UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022March 31, 2023
☐ OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________Commission File Number: 000-38728
COMMISSION FILE NUMBER: 001-38728
AVALON GLOBOCARE CORP.
(Exact name of Registrantregistrant as specified in its charter)
Delaware | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
4400 Route 9 South, Suite 3100 Freehold, New Jersey | 07728 | |
(Address of principal executive offices) | (Zip Code) |
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)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.0001 per share | ALBT | The Nasdaq Capital Market |
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,”company” and “emerging“emerging growth company”company” in Rule 12b-2 of the Exchange Act. (Check one):
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 ☒☒
As of May 19, 2023, 10,164,307 shares of common stock, $0.0001 par value per share, were outstanding.
Securities registered pursuant to Section 12(b)
of the Act:
State the number of shares outstanding of each
of the issuer’s classes of common equity, as of the latest practicable date.
AVALON GLOBOCARE CORP.
FORM 10-Q
June 30, 2022For the Quarterly Period Ended March 31, 2023
TABLE OF CONTENTSTable 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”
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” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of 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’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”, “Avalon” or the “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.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Ended June 30, | Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Three Months Ended March 31, 2023
(Unaudited)
Avalon GloboCare Corp. Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock | Series B Preferred Stock | Common Stock | Additional | Treasury Stock | Accumulated Other | Non- | ||||||||||||||||||||||||||||||||||||||||||||||||||
Number of | Number of | Number of | Paid-in | Number of | Accumulated | Statutory | Comprehensive | controlling | Total | |||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Reserve | Loss | Interest | Equity | |||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2023 | 9,000 | $ | 9,000,000 | - | $ | - | 10,013,576 | $ | 1,005 | $ | 65,949,723 | (52,000 | ) | $ | (522,500 | ) | $ | (63,062,721 | ) | $ | 6,578 | $ | (213,137 | ) | $ | - | $ | 11,158,948 | ||||||||||||||||||||||||||||
Issuance of Series B Convertible Preferred Stock for equity method investment | - | - | 11,000 | 11,000,000 | - | - | - | - | - | - | - | - | - | 11,000,000 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for services | - | - | - | - | 202,731 | 21 | 463,355 | - | - | - | - | - | - | 463,376 | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | 68,262 | - | - | - | - | - | - | 68,262 | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | - | - | 3,670 | - | 3,670 | ||||||||||||||||||||||||||||||||||||||||||
Net loss for the three months ended March 31, 2023 | - | - | - | - | - | - | - | - | - | (2,783,914 | ) | - | - | - | (2,783,914 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2023 | 9,000 | $ | 9,000,000 | 11,000 | $ | 11,000,000 | 10,216,307 | $ | 1,026 | $ | 66,481,340 | (52,000 | ) | $ | (522,500 | ) | $ | (65,846,635 | ) | $ | 6,578 | $ | (209,467 | ) | $ | - | $ | 19,910,342 |
See accompanying notes to the condensed consolidated financial statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Three Months Ended March 31, 2022
(Unaudited)
Avalon GloboCare Corp. Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Additional | Treasury Stock | Accumulated Other | Non- | |||||||||||||||||||||||||||||||||||||||||||
Number of | Number of | Paid-in | Number of | Accumulated | Statutory | Comprehensive | controlling | Total | ||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | 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 |
See accompanying notes to the condensed consolidated financial statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
EQUITYCASH FLOWS
For the Three and Six Months Ended June 30, 2022
(Unaudited)
For the Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (2,783,914 | ) | $ | (2,070,538 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 61,056 | 84,984 | ||||||
Change in straight-line rent receivable | 13,196 | 4,463 | ||||||
Amortization of operating lease right-of-use asset | 34,888 | 34,247 | ||||||
Stock-based compensation and service expense | 327,190 | 605,626 | ||||||
(Income) loss from equity method investments | (37,285 | ) | 12,916 | |||||
Amortization of debt issuance costs | 22,205 | - | ||||||
Changes in operating assets and liabilities: | ||||||||
Rent receivable | 4,309 | (19,565 | ) | |||||
Security deposit | 409 | (441 | ) | |||||
Deferred leasing costs | 8,350 | 7,856 | ||||||
Prepaid expense and other assets | (87,328 | ) | 30,219 | |||||
Accrued liabilities and other payables | 634,558 | 793,585 | ||||||
Accrued liabilities and other payables - related parties | 2,021 | 39,687 | ||||||
Operating lease obligation | (34,465 | ) | (34,247 | ) | ||||
NET CASH USED IN OPERATING ACTIVITIES | (1,834,810 | ) | (511,208 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of property and equipment | (20,185 | ) | (1,749 | ) | ||||
NET CASH USED IN INVESTING ACTIVITIES | (20,185 | ) | (1,749 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from loan payable - related party | 750,000 | 100,000 | ||||||
Proceeds from equity offering | - | 135,567 | ||||||
Disbursements for equity offering costs | - | (4,067 | ) | |||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 750,000 | 231,500 | ||||||
EFFECT OF EXCHANGE RATE ON CASH | 1,116 | 209 | ||||||
NET DECREASE IN CASH | (1,103,879 | ) | (281,248 | ) | ||||
CASH - beginning of period | 1,990,910 | 807,538 | ||||||
CASH - end of period | $ | 887,031 | $ | 526,290 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for: | ||||||||
Interest | $ | 132,000 | $ | - | ||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Common stock issued for future services | $ | 54,576 | $ | - | ||||
Common stock issued for accrued liabilities | $ | 164,871 | $ | - | ||||
Deferred financing costs in accrued liabilities | $ | - | $ | 20,000 | ||||
Reclassification of advances for equity interest purchase to equity method investment | $ | 9,000,000 | $ | - | ||||
Series B Convertible Preferred Stock issued related to equity method investment | $ | 11,000,000 | $ | - | ||||
Accrued purchase price related to equity method investment | $ | 1,000,000 | $ | - |
See accompanying notes to the condensed consolidated financial statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
EQUITY
For the Three and Six Months Ended June 30, 2021
(Unaudited)
See accompanying notes to the condensed consolidated
financial statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
See accompanying notes to the condensed consolidated financial statements.
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, had limited assets and iswas engaged in medical related consulting services for customers. Due to the winding down of the medical related consulting services in 2022, the Company decided to cease all operations of Avalon Shanghai and no longer has any material revenues or expenses in Avalon Shanghai. As a result, Avalon Shanghai is no longer an operating entity.
The Company is a clinical-stage vertically integrated, leading CellTech bio-developerbiotechnology company dedicated to advancingdeveloping and empoweringdelivering innovative, transformative immune effector cell therapy, exosome technology, as well as companion diagnostics. The Company also provides strategic advisorycellular therapeutics, precision diagnostics, and outsourcing services to facilitate and enhance its clients’ growth and development, as well as competitiveness in healthcare and
CellTech industry markets.clinical laboratory services. Through its subsidiary structure with unique integration of vertical segmentsverticals from innovative R&Dresearch and development 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™), 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 June 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 June 30, 2022,March 31, 2023, the occupancy rate of the building is 87.0%82.7%.
On July 31, 2017, the Company formed Genexosome
Technologies Inc. (“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’s Republic of China on August 7, 2015 (“Beijing 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. Avactis owns 100% of the capital stock of Avactis Nanjing Biosciences Ltd., a company incorporated in the People’s Republic of China on May 8, 2020 (“Avactis Nanjing”), which only owns a patent and is not considered an operating entity.
On June 13, 2019,October 14, 2022, the Company formed a wholly owned subsidiary, International Exosome Association LLC,Avalon Laboratory Services, Inc. (“Avalon Lab”), a Delaware company. There was no activity forOn February 9, 2023, Avalon Lab purchased forty percent (40%) of all the subsidiary sinceissued and outstanding equity interests of Laboratory Services MSO, LLC, a private limited company formed under the laws of the State of Delaware on September 6, 2019 (“Lab Services MSO”) and its incorporationsubsidiaries. Lab Services MSO, through June 30, 2022.its two subsidiaries, Laboratory Services, LLC (“Lab Services LLC”) and Laboratory Services DME, LLC (“Lab Services DME”), is engaged in providing laboratory testing services.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 –– ORGANIZATION AND NATURE OF OPERATIONS (continued)
Details of the Company’s subsidiaries which
are included in theseThe accompanying condensed consolidated financial statements asreflect the activities of June 30, 2022 are as follows:ALBT and each of the following entities:
Name of Subsidiary | Place and date of Incorporation | Percentage of Ownership | Principal Activities | |||
Avalon Healthcare System, Inc.
| Delaware May 18, 2015 | 100% held by | ||||
|
|
| ||||
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 | Ceased operations and is not considered an operating entity | |||
Genexosome Technologies Inc.
| Nevada July 31, 2017 | 60% held by | ||||
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 and is not considered an operating entity | |||
International Exosome Association LLC
| Delaware June 13, 2019 | 100% held by | Promotes standardization related to exosome industry | |||
Avalon Laboratory Services, Inc. (“Avalon Lab”) | Delaware October 14, 2022 | 100% held by ALBT | Purchases a membership interest |
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, 20212022 filed with the Securities and Exchange Commission on March 30, 2022.2023.
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-developerbiotechnology company dedicated to advancingdeveloping and empoweringdelivering innovative, transformative immune effector cell therapy, exosome technology, as well as companion diagnostics. The Company also provides strategic advisorycellular therapeutics, precision diagnostics, and outsourcing
services to facilitate and enhance its clients’ growth and development, as well as competitiveness in healthcare and CellTech industry
markets.clinical laboratory services. Through its subsidiary structure with unique integration of vertical segmentsverticals from innovative R&Dresearch and development 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™), 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 focusedJersey. The Company also has income from equity method investment through its forty percent (40%) interest in the People’s Republic of China.Lab Services MSO. 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, 2022approximately $3,785,000 at March 31, 2023 and hashad incurred recurring net losses and generated negative cash flow from operating activities of $4,099,012approximately $2,784,000 and $2,686,722$1,835,000 for the sixthree months ended June
30, 2022,March 31, 2023, 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,Jersey 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’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’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
Significant Accounting Policies
There have been no changes to the Company’s significant accounting policies described in the Company’s 2022 Annual Report on Form 10-K filed with the SEC that have had a material impact on the Company’s financial condition, and operating results.
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. ActualChanges in these estimates and assumptions may have a material impact on the condensed consolidated financial statements and accompanying notes. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from thesethose estimates.
Significant estimates during the three and six months ended June 30,March 31, 2023 and 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, the valuation of stock-based compensation, and assumptions used to determinethe fair value of warrants and embedded conversion featuresthe consideration given in the purchase of convertible
note payable.40% of Lab Services MSO.
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 six months ended June 30, 2022:
(Level 3) | ||||
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 June 30, 2022March 31, 2023 and December 31, 2021,2022, the Company’sCompany’s cash balances by geographic area were as follows:
Country: | March 31, 2023 | December 31, 2022 | ||||||||||||||
United States | $ | 787,978 | 88.8 | % | $ | 1,806,083 | 90.7 | % | ||||||||
China | 99,053 | 11.2 | % | 184,827 | 9.3 | % | ||||||||||
Total cash | $ | 887,031 | 100.0 | % | $ | 1,990,910 | 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 June 30, 2022March 31, 2023 and December 31, 2021.2022.
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)$73,000) per bank. Any balance over RMB 500,000 per bank in PRC will not be covered. At June 30, 2022,March 31, 2023, cash balances held in the PRC are RMB 3,108,354680,408 (approximately $464,000)$99,000), of which, RMB 2,582,643149,955 (approximately $385,000)$22,000) 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 inon deposits with bank and financial institution deposits within the 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 June 30, 2022,March 31, 2023, the Company’sCompany’s cash balances in United States bank accounts had approximately $137,000$154,000 in excess of the federally-insured limits.
Currently, a portion of the Company’s operations
are carried out in PRC. Accordingly, the Company’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’s economy. The Company’s operations
in PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’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’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,Company’s concentrations of credit risk with respect to trade accountsits rent receivable is limited due to short-term payment terms. The Company also performs ongoing credit evaluations of its customerstenants to help further reduce credit risk.
Investment in Unconsolidated Company – Epicon Biosciences Co., Ltd.
Companies
The Company uses the equity method of accounting for its investmentinvestments in, and earning or loss of, companycompanies that it does not control but over which it does exert significant influence. The Company considers whether the fair valuevalues of its equity method investment hasinvestments have declined below itstheir carrying valuevalues whenever adverse events or changes in circumstances indicate that recorded valuevalues 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.investments.
Real Property Rental Revenue Recognition
The Company recognizes
revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 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:
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’s definition of a “distinct”
goods or service (or bundle of goods or services) if both of the following criteria are met:
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’s revenues are derived from
providing medial related consulting services for 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 rentaccount receivable on the consolidated balance sheets.
The Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers.
Commitments and Contingencies
In the normal course of business, the Company is subject to contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters. Liabilities for such contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
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.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Per Share Data (continued)
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 six months ended June 30,March 31, 2023 and 2022, and 2021, potentially dilutive common shares consist of the common shares issuable upon the conversion of convertible notepreferred stock (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.
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 March 31, | ||||||||
2023 | 2022 | |||||||
Options to purchase common stock | 767,303 | 818,500 | ||||||
Warrants to purchase common stock | 123,964 | - | ||||||
Series A convertible preferred stock (*) | 900,000 | - | ||||||
Series B convertible preferred stock (**) | 2,910,053 | - | ||||||
Potentially dilutive securities | 4,701,320 | 818,500 |
June 30, | June 30, | |||||||||||||||
(*) Assumed the convertible note was converted
into shares of common stock of the Company at a conversion price of $0.75 per share.
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 six months ended June 30,March 31, 2022, and 2021, the Company operates throughoperated in two reportable business segments:segments - (1) the real property operating segment, and (2) the 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. Due to the winding down of the medical related consulting services segment in 2022, the Company decided to cease all operations of this segment and no longer has any material revenues or expenses in this segment. As a result, commencing from the first quarter of 2023, the Company’s chief operating decision maker no longer reviews medical related consulting services operating results.
ReclassificationDuring the three months ended March 31, 2023, the Company operated in one reportable business segment: the real property operating segment.
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.
Recent Accounting Standards
In August 2020, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt
- Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own
Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 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’s own stock and
classified in 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)
Reverse Stock Split
The Company effected a one-for-ten reverse stock split of its outstanding shares of common stock on January 5, 2023. The reverse split did not change the number of authorized shares of common stock or par value. All references in these condensed consolidated financial statements to shares, share prices, exercise prices, and other per share information in all periods have been adjusted, on a retroactive basis, to reflect the reverse stock split.
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 willof this new guidance did not have aany material impact on the Company’sCompany’s condensed consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends the accounting related to contract assets and liabilities acquired in business combinations. ASU 2021-08 requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to businesses combinations occurring on or after the effective date of the amendment. Early adoption is permitted, including adoption in an interim period. The adoption of this new guidance did not have any material impact on the Company’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 EXPENSESEXPENSE AND OTHER CURRENT ASSETS
At June 30, 2022March 31, 2023 and December 31, 2021,2022, prepaid expensesexpense and other current assets consisted of the following:
March 31, 2023 | December 31, 2022 | |||||||
Prepaid professional fees | $ | 156,802 | $ | 93,817 | ||||
Prepaid directors and officers liability insurance premium | 37,838 | 29,301 | ||||||
Prepaid NASDAQ listing fee | 67,313 | - | ||||||
Deferred financing costs | 34,821 | 34,821 | ||||||
Deferred leasing costs | 33,402 | 33,402 | ||||||
Security deposit | - | 19,084 | ||||||
Others | 40,425 | 37,565 | ||||||
Total | $ | 370,601 | $ | 247,990 |
2022 | 2021 | |||||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 –– EQUITY METHOD INVESTMENTINVESTMENTS
Investment in Epicon Biotech Co., Ltd.
As of June 30, 2022March 31, 2023 and December 31, 2021,2022, the equity method investment in Epicon Biotech Co., Ltd. (“Epicon”) amounted to $517,442$477,625 and $515,632,$485,008, 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 June 30,March 31, 2023 and 2022, and
2021, the Company’sCompany’s share of Epicon’sEpicon’s net loss was $11,882$9,454 and $15,418, respectively, which was included in loss from
equity method investment in the accompanying condensed consolidated statements of operations and comprehensive loss. For the six months
ended June 30, 2022 and 2021, the Company’s share of Epicon’s net loss was $24,798 and $33,932,$12,916, 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 sixthree months ended June 30, 2022,March 31, 2023, 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, 2023 | $ | 485,008 | ||
Epicon’s net loss attributable to the Company | (9,454 | ) | ||
Foreign currency fluctuation | 2,071 | |||
Equity investment carrying amount at March 31, 2023 | $ | 477,625 |
The tables below present the summarized financial information, as provided to the Company by the investee, for the unconsolidated company:
2022 | 2021 | |||||||
March 31, 2023 | December 31, 2022 | |||||||
Current assets | $ | 785 | $ | 1,051 | ||||
Noncurrent assets | 130,617 | 143,984 | ||||||
Current liabilities | 53,206 | 43,723 | ||||||
Equity | 78,196 | 101,312 |
Ended June 30, | Ended June 30, | |||||||||||||||
For the Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Net revenue | $ | - | $ | - | ||||
Gross profit | - | - | ||||||
Loss from operation | 23,636 | 32,323 | ||||||
Net loss | 23,635 | 32,291 |
NOTE 6 –
ACCRUED
LIABILITIES AND OTHER PAYABLESInvestment in Laboratory Services MSO, LLC
At June 30, 2022On February 9, 2023 (the “Closing Date”), the Company entered into and December 31, 2021, accrued liabilitiesclosed an Amended and other payables consistedRestated Membership Interest Purchase Agreement (the “Amended MIPA”), by and among Avalon Laboratory Services, Inc., a wholly-owned subsidiary of the following:Company (the “Buyer”), SCBC Holdings LLC (the “Seller”), the Zoe Family Trust, Bryan Cox and Sarah Cox as individuals (each an “Owner” and collectively, the “Owners”), and Laboratory Services MSO, LLC.
2022 | 2021 | |||||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 –5 – CONVERTIBLE NOTE PAYABLEEQUITY METHOD INVESTMENTS (continued)
On March 28, 2022,Investment in Laboratory Services MSO, LLC (continued)
Pursuant to the Company entered into Securities Purchase Agreement with an accredited investor, which was amended on June 8, 2022, providingterms and conditions set forth in the Amended MIPA, Buyer acquired from the Seller, forty percent (40%) of all the issued and outstanding equity interests of Lab Services MSO (the “Purchased Interests”). The consideration paid by Buyer to Seller for the sale by the CompanyPurchased Interests consisted of $21,000,000, which comprised of (i) $9,000,000 in cash, (ii) $11,000,000 pursuant to the investorissuance of a Convertible Note in the amount of $3,718,943 (“2022 Convertible Note”). In addition
to the 2022 Convertible Note, the investor also received a Stock Purchase Warrant (“2022 Warrant”) to acquire an aggregate
of 1,239,64711,000 shares of common stock.the Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”), stated value $1,000 (the “Series B Stated Value”), and (iii) a $1,000,000 cash payment on February 9, 2024. The 2022 Warrant is exercisable for five years at an exercise price of $1.25. The financing closed
with respect to:
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 and a 2022 Convertible Note in the principal amount of $190,000 and a 2022 Warrant to
acquire 63,333 shares of common stock.
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 timeSeries B Preferred Stock will be convertible into shares of Avalon’s common stock of the Company at a conversion price per share equal to 95%$3.78 or an aggregate of 2,910,053 shares of the average of the highest three trading prices for theCompany’s common stock during the 20-trading day period ending one trading
day priorand are subject to the conversion date butLock Up Period and the restrictions on sale (See Note 8 – Series B Convertible Preferred Stock Issued for Equity Method Investment). The Seller is also eligible, under the terms set forth in no eventthe Amended MIPA, to receive certain earnout payments upon achievement of certain operating results, which may be comprised of up to $10,000,000 of which (x) up to $5,000,000 will be paid in cash and (y) up to $5,000,000 will be paid pursuant to 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 sharesissuance of common stock such that the number of shares of the Company’s common stock held byvalued at $5,000,000, calculated using the investor after such conversion or exercise does not exceed 4.99%closing price 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 ofAvalon’s common stock underlyingon December 31, 2023, rounded down to the 2022 Convertible Note ornearest whole share (collectively, the 2022 Warrant for“Earnout Payments”). At February 9, 2023, the estimated earnout liability amounted to $0 since the minimum thresholds as defined in the agreement are currently unlikely to be met. The estimated earnout is a periodlevel 3 valuation which will be measured at the end of 90 days beginning on the closing date (the “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.reporting period.
Based uponLab Services MSO, through its two subsidiaries, Lab Services LLC and Lab Services DME, is engaged in providing laboratory testing services. Avalon Lab and the Company’s
analysisother unrelated company, accounted for 40% and 60% of the criteria containedtotal ownership, respectively. As of March 31, 2023, the equity method investment in ASC Topic 815-40, “Derivatives and Hedging - Contracts in an Entity’s Own Equity”,
the Company determined that all the warrants issuedLab Services MSO amounted to the investor with this private placement are classified as equity in additional
paid in-capital.$21,046,739.
In accordance with ASC 470-20-25-2, proceeds from810, the saleCompany determined that Lab Services MSO does not qualify as a Variable Interest Entity, nor does it have a controlling financial interest over the legal entity. However, it determined it does have significant influence as a result of a debt instrument with stock purchase warrants are allocated toits board representation. Therefore, the two elements based onCompany treats the relativeequity 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’s share of the purchased-date fair values of the debt instrument withoutinvestee’s identifiable net assets over the warrants andcost of the warrants themselves at time of issuance. The portioninvestment (if any). Thereafter, the investment is adjusted for the post purchase change in the Company’s share of the proceeds
so allocatedinvestee’s net assets and any impairment loss relating 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.investment.
The fair valuesFor the period from February 9, 2023 (date on investment) through March 31, 2023, the Company’s share 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’s common stock were treated as a discount on the convertible note
payable and were valued at $498,509 and will be amortized over the term of the 2022 Convertible Note. Additionally, the fair value
of embedded conversion option at commitment dates,Lab Services MSO’s net income was $46,739, which was valued at $2,782,569, is recorded as a discount on the convertible note
payable and will be amortized over the term of the 2022 Convertible Note. Hence,included 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 be amortized over the term of the
convertible note payable. For the three and six months ended June 30, 2022, amortization of debt discount and interest expense
related to the 2022 Convertible Note amounted to $54,685 and $7,204, respectively, 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’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 valuationincome (loss) from equity 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.
The estimated fair value
of the derivative feature of convertible debt was $2,013,300 at June 30, 2022, which was computed using the following assumptions: volatility
of 95.71%, risk-free rate of 2.98%, annual dividend yield of 0% and expected life of 9.8 – 9.9 years.
Increases or decreases
in fair value of the derivative liability is included as a component of total other (expenses) incomeinvestments in the accompanying condensed consolidated statements of operations and comprehensive lossloss.
In the three months ended March 31, 2023, activity recorded for the respective period. Company’s equity method investment in Lab Services MSO is summarized in the following table:
Equity investment carrying amount at January 1, 2023 | $ | - | ||
Payment for equity method investment | 21,000,000 | |||
Lab Services MSO’s net income attributable to the Company | 46,739 | |||
Equity investment carrying amount at March 31, 2023 | $ | 21,046,739 |
The changestables below present the summarized financial information, as provided to the derivative liability resultedCompany by the investee, for the unconsolidated company:
March 31, 2023 | ||||
Current assets | $ | 3,759,918 | ||
Noncurrent assets | 2,325,044 | |||
Current liabilities | 1,258,470 | |||
Noncurrent liabilities | 1,961,178 | |||
Equity | 2,865,314 |
For the Period from February 9, 2023 (Date of Investment) through March 31, 2023 | ||||
Net revenue | $ | 2,174,524 | ||
Gross profit | 776,778 | |||
Income from operation | 116,846 | |||
Net income | 116,846 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – EQUITY METHOD INVESTMENTS (continued)
On February 9, 2023, the Company entered into an Amended and Restated Membership Interest Purchase Agreement (the “Amended MIPA”), by and among Avalon Laboratory Services, Inc., a wholly-owned subsidiary of the Company, SCBC Holdings LLC, the Zoe Family Trust, Bryan Cox and Sarah Cox as individuals, and Laboratory Services MSO.
Investment in a decreaseLaboratory Services MSO, LLC (continued)
According to the Amended MIPA, at any time during the period beginning on February 9, 2023 and ending on the date nine (9) months after February 9, 2023, Avalon Laboratory Services, Inc., or its designated affiliates under the Amended MIPA, may purchase from SCBC Holdings LLC twenty percent (20%) of $769,269the total issued and outstanding equity interests of Laboratory Services MSO for the purchase price of (i) $6,000,000 in cash and (ii) the issuance of an additional 4,000 shares of Series B Preferred Stock valued at $4,000,000, in accordance with the terms and conditions set forth in the derivative liabilityAmended MIPA.
NOTE 6 – NOTE PAYABLE, NET
On September 1, 2022, the Company issued a balloon promissory note in the form of a mortgage on our headquarters 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 March 31, 2023 and December 31, 2022, the carrying balance of the 2022 Note Payable was $4,585,356 and $4,563,152 and the corresponding increase in other income as a gain forremaining unamortized debt issuance costs balance was $214,644 and $236,848, respectively.
For the three and six months ended June 30, 2022. There was no derivative liabilityMarch 31, 2023, amortization of debt issuance costs and interest expense related to the 2022 Note Payable amounted to $22,205 and $132,000, respectively, which have been included in interest expense on the threeaccompanying condensed consolidated statements of operations and six months ended June 30, 2021.comprehensive loss.
NOTE 9 –7 – 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 the three months ended June 30,March 31, 2023 and 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 six months ended June 30, 2022 and 2021, the related party rental revenue amounted to $25,200 and $8,400, 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$61,700 and $33,600,$74,100, respectively, which has been included in rent receivable on the accompanying condensed consolidated balance sheets, and no allowance for doubtful accounts was deemed to be required on rentthe receivable – related party at June 30, 2022March 31, 2023 and December 31, 2021.2022.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – RELATED PARTY TRANSACTIONS
(continued)
Services Provided by Related PartyParties
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$26,457 and $54,545$51,138 for the three months ended June 30,March 31, 2023 and 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 and $111,950 for the
six months ended June 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 June 30, 2022March 31, 2023 and December 31, 2021,2022, 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 June 30, 2022March 31, 2023 and December 31, 2021, $439,9742022, $2,021 and $368,433$0 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.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – RELATED PARTY TRANSACTIONS (continued)
Borrowings from Related Party
Promissory Note
On March 18, 2019, the Company issued Wenzhao
Lu, the Company’s largest shareholder and Chairman of the Board of Directors, a Promissory Note in the principal amount of $1,000,000 (“Promissory
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”)
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 June 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.
In the sixthree months ended June 30, 2022,March 31, 2023, activity recorded for the Line of Credit is summarized in the following table:
Outstanding principal under the Line of Credit at January 1, 2023 | $ | - | ||
Draw down from Line of Credit | 750,000 | |||
Outstanding principal under the Line of Credit at March 31, 2023 | $ | 750,000 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – RELATED PARTY TRANSACTIONS
(continued)
Borrowings from Related Party (continued)
For the three months ended June 30,March 31, 2023 and 2022, and
2021, the interest expense related to aboverelated party borrowings amounted to $31,854$2,021 and $46,131,$39,686, respectively, and has been included inreflected as interest expense – related party on the accompanying condensed consolidated statements of operations and comprehensive loss. For the six
months ended June 30, 2022 and 2021, the interest expense related to above borrowings amounted to $71,540 and $91,280, respectively,
and has been included in interest expense –– related party on the accompanying condensed consolidated statements of operations and comprehensive loss.
As of June 30, 2022March 31, 2023 and December 31, 2021,2022, the related accrued and unpaid interest for above borrowingsLine of Credit was $439,974$2,021 and $368,433,$0, respectively, and has been included in accrued liabilities and other payables –– related parties on the accompanying condensed consolidated balance sheets.
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 10 –8 – EQUITY
Common Shares Sold
for CashSeries A Convertible Preferred Stock
On December 13, 2019, theThe Company entered into
an Open Market Sale AgreementSM (the “Sales Agreement”) with Jefferies LLC, as sales agent (“Jefferies”),
pursuantdesignated up to which the Company may offer and sell, from time to time, through Jefferies,15,000 shares of its previously undesignated preferred stock as Series A Preferred Stock. Each share of Series A Preferred Stock has a par value of $0.0001 per share and a stated value equal to $1,000.
As of March 31, 2023, 9,000 shares of Series A Preferred Stock were issued and outstanding. The Series A Preferred Stock is convertible into shares of the Company’s common stock. Duringstock at a conversion price per share equal to the six months
ended June 30, 2022, Jefferies soldgreater of (i) ten dollars ($10.00), and (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 Series A Preferred stock-holder, subject to adjustment for stock splits and similar matters. Conversion of the Series A Preferred Stock is subject to restriction pursuant to the Nasdaq Stock Market Listing Rules.
Series B Convertible Preferred Stock Issued for Equity Method Investment
The Company designated up to 15,000 shares of its previously undesignated preferred stock as Series B Preferred Stock. Each share of Series B Preferred Stock has a par value of $0.0001 per share and a stated value equal to $1,000.
On February 9, 2023, the Company issued 11,000 shares of its Series B Convertible Preferred Stock as a part of consideration for the purchase of 40% of equity interest of Lab Services MSO. The Series B Preferred Stock will be convertible into shares of the Company’s common stock at a conversion price per share equal to $3.78 or an aggregate of 170,6402,910,053 shares of the Company’s common stock at an average price of $0.79 per shareand are subject to investorsthe Lock Up Period and the Company recorded net proceeds of $112,328, net of commission and other offering costs of $23,239.restrictions (See Note – 5 - Investment in Laboratory Services MSO, LLC).
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 – EQUITY (continued)
Common Shares Issued for Services
During the sixthree months ended June 30, 2022,March 31, 2023, the Company issued a total of 408,957202,731 shares of its common stock for services rendered and to be rendered. These shares were valued at $340,950,$463,375, 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$243,928 for the sixthree months ended June 30, 2022March 31, 2023 and reduced accrued liabilities of $30,000$164,871 and recorded prepaid expense of $56,027$54,576 as of June 30, 2022March 31, 2023 which will be amortized over the rest of corresponding service periods.
Options
The following table summarizes the shares of the Company’sCompany’s common stock issuable upon exercise of options outstanding at June 30, 2022:March 31, 2023:
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 March 31, 2023 | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at March 31, 2023 | Weighted Average Exercise Price | |||||||||||||||||
$ | 3.25 – 8.20 | 307,803 | 3.79 | $ | 5.26 | 269,137 | $ | 5.34 | ||||||||||||||
10.20 – 20.00 | 432,500 | 2.59 | 16.50 | 432,500 | 16.50 | |||||||||||||||||
23.00 – 28.00 | 27,000 | 0.61 | 26.91 | 27,000 | 26.91 | |||||||||||||||||
$ | 3.25 – 28.00 | 767,303 | 3.00 | $ | 12.36 | 728,637 | $ | 12.76 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – EQUITY
(continued)
Options (continued)
Stock option activities for the sixthree months ended June 30, 2022March 31, 2023 were as follows:
Number of Options | Weighted Average Exercise Price | |||||||
Outstanding at January 1, 2023 | 800,500 | $ | 13.03 | |||||
Granted | 37,803 | 4.85 | ||||||
Expired | (71,000 | ) | (15.97 | ) | ||||
Outstanding at March 31, 2023 | 767,303 | $ | 12.36 | |||||
Options exercisable at March 31, 2023 | 728,637 | $ | 12.76 | |||||
Options expected to vest | 38,666 | $ | 4.69 |
The aggregate intrinsic value of both stock options outstanding and stock options exercisable at June 30, 2022March 31, 2023 was $0.
The fair values of options granted during the sixthree months ended June 30,March 31, 2023 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 143.99% - 145.73%, risk-free rate of 3.58% - 3.94%, annual dividend yield of 0%, and expected life of 5.00 years. The aggregate fair value of the options granted during the three months ended March 31, 2023 was $176,786.
The fair values of options granted during the three months ended March 31, 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%1.53%, annual dividend yield of 0%, and expected life of 3.00
- 5.00 years. The aggregate fair value of the options granted during the sixthree months ended June 30,March 31, 2022 was $373,982.$315,145.
The fair values of options granted during the
six months ended June 30, 2021 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
volatility of 123.27% - 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 six months ended June 30, 2021 was
$575,078.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 – EQUITY (continued)
Options (continued)
For the three months ended June 30,March 31, 2023 and 2022, and
2021, stock-based compensation expense associated with stock options granted amounted to $126,301$68,262 and $195,209,$152,323, of which, $93,171$51,336 and $136,392$104,913 was recorded as compensation and related benefits, $21,460$11,457 and $39,545$36,138 was recorded as professional fees, and $11,670$5,469 and $19,272$11,272 was recorded as research and development expenses, respectively.
For the six months ended June 30, 2022 and 2021, stock-based
compensation expense associated with stock options granted amounted to $278,624 and $397,714, of which, $198,084 and $275,899 was
recorded as compensation and related benefits, $57,598 and $82,988 was recorded as professional fees, and $22,942 and $38,827 was
recorded as research and development expenses, respectively.
A summary of the status of the Company’sCompany’s nonvested stock options granted as of June 30, 2022March 31, 2023 and changes during the sixthree months ended June 30, 2022March 31, 2023 is presented below:
Number of Options | Weighted Average Exercise Price | |||||||
Nonvested at January 1, 2023 | 20,000 | $ | 4.29 | |||||
Granted | 37,803 | 4.85 | ||||||
Vested | (19,137 | ) | (4.58 | ) | ||||
Nonvested at March 31, 2023 | 38,666 | $ | 4.69 |
Warrants
OnThere was no stock warrant activity during the three months ended 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”). In addition
to the 2022 Convertible Note, the investor also received a Stock Purchase Warrant (“2022 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 $1.25.31, 2023.
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’s common stock were treated
as a discount on the convertible note payable and were valued at $498,509 and will be amortized over the term of the 2022 Convertible
Note.
Stock warrant activities
for the six months ended June 30, 2022 were as follows:
The following table summarizes the shares of the Company’sCompany’s common stock issuable upon exercise of warrants outstanding at June 30, 2022:March 31, 2023:
Price | Outstanding at June 30, 2022 | Remaining Contractual Life (Years) | Exercisable at June 30, 2022 | Price | ||||||||||||||
Warrants Outstanding | Warrants Exercisable | |||||||||||||||||
Exercise Price | Number Outstanding at March 31, 2023 | Weighted Average Remaining Contractual Life (Years) | Number Exercisable at March 31, 2023 | Exercise Price | ||||||||||||||
$ | 12.5 | 123,964 | 4.06 | 123,964 | $ | 12.5 |
The aggregate intrinsic value of both stock warrants outstanding and stock warrants exercisable at June 30, 2022March 31, 2023 was $0.
NOTE 11 –9 - 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 six months ended June 30,March 31, 2023 and 2022 as it incurred net loss in the periods. As of both June 30, 2022March 31, 2023 and December 31, 2021,2022, 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 June 30, 2022March 31, 2023 and December 31, 2021,2022, total restricted net assets amounted to $706,578.$1,006,578.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 – 10 – 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.
NOTE 13 –11 - 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 six months ended June 30, 2022March 31, 2023 and 2021.2022.
Three Months Ended March 31, | ||||||||
Customer | 2023 | 2022 | ||||||
A | 31 | % | 28 | % | ||||
B | 20 | % | 18 | % | ||||
C | 13 | % | 12 | % |
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 June 30, 2022,March 31, 2023, accounted for 81.0%79.6% of the Company’sCompany’s total outstanding rent receivable and rent receivable – related party at June 30, 2022.March 31, 2023.
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, 2021,2022, accounted for 80.6%81.4% of the Company’sCompany’s total outstanding rent receivable and rent receivable – related party at December 31, 2021.2022.
Suppliers
No supplier accounted for 10% or more of the Company’sCompany’s purchase during the three and six months ended June 30, 2022March 31, 2023 and 2021.
One supplier, whose outstanding payable
accounted for 10% or more of the Company’s total outstanding accounts payable at June 30, 2022, accounted for 100.0%
of the Company’s total outstanding accounts payable at June 30, 2022.
NOTE 14 –12 – SEGMENT INFORMATION
For the three and six months ended June 30,March 31, 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.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14 – 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.
Due to the winding down of the medical related consulting services segment in 2022, the Company decided to cease all operations of this segment and no longer has any material revenues or expenses in this segment. As a result, commencing from the first quarter of 2023, the Company’s chief operating decision maker no longer reviews medical related consulting services operating results.
For the three months ended March 31, 2023, the Company operated in one reportable business segments: the real property operating segment.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 – SEGMENT INFORMATION (continued)
Information with respect to these reportable business segments for the three and six months ended June 30,March 31, 2023 and 2022 and 2021 was as follows:
June 30, | June 30, | |||||||||||||||
Three Months Ended March 31, 2023 | ||||||||||||
Real property rental | Corporate/Other | Total | ||||||||||
Real property rental revenue | $ | 296,165 | $ | - | $ | 296,165 | ||||||
Real property operating expenses | (248,445 | ) | - | (248,445 | ) | |||||||
Real property operating income | 47,720 | - | 47,720 | |||||||||
Other operating expenses | (113,711 | ) | (2,598,245 | ) | (2,711,956 | ) | ||||||
Other (expense) income: | ||||||||||||
Interest expense | - | (156,226 | ) | (156,226 | ) | |||||||
Other income | 4 | 36,544 | 36,548 | |||||||||
Net loss | $ | (65,987 | ) | $ | (2,717,927 | ) | $ | (2,783,914 | ) | |||
2022 | 2021 | |||||||
Three Months Ended March 31, 2022 | ||||||||||||||||
Real property rental | Medical related consulting services | Corporate/Other | Total | |||||||||||||
Real property rental revenue | $ | 297,631 | $ | - | $ | - | $ | 297,631 | ||||||||
Real property operating expenses | (218,448 | ) | - | - | (218,448 | ) | ||||||||||
Real property operating income | 79,183 | - | - | 79,183 | ||||||||||||
Other operating expenses | (107,053 | ) | (87,115 | ) | (2,011,957 | ) | (2,206,125 | ) | ||||||||
Other (expense) income: | ||||||||||||||||
Interest expense | - | - | (39,686 | ) | (39,686 | ) | ||||||||||
Other income | 4 | 96,086 | - | 96,090 | ||||||||||||
Net (loss) income | $ | (27,866 | ) | $ | 8,971 | $ | (2,051,643 | ) | $ | (2,070,538 | ) |
2022 | 2021 | |||||||
Identifiable long-lived tangible assets at March 31, 2023 and December 31, 2022 | March 31, 2023 | December 31, 2022 | ||||||
Real property operations | $ | 7,344,620 | $ | 7,367,360 | ||||
Medical related consulting services | - | 408 | ||||||
Corporate/Other | 113,382 | 130,613 | ||||||
Total | $ | 7,458,002 | $ | 7,498,381 |
Identifiable long-lived tangible assets at March 31, 2023 and December 31, 2022 | March 31, 2023 | December 31, 2022 | ||||||
United States | $ | 7,365,540 | $ | 7,393,307 | ||||
China | 92,462 | 105,074 | ||||||
Total | $ | 7,458,002 | $ | 7,498,381 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
NOTE 15 –13 – 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’s
Hospital (“Research 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”) 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’s initial pre-tax profit of $3,333,333, 20% of the Company’s second pre-tax profit of $3,333,333 and 10%
of the Company’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 2025. Rent expense under all operating leases amounted to approximately $72,000$33,000 and $73,000$36,000 for the sixthree months ended June 30,March 31, 2023 and 2022,
and 2021, respectively. Supplemental cash flow information related to leases for the sixthree months ended June 30,March 31, 2023 and 2022 and 2021 is as follows:
June 30, | ||||||||
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows paid for operating lease | $ | 33,209 | $ | 35,759 | ||||
Right-of-use assets obtained in exchange for lease obligation: | ||||||||
Operating lease | $ | 244,577 | $ | - |
The following table summarizes the lease term and discount rate for the Company’sCompany’s operating lease as of June 30, 2022:March 31, 2023:
Operating Lease | ||||
Weighted average remaining lease term (in years) | ||||
Weighted average discount rate | % |
The following table summarizes the maturity of lease liabilities under operating lease as of June 30, 2022:March 31, 2023:
For the Twelve-month Period Ending March 31: | Operating Lease | |||
2024 | $ | 138,597 | ||
2025 | 104,497 | |||
2026 and thereafter | - | |||
Total lease payments | 243,094 | |||
Amount of lease payments representing interest | (21,897 | ) | ||
Total present value of operating lease liabilities | $ | 221,197 | ||
Current portion | $ | 121,124 | ||
Long-term portion | 100,073 | |||
Total | $ | 221,197 |
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 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 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 June 30, 2022,March 31, 2023, 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.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 – COMMITMENTS AND CONTINGENCIES (continued)
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. globally.
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.
In addition, the Company is responsible for: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 Company’s discretion. As of the date hereof, this company has been limited to a patent holding company and there no activity or planned contributions in 2023.
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:
| ||
As of both June 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 lineLine of creditCredit 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 June 30, 2022,
$2,440,262March 31, 2023, $750,000 was outstanding under the Line of Credit.
Amended and Restated Membership Interest Purchase Agreement
On July 25, 2022,February 9, 2023, the Company entered into an Amended and Restated Membership Interest Purchase Agreement (the “Amended MIPA”), by and among Avalon Laboratory Services, Inc., a wholly-owned subsidiary of the Company, SCBC Holdings LLC, the Zoe Family Trust, Bryan Cox and Sarah Cox as individuals, and Laboratory Services MSO.
According to the Amended MIPA, at any time during the period beginning on February 9, 2023 and ending on the date nine (9) months after February 9, 2023, Avalon Laboratory Services, Inc., or its designated affiliates under the Amended MIPA, may purchase from SCBC Holdings LLC twenty percent (20%) of the total issued and outstanding principalequity interests of Laboratory Services MSO for the purchase price of (i) $6,000,000 in cash and related accrued and unpaid interest were settled
by(ii) the issuance of an additional 4,000 shares of Series B Preferred Stock valued at $4,000,000, in accordance with the Company’s common stock (seeterms and conditions set forth in the Amended MIPA (See Note 16– 5 - Common Shares Issued Pursuant to Related Party Debt Settlement Agreement
and Release)Investment in Laboratory Services MSO, LLC).
NOTE 16 –14 – 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 ConversionLine of Credit
On July
25, 2022,As disclosed above, 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.
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 Agreement with Mr. Lu, as the Lender and unpaid interest of $448,331 by issuance of 4,443,990 shares of common stock, with a fair value of $2,888,593,significant shareholder and director 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,providing 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 underwith the Line of Credit and unpaid interestfrom the Lender. Under the Line of $448,331 by issuance of 4,443,990 shares of common stock ofCredit, the Company atreceived a per share priceloan from the Lender of $0.65.
The 4,443,990 shares issued had a fair value of $2,888,593.$100,000 in April 2023.
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.
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)
Unaudited Pro Forma Adjustment Reflects the Following Four Transactions:
Transaction 1:
The transaction reflects the embedded conversion
option derivative liability was reclassified to additional paid-in capital upon the related note conversion.
Transaction 2:
To amortize the discount upon conversion.
Transaction 3:
The transaction reflects the principal and unpaid
interest were converted into shares of common stock of the Company pursuant to a Conversion
Agreement.
Transaction 4:
The transaction reflects debt owed under the Line of Credit and unpaid
interest were settled by issuance of shares of common stock of the Company pursuant to a Debt Settlement Agreement and Release.
ITEM 2. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future. Accordingly, factors that may affect our results include, but are not limited to:
● | Avalon our dependence on product candidates that are still in an early development stage; |
● | our ability to successfully complete research and further development, including preclinical and clinical studies; |
● | our anticipated timing for preclinical development, regulatory submissions, commencement and completion of clinical trials and product approvals; |
● | our ability to negotiate strategic partnerships, where appropriate, for our product candidates; |
● | our ability to manage multiple clinical trials for a variety of product candidates at different stages of development; |
● | the cost, timing, scope and results of ongoing preclinical and clinical testing; |
● | our expectations of the attributes of our product and development candidates, including pharmaceutical properties, efficacy, safety and dosing regimens; |
● | the cost, timing and uncertainty of obtaining regulatory approvals for our product candidates; |
● | the availability, cost, delivery and quality of clinical management services provided by our clinical research organization partners; |
● | the availability, cost, delivery and quality of clinical and commercial-grade materials produced by our own manufacturing facility or supplied by contract manufacturers, suppliers and partners; |
● | our ability to commercialize our product candidates and the growth of the markets for those product candidates; |
● | our ability to develop and commercialize products before competitors that are superior to the alternatives developed by such competitors; |
● | our ability to develop technological capabilities, including identification of novel and clinically important targets, exploiting our existing technology platforms to develop new product candidates and expand our focus to broader markets for our existing targeted therapeutics; |
● | our ability to raise sufficient capital to fund our preclinical and clinical studies and to meet our long-term liquidity needs, on terms acceptable to us, or at all. If we are unable to raise the funds necessary to meet our long-term liquidity needs, we may have to delay or discontinue the development of one or more programs, discontinue or delay ongoing or anticipated clinical trials, discontinue or delay our commercial manufacturing efforts, discontinue or delay our efforts to expand into additional indications for our product candidates, license out programs earlier than expected, raise funds at significant discount or on other unfavorable terms, if at all, or sell all or part of our business; |
● | our ability to protect our intellectual property rights and our ability to avoid intellectual property litigation, which can be costly and divert management time and attention; |
● | our ability to develop and commercialize products without infringing the intellectual property rights of third parties; |
● | heightened competition from commercial clinical testing companies, IDNs, physicians and others; |
● | increased pricing pressure from customers, including payers and patients, and changing relationships with customers, payers, suppliers or strategic partners; |
● | impact of changes in payment mix, including increased patient financial responsibility and any shift from fee-for-service to discounted, capitated or bundled fee arrangements; |
● | adverse actions by government, including healthcare reform that focuses on reducing healthcare costs but does not recognize the value and importance to healthcare of clinical testing or innovative solutions, unilateral reduction of fee schedules payable to us, unilateral recoupment of amounts allegedly owed and competitive bidding; |
● | the impact of increased prior authorization programs; |
● | adverse results from pending or future government investigations, lawsuits or private actions. These include, in particular, monetary damages, loss or suspension of licenses or criminal penalties; |
● | the impact of the COVID-19 pandemic on our business or on the economy generally, and |
● | a decline in economic conditions, including the impact of an inflationary environment. |
All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference into this report. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith, and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished.
The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30,March 31, 2023 and 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,” 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.Overview
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’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 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-developerbiotechnology company dedicated to advancingdeveloping and empoweringdelivering innovative, transformative immune effector cell therapy, exosome technology, as well as companion diagnostics. The Company also provides strategic advisorycellular therapeutics, precision diagnostics, and outsourcing
services to facilitate and enhance its clients’ growth and development, as well as competitiveness in healthcare and CellTech industry
markets.clinical laboratory services. Through its subsidiary structure with unique integration of vertical segmentsverticals from innovative R&Dresearch and development 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™), and regenerative therapeutics.. It has also embarked on a laboratory rollup strategy, for which its first acquisition to acquire 40% membership interest in Lab Services MSO closed in February 2023.
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:
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 |
Co-development of next generation, mRNA-based immune effector cell therapeutic modalities with Arbele |
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.therapy.
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.transplant. 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 |
Avalon has embarked on a laboratory rollup strategy focused on forming joint ventures and acquiring laboratories that are accretive to our clinical strategy. We have identified several laboratories to further this effort. On February 9, 2023, Avalon Lab purchased forty percent (40%) of all the issued and outstanding equity interests of Laboratory Services MSO, LLC, a private limited company formed under the laws of the State of Delaware on September 6, 2019 and its subsidiaries. Lab Services MSO, through its two subsidiaries, Laboratory Services, LLC and Laboratory Services DME, LLC, is engaged in providing laboratory testing services.
Lab Services MSO is focused on delivering high quality services related to toxicology and wellness testing and 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. The panels that Lab Services MSO tests for are thyroid panel, comprehensive metabolic panel, kidney profile, liver function tests, and other individual tests. Through Lab Services MSO, we use fast, accurate, and efficient equipment to provide practitioners with the tools to quickly determine if a patient is following their designated treatment plan. In most instances, we are able to provide a practitioner with qualitative drug class results the same day the sample is received. We provide an extensive chemistry test menu that gives physicians the information to better treat their patients and maintain their overall wellness and have developed a premier reputation for customer service and fast turnaround times in the industry.
Going Concern
The Company is a clinical-stage vertically integrated, leading CellTech bio-developerbiotechnology company dedicated to advancingdeveloping and empoweringdelivering innovative, transformative immune effector cell therapy, exosome technology, as well as companion diagnostics. The Company also provides strategic advisorycellular therapeutics, precision diagnostics, and outsourcing services to facilitate and enhance its clients’ growth and development, as well as competitiveness in healthcare and
CellTech industry markets.clinical laboratory services. Through its subsidiary structure with unique integration of vertical segmentsverticals from innovative R&Dresearch and development 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™), 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 focusedJersey. The Company also has income from equity method investment through its forty percent (40%) interest in the People’s Republic of China.Lab Services MSO. 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, 2022approximately $3,785,000 at March 31, 2023 and hashad incurred recurring net losses and generated negative cash flow from operating activities of $4,099,012approximately $2,784,000 and $2,686,722$1,835,000 for the sixthree months ended June 30, 2022,March 31, 2023, 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, Jersey 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’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’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 analysisThe preparation of our financial
condition and results of operations are based upon ourthe condensed consolidated financial statements which have been prepared in accordanceconformity with accounting principles generally accepted in the United States. The preparationStates of these condensed consolidated financial statementsAmerica (“U.S. GAAP”) requires usmanagement to make estimates and judgmentsassumptions that affect the reported amounts of assets and liabilities revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate ourliabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Changes in these estimates includingand assumptions may have a material impact on the consolidated financial statements and accompanying notes. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those related toestimates.
Significant estimates during the useful life of
propertythree months ended March 31, 2023 and equipment and investment in real estate, assumptions used in assessing impairment of long-term assets,2022 include the valuation of deferred tax assets and the associated valuation allowances, andthe valuation of stock-based compensation, and assumptions used to determinethe fair value of warrantsassets acquired and embedded conversion featuresliabilities assumed in the purchase of convertible note payable.40% of Lab Services MSO.
Real Property Rental
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.
Revenue Recognition
We recognize revenue
under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 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:
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’s definition
of a “distinct” goods or service (or bundle of goods or services) if both of the following criteria are met:
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’s
revenues are derived from providing medial related consulting services for 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 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 condensed consolidated balance sheets.
We doThe Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to ourits customers.
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 Six Months Ended June 30,March 31, 2023 and 2022 and 2021
RevenuesReal Property Rental Revenue
For the three months ended June 30, 2022,March 31, 2023, we had real property rental revenue of $290,821,$296,165, as compared to $280,232$297,631 for the three months ended June 30, 2021,
an increaseMarch 31, 2022, a decrease of $10,589,$1,466, or 3.8%0.5%. For the six months ended June 30, 2022, we had real property rental revenue of $588,452, as compared
to $570,006 for the six months ended June 30, 2021, an increase of $18,446, or 3.2%. The slight increase was primarily attributable to
the increase of tenants 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.
Costs andReal Property Operating 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 June 30, 2022,March 31, 2023, our real property operating expenses amounted to $211,703,$248,445, as compared to $205,147$218,448 for the three months ended June
30, 2021,March 31, 2022, an increase of $6,556,$29,997, or 3.2%13.7%. The increase was mainly due to an increase in property management fees of approximately $9,000, an increase in repairs and maintenance fee of approximately $16,000, an increase in utilities of approximately $5,000.
For the six months ended
June 30, 2022, our real property operating expenses amounted to $430,151, as compared to $422,041 for the six months ended June 30, 2021,
an increase of $8,110, or 1.9%.
Real Property Operating Income
Our real property operating income for the three months ended June 30, 2022March 31, 2023 was $79,118,$47,720, representing an increasea decrease of $4,033,$31,463 or 5.4%39.7%, as compared to $75,085$79,183 for the three months ended June 30, 2021. Our real property operating income for the six months ended June 30, 2022March 31, 2022. The decrease was $158,301, representing an increase of $10,336,
or 7.0%, as compared to $147,965 for the six months ended June 30, 2021. The increase was mainlyprimarily attributable to the increase in real property rental revenueoperating 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.
Other Operating Expenses
For the three and six
months ended June 30,March 31, 2023 and 2022, and 2021, other operating expenses consisted of the following:
June 30, | June 30, | |||||||||||||||
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Advertising and marketing expenses | $ | 691,753 | $ | 526,806 | ||||
Professional fees | 1,226,239 | 821,308 | ||||||
Compensation and related benefits | 451,555 | 523,045 | ||||||
Research and development | 92,350 | 116,684 | ||||||
Travel and entertainment | 62,374 | 38,280 | ||||||
Directors and officers liability insurance | 103,801 | 103,584 | ||||||
Rent and related utilities | 17,288 | 20,556 | ||||||
Other general and administrative | 66,596 | 55,862 | ||||||
$ | 2,711,956 | $ | 2,206,125 |
For the three months ended |
Professional fees primarily consisted of accounting fees, audit fees, legal service fees, consulting fees, investor relations service charges |
For the three months ended |
For the three months ended |
For the three months ended |
For the three months ended |
● | For the |
Other general and administrative expenses mainly consisted of NASDAQ listing fee, office supplies, miscellaneous taxes, and other miscellaneous items. For the three months ended |
Loss from Operations
As a result of the foregoing, for the three months ended June 30, 2022,March 31, 2023, loss from operations amounted to $2,843,571,$2,664,236, as compared to $2,302,280$2,126,942 for the three months ended June 30, 2021, an increaseMarch 31, 2022, a decrease of $541,291$537,294 or 23.5%25.3%.
As a result of the foregoing,
for the six months ended June 30, 2022, loss from operations amounted to $4,970,513, as compared to $4,605,868 for the six months ended
June 30, 2021, an increase of $364,645 or 7.9%.
Other (Expense) Income
Other (expense) income mainly includes third party and related party interest expense, lossincome (loss) from equity method investment, change in fair value of derivative liability,investments, and other miscellaneous income (expense). income.
Other income,expense, net, totaled $815,097$119,678 for the three months ended June 30, 2022,March 31, 2023, as compared to other expense,income, net, of $62,630$56,404 for the three months ended June 30,
2021,March 31, 2022, a changedecrease of $877,727,$176,082, or 1,401.4%312.2%, which was primarily attributable to an increase in interest expense of approximately $116,000 mainly driven by the amortization of debt discount and the increase in outstanding borrowings in the first quarter of 2023, and a decrease in other miscellaneous income of approximately $153,000 mainly driven$110,000, offset by reagent sale in the second quarter 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 $4,000, offset by an increase in interest
expense of approximately $48,000 due to the increase in outstanding borrowings.$50,000.
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,March 31, 2023 and 2022 and 2021 since we incurred losses in these periods. We did not have any income taxes expense for
the six months ended June 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$2,783,914 for the three months ended June 30, 2022,March 31, 2023, as compared to $2,364,910$2,070,538 for the three months ended June 30, 2021, a decreaseMarch 31, 2022, an increase of $336,436$713,376 or 14.2%34.5%.
As a result
of the factors described above, our net loss was $4,099,012 for the six months ended June 30, 2022, as compared to $4,732,028 for the
six months ended June 30, 2021, a decrease of $633,016 or 13.4%.
Net Loss Attributable to Avalon GloboCare Corp. Common Shareholders
The net loss attributable to Avalon GloboCare Corp. common shareholders was $2,028,474$2,783,914 or $0.02$0.28 per share (basic and diluted) for the three months ended June 30, 2022,March 31, 2023, as compared with $2,364,910,$2,070,538 or $0.03$0.23 per share (basic and diluted) for the three months ended June 30, 2021, a changeMarch 31, 2022, an increase of $336,436$713,376 or 14.2%34.5%.
The net
loss attributable to Avalon GloboCare Corp. common shareholders was $4,099,012 or $0.05 per share (basic and diluted) for the six months
ended June 30, 2022, as compared with $4,732,028, or $0.06 per share (basic and diluted) for the six months ended June 30, 2021, a change
of $633,016 or 13.4%.
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 and a foreign
currency translation gain of $14,786$3,670 and $2,021 for the three months ended June 30,March 31, 2023 and 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 and a foreign currency translation
gain of $12,064 for the six months ended June 30, 2022 and 2021, respectively. This non-cash loss/gain had the effect of increasing/decreasing our reported comprehensive loss.
Comprehensive Loss
As a result of our foreign currency translation adjustment, we had comprehensive loss of $2,071,977$2,780,244 and $2,350,124$2,068,517 for the three months ended June 30,March 31, 2023 and 2022, and 2021,
respectively.
As a result of our foreign
currency translation adjustment, we had comprehensive loss of $4,140,494 and $4,719,964 for the six months ended June 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,Jersey 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 or debt 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’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 June 30, 2022March 31, 2023 and December 31, 2021,2022, we had cash balance of approximately $1,180,000$887,000 and $808,000,$1,991,000, respectively. These funds are kept in financial institutions located as follows:
Country: | March 31, 2023 | December 31, 2022 | ||||||||||||||
United States | $ | 787,978 | 88.8 | % | $ | 1,806,083 | 90.7 | % | ||||||||
China | 99,053 | 11.2 | % | 184,827 | 9.3 | % | ||||||||||
Total cash | $ | 887,031 | 100.0 | % | $ | 1,990,910 | 100.0 | % |
Under the applicable PRCPeople’s Republic of China (“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 enterprisean FIE 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 small 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 deficit from December 31, 20212022 to June 30, 2022:March 31, 2023:
March 31, | December 31 | Changes in | ||||||||||||||
2023 | 2022 | Amount | Percentage | |||||||||||||
Working capital (deficit): | ||||||||||||||||
Total current assets | $ | 1,391,381 | $ | 2,373,526 | $ | (982,145 | ) | (41.4 | )% | |||||||
Total current liabilities | 5,176,471 | 3,579,805 | 1,596,666 | 44.6 | % | |||||||||||
Working capital (deficit) | $ | (3,785,090 | ) | $ | (1,206,279 | ) | $ | (2,578,811 | ) | 213.8 | % |
Our working capital deficit increased by $2,478,854$2,578,811 to $5,557,470$3,785,090 at June 30, 2022March 31, 2023 from $3,078,616$1,206,279 at December 31, 2021.2022. 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 an increasedecrease in cash of approximately $373,000, a
decrease$1,104,000, an increase in accrued professional fees of approximately $396,000,$414,000 which was mainly dueattributable to payments madethe increase in professional service related to our professional service
providerspurchase of 40% of Lab Services MSO, an increase in the first half of 2022, a decrease in accrued research and development feesoperating lease obligation of approximately $319,000$110,000, an increase in equity method investment payable of $1,000,000 resulting from payments made to researchthe purchase of 40% of Lab Services MSO incurred in February 2023, offset by an increase in prepaid expense and development service provider in the six months ended June 30, 2022 , and a decrease in note payable
– related partyother current assets of $390,000 due to repayment made to this related party in the first half of 2022.approximately $123,000.
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 SixThree Months Ended June 30,
2022March 31, 2023 Compared to the SixThree Months Ended June 30, 2021March 31, 2022
The following summarizes the key components of our cash flows for the sixthree months ended June 30, 2022March 31, 2023 and 2021:2022:
June 30, | ||||||||
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Net cash used in operating activities | $ | (1,834,810 | ) | $ | (511,208 | ) | ||
Net cash used in investing activities | (20,185 | ) | (1,749 | ) | ||||
Net cash provided by financing activities | 750,000 | 231,500 | ||||||
Effect of exchange rate on cash | 1,116 | 209 | ||||||
Net decrease in cash | $ | (1,103,879 | ) | $ | (281,248 | ) |
Net cash flow used in operating activities for the sixthree months ended June 30, 2022March 31, 2023 was $2,686,722,$1,834,810, which primarily reflected our consolidated net loss of approximately $4,099,000, and the non-cash item adjustment consisting of change in fair market value of derivative liability of
approximately $769,000,$2,784,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in operating lease
obligation of approximately $80,000, offset by an increase in accounts payableprepaid expense and other assets of approximately $389,000,$87,000, offset by an increase in accrued liabilities and other payables of approximately $675,000,$635,000 which was mainlyprimarily attributable theto an 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 due to payments made$414,000 resulting from the increase in professional service related to our professional service providers in the first halfpurchase of 202240% of Lab Services MSO and the decreasean increase in accrued research and development fees of approximately $319,000 resulting from payments made to research and development service
provider in the six months ended June 30, 2022,$62,000 and an increase in accrued liabilities and other payables – related parties of approximately $72,000,$159,000, and the non-cash items adjustment primarily consisting of depreciation of approximately $169,000,
amortization of right-of-use asset of approximately $68,000,$61,000, and stock-based compensation and service expense of approximately $821,000,
and amortization of debt discount of approximately $55,000.$327,000.
Net cash flow used in operating activities for the sixthree months ended June 30, 2021March 31, 2022 was $2,593,548,$511,208, which primarily reflected our consolidated net loss of approximately $4,732,000, and$2,071,000, offset by 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,$794,000 which was primarily attributable to an increase in accrued professional fees of approximately $686,000 resulting from the increase in professional service providers and an increase in other miscellaneous items of approximately $108,000, and the non-cash items adjustment primarily consisting of depreciation of approximately $141,000, amortization of right-of-use asset of approximately $60,000,$85,000, and stock-based compensation and service expense of approximately $1,087,000.$606,000.
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$20,185 for the sixthree months ended June 30, 2022March 31, 2023 as compared to $50,511$1,749 for the sixthree months ended June 30,
2021.March 31, 2022. During the sixthree months ended June 30,March 31, 2023 and 2022, we made paymentspayment for purchase of property and equipment of approximately $20,000 and $2,000, and made
additional investment in equity method investment of approximately $54,000. During the six
months ended June 30, 2021, we made payment for improvement of commercial real estate of approximately $10,000 and made additional investment
in equity method investment of approximately $40,000. respectively.
Net cash flow provided by financing activities was $3,130,443$750,000 for the sixthree months ended June 30, 2022March 31, 2023 as compared to $2,600,151$231,500 for the sixthree months ended June
30, 2021.March 31, 2022. During the sixthree months ended June 30,March 31, 2023, we received proceeds from related party borrowings of $750,000. During the three months ended March 31, 2022, we received proceeds from related party borrowings of approximately $100,000 and net proceeds from equity offering of approximately $112,000 (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 six months ended June 30, 2021, we received proceeds from related party borrowings
of approximately $193,000 and net proceeds from equity offering of approximately $2,407,000$132,000 (net of cash paid for commission of approximately $74,000)$4,000).
Our capital requirements
for the next twelve months primarily relate to working capital requirements, including salaries, fees related to third 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 |
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 June 30, 2022,March 31, 2023, the total principal amount outstanding under the Credit Line was $2.4 million$750,000 and we used approximately $6.7 million of the credit facility and have approximately $14.1$13.3 million remaining available under the Line Credit.
On December 13,
2019, we entered into an Open Market Sale AgreementSM (the “Sales Agreement”) with Jefferies LLC, as sales
agent (“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 June 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 flow provided by operations, and cash available under our Credit Line and sales of equity through our Sales Agreement.equity. Under the Line of Credit, the Company received a loan from the Lender of $100,000 in April 2023. 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.
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 June 30, 2022, and the effect these obligations
are expected to have on our liquidity and cash flows in future periods.
Off-balance Sheet Arrangements
We presently do not have off-balance sheet arrangements.
Foreign Currency Exchange Rate Risk
A portionIn November of our2022, we decided to cease all operations are in China.China with the exception of a small administrative office, Avalon Shanghai. We do not expect nor do we plan that there will be further revenue generated from PRC operations in the foreseeable future. Thus, a portion of our revenues and operating results may be impacted by exchange rate fluctuations between RMB and US dollars.dollars do not have a material effect on us. For the three months ended June 30,March 31, 2023 and 2022, and 2021, we had an unrealized foreign currency translation loss of approximately
$44,000 and an unrealized foreign currency translation gain of approximately $15,000,$4,000 and $2,000, respectively, because of changes in the exchange rate. For the six months ended June 30, 2022 and 2021, we had an unrealized foreign currency translation loss of approximately $42,000
and an unrealized foreign currency translation gain of approximately $12,000, respectively, because of changes in the exchange rate.
Inflation
The effect of inflation on our revenue and operating results was not significant.
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”) is recorded, processed, summarized and reported within the time periods specified in the SEC’sSecurities and Exchange Commission’s (the “SEC”) 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 reportthis Quarterly Report on Form 10-Q for the quarter ended June 30, 2022,March 31, 2023, 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’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 reportingdisclosure controls and procedures were not effective as of June 30, 2022March 31, 2023 due to the significant
deficiencies which aggregate to a material weakness andthat was previously reported in our Form 10-K Annual Report for the year ended December 31, 2021 (“2021 10-K”),2022, 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.
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.proceedings.
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’s Hospital (“Research 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”) 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’s initial pre-tax profit of $3,333,333, 20% of the Company’s second pre-tax profit
of $3,333,333 and 10% of the Company’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 fromIn addition to the risk factorsother information set forth underin this report, you should carefully consider the factors discussed in Part I, Item“Item 1A., “Risk Factors”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 report2022, 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, aremay not be the only risks and uncertainties facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may also have a material adverse effect onmaterially adversely affect our business, financial position, results of operations
condition and/or cash flows. operating results.
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 sixthree months ended June 30, 2022, the CompanyMarch 31, 2023, we issued a total of 408,957202,731 shares of itsour common stock for services rendered and to be rendered. These shares were valued at $340,950,$463,375, the fair market values on the grant dates using the reported closing share prices on the dates of grant, and the Companywe recorded stock-based compensation expense of $254,923$243,928 for the sixthree months ended June 30,
2022March 31, 2023 and reduced accrued liabilities of $30,000$164,871 and recorded prepaid expense of $56,027$54,576 as of June 30, 2022March 31, 2023 which will be amortized over the rest of corresponding service periods.
Subsequent Event Issuances
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”) entered into a Conversion Agreement pursuant to which Fsunshine converted
its Convertible Notes in the amount of approximately $3.7 million, including interest, into 5,736,452 shares of common stock of the Company
at a per share price of $0.65.
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, as amended, 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.Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
None.Not applicable.
ITEM 5. OTHER INFORMATION
Equity OfferingNot applicable.
On December 13,
2019, the Company entered into an Open Market Sale AgreementSM (the “Sales Agreement”) with Jefferies LLC,
as sales agent (“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’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, 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 notice from The Nasdaq Stock Market (“Nasdaq”) that the closing bid price for the Company’s common
stock had been below $1.00 per share for the previous 30 consecutive business days, and that the Company is therefore not in compliance
with the minimum bid price requirement for continued inclusion on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the
“Rule”). Nasdaq’s notice has no immediate effect on the listing or trading of the Company’s common stock on The
Nasdaq Capital Market. The notice indicates that the Company will have 180 calendar days, until August 8, 2022, to regain compliance with
this requirement. The Company can regain compliance with the $1.00 minimum bid listing requirement if the closing bid price of its common
stock is at least $1.00 per share for a minimum of ten (10) consecutive business days during the 180-day compliance period. If the Company
does not regain compliance during 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 second compliance period, Nasdaq will provide
written notice to the Company that the Company’s common stock will be subject to delisting. In the event of such notification, the
Company may appeal Nasdaq’s determination to delist its securities, but there can be no assurance that 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. 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.
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.
ITEM 6. EXHIBITS
The following exhibits are filed as part of or incorporated by reference
into, this Quarterly Report on Form 10-Q.10-Q are listed in the exhibit index included herewith and are incorporated by reference herein.
EXHIBIT INDEX
* | Filed |
** | Furnished herewith. |
Management contract or compensatory plan or arrangement. |
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. | |||
By: | /s/ David K. Jin | ||
David K. Jin | |||
Chief Executive Officer Director (Principal | |||
(Principal Executive | |||
By: | /s/ Luisa Ingargiola | ||
Name: | Luisa Ingargiola | ||
Chief Financial Officer | |||
(Principal Financial and Accounting |
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