Business context and reporting period
The supplied filing is Amarillo Biosciences, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2011; it does not identify Ainos, Inc. as the registrant. Amarillo was developing low-dose oral interferon products and depended on clinical progress, licensing partners, and external financing. Its products required further development, testing, and regulatory approval.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $50,480 | $1,375 | $58,035 | $4,495 |
| Operating expenses | $514,558 | $295,806 | $1,006,507 | $807,491 |
| Operating loss | $464,270 | $295,031 | $952,683 | $805,691 |
| Net income (loss) | ($534,807) | ($170,649) | ($1,083,363) | $120,277 |
| Net loss applicable to common shareholders | ($539,057) | ($171,877) | ($1,096,069) | $119,049 |
| Cash used in operating activities | Not stated quarterly | ($199,737) | ($312,162) |
Q3 revenue included a $50,000 sublicense fee from an option agreement with Colorado Serum Company; product sales were only $480. Nine-month product sales were $8,035. Gross margin was $50,288 in Q3 and $53,824 for the nine-month period, principally reflecting sublicense income with little associated cost of revenue. The filing does not provide a meaningful product gross-margin measure separately.
At September 30, 2011, cash was $1,147; current assets were $69,667 and current liabilities were $4,194,822, yielding a working-capital deficit of $4,125,155. Total liabilities were $4,194,822 and stockholders’ deficit was $4,015,978. Current liabilities included $2.27 million of related-party notes, $818,667 of accrued interest to related parties, $171,906 of derivative liabilities, and $24,995 of net convertible notes. Management estimated cash burn at approximately $66,000 per month.
Material changes versus comparable periods
- Q3 revenue rose from $1,375 to $50,480 due to the sublicense fee, while product sales declined 65% to $480.
- Q3 SG&A increased 120% to $426,465, attributed mainly to stock-option expense, public/investor relations, insurance, and stock grants. R&D fell 14% to $88,093.
- Q3 net loss widened to $534,807 from $170,649. Derivative results swung to a $9,954 expense from $148,555 of income; interest expense also increased to $60,583 from $24,173.
- For the first nine months, the company moved from $120,277 net income to a $1,083,363 net loss, largely because derivative income of $996,345 in 2010 became derivative expense of $9,122 in 2011. SG&A rose 46%, while R&D declined 11%.
- Cash fell from $4,332 at December 31, 2010 to $1,147 at September 30, 2011. Nine-month financing provided $199,000, primarily from convertible notes and related-party borrowing, alongside operating cash use of $199,737.
Outlook, risks, contingencies, and unusual items
- Management said additional funds were needed to execute its 2011 plan and that it was pursuing investors and pharmaceutical partners. It cautioned that financing or partner funding was not assured. The filing states that recurring losses and lack of liquidity raise substantial doubt about the company’s ability to continue as a going concern.
- Management hoped to attract global pharmaceutical partners in 2012. A Taiwan influenza study’s results were expected in mid-2012; hepatitis C study results were expected in early 2012. The U.S. chronic-cough study was on indefinite hold because of slow recruitment.
- The company was in default on two $1 million HBL notes, although HBL had not demanded payment. Certain director loans and one Asher convertible note were also in default. The filing describes variable-price convertible debt and warrants that can create derivative liabilities and potential share dilution.
- Common shares outstanding increased to 68,243,122 at quarter-end from 61,147,224 at year-end 2010; 20,156,596 additional shares were reserved for options, warrants, and conversions. Management warned that further financing could substantially dilute existing holders or change control.
- Subsequent to quarter-end, a November 5 private placement sold 2,666,667 shares at $0.03 plus 1,000,000 warrants at $0.03. The issuance triggered an anti-dilution adjustment to an existing warrant. In October, a holder converted $10,000 of an Asher note into 250,000 shares.
- Other business risks include dependence on third-party suppliers and distributors, patent and licensing protection, regulatory approval, clinical-trial recruitment and outcomes, competition, and the financial reorganization of HBL, a key supplier and creditor. The company said it did not expect supply disruption based on information then available.
- Management reported disclosure controls as effective and no significant changes in internal control over financial reporting. It reported no known legal proceedings as of the filing date.
Important facts for investors to verify
- Confirm the registrant: the supplied filing is for Amarillo Biosciences, Inc., not Ainos, Inc.
- Assess near-term liquidity, creditor defaults, the going-concern uncertainty, and the company’s ability to obtain financing or partner payments.
- Review the terms, conversion mechanics, default status, derivative accounting, and potential dilution from Asher notes, warrants, and the November 2011 financing.
- Verify clinical-trial status, enrollment, results timing, regulatory requirements, and the commercial status of licensing arrangements.
- Check whether HBL’s reorganization affected supply, and whether any license or distribution agreements were terminated or reinstated as contemplated.