AIMD Ainos Inc

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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. 

Some of the statements in this report are “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding our current beliefs, goals and expectations about matters such as our expected financial position and operating results, our business strategy and our financing plans. The forward-looking statements in this report are not based on historical facts, but rather reflect the current expectations of our management concerning future results and events. The forward-looking statements generally can be identified by the use of terms such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “may,” “guidance,” “estimate,” “potential,” “outlook,” “target,” “forecast,” “likely” or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals are, or may be, forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements. We cannot guarantee that our forward-looking statements will turn out to be correct or that our beliefs and goals will not change. Our actual results could be very different from and worse than our expectations for various reasons. These forward-looking statements are not guarantees of future performance and involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data, or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all).

The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

Any forward-looking statements in this report are made only as of the date hereof and, except as may be required by law, we do not have any obligation to publicly update any forward-looking statements contained in this report to reflect subsequent events or circumstances.

For a further discussion of these and other factors that could impact our future results, performance or transactions, see Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2021 filed with the SEC on April 15, 2022.

Overview

Ainos, Inc., a Texas corporation formerly known as Amarillo Biosciences, Inc. (the "Company", "we" or "us"), is engaged in developing medical technologies for point-of-care (“POCT”) testing and safe and novel medical treatment for a broad range of disease indications.  Since our inception in 1984, we have concentrated our resources on business planning, raising capital, research and clinical development activities for our programs, securing related intellectual property and commercialization of proprietary therapeutics using low-dose non-injectable interferon (“IFN”). In addition to our core IFN technology, we are committed to developing a diversified healthcare business portfolio to include medical devices and consumer healthcare products.

Although we have historically been involved in extensive pharmaceutical research and development of low-dose oral interferon as a therapeutic, we are prioritizing the commercialization of medical devices as part of our diversification strategy.  Since the beginning of 2021, we have acquired significant intellectual property from our majority shareholder, Ainos, Inc., a Cayman Islands corporation (“Ainos KY”), to expand our potential product portfolio into Volatile Organic Compounds (“VOC”) and COVID-19 POCTs.  We expect our underlying intellectual property to enable us to expedite the commercialization of our medical device pipeline, beginning with Ainos-branded COVID-19 POCT product candidates. 

Our portfolio of products

Our portfolio of products is currently comprised of the following:

An integral part of our operating strategy is to create multiple revenue streams through commercializing our product portfolio and leveraging our intellectual property patents, including potentially out-licensing or forming strategic relationships to develop our medical devices, consumer healthcare products and low-dose interferon therapeutics. 

In 2022, we are prioritizing the commercialization of our POCT devices, beginning with seeking EUA authorizations for the COVID-19 POCT product candidates and plans to commercialize our other POCT product candidates.  As a general strategy, we plan to conduct clinical trials in Taiwan and use the data to apply for TFDA approval and FDA clearance via the 510(k) or comparable pathway.  If our products are approved, we plan to work with third-party distributors to market our products in countries where we receive regulatory approval and to seek various business relationships with other medtech companies to market our products.  At the same time, we plan to initiate clinical trials for the VELDONA and SRNA programs over the course of this year.

Our ability to generate product revenue sufficient to achieve profitability will depend on further successful development and commercialization of one or more of our current or future product candidates and programs.  We anticipate our POCT products candidates to potentially generate organic cash flows to support our business while we invest in our other pipeline projects.  We expect to continue to incur significant expenses for the next few years as we advance our product candidates through preclinical development, clinical trials and regulatory approval.  In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution, and legal and regulatory compliance.  We may also incur expenses in connection with strategic relationships for the development of additional product candidates.  Furthermore, we expect to continue to incur costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses.

Until we can generate significant revenue from product sales, if ever, we expect to finance our operations with business revenues and proceeds from external sources.  We may pursue additional funding that may include our entry into or expansion of borrowing arrangements; research and development incentive payments, government grants, co-financing from pharmaceutical companies and other corporate sources; and potential future collaboration agreements with pharmaceutical companies or other third parties.  We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms.  If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization, potential in-licenses or acquisitions plans for one or more of our product candidates.

We are unable to predict the timing or amount of unexpected expenses or when or if we will be able to achieve or maintain profitability due to the numerous risks and uncertainties associated with product development and related legal regulatory requirements.  When we are eventually able to generate additional product sales, those sales may not be sufficient to become profitable.  If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of June 30, 2022, we had available cash and cash equivalents of $1,753,877.  We anticipate business revenues and further potential financial support from external sources to fund our operations over the next twelve months.  We have based this estimate on assumptions that may prove to be incorrect and we could exhaust our available capital resources sooner than we expect.  See “Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for additional information.  To finance our continuing operations, we will need to raise additional capital, which cannot be assured.

Impact of COVID-19 on Our Business

The COVID-19 pandemic presented us an opportunity to grow our business. Substantially all of our operating revenue came from the sale of the Ainos COVID-19 antigen rapid test kits in Taiwan. We intend to broaden our market reach if TCNT, our product co-developer and manufacturing partner, successfully obtains regulatory clearance in the U.S. or other countries.

We believe affordable, easy-to-use, rapid COVID-19 testing will continue to be in demand at least in the short-term.  We anticipate our management apps, when used with the Ainos antigen rapid test kit, will allow individuals and organizations to effectively manage tests, trace infections, and share results.  We also anticipate the Ainos COVID-19 nucleic acid test can help medical professionals quickly scale testing capacity if the product receives regulatory clearance.

We are continuing to monitor the potential impact of the pandemic, but we cannot be certain the future impact on our business, financial condition, results of operations and prospects. Depending on developments relating to the pandemic, including the emergence of new variants, the pandemic may affect our ability to initiate and complete research studies, delay the initiation of our future research studies, disrupt regulatory activities or have other adverse effects on our business, results of operations, financial condition and prospects.

Results of Operations for Quarter Ended June 30, 2022 (“Q2 2022”) and June 30, 2021 (“Q2 2021”):

Revenues, Cost and Gross Profit.  The Company reported revenue of $636,627 and $202,992 in Q2 2022 and Q2 2021, respectively from product sales of the Ainos COVID-19 Antigen Rapid Test Kits in Taiwan. The cost of sales relating to product sales of the Ainos COVID-19 Antigen Rapid Test Kits in Q2 2022 was $318,963 compared to of Covid-19 Test Kits $69,508 in Q2 2021.  Gross profit from product sales in Q2 2022 was $317,664 as compared to $133,484 in Q2 2021.  Gross profits generated from product sales of the Ainos COVID-19 Antigen Rapid Test Kits increased by $184,180 between Q2 2022 and the same quarter in the previous year. 

Research and Development Expenses.  R&D expenses in Q2 2022 were $1,634,856 mainly consisting of amortization expense of intellectual property assets, staffing and co-development research.  There were no R&D expenses during the same quarter in 2021. We expect that our R&D expenses will increase over time as we further product development of our POCT and other product candidates.  In addition to increasing our in-house R&D staffing, we also contribute R&D funding under our co-development agreements with Taiwan Carbon Nano Technology (“TCNT”), our manufacturing collaborator and our affiliate company for POCT products.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses in Q2 2022 were $627,104 mainly consisting of staffing and legal, audit and consulting etc. professional service expenses, and in Q2 2021 were $860,030 mainly consisting of amortization expense of intellectual property assets, staffing and legal, audit and consulting etc. professional service expenses.  Although personnel expenditure increased in Q2 2022, the total S&A expenses decreased by $232,926 (27%) compared with Q2 2021.The decrease was mainly due to the amortization expense of intellectual property assets, as these amortization expense has been charged to the R&D department after establishing R&D department in August 2021; besides, one-time transactional expenses such as the Securities Purchase Agreement transaction and initiation of new operational activities only incurred in 2021.

Operating Loss.  The Company's operating loss was $1,944,295 and $726,546 in Q2 2022 and Q2 2021, respectively, reflecting a $1,217,749 (168%) increase in operating losses between the reporting periods.  As stated in our discussion about R&D expenses, our operating losses are mainly attributable to additional R&D expenses in line with the Company's product development initiatives.

Interest Expense.  In Q2 2022 interest expense was $18,796 compared to $20,981 in Q2 2021, due to accrued interest for convertible and other debt notes amounted to $ 4,389,931 and $1,711,420 as of June 30, 2022 and 2021, respectively. The interest of $20,981 in Q2 2021 including the default interest of the principal due and unpaid, and the holders of those notes waived their right to such default interest in Q3 2021.

Net Loss.  Net loss attributable to common stock shareholders was $1,954,032 in Q2 2022 compared to $749,774 in Q2 2021, resulting in a 1,204,258 (161%) increase in net losses. The net losses are attributable to increased R&D expenses in line with the Company's product development plans.

Results of Operations for the Six Months Ended June 30, 2022 (“H1 2022”) and June 30, 2021(“H1 2021”):

Revenues.  The total revenue recognized from the sale of Covid-19 Test Kits in Taiwan was $723,828 through June 30, 2022, as compared to $205,113 for the first six months of 2021, an increase of $518,715 or 253%.

Cost of Revenues and Gross Profit.  Cost of sales of Covid-19 Test Kits for the six months ended June 30, 2022 was $360,042 compared to $70,757 for the six months ended June 30, 2021.  The increase in cost of sales of Covid-19 Test Kits for 2022 as compared to 2021 for the six month period was $289,285, or 409 %.  Gross profit for six months ended June 30, 2022 was $363,786 compared to $134,356 for the six months ended June 30, 2021, an increase of $229,430 or 171%.

Research and Development Expenses.  Research and development expenses of $3,212,310 were incurred for the first six months of 2022, compared to $0 for the first six months of 2021, an increase of $3,212,310. The increase in 2022 was primarily due to amortization expense of intellectual property assets, staffing and co-development research. In addition, we also contributed R&D funding to our COVID-19 oral treatment program.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses of $1,178,834 were incurred for the first six months of 2022, compared to $1,383,011 for the first six months of 2021, a decrease of $204,177 (15%).  The mainly S&A expenses of H1 2022 and H1 2021 are the same as Q2 2022 and Q2 2021, and the reasons for expenses decrease are also the same. Please refer to the analysis in preceding paragraph.

Operating Loss.  In the six month period ended June 30, 2022, the Company's operating loss was $4,027,358 compared to an operating loss for the six month period ended June 30, 2021 of $1,248,655, a $2,778,703 (223%) increase. Our operating losses are mainly attributable to additional R&D expenses in line with the Company's product development initiatives.

Interest Income and Expense.  Interest expense, net was $35,483 for the six months ended June 30, 2022, compared to $32,879 for the six months period ended June 30, 2021. The interest expense was due to the interest-bearing debt, including convertible notes and other debt notes, amounted to $4,389,931 and $1,711,420 as of June 30, 2022 and 2021, respectively. The interest of $32,879 in H1 2021 including the default interest of the principal due and unpaid, and the holders of those notes waived their right to such default interest in Q3 2021.

Net Loss. The Net Loss for the first half of 2022, increased to $4,053,927 from $1,283,781 in 2021, an increase of $2,770,146 (216%) for the period.  The major constituents of the increase in net loss are the increases in R&D expenses in the first six months of 2022.

Liquidity and Capital Resources

As of June 30, 2022 and December 31, 2021, the Company had available cash of $1,753,877 and $1,751,499, respectively.

The following table summarizes our cash flows at the end of June 30, 2022:

Operating activities:

Cash used by operating activities increased in H1 2022 compared to H1 2021, due to higher operating expenses.  We incurred net operating outflow of $1,619,153 for H1 2022 and $42,926 for H1 2021. While our revenues grew in H1 2022 due to sales of the Ainos COVID-19 test kits, our increased staffing and investment in research and developments increased our expenses resulted in higher net operating outflow.

Investing activities:

Cash used in investing activities increased in H1 2022 compared to cash used in H1 2021, attributed to the acquisition of R&D equipment and office facilities.

Financing activities:

Cash provided by financing activities increased in H1 2022 compared to cash provided in H1 2021, which primarily reflects higher proceeds from convertible notes payable amounted to $1,400,000 and other non-convertible notes payable amounted to $800,000. For a discussion of the notes, see “Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.”

As of June 30, 2022, the principal amount of our convertible and non-convertible notes payable due within the next 12 months was $3,376,526 and $1,013,405, respectively.

The convertible notes outstanding in the principal amount of $3,000,000 due in February 2023 are convertible at the option of the holder at a conversion price of $0.20. The non-convertible debt outstanding in the principal amount of $213,405 are currently payable and due on demand and the rest of amount $800,000 due in March 2023.

On January 30, 2022, we issued a non-interest bearing Convertible Promissory Note in the principal amount of $26,000,000 (the “APA Convertible Note”) in connection with the closing of the Asset Purchase Agreement. 

In addition, in the first quarter of 2022, we executed $1,400,000 of the March 2027 Convertible Notes with terms that are substantially similar to the terms of the APA Convertible Note.

In 2022 we intend to focus on commercializing our POCT medical devices and developing our VELDONA-based COVID-19 oral treatment program. Our near-term liquidity requirements will include expenses for clinical trials, repayment of debt not converted into equity, regulatory clearances, and marketing to commercialize our POCT devices, including the Ainos COVID-19 Nucleic Acid Test, the Ainos Flora, the Ainos Pen and our VELDONA-based COVID-19 oral treatment program. We also intend to increase staffing for general administration, marketing and technology development purposes.

In 2023 and beyond, we intend to invest in research and development and clinical trial spending to advance our VELDONA development efforts for disease indications such as thrombocytopenia and Sjögren’s syndrome. We also plan on investing in clinical trials and regulatory approval for the CHS430 device, in collaboration with TCNT, and clinical trial expenses for our SRNA program.

On August 9, 2022, in connection with the Offering, (i) the APA Convertible Note, (ii) the March 2027 Convertible Notes and (iii) $3,000,000 aggregate principal amount of convertible notes plus accrued interest of $42,959 were converted into a total of 9,037,137 shares of our common stock. Following the closing of the Offering on August 11, 2022, we received net proceeds of approximately $2.1 million.

The Company anticipates that its cash reserves, business revenues from the Ainos COVID-19 test kits, sales of its common stock, and debt financing through convertible and non-convertible notes are sufficient to fund the Company’s operations over the next twelve months. As the number of reported COVID cases has been increasing in Taiwan, we anticipate demand for the test kits to increase, at least in the short term. There can be no assurance that we will be successful in our efforts to make the Company profitable. If those efforts are not successful, the Company may raise additional capital through the issuance of equity securities, debt financings or other sources in order to further implement its business plan, including, as required, additional external financing from our majority shareholder. However, if such financing is not available when needed and at adequate levels, the Company will need to reevaluate its operating plan.