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 September 30, 20172023
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: 000-55709
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(732) 780-4400
(Address of principal executive offices) (zip code)
(646) 762-4517
(Registrant’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 $0.0001per share | ALBT | The NasdaqCapital 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 accelerated filer,” “accelerated filer,” “smaller reporting company,”company” and “emerging growth 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 November 14, 2017, 67,218,6222023,10,999,534 shares of common stock, $0.0001 par value $0.0001 per share, were issued and outstanding.
AVALON GLOBOCARE CORP.
FORM 10-Q
For the Quarterly Period Ended September 30, 20172023
TABLE OF CONTENTSTable of Contents
FORWARD LOOKING STATEMENTSi
Thisreport 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.
Althoughforward-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.
Wefile 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.
Weundertake 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” or the “Company” refer to Avalon GloboCare Corp. and its subsidiaries.
PART 1 - FINANCIAL INFORMATION
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 356,822 | $ | 2,886,189 | ||||
| Accounts receivable - related parties, net of allowance for doubtful accounts | 166,874 | 70,228 | ||||||
| Tenants receivable, net of allowance for doubtful accounts | 56,239 | — | ||||||
| Security deposit | 6,012 | �� | — | |||||
| Prepaid expenses and other | 36,414 | 749,796 | ||||||
| Total Current Assets | 622,361 | 3,706,213 | ||||||
| OTHER ASSETS: | ||||||||
| Security deposit - noncurrent portion | 24,763 | — | ||||||
| Property, plant and equipment, net | 46,365 | 295 | ||||||
| Investment in real estate, net | 7,655,562 | — | ||||||
| Total Other Assets | 7,726,690 | 295 | ||||||
| Total Assets | $ | 8,349,051 | $ | 3,706,508 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 21,600 | $ | — | ||||
| Accrued liabilities and other payables | 343,002 | 22,334 | ||||||
| Accrued liabilities and other payables - related parties | 31,634 | 8,587 | ||||||
| Deferred rental income | 19,914 | — | ||||||
| Loan payable | 2,100,000 | — | ||||||
| Income taxes payable | — | 20,976 | ||||||
| VAT and other taxes payable | 2,091 | 11,270 | ||||||
| Tenants’ security deposit | 92,288 | — | ||||||
| Due to related parties | 306,650 | 97,150 | ||||||
| Refundable deposit | 3,000,000 | — | ||||||
| Total Current Liabilities | 5,917,179 | 160,317 | ||||||
| Commitments and Contingencies - (Note 14) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2017 and December 31, 2016 | — | — | ||||||
| Common stock, $0.0001 par value; 490,000,000 shares authorized; 64,628,622 and 61,628,622 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 6,463 | 6,163 | ||||||
| Additional paid-in capital | 4,283,311 | 3,681,387 | ||||||
| Accumulated deficit | (1,743,939 | ) | (53,369 | ) | ||||
| Statutory reserve | 6,578 | 6,578 | ||||||
| Accumulated other comprehensive loss - foreign currency translation adjustment | (120,541 | ) | (94,568 | ) | ||||
| Total Stockholders’ Equity | 2,431,872 | 3,546,191 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 8,349,051 | $ | 3,706,508 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| REVENUES | ||||||||||||||||
| Real property rental revenue | $ | 315,284 | $ | — | $ | 537,538 | $ | — | ||||||||
| Consulting services revenue - related parties | 2,166 | 326,667 | 220,949 | 326,667 | ||||||||||||
| Total Revenues | 317,450 | 326,667 | 758,487 | 326,667 | ||||||||||||
| COSTS AND EXPENSES | ||||||||||||||||
| Real property operating expenses | 180,722 | — | 342,576 | — | ||||||||||||
| Consulting services costs - related parties | 47,033 | 33,548 | 271,845 | 33,548 | ||||||||||||
| Total Costs and Expenses | 227,755 | 33,548 | 614,421 | 33,548 | ||||||||||||
| REAL PROPERTY OPERATING INCOME | 134,562 | — | 194,962 | — | ||||||||||||
| GROSS (LOSS) PROFIT FROM CONSULTING SERVICES | (44,867 | ) | 293,119 | (50,896 | ) | 293,119 | ||||||||||
| OTHER OPERATING EXPENSES: | ||||||||||||||||
| Selling expense | 148 | 121 | 15,138 | 121 | ||||||||||||
| Compensation and related benefits | 468,837 | — | 857,237 | — | ||||||||||||
| Professional fees | 186,208 | 84,038 | 566,131 | 161,113 | ||||||||||||
| Other general and administrative | 92,421 | 1,127 | 245,080 | 29,583 | ||||||||||||
| Total Other Operating Expenses | 747,614 | 85,286 | 1,683,586 | 190,817 | ||||||||||||
| (LOSS) INCOME FROM OPERATIONS | (657,919 | ) | 207,833 | (1,539,520 | ) | 102,302 | ||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest income | 122 | 41 | 1,126 | 101 | ||||||||||||
| Interest expense | (52,932 | ) | — | (94,932 | ) | — | ||||||||||
| Foreign currency transaction loss | — | — | (57,244 | ) | — | |||||||||||
| Total Other (Expense) Income, net | (52,810 | ) | 41 | (151,050 | ) | 101 | ||||||||||
| (LOSS) INCOME BEFORE INCOME TAXES | (710,729 | ) | 207,874 | (1,690,570 | ) | 102,403 | ||||||||||
| INCOME TAXES | — | — | — | — | ||||||||||||
| NET (LOSS) INCOME | $ | (710,729 | ) | $ | 207,874 | $ | (1,690,570 | ) | $ | 102,403 | ||||||
| COMPREHENSIVE (LOSS) INCOME | ||||||||||||||||
| NET (LOSS) INCOME | (710,729 | ) | 207,874 | (1,690,570 | ) | 102,403 | ||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||
| Unrealized foreign currency translation gain (loss) | 6,151 | 216 | (25,973 | ) | 431 | |||||||||||
| COMPREHENSIVE (LOSS) INCOME | $ | (704,578 | ) | $ | 208,090 | $ | (1,716,543 | ) | $ | 102,834 | ||||||
| NET (LOSS) INCOME PER COMMON SHARES: | ||||||||||||||||
| Basic and diluted | $ | (0.011 | ) | $ | 0.004 | $ | (0.026 | ) | $ | 0.002 | ||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic and diluted | 64,628,622 | 50,000,000 | 63,958,292 | 50,000,000 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| Preferred Stock | Common Stock | Additional | Accumulated | Total | ||||||||||||||||||||||||||||||||
| Number of | Number of | Paid-in | Accumulated | Statutory | Other | Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Reserve | Comprehensive Loss | Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2016 | — | $ | — | 61,628,622 | $ | 6,163 | $ | 3,681,387 | $ | (53,369 | ) | $ | 6,578 | $ | (94,568 | ) | $ | 3,546,191 | ||||||||||||||||||
| Common shares issued in connection with Share Subscription Agreement | — | — | 3,000,000 | 300 | (300 | ) | — | — | — | — | ||||||||||||||||||||||||||
| Options granted for service | — | — | — | — | 602,224 | — | — | — | 602,224 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | — | (25,973 | ) | (25,973 | ) | |||||||||||||||||||||||||
| Net loss for the nine months ended September 30, 2017 | — | — | — | — | — | (1,690,570 | ) | — | — | (1,690,570 | ) | |||||||||||||||||||||||||
| Balance, September 30, 2017 | — | $ | — | 64,628,622 | $ | 6,463 | $ | 4,283,311 | $ | (1,743,939 | ) | $ | 6,578 | $ | (120,541 | ) | $ | 2,431,872 | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.Item 1. Financial Statements.
| For the Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income | $ | (1,690,570 | ) | $ | 102,403 | |||
| Adjustments to reconcile net (loss) income from operations to | ||||||||
| net cash (used in) provided by operating activities: | ||||||||
| Depreciation expense | 58,478 | — | ||||||
| Options granted for service | 602,224 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable - related parties | (91,463 | ) | — | |||||
| Tenants receivable | (56,239 | ) | — | |||||
| Prepaid expenses and other | 14,151 | (5,125 | ) | |||||
| Security deposit | (30,081 | ) | — | |||||
| Accounts payable | 21,600 | — | ||||||
| Accrued liabilities and other payables | 320,505 | (2,790 | ) | |||||
| Accrued liabilities and other payables - related parties | 22,990 | 6,226 | ||||||
| Deferred rental income | 19,914 | — | ||||||
| Advance from customers - related parties | — | 227,184 | ||||||
| Income taxes payable | (21,400 | ) | — | |||||
| VAT and other taxes payable | (9,453 | ) | — | |||||
| Tenants’ security deposit | 92,288 | — | ||||||
| NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | (747,056 | ) | 327,898 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of Avalon GloboCare Corp.’s shares | — | (230,000 | ) | |||||
| Purchase of property, plant and equipment | (50,994 | ) | (395 | ) | ||||
| Purchase of commercial real estate | (7,008,571 | ) | — | |||||
| NET CASH USED IN INVESTING ACTIVITIES | (7,059,565 | ) | (230,395 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds received from loan payable | 2,100,000 | — | ||||||
| Proceeds received from related parties’ advance | 210,000 | 9,000 | ||||||
| Repayment for related parties’ advance | (500 | ) | — | |||||
| Proceeds received from AHS’s founders’ contribution | — | 141,000 | ||||||
| Refundable deposit in connection with Share Subscription Agreement | 3,000,000 | — | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 5,309,500 | 150,000 | ||||||
| EFFECT OF EXCHANGE RATE ON CASH | (32,246 | ) | (1,262 | ) | ||||
| NET (DECREASE) INCREASE IN CASH | (2,529,367 | ) | 246,241 | |||||
| CASH - beginning of period | 2,886,189 | 109,586 | ||||||
| CASH - end of period | $ | 356,822 | $ | 355,827 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | — | $ | — | ||||
| Income taxes | $ | 21,400 | $ | — | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Stock issued in connection with Share Subscription Agreement | $ | 300 | $ | — | ||||
| Distribution of Avalon GloboCare Corp.’s shares to owners | $ | — | $ | 230,000 | ||||
| Acquisition of real estate by decreasing prepayment for property | $ | 700,000 | $ | — | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 341,771 | $ | 1,990,910 | ||||
| Rent receivable | 116,665 | 134,626 | ||||||
| Prepaid expense and other current assets | 405,599 | 247,990 | ||||||
| Total Current Assets | 864,035 | 2,373,526 | ||||||
| NON-CURRENT ASSETS: | ||||||||
| Operating lease right-of-use assets, net | 154,854 | 10,885 | ||||||
| Property and equipment, net | 40,334 | 138,294 | ||||||
| Investment in real estate, net | 7,233,575 | 7,360,087 | ||||||
| Equity method investments, net | 21,370,060 | 485,008 | ||||||
| Advances for equity interest purchase | - | 8,999,722 | ||||||
| Other non-current assets | 304,323 | 384,383 | ||||||
| Total Non-current Assets | 29,103,146 | 17,378,379 | ||||||
| Total Assets | $ | 29,967,181 | $ | 19,751,905 | ||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accrued professional fees | $ | 1,730,232 | $ | 1,673,411 | ||||
| Accrued research and development fees | 891,751 | 838,001 | ||||||
| Accrued payroll liability and compensation | 385,754 | 223,722 | ||||||
| Accrued litigation settlement | 450,000 | 450,000 | ||||||
| Accrued liabilities and other payables | 383,287 | 283,234 | ||||||
| Accrued liabilities and other payables - related parties | 159,481 | 100,000 | ||||||
| Operating lease obligation | 124,438 | 11,437 | ||||||
| Equity method investment payable | 1,000,000 | - | ||||||
| Derivative liability | 41,048 | - | ||||||
| Convertible note payable, net | 1,525,834 | - | ||||||
| Total Current Liabilities | 6,691,825 | 3,579,805 | ||||||
| NON-CURRENT LIABILITIES: | ||||||||
| Operating lease obligation - noncurrent portion | 36,416 | - | ||||||
| Accrued litigation settlement - noncurrent portion | - | 450,000 | ||||||
| Note payable, net | 5,566,412 | 4,563,152 | ||||||
| Loan payable - related party | 850,000 | - | ||||||
| Total Non-current Liabilities | 6,452,828 | 5,013,152 | ||||||
| Total Liabilities | 13,144,653 | 8,592,957 | ||||||
| Commitments and Contingencies (Note 15) | ||||||||
| EQUITY: | ||||||||
| Preferred stock, $0.0001 par value; 10,000,000 shares authorized; | ||||||||
| Series A Convertible Preferred Stock, 9,000 shares issued and outstanding at September 30, 2023 and December 31, 2022. Liquidation preference $9 million at September 30, 2023 | 9,000,000 | 9,000,000 | ||||||
| Series B Convertible Preferred Stock, 11,000 and 0 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively. Liquidation preference $11 million at September 30, 2023 | 11,000,000 | - | ||||||
| Common stock, $0.0001 par value; 490,000,000 shares authorized; 10,981,534 shares issued and 10,929,534 shares outstanding at September 30, 2023; 10,013,576 shares issued and 9,961,576 shares outstanding at December 31, 2022 | 1,098 | 1,005 | ||||||
| Additional paid-in capital | 67,781,112 | 65,949,723 | ||||||
| Less: common stock held in treasury, at cost; 52,000 shares at September 30, 2023 and December 31, 2022 | (522,500 | ) | (522,500 | ) | ||||
| Accumulated deficit | (70,214,597 | ) | (63,062,721 | ) | ||||
| Statutory reserve | 6,578 | 6,578 | ||||||
| Accumulated other comprehensive loss | (229,163 | ) | (213,137 | ) | ||||
| Total Avalon GloboCare Corp. stockholders' equity | 16,822,528 | 11,158,948 | ||||||
| Non-controlling interest | - | - | ||||||
| Total Equity | 16,822,528 | 11,158,948 | ||||||
| Total Liabilities and Equity | $ | 29,967,181 | $ | 19,751,905 | ||||
See accompanying notes to the condensed consolidated financial statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| RENTAL REVENUE | $ | 331,290 | $ | 317,390 | $ | 934,360 | $ | 905,842 | ||||||||
| OPERATING EXPENSES | 288,083 | 247,152 | 781,931 | 677,303 | ||||||||||||
| OPERATING INCOME | 43,207 | 70,238 | 152,429 | 228,539 | ||||||||||||
| INCOME FROM EQUITY METHOD INVESTMENT - LAB SERVICES MSO | 354,500 | - | 370,060 | - | ||||||||||||
| OTHER OPERATING EXPENSES: | ||||||||||||||||
| Advertising and marketing expenses | 437,750 | 150,620 | 1,634,720 | 807,821 | ||||||||||||
| Professional fees | 435,144 | 628,807 | 2,659,895 | 1,886,562 | ||||||||||||
| Compensation and related benefits | 469,959 | 488,373 | 1,375,637 | 1,514,959 | ||||||||||||
| Research and development expenses | - | 170,406 | 110,160 | 541,566 | ||||||||||||
| Litigation settlement | - | - | - | 1,350,000 | ||||||||||||
| Other general and administrative expenses | 195,990 | 221,131 | 704,908 | 687,243 | ||||||||||||
| Total Other Operating Expenses | 1,538,843 | 1,659,337 | 6,485,320 | 6,788,151 | ||||||||||||
| LOSS FROM OPERATIONS | (1,141,136 | ) | (1,589,099 | ) | (5,962,831 | ) | (6,559,612 | ) | ||||||||
| OTHER (EXPENSE) INCOME | ||||||||||||||||
| Interest expense - amortization of debt discount and debt issuance cost | (199,136 | ) | (3,248,597 | ) | (290,794 | ) | (3,303,282 | ) | ||||||||
| Interest expense - other | (229,144 | ) | (46,547 | ) | (527,702 | ) | (53,751 | ) | ||||||||
| Interest expense - related party | (10,712 | ) | (8,358 | ) | (23,000 | ) | (79,898 | ) | ||||||||
| Conversion inducement expense | - | (344,264 | ) | - | (344,264 | ) | ||||||||||
| Loss from equity method investment - Epicon | - | (9,011 | ) | (18,564 | ) | (33,809 | ) | |||||||||
| Change in fair value of derivative liability | 87,173 | (168,520 | ) | 128,894 | 600,749 | |||||||||||
| Impairment of equity method investment - Epicon | - | - | (464,406 | ) | - | |||||||||||
| Other income | 7,880 | 242 | 6,527 | 260,701 | ||||||||||||
| Total Other Expense, net | (343,939 | ) | (3,825,055 | ) | (1,189,045 | ) | (2,953,554 | ) | ||||||||
| LOSS BEFORE INCOME TAXES | (1,485,075 | ) | (5,414,154 | ) | (7,151,876 | ) | (9,513,166 | ) | ||||||||
| INCOME TAXES | - | - | - | - | ||||||||||||
| NET LOSS | $ | (1,485,075 | ) | $ | (5,414,154 | ) | $ | (7,151,876 | ) | $ | (9,513,166 | ) | ||||
| LESS: NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST | - | - | - | - | ||||||||||||
| NET LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS | $ | (1,485,075 | ) | $ | (5,414,154 | ) | $ | (7,151,876 | ) | $ | (9,513,166 | ) | ||||
| COMPREHENSIVE LOSS: | ||||||||||||||||
| NET LOSS | $ | (1,485,075 | ) | $ | (5,414,154 | ) | $ | (7,151,876 | ) | $ | (9,513,166 | ) | ||||
| OTHER COMPREHENSIVE LOSS | ||||||||||||||||
| Unrealized foreign currency translation loss | (8,685 | ) | (37,033 | ) | (16,026 | ) | (78,515 | ) | ||||||||
| COMPREHENSIVE LOSS | (1,493,760 | ) | (5,451,187 | ) | (7,167,902 | ) | (9,591,681 | ) | ||||||||
| LESS: COMPREHENSIVE LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST | - | - | - | - | ||||||||||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS | $ | (1,493,760 | ) | $ | (5,451,187 | ) | $ | (7,167,902 | ) | $ | (9,591,681 | ) | ||||
| NET LOSS PER COMMON SHARE ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS: | ||||||||||||||||
| Basic and diluted | $ | (0.14 | ) | $ | (0.56 | ) | $ | (0.69 | ) | $ | (1.04 | ) | ||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic and diluted | 10,795,489 | 9,703,603 | 10,372,447 | 9,152,168 | ||||||||||||
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 Nine Months Ended September 30, 2023
(Unaudited)
| Avalon GloboCare Corp. Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Series B preferred Stock | Common Stock | Additional | Treasury Stock | Accumulated Other | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of | Number of | Number of | Paid-in | Number of | Accumulated | Statutory | Comprehensive | Non-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 | - | - | ` | - | - | - | - | - | - | - | (2,919,744 | ) | - | - | - | (2,919,744 | ) | |||||||||||||||||||||||||||||||||||||||
| 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 | ) | (65,982,465 | ) | 6,578 | (209,467 | ) | - | 19,774,512 | ||||||||||||||||||||||||||||||||||||||
| To correct shares issued for adjustments for 1:10 reverse split | - | - | - | - | 50,000 | 1 | (1 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services | - | - | - | - | 158,600 | 16 | 536,264 | - | - | - | - | - | - | 536,280 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as convertible note payable commitment fee | - | - | - | - | 75,000 | 7 | 146,993 | - | - | - | - | - | - | 147,000 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | 112,015 | - | - | - | - | - | - | 112,015 | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | - | - | (11,011 | ) | - | (11,011 | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2023 | - | - | - | - | - | - | - | - | - | (2,747,057 | ) | - | - | - | (2,747,057 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | 9,000 | 9,000,000 | 11,000 | 11,000,000 | 10,499,907 | 1,050 | 67,276,611 | (52,000 | ) | (522,500 | ) | (68,729,522 | ) | 6,578 | (220,478 | ) | - | 17,811,739 | ||||||||||||||||||||||||||||||||||||||
| Sale of common stock, net | - | - | - | - | 456,627 | 46 | 414,350 | - | - | - | - | - | - | 414,396 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as convertible note payable commitment fee | - | - | - | - | 25,000 | 2 | 35,498 | - | - | - | - | - | - | 35,500 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | 54,653 | - | - | - | - | - | - | 54,653 | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | - | - | (8,685 | ) | - | (8,685 | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2023 | - | - | - | - | - | - | - | - | - | (1,485,075 | ) | - | - | - | (1,485,075 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | 9,000 | $ | 9,000,000 | 11,000 | $ | 11,000,000 | 10,981,534 | $ | 1,098 | $ | 67,781,112 | (52,000 | ) | $ | (522,500 | ) | $ | (70,214,597 | ) | $ | 6,578 | $ | (229,163 | ) | $ | - | $ | 16,822,528 | ||||||||||||||||||||||||||||
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 Nine Months Ended September 30, 2022
(Unaudited)
| Avalon GloboCare Corp. Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Common Stock | Additional | Treasury Stock | Accumulated Other | Non- | ||||||||||||||||||||||||||||||||||||||||||||||
| Number of | Number of | to be | Paid-in | Number of | Accumulated | Statutory | Comprehensive | controlling | Total | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Issued | Capital | Shares | Amount | Deficit | Reserve | Loss | Interest | Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | - | $ | - | 8,897,517 | $ | 890 | $ | - | $ | 54,896,567 | (52,000 | ) | $ | (522,500 | ) | $ | (51,131,874 | ) | $ | 6,578 | $ | (165,266 | ) | $ | - | $ | 3,084,395 | |||||||||||||||||||||||||
| Sale of common stock, net | - | - | 17,064 | 2 | - | 112,326 | - | - | - | - | - | - | 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 | - | - | 8,914,581 | 892 | - | 55,161,216 | (52,000 | ) | (522,500 | ) | (53,202,412 | ) | 6,578 | (163,245 | ) | - | 1,280,529 | |||||||||||||||||||||||||||||||||||
| Warrants issued with convertible debt offering | - | - | - | - | - | 498,509 | - | - | - | - | - | - | 498,509 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services | - | - | 40,896 | 4 | - | 340,946 | - | - | - | - | - | - | 340,950 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | 126,301 | - | - | - | - | - | - | 126,301 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | - | (43,503 | ) | - | (43,503 | ) | |||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2022 | (2,028,474 | ) | (2,028,474 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | - | - | 8,955,477 | 896 | - | 56,126,972 | (52,000 | ) | (522,500 | ) | (55,230,886 | ) | 6,578 | (206,748 | ) | - | 174,312 | |||||||||||||||||||||||||||||||||||
| Conversion of convertible note payable and accrued interest into common stock | - | - | 573,645 | 57 | - | 4,072,901 | - | - | - | - | - | - | 4,072,958 | |||||||||||||||||||||||||||||||||||||||
| Reclassification of derivative liability to equity | - | - | - | - | - | 2,181,820 | - | - | - | - | - | - | 2,181,820 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of loan payable and accrued interest - related party | - | - | 444,399 | 44 | - | 2,888,549 | - | - | - | - | - | - | 2,888,593 | |||||||||||||||||||||||||||||||||||||||
| Sale of common stock - related party | - | - | - | - | 350,000 | - | - | - | - | - | - | - | 350,000 | |||||||||||||||||||||||||||||||||||||||
| Sale of common stock | - | - | - | - | 250,000 | - | - | - | - | - | - | - | 250,000 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | 110,442 | - | - | - | - | - | - | 110,442 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | - | (37,033 | ) | - | (37,033 | ) | |||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2022 | - | - | - | - | - | - | - | - | (5,414,154 | ) | - | - | - | (5,414,154 | ) | |||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | - | $ | - | 9,973,521 | $ | 997 | $ | 600,000 | $ | 65,380,684 | (52,000 | ) | $ | (522,500 | ) | $ | (60,645,040 | ) | $ | 6,578 | $ | (243,781 | ) | $ | - | $ | 4,576,938 | |||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (7,151,876 | ) | $ | (9,513,166 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Bad debt provision | - | 2,295 | ||||||
| Depreciation | 167,390 | 250,553 | ||||||
| Change in straight-line rent receivable | (7,227 | ) | (19,581 | ) | ||||
| Amortization of operating lease right-of-use asset | 89,731 | 101,980 | ||||||
| Stock-based compensation and service expense | 1,056,214 | 983,036 | ||||||
| (Income) loss from equity method investments | (351,496 | ) | 33,809 | |||||
| Impairment of equity method investment | 464,406 | - | ||||||
| Amortization of debt issuance costs and debt discount | 290,794 | 3,303,282 | ||||||
| Conversion inducement expense | - | 344,264 | ||||||
| Change in fair market value of derivative liability | (128,894 | ) | (600,749 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Rent receivable | 31,848 | (33,049 | ) | |||||
| Security deposit | 398 | (424 | ) | |||||
| Deferred leasing costs | 25,051 | 18,947 | ||||||
| Prepaid expense and other assets | (29,393 | ) | (65,963 | ) | ||||
| Accounts payable | - | 86,826 | ||||||
| Accrued liabilities and other payables | (140,442 | ) | 63,089 | |||||
| Accrued liabilities and other payables - related parties | 59,481 | 79,898 | ||||||
| Operating lease obligation | (84,387 | ) | (107,979 | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | (5,708,402 | ) | (5,072,932 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (22,171 | ) | (1,749 | ) | ||||
| Additional investment in equity method investment | - | (52,994 | ) | |||||
| NET CASH USED IN INVESTING ACTIVITIES | (22,171 | ) | (54,743 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayments of note payable - related party | - | (390,000 | ) | |||||
| Proceeds from loan payable - related party | 850,000 | 100,000 | ||||||
| Repayments of loan payable - related party | - | (410,000 | ) | |||||
| Proceeds from issuance of convertible debt and warrants | 1,900,000 | 3,718,943 | ||||||
| Payments of convertible debt issuance costs | (210,500 | ) | - | |||||
| Proceeds from issuance of balloon promissory note | 1,000,000 | 4,800,000 | ||||||
| Payments of balloon promissory note issuance costs | (64,436 | ) | (266,454 | ) | ||||
| Proceeds from equity offering | 635,391 | 735,567 | ||||||
| Disbursements for equity offering costs | (19,132 | ) | (24,067 | ) | ||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 4,091,323 | 8,263,989 | ||||||
| EFFECT OF EXCHANGE RATE ON CASH | (9,889 | ) | (5,893 | ) | ||||
| NET (DECREASE) INCREASE IN CASH | (1,649,139 | ) | 3,130,421 | |||||
| CASH - beginning of period | 1,990,910 | 807,538 | ||||||
| CASH - end of period | $ | 341,771 | $ | 3,937,959 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | 442,222 | $ | 44,000 | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Common stock issued for future services | $ | 58,500 | $ | 19,680 | ||||
| Common stock issued for accrued liabilities | $ | 164,871 | $ | 30,000 | ||||
| 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 | $ | - | ||||
| Warrants issued as convertible note payable finder's fee | $ | 13,597 | $ | - | ||||
| Warrants issued with convertible note payable recorded as debt discount | $ | 156,345 | $ | 498,509 | ||||
| Bifurcated embedded conversion feature recorded as derivative liability and debt discount | $ | - | $ | 2,782,569 | ||||
| Common stock issued as convertible note payable commitment fee | $ | 182,500 | $ | - | ||||
| Deferred financing costs in accrued liabilities | $ | 152,892 | $ | - | ||||
| Conversion of convertible note payable and accrued interest into common stock | $ | - | $ | 4,072,958 | ||||
| Reclassification of derivative liability to equity | $ | - | $ | 2,181,820 | ||||
| Related party loan and accrued interest settled in shares | $ | - | $ | 2,888,593 | ||||
See accompanying notes to the condensed consolidated financial statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(Unaudited)
NOTE 1 –— ORGANIZATION AND NATURE OF OPERATIONS
Avalon GloboCare Corp. (f/k/a Global Technologies Corp.) (the “Company” or “ALBT”) is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on July 28, 2014. On October 18, 2016, the Company changed its name to Avalon GloboCare Corp. and completed a reverse split its shares of common stock at a ratio of 1:4. 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”), each of which arewere accredited investors (“AHS Shareholders”), pursuant to which wethe Company acquired 100% of the outstanding securities of AHS in exchange for 50,000,000 shares of ourthe Company’s common stock (the “AHS Acquisition”). AHS was incorporated on May 18, 2015 under the laws of the State of Delaware. As a result of such acquisition, the Company’s operations now are focused on integrating and managing global healthcare services and resources, as well as empowering high-impact biomedical innovations and technologies to accelerate their clinical applications. Operating through two major platforms, namely “Avalon Cell”, and “Avalon Rehab”, our “technology + service” ecosystem covers the areas of regenerative medicine, cell-based immunotherapy, exosome technology, as well as fertility and rehabilitation medicine. We plan to integrate these services through joint ventures and acquisitions that bring shareholder value both in the short term, through operational entities as part of Avalon Rehab and in the long term, through biomedical innovations as part of Avalon Cell. AHS owns 100% of the capital stock of Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”), which is a wholly foreign-owned enterprise organized under the laws of the People’s Republic of China (“PRC”). Avalon Shanghai was incorporated on April 29, 2016 and is engaged in medical related consulting services for customers.
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 iswas the legal acquirer. The Company did not recognize goodwill or any intangible assets in connection with this transaction. Accordingly, the Company’s historical financial statements are those of AHS and its wholly-ownedwholly owned subsidiary, Avalon Shanghai(Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”) immediately following the consummation of this reverse merger transaction.
On January 23, 2017, AHS owns 100% of the capital stock of Avalon Shanghai, which is a wholly foreign-owned enterprise organized under the laws of the People’s Republic of China (“PRC”). Avalon Shanghai was incorporated on April 29, 2016, had limited assets and was engaged in medical related consulting services for customers. Due to the winding down of the medical related consulting services in 2022, the Company incorporateddecided to cease all operations of Avalon (BVI) Ltd,Shanghai and no longer has any material revenues or expenses in Avalon Shanghai. As a British Virgin Island company. There wasresult, Avalon Shanghai is no activity forlonger an operating entity.
The Company is a commercial stage company dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. The Company is establishing a leading role in the subsidiary since its incorporation through September 30, 2017.innovation of diagnostic testing, utilizing proprietary technology to deliver precise, genetics-driven results. The Company also provides laboratory services, offering 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.
On February 7, 2017, the Company formed Avalon RT 9 Properties, LLC (“Avalon RT 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 9S,9 South, Freehold, NJ 07728. Currently,This property was purchased to serve as the Company’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’s business consists of the ownership and operation of the income-producing real estate property in New Jersey. Avalon RT 9 owns an officeAs of September 30, 2023, the occupancy rate of the building in New Jersey.is 89.4%.
On July 31, 2017,18, 2018, the Company formed GenExosome Technologiesa wholly owned subsidiary, Avactis Biosciences Inc. (“GenExosome”Avactis”), a Nevada corporation, which focuses on accelerating commercial activities related to cellular therapies as well as cellular immunotherapy including CAR-T, CAR-NK, TCR-T and others. Avactis is designed to integrate and optimize the Company’s 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”) owns 40% of Avactis. Avactis owns 100% of the capital stock of Avactis Nanjing Biosciences Ltd., a company incorporated in Nevada. the PRC on May 8, 2020 (“Avactis Nanjing”), which only owns a patent and is not considered an operating entity.
On October 25, 2017, GenExosome and14, 2022, the Company entered intoformed a Securities Purchase Agreement pursuant to whichwholly owned subsidiary, Avalon Laboratory Services, Inc. (“Avalon Lab”), a Delaware company. On February 9, 2023, Avalon Lab purchased forty percent (40%) of 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 (“Lab Services MSO”), and its subsidiaries. Lab Services MSO, through 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)
The accompanying condensed consolidated financial statements reflect the activities of the Company acquired 60%and each of the total equity ownership of GenExosome. There were no operations for GenExosome since its incorporation through September 30, 2017.following entities:
| Name of Subsidiary | Place and Date of Incorporation | Percentage of Ownership | Principal Activities | |||
Avalon Healthcare System, Inc. (“AHS”) | Delaware May 18, 2015 | 100% held by ALBT | Developing Avalon Cell and Avalon Rehab in United States of America (“USA”) | |||
Avalon RT 9 Properties LLC (“Avalon RT 9”) | New Jersey February 7, 2017 | 100% held by ALBT | Owns and operates an income-producing real property and holds and manages the corporate headquarters | |||
Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”) | PRC April 29, 2016 | 100% held by AHS | Ceased operations and is not considered an operating entity | |||
Genexosome Technologies Inc. (“Genexosome”) | Nevada July 31, 2017 | 60% held by ALBT | No current activities to report, dormant | |||
Avactis Biosciences Inc. (“Avactis”) | Nevada July 18, 2018 | 60% held by ALBT | Patent holding company | |||
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 (“Exosome”) | Delaware June 13, 2019 | 100% held by ALBT | No activity, dormant | |||
Avalon Laboratory Services, Inc. (“Avalon Lab”) | Delaware October 14, 2022 | 100% held by ALBT | Laboratory holding company with a 40% membership interest in Lab Services MSO |
NOTE 2 –— BASIS OF PRESENTATION AND GOING CONCERN CONDITION
Basis of presentationPresentation
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 unaudited 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 unaudited 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”). The Company’s unaudited 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 unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162022 filed with the Securities and Exchange Commission on March 28, 2017.30, 2023.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(Unaudited)
NOTE 2 –— BASIS OF PRESENTATION AND GOING CONCERN CONDITION (continued)
Going Concern
Going concern
TheCompany currently has limited operations. The Company’s operations now are focused on providing outsourced, customized international healthcare services to the rapidly changing health care industry primarily focused in the People’s Republic of China and real estate property ownership and operation in the United States. The Company is also pursuing the provision of healthcare servicesa commercial stage company dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. The Company is establishing a leading role in the United States.innovation of diagnostic testing, utilizing proprietary technology to deliver precise, genetics-driven results. The Company also provides laboratory services, offering 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.
In addition, the Company owns commercial real estate that houses its headquarters in Freehold, New Jersey. The Company also has income from equity method investment through its forty percent (40%) interest in Lab Services MSO. These unaudited 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.business.
As reflected in the accompanying unaudited condensed consolidated financial statements, the Company had a working capital deficit (total current liabilities in excess of total current assets) and an accumulated deficit of $5,294,818 and $1,743,939approximately $5,828,000 at September 30, 2017, respectively,2023 and had aincurred recurring net losslosses and netgenerated negative cash flow used infrom operating activities of $1,690,570approximately $7,152,000 and $747,056$5,708,000 for the nine months ended September 30, 2017,2023, respectively.
The Company has a limited operating history and its continued growth is dependent upon the continuation of providing medical consulting services to its only three clients who are related parties and generating rental revenue from its income-producing real estate property in New Jersey; hence generating revenues,Jersey and income from equity method investment through its forty percent (40%) interest in Lab Services MSO 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’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’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 instruments 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 accompanying unaudited 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 estimatesEstimates
The preparation of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States of AmericaU.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 nine months ended September 30, 20172023 and 20162022 include the allowance for doubtful accounts, the useful life of property, plant, equipment and investment in real estate, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets accruals for taxes due, and the associated valuation allowances, the valuation of options.
Fairstock-based compensation, the assumptions used to determine fair value of financial instrumentswarrants and embedded conversion features of convertible note payable, and the fair value measurementsof the consideration given and assets acquired in the purchase of 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”) 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:follows:
| Level1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement |
| Level2-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 |
| Level3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FairThe fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “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 measurements (continued)
The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable – related parties, tenants receivable, security deposit, prepaid expenseson a recurring basis. Certain assets and other, accounts payable, accrued liabilities and other payables, accrued liabilities and other payables – related parties, deferred rental income, loan payable, income taxes payable, Value Added Tax (“VAT”) and other taxes payable, tenants’ security deposit, due to related parties, and refundable deposit, approximate their fair market value based on the short-term maturity of these instruments. The Company did not have any non-financial assets or liabilities that are measured at fair value on a recurring basis asbasis. 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 nine months ended September 30, 20172023:
| Significant Unobservable Inputs (Level 3) | ||||
| Balance of derivative liability as of January 1, 2023 | $ | - | ||
| Initial fair value of derivative liability attributable to warrants issuance with fund raise | 169,942 | |||
| Gain from change in the fair value of derivative liability | (128,894 | ) | ||
| Balance of derivative liability as of September 30, 2023 | $ | 41,048 | ||
Assets and December 31, 2016.liabilities measured at fair value on a nonrecurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances. These assets and liabilities can include equity method investment that are written down to fair value when they are impaired.
Equity method investment in Epicon Biotech Co., Ltd. The factors used to determine fair value are subject to management’s judgment and expertise and include, but are not limited to, the investee’s series of operating losses and the joint venture partner unable to obtain funds to commence operations. These assumptions represent Level 3 inputs. Impairment of equity method investment in Epicon Biotech Co., Ltd. for the nine months ended September 30, 2023 was $464,406.
ASC 825-10 “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.instruments.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
Cash consistsAt September 30, 2023 and December 31, 2022, the Company’s cash balances by geographic area were as follows:
| Country: | September 30, 2023 | December 31, 2022 | ||||||||||||||
| United States | $ | 321,899 | 94.2 | % | $ | 1,806,083 | 90.7 | % | ||||||||
| China | 19,872 | 5.8 | % | 184,827 | 9.3 | % | ||||||||||
| Total cash | $ | 341,771 | 100.0 | % | $ | 1,990,910 | 100.0 | % | ||||||||
For purposes of the condensed consolidated statements of cash on handflows, 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 September 30, 2023 and December 31, 2022.
Credit Risk and Uncertainties
A portion of the Company’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 $69,000) per bank. Any balance over RMB 500,000 per bank in banks. PRC will not be covered. At September 30, 2023, cash balances held in the PRC are RMB 144,963 (approximately $20,000), which was covered by such limited insurance.
The Company maintains a portion of its cash on deposits with variousbank and financial institutions ininstitution within the PRC and United States. At September 30, 2017 and December 31, 2016,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 PRC are $128,301high quality financial institutions and $2,525,630, respectively, are uninsured. At September 30, 2017 and December 31, 2016, cash balances in United States are $228,521 and $360,559, respectively.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.
Concentrations of credit risk
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 cash and trade accounts receivable. A portion of At September 30, 2023, the Company’s cash is maintained with state-owned banks within the PRC, and none of these deposits are covered by insurance. The Company has not experienced any lossesbalances in suchUnited States bank accounts and believes it is not exposed to any risks on its cashhad approximately $25,000 in bank accounts. A portionexcess of the federally-insured limits.
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, concentrations of credit risk with respect to trade accounts receivablesits rent receivable is limited due to generally shortshort-term payment terms. The Company also performs ongoing credit evaluations of its customerstenants to help further reduce credit risk.risk.
At September 30, 2017 and December 31, 2016, the Company’s cash balances by geographic area were as follows:Investment in Unconsolidated Companies
| Country: | September 30, 2017 | December 31, 2016 | ||||||||||||||
| United States | $ | 228,521 | 64.0 | % | $ | 360,559 | 12.5 | % | ||||||||
| China | 128,301 | 36.0 | % | 2,525,630 | 87.5 | % | ||||||||||
| Total cash | $ | 356,822 | 100.0 | % | $ | 2,886,189 | 100.0 | % | ||||||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounts receivable – related parties and allowance for doubtful accounts
Accounts receivable – related parties are presented net of an allowance for doubtful accounts. The Company maintains allowancesuses the equity method of accounting for doubtful accounts for estimated losses.its investments in, and earning or loss of, companies that it does not control but over which it does exert significant influence. The Company reviewsconsiders whether the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectabilityfair values of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.
Management believes that the accounts receivable are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its accounts receivable – related parties at September 30, 2017 and December 31, 2016. The Company historically has not experienced uncollectible accounts from customers granted with credit sales.
Tenants receivable and allowance for doubtful accounts
Tenants receivable are presented net of an allowance for doubtful accounts. Tenants receivable balance consists of base rents, tenant reimbursements and receivables arising from straight-lining of rents primarily represent amounts accrued and unpaid from tenants in accordance with the terms of the respective leases, subject to the Company’s revenue recognition policy. An allowance for the uncollectible portion of tenant receivable is determined based upon an analysis of the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in Freehold, New Jersey in which the property is located.
Management believes that the tenants receivable is fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its tenants receivable at September 30, 2017.
Property, plant and equipment
Property, plant and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact thatequity method investments have declined below their recorded value may not be recoverable.
Investment in real estate and depreciation
Investment in real estate is carried at cost less accumulated depreciation. The Company depreciates real estate building on a straight-line basis over estimated useful life. The Company capitalizes all capital improvements associated with replacements, improvements or major repairs to real property that extend its useful life and depreciate them using the straight-line method over its estimated useful life. Real estate depreciation expense was $20,066 and $53,009 for the three and nine months ended September 30, 2017, respectively.
The Company charges maintenance and repair costs that do not extend an asset’s useful life to expense as incurred.
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairmentcarrying values whenever adverse events or changes in circumstances indicate that the carrying amount of the assetsrecorded values may not be fully recoverable, or at least annually. Therecoverable. If the Company recognizes an impairment loss whenconsiders any decline to be other than temporary (based on various factors, including historical financial results and the sum of expected undiscounted future cash flows is less than the carrying amountoverall health of the asset. The amount of impairment is measured as the difference between the asset’sinvestee), then a write-down would be recorded to estimated fair value and its book value. The Company did not record any impairment charge for the three and nine months ended September 30, 2017 and 2016.
Deferred rental income
Deferred rental income represents rental income collected but not earned as of the report date. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. As of September 30, 2017 and December 31, 2016, deferred rental income totaled $19,914 and $0, respectively.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Value added tax
The Company is subject to a value added tax (“VAT”) of 6% for providing consulting service. The amount ofVATliability is determined by applying the applicable tax rate to the invoiced amount of consulting services provided (outputVAT) lessVATpaid on purchases made with the relevant supporting invoices (inputVAT). The Company reports revenue net of PRC’s value added tax for all the periods presented in the unaudited condensed consolidated statements of operations and comprehensive (loss) income.
Revenue recognition
Pursuant to the guidance of ASC Topic 605, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been provided, the purchase price is fixed or determinable and collectability is reasonably assured.
The Company provides medical related consulting services to its clients. The Company is paid for its services by its clients pursuant to the terms of the written consulting agreements. Each contract calls for a fixed payment in a fixed period of time. The Company recognizes revenue by providing medical related consulting services under written service contracts with its customers. Revenue related to its service offerings is recognized as the services are performed and amounts are earned, using the straight-line method over the term of the related services agreement. Prepayments, if any, received from customers prior to the services being performed are recorded as advance from customers. In these cases, when the services are performed, the amount recorded as advance from customers is recognized as revenue.
The Company leases commercial property under operating leases with terms of generally two years or more. The Company recognizes rental revenue from its commercial leases on a straight-line basis over the life of the lease including rent holidays, if any. Straight-line rent receivable consists of the difference between the tenants’ rents calculated on a straight-line basis from the date of lease commencement over the remaining terms of the related leases and the tenants’ actual rents due under the lease agreements and is included in tenants receivable in the accompanying consolidated balance sheets. Revenues associated with operating expense recoveries are recognized in the period in which the expenses are incurred.
Consulting services costs
Costs of consulting services includes the cost of internal labor and related benefits, travel expenses related to consulting services, subcontractor costs, other related consulting costs, and other overhead costs. Subcontractor costs were costs related to consulting services incurred by our subcontractor, such as medical professional’s compensation and travel costs.
Real estate 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 the Company’s rental properties.
Stock-based compensation
Stock based compensation is accounted for based on the requirements of the Share-Based Payment topic of Accounting Standards Codification (“ASC”) 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an awardImpairment of equity instruments over the period the employee or director is requiredmethod investment amounted to perform the services in exchange for the award. The Accounting Standards Codification also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the period of services or the vesting period, whichever is applicable. Until the measurement date is reached, the total amount of compensation expense remains uncertain.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Research and development
Expenditures for research and product development costs are expensed as incurred. The Company did not incur any research and development costs during the three and nine months ended September 30, 2017 and 2016.
Advertising
All costs related to advertising are expensed as incurred. The Company did not incur any advertising expenses during the three and nine months ended September 30, 2017 and 2016.
Income taxes
The Company accounts for income taxes using the asset/liability method prescribed by ASC 740, “Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of September 30, 2017 and December 31, 2016, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Tax year that remains subject to examination is the years ended December 31, 2016 and 2015. The Company recognizes interest and penalties related to uncertain income tax positions in other expense. However, no such interest and penalties were recorded as of September 30, 2017 and December 31, 2016.
Foreign currency translation
The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company and its wholly-owned U.S. subsidiaries, Avalon Healthcare System Inc., Avalon RT 9 Properties, LLC, and Avalon (BVI) Ltd., is the U.S. dollar and the functional currency of the Company’s wholly-owned PRC subsidiary, Avalon (Shanghai) Healthcare Technology Co., Ltd., is the Chinese Renminbi (“RMB”). For the subsidiary whose functional currency is the RMB, result of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income/loss. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
All of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries. The Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
Asset and liability accounts at September 30, 2017 and December 31, 2016 were translated at 6.6536 RMB to $1.00 and at 6.9448 RMB to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rates. The average translation rates applied to the statements of operations$464,406 for the nine months ended September 30, 20172023. See Note 5 for discussion of equity method investments.
Real Property Rental Revenue
The Company has determined that 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 2016 were 6.8071 RMB and 6.57924 RMBcontractual lease payments are included in account receivable on the consolidated balance sheets.
The Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to $1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate.its customers.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(Unaudited)
NOTE 3 –— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Commitments and Contingencies
Comprehensive (loss) income
Comprehensive (loss) income is comprisedIn the normal course of net (loss) income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Forbusiness, the Company comprehensive (loss) incomeis 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 three and nine months ended September 30, 2017 and 2016 consistedamount of net (loss) income and unrealized gain (loss) from foreign currency translation adjustment.the assessment can be reasonably estimated.
Per share dataShare Data
ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“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.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.entity.
Basic net (loss) incomeloss per share areis computed by dividing net (loss) incomeloss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net (loss) incomeloss per share is computed by dividing net (loss) incomeloss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. PotentiallyFor the three and nine months ended September 30, 2023 and 2022, potentially dilutive common shares consist of the common shares issuable upon the conversion of convertible preferred stock and convertible note (using the if-converted method) and exercise of common stock options and warrants (using the treasury stock method). Common stock equivalents are not included in the calculation of diluted net loss per share if their effect would be anti-dilutive. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact.
The following table presents a reconciliation of basic and diluted net (loss) income per share:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net (loss) income for basic and diluted net (loss) income per share of common stock | $ | (710,729 | ) | $ | 207,874 | $ | (1,690,570 | ) | $ | 102,403 | ||||||
| Weighted average common stock outstanding - basic and diluted | 64,628,622 | 50,000,000 | 63,958,292 | 50,000,000 | ||||||||||||
| Net (loss) income per common shares - basic and diluted | $ | (0.011 | ) | $ | 0.004 | $ | (0.026 | ) | $ | 0.002 | ||||||
Forsummarizes the three and nine months ended September 30, 2017, stock options to purchase 484,448 shares of common stock have beensecurities that were excluded from the computation of diluted loss per share as theircalculation because the effect would be anti-dilutive.of including these potential shares was antidilutive:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Options to purchase common stock | 872,303 | 814,500 | 872,303 | 838,500 | ||||||||||||
| Warrants to purchase common stock | 303,962 | 123,964 | 303,962 | 123,964 | ||||||||||||
| Series A convertible preferred stock (*) | 900,000 | - | 900,000 | - | ||||||||||||
| Series B convertible preferred stock (**) | 2,910,053 | - | 2,910,053 | - | ||||||||||||
| Convertible note (***) | 444,444 | 572,145 | 444,444 | 572,145 | ||||||||||||
| Potentially dilutive securities | 5,430,762 | 1,510,609 | 5,430,762 | 1,534,609 | ||||||||||||
| (*) | Assumed the Series A convertible preferred stock was converted into shares of common stock of the Company at a conversion price of $10.0 per share. |
| (**) | Assumed the Series B convertible preferred stock was converted into shares of common stock of the Company at a conversion price of $3.78 per share. |
| (***) | Assumed the convertible note was converted into shares of common stock of the Company at a conversion price of $4.50 and $0.65 per share for the 2023 and 2022 periods, respectively. |
Segment reportingReporting
TheCompany uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the Chief Executive Officer (“CEO”) and president of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company.
TheDuring the three and nine months ended September 30, 2022, the Company has determined that it hasoperated 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 service,services and products, have different types of revenue, and are managed separately as each requires different operating strategies and management expertise.
Related parties
Parties are considered to be related Due to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal ownerswinding down of the Company, its management, members of the immediate families of principal owners ofmedical related consulting services segment in 2022, the Company decided to cease all operations of this segment and its management and other parties with whichno longer has any material revenues or expenses in this segment. As a result, commencing from the Company may deal with if one party controls or can significantly influencefirst quarter of 2023, the management orCompany’s chief operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all significantdecision maker no longer reviews medical related party transactions.consulting services operating results.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(Unaudited)
NOTE 3 –— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Segment Reporting (continued)
On February 9, 2023, the Company purchased 40% of Lab Services MSO. Commencing from the purchase date, February 9, 2023, the Company is active in the management of Lab Services MSO. During the three and nine months ended September 30, 2023, the Company operated in two reportable business segments: (1) the real property operating segment, and (2) laboratory testing services segment (which commenced with the purchase date, February 9, 2023) since Lab Services MSO’s operating results are regularly reviewed by the Company’s chief operating decision maker to determine the resources to be allocated to the segment and assess its performance. The Company regularly reviews the operating results and performance of Lab Services MSO, for which the Company accounts for under the equity method.
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.
Reverse stock splitStock Split
TheCompany effected a one-for-fourone-for-ten reverse stock split of its outstanding shares of common stock on October 18, 2016.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 hasin all periods have been retroactively adjusted, on a retroactive basis, to reflect thisthe reverse stock split.split.
Fiscal year end
TheCompany has adopted a fiscal year end of December 31st.
Recent accounting pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. This pronouncement is effective for reporting periods beginning after December 15, 2018 using a modified retrospective adoption method. The Company is currently evaluating the impact of adopting the new lease standard on its consolidated financial statements.
In AugustJune 2016, the FASB issued ASU 2016-15, Statement2016-13, Financial Instruments - Credit Losses (“Topic 326”). The ASU introduces a new accounting model, the Current Expected Credit Losses model (“CECL”), which requires earlier recognition of Cash Flowscredit 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 adoption of this new guidance did not have any material impact on the Company’s condensed consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 230)805): Classification of Certain Cash ReceiptsAccounting for Contract Assets and Cash Payments. ThisContract Liabilities from Contracts with Customers, which amends the accounting related to contract assets and liabilities acquired in business combinations. ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after2021-08 requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination proceedsin accordance with ASC Topic 606, Revenue from the settlement of certain insurance claims and distributions received from equity method investees. ThisContracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2017, and2022, including interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must adopt alland should be applied prospectively to business combinations occurring on or after the effective date of the amendments in the same period. The Company is currently evaluating the impact it may have on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting. The guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. This guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017.amendment. Early adoption is permitted.permitted, including adoption in an interim period. The Company is currently evaluatingadoption of this new guidance did not have any material impact on the impact it may have on itsCompany’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 September 30, 20172023 and December 31, 2016,2022, prepaid expensesexpense and other current assets consisted of the following:
| September 30, 2023 | December 31, 2022 | |||||||
| Prepaid professional fees | $ | 112,393 | $ | 93,817 | ||||
| Prepaid directors and officers liability insurance premium | 25,862 | 29,301 | ||||||
| Prepaid NASDAQ listing fee | 25,313 | - | ||||||
| Deferred offering costs | 125,136 | 34,821 | ||||||
| Deferred leasing costs | 33,402 | 33,402 | ||||||
| Security deposit | - | 19,084 | ||||||
| Others | 83,493 | 37,565 | ||||||
| Total | $ | 405,599 | $ | 247,990 | ||||
| September 30, 2017 | December 31, 2016 | |||||||
| Prepayment for acquisition of real property | $ | — | $ | 700,000 | ||||
| Other | 36,414 | 49,796 | ||||||
| $ | 36,414 | $ | 749,796 | |||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(Unaudited)
NOTE 5 –PROPERTY, PLANT AND EQUIPMENT— EQUITY METHOD INVESTMENTS
AtInvestment in Epicon Biotech Co., Ltd.
As of September 30, 20172023 and December 31, 2016, property, plant2022, the equity method investment in Epicon Biotech Co., Ltd. (“Epicon”) amounted to $0 and equipment consisted$485,008, respectively. The investment represents the Company’s subsidiary, Avalon Shanghai’s interest in Epicon. Epicon was incorporated on August 14, 2018 in PRC. Avalon Shanghai and an unrelated company, Jiangsu Unicorn Biological Technology Co., Ltd. (“Unicorn”), have an ownership interest in Epicon of 40% and 60%, respectively. Epicon is focused on cell preparation, third party testing, biological sample repository for commercial and scientific research purposes and clinical transformation of scientific achievements. The Company is not involved in the management of Epicon. Therefore, it is a passive investment.
In June 2023, the Company assessed its equity method investment in Epicon for any impairment and concluded that there were indicators of impairment as of June 30, 2023. The impairment is due to the Company’s conclusion that it will be unable to recover the carrying amount of the following:
| Useful life | September 30, 2017 | December 31, 2016 | ||||||||
| Office equipment | 3 – 10 Years | $ | 27,966 | $ | 320 | |||||
| Leasehold improvement | 1.75 Years | 24,009 | — | |||||||
| 51,975 | 320 | |||||||||
| Less: accumulated depreciation | (5,610 | ) | (25 | ) | ||||||
| $ | 46,365 | $ | 295 | |||||||
Forinvestment due to the investee’s series of operating losses and the inability of Avalon Shanghai’s joint venture partner (Unicorn) to obtain adequate funding to commence operations. The Company calculated that the estimated undiscounted cash flows were less than the carrying amount related to the equity method investment. The Company has recognized an impairment loss of $464,406 related to the equity method investment for the three and nine months ended September 30, 2017, depreciation expense2023, which reduced the investment value to zero.
Under the equity method, if there is a commitment for the Company to fund the losses of its equity method investees, the Company would continue to record its share of losses resulting in a negative equity method investment, which would be presented as a liability on the condensed consolidated balance sheets. Commitments may be explicit and may include formal guarantees, legal obligations, or arrangements by contract. Implicit commitments may arise from reputational expectations, intercompany relationships, statements by the Company of its intention to provide support, a history of providing financial support or other facts and circumstances. When the Company has no commitment to fund the losses of its equity method investees, the carrying value of its equity method investments will not be reduced below zero. The Company had no commitment to fund additional losses of its equity method investments during the three months ended September 30, 2023.
Investment in Laboratory Services MSO, LLC
On February 9, 2023 (the “Closing Date”), the Company entered into and closed 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 (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
Pursuant to the terms and conditions set forth in the Amended MIPA, the Buyer acquired from the Seller, forty percent (40%) of the issued and outstanding equity interests of Lab Services MSO (the “Purchased Interests”). The consideration paid by Buyer to Seller for the Purchased Interests consisted of $21,000,000, which was comprised of (i) $9,000,000 in cash, (ii) $11,000,000 pursuant to the issuance of 11,000 shares of 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 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 2,910,053 shares of the Company’s common stock, which are subject to a lock-up period and restrictions on sale (See Note 10 — Series B Convertible Preferred Stock Issued for Equity Method Investment). The Seller is also eligible, under the terms set forth in the Amended MIPA, to receive certain earnout payments upon achievement of certain operating results, up to $10,000,000, which may be comprised of(x) up to $5,000,000 paid in cash and (y) up to $5,000,000 paid pursuant to the issuance of the number of shares of the Company’s common stock valued at $5,000,000, calculated using the closing price of the Company’s common stock on December 31, 2023, rounded down to the nearest whole share (collectively, the “Earnout Payments”). At both February 9, 2023 and September 30, 2023, the estimated earnout liability amounted to $4,256$0 since the minimum thresholds set forth in the Amended MIPA are currently unlikely to be met. The estimated earnout is a level 3 valuation which will be measured at the end of the applicable reporting period.
Lab Services MSO, through its two subsidiaries, Lab Services LLC and $5,469,Lab Services DME, is engaged in providing laboratory testing services. Avalon Lab and an unrelated company, have an ownership interest in Lab Services MSO of 40% and 60%, respectively. As of September 30, 2023, the equity method investment in Lab Services MSO amounted to $21,370,060.
In accordance with ASC 810, the Company 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, the Company determined that it does have significant influence as a result of its board representation. Therefore, 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’s share of the purchased-date fair values of the investee’s identifiable net assets over the cost of the investment (if any). At February 9, 2023 (date of investment), the excess of the Company’s share of the fair values of the investee’s identifiable net assets over the cost of the investment was approximately $19,901,000 which was attributable to intangible assets and goodwill. Thereafter, the investment is adjusted for the post purchase change in the Company’s share of the investee’s net assets and any impairment loss relating to the investment.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 — EQUITY METHOD INVESTMENTS (continued)
Investment in Laboratory Services MSO, LLC (continued)
For the three months ended September 30, 2023 and the period from February 9, 2023 (date of investment) through September 30, 2023, the Company’s share of Lab Services MSO’s net income was $354,500 and $370,060, respectively, of which $502 and $502 was included in real property operating expensesincome from equity method investment — Lab Services MSO in the accompanying condensed consolidated statements of operations and $3,754comprehensive loss.
In the nine months ended September 30, 2023, activity recorded for the 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: | ||||
| The Company’s interest in the net assets of Lab Services MSO’s carrying amount at February 9, 2023 which approximates fair value | 1,099,387 | |||
| The Company’s interest in the net excess of Lab Services MSO’s fair value over carrying value which was attributable to identifiable intangible assets at February 9, 2023 | 5,970,184 | |||
| The Company’s interest in the net excess of Lab Services MSO’s fair value over carrying value which was attributable to goodwill at February 9, 2023 | 13,930,429 | |||
| 21,000,000 | ||||
| Lab Services MSO’s net income attributable to the Company | 913,378 | |||
| Intangible assets amortization amount | (543,318 | ) | ||
| Equity investment carrying amount at September 30, 2023 | $ | 21,370,060 |
As of September 30, 2023, the Company’s carrying value of the identified intangible assets and $4,967 wasgoodwill which are included in the equity investment carrying amount was $5,426,866 and $13,930,429, respectively.
The tables below present the summarized financial information, as provided to the Company by the investee, for the unconsolidated company:
| September 30, 2023 | ||||
| Current assets | $ | 4,942,287 | ||
| Noncurrent assets | 5,631,040 | |||
| Current liabilities | 818,045 | |||
| Noncurrent liabilities | 4,731,503 | |||
| Equity | 5,023,779 | |||
| For the Three Months Ended September 30, 2023 | For the Period from February 9, 2023 (Date of Investment) through September 30, 2023 | |||||||
| Net revenue | $ | 3,485,337 | $ | 9,147,554 | ||||
| Gross profit | 1,607,102 | 3,634,508 | ||||||
| Income from operation | 1,014,236 | 1,710,118 | ||||||
| Net income | 1,395,611 | 2,283,446 | ||||||
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, the Buyer, or its designated affiliates under the Amended MIPA, may purchase from the Seller twenty percent (20%) of the 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 Amended MIPA. As of the date of this report, the Amended MIPA has expired. Currently, both parties are negotiating the purchase of additional eleven percent (11%) of the total issued and outstanding equity interests of Laboratory Services MSO.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 — CONVERTIBLE NOTE PAYABLE
May 2023 Convertible Note
On May 23, 2023, the Company entered into securities purchase agreements with Mast Hill Fund, L.P. (“Mast Hill”) for the issuance of 13.0% senior secured promissory notes in the aggregate principal amount of $1,500,000 (collectively, the “May 2023 Convertible Note”) convertible into shares of common stock, par value $0.0001 per share, of the Company, as well as the issuance of 75,000 shares of common stock as a commitment fee and warrants for the purchase of 230,500 shares of common stock of the Company. The Company and its subsidiaries have also entered into a security agreement, creating a security interest in certain property of the Company and its subsidiaries to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the May 2023 Convertible Note. Principal amount and interest under the May 2023 Convertible Note are convertible into shares of common stock of the Company at a conversion price of $4.50 per share unless the Company fails to make an amortization payment when due, in which case the conversion price shall be the lower of $4.50 or the trading price of the shares, subject to a floor of $1.50.
Mast Hill acquired the May 2023 Convertible Note with principal amount of $1,500,000 and paid the purchase price of $1,425,000 after an original issue discount of $75,000. On May 23, 2023, the Company issued (i) a warrant to purchase 125,000 shares of common stock with an exercise price of $4.50 exercisable until the five-year anniversary of May 23, 2023, (ii) a warrant to purchase 105,500 shares of common stock with an exercise price of $3.20 exercisable until the five-year anniversary of May 23, 2023, which warrant shall be cancelled and extinguished against payment of the May 2023 Convertible Note, and (iii) 75,000 shares of common stock as a commitment fee for the purchase of the May 2023 Convertible Note, which were earned in full as of May 23, 2023. On May 23, 2023, the Company delivered such duly executed May 2023 Convertible Note, warrants and common stock to Mast Hill against delivery of such purchase price.
The Company is obligated to make amortization payments in cash to Mast Hill towards the repayment of the May 2023 Convertible Note, as provided in the following table:
| Payment Date: | Payment Amount: | |
| November 23, 2023 | $150,000 plus accrued interest through November 23, 2023 | |
| December 23, 2023 | $150,000 plus accrued interest through December 23, 2023 | |
| January 23, 2024 | $200,000 plus accrued interest through January 23, 2024 | |
| February 23, 2024 | $250,000 plus accrued interest through February 23, 2024 | |
| March 23, 2024 | $250,000 plus accrued interest through March 23, 2024 | |
| April 23, 2024 | $300,000 plus accrued interest through April 23, 2024 | |
| May 23, 2024 | The entire remaining outstanding balance of the May 2023 Convertible Note |
In connection with the issuance of the May 2023 Convertible Note, the Company incurred debt issuance costs of $175,162 (including the issuance of 10,000 warrants as a finder’s fee) which is capitalized and will be amortized into interest expense over the term of the May 2023 Convertible Note.
Based upon the Company’s analysis of the criteria contained in ASC 815, the Company determined that all the warrants issued to Mast Hill and a third party as a finder’s fee met the definition of a derivative liability, as the Company cannot avoid a net cash settlement under certain circumstances. Management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the 105,500 warrants with an exercise price of $3.20 exercisable until the five-year anniversary of May 23, 2023, which warrant shall be cancelled and extinguished against payment of the May 2023 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 135,000 warrants with an exercise price of $4.50 exercisable until the five-year anniversary of May 23, 2023 was classified as derivative liability on May 23, 2023. The fair values of the 135,000 warrants with an exercise price of $4.50 exercisable until the five-year anniversary of May 23, 2023 issued on May 23, 2023 were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $1.96, volatility of 88.80%, risk-free rate of 3.76%, annual dividend yield of 0% and expected life of 5 years.
In accordance with ASC 470-20-25-2, proceeds from the sale of a debt instrument with stock purchase warrants are allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds allocated to the warrants are accounted for as derivative liability. The remainder of the proceeds are allocated to the debt instrument portion of the transaction.
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 liability in accordance with the provisions of the convertible debt (see Note 7). However, management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the embedded conversion feature has been estimated to be zero.
The Company recorded a total debt discount of $349,654 related to the original issue discount, common shares issued and warrants issued to Mast Hill, which will be amortized over the term of the May 2023 Convertible Note.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 — CONVERTIBLE NOTE PAYABLE (continued)
May 2023 Convertible Note (continued)
For the three months ended September 30, 2023, amortization of debt discount and debt issuance costs and interest expense related to the May 2023 Convertible Note amounted to $131,204 and $49,151, respectively, which have been included in interest expense — amortization of debt discount and debt issuance cost and interest expense — other operating expenses, respectively. on the accompanying condensed consolidated statements of operations and comprehensive loss.
For the nine months ended September 30, 2023, amortization of debt discount and debt issuance costs and interest expense related to the May 2023 Convertible Note amounted to $175,919 and $69,987, respectively, which have been included in interest expense — amortization of debt discount and debt issuance cost and interest expense — other on the accompanying condensed consolidated statements of operations and comprehensive loss.
July 2023 Convertible Note
On July 6, 2023, the Company entered into securities purchase agreements with Firstfire Global Opportunities Fund, LLC (“Firstfire”) for the issuance of 13.0% senior secured promissory notes in the aggregate principal amount of $500,000 (collectively, the “July 2023 Convertible Note”) convertible into shares of common stock, par value $0.0001 per share, of the Company, as well as the issuance of 25,000 shares of common stock as a commitment fee and warrants for the purchase of 76,830 shares of common stock of the Company. The Company and its subsidiaries have also entered into a security agreement, creating a security interest in certain property of the Company and its subsidiaries to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the July 2023 Convertible Note. Principal amount and interest under the July 2023 Convertible Note are convertible into shares of common stock of the Company at a conversion price of $4.50 per share unless the Company fails to make an amortization payment when due, in which case the conversion price shall be the lower of $4.50 or the trading price of the shares, subject to a floor of $1.50.
Firstfire acquired the July 2023 Convertible Note with principal amount of $500,000 and paid the purchase price of $475,000 after an original issue discount of $25,000. On July 6, 2023, the Company issued (i) a warrant to purchase 41,665 shares of common stock with an exercise price of $4.50 exercisable until the five-year anniversary of July 6, 2023, (ii) a warrant to purchase 35,165 shares of common stock with an exercise price of $3.20 exercisable until the five-year anniversary of July 6, 2023, which warrant shall be cancelled and extinguished against payment of the July 2023 Convertible Note, and (iii) 25,000 shares of common stock as a commitment fee for the purchase of the July 2023 Convertible Note, which were earned in full as of July 6, 2023. On July 6, 2023, the Company delivered such duly executed July 2023 Convertible Note, warrants and common stock to Firstfireagainst delivery of such purchase price.
The Company is obligated to make amortization payments in cash to Firstfire towards the repayment of the July 2023 Convertible Note, as provided in the following table:
| Payment Date: | Payment Amount: | |
| January 6, 2024 | $50,000 plus accrued interest through January 6, 2024 | |
| February 6, 2024 | $50,000 plus accrued interest through February 6, 2024 | |
| March 6, 2024 | $66,000 plus accrued interest through March 6, 2024 | |
| April 6, 2024 | $83,000 plus accrued interest through April 6, 2024 | |
| May 6, 2024 | $83,000 plus accrued interest through May 6, 2024 | |
| June 6, 2024 | $100,000 plus accrued interest through June 6, 2024 | |
| July 6, 2024 | The entire remaining outstanding balance of the July 2023 Convertible Note |
In connection with the issuance of the July 2023 Convertible Note, the Company incurred debt issuance costs of $74,204 (including the issuance of 3,333 warrants as a finder’s fee), which is capitalized and will be amortized into interest expense over the term of the July 2023 Convertible Note.
Based upon the Company’s analysis of the criteria contained in ASC 815, the Company determined that all the warrants issued to Firstfire and a third party as a finder’s fee meet the definition of a derivative liability, as the Company cannot avoid a net cash settlement under certain circumstances. Management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the 35,165 warrants with an exercise price of $3.20 exercisable until the five-year anniversary of July 6, 2023, which warrant shall be cancelled and extinguished against payment of the July 2023 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 44,998 warrants with an exercise price of $4.50 exercisable until the five-year anniversary of July 6, 2023 was classified as a derivative liability on July 6, 2023. The fair values of the 44,998 warrants with an exercise price of $4.50 exercisable until the five-year anniversary of July 6, 2023 issued on July 6, 2023 were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $1.42, volatility of 88.52%, risk-free rate of 4.37%, annual dividend yield of 0% and expected life of 5 years.
In accordance with ASC 470-20-25-2, proceeds from the sale of a debt instrument with stock purchase warrants are allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds allocated to the warrants are accounted for as derivative liability. The remainder of the proceeds are allocated to the debt instrument portion of the transaction.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 — CONVERTIBLE NOTE PAYABLE (continued)
July 2023 Convertible Note (continued)
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 liability in accordance with the provisions of the convertible debt (see Note 7). However, management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the embedded conversion feature has been estimated to be zero.
The Company recorded a total debt discount of $89,191 related to the original issue discount, common shares issued and warrants issued to Firstfire, which will be amortized over the term of the July 2023 Convertible Note.
For both the three and nine months ended September 30, 2016,2023, amortization of debt discount and debt issuance costs and interest expense related to the July 2023 Convertible Note amounted to $38,125 and $15,493, respectively, which have been included in interest expense — amortization of debt discount and debt issuance cost and interest expense — other on the accompanying condensed consolidated statements of operations and comprehensive loss.
NOTE 7 — DERIVATIVE LIABILITY
As stated in Note 6, May 2023 Convertible Note and July 2023 Convertible Note, the Company did not have any depreciation expense.
NOTEdetermined that the convertible note payable contains an embedded derivative feature in the form of a conversion provision which is adjustable based on future prices of the Company’s common stock. In accordance with ASC 815-10-25, each derivative feature is initially recorded at its fair value using the Black-Scholes option valuation method and then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. However, on May 23, 2023, July 6, –INVESTMENT IN REAL ESTATE
At2023, and September 30, 20172023, management determined the probability of failing to make an amortization payment when due to be remote and December 31, 2016, investment in real estate consistedas such the fair value of the following:embedded conversion feature has been estimated to be zero.
On May 23, 2023, the Company issued 240,500 warrants to Mast Hill and a third party as a finder’s fee (see Note 6). Upon evaluation, the warrants meet the definition of a derivative liability under FASB ASC 815, as the Company cannot avoid a net cash settlement under certain circumstances. Management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the 105,500 warrants with an exercise price of $3.20 exercisable until the five-year anniversary of May 23, 2023, which warrant shall be cancelled and extinguished against payment of the May 2023 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 135,000 warrants with an exercise price of $4.50 exercisable until the five-year anniversary of May 23, 2023 was classified as a derivative liability on May 23, 2023.
On May 23, 2023, the estimated fair value of the 135,000 warrants with an exercise price of $4.50 exercisable until the five-year anniversary of May 23, 2023 issued were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $1.96, volatility of 88.80%, risk-free rate of 3.76%, annual dividend yield of 0% and expected life of 5 years.
On September 30, 2023, the estimated fair value of the 135,000 warrants with an exercise price of $4.50 exercisable until the five-year anniversary of May 23, 2023 as derivative liability was $39,688. The estimated fair value of the warrants was computed as of September 30, 2023 using Black-Scholes option-pricing model, with the following assumptions: stock price of $0.80, volatility of 86.97%, risk-free rate of 4.60%, annual dividend yield of 0% and expected life of 4.6 years.
On July 6, 2023, the Company issued 80,163 warrants to Firstfire and a third party as a finder’s fee (see Note 6). Upon evaluation, the warrants meet the definition of a derivative liability under FASB ASC 815, as the Company cannot avoid a net cash settlement under certain circumstances. Management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the 35,165 warrants with an exercise price of $3.20 exercisable until the five-year anniversary of July 6, 2023, which warrant shall be cancelled and extinguished against payment of the July 2023 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 44,998 warrants with an exercise price of $4.50 exercisable until the five-year anniversary of July 6, 2023 was classified as a derivative liability on July 6, 2023.
On July 6, 2023, the estimated fair values of the 44,998 warrants with an exercise price of $4.50 exercisable until the five-year anniversary of July 6, 2023 issued were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $1.42, volatility of 88.52%, risk-free rate of 4.37%, annual dividend yield of 0% and expected life of 5 years.
| Useful life | September 30, 2017 | December 31, 2016 | ||||||||
| Commercial real property | 39 Years | $ | 7,708,571 | $ | — | |||||
| Less: accumulated depreciation | (53,009 | ) | — | |||||||
| $ | 7,655,562 | $ | — | |||||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 — DERIVATIVE LIABILITY (continued)
On September 30, 2023, the estimated fair value of the 44,998 warrants with an exercise price of $4.50 exercisable until the five-year anniversary of July 6, 2023 as derivative liability was $14,982. The estimated fair value of the warrants was computed as of September 30, 2023 using Black-Scholes option-pricing model, with the following assumptions: stock price of $0.80, volatility of 91.44%, risk-free rate of 4.60%, annual dividend yield of 0% and expected life of 4.8 years.
For
Increases or decreases in fair value of the derivative liability is included as a component of total other (expenses) income in the accompanying condensed consolidated statements of operations and comprehensive loss for the respective period. The changes to the derivative liability resulted in a decrease of $87,173 and $128,894 in the derivative liability and the corresponding increase in other income as a gain for the three and nine months ended September 30, 2017, depreciation expense amounted to $20,066 and $53,009, respectively, which was included in real property operating expenses.2023, respectively.
NOTE 7 –ACCRUED LIABILITIES AND OTHER PAYABLES
At September 30, 2017 and December 31, 2016, accrued liabilities and other payables consisted of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| Accrued professional fees | $ | 239,927 | $ | 14,080 | ||||
| Accrued interest | 94,932 | — | ||||||
| Other | 8,143 | 8,254 | ||||||
| $ | 343,002 | $ | 22,334 | |||||
NOTE 8 –LOAN— NOTE PAYABLE, NET
On April 19, 2017,September 1, 2022, the Company entered intoissued a loan agreement, providing forballoon promissory note in the issuanceform of a loanmortgage on its headquarters to a third party company in the principal amount of $2,100,000.$4,800,000, which carries interest of 11.0% per annum. 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 termprincipal of $4,800,000 can be extended for an additional 36 months, provided that the loanCompany has not defaulted. The Company may not prepay the principal of $4,800,00 for a period of 12 months. The principal of $4,800,000 is one year.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.
In May 2023, the Company borrowed $1,000,000 from the same lender. The principal of $1,000,000 accrues interest at an annual rate of 13.0% and is payable in monthly installments of interest-only in the amount of $10,833, commencing in June 2023 and continuing through October 2025 (at which point any unpaid balance of principal, interest rate for the loan is 10%and other charges are due and payable). The loan is guaranteedsecured by the Company’s Chairman, Mr. Wenzhao Lu. Ata second-lien mortgage on certain real property and improvements located at 4400 Route 9, Freehold, Monmouth County, New Jersey.
The note payable as of September 30, 2017, the outstanding principal balance of the loan and related accrued and unpaid interest for the loan was $2,100,000 and $94,932, respectively.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 9 –VAT AND OTHER TAXES PAYABLE
At September 30, 20172023 and December 31, 2016, VAT and other taxes payable consisted of the following:2022 is as follows:
| September 30, 2017 | December 31, 2016 | |||||||
| VAT tax payable | $ | — | $ | 8,768 | ||||
| Other taxes payable | 2,091 | 2,502 | ||||||
| $ | 2,091 | $ | 11,270 | |||||
| September 30, 2023 | December 31, 2022 | |||||||
| Principal amount | $ | 5,800,000 | $ | 4,800,000 | ||||
| Less: unamortized debt issuance costs | (233,588 | ) | (236,848 | ) | ||||
| Note payable, net | $ | 5,566,412 | $ | 4,563,152 | ||||
NOTE 10 –RELATED PARTY TRANSACTIONS
Revenue from related parties and accounts receivable – related parties
DuringFor the three months ended September 30, 2023 and 2022, amortization of debt issuance costs related to note payable amounted to $29,807 and $22,204, respectively, which have been included in interest expense — amortization of debt discount and debt issuance cost on the accompanying condensed consolidated statements of operations and comprehensive loss. For the three months ended September 30, 2023 and 2022, interest expense related to note payable amounted to $164,500 and $44,000, respectively, which have been included in interest expense - other on the accompanying condensed consolidated statements of operations and comprehensive loss.
For the nine months ended September 30, 20172023 and 2016, revenue from2022, amortization of debt issuance costs related parties was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Medical related consulting services provided to: | ||||||||||||||||
| Beijing Nanshan (1) | $ | 2,166 | $ | 108,333 | $ | 154,663 | $ | 108,333 | ||||||||
| Shanghai Daopei (2) | — | 125,001 | 66,286 | 125,001 | ||||||||||||
| Hebei Yanda (3) | — | 93,333 | — | 93,333 | ||||||||||||
| $ | 2,166 | $ | 326,667 | $ | 220,949 | $ | 326,667 | |||||||||
Accounts receivable – related parties, netto note payable amounted to $76,750 and $22,204, respectively, which have been included in interest expense — amortization of allowance for doubtful accounts, atdebt discount and debt issuance cost on the accompanying condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 20172023 and 2022, interest expense related to note payable amounted to $442,222 and $44,000, respectively, which have been included in interest expense - other on the accompanying condensed consolidated statements of operations and comprehensive loss.
NOTE 9 — 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’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.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 — RELATED PARTY TRANSACTIONS (continued)
Rental Revenue from Related Party and Rent Receivable — Related Party (continued)
For both the three months ended September 30, 2023 and 2022, the related party rental revenue amounted to $12,600 and has been included in rental revenue on the accompanying condensed consolidated statements of operations and comprehensive loss. For both the nine months ended September 30, 2023 and 2022, the related party rental revenue amounted to $37,800 and has been included in rental revenue on the accompanying condensed consolidated statements of operations and comprehensive loss.
At September 30, 2023 and December 31, 2016 amounted to $166,8742022, the related party rent receivable totaled $36,900 and $70,228,$74,100, respectively, and were related to consulting services provided to Beijing Nanshan and Shanghai Daopei, two Chinese entities whose chairman is Wenzhao Lu,which has been included in rent receivable on the major shareholder of the Company. Management believes that the accounts receivable are fully collectable. Therefore,accompanying condensed consolidated balance sheets, and no allowance for doubtful accounts iswas deemed to be required on its accounts receivable – related parties atthe receivable.
Services Provided by Related Parties
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 $20,049 and $29,121 for the three months ended September 30, 2023 and 2022, 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 $68,691 and $116,719 for the nine months ended September 30, 2023 and 2022, 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 September 30, 2023 and December 31, 2016.
Accrued liabilities2022, the unpaid acquisition consideration of $100,000, was payable to Dr. Yu Zhou, former director and other payables – related parties
At September 30, 2017 and December 31, 2016, the Company owed David Jin, its shareholder, chiefformer co-chief executive officer president and board member,40% owner of $19,420Genexosome, and $6,278, respectively, for travel and other miscellaneous reimbursements which havehas been included in accrued liabilities and other payable –payables — related parties on the accompanying condensed consolidated balance sheets.
AtDuring the period from June 2023 through September 2023, Lab Services MSO paid shared expense on behalf of the Company. As of September 30, 20172023, the balance due to Lab Services MSO amounted to $36,481, which has been included in accrued liabilities and other payables — related parties on the accompanying condensed consolidated balance sheets.
As of September 30, 2023 and December 31, 2016,2022, $23,000 and $0 of accrued and unpaid interest related to borrowings from Wenzhao Lu, the Company owed Meng Li, itsCompany’s largest shareholder chief operating officer and board member,chairman of $2,214 and $309,the Board of Directors, respectively, for travel and other miscellaneous reimbursements which have been included in accrued liabilities and other payables –— related parties on the accompanying condensed consolidated balance sheets.
Borrowings from Related Party
Line of Credit
On October 17, 2016,August 29, 2019, the Company entered into a lease for office space in New JerseyLine of Credit Agreement (the “Line of Credit Agreement”) providing the Company with a related party$20 million line of credit (the “AHS Office Lease”). Pursuant to the AHS Office Lease, the monthly rent was $1,000. The AHS Office Lease was terminated in August 2017. As“Line of September 30, 2017 and December 31, 2016, the accrued and unpaid rent expense related to this AHS Office Lease amounted to $10,000 and $2,000, respectively, which was included in accrued liabilities and other payables – related parties on the accompanying consolidated balance sheets.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 10 –RELATED PARTY TRANSACTIONS (continued)
Due to related parties
From time to time, David Jin, shareholder, chief executive officer, president and board member of the Company, provided advances to the Company to supplement its working capital needs. Those advances are short-term in nature, non-interest bearing, unsecured and payable on demand. During the nine months ended September 30, 2017, the Company repaid $500 working capital advance to David Jin. As of September 30, 2017 and December 31, 2016, the working capital advance balance was $0 and $500, respectively, which was reflected as due to related parties on the accompanying consolidated balance sheets.
From time to time, Meng Li, shareholder, chief operating officer and board member of the Company, provided advances to the Company to supplement its working capital needs. Those advances are short-term in nature, non-interest bearing, unsecured and payable on demand. The working capital advance of $87,650 at September 30, 2017 and December 31, 2016, was reflected as due to related parties on the accompanying consolidated balance sheets.
From time to time,Credit”) from Wenzhao Lu major(the “Lender”), the largest shareholder and chairmanChairman of the Board of Directors of the Company, provided advances toCompany. The Line of Credit allows the Company to supplement itsrequest loans thereunder and to use the proceeds of such loans for working capital needs. Those advancesand operating expense purposes until the facility matures on December 31, 2024. The loans are short-term in nature, non-interest bearing, unsecured and are not convertible into equity of the Company. Loans drawn under the Line of Credit bear interest at an annual rate of 5% and each individual loan is payable on demand.three years from the date of issuance. The working capital advance of $29,000 and $9,000, respectively, at September 30, 2017 and December 31, 2016, was reflected as dueCompany has a right to related partiesdraw down on the accompanying consolidated balance sheets.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.
During
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 — RELATED PARTY TRANSACTIONS (continued)
In the nine months ended September 30, 2017,2023, activity recorded for the Company received advance from a company, whichLine of Credit is controlled by Wenzhao Lu,summarized in the Company’s major shareholder and chairman of the Board of Directors of the Company, of $190,000 for general working capital purpose. The advance is unsecured, non-interest bearing and repayable on demand. The working capital advance of $190,000 at September 30, 2017 was reflected as due to related parties on the accompanying consolidated balance sheets.following table:
| Outstanding principal under the Line of Credit at January 1, 2023 | $ | - | ||
| Draw down from Line of Credit | 850,000 | |||
| Outstanding principal under the Line of Credit at September 30, 2023 | $ | 850,000 |
Operating lease
On October 17, 2016, AHS entered into a lease for office space in New Jersey with a related party (the “AHS Office Lease”). Pursuant to the AHS Office Lease, the monthly rent is $1,000. The AHS Office Lease was terminated in August 2017. For the three and nine months ended September 30, 2017, rent2023 and 2022, the interest expense related to the AHS Office Leaserelated party borrowings amounted to $2,000$10,712 and $8,000, respectively.
Real property management agreement
The Company pays a company, which is controlled by Wenzhao Lu, the Company’s major shareholder$8,358, respectively, and chairman of the Board of Directors, for the management of its commercial real property located in New Jersey. The monthly property management fee is $5,417. The term of the property management agreement is two years commencing on May 5, 2017 and will expire on May 4, 2019. For the three and nine months ended September 30, 2017, the management feehas been reflected as interest expense — related to the property management agreement amounted to $16,251 and $27,085, respectively.
NOTE 11 –STOCKHOLDERS’ EQUITY
Shares authorized
The Company is authorized to issue 10,000,000 shares of preferred stock and 490,000,000 shares of common shares with a par value of $0.0001.
There are no shares of its preferred stock issued and outstanding as of September 30, 2017 and December 31, 2016.
There are 64,628,622 and 61,628,622 shares of its common stock issued and outstanding as of September 30, 2017 and December 31, 2016, respectively.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 11 –STOCKHOLDERS’ EQUITY (continued)
Common shares issued for Share Subscription Agreement
On March 3, 2017, the Company entered into and closed a Subscription Agreement with an accredited investor (the “March 2017 Accredited Investor”) pursuant to which the March 2017 Accredited Investor purchased 3,000,000 shares of the Company’s common stock (“March 2017 Shares”) for a purchase price of $3,000,000 (the “Purchase Price”).
The offer, sale and issuance of the above securities was made to an accredited investor and the Company relied upon the exemptions contained in Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated there under with regard to the sale. No advertising or general solicitation was employed in offering the securities. The offer and sale was made to an accredited investor and transfer of the common stock issued was restricted by the Company in accordance with the requirements of the Securities Act of 1933, as amended.
The Company, Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”), Beijing DOING Biomedical Technology Co., Ltd. (“DOING”), who is an unaffiliated third party and the March 2017 Accredited Investor entered into a Share Subscription Agreement whereby the parties acknowledged, among other things, that DOING agreed to transfer the Purchase Price to Avalon Shanghai on behalf of the March 2017 Accredited Investor and the March 2017 Accredited Investor agreed to transfer the March 2017 Shares to DOING upon DOING completing the registration of the acquisition of the March 2017 Shares with the Beijing Commerce Commission (“BCC”) and obtaining an Enterprise Overseas Investment Certificate (the “Investment Certificate”) from BCC. If DOING fails to complete the registration and acquire the Investment Certificate within one year of the closing then Avalon Shanghai shall transfer $3,000,000 with an annual interest of 20% to DOING upon the request of DOING (the “BCC Repayment Obligation”). As of the date hereof, the Company is obligated to DOING in the principal amount of $3,000,000. The BCC Repayment Obligation is a debt obligation arising other than in the ordinary course of business, which constitutes a direct financial obligation of the Company. Further, Wenzhao Lu, a director and shareholder of the Company, and DOING entered into a Warranty Agreement. Pursuant to the Warranty Agreement, Mr. Lu agreed to (i) cause the Company to be liable to DOING in the event the March 2017 Accredited Investor defaults in its obligations to DOING, (ii) cause the March 2017 Accredited Investor to transfer the March 2017 Shares to DOING upon DOING’s receipt of the Investment Certificate from BCC, (iii) within three years from the date of the Warranty Agreement, DOING may require Mr. Lu to acquire the March 2017 Shares at $1.20 per share upon three-month notice, and (iv) in the event Mr. Lu does not acquire the March 2017 Shares within the three-month period, interest of 15% per annum will be added to the purchase price.
The Company received cash payment of $3,000,000 as an earnest money from DOING in connection with the 3,000,000 common stock issued to the March 2017 Accredited Investor who is an entrusted party that holds the shares on behalf of DOING and recorded the $3,000,000 as refundable deposit on the accompanying condensed consolidated balance sheets. Upon DOING completing the registration of the acquisition of the March 2017 Shares with the BCC and obtaining an Enterprise Overseas Investment Certificate from BCC, the Company will cancel the stock certificate issued under the March 2017 Accredited Investor’s name as an entrusted holder of the shares and the Company will issue a new stock certificate under DOING’s name. The $3,000,000 refundable deposit, which paid by DOING as an earnest money will be applied as the proceeds for issuance of the 3,000,000 shares of the Company’s common stock under DOING’s name at the closing date.
The Company is subject to the contingency of paying interest liability upon the request of DOING if DOING fails to complete the registration and obtain the Enterprise Overseas Investment Certificate within one year. The Company records accrual for such contingency based upon the assessment of the probability of occurrence and, where determinable, an estimate of the liability. Management may consider many factors in making these assessments including past history and the specifics of this matter. The Company did not accrue any interest for theBCC Repayment Obligation sincemanagement has evaluated the claim and concluded the likelihood of the claim is remote.
Options
During the nine months ended September 30, 2017, the Company granted a total of 444,448 options to the Company’s Chief Financial Officer (“CFO”) at a fixed exercise price of $0.50 per share and granted a total of 40,000 options to the Company’s two directors at a fixed exercise price of $1.49 per share. The 444,448 options granted to the Company’s CFO are exercisable for ten years and the 40,000 options granted to the Company’s two directors are exercisable for five years. The fair value of the options was $602,224 which was determined using the Black-Scholes option-pricing model and using the following assumptions:
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 11 –STOCKHOLDERS’ EQUITY (continued)
Options (continued)
In connection with the option grant, for the three and nine months ended September 30, 2017, the Company recognized stock-based compensation of $335,757 and $602,224, respectively, on the accompanying condensed consolidated statements of operations becauseand comprehensive loss. For the optionsnine months ended September 30, 2023 and 2022, the interest expense related to related party borrowings amounted to $23,000 and $79,898, respectively, and has been reflected as interest expense — related party on the accompanying condensed consolidated statements of operations and comprehensive loss.
As of September 30, 2023 and December 31, 2022, the related accrued and unpaid interest for Line of Credit was $23,000 and $0, respectively, and has been included in accrued liabilities and other payables — related parties on the accompanying condensed consolidated balance sheets.
As of September 30, 2023, the Company used approximately $6.8 million of the credit facility and has approximately $13.2 million remaining available under the Line of Credit.
NOTE 10 — EQUITY
Series A Convertible Preferred Stock
The Company designated up to 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 September 30, 2023, 9,000 shares of Series A Preferred Stock were deemed fully earnedissued and non-cancellableoutstanding. The Series A Preferred Stock is convertible into shares of the Company’s common stock at a conversion price per share equal to the greater 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 is convertible into shares of the Company’s common stock at a conversion price per share equal to $3.78 or an aggregate of 2,910,053 shares of the Company’s common stock and are subject to a lock-up period and restrictions on sale (See Note — 5 - Investment in Laboratory Services MSO, LLC).
Common Shares Sold for Cash
In June 2023, the Company entered into a sales agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (“Roth”) under which the Company may offer and sell from time to time shares of its common stock having an aggregate offering price of up to $3.5 million. During the nine months ended September 30, 2023, Roth sold an aggregate of 456,627 shares of common stock at an average price of $1.39 per share to investors and the Company recorded net proceeds of $414,396, net of commission and other offering costs of $220,995.
Common Shares Issued for Services
During the nine months ended September 30, 2023, the Company issued a total of 361,331 shares of its common stock for services rendered and to be rendered. These shares were valued at $999,656, the fair market values on the grant date. Stock Option activitiesdates using the reported closing share prices on the dates of grant, and the Company recorded stock-based compensation expense of $776,285 for the nine months ended September 30, 2017 were2023 and reduced accrued liabilities of $164,871 and recorded prepaid expense of $58,500 as follows:of September 30, 2023 which will be amortized over the rest of corresponding service periods.
| Number of Options | Weighted Average Exercise Price | ||||||||
| Balance at December 31, 2016 | — | $ | — | ||||||
| Granted | 484,448 | 0.58 | |||||||
| Exercised | — | — | |||||||
| Balance at September 30, 2017 | 484,448 | 0.58 | |||||||
| Option exercisable at September 30, 2017 | 484,448 | $ | 0.58 | ||||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 — EQUITY (continued)
Common Shares Issued as Convertible Note Payable Commitment Fee
The total intrinsic value
On May 23, 2023, the Company issued 75,000 shares of its common stock to Mast Hill as a commitment fee for the purchase of the May 2023 Convertible Note. These shares were valued at $147,000, the fair market value on the grant date using the reported closing share price on the date of grant, and the Company recorded it as debt discount.
On July 6, 2023, the Company issued 25,000 shares of its common stock options outstandingto FirstFire as a commitment fee for the purchase of the July 2023 Convertible Note. These shares were valued at $35,500, the fair market value on the grant date using the reported closing share price on the date of grant, and exercisable at September 30, 2017 was $1,098,853.the Company recorded it as debt discount.
Options
The following table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at September 30, 2017:2023:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Range of Exercise Price | Number Outstanding at September 30, 2023 | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at September 30, 2023 | Weighted | |||||||||||||||||
| $ | 1.86 — 2.08 | 131,000 | 4.43 | $ | 1.87 | 59,667 | $ | 1.87 | ||||||||||||||
| 3.25 — 8.20 | 307,803 | 3.29 | 5.26 | 298,136 | 5.27 | |||||||||||||||||
| 10.20 — 20.00 | 414,500 | 2.20 | 16.42 | 414,500 | 16.42 | |||||||||||||||||
| 27.50 | 19,000 | 0.25 | 27.50 | 19,000 | 27.50 | |||||||||||||||||
| $ | 1.86 — 27.50 | 872,303 | 2.88 | $ | 10.54 | 791,303 | $ | 11.39 | ||||||||||||||
Stock option activity for the nine months ended September 30, 2023 was as follows:
| Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding at January 1, 2023 | 800,500 | $ | 13.03 | |||||
| Granted | 168,803 | 2.54 | ||||||
| Expired | (97,000 | ) | (17.21 | ) | ||||
| Outstanding at September 30, 2023 | 872,303 | $ | 10.54 | |||||
| Options exercisable at September 30, 2023 | 791,303 | $ | 11.39 | |||||
| Options expected to vest | 81,000 | $ | 2.22 | |||||
The aggregate intrinsic value of both stock options outstanding and stock options exercisable at September 30, 2023 was $0.
The fair values of options granted during the nine months ended September 30, 2023 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 79.76% - 96.37%, risk-free rate of 3.58% - 3.96%, annual dividend yield of 0%, and expected life of 3.00 - 5.00 years. The aggregate fair value of the options granted during the nine months ended September 30, 2023 was $313,144.
The fair values of options granted during the nine months ended September 30, 2022 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 74.8% - 117.46%, risk-free rate of 1.37% - 3.56%, annual dividend yield of 0%, and expected life of 3.00 - 5.00 years. The aggregate fair value of the options granted during the nine months ended September 30, 2022 was $373,982.
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Range of Exercise Price | Number Outstanding at September 30, 2017 | Range of Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at September 30, 2017 | Weighted Average Exercise Price | |||||||||||||||||
| $ | 0.50 | 444,448 | 9.71 | $ | 0.50 | 444,448 | $ | 0.50 | ||||||||||||||
| 1.49 | 40,000 | 4.63 | 1.49 | 40,000 | 1.49 | |||||||||||||||||
| $ | 0.50–1.49 | 484,448 | 9.29 | $ | 0.58 | 484,448 | $ | 0.58 | ||||||||||||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 — EQUITY (continued)
Options (continued)
For the three months ended September 30, 2023 and 2022, stock-based compensation expense associated with stock options granted amounted to $54,654 and $110,442, of which, $42,906 and $87,300 was recorded as compensation and related benefits, $11,748 and $14,121 was recorded as professional fees, and $0 and $9,021 was recorded as research and development expenses, respectively.
For the nine months ended September 30, 2023 and 2022, stock-based compensation expense associated with stock options granted amounted to $234,931 and $389,066, of which, $132,433 and $285,384 was recorded as compensation and related benefits, $97,029 and $71,719 was recorded as professional fees, and $5,469 and $31,963 was recorded as research and development expenses, respectively.
A summary of the status of the Company’s nonvested stock options granted as of September 30, 2023 and changes during the nine months ended September 30, 2023 is presented below:
| Number of Options | Weighted Average Exercise Price | |||||||
| Nonvested at January 1, 2023 | 20,000 | $ | 4.29 | |||||
| Granted | 168,803 | 2.54 | ||||||
| Vested | (107,803 | ) | (3.10 | ) | ||||
| Nonvested at September 30, 2023 | 81,000 | $ | 2.22 | |||||
Warrants
The following table summarizes the shares of the Company’s common stock issuable upon exercise of warrants outstanding at September 30, 2023:
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||||
| Exercise Price | Number Outstanding at September 30, 2023 | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at September 30, 2023 | Weighted Average Exercise Price | |||||||||||||||||
| $ | 3.20 | 140,665 | 4.68 | $ | 3.20 | - | $ | - | ||||||||||||||
| 4.50 | 179,998 | 4.68 | 4.50 | 179,998 | 4.50 | |||||||||||||||||
| 12.50 | 123,964 | 3.56 | 12.50 | 123,964 | 12.50 | |||||||||||||||||
| $ | 3.20 — 12.50 | 444,627 | 4.37 | $ | 6.32 | 303,962 | $ | 7.76 | ||||||||||||||
Stock warrant activities for the nine months ended September 30, 2023 were as follows:
| Number of Warrants | Weighted Average Exercise Price | |||||||
| Outstanding at January 1, 2023 | 123,964 | $ | 12.50 | |||||
| Issued | 320,663 | 3.93 | ||||||
| Outstanding at September 30, 2023 | 444,627 | $ | 6.32 | |||||
| Warrants exercisable at September 30, 2023 | 303,962 | $ | 7.76 | |||||
| Warrants expected to vest | 140,665 | $ | 3.20 | |||||
The aggregate intrinsic value of both stock warrants outstanding and stock warrants exercisable at September 30, 2023 was $0.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1210 — EQUITY (continued)
Warrants (continued)
Warrants Issued in May 2023
In connection with the issuance of May 2023 Convertible Note (See Note 6), the Company issued (i) a warrant to purchase 125,000 shares of common stock with an exercise price of $4.50 exercisable until the five-year anniversary of May 23, 2023, and (ii) a warrant to purchase 105,500 shares of common stock with an exercise price of $3.20 exercisable until the five-year anniversary of May 23, 2023, which warrant shall be cancelled and extinguished against payment of the May 2023 Convertible Note, to Mast Hill; and issued a warrant to purchase 10,000 shares of common stock with an exercise price of $4.50 exercisable until the five-year anniversary of May 23, 2023 to a third party as a finder’s fee.
Based upon the Company’s analysis of the criteria contained in ASC 815, the Company determined that all the warrants issued to Mast Hill and a third party as a finder’s fee meet the definition of derivative liability, as the Company cannot avoid a net cash settlement under certain circumstances. Management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the 105,500 warrants with an exercise price of $3.20 exercisable until the five-year anniversary of May 23, 2023, which warrant shall be cancelled and extinguished against payment of the May 2023 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 135,000 warrants with an exercise price of $4.50 exercisable until the five-year anniversary of May 23, 2023 was classified as derivative liability on May 23, 2023. The fair values of the 135,000 warrants with an exercise price of $4.50 exercisable until the five-year anniversary of May 23, 2023 issued on May 23, 2023 were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $1.96, volatility of 88.80%, risk-free rate of 3.76%, annual dividend yield of 0% and expected life of 5 years.
The warrants with an exercise price of $4.50 exercisable until the five-year anniversary of May 23, 2023 issued to Mast Hill to purchase 125,000 shares of the Company’s common stock were treated as a discount on the convertible note payable and were valued at $127,654 and will be amortized over the term of the May 2023 Convertible Note.
The warrants with an exercise price of $4.50 exercisable until the five-year anniversary of May 23, 2023 issued to a third party as a finder’s fee to purchase 10,000 shares of the Company’s common stock were treated as convertible debt issuance costs and were valued at $11,162 and will be amortized over the term of the May 2023 Convertible Note.
Warrants Issued in July 2023
In connection with the issuance of July 2023 Convertible Note (See Note 6), the Company issued (i) a warrant to purchase 41,665 shares of common stock with an exercise price of $4.50 exercisable until the five-year anniversary of July 6, 2023, and (ii) a warrant to purchase 35,165 shares of common stock with an exercise price of $3.20 exercisable until the five-year anniversary of July 6, 2023, which warrant shall be cancelled and extinguished against payment of the July 2023 Convertible Note, to Firstfire; and issued a warrant to purchase 3,333 shares of common stock with an exercise price of $4.50 exercisable until the five-year anniversary of July 6, 2023 to a third party as a finder’s fee.
Based upon the Company’s analysis of the criteria contained in ASC 815, the Company determined that all the warrants issued to Firstfire and a third party as a finder’s fee meet the definition of derivative liability, as the Company cannot avoid a net cash settlement under certain circumstances. Management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the 35,165 warrants with an exercise price of $3.20 exercisable until the five-year anniversary of July 6, 2023, which warrant shall be cancelled and extinguished against payment of the July 2023 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 44,998 warrants with an exercise price of $4.50 exercisable until the five-year anniversary of July 6, 2023 was classified as derivative liability on July 6, 2023. The fair values of the 44,998 warrants with an exercise price of $4.50 exercisable until the five-year anniversary of July 6, 2023 issued on July 6, 2023 were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $1.42, volatility of 88.52%, risk-free rate of 4.37%, annual dividend yield of 0% and expected life of 5 years.
The warrants with an exercise price of $4.50 exercisable until the five-year anniversary of July 6, 2023 issued to Firstfire to purchase 41,665 shares of the Company’s common stock were treated as a discount on the convertible note payable and were valued at $28,691 and will be amortized over the term of the July 2023 Convertible Note.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 — EQUITY (continued)
Warrants (continued)
The warrants with an exercise price of $4.50 exercisable until the five-year anniversary of July 6, 2023 issued to a third party as a finder’s fee to purchase 3,333 shares of the Company’s common stock were treated as convertible debt issuance costs and were valued at $2,435 and will be amortized over the term of the July 2023 Convertible Note.
A summary of the status of the Company’s nonvested stock warrants issued as of September 30, 2023 and changes during the nine months ended September 30, 2023 is presented below:
| Number of Warrants | Weighted Average Exercise Price | |||||||
| Nonvested at January 1, 2023 | - | $ | - | |||||
| Issued | 320,663 | 3.93 | ||||||
| Vested | (179,998 | ) | (4.50 | ) | ||||
| Nonvested at September 30, 2023 | 140,665 | $ | 3.20 | |||||
NOTE 11 -STATUTORY RESERVE AND RESTRICTED NET ASSETS
The Company’s PRC subsidiary, Avalon Shanghai, operatesis 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 are required to reserve 10%currently permit payment of its net profit after income tax,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 accounting rules and regulations. Appropriation(“PRC GAAP”). Appropriations to the statutory surplus reserve byare required to be at least 10% of the Company is based on profit arrived at underafter-tax net income determined in accordance with PRC accounting standards for business enterprises for each year.
The profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is made to the statutory reserve. Appropriation to the statutory reserve must be made before distribution of dividends to shareholders. The appropriation is requiredGAAP until the statutory reserve reachesis equal to 50% of the entity’s registered capital. ThisAppropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. The statutory reserve ismay 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 in the form ofas cash dividends. The Company did not make any appropriation to statutory reserve for Avalon Shanghai during the nine months ended September 30, 2017 since2023 and 2022 as it incurred anet loss in the period.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 13 –SEGMENT INFORMATION
For the three and nine months ended September 30, 2017, the Company operated in two reportable business segments - (1) the real property operating segment, and (2) the medical related consulting services segment. For the three and nine months ended September 30, 2016, the Company operated in one reportable business segment – the medical related consulting services segment. The Company’s reportable segments are strategic business units that offer different services. They are managed separately based on the fundamental differences in their operations. Information with respect to these reportable business segments for the three and nine months ended September 30, 2017 and 2016 was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | ||||||||||||||||
| Real property operating | $ | 315,284 | $ | — | $ | 537,538 | $ | — | ||||||||
| Medical related consulting services | 2,166 | 326,667 | 220,949 | 326,667 | ||||||||||||
| 317,450 | 326,667 | 758,487 | 326,667 | |||||||||||||
| Depreciation | ||||||||||||||||
| Real property operating | 20,568 | — | 53,511 | — | ||||||||||||
| Medical related consulting services | 3,754 | — | 4,967 | — | ||||||||||||
| 24,322 | — | 58,478 | — | |||||||||||||
| Interest expense | ||||||||||||||||
| Real property operating | 52,932 | — | 94,932 | — | ||||||||||||
| Medical related consulting services | — | — | — | — | ||||||||||||
| 52,932 | — | 94,932 | — | |||||||||||||
| Net (loss) income | ||||||||||||||||
| Real property operating | (119,782 | ) | — | (121,016 | ) | — | ||||||||||
| Medical related consulting services | (116,230 | ) | 207,874 | (278,019 | ) | 102,403 | ||||||||||
| Other (a) | (474,717 | ) | — | (1,291,535 | ) | — | ||||||||||
| $ | (710,729 | ) | $ | 207,874 | $ | (1,690,570 | ) | $ | 102,403 | |||||||
| Identifiable long-lived tangible assets at September 30, 2017 and December 31, 2016 | September 30, 2017 | December 31, 2016 | ||||||
| Real property operating | $ | 7,677,995 | $ | — | ||||
| Medial related consulting services | 23,932 | 295 | ||||||
| $ | 7,701,927 | $ | 295 | |||||
| Identifiable long-lived tangible assets at September 30, 2017 and December 31, 2016 | September 30, 2017 | December 31, 2016 | ||||||
| United States | $ | 7,677,995 | $ | — | ||||
| China | 23,932 | 295 | ||||||
| $ | 7,701,927 | $ | 295 | |||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 14 –COMMITMENTS AND CONTINCENGIES
Severance payments
The Company has employment agreements with certain employees that provided severance payments upon termination of employment under certain circumstances, as defined in the applicable agreements. The Company has estimated its possible severance payments of approximately $302,000 asperiods. As of September 30, 20172023 and December 31, 2016, which have not been reflected in its condensed consolidated financial statements since2022, the Company concluded that the likelihood is remote at this moment.restricted amount as determined pursuant to PRC statutory laws totaled $6,578.
Legal service contract
On November 22, 2016, the Company entered into a legal service agreement with a law firm who has agreed to provide legal and corporate advisory services to the Company. The term of this agreement is on a month to month basis. In accordance to this service agreement, the Company pays a flat cash fee of $15,000 per month. At September 30, 2017 and December 31, 2016, the accrued legal service fees related to the service agreement was $60,000 and $10,000, respectively, which was included in accrued liabilities and other payables on the accompanying condensed consolidated balance sheets.
Financial consulting service contract
On October 17, 2016, the Company entered into a one-year consulting service agreement with a consultant who has agreed to provide financial consulting service to the Company. In accordance with this agreement, the Company pays a flat fee of $4,800 per month commencing on October 20, 2016. On April 19, 2017, the Company renewed the consulting agreement. In accordance with the renewed agreement, the Company pays a flat fee of $10,000 per month commencing on April 19, 2017. At September 30, 2017 and December 31, 2016, the accrued service fees related to the service agreement was $34,000 and $1,600, respectively, which was included in accrued liabilities and other payables on the accompanying condensed consolidated balance sheets.
Real property management agreement
On June 6, 2017, the Company entered into a two-year real property management agreement with a related party which agreed to provide real property management service to the Company. In accordance with this agreement, the Company pays a flat fee of $5,417 per month commencing on May 5, 2017 (see Note 10 for real property management agreement).
Operating leases
Avalon Shanghai office leases
On January 19, 2017, Avalon Shanghai entered into a lease for office space in Beijing, China with a third party (the “Beijing Office Lease”). Pursuant to the Beijing Office Lease, the monthly rent is RMB 50,586 (approximately $7,600) with a required security deposit of RMB 164,764 (approximately $24,800). In addition, Avalon Shanghai needs to pay monthly maintenance fees of RMB 4,336 (approximately $700). The term of the Beijing Office Lease is 26 months commencing on January 1, 2017 and will expire on February 28, 2019 with two months of free rent in the months of December 2017 and February 2019. For the three and nine months ended September 30, 2017, rent expense and maintenance fees related to the Beijing Office Lease amounted to approximately $21,900 and $64,400, respectively. Future minimum rental payment required under the Beijing Office Lease is as follows:
| Twelve-month Period Ending September 30: | Amount | ||||
| 2018 | $ | 91,450 | |||
| 2019 | 33,669 | ||||
| Total | $ | 125,119 | |||
In December 2016, Avalon Shanghai entered into a lease for office space in Shanghai, China with a third party (the “Shanghai Office Lease”). Pursuant to the Shanghai Office Lease, the monthly rent is RMB 20,000 (approximately $3,000). The term of the Shanghai Office Lease is one year commencing on January 1, 2017 and will expire on December 31, 2017. For the three and nine months ended September 30, 2017, rent expense related to the Shanghai Office Lease amounted to approximately $8,600 and $25,200, respectively. Future minimum rental payment required under the Shanghai Office Lease is as follows:
| Twelve-month Period Ending September 30: | Amount | |||||
| 2018 | $ | 9,018 | ||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 15 -CONCENTRATIONS
Customers
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenue for the three and nine months ended September 30, 2017 and 2016.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Customer | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| A (Beijing Nanshan, a related party) | * | 33 | % | 20 | % | 33 | % | |||||||||
| B (Shanghai Daopei, a related party) | * | 38 | % | * | 38 | % | ||||||||||
| C (Hebei Yanda, a related party) | * | 29 | % | * | 29 | % | ||||||||||
| D | 27 | % | 0 | 18 | % | 0 | ||||||||||
| E | 16 | % | 0 | 11 | % | 0 | ||||||||||
| F | 13 | % | 0 | * | 0 | |||||||||||
* Less than 10%
Two customers, one of which was a related party, accounted for 86.1% of the Company’s total outstanding accounts receivable and tenants receivable at September 30, 2017.
One customer, who was a related party, accounted for 100% of the Company’s total outstanding accounts receivable at December 31, 2016.
Suppliers
No supplier accounted for 10% or more of the Company’s purchase during the three and nine months ended September 30, 2017 and 2016.
Two suppliers accounted for 89.4% of the Company’s total outstanding accounts payable at September 30, 2017.
No supplier accounted for 10% of the Company’s total outstanding accounts payable at December 31, 2016.
Concentrations of credit risk
At September 30, 2017 and December 31, 2016, cash balances in theRelevant PRC are $128,301 and $2,525,630, respectively, are uninsured. The Company has not experienced any losses in PRC bank accounts and believes it is not exposed to any risks on its cash in PRC bank accounts.
The Company maintains its cash in United States bank and financial institution deposits that at times may exceed federally insured limits. At September 30, 2017 and December 31, 2016, the Company’s cash balances in United States bank accounts had approximately $0 and $80,000 in excess of the federally-insured limits, respectively. The Company has not experienced any losses in its United States bank accounts through and as of the date of this report.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 16 –RESTRICTED NET ASSETS
A portion of the Company’s operations are conducted through its PRC subsidiary, which can only pay dividends out of its retained earnings determined in accordance with the accounting standardslaws and regulations in the PRC and after it has met the PRC requirements for appropriation to statutory reserve. In addition, a portion of the Company’s 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’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the ability of the Company’s PRC subsidiary, to transferAvalon Shanghai, from transferring a portion of its net assets, equivalent to their statutory reserves and their share capital, to the Parent Company throughCompany’s shareholders in the form of loans, advances or cash dividends. Only PRC entity’s accumulated profit may be distributed as dividend to the Company’s shareholders without the consent of a third party. As of September 30, 2023 and December 31, 2022, total restricted net assets amounted to $1,106,578 and $1,006,578, respectively.
NOTE 12 — CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Schedule IPursuant to the requirements of Article 5-04Rule 12-04(a), 5-04(c) and 4-08(e)(3) of Regulation S-X, requires the condensed financial information of the parent company toshall 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 registrant’sCompany’s proportionate share of net assets of its 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’s PRC subsidiary’s net assets as of September 30, 2017 and December 31, 2016subsidiary did not exceed 25% of the Company’s consolidated net assets. Accordingly, Parent Company’sassets of the Company, therefore, the condensed consolidated financial statements for the parent company have not been required in accordance with Rule 5-04 and Rule 12-04 of SEC Regulation S-X.required.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 17 –SUBSEQUENT EVENTS13 - CONCENTRATIONS
Customers
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the three and nine months ended September 30, 2023 and 2022.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Customer | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| A | 32 | % | 32 | % | 31 | % | 31 | % | ||||||||
| B | 17 | % | 19 | % | 18 | % | 19 | % | ||||||||
| C | 11 | % | 12 | % | 12 | % | 12 | % | ||||||||
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’s total outstanding rent receivable at September 30, 2023, accounted for 70.8% of the Company’s total outstanding rent receivable at September 30, 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’s total outstanding rent receivable at December 31, 2022, accounted for 81.4% of the Company’s total outstanding rent receivable at December 31, 2022.
Suppliers
No supplier accounted for 10% or more of the Company’s purchase during the three and nine months ended September 30, 2023 and 2022.
NOTE 14 — SEGMENT INFORMATION
For the three and nine months ended September 30, 2022, the Company operated in two reportable business segments - (1) the real property operating segment, and (2) the medical related consulting services segment. The Company’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.
On February 9, 2023, the Company purchased 40% of Lab Services MSO. Commencing from the purchase date, February 9, 2023, the Company is active in the management of Lab Services MSO. During the three and nine months ended September 30, 2023, the Company operated in two reportable business segments: (1) the real property operating segment, and (2) laboratory testing services segment (which commenced with the purchase date, February 9, 2023) since Lab Services MSO’s operating results are regularly reviewed by the Company’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. The Company regularly reviews the operating results and performance of Lab Services MSO, which is the Company’s an equity method investee.
Information with respect to these reportable business segments for the three and nine months ended September 30, 2023 and 2022 was as follows:
| Three Months Ended September 30, 2023 | ||||||||||||||||
| Real Property Operations | Lab Services MSO | Corporate / Other | Total | |||||||||||||
| Real property rental revenue | $ | 331,290 | $ | - | $ | - | $ | 331,290 | ||||||||
| Real property operating expenses | (288,083 | ) | - | - | (288,083 | ) | ||||||||||
| Real property operating income | 43,207 | - | - | 43,207 | ||||||||||||
| Income from equity method investment - Lab Services MSO | - | 354,500 | - | 354,500 | ||||||||||||
| Other operating expenses | (73,092 | ) | - | (1,465,751 | ) | (1,538,843 | ) | |||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | - | - | (438,992 | ) | (438,992 | ) | ||||||||||
| Other income | 4 | - | 95,049 | 95,053 | ||||||||||||
| Net (loss) income | $ | (29,881 | ) | $ | 354,500 | $ | (1,809,694 | ) | $ | (1,485,075 | ) | |||||
October 2017 Private Placement
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14 — SEGMENT INFORMATION (continued)
| Three Months Ended September 30, 2022 | ||||||||||||||||
| Real Property Operations | Medical Related Consulting Services | Corporate / Other | Total | |||||||||||||
| Real property rental revenue | $ | 317,390 | $ | - | $ | - | $ | 317,390 | ||||||||
| Real property operating expenses | (247,152 | ) | - | - | (247,152 | ) | ||||||||||
| Real property operating income | 70,238 | - | - | 70,238 | ||||||||||||
| Other operating expenses | (76,299 | ) | (96,321 | ) | (1,486,717 | ) | (1,659,337 | ) | ||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | - | - | (3,303,502 | ) | (3,303,502 | ) | ||||||||||
| Other income (expense) | 4 | (8,848 | ) | (512,709 | ) | (521,553 | ) | |||||||||
| Net loss | $ | (6,057 | ) | $ | (105,169 | ) | $ | (5,302,928 | ) | $ | (5,414,154 | ) | ||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||
| Real Property Operations | Lab Services MSO | Corporate / Other | Total | |||||||||||||
| Real property rental revenue | $ | 934,360 | $ | - | $ | - | $ | 934,360 | ||||||||
| Real property operating expenses | (781.931 | ) | - | - | (781,931 | ) | ||||||||||
| Real property operating income | 152,429 | - | - | 152,429 | ||||||||||||
| Income from equity method investment - Lab Services MSO | - | 370,060 | - | 370,060 | ||||||||||||
| Other operating expenses | (266,433 | ) | - | (6,218,887 | ) | (6,485,320 | ) | |||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | - | - | (841,496 | ) | (841,496 | ) | ||||||||||
| Other income (expense) | 11 | - | (347,560 | ) | (347,549 | ) | ||||||||||
| Net (loss) income | $ | (113,993 | ) | $ | 370,060 | $ | (7,407,943 | ) | $ | (7,151,876 | ) | |||||
| Nine Months Ended September 30, 2022 | ||||||||||||||||
| Real Property Operations | Medical Related Consulting Services | Corporate / Other | Total | |||||||||||||
| Real property rental revenue | $ | 905,842 | $ | - | $ | - | $ | 905,842 | ||||||||
| Real property operating expenses | (677,303 | ) | - | - | (677,303 | ) | ||||||||||
| Real property operating income | 228,539 | - | - | 228,539 | ||||||||||||
| Other operating expenses | (265,251 | ) | (289,671 | ) | (6,233,229 | ) | (6,788,151 | ) | ||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | - | - | (3,436,931 | ) | (3,436,931 | ) | ||||||||||
| Other income | 11 | 223,735 | 259,631 | 483,377 | ||||||||||||
| Net loss | $ | (36,701 | ) | $ | (65,936 | ) | $ | (9,410,529 | ) | $ | (9,513,166 | ) | ||||
| Identifiable long-lived tangible assets at September 30, 2023 and December 31, 2022 | September 30, 2023 | December 31, 2022 | ||||||
| Real property operations | $ | 7,255,968 | $ | 7,367,360 | ||||
| Medical related consulting services | - | 408 | ||||||
| Corporate/Other | 17,941 | 130,613 | ||||||
| Total | $ | 7,273,909 | $ | 7,498,381 | ||||
| Identifiable long-lived tangible assets at September 30, 2023 and December 31, 2022 | September 30, 2023 | December 31, 2022 | ||||||
| United States | $ | 7,271,860 | $ | 7,393,307 | ||||
| China | 2,049 | 105,074 | ||||||
| Total | $ | 7,273,909 | $ | 7,498,381 | ||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 15 — COMMITMENTS AND CONTINGENCIES
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 $97,000 and $107,000 for the nine months ended September 30, 2023 and 2022, respectively. Supplemental cash flow information related to leases for the nine months ended September 30, 2023 and 2022 is as follows:
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows paid for operating lease | $ | 93,458 | $ | 116,897 | ||||
| Right-of-use assets obtained in exchange for lease obligation: | ||||||||
| Operating lease | $ | 236,533 | $ | - | ||||
The following table summarizes the lease term and discount rate for the Company’s operating lease as of September 30, 2023:
| Operating Lease | ||||
| Weighted average remaining lease term (in years) | 1.34 | |||
| Weighted average discount rate | 11.0 | % | ||
The following table summarizes the maturity of lease liabilities under operating lease as of September 30, 2023:
| For the Twelve-month Period Ending September 30: | Operating Lease | |||
| 2024 | $ | 135,061 | ||
| 2025 | 37,020 | |||
| Total lease payments | 172,081 | |||
| Amount of lease payments representing interest | (11,227 | ) | ||
| Total present value of operating lease liabilities | $ | 160,854 | ||
| Current portion | $ | 124,438 | ||
| Long-term portion | 36,416 | |||
| Total | $ | 160,854 | ||
Joint Venture — Avactis Biosciences Inc.
On October 20, 2017,July 18, 2018, the Company formed a wholly owned subsidiary, Avactis Biosciences Inc. (“Avactis”), a Nevada corporation, which focuses on accelerating commercial activities related to cellular therapies as well as cellular immunotherapy including CAR-T, CAR-NK, TCR-T and others. When formed, Avactis was designed to integrate and optimize the Company’s global scientific and clinical resources to further advance the use of cellular therapies to treat certain cancers, however the Company is no longer pursuing any commercial activities with respect to cellular immunotherapy and CAR-T, in particular. As of April 6, 2022, the Company owns 60% of Avactis and Arbele Biotherapeutics Limited (“Arbele Biotherapeutics”) owns 40% of Avactis. Avactis owns 100% of the capital stock of Avactis Nanjing Biosciences Ltd., a company incorporated in the PRC on May 8, 2020 (“Avactis Nanjing”), which only owns a patent and is not considered an operating entity.
The Company is required to contribute $10 million (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’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 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 by the parties.
In addition, the Company is responsible for contributing registered capital of RMB 5,000,000 (approximately $0.7 million) for working capital purposes as required by local regulation, which is not required to be contributed immediately and will be contributed subject to the Company’s discretion. As of the date hereof, Avactis’ activities have been limited to that of a patent holding company and there is no other activity or planned contributions in 2023.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 15 — COMMITMENTS AND CONTINGENCIES (continued)
Line of Credit Agreement
On August 29, 2019, the Company entered into Subscription Agreementsa Line of Credit Agreement (the “Line of Credit Agreement”) providing the Company with accredited investorsa $20 million line of credit (the “Line of Credit”) from Wenzhao Lu (the “Lender”), a significant shareholder and director of the Company. The Line of Credit allows the Company to request loans thereunder and to use the proceeds of such loans for working capital and operating expense purposes until the facility matures on December 31, 2024. The loans are unsecured and are not convertible into equity of the Company. Loans drawn under the Line of Credit bears interest at an annual rate of 5% and each individual loan will be payable three years from the date of issuance. The Company has a right to draw down on the Line of Credit and not at the discretion of the related party Lender. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to maturity, without premium or penalty. The Line of Credit Agreement includes customary events of default. If any such event of default occurs, the Lender may declare all outstanding loans under the Line of Credit to be due and payable immediately. As of September 30, 2023, $850,000 was outstanding under the Line of Credit.
NOTE 16 — RESTATEMENTS OF PREVIOUSLY ISSSUED FINANCIAL STATEMENTS
Three months ended March 31, 2023
During the three months ended March 31, 2023, the Company misstated the equity method investment and income from equity method investments. The impact of these errors was an overstatement of total assets and total equity by approximately $136,000 and an overstatement of income from equity method investments of approximately $136,000 for the three months ended March 31, 2023. These errors did not have any impact on consolidated cash flow. The Company’s March 31, 2023 financial statements have been restated for the impact of these adjustments as follows:
| As | As | |||||||||||
| Reported | Adjustment | Restated | ||||||||||
| Condensed Consolidated Balance Sheet As of March 31, 2023 | ||||||||||||
| Equity method investments | $ | 21,524,364 | $ | (135,830 | ) | $ | 21,388,534 | |||||
| Total assets | $ | 30,972,242 | $ | (135,830 | ) | $ | 30,836,412 | |||||
| Accumulated deficit | $ | (65,846,635 | ) | $ | (135,830 | ) | $ | (65,982,465 | ) | |||
| Total equity | $ | 19,910,342 | $ | (135,830 | ) | $ | 19,774,512 | |||||
| Total liabilities and equity | $ | 30,972,242 | $ | (135,830 | ) | $ | 30,836,412 | |||||
| As | As | |||||||||||
| Reported | Adjustment | Restated | ||||||||||
| Condensed Consolidated Statement of Operations and Comprehensive Loss for the Three Months Ended March 31, 2023 | ||||||||||||
| Income from equity method investments | $ | 37,285 | $ | (135,830 | ) | $ | (98,545 | ) | ||||
| Total other expense, net | $ | (119,678 | ) | $ | (135,830 | ) | $ | (255,508 | ) | |||
| Loss before income taxes | $ | (2,783,914 | ) | $ | (135,830 | ) | $ | (2,919,744 | ) | |||
| Net loss | $ | (2,783,914 | ) | $ | (135,830 | ) | $ | (2,919,744 | ) | |||
| Net loss attributable to Avalon Globocare Corp. common shareholders | $ | (2,783,914 | ) | $ | (135,830 | ) | $ | (2,919,744 | ) | |||
| Comprehensive loss | $ | (2,780,244 | ) | $ | (135,830 | ) | $ | (2,916,074 | ) | |||
| Comprehensive loss attributable to Avalon Globocare Corp. common shareholders | $ | (2,780,244 | ) | $ | (135,830 | ) | $ | (2,916,074 | ) | |||
| Net loss per common share attributable to Avalon Globocare Corp. common shareholders: | $ | (0.28 | ) | $ | (0.01 | ) | $ | (0.29 | ) | |||
Six months ended June 30, 2023
During the six months ended June 30, 2023, the Company misstated the equity method investment and income from equity method investments. The impact of these errors was an overstatement of total assets and total equity by approximately $340,000 and an overstatement of income from equity method investment — Lab Services MSO of approximately $204,000 and $340,000 for the three and six months ended June 30, 2023, respectively. These errors did not have any impact on consolidated cash flow. The Company’s June 30, 2023 financial statements have been restated for the impact of these adjustments as follows:
| As | As | |||||||||||
| Reported | Adjustment | Restated | ||||||||||
| Condensed Consolidated Balance Sheet As of June 30, 2023 | ||||||||||||
| Equity method investments, net | $ | 21,355,134 | $ | (339,574 | ) | $ | 21,015,560 | |||||
| Total assets | $ | 30,570,584 | $ | (339,574 | ) | $ | 30,231,010 | |||||
| Accumulated deficit | $ | (68,389,948 | ) | $ | (339,574 | ) | $ | (68,729,522 | ) | |||
| Total equity | $ | 18,151,313 | $ | (339,574 | ) | $ | 17,811,739 | |||||
| Total liabilities and equity | $ | 30,570,584 | $ | (339,574 | ) | $ | 30,231,010 | |||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 16 — RESTATEMENTS OF PREVIOUSLY ISSSUED FINANCIAL STATEMENTS (continued)
Six months ended June 30, 2023 (continued)
| As | As | |||||||||||
| Reported | Adjustment | Restated | ||||||||||
| Condensed Consolidated Statement of Operations and Comprehensive Loss for the Three Months Ended June 30, 2023 | ||||||||||||
| Income from equity method investment - Lab Services MSO | $ | 308,395 | $ | (203,744 | ) | $ | 104,651 | |||||
| Loss from operations | $ | (1,864,624 | ) | $ | (203,744 | ) | $ | (2,068,368 | ) | |||
| Loss before income taxes | $ | (2,543,313 | ) | $ | (203,744 | ) | $ | (2,747,057 | ) | |||
| Net loss | $ | (2,543,313 | ) | $ | (203,744 | ) | $ | (2,747,057 | ) | |||
| Net loss attributable to Avalon Globocare Corp. common shareholders | $ | (2,543,313 | ) | $ | (203,744 | ) | $ | (2,747,057 | ) | |||
| Comprehensive loss | $ | (2,554,324 | ) | $ | (203,744 | ) | $ | (2,758,068 | ) | |||
| Comprehensive loss attributable to Avalon Globocare Corp. common shareholders | $ | (2,554,324 | ) | $ | (203,744 | ) | $ | (2,758,068 | ) | |||
| Net loss per common share attributable to Avalon Globocare Corp. common shareholders: | $ | (0.25) | $ | (0.02) | $ | (0.27) | ||||||
| As | As | |||||||||||
| Reported | Adjustment | Restated | ||||||||||
| Condensed Consolidated Statement of Operations and Comprehensive Loss for the Six Months Ended June 30, 2023 | ||||||||||||
| Income from equity method investment - Lab Services MSO | $ | 355,134 | $ | (339,574 | ) | $ | 15,560 | |||||
| Loss from operations | $ | (4,482,121 | ) | $ | (339,574 | ) | $ | (4,821,695 | ) | |||
| Loss before income taxes | $ | (5,327,227 | ) | $ | (339,574 | ) | $ | (5,666,801 | ) | |||
| Net loss | $ | (5,327,227 | ) | $ | (339,574 | ) | $ | (5,666,801 | ) | |||
| Net loss attributable to Avalon Globocare Corp. common shareholders | $ | (5,327,227 | ) | $ | (339,574 | ) | $ | (5,666,801 | ) | |||
| Comprehensive loss | $ | (5,334,568 | ) | $ | (339,574 | ) | $ | (5,674,142 | ) | |||
| Comprehensive loss attributable to Avalon Globocare Corp. common shareholders | $ | (5,334,568 | ) | $ | (339,574 | ) | $ | (5,674,142 | ) | |||
| Net loss per common share attributable to Avalon Globocare Corp. common shareholders: | $ | (0.52 | ) | $ | (0.04 | ) | $ | (0.56 | ) | |||
NOTE 17 — SUBSEQUENT EVENTS
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued. Based upon this review, other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.
October 2023 Convertible Note Financing
In October 2023, the Company entered into securities purchase agreements with certain lenders (the “October 2017 Accredited Investors”2023 Lenders”) pursuantand closed on the issuance of 13.0% senior secured convertible promissory notes in the aggregate principal amount of $700,000 (the “October 2023 Note”), as well as the issuance of 70,000 shares of common stock as a commitment fee and warrants for the purchase of up to which the October 2017 Accredited Investors agreed to purchase 3,750,000105,000 shares of the Company’s common stock (“October 2017 Shares”) for a purchase price of $3,750,000 (the “Purchase Price”).stock. The closing with respect to $200,000 of the Purchase occurred on October 24, 2017. As of November 10, 2017, the Company has received $2,090,000 of the Purchase Price. The balance of the Purchase Price is expected to close on or before December 6, 2017 if not sooner.
The offer, sale and issuance of the above securities was made to accredited investors and the Company relied upon the exemptions contained in Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated there under with regard to the sale. No advertising or general solicitation was employed in offering the securities. The offer and sale was made to accredited investors and transfer of the common stock issued was restricted by the Company in accordance with the requirements of the Securities Act of 1933, as amended.The accredited investors acknowledged that they were not aware of nor did it review any registration statement or prospectus filed by the Company with the SEC.
GenExosome Technologies Inc.
In July 2017, the Company formed GenExosome Technologies Inc., a Nevada corporation (“GenExosome”). On September 29, 2017, Dr. David K. Jin was appointed as the sole director and as the Chief Executive Officer, Chief Medical Officer and President, Meng Li was appointed as Chief Operating Officer and Secretary and Luisa Ingargiola was appointed as Chief Financial Officer. On October 25, 2017, GenExosome and the Companyits subsidiaries have also entered into security agreements, creating a Securities Purchase Agreement pursuant to which the Company acquired 600 shares of GenExosomesecurity interest in consideration of $1,326,087 and 500,000 shares of common stock of the Company. The Company is required to pay $876,087 of the cash purchase price by November 24, 2017 and $450,000 of the cash purchase price by December 24, 2017. In addition, the Company is required to deliver the 500,000 shares of its common stock no later than November 24, 2017.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 17 –SUBSEQUENT EVENTS (continued)
GenExosome Technologies Inc. (continued)
On October 25, 2017, GenExosome entered into and closed an Asset Purchase Agreement with Yu Zhou, MD, PhD, pursuant to which the Company acquired all assets, including all intellectualcertain property held by Dr. Zhou pertaining to the business of researching, developing and commercializing exosome technologies including, but not limited to, patent application number CN 2016 1 0675107.5 (application of an Exosomal MicroRNA in plasma as biomaker to diagnosis liver cancer), patent application number CN 2016 1 0675110.7 (clinical application of circulating exosome carried miRNA-33b in the diagnosis of liver cancer), patent application number CN 2017 1 0330847.X (saliva exosome based methods and composition for the diagnosis, staging and prognosis of oral cancer) and patent application number CN 2017 1 0330835.7 (a novel exosome-based therapeutics against proliferative oral diseases). In consideration of the assets, GenExosome agreed to pay Dr. Zhou $876,087 in cash no later than November 24, 2017, transfer 500,000 shares of common stock of the Company and its subsidiaries to Dr. Zhou no later than November 24, 2017secure the prompt payment, performance and issue Dr. Zhou 400 sharesdischarge in full of common stock of GenExosome no later than November 24, 2017. As a result of the above transactions, the Company holds 60% of GenExosome and Dr. Zhou holds 40% of GenExosome.
On October 25, 2017, GenExosome entered into and closed a Stock Purchase Agreement with Beijing Jieteng (GenExosome) Biotech Co. Ltd., a corporation incorporated in the People’s Republic of China (“Beijing GenExosome”) and Dr. Zhou, 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 inCompany’s obligations under the amount of $450,000, which shall be paid upon Beijing GenExosome recording the change in ownership with the Ministry of Commerce of the People’s Republic of China in accordance with the Interim Measures for Record Management regarding the Establishment and Change of Foreign-invested Enterprises.October 2023 Note.
On October 25, 2017, GenExosome increased its size of its board of directors from one to four and appointed Wenzhao “Daniel” Lu, Meng Li and Dr. Zhou to the board of directors. In addition, Dr. Zhou was appointed as Co-Chief Executive Officer of GenExosome.
On October 25, 2017, Dr. Zhou and GenExosome entered into an Executive Retention Agreement pursuant to which Dr. Zhou agreed to serve as Co-Chief Executive Officer in consideration of an annual salary of $160,000. Dr. Zhou and GenExosome also entered into an Invention Assignment, Confidentiality, Non-Compete and Non-Solicit Agreement.
Beijing GenExosome is engaged in the development of exosome technology to improve diagnosis and management of diseases. Exosomes are tiny, subcellular, membrane-bound vesicles in diameter of 30-150 nm that are released by almost all cell types and that can carry membrane and cellular proteins, as well as genetic materials that are representative of the cell of origin. Profiling various bio-molecules in exosomes may serve as useful biomarkers for a wide variety of diseases. Beijing GenExosome’s research kits are designed to be used by researchers for biomarker discovery and clinical diagnostic development, and the advancement of targeted therapies. Currently, research kits and service are available to isolate exosomes or extract exosomal RNA/protein from serum/plasma, urine and saliva samples. Beijing GenExosome is seeking to decode proteomic and genomic alterations underlying a wide-range of pathologies, thus allowing for the introduction of novel non-invasive “liquid biopsies”. Its mission is focused toward diagnostic advancements in the fields of oncology, infectious diseases and fibrotic diseases, and discovery of disease-specific exosomes to provide disease origin insight necessary to enable personalized clinical management. There is no guarantee that Beijing GenExosome will be able to successfully achieve its stated mission.
ITEM 2. MANAGEMENT’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:
| ● | 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 upon 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 the 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, which 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 theour financial condition and results of operations and financial condition of Avalon GloboCare Corp. for the three and nine months ended September 30, 20172023 and 20162022 should be read in conjunction with the Avalon GloboCare Corp. unauditedour condensed consolidated financial statements and therelated notes thereto containedto 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 28, 2017. 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.
Unless otherwise indicated, references to the “Company,” “us” or “we” refer to Avalon GloboCare Corp. and its subsidiaries.Overview
Overview
Avalon GloboCareThe Company is dedicated to integratingdeveloping and managing global healthcare servicesdelivering innovative, transformative, precision diagnostics and resources, as well as empowering high-impact biomedical innovationsclinical laboratory services. Our main strategy is to acquire ownership or license rights in precision diagnostic assets, genetic testing and technologies to accelerate their clinical applications. Operatinglaboratory companies through two major platforms, namely “Avalon Cell”, and “Avalon Rehab”, our “Technology + Service” ecosystem covers the areas of regenerative medicine, cell-based immunotherapy, exosome technology, telemedicine with medical second opinion/referral services, as well as fertility and rehabilitation medicine.joint ventures, share ownership structures or distribution rights. We plan to integrate these services throughplay a leading role in the innovation of diagnostic testing, utilizing proprietary technology to deliver precise, genetics-driven results. As a first major step into the laboratory market, we completed an acquisition of a 40% membership interest in Laboratory Services MSO, LLC (“Lab Services MSO”), which closed in February 2023.
We have the following areas of focus:
Laboratory Acquisitions
We have embarked on a laboratory rollup strategy focused on forming joint ventures and acquiring laboratories that are accretive acquisitions that bring shareholder value bothto our commercial strategy. As a first step, in February of 2023, we acquired a 40% membership interest in Lab Services MSO.
| ● | 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, and sexually transmitted disease testing. 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. Lab Services MSO provides a menu of extensive chemistry tests that physicians can use to obtain information to better treat their patients and maintain their overall wellness. Lab Services MSO has developed a premier reputation for customer service and fast turnaround times. |
| ● | Lab Services MSO is also focused on commercialization of genetic-based proprietary testing. The first area of focus in this area is confirmatory genetic testing during toxicology screening and genetic testing to screen for addictive propensity. Lab Services MSO laboratory plans to focus on diagnostic testing utilizing proprietary technology to deliver precise genetic driven results. |
| ● | In the third quarter of 2023, Lab Services MSO acquired Merlin Technologies, Inc. which is a medical equipment retail company. |
| ● | Lab Services MSO plans to open a new laboratory, Veritas Laboratories LLC (“Veritas”). Veritas is a CLIA-certified and COLA-accredited laboratory located in Scottsdale, Arizona that offers a wide range of high-quality testing, including drug testing, genetic testing, urinary testing and COVID-19 PCR testing. |
Product Commercialization
We are exploring the commercialization and development of a versatile breathalyzer system.
| ● | The KetoAir breathalyzer is a handheld device that allows the user to detect acetone levels in exhaled breath. The acetone level is in concentration units (ppm, part-per-million) such that the user will know his/her real-time ketosis status: inadequate ketosis (0-3.99 ppm), mild ketosis (4-9.99 ppm), optimal ketosis (10-40 ppm), or alarming level (> 40 ppm). The breathalyzer is registered with the United States FDA as a Class I medical device. The device is also paired with an “AI Nutritionist” software program (via Bluetooth connection) which is downloadable from Google Play (for Android mobile phones, approved) and iPhone (the app is currently being reviewed by Apple iOS AppStore). It helps users monitor and manage their ketogenic diet and related programs. We believe the KetoAir breathalyzer can be an essential tool to help diabetic patients adhere to their therapeutic programs and optimize their ketogenic dietary management. |
| ● | We were granted exclusive distributorship rights for the KetoAir breathalyzer in the following territories: North America, South America, the EU and the UK. We had a pilot launch and exhibition of the KetoAir breathalyzer in this year’s KetoCon conference in Austin, Texas (April 21-23, 2023). For our commercialization strategy, we intend to target the diabetes and obesity markets. We are evaluating options for commercialization, including identifying distribution partners or distributing KetoAir ourselves. |
Research and Development
| ● | We are focused on bringing forward intellectual property through joint patent filings with the Massachusetts Institute of Technology (MIT). We completed a sponsored research and co-development project with MIT led by Professor Shuguang Zhang as Principal Investigator. Using the unique QTY code protein design platform, six water-soluble variant cytokine receptors have been successfully designed and tested to show binding affinity to the respective cytokines. We currently are focused on bringing forward the intellectual property associated with this program through joint patent submissions. |
Other Areas
In order to preserve cash and focus on our core laboratory rollup strategy and product commercialization, we have currently suspended all research and development efforts related to cellular therapy in order to redirect our funding efforts to our core business strategies outlined above.
Going Concern
The Company is a commercial stage company dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. The Company is establishing a leading role in the short term,innovation of diagnostic testing, utilizing proprietary technology to deliver precise, genetics-driven results. The Company also provides laboratory services, offering 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.
In addition, the Company owns commercial real estate that houses its headquarters in Freehold, New Jersey. The Company also has income from equity method investment through operational entitiesits forty percent (40%) interest in Lab Services MSO. These condensed consolidated financial statements have been prepared assuming that the Company will continue as part of Avalon Rehab, and long term, through biomedical innovation development as part of Avalon Cell.
We currently produce revenue through related party strategic relationships in the Peoples Republic of China (“China”) that provide consultative services in advanced areas of immunotherapy and second opinion/referral services. Our services include research studies; executive education; daily online executive briefings; tailored expert advisory services; and consulting and management services. We typically charge an annual fee. Through our services we attempt to focus our clients on important problems by providing an analysis of the evolving healthcare industry and the methods prevalent in the industry to solve those problems through counsel, business planning and support.
We also own and operate rental real property in New Jersey.
The value of the Renminbi (“RMB”), the main currency used in China, fluctuates and is affected by,a going concern, which contemplates, among other things, changesthe realization of assets and the satisfaction of liabilities in China’s politicalthe normal course of business.
As reflected in the accompanying condensed consolidated financial statements, the Company had working capital deficit of approximately $5,828,000 at September 30, 2023 and economic conditions. The conversionhad incurred recurring net losses and generated negative cash flow from operating activities of RMB into foreign currencies such asapproximately $7,152,000 and $5,708,000 for the U.S. dollar have generally been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets.nine months ended September 30, 2023, respectively.
Going Concern
We haveThe Company has a limited operating history and ourits continued growth is dependent upon the continuation of providing medical consulting services to our only three clients who are our related parties, andgenerating rental revenue from its income-producing real estate property ownershipin New Jersey and operation; hence generating revenues,income from equity method investment through its forty percent (40%) interest in Lab Services MSO and obtaining additional financing to fund future obligations and pay liabilities arising from normal business operations. We had working capital deficit (total current liabilities in excess of total current assets) and an accumulated deficit of $5,294,818 and $1,743,939 at September 30, 2017, respectively, and had a net loss and net cash flow used in operating activities of $1,690,570 and $747,056 for the nine months ended September 30, 2017, respectively. 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 factors, among others, raisedmatters raise substantial doubt about ourthe Company’s ability to continue as a going concern. Our unaudited condensed consolidated financial statements appearing elsewhere in this report do not include any adjustments that might result fromThe ability of the outcome of this uncertainty.Company to continue as a going concern is dependent on the Company’s ability to raise additional capital, implement its business plan, and generate significant revenues. There are no assurances wethat the Company will be successful in ourits efforts to generate significant revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern, in which event investors would lose their entire investment in our company.
Our abilityconcern. The Company plans on raising capital through the sale of equity to continue as a going concern is dependent upon our ability to carry out ourimplement its business plan, achieve profitable operations, obtain additional working capital funds from our significant shareholders, and or through debt and equity financings.plan. However, there canis no assurance these plans will be no assurancerealized and that any additional financings will be available to usthe Company on satisfactory terms and conditions, if any.
The accompanying unaudited 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 and
Use of Estimates
Our discussion and analysisThe preparation of our financial condition and results of operations are based upon our unauditedthe condensed consolidated financial statements which have been prepared in accordanceconformity with accounting principles generally accepted in the United States. The preparationStates of these unaudited 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 allowance for doubtful accounts,three and nine months ended September 30, 2023 and 2022 include the useful life of property plant, equipment and investment in real estate, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets accruals for taxes due, and the associated valuation allowances, the valuation of options.stock-based compensation, the assumptions used to determine fair value of warrants and embedded conversion features of convertible note payable, and the fair value of the consideration given and assets acquired in the purchase of 40% of Lab Services MSO.
We base our estimates on historical experienceInvestment in Unconsolidated Companies
The Company uses the equity method of accounting for its investments in, and earning or loss of, companies that it does not control but over which it does exert significant influence. The Company considers whether the fair values of its equity method investments have declined below their carrying values whenever adverse events or changes in circumstances indicate that recorded values 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. Impairment of equity method investment amounted to $464,406 for the nine months ended September 30, 2023. See Note 5 for discussion of equity method investments.
Real Property Rental
The Company has determined that the ASC 606 does not apply to rental contracts, which are within the scope of other assumptions that we believed to be reasonablerevenue recognition accounting standards.
Rental income from operating leases is recognized on a straight-line basis under the circumstances, the resultsguidance of which form theASC 842. Lease payments under tenant leases are recognized on a straight-line 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. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the unaudited consolidated financial statements.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured.
We provide medical related consulting services to our clients. We are paid for our services by our clients pursuant to the terms of the written consulting agreements. Each contract calls for a fixed payment in a fixed period of time. We recognize revenue by providing medical related consulting services under written service contracts with our customers. Revenue related to our service offerings is recognized as the services are performed and amounts are earned, using the straight-line method over the term of the related services agreement. Prepayments, if any, received from customers prior toleases. The cumulative difference between lease revenue recognized under the services being performedstraight-line method and contractual lease payments are recorded as advance from customers. In these cases, when the services are performed, the amount recorded as advance from customers is recognized as revenue.
We lease commercial property under operating leases with terms of generally two years or more. We recognize rental revenue from our commercial leases on a straight-line basis over the life of the lease including rent holidays, if any. Straight-lineincluded in rent receivable consists ofon the difference between the tenants’ rents calculated on a straight-line basis from the date of lease commencement over the remaining terms of the related leases and the tenants’ actual rents due under the lease agreements and is included in tenants receivable in the accompanying consolidated balance sheets. Revenues associated with operating expense recoveries are recognized in the period in which the expenses are incurred.
The Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers.
Income Taxes
We are governed by the income tax laws of the PRCChina and the United States. Income taxes are accounted for pursuant to ASC 740 “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.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.basis.
Stock-based Compensation
Stock based compensation is accounted for based on the requirements of the Share-Based Payment topic ofRecent Accounting Standards Codification (“ASC”) 718 which requires recognition in the financial statements
For details of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is requiredapplicable new accounting standards, please, refer to perform the services in exchange for the award. TheRecent Accounting Standards Codification also requires measurementin Note 3 of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the period of services or the vesting period, whichever is applicable. Until the measurement date is reached, the total amount of compensation expense remains uncertain.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. This pronouncement is effective for reporting periods beginning after December 15, 2018 using a modified retrospective adoption method. We are currently evaluating the impact of adopting the new lease standard on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. We are currently evaluating the impact it may have on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting. The guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. This guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact it may have on our 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 ourcondensed consolidated financial statements upon adoption. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our consolidated financial condition, results of operations, cash flows or disclosures.accompanying this report.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Three and Nine Months Ended September 30, 20172023 and 20162022
RevenuesReal Property Rental Revenue
We generated revenue from medical related consulting services commencing on July 2016 andFor the three months ended September 30, 2023, we generatedhad real property rental revenue commencing on May 2017.
of $331,290, as compared to $317,390 for the three months ended September 30, 2022, an increase of $13,900, or 4.4%. For the nine months ended September 30, 2023, we had real property rental revenue of $934,360, as compared to $905,842 for the nine months ended September 30, 2022, an increase of $28,518, or 3.1%. The increase was primarily attributable to the increase of tenants in the three and nine months ended September 30, 2017, we had2023. We expect that our revenue from real property rental revenue of $315,284 and $537,538, respectively. We did not generate any real property rental revenue forrent will remain at its current quarterly level with minimal increase in the three and nine months ended September 30, 2016.
For the three months ended September 30, 2017, we had consulting services revenue from related parties of $2,166, as compared to consulting services revenue from related parties of $326,667 for the three months ended September 30, 2016, a decrease of $324,501, or 99.3%. For the nine months ended September 30, 2017, we had consulting services revenue from related parties of $220,949, as compared to consulting services revenue from related parties of $326,667 for the nine months ended September 30, 2016, a decrease of $105,718, or 32.4%. The decrease was mainly attributable to the decreased demand for our consulting service from our related parties.
near future.
Costs and
Real 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 and nine months ended September 30, 2017,2023, our real property operating expenses amounted to $180,722 and $342,576, respectively. Since we started generating real property rental revenue during the second quarter of 2017, we had neither real property rental revenue nor real property operating expenses in the three and nine months ended September 30, 2016.
Costs of consulting services includes the cost of internal labor and related benefits, travel expenses related$288,083, as compared to consulting services, subcontractor costs, other related consulting costs, and other overhead costs. Subcontractor costs were costs related to consulting services incurred by our subcontractor, such as medical professional’s compensation and travel costs.
Costs of consulting services$247,152 for the three months ended September 30, 2017 was $47,033, representing2022, an increase of $13,485,$40,931, or 40.2%, as compared16.6%. The increase was mainly due to $33,548 foran increase in repairs and maintenance fee of approximately $35,000, and an increase in other miscellaneous items of approximately $6,000.
For the threenine months ended September 30, 2016. Costs of consulting services2023, our real property operating expenses amounted to $781,931, as compared to $677,303 for the nine months ended September 30, 2017 was $271,845, representing2022, an increase of $238,297,$104,628 or 710.3%, as compared to $33,548 for the nine months ended September 30, 2016.15.4%. The increase was primarily attributablemainly due to the allocationan increase in property management fees of fixed costs, mainly consistingapproximately $15,000, an increase in repairs and maintenance fee of internal laborapproximately $71,000, an increase in utilities of approximately $15,000, and related benefits, to our costan increase in other miscellaneous items of consulting services.approximately $4,000.
Real Property Operating Income
Our real property operating income was $134,562 and $194,962, respectively, for the three and nine months ended September 30, 2017. We did not generate any real property operating income for the three and nine months ended September 30, 2016.
Gross Profit (Loss) from Consulting Services and Gross Margin
Our gross loss from consulting services2023 was $43,207, representing a decrease of $27,031 or 38.5%, as compared to $70,238 for the three months ended September 30, 2017 was $44,867, representing a change of $337,986, or (115.3)%, as compared to gross profit of $293,119 for the three months ended September 30, 2016, mainly due to the significant decrease in our consulting services revenue and the increase in our consulting services costs. Gross margin decreased to (2,071.4)% for the three months ended September 30, 2017 from 89.7% for the three months ended September 30, 2016.
2022. Our gross loss from consulting servicesreal property operating income for the nine months ended September 30, 20172023 was $50,896,$152,429, representing a changedecrease of $344,015,$76,110 or (117.4)%33.3%, as compared to gross profit of $293,119$228,539 for the nine months ended September 30, 2016, mainly due2022. The decrease was primarily attributable to the decrease in our consulting services revenue and increase in real property operating expenses as described above. We expect our consulting services costs. Gross margin decreased to (23.0)% forreal property operating income will remain at its current quarterly level with minimal increase in the nine months ended September 30, 2017near future.
Income from 89.7% for the nine months ended September 30, 2016.Equity Method Investment — Lab Services MSO
The decrease in gross margin for the three and nine months ended September 30, 2017 as compared to the three and nine months ended September 30, 2016 was primarily resulted from low consulting services revenue and the allocation of fixed costs, mainly consisting of internal labor and related benefits, to costs of the low level of consulting revenue.
Other Operating Expenses
For the three and nine months ended September 30, 20172023, we had income from our investment in Lab Services MSO of $354,500 and 2016,$370,060, respectively, which represents our share of Lab Services MSO’s net income. We purchased 40% of Lab Services MSO on February 9, 2023. In the third quarter of 2023, Lab Services MSO acquired Merlin Technologies, Inc. which is a medical equipment retail company. Lab Services MSO plans to open a new laboratory, Veritas Laboratories LLC (“Veritas”). Veritas is a CLIA-certified and COLA-accredited laboratory located in Scottsdale, Arizona that offers a wide range of high-quality testing, including drug testing, genetic testing, urinary testing and COVID-19 PCR testing. We expect that our income from our investment in Lab Services MSO will continue to increase in the near future since Lab Services MSO has a strong earnings growth potential.
Other Operating Expenses
For the three and nine months ended September 30, 2023 and 2022, other operating expenses consisted of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Selling expense | $ | 148 | $ | 121 | $ | 15,138 | $ | 121 | ||||||||
| Compensation and related benefits | 468,837 | — | 857,237 | — | ||||||||||||
| Professional fees | 186,208 | 84,038 | 566,131 | 161,113 | ||||||||||||
| Rent | 34,846 | — | 103,173 | — | ||||||||||||
| Other general and administrative | 57,575 | 1,127 | 141,907 | 29,583 | ||||||||||||
| $ | 747,614 | $ | 85,286 | $ | 1,683,586 | $ | 190,817 | |||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Advertising and marketing expenses | $ | 437,750 | $ | 150,620 | $ | 1,634,720 | $ | 807,821 | ||||||||
| Professional fees | 435,144 | 628,807 | 2,659,895 | 1,886,562 | ||||||||||||
| Compensation and related benefits | 469,959 | 488,373 | 1,375,637 | 1,514,959 | ||||||||||||
| Research and development | - | 170,406 | 110,160 | 541,566 | ||||||||||||
| Litigation settlement | - | - | - | 1,350,000 | ||||||||||||
| Directors and officers liability insurance premium | 72,835 | 103,787 | 280,438 | 310,955 | ||||||||||||
| Travel and entertainment | 61,631 | 40,662 | 179,583 | 120,224 | ||||||||||||
| Rent and related utilities | 15,338 | 18,938 | 48,599 | 59,150 | ||||||||||||
| Other general and administrative | 46,186 | 57,744 | 196,288 | 196,914 | ||||||||||||
| $ | 1,538,843 | $ | 1,659,337 | $ | 6,485,320 | $ | 6,788,151 | |||||||||
| ● |
| ● |
| Professional fees primarily consisted of accounting fees, audit fees, legal service fees, consulting fees, investor relations service charges and other |
| ● | For the three months ended September 30, 2023, compensation and related benefits decreased by $18,414, or 3.8%, as compared to the three months ended September 30, 2022. For the nine months ended September 30, 2023, compensation and related benefits decreased by $139,322, or 9.2%, as compared to the nine months ended September 30, 2022. The decrease was primarily attributable to the decrease in stock-based compensation which reflected the value of |
| ● |
| ● | For the three months ended September 30, 2023 and 2022, we did not |
| ● | For the three months ended September 30, 2023, Directors and Officers Liability Insurance premium decreased by $30,952, or 29.8%, as compared to the three months ended September 30, 2022. For the nine months ended September 30, 2023, Directors and Officers Liability Insurance premium decreased by $30,517, or 9.8%, as compared to the nine months ended September 30, 2022. |
| ● | For the three months ended September 30, 2023, travel and entertainment expense increased by $20,969, or 51.6%, as compared to the three months ended September 30, 2022. For the nine months ended September 30, 2023, travel and entertainment expense increased by $59,359, or 49.4%, as compared to the nine months ended September 30, 2022. The increase was mainly due to increased business travel activities for seeking strategic partners in the three and nine months ended September 30, |
| ● | For the three months ended September 30, 2023, rent and related utilities expenses decreased by $3,600, or 19.0%, as compared to the three months ended September 30, 2022. For the nine months ended September 30, 2023, rent and related utilities expenses decreased by $10,551, or 17.8%, as compared to the nine months ended September 30, 2022. The decrease was attributable to decreased rental rate in the three and nine months ended September 30, 2023. |
| ● | Other general and administrative expenses mainly consisted of |
(Loss) IncomeLoss from Operations
As a result of the foregoing, for the three months ended September 30, 2017,2023, loss from operations amounted to $657,919,$1,141,136, as compared to income from operations of $207,833$1,589,099 for the three months ended September 30, 2016,2022, a changedecrease of $865,752,$447,963 or 416.6%28.2%.
As a result of the foregoing, for the nine months ended September 30, 2017,2023, loss from operations amounted to $1,539,520,$5,962,831, as compared to income from operations of $102,302$6,559,612 for the nine months ended September 30, 2016,2022, a changedecrease of $1,641,822,$596,781 or 1,604.9%9.1%.
Other (Expense) Income (Expense)
Other (expense) income (expense)mainly includes interest income from bank deposits,third party and related party interest expense, generatedconversion inducement expense, loss from loan payable,equity method investment - Epicon, change in fair value of derivative liability, impairment of equity method investment, and foreign currency transaction loss. other miscellaneous income.
Other expense, net, totaled $52,810$343,939 for the three months ended September 30, 2017,2023, as compared to other income, net, of $41$3,825,055 for the three months ended September 30, 2016,2022, a changedecrease of $52,851,$3,481,116, or 91.0%, which was mainlyprimarily attributable to an increasea decrease in third party interest expense of approximately $53,000.
$2,867,000 mainly driven by the decrease in amortization of debt discount and debt issuance cost of approximately $3,049,000 which was offset by the increased interest expense of approximately $182,000 from third party debts in the third quarter of 2023, a decrease in conversion inducement expense of approximately $344,000resulted from the reduction in the conversion price which was incurred in the third quarter of 2022, a decrease in change in fair value of derivative liability of approximately $256,000, and a decrease in other miscellaneous items of approximately $14,000.
Other expense, net, totaled $151,050$1,189,045 for the nine months ended September 30, 2017,2023, as compared to other income, net, of $101$2,953,554 for the nine months ended September 30, 2016,2022, a changedecrease of $151,151,$1,764,509, or 59.7%, which was mainlyprimarily attributable to an increasea decrease in third party interest expense of approximately $95,000,$2,539,000 mainly driven by the decrease in amortization of debt discount and debt issuance cost of approximately $3,013,000 which was offset by the increased interest expense of approximately $474,000 from third party debts in the nine months ended September 30, 2023, and a decrease in conversion inducement expense of approximately $344,000 resulted from the reduction in the conversion price which was incurred in the nine months ended September 30, 2022, offset by a decrease in gain from change in fair value of derivative liability of approximately $472,000, an increase in foreign currency transaction lossimpairment of equity method investment of approximately $57,000, offset by an increase$464,000,and a decrease in interest incomeother miscellaneous items of approximately $1,000.$182,000, which was mainly driven by the decrease in reagent sale.
Income Taxes
We did not have any income taxes expense for the three and nine months ended September 30, 20172023 and 20162022 since we did not generate any taxable incomeincurred losses in the periods.these periods.
Net Loss
As a result of the factors described above, our net loss was $710,729, or $(0.011) per share (basic and diluted), for the three months ended September 30, 2017. Our net income was $207,874, or $0.004 per share (basic and diluted), for the three months ended September 30, 2016.
As a result of the factors described above, our net loss was $1,690,570,$1,485,075 for the three months ended September 30, 2023, as compared to $5,414,154 for the three months ended September 30, 2022, a decrease of $3,929,079 or $(0.026) per share (basic and diluted),72.6%. As a result of the factors described above, our net loss was $7,151,876 for the nine months ended September 30, 2017. Our net income was $102,403, or $0.002 per share (basic and diluted),2023, as compared to $9,513,166 for the nine months ended September 30, 2016.2022, a decrease of $2,361,290 or 24.8%.
Net Loss Attributable to Avalon GloboCare Corp. Common Shareholders
The net loss attributable to Avalon GloboCare Corp. common shareholders was $1,485,075 or $0.14 per share (basic and diluted) for the three months ended September 30, 2023, as compared with $5,414,154 or $0.56 per share (basic and diluted) for the three months ended September 30, 2022, a decrease of $3,929,079 or 72.6%. The net loss attributable to Avalon GloboCare Corp. common shareholders was $7,151,876 or $0.69 per share (basic and diluted) for the nine months ended September 30, 2023, as compared with $9,513,166 or $1.04 per share (basic and diluted) for the nine months ended September 30, 2022, a decrease of $2,361,290 or 24.8%.
Foreign Currency Translation Adjustment
Our reporting currency is the U.S. dollar. The functional currency of our parent company, and our wholly-owned U.S. subsidiaries, Avalon Healthcare System Inc.,AHS, Avalon RT 9, Properties, LLC,Genexosome, Avactis, and Avalon (BVI) Ltd.,Exosome, is the U.S. dollar and the functional currency of our wholly-owned PRC subsidiary, Avalon (Shanghai) Healthcare Technology Co., Ltd. which is incorporated in China,Shanghai is the Chinese Renminbi (“RMB”). The financial statementsstatement of our subsidiary 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 the period) for revenue,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 gainloss of $6,151$8,685 and $216$37,033 for the three months ended September 30, 20172023 and 2016,2022, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $25,973$16,026 and a foreign currency translation gain of $431$78,515 for the nine months ended September 30, 20172023 and 2016,2022, respectively. This non-cash gain had the effect of decreasing our reported comprehensive loss and increasing our reported comprehensive income. This non-cash loss had the effect of increasing our reported comprehensive loss and decreasing our reported comprehensive income.loss.
Comprehensive (Loss) IncomeLoss
As a result of our foreign currency translation adjustment, we had comprehensive loss of $704,578$1,493,760 and comprehensive income of $208,090$5,451,187 for the three months ended September 30, 20172023 and 2016,2022, respectively. As a result of our foreign currency translation adjustment, we had comprehensive loss of $1,716,543$7,167,902 and comprehensive income of $102,834$9,591,681 for the nine months ended September 30, 20172023 and 2016,2022, respectively.
Liquidity and Capital Resources
The Company has a limited operating history and its continued growth is dependent upon the continuation of generating rental revenue from its income-producing real estate property in New Jersey and income from equity method investment through its forty percent (40%) interest in Lab Services MSO 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’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’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. As described below, the Company has raised additional capital through the sale of equity and debt and the Company plans on raising additional capital in the future 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.
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 September 30, 20172023 and December 31, 2016,2022, we had cash balance of approximately $357,000$342,000 and $2,886,000,$1,991,000, respectively. These funds are kept in financial institutions located as follows:
| Country: | September 30, 2017 | December 31, 2016 | ||||||||||||||
| United States | $ | 228,521 | 64.0 | % | $ | 360,559 | 12.5 | % | ||||||||
| China | 128,301 | 36.0 | % | 2,525,630 | 87.5 | % | ||||||||||
| Total cash | $ | 356,822 | 100.0 | % | $ | 2,886,189 | 100.0 | % | ||||||||
| Country: | September 30, 2023 | December 31, 2022 | ||||||||||||||
| United States | $ | 321,899 | 94.2 | % | $ | 1,806,083 | 90.7 | % | ||||||||
| China | 19,872 | 5.8 | % | 184,827 | 9.3 | % | ||||||||||
| Total cash | $ | 341,771 | 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.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’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with 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.dividends.
The current PRC Enterprise Income Tax (“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’ shareholder has a tax treaty with China that provides for a different withholding arrangement.arrangement.
The following table sets forth a summary of changes in our working capital deficit from December 31, 20162022 to September 30, 2017:2023:
December 31, 2016 to September 30, 2017 | ||||||||||||||||
September 30, 2017 | December 31, 2016 | Change | Percentage Change | |||||||||||||
| Working capital (deficit): | ||||||||||||||||
| Total current assets | $ | 622,361 | $ | 3,706,213 | $ | (3,083,852 | ) | (83.2 | )% | |||||||
| Total current liabilities | 5,917,179 | 160,317 | 5,756,862 | 3,590.9 | % | |||||||||||
| Working capital (deficit): | $ | (5,294,818 | ) | $ | 3,545,896 | $ | (8,840,714 | ) | (249.3 | )% | ||||||
| September 30, | December 31, | Changes in | ||||||||||||||
| 2023 | 2022 | Amount | Percentage | |||||||||||||
| Working capital deficit: | ||||||||||||||||
| Total current assets | $ | 864,035 | $ | 2,373,526 | $ | (1,509,491 | ) | (63.6 | )% | |||||||
| Total current liabilities | 6,691,825 | 3,579,805 | 3,112,020 | 86.9 | % | |||||||||||
| Working capital deficit | $ | (5,827,790 | ) | $ | (1,206,279 | ) | $ | (4,621,511 | ) | 383.1 | % | |||||
Our working capital deficit increased by $8,840,714$4,621,511 to working capital deficit $5,294,818$5,827,790 at September 30, 20172023 from working capital $3,545,896$1,206,279 at December 31, 2016.2022. The increase in working capital deficit was primarily attributable to a decrease in cash of approximately $2,529,000 mainly due to cash payment made for acquisition of New Jersey real property, a decrease$1,649,000, an increase in prepaid expensesaccrued payroll liability and othercompensation of approximately $713,000 primarily due to the decrease in prepayment for acquisition of real property of approximately $700,000,$162,000, an increase in accrued liabilities and other payables of approximately $321,000$100,000, an increase in operating lease obligation of approximately $113,000, an increase in equity method investment payable of $1,000,000 resulting from the increasepurchase of 40% of Lab Services MSO incurred in accrued professional fees of approximately $226,000 and the increase in accrued interest for our outstanding loan of approximately $95,000,February 2023, an increase in loanconvertible note payable, net, of approximately $2,100,000 borrowed in connection with our purchase$1,526,000 resulting from the issuance of New Jersey real property, an increase in tenants’ security deposit of approximately $92,000, an increase in due to related parties of approximately $210,000 mainly due to the increase in working capital advance from our related parties,May 2023 Convertible Note and an increase in refundable deposit of approximately $3,000,000 related to our March 2017 Subscription Agreement (see note 11 – Common shares issued for Share Subscription Agreement),July 2023 Convertible Note, offset by an increase in accounts receivable – related parties, net of allowance for doubtful accounts,prepaid expense and other current assets of approximately $97,000, and an$158,000 which was mainly attributable to the increase in tenants receivable, net of allowance for doubtful accounts,deferred financing costs of approximately $56,000.$90,000 and the increase in prepaid NASDAQ listing fee of approximately $25,000 and the increase in other miscellaneous items of approximately $43,000.
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 Nine Months Ended September 30, 20172023 Compared to the Nine Months Ended September 30, 20162022
The following summarizes the key components of our cash flows for the nine months ended September 30, 20172023 and 2016:
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Net cash (used in) provided by operating activities | $ | (747,056 | ) | $ | 327,898 | |||
| Net cash used in investing activities | (7,059,565 | ) | (230,395 | ) | ||||
| Net cash provided by financing activities | 5,309,500 | 150,000 | ||||||
| Effect of exchange rate on cash | (32,246 | ) | (1,262 | ) | ||||
| Net (decrease) increase in cash | $ | (2,529,367 | ) | $ | 246,241 | |||
2022:
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (5,708,402 | ) | $ | (5,072,932 | ) | ||
| Net cash used in investing activities | (22,171 | ) | (54,743 | ) | ||||
| Net cash provided by financing activities | 4,091,323 | 8,263,989 | ||||||
| Effect of exchange rate on cash | (9,889 | ) | (5,893 | ) | ||||
| Net (decrease) increase in cash | $ | (1,649,139 | ) | $ | 3,130,421 | |||
Net cash flow used in operating activities for the nine months ended September 30, 20172023 was $747,056,$5,708,402, which primarily reflected our consolidated net loss of approximately $1,691,000,$7,152,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in accrued liabilities and other payables of approximately $140,000 due to payments made to vendors in the nine months ended September 30, 2023, and the non-cash items adjustment, primarily consisting of income from equity method investment of approximately $351,000 resulting from our purchase of a 40% equity interest in Lab Services MSO in February 2023, and change in fair market value of derivative liability of approximately $129,000, offset by depreciation of approximately $167,000, stock-based compensation and service expense of approximately $1,056,000, impairment of equity method investment of approximately $464,000, and amortization of debt issuance costs and debt discount of approximately $291,000.
Net cash flow used in operating activities for the nine months ended September 30, 2022 was $5,072,932, which primarily reflected our consolidated net loss of approximately $9,513,000, and the non-cash item adjustment consisting of change in fair market value of derivative liability of approximately $601,000, and the changes in operating assets and liabilities, primarily consisting of an increase in accounts receivable – related partiesprepaid expense and other assets of approximately $91,000, an increase in tenants receivable of approximately $56,000, an increase in security deposit of approximately $30,000, and$66,000, a decrease in income taxes payableoperating lease obligation of approximately $21,000,$108,000, offset by an increase in accounts payable of approximately $22,000,$87,000, an increase in accrued liabilities and other payables of approximately $321,000 resulting from the increase in accrued professional fees of approximately $226,000 and the increase in accrued interest for our outstanding loan of approximately $95,000,$63,000, an increase in accrued liabilities and other payables –— related parties of approximately $23,000, and an increase in tenants’ security deposit of approximately $92,000,$80,000, and the add-back of non-cash items adjustment primarily consisting of depreciation of approximately $251,000, amortization of operating lease right-of-use asset of approximately $102,000, stock-based compensation and service expense of approximately $58,000$983,000, amortization of debt issuance costs and stock-based compensationdebt discount of approximately $602,000.$3,303,000 mainly resulting from the conversion of convertible debt in July 2022, and conversion inducement expense of approximately $344,000 resulted from the reduction in the conversion price.
NetWe expect our cash flow provided byused in operating activities forto increase due to the nine months ended September 30, 2016 was $327,898, which primarily reflected our net income of approximately $102,000, and changes in operating assets and liabilities consisting of an increase in accrued liabilities and other payables – related parties of approximately $6,000, and an increase in advance from customers – related parties of approximately $227,000, offset by changes in operating assets and liabilities consisting of an increase in prepaid expenses and other of approximately $5,000, and a decrease in accrued liabilities and other payables of approximately $3,000.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 $7,059,565$22,171 for the nine months ended September 30, 20172023 as compared to $230,395$54,743 for the nine months ended September 30, 2016.2022. During the nine months ended September 30, 2017,2023, we made payment for purchase of property and equipment of approximately $22,000. During the nine months ended September 30, 2022, we made payments for purchase of property plant and equipment of approximately $51,000,$2,000 and made payments for purchase of commercial real estateadditional investment in equity method investment of approximately $7,009,000. During the nine months ended September 30, 2016, we made payment forthe purchase of Avalon GloboCare Corp.’s shares of $230,000 and made payments for the purchase of property, plant and equipment of $395.$53,000.
Net cash flow provided by financing activities was $5,309,500$4,091,323 for the nine months ended September 30, 20172023 as compared to $150,000$8,263,989 for the nine months ended September 30, 2016.2022. During the nine months ended September 30, 2017,2023, we received $2,100,000 proceeds from loan payable,related party borrowings of $850,000, and received $210,000 advancenet proceeds from related parties,issuance of convertible debt and received $3,000,000warrants of approximately $1,690,000 (net of original issue discount of $100,000 and cash paid for convertible note issuance costs of approximately $211,000), and net proceeds from issuance of refundable deposit as earnest money in connection with the Share Subscription Agreement related to the 3,000,000 common stock issued to the March 2017 Accredited Investor who is an entrusted party that holds the shares on behalfballoon promissory note of DOING, offset by repaymentapproximately $936,000 (net of cash paid for related parties’ advancepromissory note issuance costs of $500.approximately $64,000), and net proceeds from equity offering of approximately $616,000 (net of cash paid for commission and other offering costs of approximately $19,000). During the nine months ended September 30, 2016,2022, we received proceeds from related parties’ advanceparty borrowings of $9,000$100,000, and received proceeds from AHS’s founders’ contributionissuance of $141,000, in fundingconvertible debt and warrants of approximately $3,719,000, and net proceeds from issuance of balloon promissory note of $4,534,000 (net of cash paid for debt issuance costs of approximately $266,000), and net proceeds from equity offering of approximately $712,000 (net of cash paid for commission and other offering costs of approximately $24,000) to fund our operations.
Ourworking capital requirementsneeds, offset by repayments made for the next twelve months primarily relate to mergers, acquisitionsnote payable — related party of $390,000 and the developmentrepayments made for loan payable — related party of business opportunities. In addition, we expect to use cash to pay salaries and fees related to third parties’ professional services. All funds received have been expended in the furtherance of growing the business. $410,000.
The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:term:
| ● |
| ● |
| ● |
August 2019 Credit Facility
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 September 30, 2023, the total principal amount outstanding under the Credit Line was $850,000 and we used approximately $6.8 million of the credit facility and have approximately $13.2 million remaining available under the Line Credit.
ATM
In June 2023, the Company entered into a sales agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (“Roth”) under which the Company may offer and sell from time to time shares of its common stock having an aggregate offering price of up to $3.5 million. From July 1, 2023 to November 13, 2023, Roth has sold an aggregate of 456,627 shares of common stock of the Company at an average price of $1.39 per share to investors. The Company received net cash proceeds of $616,259, net of cash paid for sales agent’s commission and other fees of $19,132.
We will need
Balloon Mortgage Note
In May 2023, the Company, through Avalon RT9 Properties, LLC (“Avalon RT9”), executed a balloon mortgage note in favor of a lender (the “Lender”) in the original principal amount of $1,000,000 (the “Balloon Mortgage Note”). The Balloon Mortgage Note accrues interest at the annual rate of 13.0% and is paid in monthly installments of interest-only in the amount of $10,833 commencing in June 2023 and continuing through October 2025 (at which point any unpaid balance of principal, interest and other charges become due and payable). The Balloon Mortgage Note is secured by a second-lien mortgage on the Company’s real property in Monmouth County, New Jersey, In addition, the Company and Avalon RT9 executed a guaranty related to raise additional funds, particularly if we are unable to generate positive cash flowthe Balloon Mortgage Note.
May 2023 Convertible Note Financing
In May 2023, the Company entered into a securities purchase agreement with certain lenders (the “May 2023 Lenders”) and closed on the issuance of a 13.0% senior secured convertible promissory note in the aggregate principal amount of $1,500,000 (the “May 2023 Note”), as well as the issuance of 75,000 shares of common stock as a resultcommitment fee and warrants for the purchase of our operations. up to 230,000 shares of the Company’s common stock. The Company and its subsidiaries have also entered into a security agreement, creating a security interest in certain property of the Company and its subsidiaries to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the May 2023 Note. The May 2023 Lenders acquired the May 2023 Note for $1,425,000 after an original issue discount of $75,000. The May 2023 Note matures on May 23, 2024 and accrues interest at a rate of 13.0% per annum. The May 2023 Note contains certain negative covenants. If the May 2023 Note is accelerated following the occurrence of an event of default as described in such note, the Company is required to pay 120% of the principal and interest outstanding under the May 2023 Note. The principal amount and interest under the May 2023 Note is convertible into shares of the Company’s common stock at a conversion price of $4.50 per share, unless the Company fails to make an amortization payment when due in accordance with the terms of the May 2023 Note, in which case the conversion price shall be the lower of (i) $4.50 or (ii) 85% of the lowest VWAP of the Company’s common stock on any trading day during the five (5) trading days prior to the respective conversion date, subject to a floor of $1.50 per share. The warrants are comprised of (i) a warrant to purchase 125,000 shares of the Company’s common stock at an exercise price of $4.50 and exercisable until May 23, 2028 and (ii) a warrant to purchase 105,500 shares of the Company’s common stock at an exercise price of $3.20 and exercisable until May 23, 2028 (which warrant shall be cancelled and extinguished upon the payment of the May 2023 Note). The conversion price of the May 2023 Note and the exercise price of the warrants issued thereunder contain certain price protection anti-dilution adjustments if an event of default occurs under the May 2023 Notes.
July 2023 Convertible Note Financing
In July 2023, the Company entered into a securities purchase agreement with certain lenders (the “July 2023 Lenders”) and closed on the issuance of a 13.0% senior secured convertible promissory note in the aggregate principal amount of $500,000 (the “July 2023 Note”), as well as the issuance of 25,000 shares of common stock as a commitment fee and warrants for the purchase of up to 76,830 shares of the Company’s common stock. The Company and its subsidiaries have also entered into a security agreement, creating a security interest in certain property of the Company and its subsidiaries to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the July 2023 Note. The July 2023 Lenders acquired the July 2023 Note for $475,000 after an original issue discount of $25,000. The July 2023 Note matures on July 6, 2024 and accrues interest at a rate of 13.0% per annum. The July 2023 Note contains certain negative covenants. If the July 2023 Note is accelerated following the occurrence of an event of default as described in such note, the Company is required to pay 120% of the principal and interest outstanding under the July 2023 Note. The principal amount and interest under the July 2023 Note is convertible into shares of the Company’s common stock at a conversion price of $4.50 per share, unless the Company fails to make an amortization payment when due which commences in January 2024 in accordance with the terms of the July 2023 Note, in which case the conversion price shall be the lower of (i) $4.50 or (ii) 85% of the lowest VWAP of the Company’s common stock on any trading day during the five (5) trading days prior to the respective conversion date, subject to a floor of $1.50 per share. The warrants are comprised of (i) a warrant to purchase 41,665 shares of the Company’s common stock at an exercise price of $4.50 and exercisable until July 6, 2028 and (ii) a warrant to purchase 35,165 shares of the Company’s common stock at an exercise price of $3.20 and exercisable until July 6, 2028 (which warrant shall be cancelled and extinguished upon the payment of the July 2023 Notes). The conversion price of the July 2023 Note and the exercise price of the warrants issued thereunder contain certain price protection anti-dilution adjustments if an event of default occurs under the July 2023 Notes.
October 2023 Convertible Note Financing
In October 2023, the Company entered into securities purchase agreements with certain lenders (the “October 2023 Lenders”) and closed on the issuance of 13.0% senior secured convertible promissory notes in the aggregate principal amount of $700,000 (the “October 2023 Note”), as well as the issuance of 70,000 shares of common stock as a commitment fee and warrants for the purchase of up to 105,000 shares of the Company’s common stock. The Company and its subsidiaries have also entered into security agreements, creating a security interest in certain property of the Company and its subsidiaries to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the October 2023 Note. The October 2023 Lenders acquired the October 2023 Note for $665,000 after an original issue discount of $35,000. The October 2023 Note matures on October 9, 2024 and accrues interest at a rate of 13.0% per annum. The October 2023 Note contains certain negative covenants. If the October 2023 Note is accelerated following the occurrence of an event of default as described in such note, the Company is required to pay 120% of the principal and interest outstanding under the October 2023 Note. The principal amount and interest under the October 2023 Note is convertible into shares of the Company’s common stock at a conversion price of $1.50 per share, unless the Company fails to make an amortization payment when due which commences in April 2024 in accordance with the terms of the October 2023 Note, in which case the conversion price shall be the lower of (i) $1.50 or (ii) 85% of the lowest VWAP of the Company’s common stock on any trading day during the five (5) trading days prior to the respective conversion date. The warrants are comprised of (i) a warrant to purchase 105,000 shares of the Company’s common stock at an exercise price of $2.50 and exercisable until October 9, 2028 and (ii) a warrant to purchase 87,500 shares of the Company’s common stock at an exercise price of $1.80 and exercisable until October 9, 2028 and which warrant shall be cancelled and extinguished upon the payment of the October 2023 Note. The conversion price of the October 2023 Note and the exercise price of the warrants issued thereunder contain certain price protection anti-dilution adjustments if an event of default occurs under the October 2023 Note.
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.expectations through cash flow provided by operations, and cash available under our ATM and lending facilities and sales of equity. Other than funds received from the sale of our equityas described above and advancescash resource generating from our related parties,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.
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 September 30, 2017, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
| Payments Due by Period | ||||||||||||||||||||
| Contractual obligations: | Total | Less than 1 year | 1-3 years | 3-5 years | 5+years | |||||||||||||||
| Legal service contract | $ | 60,000 | $ | 60,000 | $ | — | $ | — | $ | — | ||||||||||
| Financial consulting service contract | 34,000 | 34,000 | — | — | — | |||||||||||||||
| Real property management agreement | 102,923 | 65,004 | 37,919 | — | — | |||||||||||||||
| Office leases commitment | 134,137 | 100,468 | 33,669 | — | — | |||||||||||||||
| Loan payable (principal) | 2,100,000 | 2,100,000 | — | — | — | |||||||||||||||
| Accrued interest for loan | 94,932 | 94,932 | — | — | — | |||||||||||||||
| Total | $ | 2,525,992 | $ | 2,454,404 | $ | 71,588 | $ | — | $ | — | ||||||||||
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 revenue and operating results may be impacted by exchange rate fluctuations between the RMB and the US dollars.dollar do not have a material effect on us. For the three months ended September 30, 2023 and 2022, we had an unrealized foreign currency translation loss of approximately $9,000 and $37,000, respectively, because of changes in the exchange rate. For the nine months ended September 30, 20172023 and 2016,2022, we had an unrealized foreign currency translation loss of approximately $26,000$16,000 and unrealized foreign currency translation gain of approximately $400,$79,000, 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 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 September 30, 2017,2023, 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 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 September 30, 20172023 due to the material weakness wethat was previously reported in our 2016Annual Report on Form 10-K which hasfor the year ended December 31, 2022 filed with the SEC on March 30, 2023, that have not yet been remediated. In our 2016Management’s plan to remediate the material weakness is described in detail in such Annual Report on Form 10-K we reported that we did not maintain a sufficient complement of personnel with an appropriate level of experience and training infor the application of U.S. GAAP commensurate with our financial reporting requirements and we did not form a formal audit committee.year ended December 31, 2022.
Changes in Internal Controls Over Financial Reporting
Management is working towards enhancing internal controls, including the hiring of a controller at Lab Services MSO, who is also expected to assist the Company with its internal control over financial reporting processes. Additionally, management continues its risk assessment to identify risks and objectives. There were no other changes (including corrective actions with regard to material weakness) 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 litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business, operating results, cash flows or financial condition.legal proceedings.
ITEM 1A. RISK FACTORS
As a smaller reporting company, as definedIn addition to the other information set forth in Rule 12b-2 ofthis report, you should carefully consider the Exchange Act,factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 30, 2023 and the additional factors discussed in Part II, “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the period ended June 30, 2023 filed with the SEC on August 14, 2023, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that we are not requiredcurrently deem to provide the information required by this Item.be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Services
On February 21, 2017, Ms. Ingariola and the Company entered into an Executive Retention Agreement effective February 9, 2017 pursuantIn July 2023, we issued a five-year warrant to which Ms. Ingariola agreed to serve as Chief Financial Officer. As partial compensation, the Company granted Ms. Ingariola a Stock Option to acquire 2,000,000purchase 13,333 shares of our common stock atwith an exercise price of $0.50 per share for$4.50 as a periodfinder’s fee in connection with our note offerings in May and July 2023.
In July 2023, as settlement of ten years. The Stock Options vest in 36 equal tranches commencing on the grant date. On April 28, 2017, Steven P. Sukel and Yancen Lu were appointedoutstanding fees of $236,280 owed to a consultant, we issued 158,600 shares of our common stock to the Board of Directorsconsultant for services rendered to us.
In November 2023, we issued a five-year warrant to purchase 8,400 shares of our company to serve as directors. Mr. Sukel and Mr. Yancen Lu both entered into agreements pursuant to which they will serve as directors. The director agreements provide that they will receive options to receive 40,000 shares of common stock per year atwith an exercise price equal to the closing price on December 31st of the prior year. The options shall vest$2.50 as a finder’s fee in equal amounts quarterly and shall be exercisable for a period of five years.During the nine months ended September 30, 2017, we granted a total of 444,448 options to our Chief Financial Officer at a fixed exercise price of $0.50 per share and granted a total of 40,000 options to our two directors at a fixed exercise price of $1.49 per share. The 444,448 options granted to our Chief Financial Officer are exercisable for ten years and the 40,000 options granted to our two directors are exercisable for five years. In connection with the option vest, we recorded stock-based compensation of $602,224for the nine months ended September 30, 2017.
our note offering in October 2023.
DOING Biomedical Technology Co., Ltd.
DOING Biomedical Technology Co., Ltd. (“DOING”) and Avalon discussed DOING potentially investing in Avalon. However, prior to such investment, DOING needed to obtain the required approvals from the government, which is a timely and costly process. In lieu of acquiring shares directly from Avalon, DOING agreed to fund the purchase of shares of common stock of Avalon on behalf of an accredited investor (the “March 2017 Accredited Investor”), which is permitted under Chinese law.
Accordingly, we entered into and closed a Subscription Agreement with the March 2017 Accredited Investor pursuant to which the March 2017 Accredited Investor purchased 3,000,000 shares of common stock (“March 2017 Shares”) for a purchase price of $3,000,000 (the “Purchase Price”). The closing occurred on March 3, 2017.
Avalon Shanghai, DOING, the March 2017 Accredited Investor and our company entered into a Share Subscription Agreement whereby the parties acknowledged, among other things, that DOING agreed to transfer the Purchase Price to Avalon Shanghai on behalf of the March 2017 Investor and the March 2017 Accredited Investor agreed to transfer the March 2017 Shares to DOING upon DOING completing the registration of the acquisition of the March 2017 Shares with the Beijing Commerce Commission (“BCC”).
The BCC is responsible for guiding foreign investment, trade and technology transfer in China. DOING is required to obtain an Enterprise Overseas Investment Certificate (the “Investment Certificate”) from BCC in order to acquire the March 2017 Shares.
If DOING fails to complete the registration and acquire the Investment Certificate within one year of the closing then Avalon Shanghai shall transfer $3,000,000 with interest of 20% to DOING upon the request of DOING (the “BCC Repayment Obligation”). As of the date hereof, the Company is obligated to DOING in the principal amount of $3,000,000. The BCC Repayment Obligation is a debt obligation arising other than in the ordinary course of business, which constitutes a direct financial obligation of our company. In the event we are required to repay the BCC Repayment Obligation, our operations will be negatively impacted.
Further, Wenzhao Lu, major shareholder and chairman of the Board of Directors of our company, and DOING entered into a Warranty Agreement. Pursuant to the Warranty Agreement, Mr. Wenzhao Lu agreed to (i) cause us to be liable to DOING in the event the March 2017 Accredited Investor defaults in its obligations to DOING, (ii) cause the March 2017 Accredited Investor to transfer the March 2017 Shares to DOING upon DOING’s receipt of the Investment Certificate from BCC, (iii) within three years from the date of the Warranty Agreement, DOING may require Mr. Wenzhao Lu to acquire the March 2017 Shares at $1.20 per share upon three months notice, and (iv) in the event Mr. Wenzhao Lu does not acquire the March 2017 Shares within the three month period, interest of 15% per annum will be added to the purchase price.
October 2017 Private Placement
On October 20, 2017, the Company entered into Subscription Agreements with accredited investors (the “October 2017 Accredited Investors”) pursuant to which the October 2017 Accredited Investors agreed to purchase 3,750,000 shares of the Company’s common stock (“October 2017 Shares”) for a purchase price of $3,750,000 (the “Purchase Price”). The closing with respect to $200,000 of the Purchase occurred on October 24, 2017. As of November 10, 2017, the Company has received $2,090,000 of the Purchase Price. The balance of the Purchase Price is expected to close on or before December 6, 2017 if not sooner.
GenExosome Technologies Inc.
In July 2017, the Company formed GenExosome Technologies Inc., a Nevada corporation (“GenExosome”). On September 29, 2017, Dr. David K. Jin was appointed as the sole director and as the Chief Executive Officer, Chief Medical Officer and President, Meng Li was appointed as Chief Operating Officer and Secretary and Luisa Ingargiola was appointed as Chief Financial Officer. On October 25, 2017, GenExosome and the Company entered into a Securities Purchase Agreement pursuant to which the Company acquired 600 shares of GenExosome in consideration of $1,326,087 and 500,000 shares of common stock of the Company. The Company is required to deliver the 500,000 shares of its common stock no later than November 24, 2017. On October 25, 2017, GenExosome entered into and closed an Asset Purchase Agreement with Yu Zhou, MD, PhD, pursuant to which the Company acquired all assets, including all intellectual property, held by Dr. Zhou pertaining to the business of researching, developing and commercializing exosome technologies including, but not limited to, patent application number CN 2016 1 0675107.5 (application of an Exosomal MicroRNA in plasma as biomaker to diagnosis liver cancer), patent application number CN 2016 1 0675110.7 (clinical application of circulating exosome carried miRNA-33b in the diagnosis of liver cancer), patent application number CN 2017 1 0330847.X (saliva exosome based methods and composition for the diagnosis, staging and prognosis of oral cancer) and patent application number CN 2017 1 0330835.7 (a novel exosome-based therapeutics against proliferative oral diseases). In consideration of the assets, GenExosome agreed to pay Dr. Zhou $876,087 in cash no later than November 24, 2017, transfer 500,000 shares of common stock of the Company to Dr. Zhou no later than November 24, 2017 and issue Dr. Zhou 400 shares of common stock of GenExosome no later than November 24, 2017.
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
Not applicable.
On April 19, 2017, the Company entered into a loan agreement, providing for the issuance of a loan in the principal amount of $2,100,000. The term of the loan is one year. The annual interest rate for the loan is 10%. The loan is guaranteed by the Company’s Chairman, Mr. Wenzhao Lu. At September 30, 2017, the outstanding principal balance of the loan and related accrued and unpaid interest for the loan was $2,100,000 and $94,932, respectively.
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
| ** | Furnished herewith. |
* Filed herewithSIGNATURES
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 | ||
| Name: | David K. Jin | ||
| Title: | Chief Executive Officer | ||
| (Principal Executive Officer) | |||
| Dated: November 14, | By: | /s/ Luisa Ingargiola | |
| Name: | Luisa Ingargiola | ||
| Title: | Chief Financial Officer | ||
| (Principal Financial and Accounting | |||
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