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Note 6 - Notes Payable - Related Party

9 Months Ended

Sep. 30, 2014

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. The principal and accrued interest through October 31, 2013, Petition Date, is listed on Schedule F of the Summary of Schedules filed by ABI with the United States Bankruptcy Court. Schedule F is the List of Unsecured Non-priority (Creditors’) Claims. The claim is also scheduled in Class Four – General Unsecured Creditors of the Plan of Reorganization – in the amount of $3,006,252.88. The disposition of all classes of creditors is a provision of the Company’s confirmed Plan of Reorganization.

On January 10, 2011 a promissory note for $200,000 was executed with Paul Tibbits, a director, which is in default and accrues interest at the default rate of 10% per annum, with no stated maturity date, and no collateral. This debt is listed on Schedule F of the Summary of Schedules filed by the Company with the United States Bankruptcy Court. Schedule F is the list of Unsecured Non-priority (Creditors’) Claims. The Claim is also scheduled in Class Four – General Unsecured Creditors of the Plan of Reorganization. The debt includes $200,000 of principal and $35,055.56 of pre-petition interest accrued through October 31, 2013, Petition Date. As of September 30, 2014, this note is still outstanding. The disposition of all classes of creditors is a provision of the Company’s confirmed Plan of Reorganization.

Amendment #4 to the employment contract of Joseph M. Cummins (“Employee”) was entered into on May 19, 2012 by Employee and ABI (“Employer”). The amendment provides for the change in annual salary of Employee from $175,000 per year to $5,000 per month ($60,000 annually). Additionally, Employee releases Employer from any liability for payment of back salary or benefits (of any form) in the amount of $278,259. Further, the Company forgave an employee receivable of approximately $10,448 in connection with the amended employment agreement. The Amendment further states that the term of the contract shall be through November 30, 2012. Commencing December 1, 2012 through November 30, 2014, the Employee became a consultant for the monthly sum of $5,000. The Amendment was effective as of May 15, 2012, and was executed by Dr. Stephen T Chen, PhD, Chairman and CEO and Joseph M. Cummins, DVM, PhD, President and COO. This contract was rejected as shown in the approved Disclosure Statement for the Plan of Reorganization. Any claim which arose in conjunction with the rejection of this contract is provided for in the Confirmed Plan of Reorganization.

On October 31, 2012, ABI carried a liability for back salary owed to Martin Cummins in the amount or $236,732. An agreement was reached between ABI and Martin Cummins wherein the parties agreed that claim to $136,732 was waived and forgiven by Martin Cummins, both parties agreed to execute a note payable for $100,000 which was not forgiven by Mr. Cummins and would be paid with a $40,000 down payment and a payout according to a schedule, and a new employment contract where Mr. Cummins was given ten months employment at $5,000 gross salary per month to be employed. Furthermore, both parties agreed to execute a mutual release of liability and Mr. Cummins agreed to return 879,000 ABI stock options. As of September 30, 2014, the outstanding balance on the note payable was $13,250. This amount is listed as a Class Four – General Unsecured Debt in the Plan of Reorganization and Disclosure Statement.

All future transactions and loans between the Company and its officers, directors and 5% shareholders will be on terms no less favorable to the Company than could be obtained from independent third parties. There can be no assurance, however, that future transactions or arrangements between the Company and its affiliates will be advantageous, that conflicts of interest will not arise with respect thereto or that if conflicts do arise, that they will be resolved in favor of the Company.

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

On July 19, 2013, the unsecured funds advanced through Dr. Chen ($976,793), were reduced to a promissory note made payable by Amarillo Biosciences, Inc. to the Yang Group. The note was a demand note with no certain due date with an annual interest rate of 23/100 of one percent (.23%) due on unpaid principal from the date of funding. The interest rate was based on the Applicable Federal Rate (“AFR”) in force for the month in which the note was executed. The note carried a 10% annual interest rate on material, unpaid amounts. There was no penalty for prepayment of outstanding amounts. As of September 30, 2014, the note is still outstanding and is included in the Plan of Reorganization.

On July 25, 2013, the Yang Group began advancing funds under a new promissory note which is secured by substantially all of the assets of the Company. The note is a revolving/advancing note for $300,000 or so much thereof as may from time to time have been advanced. The annual interest rate as to each advance thereunder, is at the short term Applicable Federal Rate (“AFR”) determined under Section 1274(d) of the Internal Revenue Code of 1986, for the month in which such advance was received. As of September 30, 2014, $280,000 was advanced under the secured note and remains outstanding. This note is included in the Plan of Reorganization.

An order of the Bankruptcy Court approved a Post-Petition Financing Facility on January 15, 2014. The Facility is an unsecured, priority basis financing facility approving up to $285,000 of funds to be advanced as needed. From Petition Date of October 31, 2013, through September 30, 2014, $318,892 has been advanced under the Post-Petition Financing Facility. The source of funds under the Facility continues to be The Yang Group.

For some time, the Company had been researching and contemplating structural changes. After significant research and serious consideration, the Company filed a voluntary petition for reorganization under Chapter 11 of Title XI of the U.S. Code on October 31, 2013. The Company operated as “a debtor in possession” (DIP) from October 31, 2013, until May 23, 2014, when the Company’s Plan of Reorganization was confirmed by the Court. The Company continues to be a DIP until the Plan is implemented and consummated. An Effective Date for the Plan has not yet been determined. Once the Effective Date is set and the Plan is implemented, the Company will continue to operate and carry out the provisions of the Plan supervised by the Court and the Bankruptcy Code to consummate the Plan of Reorganization.