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.

OVERVIEW

The Company

Ainos, Inc. (the “Company”) is a Texas corporation incorporated in 1984 engaged in the discovery and development of pharmaceuticals, medical devices and preventative medicine. The Company currently has offices in the United States and Taiwan. The Company operates a branch office in Taiwan registered as AINOS, INC. TAIWAN BRANCH.

Our Business Divisions

We operate through three business divisions: Pharmaceutical, Medical Devices and Preventive Medicine. Our Preventive Medicine Division was formerly the Consumer Product Division.

Pharmaceutical: Low-dose lozenge interferon alpha (IFN-α) Research. Our core pharmaceutical drug development platform, VELDONA (Very Low-Dose Oral Interferon Alpha), is the result of more than thirty years of clinical research on low-dose non-injectable interferon alpha (IFN-α), which has been shown to be effective in trials against a variety of diseases, including thrombocytopenia, Sjögren’s syndrome, hepatitis C, influenza, HIV, SARS, and other conditions ranging from genital warts to canker sores. Shifting to a more focused approach, we plan to conduct further clinical trials of VELDONA on thrombocytopenia and Sjögren’s syndrome.

Medical Devices: Our previous focus on insulin infusion therapy under our SMART (Simultaneous Metabolic Activation & Restoration Therapy) treatment resulted in the development of a prototype novel insulin pulsatile pump. Our pump prototype delivers insulin intravenously in pulses, as opposed to the typical subcutaneous route of administration, in order to more closely imitate how the pancreas secretes insulin in healthy non-diabetics. The pump requires additional stages of development and is subject to further studies. Meanwhile, we have expanded our product lines to include COVID-19 diagnostics and VOC diagnostics. Going forward we plan to accelerate commercialization of these new products following receipt of the applicable regulatory approval.

Preventive Medicine: We have restructured our former Consumer Product Division into a Preventive Medicine Division to expand our focus on treatments to prevent disease. Our previous efforts in the sale and marketing of liposomal nutraceutical and food supplements lacked synergies with our focus on specific disease indications and pharmaceutical treatment potentials. While we continue to believe in the efficacy of nutrition as a primary contributor to human health, we restructured this division in the third quarter of 2021 in order to incorporate a broader perspective centered on preventative interventions and to pivot towards more cutting-edge, revolutionary technologies. Going forward we are seeking new efforts on SRNA-based therapeutics development, to truly effect medical approaches that prevent the advancement of diseases. Our focus will be on fundamental research and development of vaccines with the intent to seek out-licensing opportunities and strategic partnerships when appropriate.

Our Medtech Transformation

The COVID-19 pandemic has fundamentally changed the healthcare and medical industries. Digital transformation of healthcare is underway to provide access to quality healthcare with reduced physical contact. As a result, telehealth adoption has substantially accelerated. We believe that better telehealth service requires enhanced telehealth-enabled diagnostics, and therefore we anticipate the need for rapid, convenient, low-cost, cloud-connected digital diagnostics. In addition, the recent commercialization of mRNA COVID-19 vaccines suggests SRNA's has established SRNA’s promising potential in expediting pharmaceutical innovation. In order to meet these structural changes, we are transforming to a diversified medtech company.

We envision playing a major role in the digital healthcare revolution through an evolution in artificial intelligence, enabled by our AI Nose platform. We believe our AI Nose technology platform can potentially enable the eventual utilization of smell digitization for a plethora of applications, beginning with healthcare volatile organic compound (VOC) diagnostics. In our view, VOCs within the human body can be digitally profiled to facilitate personalized medicine. We refer to the digital identification of VOCs as “Smell ID.” As we train our AI algorithm with more Smell ID data, we believe we can provide more value-added service to our customers.

Our Strategic Partner

Ainos, Inc., a Cayman Islands incorporated company (“Ainos KY”), acquired majority ownership and management of the Company earlier this year. Under a Securities Purchase Agreement that closed on April 15, 2021 (the “Ainos KY Transaction”), we acquired intellectual properties valued at approximately $20 million that included VOC AI algorithms, digital nose technology, and a pipeline of innovative point-of-care testing (POCT) diagnostic technologies for a myriad of diseases including COVID-19, vaginitis and certain sexual transmitted diseases (STD), pneumonia and helicobacter pylori (h. pylori).

We expect that our newly-acquired in vitro POCTs can generate organic cash flows to support our business while we invest in our Pharmaceutical and Preventive Medicine Divisions. We have successfully commercialized our Ainos Covid-19 Test Kit this year in Taiwan and plan to commercialize other new in-vitro POCT diagnostics over the next several years if our products receive regulatory approval.

Ainos KY has also provided financial and management resources to supplement our business management capacity and operations. The current Board of Directors represents a broad spectrum of scientific, management, legal, and financial expertise that will be necessary to implement our business plans. After closing the Ainos KY Transaction, the Company engaged additional management resources including Mr. Chun-Hsien Tsai as Chairman and CEO, Ms. Hui-Lan (Celia) Wu as CFO and Mr. Chih-Heng (Jack) Lu as Head of Corporate Development, retained key management and legal staff.

Ainos Transformational Technologies

The intellectual property and other assets acquired from Ainos KY address key gaps in our former business model and provide a foundation for a more holistic drug and medical device development program.

First, by infusing the Company with VOC + AI algorithms and digital nose technology, we are now positioned to transition from our treatment-driven model for medical interventions to a more proactive diagnostic-driven pharmaceutical, medical device, and preventative medicine business plan. Ainos’ VOC AI assets are central to our telehealth friendly, point-of-care diagnostic-driven approaches throughout our Company’s product development program.

VOC Diagnostics. Volatile organic compounds (VOCs) profiles measured in exhaled breath as well as from headspaces of feces or urine samples are a source of information with respect to disease detection. Emerging advances in analytical technologies in the detection and measurement of VOCs in clinical matrices have generated increasing interest for their use in evaluating the diagnostic potential of VOCs for different diseases. VOCs represent a wide range of stable chemicals, are volatile at ambient temperature (may emit odors), and are detectable in exhaled breath, urine, feces, and sweat. Testing clinical samples for VOCs offers an option for developing rapid and potentially inexpensive disease screening tools. Most of the studies on volatile biomarkers have been carried out on exhaled-breath samples, although other clinical matrices, such as urine and feces, have also been investigated. Analysis of breath samples for testing of volatiles can be performed frequently in follow-up studies and may reflect disease progression and be helpful in monitoring therapeutic intervention. Moreover, breath tests are noninvasive and thus suitable for critically ill patients in intensive care units and small children.

AI Nose Technology Platform. Our AI Nose technology platform comprises the key building block of our VOC-based approaches. AI Nose’s main technology pillars include the digital nose sensor array, our proprietary VOC AI analytics, Smell ID, and our Company’s extensive knowhow of VOC-based medical device engineering. Our technology digitally profiles each VOC as a Smell ID and as more Smell IDs are collected for individuals, we may be able to build personalized medical treatment based on this data.

Our early efforts to develop a diabetes-focused insulin pump have significantly expanded into a more comprehensive development of a wide range of innovative point-of-care testing (POCT) diagnostic technologies, starting with our recent launch of the Ainos COVID-19 Antigen Test Kit in Taiwan.

COVID-19 Antigen Test Kit. On June 14, 2021 we entered into an exclusive agreement to serve as the master sales and marketing agent for the Ainos SARS-CoV-2 Antigen Rapid Test Kit (“Ainos Covid-19 Test Kit”) for Taiwan Carbon Nano Corporation (“TCNT”), the majority shareholder of Ainos KY. The Ainos COVID-19 Test Kit has been granted the CE mark, enabling us to market the product in Europe. On June 7, 2021, the Taiwan Food and Drug Administration (“TFDA”) granted emergency use authorization for the Ainos COVID-19 Test Kit for use by healthcare professionals in Taiwan.

The Ainos Covid-19 Test Kit uses an antigen rapid test technology jointly developed by Taiwan’s National Health Research Institutes (“NHRI”), National Defense Medical Center (“NDMC”), and TCNT. Our test kit features a smartphone-based test management function, which can be accessed through a data matrix code. The data matrix code stores each test kit’s unique ID. Each user will be able to store the results directly to the individual’s mobile phone.

Continuous personalized testing and community-wide tracing capabilities are fully integrated in our rapid test kit designs by leveraging smart phone applications and cloud-based technologies.

We developed a comprehensive, end-to-end, cloud-based COVID-19 management platform that allows individuals and organizations to manage tests and trace infection effectively. Our platform is comprised of our test kits, a consumer app and an enterprise app.

We aim to empower our customers and telehealth practitioners with rapid, accurate and non-invasive tools to monitor health with our Ainos Flora, Ainos Pen and CHS340 VAP rapid test devices.

Ainos Flora. We designed our iF-award winning Ainos Flora to empower patients to effortlessly, non-invasively and quickly test their vaginal health at home. Through specialized digital nose sensor arrays and A.I. algorithms, Ainos Flora is designed to detect vaginal infection and common STDs (including bacterial vaginosis, fungus infection, gonorrhea and trichomoniasis) in minutes. Ainos Flora is portable, handheld, and enables remote monitoring by designated medical professionals. Patients can store test results in a mobile app. Ainos Flora is designed to give women back control of monitoring their personal health.

Ainos Pen. Conventional breathalyzers are typically single-purpose and primarily designed to test for alcohol and drug use. Ainos Pen is a multi-purpose, cloud-connected breathalyzer intended for routine health monitoring. By enabling self-care at home, we anticipate Ainos Pen will create new applications for the telehealth ecosystem by allowing its users to non-invasively monitor their health. Ainos Pen securely stores test data in a complimentary mobile app with the ability to upload test data to a cloud server for access by designated healthcare providers. Through telehealth and A.I. analytics, patients can provide comprehensive and long-term health data to their healthcare providers.

CHS430 VAP Rapid Test. Ventilator-associated pneumonia (VAP) is one of the most frequent ICU-acquired infections. Reported prevalence varies widely from 5% to 40%. Causes of VAP include prolonged duration of mechanical ventilation or endotracheal intubation. The estimated mortality of VAP is around 10%, with higher mortality rates in surgical ICU patients and in patients with mid-range severity scores at admission. CHS430 is a patented portable breathalyzer that connects into a respirator’s y-connector and detects VAP within 10 minutes. It is designed to screen VAP infections and the likely causation pathogen. A specialized sensor array and algorithms quickly identify infections and the most common bacterial species related to VAP. The device is easy to operate with the press of a button. The sensor array inside the device is designed to be periodically replaced.

Our Divisions and Product Lines

As part of our medtech transformation strategy, we reclassified our divisions into the Pharmaceutical Division, Medical Device Division and Preventive Medicine Division.

Our Pharmaceutical Division researches and develops drug therapeutics that support the human immune system and address persistent diseases.

VELDONA Pharmaceutical Drug Development Program

Since our inception we have engaged in the research of low-dose non-injectable interferon delivered through nasal, oral mucosal, topical and transdermal pathways and in liquid, ointment or lozenge forms. Our core pharmaceutical drug development platform, VELDONA (Very Low-Dose Oral Interferon Alpha), is predicated on a comprehensive library of scientific clinical data for low-dose non-injectable interferon, including more than 100 clinical and pre-clinical animal and human studies conducted over several decades that we believe substantiates its safety and efficacy. We have an accomplished track record of completing numerous late-stage clinical trials for a variety of disease indications and also own several active patents associated with the treatment of thrombocytopenia, related to the prevention of viral recurrence of hepatitis C.

Ainos differentiates itself from other interferon drug developers through the distinct advantage of owning a proprietary library of over sixty late-stage clinical studies and trials aggregated over decades of research experience. The VELDONA platform leverages our research of numerous disease indications where we have established safety data for the use of low-dose non-injectable interferon from over thirty years of clinical studies and trials without any adverse side effects from low-dose interferon. We believe we have a higher likelihood to potentially accelerate clinical trials without the need to substantiate safety data through preliminary trials normally required for new drug applications.

We believe that low-dose non-injectable interferon therapeutics have broad potential applications for new drugs and nutraceuticals that address infectious diseases, autoimmune diseases and cancer. It has anti-proliferative effects which can be targeted at rapidly spreading viruses or rapidly dividing cancer cells. We believe VELDONA is a safe, universal and multi-functional product that is a well-suited for the prevention and treatment of viral infections. We have developed a proprietary formulation for the production of an IFN-α lozenge that can be administered sublingually as a small tablet in doses ten-thousand times less than FDA-approved high-dose injectable interferon therapies, which we believe may dramatically reduce side effects. The VELDONA lozenge is also stable at room temperature, which makes them easy and inexpensive to transport, store and administer.

Interferon-alpha (IFN-α)

Ainos currently focuses primarily on therapeutic applications of interferon-alpha (IFN-α). Interferons are a family of natural occurring proteins that can be used to potentially treat many diseases that involve the immune system – for example, cancers, hepatitis, AIDS, multiple sclerosis (MS), genital and perianal warts, and granulomatous disease. IFN-α is a key modulator in our innate immune response to viral infection. Almost every cell in the body can produce interferon when under attack, but research indicates that interferon seems especially important in the cells that form the frontline defense with the external environment, such as the oral and nasal mucosa. Its anti-viral effects include inhibition of viral replication, destruction of virus-infected cells, and activation of other, important immune cells. IFN-α also has anti-proliferative effects which can be targeted at rapidly spreading viruses or rapidly dividing cancer cells.

High-dose systemically administered IFN-α has been used alone or in combination to treat a variety of diseases, including hepatitis C, polycythemia vera, and adult T-cell leukemia/lymphoma (ATLL). While IFN-α has powerful anti-viral and anti-proliferative actions, its therapeutic success has been limited by a host of adverse effects some of which are life-threatening, such as neutropenia and thrombocytopenia. Our research with low-dose oral IFN-α in animal and human clinical trials has shown promise to deliver equal or superior efficacy to that of high-dose systemic IFN-α without the associated adverse effects. A significantly lower dose of IFN-α and its absorbance across the mucous membrane of the oral cavity, more closely mimics our innate immune response. Our oral IFN-α lozenges, VELDONA, exert both local and systemic effects, but at such low doses that the adverse events which plague high dose injectable IFN are not an issue. In fact, low-dose oral IFN-α has even been shown to reverse some of the adverse effects of thrombocytopenia directly caused by high-dose IFN. The Company is in prime position to meet this need having secured several patents for the treatment of thrombocytopenia using orally administered IFN-α.

We have aggregated many years of testing in the use of low-dose oral IFN-α for applications ranging from the common cold and warts to cancers and HIV. The therapeutic diversity of IFN-α stems from its ability to induce the transcription of hundreds of genes that stimulate the immune system. These genes effect numerous parts of the innate and adaptive immune system, including antigen processing and presentation, leukocyte migration, lymphocyte activation, immune effector and modulation functions, apoptosis, hematopoiesis, enzymatic destruction of viral RNA. In the past, we typically used natural human cell interferon in clinical trials as this was the specific form manufactured by our previous investment partner, Hayashibara Co., Ltd. We are now considering a substitute form of recombinant interferon product to replace natural human cell interferon and plan on conducting pilot studies to establish efficacy prior to advancing further clinical trials for our target disease indications.

Much clinical trial research has already evidenced recombinant interferon to be effective in adjuvant cancer therapies and FDA-approved high-dose injectable recombinant interferon alfa-2b treatments have been used globally to treat a multitude of disease indications such as AIDS-related Kaposi sarcoma, lymphoma, hairy cell leukemia and melanoma. In fact, interferon alpha (IFN-α), a cytokine that is responsible for regulating and activating the immune response, was the first cancer immunotherapy approved by the FDA in 1986. This helps support a higher level of certainty that recombinant interferon should demonstrate a desired level of efficacy, especially given that low-dose IFN-α is delivered as a miniscule dose compared to high-dose injectable IFN-α treatments. We plan to conduct pilot clinical trials starting in the first half of 2022 to validate newly-sourced interferon material and pursue several disease indications including thrombocytopenia, and Sjögren’s syndrome. We intend to continue exploring the modernization of interferon technology by researching new sources and types of interferon and are looking into methods of new interferon production, preparation, and purification methods.

Clinical Trials for Key Disease Indications

We plan to orchestrate a concerted effort with research and medical expert supporters of the VELDONA drug program to facilitate the advancement of various low-dose IFN-α formulations and delivery modalities. We own proprietary clinical data on previously studied indications that can potentially be delivered to market at minimal clinical trial cost. The Company plans to resume clinical studies for key disease indications. In the near term, we will seek to advance our drug program with a particular focus on conducting clinical trials for two disease indications – thrombocytopenia and Sjögren’s syndrome. We believe these two indications can reach late-stage trials with the highest probability of successful approval in the shortest time. At any time during the drug development stage, the Company aims to out-license the intellectual property, ultimately acquiring global approvals for various disease indications.

Thrombocytopenia

In a 2014 data study, “Efficacy of Low Dose Oral Interferon-alpha in Preventing Hepatitis C Relapse,” was published based on a phase 2 clinical trial of 169 hepatitis C patients conducted at Chang Gung Hospital in Taiwan that found VELDONA to reduce the relapse rate of hepatitis C and improve the function of platelets. In connection with this study, Ainos received four thrombocytopenia related patents. Low-dose oral IFN-α can contribute to reversing the immunosuppressive tumor microenvironment and prevent some of the dangerous side-effects of chemotherapy such as thrombocytopenia. We will leverage our previous clinical trial experience to prepare a well-designed protocol to test whether VELDONA is effective in treating thrombocytopenia and determine whether it can continue the next-stage trials.

Sjögren’s Syndrome

The Company intends to resume late-stage clinical trials in late 2022 for Sjögren’s syndrome, an immune system disorder characterized by dry eyes and dry mouth. We previously reached two phase 3 trials in 2003 but were unable to conduct the final FDA-mandated studies for drug approval due to capital constraints (“Treatment of primary Sjögren’s syndrome with low-dose human interferon alfa administered by the oromucosal route: combined phase III results”). Ainos will reference its previous research to design an efficient phase 3 study based on previous FDA guidance.

In respect to its VELDONA program, the Company owns three (3) patents issued in the U.S. and one (1) issued in Taiwan as follows:

The Company continues to seek to expand its patent licensing and commercialization opportunities for VELDONA with global partners. The Company’s licensing, development and commercialization of its VELDONA patents and research library are subject to approval by the FDA and other regulatory agencies in the U.S., and other regulatory agencies for use and marketing in other countries.

Our Medical Device Division focuses on research and development of novel medical devices.

Innovations in point-of-care testing

We develop, market, and sell various easy-to-use, cloud-connected POCT diagnostics for infectious disease indications. Our product pipeline target indications include COVID-19, vaginitis, certain sexually transmitted diseases (STD), ventilator-associated pneumonia (VAP), and helicobacter pylori (H. pylori). We categorize our POCT portfolio into the following:

COVID-19 POCT. This category currently includes an antigen rapid test kit based on lateral flow immunoassay technology, a molecular test kit based on reverse transcription loop-mediated isothermal amplification (“RT-LAMP”) technology, and test management apps for personal and enterprise users. The COVID-19 antigen test kit includes professional-use and at-home SKUs. The professional SKU targets the professional healthcare segment, while at-home SKUs aims the at-home self-testing segment. We also offer a cloud-based test management platform with a personal app as well as an enterprise app. Our molecular tests comprised of test kit assay and a low-cost portable tester.

VOC-based POCT. This category employs digital nose sensors and AI algorithms to detect and analyze VOC biomarkers for rapid detection of infectious disease and everyday self-care. We further implement wireless and secured cloud technologies to enable seamless, easy-to-use test data transmission to the telehealth community. Our target disease indications include vaginitis, STD, VAP, and H. pylori. We anticipate that our near-term revenue stream for VOC-based POCTs will mainly come from hardware sales. Longer-term, we plan to introduce a subscription-based analytics service to our customers, and when sales of medical devices reach scale, we anticipate subscription revenue to create substantial operating cash flow.

The opportunities of digital nose innovation

The digital nose, also known as the electric nose (e-nose) or, more generally, gas sensor, is a more scalable technology to analyze VOCs in a clinical setting, in our view. Comprised of gas sensors, the digital nose electronically mimics the human nose and the advancement in semiconductor manufacturing technologies allow digital noses to be made small, and at low cost. When combined with a pattern recognition algorithm, the digital nose directly detects components of different VOCs present in a gas mixture, which eliminates the need for complex preprocessing steps. A digital nose can be customized for specific applications using an array of sensors, which can detect volatile components included in a predetermined VOC profile. With the help of algorithms and other electronic components such as microprocessors, and wireless technologies, the digital nose can convert a VOC profile into unique digital signals that can be understood by many electric devices, which may enable a digital nose to be quickly developed into many easy-to-use, affordable, portable, cloud-connected POCTs for a wide range of diseases. We believe these potential new tools could facilitate new telehealth services previously unavailable.

Our AI Nose technology platform

Our AI Nose technology platform comprises the key building block of our VOC-based POCT. AI Nose’s main technology pillars include the digital nose sensor array, our proprietary VOC AI analytics, Smell ID, and the Company’s extensive knowhow of VOC-based medical device engineering. Our technology digitally profiles each VOC as a Smell ID and as more Smell IDs are collected for individuals, we may be able to build personalized medical treatment based on this data. We believe Smell ID’s long-term potential goes beyond healthcare. As we populate AI with more Smell ID, we believe we may eventually enable the AI Nose to detect smell in the broader, non-healthcare settings.

COVID-19 Antigen Test Kit

Antigen test kits have been vital in testing COVID-19 at high frequency, large scale, and at low cost. Most EUA-approved test kits claim nearly identical value propositions and these essential functions are already commoditized. In our opinion, helping communities to better store and report the test results, and assisting organizations to better trace infection are critical attributes as countries try to reopen their economies. Unfortunately, few COVID-19 antigen test kits in the market provide these services. While testing labs are required to report their findings, many at-home tests are not required to report results to the health authorities.

We have developed a comprehensive, end-to-end, cloud-based platform that allows individuals and organizations to manage tests and trace infection effectively. Our platform is comprised of our test kit, a consumer app and an enterprise app. Consumers can visually see the test result on our test kit without using the app. We launched a free, consumer-friendly app called the Ainos Antigen Rapid Test App, available on iOS and Android. The app is currently available in Taiwan and we plan to roll out to additional countries in which we receive authorization to market, if approved. The app provides a simple and comprehensive interface platform to manage test results with the following vital services:

Our Ainos Enterprise App is a centralized, cloud-based COVID-19 test management platform designed for public and private institutions. With this app, institutions can centrally manage and trace COVID-19 testing. The key features are: