Ainos, Inc. - Quarter Report: 2017 June (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 June 30, 2017

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 August 11, 2017 there were 22,437,176 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 June 30									Six months ended June 30
		2017					2016			2017				2016
Revenues:
Sales – APT		$	250,502			$	-			$	250,502			$	-
Sales – Herbs			-				-				-				4,400
Total revenues			250,502				-				250,502				4,400
Cost of revenues:
Product sales			58,801				-				58,801				5,100
Total cost of revenues			58,801				-				58,801				5,100
Gross margin (loss)			191,701				-				191,701				(700	)
Operating expenses:
Research and development expenses			-				-				-				-
Selling, general and administrative expenses			176,935				135,127				361,948				255,706
Total operating expenses			176,935				135,127				361,948				255,706
Operating income (loss)			14,766				(135,127	)			(170,247	)			(256,406	)
Other income (expense)
Interest expense			(1,742	)			(1,097	)			(5,701	)			(1,459	)
Net income (loss)		$	13,024			$	(136,224	)			(175,948	)		$	(257,865	)
Basic and diluted net income (loss) per share		$	0.00			$	(0.01	)		$	(0.01	)		$	(0.01	)
Weighted average shares outstanding – basic and diluted			22,431,427				21,069,535				22,353,918				20,607,173

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 "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, which is included in the Pharmaceutical Division, ABI is exploring the possibility of instituting new revenue streams with a Medical Division and a Consumer Products Division.

The Medical Division opened a diabetic treatment center in Hong Kong in February, 2017, and is preparing to deploy diabetic treatment centers in Taiwan.  These centers will provide a therapy (Artificial Pancreas Treatment, or "APT") for the management of Type 1 and Type 2 diabetes along with the reversal of the complications that historically accompany this disease and plague patients. The Consumer Product Division is presently working on a delivery system for nutraceuticals and food supplements such as Vitamin C, negotiations to import and distribute to the Asian markets a natural resource product which can be modified for human, animal, or agricultural applications, and enter the alternative medicine market through domestic and international distribution of natural Kentucky Wild Ginseng and other medicinal herbs.

2.

Basis of presentation. The accompanying financial statements, which should be read in conjunction with the audited financial statements and footnotes included in the Company's Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on April 17, 2017, 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, 2017 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017.

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 sustained 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 June 30, 2017, a total of 26,747,815 shares of common stock were either issued (22,437,176) or reserved for 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).

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.  During the first quarter of 2017, the Company sold 270,000 shares of common stock at $.1875 per share for proceeds of $50,625.

On January 3, 2017, Stephen T. Chen, CEO, and Bernard Cohen, CFO/VP, received 145,405 shares of common stock and 19,387 shares of common stock, respectively, as payment of a 2016 stock bonus totaling $42,500.  The stock was issued at a price of $.2579 per share pursuant to the Board of Directors resolution of December 20, 2016. The shares are recognized as stock compensation expense for the period ended June 30, 2017.

On April 3, 2017, Stephen T. Chen, CEO, and Bernard Cohen, CFO/VP, received 76,095 shares of common stock and 10,146 shares of common stock, respectively, as payment of a Q1 2017 stock bonus totaling $21,250.  The stock was issued at a price of $.2464 per share. The shares are recognized as stock compensation expense for the period ended June 30, 2017.

No stock has been sold subsequent to the balance sheet date of June 30, 2017 and through the issue date of this report.

5.	Convertible Notes Payable – Related Party. During the fiscal year ended December 31, 2016, a payable in the amount of $144,426 to Dr. Stephen T. Chen, Chairman, CEO and President of the Company, was exchanged for a convertible promissory note.  The note was

executed on January 11, 2016, is payable on demand, and is unsecured.  The interest rate is .75%, the Annual Federal Rate (AFR), the rate in effect when the note was made.  The Payee, Dr. Chen, may convert all or some part of the note to the Maker's (ABI's) common voting stock at a conversion price of $.168 per share.

On March 18, 2016, Dr. Chen purchased a Convertible Promissory Note in the amount of $262,500 through the Company's Private Placement Convertible Note Security Offering entitled Private Placement 2016-1 (previously approved by the ABI Board of Directors on March 10, 2016).  The note is payable on demand, unsecured, carries interest at the Short Term Annual Federal Rate (AFR) of .65% per annum, and is convertible into ABI 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. Chen in exchange for the aggregated amounts of two existing Notes Payable – Related Party.  The Convertible Note is due on demand, is unsecured, bears interest at the Short-Term Applicable Federal Rate of .64% per annum, and is convertible into ABI common stock at a stock price of $.1875 per share.

 

	June 30, 2017		December 31, 2016
Convertible Note payable – related party	$                    144,426		$                     144,426
Convertible Note payable – related party	262,500		262,500
Convertible Note payable – related party	384,555		384,555
Convertible Notes payable – related party	$                    791,481		$      791,481

6.

Related Party Transactions. 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. To date, ABI has advanced to 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 People's Republic of China.  That Agency Agreement is still in force.  For their services, ACTS Global, is 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 June 30, 2017, ACTS Global has a balance of $37,835 to be utilized for the benefit of the Company, which is included on the Company's Balance Sheet in Advance to related party.

In April 2016, the Company received proceeds of $187,500 from an investor related to Amarillo Biosciences (Hong Kong) Ltd. in exchange for the potential issuance of 1,000,000 shares of common stock (Private Placement 2016-2).  As of June 30, 2017, the shares have not been issued and the amount received is included in Advances from related party.  As of the filing date, the stock subscription has not been executed.

On December 20, 2016, effective January 1, 2017, the Board of Directors approved a resolution whereby Dr. Chen's annual compensation was changed to $90,000 cash per annum and $75,000 per annum payable in the Company's unregistered, voting common stock.  The Board also approved the change in compensation to Bernard Cohen to $65,000 cash per

annum and $10,000 per annum payable in the Company's unregistered, voting common stock. The cash compensation is to be paid on the normal payroll cycle of 15th and 31st of each month and stock compensation to be paid quarterly.  Shares are to be priced at the average of all trading day closing quotes on the OTC-BB for the month preceding date of issuance, with such shares to be issued on the first business day after the close of each calendar quarter or as soon thereafter as practicable.  During the period ended June 30, 2017, the Company has issued an aggregate of 251,033 shares of common stock valued at $63,750. As of June 30, 2017, the Company has accrued $21,250 in Accounts Payable and Accrued Expenses representing Q2 2017 shares that have not been issued.

On May 25, 2017, a Promissory Note in the amount of $70,000 was issued to Dr. Chen.  The Note is due on May 25, 2018, is unsecured, and bears interest at .86% per annum.

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 four patents, two pending patents, one in the U.S. and one in Taiwan.  Additionally, we have 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. The newest patent will expire in April 2033.  These four patents and the two pending patents 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 but the newest of the patents, and even if it does not, could leave relatively little time to derive revenues from the patent protections, prior to patent expiration. The patent which also carries the trademark, 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.

Results of Operations for Quarters Ended June 30, 2017 and 2016:

Revenues.  During the quarters ended June 30, 2017, we had revenue recognition from APT equipment sales of $250,502. During the quarter ended June 30, 2016, there were no sales of ginseng samples, dietary supplements or ACM.

Cost of Revenues.  During the quarters ended June 30, 2017, we purchased equipment at a cost of $58,801, including shipping, insurance, and import fees, which was sold for the APT program.  During the quarter ended June 30, 2016, no equipment, ginseng, dietary supplements, or ACM was purchased for resale.

Research and Development Expenses. Research and development expenses have not been incurred for the quarters ended June 30, 2017, and June 30, 2016.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses of $176,935 were incurred for the second quarter in 2017, compared to $135,127 for the second quarter of 2016, an increase of $41,808 (31%).  This increase is mostly due to additional salary expense in 2017.

Operating Income (Loss).  In the three-month period ended June 30, 2017, the Company's operating income was $14,766 compared to an operating loss for the three-month period ended June 30, 2016 of $135,127, a $149,893 decrease in loss. There were more expenses overall during the second quarter of 2017, offset against sales of APT equipment.

Interest Expense.  During the three-month period ended June 30, 2017, interest expense was $1,742, compared to $1,097 for the three-month period ended June 30, 2016.  The interest expense recognized in the second quarter of 2017 is mostly due to accrued interest for our secured and unsecured loans with Dr. Stephen Chen.

Net Income (Loss). In the three-month period ended June 30, 2017, the Company had net income of $13,024 compared to a net loss for the three-month period ended June 30, 2016, of $136,224 an $149,248 (110%) decrease in loss. This decrease was mainly due to recognition of recent APT equipment sales.

Results of Operations for the Six Months Ended June 30, 2017 and 2016:

Revenues.  During the six months ended June 30, 2017 and June 30, 2016, there were no sales of dietary supplements, or ACM.  There were no sales of ginseng samples in 2017, a potential source of revenue, compared to $4,400 in 2016, a decrease of (100%) in 2017. In 2017, there was revenue recognition of APT equipment sales of $250,502, compared to no sales in 2016.

Cost of Revenues.  During the six months ended June 30, 2017 and June 30, 2016, no dietary supplements or ACM was purchased for resale.  No ginseng was purchased for resale in 2017 as

compared to $5,100 in 2016.  In 2017, equipment in the amount of $58,801, including shipping, insurance, and import fees, was purchased and resold for the APT program, compared to no equipment purchases in 2016.

Research and Development Expenses. Research and development expenses have not been incurred for the six months ended June 30, 2017, and June 30, 2016.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses of $361,948 were incurred for the first six months of 2017, compared to $255,706 for the first six months of 2016, an increase of $106,242 (42%).  This increase is mostly due to additional salary expense in 2017.

Operating Loss.  In the six month period ended June 30, 2017, the Company's operating loss was $170,247 compared to an operating loss for the six month period ended June 30, 2016 of $256,406, a $86,159 (34%) decrease. There were more expenses overall during the second quarter of 2017, offset against sales of APT equipment.

Interest Expense.  During the six-month period ended June 30, 2017, interest expense was $5,701, compared to $1,459 for the six-month period ended June 30, 2016, an increase of $4,242 (291%). The interest expense recognized in the six-month period ended June 30, 2017 is mostly due to accrued interest for our secured and unsecured loans with Dr. Stephen Chen and interest paid associated with our D&O insurance policy payment.

Net Loss. In the six months ended June 30, 2017, the Company's net loss was $175,948 compared to a net loss for the six months ended June 30, 2016 of $257,865 a $81,917 (32%) decrease. This decrease was mainly due to recognition of recent APT equipment sales.

Liquidity Needs. At June 30, 2017, we had available cash of $69,376 whereas we had a cash position of $134,125 as of December 31, 2016.  The Company had a working capital deficit of $443,046 at the end of June 30, 2016.  For 2017, the working capital deficit was $1,077,921.  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 budgets 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 financing needs to be between $1,000,000 and $1,600,000 to support our core technology, which is included in the Pharmaceutical Division, and exploring the possibility of instituting new revenue streams with a Medical Division and a Consumer Products Division.

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.

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

Disclosure Controls and Procedures

At the end of the period covered by the Annual Report on Form 10-K for the fiscal year ended  December 31, 2016, and this Form 10-Q Quarterly Report for the quarter ending June 30, 2017, an evaluation was carried out under the supervision of and with the participation of our

management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). Based on that evaluation, the CEO and the CFO have concluded that as of the end of the period covered by the Annual Report and Quarterly Report, our disclosure controls and procedures were not effective in ensuring that: (i) information required to be disclosed by us in reports that we file or submit to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for accurate and timely decisions regarding required disclosure.

 

Changes to Internal Controls and Procedures 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.

Management's Remediation Plans

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles ("GAAP"). Management has assessed the effectiveness of internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. A material weakness, as defined by SEC rules, is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses in internal control over financial reporting that were identified are:

a) We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements. We have limited experience in the areas of financial reporting and disclosure controls and procedures. Also, we do not have an independent audit committee. As a result, there is a lack of monitoring of the financial reporting process and there is a reasonable possibility that material misstatements of the financial statements, including disclosures, will not be prevented or detected on a timely basis; and

b) Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process. The areas where we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable invoices for payment. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis.

c) We do not have sufficient controls over authorization and documentation of revenue and equity transactions.

We will look to increase our personnel resources and technical accounting expertise within the accounting function as funds become available. Management believes that hiring additional knowledgeable personnel with technical accounting expertise will remedy the following material weakness: insufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements.

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.

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.  During the first quarter of 2017, the Company sold 270,000 shares of common stock at $.1875 per share for proceeds of $50,625.  No shares were sold during the second quarter of 2017, nor have any shares been sold subsequent to the balance sheet date nor through the date this report was filed.

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.