AMARILLO BIOSCIENCES INC
10QSB, 1999-11-12
PHARMACEUTICAL PREPARATIONS
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<PAGE>   1
                                  United States
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-QSB


[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934


For the quarterly period ended              SEPTEMBER 30, 1999
                               -------------------------------------------------

[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

                         Commission File Number 0-20791


                           AMARILLO BIOSCIENCES, INC.
- --------------------------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

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

    800 West Ninth, Amarillo, TX                                    79101
- --------------------------------------------------------------------------------
(Address of principal executive offices)                          (Zip Code)

                806-376-1741                                  FAX 806-376-9301
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)


         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [X]  No[ ]

As of September 30, 1999, there were 6,360,326 shares of the issuer's common
stock outstanding.

                         This report contains 12 pages.


                                        1
<PAGE>   2
                           AMARILLO BIOSCIENCES, INC.


                                      INDEX



<TABLE>
<CAPTION>
PART I:    FINANCIAL INFORMATION                                                   PAGE NO.
                                                                                   --------
<S>        <C>                                                                        <C>
Item 1.    Financial Statements (unaudited)

           Consolidated Balance Sheets - December 31, 1998 and
           September 30, 1999...................................................      3

           Consolidated Statements of Operations - Three Months and
           Nine Months Ended September 30, 1998 and 1999 and
           Cumulative from June 25, 1984 (Inception) through
           September 30, 1999...................................................      4

           Condensed Consolidated Statements of Cash Flows - Nine
           Months Ended September 30, 1998 and 1999 and Cumulative
           from June 25, 1984 (Inception) through September 30, 1999............      5

           Notes to Consolidated Financial Statements...........................      6

Item 2.    Management's Plan of Operation.......................................      8

PART II:   OTHER INFORMATION

Item 2.    Changes in Securities and Use of Proceeds............................     10

Item 5.    Other Information....................................................     10

Item 6.    Exhibits and Reports on Form 8-K.....................................     11

Signatures .....................................................................     12
</TABLE>




                                        2
<PAGE>   3
                   AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES
                      (COMPANIES IN THE DEVELOPMENT STAGE)

                           CONSOLIDATED BALANCE SHEETS
                                   (unaudited)


<TABLE>
<CAPTION>
                                                                        December 31,      September 30,
                                                                            1998              1999
                                                                        ------------      ------------
<S>                                                                     <C>               <C>
ASSETS
Current assets:
  Cash and cash equivalents                                             $  4,776,328      $  1,769,660
  Other current assets                                                        43,415            53,571
                                                                        ------------      ------------
   Total current assets                                                    4,819,743         1,823,231
Property and equipment, net                                                  116,761           110,112
Patent license, net of accumulated amortization of $81,177 and
  $86,676 at December 31, 1998 and September 30, 1999, respectively           43,823            38,324
Investment in ISI common stock                                                 5,735               738
                                                                        ------------      ------------
Total assets                                                            $  4,986,062      $  1,972,405
                                                                        ============      ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                      $     88,920      $    520,798
  Accrued interest expense                                                   208,356             3,637
  Other accrued expenses                                                      20,722            23,026
                                                                        ------------      ------------
    Total current liabilities                                                317,998           547,461
Notes payable to related party                                             2,600,000         1,000,000
                                                                        ------------      ------------
Total liabilities                                                          2,917,998         1,547,461
STOCKHOLDERS' EQUITY:
  Common stock, $.01 par value:
    Authorized shares - 10,000,000
    Issued shares - 5,414,232 at December 31, 1998 and 6,360,326
      at September 30, 1999                                                   54,142            63,603
  Additional paid-in capital                                              13,392,138        16,220,203
  Deficit accumulated during the development stage                       (11,378,216)      (15,858,862)
                                                                        ------------      ------------
Total stockholders' equity                                                 2,068,064           424,944
                                                                        ------------      ------------
Total liabilities and stockholders' equity                              $  4,986,062      $  1,972,405
                                                                        ============      ============
</TABLE>


                             See accompanying notes.


                                        3
<PAGE>   4

                   AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES
                      (COMPANIES IN THE DEVELOPMENT STAGE)

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)


<TABLE>
<CAPTION>
                                                                                                    Cumulative
                                                                                                       from
                                                                                                     June 25,
                                                                                                       1984
                                    Three months ended                  Nine months ended           (Inception)
                                       September 30,                      September 30,               through
                               -----------------------------     -----------------------------     September 30,
                                   1998            1999              1998             1999              1999
                               ------------     ------------     ------------     ------------     ------------
<S>                            <C>              <C>              <C>              <C>              <C>
Revenues:
  Contract revenues            $       --       $       --       $       --       $       --       $  9,000,000
  Interferon sales                     --               --               --               --            420,974
  Interest income                    68,494           19,492          235,969           96,130        1,510,767
  Sublicense fees                      --               --               --               --            113,334
  Royalty income                       --               --               --               --             31,544
  Gain on sale of ISI stock            --               --               --               --            113,972
  Other                                --               --               --               --            604,431
                               ------------     ------------     ------------     ------------     ------------
                                     68,494           19,492          235,969           96,130       11,795,022

Expenses:
  Research and
    development expenses            341,998        1,299,344        1,062,409        3,536,743       14,889,187
  Selling, general, and
    administrative expenses         235,600          267,807          794,591        1,007,226       11,879,946
  Interest expense                   29,250            3,637           87,750           32,807          849,751
                               ------------     ------------     ------------     ------------     ------------
                                    606,848        1,570,788        1,944,750        4,576,776       27,618,884
                               ------------     ------------     ------------     ------------     ------------

Loss before income taxes           (538,354)      (1,551,296)      (1,708,781)      (4,480,646)     (15,823,862)
Income tax expense                     --               --               --               --             35,000
                               ------------     ------------     ------------     ------------     ------------
Net loss                       $   (538,354)    $ (1,551,296)    $ (1,708,781)    $ (4,480,646)    $(15,858,862)
                               ============     ============     ============     ============     ============
Net loss per share             $      (0.10)    $      (0.24)    $      (0.32)    $      (0.74)
                               ============     ============     ============     ============
Weighted average shares
outstanding                       5,414,232        6,360,326        5,414,232        6,044,961
                               ============     ============     ============     ============
</TABLE>




                             See accompanying notes.

                                        4
<PAGE>   5
                   AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES
                      (COMPANIES IN THE DEVELOPMENT STAGE)

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)


<TABLE>
<CAPTION>
                                                   Nine months ended          Cumulative from
                                                     September 30,             June 25,1984
                                             ----------------------------- (Inception) through
                                                1998              1999        Sept. 30, 1999
                                             ------------     ------------     ------------
<S>                                          <C>              <C>              <C>
Net cash used in operating activities        $ (1,541,335)    $ (4,000,538)    $(14,171,375)
                                             ------------     ------------     ------------

Net cash provided by (used in) investing
activities                                      5,997,617           (6,130)        (535,984)
                                             ------------     ------------     ------------
Net cash provided by financing activities            --          1,000,000       16,477,019
                                             ------------     ------------     ------------
Net increase (decrease) in cash and cash
equivalents                                     4,456,282       (3,006,668)       1,769,660
                                             ------------     ------------     ------------
Cash and cash equivalents at beginning of
period                                            879,170        4,776,328             --
                                             ------------     ------------     ------------
Cash and cash equivalents at end of
period                                       $  5,335,452     $  1,769,660     $  1,769,660
                                             ============     ============     ============
Supplemental Disclosure of Cash Flow
Information
Cash paid for income taxes                   $       --       $       --       $     37,084
                                             ============     ============     ============
Cash paid for interest                       $       --       $       --       $      6,466
</TABLE>



                             See accompanying notes.


                                        5
<PAGE>   6

                   AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES
                      (COMPANIES IN THE DEVELOPMENT STAGE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Basis of Presentation. The accompanying consolidated financial statements,
     which should be read in conjunction with the consolidated financial
     statements and footnotes included in the Company's Form 10-KSB, are
     unaudited (except for the December 31, 1998 consolidated balance sheet
     which was derived from the Company's audited financial statements), but
     have been prepared in accordance with generally accepted accounting
     principles for interim financial information. Accordingly, they do not
     include all of the information and footnotes required by generally accepted
     accounting principles 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, 1999 are not
     necessarily indicative of the results that may be expected for the full
     year ending December 31, 1999.

2.   Loss per share. Loss per share is computed based on the weighted average
     number of common shares outstanding.

3.   Effective July 22, 1999, Hayashibara Biochemical Laboratories, Inc. agreed
     to loan Amarillo Biosciences, Inc. $3 million to be advanced in three
     installments as follows: $1 million by August 31, 1999; $1 million by
     November 30, 1999; and $1 million by February 29, 2000. The annual interest
     rate on unpaid principal from the date of each respective advance is 4
     1/2%, with accrued interest being payable at the time of redemption of the
     note. The note is payable on or before July 22, 2004, or on or before the
     expiration of one (1) year after approval of the product by the U.S. Food
     and Drug Administration, whichever occurs first.

     Effective April 2, 1999, by agreement between the Company and Hayashibara
     Biochemical Laboratories (HBL), two promissory notes dated September 25,
     1996 and September 16, 1997, issued by the Company to HBL for loans, were
     converted into common stock of the Company. The amount converted included
     principal of $2.6 million, and accrued interest at $237,526. The total
     number of shares of common stock of the Company issued to HBL in
     consideration for the cancellation of said notes was 946,094 shares, at
     $2.9992 per share. The share price was determined by the average of the
     high and low price weighted by volume for the ten trading days prior to
     April 2, 1999. The shares are "restricted stock" within the meaning of Rule
     144 promulgated under the U.S. Securities Act of 1933, and must be held for
     one year before they can be sold under such rule. As a consequence of the
     conversion, HBL's ownership of the Company increased from 22.8%, to 34.3%.

4.   On September 30, 1999, Amarillo Biosciences, Inc. (the "Company") entered
     into an Agreement to Convert Debt with Hayashibara Biochemical
     Laboratories, Inc. ("HBL") regarding the note payable to HBL in the
     principal amount of $1,000,000 described above.



                                        6
<PAGE>   7
     Pursuant to this agreement, HBL will cancel the note on October 15, 1999 in
     exchange for common stock of the Company.

     The two additional $1.0 million advances which will be converted to equity
     purchases will occur on or before November 30, 1999 and February 29, 2000.
     The shares which have been or will be issued to Hayashibara Biochemical
     Laboratories, Inc. are "restricted stock" within the meaning of Rule 144
     promulgated under the U.S. Securities Act of 1933.



                                        7
<PAGE>   8
ITEM 2.  MANAGEMENT'S PLAN OF OPERATIONS

Amarillo Biosciences, Inc. is a development stage company, which is conducting
research and development activities focused on biologics for the treatment of
human and animal diseases. The Company has not commenced any significant product
commercialization and, until such time as it does, will not generate significant
product revenues. The Company's accumulated deficit has continued to grow, from
$11,378,216 at December 31, 1998 to $15,858,862 at September 30, 1999. Operating
losses are expected to continue for the foreseeable future and until such time
as the Company is able to attain sales levels sufficient to support its
operations.

During the next twelve months the Company will continue its research and
development activities, as well as the activities necessary to develop
commercial partnerships and licenses. The Company's expenditure of financial
resources during this period will fall principally into five broad categories,
as follows: Research and Development; Personnel; Consulting and Professional
(other than legal and accounting); Legal and Accounting; and Liquidity Needs.
The Company's expectations and goals with respect to these categories are
addressed separately below, by category:

RESEARCH AND DEVELOPMENT: Until it achieves commercial product sales, the
Company's business is research and development, and this is the area where the
Company's principal efforts will be expended during the next 12 months. The
Company has budgeted approximately $4.2 million for expenditure during the next
twelve months on research and development, inclusive of amounts to be expended
on the Company's Phase III Sjogren's syndrome clinical trial.

PERSONNEL: In addition to its intellectual property, the Company's principal
assets are its personnel. The Company has been successful in controlling its
personnel costs, both by maintaining its principal location in Amarillo, Texas,
and by ensuring maximum efficiency and utilization of existing personnel. The
Company has budgeted approximately $900,000 for personnel expenses during the
next twelve months, including salaries, payroll taxes, directors' and officers'
general liability insurance, and group life, health, and liability insurance.

CONSULTING AND PROFESSIONAL (EXCEPT LEGAL AND ACCOUNTING): The Company has
budgeted approximately $150,000 for expenditure on professional consultants in
the next 12 months. Consulting fees are expected to be paid to the Company's
scientific advisory board; to certain directors who perform specific consulting
tasks at the Company's request; and to a number of independent consultants, in
connection with the operation of the Company. The Company will continue to use
the services of consultants to complement the Company's small full-time staff,
where such is a more efficient utilization of the Company's resources.

LEGAL AND ACCOUNTING: Although the Company is not involved in litigation, it has
budgeted legal expenses of approximately $180,000 during the next 12 months.
Almost 40% of the Company's legal expenditures will be for preparation and
filing of patents and for maintenance of existing patents in a number of
countries. Other legal expenses will be related to compliance with laws and
regulations affecting public companies, licensing and contracting, and general
corporate matters. The Company does not presently have an in-house legal staff,
nor does it intend to put such a staff in place during the next 12 months. The
Company will maintain Ernst & Young as its auditors.




                                        8
<PAGE>   9
LIQUIDITY NEEDS: The principal budget items discussed above, along with other
miscellaneous costs and expenses, will cause the Company to expend approximately
$5.9 million during the next twelve months including the substantial expense of
the Company's Phase III Sjogren's syndrome trial. At September 30, 1999, the
Company had available cash of $1,769,660 and an additional $2 million loan
commitment from Hayashibara Biochemical Laboratories, payable in $1 million
increments on or before November 30, 1999; and February 29, 2000.

The Company has sufficient funds to complete the first portion of the Sjogren's
syndrome clinical trial, Study A. The results from this study are expected to be
available in April, 2000. The Company believes that one or more corporate
partnership agreements will be executed shortly thereafter. Such agreements
could include a combination of license fees, milestone payments, and royalty
payments.



                                        9
<PAGE>   10

                           PART II - OTHER INFORMATION


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

The effective date of the Company's first registration statement, filed on Form
SB-2 under the Securities Act of 1993 (File No. 333-4413) was May 23, 1996. The
class of securities registered was common stock. The offering commenced on
August 7, 1996. Total number of shares of common stock offered was 2,000,000
shares. The initial public offering resulted in gross proceeds of $10,000,000.
The Company incurred expenses of approximately $1,320,000, of which $300,000
represented underwriting discounts and commissions. The net offering proceeds to
issuer was $8,680,000. The Company has used $4,930,361 of the net proceeds from
the offering for research and development, and $1,000,000 for the repayment of
indebtedness to Hayashibara Biochemical Laboratories. The remainder of the net
offering proceeds $3,749,639(1), has been used for working capital and general
corporate purposes. The use of proceeds does not represent a change from that
described in the prospectus.

The Company's common stock was delisted from the Nasdaq SmallCap Stock Market on
October 12, 1999, because the Company did not have sufficient net tangible
assets to meet the applicable Nasdaq maintenance criteria. The Company has
appealed this decision to the Nasdaq Listing and Hearing Review Council. The
Company's common stock is currently traded on the Over the Counter Bulletin
Board.

ITEM 5.  OTHER INFORMATION.

On September 30, 1999, Amarillo Biosciences, Inc. (the "Company") entered into
an Agreement to Convert Debt with Hayashibara Biochemical Laboratories, Inc.
("HBL") regarding the note payable to HBL in the principal amount of $1,000,000
described above. Pursuant to this agreement, HBL will cancel the note on October
15, 1999 in exchange for common stock of the Company.

The two additional $1.0 million advances which will be converted to equity
purchases will occur on or before November 30, 1999 and February 29, 2000. The
shares which have been or will be issued to Hayashibara Biochemical
Laboratories, Inc. are "restricted stock" within the meaning of Rule 144
promulgated under the U.S. Securities Act of 1933.


- ----------

(1)  Included in this amount are payments of $112,550 for consulting fees to Dr.
     Stephen Chen, a Director of the Company.



                                       10
<PAGE>   11



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

         EXHIBIT 27.   Financial Data Schedule

         A report on Form 8-K, dated September 30, 1999, relating to the
         Agreement to Convert Debt between Amarillo Biosciences, Inc. and
         Hayashibara Biochemical Laboratories, Inc., was filed on October 1,
         1999.



                                       11
<PAGE>   12

                                   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 11, 1999                 By: /s/ JOSEPH M. CUMMINS
                                           ------------------------------------
                                             Joseph M. Cummins
                                             President, Chief Executive Officer
                                             and Chief Financial Officer


<PAGE>   13


                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
      EXHIBIT
        NO.     DESCRIPTION
      -------   -----------
         <S>    <C>
         27     Financial Data Schedule
</TABLE>


<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN
THIS FORM 10-QSB FOR PERIOD ENDED SEPTEMBER 30, 1999.
</LEGEND>

<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1999
<PERIOD-START>                             JAN-01-1999
<PERIOD-END>                               SEP-30-1999
<CASH>                                       1,769,660
<SECURITIES>                                         0
<RECEIVABLES>                                        0
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                             1,823,231
<PP&E>                                         250,508
<DEPRECIATION>                                 140,396
<TOTAL-ASSETS>                               1,972,405
<CURRENT-LIABILITIES>                        1,547,461
<BONDS>                                              0
                                0
                                          0
<COMMON>                                        63,603
<OTHER-SE>                                     361,341
<TOTAL-LIABILITY-AND-EQUITY>                 1,972,405
<SALES>                                              0
<TOTAL-REVENUES>                                96,130
<CGS>                                                0
<TOTAL-COSTS>                                3,536,743
<OTHER-EXPENSES>                             1,007,226
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              32,807
<INCOME-PRETAX>                            (4,480,646)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                                  0
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                               (4,480,646)
<EPS-BASIC>                                      (.74)
<EPS-DILUTED>                                    (.74)


</TABLE>


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