Filing summary
Business context and reporting period
This is a Form 10-Q for the three months ended March 31, 2012. The filing identifies the registrant as Amarillo Biosciences, Inc., not Ainos, Inc.; verify that this is the intended filing. Amarillo was developing low-dose oral interferon products and reported negligible product sales. Its strategy was to fund Phase 2 studies and pursue pharmaceutical partners for further development and commercialization.
Financial performance and position
- Revenue was $240, down from $2,720 in Q1 2011. Gross margin was $144, compared with $1,289.
- Research and development expense was $84,189, down 3%; selling, general and administrative expense was $73,998, down 33%. Operating loss narrowed to $158,043 from $196,880.
- Net loss was $236,114, versus $220,253; net loss applicable to common shareholders was $242,672, versus $224,459. Reported basic and diluted loss per share rounded to $0.00 in both periods.
- Operating cash outflow was $112,297, compared with $39,615. Financing provided $132,000; cash increased by $19,703 to $22,522 at quarter-end.
- At March 31, total assets were $129,198 and current liabilities were $4,228,578, leaving a working-capital deficit of $4,201,089. Stockholders’ deficit was $4,099,380.
- Current liabilities included $2,382,000 of related-party notes, $870,505 of accrued related-party interest, $825,769 of accounts payable and accrued expenses, and $71,944 of derivative liabilities. The company also disclosed a $200,000 note to a director and $182,000 in working-capital loans from its CEO. The HBL notes were in repayment default, although HBL had not demanded payment.
- Management estimated cash burn at approximately $66,000 per month and stated that cash on hand was insufficient to fund operations. The company reported an accumulated deficit of $36,390,228.
Material changes and unusual items
- Net loss increased 7% year over year despite a 20% reduction in operating loss, reflecting higher interest expense and derivative-related losses.
- During Q1, the company issued 1,995,108 common shares, including shares for debt conversion, and issued preferred shares for cash, debt, interest and dividends. It also issued 724,487 additional warrants after a dilutive share issuance; common shares outstanding were 73,554,897 at March 31.
- Noncash financing items included $74,091 of common stock issued for convertible debt and preferred shares issued for related-party debt, interest and dividends. Cash financing included $192,000 of related-party note proceeds and $20,000 from preferred stock sales.
- In April 2012, the company disclosed that Hayashibara Company, Ltd. had decided to permanently halt production of interferon alpha. Amarillo said its supply agreement might be terminated or materially changed and that it was exploring alternative supply, including possible access to existing inventory and production-related materials.
- A chronic-cough Phase 2 study was closed in April 2012 because enrollment was insufficient to produce meaningful results. Results from a Taiwan influenza study were expected in the second half of 2012, and final results from a Taiwan hepatitis C study were expected in Q2 2012.
- After quarter-end, the company received $79,829 in additional short-term, non-interest-bearing working-capital loans through arrangements involving its CEO.
Outlook, risks and contingencies
Management said additional financing was necessary and was pursuing investors and pharmaceutical partners, but gave no assurance that funding would be available. The filing states that recurring losses, limited liquidity and reliance on financing raise substantial doubt about the company’s ability to continue as a going concern. Potential financing could materially dilute existing shareholders or result in a change of control. Other principal risks include regulatory approval and clinical-trial outcomes, patient recruitment, dependence on third-party supply and distribution, the loss of interferon production by its supplier, and possible demands for defaulted HBL debt. Management reported disclosure controls as effective and no significant changes in internal controls during the quarter.
Important facts to verify
- Confirm that the Amarillo Biosciences 10-Q is the intended filing for the Ainos, Inc. request.
- Verify the status, terms and repayment demands for HBL debt and related-party loans, and the company’s near-term funding needs.
- Confirm whether Amarillo secured an alternative interferon supply following HBC’s production halt.
- Reconcile the derivative loss: the statement of operations reports $23,631, while the notes describe a $25,483 derivative loss.
- Check the reported cash burn estimate against operating cash flow and subsequent financing, and confirm the status of the cited clinical-trial results.