SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the Quarterly Period Ended September 30, 2012
Commission File Number 0-20791
AMARILLO BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
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.
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 October 31, 2012 there were 73,554,897 shares of the issuer's common stock and 3,262 shares of the issuer’s preferred stock outstanding.
AMARILLO BIOSCIENCES, INC.
PART I - FINANCIAL INFORMATION
Amarillo Biosciences, Inc.
See accompanying notes to financial statements.
Amarillo Biosciences, Inc.
Statements of Operations
See accompanying notes to financial statements.
Amarillo Biosciences, Inc.
Condensed Statements of Cash Flows
See accompanying notes to financial statements.
Amarillo Biosciences, Inc.
Notes to Financial Statements
No brokerage commissions were paid for the sale of common stock during the first, second, or third quarters of 2012.
The Black-Scholes option pricing model was utilized to value the Warrant Strategies warrants for the quarter ended September 30, 2012 under the following assumptions: dividend yield 0.0%, expected volatility 231.51%, risk free interest rate 0.14%, and expected life of approximately 0.2739726 years. The valuation for the remaining 2,217,817 warrants outstanding on September 30, 2012, was $10,563. The derivative gain for the third three months of 2012 was $15,096 making the net derivative gain of $35,899 for the first nine months of 2012.
A summary of the Company’s stock warrant activity and related information for the period ended September 30, 2012 is as follows:
A summary of the Company’s stock option activity and related information for the period ended September 30, 2012 is as follows:
On January 23, 2012, Stephen Chen, ABI Director, wired $10,000 to ABI on a short-term non-interest-bearing loan for operations. The agreement was verbal only and no note was executed. Due to the short-term nature of the loan, no interest rate was assigned to the loan. The loan was repaid in full on February 28, 2012.
Stephen Chen, ABI CEO, wired the Company money for working capital loans to be used for operations; $182,000 in the first quarter, $134,205 in the second quarter and $119,379 in the third quarter 2012. The working capital loans are short term, without due dates, and carry no stated interest rates or any other terms.
On February 6, 2012, Hope Capital, Inc. exercised its right to convert debt into equity by sending a Notice of Conversion to ABI to convert $14,000 principal amount of the note dated May 24, 2011, into 693,069 shares of ABI Common Stock at $0.0202 per share. The shares were issued in a timely manner in accordance with the covenants of the Note. The Conversion Price used was the Variable Conversion Price as defined by the Note. The principal balance of the note after the conversion was $0.00.
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: AMAR), is a leader in the development of low-dose interferon for oral delivery in the treatment of animal and human diseases. We have changed our focus from Orphan Diseases (small markets) to treatment of diseases with large markets to attract large pharma partners. Our funding strategy is to seek private placement and partner funding to complete Phase 2 clinical studies; then seek large pharma partners to fund and help with the regulatory approval process in the US and Europe.
Our portfolio consists of patents with claims that encompass method of use or treatment with interferon and composition of matter and manufacturing. We currently own or license four patents related to low-dose orally delivered interferon, and one issued patent on our dietary supplement. We have completed more than 100 pre-clinical (animal) and human studies of the safety and efficacy of low-dose orally delivered interferon.
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 is 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 products. Our progress toward approval is discussed under each specific indication, below.
Influenza, commonly referred to as the flu, is an infectious disease caused by RNA viruses of the family Orthomyxoviridae that affects birds and mammals. The most common symptoms of the disease are chills, fever, sore throat, muscle pains, severe headache, coughing, weakness/fatigue and general discomfort. Influenza spreads around the world in seasonal epidemics, resulting in the deaths of between 250,000 and 500,000 people every year, up to millions in some pandemic years. On average 41,400 people died each year in the United States between 1979 and 2001 from influenza. Two publications in the April 2009 issue of the Journal of Virology report that interferon placed in the nose of guinea pigs or ferrets significantly suppresses replication of influenza virus. These publications reinforce the Company’s view that low-dose interferon is protective against influenza.
Further support of the efficacy of oral interferon against influenza was generated by The University of Western Australia in a Phase 2 clinical trial with 200 healthy volunteers during the 2009 winter cold/flu season in Australia. The study found that volunteers who took oral interferon had less severe cold/flu symptoms, compared to volunteers who received placebo. Publication of these results is pending.
In January 2011, CytoPharm, Inc., ABI’s licensee for Taiwan and China, launched an influenza treatment study in Taiwan. Up to 60 patients being treated with Tamiflu for influenza A infection of less than 48 hours duration may be randomly assigned to co-treatment with oral IFN or placebo. The aim of the study is to examine whether the combination of oral IFN and Tamiflu is superior to Taimflu alone in the treatment of influenza illness. Results are expected by the end of 2012.
ABI’s licensee CytoPharm, Inc. funded a Phase 2 study of oral interferon treatment of hepatitis C virus-infected patients in Taiwan. The study explored the ability of oral interferon to reduce virologic relapse in patients who have completed standard therapy with pegylated interferon plus Ribavirin. Up to 50% of patients with certain genotypes of HCV relapse after receiving standard therapy, so reducing this relapse rate will represent a major breakthrough in the management of HCV. The study was completed at the end of 2011, and final results are expected to be available by the end of 2012. Enrollment was completed in 2010 with 169 total subjects.
Preliminary study results were provided to ABI by CytoPharm in Q2, 2012. While the primary endpoint was not achieved, results did suggest that subjects with mild liver fibrosis, as suggested by low FibroIndex scores at study entry, had a reduced rate of relapse (12%) when treated once daily with oral IFN, compared to subjects in the placebo group (32%).
It was noted that 60% of the study subjects had a low platelet count (thrombocytopenia) at baseline, likely due to the high-dose injectable interferon-alpha treatment they received immediately prior to study entry. Interestingly, it was observed that subjects treated once per day with oral IFN had nearly twice the rate of platelet count normalization (81%), compared to subjects given placebo (42%), P = 0.005. Follow-up studies are being planned, both to confirm this effect prospectively in a larger group of HCV patients and to explore whether oral interferon is effective in other cases of treatment-induced thrombocytopenia, such as cancer.
Strategic Alliance with HBL
Hayashibara Biochemical Laboratories, Inc. (“HBL”) was established in 1970 to engage in research and development. It is a subsidiary of Hayashibara Company, Ltd., a privately-owned Japanese holding corporation with diversified subsidiaries. For more than 130 years, the Hayashibara Company, Ltd. and its predecessors have been applying microbiological technology to the starch industry for the production of maltose and other sugars.
In 1981, HBL established the Fujisaki Institute to accelerate development of industrial methods for the production of biologics and to sponsor clinical trials for such products. In 1985, HBL built the Fujisaki Cell Center to support basic research. In 1987, HBL successfully accomplished the mass production of human cells in an animal host by producing human cells in hamsters. This made it possible to economically produce a natural form of human interferon alpha and other biologics. HBL also has developed and obtained patents for technology relating to the production of interferon alpha-containing lozenges by which the stability of the interferon alpha activity can be maintained for up to 24 months at room temperature and up to five years if the product is refrigerated. 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”). Such Development Agreement was subsequently amended on January 17, 1996; May 10, 1996; and September 7, 2001. The current expiration date of the Development Agreement is March 12, 2014, at which time it will automatically renew for an additional three (3) years, unless the parties agree otherwise. Among other things, the Development Agreement provides us with a source of natural human interferon alpha for use in the Company’s interferon alpha-containing products.
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 ABI that it had decided to permanently halt production of IFNα. Subsequently, ABI was informed that HBC was preparing a letter of notification that ABI’s agreement with HBC will be terminated. On September 23, 2012, the expected letter of notification was received, indicating an effective termination date of December 22, 2012.
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. Bumimedic was to have sought registration for our natural human IFN and to have commenced marketing the product after approval. The terms of the agreement called for Bumimedic to manufacture lozenges from bulk natural human IFN (supplied by Hayashibara Biochemical Laboratories); package the lozenges and distribute them to local hospitals, pharmacies and clinics in Malaysia. Pursuant to the agreement, the Company was to have received a series of payments, in three stages: upon formal execution of the distribution agreement, upon regulatory approval, and upon production. The Company was to have received a royalty on the sale of the natural human IFN. Given the termination notice received from HBC, 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.
Strategic Alliance with CytoPharm
In November 2006, the Company entered into a License and Supply Agreement with CytoPharm, Inc., a Taipei, Taiwan-based biopharmaceutical company whose parent company is Vita Genomics, Inc., the largest biotech company in Taiwan, specializing in pharmacogenomics and is a specialty Clinical Research Organization. Under the terms of the Agreement, CytoPharm and its subsidiary were to conduct all clinical trials, and seek to obtain regulatory approvals in both China and Taiwan (the “Territory”) to launch our low dose oral interferon in the Territory for influenza and hepatitis B (“HBV”) and hepatitis C (“HCV”) indications. According to the Agreement, CytoPharm was to make payments to the Company upon reaching certain milestones and was to have paid royalties on low dose oral interferon sales in the Territory. Given the termination notice received from HBC, the Company will most likely issue a notice of termination to CytoPharm by November 30, 2012 since the Company can no longer supply CytoPharm with natural human IFN produced by Hayashibara.
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. Under the terms of the agreement, Intas was to pay the Company a royalty on net sales in India and Nepal after marketing approval was obtained. 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.
Strategic Alliance with Cadila Healthcare
On October 18, 2010, the Company entered into a License and Supply Agreement with Cadila Healthcare of Amedabad, India. The Company was to supply anhydrous crystalline maltose (ACM) to Cadila for sale as an active ingredient in nutraceutical and healthcare products for human consumption to relieve dry mouth in India and Nepal. However, increases imposed by HBL both with respect to price and minimum purchase quantity made it impossible for ABI to profitably supply ACM to Cadila. On July 18, 2012, the Company received a notice of termination from Cadila, citing ABI’s failure to supply ACM. The termination became effective as of August 17, 2012.
Equity Funding. In the first quarter of 2012, the Company sold 100 unregistered shares of preferred stock for $100 per share, and 123 unregistered shares of preferred stock for $81.30 per share, convertible to common stock with a $0.10 conversion price. No stock was sold in the second or third quarters of 2012.
Results of Operations for Quarters Ended September 30, 2012 and 2011:
Revenues. During the quarter ended September 30, 2012, $50 from dietary supplement sales was generated compared to $480 for the quarter ended September 30, 2011, a decrease of $430 (90%). During the quarters ended September 30, 2012 and 2011, no ACM sales were generated. There have been no sublicense fees in 2012, while a $50,000 sublicense fee was received in 2011.
Research and Development Expenses. Research and development expenses of $70,809 were incurred for the quarter ended September 30, 2012, compared to $88,093 for the quarter ended September 30, 2011, a decrease of $17,284 (20%). The decrease was mostly because consultants and personnel costs were lower in the third quarter of 2012.
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $60,826 were incurred for the third quarter in 2012, compared to $426,465 for the third quarter of 2011, a decrease of $365,639 (86%). Most of this decrease was due to lower professional expense and public/investor relations expenses in the third quarter of 2012.
Changes in Fair Value of Derivative Instruments. Changes in fair value of derivative instruments was realized as a $15,096 gain in the third quarter of 2012 compared to $9,954 loss in the third quarter of 2011. Derivative liabilities decreased $161,343 from September 30, 2011 to September 30 30, 2012 mostly because of the liability associated with the Asher notes and our stock price declined from $0.053 on September 30, 2011 to $0.013 on September 30, 2012.
Operating Loss. In the three-month period ended September 30, 2012, the Company's operating loss was $131,605 compared to an operating loss for the three-month period ended September, 2011 of $464,270, a decrease of $332,665 (72%). The operating loss was lower mostly because of increased costs of 2011 associated with the convertible notes payable, as well as reduction in operating expense in 2012.
Other Income. During the three-month periods ended September 30, 2012 and 2011, no interest or miscellaneous income was generated. Interest expense for the period was $30,266 as compared to $60,583 for the previous year, a decrease of $30,317.
Net Loss. In the three-month period ended September 30, 2012, the Company's net loss was $146,775 compared to net loss of $534,807 for the three-month period ended September 30, 2011, a $388,032 (73%) reduction in net loss. The derivative gain was a significant contributor to the reduction in net loss for the period, as well as operating expense reductions.
Results of Operations for the Nine Months Ended September 30, 2012 and September 30, 2011.
Revenues. During the nine months ended September 30, 2011, $8,035 from dietary supplement sales were generated compared to $530 of dietary supplement sales for the nine months ended September 30, 2012, a decrease of $7,505 (93%). No ACM sales were made in 2012 or 2011. There have been no sublicense fees in 2012, while a $50,000 sublicense fee was received in 2011.
Research and Development Expenses. Research and development expenses of $243,748 were incurred for the nine month period ended September 30, 2012, compared to $268,322 for the nine month period ended September 30, 2011, a decrease of $24,574 (9%). Research and development costs were lower the first nine months of 2012 primarily due to decreased personnel and consulting costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $191,614 were incurred for the nine-month period ended September 30, 2012, compared to $738,185 for the nine-month period ended September 30, 2011, a decrease of $546,571 (74%) due to decreased personnel costs, legal expenses and public-investor relations expenses.
Change in fair value of Derivative Instruments. Change in fair value of derivative instruments was a $37,750 gain for the nine-month period ended September 30, 2012 compared to a $9,122 loss in the nine-month period ended September 30, 2011. Derivative liabilities decreased $161,343 from September 30, 2011 to September 30, 2012 mostly because of the liability associated with the Asher notes and our stock price declined from $0.053 on September 30, 2011 to $0.013 on September 30, 2012.
Operating Loss. In the nine-month period ended September 30, 2012, the Company's operating loss was $435,044 compared to an operating loss for the nine-month period ended September 30, 2011 of $952,683, a $517,639 (54%) reduction. Overall expense reduction was the main contributory factor in the operating loss decrease in 2012 versus 2011.
Interest and Other Income. During the nine-month period ended September 30, 2012 and September 30, 2011, there was no interest or other income generated.
Net Loss. In the nine-month period ended September 30, 2012, net loss was $511,516 compared to net loss for the nine-month period ended September 30, 2011 of $1,083,363, a decrease in net loss of $571,847(53%). The decrease in net loss in 2012 as compared to 2011 was due mainly to expense control and reduction in 2012.
Liquidity Needs: On September 30, 2012, the Company had available $302 cash and had a working capital deficit (current assets less current liabilities) of $4,210,716. Current liabilities include two $1 million notes, $908,609 of accrued interest and $78,360 of accrued expenses owed to Hayashibara Biochemical Laboratories, Inc. (HBL), and a $200,000 note, owed to Paul Tibbits. We have an additional amount of $435,584 loaned by a related party. Accrued payroll and vacation expenses owed mostly to officers are $317,787. Derivative liabilities from warrants with embedded variable features valued at $10,563 are also included in the working capital deficit. That leaves approximately $259,813 of accounts payable and accrued expenses in the working capital deficit.
Assuming there is no decrease in current accounts payable, and accounting for various one–time expenses, the Company’s negative cash flow for operating activities plus patent filings, the Company’s cash burn rate is approximately $55,000 per month. The Company's continued losses and lack of liquidity raise substantial doubt about whether the Company is 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 license and milestone fees, 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 2012 Plan. The Company is currently pursuing potential investors for funding. In addition, the Company is also pursuing potential pharmaceutical partners to provide upfront license fee payments and funding for clinical studies. There can be no assurance that private placement funding or pharmaceutical partner funding will become available.
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-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 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. Quantitative and Qualitative Disclosures About Market Risk.
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 three patents and license seven patents. 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. We do not currently have manufacturing facilities or personnel to independently manufacture our products. Currently, Marlyn Nutraceutical manufactures our nutraceutical products. Our licensed distributors located in the United States and internationally, distribute the products. Except for any contractual rights and remedies that we may have with our manufacturer and our distributors, we 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 are unable to obtain or retain third-party manufacturers and distributors on commercially acceptable terms, we may not be able to produce and distribute our products as planned. If we encounter delays or difficulties with our contract manufacturer in producing or packaging our products or with our distributor in distributing our products, the production, distribution, marketing and subsequent sales of these products would be adversely affected, and we may have to seek alternative sources of supply or distribution or abandon or sell product lines on unsatisfactory terms. 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.
We are dependent on funding from private placements of stock. Our product revenue, sublicense fees and royalty income are negligible compared to expenses. Our primary focus is to achieve FDA approval of oral interferon for one or more disease indications. We do not expect significant sales or royalty revenue in the near term as Phase 2 and Phase 3 clinical studies must be completed before a NDA (New Drug Application) may be submitted to the FDA. We operate at a net loss and current liabilities exceed current assets by approximately $4,210,716. The working capital deficit includes two $1 million notes, $908,609 of accrued interest and $78,360 of accrued expenses owed to Hayashibara Biochemical Laboratories, Inc. (HBL). To date, neither HBC nor its parent company Nagase has made demand on the outstanding amounts owing to the former HBL by the Company. There exists risk that either HBC or Nagase could make demand in the foreseeable future. At such time as demand is made, the risk exists that there would be impairment to the Company’s cash position. At this time it is impossible to quantify or further qualify the risk potential of this debt. Additionally, a $200,000 note, owed to Paul Tibbits is included in the working capital deficit. We have an additional amount of $435,584 loaned by a related party. Accrued payroll and vacation expenses owed mostly to officers are $317,787. Derivative liabilities from warrants with embedded variable features valued at $10,563 are also included in the working capital deficit. That leaves approximately $259,813 of accounts payables and accrued expenses in the working capital deficit.
The Company is currently pursuing potential investors for funding. In addition the Company is also pursuing potential pharmaceutical partners to provide upfront license fee payments and funding for clinical studies. There can be no assurance that private placement funding or pharmaceutical partner funding will become available.
We are dependent on certain key existing and future personnel. Our success will depend, to a large degree, upon the efforts and abilities of our officers and key management employees such as Dr. Stephen Chen, Chief Executive Officer, Dr. Joseph M. Cummins, our President and Chief Operating Officer, Bernard Cohen, our Chief Financial Officer, and Martin J. Cummins, our Vice President of Clinical and Regulatory Affairs. The loss of the services of one or more of our key employees could have a material adverse effect on our operations. We do currently have employment agreements with our executive officers. 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 assure that we will be able to successfully attract and retain key personnel.
If we do not successfully develop, acquire or license new drugs our business may not grow. 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 may be adversely affected. In addition, we may 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 may not be able to obtain necessary financing for such development if we are unable to fund such development from our future revenues. 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, Schering,
InterMune, Serono, Biogen, Berlex and Hemispherx. 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 added an explanatory paragraph to their audit reports issued in connection with our financial statements for December 31, 2011 and 2010 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 $511,516 for the nine months ended September 30, 2012 and a net loss of $1,083,363 for the nine months ended September 30, 2011. The operating loss for the nine months ended September 30, 2012 was $435,044. In addition, as of September 30, 2012 we had an accumulated deficit of $36,681,825. 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 unable to generate profits and if we to continue to be unable to obtain financing to meet our working capital requirements, we will have to cease operations altogether. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis, to retain our current financing, to obtain additional financing, and, ultimately, to attain profitability.
Risk Relating to Our January 2008 Financing Arrangement. There are 2,217,817 shares underlying our warrants related to our January 2008 financing arrangement that may be available for future sale and the sale of these shares may depress the market price of our common stock. In addition the warrants have an anti-dilution ratchet feature that could cause the number of warrants to increase and the exercise price to decrease if we should have any non exempt stock, option or warrant issuances at less than the $0.0202 per share. As of September 30, 2012, we had 73,554,897 shares of common stock issued and outstanding plus 13,236,109 shares reserved for options and warrants or conversion of convertible preferred stock which includes the above January 2008 warrants.
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:
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:
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.
Future sales of a significant number of shares of our common stock by existing stockholders may lower the price of our common stock, which could result in losses to our stockholders. There were no restricted shares of our common stock issued during the nine months ended September 30, 2012. The number of shares of restricted stock issued prior to September 1, 2011 that has been held for at least nine months and hasn’t had the legends removed to become freely tradable under Rule 144 or 144(k) is not known.
The Company continues to pursue a broad range of financing alternatives to improve its financial condition. These alternatives may include the sale or issuance of a substantial amount of common stock, common stock warrants or stock options. These financing alternatives could require an increase in the number of authorized shares of the Company’s common stock and result in significant dilution to existing shareholders and, possibly, a change of control of the Company.
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, 2012. 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.
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 were no changes in internal controls over financial reporting during the period ending September 30, 2012.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceeding.
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.
In the first quarter of 2012, the Company sold 100 unregistered shares of preferred stock for $100 per share, and 123 unregistered shares of preferred stock for $81.30 per share, convertible to common stock with a $0.10 conversion price.
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.