UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 2022
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER: 001-38728
AVALON GLOBOCARE CORP.
(Exact name of Registrant as specified in its charter)
| Delaware | 47-1685128 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
4400 Route 9 South, Suite 3100, Freehold, New Jersey 07728
(Address of principal executive offices) (zip code)
(732) 780-4400
(Registrant’sRegistrant’s telephone number, including area code)
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 has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒☒ No ☐☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large“large accelerated filer,” “accelerated” “accelerated filer,” “smaller” “smaller reporting company,”” and “emerging“emerging growth company”company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | ||
| Non-accelerated filer | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☒☒
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of each exchange on which registered | ||
| Common Stock, $0.0001 par value per share | The NASDAQ Stock Market LLC |
State the number of shares outstanding of each of the issuer’sissuer’s classes of common equity, as of the latest practicable date.
| Class | Outstanding | |
| Common Stock, $0.0001 par value per share | 99,215,208 shares |
AVALON GLOBOCARE CORP.
FORM 10-Q
JuneSeptember 30, 2022
TABLE OF CONTENTS
i
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates”“expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors”“Risks Factors” and “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” in our annual report on Form 10-K, in “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.
We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’sSEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Unless otherwise indicated, references in this report to “we,” “us”“we,” “us”, “Avalon”“Avalon” or the “Company”“Company” refer to Avalon GloboCare Corp. and its consolidated subsidiaries.
ii
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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See accompanying notes to the condensed consolidated financial statements.
| 1 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Ended June 30, | Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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See accompanying notes to the condensed consolidated financial statements.
| 2 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Three and SixNine Months Ended JuneSeptember 30, 2022
(Unaudited)
| Avalon GloboCare Corp. Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Treasury Stock | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||
| Number of | Number of | Common Stock to be | Additional Paid-in | Number of | Accumulated | Statutory | Other Comprehensive | Non-controlling | Total | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Issued | Capital | Shares | Amount | Deficit | Reserve | Loss | Interest | Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | - | $ | - | 88,975,169 | $ | 8,898 | $ | - | $ | 54,888,559 | (520,000 | ) | $ | (522,500 | ) | $ | (51,131,874 | ) | $ | 6,578 | $ | (165,266 | ) | $ | - | $ | 3,084,395 | |||||||||||||||||||||||||
| Sale of common stock, net | - | - | 170,640 | 17 | - | 112,311 | - | - | - | - | - | - | 112,328 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | 152,323 | - | - | - | - | - | - | 152,323 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | - | 2,021 | - | 2,021 | |||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2022 | - | - | - | - | - | - | - | - | (2,070,538 | ) | - | - | - | (2,070,538 | ) | |||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | - | - | 89,145,809 | 8,915 | - | 55,153,193 | (520,000 | ) | (522,500 | ) | (53,202,412 | ) | 6,578 | (163,245 | ) | - | 1,280,529 | |||||||||||||||||||||||||||||||||||
| Warrants issued with convertible debt offering | - | - | - | - | - | 498,509 | - | - | - | - | - | - | 498,509 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services | - | - | 408,957 | 40 | - | 340,910 | - | - | - | - | - | - | 340,950 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | 126,301 | - | - | - | - | - | - | 126,301 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | - | (43,503 | ) | - | (43,503 | ) | |||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2022 | - | - | - | - | - | - | - | - | (2,028,474 | ) | - | - | - | (2,028,474 | ) | |||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | - | - | 89,554,766 | 8,955 | - | 56,118,913 | (520,000 | ) | (522,500 | ) | (55,230,886 | ) | 6,578 | (206,748 | ) | - | 174,312 | |||||||||||||||||||||||||||||||||||
| Conversion of convertible note payable and accrued interest into common stock | - | - | 5,736,452 | 574 | - | 4,072,384 | - | - | - | - | - | - | 4,072,958 | |||||||||||||||||||||||||||||||||||||||
| Reclassification of derivative liability to equity | - | - | - | - | - | 2,181,820 | - | - | - | - | - | - | 2,181,820 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of loan payable and accrued interest - related party | - | - | 4,443,990 | 444 | - | 2,888,149 | - | - | - | - | - | - | 2,888,593 | |||||||||||||||||||||||||||||||||||||||
| Sale of common stock - related party | - | - | - | - | 350,000 | - | - | - | - | - | - | - | 350,000 | |||||||||||||||||||||||||||||||||||||||
| Sale of common stock | - | - | - | - | 250,000 | - | - | - | - | - | - | - | 250,000 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | 110,442 | - | - | - | - | - | - | 110,442 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | - | (37,033 | ) | - | (37,033 | ) | |||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2022 | - | - | - | - | - | - | - | - | (5,414,154 | ) | - | - | - | (5,414,154 | ) | |||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | - | $ | - | 99,735,208 | $ | 9,973 | $ | 600,000 | $ | 65,371,708 | (520,000 | ) | $ | (522,500 | ) | $ | (60,645,040 | ) | $ | 6,578 | $ | (243,781 | ) | $ | - | $ | 4,576,938 | |||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
| 3 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Three and SixNine Months Ended JuneSeptember 30, 2021
(Unaudited)
| Avalon GloboCare Corp. Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Treasury Stock | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||
| Number of | Number of | Additional Paid-in | Number of | Accumulated | Statutory | Other Comprehensive | Non-controlling | Total | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Reserve | Loss | Interest | Equity | |||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2021 | - | $ | - | 82,795,297 | $ | 8,279 | $ | 46,856,447 | (520,000 | ) | $ | (522,500 | ) | $ | (42,041,375 | ) | $ | 6,578 | $ | (190,510 | ) | $ | - | $ | 4,116,919 | |||||||||||||||||||||||
| Sale of common stock, net | - | - | 1,848,267 | 185 | 2,337,074 | - | - | - | - | - | - | 2,337,259 | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services | - | - | 300,000 | 30 | 359,970 | - | - | - | - | - | - | 360,000 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 202,505 | - | - | - | - | - | - | 202,505 | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | (2,722 | ) | - | (2,722 | ) | ||||||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2021 | - | - | - | - | - | - | - | (2,367,118 | ) | - | - | - | (2,367,118 | ) | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | - | - | 84,943,564 | 8,494 | 49,755,996 | (520,000 | ) | (522,500 | ) | (44,408,493 | ) | 6,578 | (193,232 | ) | - | 4,646,843 | ||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of accrued professional fees | - | - | 167,355 | 17 | 202,483 | - | - | - | - | - | - | 202,500 | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services | - | - | 490,000 | 49 | 534,251 | - | - | - | - | - | - | 534,300 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 195,209 | - | - | - | - | - | - | 195,209 | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | 14,786 | - | 14,786 | ||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2021 | - | - | - | - | - | - | - | (2,364,910 | ) | - | - | - | (2,364,910 | ) | ||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | - | - | 85,600,919 | 8,560 | 50,687,939 | (520,000 | ) | (522,500 | ) | (46,773,403 | ) | 6,578 | (178,446 | ) | - | 3,228,728 | ||||||||||||||||||||||||||||||||
| Sale of common stock, net | - | - | 35,769 | 4 | 33,789 | - | - | - | - | - | - | 33,793 | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services | - | - | 415,679 | 41 | 425,146 | - | - | - | - | - | - | 425,187 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 188,859 | - | - | - | - | - | - | 188,859 | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | 1,285 | - | 1,285 | ||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2021 | - | - | - | - | - | - | - | (2,024,219 | ) | - | - | - | (2,024,219 | ) | ||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | - | $ | - | 86,052,367 | $ | 8,605 | $ | 51,335,733 | (520,000 | ) | $ | (522,500 | ) | $ | (48,797,622 | ) | $ | 6,578 | $ | (177,161 | ) | $ | - | $ | 1,853,633 | |||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
| 4 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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See accompanying notes to the condensed consolidated financial statements.
| 5 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 –– ORGANIZATION AND NATURE OF OPERATIONS
Avalon GloboCare Corp. (the “Company”“Company” or “AVCO”“ALBT”) is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on July 28, 2014. On October 19, 2016, the Company entered into and closed a Share Exchange Agreement with the shareholders of Avalon Healthcare System, Inc., a Delaware corporation (“AHS”(“AHS”), each of which were accredited investors (“(“AHS Shareholders”Shareholders”) pursuant to which we acquired 100% of the outstanding securities of AHS in exchange for 50,000,000 shares of the Company’sCompany’s common stock (the “AHS Acquisition”“AHS Acquisition”). AHS was incorporated on May 18, 2015 under the laws of the State of Delaware.
For accounting purposes, AHS was the surviving entity. The transaction was accounted for as a recapitalization of AHS pursuant to which AHS was treated as the accounting acquirer, surviving and continuing entity although the Company is the legal acquirer. The Company did not recognize goodwill or any intangible assets in connection with this transaction. Accordingly, the Company’sCompany’s historical financial statements are those of AHS and its wholly-owned subsidiary, Avalon (Shanghai) Healthcare Technology Co., Ltd. (“(“Avalon Shanghai”Shanghai”) immediately following the consummation of this reverse merger transaction. AHS owns 100% of the capital stock of Avalon Shanghai, which is a wholly foreign-owned enterprise organized under the laws of the People’sPeople’s Republic of China (“PRC”(“PRC”). Avalon Shanghai was incorporated on April 29, 2016 and is engaged in medical related consulting services for customers.
The Company is a clinical-stage, vertically integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative, transformative immune effector cell therapy, exosome technology, as well as cell therapy related companion diagnostics. The Company also provides strategic advisory and outsourcing services to facilitate and enhance its clients’clients’ growth and development, as well as competitiveness in healthcare and CellTech industry markets. Through its subsidiary structure with unique integration of vertical segmentsverticals from innovative R&D&D to automated bioproduction and accelerated clinical development, the Company is establishing a leading role in the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEX™(ACTEX™), and regenerative therapeutics.
On January 23, 2017, the Company incorporated Avalon (BVI) Ltd., a British Virgin Island company. There was no activity for the subsidiary since its incorporation through JuneSeptember 30, 2022. Avalon (BVI) Ltd. is dormant and is in process of being dissolved.
On February 7, 2017, the Company formed Avalon RT 9 Properties, LLC (“(“Avalon RT 9”9”), a New Jersey limited liability company. On May 5, 2017, Avalon RT 9 purchased a real property located in Township of Freehold, County of Monmouth, State of New Jersey, having a street address of 4400 Route 9 South, Freehold, NJ 07728. This property was purchased to serve as the Company’sCompany’s world-wide headquarters for all corporate administration and operations. In addition, the property generates rental income. Avalon RT 9 owns this office building. Avalon RT 9’s9’s business consists of the ownership and operation of the income-producing real estate property in New Jersey. As of JuneSeptember 30, 2022, the occupancy rate of the building is 87.0%.
On July 31, 2017, the Company formed Genexosome Technologies Inc. (“Genexosome”(“Genexosome”) in Nevada. Genexosome was engaged in developing proprietary diagnostic and therapeutic products using exosomes. Genexosome owns 100% of the capital stock of Beijing Jieteng (Genexosome) Biotech Co., Ltd., a corporation incorporated in the People’sPeople’s Republic of China on August 7, 2015 (“(“Beijing Genexosome”Genexosome”) which was dissolved in June 2022, and the Company holds 60% of Genexosome and Dr. Yu Zhou holds 40% of Genexosome. The Company had not been able to realize the financial projections provided by Dr. Zhou at the time of the acquisition and has decided to impair the intangible asset associated with this acquisition to zero. Dr. Zhou was terminated as Co-CEO of Genexosome on August 14, 2019. Since the fourth quarter of 2019, the non-controlling interest has remained inactive.
On July 18, 2018, the Company formed a wholly owned subsidiary, Avactis Biosciences Inc. (“Avactis”(“Avactis”), a Nevada corporation, which will focus on accelerating commercial activities related to cellular therapies, including regenerative medicine with stem/progenitor cells as well as cellular immunotherapy including CAR-T, CAR-NK, TCR-T and others. The subsidiary is designed to integrate and optimize our global scientific and clinical resources to further advance the use of cellular therapies to treat certain cancers. Commencing on April 6, 2022, the Company owns 60% of Avactis and Arbele Biotherapeutics Limited (“(“Arbele Biotherapeutics”Biotherapeutics”) owns 40% of Avactis.
On June 13, 2019, the Company formed a wholly owned subsidiary, International Exosome Association LLC, a Delaware company. There was no activity for the subsidiary since its incorporation through JuneSeptember 30, 2022.
| 6 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 –– ORGANIZATION AND NATURE OF OPERATIONS (continued)
Details of the Company’sCompany’s subsidiaries which are included in these condensed consolidated financial statements as of JuneSeptember 30, 2022 are as follows:
| Name of Subsidiary | Place and date of Incorporation | Percentage of Ownership | Principal Activities | |||
Avalon Healthcare System, Inc.
| Delaware May 18, 2015 | 100% held by | Provides medical related consulting services and developing Avalon Cell and Avalon Rehab in United States of America | |||
Avalon (BVI) Ltd. ( | British Virgin Island January 23, 2017 | 100% held by | Dormant, is in process of being dissolved | |||
Avalon RT 9 Properties LLC ( | New Jersey February 7, 2017 | 100% held by | Owns and operates an income-producing real property and holds and manages the corporate headquarters | |||
Avalon (Shanghai) Healthcare Technology Co., Ltd.
| PRC April 29, 2016 | 100% held by AHS | ||||
Genexosome Technologies Inc.
| Nevada July 31, 2017 | 60% held by | Dormant | |||
Avactis Biosciences Inc.
| Nevada July 18, 2018 | 60% held by | Integrate and optimize global scientific and clinical resources to further advance cellular therapies, including regenerative medicine with stem/progenitor cells as well as cellular immunotherapy including CAR-T, CAR-NK, TCR-T and others to treat certain cancers | |||
Avactis Nanjing Biosciences Ltd. (“Avactis Nanjing”) | PRC May 8, 2020 | 100% held by Avactis | Owns a patent | |||
International Exosome Association LLC
| Delaware June 13, 2019 | 100% held by | Promotes standardization related to exosome industry |
NOTE 2 –– BASIS OF PRESENTATION AND GOING CONCERN CONDITION
Basis of Presentation
These interim condensed consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements have been included. The results reported in the condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States (“(“U.S. GAAP”GAAP”). The Company’sCompany’s condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company’sCompany’s audited consolidated financial statements and notes thereto included in the Company’sCompany’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on March 30, 2022.
| 7 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 –– BASIS OF PRESENTATION AND GOING CONCERN CONDITION (continued)
Going Concern
The Company is a clinical-stage, vertically integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative, transformative immune effector cell therapy, exosome technology, as well as cell therapy related companion diagnostics. The Company also provides strategic advisory and outsourcing services to facilitate and enhance its clients’clients’ growth and development, as well as competitiveness in healthcare and CellTech industry markets. Through its subsidiary structure with unique integration of vertical segmentsverticals from innovative R&D&D to automated bioproduction and accelerated clinical development, the Company is establishing a leading role in the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEX™(ACTEX™), and regenerative therapeutics.
In addition, the Company owns commercial real estate that houses its headquarters in Freehold, New Jersey and provides outsourced, customized international healthcare services to the rapidly changing health care industry primarily focused in the People’sPeople’s Republic of China. These condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business.
As reflected in the accompanying condensed consolidated financial statements, the Company had a working capital deficit of $5,557,470 as of June 30, 2022 and has incurred recurring net losses and generated negative cash flow from operating activities of $4,099,012$9,513,166 and $2,686,722$5,072,932 for the sixnine months ended JuneSeptember 30, 2022, respectively. The Company has a limited operating history and its continued growth is dependent upon the continuation of providing medical related consulting services to its only few clients who are related parties and generating rental revenue from its income-producing real estate property in New Jersey; hence generating revenues, and obtaining additional financing to fund future obligations and pay liabilities arising from normal business operations. In addition, the current cash balance cannot be projected to cover the operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about the Company’sCompany’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’sCompany’s ability to raise additional capital, implement its business plan, and generate significant revenues. There are no assurances that the Company will be successful in its efforts to generate significant revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. The Company plans on raising capital through the sale of equity to implement its business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to the Company on satisfactory terms and conditions, if any.
The occurrence of an uncontrollable event such as the COVID-19 pandemic had negatively impact on the Company’sCompany’s operations. Our general development operations have continued during the COVID-19 pandemic and we have not had significant disruption. However, we are uncertain if the COVID-19 pandemic will impact future operations at our laboratory, or our ability to collaborate with other laboratories and universities. In addition, we are unsure if the COVID-19 pandemic will impact future clinical trials. Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related financial effect cannot be reasonably estimated at this time but is expected to adversely impact the Company’sCompany’s business for the rest of 2022.
The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
NOTE 3 –– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates during the three and sixnine months ended JuneSeptember 30, 2022 and 2021 include the useful life of property and equipment and investment in real estate, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances, valuation of stock-based compensation, and assumptions used to determine fair value of warrants and embedded conversion features of convertible note payable.
| 8 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 –– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments and Fair Value Measurements
The Company adopted the guidance of Accounting Standards Codification (“ASC”(“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
| ● | Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. |
| ● | Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. |
| ● | Level 3-Inputs are unobservable inputs which reflect the reporting |
The fair value of the Company’sCompany’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair“Fair Value Measurement,”” approximates the carrying amounts represented in the accompanying condensed consolidated financial statements, primarily due to their short-term nature.
Assets and liabilities measured at fair value on a recurring basis. Certain assets and liabilities are measured at fair value on a recurring basis. These assets and liabilities are measured at fair value on an ongoing basis. These assets and liabilities include derivative liability.
Derivative liability. Derivative liability is carried at fair value and measured on an ongoing basis. The table below reflects the activity of derivative liability measured at fair value for the sixnine months ended JuneSeptember 30, 2022:
| Significant Unobservable Inputs | ||||
| Balance of derivative liability as of January 1, 2022 | $ | |||
| Initial fair value of derivative liability attributable to embedded conversion feature of convertible note payable | 2,782,569 | |||
| Gain from change in the fair value of derivative liability | ( | ) | ||
| Reclassification of derivative liability to equity | 2,181,820 | |||
| Balance of derivative liability as of | $ | |||
ASC 825-10 “Financial
Instruments”“Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
Cash and Cash Equivalents
At JuneSeptember 30, 2022 and December 31, 2021, the Company’sCompany’s cash balances by geographic area were as follows:
| Country: | September 30, 2022 | December 31, 2021 | ||||||||||||||
| United States | $ | 3,578,273 | 90.9 | % | $ | 767,605 | 95.1 | % | ||||||||
| China | 359,686 | 9.1 | % | 39,933 | 4.9 | % | ||||||||||
| Total cash | $ | 3,937,959 | 100.0 | % | $ | 807,538 | 100.0 | % | ||||||||
For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less when purchased and money market accounts to be cash equivalents. The Company had no cash equivalents at JuneSeptember 30, 2022 and December 31, 2021.
| 9 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 –– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Credit Risk and Uncertainties
A portion of the Company’sCompany’s cash is maintained with state-owned banks within the PRC. Balances at state-owned banks within the PRC are covered by insurance up to RMB 500,000 (approximately $75,000)$70,000) per bank. Any balance over RMB 500,000 per bank in PRC will not be covered. At JuneSeptember 30, 2022, cash balances held in the PRC are RMB 3,108,3542,559,525 (approximately $464,000)$360,000), of which, RMB 2,582,6432,034,731 (approximately $385,000)$286,000) was not covered by such limited insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
The Company maintains a portion of its cash in bank and financial institution deposits within U.S. that at times may exceed federally-insured limits of $250,000. The Company manages this credit risk by concentrating its cash balances in high quality financial institutions and by periodically evaluating the credit quality of the primary financial institutions holding such deposits. The Company has not experienced any losses in such bank accounts and believes it is not exposed to any risks on its cash in bank accounts. At JuneSeptember 30, 2022, the Company’sCompany’s cash balances in United States bank accounts had approximately $137,000$2,951,000 in excess of the federally-insured limits.
Currently, a portion of the Company’sCompany’s operations are carried out in PRC. Accordingly, the Company’sCompany’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’sPRC’s economy. The Company’sCompany’s operations in PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’sCompany’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. A portion of the Company’sCompany’s sales are credit sales which is to the customer whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivable is limited due to short-term payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.
Investment in Unconsolidated
Company – Epicon Biosciences Co., Ltd.
The Company uses the equity method of accounting
for its investment in, and earning or loss of, company that it does not control but over which it does exert significant influence. The
Company considers whether the fair value of its equity method investment has declined below its carrying value whenever adverse events
or changes in circumstances indicate that recorded value may not be recoverable. If the Company considers any decline to be other than
temporary (based on various factors, including historical financial results and the overall health of the investee), then a write-down
would be recorded to estimated fair value. See Note 5 for discussion of equity method investment.
Revenue Recognition
The Company recognizes revenue under Accounting Standards Codification (“ASC”(“ASC”) Topic 606, Revenue from Contracts with Customers (“(“ASC 606”606”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
| Step 1: Identify the contract with the customer |
| Step 2: Identify the performance obligations in the contract |
| Step 3: Determine the transaction price |
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract |
| Step |
| 10 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 –– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition (continued)
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised goods or service that is distinct. A performance obligation meets ASC 606’s606’s definition of a “distinct”“distinct” goods or service (or bundle of goods or services) if both of the following criteria are met:
| The customer can benefit from the goods or service either on its own or together with other resources that are readily available to the customer (i.e., the goods or service is capable of being distinct). |
| The |
If a goods or service is not distinct, the goods or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
The Company’sCompany’s revenues are derived from providing medial related consulting services for its’its’ related parties. Revenues related to its service offerings are recognized at a point in time when service is rendered. Any payments received in advance of the performance of services are recorded as deferred revenue until such time as the services are performed.
The Company has determined that the ASC 606 does not apply to rental contracts, which are within the scope of other revenue recognition accounting standards.
Rental income from operating leases is recognized on a straight-line basis under the guidance of ASC 842. Lease payments under tenant leases are recognized on a straight-line basis over the term of the related leases. The cumulative difference between lease revenue recognized under the straight-line method and contractual lease payments are included in rent receivable on the consolidated balance sheets.
The Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers.
Per Share Data
ASC Topic 260 “Earnings“Earnings per Share,”” requires presentation of both basic and diluted earnings per share (“EPS”(“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the three and sixnine months ended JuneSeptember 30, 2022 and 2021, potentially dilutive common shares consist of the common shares issuable upon the conversion of convertible note (using the if-converted method) and exercise of common stock options and warrants (using the treasury stock method). Common stock equivalents are not included in the calculation of diluted net loss per share if their effect would be anti-dilutive. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact.
| 11 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 –– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Per Share Data (continued)
The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Stock options | 8,145,000 | 7,720,000 | 8,385,000 | 7,720,000 | ||||||||||||
| Warrants | 1,239,647 | - | 1,239,647 | - | ||||||||||||
| Convertible note (*) | 5,721,450 | - | 5,721,450 | - | ||||||||||||
| Potentially dilutive securities | 15,106,097 | 7,720,000 | 15,346,097 | 7,720,000 | ||||||||||||
June 30, | June 30, | |||||||||||||||
(*) AssumedDeferred Financing Costs
Deferred financing costs consist of legal, accounting and other costs that are directly related to the convertible note was converted
into shares of common stockCompany’s open market sale equity financing and will be charged to stockholders’ equity upon the completion of the Company at a conversion priceequity offering. As of $0.75 per share.September 30, 2022 and December 31, 2021, deferred financing costs amounted to $214,107 and $213,279, of which $74,937 and $74,648 were included in other noncurrent assets, respectively.
Debt Issuance Costs
Debt issuance costs are those costs that have been incurred in connection with the issuance of balloon promissory note payable and are offset against note payable in the condensed consolidated balance sheets. Such costs are being amortized to interest expense over the term of the underlying debt using the straight-line method, as the difference between that and the effective interest method are immaterial. As of September 30, 2022, debt issuance costs amounted to $244,250.
Segment Reporting
The Company uses “the“the management approach”approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’sCompany’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’sCompany’s reportable segments. The Company’sCompany’s chief operating decision maker is the Chief Executive Officer (“CEO”(“CEO”) and president of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. During the three and sixnine months ended JuneSeptember 30, 2022 and 2021, the Company operates through two business segments: real property operating segment and medical related consulting services segment. These reportable segments offer different types of services and products, have different types of revenue, and are managed separately as each requires different operating strategies and management expertise.
Reclassification
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the previously reported financial position, results of operations and cash flows.
| 12 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Standards
In August 2020, the Financial Accounting Standards Board (“FASB”(“FASB”) issued Accounting Standards Update (“ASU”(“ASU”) 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’sEntity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’sEntity’s Own Equity (““ASU 2020-06”2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’sissuer’s own stock and classified in stockholders’stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. ASU 2020-06 is effective for public business entities for fiscal years beginning after December 15, 2021 (or December 15, 2023 for companies who meet the SEC definition of Smaller Reporting Companies), and interim periods within those fiscal years. The guidance is to be adopted through either a fully retrospective or modified retrospective method of transition. However, early adoption is permitted as early as fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted the new standard on January 1, 2022, which adoption required the Company to bifurcate the embedded conversion feature from the convertible note it issued during the second quarter of 2022.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Recent Accounting Standards (continued)
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“(“Topic 326”326”). The ASU introduces a new accounting model, the Current Expected Credit Losses model (“CECL”(“CECL”), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. ASU 2016-13 is effective for annual period beginning after December 15, 2022, including interim reporting periods within those annual reporting periods. The Company expects that the adoption will not have a material impact on the Company’sCompany’s condensed consolidated financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.
NOTE 4 –– PREPAID EXPENSES
AND OTHER CURRENT AND NON-CURRENT ASSETS
At JuneSeptember 30, 2022 and December 31, 2021, prepaid
expensesother current and other currentnon-current assets consisted of the following:
2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 13 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 –– EQUITY METHOD INVESTMENT
As of JuneSeptember 30, 2022 and December 31, 2021, the equity method investment amounted to $517,442$478,362 and $515,632, respectively. The investment represents the Company’sCompany’s subsidiary, Avalon Shanghai’sShanghai’s interest in Epicon Biotech Co., Ltd. (“Epicon”(“Epicon”). Epicon was incorporated on August 14, 2018 in PRC. Avalon Shanghai and the other unrelated company, Jiangsu Unicorn Biological Technology Co., Ltd. (“Unicorn”(“Unicorn”), accounted for 40% and 60% of the total ownership, respectively. Epicon is focused on cell preparation, third party testing, biological sample repository for commercial and scientific research purposes and the clinical transformation of scientific achievements.
The Company treats the equity investment in the condensed consolidated financial statements under the equity method. Under the equity method, the investment is initially recorded at cost, adjusted for any excess of the Company’sCompany’s share of the incorporated-date fair values of the investee’sinvestee’s identifiable net assets over the cost of the investment (if any). Thereafter, the investment is adjusted for the post incorporation change in the Company’sCompany’s share of the investee’sinvestee’s net assets and any impairment loss relating to the investment.
For the three months ended JuneSeptember 30, 2022 and 2021, the Company’sCompany’s share of Epicon’sEpicon’s net loss was $11,882$9,011 and $15,418,$14,203, respectively, which was included in loss from equity method investment in the accompanying condensed consolidated statements of operations and comprehensive loss. For the sixnine months ended JuneSeptember 30, 2022 and 2021, the Company’sCompany’s share of Epicon’sEpicon’s net loss was $24,798$33,809 and $33,932,$48,135, respectively, which was included in loss from equity method investment in the accompanying condensed consolidated statements of operations and comprehensive loss.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – EQUITY METHOD INVESTMENT
(continued)
In the sixnine months ended JuneSeptember 30, 2022, activity recorded for the Company’sCompany’s equity method investment in Epicon is summarized in the following table:
| Equity investment carrying amount at January 1, 2022 | $ | 515,632 | ||
| Payment made for equity method investment | 52,994 | |||
| Epicon’s net loss attributable to the Company | (33,809 | ) | ||
| Foreign currency fluctuation | (56,455 | ) | ||
| Equity investment carrying amount at September 30, 2022 | $ | 478,362 |
The tables below present the summarized financial information, as provided to the Company by the investee, for the unconsolidated company:
2022 | 2021 | |||||||
| September 30, 2022 | December 31, 2021 | |||||||
| Current assets | $ | 2,487 | $ | 5,479 | ||||
| Noncurrent assets | 153,057 | 216,864 | ||||||
| Current liabilities | 36,790 | 56,626 | ||||||
| Noncurrent liabilities | - | - | ||||||
| Equity | 118,754 | 165,717 | ||||||
Ended June 30, | Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 14 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 –– ACCRUED LIABILITIES AND OTHER PAYABLES
At JuneSeptember 30, 2022 and December 31, 2021, accrued liabilities and other payables consisted of the following:
2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 –– CONVERTIBLE NOTE PAYABLE
On March 28, 2022, the Company entered into Securities Purchase Agreement with an accredited investor, which was amended on June 8, 2022, providing for the sale by the Company to the investor of a Convertible Note in the amount of $3,718,943 (“(“2022 Convertible Note”Note”). In addition to the 2022 Convertible Note, the investor also received a Stock Purchase Warrant (“(“2022 Warrant”Warrant”) to acquire an aggregate of 1,239,647 shares of common stock. The 2022 Warrant is exercisable for five years at an exercise price of $1.25. The financing closed with respect to:
| $2,669,522 of the financing on April 15, 2022, |
| $659,581 of the financing on April 29, 2022, |
| $199,840 of the financing on May 18, 2022, and |
| $190,000 of the financing on May 25, 2022. |
As a result of each of the closings, the Company issued the investor a 2022 Convertible Note in the principal amount of $2,669,522 and a 2022 Warrant to acquire 889,840 shares of common stock dated April 15, 2022, a 2022 Convertible Note in the principal amount of $659,581 and a 2022 Warrant to acquire 219,860 shares of common stock dated April 29, 2022, a 2022 Convertible Note in the principal amount of $199,840 and a 2022 Warrant to acquire 66,614 shares of common stock dated May 18, 2022, and a 2022 Convertible Note in the principal amount of $190,000 and a 2022 Warrant to acquire 63,333 shares of common stock.stock dated May 25, 2022.
The 2022 Convertible Note bears interest at 1% per annum payable at maturity and matures ten years from issuance. The investor may elect to convert all or part of the 2022 Convertible Note, plus accrued interest, at any time into shares of common stock of the Company at a conversion price equal to 95% of the average of the highest three trading prices for the common stock during the 20-trading day period ending one trading day prior to the conversion date but in no event will the conversion price be lower than $0.75 per share.
The investor agreed to restrict its ability to convert the 2022 Convertible Note and exercise the 2022 Warrant and receive shares of common stock such that the number of shares of common stock held by the investor after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. Further, the investor agreed to not sell or transfer any or all of the shares of common stock underlying the 2022 Convertible Note or the 2022 Warrant for a period of 90 days beginning on the closing date (the “Lock-Up Period”“Lock-Up Period”). Following the expiration of the Lock-Up Period, the investor has agreed to limit its sale or transfer of such shares of common stock to a maximum monthly amount equal to 20% of the shares of common stock issuable upon conversion of the 2022 Convertible Note. The Company agreed to use its reasonable best efforts to file a registration statement on Form S-3 (or other appropriate form) providing for the resale by the investor of the shares of common stock underlying the 2022 Convertible Note and the 2022 Warrant.
| 15 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – CONVERTIBLE NOTE PAYABLE (continued)
Based upon the Company’sCompany’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives“Derivatives and Hedging - Contracts in an Entity’sEntity’s Own Equity”Equity”, the Company determined that all the warrants issued to the investor with this private placement are classified as equity in additional paid in-capital.
In accordance with ASC 470-20-25-2, proceeds from the sale of a debt instrument with stock purchase warrants are allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds so allocated to the warrants are accounted for as additional paid-in capital. The remainder of the proceeds are allocated to the debt instrument portion of the transaction.
The fair values of the warrants issued to the investor with this private placement were computed using the Black-Scholes option-pricing model with the following assumptions: volatility of 111.94%, risk-free rate of 2.71% - 2.92%, annual dividend yield of 0% and expected life of 5 years.
In accordance with ASC 480-10-25-14, the Company determined that the conversion provisions contain an embedded derivative feature and the Company valued the derivative feature separately, recording debt discount and derivative liabilities in accordance with the provisions of the convertible debt (see Note 8). The Company calculates the fair value of conversion option at the commitment dates using the Black-Scholes valuation model with the following assumptions: volatility of 95.97%, risk-free rate of 2.75% - 2.89%, annual dividend yield of 0% and expected life of 10 years.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – CONVERTIBLE NOTE PAYABLE
(continued)
The warrants issued to the investor to purchase 1,239,647 shares of the Company’sCompany’s common stock were treated as a discount on the convertible note payable and were valued at $498,509 and will behad been amortized over the term of the 2022 Convertible Note. Additionally, the fair value of embedded conversion option at commitment dates, which was valued at $2,782,569, iswas recorded as a discount on the convertible note payable and will behad been amortized over the term of the 2022 Convertible Note. Hence, in connection with the issuance of the 2022 Convertible Note and 2022 Warrant, the Company recorded a total debt discount of $3,281,078, to bewhich had been amortized over the term of the convertible note payable.
On July 25, 2022, the Company and the investor entered into a Conversion Agreement (“Conversion Agreement”) pursuant to which the investor converted all of its Convertible Notes in the principal amount of $3,718,943 and unpaid interest of $9,751 into 5,736,452 shares of common stock of the Company at a per share price of $0.65 (see Note 11 - Common Shares Issued for Debt Conversion). The Company recorded a conversion inducement charge of $344,264 as a result of the Conversion Agreement, representing the value of common stock issued upon conversion in excess of the common stock issuable under the original terms of the 2022 Convertible Note.
For the three and six months ended JuneSeptember 30, 2022, amortization of debt discount and interest expense related to the 2022 Convertible Note amounted to $54,685$3,226,393 and $7,204,$2,547, respectively, both of which have been reflected as interest expense on the accompanying condensed consolidated statements of operation and comprehensive loss. For the nine months ended September 30, 2022, amortization of debt discount and interest expense related to the 2022 Convertible Note amounted to $3,281,078 and $9,751, respectively, both of which have been reflected as interest expense on the accompanying condensed consolidated statements of operation and comprehensive loss.
At June 30, 2022, convertible note payable consisted
of the following:
2022 | ||||
In accordance with an agreement signed on July
25, 2022, all outstanding principal and unpaid interest were converted into common stock of the Company at a conversion
price of $0.65 per share (see Note 16 - Common Shares Issued for Debt Conversion).
NOTE 8 –– DERIVATIVE LIABILITY
As stated in Note 7, 2022 Convertible Note, the Company determined that the convertible note payable contained an embedded derivative feature in the form of a conversion provision which was adjustable based on future prices of the Company’sCompany’s common stock. In accordance with ASC 815-10-25, each derivative feature was initially recorded at its fair value using the Black-Scholes option valuation method and then re-valued at each reporting date, with changes in the fair value reported in the statements of operations.
The estimated fair value of the derivative feature of convertible debt was $2,782,569 at commitment dates, which was calculated using the following assumptions: volatility of 95.97%, risk-free rate of 2.75% - 2.89%, annual dividend yield of 0% and expected life of 10 years.
On July 25, 2022, the Company and the 2022 Convertible Note holder entered into a Conversion Agreement pursuant to which the investor converted all of its Convertible Notes into shares of common stock of the Company.
The estimated fair value of the derivative feature of convertible debt was $2,013,300 at June 30,$2,181,820 on July 25, 2022, which was computed using the following assumptions: volatility of 95.71%95.53%, risk-free rate of 2.98%2.81%, annual dividend yield of 0% and expected life of 9.7 – 9.8 – 9.9 years.
| 16 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 – DERIVATIVE LIABILITY (continued)
Increases or decreases in fair value of the derivative liability is included as a component of total other (expenses) income in the accompanying condensed consolidated statements of operations and comprehensive loss for the respective period. The changeschange to the derivative liability for the embedded conversion option from July 1, 2022 through July 25, 2022 resulted in an increase of $168,520 in the derivative liability and the corresponding increase in other expense as a loss for the three months ended September 30, 2022. The change to the derivative liability for the embedded conversion option from commitment dates through July 25, 2022 resulted in a decrease of $769,269$600,749 in the derivative liability and the corresponding increase in other income as a gain for the three and sixnine months ended JuneSeptember 30, 2022. There was no derivative liability in the three and sixnine months ended JuneSeptember 30, 2021.
NOTE 9 –– NOTE PAYABLE, NET
On September 1, 2022, the Company issued a balloon promissory note to a third party company in the principal amount of $4,800,000 which carries interest of 11.0% per annum (the “2022 Note Payable”). Interest is due in monthly payments of $44,000 beginning November 1, 2022 and payable monthly thereafter until September 1, 2025 when the principal outstanding and all remaining interest is due. The 2022 Note Payable can be extended for an additional 36 months provided that the Company has not defaulted. The Company may not prepay the 2022 Note Payable for a period of 12 months. The 2022 Note Payable is secured by a first mortgage on the Company’s real property located in Township of Freehold, County of Monmouth, State of New Jersey, having a street address of 4400 Route 9 South, Freehold, NJ 07728.
As of September 30, 2022, the carrying balance of the 2022 Note Payable was $4,555,750 and the remaining unamortized debt issuance costs balance was $244,250. For the three and nine months ended September 30, 2022, the interest expense related to the 2022 Note Payable (including amortization of debt issuance costs of $22,204) totaled $66,204.
NOTE 10 – RELATED PARTY TRANSACTIONS
Rental Revenue from Related Party and Rent Receivable –– Related Party
The Company leases space of its commercial real property located in New Jersey to a company, D.P. Capital Investments LLC, which is controlled by Wenzhao Lu, the Company’sCompany’s largest shareholder and chairman of the Board of Directors. The term of the related party lease agreement is five years commencing on May 1, 2021 and will expire on April 30, 2026.
For both the three months ended JuneSeptember 30, 2022 and 2021, the related party rental revenue amounted to $12,600 and $8,400, respectively, and has been included in real property rental on the accompanying condensed consolidated statements of operations and comprehensive loss. For the sixnine months ended JuneSeptember 30, 2022 and 2021, the related party rental revenue amounted to $25,200$37,800 and $8,400,$21,000, respectively, and has been included in real property rental on the accompanying condensed consolidated statements of operations and comprehensive loss.
The related party rent receivable totaled $58,500$71,400 and $33,600, respectively, and no allowance for doubtful accounts was deemed to be required on rent receivable –– related party at JuneSeptember 30, 2022 and December 31, 2021.
Medical Related Consulting Services Revenue from Related Party
During the three and nine months ended September 30, 2022 and 2021, medical related consulting services revenue from related party was as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Medical related consulting services provided to: | ||||||||||||||||
| Hebei Daopei * | $ | - | $ | 131,305 | $ | - | $ | 131,305 | ||||||||
| * | Hebei Daopei is subsidiary of an entity whose chairman is Wenzhao Lu, the largest shareholder of the Company. |
| 17 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 –10 – RELATED PARTY TRANSACTIONS (continued)
Services Provided by Related Party
From time to time, Wilbert Tauzin, a director of the Company, and his son provide consulting services to the Company. As compensation for professional services provided, the Company recognized consulting expenses of $36,460$29,121 and $54,545$52,596 for the three months ended JuneSeptember 30, 2022 and 2021, respectively, which have been included in professional fees on the accompanying condensed consolidated statements of operations and comprehensive loss. As compensation for professional services provided, the Company recognized consulting expenses of $87,598$116,719 and $111,950$164,546 for the sixnine months ended JuneSeptember 30, 2022 and 2021, respectively, which have been included in professional fees on the accompanying condensed consolidated statements of operations and comprehensive loss.
Accrued Liabilities and Other Payables –– Related Parties
In 2017, the Company acquired Beijing Genexosome for a cash payment of $450,000. As of JuneSeptember 30, 2022 and December 31, 2021, the unpaid acquisition consideration of $100,000, was payable to Dr. Yu Zhou, former director and former co-chief executive officer and 40% owner of Genexosome, and has been included in accrued liabilities and other payables –– related parties on the accompanying condensed consolidated balance sheets.
As of JuneSeptember 30, 2022 and December 31, 2021, $439,974$0 and $368,433 of accrued and unpaid interest related to borrowings from Wenzhao Lu, the Company’sCompany’s largest shareholder and chairman of the Board of Directors, respectively, have been included in accrued liabilities and other payables –– related parties on the accompanying condensed consolidated balance sheets.
Borrowings from Related Party
Promissory Note
On March 18, 2019, the Company issued Wenzhao Lu, the Company’sCompany’s largest shareholder and Chairman of the Board of Directors, a Promissory Note in the principal amount of $1,000,000 (“(“Promissory Note”Note”) in consideration of cash in the amount of $1,000,000. The Promissory Note accrues interest at the rate of 5% per annum and matures March 19, 2022. In March 2022, the Company and Wenzhao Lu entered into a Loan Extension and Modification Agreement (the “Extension”“Extension”) to extend the maturity date to March 19, 2024.The Company repaid principal of $410,000, $200,000 and $390,000 in the third quarter of 2019, second quarter of 2020 and second quarter of 2022, respectively. As of JuneSeptember 30, 2022 and December 31, 2021, the outstanding principal balance was $0 and $390,000, respectively.
Line of Credit
On August 29, 2019, the Company entered into a Line of Credit Agreement (the “Line“Line of Credit Agreement”Agreement”) providing the Company with a $20 million line of credit (the “Line“Line of Credit”Credit”) from Wenzhao Lu (the “Lender”“Lender”), the largest shareholder and Chairman of the Board of Directors of the Company. The Line of Credit allows the Company to request loans thereunder and to use the proceeds of such loans for working capital and operating expense purposes until the facility matures on December 31, 2024. The loans are unsecured and are not convertible into equity of the Company. Loans drawn under the Line of Credit bears interest at an annual rate of 5% and each individual loan will be payable three years from the date of issuance. The Company has a right to draw down on the line of credit and not at the discretion of the related party Lender. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to maturity, without premium or penalty. The Line of Credit Agreement includes customary events of default. If any such event of default occurs, the Lender may declare all outstanding loans under the Line of Credit to be due and payable immediately.
On July 25, 2022, the Company and Mr. Lu entered into and closed a Debt Settlement Agreement and Release pursuant to which the Company settled $2,440,262 debt owed under the Line of Credit and unpaid interest of $448,331 by issuance of 4,443,990 shares of common stock of the Company (see Note 11 - Common Shares Issued Pursuant to Related Party Debt Settlement Agreement and Release). The total amount of the debt settled of $2,888,593 exceeded the fair market value of the shares issued by $888,353 which was treated as a capital transaction due to Mr. Lu's relationship with the Company.
| 18 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – RELATED PARTY TRANSACTIONS (continued)
In the sixnine months ended JuneSeptember 30, 2022, activity recorded for the Line of Credit is summarized in the following table:
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – RELATED PARTY TRANSACTIONS
(continued)
Borrowings from Related Party (continued)
| Outstanding principal under the Line of Credit at January 1, 2022 | $ | 2,750,262 | ||
| Draw down from Line of Credit | 100,000 | |||
| Repayment of Line of Credit | (410,000 | ) | ||
| Settlement of Line of Credit in shares | (2,440,262 | ) | ||
| Outstanding principal under the Line of Credit at September 30, 2022 | $ | - |
For the three months ended JuneSeptember 30, 2022 and 2021, the interest expense related to above borrowings amounted to $31,854$8,358 and $46,131,$50,248, respectively, and has been included in interest expense –– related party on the accompanying condensed consolidated statements of operations and comprehensive loss. For the sixnine months ended JuneSeptember 30, 2022 and 2021, the interest expense related to above borrowings amounted to $71,540$79,898 and $91,280,$141,528, respectively, and has been included in interest expense –– related party on the accompanying condensed consolidated statements of operations and comprehensive loss.
As of JuneSeptember 30, 2022 and December 31, 2021, the related accrued and unpaid interest for above borrowings was $439,974$0 and $368,433, respectively, has been included in accrued liabilities and other payables –– related parties on the accompanying condensed consolidated balance sheets.
Common Shares Sold to Related Party for Cash
On July 25,August 5, 2022, the outstanding principal
and related accrued and unpaid interest were settled by issuanceCompany sold 448,718 shares of the Company’s common stock at a purchase price of $0.78 per share to Wenzhao Lu pursuant to a subscription agreement. The Company received proceeds of $350,000 (see Note 1611 - Common Shares Issued PursuantSold for Cash). As of September 30, 2022, the shares have not been issued and have been included in common stock to Related Party Debt Settlement Agreement and Release).be issued at a value of $350,000 on the accompanying condensed consolidated balance sheets.
NOTE 10 –11 – EQUITY
Common Shares Sold for Cash
On December 13, 2019, the Company entered into an Open Market Sale AgreementSM (the “Sales Agreement”“Sales Agreement”) with Jefferies LLC, as sales agent (“Jefferies”(“Jefferies”), pursuant to which the Company may offer and sell, from time to time, through Jefferies, shares of its common stock. During the sixnine months ended JuneSeptember 30, 2022, Jefferies sold an aggregate of 170,640 shares of common stock at an average price of $0.79 per share to investors and the Company recorded net proceeds of $112,328, net of commission and other offering costs of $23,239.
On August 5, 2022, the Company sold 448,718 shares of common stock at a purchase price of $0.78 per share to Wenzhao Lu pursuant to a subscription agreement. The Company received proceeds of $350,000 (see Note 10 - Common Shares Sold to Related Party for Cash). As of September 30, 2022, the shares have not been issued and have been included in common stock to be issued at a value of $350,000 on the accompanying condensed consolidated balance sheets.
On August 5, 2022, the Company sold 320,513 shares of common stock at a purchase price of $0.78 per share to an investor pursuant to a subscription agreement. The Company received proceeds of $250,000. As of September 30, 2022, the shares have not been issued and have been included in common stock to be issued at a value of $250,000 on the accompanying condensed consolidated balance sheets.
Common Shares Issued for Services
During the sixnine months ended JuneSeptember 30, 2022, the Company issued a total of 408,957 shares of its common stock for services rendered and to be rendered. These shares were valued at $340,950, the fair market values on the grant dates using the reported closing share prices on the dates of grant, and the Company recorded stock-based compensation expense of $254,923$291,270 for the sixnine months ended JuneSeptember 30, 2022 and reduced accrued liabilities of $30,000 and recorded prepaid expense of $56,027$19,680 as of JuneSeptember 30, 2022 which will be amortized over the rest of corresponding service periods.
| 19 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – EQUITY (continued)
Common Shares Issued for Debt Conversion
On July 25, 2022, the Company and 2022 Convertible Note holder entered into a Conversion Agreement pursuant to which the investor converted its Convertible Notes in the principal amount of $3,718,943 and unpaid interest of $9,751 into 5,736,452 shares of common stock of the Company at a per share price of $0.65 (see Note 7). The Company recorded a conversion inducement charge of $344,264 as a result of the Conversion Agreement, representing the value of common stock issued upon conversion in excess of the common stock issuable under the original terms of the 2022 Convertible Note.
Common Shares Issued Pursuant to Related Party Debt Settlement Agreement and Release
On July 25, 2022, the Company and Mr. Lu entered into and closed a Debt Settlement Agreement and Release pursuant to which the Company settled $2,440,262 debt owed under the Line of Credit and unpaid interest of $448,331 by issuance of 4,443,990 shares of common stock of the Company (see Note 10 - Line of Credit). The total amount of the debt settled of $2,888,593 exceeded the fair market value of the shares issued by $888,353 which was treated as a capital transaction due to Mr. Lu's relationship with the Company.
Options
The following table summarizes the shares of the Company’sCompany’s common stock issuable upon exercise of options outstanding at JuneSeptember 30, 2022:
Exercise Price | Outstanding at June 30, 2022 | Remaining Contractual Life (Years) | Average Exercise Price | Exercisable at June 30, 2022 | Average Exercise Price | |||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Range of Exercise Price | Number Outstanding at September 30, 2022 | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at September 30, 2022 | Weighted Average Exercise Price | |||||||||||||||||
| $ | 0.50 – 0.82 | 2,660,000 | 4.23 | $ | 0.56 | 2,440,000 | $ | 0.55 | ||||||||||||||
| 1.00 – 1.93 | 2,895,000 | 4.15 | 1.38 | 2,895,000 | 1.38 | |||||||||||||||||
| 2.00 – 2.80 | 2,560,000 | 1.12 | 2.15 | 2,560,000 | 2.15 | |||||||||||||||||
| 4.76 | 30,000 | 1.51 | 4.76 | 30,000 | 4.76 | |||||||||||||||||
| $ | 0.50 – 4.76 | 8,145,000 | 3.21 | $ | 1.37 | 7,925,000 | $ | 1.38 | ||||||||||||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – EQUITY
(continued)
Options (continued)
Stock option activities for the sixnine months ended JuneSeptember 30, 2022 were as follows:
| Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding at January 1, 2022 | 7,725,000 | $ | 1.45 | |||||
| Granted | 660,000 | 0.73 | ||||||
| Expired/forfeited/exercised | (240,000 | ) | (2.26 | ) | ||||
| Outstanding at September 30, 2022 | 8,145,000 | $ | 1.37 | |||||
| Options exercisable at September 30, 2022 | 7,925,000 | $ | 1.38 | |||||
| Options expected to vest | 220,000 | $ | 0.68 | |||||
The aggregate intrinsic value of both stock options outstanding and stock options exercisable at JuneSeptember 30, 2022 was $0.$303,800 and $292,597, respectively.
The fair values of options granted during the sixnine months ended JuneSeptember 30, 2022 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 74.8% - 117.46%, risk-free rate of 1.37% - 3.56%, annual dividend yield of 0%, and expected life of 3.00 - 5.00 years. The aggregate fair value of the options granted during the sixnine months ended JuneSeptember 30, 2022 was $373,982.
| 20 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – EQUITY (continued)
Options (continued)
The fair values of options granted during the sixnine months ended JuneSeptember 30, 2021 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 123.27%121.52% - 128.42%, risk-free rate of 0.33% - 0.80%, annual dividend yield of 0% and expected life of 3.00 - 5.00 years. The aggregate fair value of the options granted during the sixnine months ended JuneSeptember 30, 2021 was $575,078.$594,401.
For the three months ended JuneSeptember 30, 2022 and 2021, stock-based compensation expense associated with stock options granted amounted to $126,301$110,442 and $195,209,$188,859, of which, $93,171$87,300 and $136,392$134,833 was recorded as compensation and related benefits, $21,460$14,121 and $39,545$37,596 was recorded as professional fees, and $11,670$9,021 and $19,272$16,430 was recorded as research and development expenses, respectively.
For the sixnine months ended JuneSeptember 30, 2022 and 2021, stock-based compensation expense associated with stock options granted amounted to $278,624$389,066 and $397,714,$586,573, of which, $198,084$285,384 and $275,899$410,732 was recorded as compensation and related benefits, $57,598$71,719 and $82,988$120,584 was recorded as professional fees, and $22,942$31,963 and $38,827$55,257 was recorded as research and development expenses, respectively.
A summary of the status of the Company’sCompany’s nonvested stock options granted as of JuneSeptember 30, 2022 and changes during the sixnine months ended JuneSeptember 30, 2022 is presented below:
| Number of Options | Weighted Average Exercise Price | |||||||
| Nonvested at January 1, 2022 | 205,834 | $ | 1.04 | |||||
| Granted | 660,000 | 0.73 | ||||||
| Vested | (645,834 | ) | (0.85 | ) | ||||
| Nonvested at September 30, 2022 | 220,000 | $ | 0.68 | |||||
Warrants
On March 28, 2022, the Company entered into Securities Purchase Agreement with an accredited investor, which was amended on June 8, 2022, providing for the sale by the Company to the investor of a Convertible Note in the amount of $3,718,943 (“(“2022 Convertible Note”Note”). In addition to the 2022 Convertible Note, the investor also received a Stock Purchase Warrant (“(“2022 Warrant”Warrant”) to acquire an aggregate of 1,239,647 shares of common stock. The 2022 Warrant is exercisable for five years at an exercise price of $1.25.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – EQUITY
(continued)
Warrants (continued)
The fair values of the warrants issued to the investor with this private placement were computed using the Black-Scholes option-pricing model with the following assumptions: volatility of 111.94%, risk-free rate of 2.71% - 2.92%, annual dividend yield of 0% and expected life of 5 years. The warrants issued to the investor to purchase 1,239,647 shares of the Company’sCompany’s common stock were treated as a discount on the convertible note payable and were valued at $498,509 and will behad been amortized over the term of the 2022 Convertible Note.
Stock warrant activities for the sixnine months ended JuneSeptember 30, 2022 were as follows:
| Number of Warrants | Exercise Price | |||||||
| Outstanding at January 1, 2022 | - | $ | - | |||||
| Issued | 1,239,647 | 1.25 | ||||||
| Expired/exercised | - | - | ||||||
| Outstanding and exercisable at September 30, 2022 | 1,239,647 | $ | 1.25 | |||||
| 21 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – EQUITY (continued)
The following table summarizes the shares of the Company’sCompany’s common stock issuable upon exercise of warrants outstanding at JuneSeptember 30, 2022:
Price | Outstanding at June 30, 2022 | Remaining Contractual Life (Years) | Exercisable at June 30, 2022 | Price | ||||||||||||||
Warrants (continued)
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||||
| Exercise Price | Number Outstanding at September 30, 2022 | Weighted Average Remaining Contractual Life (Years) | Number Exercisable at September 30, 2022 | Exercise Price | ||||||||||||||
| $ | 1.25 | 1,239,647 | 4.56 | 1,239,647 | $ | 1.25 | ||||||||||||
The aggregate intrinsic value of both stock warrants outstanding and stock warrants exercisable at JuneSeptember 30, 2022 was $0.
NOTE 11 –12 – STATUTORY RESERVE AND RESTRICTED NET ASSETS
The Company’sCompany’s PRC subsidiary, Avalon Shanghai, is restricted in its ability to transfer a portion of its net asset to the Company. The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China.
The Company is required to make appropriations to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“(“PRC GAAP”GAAP”). Appropriations to the statutory surplus reserve are required to be at least 10% of the after-tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entity’sentity’s registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. The statutory reserve may be applied against prior year losses, if any, and may be used for general business expansion and production or increase in registered capital, but are not distributable as cash dividends. The Company did not make any appropriation to statutory reserve for Avalon Shanghai during the three and sixnine months ended JuneSeptember 30, 2022 as it incurred net loss in the periods. As of both JuneSeptember 30, 2022 and December 31, 2021, the restricted amount as determined pursuant to PRC statutory laws totaled $6,578.
Relevant PRC laws and regulations restrict the Company’sCompany’s PRC subsidiary, Avalon Shanghai, from transferring a portion of its net assets, equivalent to their statutory reserves and their share capital, to the Company’sCompany’s shareholders in the form of loans, advances or cash dividends. Only PRC entity’sentity’s accumulated profit may be distributed as dividend to the Company’sCompany’s shareholders without the consent of a third party. As of both
JuneSeptember 30, 2022 and December 31, 2021, total restricted net assets amounted to $706,578.$1,006,578 and $706,578, respectively.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 –13 – CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Pursuant to the requirements of Rule 12-04(a), 5-04(c) and 4-08(e)(3) of Regulation S-X, the condensed financial information of the parent company shall be filed when the restricted net assets of consolidated subsidiary exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of this test, restricted net assets of consolidated subsidiary shall mean that amount of the Company’sCompany’s proportionate share of net assets of consolidated subsidiary (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiary in the form of loans, advances or cash dividends without the consent of a third party.
The Company performed a test on the restricted net assets of consolidated subsidiary in accordance with such requirement and concluded that it was not applicable to the Company as the restricted net assets of the Company’sCompany’s PRC subsidiary did not exceed 25% of the consolidated net assets of the Company, therefore, the condensed financial statements for the parent company have not been required.
| 22 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 –14 – CONCENTRATIONS
Customers
The following table sets forth information as to each customer that accounted for 10% or more of the Company’sCompany’s revenues for the three and sixnine months ended JuneSeptember 30, 2022 and 2021.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Customer | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| A (Hebei Daopei, a related party) | * | 27 | % | * | 12 | % | ||||||||||
| B | 32 | % | 28 | % | 31 | % | 29 | % | ||||||||
| C | 19 | % | 12 | % | 19 | % | 16 | % | ||||||||
| D | 12 | % | * | 12 | % | 11 | % | |||||||||
June 30, | June 30, | |||||||||||||||
Two customers, of which, one is a related party and the other is a third party, whose outstanding receivable accounted for 10% or more of the Company’sCompany’s total outstanding rent receivable and rent receivable –– related party at JuneSeptember 30, 2022, accounted for 81.0%82.3% of the Company’sCompany’s total outstanding rent receivable and rent receivable –– related party at JuneSeptember 30, 2022.
Two customers, of which, one is a related party and the other is a third party, whose outstanding receivable accounted for 10% or more of the Company’sCompany’s total outstanding rent receivable and rent receivable –– related party at December 31, 2021, accounted for 80.6% of the Company’sCompany’s total outstanding rent receivable and rent receivable –– related party at December 31, 2021.
Suppliers
No supplier accounted for 10% or more of the Company’sCompany’s purchase during the three and sixnine months ended JuneSeptember 30, 2022 and 2021.
One supplier, whose outstanding payable accounted for 10% or more of the Company’sCompany’s total outstanding accounts payable at JuneSeptember 30, 2022, accounted for 100.0% of the Company’sCompany’s total outstanding accounts payable at JuneSeptember 30, 2022.
NOTE 14 –15 – SEGMENT INFORMATION
For the three and sixnine months ended JuneSeptember 30, 2022 and 2021, the Company operated in two reportable business segments - (1) the real property operating segment, and (2) the medical related consulting services segment.
| 23 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14 –15 – SEGMENT INFORMATION (continued)
The Company’sCompany’s reportable segments are strategic business units that offer different services and products. They are managed separately based on the fundamental differences in their operations. Information with respect to these reportable business segments for the three and sixnine months ended JuneSeptember 30, 2022 and 2021 was as follows:
June 30, | June 30, | |||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | ||||||||||||||||
| Real property operations | $ | 317,390 | $ | 355,459 | $ | 905,842 | $ | 925,465 | ||||||||
| Medical related consulting services | - | 131,305 | - | 131,305 | ||||||||||||
| Total | 317,390 | 486,764 | 905,842 | 1,056,770 | ||||||||||||
| Costs and expenses | ||||||||||||||||
| Real property operations | 247,152 | 215,622 | 677,303 | 637,663 | ||||||||||||
| Medical related consulting services | - | 102,442 | - | 102,442 | ||||||||||||
| Total | 247,152 | 318,064 | 677,303 | 740,105 | ||||||||||||
| Gross profit | ||||||||||||||||
| Real property operations | 70,238 | 139,837 | 228,539 | 287,802 | ||||||||||||
| Medical related consulting services | - | 28,863 | - | 28,863 | ||||||||||||
| Total | 70,238 | 168,700 | 228,539 | 316,665 | ||||||||||||
| Other operating expenses | ||||||||||||||||
| Real property operations | 76,299 | 76,422 | 265,251 | 256,675 | ||||||||||||
| Medical related consulting services | 96,321 | 32,239 | 289,671 | 361,067 | ||||||||||||
| Corporate/Other | 1,486,717 | 2,025,010 | 6,233,229 | 6,269,762 | ||||||||||||
| Total | 1,659,337 | 2,133,671 | 6,788,151 | 6,887,504 | ||||||||||||
| Other (expense) income | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Corporate/Other | (3,303,502 | ) | (50,248 | ) | (3,436,931 | ) | (141,528 | ) | ||||||||
| Total | (3,303,502 | ) | (50,248 | ) | (3,436,931 | ) | (141,528 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Real property operations | 4 | 3 | 11 | 111 | ||||||||||||
| Medical related consulting services | (8,848 | ) | (14,173 | ) | 223,735 | (49,162 | ) | |||||||||
| Corporate/Other | (512,709 | ) | 5,170 | 259,631 | 5,171 | |||||||||||
| Total | (521,553 | ) | (9,000 | ) | 483,377 | (43,880 | ) | |||||||||
| Total other expense, net | (3,825,055 | ) | (59,248 | ) | (2,953,554 | ) | (185,408 | ) | ||||||||
| Net (loss) income | ||||||||||||||||
| Real property operations | (6,057 | ) | 63,418 | (36,701 | ) | 31,238 | ||||||||||
| Medical related consulting services | (105,169 | ) | (17,549 | ) | (65,936 | ) | (381,366 | ) | ||||||||
| Corporate/Other | (5,302,928 | ) | (2,070,088 | ) | (9,410,529 | ) | (6,406,119 | ) | ||||||||
| Total | $ | (5,414,154 | ) | $ | (2,024,219 | ) | $ | (9,513,166 | ) | $ | (6,756,247 | ) | ||||
2022 | 2021 | |||||||
| Identifiable long-lived tangible assets at September 30, 2022 and December 31, 2021 | September 30, 2022 | December 31, 2021 | ||||||
| Real property operations | $ | 7,410,004 | $ | 7,537,281 | ||||
| Medical related consulting services | 396 | 742 | ||||||
| Corporate/Other | 205,993 | 352,294 | ||||||
| Total | $ | 7,616,393 | $ | 7,890,317 | ||||
2022 | 2021 | |||||||
| Identifiable long-lived tangible assets at September 30, 2022 and December 31, 2021 | September 30, 2022 | December 31, 2021 | ||||||
| United States | $ | 7,440,978 | $ | 7,583,880 | ||||
| China | 175,415 | 306,437 | ||||||
| Total | $ | 7,616,393 | $ | 7,890,317 | ||||
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AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 15 –16 – COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, the Company is subject to ordinary routine litigation incidental to its normal business operations. The Company is not currently a party to, and its property is not subject to, any material legal proceedings, except as set forth below.
On October 25, 2017, Genexosome entered into and closed a Stock Purchase Agreement with Beijing Genexosome and Yu Zhou, MD, PhD, the sole shareholder of Beijing Genexosome, pursuant to which Genexosome acquired all of the issued and outstanding securities of Beijing Genexosome in consideration of a cash payment in the amount of $450,000, of which $100,000 is still owed. Further, on October 25, 2017, Genexosome entered into and closed an Asset Purchase Agreement with Dr. Zhou, pursuant to which the Company acquired all assets, including all intellectual property and exosome separation systems, held by Dr. Zhou pertaining to the business of researching, developing and commercializing exosome technologies. In consideration of the assets, Genexosome paid Dr. Zhou $876,087 in cash, transferred 500,000 shares of common stock of the Company to Dr. Zhou and issued Dr. Zhou 400 shares of common stock of Genexosome. Further, the Company had not been able to realize the financial projections provided by Dr. Zhou at the time of the acquisition and has decided to impair the intangible asset associated with this acquisition to zero. Dr. Zhou was terminated as Co-CEO of Genexosome on August 14, 2019. Further, on October 28, 2019, Research Institute at Nationwide Children’sChildren’s Hospital (“(“Research Institute”Institute”) filed a Complaint in the United States District Court for the Southern District of Ohio Eastern Division against Dr. Zhou, Li Chen, the Company and Genexosome with various claims against the Company and Genexosome. The criminal proceedings against Dr. Zhou and Li Chen have been concluded. The Company, Genexosome and the Research Institute entered into a Settlement Agreement dated June 7, 2022 (the “Settlement Date”“Settlement Date”) whereby the Company agreed to pay the Research Institute $450,000 on each of the sixty-day, one year and two-year anniversaries of the Settlement Date. In addition, the Company agreed to pay the Research Institute 30% of the Company’sCompany’s initial pre-tax profit of $3,333,333, 20% of the Company’sCompany’s second pre-tax profit of $3,333,333 and 10% of the Company’sCompany’s third pre-tax profit of $3,333,333. The parties provided a mutual release as well.
Operating Leases Commitment
The Company is a party to leases for office space. These lease agreements will expire through February 2023. Rent expense under all operating leases amounted to approximately $72,000$107,000 and $73,000$108,000 for the sixnine months ended JuneSeptember 30, 2022 and 2021, respectively. Supplemental cash flow information related to leases for the sixnine months ended JuneSeptember 30, 2022 and 2021 is as follows:
June 30, | ||||||||
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows paid for operating lease | $ | 116,897 | $ | 94,456 | ||||
| Right-of-use assets obtained in exchange for lease obligation: | ||||||||
| Operating lease | $ | - | $ | 133,473 | ||||
The following table summarizes the lease term and discount rate for the Company’sCompany’s operating lease as of JuneSeptember 30, 2022:
| Operating Lease | ||||
| Weighted average remaining lease term (in years) | ||||
| Weighted average discount rate | 4.88 | % | ||
| 25 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 16 – COMMITMENTS AND CONTINCENGIES (continued)
Operating Leases Commitment (continued)
The following table summarizes the maturity of lease liabilities under operating lease as of JuneSeptember 30, 2022:
| For the Twelve-month Period Ending September 30: | Operating Lease | |||
| 2023 | $ | 45,122 | ||
| 2024 and thereafter | - | |||
| Total lease payments | 45,122 | |||
| Amount of lease payments representing interest | (242 | ) | ||
| Total present value of operating lease liabilities | $ | 44,880 | ||
| Current portion | $ | 44,880 | ||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 15 – COMMITMENTS
AND CONTINCENGIES (continued)
Equity Investment Commitment
On May 29, 2018, Avalon Shanghai entered into a Joint Venture Agreement with Jiangsu Unicorn Biological Technology Co., Ltd. (“Unicorn”(“Unicorn”), pursuant to which a company named Epicon Biotech Co., Ltd. (“Epicon”(“Epicon”) was formed on August 14, 2018. Epicon is owned 60% by Unicorn and 40% by Avalon Shanghai. Within five years of execution of the Joint Venture Agreement, Unicorn shall invest cash into Epicon in an amount not less than RMB 8,000,000 (approximately $1.2$1.1 million) and the premises of the laboratories of Nanjing Hospital of Chinese Medicine for exclusive use by Epicon, and Avalon Shanghai shall invest cash into Epicon in an amount not less than RMB 10,000,000 (approximately $1.5$1.4 million). Epicon is focused on cell preparation, third party testing, biological sample repository for commercial and scientific research purposes and the clinical transformation of scientific achievements. As of JuneSeptember 30, 2022, Avalon Shanghai has contributed RMB 5,110,000 (approximately $0.8$0.7 million) that was included in equity method investment on the accompanying condensed consolidated balance sheets. The Company intends to use its present working capital together with borrowings from related party and equity raises to fund the project cost.
Joint Venture –– Avactis Biosciences Inc.
On July 18, 2018, the Company formed Avactis Biosciences Inc. (“Avactis”(“Avactis”), a Nevada corporation, as a wholly owned subsidiary. On October 23, 2018, Avactis and Arbele Limited (“Arbele”(“Arbele”) agreed to the establishment of AVAR BioTherapeutics (China) Co. Ltd. (“AVAR”(“AVAR”), a Sino-foreign equity joint venture, pursuant to an Equity Joint Venture Agreement (the “AVAR Agreement”“AVAR Agreement”), which was to be owned 60% by Avactis and 40% by Arbele. On April 6, 2022, the Company, Acactis, Arbele and Arbele Biotherapeutics Limited (“(“Arbele Biotherapeutics”Biotherapeutics”), a wholly owned subsidiary of Arbele, entered into an Amendment No. 1 to the Equity Joint Venture Agreement pursuant to which Arbele Biotherapeutics acquired 40% of Avactis for the purpose of the Company and Arbele establishing a joint venture in the United States and the parties agreed that they would no longer pursue AVAR as a joint venture. Further, all rights and obligations under the AVAR Agreement were assigned by Avactis to Avalon and by Arbele to Arbele Biotherapeutics. Avactis established Avactis Nanjing Biosciences Ltd., a wholly owned foreign entity in the PRC. Further, the parties agreed that the Exclusive Patent License Agreement dated January 3, 2019 entered between Arbele, as licensor, and AVAR, as licensee (the “Arbele“Arbele License Agreement”Agreement”), was assigned to Avactis and Avalon and Arbele agreed to enter into a new Arbele License Agreement with Avactis on the same/similar terms as the Arbele License Agreement. Further, Dr. Anthony Chan was appointed to the Board of Directors of Avactis and as the Chief Scientific Officer of Avactis. Avactis purpose and business scope is to research, research, develop, produce, sell, distribute and generally commercialize CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy globally including in the PRC. The Company is required to contribute $10$10 million (or(or equivalent in RMB) in cash and/or services, which shall be contributed in tranches based on milestones to be determined jointly by Avactis and the Company in writing subject to the Company’sCompany’s cash reserves. Within 30 days, Arbele Biotherapeutics shall make contribution of $6.66 million in the form of entering into a License Agreement with Avactis granting Avactis with an exclusive right and license in China to its technology and intellectual property pertaining to CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy technology and any additional technology developed in the future with terms and conditions to be mutually agreed upon the Company and Avactis and services. As of the date hereof, the License Agreement has not been finalized.
| 26 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 16 – COMMITMENTS AND CONTINCENGIES (continued)
Joint Venture – Avactis Biosciences Inc. (continued)
In addition, the Company is responsible for:
| Contributing registered capital of RMB 5,000,000 (approximately $0.7 million) for working capital purposes as required by local regulation, which is not required to be contributed immediately and will be contributed subject to the |
| assist Avactis in setting up its business operations and obtaining all required permits and licenses from the Chinese government; |
| assisting Avactis in recruiting, hiring and retaining personnel; |
| providing Avactis with access to various hospital networks in China to assist in the testing and commercialization of the CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy technology in China; |
| assisting Avactis in managing the Good Manufacturing Practices (GMP) facility and clinic to be developed by Avactis; |
| providing Avactis with advice pertaining to conducting clinicals in China; and |
| Within 6 days of signing the AVAR Agreement, the Company is required to pay to Arbele Biotherapeutics $300,000 as a research and development fee with an additional two payments of $300,000 (for a total of $900,000) to be paid upon mutually agreed upon milestones. |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 15 – COMMITMENTS AND CONTINCENGIES (continued)
Joint Venture – Avactis Biosciences
Inc. (continued)
Under AVAR Agreement, as amended, Arbele Biotherapeutics shall be responsible for the following:
Entering into a License Agreement with Avactis; and | ||
| Providing Avactis with research and development expertise pertaining to clinical laboratory medicine when hired by Avactis. |
As of both JuneSeptember 30, 2022 and December 31, 2021, the Company paid the $900,000 to Arbele Biotherapeutics as research and development fee. As of June 30, 2022, License Agreement
has not been finalized.
Line of Credit Agreement
On August 29, 2019, the Company entered into a Line of Credit Agreement (the “Line“Line of Credit Agreement”Agreement”) providing the Company with a $20 million line of credit (the “Line“Line of Credit”Credit”) from Wenzhao Lu (the “Lender”“Lender”), a significant shareholder and director of the Company. The Line of Credit allows the Company to request loans thereunder and to use the proceeds of such loans for working capital and operating expense purposes until the facility matures on December 31, 2024. The loans are unsecured and are not convertible into equity of the Company. Loans drawn under the Line of Credit bears interest at an annual rate of 5% and each individual loan will be payable three years from the date of issuance. The Company has a right to draw down on the line of credit and not at the discretion of the related party Lender. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to maturity, without premium or penalty. The Line of Credit Agreement includes customary events of default. If any such event of default occurs, the Lender may declare all outstanding loans under the Line of Credit to be due and payable immediately. As of JuneSeptember 30, 2022, $2,440,262$0 was outstanding under the Line of Credit. On July 25, 2022, the outstanding principal and related accrued and unpaid interest were settled
by issuance of the Company’s common stock (see Note 16 - Common Shares Issued Pursuant to Related Party Debt Settlement Agreement
and Release).
NOTE 16 –17 – SUBSEQUENT EVENTS
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued. Based upon this review, other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.
Common Shares Issued for Debt ConversionNew Subsidiary
On July
25,In October 2022, the Company andformed a convertible note holder entered intowholly owned subsidiary, Avalon Laboratory Services, Inc., a Conversion Agreement pursuant to which the convertible note holder
converted its Convertible Notes in the principal amount of $3,718,943 and unpaid interest of $9,751 into
5,736,452 shares of common stock of the Company at a per share price of $0.65.Delaware company.
Common Shares Issued Pursuant to Related Party
Debt Settlement Agreement and Release
On July 25, 2022, the Company and Mr. Lu entered into
and closed a Debt Settlement Agreement and Release pursuant to which the Company settled $2,440,262 debt owed under the Line of Credit
and unpaid interest of $448,331 by issuance of 4,443,990 shares of common stock, with a fair value of $2,888,593, of the Company at a
per share price of $0.65.
Unaudited Pro Forma Condensed Consolidated Balance Sheet As of June
30, 2022
On July
25, 2022, the Company and a convertible note holder entered into a Conversion Agreement pursuant to which the convertible note holder
converted its Convertible Notes in the principal amount of $3,718,943 and unpaid interest of $9,751 into
5,736,452 shares of common stock of the Company at a per share price of $0.65.
On July 25, 2022, the Company and Mr. Lu entered
into and closed a Debt Settlement Agreement and Release pursuant to which the Company settled $2,440,262 debt owed under the Line
of Credit and unpaid interest of $448,331 by issuance of 4,443,990 shares of common stock of the Company at a per share price of $0.65.
The 4,443,990 shares issued had a fair value of $2,888,593.
The unaudited pro forma
condensed consolidated balance sheet as of June 30, 2022 combines the historical unaudited condensed consolidated balance sheet as of
June 30, 2022 and the debt conversion transactions mentioned above, giving effect to the conversions as if they had been consummated on
June 30, 2022.
| 27 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE
SHEET
As of June 30, 2022
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 17 – SUBSEQUENT EVENTS (continued)
Cease all operations in the People’s Republic of China
Unaudited Pro Forma Adjustment ReflectsIn November of 2022, the Following Four Transactions:Company decided to cease all operations in the People’s Republic of China with the exception of a small administrative office, Avalon Shanghai. The Company, through its Nevada Subsidiary Avactis Biosciences Inc., will continue to own Avactis Nanjing Biosciences Ltd. However, Avactis Nanjing Biosciences Ltd. only owns a patent and is not considered an operating entity. The Company does not expect nor does it plan that there will be further revenue generated from PRC operations in the foreseeable future. The impact of ceasing operations will not have a material effect on the Company’s operations.
Transaction 1:
The transaction reflects the embedded conversion
option derivative liability was reclassified to additional paid-in capital upon the related note conversion.Membership Interest Purchase Agreement
Transaction 2:
To amortizeOn November 7, 2022, Avalon Laboratory Services, Inc. (the “Buyer”), a wholly-owned subsidiary of Avalon GloboCare Corp. (the “Company”), entered into a Membership Interest Purchase Agreement (the “MIPA”), by and among SCBC Holdings LLC (the “Seller”), the discount upon conversion.
Zoe Family Trust, and Bryan Cox and Sarah Cox as individuals (each an “Owner” and collectively, the “Owners”), and Laboratory Services MSO, LLC (“Laboratory Services MSO”), pursuant to which, subject to the terms and conditions set forth in the MIPA, the Buyer will acquire from the Seller, sixty percent (60%) of all the issued and outstanding equity interests of the Laboratory Services MSO (the “Purchased Interests”), free and clear of all liens (the “Transaction 3:
”). The transaction reflectsconsideration to be paid for the principal and uPurchased Interests consists of up to thirty-one million dollars ($31,000,000), of which (i) five million dollars ($5,000,000) was paid as a refundable prepayment at signing, (ii) ten million dollars ($10,000,000) will be paid in cash at the closing, (iii) fifteen million dollars ($15,000,000) will be paid pursuant to the issuance of 15,000 shares of the Company’s newly designated Series B Convertible Preferred Stock (the “npaid
interest were convertedSeries B Preferred Stock”), stated value $1,000 (the “Series B Stated Value”), which Series B Preferred Stock will be convertible into shares of the Company’s common stock at a conversion price per share equal to $0.575 or an aggregate of 26,086,957 shares of the Company’s common stock, which are subject to the Lock Up Period and the restrictions on sale set forth under Item 5.03 Amendments to Articles of Incorporation or Bylaws: Change in Fiscal Year - Series B Preferred Stock - Conversion, and (iv) one million dollars ($1,000,000) will be paid on the first anniversary of the closing date (the “Anniversary Payment”). The Seller is also eligible to receive certain earnout payments upon achievement of certain operating results, which may be comprised of up to ten million dollars ($10,000,000) of which (x) five million dollars ($5,000,000) will be paid in cash and (y) five million dollars ($5,000,000) will be paid pursuant to the issuance of the number of shares of Company common stock valued at five million dollars ($5,000,000), calculated using the closing price of the Company’s common stock on December 31, 2023 (collectively, the “Earnout Payments”).
Headquartered in Costa Mesa California, Laboratory Services MSO provides a broad portfolio of diagnostic tests including drug testing, toxicology, and a broad array of test services, from general bloodwork to anatomic pathology, and urine toxicology. Specific capabilities include STAT blood testing, qualitative drug screening, genetic testing, urinary testing, sexually transmitted disease testing and more. Laboratory Services MSO has developed a premier reputation for customer service and fast turnaround times in the industry. Laboratory Services MSO is the parent company of Laboratory Services, LLC, a Wyoming limited liability company and Laboratory Services DME, LLC, a Delaware limited liability company.
The board of directors of the Company pursuant and the managing member of the Buyer have approved the MIPA and certain ancillary documents related to the Purchased Interests of Laboratory Services MSO, as discussed above. The MIPA contains customary representations and warranties and covenants. The Anniversary Payment and the Earnout Payments will be available to compensate the Buyer for certain losses it may incur as a Conversion
Agreement.result of any breach of the representations, warranties or covenants of the Seller and Laboratory Services MSO and for post-closing working capital adjustments.
In connection with the closing of the Transaction, 4:
The transaction reflects debt owed underSarah Cox will become the Line of Credit and unpaid
interest were settled by issuance of shares of common stockChief Operating Officer of the Company, replacing Meng Li, who will continue to serve as a Chief Operating Officer of Avalon (Shanghai) Healthcare Technology Co., Ltd, a subsidiary of the Company. In addition, Ms. Cox will be appointed as a director of the Company and Ms. Li will resign as a director of the Company. Ms. Cox, age 46, has continuously served as the Chief Executive Officer of Laboratory Services MSO for the past five years. Ms. Cox co-founded Laboratory Services MSO in 2017. Ms. Cox earned her undergraduate degree from the University of Deakin, in Australia where she studied business and received a degree in financial planning. At the closing of the Transaction, Ms. Cox and the Company will enter into an employment agreement providing for an annual salary of three hundred and fifty thousand dollars ($350,000) and other customary compensation.
The closing of the Transaction is subject to customary conditions to closing, including completion of financing for the remainder of the cash purchase price. The transaction is expected to close in 30 days, subject to a 90 day right of extension by the Company.
Private Placement
In conjunction with the Transaction, on November 7, 2022, the Company conducted a private placement offering (the “Private Placement”) of 5,000 shares of its newly designated Series A Convertible Preferred Stock (the “Series A Preferred Stock”), stated value $1,000, and entered into a securities purchase agreement (the “Securities Purchase Agreement”), with an accredited investor named therein (the “Investor”), pursuant to which the Company sold to the Investor 5,000 shares of its Series A Preferred Stock for gross proceeds of $5,000,000. The Series A Preferred Stock is convertible into shares of the Company’s common stock at a Debt Settlement Agreementconversion price per share equal to the greater of (i) one dollar ($1.00), and Release.(ii) ninety percent (90%) of the closing price of the Company’s common stock on the Nasdaq Stock Market (“Nasdaq”) on the day prior to receipt of the conversion notice from the Investor, subject to adjustment for stock splits and similar matters. The Company intends to complete the financing for the Transaction through the sale and issuance of an additional 10,000 shares of the Series A Preferred Stock.
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ITEM 2. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations for the three and sixnine months ended JuneSeptember 30, 2022 and 2021 should be read in conjunction with our condensed consolidated financial statements and related notes to those condensed consolidated financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Special Note Regarding Forward-Looking Statements and Business sections in our Form 10-K as filed with the Securities and Exchange Commission on March 30, 2022. We use words such as “anticipate,” “estimate,” “plan,” “project,”
“continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,”
“will,” “should,” “could,”“anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
Impact of COVID-19 on Our Operations, Financial Condition, Liquidity and Results of Operations
Although the COVID-19 vaccines have generally been introduced to the public, the ultimate impact of the COVID-19 pandemic on our operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, a significant increase in new and variant strains of COVID-19 cases, availability and effectiveness of COVID-19 vaccines and therapeutics, the level of acceptance of the vaccine by the general population and any additional preventative and protective actions that governments, or us, may determine are needed.
The occurrence of COVID-19 pandemic had negative impact on our operations. Some of the universities and laboratories with which we collaborate were temporarily closed. Our general development operations have continued during the COVID-19 pandemic and we have not had significant disruption. However, we are uncertain if the COVID-19 pandemic will impact future operations at our laboratory, or our ability to collaborate with other laboratories and universities. In addition, we are unsure if the COVID-19 pandemic will impact future clinical trials. Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related financial effect cannot be reasonably estimated at this time but is expected to adversely impact the Company’sCompany’s business for the rest of 2022.
We have limited cash available to fund planned operations and although we have other sources of capital described below under “Liquidity“Liquidity and Capital Resources,”” management continues to pursue various financing alternatives to fund our operations so we can continue as a going concern. However, the COVID-19 pandemic has created significant economic uncertainty and volatility in the credit and capital markets. Management plans to secure the necessary financing through the issue of new equity and/or the entering into of strategic partnership arrangements but the ultimate impact of the COVID-19 pandemic on our ability to raise additional capital is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak and new information which may emerge concerning the severity of the COVID-19 pandemic. We may not be able to raise sufficient additional capital and may tailor our operations based on the amount of funding we are able to raise in the future. Nevertheless, there is no assurance that these initiatives will be successful. Further, there is no assurance that capital available to us in any future financing will be on acceptable terms.
Overview
The Company is a clinical-stage, vertically integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative, transformative immune effector cell therapy, exosome technology, as well as cell therapy related companion diagnostics. The Company also provides strategic advisory and outsourcing services to facilitate and enhance its clients’clients’ growth and development, as well as competitiveness in healthcare and CellTech industry markets. Through its subsidiary structure with unique integration of vertical segmentsverticals from innovative R&D&D to automated bioproduction and accelerated clinical development, the Company is establishing a leading role in the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEX™(ACTEX™), and regenerative therapeutics.
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Avalon achieves and fosters seamless integration of unique verticals to bridge and accelerate innovative research, bio-process development, clinical programs and product commercialization. Avalon’sAvalon’s upstream innovative research includes:
| Development of Avalon Clinical-grade Tissue-specific Exosome |
| Novel therapeutic and diagnostic targets development utilizing QTY-code protein design technology with Massachusetts Institute of Technology (MIT) including using the QTY code protein design technology for development of a hemofiltration device to treat Cytokine |
| ● |
Avalon’sAvalon’s midstream bio-processing and bio-production facility is co-developed at the University of Pittsburgh Medical Center (UPMC) with state-of-the-art infrastructure and standardization accredited with cGMP, FACT, aaBB, CLIA and CAP, as well as stringent QC/QA facility for standardized bio-manufacturing of clinical-grade cellular products involved in our clinical programs in immune effector cell therapy and ACTEX-based regenerative therapeutics.
Avalon’sAvalon’s downstream medical team and facility consists of top-rated affiliated hospital network and experts specialized in hematology, oncology, cellular immunotherapy, hematopoietic stem/progenitor cell transplant, as well as regenerative therapeutics. Our major clinical programs include:
| AVA-001: Avalon has initiated its first-in-human clinical trial of CD19 CAR-T candidate, AVA-001 in August 2019 at the Hebei Yanda Lu Daopei Hospital and Beijing Lu Daopei Hospital in China (the |
| AVA-011 and |
| ● |
| ● | AVA-Trap™: Avalon’s AVA-Trap™ therapeutic program plans to enter animal model testing followed by expedited clinical studies with the goal of providing an effective therapeutic option to combat COVID-19 and other life-threatening conditions involving cytokine storms. The Company |
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Going Concern
The Company is a clinical-stage, vertically integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative, transformative immune effector cell therapy, exosome technology, as well as cell therapy related companion diagnostics. The Company also provides strategic advisory and outsourcing services to facilitate and enhance its clients’clients’ growth and development, as well as competitiveness in healthcare and CellTech industry markets. Through its subsidiary structure with unique integration of vertical segmentsverticals from innovative R&D&D to automated bioproduction and accelerated clinical development, the Company is establishing a leading role in the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEX™(ACTEX™), and regenerative therapeutics.
In addition, the Company owns commercial real estate that houses its headquarters in Freehold, New Jersey and provides outsourced and customized international healthcare services to the rapidly changing health care industry primarily focused in the People’sPeople’s Republic of China. These condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business.
As reflected in the accompanying condensed consolidated financial statements, the Company had a working capital deficit of $5,557,470 as of June 30, 2022
and has incurred recurring net losses and generated negative cash flow from operating activities of $4,099,012$9,513,166 and $2,686,722$5,072,932 for the sixnine months ended JuneSeptember 30, 2022, respectively. The Company has a limited operating history and its continued growth is dependent upon the continuation of providing medical related consulting services to its only few clients who are related parties and generating rental revenue from its income-producing real estate property in New Jersey; hence generating revenues, and obtaining additional financing to fund future obligations and pay liabilities arising from normal business operations. In addition, the current cash balance cannot be projected to cover the operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about the Company’sCompany’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’sCompany’s ability to raise additional capital, implement its business plan, and generate significant revenues. There are no assurances that the Company will be successful in its efforts to generate significant revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. The Company plans on raising capital through the sale of equity to implement its business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to the Company on satisfactory terms and conditions, if any.
The occurrence of an uncontrollable event such as the COVID-19 pandemic had negatively impact on the Company’sCompany’s operations. Our general development operations have continued during the COVID-19 pandemic and we have not had significant disruption. However, we are uncertain if the COVID-19 pandemic will impact future operations at our laboratory, or our ability to collaborate with other laboratories and universities. In addition, we are unsure if the COVID-19 pandemic will impact future clinical trials. Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related financial effect cannot be reasonably estimated at this time but is expected to adversely impact the Company’sCompany’s business for the rest of 2022.
The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
Critical Accounting Policies
Critical Accounting
Policies
Use of Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to the useful life of property and equipment and investment in real estate, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances, and valuation of stock-based compensation, and assumptions used to determine fair value of warrants and embedded conversion features of convertible note payable.
We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
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Revenue Recognition
We recognize revenue under Accounting Standards Codification (“ASC”(“ASC”) Topic 606, Revenue from Contracts with Customers (“(“ASC 606”606”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitledentitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
| Step 1: Identify the contract with the customer |
| Step 2: Identify the performance obligations in the contract |
| Step 3: Determine the transaction price |
| Step 4: Allocate the transaction price to the performance obligations in the contract |
| Step 5: Recognize revenue when the company satisfies a performance obligation |
In order to identifyidentify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised goods or service that is distinct. A performance obligation meets ASC 606’s definition606’s definition of a “distinct”“distinct” goods or service (or bundle of goods or services) if both of the following criteria are met:
| The customer can benefit from the goods or service either on its own or together with other resources that are readily available to the customer (i.e., the goods or service is capable of being distinct). |
| The |
If a goods or service is not distinct, the goods or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
The Company’sCompany’s revenues are derived from providing medial related consulting services for its’its’ related parties. Revenues related to its service offerings are recognized at a point in time when service is rendered. Any payments received in advance of the performance of services are recorded as deferred revenue until such time as the services are performed.
We have determined that the ASC 606 does not apply to rental contracts, which are within the scope of other revenue recognition accounting standards.
Rental income from operating leases is recognized on a straight-line basis under the guidance of ASC 842. Lease payments under tenant leases are recognized on a straight-line basis over the term of the related leases. The cumulative difference between lease revenue recognized under the straight-line method and contractual lease payments are included in rent receivable on the condensed consolidated balance sheets.
We do not offer promotional payments, customer coupons, rebates or other cash redemption offers to our customers.
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Income Taxes
We are governed by the income tax laws of China and the United States. Income taxes are accounted for pursuant to ASC 740 “Accounting“Accounting for Income Taxes,”” which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge for taxes is based on the results for the period as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is changed to equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis.
Recent Accounting Standards
For details of applicable new accounting standards, please, refer to Recent Accounting Standards in Note 3 of our condensed consolidated financial statements accompanying this report.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Three and SixNine Months Ended JuneSeptember 30, 2022 and 2021
Revenues
For the three months ended JuneSeptember 30, 2022, we had real property rental revenue of $290,821,$317,390, as compared to $280,232$355,459 for the three months ended JuneSeptember 30, 2021, an increasea decrease of $10,589,$38,069, or 3.8%10.7%. For the sixnine months ended JuneSeptember 30, 2022, we had real property rental revenue of $588,452,$905,842, as compared to $570,006$925,465 for the sixnine months ended JuneSeptember 30, 2021, an increasea decrease of $18,446,$19,623, or 3.2%2.1%. The slight increasedecrease was primarily attributable to the increase of tenantsone tenant moved out in the first half of 2022. We expect that our revenue from real property rent will remain in its current quarterly level with minimal increase in the near future.
For the three and nine months ended September 30, 2022, we did not have any medical related consulting services revenue since there was no demand for our consulting service from our related parties and there was no order for our medical related consulting services from third party in these periods. For the three and nine months ended September 30, 2021, we had medical related consulting services revenue from related party of $131,305. Currently, we are negotiating with our potential customers and expect to enter consulting services agreement in the near future.
Costs and Expenses
Real property operating expenses consist of property management fees, property insurance, real estate taxes, depreciation, repairs and maintenance fees, utilities and other expenses related to our rental properties.
For the three months ended JuneSeptember 30, 2022, our real property operating expenses amounted to $211,703,$247,152, as compared to $205,147$215,622 for the three months ended JuneSeptember 30, 2021, an increase of $6,556,$31,530, or 3.2%14.6%. The increase was mainly due to an increase in building cleaning fees of approximately $5,000, an increase in property management fees of approximately $9,000, an increase in repairs and maintenance fees of approximately $5,000, an increase in utilities of approximately $9,000, and an increase in other miscellaneous items of approximately $4,000.
For the sixnine months ended JuneSeptember 30, 2022, our real property operating expenses amounted to $430,151,$677,303, as compared to $422,041$637,663 for the sixnine months ended JuneSeptember 30, 2021, an increase of $8,110,$39,640, or 1.9%6.2%. The increase was mainly due to an increase in building cleaning fees of approximately $11,000, an increase in property management fees of approximately $12,000, an increase in air conditioner maintenance fee of approximately $6,000, an increase in utilities of approximately $4,000, and an increase in other miscellaneous items of approximately $7,000.
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Costs of medical related consulting services include the cost of labor and related benefits, travel expenses related to medical related consulting services, and other overhead costs.
There were no comparative revenue and related costs of revenue from our medical related consulting services for the three and nine months ended September 30, 2022 since there was no demand for our consulting service from our related parties and there was no order for our medical related consulting services from third party in these periods. For the three and nine months ended September 30, 2021, costs of medical related consulting services amounted to $102,442.
Real Property Operating Income
Our real property operating income for the three months ended JuneSeptember 30, 2022 was $79,118,$70,238, representing an increasea decrease of $4,033,$69,599, or 5.4%49.8%, as compared to $75,085$139,837 for the three months ended JuneSeptember 30, 2021. Our real property operating income for the sixnine months ended JuneSeptember 30, 2022 was $158,301,$228,539, representing an increasea decrease of $10,336,$59,263, or 7.0%20.6%, as compared to $147,965$287,802 for the sixnine months ended JuneSeptember 30, 2021. The increasedecrease was mainly attributable to the increasea decrease in real property rental revenue and an increase in real property operating expenses as described above. We expect our real property operating income will remain in its current quarterly level with minimal increase in the near future.
Gross Profit from Medical Related Consulting Services and Gross Margin
We did not generate any gross profit from medical related consulting services in the three and nine months ended September 30, 2022. Our gross profit from medical related consulting services for the three and nine months ended September 30, 2021 was $28,863, with a gross margin of 22.0%.
Other Operating Expenses
For the three and sixnine months ended JuneSeptember 30, 2022 and 2021, other operating expenses consisted of the following:
June 30, | June 30, | |||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Advertising and marketing expenses | $ | 150,620 | $ | 27,833 | $ | 807,821 | $ | 44,156 | ||||||||
| Professional fees | 628,807 | 1,221,952 | 1,886,562 | 3,960,209 | ||||||||||||
| Compensation and related benefits | 488,373 | 434,602 | 1,514,959 | 1,544,437 | ||||||||||||
| Research and development | 170,406 | 224,072 | 541,566 | 676,053 | ||||||||||||
| Litigation settlement | - | - | 1,350,000 | - | ||||||||||||
| Directors and officers liability insurance premium | 103,787 | 101,499 | 310,955 | 263,781 | ||||||||||||
| Travel and entertainment | 40,662 | 48,646 | 120,224 | 120,865 | ||||||||||||
| Rent and related utilities | 18,938 | 18,487 | 59,150 | 59,775 | ||||||||||||
| Other general and administrative | 57,744 | 56,580 | 196,914 | 218,228 | ||||||||||||
| $ | 1,659,337 | $ | 2,133,671 | $ | 6,788,151 | $ | 6,887,504 | |||||||||
| For the three months ended |
| Professional fees primarily consisted of accounting fees, audit fees, legal service fees, consulting fees, investor relations service charges, valuation service fees and other fees. For the three months ended |
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| For the three months ended |
| For the three months ended |
| For both the three months ended |
| For the three months ended |
| For the three months ended |
| For the three months ended |
| Other general and administrative expenses mainly consisted of NASDAQ listing fee, office supplies, and other miscellaneous items. For the three months ended |
Loss from Operations
As a result of the foregoing, for the three months ended JuneSeptember 30, 2022, loss from operations amounted to $2,843,571,$1,589,099, as compared to $2,302,280$1,964,971 for the three months ended JuneSeptember 30, 2021, an increasea decrease of $541,291$375,872 or 23.5%19.1%.
As a result of the foregoing, for the sixnine months ended JuneSeptember 30, 2022, loss from operations amounted to $4,970,513,$6,559,612, as compared to $4,605,868$6,570,839 for the sixnine months ended JuneSeptember 30, 2021, an increasea decrease of $364,645$11,227 or 7.9%0.2%.
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Other (Expense) Income
Other (expense) income mainly includes third party and related party interest expense, conversion inducement expense, loss from equity method investment, change in fair value of derivative liability, and other miscellaneous income (expense).income.
Other income,expense, net, totaled $815,097$3,825,055 for the three months ended JuneSeptember 30, 2022, as compared to other expense, net, of $62,630$59,248 for the three months ended JuneSeptember 30, 2021, a changean increase of $877,727,$3,765,807, or 1,401.4%6,356.0%, which was primarily attributable to an increase in third party interest expense of approximately $3,295,000 mainly driven by the amortization of convertible debt discount upon conversion of approximately $3,226,000 and the increased interest expense of approximately $69,000 from third party debts in the third quarter of 2022, an increase in conversion inducement expense of approximately $344,000 resulted from the reduction in the conversion price, an increase in loss from change in fair value of derivative liability of approximately $169,000, and a decrease in other miscellaneous income of approximately $153,000$5,000, offset by a decrease in interest expense – related party of approximately $42,000 due to the decrease in outstanding borrowing in the third quarter of 2022, and a decrease in loss from equity method investment of approximately $5,000.
Other expense, net, totaled $2,953,554 for the nine months ended September 30, 2022, as compared to $185,408 for the nine months ended September 30, 2021, an increase of $2,768,146, or 1,493.0%, which was primarily attributable to an increase in third party interest expense of approximately $3,357,000 mainly driven by reagent salethe amortization of convertible debt discount of approximately $3,281,000 and the increased interest expense of approximately $76,000 from third party debts in the second quarternine months ended September 30, 2022, and an increase in conversion inducement expense of 2022,approximately $344,000 resulted from the reduction in the conversion price, offset by an increase in gain from change in fair value of derivative liability of approximately $769,000,$601,000, an increase in other miscellaneous income of approximately $256,000, mainly driven by reagent sale in the nine months ended September 30, 2022, a decrease in interest expense – related party of approximately $62,000 due to the decrease in outstanding borrowing in the nine months ended September 30, 2022, and a decrease in loss from equity method investment of approximately $4,000, offset by an increase in interest
expense of approximately $48,000 due to the increase in outstanding borrowings.$14,000.
Other income, net, totaled
$871,501 for the six months ended June 30, 2022, as compared to other expense, net, of $126,160 for the six months ended June 30, 2021,
a change of $997,661, or 790.8%, which was primarily attributable to an increase in other miscellaneous income of approximately $261,000
mainly driven by reagent sale in the first half of 2022, an increase in gain from change in fair value of derivative liability of approximately
$769,000, and a decrease in loss from equity method investment of approximately $9,000, offset by an increase in interest expense of
approximately $42,000 due to the increase in outstanding borrowings.
Income Taxes
We did not have any income taxes expense for the three months ended June 30, 2022 and 2021 since we incurred losses in these periods. We did not have any income taxes expense for
the six months ended JuneSeptember 30, 2022 and 2021 since we incurred losses in these periods.
We did not have any income taxes expense for the nine months ended September 30, 2022 and 2021 since we incurred losses in these periods.
Net Loss
As a result of the factors described above, our net loss was $2,028,474$5,414,154 for the three months ended JuneSeptember 30, 2022, as compared to $2,364,910$2,024,219 for the three months ended JuneSeptember 30, 2021, a decreasean increase of $336,436$3,389,935 or 14.2%167.5%.
As a result of the factors described above, our net loss was $4,099,012$9,513,166 for the sixnine months ended JuneSeptember 30, 2022, as compared to $4,732,028$6,756,247 for the sixnine months ended JuneSeptember 30, 2021, a decreasean increase of $633,016$2,756,919 or 13.4%40.8%.
Net Loss Attributable to Avalon GloboCare Corp. Common Shareholders
The net loss attributable to Avalon GloboCare Corp. common shareholders was $2,028,474$5,414,154 or $0.06 per share (basic and diluted) for the three months ended September 30, 2022, as compared with $2,024,219, or $0.02 per share (basic and diluted) for the three months ended June 30, 2022, as compared with $2,364,910, or $0.03 per share (basic and diluted) for the three months ended JuneSeptember 30, 2021, a changean increase of $336,436$3,389,935 or 14.2%167.5%.
The net loss attributable to Avalon GloboCare Corp. common shareholders was $4,099,012$9,513,166 or $0.05$0.10 per share (basic and diluted) for the sixnine months ended JuneSeptember 30, 2022, as compared with $4,732,028,$6,756,247, or $0.06$0.08 per share (basic and diluted) for the sixnine months ended JuneSeptember 30, 2021, a changean increase of $633,016$2,756,919 or 13.4%40.8%.
Foreign Currency Translation Adjustment
Our reporting currency is the U.S. dollar. The functional currency of our parent company, AHS, Avalon RT 9, Genexosome, Avactis, and Exosome, is the U.S. dollar and the functional currency of Avalon Shanghai and Beijing Genexosome is the Chinese Renminbi (“RMB”(“RMB”). The financial statementsstatement of our subsidiariessubsidiary whose functional currency is the RMB are translated to U.S. dollars using period end ratesrate of exchange for assets and liabilities, average rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange ratesrate for equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $43,503$37,033 and a foreign currency translation gain of $14,786$1,285 for the three months ended JuneSeptember 30, 2022 and 2021, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $41,482$78,515 and a foreign currency translation gain of $12,064$13,349 for the sixnine months ended JuneSeptember 30, 2022 and 2021, respectively. This non-cash loss/gain had the effect of increasing/decreasing our reported comprehensive loss.
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Comprehensive Loss
As a result of our foreign currency translation adjustment, we had comprehensive loss of $2,071,977$5,451,187 and $2,350,124$2,022,934 for the three months ended JuneSeptember 30, 2022 and 2021, respectively.
As a result of our foreign currency translation adjustment, we had comprehensive loss of $4,140,494$9,591,681 and $4,719,964$6,742,898 for the sixnine months ended JuneSeptember 30, 2022 and 2021, respectively.
Liquidity and Capital Resources
The Company has a limited operating history and its continued growth is dependent upon the continuation of providing medical related consulting services to its only few clients who are related parties and generating rental revenue from its income-producing real estate property in New Jersey; hence generating revenues, and obtaining additional financing to fund future obligations and pay liabilities arising from normal business operations. In addition, the current cash balance cannot be projected to cover the operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about the Company’sCompany’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’sCompany’s ability to raise additional capital, implement its business plan, and generate significant revenues. There are no assurances that the Company will be successful in its efforts to generate significant revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. The Company plans on raising capital through the sale of equity to implement its business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to the Company on satisfactory terms and conditions, if any.
The occurrence of an uncontrollable event such as the COVID-19 pandemic is likely to negatively affect the Company’sCompany’s operations. Efforts to contain the spread of the coronavirus have intensified, including social distancing, travel bans and quarantine, and these are likely to negatively impact our tenants, employees and consultants. These, in turn, will not only impact our operations, financial condition and demand for our medical related consulting services but our overall ability to react timely to mitigate the impact of this event. Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related financial effect cannot be reasonably estimated at this time but is expected to adversely impact our business for the rest of 2022.
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At JuneSeptember 30, 2022 and December 31, 2021, we had cash balance of approximately $1,180,000$3,938,000 and $808,000, respectively. These funds are kept in financial institutions located as follows:
| Country: | September 30, 2022 | December 31, 2021 | ||||||||||||||
| United States | $ | 3,578,273 | 90.9 | % | $ | 767,605 | 95.1 | % | ||||||||
| China | 359,686 | 9.1 | % | 39,933 | 4.9 | % | ||||||||||
| Total cash | $ | 3,937,959 | 100.0 | % | $ | 807,538 | 100.0 | % | ||||||||
Under applicable PRC regulations, foreign invested enterprises, or FIEs, in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign invested enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the cumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends.
In addition, a portion of our businesses and assets are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’sPeople’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’sPeople’s Bank of China. Approval of foreign currency payments by the People’sPeople’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’suppliers’ invoices, shipping documents and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the ability of our PRC subsidiary to transfer its net assets to the Parent Company through loans, advances or cash dividends.
The current PRC Enterprise Income Tax (“EIT”(“EIT”) Law and its implementing rules generally provide that a 10% withholding tax applies to China-sourced income derived by non-resident enterprises for PRC enterprise income tax purposes unless the jurisdiction of incorporation of such enterprises’enterprises’ shareholder has a tax treaty with China that provides for a different withholding arrangement.
The following table sets forth a summary of changes in our working capital from December 31, 2021 to JuneSeptember 30, 2022:
| September 30, | December 31, | Changes in | ||||||||||||||
| 2022 | 2021 | Amount | Percentage | |||||||||||||
| Working capital (deficit): | ||||||||||||||||
| Total current assets | $ | 4,449,401 | $ | 1,323,042 | $ | 3,126,359 | 236.3 | % | ||||||||
| Total current liabilities | 3,327,985 | 4,401,658 | (1,073,673 | ) | (24.4 | )% | ||||||||||
| Working capital (deficit) | $ | 1,121,416 | $ | (3,078,616 | ) | $ | 4,200,032 | (136.4 | )% | |||||||
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Our working capital deficit increased by $2,478,854$4,200,032 to $5,557,470$1,121,416 at JuneSeptember 30, 2022 from working capital deficit of $3,078,616 at December 31, 2021. The increase in working capital deficit was primarily attributable to an increase in accounts payable of approximately $376,000, an increase in accrued
settlement of lawsuit of $900,000 due to a settlement signed in June 2022, an increase in convertible note payable, net,
of approximately $493,000 resulting from the issuance of 2022 Convertible Note, and an increase in derivative liability of
approximately $2,013,000 which was related to our 2022 Convertible Note, offset by ansignificant increase in cash of approximately $373,000,$3,130,000 mainly due to the issuance of convertible debt and balloon promissory note, a decrease in accrued professional fees of approximately $396,000,$647,000 which was mainly due to payments made to our professional service providers in the first half ofnine months ended September 30, 2022, a decrease in accrued research and development fees of approximately $319,000$220,000 resulting from payments made to research and development service providerproviders in the sixnine months ended JuneSeptember 30, 2022, ,a decrease in accrued liabilities and other payables – related parties of approximately $368,000 which was mainly attributable to the accrued and unpaid related party interest was settled in shares in the nine months ended September 30, 2022, a decrease in operating lease obligation of approximately $107,000, a decrease in note payable –– related party of $390,000 due to repayment made to this related party in the first halfnine months ended September 30, 2022, offset by an increase in accrued settlement of lawsuit of $450,000 due to a settlement signed in June 2022.
Because the exchange rate conversion is different for the condensed consolidated balance sheets and the condensed consolidated statements of cash flows, the changes in assets and liabilities reflected on the condensed consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the condensed consolidated balance sheets.
Cash Flows for the SixNine Months Ended JuneSeptember 30, 2022 Compared to the SixNine Months Ended JuneSeptember 30, 2021
The following summarizes the key components of our cash flows for the sixnine months ended JuneSeptember 30, 2022 and 2021:
June 30, | ||||||||
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (5,072,932 | ) | $ | (3,307,520 | ) | ||
| Net cash used in investing activities | (54,743 | ) | (67,960 | ) | ||||
| Net cash provided by financing activities | 8,263,989 | 3,178,336 | ||||||
| Effect of exchange rate on cash | (5,893 | ) | 2,818 | |||||
| Net increase (decrease) in cash | $ | 3,130,421 | $ | (194,326 | ) | |||
Net cash flow used in operating activities for the sixnine months ended JuneSeptember 30, 2022 was $2,686,722,$5,072,932, which primarily reflected our consolidated net loss of approximately $4,099,000,$9,513,000, and the non-cash item adjustment consisting of change in fair market value of derivative liability of approximately $769,000,$601,000, and the changes in operating assets and liabilities, primarily consisting of an increase in other assets of approximately $66,000, a decrease in operating lease obligation of approximately $108,000, offset by an increase in accounts payable of approximately $87,000, an increase in accrued liabilities and other payables of approximately $63,000, an increase in accrued liabilities and other payables – related parties of approximately $80,000, and the non-cash items adjustment primarily consisting of depreciation of approximately $251,000, amortization of right-of-use asset of approximately $102,000, stock-based compensation and service expense of approximately $983,000, amortization of debt discount of approximately $3,281,000 mainly resulting from the conversion of convertible debt in July 2022, and conversion inducement expense of approximately $344,000 resulted from the reduction in the conversion price.
Net cash flow used in operating activities for the nine months ended September 30, 2021 was $3,307,520, which primarily reflected our consolidated net loss of approximately $6,756,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in operating lease obligation of approximately $80,000,$87,000, offset by an increase in accounts payable of approximately $389,000, an increase in accrued liabilities and other payables of approximately $675,000,$1,436,000, which was mainly attributable the increase in accrued settlement of
lawsuit of $1,350,000 resulting from a settlement signed in June 2022 offset by the decrease in accrued professional fees of approximately $396,000$994,000 due to payments made to ourincreased professional service providers, in the first half of 2022 and the decreaseincrease in accrued research and development fees of approximately $319,000 resulting from payments made to research$227,000, and development service
providerthe increase in the six months ended June 30, 2022,accrued payroll liability and directors’ compensation of approximately $147,000, and an increase in accrued liabilities and other payables –– related parties of approximately $72,000,$142,000 resulting from the increase in accrued interest for related party borrowings, and the non-cash items adjustment primarily consisting of depreciation of approximately $169,000,$227,000, amortization of right-of-use asset of approximately $68,000, stock-based compensation and service expense of approximately $821,000,
and amortization of debt discount of approximately $55,000.
Net
cash flow used in operating activities for the six months ended June 30, 2021 was $2,593,548, which primarily reflected our consolidated
net loss of approximately $4,732,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in operating
lease obligation of approximately $60,000, offset by an increase accrued liabilities and other payables of approximately $714,000, and
an increase in accrued liabilities and other payables – related parties of approximately $91,000, and the non-cash items adjustment
primarily consisting of depreciation of approximately $141,000, amortization of right-of-use asset of approximately $60,000,$93,000, and stock-based compensation and service expense of approximately $1,087,000.$1,621,000.
We expect our cash used in operating activities to increase due to the following:
| the development and commercialization of new products; |
| an increase in professional staff and services; and |
| an increase in public relations and/or sales promotions for existing and/or new brands as we expand within existing markets or enter new markets. |
Net cash flow used in investing activities was $55,757$54,743 for the sixnine months ended JuneSeptember 30, 2022 as compared to $50,511$67,960 for the sixnine months ended JuneSeptember 30, 2021. During the sixnine months ended JuneSeptember 30, 2022, we made payments for purchase of property and equipment of approximately $2,000 and made additional investment in equity method investment of approximately $54,000. $53,000. During the sixnine months ended JuneSeptember 30, 2021, we made paymentpayments for purchase of property and equipment of approximately $17,000 and for improvement of commercial real estate of approximately $10,000, and made additional investment in equity method investment of approximately $40,000.
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Net cash flow provided by financing activities was $3,130,443$8,263,989 for the sixnine months ended JuneSeptember 30, 2022 as compared to $2,600,151$3,178,336 for the sixnine months ended JuneSeptember 30, 2021. During the sixnine months ended JuneSeptember 30, 2022, we received proceeds from related party borrowings of $100,000, and proceeds from issuance of convertible debt and warrants of approximately $100,000$3,719,000, and net proceeds from issuance of balloon promissory note of $4,534,000 (net of cash paid for debt issuance costs of approximately $266,000), and net proceeds from equity offering of approximately $112,000$712,000 (net of cash paid for commission and other offering costs of approximately $24,000) and proceeds from issuance of convertible debt and warrants of approximately $3,719,000 to fund our working capital needs, offset by repayments made for note payable –– related party of $390,000 and repayments made for loan payable –– related party of $410,000. During the sixnine months ended JuneSeptember 30, 2021, we received proceeds from related party borrowings of approximately $193,000$763,000 and net proceeds from equity offering of approximately $2,407,000$2,415,000 (net of cash paid for commission and other offering costs of approximately $74,000)$104,000).
Our capital requirements for the next twelve months primarily relate to working capital requirements, including salaries, fees related to third parties’parties’ professional services, reduction of accrued liabilities, mergers, acquisitions and the development of business opportunities. These uses of cash will depend on numerous factors including our sales and other revenues, and our ability to control costs. All funds received have been expended in the furtherance of growing the business. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
| an increase in working capital requirements to finance our current business, including ongoing research and development programs, clinical studies, as well as commercial strategies; |
| the use of capital for mergers, acquisitions and the development of business opportunities; |
| addition of administrative personnel as the business grows; and |
| the cost of being a public company. |
In the third quarter of 2019, we had secured a $20 million credit facility (Line of Credit) provided by our Chairman, Wenzhao Lu. The unsecured credit facility bears interest at a rate of 5% and provides for maturity on drawn loans 36 months after funding. As of JuneSeptember 30, 2022, the total principal amount outstanding under the Credit Line was $2.4 million$0 and we have approximately $14.1 million remaining available under the Line Credit.
On December 13, 2019, we entered into an Open Market Sale AgreementSM (the “Sales Agreement”“Sales Agreement”) with Jefferies LLC, as sales agent (“Jefferies”(“Jefferies”), pursuant to which we may offer and sell, from time to time, through Jefferies, shares of our common stock, par value $0.0001 per share, having an aggregate offering price of up to $20.0 million. On April 6, 2020, the date on which we filed our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, our registration statement became subject to the offering limits set forth in General Instruction I.B.6 of Form S-3. As of April 6, 2020, the aggregate market value of our outstanding common stock held by non-affiliates, or public float, was $39,564,237, based on 23,691,160 shares of our outstanding common stock that were held by non-affiliates on such date and a price of $1.67 per share, which was the price at which our common stock was last sold on The Nasdaq Capital Market on February 19, 2020 (a date within 60 days of the date hereof), calculated in accordance with General Instruction I.B.6 of Form S-3. We have not offered any securities pursuant to General Instruction I.B.6 of Form S-3 in the 12 calendar months preceding the date of this prospectus supplement. We filed a prospectus supplement to amend and supplement the information in our prospectus and original prospectus supplement based on the amount of securities that we are eligible to sell under General Instruction I.B.6 of Form S-3. After giving effect to the $13,000,000 offering limit imposed by General Instruction I.B.6 of Form S-3, we may offer and sell additional shares of our common stock having an aggregate offering price of up to $13,000,000 from time to time through Jefferies acting as our sales agent in accordance with the terms of the sales agreement. As of JuneSeptember 30, 2022, we sold a total of 6,429,486 shares of our common stock through Jefferies with an aggregate offering price of $10,073,707 and we have approximately $4.9 million offering price remaining available under the Sales Agreement.
We estimate that based on current plans and assumptions, that our available cash will be insufficient to satisfy our cash requirements under our present operating expectations through cash available under our Credit Line and sales of equity through our Sales Agreement. Other than funds received from the sale of our equity and advances from our related party, and cash resource generating from our operations, we presently have no other significant alternative source of working capital. We have used these funds to fund our operating expenses, pay our obligations and grow our company. We will need to raise significant additional capital to fund our operations and to provide working capital for our ongoing operations and obligations. Therefore, our future operation is dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will be required to cease our operations. To date, we have not considered this alternative, nor do we view it as a likely occurrence.
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Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of JuneSeptember 30, 2022, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
| Payments Due by Period | ||||||||||||||||||||
| Contractual obligations: | Total | Less than 1 year | 1-3 years | 3-5 years | 5+ years | |||||||||||||||
| Operating lease commitment | $ | 47,560 | $ | 47,560 | $ | - | $ | - | $ | - | ||||||||||
| Acquisition consideration | 100,000 | 100,000 | - | - | - | |||||||||||||||
| Litigation settlement | 900,000 | 450,000 | 450,000 | - | - | |||||||||||||||
| Balloon promissory note (principal) | 4,800,000 | - | - | 4,800,000 | - | |||||||||||||||
| Epicon equity investment obligation | 687,184 | 229,061 | 458,123 | - | - | |||||||||||||||
| Avactis joint venture commitment | 10,702,642 | - | 5,702,642 | 5,000,000 | - | |||||||||||||||
| Total | $ | 17,237,386 | $ | 826,621 | $ | 6,610,765 | $ | 9,800,000 | $ | - | ||||||||||
Off-balance Sheet Arrangements
We presently do not have off-balance sheet arrangements.
Foreign Currency Exchange Rate Risk
A portion of our operations are in China. Thus, a portion of our revenues and operating results may be impacted by exchange rate fluctuations between RMB and US dollars. For the three months ended JuneSeptember 30, 2022 and 2021, we had an unrealized foreign currency translation loss of approximately $44,000$37,000 and an unrealized foreign currency translation gain of approximately $15,000,$1,000, respectively, because of changes in the exchange rate. For the sixnine months ended JuneSeptember 30, 2022 and 2021, we had an unrealized foreign currency translation loss of approximately $42,000$79,000 and an unrealized foreign currency translation gain of approximately $12,000,$13,000, respectively, because of changes in the exchange rate.
Inflation
The effect of inflation on our revenue and operating results was not significant.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (“(“Exchange Act”Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
In connection with the preparation of the quarterly report on Form 10-Q for the quarter ended JuneSeptember 30, 2022, our management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, which are defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’sissuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based on this evaluation, management concluded that our internal control over financial reporting were not effective as of JuneSeptember 30, 2022 due to the significant deficiencies which aggregate to a material weakness and was previously reported in our Form 10-K Annual Report for the year ended December 31, 2021 (“(“2021 10-K”10-K”), that have not yet been remediated.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to, and our property is not subject to, any material legal proceedings, except as set forth below.
On October 25, 2017, Genexosome entered into and closed a Stock Purchase Agreement with Beijing Genexosome and Yu Zhou, MD, PhD, the sole shareholder of Beijing Genexosome, pursuant to which Genexosome acquired all of the issued and outstanding securities of Beijing Genexosome in consideration of a cash payment in the amount of $450,000, of which $100,000 is still owed. Further, on October 25, 2017, Genexosome entered into and closed an Asset Purchase Agreement with Dr. Zhou, pursuant to which the Company acquired all assets, including all intellectual property and exosome separation systems, held by Dr. Zhou pertaining to the business of researching, developing and commercializing exosome technologies. In consideration of the assets, Genexosome paid Dr. Zhou $876,087 in cash, transferred 500,000 shares of common stock of the Company to Dr. Zhou and issued Dr. Zhou 400 shares of common stock of Genexosome. Further, the Company had not been able to realize the financial projections provided by Dr. Zhou at the time of the acquisition and has decided to impair the intangible asset associated with this acquisition to zero. Dr. Zhou was terminated as Co-CEO of Genexosome on August 14, 2019. Further, on October 28, 2019, Research Institute at Nationwide Children’sChildren’s Hospital (“(“Research Institute”Institute”) filed a Complaint in the United States District Court for the Southern District of Ohio Eastern Division against Dr. Zhou, Li Chen, the Company and Genexosome with various claims against the Company and Genexosome. The criminal proceedings against Dr. Zhou and Li Chen have been concluded. The Company, Genexosome and the Research Institute entered into a Settlement Agreement dated June 7, 2022 (the “Settlement Date”“Settlement Date”) whereby the Company agreed to pay the Research Institute $450,000 on each of the sixty-day, one year and two-year anniversaries of the Settlement Date. In addition, the Company agreed to pay the Research Institute 30% of the Company’sCompany’s initial pre-tax profit of $3,333,333, 20% of the Company’sCompany’s second pre-tax profit of $3,333,333 and 10% of the Company’sCompany’s third pre-tax profit of $3,333,333. The parties provided a mutual release as well.
ITEM 1A. RISK FACTORS
There were no material changes from the risk factors set forth under Part I, Item 1A., “Risk Factors”“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. You should carefully consider these factors in addition to the other information set forth in this report which could materially affect our business, financial condition or future results. The risks and uncertainties described in this report and in our Annual Report on Form 10-K for the year ended December 31, 2021, as well as other reports and statements that we file with the SEC, are not the only risks and uncertainties facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also have a material adverse effect on our financial position, results of operations or cash flows.
Our general development operations have continued during the COVID-19 pandemic and we have not had significant disruption. Currently we are unable to accurately predict the future impact of COVID-19 due to the developing circumstances and uncertainty surrounding this current pandemic, including the ultimate geographic spread of COVID-19, the severity of the disease, the duration of the outbreak, and effectiveness of the actions that may be taken by governmental authorities. Our management has been closely monitoring the impact caused by COVID-19 and we will continue to operate our business as steadily and safely as we can.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Common Shares Issued for Services
During the sixnine months ended JuneSeptember 30, 2022, the Company issued a total of 408,957 shares of its common stock for services rendered and to be rendered. These shares were valued at $340,950, the fair market values on the grant dates using the reported closing share prices on the dates of grant, and the Company recorded stock-based compensation expense of $254,923$291,270 for the sixnine months ended JuneSeptember 30, 2022 and reduced accrued liabilities of $30,000 and recorded prepaid expense of $56,027$19,680 as of JuneSeptember 30, 2022 which will be amortized over the rest of corresponding service periods.
Subsequent Event IssuancesCommon Shares Sold for Cash
On August 5, 2022, the Company sold 448,718 shares of common stock at a purchase price of $0.78 per share to Wenzhao Lu pursuant to a subscription agreement. The Company received proceeds of $350,000.
On August 5, 2022, the Company sold 320,513 shares of common stock at a purchase price of $0.78 per share to an investor pursuant to a subscription agreement. The Company received proceeds of $250,000.
Common Shares Issued for Debt Conversion
On July 25, 2022, the Company and Wenzhao “Daniel” Lu entered into and closed a Debt Settlement Agreement and Release pursuant to which Mr. Lu converted
approximately $2.4 million principal and approximately $0.4 million unpaid interest owed under the Line of Credit into 4,443,990 shares
of common stock of the Company at a per share price of $0.65. As a result of the conversion, the total principal amount outstanding under
the Credit Line amounted to $0.
On July 25, 2022 the
Company and Fsunshine Trading PTE. Ltd. (“Fsunshine”)Convertible Note holder entered into a Conversion Agreement pursuant to which Fsunshinethe investor converted its Convertible Notes in the principal amount of approximately $3.7 million, including$3,718,943 and unpaid interest of $9,751 into 5,736,452 shares of common stock of the Company at a per share price of $0.65. The Company recorded a conversion inducement charge of $344,264 as a result of the Conversion Agreement, representing the value of common stock issued upon conversion in excess of the common stock issuable under the original terms of the 2022 Convertible Note.
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Common Shares Issued Pursuant to Related Party Debt Settlement Agreement and Release
On July 25, 2022, the Company and Mr. Lu entered into and closed a Debt Settlement Agreement and Release pursuant to which the Company settled $2,440,262 debt owed under the Line of Credit and unpaid interest of $448,331 by issuance of 4,443,990 shares of common stock of the Company. The total amount of the debt settled of $2,888,593 exceeded the fair market value of the shares issued by $888,353 which was treated as a capital transaction due to Mr. Lu's relationship with the Company.
The offers, sales, and issuances of the securities described above were deemed to be exempt from registration under the Securities Act of 1933 in reliance on Section 4(a)(2) of the Securities Act of 1933 or Regulation D promulgated thereunder as transactions by an issuer not involving a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited or sophisticated person and had adequate access, through employment, business or other relationships, to information about us.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
Equity Offering
On December 13, 2019, the Company entered into an Open Market Sale AgreementSM (the “Sales Agreement”“Sales Agreement”) with Jefferies LLC, as sales agent (“Jefferies”(“Jefferies”), pursuant to which the Company may offer and sell, from time to time, through Jefferies, shares of its common stock, par value $0.0001 per share, having an aggregate offering price of up to $20.0 million. On April 6, 2020, the date on which the Company filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2019, the Company’sCompany’s registration statement became subject to the offering limits set forth in General Instruction I.B.6 of Form S-3. From December 13, 2019 through August 4,November 11, 2022, Jefferies sold an aggregate of 6,429,486 shares of common stock at an average price of $1.57 per share to investors. The Company received net cash proceeds of $9,771,496, net of commission paid to sales agent of $302,211.
Nasdaq Notice
On February 9, 2022, the Company received noticea letter from the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market (“Nasdaq”LLC (“Nasdaq”) therein indicating that, based upon the closing bid price of the Company’s common stock (the “Common Stock”) for the Company’s common
stock had been below $1.00 per share for the previousprior 30 consecutive business days, and that the Company is thereforewas not in compliance with the requirement to maintain a minimum bid price requirementof $1.00 per share for continued inclusionlisting on Thethe Nasdaq Capital Market, underas set forth in Nasdaq Listing Rule 5550(a)(2) (the “Rule”“Minimum Bid Price Requirement”). Nasdaq’s notice has no immediate effect on the listing or trading of the Company’s common stock on ThePursuant to Nasdaq Capital Market. The notice indicates thatListing Rule 5810(c)(3)(A), the Company will havewas granted 180 calendar days, or until August 8, 2022, to regain compliance with
this requirement. Thecompliance.
On August 9, 2022, the Company canreceived a second letter from the Staff advising that the Company had been granted an additional 180 calendar days, or to February 6, 2023, to regain compliance with the $1.00 minimum bid listing requirement ifMinimum Bid Price Requirement, in accordance with Nasdaq Listing Rule 5810(c)(3)(A).
The Company will continue to monitor the closing bid price of its common
stock is at least $1.00 per share for a minimum of ten (10) consecutive business days duringCommon Stock and seek to regain compliance with the 180-dayMinimum Bid Price Requirement within the allotted compliance period. If the Company does not regain compliance duringwithin the initial compliance period, it may be eligible for additional time to regain compliance. To qualify,
the Company will be required to meet the continued listing requirement for market value of its publicly held shares and all other Nasdaq
initial listing standards, except the bid price requirement, and will need to provide written notice to Nasdaq of its intention to cure
the deficiency during the second compliance period by effecting a reverse stock split, if necessary. If the Company is not eligible or
it appears to Nasdaq that the Company will not be able to cure the deficiency during the secondallotted compliance period, Nasdaq will provide written notice to the Company that the Company’s common stockCompany’s Common Stock will be subject to delisting. In the event of such notification, theThe Company maywould then be entitled to appeal Nasdaq’sthat determination to delist its securities, but there can be no assurance thata Nasdaq would grant the Company’s
request for continued listing. The Company intends to actively monitor the minimum bid price of its common stock and may, as appropriate,
consider available options to regain compliance with the Rule.hearings panel. There can be no assurance that the Company will be able to regain compliance with the Rule or will otherwise be in compliance with other Nasdaq listing criteria.Minimum Bid Price Requirement during the 180-day extension.
A delisting of our common stock is likely to reduce the liquidity of our common stock and may inhibit or preclude our ability to raise additional financing.
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ITEM 6. EXHIBITS
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
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| 45 |
| 46 |
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| * | Filed herewith |
| Management contract or compensatory plan or |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| AVALON GLOBOCARE CORP. | ||
| (Registrant) | ||
| Date: | By: | /s/ David K. Jin |
| David K. Jin | ||
| Chief Executive Officer, President and | ||
| Date: | By: | /s/ Luisa Ingargiola |
| Luisa Ingargiola | ||
| Chief Financial Officer (Principal Financial | ||
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