ITEM 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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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. Amarillo Biosciences, Inc. (the "Company” or “ABI”) is a Texas corporation formed in 1984 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 interferon alpha that is administered in a proprietary low dose oral
form. In addition to its core technology ABI is working to expand the Company’s current focus into a diversified healthcare business portfolio in order to generate new revenue streams.
ABI currently owns or licenses five issued patents, four in the U.S., and one in Taiwan, of which four 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.
The Company primarily operates three business units: the Medical, Pharmaceutical, and Consumer Product Divisions. Historically, the Company has focused on R&D involving low-dose, orally administered lozenges
containing the natural immune system activator interferon-alpha as a treatment for a variety of disease indications. ABI owns a proprietary library of over thirty years of scientific and clinical data on the human and animal applications of low-dose
oral interferon. Through the Pharmaceutical Division, ABI seeks to out-license or leverage in other ways its core technology by forming partnerships to develop current and new discoveries and commercialize the resulting products.
An integral part of the company’s operating strategy is to create multiple revenue streams through the implementation of programs (including but not limited to in-licensing) of medical and healthcare products and
therapeutics. The Medical Division and Consumer Products Division facilitate the enhancement of these revenue streams. These programs will be the catalysts that allow ABI to enter markets in Taiwan, Hong Kong, China, and other Asian countries for the
distribution of 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. Currently, almost 2 million people suffer from diabetes in Taiwan, which equals 11% prevalence or 1 in 9 people, for a country with a population
of around 18 million adults. The adoption of a Western diet and lifestyle has had more detrimental effects on East Asian countries with diabetes prevalence in Taiwan and China now outpacing the US and other Western nations. Studies have shown that
East Asians have weaker insulin secretions compared with other ethnicities which make controlling blood glucose more challenging which in turn makes them more susceptible to type-2 diabetes. The weaker insulin response seen in Taiwanese and Chinese
populations could be due to certain genetic polymorphisms or differential intestinal secretions and helps explain why only 30-40% of East Asians with type-2 diabetes are overweight or obese compared to over 80% of Americans. While obesity is on the
rise in China, diabetes is climbing at a faster rate than other obesity-related diseases such as heart disease and cancer. 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.
Over the past several years the Company has focused its research efforts towards the development of a novel pulsatile insulin infusion 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.
When the liver receives insulin in discreet pulses, it appears to be better able to regulate blood glucose levels. Patients suffering from peripheral neuropathies have reported less numbness and pain after receiving
pulsatile insulin infusion treatments for several weeks or months. Pulsatile insulin treatments given once or twice a week for a number of months show promise in lessening the incidence and severity of microvascular complications of diabetes such as
retinopathy, neuropathy, and nephropathy. In addition, certain endpoints such as reduction of patient medications and avoidance of worsening kidney function leading to kidney dialysis can be achieved. ABI’s Medical Division has developed a
proprietary insulin infusion pump dedicated for administering its pulsatile insulin therapy and is currently in the process of obtaining patents and medical device approvals, including 510k FDA clearance.
ABI plans to offer an innovative and comprehensive diabetes treatment that provides solutions to all stages of diabetes from pre-diabetes through late-stage diabetes with advanced complications. We intend to target
Taiwan first as an R&D base and demonstration platform in Greater China, then subsequently establish a licensing platform for clinics in China. The Consumer Product Division is presently focused on sales of liposomal nutraceuticals and food
supplements that include Vitamin C, Glutathione, CoQ10, Curcumin/Resveratrol, DHA, and a Multi-Vitamin.
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.
Core Technology. Injectable high-dose 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 primarily based on low-dose non-injectable interferon-alpha that is delivered into the oral cavity as a lozenge in low 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. We believe that our technology is sound and can be commercialized for various indications. Due to occurrences in the interferon supply market
over the past several years, we have been unsuccessful at such commercialization to date. However, as a result of Covid-19, Chinese government health authorities recently recommended use of anti-AIDS drugs and interferon. The Company believes this
has brought renewed attention in the importance of incorporating low-dose interferon as a treatment to stem the pandemic. In light of the circumstances, ABI is uniquely positioned to potentially develop safe, low-dose interferon.
Interferon Supply. 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 sourcing options with pharmaceutical
companies that have a supply of either recombinant interferon or natural human interferon made in a similar manner, but from a different cell line as our previous product.
Procuring a new source of interferon may require some studies demonstrating comparability and further clinical trials will have to be performed. 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 a greenfield development 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, 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.
Intellectual Property. Since inception, the company has worked to build an extensive patent portfolio for low dose orally administered interferon. This portfolio consists of
patents with claims that encompass method of use or treatment, and/or composition of matter and manufacturing. As listed below, the Company presently owns or licenses five issued patents.
ACTIVE PATENTS:
"TREATMENT OF THROMBOCYTOPENIA USING ORALLY ADMINISTERED INTERFERON" as described and claimed in U.S. Patent No. 9,526,694 B2 issued December 27, 2016, Owned. Expiration: April 2033.
“TREATMENT OF THROMBOCYTOPENIA USING ORALLY ADMINISTERED INTERFERON" as described and claimed in U.S. Patent No. 9,750,786 B2 issued September 5, 2017, Owned. Expiration: April 2033.
“TREATMENT OF THROMBOCYTOPENIA USING ORALLY ADMINISTERED INTERFERON" as described and claimed in U.S. Patent No. 9,839,672 B2 issued December 12, 2017, Owned. Expiration: April 2033.
"TREATMENT OF THROMBOCYTOPENIA USING ORALLY ADMINISTERED INTERFERON" as described and claimed in TAIWAN Patent No. I592165 issued July 21, 2017, Owned. Expiration: May 2033.
"COMPOSITION AND METHOD FOR PROMOTING ORAL HEALTH" as described and claimed in U.S. Patent No. 6,656,920 B2 issued December 2003, Owned. Expiration: April 2021.
Results of Operations for Quarter Ended September 30, 2020 and 2019:
Revenues. ABI reported revenue for the quarter ended September 30, 2020, of $192 from sales of liposomal nutraceuticals. Revenue for the same period in 2019 was $4,786 also
from sales of nutraceuticals. The cost of sales for the third quarter of 2020 was $123 as compared to $3,368 for cost of sales in 2019. Gross profit for the quarter in 2020 was $69 as compared to $1,418 in 2019, a decrease of $1,349.
Research and Development Expenses. There were no R&D expenditures for the third quarter of 2020 and none for the same period in 2019.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the third quarter of 2020 were $321,153 as compared to $366,824 for the same
period in 2019, a decrease of $45,671 12%. The decrease was largely due to reductions in salary and related expenses; travel, entertainment and business meals; dues and subscriptions; and expenses for accounting and other professional fees.
Operating Loss. The Company's operating loss was $321,084 which was $44,322 (12%) lower for 2020 than the 2019 operating loss of $365,406 mostly due to decreases in SG&A
expenses.
Interest Income and Expense. During the three months ended September 30, 2020, interest income was $75 consisting of interest earned on two interest-bearing bank accounts.
Interest income for 2019 was $213, $138 or 65% higher than the previous year. Interest expense recognized in those three months was $2,111 due to accrued interest for convertible debt - notes payable. For the same period in 2019, interest expense
was $1,026.
Net Loss. Net loss attributable to common shareholders was $323,285 which was $42,930 (12%) less in 2020 than the 2019 loss of $366,215. This decrease was mainly due to a
reduction of selling, general and administrative expenses in 2020.
Results of Operations for the Nine Months Ended September 30, 2020 and 2019:
Revenues. The total revenue recognized from the sale of nutraceuticals was $15,876 through September 30, 2020, as compared to $9,468 for the first nine months of 2019, an
increase of $6,408 or 68%.
Cost of Revenues. Cost of sales for the nine months ended September 30, 2020 was $11,221. For the nine months ended September 30, 2019, the cost of sales was $6,649. The
increase in cost of sales for 2020 as compared to 2019 for the nine month period was $4,572, or 69%. Gross profit for nine months ended September 30, 2020, was $4,655 compared to $2,819 for the nine months ended September 30, 2019, an increase of
$1,836 or 65%.
Research and Development Expenses. The R&D activity in 2020 was $389 as compared to 2019 when the expenditure was $52,510. The large expenditure in 2019 was the initial
development investment for the metabolic pump which consisted of modification of LCD function, prototype development, hardware and software engineering. Subsequent to the balance sheet date, the Company issued 100,000 common voting shares to a
Taiwan company, UHO Wellness Corporation (“UHO”), for services rendered pursuant to the Medical Device Development Agreement of
February 13, 2020, between ABI and UHO. The spread of Covid-19 in 2020 slowed the development and testing process. R&D activity is anticipated to ramp up significantly in both the U.S. and Asian markets for the
balance of 2020 and in 2021.
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $1,001,893 were incurred for the first nine months of 2020, compared to $1,161,317
for the first nine months of 2019, a decrease of $159,424 (14%). The 2020 decrease was due in large part to decreases in numerous expense line items. Expense decreases for 2020 over 2019 primarily include: (1) Salaries and wages - $253,302
compared to $321,458 (a decrease of $68156 or 21%); (2) travel expenses - $7,745 compared to $31,594 (a decrease of $23,849 or 75%); (3) business meals, and entertainment - $12,372.19 compared to $17,919 (a decrease of $5,547 or 31%); (4) accounting
fees - $84,315.05 compared to $99,001 (a decrease of $14,686 or 15%); and (5) occupancy expense (rent) - $33,299 compared to $40,068 (a decrease of $6,769 or 17%).
There were also areas where expenses increased for the 2020 – 2019 comparative periods. These expense items include: (1) Insurance expense including general liability, directors & officers liability, group health
insurance, and property casualty - $66,713 compared to $52,012 (an increase of $14,700 or 22%); and (2) legal services - $6,362 compared to $2,271 (an increase of $4,091 or 180%).
Operating Loss. In the nine month period ended September 30, 2020, the Company's operating loss was $997,627 compared to an operating loss for the nine month period ended
September 30, 2019 of $1,211,008, a $213,381 (18%) decrease. The decrease in selling, general, and administrative expenses in 2020 was a major factor in reducing the operating loss.
Interest Income and Expense. During the nine month period ended September 30, 2020, there was interest income of $356 versus expense of $2,745 for the same period of 2019. Cash
balances were higher for the 2019 period resulting in greater interest income.
Interest expense was $4,895 for the nine months ended September 30, 2020, compared to $2,920 for the nine month period ended September 30, 2019, an increase of $1,975 (68%). The increase in interest expense for 2020
was precipitated by the continued deferral of salary for Dr. Chen and consulting fees for i2China, both of which were included in the outstanding balances for Convertible Notes – Related Party as explained in footnote 6 to financial statements.
There was an increase in outstanding Convertible Debt- Related Party for the period June 30, 2020, through September 30, 2020, in the amount of $54,150 from $578,664 to $632,814. As shown in the table of footnote 6, principal for the notes increased
from $444,581 on December 31, 2019 to $632,814 as of September 30, 2020, or $188,233, or 42%.
Net Loss. The Net Loss for the first nine months of 2020, decreased to $1,002,130 from $1,211,180 in 2019, a decrease of $209,050 (17%) for the period. The major constituents of
the decrease in net loss are the decreases in operating expenses in the first six months of 2020 as previously discussed.
Liquidity and Capital Resources
As of September 30, 2020, the Company had available cash of $83,767 whereas it had a cash position of $482,772 for the same period in 2019 and $409,039 as of December 31, 2019. The Company had a working capital
deficit of $919,880 at the end of September 2020, and a working capital deficit of $65,043 for the same period in 2019, an increase of 1,414%. As of December 31, 2019, working capital was a deficit of $308,013. The average monthly burn rate in
2020, was $65,000. Going forward, we expect that the burn rate will continue to be in that same range.
As explained in the previous section entitled Selling, General, and administrative Expenses, the Company did, indeed, reduce expenses by an overall amount of $159,424 or 14%.
Significant reductions were made in the areas discussed in that paragraph. A comparative review of cash flows for the nine-month periods ending September 30, 2020 and 2019 reveal that cash used for operations in 2020 was $408,381 as compared to
$779,339 used in 2019. In 2020, the Company used $1,891 for investing activities as compared to $2,043 used in 2019. Financing activities provided $85,000 in 2020 and used $12,500 in 2019.
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 (1) to continue to leverage the Company’s core technology,
the development and application of low-dose oral interferon, and (2) to commercialize its metabolic restoration therapy for the treatment of diabetes and other metabolic diseases. ABI aggressively seeks to monetize its existing intellectual property
as well as potential new discoveries and estimates its short-term project development needs to be between $3,000,000 and $6,000,000 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.