Ainos(AIMD) - 2018 Q4 - Annual Report

PART I Item 1. Business The company develops low-dose oral interferon but faces a critical manufacturing halt while diversifying its business post-bankruptcy - The company's core business is developing biologics, with a focus on low-dose oral natural human interferon alpha for various conditions[7] - Post-bankruptcy, ABI restructured into three business units: Medical, Pharmaceutical, and Consumer Product Divisions to diversify revenue streams[10][12] - A major operational hurdle is the cessation of manufacturing by its long-time interferon supplier, halting further clinical trials and commercialization[18] - ABI is expanding into Asian markets by establishing a Taiwan branch to distribute new medical products like TissueAid™ and develop diabetes therapies[12][15] - The company owns or licenses six issued patents, primarily related to its low-dose oral interferon technology[8][21][22] Item 2. Description of Property The company leases an 1,800 square-foot office facility in Amarillo, Texas under an annually renewed agreement - ABI leases an 1,800 square-foot office facility at 4134 Business Park Drive, Amarillo, Texas[39] - The lease is renewed annually, with a monthly rent of $1,120 as of December 31, 2018[39] Item 3. Legal Proceedings The company is not currently involved in any legal proceedings - There are currently no legal proceedings involving the Company[39] Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the reporting period - No matters were submitted to a vote of security holders[40] PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters This section details the company's equity structure, new stock option plans, and significant related-party transactions with the CEO - As of December 31, 2018, there were 39,117,524 common shares outstanding, with an additional 8,855,831 shares reserved for issuance[41] - In September 2018, the company adopted two new stock option plans authorizing a total of 26,000,000 shares[47][49] Convertible Notes Payable to Related Party (Dr. Stephen T. Chen) | Date | 2018 Balance | 2017 Balance | | :--- | :--- | :--- | | Dec 31 | $513,356 | $886,481 | - During 2018, Dr. Chen converted $178,125 of his convertible notes into 950,000 common shares and received cash repayments for other notes[45][63] - Effective July 1, 2018, the company acquired all voting interests of ACTS Global, a related party, in exchange for 539,447 shares of ABI common stock[45][71] Item 7. Management's Discussion and Analysis (MD&A) The financial review shows a significant revenue decline and a widened net loss in 2018, driven by increased SG&A expenses Fiscal Year Comparison (2018 vs. 2017) | Metric | 2018 | 2017 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $77,724 | $250,928 | -69.0% | | Gross Profit | $12,847 | $190,612 | -93.3% | | SG&A Expenses | $1,314,932 | $770,375 | +70.7% | | Net Loss | ($1,338,639) | ($617,375) | +117.0% | Liquidity Position (as of Dec 31) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Cash | $1,276,654 | $2,038,150 | | Working Capital | $569,613 | $261,412 | - The company's monthly cash burn rate in 2018 was approximately between $65,000 and $75,000[80] - Management estimates short-term project development financing needs to be between $3,000,000 and $5,000,000[80] Item 9A. Controls and Procedures Management concluded that disclosure controls were ineffective due to material weaknesses in internal control over financial reporting - Management concluded that as of December 31, 2018, the company's disclosure controls and procedures were not effective[87] - Material weaknesses in internal control were identified, including insufficient personnel with GAAP knowledge and a lack of proper segregation of duties[90] - Management's remediation plan is to hire additional qualified personnel as funds become available[93] PART III Item 10. Directors, Executive Officers, and Corporate Governance This section provides biographical details for the company's leadership team and notes the current inactivity of its Audit Committee - The executive officers are Dr. Stephen Chen (Chairman, CEO, President) and Bernard Cohen (Vice President, CFO)[94][95] - The Board of Directors consists of five members: Stephen T. Chen, Yasushi Chikagami, Daniel Fisher, Nicholas Moren, and Edward L. Morris[78][94] - The company does not currently have an active Audit Committee but anticipates it will resume its function as the company progresses[103] Item 11. Executive Compensation Executive compensation was restructured in 2018, significantly increasing the cash and stock awards for top officers Executive Compensation Summary (2018) | Name and Principal Position | Salary | Stock Compensation | | :--- | :--- | :--- | | Dr. Stephen T. Chen, CEO | $240,000 | $100,000 | | Mr. Bernard Cohen, CFO | $70,000 | $12,000 | - The Board of Directors approved a restructuring of the compensation packages for Dr. Chen and Mr. Cohen, effective as of January 1, 2018[108] Item 12. Security Ownership of Certain Beneficial Owners and Management CEO Dr. Stephen T. Chen is the largest beneficial owner, and insiders collectively hold over 28% of the company's stock Beneficial Owners of More Than 5% | Name | Percent of Class Owned | | :--- | :--- | | Stephen T Chen & Virginia M Chen Living Trust | 22.21% | | Hung Lan Lee | 9.43% | | ANXON International Inc. | 5.80% | - All directors and executive officers as a group beneficially own 12,076,650 shares, representing 28.48% of the class[116] Item 13. Certain Relationships and Related Transactions The company outlines its policy for future related-party transactions to ensure they are conducted at arm's length - The company states that all future transactions with related parties will be on terms no less favorable than could be obtained from independent third parties[119] - No new related party arrangements are disclosed in this section, as all current arrangements have been disclosed elsewhere[120] Item 14. Principal Accounting Fees and Services The company reports a year-over-year increase in audit fees paid to its independent accounting firm Audit Fees | Year | Amount | | :--- | :--- | | 2018 | $42,250 | | 2017 | $32,250 | Financial Statements and Notes Report of Independent Registered Public Accounting Firm The auditor's report expresses substantial doubt about the company's ability to continue as a going concern - The auditor's report explicitly raises "substantial doubt about its ability to continue as a going concern" due to recurring losses and lack of revenues[130] Consolidated Financial Statements Financial statements show deteriorating operational performance with a widening net loss, offset by an improved equity position Consolidated Balance Sheet Data (as of Dec 31) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,276,654 | $2,038,150 | | Total Assets | $1,463,700 | $2,293,834 | | Total Liabilities | $733,621 | $1,823,039 | | Total Stockholders' Equity | $730,079 | $470,795 | Consolidated Statement of Operations Data (Year Ended Dec 31) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Revenues | $77,724 | $250,928 | | Operating Loss | ($1,334,676) | ($579,763) | | Net Loss | ($1,338,639) | ($617,375) | | Net Loss per Share | ($0.04) | ($0.03) | Consolidated Statement of Cash Flows Data (Year Ended Dec 31) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Net cash used in operating activities | ($1,009,198) | ($484,568) | | Net cash provided by financing activities | $254,979 | $2,437,689 | | Net change in cash | ($761,496) | $1,904,025 | Notes to Consolidated Financial Statements The notes reiterate the going concern uncertainty and detail the consolidation of a VIE, related-party transactions, and new stock option plans Note 1. Organization and Summary of Significant Accounting Policies This note details the 'going concern' uncertainty, the consolidation of ACTS Global as a VIE, and the adoption of ASC 606 - The financial statements were prepared on a going concern basis, but management notes that recurring losses raise substantial doubt about this assumption[146][148] - Effective January 1, 2018, the company consolidated ACTS Global Healthcare, Inc. as a Variable Interest Entity (VIE)[142] - The company adopted ASC Topic 606 (Revenue from Contracts with Customers) on January 1, 2018, with no material impact to reported revenues[156] Note 4. Convertible Notes Payable – Related Party This note details the significant reduction in convertible notes payable to the CEO through repayments and stock conversions Change in Convertible Notes Payable to Related Party | Date | Balance | | :--- | :--- | | Dec 31, 2017 | $886,481 | | Dec 31, 2018 | $513,356 | - During 2018, Dr. Chen was repaid $195,000 in principal and converted $178,125 of principal into 950,000 common shares[180][181][182] Note 9. Stock Option and Stock Plans The company adopted two new stock option plans authorizing 26 million shares, creating a significant future compensation expense - On September 26, 2018, the company adopted two new stock option plans authorizing a total of 26 million common shares for issuance[204][205] - A total of 4,945,000 options were granted on September 26, 2018, with an exercise price of $0.38[210] - As of December 31, 2018, there is $1,775,222 in unrecognized option expense that will be recognized over the next 4.75 years[210]