Business context and reporting period
The supplied filing is Amarillo Biosciences, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018—not a filing under the name Ainos, Inc. Investors should confirm the issuer identity. Amarillo describes itself as a diversified healthcare company with pharmaceutical, medical, and consumer-product operations, including low-dose oral interferon research, medical products and equipment, and nutraceuticals.
Effective July 1, 2018, the company acquired ACTS Global Healthcare’s assets and certain liabilities in exchange for 539,447 shares. ACTS had previously been consolidated as a variable-interest entity. The filing reports goodwill of approximately $133,000 associated with consolidation.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | 2018: $14,908; 2017: $0 | 2018: $71,748; 2017: $250,502 |
| Gross profit (loss) | 2018: $(1,883); 2017: $0 | 2018: $10,911; 2017: $191,701 |
| SG&A | 2018: $306,965; 2017: $230,875 | 2018: $859,956; 2017: $592,822 |
| Operating loss | 2018: $(308,848); 2017: $(230,875) | 2018: $(849,045); 2017: $(401,121) |
| Net loss | 2018: $(310,039); 2017: $(232,804) | 2018: $(852,589); 2017: $(408,751) |
Nine-month 2018 net loss attributable to common shareholders was $834,268 after a $18,321 loss attributable to non-controlling interests. Basic and diluted loss per share was $0.01 for the quarter and $0.02 for the nine months, in both 2018 and 2017.
Nine-month gross margin was approximately 15% in 2018 versus approximately 77% in 2017; third-quarter 2018 gross margin was negative. Management reported no direct research and development activity in either comparative period.
Cash and cash equivalents were $1,143,317 at September 30, 2018, down from $1,980,015 at December 31, 2017. Nine-month operating cash use was $697,341, compared with $188,526 in 2017. Reported investing cash flow was positive $55,643, including a $63,414 line item for “Acquisition of AEI”; financing cash flow was negative $195,000, reflecting convertible-note repayments. The filing does not clearly reconcile the “AEI” cash-flow description with its ACTS acquisition discussion.
Current liabilities were $707,342, including $513,356 of related-party convertible notes. Working capital was $488,876. Total assets were $1,517,081 and stockholders’ equity was $809,739. The company reported no cash paid for interest or income taxes during the nine months.
Material changes versus prior comparable periods
- Nine-month revenue fell 71% year over year, principally because the company recorded no metabolism-treatment-equipment sales in 2018. TissueAid wound-closure product sales contributed $1,960 of the 2018 nine-month revenue.
- Nine-month SG&A increased 45%, with management citing higher salaries and stock compensation, travel, accounting, rent, and consulting costs associated with expanding foreign operations. The nine-month net loss increased 109%.
- Cash declined by $836,698 from year-end. Related-party convertible notes decreased from $886,481 to $513,356, through repayments and a $178,125 debt conversion to common stock.
- Common shares outstanding rose from 23,156,563 at December 31, 2017 to 37,299,276 at September 30, 2018. The filing reports 37,417,524 outstanding on November 14, 2018.
Outlook, risks, contingencies, and unusual items
Management states that the company has not achieved sustained operating income and that its ability to continue as a going concern depends on obtaining financing and achieving profitable operations. The filing says these factors raise substantial doubt about the company’s ability to continue as a going concern. Management estimated $1.0 million to $1.6 million in funding needs for core technology and new revenue streams, and said such activities would not be expected to generate revenue before the fourth quarter of 2019, or possibly later. No specific earnings or revenue guidance was provided.
Management cited uncertainty around financing, commercialization and regulatory approval, clinical-trial results and costs, commercial-partner agreements, and foreign expansion. It also warned that two patents expire in 2019 and 2021, while developing and testing a new interferon source could take substantial time. The Maxisal product faces increased raw-material prices and minimum purchase quantities, with no satisfactory alternative identified.
During October and November 2018, the company reported selling 1,550,000 shares for $387,500 under a private placement; those shares had not been issued as of November 14. The filing also reports 950,000 qualified and 3,995,000 nonqualified options granted, with $1,865,312 of unrecognized option expense. The related option plans authorize reserves of up to 6 million and 20 million shares, respectively.
Management concluded that disclosure controls and procedures were not effective. Identified material weaknesses included insufficient technical accounting resources, lack of an independent audit committee, inadequate segregation of duties, and insufficient controls over revenue and equity transactions. Management said it would seek additional expertise as funds became available. The company reported no known legal proceedings or defaults on senior securities.
Most important facts for investors to verify
- Confirm that Amarillo Biosciences, Inc. is the intended issuer, given the request’s Ainos, Inc. label.
- Review financing availability, cash use, and the going-concern disclosure; management’s stated funding requirement is $1.0 million to $1.6 million.
- Assess related-party debt, stock issuances, compensation, and the potential dilution from outstanding options and authorized plan reserves.
- Check the ACTS acquisition accounting and the filing’s “Acquisition of AEI” cash-flow line for clarification.
- Monitor remediation of the disclosed material weaknesses and the status of commercialization, regulatory, patent, and supply-chain risks.