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.) | |
(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
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As
of May 30, 2024,
AVALON GLOBOCARE CORP.
FORM 10-Q
For the Quarterly Period Ended March 31, 2024
Table of Contents
i
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (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 | ||||||||
| 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 | ||||||||
| Advance from pending sale of noncontrolling interest - related party | ||||||||
| Equity method investment payable | ||||||||
| Derivative liability | ||||||||
| Convertible note payable, net | ||||||||
| Total Current Liabilities | ||||||||
| NON-CURRENT LIABILITIES: | ||||||||
| Operating lease obligation - 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 | ||||||||
| Noncontrolling 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 | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| REAL PROPERTY RENTAL REVENUE | $ | $ | ||||||
| REAL PROPERTY OPERATING EXPENSES | ||||||||
| REAL PROPERTY OPERATING INCOME | ||||||||
| INCOME (LOSS) FROM EQUITY METHOD INVESTMENT - LAB SERVICES MSO | ( | ) | ||||||
| OTHER OPERATING EXPENSES: | ||||||||
| Advertising and marketing expenses | ||||||||
| Professional fees | ||||||||
| Compensation and related benefits | ||||||||
| 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 | ( | ) | ( | ) | ||||
| Change in fair value of derivative liability | - | |||||||
| Other expense | ( | ) | ( | ) | ||||
| Total Other Expense, net | ( | ) | ( | ) | ||||
| LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ||||
| INCOME TAXES | ||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | ||
| LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST | ||||||||
| NET 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: | ||||||||
| COMPREHENSIVE LOSS: | ||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | ||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||
| Unrealized foreign currency translation (loss) gain | ( | ) | ||||||
| COMPREHENSIVE LOSS | ( | ) | ( | ) | ||||
| LESS: COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST | ||||||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS | $ | ( | ) | $ | ( | ) | ||
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 Months Ended March 31, 2024
(Unaudited)
| Avalon GloboCare Corp. Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series
A Preferred Stock | Series
B Preferred Stock | Common Stock | Treasury Stock | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of | Number of | Number of | Additional Paid-in | Number of | Accumulated | Statutory | Other Comprehensive | Noncontrolling | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Reserve | Loss | Interest | Equity | |||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as convertible note payable commitment fee | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2024 | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||||||||
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 Months Ended March 31, 2023
(Unaudited)
| Avalon GloboCare Corp. Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series
A Preferred Stock | Series
B Preferred Stock | Common Stock | Treasury Stock | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of | Number of | Number of | Additional Paid-in | Number of | Accumulated | Statutory | Other 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 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
4
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| 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 | ( | ) | ||||||
| Distribution of earnings from equity method investment | ||||||||
| Amortization of debt issuance costs and debt discount | ||||||||
| 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 | ( | ) | ( | ) | ||||
| 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 | ( | ) | ||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from loan payable - related party | ||||||||
| Proceeds from issuance of convertible debt and warrants | - | |||||||
| Payments of convertible debt issuance costs | ( | ) | ||||||
| Repayments of convertible debt | ( | ) | ||||||
| Advance from sale of noncontrolling interest in subsidiary | ||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| EFFECT OF EXCHANGE RATE ON CASH | ( | ) | ||||||
| NET INCREASE (DECREASE) 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 | $ | $ | ||||||
| Common stock issued as convertible note payable commitment fee | $ | $ | ||||||
| Equity method investment payable paid by a related party | $ | $ | ||||||
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.
The Company is a commercial stage company dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. The Company is working to establish a leading role in the innovation of diagnostic testing, utilizing proprietary technology to deliver precise, genetics-driven results. Through its membership interest in a laboratory, 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 March 31, 2024, 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 is a patent holding company. 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 | |||||
| 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, 2023 filed with the Securities and Exchange Commission on April 15, 2024.
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 through its
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 (
The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of 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 months ended March 31, 2024 and 2023 include the useful life of investment in real estate and intangible assets,
the assumptions used in assessing impairment of long-term assets, 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, 2024 | $ | |||
| Initial fair value of derivative liability attributable to warrants issuance with March 2024 fund raise | ||||
| Gain from change in the fair value of derivative liability | ( | ) | ||
| Balance of derivative liability as of March 31, 2024 | $ | |||
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.
Cash and Cash Equivalents
| Country: | March 31, 2024 | December 31, 2023 | ||||||||||||||
| 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 March 31, 2024 and December 31, 2023.
9
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Credit Risk and Uncertainties
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 Company
The Company uses the equity method of accounting for its investment in, and earning or loss of, investees that it does not control but over which it does exert significant influence. The Company applies the equity method by initially recording these investments at cost, as equity method investments, subsequently adjusted for equity in earnings and cash distributions.
The Company considers whether the fair value of its equity method investment has declined below its carrying value whenever adverse events or changes in circumstances indicate that recorded value may not be recoverable. If the Company considers any decline to be other than temporary (based on various factors, including historical financial results and the overall health of the investee), then a write-down would be recorded to estimated fair value. See Note 5 for discussion of equity method investments.
The Company classifies distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.
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 rent receivable on the condensed consolidated balance sheets.
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.
10
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Per Share Data (continued)
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the three months ended March 31, 2024 and 2023, 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 March 31, | ||||||||
| 2024 | 2023 | |||||||
| Options to purchase common stock | ||||||||
| Warrants to purchase common stock | ||||||||
| Series A convertible preferred stock (*) | ||||||||
| Series B convertible preferred stock (**) | ||||||||
| Convertible notes (***) | ||||||||
| 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.
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.
11
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Standards
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This guidance is intended to enhance the transparency and decision-usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to disclosure regarding rate reconciliation and income taxes paid both in the U.S. and in foreign jurisdictions. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 on a prospective basis, with the option to apply the standard retrospectively. Early adoption is permitted. The company is currently evaluating this guidance to determine the impact it may have on its condensed consolidated financial statements disclosures.
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
| March 31, 2024 | December 31, 2023 | |||||||
| Prepaid professional fees | $ | $ | ||||||
| Prepaid directors and officers’ liability insurance premium | ||||||||
| Prepaid NASDAQ listing fee | ||||||||
| Deferred offering costs | ||||||||
| Deferred leasing costs | ||||||||
| Security deposit | ||||||||
| Due from broker | ||||||||
| Others | ||||||||
| Total | $ | $ | ||||||
NOTE 5 – EQUITY METHOD INVESTMENTS
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 (
12
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – EQUITY METHOD INVESTMENTS (continued)
Lab Services MSO, through
its subsidiaries, 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 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 $
Intangible assets consist
of the valuation of identifiable intangible assets acquired, representing trade names and customers relationships, which are being amortized
on a straight-line method over the estimated useful life of
Goodwill represents the excess of the purchase price paid over the fair value of net assets acquired in the business acquisition of Lab Services MSO incurred on February 9, 2023. Goodwill is not amortized but is tested for impairment at least once annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.
For the three months
ended March 31, 2024 and for the period from February 9, 2023 (date of investment) through March 31, 2023, the Company’s share of
Lab Services MSO’s net income was $
| Equity investment carrying amount at January 1, 2024 | $ | |||
| Lab Services MSO’s net income attributable to the Company | ||||
| Intangible assets amortization amount | ( | ) | ||
| Distribution of earnings from equity investment | ( | ) | ||
| Equity investment carrying amount at March 31, 2024 | $ |
As
of March 31, 2024, the Company’s carrying value of the identified intangible assets and goodwill which are included in the equity
investment carrying amount was $
| March 31, 2024 | December 31, 2023 | |||||||
| Current assets | $ | $ | ||||||
| Noncurrent assets | ||||||||
| Current liabilities | ||||||||
| Noncurrent liabilities | ||||||||
| Equity | ||||||||
13
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – EQUITY METHOD INVESTMENTS (continued)
| For the Three Months Ended March 31, 2024 | For the Period from February 9, 2023 (Date of Investment) through March 31, 2023 | |||||||
| Net revenue | $ | $ | ||||||
| Gross profit | ||||||||
| Income from operation | ||||||||
| Net income | ||||||||
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 $
14
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued)
May 2023 Convertible Note (continued)
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 $
For the
three months ended March 31, 2024, 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 $
15
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued)
July 2023 Convertible Note (continued)
| 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.
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 the
three months ended March 31, 2024, amortization of debt discount and debt issuance costs and interest expense related to the July 2023
Convertible Note amounted to $
16
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued)
October 2023 Convertible Note
On October 9, 2023, the
Company entered into securities purchase agreements with Mast Hill and Firstfire for the issuance of
Mast Hill acquired
the October 2023 Convertible Note with principal amount of $
| Payment Date: | Payment Amount: | |
| April 9, 2024 | ||
| May 9, 2024 | ||
| June 9, 2024 | ||
| July 9, 2024 | ||
| August 9, 2024 | ||
| September 9, 2024 | ||
| October 9, 2024 |
Firstfire acquired
the October 2023 Convertible Note with principal amount of $
17
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued)
October 2023 Convertible Note (continued)
| Payment Date: | Payment Amount: | |
| April 9, 2024 | ||
| May 9, 2024 | ||
| June 9, 2024 | ||
| July 9, 2024 | ||
| August 9, 2024 | ||
| September 9, 2024 | ||
| October 9, 2024 |
In connection with the issuance of the October
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 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.
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 the
three months ended March 31, 2024, amortization of debt discount and debt issuance costs and interest expense related to the October 2023
Convertible Note amounted to $
18
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued)
March 2024 Convertible Note
On March 7, 2024, the
Company entered into securities purchase agreements with Mast Hill Fund, L.P. for the issuance of
Mast Hill acquired the
March 2024 Convertible Note with principal amount of $
| Payment Date: | Payment Amount: | |
| September 7, 2024 | ||
| October 7, 2024 | ||
| November 7, 2024 | ||
| December 7, 2024 | ||
| January 7, 2025 | ||
| February 7, 2025 | ||
| March 7, 2025 |
In connection
with the issuance of the March 2024 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.
19
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued)
March 2024 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 the
three months ended March 31, 2024, amortization of debt discount and debt issuance costs and interest expense related to the March 2024
Convertible Note amounted to $
2023 Convertible Notes and March 2024 Convertible Notes – Events of Default
The 2023 Convertible Notes and the March 2024 Convertible Note contain customary events of default, upon the occurrence of which (after giving effect to the right to cure of the borrower), the notes shall become due and payable and the borrower shall pay to the lender/s an amount equal to the principal amount then outstanding under such notes plus accrued interest (including any Default Interest, as defined in the 2023 Convertible Notes and the March 2024 Convertible Note, respectively), provided, however, that Mast Hill and Firstfire (collectively, the “Convertible Notes Lenders”) may in their sole discretion determine to accept payment part in shares of the Company’s common stock (pursuant to the conversion formula set forth in the 2023 Convertible Notes and the March 2024 Convertible Note) and part in cash.
During the quarter ended March
31, 2024, the Company’s market capitalization fell below $
Pursuant to Section 3.22 of the 2023 Convertible Notes (and the March 2024 Convertible Note), the Company (as borrower under such notes) has a right to cure such default within ten (10) calendar days (the “Cure Period”) after the earlier of (i) the date the borrower receives notice from the lenders demanding cure of such default, or (ii) the first date that the then Chief Executive Officer, Chief Financial Officer, or Board of Directors of the borrower has actual knowledge of the existence of the default.
The Company did not receive any notice from the Convertible Notes Lenders with respect to the event of default. The Company first had actual knowledge of the existence of the default on April 29, 2024 and received a waiver from the Convertible Notes Lenders, waiving this event of default on May 29, 2024. Although this waiver was not within the Cure Period, the Convertible Notes Lenders provided a full waiver to the event of default prior to the issuance of this report.
On May 23, 2024, the Company received a waiver to the required amortization payment under the May 2023 Convertible Note. Pursuant to the waiver, the Company received an extension until June 10, 2024 to allow time for the payment to be made or to allow the Company to refinance the Convertible Notes.
In addition, the Company failed to file this report in a timely manner during the prescribed period following the Company’s filing of a 12b-25 extension with respect thereto, which would have triggered an event of default under the 2023 Convertible Notes and the March 2024 Convertible Note but for receipt by the Company of the waiver with respect to this event of default from the Convertible Notes Lenders on the original due date of this report (which was reaffirmed by the waiver dated May 29, 2024).
As a result, the 2023 Convertible
Notes and the March 2024 Convertible Note are no longer in default as of the date of this report. The events of default described above
did not have an accounting impact on the Company’s unaudited financial statements for the quarter ended March 31, 2024 since the
events of default were cured either within the Cure Period or prior to the date of this report and no penalties associated with such events
of default under the 2023 Convertible Notes and the March 2024 Convertible Note were ever triggered. In addition, the Company is in the
process of refinancing the 2023 Convertible Notes and the March 2024 Convertible Note into one new note, which will also remove the $
20
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – DERIVATIVE LIABILITY
As stated in Note 6, May 2023 Convertible Note, July 2023 Convertible Note, October 2023 Convertible Note, and March 2024 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-value at each reporting date, with changes in the fair value reported in the statements of operations. However, on May 23, 2023, July 6, 2023, October 9, 2023, March 7, 2024, and March 31, 2024, 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 March
31, 2024, the estimated fair value of the
On July 6, 2023, the Company
issued
On March
31, 2024, the estimated fair value of the
21
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – DERIVATIVE LIABILITY (continued)
On October 9, 2023, the
Company issued
On March
31, 2024, the estimated fair value of the
On March 7, 2024, the
Company issued
On March
31, 2024, 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. 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 $
| March 31, 2024 | December 31, 2023 | |||||||
| Principal amount | $ | $ | ||||||
| Less: unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Note payable, net | $ | $ | ||||||
22
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 – NOTE PAYABLE, NET (continued)
For the three months ended March 31, 2024 and
2023, 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.
For
both the three months ended March 31, 2024 and 2023, the related party rental revenue amounted to $
Services Provided by Related Party
From time to time, Wilbert
Tauzin, a director of the Company, and his son provide consulting services to the Company. As compensation for professional services provided,
the Company recognized consulting expenses of $
Accrued Liabilities and Other Payables – Related Parties
In 2017, the Company
acquired Beijing Genexosome for a cash payment of $
From time to time, Lab
Services MSO paid shared expense on behalf of the Company. In addition, Lab Services MSO made a payment of $
As of March 31, 2024
and December 31, 2023, $
Borrowing from Related Party
On
August 29, 2019, the Company entered into a Line of Credit Agreement (the “Line of Credit Agreement”) providing the Company
with a $
23
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – RELATED PARTY TRANSACTIONS (continued)
Borrowing from Related Party (continued)
There
was no Line of Credit activity during the three months ended March 31, 2024. As of both March
31, 2024 and December 31, 2023, the outstanding principal balance was $
For the
three months ended March 31, 2024 and 2023, the interest expense related to related party borrowing amounted to $
As of March
31, 2024 and December 31, 2023, the related accrued and unpaid interest for Line of Credit was $
As of March
31, 2024, the Company has used approximately $
Membership Interest Purchase Agreement
On November 17, 2023,
the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Wenzhao Lu (the “Purchaser”),
the largest shareholder and Chairman of the Board of Directors of the Company, pursuant to which (i) the Purchaser will acquire from the
Company
NOTE 10 – EQUITY
Common Shares Issued as Convertible Note Payable Commitment Fee
During the three months
ended March 31, 2024, the Company issued a total of
Options
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Range of Exercise Price | Number Outstanding at March 31, 2024 | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at March 31, 2024 | Weighted Average Exercise Price | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
24
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – EQUITY (continued)
Options (continued)
| Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding at January 1, 2024 | $ | |||||||
| Granted | ||||||||
| Expired | ( | ) | ( | ) | ||||
| Outstanding at March 31, 2024 | $ | |||||||
| Options exercisable at March 31, 2024 | $ | |||||||
| Options expected to vest | $ | |||||||
The aggregate
intrinsic value of both stock options outstanding and stock options exercisable at March 31, 2024 was $
The fair
values of options granted during the three months ended March 31, 2024 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
three months ended March 31, 2023 were estimated at the date of grant using the Black-Scholes option-pricing model with the following
assumptions: volatility of
For the three months
ended March 31, 2024 and 2023, stock-based compensation expense associated with stock options granted amounted to $
| Number of Options | Weighted Average Exercise Price | |||||||
| Nonvested at January 1, 2024 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ( | ) | ||||
| Nonvested at March 31, 2024 | $ | |||||||
Warrants
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||||
| Range of Exercise Price | Number Outstanding at March 31, 2024 | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at March 31, 2024 | Weighted Average Exercise Price | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
25
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – EQUITY (continued)
Warrants (continued)
| Number of Warrants | Weighted Average Exercise Price | |||||||
| Outstanding at January 1, 2024 | $ | |||||||
| Issued | ||||||||
| Outstanding at March 31, 2024 | $ | |||||||
| Warrants exercisable at March 31, 2024 | $ | |||||||
| Warrants expected to vest | $ | |||||||
The aggregate intrinsic
value of both stock warrants outstanding and stock warrants exercisable at March 31, 2024 was $
Warrants Issued in March 2024
In connection with the
issuance of March 2024 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 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
The warrants with an exercise price of $
The warrants with an exercise price of $
| Number of Warrants | Weighted Average Exercise Price | |||||||
| Nonvested at January 1, 2024 | $ | |||||||
| Issued | ||||||||
| Vested | ( | ) | ( | ) | ||||
| Nonvested at March 31, 2024 | $ | |||||||
26
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 its statutory reserve and
its 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 both March 31, 2024
and December 31, 2023, 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
NOTE 13 - CONCENTRATIONS
Customers
| Three Months Ended March 31, | ||||||||
| Customer | 2024 | 2023 | ||||||
| A | % | % | ||||||
| B | % | % | ||||||
| C | % | % | ||||||
Two customers, which are 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
27
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 - CONCENTRATIONS (continued)
Suppliers
No supplier accounted for 10% or more of the Company’s purchase during the three months ended March 31, 2024 and 2023.
NOTE 14 – SEGMENT INFORMATION
On
February 9, 2023, the Company purchased
| Three Months Ended March 31, 2024 | ||||||||||||||||
| 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 | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Three Months Ended March 31, 2023 | ||||||||||||||||
| Real Property Operations | Lab Services MSO | Corporate / Other | Total | |||||||||||||
| Real property rental revenue | $ | $ | $ | $ | ||||||||||||
| Real property operating expenses | ( | ) | ( | ) | ||||||||||||
| Real property operating income | ||||||||||||||||
| Loss from equity method investment - Lab Services MSO | ( | ) | ( | ) | ||||||||||||
| Other operating expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Other income (expense) | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Identifiable long-lived tangible assets at March 31, 2024 and December 31, 2023 | March 31, 2024 | December 31, 2023 | ||||||
| Real property operations | $ | $ | ||||||
| Corporate/Other | ||||||||
| Total | $ | $ | ||||||
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AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14 – SEGMENT INFORMATION (continued)
| Identifiable long-lived tangible assets at March 31, 2024 and December 31, 2023 | March 31, 2024 | December 31, 2023 | ||||||
| United States | $ | $ | ||||||
| China | ||||||||
| Total | $ | $ | ||||||
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 $
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| 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 March 31: | Operating Lease | |||
| 2025 | $ | |||
| 2026 and thereafter | ||||
| Total lease payments | ||||
| Amount of lease payments representing interest | ( | ) | ||
| Total present value of operating lease liabilities (current liability) | $ | |||
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AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 15 – COMMITMENTS AND CONTINGENCIES (continued)
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
NOTE 16 – SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date of the issuance date of these financial statements. Management is not aware of any significant events that occurred subsequent to the balance sheet date that would have a material effect on the financial statements and would require adjustment or disclosure thereto.
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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 (the “Securities Act”), 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; |
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| ● | heightened competition from commercial clinical testing companies, IDNs, physicians and others; |
| ● | increased pricing pressure from customers, including payers and patients, and changing relationships with customers, payers, suppliers or strategic partners; |
| ● | impact of changes in payment mix, including increased patient financial responsibility and any shift from fee-for-service to discounted, capitated or bundled fee arrangements; |
| ● | adverse actions by the government, including healthcare reform that focuses on reducing healthcare costs but does not recognize the value and importance to healthcare of clinical testing or innovative solutions, unilateral reduction of fee schedules payable to us, unilateral recoupment of amounts allegedly owed and competitive bidding; |
| ● | the impact of increased prior authorization programs; |
| ● | adverse results from pending or future government investigations, lawsuits or private actions, which include in particular, monetary damages, loss or suspension of licenses or criminal penalties; |
| ● | the impact of the COVID-19 pandemic on our business or on the economy generally; and |
| ● | a decline in economic conditions, including the impact of an inflationary environment. |
All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference into this report. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith, and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished.
The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2024 and 2023 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
We are a commercial stage company dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. We are working towards establishing a leading role in the innovation of diagnostic testing, utilizing proprietary technology to deliver precise, genetics-driven results. As a first 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. |
| ● | In the third quarter of 2023, Lab Services MSO acquired Merlin Technologies, Inc. which is a medical equipment retail company. |
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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.
Product Commercialization
We have begun the commercialization and development of a versatile breathalyzer system.
We were granted exclusive distributorship rights for the KetoAir from Qi Diagnostics for the following territories: North America, South America, the EU and the UK. For our commercialization strategy, we intend to target the diabetes and obesity markets. On May 31,2024, we plan to formally launch sales of the KetoAir at the 2024 KetoCon Hack Your Health conference in Texas. We plan to sell the product through the KetoAir website and social media. We believe the KetoAir device has some competitive advantages to other methods for measuring ketosis and expect initial sales to occur in the United States.
The KetoAir 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 KetoAir 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 can be an essential tool to help diabetic patients adhere to their therapeutic programs and optimize their ketogenic dietary management.
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
We are a commercial stage company dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. We are focused on establishing a leading role in the innovation of diagnostic testing, utilizing proprietary technology to deliver precise, genetics-driven results. We also provide 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, we own commercial real estate that houses our headquarters in Freehold, New Jersey. We also have income from equity method investment through our forty percent (40%) interest in Lab Services MSO. These condensed consolidated financial statements have been prepared assuming that we 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, we had working capital deficit of approximately $7,026,000 at March 31, 2024 and had incurred recurring net losses and generated negative cash flow from operating activities of approximately $1,368,000 and $916,000 for the three months ended March 31, 2024, respectively.
We have a limited operating history and our continued growth is dependent upon the continuation of generating rental revenue from our income-producing real estate property in New Jersey and income from equity method investment through our forty percent (40%) interest in Lab Services MSO and obtaining additional financing to fund future obligations and pay liabilities arising from ordinary course business operations. In addition, the current cash balance cannot be projected to cover our operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital, implement our business plan, and generate sufficient revenues. There are no assurances that we will be successful in our efforts to generate sufficient revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. We plan on raising capital through the sale of equity to implement our business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to us 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 we be unable to continue as a going concern.
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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 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 months ended March 31, 2024 and 2023 include the useful life of investment in real estate and intangible assets, the assumptions used in assessing impairment of long-term assets, 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 our equity interest in Lab Services MSO.
Investment in Unconsolidated Company
We use the equity method of accounting for our investment in, and earning or loss of, company that we do not control but over which we do exert significant influence. We apply the equity method by initially recording these investments at cost, as equity method investments, subsequently adjusted for equity in earnings and cash distributions.
We consider whether the fair value of our equity method investment has declined below its carrying value whenever adverse event or change in circumstance indicates that recorded value may not be recoverable. If we consider 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.
We classify distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.
Real Property Rental
We have 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 rent receivable on the condensed consolidated balance sheets.
We do 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 probable 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 Months Ended March 31, 2024 and 2023
Real Property Rental Revenue
For the three months ended March 31, 2024, we had real property rental revenue of $314,588, as compared to $296,165 for the three months ended March 31, 2023, an increase of $18,423, or 6.2%. The increase was primarily attributable to the increase in the number of tenants occupying the building in the three months ended March 31, 2024 as compared to the three months ended March 31, 2023. We expect that our revenue from real property rent will remain at its current 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 March 31, 2024, our real property operating expenses amounted to $263,126, as compared to $248,445 for the three months ended March 31, 2023, an increase of $14,681 or 5.9%. The increase was primarily due to an increase in repairs and maintenance fee of approximately $11,000 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 March 31, 2024 was $51,462, representing an increase of $3,742 or 7.8%, as compared to $47,720 for the three months ended March 31, 2023. The increase was primarily attributable to the increase in real property rental revenue as described above. We expect our real property operating income will remain at its current level with minimal increase in the near future.
Income (Loss) from Equity Method Investment – Lab Services MSO
For the three months ended March 31, 2024, we had income from our investment in Lab Services MSO of $107,469, which consists of our share of Lab Services MSO’s net income of $274,202 and amortization of identifiable intangible assets acquired from Lab Services MSO acquisition of $166,733. For the three months ended March 31, 2023, we had loss from our investment in Lab Services MSO of $89,091, which consists of our share of Lab Services MSO’s net income of $46,739 and amortization of identifiable intangible assets acquired from Lab Services MSO acquisition of $135,830. 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 has also opened 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 to continue to receive income from our investment in Lab Services MSO in the near future.
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Other Operating Expenses
For the three months ended March 31, 2024 and 2023, other operating expenses consisted of the following:
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Advertising and marketing expenses | $ | 45,000 | $ | 691,753 | ||||
| Professional fees | 442,335 | 1,226,239 | ||||||
| Compensation and related benefits | 353,571 | 451,555 | ||||||
| Research and development | - | 92,350 | ||||||
| Directors and officers’ liability insurance premium | 69,307 | 103,801 | ||||||
| Travel and entertainment | 22,323 | 62,374 | ||||||
| Rent and related utilities | 15,592 | 17,288 | ||||||
| Other general and administrative | 53,865 | 66,596 | ||||||
| $ | 1,001,993 | $ | 2,711,956 | |||||
| ● | For the three months ended March 31, 2024, advertising and marketing expenses decreased by $646,753 or 93.5% as compared to the three months ended March 31, 2023. The decrease was primarily due to decreased advertising activities in the three months ended March 31, 2024. We expect that our advertising and marketing expenses will decrease in the near future as we conserve cash. |
| ● | Professional fees primarily consisted of accounting fees, audit fees, legal service fees, consulting fees, investor relations service charges, valuation service fees and other fees. For the three months ended March 31, 2024, professional fees decreased by $783,904, or 63.9%, as compared to the three months ended March 31, 2023, which was primarily attributable to a decrease in consulting fees of approximately $471,000, mainly due to the decrease in use of consulting service providers related to our acquisition of Lab Services MSO, a decrease in accounting fees of approximately $209,000, mainly due to the decreased accounting services related to our acquisition of Lab Services MSO, and a decrease in legal service fees of approximately $121,000, mainly due to the decreased legal services related to our acquisition of Lab Services MSO, offset by an increase in other miscellaneous items of approximately $17,000. We expect that our professional fees will likely remain at their current level with minimal increase in the near future. |
| ● | For the three months ended March 31, 2024, compensation and related benefits decreased by $97,984, or 21.7%, as compared to the three months ended March 31, 2023. The decrease was primarily attributable to the decreased compensation for two of our named executive officers, David Jin and Meng Li (as described in detail in Item 11 of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2024). We expect that our compensation and related benefits will remain in its current level with minimal increase in the near future. |
| ● | For the three months ended March 31, 2024, research and development expenses decreased by $92,350, or 100.0%, as compared to the three months ended March 31, 2023. In the three months ended March 31, 2024, we did not incur any activity with respect to research and development projects as we redirected our funding efforts to our core business strategies discussed above. |
| ● | For the three months ended March 31, 2024, Directors and Officers’ Liability Insurance premium decreased by $34,494, or 33.2%, as compared to the three months ended March 31, 2023. The decrease was mainly due to our switching to a different insurance provider, resulting in a lower premium. |
| ● | For the three months ended March 31, 2024, travel and entertainment expense decreased by $40,051, or 64.2%, as compared to the three months ended March 31, 2023. The decrease was mainly due to decreased business travel activities in the first quarter of 2024. |
| ● | For the three months ended March 31, 2024, rent and related utilities expenses decreased by $1,696, or 9.8%, as compared to the three months ended March 31, 2023. The decrease was attributable to decreased rental rate in the three months ended March 31, 2024. |
| ● | Other general and administrative expenses mainly consisted of NASDAQ listing fee, office supplies, miscellaneous taxes, and other miscellaneous items. For the three months ended March 31, 2024, other general and administrative expenses decreased by $12,731, or 19.1%, as compared to the three months ended March 31, 2023, reflecting our efforts at stricter controls on corporate expenditures. |
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Loss from Operations
As a result of the foregoing, for the three months ended March 31, 2024, loss from operations amounted to $843,062, as compared to $2,753,327 for the three months ended March 31, 2023, a decrease of $1,910,265 or 69.4%.
Other (Expense) Income
Other (expense) income mainly includes third party and related party interest expense, change in fair value of derivative liability, and other miscellaneous expense.
Other expense, net, totaled $524,451 for the three months ended March 31, 2024, as compared to $166,417 for the three months ended March 31, 2023, an increase of $358,034, or 215.1%, which was primarily attributable to an increase in third party interest expense of approximately $354,000, mainly driven by the increase in amortization of debt discount and debt issuance cost of approximately $250,000 and the increased interest expense of approximately $104,000 from third party debts in the three months ended March 31, 2024.
Income Taxes
We did not have any income taxes expense for the three months ended March 31, 2024 and 2023 since we incurred losses in these periods.
Net Loss
As a result of the factors described above, our net loss was $1,367,513 for the three months ended March 31, 2024, as compared to $2,919,744 for the three months ended March 31, 2023, a decrease of $1,552,231 or 53.2%.
Net Loss Attributable to Avalon GloboCare Corp. Common Shareholders
The net loss attributable to our common shareholders was $1,367,513 or $0.12 per share (basic and diluted) for the three months ended March 31, 2024, as compared to $2,919,744 or $0.29 per share (basic and diluted) for the three months ended March 31, 2023, a decrease of $1,552,231 or 53.2%.
Foreign Currency Translation Adjustment
Our reporting currency is the U.S. dollar. The functional currency of our parent company, AHS, Avalon RT 9, and Avalon Lab 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 $2,920 and a foreign currency translation gain of $3,670 for the three months ended March 31, 2024 and 2023, respectively. This non-cash loss/gain had the effect of increasing/decreasing our reported comprehensive loss in each respective period.
Comprehensive Loss
As a result of our foreign currency translation adjustment, we had comprehensive loss of $1,370,433 and $2,916,074 for the three months ended March 31, 2024 and 2023, respectively.
Liquidity and Capital Resources
We have a limited operating history and our continued growth is dependent upon the continuation of generating rental revenue from our income-producing real estate property in New Jersey and income from equity method investment through our equity interest in Lab Services MSO, as well as obtaining additional financing to fund future obligations and pay liabilities arising from ordinary course business operations. In addition, the current cash balance cannot be projected to cover our operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital, implement our business plan, and generate sufficient revenues. There are no assurances that we will be successful in our efforts to generate sufficient revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. As described below, we have raised additional capital through the sale of equity and debt and we plan to raise additional capital in the future through the sale of equity or debt to implement our business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to us on satisfactory terms and conditions, if at all.
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Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations as they come due and otherwise operate on an ongoing basis. At March 31, 2024 and December 31, 2023, we had cash balance of approximately $305,000 and $285,000, respectively. These funds are kept in financial institutions located as follows:
| Country: | March 31, 2024 | December 31, 2023 | ||||||||||||||
| United States | $ | 297,232 | 97.3 | % | $ | 280,197 | 98.2 | % | ||||||||
| China | 8,236 | 2.7 | % | 5,203 | 1.8 | % | ||||||||||
| Total cash | $ | 305,468 | 100.0 | % | $ | 285,400 | 100.0 | % | ||||||||
The following table sets forth a summary of changes in our working capital deficit from December 31, 2023 to March 31, 2024:
| March 31, | December 31, | Changes in | ||||||||||||||
| 2024 | 2023 | Amount | Percentage | |||||||||||||
| Working capital deficit: | ||||||||||||||||
| Total current assets | $ | 777,817 | $ | 850,867 | $ | (73,050 | ) | (8.6 | )% | |||||||
| Total current liabilities | 7,803,334 | 6,762,686 | 1,040,648 | 15.4 | % | |||||||||||
| Working capital deficit | $ | (7,025,517 | ) | $ | (5,911,819 | ) | $ | (1,113,698 | ) | 18.8 | % | |||||
Our working capital deficit increased by $1,113,698 to $7,025,517 at March 31, 2024 from $5,911,819 at December 31, 2023. The increase in working capital deficit was primarily attributable to a decrease in rent receivable of approximately $109,000 driven by collection efforts in the three months ended March 31, 2024, an increase in accrued liabilities and other payables – related parties of approximately $605,000 mainly due to our equity method investment payable paid by a related party on our behalf, and a significant increase in advance from sale of noncontrolling interest – related party of approximately $1,210,000 resulting from advance received in connection with the membership interest purchase agreement entered into in November 2023 in the three months ended March 31, 2024, offset by a decrease in equity method investment payable of approximately $667,000 resulting from payment made by a related party on our behalf in the first quarter of 2024, and a decrease in convertible note payable, net, of approximately $95,000 mainly due to the repayments made to lenders of $866,000, which was partially offset by the issuance of the March 2024 Convertible Note with principal of $700,000 in the first quarter of 2024 (as described below).
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 Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023
The following summarizes the key components of our cash flows for the three months ended March 31, 2024 and 2023:
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net cash used in operating activities | $ | (915,709 | ) | $ | (1,834,810 | ) | ||
| Net cash used in investing activities | - | (20,185 | ) | |||||
| Net cash provided by financing activities | 936,772 | 750,000 | ||||||
| Effect of exchange rate on cash | (995 | ) | 1,116 | |||||
| Net increase (decrease) in cash | $ | 20,068 | $ | (1,103,879 | ) | |||
Net cash flow used in operating activities for the three months ended March 31, 2024 was $915,709, which primarily reflected our consolidated net loss of approximately $1,368,000, and the non-cash items adjustment, primarily consisting of income from equity method investment of approximately $107,000, offset by distribution of earnings from equity method investment of approximately $161,000, and amortization of debt issuance costs and debt discount of approximately $272,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in rent receivable of approximately $113,000 driven by our collection efforts.
Net cash flow used in operating activities for the three months ended March 31, 2023 was $1,834,810, which primarily reflected our consolidated net loss of approximately $2,920,000, and the changes in operating assets and liabilities, primarily consisting of an increase in prepaid expense and other assets of approximately $87,000, offset by an increase in accrued liabilities and other payables of approximately $635,000 which was primarily attributable to an increase in accrued professional fees of approximately $414,000 resulting from the increase in professional service related to our acquisition of Lab Services MSO and an increase in accrued research and development fees of approximately $62,000 and an increase in other payables of approximately $159,000, and the non-cash items adjustment primarily consisting of depreciation of approximately $61,000, stock-based compensation and service expense of approximately $327,000, and loss from equity method investments of approximately $99,000.
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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. |
There was no investing activity during the three months ended March 31, 2024.
Net cash flow used in investing activities was $20,185 for the three months ended March 31, 2023. During the three months ended March 31, 2023, we made payment for purchase of property and equipment of approximately $20,000.
Net cash flow provided by financing activities was $936,772 for the three months ended March 31, 2024 as compared to $750,000 for the three months ended March 31, 2023. During the three months ended March 31, 2024, we received net proceeds from issuance of convertible debt and warrants of approximately $592,000 (net of original issue discount of $35,000 and cash paid for convertible note issuance costs of approximately $73,000), and advance from sale of noncontrolling interest in subsidiary of approximately $1,210,000, offset by repayments made for convertible debt of $866,000. During the three months ended March 31, 2023, we received proceeds from related party borrowings of $750,000.
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 entered 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 March 31, 2024, we have 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, we entered into a sales agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (“Roth”) under which we may offer and sell from time to time shares of our common stock having an aggregate offering price of up to $3.5 million. From July 1, 2023 to May 15, 2024, Roth has sold an aggregate of 456,627 shares of our common stock at an average price of $1.39 per share to investors. We received net cash proceeds of $616,259, net of cash paid for sales agent’s commission and other fees of $19,132.
March 2024 Convertible Note Financing
In March 2024, we entered into a security purchase agreement with a lender (the “March 2024 Lender”) and closed on the issuance of a 13.0% senior secured convertible promissory note in the principal amount of $700,000 (the “March 2024 Convertible Note”), as well as the issuance of 105,000 shares of common stock as a commitment fee and warrants for the purchase of up to 252,404 shares of our common stock. We and our subsidiaries also entered into security agreements in connection with the March 2024 Convertible Note, 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 our obligations under the March 2024 Convertible Note.
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2023 Convertible Notes and March 2024 Convertible Notes – Events of Default
In addition to the March 2024 Convertible Note, as of the date of this report, we have outstanding the May 2023 Convertible Note with Mast Hill, the July 2023 Convertible Note with Firstfire and the October 2023 Convertible Note with Mast Hill and Firstfire (collectively, the “2023 Notes Lenders”), each as defined and further discussed in Item 1 of this report under “Note 6. Convertible Note Payable” (collectively, the “2023 Convertible Notes”). The 2023 Convertible Notes and the March 2024 Convertible Note contain customary events of default, upon the occurrence of which (after giving effect to the right to cure of the borrower), the notes shall become due and payable and the borrower shall pay to the lender/s an amount equal to the principal amount then outstanding under such notes plus accrued interest (including any Default Interest, as defined in the 2023 Convertible Notes and the March 2024 Convertible Note, respectively), provided, however, that the 2023 Notes Lenders and the March 2024 Lender may in their sole discretion determine to accept payment part in shares of the Company’s common stock (pursuant to the conversion formula set forth in the 2023 Convertible Notes and the March 2024 Convertible Note) and part in cash.
During the quarter ended March 31, 2024, the Company’s market capitalization fell below $5 million, which constitutes an event of default under the 2023 Convertible Notes and the March 2024 Convertible Note.
Pursuant to Section 3.22 of the 2023 Convertible Notes (and the March 2024 Convertible Note), the Company (as borrower under such notes) has a right to cure such default within ten (10) calendar days (the “Cure Period”) after the earlier of (i) the date the borrower receives notice from the lenders demanding cure of such default, or (ii) the first date that the then Chief Executive Officer, Chief Financial Officer, or Board of Directors of the borrower has actual knowledge of the existence of the default.
The Company did not receive any notice from the 2023 Notes Lenders or the March 2024 Lender with respect to the event of default. The Company first had actual knowledge of the existence of the default on April 29, 2024 and received a waiver from the 2023 Notes Lenders and the March 2024 Lender, waiving this event of default on May 29, 2024. Although this waiver was not within the Cure Period, the lenders provided a full waiver to the event of default prior to the issuance of this report.
In addition, the Company failed to file this report in a timely manner during the prescribed period following the Company’s filing of a 12b-25 extension with respect thereto, which would have triggered an event of default under the 2023 Convertible Notes and the March 2024 Convertible Note but for receipt by the Company of the waiver with respect to this event of default from the 2023 Notes Lenders and the March 2024 Lender on the original due date of this report (which waiver was reaffirmed on May 29, 2024).
Furthermore, on May 23, 2024, the Company received a waiver to the required amortization payment under the May 2023 Convertible Note. Pursuant to the waiver, the Company received an extension until June 10, 2024 to allow time for the payment to be made or to allow the Company to refinance the Convertible Notes.
As a result, the 2023 Convertible Notes and the March 2024 Convertible Note are no longer in default as of the date of this report. The events of default described above did not have an accounting impact on the Company’s unaudited financial statements for the quarter ended March 31, 2024 since the events of default were either cured within the Cure Period or prior to the date of this report and no penalties associated with such events of default under the 2023 Convertible Notes and March 2024 Convertible Notes were ever triggered.
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.
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Foreign Currency Exchange Rate Risk
We ceased all operations in China in 2022, with the exception of a small administrative office. 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 March 31, 2024 and 2023, we had an unrealized foreign currency translation loss of approximately $3,000 and an unrealized foreign currency translation gain of approximately $4,000, respectively, because of changes in the exchange rate.
Inflation
The effect of inflation on our revenue and operating results was not significant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the 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 March 31, 2024, 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 March 31, 2024 due to the material weaknesses that were previously reported in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on April 15, 2024, that have not yet been remediated, and our lack of the controls needed to monitor our continuous compliance with contracts, including debt agreements. Management’s plan to remediate these material weaknesses is described in detail in such Annual Report on Form 10-K for the year ended December 31, 2023.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are 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 may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, we believe would individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition or cash flows.
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, 2023 filed with the SEC on April 15, 2024, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K 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.
There have been no material changes from the risk factors previously disclosed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on April 15, 2024.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We issued 105,000 shares of our common stock as a commitment fee and warrants for the purchase of up to 252,404 shares of our common stock in connection with the issuance of the March 2024 Note to the March 2024 Lender.
In March 2024, we issued a five-year warrant to purchase 10,500 shares of our common stock with an exercise price of $2.00 as a finder’s fee in connection with our note offering in March 2024.
The offers, sales, and issuances of the securities described above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act, 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
As outlined fully in Part I, Item 1, Note 6 above, the Company defaulted on the Senior Secured Convertible Notes with Mast Hill and First Fire.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. OTHER INFORMATION
(a) 2023 Convertible Notes and March 2024 Convertible Notes – Events of Default.
As of the date of this report, we have outstanding the 2023 Convertible Notes with the 2023 Notes Lenders and the March 2024 Convertible Note with the March 2024 Lender, each as further discussed in Item 1 of this report under “Note 6. Convertible Note Payable.” The 2023 Convertible Notes and the March 2024 Convertible Note contain customary events of default, upon the occurrence of which (after giving effect to the right to cure of the borrower), the notes shall become due and payable and the borrower shall pay to the lender/s an amount equal to the principal amount then outstanding under the 2023 Convertible Notes and the March 2024 Convertible Note plus accrued interest (including any Default Interest, as defined in the 2023 Convertible Notes and the March 2024 Convertible Note, respectively), provided, however, that the 2023 Notes Lenders and the March 2024 Lender may in their sole discretion determine to accept payment part in shares of the Company’s common stock (pursuant to the conversion formula set forth in the 2023 Convertible Notes and the March 2024 Convertible Note) and part in cash.
During the quarter ended March 31, 2024, the Company’s market capitalization fell below $5 million, which constitutes an event of default under the 2023 Convertible Notes and the March 2024 Convertible Note.
Pursuant to Section 3.22 of the 2023 Convertible Notes (and the March 2024 Convertible Note), the Company (as borrower under such notes) has a right to cure such default within ten (10) calendar days (the “Cure Period”) after the earlier of (i) the date the borrower receives notice from the lenders demanding cure of such default, or (ii) the first date that the then Chief Executive Officer, Chief Financial Officer, or Board of Directors of the borrower has actual knowledge of the existence of the default.
The Company did not receive any notice from the 2023 Notes Lenders or the March 2024 Lender with respect to the event of default. The Company first had actual knowledge of the existence of the default on April 29, 2024 and received a waiver from the 2023 Notes Lenders and the March 2024 Lender, waiving this event of default on May 29, 2024. Although this waiver was not within the Cure Period, the lenders provided a full waiver to the event of default prior to the issuance of this report.
In addition, the Company failed to file this report in a timely manner during the prescribed period following the Company’s filing of a 12b-25 extension with respect thereto, which would have triggered an event of default under the 2023 Convertible Notes and the March 2024 Convertible Note but for receipt by the Company of the waiver with respect to this event of default from the 2023 Notes Lenders and the March 2024 Lender on the original due date of this report (which waiver was reaffirmed on May 29, 2024).
Furthermore, on May 23, 2024, the Company received a waiver to the required amortization payment under the May 2023 Convertible Note. Pursuant to the waiver, the Company received an extension until June 10, 2024 to allow time for the payment to be made or to allow the Company to refinance the Convertible Notes.
As a result, the 2023 Convertible Notes and the March 2024 Convertible Note are no longer in default as of the date of this report. The events of default described above did not have an accounting impact on the Company’s unaudited financial statements for the quarter ended March 31, 2024 since the events of default were either cured within the Cure Period or prior to the date of this report and no penalties associated with such events of default under the 2023 Convertible Notes and March 2024 Convertible Notes were ever triggered.
(b) None of the Company’s directors and
officers
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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. | ||
| By: | /s/ David K. Jin | |
| Dated: May 30, 2024 | Name: | David K. Jin |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| By: | /s/ Luisa Ingargiola | |
| Dated: May 30, 2024 | Name: | Luisa Ingargiola |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
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