Business context and reporting period
The filing is Amarillo Biosciences, Inc.’s Form 10-K for the fiscal year ended December 31, 2013, not a filing identified as Ainos, Inc. The company describes a biotechnology business focused on low-dose oral interferon and the Maxisal dry-mouth supplement. It filed for Chapter 11 protection on October 31, 2013 and remained in bankruptcy when this report was signed on April 15, 2014.
Financial performance and position
| Metric | FY 2013 / year-end | FY 2012 / prior year-end |
|---|---|---|
| Revenue | $0 | $530 |
| Research and development expense | $132,962 | $199,599 |
| Selling, general and administrative expense | $433,193 | $355,327 |
| Operating loss | $566,155 | $554,608 |
| Net loss | $622,602 | $650,847 |
| Net loss attributable to common shareholders | $654,992 | $681,698 |
| Operating cash used | $664,248 | $489,442 |
| Cash at year-end | $6,539 | $7,261 |
| Total assets | $161,531 | $115,035 |
| Total liabilities | $4,944,318 | $4,242,330 |
Gross margin was zero in 2013 because there were no sales; the prior-year gross margin was $318 on $530 of revenue. SG&A rose about 22%, including $56,408 of bankruptcy reorganization expense and higher directors’ and officers’ insurance. R&D fell about 33%, mainly due to lower personnel costs. The net loss narrowed about 4%, while operating cash use increased. Cash flows from financing provided $678,585, primarily through related-party advances; investing activities used $15,059. The filing does not provide a meaningful revenue-based margin for 2013.
At year-end, the balance sheet showed a $4.78 million stockholders’ deficit and less than $7,000 in cash. Notes payable to related parties were $3.53 million, with additional accrued related-party interest of $1.05 million. Yang’s July 2013 secured advances totaled $280,000 at year-end and were secured by substantially all company assets. Separately, the filing reports that at the October 31 bankruptcy petition date the company had $101,089 of assets and $4,787,127 of liabilities.
Material changes and proposed reorganization
- Hayashibara halted interferon production; the supply agreement ended in December 2012, leaving the company without a current source for clinical trials or commercial supply. The company said studies using its historical natural interferon may need to be repeated with recombinant interferon.
- The company’s proposed Chapter 11 plan, whose disclosure statement was approved by the bankruptcy court on March 28, 2014, remained subject to confirmation. A confirmation hearing was scheduled for May 20, 2014.
- Under the proposed plan, Yang would contribute $250,000, receive 80% of reorganized equity in exchange for its unsecured claim and contribution, and hold a $150,000 secured claim payable over five annual installments. General unsecured creditors would generally receive 6% of allowed claims, or could elect payment of the lesser of their claim or $500. Existing common shares would undergo a 1-for-19 reverse split; existing common and preferred interests would be canceled and replaced under the plan’s equity terms. These treatments were proposed, not completed as of the filing.
- The plan depends on Yang’s funding. The disclosure statement estimated post-confirmation capital needs of $1.0 million to $1.6 million, but said Yang had not expressly committed to those additional amounts.
Outlook, risks and unusual items
Management described no near-term revenue guidance. It projected that any renewed effort to commercialize intellectual property would require a replacement interferon source, further trials and regulatory work, and additional financing; meaningful revenue was not expected before the final quarter of 2014, or possibly later. The company had no ongoing clinical studies at year-end. Its principal product requires regulatory approval.
The independent auditor stated that recurring losses, the absence of significant revenue, the need for financing and the Chapter 11 filing raise substantial doubt about the company’s ability to continue as a going concern. The company also warned that bankruptcy could delay or prevent reorganization, restrict ordinary-course actions and jeopardize vendor and partner relationships. Other risks include competition from better-funded companies, patent expirations, the uncertain commercial value of its intellectual property, and potential loss of licensing relationships. Its proposed liquidation analysis estimated maximum net liquidation value of $20,000, but that was management’s estimate, not an independent valuation. The filing also reported approximately $22.77 million of tax net operating loss carryforwards, subject to ownership-change limitations and uncertain future usability.
Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to management’s internal-control assessment. The company had no audit committee at year-end. The plan disclosure stated that its projections, claim balances and asset values were not independently verified, and no fairness opinion was obtained.
Most important facts to verify
- Confirm the issuer’s identity: the supplied filing is for Amarillo Biosciences, Inc., whereas the request names Ainos, Inc.
- Check the bankruptcy docket for whether the plan was confirmed, became effective, and whether Yang funded the $250,000 contribution and subsequent capital needs.
- Reconcile creditor claims, related-party balances, secured liens and cash availability against bankruptcy schedules and subsequent reports.
- Verify whether the company secured a replacement interferon supplier, resumed clinical or development work, and retained or renewed relevant licenses and patents.
- Review the final equity allocation, reverse split, warrant and option adjustments, and any trading restrictions if the plan was implemented.