Ainos, Inc. - Quarter Report: 2016 March (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 March 31, 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 May 16, 2016 there were 20,144,810 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)

		Three Months Ended March 31
		2016				2015
Revenues:
Sales – Herbs		$	4,400			$	-
Total revenues			4,400				-
Cost of revenues:
Product sales			5,100				-
Total cost of revenues			5,100				-
Gross margin			(700	)			-
Operating expenses:
Research and development expenses			-				-
Selling, general and administrative expenses			120,579				111,818
Total operating expenses			120,579				111,818
Operating loss			(121,279	)			(111,818	)
Other income (expense):
Interest expense			(362	)			(271	)
Net loss			(121,641	)			(112,089	)
Preferred stock dividend			-				-
Net loss applicable to common shareholders		$	(121,641	)		$	(112,089	)
Basic and diluted net loss per average share available to common shareholders		$	(0.01	)		$	(0.01	)
Weighted average common shares outstanding – basic and diluted			20,144,810				20,144,810

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 three months ended March 31, 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 March 31, 2016, a total of 21,013,057 shares of common stock were either outstanding (20,144,810) or reserved for issuance upon exercise of options (8,568) or conversion of convertible debt to stock (859,679). No common stock was issued in the three months ending March 31, 2016.

During the period ended March 31, 2016, the Company has received $250,000 for the purchase of 1,333,333 shares of common stock from Dr. Stephen T. Chen in connection with a $937,500 Private Placement Common Stock Security Offering. The offering contemplates the sale of a maximum of 5,000,000 shares at a cost of $0.1875 per share. The required SEC Form D was filed on May 6, 2016. As of March 31, 2016, these shares have not been issued.

5.	Common Stock Options and Warrants.  As of March 31, 2016 there were no shares reserved as unexercised warrants and 8,568 shares reserved as unexercised options. No options or warrants expired in the first three months of 2016.

A summary of the Company's stock option activity and related information for the period ended March 31, 2016 is as follows:

A summary of the Company's stock warrant activity and related information for the period ended March 31, 2016:

6.	Notes Payable – Related Party.

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, the payment has not been made and there has been no demand for the payment.  ABI is discussing the exchange of some or all of this debt, principal and interest, for ABI Common stock, with the holders. As of March 31, 2016, the outstanding balance is $150,000.

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.  There has been no demand and the parties are contemplating the exchange of some or all of this debt for ABI Common stock. As of March 31, 2016, the outstanding balance is $234,555.

7.

Convertible Note Payable – Related Party. On July 31, 2015, two investors paid a total of $225,000 for their subscribed investment to the Yang Group for an investment in 1,200,000 shares of ABI common stock. The investors agreed to pay a premium of $0.07 per share over the original cost of the stock, which was $0.12 per share. The Company allocated $144,426 as an Accounts payable – related party to Dr. Chen for his previous advances to the Company through The Yang Group. The remaining $80,574 was recognized as "additional paid in capital" (APIC) during the year ended December 31, 2015.

 

Shares Subscribed				Purchase Price				Purchase Premium				Total
	200,000			$	24,071			$	13,429			$	37,500
	1,000,000				120,355				67,145				187,500
	1,200,000			$	144,426			$	80,574				225,000
Less: Due to Dr. Stephen Chen													(144,426	)
Additional paid in capital												$	80,574

Subsequently, an offering of $1,000,000 of Convertible Notes was made with a conversion rate of $0.168 per share. The SEC Form D was filed on April 7, 2016, and the first sale was a Convertible Promissory Note for the face amount of $144,426 to Dr. Stephen Chen, who as consideration to the Company, forwent immediate collection of the $144,126 mentioned in the preceding paragraphs.

 

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 has been paid back to Dr. Chen subsequent to March 31, 2016.

9.

Corporate Governance and Stock - A Special Shareholders Meeting was held July 10, 2015, at which time 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.

Additionally, at the Special Shareholder Meeting of July 10, 2015, the following Board of Directors was elected: Stephen T. Chen, Paul Tibbits, Yasushi Chikagami, Dan Fisher, and Nick Moren.  There is expected to be no continuing arrangement or understanding among the members or former members of The Yang Group and their associates with respect to the election of directors, or other matters, although the unallocated shares to be retained by The Yang Group will continue to be voted by Stephen T. Chen, Chairman, CEO and President of the Company, until such time as they are distributed.

10.	Subsequent Event. On April 25, 2016, the Company sold 2,316,667 shares of common stock for total proceeds of $434,375 in connection with the Private Placement Common Stock Security Offering. These shares have not yet been issued.

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.

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.

Assets, Liquidity, and Capital.  ABI holds various patents and related intellectual property. Most, if not all, of ABI's assets secure Yang's collateralized debt pursuant to Loan Documents.¹

At March 31, 2016, we had available cash of $264,184 whereas we had a cash position of $21,138 as of December 31, 2015.  The Company had a working capital deficit of $549,945 at December 31, 2015.  For 2016, the working capital deficit was $426,113.  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 post-reorganization budgets and projections are still being developed and new revenue lines have not yet materialized.  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 constituent members of the Yang Group have 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.

Dr. Chen and the present management team will continue to operate ABI.  There is expected to be no continuing arrangement or understanding among the members or former members of The Yang Group and their associates with respect to the election of directors or other matters, although the shares to be retained by The Yang Group will continue to be voted by Stephen T. Chen, Chairman, President and CEO of the Company, until such time as they are distributed.

Pending Litigation

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

Risk Factors

The most significant asset is the Debtor's 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. These three patents and the single 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.

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. 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,² 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.

Equity Funding.  In the three months ending March 31, 2016, 1,333,333 shares of Common Stock have been sold at a price of $0.1875 per share totaling $250,000.  However, as of that date the shares have not yet been issued.

Results of Operations for Quarters Ended March 31, 2016 and 2015:

Revenues.  During the quarters ended March 31, 2016, and March 31, 2015 there were no sales of dietary supplements and there were no ACM sales. 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 quarters ended March 31, 2016, and March 31, 2015.

² See 26 U.S.C. § 382 (known as Section 382 of the IRC) and related regulations.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses of $120,579 were incurred for the first quarter in 2016, compared to $111,818 for the first quarter of 2015, an increase of $8,761 (8%).  This increase is mostly due to increased professional fees in 2016.

Operating Loss.  In the three-month period ended March 31, 2016, the Company's operating loss was $121,279 compared to an operating loss for the three-month period ended March 31, 2015 of $111,818, a $9,461 increase. Increased professional fees in 2016 was a significant factor in the increase.

Interest Expense.  During the three-month period ended March 31, 2016, interest expense was $362, compared to $271 for the three-month period ended March 31, 2015.  The interest expense recognized in the first quarter of 2016 is mostly due to accrued interest for our secured and unsecured loans with The Yang Group.

Net Loss. In the three-month period ended March 31, 2016, the Company's net loss was $121,641 compared to a net loss for the three-month period ended March 31, 2015 of $112,089 a $9,552 (9%) increase. This increase was mainly due to increased professional fees.

Liquidity Needs. At March 31, 2016, we had available cash of $264,184 whereas we had a cash position of $21,138 as of December 31, 2015.  The Company had a working capital deficit of $549,945 at the end of December 31, 2015.  For 2016, the working capital deficit was $426,113.  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 post-reorganization budgets and projections 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 Yang Group 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.

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.

We may not be able to adequately protect and maintain our intellectual property. The most significant asset is the Company's 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 will expire in a range of three to five years. These three patents and the single 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 stated earlier, 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 the 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.

Constituent members of the Yang Group have recognized the necessity of additional capital infusion to return ABI to profitable operations post-reorganization. This will likely include the advance of debt financing or infusion of additional capital, although Yang members are not obligated to do so, and will consider economic and market factors before making such determination. 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 with Yang members the acquisition and development of new

product lines to which Yang members may have access. 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.

We rely on third parties for the supply, manufacture and distribution of our products.  Third parties manufacture and distribute all of our products. Our historical reliance on third parties has left us without a source of natural human interferon which seriously jeopardizes our ability to leverage our core technology.  The Company has been forced to diligently search for a new supply of interferon. Developing a new source of interferon will be very costly and time consuming which will have a profoundly negative impact on the Company's continuing operations. We do not currently have manufacturing facilities or personnel to independently manufacture our products; therefore, third parties would have to manufacture and distribute all of our products.  Licensed distributors located in the United States and internationally, would be required to distribute the products.  Except for any contractual rights and remedies that we might have with potential manufacturers and distributors, we would 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 were unable to obtain or retain third-party manufacturers and distributors on commercially acceptable terms, we would not be able to produce and distribute our products as planned.  If delays or difficulties were encountered with contract manufacturers in producing or packaging products or with a distributor in distributing our products, the production, distribution, marketing and subsequent sales of these products would be adversely affected, and we would then have to seek alternative sources of supply or distribution or abandon or sell product lines on unsatisfactory terms or even discontinue sales entirely. 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 our specifications or that our distributor will be able to distribute our products in accordance with our requirements.

Sales revenue, sublicense fees and royalty income are currently nonexistent.  Historically, the Company's primary focus has been to achieve FDA approval of oral interferon for one or more disease indications.  We do not expect any significant sales or royalty revenue in the next several years. We operate at a net loss and current liabilities exceed current assets by $426,113 as of March 31, 2016.

We are dependent on certain key existing and future personnel.  Our ability to continue operations will depend, to a large degree, upon the efforts and abilities of our officers and key management employees such as Stephen T. Chen, President, Chairman and Chief Executive Officer, Bernard Cohen, our Vice President and Chief Financial Officer, and Edward Morris, our Corporate Secretary and General Counsel. The loss of the services of one or more of our key employees would have a material adverse effect on our operations. 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 offer assurance that we will be able to successfully attract and retain key personnel. From time to time we contract consultants to advise on certain projects.

If we do not successfully develop, acquire or license new drugs we will not be able to continue operations.  We must invest substantial time, resources and capital in identifying and developing new drugs, dosage and delivery systems, either on our own or by acquiring and licensing such products

from third parties. Our growth depends, in part, on our success in such process.  If we are unable to either develop new products on our own or acquire licenses for new products from third parties, our ability to grow revenues and market share will be adversely affected. In addition, we will 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 were not be able to obtain necessary financing for such development. 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, InterMune, Serano, Biogen, Berlex, Hemispherx and others.  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 has added an explanatory paragraph to their audit opinion issued in connection with our financial statements as of and for the year ended December 31, 2015 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 $121,641 for the three months ended March 31, 2016 and a net loss of $112,089 for the three months ended March 31, 2015.  The operating loss for the three months ended March 31, 2016 was $121,279.

In addition, as of March 31, 2016 we had an accumulated deficit of $718,259. 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 not successful in our efforts to operate the reorganized Company, we will be forced to cease operations.

Risks Related to our Common Stock.  There is only a limited market for our common stock and the price of our common stock may be affected by factors that are unrelated to the performance of our business.  If any of the risks described in these Risk Factors or other unseen risks are realized, the market price of our common stock could be materially adversely affected.  Additionally, market prices for securities of biotechnology and diagnostic companies have historically been very volatile.

The market for these securities has from time to time experienced significant price and volume fluctuations for reasons that are unrelated to the operating performance of any one company. In particular, and in addition to the other risks described elsewhere in these Risk Factors, the following factors can adversely affect the market price of our common stock:

·

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.

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 March 31, 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. 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 have been no changes in internal controls over financial reporting during 2016.

 

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.	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 $0.168.  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."

The only sale to date occurred on March 18, 2016, when a Convertible Promissory Note (containing the conversion terms set forth above) in the face amount of $144,426 was sold.  No underwriter was involved, and no underwriting discounts or commissions were given or paid.  The purchaser was Stephen T Chen, the Company's CEO.  The consideration received by the Company was the forbearance by Mr. Chen of his right to demand from the Company a cash payment of $144,426.  The issuance of the Convertible Promissory Note 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").

B.	Voting Common Stock:

The Company is offering 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 will be 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").

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.