10QSB 1 v08724.txt United States SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 ------------------------------------------------- |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-20791 AMARILLO BIOSCIENCES, INC. -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) TEXAS 75-1974352 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 4134 Business Park Drive, Amarillo, Texas 79110-4225 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 806-376-1741 FAX 806-376-9301 -------------------------------------------------------------------------------- (Issuer's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 |X| . No |_| . As of September 30, 2004 there were 13,235,296 shares of the issuer's common stock outstanding. 1 AMARILLO BIOSCIENCES, INC. INDEX
PAGE NO. -------- PART I: FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheet - September 30, 2004............................... 3 Consolidated Statements of Operations - Nine Months Ended September 30, 2004 and September 30, 2003..................................... 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2004 and 2003...................................... 5 Notes to Consolidated Financial Statements.................................... 6 Management's Discussion and Analysis of Financial Condition and Results of ITEM 2. Operations.................................................................... 7 ITEM 3. Controls and Procedures....................................................... 11 PART II: OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K.............................................. 11 Signatures .............................................................................. 12
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Amarillo Biosciences, Inc. and Subsidiaries Consolidated Balance Sheet September 30, 2004 (unaudited) Assets Current assets: Cash $ 3,191 Other current assets 23,992 ------------ Total current assets 27,183 Equipment, net 1,117 Patents, net of accumulated amortization of $166,223 143,927 ------------ Total assets $ 172,227 ============ Liabilities and Stockholders' Deficit Current liabilities: Accounts payable $ 163,731 Accrued interest expense 423,728 Accrued payroll expense 145,393 Other accrued expense 304 Notes payable, including notes payable to stockholder 2,103,500 ------------ Total current liabilities 2,836,656 ------------ Total liabilities 2,836,656 Commitments and contingencies Stockholders' deficit Preferred stock, $.01 par value: Authorized shares - 10,000,000 Issued shares - none - Common stock, $.01 par value: Authorized shares - 20,000,000 Issued shares - 13,235,296 132,353 Additional paid-in capital 19,565,645 Accumulated deficit (22,362,427) ------------ Total stockholders' deficit (2,664,429) ------------ Total liabilities and stockholders' deficit $ 172,227 ============ 3 Amarillo Biosciences, Inc. and Subsidiaries Consolidated Statements of Operations (unaudited)
Three months ended Nine months ended September 30, September 30, -------------------------- -------------------------- 2004 2003 2004 2003 ------------------------------------------------------------------------------------------------------ Revenues: Dietary supplement sales $ 11,053 $ 6,420 $ 34,879 $ 24,633 Interferon sales -- -- 6,490 10,000 Federal research grants -- -- -- 6,586 Gain on sale of building and equipment -- -- -- 34,790 Income from reversal of accrued contingent liability -- 750,965 -- 750,965 Gain on sale of intangible assets -- 50,298 2,663 50,298 Other -- -- 36 5,858 ------------------------------------------------------------------------------------------------------ 11,053 807,683 44,068 883,130 Expenses: Cost of sales 368 600 14,915 2,512 Research and development expenses 43,090 50,175 128,382 129,102 Selling, general and administrative expenses 51,507 64,795 278,365 270,502 Interest expense 24,613 24,341 72,831 71,553 Loss on dissolution of subsidiary -- 1,000 -- 1,000 Impairment of intangible assets -- 50,298 -- 50,298 ------------------------------------------------------------------------------------------------------ 119,578 191,209 494,493 524,967 ------------------------------------------------------------------------------------------------------ Net income (loss) $ (108,525) $ 616,474 $ (450,425) $ 358,163 ====================================================================================================== Basic and diluted net loss per share $ (0.01) $ 0.06 $ (0.04) $ 0.04 ====================================================================================================== Weighted average shares outstanding 12,871,713 10,220,391 12,054,425 9,742,661 ======================================================================================================
4 Amarillo Biosciences, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, --------------------- 2004 2003 --------- --------- Net cash used in operating activities $(164,039) $(209,250) --------- --------- Cash provided by (used in) investing activities -- 132,008 --------- --------- Cash from financing activities: Proceeds from issuance of common stock 155,930 141,600 Repayments of notes payable -- (52,468) --------- --------- Net cash provided by (used in) financing activities 155,930 89,132 --------- --------- Net increase (decrease) in cash (8,109) 11,889 --------- --------- Cash at beginning of period 11,300 100 --------- --------- Cash at end of period $ 3,191 $ 11,989 ========= ========= Supplemental Disclosure of Cash Flow Information Cash paid for income taxes $ -- $ -- ========= ========= Cash paid for interest $ 0 $ 11,142 ========= ========= Stock issued for debt $ 36,000 $ -- ========= =========
5 Amarillo Biosciences, Inc. and Subsidiaries Notes To Condensed Consolidated Financial Statements 1. Basis of presentation. The accompanying consolidated financial statements, which should be read in conjunction with the consolidated financial statements and footnotes included in Amarillo Biosciences, Inc. ("ABI") Form 10-KSB for the year ended December 31, 2003 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 nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2004. 2. Stock based compensation. The Company accounts for its employee stock-based compensation plans under Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. No options were granted in the three month period ending March 31, 2004. There were 725,000 options granted to purchase common stock in the three months ended June 30, 2004, with an exercise price of $0.23 per share with a 5 year term. In the three month period ended September 30, 2004 775,000 options were granted to purchase common stock, with an exercise price of $0.27 per share with a 5 year term. The following table illustrates the effect on net loss and net loss per share if Amarillo had applied the fair value provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. Nine Months Ended September 30, 2004 2003 ----------- ----------- Net loss, as reported $ 450,425 $ 358,163 Less: stock based compensation determined under fair value based method 360,199 -- ----------- ----------- Pro forma net loss $ 810,624 $ 358,163 Basic and diluted net loss per share As reported $ (0.04) $ (0.04) Pro forma $ (0.07) $ (0.04) The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield 0.0%, expected volatility of 141.0%, risk-free interest rate of 1.5% and expected life of 60 months. 6 3. Loss per share. Loss per share is computed based on the weighted average number of common shares outstanding. 4. Financial Condition. The Company's viability is dependent upon successful commercialization of products resulting from its research and product development activities. The Company plans 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. The Company's products will require significant additional development, laboratory and clinical testing and investment prior to the Company obtaining regulatory approval to commercially market its product(s). Accordingly, for at least the next few years, the Company will continue to incur research and development and general and administrative expenses and may not generate sufficient revenues from product sales to support its operations. 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. In the first nine months of 2004, the Company completed private equity financing by selling restricted stock at a discount to 20 investors. The net proceeds to the Company were approximately $155,930. During the first nine months of 2004, ABI worked in five areas to improve the Company. These are the areas 1) funding, 2) agroterrorism, 3) publishing, 4) partner/licensing discussions and 5) sales. Agroterrorism. Dr. Joseph Cummins met with scientists, livestock producers and elected officials to argue for alternatives to the government's plans to slaughter livestock if diseases are introduced by terrorists. On February 12, 2004, Dr. Joseph Cummins participated in an agroterrorism seminar held at the Texas A&M Research and Extension Center in Amarillo, Texas. Working with Dr. Albert Paszek of Cargill, a manuscript entitled "Interferon Alpha in the Feed to Control Foot-and-Mouth Disease" was presented June 23, 2004 at the 57th Reciprocal Meat Conference in Lexington, KY. At various times, Dr. Cummins met with members of the staff of US Senator Cornyn and US Senator John Rockefeller to discuss agroterrorism. Members of the Emergency Management team in Amarillo and the Randall County Judge met with Dr. Cummins on April 27, 2004, to hear his concerns that the livestock in the Texas Panhandle are completely vulnerable to an attack with foot-and-mouth disease virus. On July 20, 21, 23, 24, 26, 27, and 31, 2004 Dr. Cummins presented seminars in Japan at which agroterrorism and oral interferon were discussed; approximately 700 veterinarians attended the seminars. 7 Publishing. A manuscript entitled "Orally Administered Interferon Alpha has Systemic Effects" was submitted and accepted by the American Journal of Veterinary Research. A chapter entitled "The Clinical Use of Low Dose Orally Administered Interferon Alpha, with Emphasis on Treatment of Patients Positive for Human Immunodeficiency Virus" appeared in the book, AIDS Vaccines and Related Topics. Publishing this information, ABI believes, will help the Company gain recognition for our technology. Partner/License Discussions. September 14, 2004 the announcement was made that Amarillo Biosciences had executed a licensing and supply agreement with a leading Turkish pharmaceutical company, NOBEL ILAC SANAYII VE TICARET A.S., providing the rights to oral low-dose interferon-alpha for the treatment of Behcet's disease in Turkey and in Azerbaijan, Bosnia & Herzegovina, Bulgaria, Croatia, Georgia, Kazakhstan, Kyrghyzstan, Macedonia, Romania, Russia, Saudi Arabia, Slovenia, Tajikistan, Turkmenistan, Uzbekistan, and Federal Republic of Yugoslavia. The U.S. Food and Drug Administration (FDA) has granted Orphan Drug Designation for this product for the clinical indication of Behcet's Disease to Amarillo Biosciences. The Orphan Drug Designation is designed to promote the development of treatments for diseases rare in the United States and provides certain marketing exclusivity incentives outlined under the Orphan Drug Act. U.S. FDA approval will be sought and this FDA approval will be owned by Amarillo Biosciences, but will be used by NOBEL to seek regulatory approval in each country of the Territory. On July 22, 2004 ABI announced that BioVet, Inc., a Tokyo based animal health company with whom Amarillo Biosciences has been collaborating, has been granted regulatory approval for production and marketing of oral interferon for treatment of rotavirus in cattle in Japan. Rotavirus diarrhea is a major cause of disease and death in animals and humans. The animal health approval is for low dose oral administration of human interferon alpha supplied by Hayashibara Biochemical Laboratories (HBL). The product was launched in Japan in August 2004. Amarillo Biosciences owns the distribution rights to HBL interferon for animal health outside Japan; will receive a royalty on all Japanese HBL interferon sales. Nutraceutical Product. ABI reached agreement with Global Kinetics of Kent, Washington to become the US distributor of Dry Mouth Relief (DMR), replacing Natrol. Global Kinetics' sales of DMR are expected to begin in the first quarter of 2005. On September 16, 2004, to discuss the nation's response to agroterrorism, Dr. Cummins met with Dr. Chuck Lambert, Deputy Undersecretary of Agriculture, USDA, Dr. Richard McDonald, President of Texas Cattle Feeders Association (TCFA) and Dr. Ross Wilson, Vice President of TCFA. The Company is presently negotiating with human health and animal health commercial development partners in various regions of the world including the United States, Canada, Southeast Asia, Europe and the Middle East. The Company believes that one or more of these agreements will be executed during 2004. These agreements are expected to include provisions for the commercial partner to pay ABI a technology access fee, payments for a portion of the clinical trial expenses, payment obligations to ABI upon the accomplishment of certain defined tasks and/or provide for payments relating to the future sales of commercial product. These agreements could be an important source of funds for ABI. However, there can be no assurance that the Company will be successful in obtaining additional funding from either human health and animal health commercial development partners or private investors. If the Company is not successful in raising additional funds, it will need to significantly curtail clinical trial expenditures and to further reduce staff and administrative expenses and may be forced to cease operations. 8 Results of Operations: Revenues. During the nine-month period ended September 30, 2004 $41,369 from product sales was generated compared to revenues from product sales for the nine-month period ended September 30, 2003, of $34,633, an increase of $6,736 or approximately 19%. Selling, General and Administrative Expenses. Selling, General and Administrative expenses of $278,365 were incurred for the nine-month period ended September 30, 2004, compared to $270,502 for the nine-month period ended September 30, 2003. Non-Cash Consulting Activities. During the first nine-months of 2004, the Board of Directors authorized the issuance of shares of restricted common stock to three consultants in lieu of cash payments. Based upon the common stock trading price at the times of issuance, non-cash consulting expense of approximately $2,900 was recorded for the issuance of these shares during the three-month period ended September 30, 2004, and approximately $90,000 for the three-month period ended June 30, 2004. Net Income (Loss). As a result of the above, in the nine-month period ended September 30, 2004, the Company's Net Loss was ($450,425) compared to a Net Loss for the nine-month period ended September 30, 2003 of ($358,163). This increased loss is due primarily to increased cost of sales in 2004. Liquidity Needs: At September 30, 2004, the Company had available cash of approximately $3,191, and had a working capital deficit of approximately ($2,809,473). Assuming there is no decrease in current accounts payable, and accounting for various one-time expenses, the Company's negative cash flow is approximately $39,000 per month. The Company's continued losses and lack of liquidity indicate that the Company may not be able to continue as a going concern for a reasonable period of time. The Company's ability to continue as a going concern is dependent upon several factors including, but not limited to, the Company's ability to generate sufficient cash flows to meet its obligations on a timely basis, obtain additional financing and continue to obtain supplies and services from its vendors. The Company will need to raise additional funds in order to fully execute its 2004 Plan. 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-QSB and 10-KSB 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. 9 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. 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. 10 Item 3. Controls and Procedures Based on the evaluation conducted by Dr. Joseph M. Cummins, both the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as of a date within 90 days of the filing date of this quarterly report ("Evaluation Date"), of the effectiveness of the Company's disclosure controls and procedures, Dr. Joseph M. Cummins concluded that, as of the Evaluation Date, (1) there were no significant deficiencies or material weaknesses in the Company's disclosure controls and procedures, (2) there were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date and (3) no corrective actions were required to be taken. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (1) Form 8-K filed on August 20, 2004, to report a change in the Company's certifying accountant. No reports on Form 8-K were filed during the quarter ended September 30, 2004. 11 SIGNATURES Pursuant to the requirements of Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMARILLO BIOSCIENCES, INC. Date: November 15, 2004 By: /s/ Joseph M. Cummins ----------------------------------------- Joseph M. Cummins President, Chief Executive Officer and Chief Financial Officer 12