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 June 30, 2011





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 September 7, 2011 there were 67,243,122 shares of the issuer's common stock and 1,700 shares of the issuer’s preferred stock outstanding.





1


AMARILLO BIOSCIENCES, INC.





INDEX


PAGE NO.PART I:
FINANCIAL INFORMATIONITEM 1.
Financial StatementsBalance Sheets– June 30, 2011  (unaudited) and December 31, 2010
3Statements of Operations – Three and Six Months Ended June 30, 2011 and 2010 (unaudited)
4Condensed Statements of Cash Flows – Six Months Ended June 30, 2011 and 2010 (unaudited)
5Notes to Financial Statements (unaudited)
6ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
12ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk.
18ITEM 4.
Controls and Procedures
22PART II:
OTHER INFORMATIONITEM 1.
Legal Proceedings
22ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
22ITEM 3.
Defaults Upon Senior Securities
22ITEM 4.
Submission of Matters to a Vote of Security Holders
22ITEM 5.
Other Information
22ITEM 6.
Exhibits.....................................................................
22Signatures

23





2


PART I - FINANCIAL INFORMATION





ITEM 1.
Financial Statements





Amarillo Biosciences, Inc.


Balance Sheets


June 30,

2011


December 31,

2010Assets

(unaudited)Current assets:Cash and cash equivalents

$
5,396


$
4,332Prepaid expense and other current assets


62,003



135,634Total current assets


67,399



139,966Property, equipment and software, net


282



1,349Patents, net


111,639



118,038Total assets

$
179,320


$
259,353Liabilities and Stockholders' DeficitCurrent liabilities:Accounts payable and accrued expenses

$
734,221


$
539,955Accrued interest - related parties


795,981



751,294Accrued expenses – related party


78,360



78,360Derivative liabilities


161,952



59,784Notes payable - related parties


2,260,000



2,200,000Notes payable – convertible, net


13,618



-Total current liabilities


4,044,132



3,629,393Total liabilities


4,044,132



3,629,393Commitments and contingenciesStockholders' deficitPreferred stock, $0.01 par value:Authorized shares - 10,000,000Issued and outstanding shares –  1,700 at

June 30, 2011 and 1,500 at December 31, 2010


17



15Common stock, $0.01par value:Authorized shares - 100,000,000Issued and outstanding shares – 61,609,446 at June 30, 2011 and 61,147,224 at December 31, 2010


616,094



611,472Additional paid-in capital


30,892,916



30,835,300Accumulated deficit


(35,373,839
)


(34,816,827
)Total stockholders' deficit


(3,864,812
)


(3,370,040
)Total liabilities and stockholders’ deficit

$
179,320


$
259,353





See accompanying notes to financial statements.


3


Amarillo Biosciences, Inc.


Statements of Operations


(Unaudited)





Three months ended June 30,


Six months ended June 30,2011


2010


2011


2010Revenues:Product sales

$
4,835


$
3,024


$
7,555


$
3,120Total revenues


4,835



3,024



7,555



3,120Cost of revenues:Product sales


2,588



2,038



4,019



2,095Total cost of revenues


2,588



2,038



4,019



2,095Gross Margin


2,247



986



3,536



1,025Operating expenses:Research and development expenses


93,284



97,831



180,229



199,119Selling, general and administrative expenses


200,496



137,403



311,720



312,567Total operating expenses


293,780



235,234



491,949



511,686Operating loss


(291,533
)


(234,248
)


(488,413
)


(510,661
)Other income (expense)Derivative income


1,442



784,056



832



847,790Interest expense


(38,362
)


(23,575
)


(61,425
)


(46,343
)Interest and other income


150



140



450



140Net income (loss)


(328,303
)


526,373



(548,556
)


290,926Preferred stock dividend


4,250



-



8,456



-Net income (loss) applicable to common shareholders

$
(332,553
)

$
526,373


$
(557,012
)

$
290,926Basic net income ( loss) per share

$
(0.01
)

$
0.01



(0.01
)

$
0.01Diluted net income ( loss) per share

$
(0.01
)

$
0.01


$
(0.01
)

$
0.01Basic weighted average shares outstanding


61,336,919



53,911,830



61,254,971



53,356,757Diluted weighted average shares outstanding


61,336,919



53,911,830



61,254,971



56,410,440





See accompanying notes to financial statements.


4


Amarillo Biosciences, Inc.


Condensed Statements of Cash Flows


(Unaudited)





Six months ended June 30,2011

2010Net cash used in operating activities
$
(178,728
)

$
( 206,033
)Cash from investing activities:Patent expenditures

(1,208
)


( 5,083
)Net cash used in investing activities

(1,208
)


( 5,083
)Cash from financing activities:Proceeds from issuance of convertible note payable

103,000



-Proceeds from notes payable – related party

60,000



-Proceeds from exercise of options

-



8,200Proceeds from sale of convertible preferred stock

18,000



-Proceeds from sale of common stock

-



200,000Net cash provided by financing activities

181,000



208,200Net change in cash

1,064



(2,916
)Cash and cash equivalents at beginning of period

4,332



24,216Cash and cash equivalents at end of period
$
5,396


$
21,300Supplemental disclosure of cash flow informationCash paid for interest
$
571


$
1,713Cash paid for income taxes
$
-


$
-Non-cash transactions:Discount on convertible notes payable
$
103,000


$
-





See accompanying notes to financial statements.


5


Amarillo Biosciences, Inc.


Notes to Financial Statements


(Unaudited)





1.
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, 2010 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 three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011.





2.
Financial Condition. Our viability as a company is dependent upon successful commercialization of products resulting from its research and product development activities. We plan on working with commercial development partners in the United States and in other parts of the world to provide the necessary sales, marketing and distribution infrastructure to successfully commercialize the interferon alpha product for both human and animal applications.  Our products will require significant additional development, laboratory and clinical testing and investment prior to obtaining regulatory approval to commercially market our product(s). Accordingly, for at least the next few years, we will continue to incur research and
development and general and administrative expenses and may not generate sufficient revenues from product sales or license fees to support its operations.





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.





3.
Common Stock.  The shareholders have authorized 100,000,000 shares of voting common shares for issuance.  On June 30, 2011, a total of 82,466,042 shares of common stock were either outstanding (61,609,446) or reserved for issuance upon exercise of options and warrants or conversion of convertible preferred stock or conversion of debt (20,856,596).  Common stock issuances in the first and second quarters of 2011 are as follows:





Common Stock Issued in Q1 2011

Shares


Issue Price


Net PriceDirectors, officers, consultants plan – services


62,222


$
0.09


$
5,600Total Common Stock Issued in Q1 2011


62,222


$
0.09


$
5,600





Common Stock Issued in Q2 2011

Shares


Issue Price


Net PriceDirectors, officers, consultants plan – services


400,000


$
0.055-0.065


$
35,000Total Common Stock Issued in Q2 2011


400,000


$
0.055-0.065


$
35,000





No brokerage commissions were paid for the sale of common stock during the first or second quarters of 2011.





6


On March 8, 2011, the Company renewed the Consulting Contract with Caprock Consulting Group to render services through Kimball Austin Miller, M.D. as Medical Director pertaining to achieving recognition of ABI’s technology as treatment or prevention of human diseases.  The terms and conditions of the renewed contract remain the same as the previous contract for the same period of 2010.





On March 8 2011, the Company and Dr. Miller executed the Non-Qualified Stock Option Agreement evidencing the grant of options under the Consulting Agreement referenced above between the Company and Dr. Miller. The Company granted 100,000 options with a 2 year term and a $0.075 exercise price, with a fair value of $7,280, vesting quarterly during 2011.





On June 1, 2011, the Company and Edward L. Morris executed a consulting agreement whereby Mr. Morris would render general consulting services in the area of regulatory compliance to the Company subject to his availability.  The compensation agreed to by the parties consists of the grant of 200,000 shares of ABI voting common stock each month during the term of the contract. The shares are to be registered by the Company on Form S-8.





On June 22, 2011, the Company granted Kimball Miller 200,000 shares of ABI voting common stock for consulting services and will grant Dr. Miller 200,000 shares monthly for a total of 5 months for consulting services. The shares are to be registered by the Company on Form S-8. In July and August 2011, an additional 400,000 shares have been issued.





On June 22, 2011, the Company entered into a consulting agreement with Claudia Walters for services rendered beginning in July 2011, subject to her availability, in the area of corporate finance.  In exchange for those services, the Consultant shall be compensated by the grant of 200,000 shares of ABI voting common stock.  The first grant was to occur upon execution of the Agreement and an additional 200,000 shares each month during the contract period.  The first 400,000 shares were to be issued immediately and the balance of the shares is to be common stock registered on Form S-8. The Company recognized $11,000 expense in June 2011 for the initial 200,000 shares which were issued
in July 2011.





The Company entered into an agreement on June 27, 2011 with Rui Figueiredo for the purpose of providing multimedia services to the Company for a six-month period beginning in July 2011 in exchange for 3,246,753 shares of ABI common stock registered on Form S-8.





On June 27, 2011, the Company entered into an agreement with Interactive Business Alliance, LLC for consultation and rendering of public relations and communications services for a period of six months beginning in July 2011.  For consultation services rendered, the Company agreed to pay 1,250,000 shares of Rule 144 Restricted AMAR stock.





4.
Common Stock Options and Warrants.  The Board granted 100,000 options with a 2-year term and $0.075 exercise price to a consultant on March 8, 2011 with a fair value of $7,280.  One quarter of the options (fair value $1,820) vest each quarter during 2011.





The binomial Black-Scholes pricing model was used to calculate the fair value of the Warrant Strategies (formerly Midsouth) warrants on June 30, 2011.  The probability of private placement issuances triggering a reset equal to a stock price of $0.03 per share was estimated as 75%.  The reset stock price was set at $0.03 since this was the lowest quarterly closing price for 2010 and for the first and second quarter of 2011.  The stock price closed at $0.08 on December 31, 2010, $0.09 on March 31, 2011, and $0.06 on June 30, 2011.  The probability was


7


estimated at 75% because during the 3rd and 4th quarter of 2010 and the 1st quarter of 2011 the Company sold convertible preferred stock with $0.10 per share common stock share conversion price although the market price of the common stock was below $0.10 per share.  The Company sold exempt issuances of stock below $0.10 per share to directors, officers, and consultants during the fourth quarter of 2010, which is allowable without triggering a reset.  No such
exempt issuances have been sold during the 1st or 2nd quarter of 2011.  The probability of not triggering the reset at $0.10 per share was estimated as 25%.  Valuation consists of 75% of the Black-Scholes value of the warrants for a reset occurrence at $0.03 per share and 25% of the Black-Scholes value of the warrants on June 30, 2011.  The Black-Scholes option-pricing model was utilized with the following assumptions:  dividend yield 0.0%; expected volatility of 171.59%; risk-free interest rate of 0.45% (2 year treasury on June 30, 2011) and expected life of 1.5260274 years.  The valuation for the 447,999 Warrant
Strategies warrants was $53,706 on June 30, 2011.  For the quarter ended June 30, 2011, the change in fair value of the derivative instrument was recorded as a $6,688 derivative gain and the derivative liabilities account decreased from $60,395 on March 31, 2011 to $53,706 on June 30, 2011.





The Company entered into two Securities Purchase Agreements each consisting of a secured convertible debenture (the Note) and a warrant (Warrant) issued on April 15, 2011 and May 24, 2011 (Valuation Dates).  The instruments were valued on issue date(s) and at the end of the second fiscal quarter, June 30, 2011.





The instruments are:


1.
$63,000 Convertible Note at the greater/lesser (see definition below) of the 55% of market price and $0.04 fixed conversion price; an annual interest rate of 14%; redemption at 150% to 180 days and 100% to 240 days; and a maturity date of April 14, 2012; 787,500 Warrants for a period of 3 years at $0.04 per share.





2.
$40,000 Convertible Note at the greater/lesser (see definition below) of the 55% of market price and $0.04 fixed conversion price; an annual interest rate of 14%; redemption at 150% to 180 days and 100% to 240 days; and a maturity date of May 31, 2012; 500,000 Warrants for a period of 3 years at $0.04 per share.





The conversion price and time frame is defined and explained for both Convertible Notes as follows:




The Variable Conversion Price is defined as 55% multiplied by the Market Price.  This represents a 45% discount from the market price.  The Market Price is defined as the average of the lowest three Trading Prices for the Common Stock during the ten trading day period ending on the latest complete trading day prior to the Conversion Date (the date the Conversion Notice is sent by the Holder to the Borrower via facsimile).  The Trading Price is defined as the closing on the OTCBB.  The
Trading Dayis defined as any day on which the Common Stock is listed for any period on the OTCBB.





The Fixed Conversion Price is defined as $0.04 per share of Common Stock.





The First Period:  Beginning on the date of the note and ending on the 240th day following the date of the note, providing that no default has occurred, the (Conversion) Price is to be the greater of the Variable Conversion Price and the Fixed Conversion Price.





The Second Period:  This period is defined as (a) following the occurrence of a default or (b) anytime after the 240th day following the date of the note, the (Conversion) Price is to be the lesser of the Variable Conversion Price and the Fixed Conversion Price.





8





The basis for determination and valuation are


·
FASB ASC 820 Fair Value Measurements and Disclosures


·
FASB ASC 815 Derivatives and Hedging





Management determined that the variable conversion prices of the notes constituted an embedded derivative.





The embedded derivatives were bundled and valued as a single, compound embedded derivative divided from the debt host and treated as a liability.  The single compound embedded derivative features are


1.
The conversion feature with the variable and fixed conversion prices


2.
The redemption features





The embedded conversion features in the Notes’ conversion and redemption features were accounted for as a derivative liability.  The Warrants’ were valued as a liability and discount to the note, due to the unknown number of shares to be issued upon conversion of the debt, causing a lack of sufficient authorized shares to be available to settle the warrants. The derivative liabilities will be marked-to-market each quarter with the change in fair value recorded in the income statement.





The fair values for the derivatives within the Convertible Notes at the dates of issuance and at the end of the second fiscal quarter are:





4/15/2011
5/24/2011
6/30/2011Notional Amount
63,000
40,000
103,000Note Balance
63,000
40,000
103,000Derivative Value (Notes)
50,410
32,414
81,066Mark to Market (Notes)
-
-
(1,758)





The fair values for the derivatives within the Warrants at the dates of issuance and at the end of the second fiscal quarter are:





4/15/2011
5/24/2011
6/30/2011Warrants
787,500
500,000
1,287,500Warrants Value
28,940
17,757
27,180Mark to Market Warrants
-
-
(19,517)





At each issuance date of the Note, the initial loan and valuation of the embedded derivative was recorded.  The net cash received was recorded.  There was an upfront payment of legal expenses made to the Holder’s attorney for each note.  That amount was recorded as a deferred financing cost.  The notional amount was recorded as a liability with that same amount recorded as debt discount. The debt discount and deferred financing costs are being amortized over the life of the notes using the effective interest method. An additional expense of $26,521 was recorded as derivative expense for the excess of inception date derivative values over the face value of the
notes.





9





Quarterly the Convertible Embedded Derivative(s) and the Warrant values are marked-to-market.  The convertible Term Note Discount and the Deferred Financing Costs are amortized quarterly.





5.
Convertible Preferred Stock.  The shareholders have authorized 10,000,000 shares of preferred stock 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.  During the
first quarter of 2011, a total of 200 shares of Series 2010-A 10% Convertible Preferred Stock were issued.  Net proceeds totaled $18,000 after $2,000 of brokerage commissions.  The preferred stock is convertible into 200,000 shares of restricted common stock.





The Company accrued $4,206 of preferred stock dividends during the first quarter and $4,250 during the second quarter of 2011.





6.
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 default on the notes, HBL has not demanded payment.





In 2010, the Company entered into a verbal agreement with Paul Tibbits, a Director, to purchase 12,000,000 warrants held by him for $200,000. On January 10, 2011 a promissory note in the amount of $200,000 was executed at an annual interest rate of 0.43%, with no stated maturity date, and no collateral.





On March 9, 2011, the Company entered into a promissory agreement with Paul Tibbits, a Director, for $20,000. A note was executed and includes interest at 0.54% per annum; the note is due upon demand, or if no demand is made, on September 11, 2011.





On April 6, 2011, the Company entered into another promissory agreement with Paul Tibbits, a Director, for $40,000. A note was executed and includes interest at 0.54% per annum; the note is due upon demand, or if no demand is made, on October 8, 2011.





7.
Line of Credit.  We have a line of credit with Wells Fargo Bank for $20,000, at an interest rate of prime rate plus 6.75 percent.  There was an outstanding balance on June 30, 2011 of $19,972 which is included in accounts payable.





8.
License and Sublicense Agreements.  During the first six months of 2011 no license fees were received.





9.
Related Party Transactions.  The Company engaged the law firm of Underwood, Wilson, Berry, Stein and Johnson P.C. of which Mr. Edward Morris was a shareholder through March 15, 2011.  Mr. Morris also was, and continues to be, the Secretary of the Company.  During the six months ended June 30, 2011 the Company incurred approximately $17,912 of legal fees to said law firm. For the second quarter of 2011, Mr. Morris has had no connection with the above referenced law firm.  Mr. Morris remains the Secretary of the Company.





10





Mr. Morris executed a consulting contract with the Company on June 1, 2011. 200,000 shares of common stock were issued on June 2, 2011 associated with services rendered pursuant to the consulting contract of June 1, 2011.  The contract is effective through December 31, 2011.  The shares were issued under the authority of the First Amended and Restated 2011 Consultants Stock Grant Plan and were registered on Form S-8.  Mr. Morris incurred $6,250 for consulting services prior to the execution of the consulting contract.





10.
Subsequent Events. 400,000 shares were issued to Claudia Walters in July 2011 and 200,000 shares in August 2011 associated with services rendered pursuant to the consulting contract of June 22, 2011.  The contract is effective through December 31, 2011.  The shares were issued under authority of the First Amended and Restated 2011 Consultants Stock Grant Plan and were registered on Form S-8.





On July 20, 2011, Dennis Moore, a director, purchased 76,923 shares of common stock under authority of the Amended and Restated 2008 Directors, Officers, and Consultants Stock Purchase Plan, and were registered on Form S-8.





On July 1, 2011, 3,246,753 shares of ABI common stock were issued to Rui Figueiredo associated with services rendered pursuant to a consulting agreement entered into on June 27, 2011 for the purpose of providing multimedia services to the Company for a six-month period. The shares were issued under authority of the First Amended and Restated 2011 Consultants Stock Grant Plan and were registered on Form S-8.





On June 27, 2011, the Company entered into an agreement with Interactive Business Alliance, LLC for consultation and rendering of public relations and communications services for a period of six months beginning in July 2011.  For consultation services rendered, the Company agreed to pay 1,250,000 shares of Rule 144 Restricted AMAR stock. 1,250,000 shares were issued on July 8, 2011 under authority of the First Amended and Restated 2011 Consultants Stock Grant Plan.





Kimball Miller was issued 200,000 shares in July and 200,000 shares in August, 2011 for consulting. The shares were issued under authority of the First Amended and Restated 2011 Consultants Stock Grant Plan and were registered on Form S-8.





On August 1, 2011, the Company entered into an Agreement with Drew Alexander for mutually agreed upon consulting services in exchange for a fee of $200 per hour.  The contract may be extended upon mutual consent of the parties.  Consultant will render advice relative to Indian tribes in Oklahoma and various matters as requested by ABI.





Mr. Alexander purchased 60,000 shares of common stock on August 3, 2011 under the authority of the Amended and Restated 2008 Directors, Officers, and Consultants Stock Purchase Plan, and were registered on Form S-8.





On August 21, 2011, the Company entered into the Option for License Agreement and Technology Transfer between Amarillo Biosciences and Colorado Serum Company.  The Business Objective is to achieve the successful commercialization of products containing bovine or other animal cytokines (Extract) for human and animal health.  The term of the agreement is for one year from the execution date of the agreement.




11


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: AMAR), is the world leader in the development of low-dose interferon for oral delivery and is conducting Phase 2 clinical studies testing oral interferon in 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 for influenza,  chronic cough in COPD patients, and hepatitis C; then seek large pharma partners to fund and help with the regulatory approval process in the US and Europe.  We believe that our technology and the
large, billion-dollar markets for these disease indications will attract global pharma partners sometime later this year or early next year.





Intellectual Property


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 five 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


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.





12





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.





Chronic Cough in COPD


COPD affects approximately 10% of the population over 40, is a growing problem, and is the 4th leading cause of death in the world.  Chronic obstructive pulmonary disease (COPD) is a clinical condition with a progressive airflow limitation that is poorly reversible and characteristic of chronic bronchitis and emphysema.  The causes of COPD include tobacco smoke, occupational dusts, chemicals, vapors and environmental pollutants.  COPD is estimated to affect more that 600 million people worldwide. There are no effective therapies for emphysema, nor are there efficient clinical management
strategies.





Data from a Phase 2 clinical study at Texas Tech University shows that treatment with oral interferon leads to a rapid and significant reduction in the cough associated with idiopathic pulmonary fibrosis (IPF), resulting in improved quality of life.  Blinded, controlled studies in the US and Canada showed that oral interferon relieves chronic coughing in horses with COPD-like disease.  A proof-of-concept study of low-dose oral interferon as treatment of chronic cough is ongoing at Texas Tech University. This  clinical study is a Phase 2, randomized, double-blind, placebo-controlled, parallel trial in which 40 eligible volunteers with IPF- or COPD-associated chronic cough will be
randomly assigned to one of two groups in equal numbers to receive either oral interferon or placebo lozenges. Treatment will be given three times daily for 4 weeks, and patients will be followed for 4 weeks post-treatment to assess durability of response. The study will evaluate the ability of oral interferon to reduce the frequency and severity of chronic cough, compared to placebo.





Hepatitis C


ABI’s licensee CytoPharm, Inc. is funding an ongoing Phase 2 study of oral interferon treatment of hepatitis C virus-infected patients in Taiwan.  The study is exploring 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.Completion of the study is expected by the end of 2011 with final results to be available in early 2012.





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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.





HBL is part of the Hayashibara Group of companies, which announced on February 2, 2011 on its website in Japan that it had filed a petition for corporate reorganization with the Tokyo District Court. In a letter to customers dated February 2, 2011, Mr. Hideki Matsushima, who has been appointed by the Tokyo District Court to be the provisional administrator of HBL, made the following statement, “We believe that we will be able to ensure a stable supply of our products, since we have been permitted by the Tokyo District Court to pay our debts to our suppliers related to the purchase of raw materials for our products, on the condition that our suppliers will continue to do business with us under the
pre-existing payment terms and conditions.” Based on this statement from Mr. Matsushima, ABI does not expect any disruption in the supply of interferon or ACM from HBL.





Strategic Alliance with Nobel.


A licensing and supply agreement was executed in September 2004 with a Turkish pharmaceutical company, NOBEL ILAC SANAYII VE TICARET A.S., providing the rights to oral low-dose interferon-alpha for the treatment of Behcet’s disease in Turkey and in Azerbaijan, Bosnia & Herzegovina, Bulgaria, Croatia, Georgia, Kazakhstan, Kyrghyzstan, Macedonia, Romania, Russia, Saudi Arabia, Slovenia, Tajikistan, Turkmenistan, Uzbekistan, and Federal Republic of Yugoslavia.





A 90-day letter of termination due to non-performance was sent to Nobel on November 19, 2010. On February 4, 2011, ABI received a letter from Nobel in which they disputed ABI’s right to terminate the agreement. In response, ABI sent a letter dated March 16, 2011 to Nobel stating ABI’s position that sufficient grounds for termination existed and that the agreement was no longer in force. No further reply has been received from Nobel.





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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 will seek registration for our natural human IFN and commence marketing the product after approval. The terms of the agreement call 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 will receive a series of payments, in three stages: upon formal execution of the distribution agreement, upon regulatory approval, and upon production. The Company will also receive a royalty on the sale of the natural human IFN.





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 will 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 will make
payments to the Company upon reaching certain milestones and will also pay royalties on low dose oral interferon sales in the Territory.





In March 2008, the Company entered into a Supply Agreement for Animal Health with CytoPharm, Inc. Under the terms of the Agreement, CytoPharm will conduct all clinical trials, and seek to obtain regulatory approvals in China and Taiwan (the “Territory”) to launch our low dose oral interferon in the Territory for treatment of diseases and other healthcare applications of swine, cattle and poultry.  CytoPharm will make payments to us upon reaching certain milestones and will also pay royalties on low dose oral interferon sales in the Territory.





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 will pay the Company a royalty on net sales in India and Nepal after marketing approval is obtained.





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 will 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.





Strategic Alliance with Oasis Diagnostics


On January 12, 2011, the Company entered into a License and Supply Agreement with Oasis Diagnostics Company (ODC) of Vancouver, WA.  The Company will supply ACM to Oasis for sale as an active ingredient in nutraceutical and healthcare products for human consumption to relieve dry mouth in China, Taiwan and the Americas.





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This agreement was terminated as of July 11, 2011 based on ODC’s failure to pay the first installment of the $120,000 upfront licensee fee specified in the agreement. On August 1, 2011, ABI and ODC signed an option agreement that terminates on January 11, 2012. During the option period, ABI has agreed to re-instate the License and Supply Agreement under the previous terms if ODC pays the $120,000 license fee in full. ABI has agreed not to license the territories covered by the License and Supply Agreement to another party during the terms of the option agreement.





Equity Funding.In the first quarter of 2011, the Company sold 200 unregistered shares of preferred stock for $100 per share, convertible to common stock with a $0.10 conversion price.  Net proceeds from the stock sale were $18,000 after payment of $2,000 in commissions.





Results of Operations for Quarters Ended June 30, 2011 and 2010:





Revenues.  During the quarter ended June 30, 2011, $1,085 from dietary supplement sales was generated compared to $24 for the quarter ended June 30, 2010, an increase of $1,061 (4421%).  During the quarter ended June 30, 2011, $3,750 of ACM sales was generated compared to $3,000 for the quarter ended June 30, 2010, an increase of $750 (25%).





Research and Development Expenses. Research and development expenses of $93,284 were incurred for the quarter ended June 30, 2011, compared to $97,831 for the quarter ended June 30, 2010, a decrease of $4,547 (-5%).  The decrease was mostly because oral warts, influenza and hepatitis C costs and personnel costs were lower in the second quarter of 2011.   The oral warts in HIV+ patients and influenza studies were mostly completed in 2009.





Selling, General and Administrative Expenses.  Selling, general and administrative expenses of $200,496 were incurred for the second quarter in 2011, compared to $137,403 for the second quarter of 2010, an increase of $63,093 (46%).  Most of this increase was due to stock option expense, PR/IR, insurance and stock grants in the second quarter of 2011.





Derivative Income.  Derivative income was $1,442 in the second quarter of 2011 compared to $784,056 in the second quarter of 2010. Derivative liabilities increased $102,168 from December 31, 2010 to June 30, 2011 mostly because of the liability associated with the Asher Notes and our stock price declined from $0.07 on June 30, 2010 to $0.06 on June 30, 2011.





Other Income.  During the three-month period ended June 30, 2011, $150 interest and other income was generated compared to $140 interest and other income for the three-month period ended June 30, 2010.





Operating Loss.  In the three-month period ended June 30, 2011, the Company's operating loss was $291,533 compared to an operating loss for the three-month period ended June, 2010 of $234,248, a $57,285 (24%) increase.  The operating loss was higher mostly because of increased costs associated with the Asher Notes.





Net Loss. In the three-month period ended June 30, 2011, the Company's net loss was $328,303 compared to net income of $526,373 for the three-month period ended June 30, 2010, a $854,676 (162%) decrease.  The operating loss was mostly because of the derivative liabilities decrease, due to a return of 12,000,000 warrants to the Company in December 2010.





Results of Operations for the Six Months Ended June 30, 2011 and June 30, 2010.





Revenues.  During the six months ended June 30, 2011, $2,405 from dietary supplement sales were generated compared to $3,120 of dietary supplement sales only for the six months ended June 30, 2010, a decrease of $715.





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Research and Development Expenses. Research and development expenses of $180,229 were incurred for the six month period ended June 30, 2011, compared to $199,119 for the six month period ended June 30, 2010, a decrease of $18,890 (9%).  Research and development costs were lower the first six months of 2011 primarily due to decreased insurance costs.





Selling, General and Administrative Expenses. Selling, general and administrative expenses of $311,720 were incurred for the six-month period ended June 30, 2011, compared to $312,567 for the six-month period ended June 30, 2010, a decrease of $847 (0%).





Derivative Income.  Derivative income was $832 for the six-month period ended June 30, 2011 compared to $847,790 in the six-month period ended June 30, 2010.  Derivative liabilities increased $102,168 from December 31, 2010 to June 30, 2011 mostly because of the liability associated with the Asher Notes and our stock price declined from $0.07 on June 30, 2010 to $0.06 on June 30, 2011.





Interest and Other Income.   During the six-month period ended June 30, 2011, $450 of interest and other income was generated compare to $140 in the six-month period ended June 30, 2010, an increase of $310 (221%).





Operating Loss.  In the six-month period ended June 30, 2011, the Company's operating loss was $488,413 compared to an operating loss for the six-month period ended June 30, 2010 of $510,661, a $22,248 (4%) reduction.  Also, no options were issued to employees or directors in the first six months of 2011, a $40,599 difference.





Net Income (Loss).  In the six-month period ended June 30, 2011, net loss was $548,556 compared to a net income for the six-month period ended June 30, 2010 of $290,926, a decrease in net income of $839,482 (289%).  The increase was mostly the $820,437 difference in derivative gains in the first six months of 2011 and 2010.  The $80,752 reduction in Black-Scholes option expense during the first six months of 2011 compared to the first six months of 2010 also contributed to the difference.





Liquidity Needs:  On June 30, 2011, the Company had available $5,396 cash and had a working capital deficit (current assets less current liabilities) of $3,976,733.  Current liabilities include two $1 million notes, $795,981 of accrued interest and $78,360 of accrued expenses owed to Hayashibara Biochemical Laboratories, Inc. (HBL), $260,000 of notes, and $1,015 of accrued interest owed to Paul Tibbits, and $13,618 of notes owed to Asher Enterprises. Accrued payroll and vacation expenses owed mostly to officers is $414,878.  Derivative liabilities from warrants with embedded variable features valued at $161,952 are also included in the working capital deficit.  That leaves
approximately $319,343 of accounts payables 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 $66,000 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 2011 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.





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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.




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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 sales 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 $3,976,733.  The working capital deficit includes two $1 million notes,
$795,924 of accrued interest and $78,360 of accrued expenses owed to our shareholder (HBL); $260,000 of notes, and $1,015 of accrued interest owed to our director and shareholder Paul Tibbits; $103,000 of notes to Asher Enterprises with an unamortized discount of $89,382; $414,878 of accrued payroll and vacation expenses owed mostly to officers; and $161,952 of non-cash derivative liabilities. The remaining working capital deficit of approximately $319,343 consists of accounts payable and accrued expenses.





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. Joseph M. Cummins, our President and Chief Executive 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





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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, 2010 and 2009 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 $548,556 for the six months ended June 30, 2011 and a net income of
$290,926 for the six months ended June 30, 2010.  The operating loss for the six months ended June 30, 2011 was $488,413.  In addition, as of June 30, 2011 we had an accumulated deficit of $35,373,839. 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 447,999 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 $0.10 per
share.As of June 30, 2011, we had 61,609,446 shares of common stock issued and outstanding plus 20,856,596 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





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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.




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.  Approximately 1,312,222 of our restricted shares were issued during the six months ended June 30, 2011 which, upon becoming freely tradable under Rule 144 or 144(k) of the Securities Exchange Act of 1934, may lower the price of our common stock.  The number of shares of restricted stock issued prior to September 1, 2010 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.





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.





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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 June 30, 2011. 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 ended June 30,  2011.





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.





ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds





During the first quarter of 2011, the Company sold 200 unregistered shares of preferred stock for $100 per share, convertible to common stock with a $0.10 conversion price.  Net proceeds from the stock sale were $18,000 after payment of $2,000 in commissions.





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.
Submission of Matters to a Vote of Security Holders.


None.





ITEM.5.
Other Information


None





ITEM 6.
Exhibits.


None


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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: September 8, 2011
By: /s/ Joseph M. Cummins


Joseph M. Cummins


President and Chief Executive Officer











Date: September 8, 2011
By: /s/ Bernard Cohen


Bernard Cohen


Vice President and Chief Financial Officer










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