Ainos, Inc. - Quarter Report: 2016 September (Form 10-Q)

United States

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2016

Commission File Number 0-20791

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [√ ] Yes   [ ] No

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

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

As of November 21, 2016, there were 21,394,810 shares of the issuer's common stock outstanding.

AMARILLO BIOSCIENCES, INC.

INDEX

PART I - FINANCIAL INFORMATION

ITEM 1.

Financial Statements

Amarillo Biosciences, Inc.

Balance Sheets

(Unaudited)

See accompanying notes to financial statements.

Amarillo Biosciences, Inc.

Statements of Operations

(Unaudited)

See accompanying notes to financial statements.

Amarillo Biosciences, Inc.

Condensed Statements of Cash Flows

(Unaudited)

See accompanying notes to financial statements.

Amarillo Biosciences, Inc.

Notes to Financial Statements

(Unaudited)

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, 2015, filed with the Securities and Exchange Commission, are unaudited, but have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016.

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. 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.

Common Stock.  The shareholders have authorized 100,000,000 shares of voting common shares for issuance.  On September 30, 2016, a total of 25,714,017 shares of common stock were either outstanding (21,394,810) or reserved for issuance upon exercise of options (8,568) or conversion of convertible debt to stock (4,310,639).

On March 10, 2016, the Board of Directors approved the Company to enter into private placements for the sale of up to 5,000,000 shares of the Company's common stock (Private Placement 2016-2) at a price of $.1875 per share (aggregate offering amount of $937,500).

During the second quarter of 2016, the Company received $421,875 from four (4) individual, outside investors for the purchase of a total of 2,250,000 shares of common stock through the 2016-2 Security Offering which contemplates the sale of a maximum of 5,000,000 shares at a cost of $.1875 per share. The required SEC Form D was filed on May 6, 2016. On July 11, 2016, 1,250,000 shares were issued to three of the four investors.  The remaining 1,000,000 shares for the fourth investor will be issued when the executed Private Placement Memorandum documents are received.

On September 30, 2016, the Board of Directors approved the Company to amend the previously authorized Private Placement 2016-2 offer, sale, and issuance of unregistered securities.  The Private Placement 2016-2 was amended to offer up to 10,000,000 shares of the Company's commons stock at a price of $.1875 per share for an aggregate offering amount of $1,875,000.  The offering is to be completed within one (1) year of the date of approval.  No stock has been sold during the third quarter of 2016, and no stock has been sold subsequent to the balance sheet date of September 30, 2016, through the issue date of this report.

5.	Common Stock Options.  As of September 30, 2016 there were 8,568 shares reserved as unexercised options.

A summary of the Company's stock option activity and related information for the period ended September 30, 2016 is as follows:

6.	Notes Payable – Related Parties.

On November 20, 2014, 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.  The first payment was due on September 1, 2015, in the amount of $37,811 (principal and interest).  To date, no payments have been made and there has been no demand for the payment.

Subsequent to consummation of the Plan, The Yang Group provided $234,555 for post-reorganization financing.  This is unsecured and draws interest at the short term Applicable Federal Rate.  On June 30, 2016, the two debts were consolidated into one convertible promissory note. The convertible promissory note is due on demand, unsecured, bears interest at the Short-Term Applicable Federal Rate of .64% per annum, and is convertible into Amarillo Biosciences, Inc. Common Stock at a price of $.1875 per share.  The amounts owed to The Yang Group after the debts were consolidated totaled $384,555 which represented all amounts then owed to The Yang Group. Those debts along with the associated liens, security interests, and accrued interest were assigned by The Yang Group to Dr. Stephen T. Chen, effective as of June 30, 2016. Subsequent to the assignment, Dr. Chen released the lien (Texas file #13-0029795076) and authorized Amarillo Biosciences, Inc. to file a UCC-3 Amendment Statement terminating the lien.

7.	Convertible Notes Payable – Related Party. During the nine months ended September 30, 2016, a payable of $144,426 to Dr. Stephen Chen was converted to a convertible promissory note with a conversion rate of $0.168 per share.

On March 10, 2016, the Board of Directors approved the Company to enter into private placements for the sale of up to $1,000,000 in face amount of the Company's Convertible Promissory Notes (Private Placement 2016-1), payable on demand, and convertible into the Company's common stock at a conversion rate of $.1875 per share.

During the period ended September 30, 2016, the Company received $262,500 from Dr. Stephen T. Chen for the purchase of Convertible Promissory Notes in connection with a $1,000,000 Private Placement Convertible Note Security Offering entitled Private Placement 2016-1.

The Note is due on demand, bears interest at the Short-Term Applicable Federal Rate of .65% per annum, and is convertible into Amarillo Biosciences, Inc. Common Stock at a price of $.1875 per share.

On June 30, 2016, a Convertible Promissory Note in the amount of $384,555 was issued to Dr. Stephen T Chen in exchange for the aggregated amounts of the two Notes Payable – Related Party described in Note 6.  The Convertible Note is due on demand, unsecured, bears interest at the Short-Term Applicable Federal Rate of .64% per annum, and is convertible into Amarillo Biosciences, Inc. Common Stock at a stock price of $.1875 per share.

8.

Related Party Transactions. Dr. Stephen T. Chen, Chairman, CEO and President, of the Company advanced $75,000 to the Company on a periodic basis between January 18, 2016 and March 18, 2016 to be used for general operations. The $75,000 was classified on the Balance Sheet as Accounts payable – related parties and was paid back to Dr. Chen on April 4, 2016.

On May 23, 2016, Amarillo Biosciences, Inc. ("ABI"), the Principal, entered into an Agency and Service Agreement with ACTS Global Healthcare, Inc. ("ACTS Global"), a Taiwan Corporation, the Agent. ABI advanced ACTS Global "Principal Funds" in the amount of NTD $3,000,681 ($91,968 USD), to be utilized and /or expended by ACTS Global solely as instructed by ABI.  Additional advances may be made by ABI to ACTS Global.  ACTS Global was also engaged by ABI to perform such other business services as may be requested by ABI in the agreed geographic area of Taiwan and the Peoples Republic of China.  For their services, ACTS Global, will be paid by ABI, one percent (1%) of the Principal's services expended by the Agent at the Principal's direction. Any other services rendered by the Agent will be paid for by the Principal based on comparable and/or reasonable values of the service rendered.  As of September 30, 2016, ACTS Global has expended $35,268 for the Company, leaving a balance of $56,700, included in Prepaid Expenses, to be utilized.

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.

Forward-Looking Statements: Certain statements made throughout this document are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance, achievements, costs or expenses and may contain words such as "believe," "anticipate," "expect," "estimate," "project," "budget," or words or phrases of similar meaning.  Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those projected in the forward-looking statements.  Such risks and uncertainties are detailed from time to time in reports filed by the Company with the Securities and Exchange Commission, including Forms 8-K, 10-Q and 10-K and include among others the following: promulgation and implementation of regulations by the U.S. Food and Drug Administration ("FDA"); promulgation and implementation of regulations by foreign governmental instrumentalities with functions similar to those of the FDA; costs of research and development and trials, including without limitation, costs of clinical supplies, packaging and inserts, patient recruitment, trial monitoring, trial evaluation and publication; and possible difficulties in enrolling a sufficient number of qualified patients for certain clinical trials.  The Company is also dependent upon a broad range of general economic and financial risks, such as possible increases in the costs of employing and/or retaining qualified personnel and consultants and possible inflation which might affect the Company's ability to remain within its budget forecasts. The principal uncertainties to which the Company is presently subject are its inability to ensure that the results of trials performed by the Company will be sufficiently favorable to ensure eventual regulatory approval for commercial sales, its inability to accurately budget at this time the possible costs associated with hiring and retaining of additional personnel, uncertainties regarding the terms and timing of one or more commercial partner agreements and its ability to continue as a going concern.

The risks cited here are not exhaustive. Other sections of this report may include additional factors which could adversely impact the Company's business and future operations. Moreover, the Company is engaged in a very competitive and rapidly changing industry.

New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company's business, or the extent to which any factor or combination of factors may cause actual results to differ materially from those projected in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual future events.

Overview. ABI has been (and is) engaged in the business of biopharmaceutical research and development. Its primary focus historically has been the development of low-dose, orally administered interferon. ABI holds or licenses various patents; it also is the developer of Maxisal^®, a dietary supplement to treat dry-mouth symptoms.

Having successfully reorganized, the Company's goal continues to be the expansion of the reach of its research, development, and marketing of biopharmaceutical, biotechnical, health and life science related products.  ABI will continue to leverage its core technology going forward by using its thirty years of scientific and clinical data to establish interferon-alpha lozenges as a therapeutic agent for conditions such as influenza, hepatitis C, and various causes of thrombocytopenia just to name a few.  The Company is committed to expanding its business operations from the currently narrow focus to encompass a wide variety of licensing, partnerships, and development opportunities in the aforementioned sectors. This commitment extends not only to the U.S., but to Taiwan, China, and other Asian Countries.

ABI holds various patents and related intellectual property, which are described earlier in this document. The most significant asset is intellectual property consisting of three patents, one pending patent, and one trademark. One of the patents expires in less than two years and two of the patents expire in a range of three to five years. It is expected that the pending patent will be fully approved and issued by the end of 2016.  These three patents and the single, soon-to-be-issued, pending patent employ the Company's core technology, which is the oral, low dosage use of (human) interferon. These patents will not have significant value unless commercialized, which will require adequate funding, time, effort, and expertise in biologics.  As previously stated, ABI's sole source of human interferon discontinued production, which negatively impacted ABI's ability to obtain source product. The anticipated location and development time required for a new source of human interferon along with the requisite testing and FDA approval time could exceed the life span of all of the patents, and even if it does not, would leave relatively little time to derive revenues from the patent protections, prior to patent expiration. The third patent, a product promoting oral health, also is the victim of supply-chain interruption because the supplier of the raw material for the product (anhydrous crystalline maltose, or "ACM") has substantially increased its purchase price. The price increase and other actions have rendered the manufacture and sale of the product less attractive.

It is anticipated that ABI will attempt to monetize and commercialize its existing intellectual property, which would necessitate identification and acquisition of new source product (e.g., Interferon), conducting new trials, and additional protection of intellectual property. It is estimated this may require additional funding (including general administrative cost and professional fees) of between $500,000 and $800,000. Similarly, ABI may explore the

acquisition and development of new product lines. The cost to commercialize any such development could likely require a similar funding level, resulting in aggregate funding requirements between $1 million and $1.6 million. These activities, even if undertaken, would not be expected to produce meaningful revenue before the last calendar quarter of 2017, or possibly later.

Pending Litigation

To the best of management's knowledge, the Company does not believe that there is any pending litigation against ABI.

Tax Consequences

ABI's most recent tax return and financial statements reflect tax attributes that may or may not be obtainable. Some of these tax attributes (e.g., net operating loss carry forwards ("NOL"), if any) are for the benefit of ABI. According to the Company's most recent federal income tax return, the face amount of the NOL was $21,683,436. The Company's NOL derived from the emergence from Chapter 11 Bankruptcy that closed on February 13, 2015. ABI has not independently verified or otherwise confirmed the favorable nature of such tax attributes or the extent to which any of the NOL can still be used. It is the Company's belief that obtaining the value of such tax attributes may be difficult and directly dependent upon many factors outside of our control, including, but not limited to, changes in the legal and regulatory framework and the operational and corporate structure of ABI and shareholders, or sales or transfers of stock by or among shareholders. For example, if ABI has experienced a change of control as defined in the relevant provisions of the IRC,¹ the use of any existing tax attributes could be severely limited. ABI does not believe the reorganization has or will impair any tax attributes; however, obtaining value from the tax attributes is a function of the Company's return to profitable operations and the timeframe of that return. While we believe it is possible, there is no assurance that ABI will return to profitability in the future.

Results of Operations for Three Months Ended September 30, 2016 and 2015:

Revenues.  During the three months ended September 30, 2016, and September 30, 2015 there were no sales of ginseng samples, dietary supplements or ACM.

Research and Development Expenses. Research and development expenses have not been incurred for the three months ended September 30, 2016, and September 30, 2015.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses of $178,470 were incurred for the three months ended September 30, 2016, compared to $113,552 for the three months ended September 30, 2015, an increase of $64,918 (57%).  This increase is contributed to additional professional fees, ginseng expense, postage/shipping expenses and overall increased activity in 2016.

Operating Loss.  In the three months ended September 30, 2016, the Company's operating loss was $178,470 compared to an operating loss for the three months ended September 30, 2015 of $113,552, a $64,918 increase. This increase is contributed to additional professional fees, ginseng expense, postage/shipping expenses and overall increased activity in 2016.

¹ See 26 U.S.C. § 382 (known as Section 382 of the IRC) and related regulations.

Interest Expense.  During the three months ended September 30, 2016, interest expense was $798, compared to $596 for the three months ended September 30, 2015.  The interest expense recognized in the three months ended September 30, 2016 is mostly due to accrued interest for our convertible debt notes with Stephen Chen.

Net Loss. In the three months ended September 30, 2016, the Company's net loss was $179,268 compared to a net loss for the three months ended September 30, 2015, of $114,148 an $65,120 (57%) increase. This increase was mainly due to additional professional fees, ginseng expense, postage/shipping expense, and overall increased activity in 2016.

Results of Operations for the Nine Months Ended September 30, 2016 and 2015:

Revenues.  During the nine months ended September 30, 2016 and September 30, 2015 there were no sales of dietary supplements, or ACM.  During the nine months ended September 30, 2016, there were $4,400 in sales of ginseng samples, a potential source of revenue.

Research and Development Expenses. Research and development expenses have not been incurred for the nine months ended September 30, 2016, and September 30, 2015.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses of $434,176 were incurred for the nine months ended September 30, 2016, compared to $327,473 for the nine months ended September 30, 2015, an increase of $106,703 (33%).  This increase is mostly due to higher professional fees, project expense and travel related costs.

Net Operating Loss.  In the nine months ended September 30, 2016, the Company's operating loss was $434,876 compared to an operating loss for the nine months ended September 30, 2015 of $327,473, a $107,403 (33%) increase.

Interest Expense.  During the nine months ended September 30, 2016, interest expense was $2,257, compared to $1,614 for the nine months ended September 30, 2015, an increase of $643 (40%). The interest expense recognized in the nine months ended September 30, 2016 is mostly due to accrued interest for our convertible debt loans with Stephen Chen and interest paid associated with our D&O insurance policy payment.

Net Loss. In the nine months ended September 30, 2016, the Company's net loss was $437,133 compared to a net loss for the nine months ended September 30, 2015 of $329,087, a $108,046 (33%) increase.

Liquidity and Capital Resources

At September 30, 2016, we had available cash of $176,357 whereas we had a cash position of $21,138 as of December 31, 2015.  The Company had a working capital deficit of $362,167 at the end of September 30, 2015.  For 2016, the working capital deficit was $647,778.  Historically the burn rate was between $50,000 and $60,000 per month.  It is difficult to estimate the burn rate at this point insomuch as the new business lines and revenue streams are still being developed.  One of the Company's main goals is to return to the status of a going concern by having reduced operating losses and subsequently becoming profitable.  As indicated throughout this document, two other major goals of ABI are to (1) leverage the core technology, low-dose oral interferon, and (2) diversify Company operations to incorporate additional lines of business

which will extend the reach of ABI into additional economic sectors such as biotech / bio-pharmaceutical / health care products and life sciences business.  The investor base has indicated the willingness to assist in future financing of operations as ABI seeks to monetize its existing (and potentially newly developed) intellectual property. ABI estimates its post-reorganization financing needs to be between $1,000,000 and $1,600,000.

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

As a "smaller reporting company", we are not required to provide the information under this Item 3.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures as of the end of the period covered by this quarterly report, being September 30, 2016. This evaluation was carried out under the supervision and with the participation of our company's management, including our company's chairman of the board and chief executive officer, Dr. Stephen T. Chen and chief financial officer, Bernard Cohen. Our company's disclosure controls and procedures are effective as at the end of the period covered by this report.

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.

Changes in Internal Controls Over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

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.

The Company is in the process of conducting two private placements, one of its unregistered Convertible Promissory Notes, and one of its unregistered voting common stock.  Both offerings are still underway, and will be described separately:

A.	2016-1 Convertible Promissory Notes:

The Company is offering by private placement its Convertible Promissory Notes in an aggregate face amount not to exceed $1 million ($1,000,000).  The Notes are payable on demand, but also contain the following conversion provision:

"Option to Convert to Maker's Stock:  At any time, and if Maker's common voting stock is then listed or quoted on a trading market or on the OTC BB, Payee shall have the option to convert some or all of the unpaid principal and/or interest to Maker's common voting stock at a conversion price of $0.1875.  The date of conversion shall be the date written notice of conversion, specifying the dollar amount of accrued interest and principal converted, shall have been delivered by Payee to Maker, and such delivery may be by mail, delivery service, or electronically by email to an Executive Officer of Maker.  Upon conversion, Payee shall hold such shares as restricted shares subject to Rule 144 promulgated under the U.S. Securities Act of 1933."

B.	2016-2 Voting Common Stock:

The Company offered by private placement up to 5,000,000 shares of its Voting Common Stock at a price of $0.1875 per share, for an aggregate offering amount of $937,500.  Sales to date have been:

No underwriter was involved, and no underwriting discounts or commissions were given or paid.

The consideration received by the Company was cash in the amounts shown.  The issuance of the shares was exempt from registration under the Securities Act of 1933 (the "Act") pursuant to Rule 506 of Regulation D promulgated thereunder, and the offering met all requirements of an offering described in Rule 506 (b) ("Conditions to be met in offerings subject to limitation on manner of offering").  On July 11, 2016, 1,250,000 shares were issued to three of the four investors.  The remaining 1,000,000 shares for the fourth investor will be issued when the executed Private Placement Memorandum documents are received.

On September 30, 2016, the Board of Directors approved the Company to amend the previously authorized Private Placement 2016-2 offer, sale, and issuance of unregistered securities.  The Private Placement 2016-2 was amended to offer up to 10,000,000 shares of the Company's common stock at a price of $.1875 per share for an aggregate offering amount of $1,875,000.  The offering is to be completed within one (1) year of the date of approval.  No stock has been sold during the third quarter of 2016, and no stock has been sold subsequent to the balance sheet date of September 30, 2016, through the issue date of this report.

ITEM 3.

Defaults Upon Senior Securities.

None

ITEM 4.

Mine Safety Disclosures.

Not applicable

ITEM.5.

Other Information.

None

ITEM 6.

Exhibits.

None

SIGNATURES

Pursuant to the requirements of Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.