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ITEM 1.
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Financial Statements
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Amarillo Biosciences, Inc.
Consolidated Balance Sheets
(Unaudited)
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March 31,
2019
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December 31,
2018
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Assets
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Current assets:
|
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|
|
|
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Cash and cash equivalents
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$
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1,046,314
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$
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1,276,654
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Inventory
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8,962
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|
|
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-
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Prepaid expense and other current assets
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16,002
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|
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26,580
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Total current assets
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1,071,278
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|
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1,303,234
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Patents, net
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143,546
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146,456
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Property and equipment, net
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11,016
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14,010
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Total assets
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$
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1,225,840
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$
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1,463,700
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Liabilities and Stockholders' Equity
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Current liabilities:
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Accounts payable and accrued expenses
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$
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141,674
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$
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115,313
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Advances from investors
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56,225
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104,952
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Convertible notes payable – related party
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475,856
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513,356
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Total current liabilities
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673,755
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733,621
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Total liabilities
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673,755
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733,621
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Stockholders' equity
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Preferred stock, $0.01 par value:
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Authorized shares - 10,000,000,
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Issued and outstanding shares – 0 at March 31, 2019 and December 31, 2018
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-
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-
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Common stock, $0.01 par value:
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Authorized shares - 100,000,000,
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Issued and outstanding shares –39,568,524 and 39,117,524 at March 31, 2019 and December 31, 2018, respectively
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395,685
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391,175
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Additional paid-in capital
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3,736,123
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3,527,238
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Accumulated deficit
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(3,579,723
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)
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(3,188,334
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)
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Total stockholders’ equity
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552,085
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730,079
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Total liabilities and stockholders’ equity
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$
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1,225,840
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$
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1,463,700
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See accompanying notes to financial statements.
Amarillo Biosciences, Inc.
Consolidated Statements of Operations
(Unaudited)
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Three Months Ended March 31,
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2019
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2018
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Revenues
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$
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4,076
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$
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56,590
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Cost of revenues
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(2,718
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)
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(43,339
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)
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Gross margin
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1,358
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13,251
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Operating expenses:
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Research and development expenses
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2,386
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-
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Selling, general and administrative expenses
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389,476
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199,309
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Total operating expenses
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391,862
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199,309
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Operating loss
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(390,504
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)
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(186,058
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)
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Other income (expense):
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Interest expense
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(885
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)
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(1,380
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)
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Net loss
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(391,389
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)
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(187,438
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)
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Less: Net Income attributable to non-controlling interests
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-
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4,992
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Net loss attributable to common shareholders
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$
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(391,389
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)
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$
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(192,430
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)
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Basic and diluted net loss per average share available to common shareholders
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$
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(0.01
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)
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$
|
(0.01
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)
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Weighted average common shares outstanding – basic and diluted
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39,262,668
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33,243,580
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See accompanying notes to financial statements.
Amarillo Biosciences, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Three months ended March 31,
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2019
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2018
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Net cash used in operating activities
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$
|
(216,202
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)
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$
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(76,524
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)
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Cash flows from investing activities
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Investment in equipment
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(1,638
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)
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-
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Investment in patents
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-
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(1,687
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)
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Net cash used in investing activities
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(1,638
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)
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(1,687
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)
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Cash flows from financing activities
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Payments on convertible notes
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(37,500
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)
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(195,000
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)
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Proceeds from private placement offering
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25,000
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-
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Net cash used in financing activities
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(12,500
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)
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(195,000
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)
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Net change in cash
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(230,340
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)
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|
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(273,211
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)
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Cash and cash equivalents at beginning of period
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1,276,654
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|
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1,980,015
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Cash and cash equivalents at end of period
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$
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1,046,314
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$
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1,706,804
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Supplemental Cash Flow Information
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Cash paid for interest
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$
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69
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$
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3,819
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Cash paid for income taxes
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$
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-
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$
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-
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Non-Cash Transactions
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Stock issued for accrued liabilities
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$
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82,750
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$
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496,736
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See accompanying notes to financial statements.
Amarillo Biosciences, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
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1.
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Organization and Business.
Amarillo Biosciences, Inc. (the "Company" or "ABI"), is a diversified healthcare company engaged in the discovery and development of novel biopharmaceuticals, technologically innovative medical treatments, and specialty consumer products.
ABI is a Texas corporation which was formed in 1984. ABI primarily operates through three divisions: Pharmaceutical, Medical and Consumer. The Pharmaceutical division leverages our data library by applying the Company's experience in
the use of low-dose oral interferon (IFN) for the treatment of neoplastic, viral, and fibrotic diseases. ABI seeks to engage in patent licensing and commercialization opportunities with global partners. The Medical division is focused on
developing technology to treat metabolism related diseases such as Type 1 and Type 2 diabetes in Asia, in addition to licensed distribution of surgical wound care products. The Consumer division includes a range of nutraceutical and food
supplement products that utilize a liposomal delivery system. ABI currently has offices in the United States and Taiwan. ABI operates in Taiwan under the name AMARILLO BIOSCIENCES, INC. TAIWAN BRANCH (
美商康華全球生技股份有限公司
台灣分公司
).
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2.
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Basis of presentation.
The
accompanying consolidated financial statements, which should be read in conjunction with the audited financial statements and footnotes included in the Company's Form 10-K for the year ended December 31, 2018, as filed with the Securities
and Exchange Commission on April 16, 2019, 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, 2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019.
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3.
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Financial
Condition.
These financial statements have been prepared in accordance with United States generally accepted accounting principles, on a going concern basis, which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The Company has not yet achieved sustained operating income, and its operations are funded primarily from related-party convertible debt and equity financings. However, losses
are anticipated in the ongoing development of its business and there can be no assurance that the Company will be able to achieve or maintain profitability.
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The continuing operations of the Company and the recoverability of the carrying
value of assets is dependent upon the ability of the Company to obtain necessary financing to fund its working capital requirements, and upon future profitable operations. The accompanying financial statements do not include any adjustments
relative to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.
There can be no assurance that capital will be available as necessary to meet the Company's working
capital requirements or, if the capital is available, that it will be on terms acceptable to the Company. The issuances of additional equity securities by the Company may result in
dilution in the equity interests of its current stockholders. Obtaining commercial loans, assuming
those loans would be available, will increase the Company's liabilities and future cash commitments. If the Company is unable to obtain financing in the amounts and on terms deemed acceptable, the business and future success may be adversely
affected and the Company may cease operations. These factors raise substantial doubt regarding our ability to continue as a going concern.
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4.
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Common Stock.
The
shareholders have authorized 100,000,000 shares of voting common shares for issuance. On March 31, 2019, a total of 47,989,122 shares of common stock were either issued (39,568,524), reserved for conversion of convertible debt to stock
(2,627,305), issuance to two Company officers as compensation (75,462), one Company employee (4,043), held for future issue to prepaid private placement investments (300,000), held for future compensation issue to a consultant (16,171),
held for future exercise of nonqualified options (3,995,000), qualified stock options (950,000), and warrants (452,617). The 300,000 share reservation was generated by the receipt of $56,225 for investment in Private Placement Offering
2016-2 in November 2017. The investment is listed as “Pending” since the Executed Private Placement Memorandum and Subscription documents have not yet been received.
|
In February 2019, the Company issued 200,000 shares of common stock at $0.25 per share to a private placement investor
through the 2016-3 Private Placement Offering. Also in February 2019, the Company issued 24,000 shares of common stock as payment for the fourth quarter 2018 stock compensation grant for a consultant. On March 26, 2019, the Company issued 115,000
shares of common stock at $.25 per share representing aggregate payment of a finder’s fee in the amount of $28,750. Effective March 31, 2019, the Company issued 100,000 shares to Dr. Stephen T. Chen, Chairman, CEO, President, and CFO, and 12,000
shares to Bernard Cohen, Vice President; both distributions were compensation.
We have not paid any dividends to our common stock shareholders to date, and have no plans to do so
in the immediate future.
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5.
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Convertible Notes Payable – Related
Party.
As of December 31, 2018, the amount of convertible debt of the Company’s balance sheet was $513,356. This amount consisted of the following convertible promissory notes payable to Dr. Stephen T. Chen, Chairman, CEO, and
President, as shown in the table below.
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March 31, 2019
|
|
|
December 31, 2018
|
|
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Convertible Note payable – related party
|
|
$
|
144,426
|
|
|
$
|
144,426
|
|
|
Convertible Note payable – related party
|
|
|
262,500
|
|
|
|
262,500
|
|
|
Convertible Note payable – related party
|
|
|
68,930
|
|
|
|
106,430
|
|
|
Convertible Notes payable – related party
|
|
$
|
475,856
|
|
|
$
|
513,356
|
|
On January 30, 2019, Dr. Chen demanded a partial repayment in the amount of $37,500. The repayment reduced the
outstanding balance of a convertible promissory note from $106,430 to $68,930. The total balance of the aggregate convertible promissory notes as of March 31, 2019, is $475,856.
Other Related Party
Transactions.
Other than the aforementioned common stock and convertible notes activity, there were no related party transactions that occurred during the
period from January 1, 2019 to March 31, 2019.
Through the date of this filing, the Company issued 95,675 shares of common stock to management and consultants for
previously accrued compensation and fees.
On April 24, 2019, Edward L. Morris gave notice of his retirement and resignation, effective April 30, 2019, from all
positions with the Company, including director, general counsel, and corporate secretary.
On April 25, 2019, the Company’s only outstanding Private Placement offer for the sale and issuance of unregistered
securities expired.
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.
Forward-Looking Statements: Certain statements made 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 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 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.
Overview.
ABI is engaged in
developing biologics for the treatment of human and animal diseases. Our current focus is research aimed at the treatment of human disease indications, particularly influenza, hepatitis C, thrombocytopenia, and other indications using natural human
interferon alpha that is administered in a proprietary low dose oral form lozenge.
ABI currently owns or licenses six issued patents, five in the U.S., and one in Taiwan, of which five patents are related to the low-dose
oral delivery of interferon and one patent is associated with a dietary supplement, Maxisal®. In our history, we have completed more than 100 pre-clinical (animal) and human studies on the safety and efficacy of low-dose orally administered
interferon, including two phase 3 clinical trials.
Injectable interferon is FDA-approved to treat some neoplastic, viral and autoimmune diseases. Many patients experience moderate to severe
side-effects, causing them to discontinue injectable interferon therapy. Our core technology is a natural human interferon-alpha that is 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 activation of hundreds of genes in the peripheral blood that stimulate the immune system. Human studies have shown that oral interferon is safe and effective against
viral and neoplastic 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, in contrast to high dose injectable interferon,
which causes adverse effects in at least 50% of recipients.
Governmental or FDA approval is required for low-dose oral interferon. Our progress toward approval is discussed under each specific
indication, below. We believe that our technology is sound and can be commercialized.
The Company’s long-time human interferon producer is no longer manufacturing interferon. Plans for further clinical
trials and commercialization of a low-dose interferon product have been placed on hold until a new cGMP source of interferon is found. ABI is actively seeking a new manufacturing partner and exploring options with pharmaceutical companies that
have a supply of natural human interferon made in a similar manner, but from a different cell line as our previous product.
Procuring a new source of interferon will require some studies demonstrating comparability and further clinical trials will have to be
performed. Although these studies may prove costly and time consuming, the Company will be able to use optimized protocols from its thirty years of experience in conducting trials with natural human interferon. Rather than having to start from
greenfield stage, the Company will be able to leverage its history, past results, and data library to target the most appropriate disease states with the best dosage regimens and minimize the time wasted by trial-and-error searching prevalent in
pharmaceutical research.
While the pharmaceutical industry is creating and marketing new and effective anti-viral medications, ABI believes that there is still
sufficient time to develop and commercialize low-dose interferon as a
safer anti-viral treatment for Influenza, Hepatitis, and other conditions caused by viruses such as genital warts and canker sores.
Interferon also has powerful cytotoxic effects which in combination with its immune stimulating activities could play a role in the rapidly expanding field of cancer immunotherapy. Other demonstrated effects of interferon offer opportunities to
commercialize low-dose interferon for the treatment of Thrombocytopenia and chronic cough in lung diseases such as COPD and Idiopathic Pulmonary Fibrosis (IPF). The Company has the opportunity to capitalize on its relationship channels in the
Asian markets to explore sources of raw materials, capital, production facilities, and to target a significant and growing sales market.
In addition to its core technology, ABI is currently working to expand the Company’s current focus into a diversified healthcare business
portfolio in order to generate new revenue streams. An integral part of the ABI Operating Plan is to create multiple revenue streams through the implementation of programs (including but not limited to in-licensing) of medical and healthcare
products and processes. The Medical Division and Consumer Products Division will facilitate the enhancement of those revenue streams. These programs will be the catalyst which allows ABI to enter markets in Taiwan, Hong Kong, China, and other Asian
countries for the distribution of these new medical and healthcare products.
Diabetes is a global epidemic with an estimated cost topping $2.5 trillion world-wide. Taiwan, gateway to China and representative of the
upward trend in diabetes prevalence and cost throughout Asia, saw a 70% increase in total diabetes cases between 2000-2009 with a 35% increase in standardized prevalence rate. Diabetic complications such as retinopathy which is a leading cause of
blindness, peripheral neuropathies which contribute to delayed wound healing and amputations, and nephropathy which can necessitate dialysis and kidney transplant, are catastrophic both to quality of life and cost of care.
Currently, type 2 diabetes is treated as a chronic progressive disease with increases in both number and dose of drugs seen across a
patient’s lifetime. Generally one or more oral hypoglycemic drugs are used for months or years until a combination of short and long-acting insulin is required to keep the patient’s blood glucose within normal limits. Unfortunately, once a
patient’s pancreas is exhausted and they are finally forced to go on insulin, they require insulin for the rest of their lives. And even more unfortunate is that even with fairly well-controlled blood glucose levels, diabetics will face one or more
undesirable complications with poor outcomes from cardiovascular, eye, nerve, or kidney disease secondary to their diabetes. This unsuccessful model of diabetes care is not satisfactory.
Amarillo Biosciences, Inc. has been developing pulsatile insulin therapy in Taiwan that consists of delivering insulin intravenously by pump
in pulses, as opposed to the typical subcutaneous route of administration, in order to more closely imitate how the pancreas secretes insulin in healthy non-diabetics. The Company’s Medical Division is currently investigating medical equipment
options for pulsatile insulin infusion and plans to be able to offer innovative and comprehensive diabetes treatment that provide solutions to all stages of diabetes from pre-diabetes through late-stage diabetes with advanced complications
targeting Taiwan first, with plans to open clinics in China within 3 years.
Within the Medical division, ABI is also a licensed distributor of TissueAid™ biodegradable wound closure products in Taiwan. ABI became the
official distributor of TissueAid™ for the Taiwan market in the fourth quarter of 2017. The TissueAid™ product is developed by the first and only medical material research company for wound care, GJ Biotech Co Ltd. This distributorship provides
momentum to enter the next level for ABI.
The Consumer Product Division is presently working on multiple endeavors. First, this division now offers a unique proprietary liposomal
delivery system for nutraceuticals and food supplements including Vitamin C, Glutathione, CoQ10, Curcumin/Resveratrol, DHA, and a Multi-Vitamin. The Company also has a dietary supplement product, Maxisal® that is useful in the symptomatic relief of
dry mouth.
ABI maintains a representative branch office in Taiwan – Amarillo Biosciences, Inc. (Taiwan Branch) (美商康華全球生技股份有限公司 台灣分公司) (“ABI Taiwan”) to
increase the Company's presence in Taiwan and serve as an operational hub to access growing Asian markets.
Results of Operations for Quarters Ended March 31, 2019 and 2018:
Revenues.
ABI reported revenue for
the quarter ended March 31, 2019, of $4,076 from sales of the newly developed and marketed liposomal nutraceuticals. Revenue for the same period in 2018 was $56,590 also from the sales of the nutraceutical program. The cost of sales for the first
quarter of 2019 was $2,718 as compared to $43,339 for cost of sales in 2018. The cost of goods sold in 2019 was 67% of sales making gross profit on sales for 2019 33%. The 2018 cost of sales and gross profit was 77% and 23%, respectively.
Research and Development Expenses.
The R&D activity in 2019 was $2,386 as compared to 2018 when there were no direct R&D expenses.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses were $190,167 (95%) higher in 2019 than 2018 largely due to salary increases (Dr. Chen and Mr. Cohen); additional accounting and consulting services; option expense for the 2018 Employees Stock Option
Plan and the 2018 Officers, Directors, Employees and Consultants Nonqualified Stock Option Plan; and other executive consulting services (i2china).
Operating Loss.
The Company's
operating loss was $390,504 which was $204,446 (110%) higher for 2019 than 2018 mostly due to the SG&A expense increase constituted by salary increases (Dr. Chen and Mr. Cohen); additional accounting and consulting services; option expense for
the 2018 Employees Stock Option Plan and the 2018 Officers, Directors, Employees and Consultants Nonqualified Stock Option Plan; and other executive consulting services (i2china).
Interest Expense.
During the three
months ended March 31, 2019, interest expense was $885, compared to $1,380 for the three months ended March 31, 2018. The interest expense recognized in the three months ended March 31, 2019 is mostly due to accrued interest for convertible debt
notes.
Net Loss.
Net loss attributable to
common shareholders was $391,389 which was $198,959 (103%) more during 2019 than 2018. This increase was mainly due to augmented selling, general and administrative expenses in 2019.
Liquidity and Capital Resources
At March 31, 2019, the Company had available cash of $1,046,314 whereas we had a cash position of $1,276,654 as of December 31, 2018. The
Company had working capital of $397,523 at the end of March 2019. As of December 31, 2018, the working capital was $569,613. The monthly burn rate in 2019 was between $65,000 and $75,000. ABI continues to develop and establish new revenue streams
to become, and maintain the position of, a profitable going concern. Two major areas of focus are to (1) leverage ABI’s core technology,
low-dose oral interferon, and (2) develop business lines to extend the Company’s reach into biotech, bio-pharmaceutical, health care products and life sciences businesses. ABI aggressively seeks to monetize its existing and any newly developed
intellectual property. ABI estimates its short-term project development financing needs to be between $3,000,000 and $5,000,000 depending upon project negotiated terms and structuring yet to be determined.
There can be no assurance that we will be successful in our efforts to make the Company profitable. If those efforts are not successful, we
will be forced to cease operations.
ITEM 4.
Controls and Procedures
Disclosure Controls and Procedures
At the end of the period covered by the Annual Report on Form 10-K for the fiscal year ended December 31, 2018, and this Form 10-Q Quarterly
Report for the quarter ending March 31, 2019, an evaluation was carried out under the supervision of and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the
effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). Based on that evaluation, the CEO and the CFO have concluded that as of the end of the
period covered by the Annual Report and Quarterly Report, our disclosure controls and procedures were not effective in ensuring that: (i) information required to be disclosed by us in reports that we file or submit to the SEC under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to
our management, including our CEO and CFO, as appropriate, to allow for accurate and timely decisions regarding required disclosure.
Changes to Internal Controls and Procedures over Financial Reporting
In an effort to augment internal financial controls and reporting, the Company recently engaged a turnkey managerial accounting services
provider to begin the oversight and internal management of Company accounting processes and financial reporting.
Management’s Remediation Plans
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). Management has assessed the effectiveness of internal
control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control-Integrated Framework
. A material weakness, as defined by SEC rules, is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or
interim
financial statements will not be prevented or detected on a timely basis. The material weaknesses in internal control over financial
reporting that were identified are:
a) We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and
training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements. We have limited experience in the areas of financial reporting and disclosure controls and procedures. Also, we do not
have an independent audit committee. As a result, there is a lack of monitoring of the financial reporting process and there is a reasonable possibility that material misstatements of the financial statements, including disclosures, will not be
prevented or detected on a timely basis; and
b) Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting
process. The areas where we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable invoices for payment. This control deficiency, which is pervasive in nature, results in
a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis.
The Company intends to and has begun to increase its personnel resources and technical accounting expertise within the accounting function.
Management believes that hiring additional knowledgeable personnel with technical accounting expertise will remedy the following material weakness: insufficient personnel with an appropriate level of technical accounting knowledge, experience, and
training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements.