10QSB 1 v023308.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 June 30, 2005 ------------------------------------------------- [ ] 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 -------------------------------------------------------------------------------- (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 June 30, 2005 there were 16,297,908 shares of the issuer's common stock outstanding. AMARILLO BIOSCIENCES, INC. INDEX PAGE PART I: FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheet - June 30, 2005...................... 3 Consolidated Statements of Operations - Six Months Ended June 30, 2005 and June 30, 2004................................. 4 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2005 and 2004............................. 5 Notes to Consolidated Financial Statements...................... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 7 ITEM 3. Controls and Procedures......................................... 10 PART II: OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K................................ 11 Signatures ................................................................ 11 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Amarillo Biosciences, Inc. and Subsidiaries Consolidated Balance Sheet June 30, 2005
Assets Current assets: Cash $ 12,488 Other current assets 419 ----------------- Total current assets 12,907 Equipment, net 757 Patents, net of accumulated amortization of $185,599 125,097 ----------------- Total assets $ 138,761 ================= Liabilities and Stockholders' Deficit Current liabilities: Accounts payable $ 109,470 Deferred revenue 13,735 Accrued interest expense 490,538 Accrued payroll 103,109 Current maturities of notes payable 1,048,500 ----------------- Total current liabilities 1,765,352 Notes payable, including notes payable to stockholder 1,065,000 ----------------- Total liabilities 2,830,352 ----------------- Commitments and contingencies Stockholders' deficit Preferred stock, $.01 par value: Authorized shares - 10,000,000 Issued shares - none -- Common stock, $.01par value: Authorized shares - 50,000,000 Issued shares - 16,297,908 162,979 Additional paid-in capital 19,927,093 Accumulated deficit (22,781,663) ----------------- Total stockholders' deficit (2,691,591) ----------------- Total liabilities and stockholder's deficit $ 138,761 =================
See accompanying notes to financial statements. 3 Amarillo Biosciences, Inc. and Subsidiaries Consolidated Statements of Operations
Three months ended Six months ended June 30, June 30, --------------------------------------------------------------- 2005 2004 2005 2004 --------------------------------------------------------------- Revenues: Dietary supplement sales $ 39,898 $ 20,266 $ 40,774 $ 23,826 Interferon sales -- 6,490 -- 6,490 Royalty earned 42,134 -- 42,134 -- Federal research grants 13,614 -- 13,614 -- Gain on sale of building and equipment -- -- -- 2,664 Other -- -- -- 36 --------------------------------------------------------------- Total Revenue 95,646 26,756 96,522 33,016 --------------------------------------------------------------- Expenses: Cost of sales 7,808 12,738 7,816 14,548 Research and development expenses 42,142 38,313 83,764 85,293 Selling, general and administrative expense 97,574 152,294 230,828 226,858 Interest expense 24,780 24,326 48,571 48,218 --------------------------------------------------------------- Total Expenses 172,304 227,671 370,979 374,917 --------------------------------------------------------------- Net loss $ (76,658) $ (200,915) $ (274,457) $ (341,901) =============================================================== Basic and diluted net loss per share $ (0.005) $ (0.017) $ (0.018) $ (0.028) =============================================================== Weighted average shares outstanding 16,162,290 12,013,347 15,605,881 12,013,997 ===============================================================
See accompanying notes to financial statements. 4 Amarillo Biosciences, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2005 2004 ------------ ------------ Net cash used in operating activities $ (188,294) $ (101,211) ------------ ------------ Net cash used in investing activities -- (2,940) ------------ ------------ Cash from financing activities: Proceeds from issuance of common stock 194,499 95,930 Proceeds from notes payable -- 10,000 ------------ ------------ Net cash provided by (used in) financing activities 194,499 105,930 ------------ ------------ Net increase in cash 6,205 1,779 Cash at beginning of period 6,283 11,300 ------------ ------------ Cash at end of period $ 12,488 $ 13,079 ============ ============ Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 5,154 $ 3,999 ============ ============ Non Cash Disclosure Stock issued for debt $ -- $ (10,500) ------------ ------------
See accompanying notes to financial statements. 5 Amarillo Biosciences, Inc. and Subsidiaries Notes To 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 the Company's Form 10-KSB for the year ended December 31, 2004 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 six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2005. 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. There were 520,000 options granted to purchase common stock in the three months ended March 31, 2005, with an exercise price of $0.40 per share with a 5 year term. No options were granted in the three month period ending June 30, 2005. 3. 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. Six Months Ended June 30, 2005 2004 ------------ ------------ Net loss, as reported $ (274,457) $ (341,901) Less: stock based compensation determined under fair value based method $ (181,105) $ -- ------------- ------------- Pro forma net loss $ (455,562) $ (341,901) ============= ============= Basic and diluted net loss per share As reported $ (0.02) $ (0.03) Pro forma $ (0.02) $ (0.03) 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 134.0%, risk-free interest rate of 1.5% and expected life of 60 months. 6 4. Loss per share. Loss per share is computed based on the weighted average number of common shares outstanding. 5. 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. 6. Equity. During the six months ended June 30, 2005, the Board of Directors authorized the issuance of 12,612 shares of restricted common stock to consultants in lieu of cash payments. Based upon the common stock trading price at the time of issuance, a non-cash consulting expense of $5,074 was recorded for the issuance of these shares during the first half of 2005. In the first six months of 2005, the Company completed private equity financing by selling 1,650,000 restricted shares of common stock at a discount to 21 investors. The net proceeds to the Company were approximately $192,000. During the quarter ending March 31, 2005 Amarillo issued 250,000 shares of stock to a consultant. The consultant paid $2,500 for these shares. The difference between the fair market value of the stock of $80,000 and the cash proceeds of $2,500 was recorded as compensation expense. In May 2005 the shareholders voted to change the number of authorized shares of common stock from 20,000,000 to 50,000,000. 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. 7 In the first six months of the fiscal year, the Company completed private equity financing by selling restricted stock at a discount to 21 investors. The net proceeds to the Company were approximately $192,000. During the first six months of 2005, the Company worked in five areas to improve its business. These are the areas 1) agroterrorism, 2) publishing, 3) partner discussions, 4) sales, and 5) relocation. Agroterrorism. Dr. Joseph Cummins continues to meet 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. Dr. Cummins expressed his concerns that the livestock in the Texas Panhandle are completely vulnerable to an attack with foot-and-mouth disease virus and proposed an alternative control plan that was published in January 2005 (see next paragraph). Publishing. A manuscript entitled "Orally Administered Interferon Alpha has Systemic Effects" was published in the January issue of the American Journal of Veterinary Research. This information, the Company believes, will help it gain recognition for its inexpensive, non-toxic technology. A second publication was posted on the internet by the International Society for Interferon and Cytokine Research, Jan 2005, Vol 12, No 1, pages 9-15. Entitled Foot-and-Mouth Disease: A Third Control Alternative, this document is expected to increase awareness about our plan to combat Foot-and-Mouth Disease. Nutraceutical Product. Natrol has discontinued the sale of anhydrous crystalline maltose (ACM) under their brand name Dry Mouth Relief (DMR). The Company sells ACM as Maxisal(R) to individuals and to pharmacies in the USA and to licensed distributors overseas. Partner/License Discussions. The Company is presently negotiating with human health and animal health commercial development partners in various regions of the world including the United States and South East Asia. The Company believes that one or more of these agreements will be executed during 2005. These agreements could generally include provisions for the commercial partner to pay the Company a technology access fee, could include payments for a portion of the clinical trial expenses, could include payment obligations to the Company upon the accomplishment of certain defined tasks and/or could provide for payments relating to the future sales of commercial product. These agreements could be an important source of funds for the Company. 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. The Company has edited the protocols for myeloproliferative disease studies at a major cancer center in Texas. The myeloproliferative diseases to be studied are polycythemia vera and essential thrombocythemia. An investigational new drug (IND) application was filed in the second quarter of 2005 and clinical supplies were ordered in the first quarter of 2005. The study is expected to enroll its first patient in October 2005. 8 Documents were prepared to be submitted to the Turkish government seeking permission to conduct a study on 90 patients with Behcet's disease. Nobel ILAC and the Company have agreed to extend the study to 12 weeks of treatment with interferon lozenges in order to collect more data about prevention of recurrence of oral ulceration. The IND application was submitted to the FDA. Our goal is to enroll the first patients to receive oral interferon before the end of 2005. Relocation. The Company has continued to explore relocation incentives. Negotiations have continued and a decision is expected in the third quarter of 2005. Results of Operations: Revenues. During the six-month period ended June 30, 2005 $40,774 from product sales was generated compared to revenues from product sales for the six-month period ended June 30, 2004, of $23,826, an increase of $16,948 or approximately 70%. There have been no sales of oral interferon products in the USA in 2005. The increase in revenue can be contributed to international sales. There was a royalty payment of $42,134 credited for animal health sales of oral interferon products in Japan. Selling, General and Administrative Expenses. Selling, General and Administrative expenses of $230,828 were incurred for the six-month period ended June 30, 2005, compared to 226,858 for the six-month period ended June 30, 2004. Non-Cash Consulting Activities. During the six-month period ended June 30, 2005, the Board of Directors authorized the issuance of shares of restricted common stock to two consultants in lieu of cash payments. Based upon the common stock trading price at the times of issuance, and FASB rules, a non-cash consulting expense of $82,575 was recorded for the issuance of these shares during the six-month period ended June 30, 2005. Net Income (Loss). As a result of the above, in the six-month period ended June 30, 2005, the Company's Net Loss was ($274,457) compared to a Net Loss for the six-month period ended June 30, 2004 of ($341,901). This decreased loss is primarily due to higher revenues in 2005. Liquidity Needs: At June 30, 2005, the Company had available cash of approximately $12,488, and had a working capital deficit of approximately ($1,752,445). 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 2005 Plan. 9 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. 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. Item 3. Controls and Procedures As required by Rule 13a-15 under the Exchange Act, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures as of the end of the period covered by this quarterly report, being June 30, 2005. This evaluation was carried out under the supervision and with the participation of our company's management, including our company's president and chief executive officer. Based upon that evaluation, our company's president and chief executive officer concluded that our company's disclosure controls and procedures are effective as at the end of the period covered by this report. There have been no significant changes in our company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date we carried out our evaluation. 10 Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our company's reports filed under the Exchange Act is accumulated and communicated to management, including our company's president and chief executive officer as appropriate, to allow timely decisions regarding required disclosure. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended June 30, 2005. 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: August 9, 2005 By: /s/ Joseph M. Cummins ----------------------------------------- Joseph M. Cummins President, Chief Executive Officer and Chief Financial Officer 11