UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
OR
Commission
File Number:
(Exact name of registrant as specified in its charter)
| No. | ||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
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(Address of principal executive offices) | (Zip Code) |
(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 | ||
| The |
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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
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” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☐ | 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, 2023,
AVALON GLOBOCARE CORP.
FORM 10-Q
For the Quarterly Period Ended September 30, 2023
Table of Contents
i
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2023 | December 31,
2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Rent receivable | ||||||||
| Prepaid expense and other current assets | ||||||||
| Total Current Assets | ||||||||
| NON-CURRENT ASSETS: | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Property and equipment, net | ||||||||
| Investment in real estate, net | ||||||||
| Equity method investments, net | ||||||||
| Advances for equity interest purchase | ||||||||
| Other non-current assets | ||||||||
| Total Non-current Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accrued professional fees | $ | $ | ||||||
| Accrued research and development fees | ||||||||
| Accrued payroll liability and compensation | ||||||||
| Accrued litigation settlement | ||||||||
| Accrued liabilities and other payables | ||||||||
| Accrued liabilities and other payables - related parties | ||||||||
| Operating lease obligation | ||||||||
| Equity method investment payable | ||||||||
| Derivative liability | ||||||||
| Convertible note payable, net | ||||||||
| Total Current Liabilities | ||||||||
| NON-CURRENT LIABILITIES: | ||||||||
| Operating lease obligation - noncurrent portion | ||||||||
| Accrued litigation settlement - noncurrent portion | - | |||||||
| Note payable, net | ||||||||
| Loan payable - related party | ||||||||
| Total Non-current Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 15) | ||||||||
| EQUITY: | ||||||||
| Preferred stock, $ | ||||||||
| Series A Convertible Preferred Stock, | ||||||||
| Series B Convertible Preferred Stock, | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Less: common stock held in treasury, at cost; | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Statutory reserve | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Avalon GloboCare Corp. stockholders' equity | ||||||||
| Non-controlling interest | ||||||||
| Total Equity | ||||||||
| Total Liabilities and Equity | $ | $ | ||||||
See accompanying notes to the condensed consolidated financial statements.
1
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 | $ | $ | $ | $ | ||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| OPERATING INCOME | ||||||||||||||||
| INCOME FROM EQUITY METHOD INVESTMENT - LAB SERVICES MSO | ||||||||||||||||
| OTHER OPERATING EXPENSES: | ||||||||||||||||
| Advertising and marketing expenses | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Compensation and related benefits | ||||||||||||||||
| Research and development expenses | ||||||||||||||||
| Litigation settlement | ||||||||||||||||
| Other general and administrative expenses | ||||||||||||||||
| Total Other Operating Expenses | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER (EXPENSE) INCOME | ||||||||||||||||
| Interest expense - amortization of debt discount and debt issuance cost | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense - other | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense - related party | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Conversion inducement expense | ( | ) | ( | ) | ||||||||||||
| Loss from equity method investment - Epicon | ( | ) | ( | ) | ( | ) | ||||||||||
| Change in fair value of derivative liability | ( | ) | ||||||||||||||
| Impairment of equity method investment - Epicon | ( | ) | ||||||||||||||
| Other income | ||||||||||||||||
| Total Other Expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| INCOME TAXES | ||||||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| LESS: NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST | ||||||||||||||||
| NET LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| COMPREHENSIVE LOSS: | ||||||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| OTHER COMPREHENSIVE LOSS | ||||||||||||||||
| Unrealized foreign currency translation loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| COMPREHENSIVE LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| LESS: COMPREHENSIVE LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST | ||||||||||||||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| NET LOSS PER COMMON SHARE ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS: | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
2
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Three and 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 | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||||||
| Issuance of Series B Convertible Preferred Stock for equity method investment | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2023 | - | ` | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| To correct shares issued for adjustments for 1:10 reverse split | - | - | ( | ) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as convertible note payable commitment fee | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2023 | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock, net | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as convertible note payable commitment fee | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2023 | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
3
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Three and 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 | - | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||
| Sale of common stock, net | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2022 | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Warrants issued with convertible debt offering | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible note payable and accrued interest into common stock | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of derivative liability to equity | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of loan payable and accrued interest - related party | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock - related party | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2022 | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | - | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
4
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 | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Bad debt provision | ||||||||
| Depreciation | ||||||||
| Change in straight-line rent receivable | ( | ) | ( | ) | ||||
| Amortization of operating lease right-of-use asset | ||||||||
| Stock-based compensation and service expense | ||||||||
| (Income) loss from equity method investments | ( | ) | ||||||
| Impairment of equity method investment | ||||||||
| Amortization of debt issuance costs and debt discount | ||||||||
| Conversion inducement expense | ||||||||
| Change in fair market value of derivative liability | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Rent receivable | ( | ) | ||||||
| Security deposit | ( | ) | ||||||
| Deferred leasing costs | ||||||||
| Prepaid expense and other assets | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accrued liabilities and other payables | ( | ) | ||||||
| Accrued liabilities and other payables - related parties | ||||||||
| Operating lease obligation | ( | ) | ( | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Additional investment in equity method investment | ( | ) | ||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayments of note payable - related party | ( | ) | ||||||
| Proceeds from loan payable - related party | ||||||||
| Repayments of loan payable - related party | ( | ) | ||||||
| Proceeds from issuance of convertible debt and warrants | ||||||||
| Payments of convertible debt issuance costs | ( | ) | ||||||
| Proceeds from issuance of balloon promissory note | ||||||||
| Payments of balloon promissory note issuance costs | ( | ) | ( | ) | ||||
| Proceeds from equity offering | ||||||||
| Disbursements for equity offering costs | ( | ) | ( | ) | ||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| EFFECT OF EXCHANGE RATE ON CASH | ( | ) | ( | ) | ||||
| NET (DECREASE) INCREASE IN CASH | ( | ) | ||||||
| CASH - beginning of period | ||||||||
| CASH - end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Common stock issued for future services | $ | $ | ||||||
| Common stock issued for accrued liabilities | $ | $ | ||||||
| Reclassification of advances for equity interest purchase to equity method investment | $ | $ | ||||||
| Series B Convertible Preferred Stock issued related to equity method investment | $ | $ | ||||||
| Accrued purchase price related to equity method investment | $ | $ | ||||||
| Warrants issued as convertible note payable finder's fee | $ | $ | ||||||
| Warrants issued with convertible note payable recorded as debt discount | $ | $ | ||||||
| Bifurcated embedded conversion feature recorded as derivative liability and debt discount | $ | $ | ||||||
| Common stock issued as convertible note payable commitment fee | $ | $ | ||||||
| Deferred financing costs in accrued liabilities | $ | $ | ||||||
| Conversion of convertible note payable and accrued interest into common stock | $ | $ | ||||||
| Reclassification of derivative liability to equity | $ | $ | ||||||
| Related party loan and accrued interest settled in shares | $ | $ | ||||||
See accompanying notes to the condensed consolidated financial statements.
5
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — ORGANIZATION AND NATURE OF OPERATIONS
Avalon
GloboCare Corp. (the “Company” or “ALBT”) is a Delaware corporation. The Company was incorporated under the laws
of the State of Delaware on July 28, 2014. On October 19, 2016, the Company entered into and closed a Share Exchange Agreement with the
shareholders of Avalon Healthcare System, Inc., a Delaware corporation (“AHS”), each of which were accredited investors (“AHS
Shareholders”), pursuant to which the Company acquired
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 was 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 owned subsidiary, Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon
Shanghai”) immediately following the consummation of this reverse merger transaction. AHS owns
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 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 9 South, Freehold, NJ 07728. 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. As of
September 30, 2023, the occupancy rate of the building is
On
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. 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
On
October 14, 2022, the Company formed a wholly owned subsidiary, Avalon Laboratory Services, Inc. (“Avalon Lab”), a Delaware
company. On February 9, 2023, Avalon Lab purchased forty percent (
6
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — ORGANIZATION AND NATURE OF OPERATIONS (continued)
| Name of Subsidiary | Place and Date of Incorporation | Percentage of Ownership | Principal Activities | |||
Avalon Healthcare System, Inc. (“AHS”) |
Delaware May 18, 2015 |
|||||
Avalon RT 9 Properties LLC (“Avalon RT 9”) |
New Jersey February 7, 2017 |
|||||
Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”) |
PRC April 29, 2016 |
|||||
Genexosome Technologies Inc. (“Genexosome”) |
Nevada July 31, 2017 |
| ||||
Avactis Biosciences Inc. (“Avactis”) |
Nevada July 18, 2018 |
|||||
Avactis Nanjing Biosciences Ltd. (“Avactis Nanjing”) |
PRC May 8, 2020 |
|||||
International Exosome Association LLC (“Exosome”) |
Delaware June 13, 2019 |
|||||
Avalon Laboratory Services, Inc. (“Avalon Lab”) |
Delaware October 14, 2022 |
NOTE 2 — BASIS OF PRESENTATION AND GOING CONCERN CONDITION
Basis of Presentation
These interim condensed consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements have been included. The results reported in the condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). The Company’s condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company’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, 2022 filed with the Securities and Exchange Commission on March 30, 2023.
7
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 — BASIS OF PRESENTATION AND GOING CONCERN CONDITION (continued)
Going Concern
The Company is a 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 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 (
As
reflected in the accompanying condensed consolidated financial statements, the Company had a working capital deficit of approximately
$
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. The Company plans on raising capital through the sale of equity to implement its business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to the Company on satisfactory terms and conditions, if any.
The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies
There have been no changes to the Company’s significant accounting policies described in the Company’s 2022 Annual Report on Form 10-K filed with the SEC that have had a material impact on the Company’s financial condition, and operating results.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Changes 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 those estimates.
Significant
estimates during the three and nine months ended September 30, 2023 and 2022 include the valuation of deferred tax assets and the associated
valuation allowances, the valuation of 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
8
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments and Fair Value Measurements
The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
| · | Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. |
| · | Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. |
| · | Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
The 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 on a recurring basis. Certain assets and liabilities are measured at fair value on a recurring basis. These assets and liabilities are measured at fair value on an ongoing basis. These assets and liabilities include derivative liability.
Derivative
liability. Derivative liability is
carried at fair value and measured on an ongoing basis.
| 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 | ||||
| Gain from change in the fair value of derivative liability | ( | ) | ||
| Balance of derivative liability as of September 30, 2023 | $ | |||
Assets and 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 $
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.
9
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
| Country: | September
30, 2023 | December
31, 2022 | ||||||||||||||
| United States | $ | % | $ | % | ||||||||||||
| China | % | % | ||||||||||||||
| Total cash | $ | % | $ | % | ||||||||||||
For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less when purchased and money market accounts to be cash equivalents. The Company had no cash equivalents at 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
The
Company maintains a portion of its cash on deposits with bank and financial institution within the U.S. that at times may exceed federally-insured
limits of $
The Company’s concentrations of credit risk with respect to its rent receivable is limited due to short-term payment terms. The Company also performs ongoing credit evaluations of its tenants to help further reduce credit risk.
Investment 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 $
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 contractual 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 its customers.
10
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Commitments and Contingencies
In the normal course of business, the Company is subject to contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters. Liabilities for such contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Per Share Data
ASC Topic 260 “Earnings 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. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the three and 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.
| Three
Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Options to purchase common stock | ||||||||||||||||
| Warrants to purchase common stock | ||||||||||||||||
| Series A convertible preferred stock (*) | ||||||||||||||||
| Series B convertible preferred stock (**) | ||||||||||||||||
| Convertible note (***) | ||||||||||||||||
| Potentially dilutive securities | ||||||||||||||||
| (*) |
| (**) |
| (***) |
Segment Reporting
The
Company 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.
During 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. These reportable segments offer different services and products, have different types of revenue, and are managed separately as each requires different operating strategies and management expertise. Due to the winding down of the medical related consulting services segment in 2022, the Company decided to cease all operations of this segment and no longer has any material revenues or expenses in this segment. As a result, commencing from the first quarter of 2023, the Company’s chief operating decision maker no longer reviews medical related consulting services operating results.
11
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Segment Reporting (continued)
On
February 9, 2023, the Company purchased
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 Split
The Company effected a one-for-ten reverse stock split of its outstanding shares of common stock on January 5, 2023. The reverse split did not change the number of authorized shares of common stock or par value. All references in these condensed consolidated financial statements to shares, share prices, exercise prices, and other per share information in all periods have been adjusted, on a retroactive basis, to reflect the reverse stock split.
Recent Accounting Standards
In June 2016, the FASB issued ASU 2016-13, 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 credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. ASU 2016-13 is effective for annual period beginning after December 15, 2022, including interim reporting periods within those annual reporting periods. The 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 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends the accounting related to contract assets and liabilities acquired in business combinations. ASU 2021-08 requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to business combinations occurring on or after the effective date of the amendment. Early adoption is permitted, including adoption in an interim period. The adoption of this new guidance did not have any material impact on the Company’s condensed consolidated financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.
NOTE 4 — PREPAID EXPENSE AND OTHER CURRENT ASSETS
| September 30,
2023 | December 31,
2022 | |||||||
| Prepaid professional fees | $ | $ | ||||||
| Prepaid directors and officers liability insurance premium | ||||||||
| Prepaid NASDAQ listing fee | ||||||||
| Deferred offering costs | ||||||||
| Deferred leasing costs | ||||||||
| Security deposit | ||||||||
| Others | ||||||||
| Total | $ | $ | ||||||
12
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 — EQUITY METHOD INVESTMENTS
Investment in Epicon Biotech Co., Ltd.
As
of September 30, 2023 and December 31, 2022, the equity method investment in Epicon Biotech Co., Ltd. (“Epicon”) amounted
to $
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 investment 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 $
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 (
Lab
Services MSO, through its two subsidiaries, Lab Services LLC and 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
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 $
13
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 $
| 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 | ||||
| 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 | ||||
| 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 | ||||
| Lab Services MSO’s net income attributable to the Company | ||||
| Intangible assets amortization amount | ( |
) | ||
| Equity investment carrying amount at September 30, 2023 | $ |
As of September 30, 2023,
the Company’s carrying value of the identified intangible assets and goodwill which are included in the equity investment carrying
amount was $
| September 30,
2023 | ||||
| Current assets | $ | |||
| Noncurrent assets | ||||
| Current liabilities | ||||
| Noncurrent liabilities | ||||
| Equity | ||||
| For
the Three Months Ended September 30, 2023 | For
the Period from February 9, 2023 (Date of Investment) through September 30, 2023 | |||||||
| Net revenue | $ | $ | ||||||
| Gross profit | ||||||||
| Income from operation | ||||||||
| Net income | ||||||||
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 (
14
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
Mast
Hill acquired the May 2023 Convertible Note with principal amount of $
| Payment Date: | Payment Amount: | |
| November 23, 2023 | ||
| December 23, 2023 | ||
| January 23, 2024 | ||
| February 23, 2024 | ||
| March 23, 2024 | ||
| April 23, 2024 | ||
| May 23, 2024 |
In
connection with the issuance of the May 2023 Convertible Note, the Company incurred debt issuance costs of $
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
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 $
15
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 $
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 $
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
Firstfire acquired
the July 2023 Convertible Note with principal amount of $
| Payment Date: | Payment Amount: | |
| January 6, 2024 | ||
| February 6, 2024 | ||
| March 6, 2024 | ||
| April 6, 2024 | ||
| May 6, 2024 | ||
| June 6, 2024 | ||
| July 6, 2024 |
In
connection with the issuance of the July 2023 Convertible Note, the Company incurred debt issuance costs of $
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
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.
16
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 $
For
both the three and nine months ended September 30, 2023, amortization of debt discount and debt issuance costs and interest expense related
to the July 2023 Convertible Note amounted to $
NOTE 7 — DERIVATIVE LIABILITY
As stated in Note 6, May 2023 Convertible Note and July 2023 Convertible Note, the Company determined 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, 2023, and September 30, 2023, 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.
On
May 23, 2023, the Company issued
On
May 23, 2023, the estimated fair value of the
On
September 30, 2023, the estimated fair value of the
On
July 6, 2023, the Company issued
On
July 6, 2023, the estimated fair values of the
17
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
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 $
NOTE 8 — NOTE PAYABLE, NET
On
September 1, 2022, the Company issued a balloon promissory note in the form of a mortgage on its headquarters to a third party company
in the principal amount of $
In
May 2023, the Company borrowed $
| September 30,
2023 | December
31, 2022 | |||||||
| Principal amount | $ | $ | ||||||
| Less: unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Note payable, net | $ | $ | ||||||
For
the three months ended September 30, 2023 and 2022, amortization of debt issuance costs related to note payable amounted to $
For
the nine months ended September 30, 2023 and 2022, amortization of debt issuance costs related to note payable amounted to $
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.
18
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 $
At
September 30, 2023 and December 31, 2022, the related party rent receivable totaled $
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 $
Accrued Liabilities and Other Payables — Related Parties
In
2017, the Company acquired Beijing Genexosome for a cash payment of $
During
the period from June 2023 through September 2023, Lab Services MSO paid shared expense on behalf of the Company. As of September
30, 2023, the balance due to Lab Services MSO amounted to $
As
of September 30, 2023 and December 31, 2022, $
Borrowings from Related Party
Line of Credit
On
August 29, 2019, the Company entered into a Line of Credit Agreement (the “Line of Credit Agreement”) providing the Company
with a $
19
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 — RELATED PARTY TRANSACTIONS (continued)
| Outstanding principal under the Line of Credit at January 1, 2023 | $ | |||
| Draw down from Line of Credit | ||||
| Outstanding principal under the Line of Credit at September 30, 2023 | $ |
For
the three months ended September 30, 2023 and 2022, the interest expense related to related party borrowings amounted to $
As
of September 30, 2023 and December 31, 2022, the related accrued and unpaid interest for Line of Credit was $
As
of September 30, 2023, the Company used approximately $
NOTE 10 — EQUITY
Series A Convertible Preferred Stock
The
Company designated up to
As
of September 30, 2023,
Series B Convertible Preferred Stock Issued for Equity Method Investment
The
Company designated up to
On
February 9, 2023, the Company issued
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 $
Common Shares Issued for Services
During
the nine months ended September 30, 2023, the Company issued a total of
20
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
On
May 23, 2023, the Company issued
On
July 6, 2023, the Company issued
Options
| 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
| |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| Number
of Options | Weighted
Average Exercise Price | |||||||
| Outstanding at January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Expired | ( | ) | ( | ) | ||||
| Outstanding at September 30, 2023 | $ | |||||||
| Options exercisable at September 30, 2023 | $ | |||||||
| Options expected to vest | $ | |||||||
The
aggregate intrinsic value of both stock options outstanding and stock options exercisable at September 30, 2023 was $
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
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
21
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
$
For
the nine months ended September 30, 2023 and 2022, stock-based compensation expense associated with stock options granted amounted to
$
| Number
of Options | Weighted
Average Exercise Price | |||||||
| Nonvested at January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ( | ) | ||||
| Nonvested at September 30, 2023 | $ | |||||||
Warrants
| 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 | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| Number
of Warrants | Weighted
Average Exercise Price | |||||||
| Outstanding at January 1, 2023 | $ | |||||||
| Issued | ||||||||
| Outstanding at September 30, 2023 | $ | |||||||
| Warrants exercisable at September 30, 2023 | $ | |||||||
| Warrants expected to vest | $ | |||||||
The
aggregate intrinsic value of both stock warrants outstanding and stock warrants exercisable at September 30, 2023 was $
22
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 — 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
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
The
warrants with an exercise price of $
The
warrants with an exercise price of $
Warrants Issued in July 2023
In
connection with the issuance of July 2023 Convertible Note (See Note 6), the Company issued
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
The
warrants with an exercise price of $
23
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 $
| Number of Warrants | Weighted Average Exercise Price | |||||||
| Nonvested at January 1, 2023 | $ | |||||||
| Issued | ||||||||
| Vested | ( | ) | ( | ) | ||||
| Nonvested at September 30, 2023 | $ | |||||||
NOTE 11 - STATUTORY RESERVE AND RESTRICTED NET ASSETS
The Company’s PRC subsidiary, Avalon Shanghai, is restricted in its ability to transfer a portion of its net asset to the Company. The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China.
The
Company is required to make appropriations to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus
reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC
GAAP”). Appropriations to the statutory surplus reserve are required to be at least
Relevant
PRC laws and regulations restrict the Company’s PRC subsidiary, Avalon Shanghai, from transferring a portion of its net assets,
equivalent to their statutory reserves and their share capital, to the Company’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 $
NOTE 12 — CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Pursuant
to the requirements of Rule 12-04(a), 5-04(c) and 4-08(e)(3) of Regulation S-X, the condensed financial information of the parent company
shall be filed when the restricted net assets of consolidated subsidiary exceed
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 did not exceed
24
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 - CONCENTRATIONS
Customers
| Three
Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||
| Customer | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| A | % | % | % | % | ||||||||||||
| B | % | % | % | % | ||||||||||||
| C | % | % | % | % | ||||||||||||
Two
customers, of which, one is a related party and the other is a third party, whose outstanding receivable accounted for
Two
customers, of which, one is a related party and the other is a third party, whose outstanding receivable accounted for
Suppliers
No
supplier accounted for
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
| Three Months Ended September 30, 2023 | ||||||||||||||||
| Real Property Operations | Lab Services MSO | Corporate / Other | Total | |||||||||||||
| Real property rental revenue | $ | $ | $ | $ | ||||||||||||
| Real property operating expenses | ( | ) | ( | ) | ||||||||||||
| Real property operating income | ||||||||||||||||
| Income from equity method investment - Lab Services MSO | ||||||||||||||||
| Other operating expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Other income | ||||||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
25
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 | $ | $ | $ | $ | ||||||||||||
| Real property operating expenses | ( | ) | ( | ) | ||||||||||||
| Real property operating income | ||||||||||||||||
| Other operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Other income (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||
| Real Property Operations | Lab Services MSO | Corporate / Other | Total | |||||||||||||
| Real property rental revenue | $ | $ | $ | $ | ||||||||||||
| Real property operating expenses | ( | ) | ( | ) | ||||||||||||
| Real property operating income | ||||||||||||||||
| Income from equity method investment - Lab Services MSO | ||||||||||||||||
| Other operating expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Other income (expense) | ( | ) | ( | ) | ||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Nine Months Ended September 30, 2022 | ||||||||||||||||
| Real Property Operations | Medical Related Consulting Services | Corporate / Other | Total | |||||||||||||
| Real property rental revenue | $ | $ | $ | $ | ||||||||||||
| Real property operating expenses | ( | ) | ( | ) | ||||||||||||
| Real property operating income | ||||||||||||||||
| Other operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Other income | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Identifiable long-lived tangible assets at September 30, 2023 and December 31, 2022 | September 30,
2023 | December 31,
2022 | ||||||
| Real property operations | $ | $ | ||||||
| Medical related consulting services | ||||||||
| Corporate/Other | ||||||||
| Total | $ | $ | ||||||
| Identifiable long-lived tangible assets at September 30, 2023 and December 31, 2022 | September 30, 2023 | December 31,
2022 | ||||||
| United States | $ | $ | ||||||
| China | ||||||||
| Total | $ | $ | ||||||
26
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 $
| 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 | $ | $ | ||||||
| Right-of-use assets obtained in exchange for lease obligation: | ||||||||
| Operating lease | $ | $ | ||||||
| Operating Lease | ||||
| Weighted average remaining lease term (in years) | ||||
| Weighted average discount rate | % | |||
| For the Twelve-month Period Ending September 30: | Operating Lease | |||
| 2024 | $ | |||
| 2025 | ||||
| Total lease payments | ||||
| Amount of lease payments representing interest | ( | ) | ||
| Total present value of operating lease liabilities | $ | |||
| Current portion | $ | |||
| Long-term portion | ||||
| Total | $ | |||
Joint Venture — Avactis Biosciences Inc.
On
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
The
Company is required to contribute $
In
addition, the Company is responsible for contributing registered capital of RMB
27
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 a Line of Credit Agreement (the “Line of Credit Agreement”) providing the Company
with a $
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 $
| As | As | |||||||||||
| Reported | Adjustment | Restated | ||||||||||
| Condensed Consolidated Balance Sheet As of March 31, 2023 | ||||||||||||
| Equity method investments | $ | $ | ( | ) | $ | |||||||
| Total assets | $ | $ | ( | ) | $ | |||||||
| Accumulated deficit | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Total equity | $ | $ | ( | ) | $ | |||||||
| Total liabilities and equity | $ | $ | ( | ) | $ | |||||||
| 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 | $ | $ | ( | ) | $ | ( | ) | |||||
| Total other expense, net | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Loss before income taxes | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss attributable to Avalon Globocare Corp. common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Comprehensive loss attributable to Avalon Globocare Corp. common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss per common share attributable to Avalon Globocare Corp. common shareholders: | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
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 $
| As | As | |||||||||||
| Reported | Adjustment | Restated | ||||||||||
| Condensed Consolidated Balance Sheet As of June 30, 2023 | ||||||||||||
| Equity method investments, net | $ | $ | ( | ) | $ | |||||||
| Total assets | $ | $ | ( | ) | $ | |||||||
| Accumulated deficit | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Total equity | $ | $ | ( | ) | $ | |||||||
| Total liabilities and equity | $ | $ | ( | ) | $ | |||||||
28
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 | $ | $ | ( | ) | $ | |||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Loss before income taxes | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss attributable to Avalon Globocare Corp. common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Comprehensive loss attributable to Avalon Globocare Corp. common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss per common share attributable to Avalon Globocare Corp. common shareholders: | $ | ( |
$ | ( |
$ | ( |
||||||
| 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 | $ | $ | ( | ) | $ | |||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Loss before income taxes | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss attributable to Avalon Globocare Corp. common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Comprehensive loss attributable to Avalon Globocare Corp. common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss per common share attributable to Avalon Globocare Corp. common shareholders: | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
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 2023 Lenders”) and
closed on the issuance of
29
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; |
30
| ● | 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 our financial condition and results of operations for the three and nine months ended September 30, 2023 and 2022 should be read in conjunction with our condensed consolidated financial statements and related notes to those condensed consolidated financial statements that are included elsewhere in this report.
Overview
The Company is dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. Our main strategy is to acquire ownership or license rights in precision diagnostic assets, genetic testing and clinical laboratory companies through joint ventures, share ownership structures or distribution rights. We plan to play 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 to 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. |
31
| ● | 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 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 condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business.
As reflected in the accompanying condensed consolidated financial statements, the Company had working capital deficit of approximately $5,828,000 at September 30, 2023 and had incurred recurring net losses and generated negative cash flow from operating activities of approximately $7,152,000 and $5,708,000 for the nine months ended September 30, 2023, respectively.
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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. The Company plans on raising capital through the sale of equity to implement its business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to the Company on satisfactory terms and conditions, if any.
The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
Critical Accounting Policies
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Changes in these estimates and 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 estimates.
Significant estimates during the three and nine months ended September 30, 2023 and 2022 include the valuation of deferred tax assets and the associated valuation allowances, the valuation of 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.
Investment 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 revenue recognition accounting standards.
Rental income from operating leases is recognized on a straight-line basis under the guidance of ASC 842. Lease payments under tenant leases are recognized on a straight-line basis over the term of the related leases. The cumulative difference between lease revenue recognized under the straight-line method and contractual lease payments are included in rent receivable on the consolidated balance sheets.
The Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers.
Income Taxes
We are governed by the income tax laws of China and the United States. Income taxes are accounted for pursuant to ASC 740 “Accounting 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.
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Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is changed to equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis.
Recent Accounting Standards
For details of applicable new accounting standards, please, refer to Recent Accounting Standards in Note 3 of our condensed consolidated
financial statements accompanying this report.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022
Real Property Rental Revenue
For the three months ended September 30, 2023, we had real property rental revenue 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, 2023. We expect that our revenue from real property rent will remain at its current quarterly level with minimal increase in the near future.
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 months ended September 30, 2023, our real property operating expenses amounted to $288,083, as compared to $247,152 for the three months ended September 30, 2022, an increase of $40,931, or 16.6%. The increase was mainly due to an increase in repairs and maintenance fee of approximately $35,000, and an increase in other miscellaneous items of approximately $6,000.
For the nine months ended September 30, 2023, our real property operating expenses amounted to $781,931, as compared to $677,303 for the nine months ended September 30, 2022, an increase of $104,628 or 15.4%. The increase was mainly due to an increase in property management fees of approximately $15,000, an increase in repairs and maintenance fee of approximately $71,000, an increase in utilities of approximately $15,000, and an increase in other miscellaneous items of approximately $4,000.
Real Property Operating Income
Our real property operating income for the three months ended September 30, 2023 was $43,207, representing a decrease of $27,031 or 38.5%, as compared to $70,238 for the three months ended September 30, 2022. Our real property operating income for the nine months ended September 30, 2023 was $152,429, representing a decrease of $76,110 or 33.3%, as compared to $228,539 for the nine months ended September 30, 2022. The decrease was primarily attributable to the increase in real property operating expenses as described above. We expect our real property operating income will remain at its current quarterly level with minimal increase in the near future.
Income from Equity Method Investment — Lab Services MSO
For the three and nine months ended September 30, 2023, we had income from our investment in Lab Services MSO of $354,500 and $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.
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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, | |||||||||||||||
| 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 | |||||||||
| ● | For the three months ended September 30, 2023, advertising and marketing expenses increased by $287,130 or 190.6% as compared to the three months ended September 30, 2022. For the nine months ended September 30, 2023, advertising and marketing expenses increased by $826,899 or 102.4% as compared to the nine months ended September 30, 2022. The increase was primarily due to increased advertising activities to enhance the visibility and marketability of our company and to improve brand recognition and awareness. We expect that our advertising and marketing expenses will remain in its current quarterly level with minimal increase in the near future. |
| ● | Professional fees primarily consisted of accounting fees, audit fees, legal service fees, consulting fees, investor relations service charges and other fees. For the three months ended September 30, 2023, professional fees decreased by $193,663, or 30.8%, as compared to the three months ended September 30, 2022, which was primarily attributable to a decrease in legal service fees of approximately $201,000 mainly due to the decreased legal services related to our purchase of 40% of Lab Services MSO, offset by an increase in other miscellaneous items of approximately $7,000. For the nine months ended September 30, 2023, professional fees increased by $773,333, or 41.0%, as compared to the nine months ended September 30, 2022, which was primarily attributable to an increase in consulting fees of approximately $278,000 mainly due to the increase in use of consulting service providers related to our purchase of 40% of Lab Services MSO, an increase in audit fees of approximately $241,000 due to the increased audit services related to our purchase of 40% of Lab Services MSO, and an increase in accounting fees of approximately $531,000 mainly due to the increased accounting services related to our purchase of 40% of Lab Services MSO, offset by a decrease in investor relations service charges of approximately $161,000 resulting from the decrease in investor relations service providers, a decrease in legal service fees of approximately $101,000 mainly due to the decreased legal services related to our purchase of 40% of Lab Services MSO, and a decrease in other miscellaneous items of approximately $15,000. We expect that our professional fees will decrease in the near future. |
| ● | 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 options granted and vested to our management. We expect that our compensation and related benefits will remain in its current quarterly level with minimal increase in the near future. |
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| ● | For the three months ended September 30, 2023, research and development expenses decreased by $170,406, or 100.0%, as compared to the three months ended September 30, 2022. For the nine months ended September 30, 2023, research and development expenses decreased by $431,406, or 79.7%, as compared to the nine months ended September 30, 2022. The decrease was mainly attributable to our decreased activity with respect to research and development projects in the three and nine months ended September 30, 2023. We expect that we will not incur any research and development expenses in the near future. |
| ● | For the three months ended September 30, 2023 and 2022, we did not have any litigation settlement. For the nine months ended September 30, 2023, litigation settlement decreased by $1,350,000, or 100.0%, as compared to the nine months ended September 30, 2022. The decrease was due to a settlement signed in June 2022. |
| ● | 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, 2023. |
| ● | 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 NASDAQ listing fee, office supplies, miscellaneous taxes, and other miscellaneous items. For the three months ended September 30, 2023, other general and administrative expenses decreased by $11,558, or 20.0%, as compared to the three months ended September 30, 2022, driven by our efforts at stricter controls on corporate expenditure. For the nine months ended September 30, 2023, other general and administrative expenses decreased by $626, or 0.3%, as compared to the nine months ended September 30, 2022. |
Loss from Operations
As a result of the foregoing, for the three months ended September 30, 2023, loss from operations amounted to $1,141,136, as compared to $1,589,099 for the three months ended September 30, 2022, a decrease of $447,963 or 28.2%. As a result of the foregoing, for the nine months ended September 30, 2023, loss from operations amounted to $5,962,831, as compared to $6,559,612 for the nine months ended September 30, 2022, a decrease of $596,781 or 9.1%.
Other (Expense) Income
Other (expense) income mainly includes third party and related party interest expense, conversion inducement expense, loss from equity method investment - Epicon, change in fair value of derivative liability, impairment of equity method investment, and other miscellaneous income.
Other expense, net, totaled $343,939 for the three months ended September 30, 2023, as compared to $3,825,055 for the three months ended September 30, 2022, a decrease of $3,481,116, or 91.0%, which was primarily attributable to a decrease in third party interest expense of approximately $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 $344,000 resulted 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 $1,189,045 for the nine months ended September 30, 2023, as compared to $2,953,554 for the nine months ended September 30, 2022, a decrease of $1,764,509, or 59.7%, which was primarily attributable to a decrease in third party interest expense of approximately $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 impairment of equity method investment of approximately $464,000, and a decrease in other miscellaneous items of approximately $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, 2023 and 2022 since we incurred losses in these periods.
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Net Loss
As a result of the factors described above, our net loss was $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 72.6%. As a result of the factors described above, our net loss was $7,151,876 for the nine months ended September 30, 2023, as compared to $9,513,166 for the nine months ended September 30, 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, AHS, Avalon RT 9, Genexosome, Avactis, and Exosome, is the U.S. dollar and the functional currency of Avalon Shanghai is the Chinese Renminbi (“RMB”). The financial statement of our subsidiary whose functional currency is the RMB are translated to U.S. dollars using period end rate of exchange for assets and liabilities, average rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rate for equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $8,685 and $37,033 for the three months ended September 30, 2023 and 2022, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $16,026 and $78,515 for the nine months ended September 30, 2023 and 2022, respectively. This non-cash loss had the effect of increasing our reported comprehensive loss.
Comprehensive Loss
As a result of our foreign currency translation adjustment, we had comprehensive loss of $1,493,760 and $5,451,187 for the three months ended September 30, 2023 and 2022, respectively. As a result of our foreign currency translation adjustment, we had comprehensive loss of $7,167,902 and $9,591,681 for the nine months ended September 30, 2023 and 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, 2023 and December 31, 2022, we had cash balance of approximately $342,000 and $1,991,000, respectively. These funds are kept in financial institutions located 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 | % | ||||||||
Under the applicable People’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, an 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.
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In addition, a small portion of our 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.
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.
The following table sets forth a summary of changes in our working capital deficit from December 31, 2022 to September 30, 2023:
| 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 $4,621,511 to $5,827,790 at September 30, 2023 from $1,206,279 at December 31, 2022. The increase in working capital deficit was primarily attributable to a decrease in cash of approximately $1,649,000, an increase in accrued payroll liability and compensation of approximately $162,000, an increase in accrued liabilities and other payables of approximately $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 purchase of 40% of Lab Services MSO incurred in February 2023, an increase in convertible note payable, net, of approximately $1,526,000 resulting from the issuance of May 2023 Convertible Note and July 2023 Convertible Note, offset by an increase in prepaid expense and other current assets of approximately $158,000 which was mainly attributable to the increase in deferred financing costs of approximately $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, 2023 Compared to the Nine Months Ended September 30, 2022
The following summarizes the key components of our cash flows for the nine months ended September 30, 2023 and 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, 2023 was $5,708,402, which primarily reflected our consolidated net loss of approximately $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.
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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 prepaid expense and other assets of approximately $66,000, a decrease in operating lease obligation of approximately $108,000, offset by an increase in accounts payable of approximately $87,000, an increase in accrued liabilities and other payables of approximately $63,000, an increase in accrued liabilities and other payables — related parties of approximately $80,000, and the non-cash items adjustment primarily consisting of depreciation of approximately $251,000, amortization of operating lease right-of-use asset of approximately $102,000, stock-based compensation and service expense of approximately $983,000, amortization of debt issuance costs and debt discount of approximately $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.
We expect our cash used in operating activities to increase due to the following:
| ● | the development and commercialization of new products; |
| ● | an increase in professional staff and services; and |
| ● | an increase in public relations and/or sales promotions for existing and/or new brands as we expand within existing markets or enter new markets. |
Net cash flow used in investing activities was $22,171 for the nine months ended September 30, 2023 as compared to $54,743 for the nine months ended September 30, 2022. During the nine months ended September 30, 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 and equipment of approximately $2,000 and made additional investment in equity method investment of approximately $53,000.
Net cash flow provided by financing activities was $4,091,323 for the nine months ended September 30, 2023 as compared to $8,263,989 for the nine months ended September 30, 2022. During the nine months ended September 30, 2023, we received proceeds from related party borrowings of $850,000, and net proceeds from issuance of convertible debt and warrants 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 balloon promissory note of approximately $936,000 (net of cash paid for promissory note issuance costs of 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, 2022, we received proceeds from related party borrowings of $100,000, and proceeds from issuance of convertible 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 working capital needs, offset by repayments made for note payable — related party of $390,000 and repayments made for loan payable — related party of $410,000.
The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
| ● | an increase in working capital requirements to finance our current business; |
| ● | the use of capital for acquisitions and the development of business opportunities; and |
| ● | the cost of being a public company. |
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.
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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 the 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 commitment fee and warrants for the purchase of 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.
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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 through cash flow provided by operations, and cash available under our ATM and lending facilities and sales of equity. Other than funds received as described above and cash resource generating from our operations, we presently have no other significant alternative source of working capital. We have used these funds to fund our operating expenses, pay our obligations and grow our company. We will need to raise significant additional capital to fund our operations and to provide working capital for our ongoing operations and obligations. Therefore, our future operation is dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will be required to cease our operations. To date, we have not considered this alternative, nor do we view it as a likely occurrence.
Foreign Currency Exchange Rate Risk
In November of 2022, we decided to cease all operations in 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, exchange rate fluctuations between the RMB and the US 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, 2023 and 2022, we had an unrealized foreign currency translation loss of approximately $16,000 and $79,000, respectively, because of changes in the exchange rate.
Inflation
The effect of inflation on our revenue and operating results was not significant.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.
ITEM 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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities 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 this Quarterly Report on Form 10-Q for the quarter ended September 30, 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.
Based on this evaluation, management concluded that our disclosure controls and procedures were not effective as of September 30, 2023 due to the material weakness that was previously reported in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 30, 2023, that have not yet been remediated. Management’s plan to remediate the material weakness is described in detail in such Annual Report on Form 10-K for the 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 in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to, and our property is not subject to, any material legal proceedings.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the 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 currently deem to 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
In July 2023, we issued a five-year warrant to purchase 13,333 shares of our common stock with an exercise price of $4.50 as a finder’s fee in connection with our note offerings in May and July 2023.
In July 2023, as settlement of outstanding fees of $236,280 owed to a consultant, we issued 158,600 shares of our common stock to the consultant for services rendered to us.
In November 2023, we issued a five-year warrant to purchase 8,400 shares of our common stock with an exercise price of $2.50 as a finder’s fee in connection with our note offering in October 2023.
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
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS
The exhibits filed as part of this Quarterly Report on Form 10-Q are listed in the exhibit index included herewith and are incorporated by reference herein.
EXHIBIT INDEX
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| AVALON GLOBOCARE CORP. | ||
| Dated: November 14, 2023 | By: | /s/ David K. Jin |
| Name: | David K. Jin | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| Dated: November 14, 2023 | By: | /s/ Luisa Ingargiola |
| Name: | Luisa Ingargiola | |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
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