Ainos, Inc. - Quarter Report: 2015 June (Form 10-Q)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

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)

 

 

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

 

 

		PAGE NO.
PART I:	FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Balance Sheets– June 30, 2015 and December 31, 2014 (unaudited)	3
	Statements of Operations – Three and Six Months Ended June 30, 2015 and 2014 (unaudited)	4
	Condensed Statements of Cash Flows – Six Months Ended June 30, 2015 and 2014 (unaudited)	5
	Notes to Financial Statements (unaudited)	6
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.	18
ITEM 4.	Controls and Procedures	22
PART II:	OTHER INFORMATION
ITEM 1.	Legal Proceedings	22
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
ITEM 3.	Defaults Upon Senior Securities	22
ITEM 4.	Mine Safety Disclosures	22
ITEM 5.	Other Information	22
ITEM 6.	Exhibits……………………………………………………………	22
	Signatures	23

ITEM 1.

Financial Statements

Amarillo Biosciences, Inc.

	June 30, 2015				December 31, 2014
Assets
Current assets:
Cash and cash equivalents	$	100,064			$	318,556
Prepaid expense and other current assets		51,213				16,882
Total current assets		151,277				335,438
Patents, net		80,949				86,097
Property and equipment, net		6,459				-
Total assets	$	238,685			$	421,535
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued expenses	$	98,677			$	67,159
Accrued interest - related parties		1,133				563
Notes payable – related parties		272,055				234,555
Total current liabilities		371,865				302,277
Notes payable – related party, long term		112,500				150,000
Total liabilities		484,365				452,277
Commitments and contingencies
Stockholders' deficit
Common stock, $0.01 par value:
Authorized shares - 100,000,000
Issued and outstanding shares – 20,144,810 at June 30, 2015 and December 31, 2014		201,448				201,448
Additional paid-in capital		(157,446	)			(157,446	)
Accumulated deficit		(289,682	)			(74,744	)
Total stockholders' deficit		(245,680	)			(30,742	)
Total liabilities and stockholders’ deficit	$	238,685			$	421,535

		Three months ended June 30,								Six months ended June 30,
		Successor 2015				Predecessor 2014				Successor 2015				Predecessor 2014
Revenues:
Product sales		$	-			$	-			$	-			$	-
Total revenues			-				-				-				-
Cost of revenues:
Product sales			-				-				-				-
Total cost of revenues			-				-				-				-
Gross Margin			-				-				-				-
Operating expenses:
Research and development expenses			-				-				-				15,270
Selling, general and administrative expenses			102,103				186,203				213,921				345,948
Total operating expenses			102,103				186,203				213,921				361,218
Operating loss			(102,103	)			(186,203	)			(213,921	)			(361,218	)
Other income (expense)
Interest expense			(746	)			(684	)			(1,017	)			(730	)
Net loss			(102,849	)			(186,887	)			(214,938	)			(361,948	)
Preferred stock dividend			-				(8,098	)			-				(16,195	)
Net loss applicable to common shareholders		$	(102,849	)		$	(194,985	)		$	(214,938	)		$	(378,143	)
Basic and diluted net loss per share		$	(0.01	)		$	(0.00	)		$	(0.01	)		$	(0.01	)
Weighted average shares outstanding – basic and diluted			20,144,810				73,291,008				20,144,810				73,291,008

	Successor				Predecessor
	Six months ended June 30, 2015				Six months ended June 30, 2014
Net cash used in operating activities	$	(207,426	)		$	(183,690	)
Cash flows from investing activities:
Investment in equipment		(7,081	)			-
Investment in patents		(3,985	)			(7,831	)
Net cash used in investing activities		(11,066	)			(7,831	)
Cash flows from financing activities:
Proceeds from notes payable related party		-				186,472
Net cash provided by financing activities		-				186,472
Net change in cash		(218,492	)			(5,049	)
Cash and cash equivalents at beginning of period		318,556				6,539
Cash and cash equivalents at end of period	$	100,064			$	1,490
Supplemental disclosure of cash flow information
Cash paid for interest	$	-			$	-
Cash paid for income taxes	$	-			$	-

1.

Organization and Business.  Amarillo Biosciences, Inc. (the "Company” or “Amarillo” or “ABI”), a Texas corporation formed in 1984, is engaged in developing biologics for the treatment of human and animal diseases.  The Company’s current focus is research aimed at the treatment of human disease indications, particularly influenza, hepatitis C, thrombocytopenia, and other indications using natural human interferon alpha that is administered in a proprietary low dose oral form.  In addition to the above core technology ABI is exploring the possibility of instituting new revenue streams along with the core technology thus expanding the Company’s current focus into a diversified business portfolio.

 

2.

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, 2014, 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 six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015.

 

3.

Financial Condition.  These financial statements have been prepared in accordance with United States generally accepted accounting principles, on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has not yet achieved operating income, and its operations are funded primarily from debt and equity financings. The Company successfully reorganized under Chapter 11 of the U.S. Bankruptcy Code.  As part of the Plan of Reorganization, debt in excess of $4 million was discharged.  However, losses are anticipated in the ongoing development of its business and there can be no assurance that the Company will be able to achieve or maintain profitability.

 

The continuing operations of the Company and the recoverability of the carrying value of assets is dependent upon the ability of the Company to obtain necessary financing to fund its working capital requirements, and upon future profitable operations. The accompanying financial statements do not include any adjustments relative to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.

 

There can be no assurance that capital will be available as necessary to meet the Company's working capital requirements or, if the capital is available, that it will be on terms acceptable to the Company. The issuances of additional equity securities by the Company may result in dilution in the equity interests of its current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase the Company's liabilities and future cash commitments. If the Company is unable to obtain financing in the amounts and on terms deemed acceptable, the business and future

 

success may be adversely affected and the Company may cease operations. These factors raise substantial doubt regarding our ability to continue as a going concern.

 

4.	Current Status.  The Company exited bankruptcy on January 23, 2015 when the Final Decree was signed by Robert L. Jones, Bankruptcy Judge for the Northern District of Texas.  The Case was administratively closed on February 13, 2015.

 

 

Upon the adoption of fresh start accounting, the Company became a new entity for financial reporting purposes. References to “Successor” or “Successor Company” relate to the financial position of the reorganized Company as of and subsequent to November 20, 2014 and results of operations for the period ended June 30, 2015. References to “Predecessor” or “Predecessor Company” refer to the financial position of the Company prior to November 20, 2014 and the results of operations for the period ended June 30, 2014. As a result of the application of fresh start accounting and the effects of the implementation of the Plan of Reorganization, the financial statements on or after November 20, 2014 are not comparable with the financial statements prior to that date.

 

5.

Fresh Start Accounting.  Upon the Company’s emergence from Chapter 11 bankruptcy, the Company applied the provisions of fresh start accounting to its financial statements as (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the emerging entity and (ii) the reorganization value of the Company’s assets immediately prior to confirmation was less than the post-petition liabilities and allowed claims. The Company applied fresh start accounting as of November 20, 2014, with results of operations and cash flows in the period ending November 20, 2014 attributed to the Predecessor Company.

 

Upon the application of fresh start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities, and the excess of reorganization value over the fair value of identified tangible and intangible assets is reported separately on the balance sheet.

 

 

 

 

·

The reorganization value, which represents the enterprise value and non-interest bearing liabilities, was allocated to the Successor Company's assets based on their estimated fair values. The reorganization value exceeded the sum of the fair value assigned to assets. This excess reorganization value was recorded as part of the Successor Company assets at November 20, 2014.

 

·	Each liability existing as of the fresh start accounting date, other than deferred taxes, has been stated at the fair value, and determined at appropriate risk adjusted interest rates.

 

·	Deferred taxes were reported in conformity with applicable income tax accounting standards. Deferred tax assets and liabilities have been recognized for differences between the assigned values and the tax basis of the recognized assets and liabilities.

		Predecessor Company				Reorganization Adjustments					Fresh-Start Adjustments				Successor Company
Assets
Current assets:
Cash and cash equivalents		$	261,147			$	113,220		(a)		$	-			$	374,367
Prepaid expense and other current assets			24,063				-					-				24,063
Total current assets			285,210				113,220					-				398,430
Patents, net			86,355				-					-				86,355
Total assets			371,565				113,220					-				484,785
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued expenses			347,236				(291,009	)	(b)			-				56,227
Accrued interest – related parties			1,051,093				(1,051,093	)	(c)			-				-

			Predecessor Company				Reorganization Adjustments					Fresh-Start Adjustments					Successor Company
Accrued expenses – related party			78,360				(78,360	)	(d)			-					-
Notes payable – related parties			4,214,935				(3,830,380	)	(e)			-					384,555
Total current liabilities			5,691,624				(5,250,842	)				-					440,782
Total liabilities			5,691,624				(5,250,842	)				-					440,782
Stockholders' deficit
Preferred stock (Predecessor)			33				(33	)	(f)			-					-
Common stock (Predecessor)			732,910				(732,910	)	(g)			-					-
Additional paid-in capital (Predecessor)			31,968,516				732,910		(g)			(32,701,426	)	(j)			-
Preferred stock (Successor)			-				-					-					-
Common stock (Successor)			-				201,448		(h)			-					201,448
Additional paid-in capital (Successor)			-				1,739,797		(h)			(1,897,242	)	(j)			(157,445	)
Accumulated deficit			(38,021,518	)			3,422,850		(i)			34,598,668		(j)			-
Total stockholders' deficit			(5,320,059	)			5,364,062					-					44,003
Total liabilities and stockholders’ deficit		$	371,565			$	113,220				$	-				$	484,785

(a)

The cash payments recorded on the Effective Date from implementation of the Plan of Reorganization include the following:

 

Proceeds from Yang Group		$	322,500
Less: Payments of Class Four claims			(207,110	)
Less: Payments of Class Five claims			(2,170	)
Net increase in cash		$	113,220

(b)

Pursuant to the Plan of Reorganization, General Unsecured Creditors were given a settlement of six percent (6%) of the amount of the allowed claim.  Administrative Convenience Creditors were given the opportunity to receive the lesser of $500 or 100% of their claim and receive payment within twenty-eight (28) days after the twenty-eight day objection period expired.  The Effective Date was November 20, 2014.  Creditors had twenty-eight days from the Effective Date to object to the amount of their particular claim. The objection period was from November 21, 2014, through December 18, 2014.  Administrative Convenience Claims were paid beginning December 19, 2014 and payments to this class were completed no later than January 16, 2015.  Creditors in the following general ledger accounts received six percent (6%) payout in full and final settlement of all outstanding debts.  The balance of the debts for both classes was discharged after the settlement payments were tendered.

General Ledger Account		Amount Paid in Settlement				Amount Discharged
Deferred Revenue		$	225			$	1,557
Accounts Payable			8,029				161,167
Accrued Payroll – P. Mueller*			*-				*30,590
Accrued Payroll – B. Cohen			793				12,428
Notes Payable			1,111				17,266
Accrued Dividends			3,471				54,372
Total		$	13,629			$	277,380

(c)

Pursuant to the Plan of Reorganization, Accrued Interest for Related Parties was classified as General Unsecured Creditors.  These Creditors received six percent (6%) of the allowed claim in full and final settlement of all outstanding debts.  The balance of the debt was discharged after the settlement payment was tendered.

 

Description		Amount
Tibbits payout of interest on $200,000 loan; write off of unpaid & discharged interest debt.		$	43,123
Adjustment to interest for The Yang Group.			1,933
Sub-Total			45,056
Accrued Yang interest post-bankruptcy			(163	)
Accrued Yang interest post-bankruptcy			(53	)
Sub-Total Yang interest			(216	)
Net Sub-Total			44,840
Write off HBL accrued interest discharged.			1,006,253
Total Adjustment		$	1,051,093

(d)

Write off licensing fees due Hayashibara Biochemical Laboratories, Inc. (HBL) which originated through sales of Bimron, and interferon product.

 

(e)

The total amount of cash received by ABI from the Yang Group was $2,324,185.  The amount of debt exchanged for equity with Yang was $1,939,630 leaving $384,555 of cash not converted to debt and still owed to The Yang Group.  This cash was for the purpose of financing future, post-bankruptcy operations.  The Notes Payable – Related Parties consisted of the following:

 

Creditor		Amount
Tibbits		$	200,000
Martin Cummins			13,250
Allowed Unsecured Debt to Yang			1,939,630
Hayashibara Biochemical Laboratories			2,000,000
Total Discharged			4,152,880
Yang Cash for future operations			(322,500	)
Total Adjustment		$	3,830,380

 

 

(f)

Convert Preferred Stock at Par to Common Stock pursuant to Implementation of Plan of Reorganization – 32.62 shares of Preferred stock at $0.01 par to 3,262,000 Common shares at par $0.01.

 

(g)

Adjust Common Stock at par value of $0.01 for 20,144,810 Common Shares following 1-for-19 reverse stock split pursuant to Plan of Reorganization.

 

(h)

Adjust Common Stock at par of $0.01 and Additional Paid in Capital for conversion of Yang debt to (New) ABI Common Equity.

 

(i)

Adjust Accumulated Deficit for debt forgiveness/debt discharge pursuant to the Plan of Reorganization.

 

Fresh Start Adjustments

(j)

Adjust Paid in Capital – Predecessor, Paid in Capital – Successor, and Accumulated Deficit for Fresh Start Reporting.

6.

Common Stock.  The shareholders have authorized 100,000,000 shares of voting common shares for issuance. On June 30, 2015, a total of 20,279,167 shares of common stock were either outstanding (20,144,810) or reserved for issuance upon exercise of options and warrants (134,357). No common stock was issued in the six months ending June 30, 2015.

 

7.	Common Stock Options and Warrants.  As of June 30, 2015 there were 52,631 shares reserved as unexercised warrants and 81,726 shares reserved as unexercised options. No warrants or options expired in the first six months of 2015.

 

		Options				Price Range
Outstanding December 31, 2014			81,726			$	0.760-1.235
Granted			-				-
Cancelled/Expired			-				-
Exercised			-				-
Outstanding June 30, 2015			81,726				0.760-1.235
Exercisable June 30, 2015			81,726			$	0.760-1.235

		Warrants				Price Range
Outstanding December 31, 2014			52,631			$	0.57
Granted			-				-
Cancelled/Expired			-				-
Exercised			-				-
Outstanding June 30, 2015			52,631				0.57
Exercisable June 30, 2015			52,631			$	0.57

 

8.

Notes Payable – Related Party.  On the Effective Date of the Plan of Reorganization, the Class Three Secured Claim of Yang was deemed allowed in the amount of $150,000, secured by the same assets that secured Yang’s prepetition secured claim (See Texas Financing Statement No. 13-0029795076). This claim bears interest at the Applicable Federal Rate, will be fully amortized and paid as follows: four (4) consecutive equal annual installments of combined principal and interest, beginning September 1, 2015, and continuing on the same date of each succeeding year until September 1, 2018, when the obligation is due and payable in full.

 

 

9.

Subsequent Events.  At a Special Shareholders Meeting held July 10, 2015, the Company’s Certificate of Formation and Bylaws were materially modified, in a manner affecting the Company’s voting common stock (the only class of the Company’s securities of which shares are currently issued and outstanding); and also affecting the

 

 

Company’s authorized shares of preferred stock, issuable in series, of which no shares or series are currently issued and outstanding.  The general effect of such modifications was as follows:

 

a.

Stockholder supermajority vote requirements were changed from 2/3 of the issued and outstanding shares entitled to vote on a matter, to 51% of the issued and outstanding shares entitled to vote on such matter, with such change additionally applying to each voting class or series where a class or series of shares is entitled to vote separately on a matter.  This change would apply to all existing or future supermajority vote requirements under Texas law, including without limitation, votes on Fundamental Business Transactions, and/or Fundamental Actions, as such are defined in the Texas Business Organizations Code.

 

b.

Requirements for action by written consent of Stockholders in lieu of a meeting were changed, to permit actions to be taken by the written consent of Stockholders having at least the minimum number of votes that would be necessary to take the action that is the subject of the consent at a meeting, in which each holder entitled to vote on the action is present and votes, in lieu of requiring that the written consent be unanimous, as at present.

 

c.	The requirement for notice to directors of Special Directors Meetings was changed from 24 hours to 4 hours.

 

 

 

 

 

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·

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.

 

·

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.

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

ITEM 3.

Defaults Upon Senior Securities.

None

ITEM 4.

Mine Safety Disclosures.

ITEM.5.

Other Information.

ITEM 6.

Exhibits.

None

 

 

 

	AMARILLO BIOSCIENCES, INC.
Date:   August 10, 2015	By:   /s/ Stephen T. Chen Stephen T. Chen, Chairman of the Board, and Chief Executive Officer
Date:   August 10, 2015	By:   /s/ Bernard Cohen Bernard Cohen, Vice President, Chief Financial Officer