds, we will need to significantly curtail clinical trial expenditures and to further reduce staff and administrative expenses and may be forced to cease operations.

Forward-Looking Statements: Certain statements made in this Plan of Operations and elsewhere in this report 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 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 prospects. Moreover, the Company is engaged in a very competitive and rapidly changing industry.

 
12

 


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.

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 three patents and license seven  patents.  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.

We rely on third parties for the supply, manufacture and distribution of our products.  Third parties manufacture and distribute all of our products. We do not currently have manufacturing facilities or personnel to independently manufacture our products. Currently, Marlyn Nutraceutical manufactures our nutraceutical products. Our licensed distributors located in the United States and internationally, distribute the products.  Except for any contractual rights and remedies that we may have with our manufacturer and our distributors, we 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 are unable to obtain or retain third-party manufacturers and distributors on commercially acceptable terms, we may not be able to produce and distribute our products as planned.  If we encounter delays or difficulties with our contract manufacturer in producing or packaging our products or with our distributor in distributing our products, the production, distribution, marketing and subsequent sales of these products would be adversely affected, and we may have to seek alternative sources of supply or distribution or abandon or sell product lines on unsatisfactory terms. 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.

We are dependent on funding from private placements of stock. Sales revenue, sublicense fees and royalty income are low compared to expenses.  Our primary focus is to achieve FDA approval of oral interferon for one or more disease indications.  We do not expect significant sales or royalty revenue in the near term as Phase 2 and Phase 3 clinical studies must be completed before a NDA (New Drug Application) may be submitted to the FDA.  We operate at a net loss and current liabilities exceed current assets by $4,412,286 on March 31, 2013.  Most of the ($4,422,002) of current liabilities includes the amount owed to HBL for $2 million in two notes plus $953,486 of accrued interest; $200,000 in loans plus $26,537 accrued interest owed to a Director, and $43,812 of accrued salaries and $826,293 note payable owed to officers.

The Company is currently pursuing potential investors for funding.  In addition the Company is also pursuing potential pharmaceutical partners to provide upfront license fee payments and funding for clinical studies.  There can be no assurance that private placement funding or pharmaceutical partner funding will become available.

 
13

 


We are dependent on certain key existing and future personnel.  Our success will depend, to a large degree, upon the efforts and abilities of our officers and key management employees such as Stephen T. Chen, Chairman and Chief Executive Officer, Bernard Cohen, our Vice President and Chief Financial Officer, Martin J. Cummins, our Vice President of Clinical and Regulatory Affairs. The loss of the services of one or more of our key employees could 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 assure 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 our business may not grow.  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 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 may be adversely affected. In addition, we may 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 may not be able to obtain necessary financing for such development if we are unable to fund such development from our future revenues. 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.  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 $186,557 for the three months ended March 31, 2013 and a net loss of $236,114 for the three months ended March 31, 2012.  The operating loss for the three months ended March 31, 2013 was $161,291.  In addition, as of March 31, 2013 we had an accumulated deficit of $37,023,909. 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

 
14

 

curtailed operations, and if we are unable to generate profits and if we to continue to be unable to obtain financing to meet our working capital requirements, we will have to cease operations altogether. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis, to retain our current financing, to obtain additional financing, and, ultimately, to attain profitability.

Risk Relating to Our January 2008 Financing Arrangement.  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 depress the market price of our common stock.  In addition the warrants have an anti-dilution ratchet feature that could cause 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.

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.

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.


 
15

 

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.
 
Future sales of a significant number of shares of our common stock by existing stockholders may lower the price of our common stock, which could result in losses to our stockholders.  There were no restricted shares of our common stock issued during the three months ended March 31, 2013. The number of shares of restricted stock issued prior to September 1, 2012 that has been held for at least six months and hasn’t had the legends removed to become freely tradable under Rule 144 or 144(k) is not known.

The Company continues to pursue a broad range of financing alternatives to improve its financial condition. These alternatives may include the sale or issuance of a substantial amount of common stock, common stock warrants or stock options. These financing alternatives could require an increase in the number of authorized shares of the Company’s common stock and result in significant dilution to existing shareholders and, possibly, a change of control of the Company.

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 March 31, 2013. This evaluation was carried out under the supervision and with the participation of our company’s management, including our company’s president and chief executive officer. Based upon that evaluation, our company’s president and chief executive officer concluded that 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 were no changes in internal controls over financial reporting during the first quarter of 2013.
 
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.

 
16

 


ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
In the first quarter of 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.


 
17

 


 
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:     May 13, 2013
 
   By:   /s/ Stephen Chen
          Stephen Chen, Chairman of the Board,
          and Chief Executive Officer
 
Date:     May 13, 2013
 
   By:   /s/ Bernard Cohen
          Bernard Cohen, Vice President,
          Chief Financial Officer
   

 
18