UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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As of November 11, 2024,
AVALON GLOBOCARE CORP.
FORM 10-Q
For the Quarterly Period Ended September 30, 2024
Table of Contents
i
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | 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 | ||||||||
| Note payable, net | ||||||||
| Convertible note payable, net | ||||||||
| Total Current Liabilities | ||||||||
| NON-CURRENT LIABILITIES: | ||||||||
| Operating lease obligation - noncurrent portion | ||||||||
| Note payable, net - noncurrent portion | ||||||||
| Loan payable - related party | ||||||||
| Total Non-current Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 15) | ||||||||
| EQUITY: | ||||||||
| Preferred stock, $ |
||||||||
| Series A Convertible Preferred Stock, |
||||||||
| Liquidation preference $ |
||||||||
| Series B Convertible Preferred Stock, |
||||||||
| Liquidation preference $ |
||||||||
| 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 | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| REAL PROPERTY RENTAL REVENUE | $ | $ | $ | $ | ||||||||||||
| REAL PROPERTY OPERATING EXPENSES | ||||||||||||||||
| REAL PROPERTY OPERATING INCOME | ||||||||||||||||
| (LOSS) INCOME 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 costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense - other | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense - related party | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative liability | ||||||||||||||||
| Impairment of equity method investment - Epicon | ( | ) | ||||||||||||||
| Other (expense) income | ( | ) | ( | ) | ( | ) | ||||||||||
| 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: | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
| COMPREHENSIVE LOSS: | ||||||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||
| Unrealized foreign currency translation gain (loss) | ( | ) | ( | ) | ||||||||||||
| 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 and Nine Months Ended September 30, 2024
(Unaudited)
| Avalon GloboCare Corp. Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Series B Preferred Stock | Common Stock | Treasury Stock | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of | Number of | Number of | Paid-in | Number of | Accumulated | Statutory | 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 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as convertible note payable commitment fee | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature related to convertible note payable | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2024 | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2024 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock, net | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| To correct beneficial conversion feature related to convertible note payable | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for adjustments for | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2024 | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 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 and Nine Months Ended September 30, 2023
(Unaudited)
| Avalon GloboCare Corp. Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Series B Preferred Stock | Common Stock | Treasury Stock | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of | Number of | Number of | Paid-in | Number of | Accumulated | Statutory | Comprehensive | Non-controlling | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Reserve | Loss | Interest | Equity | |||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2023 | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||||||
| Issuance of Series B Convertible Preferred Stock for equity method investment | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2023 | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| To correct shares issued for adjustments for | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as convertible note payable commitment fee | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2023 | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock, net | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock as convertible note payable commitment fee | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2023 | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
4
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 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 | ||||||||
| Loss (income) from equity method investments | ( | ) | ||||||
| Distribution of earnings from equity method investment | ||||||||
| Impairment of equity method investment - Epicon | ||||||||
| 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 | ( | ) | ||||||
| Payment for equity interest purchase | ( | ) | ||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from loan payable - related party | ||||||||
| Proceeds from issuance of convertible debts and warrants | ||||||||
| Payments of convertible debts issuance costs | ( | ) | ( | ) | ||||
| Repayments of convertible debts | ( | ) | ||||||
| Proceeds from issuance of balloon promissory note | ||||||||
| Payments of balloon promissory note issuance costs | ( | ) | ||||||
| Advance from pending sale of noncontrolling interest in subsidiary | ||||||||
| Proceeds from equity offering | ||||||||
| Disbursements for equity offering costs | ( | ) | ( | ) | ||||
| 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 notes payable finder's fee | $ | $ | ||||||
| Warrants issued with convertible notes payable recorded as debt discount | $ | $ | ||||||
| Common stock issued as convertible notes payable commitment fee | $ | $ | ||||||
| Deferred financing costs in accrued liabilities | $ | $ | ||||||
| Equity method investment payable paid by a related party | $ | $ | ||||||
| Reclassification of deferred offering costs | $ | $ | ||||||
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”) 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. 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
May 18, 2015, Avalon Healthcare System, Inc. (“AHS”) was incorporated under the laws of the State of Delaware. AHS owns
On
February 7, 2017, the Company formed Avalon RT 9 Properties, LLC (“Avalon RT 9”), a New Jersey limited liability company.
On May 5, 2017, Avalon RT 9 purchased a real property located in Township of Freehold, County of Monmouth, State of New Jersey, having
a street address of 4400 Route 9 South, Freehold, NJ 07728. This property was purchased to serve as the Company’s world-wide headquarters
for all corporate administration and operations. In addition, the property generates rental income. Avalon RT 9 owns this office building.
Avalon RT 9’s business consists of the ownership and operation of the income-producing real estate property in New Jersey. As of
September 30, 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
On May 1, 2024, the Company formed a wholly owned subsidiary, Q&A Distribution LLC (“Q&A Distribution”), a Texas company. Q&A Distribution is engaged in distribution of KetoAir device.
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 | |||||
Avalon RT 9 Properties LLC (“Avalon RT 9”) | New Jersey | |||||
Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”) | PRC | |||||
Genexosome Technologies Inc. (“Genexosome”) | Nevada | | ||||
Avactis Biosciences Inc. (“Avactis”) | Nevada | Dormant, is in process of being dissolved | ||||
Avactis Nanjing Biosciences Ltd. (“Avactis Nanjing”) | PRC | Dormant, is in process of being dissolved | ||||
Avalon Laboratory Services, Inc. (“Avalon Lab”) | Delaware | |||||
Q&A Distribution LLC (“Q&A Distribution”) | Texas |
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 (the “SEC”) 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 SEC 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 working to establish 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 unaudited 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
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 and nine months ended September 30, 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 the Financial Accounting Standards Board’s (“FASB”) 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 and June 2024 fund raises | ||||
| Gain from change in the fair value of derivative liability | ( | ) | ||
| Balance of derivative liability as of September 30, 2024 | $ | |||
Assets and liabilities measured at fair value on a nonrecurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances. These assets and liabilities include equity method investment that is written down to fair value when it is impaired.
Equity
method investment in Laboratory Services MSO, LLC The factors used to determine fair value are subject to management’s
judgment and expertise. These assumptions represent Level 3 inputs. Impairment of equity method investment in Laboratory Services MSO,
LLC for the nine months ended September 30, 2024 was $
ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
9
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
| Country: | September 30, 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 September 30, 2024 and December 31, 2023.
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. Impairment of equity method investment amounted to $
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.
10
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Commitments and Contingencies
In the normal course of business, the Company is subject to contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters. Liabilities for such contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Per Share Data
ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the three and nine months ended September 30, 2024 and 2023, potentially dilutive common shares consist of the common shares issuable upon the conversion of convertible preferred stock and convertible notes (using the if-converted method) and exercise of common stock options and warrants (using the treasury stock method). Common stock equivalents are not included in the calculation of diluted net loss per share if their effect would be anti-dilutive. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 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 | ||||||||||||||||
| (*) |
| (**) |
| (***) |
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)
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
Reverse Stock Split
The Company effectuated a 1-for-15 reverse stock split of its outstanding shares of common stock on October 28, 2024. The reverse split did not change the par value of common stock. All references in these condensed consolidated financial statements to shares, share prices, exercise prices, and other per share information in all periods have been adjusted, on a retroactive basis, to reflect the reverse stock split.
Recent Accounting Standards
In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40), to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The adoption of ASU 2020-06 did not have a material effect on the Company’s consolidated financial statements and related disclosures.
12
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Standards (continued)
In December 2023, the FASB 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
| September 30, 2024 | December 31, 2023 | |||||||
| Advance to supplier | $ | $ | ||||||
| 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 Lab, SCBC Holdings LLC (the “Seller”), the Zoe Family Trust, Bryan Cox and Sarah Cox as individuals (each an “Owner” and collectively, the “Owners”), and Lab Services MSO.
Pursuant
to the terms and conditions set forth in the Amended MIPA, Avalon Lab acquired from the Seller,
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
13
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – EQUITY METHOD INVESTMENTS (continued)
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.
In
September 2024, the Company assessed its equity method investment in Laboratory Services MSO, LLC for any impairment and concluded that
there were indicators of impairment as of September 30, 2024. The Company calculated that the estimated undiscounted cash flows of goodwill
were less than the carrying amount of goodwill related to the equity method investment. The Company has recognized an impairment loss
of $
For
the three months ended September 30, 2024 and 2023, the Company’s share of Lab Services MSO’s net loss was $
For
the nine months ended September 30, 2024 and for the period from February 9, 2023 (date of investment) through September 30, 2023, the
Company’s share of Lab Services MSO’s net income was $
| Equity investment carrying amount at January 1, 2024 | $ | |||
| Lab Services MSO’s net income attributable to the Company | ||||
| Intangible assets amortization amount | ( | ) | ||
| Distribution of earnings from equity investment | ( | ) | ||
| Impairment of goodwill | ( | ) | ||
| Equity investment carrying amount at September 30, 2024 | $ |
As
of September 30, 2024, the Company’s carrying value of the identified intangible assets and goodwill which are included in the
equity investment carrying amount was $
14
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – EQUITY METHOD INVESTMENTS (continued)
| September 30, 2024 | December 31, 2023 | |||||||
| Current assets | $ | $ | ||||||
| Noncurrent assets | ||||||||
| Current liabilities | ||||||||
| Noncurrent liabilities | ||||||||
| Equity | ||||||||
| For the Three Months Ended September 30, 2024 | For the Three Months Ended September 30, 2023 | For the Nine Months Ended September 30, 2024 | For the Period from February 9, 2023 (Date of Investment) through September 30, 2023 | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Gross profit | ||||||||||||||||
| Income (loss) from operation | ( | ) | ||||||||||||||
| Net (loss) 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 $
The Company was obligated to make amortization payments in cash to Mast Hill toward the repayment of the May 2023 Convertible Note, as described in the May 2023 Convertible Note. As of September 30, 2024, the May 2023 Convertible Note was repaid in full.
15
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued)
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 $
The Company was obligated to make amortization payments in cash to FirstFire toward the repayment of the July 2023 Convertible Note, as described in the July 2023 Convertible Note. As of September 30, 2024, the July 2023 Convertible Note was repaid in full.
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 $
The Company was obligated to make amortization payments in cash to Mast Hill toward the repayment of the October 2023 Convertible Note, as described in the October 2023 Convertible Note. As of September 30, 2024, the October 2023 Convertible Note was repaid in full.
16
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued)
October 2023 Convertible Note (continued)
FirstFire acquired the October 2023 Convertible Note with principal
amount of $
The Company was obligated to make amortization payments in cash to FirstFire toward the repayment of the October 2023 Convertible Note, as described in the October 2023 Convertible Note. As of September 30, 2024, the October 2023 Convertible Note was repaid in full.
March 2024 Convertible Note
On
March 7, 2024, the Company entered into securities purchase agreements with Mast Hill for the issuance of
Mast
Hill acquired the March 2024 Convertible Note with principal amount of $
The Company was obligated to make amortization payments in cash to Mast Hill toward the repayment of the March 2024 Convertible Note, as described in the March 2024 Convertible Note. As of September 30, 2024, the March 2024 Convertible Note was repaid in full.
June 2024 Convertible Note
On
June 5, 2024, the Company entered into securities purchase agreements with Mast Hill for the issuance of
17
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued)
June 2024 Convertible Note (continued)
Mast
Hill acquired the June 2024 Convertible Note with principal amount of $
The
Company received net cash amount of $
| Payment Date: | Payment Amount: | |
| December 5, 2024 | ||
| January 5, 2025 | ||
| February 5, 2025 | ||
| March 5, 2025 | ||
| April 5, 2025 | ||
| May 5, 2025 | ||
| June 5, 2025 |
In
connection with the issuance of the June 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 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.
18
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued)
June 2024 Convertible Note (continued)
The Company recorded a total
debt discount of $
For the three months ended September
30, 2024 and 2023, amortization of debt discount and debt issuance costs related to convertible note payable amounted to $
For the nine months ended September
30, 2024 and 2023, amortization of debt discount and debt issuance costs related to the convertible note payable amounted to $
For
the three months ended September 30, 2024 and 2023, interest expense related to convertible note payable amounted to $
For
the nine months ended September 30, 2024 and 2023, interest expense related to convertible note payable amounted to $
NOTE 7 – DERIVATIVE LIABILITY
As stated in Note 6, June 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 June 5, 2024 and September 30, 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 July 6, 2023, the Company
issued
On October 9, 2023, the Company issued
19
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – DERIVATIVE LIABILITY (continued)
On
March 7, 2024, the Company issued
On
June 5, 2024, the Company issued
Increases
or decreases in fair value of the derivative liability are 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 $
| September 30, 2024 | December 31, 2023 | |||||||
| Principal amount | $ | $ | ||||||
| Less: unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Note payable, net | $ | $ | ||||||
| Current portion | $ | $ | ||||||
| Long-term portion | ||||||||
| Total | $ | $ | ||||||
20
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 – NOTE PAYABLE, NET (continued)
For
the three months ended September 30, 2024 and 2023, amortization of debt issuance costs related to note payable amounted to $
For
the nine months ended September 30, 2024 and 2023, amortization of debt issuance costs related to note payable amounted to $
For
the three months ended September 30, 2024 and 2023, interest expense related to note payable amounted to $
For
the nine months ended September 30, 2024 and 2023, interest expense 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 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 September 30, 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 $
21
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – RELATED PARTY TRANSACTIONS (continued)
Accrued Liabilities and Other Payables – Related Parties (continued)
As
of September 30, 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 $
There
was no Line of Credit activity during the nine months ended September 30, 2024. As of both September 30, 2024 and December 31, 2023,
the outstanding principal balance was $
For
both the three months ended September 30, 2024 and 2023, the interest expense related to related party borrowing amounted to $
For
the nine months ended September 30, 2024 and 2023, the interest expense related to related party borrowing amounted to $
As
of September 30, 2024 and December 31, 2023, the related accrued and unpaid interest for Line of Credit was $
As
of September 30, 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 Mr. Lu, the Company’s
largest shareholder and Chairman of the Board of Directors of the Company, pursuant to which (i) Mr. Lu will acquire from the Company
22
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – EQUITY
Common Shares Issued as Convertible Note Payable Commitment Fee
During
the nine months ended September 30, 2024, the Company issued a total of
Common Shares Sold for Cash
In
June 2023, the Company entered into a sales agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (“Roth”)
under which the Company may offer and sell from time to time shares of its common stock having an aggregate offering price of up to $
Common Shares Issued for Services
During
the nine months ended September 30, 2024, the Company issued a total of
Options
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Range of Exercise Price | Number Outstanding at September 30, 2024 | Weighted Average Remaining Contractual Life (Years) | Weighted | Number Exercisable at September 30, 2024 | Weighted Average Exercise Price | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding at January 1, 2024 | $ | |||||||
| Granted | ||||||||
| Expired | ( | ) | ( | ) | ||||
| Outstanding at September 30, 2024 | $ | |||||||
| Options exercisable at September 30, 2024 | $ | |||||||
| Options expected to vest | $ | |||||||
The
aggregate intrinsic value of stock options outstanding and stock options exercisable at September 30, 2024 was approximately $
23
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – EQUITY (continued)
Options (continued)
The
fair values of options granted during the nine months ended September 30, 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 nine months ended September 30, 2023 were estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions: volatility of
For
the three months ended September 30, 2024 and 2023, stock-based compensation expense associated with stock options granted amounted to
$
For
the nine months ended September 30, 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 September 30, 2024 | $ | |||||||
Warrants
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||||
| Range of Exercise Price | Number Outstanding at September 30, 2024 | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at September 30, 2024 | Weighted Average Exercise Price | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
24
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 | ||||||||
| Cancelled (*) | ( | ) | ( | ) | ||||
| Outstanding at September 30, 2024 | $ | |||||||
| Warrants exercisable at September 30, 2024 | $ | |||||||
| Warrants expected to vest | $ | |||||||
*
The
aggregate intrinsic value of both stock warrants outstanding and stock warrants exercisable at September 30, 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. The
The
warrants with an exercise price of $
The
warrants with an exercise price of $
Warrants Issued in June 2024
In
connection with the issuance of June 2024 Convertible Note (See Note 6), the Company issued
25
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – EQUITY (continued)
Warrants (continued)
Warrants Issued in June 2024 (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 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 $
Warrants Cancelled in June 2024
As
of June 5, 2024, the Company paid in full of its outstanding May 2023 Convertible Note, July 2023 Convertible Note, October 2023 Convertible
Note, and March 2024 Convertible Note and cancelled
| Number of Warrants | Weighted Average Exercise Price | |||||||
| Nonvested at January 1, 2024 | $ | |||||||
| Issued | ||||||||
| Cancelled | ( | ) | ( | ) | ||||
| Vested | ( | ) | ( | ) | ||||
| Nonvested at September 30, 2024 | $ | |||||||
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
26
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – STATUTORY RESERVE AND RESTRICTED NET ASSETS (continued)
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 September 30, 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 September 30, | Nine Months Ended September 30, | |||||||||||||||
| Customer | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| A | % | % | % | % | ||||||||||||
| B | % | % | % | % | ||||||||||||
| C | % | % | % | % | ||||||||||||
One
customer, which is a third party, whose outstanding receivable accounted for 10% or more of the Company’s total outstanding rent
receivable at September 30, 2024, accounted for
Two
customers, of which one is a related party and the other is a third party, whose outstanding receivables accounted for 10% or more of
the Company’s total outstanding rent receivable at December 31, 2023, accounted for
Suppliers
No supplier accounted for 10% or more of the Company’s purchase during the three and nine months ended September 30, 2024 and 2023.
NOTE 14 – SEGMENT INFORMATION
On
February 9, 2023, the Company purchased
27
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14 – SEGMENT INFORMATION (continued)
| Three Months Ended September 30, 2024 | ||||||||||||||||
| 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 | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Three Months Ended September 30, 2023 | ||||||||||||||||
| Real Property Operations | Lab Services MSO | Corporate / Other | Total | |||||||||||||
| Real property rental revenue | $ | $ | $ | $ | ||||||||||||
| Real property operating expenses | ( | ) | ( | ) | ||||||||||||
| Real property operating income | ||||||||||||||||
| Income from equity method investment - Lab Services MSO | ||||||||||||||||
| Other operating expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Other income | ||||||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Nine Months Ended September 30, 2024 | ||||||||||||||||
| 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 (expense) income | ( | ) | ||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
28
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14 – SEGMENT INFORMATION (continued)
| Nine Months Ended September 30, 2023 | ||||||||||||||||
| Real Property Operations | Lab Services MSO | Corporate / Other | Total | |||||||||||||
| Real property rental revenue | $ | $ | $ | $ | ||||||||||||
| Real property operating expenses | ( | ) | ( | ) | ||||||||||||
| Real property operating income | ||||||||||||||||
| Income from equity method investment - Lab Services MSO | ||||||||||||||||
| Other operating expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Other income (expense) | ( | ) | ( | ) | ||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Identifiable long-lived tangible assets at September 30, 2024 and December 31, 2023 | September 30, 2024 | December 31, 2023 | ||||||
| Real property operations | $ | $ | ||||||
| Corporate/Other | ||||||||
| Total | $ | $ | ||||||
| Identifiable long-lived tangible assets at September 30, 2024 and December 31, 2023 | September 30, 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 $
| Nine Months Ended September 30, | ||||||||
| 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 | $ | $ | ||||||
29
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 15 – COMMITMENTS AND CONTINGENCIES (continued)
Operating Leases Commitment (continued)
| Operating Lease | ||||
| Weighted average remaining lease term (in years) | ||||
| Weighted average discount rate | % | |||
| For the Twelve-month Period Ending September 30: | Operating Lease | |||
| 2025 | $ | |||
| 2026 and thereafter | ||||
| Total lease payments | ||||
| Amount of lease payments representing interest | ( | ) | ||
| Total present value of operating lease liabilities (current liability) | $ | |||
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
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued. Based upon this review, other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.
Amendment to Article of Incorporation
On October 23, 2024, the Company filed a certificate of amendment (the
“Amendment”) to its Certificate of Incorporation with the Secretary of State of the State of Delaware to effectuate the reverse
stock split at a ratio of
30
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; |
31
| ● | 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 filing date of this Quarterly Report on Form 10-Q or the date of the document incorporated by reference into this Quarterly Report on Form 10-Q. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith, and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished.
The following discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 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 Quarterly Report on Form 10-Q.
Overview
We are a commercial stage company dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. We are working toward 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 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. |
32
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. 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 Food and Drug Administration 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
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. The Company also provides laboratory services through its 40% equity investment in Lab Services MSO, 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 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 $10,935,000 at September 30, 2024 and had incurred recurring net losses and generated negative cash flow from operating activities of approximately $5,179,000 and $3,891,000 for the nine months ended September 30, 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 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 Quarterly Report on Form 10-Q. 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, or at all.
33
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.
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 and nine months ended September 30, 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. Impairment of equity method investment amounted to $259,579 for the nine months ended September 30, 2024.
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 the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“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.
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.
34
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 Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2024 and 2023
Real Property Rental Revenue
For the three months ended September 30, 2024, we had real property rental revenue of $345,159, as compared to $331,290 for the three months ended September 30, 2023, an increase of $13,869, or 4.2%. For the nine months ended September 30, 2024, we had real property rental revenue of $987,634, as compared to $934,360 for the nine months ended September 30, 2023, an increase of $53,274, or 5.7%. The increase was primarily attributable to the increase in the number of tenants occupying the building in the three and nine months ended September 30, 2024 as compared to the three and nine months ended September 30, 2023. We expect that our revenue from real property rent will remain at its current quarterly level with minimal increase in the near future.
Real Property Operating Expenses
Real property operating expenses consist of property management fees, property insurance, real estate taxes, depreciation, repairs and maintenance fees, utilities and other expenses related to our rental properties.
For the three months ended September 30, 2024, our real property operating expenses amounted to $245,528, as compared to $288,083 for the three months ended September 30, 2023, a decrease of $42,555, or 14.8%. The decrease was primarily due to a decrease in repairs and maintenance fee of approximately $30,000, and a decrease in utilities of approximately $14,000, offset by an increase in other miscellaneous items of approximately $1,000.
For the nine months ended September 30, 2024, our real property operating expenses amounted to $794,142, as compared to $781,931 for the nine months ended September 30, 2023, an increase of $12,211, or 1.6%. The increase was primarily due to an increase in utilities of approximately $13,000, offset by a decrease in other miscellaneous items of approximately $1,000.
Real Property Operating Income
Our real property operating income for the three months ended September 30, 2024 was $99,631, representing an increase of $56,424, or 130.6%, as compared to $43,207 for the three months ended September 30, 2023. The increase was primarily attributable to an increase in real property rental revenue and a decrease in real property operating expenses as described above. Our real property operating income for the nine months ended September 30, 2024 was $193,492, representing an increase of $41,063, or 26.9%, as compared to $152,429 for the nine months ended September 30, 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 quarterly level with minimal increase in the near future.
(Loss) income from Equity Method Investment – Lab Services MSO
For the three months ended September 30, 2024, we had loss from our investment in Lab Services MSO of $447,909, which consists of our share of Lab Services MSO’s net loss of $21,597, and amortization of identifiable intangible assets acquired from Lab Services MSO acquisition of $166,733, and impairment of goodwill acquired from Lab Services MSO acquisition of $259,579, which was primarily attributable to Lab Services MSO’s lower revenues and net incomes than anticipated and the decline in our stock price and market capitalization.
35
For the three months ended September 30, 2023, we had income from our investment in Lab Services MSO of $354,500, which consists of our share of Lab Services MSO’s net income of $558,244 and amortization of identifiable intangible assets acquired from Lab Services MSO acquisition of $203,744.
For the nine months ended September 30, 2024, we had loss from our investment in Lab Services MSO of $669,777, which consists of our share of Lab Services MSO’s net income of $90,001, and amortization of identifiable intangible assets acquired from Lab Services MSO acquisition of $500,199, and impairment of goodwill acquired from Lab Services MSO acquisition of $259,579, which was primarily attributable to Lab Services MSO’s lower revenues and net incomes than anticipated and the decline in our stock price and market capitalization.
For the nine months ended September 30, 2023, we had income from our investment in Lab Services MSO of $370,060, which consists of our share of Lab Services MSO’s net income of $913,378 and amortization of identifiable intangible assets acquired from Lab Services MSO acquisition of $543,318.
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.
Other Operating Expenses
For the three and nine months ended September 30, 2024 and 2023, other operating expenses consisted of the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Advertising and marketing expenses | $ | 144,734 | $ | 437,750 | $ | 252,394 | $ | 1,634,720 | ||||||||
| Professional fees | 303,332 | 435,144 | 1,190,125 | 2,659,895 | ||||||||||||
| Compensation and related benefits | 343,360 | 469,959 | 1,054,164 | 1,375,637 | ||||||||||||
| Miscellaneous taxes | 12,000 | 8,960 | 266,498 | 49,291 | ||||||||||||
| Research and development | - | - | - | 110,160 | ||||||||||||
| Directors and officers’ liability insurance premium | 38,768 | 72,835 | 177,381 | 280,438 | ||||||||||||
| Travel and entertainment | 33,789 | 61,631 | 78,198 | 179,583 | ||||||||||||
| Rent and related utilities | 15,764 | 15,338 | 46,770 | 48,599 | ||||||||||||
| Other general and administrative | 29,936 | 37,226 | 75,571 | 146,997 | ||||||||||||
| $ | 921,683 | $ | 1,538,843 | $ | 3,141,101 | $ | 6,485,320 | |||||||||
| ● | For the three months ended September 30, 2024, advertising and marketing expenses decreased by $293,016, or 66.9%, as compared to the three months ended September 30, 2023. For the nine months ended September 30, 2024, advertising and marketing expenses decreased by $1,382,326, or 84.6%, as compared to the nine months ended September 30, 2023. The decrease was primarily due to decreased advertising activities in the three and nine months ended September 30, 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 September 30, 2024, professional fees decreased by $131,812, or 30.3%, as compared to the three months ended September 30, 2023, which was primarily attributable to a decrease in legal service fees of approximately $155,000, 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 $23,000. For the nine months ended September 30, 2024, professional fees decreased by $1,469,770, or 55.3%, as compared to the nine months ended September 30, 2023, which was primarily attributable to a decrease in consulting fees of approximately $547,000, mainly due to the decrease in use of consulting service providers related to our acquisition of Lab Services MSO, a decrease in audit fees of approximately $126,000, due to the decreased audit services related to our acquisition of Lab Services MSO, a decrease in accounting fees of approximately $454,000, mainly due to the decreased accounting services related to our acquisition of Lab Services MSO, a decrease in legal service fees of approximately $409,000, mainly due to the decreased legal services related to our acquisition of Lab Services MSO, and a decrease in other miscellaneous items of approximately $61,000, offset by an increase in valuation fee for our equity method investment on Lab Services MSO of $127,000. We expect that our professional fees will likely remain at their current quarterly level with minimal increase in the near future. |
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| ● | For the three months ended September 30, 2024, compensation and related benefits decreased by $126,599, or 26.9%, as compared to the three months ended September 30, 2023. For the nine months ended September 30, 2024, compensation and related benefits decreased by $321,473, or 23.4%, as compared to the nine months ended September 30, 2023. The decrease was primarily attributable to the decreased compensation for two of our named executive officers, David Jin and Meng Li. We expect that our compensation and related benefits will remain relatively steady, with minimal increase, in the near future. |
| ● | For the three months ended September 30, 2024, miscellaneous taxes increased by $3,040, or 33.9%, as compared to the three months ended September 30, 2023. For the nine months ended September 30, 2024, miscellaneous taxes increased by $217,207, or 440.7%, as compared to the nine months ended September 30, 2023. The increase was primarily attributable to increased Delaware state franchise tax. We expect that our miscellaneous taxes will decrease in the near future. |
| ● | For the three months ended September 30, 2024 and 2023, we did not incur any research and development activity. For the nine months ended September 30, 2024, research and development expenses decreased by $110,160, or 100.0%, as compared to the nine months ended September 30, 2023. In the nine months ended September 30, 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 September 30, 2024, Directors and Officers’ Liability Insurance premium decreased by $34,067, or 46.8%, as compared to the three months ended September 30, 2023. For the nine months ended September 30, 2024, Directors and Officers’ Liability Insurance premium decreased by $103,057, or 36.7%, as compared to the nine months ended September 30, 2023. The decrease was mainly due to our switching to a different insurance provider, resulting in a lower premium. |
| ● | For the three months ended September 30, 2024, travel and entertainment expense decreased by $27,842, or 45.2%, as compared to the three months ended September 30, 2023. For the nine months ended September 30, 2024, travel and entertainment expense decreased by $101,385, or 56.5%, as compared to the nine months ended September 30, 2023. The decrease was mainly due to decreased business travel activities in the three and nine months ended September 30, 2024 as compared to the corresponding periods in 2023. |
| ● | For the three months ended September 30, 2024, rent and related utilities expenses increased by $426, or 2.8%, as compared to the three months ended September 30, 2023. For the nine months ended September 30, 2024, rent and related utilities expenses decreased by $1,829, or 3.8%, as compared to the nine months ended September 30, 2023. The decrease was attributable to decreased rental rate in the nine months ended September 30, 2024. |
| ● | Other general and administrative expenses mainly consisted of NASDAQ listing fee, office supplies, and other miscellaneous items. For the three months ended September 30, 2024, other general and administrative expenses decreased by $7,290, or 19.6%, as compared to the three months ended September 30, 2023, due to our efforts at stricter controls on corporate expenditure. For the nine months ended September 30, 2024, other general and administrative expenses decreased by $71,426, or 48.6%, as compared to the nine months ended September 30, 2023, which was mainly attributable to a decrease in fees paid to government agencies and Financial Industry Regulatory Authority of approximately $31,000, a decrease in office supplies of approximately $16,000, and a decrease in other miscellaneous items of approximately $24,000 due to our efforts at stricter controls on corporate expenditure. |
Loss from Operations
As a result of the foregoing, for the three months ended September 30, 2024, loss from operations amounted to $1,269,961, as compared to $1,141,136 for the three months ended September 30, 2023, representing an increase of $128,825, or 11.3%.
As a result of the foregoing, for the nine months ended September 30, 2024, loss from operations amounted to $3,617,386, as compared to $5,962,831 for the nine months ended September 30, 2023, representing a decrease of $2,345,445, or 39.3%.
Other (Expense) Income
Other (expense) income mainly includes third party and related party interest expense, change in fair value of derivative liability, impairment of equity method investment on Epicon, and other miscellaneous expense.
Other expense, net, totaled $409,239 for the three months ended September 30, 2024, as compared to $343,939 for the three months ended September 30, 2023, an increase of $65,300, or 19.0%, which was primarily attributable to an increase in third party interest expense of approximately $108,000, mainly driven by the increase in amortization of debt discount and debt issuance costs of approximately $80,000 and the increased interest expense of approximately $28,000 from third party debts, a decrease in other income of approximately $39,000, offset by an increase in gain from change in fair value of derivative liability of approximately $82,000.
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Other expense, net, totaled $1,561,353 for the nine months ended September 30, 2024, as compared to $1,189,045 for the nine months ended September 30, 2023, an increase of $372,308, or 31.3%, which was primarily attributable to an increase in third party interest expense of approximately $1,024,000, mainly driven by the increase in amortization of debt discount and debt issuance costs of approximately $825,000 and the increased interest expense of approximately $199,000 from third party debts, an increase in interest expense – related party of approximately $9,000, and an increase in other expense of approximately $56,000, offset by an increase in gain from change in fair value of derivative liability of approximately $252,000, a decrease in impairment of equity method investment on Epicon of approximately $464,000.
Income Taxes
We did not have any income taxes expense for the three and nine months ended September 30, 2024 and 2023 since we incurred losses in these periods.
Net Loss
As a result of the factors described above, our net loss was $1,679,200 for the three months ended September 30, 2024, as compared to $1,485,075 for the three months ended September 30, 2023, an increase of $194,125, or 13.1%.
As a result of the factors described above, our net loss was $5,178,739 for the nine months ended September 30, 2024, as compared to $7,151,876 for the nine months ended September 30, 2023, a decrease of $1,973,137, or 27.6%.
Net Loss Attributable to Avalon GloboCare Corp. Common Shareholders
The net loss attributable to our common shareholders was $1,679,200, or $1.82 per share (basic and diluted), for the three months ended September 30, 2024, as compared to $1,485,075, or $2.06 per share (basic and diluted), for the three months ended September 30, 2023, an increase of $194,125, or 13.1%.
The net loss attributable to our common shareholders was $5,178,739, or $6.45 per share (basic and diluted), for the nine months ended September 30, 2024, as compared to $7,151,876, or $10.34 per share (basic and diluted), for the nine months ended September 30, 2023, a decrease of $1,973,137, or 27.6%.
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 statements 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 gain of $3,043 and a foreign currency translation loss of $8,685 for the three months ended September 30, 2024 and 2023, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $2,829 and a foreign currency translation loss of $16,026 for the nine months ended September 30, 2024 and 2023, respectively. This non-cash gain/loss had the effect of decreasing/increasing our reported comprehensive loss in each respective period.
Comprehensive Loss
As a result of our foreign currency translation adjustment, we had comprehensive loss of $1,676,157 and $1,493,760 for the three months ended September 30, 2024 and 2023, respectively.
As a result of our foreign currency translation adjustment, we had comprehensive loss of $5,175,910 and $7,167,902 for the nine months ended September 30, 2024 and 2023, respectively.
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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 Quarterly Report on Form 10-Q. 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.
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 September 30, 2024 and December 31, 2023, we had a cash balance of approximately $1,024,000 and $285,000, respectively. These funds are kept in financial institutions located as follows:
| Country: | September 30, 2024 | December 31, 2023 | ||||||||||||||
| United States | $ | 1,018,477 | 99.4 | % | $ | 280,197 | 98.2 | % | ||||||||
| China | 5,720 | 0.6 | % | 5,203 | 1.8 | % | ||||||||||
| Total cash | $ | 1,024,197 | 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 September 30, 2024:
| September 30, | December 31, | Changes in | ||||||||||||||
| 2024 | 2023 | Amount | Percentage | |||||||||||||
| Working capital deficit: | ||||||||||||||||
| Total current assets | $ | 1,396,821 | $ | 850,867 | $ | 545,954 | 64.2 | % | ||||||||
| Total current liabilities | 12,332,173 | 6,762,686 | 5,569,487 | 82.4 | % | |||||||||||
| Working capital deficit | $ | (10,935,352 | ) | $ | (5,911,819 | ) | $ | (5,023,533 | ) | 85.0 | % | |||||
Our working capital deficit increased by $5,023,533 to $10,935,352 at September 30, 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 $120,000 driven by collection efforts in the nine months ended September 30, 2024, an increase in accrued liabilities and other payables of $288,000 mainly due to the increase in accrued Delaware state franchise tax in the nine months ended September 30, 2024, an increase in accrued liabilities and other payables – related parties of approximately $507,000 mainly due to our equity method investment payable paid by a related party on our behalf, a significant increase in advance from pending sale of noncontrolling interest – related party of approximately $2,022,000 resulting from advance received in connection with the membership interest purchase agreement entered into in November 2023 in the nine months ended September 30, 2024, an increase in note payable, net, of approximately $4,719,000, which was attributable to the reclassification of note payable from non-current to current, and an increase in convertible note payable, net, of approximately $211,000, offset by an increase in cash of approximately $739,000, a decrease in accrued professional fees of approximately $1,191,000 resulting from payments made to our professional service providers in the nine months ended September 30, 2024, a decrease in accrued payroll liability and compensation of approximately $201,000, and a decrease in equity method investment payable of approximately $667,000 resulting from payment of $100,000 made to investee and payment of approximately $567,000 made by a related party on our behalf in the nine months ended September 30, 2024.
Because the exchange rate conversion is different for the condensed consolidated balance sheets and the condensed consolidated statements of cash flows, the changes in assets and liabilities reflected on the condensed consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the condensed consolidated balance sheets.
Cash Flows for the Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023
The following table summarizes the key components of our cash flows for the nine months ended September 30, 2024 and 2023:
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash used in operating activities | $ | (3,890,993 | ) | $ | (5,708,402 | ) | ||
| Net cash used in investing activities | (100,000 | ) | (22,171 | ) | ||||
| Net cash provided by financing activities | 4,726,942 | 4,091,323 | ||||||
| Effect of exchange rate on cash | 2,848 | (9,889 | ) | |||||
| Net increase (decrease) in cash | $ | 738,797 | $ | (1,649,139 | ) | |||
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Net cash flow used in operating activities for the nine months ended September 30, 2024 was $3,890,993, which primarily reflected our consolidated net loss of approximately $5,179,000, and the non-cash items adjustment, primarily consisting of change in fair market value of derivative liability of approximately $381,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in accrued liabilities and other payables of approximately $1,176,000 resulting from payments made to our vendors in the nine months ended September 30, 2024, offset by a decrease in rent receivable of approximately $132,000 driven by our collection efforts, and the non-cash items adjustment, primarily consisting of depreciation of approximately $133,000, stock-based compensation and service expense of approximately $255,000, loss from equity method investment of approximately $670,000 which was mainly attributable to the amortization of identifiable intangible assets acquired from Lab Services MSO acquisition of approximately $500,000 and the impairment of goodwill acquired from Lab Services MSO acquisition of approximately $260,000, resulting from Lab Services MSO’s lower revenues and net incomes than anticipated and the decline in our stock price and market capitalization, distribution of earnings from equity method investment of approximately $612,000, and amortization of debt issuance costs and debt discount of approximately $1,115,000.
Net cash flow used in operating activities for the nine months ended September 30, 2023 was $5,708,402, which primarily reflected our consolidated net loss of approximately $7,152,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in accrued liabilities and other payables of approximately $140,000 due to payments made to vendors in the nine months ended September 30, 2023, and the non-cash items adjustment, primarily consisting of income from equity method investment of approximately $351,000 resulting from our purchase of a 40% equity interest in Lab Services MSO in February 2023, and change in fair market value of derivative liability of approximately $129,000, offset by depreciation of approximately $167,000, stock-based compensation and service expense of approximately $1,056,000, impairment of equity method investment of approximately $464,000, and amortization of debt issuance costs and debt discount of approximately $291,000.
We expect our cash used in operating activities to increase in the next 12 months due to the following:
| ● | the development and commercialization of new products; and |
| ● | an increase in public relations and/or sales promotions for existing and/or new brands as we expand within existing markets or enter new markets. |
Net cash flow used in investing activities was $100,000 for the nine months ended September 30, 2024, as compared to $22,171 for the nine months ended September 30, 2023. During the nine months ended September 30, 2024, we paid $100,000 for the acquisition of a 40% interest in Lab Services MSO. During the nine months ended September 30, 2023, we made payment for purchase of property and equipment of approximately $22,000.
Net cash flow provided by financing activities was $4,726,942 for the nine months ended September 30, 2024, as compared to $4,091,323 for the nine months ended September 30, 2023. During the nine months ended September 30, 2024, we received net proceeds from the issuance of convertible debts and warrants of approximately $3,085,000 (net of original issue discount of approximately $177,000 and cash paid for convertible note issuance costs of approximately $283,000), an advance from the pending sale of a noncontrolling interest in a subsidiary of approximately $2,022,000, and net proceeds from equity offering of approximately $2,719,000 (net of cash paid for commission and other offering costs of approximately $138,000), offset by repayments made for convertible debt of $3,100,000. During the nine months ended September 30, 2023, we received proceeds from related party borrowings of $850,000, and net proceeds from issuance of convertible debt and warrants of approximately $1,690,000 (net of original issue discount of $100,000 and cash paid for convertible note issuance costs of approximately $211,000), and net proceeds from issuance of balloon promissory note of approximately $936,000 (net of cash paid for promissory note issuance costs of approximately $64,000), and net proceeds from equity offering of approximately $616,000 (net of cash paid for commission and other offering costs of approximately $19,000).
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. |
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August 2019 Credit Facility
In the third quarter of 2019, we entered into a $20 million credit facility (the “Line of Credit”) provided by our Chairman of the Board and a significant (and our largest) stockholder, Wenzhao Lu. The Line of Credit bears interest at a rate of 5% and provides for maturity on drawn loans 36 months after funding. As of September 30, 2024, we had used approximately $6.8 million of the Line of Credit and had approximately $13.2 million remaining available under the Line of 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 August 16, 2024, we sold an aggregate of 312,285 shares of our common stock at an average price of $11.19 per share to investors pursuant to the Sales Agreement, and received net cash proceeds of $3,388,251, net of cash paid for Roth’s commissions and other fees of $104,992.
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 7,000 shares of common stock as a commitment fee and warrants for the purchase of up to 16,827 shares of our common stock. We and our subsidiaries also entered into security agreements in connection with issuance of 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.
June 2024 Convertible Note Financing
In June 2024, we entered into a security purchase agreement with a lender (the “June 2024 Lender”) and closed on the issuance of a 13.0% senior secured convertible promissory note in the principal amount of $2,845,000 (the “June 2024 Convertible Note”), as well as the issuance of 26,800 shares of common stock as a commitment fee and warrants for the purchase of up to 146,667 shares of our common stock. We and our subsidiaries also entered into security agreements in connection with issuance of the June 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 June 2024 Convertible Note.
We estimate that, based on current plans and assumptions, 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 the Line of Credit and sales of equity. Other than funds received as described above and cash resources generated from our operations, we presently have no other significant alternative source of working capital. We have used these funds to fund our operating expenses, pay our obligations and grow our company. We will need to raise significant additional capital to fund our operations and to provide working capital for our ongoing operations and obligations. Therefore, our future operation is dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will be required to cease our operations. To date, we have not considered this alternative, nor do we view it as a likely occurrence.
Foreign Currency Exchange Rate Risk
We ceased all operations in China in 2022, with the exception of a small administrative office. We did not during the nine months ended September 30, 2024, and do not expect in the foreseeable future, to generate any additional revenue from PRC operations. Thus, exchange rate fluctuations between the RMB and the U.S. dollar do not have a material effect on us. For the three months ended September 30, 2024 and 2023, we had an unrealized foreign currency translation gain of approximately $3,000 and an unrealized foreign currency translation loss of approximately $9,000, respectively, because of changes in the exchange rate. For the nine months ended September 30, 2024 and 2023, we had an unrealized foreign currency translation gain of approximately $3,000 and an unrealized foreign currency translation loss of approximately $16,000, respectively, because of changes in the exchange rate.
Inflation
The effect of inflation on our revenues and operating results was not significant for the three and nine months ended September 30, 2024 and 2023.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, our management, including our principal executive officer and principal financial officer, carried out an evaluation, as of September 30, 2024, of the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act.
Based on this evaluation, management concluded that our disclosure controls and procedures were not effective as of September 30, 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. Management’s plan to remediate these material weaknesses is described in detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, 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
During the nine months ended September 30, 2024, the Company issued a total of 45,153 shares of its common stock for services rendered and to be rendered. These shares were valued at $306,350, the fair market values on the grant dates using the reported closing share prices on the dates of grant, and the Company recorded stock-based compensation expense of $217,471 for the nine months ended September 30, 2024 and reduced accrued liabilities of $60,000 and recorded prepaid expense of $28,879 as of September 30, 2024 which will be amortized over the rest of corresponding service periods.
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
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a) None.
(b) There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors since the Company last provided disclosure in response to the requirements of Item 407(c)(3) of Regulation S-K.
(c)
During the quarter ended September 30, 2024, no director or officer
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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: November 11, 2024 | Name: | David K. Jin |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| By: | /s/ Luisa Ingargiola | |
| Dated: November 11, 2024 | Name: | Luisa Ingargiola |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
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