Ainos, Inc. - Quarter Report: 2014 September (Form 10-Q)

form10-q_09302014.htm

United States

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2014

Commission File Number 0-20791

AMARILLO BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)

TEXAS		75-1974352
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)


4134 Business Park Drive, Amarillo, Texas 79110
(Address of principal executive offices) (Zip Code)


(806) 376-1741
(Issuer’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]		Accelerated filer [ ]
Non-accelerated filer [ ] (do not check if smaller reporting company)		Smaller reporting company [√]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)[ ] Yes [√] No

As of November 14, 2014 there were 73,291,008 shares of the issuer's common stock and 3,262 shares of the issuer’s preferred stock outstanding.

AMARILLO BIOSCIENCES, INC.

INDEX

		PAGE NO.
PART I:	FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Balance Sheets– September 30, 2014 and December 31, 2013 (unaudited)	3
	Statements of Operations – Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)	4
	Condensed Statements of Cash Flows – Nine Months Ended September 30, 2014 and 2013 (unaudited)	5
	Notes to Financial Statements (unaudited)	6
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.	14
ITEM 4.	Controls and Procedures	18

PART II:	OTHER INFORMATION
ITEM 1.	Legal Proceedings	19
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
ITEM 3.	Defaults Upon Senior Securities	19
ITEM 4.	Mine Safety Disclosures	19
ITEM 5.	Other Information	19
ITEM 6.	Exhibits……………………………………………………………	19
Signatures		20

PART I - FINANCIAL INFORMATION

ITEM 1.

Financial Statements

Amarillo Biosciences, Inc.

Debtor and Debtor-in-Possession

Balance Sheets

(Unaudited)

	September 30, 2014			December 31, 2013
Assets
Current assets:
Cash and cash equivalents	$	279		$	6,539
Prepaid expense and other current assets		34,226			61,953
Total current assets		34,505			68,492
Patents, net		87,849			93,039
Total assets	$	122,354		$	161,531

Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued expenses	$	477,331		$	288,244
Accrued interest - related parties		1,051,093			1,050,671
Accrued expenses – related party		78,360			78,360
Notes payable – related parties		3,788,935			3,527,043
Total current liabilities		5,395,719			4,944,318
Total liabilities		5,395,719			4,944,318

Commitments and contingencies

Stockholders' deficit
Preferred stock, $0.01 par value:
Authorized shares – 10,000,000
Issued and outstanding shares – 3,262 at September 30, 2014 and December 31, 2013		33			33
Common stock, $0.01 par value:
Authorized shares - 100,000,000
Issued and outstanding shares – 73,291,008 at September 30, 2014 and December 31, 2013		732,910			732,910
Additional paid-in capital		31,968,516			31,968,516
Accumulated deficit		(37,974,824	)		(37,484,246	)
Total stockholders' deficit		(5,273,365	)		(4,782,787	)
Total liabilities and stockholders’ deficit	$	122,354		$	161,531

See accompanying notes to financial statements.

Amarillo Biosciences, Inc.

Debtor and Debtor-in-Possession

Statements of Operations

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013

Revenues:
Product sales	$	-		$	-		$	-		$	-
Total revenues		-			-			-			-
Cost of revenues:
Product sales		-			-			-			-
Total cost of revenues		-			-			-			-
Gross Margin		-			-			-			-

Operating expenses:
Research and development expenses		-			33,659			15,270			105,450
Selling, general and administrative expenses		103,747			50,793			449,695			302,581
Total operating expenses		103,747			84,452			464,965			408,031

Operating loss		(103,747	)		(84,452	)		(464,965	)		(408,031	)

Other income (expense)
Change in fair value of derivatives		-			-			-			4,217
Interest expense		(590	)		(31,101	)		(1,320	)		(91,409	)
Net loss		(104,337	)		(115,553	)		(466,285	)		(495,223	)
Preferred stock dividend		(8,097	)		(8,097	)		(24,293	)		(24,293	)
Net loss applicable to common shareholders	$	(112,434	)	$	(123,650	)	$	(490,578	)	$	(519,516	)

Basic and diluted net loss per share	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.01	)

Weighted average shares outstanding – basic and diluted		73,291,008			73,377,059			73,291,008			73,494,966

See accompanying notes to financial statements.

Amarillo Biosciences, Inc.

Debtor and Debtor-in-Possession

Condensed Statements of Cash Flows

(Unaudited)

	Nine months ended September 30,
	2014			2013

Net cash used in operating activities	$	(260,320	)	$	(474,912	)

Cash from investing activities:
Patent expenditures		(7,832	)		(14,079	)
Net cash used in investing activities		(7,832	)		(14,079	)

Cash from financing activities:
Proceeds from issuance of note payable related party		261,892			573,835
Payments on notes payable related party		-			(82,500	)
Purchase and cancellation of treasury stock		-			(500)
Net cash provided by financing activities		261,892			490,835

Net change in cash		(6,260	)		1,844
Cash and cash equivalents at beginning of period		6,539			7,261
Cash and cash equivalents at end of period	$	279		$	9,105
Supplemental disclosure of cash flow information
Cash paid for interest	$	1,320		$	3,669
Cash paid for income taxes	$	-		$	-

See accompanying notes to financial statements.

Amarillo Biosciences, Inc.

Debtor and Debtor-in-Possession

Notes to Financial Statements

(Unaudited)

Basis of presentation. The accompanying financial statements, which should be read in conjunction with the financial statements and footnotes included in the Company's Form 10-K for the year ended December 31, 2013, 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, 2014 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014.

Financial Condition. Our viability as a company is dependent upon successful commercialization of products resulting from its research and product development activities. However, our inability to commercialize a product has had a profoundly negative impact on the financial condition of the Company. On October 31, 2013 (the “Petition Date”), Amarillo Biosciences, Inc. (“AMAR”, “ABI”, “Debtor” or the “Company”) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”), in the United States Bankruptcy Court for the Northern District of Texas (the “Bankruptcy Court” or the “Court”). The Chapter 11 Case number is 13-20393-11.

No assurance can be given as to the value, if any, that may be ascribed to the Debtor’s various pre-petition liabilities and other securities. While the Company cannot predict what the ultimate value of any of its securities may be, it has included provisions for treatment of security holders in its confirmed Plan of Reorganization. In most cases under Chapter 11 of the Bankruptcy Code, holders of equity securities receive little or no recovery of value from their investment. Accordingly, the Debtors urge that caution be exercised with respect to existing and future investments in any of these securities or other Debtor claims. On November 4, 2013, the Company’s common stock began trading under the symbol “AMARQ” on the OTCQB marketplace, operated by OTC Markets Group (www.otcmarkets.com).

The Company operated as “a debtor in possession” (DIP) from October 31, 2013, when the Chapter 11 petition was filed until May 23, 2014, when the Company’s Plan of Reorganization was confirmed by the Court. Although the Company has a confirmed Plan of Reorganization (Plan), that Plan has not been implemented and until the Plan is implemented, the Company is still considered a DIP. An Effective Date for the Plan has not yet been determined. Once the Effective Date is set and the Plan is implemented, the Company will continue to operate and carry out the provisions of the Plan supervised by the Court and the Bankruptcy Code to consummate the Plan of Reorganization.

Under Section 362 of the Bankruptcy Code, the commencement of a Chapter 11 case automatically stays most creditor actions against the Debtor’s property. Court filings and claims information are available at http://www.upshotservices.com/amarillobiosciences. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Chapter 11 Proceedings” for further information regarding the Chapter 11 Case. Commercialization of a product or products will require significant development, laboratory and

clinical testing and capital investment prior to obtaining regulatory approval to commercially market our product(s). Continued losses and lack of liquidity indicate that we were having great difficulty being able to continue as a going concern. The ability to continue as a going concern is dependent upon implementation and consummation of an executable Plan of Reorganization. A major component of the plan is recapitalization of the Company.

Common Stock. The shareholders have authorized 100,000,000 shares of voting common shares for issuance. On September 30, 2014, a total of 79,105,800 shares of common stock were either outstanding (73,291,008) or reserved for issuance upon exercise of options and warrants or conversion of convertible preferred stock (5,814,792). No common stock was issued in the nine months ending September 30, 2014.

Common Stock Options and Warrants. As of December 31, 2013 there were 2,287,500 shares reserved as unexercised warrants and 1,752,792 shares reserved as unexercised options. No warrants or options expired in the first quarter of 2014. During the second quarter ended June 30, 2014, the following took place:

a.	On April 30, 2014, 200,000 options owned by Steve Chen expired unexercised. Dr. Chen was granted the options on April 30, 2009 at an exercise price of $0.125 for a term of five (5) years;

Asher Enterprises/Hope Capital, Inc. (“Asher/Hope”) received warrants when outstanding debt was converted to common equity. The warrants were given as required by the loan contracts and security agreements on two loans provided to the Company by Asher/Hope. On April 15, 2011, Asher/Hope received 787,500 warrants with a term of three (3) years and an exercise price of $0.04 which expired unexercised on April 15, 2014. On May 27, 2011, Asher/Hope received 500,000 warrants with a term of three (3) years and an exercise price of $0.04 which expired unexercised on May 27, 2014.

No warrants or options expired in the third quarter of 2014.

A summary of the Company’s stock option activity and related information for the period ended September 30, 2014 is as follows:

	Options		Price Range
Outstanding December 31, 2013		1,752,792	$	0.040-0.125
Granted		-		-
Cancelled/Expired		200,000		0.125
Exercised		-		-
Outstanding September 30, 2014		1,552,792		0.040-0.065
Exercisable September 30, 2014		1,552,792	$	0.040-0.065

A summary of the Company’s stock warrant activity and related information for the period ended September 30, 2014 is as follows:

	Warrants		Price Range
Outstanding December 31, 2013		2,287,500	$	0.03-0.04
Granted		-		-
Cancelled/Expired		1,287,500		0.04
Exercised		-		-
Outstanding September 30, 2014		1,000,000		0.03
Exercisable September 30, 2014		1,000,000	$	0.03

Convertible Preferred Stock. The shareholders have authorized 10,000,000 shares of preferred stock shares for issuance. The Board of Directors authorized the issuance of up to 10,000 shares of Series 2010-A 10% Convertible Preferred Stock on July 29, 2010. Each preferred share is convertible into 1,000 common shares ($100 stated value per share divided by $0.10). Dividends are payable quarterly at 10% per annum in cash or stock at the option of the preferred stock holder. Stock dividend payments are valued at the higher of $0.10 per share of common stock or the average of the two highest volume weighted average closing prices for the 5 consecutive trading days ending on the trading day that is immediately prior to the dividend payment date.

There was no Series 2010-A 10% Convertible Preferred Stock issued in the nine months ending September 30, 2014.

The Company accrued $63,240 of dividends on preferred stock in 2013 and accrued $24,293 of dividends on preferred stock during the first nine months of 2014.

Notes Payable – Related Party. Two $1,000,000 notes are payable under an unsecured loan agreement with Hayashibara Biochemical Laboratories, Inc. (“HBL”), a major stockholder, dated July 22, 1999. Although we are currently in repayment default on the notes, HBL has not demanded payment. The principal and accrued interest through October 31, 2013, Petition Date, is listed on Schedule F of the Summary of Schedules filed by ABI with the United States Bankruptcy Court. Schedule F is the List of Unsecured Non-priority (Creditors’) Claims. The claim is also scheduled in Class Four – General Unsecured Creditors of the Plan of Reorganization – in the amount of $3,006,252.88. The disposition of all classes of creditors is a provision of the Company’s confirmed Plan of Reorganization.

On January 10, 2011 a promissory note for $200,000 was executed with Paul Tibbits, a director, which is in default and accrues interest at the default rate of 10% per annum, with no stated maturity date, and no collateral. This debt is listed on Schedule F of the Summary of Schedules filed by the Company with the United States Bankruptcy Court. Schedule F is the list of Unsecured Non-priority (Creditors’) Claims. The Claim is also scheduled in Class Four – General Unsecured Creditors of the Plan of Reorganization. The debt includes $200,000 of principal and $35,055.56 of pre-petition interest accrued through October 31, 2013, Petition Date. As of September 30, 2014, this note is still outstanding. The disposition of all classes of creditors is a provision of the Company’s confirmed Plan of Reorganization.

Amendment #4 to the employment contract of Joseph M. Cummins (“Employee”) was entered into on May 19, 2012 by Employee and ABI (“Employer”). The amendment provides for the change in annual salary of Employee from $175,000 per year to $5,000 per month ($60,000 annually). Additionally, Employee releases Employer from any liability for payment of back salary or benefits (of any form) in the amount of $278,259. Further, the Company forgave an employee receivable of approximately $10,448 in connection with the amended employment agreement. The Amendment further states that the term of the contract shall be through November 30, 2012. Commencing December 1, 2012 through November 30, 2014, the Employee became a consultant for the monthly sum of $5,000. The Amendment was effective as of May 15, 2012, and was executed by Dr. Stephen T Chen, PhD, Chairman and CEO and Joseph M. Cummins, DVM, PhD, President and COO. This contract was rejected as shown in the approved Disclosure Statement for the Plan of Reorganization. Any claim which arose in conjunction with the rejection of this contract is provided for in the Confirmed Plan of Reorganization.

On October 31, 2012, ABI carried a liability for back salary owed to Martin Cummins in the amount or $236,732. An agreement was reached between ABI and Martin Cummins wherein the parties agreed that claim to $136,732 was waived and forgiven by Martin Cummins, both parties agreed to execute a note payable for $100,000 which was not forgiven by Mr. Cummins and would be paid with a $40,000 down payment and a payout according to a schedule, and a new employment contract where Mr. Cummins was given ten months employment at $5,000 gross salary per month to be employed. Furthermore, both parties agreed to execute a mutual release of liability and Mr. Cummins agreed to return 879,000 ABI stock options. As of September 30, 2014, the outstanding balance on the note payable was $13,250. This amount is listed as a Class Four – General Unsecured Debt in the Plan of Reorganization and Disclosure Statement.

All future transactions and loans between the Company and its officers, directors and 5% shareholders will be on terms no less favorable to the Company than could be obtained from independent third parties. There can be no assurance, however, that future transactions or arrangements between the Company and its affiliates will be advantageous, that conflicts of interest will not arise with respect thereto or that if conflicts do arise, that they will be resolved in favor of the Company.

Stephen Chen, ABI CEO, wired the Company money for working capital loans to be used for operations; total cash received through Dr. Chen for 2012 was $547,958. During 2013 through July 19, 2013, cash received through Dr. Chen was $428,835. The advances were short term, without due dates, and carry no stated interest rates or any other terms.

On July 19, 2013, the unsecured funds advanced through Dr. Chen ($976,793), were reduced to a promissory note made payable by Amarillo Biosciences, Inc. to the Yang Group. The note was a demand note with no certain due date with an annual interest rate of 23/100 of one percent (.23%) due on unpaid principal from the date of funding. The interest rate was based on the Applicable Federal Rate (“AFR”) in force for the month in which the note was executed. The note carried a 10% annual interest rate on material, unpaid amounts. There was no penalty for prepayment of outstanding amounts. As of September 30, 2014, the note is still outstanding and is included in the Plan of Reorganization.

On July 25, 2013, the Yang Group began advancing funds under a new promissory note which is secured by substantially all of the assets of the Company. The note is a revolving/advancing note for $300,000 or so much thereof as may from time to time have been advanced. The annual interest rate as to each advance thereunder, is at the short term Applicable Federal Rate (“AFR”) determined under Section 1274(d) of the Internal Revenue Code of 1986, for the month in which such advance was received. As of September 30, 2014, $280,000 was advanced under the secured note and remains outstanding. This note is included in the Plan of Reorganization.

An order of the Bankruptcy Court approved a Post-Petition Financing Facility on January 15, 2014. The Facility is an unsecured, priority basis financing facility approving up to $285,000 of funds to be advanced as needed. From Petition Date of October 31, 2013, through September 30, 2014, $318,892 has been advanced under the Post-Petition Financing Facility. The source of funds under the Facility continues to be The Yang Group.

For some time, the Company had been researching and contemplating structural changes. After significant research and serious consideration, the Company filed a voluntary petition for reorganization under Chapter 11 of Title XI of the U.S. Code on October 31, 2013. The Company operated as “a debtor in possession” (DIP) from October 31, 2013, until May 23, 2014, when the Company’s Plan of Reorganization was confirmed by the Court. The Company continues to be a DIP until the Plan is implemented and consummated. An Effective Date for the Plan has not yet been determined. Once the Effective Date is set and the Plan is implemented, the Company will continue to operate and carry out the provisions of the Plan supervised by the Court and the Bankruptcy Code to consummate the Plan of Reorganization.

Line of Credit. We had a line of credit with Wells Fargo for $20,000, with an interest rate of prime rate plus 6.75 percent. There was an outstanding balance of $18,376 on October 31, 2013, when the Chapter 11 Petition was filed. This debt is listed on Schedule F of the Summary of Schedules filed by the Company with the United States Bankruptcy Court. Schedule F is the list of Unsecured Non-priority (Creditors’) Claims. The Claim is also scheduled in Class Four – General Unsecured Creditors of the Plan of Reorganization. This debt is also included on the September 30, 2014 Balance Sheet and the outstanding balance of $18,376 is included in accounts payable and accrued expenses.

8.	Subsequent Events. From October 1, 2014 through the date of this report $26,000 was received by the Company from The Yang Group through Dr. Stephen T. Chen.

In addition, the Company received an aggregate of $400,000 from The Yang Group as funding for the Plan of Reorganization, of which $300,000 was received on October 30, 2014 and $100,000 was received on November 4. Of the $400,000 received, $250,000 satisfies the requirement of the cash contribution as defined in Section 1.015 of the Plan of Reorganization.

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.

Company Goal – FDA Approval and Commercialization of Oral Interferon

Amarillo Biosciences, Inc. (OTCBB or OTCQB: AMARQ) is a leader in the development of low-dose interferon for oral delivery, having completed more than 100 pre-clinical (animal) and human studies related to this technology to date. Our current focus is research aimed at the treatment of human disease indications, particularly influenza, hepatitis C et al, thrombocytopenia, and other indications using interferon alpha that is administered in a proprietary low dose oral form.

Intellectual Property

Since inception, the Company has worked to build an extensive patent portfolio for low-dose orally administered interferon. This portfolio consists of patents with claims that encompass method of use or treatment, and/or composition of matter and manufacturing. We presently own or license six issued

patents, including one patent on our dietary supplement, Maxisal®. We currently have one pending patent which applies low dose oral interferon to the treatment of Thrombocytopenia.

Technology - Non-toxic Interferon

Injectable interferon is FDA-approved to treat some neoplastic, viral and autoimmune diseases. Many patients experience moderate to severe side effects that result in discontinuance of injectable interferon therapy. Our main product has been a natural human interferon alpha delivered into the oral cavity as a lozenge in low (nanogram) doses. The lozenge dissolves in the mouth where interferon binds to surface (mucosal) cells in the mouth and throat resulting in stimulation of immune mechanisms. Orally delivered interferon has been shown to activate hundreds of immune system genes in the peripheral blood. Human studies have shown that oral interferon is safe and effective against viral and autoimmune diseases. Oral interferon is given in concentrations 10,000 times less than that usually given by injection. The Company’s low dose formulation results in almost no side effects; high dose injectable interferon causes adverse effects in at least 50% of recipients.

Governmental or FDA approval is required for our principal product. Our progress toward approval is discussed under each specific indication, below.

Strategic Alliance with HBL

Hayashibara Biochemical Laboratories, Inc. (“HBL”) produced a natural form of human interferon alpha and also developed technology relating to the production of interferon alpha-containing lozenges by which the stability of the interferon alpha can be maintained at room temperature. We believe that the use of such lozenges gives us advantages over competitive technologies in terms of cost, taste and ease of handling.

On March 13, 1992, we entered into a Joint Development and Manufacturing/Supply Agreement with HBL (the “Development Agreement”). As of February 1, 2012, HBL began operating under the name Hayashibara Company, Ltd. (“HBC”) as a wholly-owned subsidiary of Nagase Corporation. In correspondence received April 23, 2012, HBC informed us that they had decided to permanently halt production of interferon. Written notice was received on September 23, 2012, and the Development Agreement was officially terminated as of December 22, 2012.

The Development Agreement provided us with a source of natural human interferon alpha for use in the Company’s interferon alpha-containing products. Termination of the Development Agreement leaves the Company without a current source of interferon with which to conduct clinical trials. The Company is currently exploring its options and is talking with alternate suppliers of interferon.

Historically, the research and development was conducted by ABI using a unique form of natural human interferon supplied by HBL. This interferon no longer provides a competitive edge insomuch as the industry as a whole is rapidly moving toward the use of recombinant interferon rather than natural human interferon. ABI’s thirty years of data has been generated from the numerous studies performed using natural human interferon. Since human interferon is virtually impossible to obtain, those studies will have to be repeated using recombinant interferon. Repeating the studies will be both costly and time consuming. While the pharmaceutical industry is creating and marketing new and effective anti-viral medications, ABI believes that there is still sufficient time to develop and commercialize low dose interferon for treatment of such diseases as Influenza, Chronic Cough in COPD, Hepatitis B, C, and D, and Thrombocytopenia caused by other diseases and as a side effect of treatment of other diseases.

Strategic Alliance with Bumimedic

In January 2006, a license and distribution agreement was executed with Bumimedic (Malaysia) Sdn. Bhd, a Malaysian pharmaceutical company that is a part of the Antah HealthCare Group, to market our low-dose interferon (natural human IFN) in Malaysia. Given the problems associated with the natural human interferon supply, it is likely that the agreement with Bumimedic will be terminated as the Company can no longer supply Bumimedic with natural human IFN produced by Hayashibara. Once the problems associated with the interferon supply are solved, the Company will most likely endeavor to enter into another such agreement with Bumimedic.

Strategic Alliance with Intas Pharmaceuticals

On January 7, 2010, the Company entered into a License and Supply Agreement with Intas Pharmaceuticals Ltd., an India-based pharmaceutical company with three decades of experience in the healthcare industry and a global presence in 42 countries worldwide. Given the termination notice received from HBC, it is likely that the agreement with Intas will be terminated as the Company can no longer supply Intas with natural human IFN produced by Hayashibara. Once the problems associated with the interferon supply are solved, the Company will most likely endeavor to enter into another such agreement with Intas Pharmaceuticals.

Equity Funding. There have been no sales of stock in the nine months ending September 30, 2014.

Results of Operations for Quarters Ended September 30, 2014 and 2013:

Revenues. During the three months ended September 30, 2014, and September 30, 2013 there were no sales of dietary supplements or ACM.

Research and Development Expenses. Research and development expenses of $0 were incurred for the quarter ended September 30, 2014, compared to $33,659 for the quarter ended September 30, 2013, a decrease of $33,659 (100%). The amount was lower in 2014 than 2013 due to the Ch. 11 Bankruptcy Reorganization. All R&D expenses ceased and beginning in April 2014 all R&D expense reclassification stopped until R&D resumes.

Selling, General and Administrative Expenses. Selling, general and administrative expenses of $103,747 were incurred for the quarter ended September 30, 2014, compared to $50,793 for the quarter ended September 30, 2013, an increase of $52,954 (104%). This increase was mostly due to no R&D Reclassification for certain administrative costs in the quarter ended September 30, 2014, D&O Insurance liability increased for 2014, and the addition of the Reorganization Expense associated with the Chapter 11 Bankruptcy Reorganization.

Operating Loss. In the three-month period ended September 30, 2014, the Company's operating loss was $103,747 compared to an operating loss for the three-month period ended September 30, 2013 of $84,452, a $19,295 (23%) increase. There were approximately the same expenses overall during the quarter ending September 30, 2014, but the addition of Reorganization Expense related to the bankruptcy filing increased the loss.

Interest Expense. During the three-month period ended September 30, 2014, interest expense was $590, compared to $31,101 for the three-month period ended September 30, 2013. The interest expense recognized in the third quarter of 2014 is due to the Post-Petition Financing Facility and D&O insurance only.

Net Loss. In the three-month period ended September 30, 2014, the Company's net loss was $104,337 compared to a net loss for the three-month period ended September 30, 2013 of $115,553, a $11,216 (10%) decrease. This decrease was mainly due to increased reorganization expense and decrease in interest.

Results of Operations for the Nine Months Ended September 30, 2014 and September 30, 2013.

Revenues. During the nine months ended September 30, 2014 and September 30, 2013 there were no sales of dietary supplements. During the nine months ended September 30, 2014 and September 30, 2013 there were no ACM sales.

Research and Development Expenses. Research and development expenses of $15,270 were incurred for the nine month period ended September 30, 2014, compared to $105,450 for the nine month period ended September 30, 2013, a decrease of $90,180 (86%). The amount was lower in 2014 than 2013 due to the Ch. 11 Bankruptcy Reorganization. All R&D expenses ceased and beginning in April 2014 all R&D expense reclassification stopped until R&D resumes.

Selling, General and Administrative Expenses. Selling, general and administrative expenses of $449,695 were incurred for the first nine months of 2014, compared to $302,581 for the first nine months of 2013, an increase of $147,114 (49%). This increase was mostly due to no R&D Reclassification for certain administrative costs beginning in April 2014, D&O Insurance liability increased for 2014, and the addition of the Reorganization Expense associated with the Chapter 11 Bankruptcy Reorganization.

Operating Loss. In the nine month period ended September 30, 2014, the Company's operating loss was $464,965 compared to an operating loss for the nine month period ended September 30, 2013 of $408,031, a $56,934 (14%) increase.

Change in Fair Value of Derivative Instruments. Change in fair value of derivative instruments was $0 in the first nine months of 2014 compared to a $4,217 gain in the first nine months of 2013. The decrease between the two periods was $4,217 (100%).

Interest Expense. During the nine month period ended September 30, 2014, interest expense was $1,320 compared to $91,409 for the nine month period ended September 30, 2013, a decrease of $90,089 (99%). The interest expense recognized in the second and third quarters of 2014 is due to the Post-Petition Financing Facility and D&O insurance only.

Net Loss. In the nine months ended September 30, 2014, the Company's net loss was $466,285 compared to a net loss for the nine months ended September 30, 2013 of $495,223 a $28,938 (6%) decrease.

Liquidity Needs. At September 30, 2014, we had available cash of $279, and had a working capital deficit of $5,361,214. This includes $102,199 of accrued salaries; $3,051,093 from loans ($2,000,000) and accrued interest ($1,006,253 from HBL and $44,840 from a related party); loans for $200,000 from a Director; and loans of $1,588,935 from related parties. Negative cash flow from operating activities plus reorganization expense and patent filings (burn rate) is approximately $50,000 per month. Continued losses and lack of liquidity indicate that we are having great difficulty being able to continue as a going concern for a reasonable period of time. The ability to continue as a going concern is dependent upon implementation and consummation of a Plan of Reorganization and successful emergence from Chapter 11 Bankruptcy which includes interim and permanent financing.

There can be no assurance that we will be successful in our efforts to reorganize the Company. If we are not successful in our efforts to reorganize, we will be forced to cease operations.

Forward-Looking Statements: Certain statements made throughout this document 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-Q and 10-K 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 operations. 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. Quantitative and Qualitative Disclosures About Market Risk.

Chapter 11 Reorganization Risks.

We filed for reorganization under Chapter 11 of the Bankruptcy Code on October 31, 2013 and are subject to the risks and uncertainties associated with Chapter 11 Cases.

For the duration of our Chapter 11 Case, our operations, including our ability to execute our business plan, are subject to the risks and uncertainties associated with bankruptcy. Risks and uncertainties associated with our Chapter 11 Case includes the following:

	•	our creditors or other third parties may take actions or make decisions that are inconsistent with and detrimental to the plans we believe to be in the best interests of the Company;
	•	we may be unable to obtain court approval with respect to certain matters in the Chapter 11 Case from time to time;
	•	the court may not agree with our objections to positions taken by other parties;
	•	we may not be able to confirm and consummate a Chapter 11 plan of reorganization or may be delayed in doing so;
	•	we may not be able to obtain and maintain normal credit terms with vendors, strategic partners and service providers;
	•	we may not be able to continue to invest in our products and services, which could hurt our competitiveness;
	•	we may not be able to enter into or maintain contracts that are critical to our operations at competitive rates and terms, if at all;
	•	we may be exposed to risks associated with third parties seeking and obtaining court approval to (i) terminate or shorten our exclusivity period to propose and confirm a plan of reorganization, (ii) appoint a Chapter 11 trustee or (iii) convert the case to a Chapter 7 liquidation case.

These risks and uncertainties could affect our business and operations in various ways. For example, negative events, the positions we take in court, or publicity associated with our Chapter 11 Case could adversely affect our relationships with vendors and partners which in turn could adversely affect our operations and financial condition, particularly if the Chapter 11 Case is protracted. Because of the risks and uncertainties associated with our Chapter 11 Case, the ultimate impact of events that occur during these proceedings will have on our business, financial condition and results of operations cannot be accurately predicted or quantified. If any one or more of these risks materializes, it could affect our ability to continue as a going concern.

Operating under Chapter 11 may restrict our ability to pursue our business strategies.

Under Chapter 11, transactions outside the ordinary course of business will be subject to the prior approval of the Bankruptcy Court, which may limit our ability to respond in a timely manner to certain events or take advantage of certain opportunities. We must obtain Bankruptcy Court approval to, among other things:

	•	engage in certain transactions with our vendors;
	•	buy or sell assets outside the ordinary course of business;
	•	consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
	•	borrow for our operations, investments or other capital needs or to engage in other business activities that would be in our interest.

We may not be able to adequately protect and maintain our intellectual property. Our success will depend in part on our ability to protect and maintain our patents, intellectual property rights and licensing arrangements for our products and technology. We currently own or license five patents related to orally-delivered low dose interferon, and one issued patent on our dietary supplement, Maxisal®. No assurance can be given that such licenses or rights used by us will not be challenged, infringed or circumvented or that the rights granted thereunder will provide competitive advantages to us. Furthermore, there can be no assurance that we will be able to remain in compliance with our existing or future licensing arrangements. Consequently, there may be a risk that licensing arrangements are withdrawn with no penalties to the licensee or compensation to us.

We rely on third parties for the supply, manufacture and distribution of our products. Third parties manufacture and distribute all of our products. Our reliance on third parties such as HBL (HBC) has left us without a source of natural human interferon which seriously jeopardizes our ability to leverage our core technology. The Company has been forced to diligently search for a new supply of interferon. Developing a new source of interferon will be very costly and time consuming which will have a profoundly negative impact on the Company’s continuing operations. We do not currently have manufacturing facilities or personnel to independently manufacture our products; therefore, third parties would have to manufacture and distribute all of our products. Licensed distributors located in the United States and internationally, would be required to distribute the products. Except for any contractual rights and remedies that we might have with potential manufacturers and distributors, we would have no control over the availability of our products, their quality or cost or the actual distribution of our products. If for any reason we were unable to obtain or retain third-party manufacturers and distributors on commercially acceptable terms, we would not be able to produce and distribute our products as planned. If delays or difficulties were encountered with contract manufacturers in producing or packaging products or with a distributor in distributing our products, the production, distribution, marketing and subsequent sales of these products would be adversely affected, and we would then have to seek alternative sources of supply or distribution or abandon or sell product lines on unsatisfactory terms or even discontinue sales entirely. We may not be able to enter into alternative supply, production or distribution arrangements on commercially acceptable terms, if at all. There can be no assurance that the manufacturer that we have engaged will be able to provide sufficient quantities of these products or that the products supplied will meet with our specifications or that our distributor will be able to distribute our products in accordance with our requirements.

Sales revenue, sublicense fees and royalty income are currently nonexistent. Historically, the Company’s primary focus has been to achieve FDA approval of oral interferon for one or more disease indications. We do not expect any significant sales or royalty revenue in the next several years. We operate at a net loss and current liabilities exceed current assets by $5,361,214 as of September 30, 2014. Most of the $5,395,719 of current liabilities includes the amount owed to HBL for $2 million in two notes plus $1,006,253 of accrued interest; $200,000 in loans plus $44,840 accrued interest owed to a Director, and $102,199 of accrued salaries and $1,588,935 notes payable owed to related parties.

We are dependent on certain key existing and future personnel. Our ability to continue operations will depend, to a large degree, upon the efforts and abilities of our officers and key management employees such as Stephen T. Chen, President, Chairman and Chief Executive Officer, and Bernard Cohen, our Vice President and Chief Financial Officer. The loss of the services of one or more of our key employees would have a material adverse effect on our operations. We do not currently maintain

key man life insurance on any of our key employees. In addition, as our business plan is implemented, we will need to recruit and retain additional management and key employees in virtually all phases of our operations. We cannot offer assurance that we will be able to successfully attract and retain key personnel. From time to time we contract consultants to advise on certain projects.

If we do not successfully develop, acquire or license new drugs we will not be able to continue operations. We must invest substantial time, resources and capital in identifying and developing new drugs, dosage and delivery systems, either on our own or by acquiring and licensing such products from third parties. Our growth depends, in part, on our success in such process. If we are unable to either develop new products on our own or acquire licenses for new products from third parties, our ability to grow revenues and market share will be adversely affected. In addition, we will not be able to recover our investment in the development of new drugs, given that projects may be interrupted, unsuccessful, not as profitable as initially contemplated or we were not be able to obtain necessary financing for such development. Similarly, there is no assurance that we can successfully secure such rights from third parties on an economically feasible basis.

Our competitors are much larger and more experienced than we are and, even if we complete the development of our drugs, we may not be able to successfully compete with them. The pharmaceutical industry is highly competitive. Our biologics and low-dose oral interferon alpha applications compete with high dose injectable interferon manufactured by Roche, InterMune, Serano, Biogen, Berlex and Hemispherx and others. High dose injectable interferon has been widely accepted by the medical community for many years. Companies who manufacture injectable interferon alpha applications are more established than we are and have far greater financial, technical, research and development, sales and marketing, administrative and other resources than we do. Even if we successfully complete the development of our tests, we may not be able to compete effectively with these much larger companies and their more established products.

We have been the subject of a going concern opinion by our independent auditors who have raised substantial doubt as to our ability to continue as a going concern. Our Independent Registered Public Accounting Firm has added an explanatory paragraph to their audit opinion issued in connection with our financial statements which states that our recurring losses from operations and the need to raise additional financing in order to execute our business plan raise substantial doubt about our ability to continue as a going concern. We incurred a net loss of $466,285 for the nine months ended September 30, 2014 and a net loss of $495,223 for the nine months ended September 30, 2013. The operating loss for the nine months ended September 30, 2014 was $464,965. In addition, as of September 30, 2014 we had an accumulated deficit of $37,974,824. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustment that might result from the outcome of this uncertainty. Assurances cannot be given that adequate financing can be obtained to meet our capital needs. We have already significantly curtailed operations, and if we are not successful in our efforts to reorganize the Company, we will be forced to cease operations.

Risks Related to our Common Stock. There is only a limited market for our common stock and the price of our common stock may be affected by factors that are unrelated to the performance of our business. If any of the risks described in these Risk Factors or other unseen risks are realized, the market price of our common stock could be materially adversely affected. Additionally, market prices for securities of biotechnology and diagnostic companies have historically been very volatile.

The market for these securities has from time to time experienced significant price and volume fluctuations for reasons that are unrelated to the operating performance of any one company. In particular, and in addition to the other risks described elsewhere in these Risk Factors, the following factors can adversely affect the market price of our common stock:

announcements of technological innovation or improved or new diagnostic products by others;

general market conditions;

changes in government regulation or patent decisions;

changes in insurance reimbursement practices or policies for diagnostic products.

Our common shares have traded on the Over the Counter Bulletin Board at prices below $5.00 for several years. As a result, our shares are characterized as “penny stocks” which could adversely affect the market liquidity of our common stock. The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. Securities and Exchange Commission regulations generally define a penny stock to be an equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on NASDAQ or a national securities exchange and any equity security issued by an issuer that has:

net tangible assets in excess of $2,000,000, if such issuer has been in continuous operation for three years;

net tangible assets in excess of $5,000,000, if such issuer has been in continuous operation for less than three years; or

average revenue of at least $6,000,000, for the last three years.

Unless an exception is available, the regulations require, prior to any transaction involving a penny stock that a disclosure schedule explaining the penny stock market and the risks associated therewith is delivered to a prospective purchaser of the penny stock. We currently do not qualify for an exception, and, therefore, our common stock is considered to be penny stock and is subject to these requirements. The penny stock regulations adversely affect the market liquidity of our common shares by limiting the ability of broker/dealers to trade the shares and the ability of purchasers of our common shares to sell in the secondary market. In addition, certain institutions and investors will not invest in penny stocks.

There were no restricted shares of our common stock issued during the nine months ended September 30, 2014. The number of shares of restricted stock issued prior to September 1, 2012 that has been held for at least six months and hasn’t had the legends removed to become freely tradable under Rule 144 or 144(k) is not known.

ITEM 4. 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 September 30, 2014. This evaluation was carried out under the supervision and with the participation of our company’s management, including our company’s chairman of the board and chief executive officer, Dr. Stephen T. Chen and chief financial officer, Bernard Cohen. 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.

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.

There have been no changes in internal controls over financial reporting during 2014.

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. As of the date of this report, we were not aware of any such legal proceedings or claims against us.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

In the nine months ended September 30, 2014, there were no sales of stock.

ITEM 3.

Defaults Upon Senior Securities.

None, other than set forth in Note 6 to Financial Statements, “Notes Payable”, under Part I, Item 1, above, regarding non-payment of the HBL Notes.

ITEM 4.

Mine Safety Disclosures.

Not applicable

ITEM.5.

Other Information.

None

ITEM 6.

Exhibits.

None

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 14, 2014	By: /s/ Stephen Chen Stephen Chen, Chairman of the Board, and Chief Executive Officer
Date: November 14, 2014	By: /s/ Bernard Cohen Bernard Cohen, Vice President, Chief Financial Officer