UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172019
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER: 000-55709001-38728
AVALON GLOBOCARE CORP.
(Exact name of Registrant as specified in its charter)
| Delaware | 47-1685128 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
4400 Route 9 South, Suite 3100, Freehold, New Jersey 07728
(Address of principal executive offices) (zip code)
(646) 762-4517(732) 780-4400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
| Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
AsSecurities registered pursuant to Section 12(b) of November 14, 2017, 67,218,622the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| Common Stock, $0.0001 par value per share | AVCO | The NASDAQ Capital Market |
State the number of shares outstanding of each of the issuer’s classes of common stock, par value $0.0001 per share, were issued and outstanding.equity, as of the latest practicable date.
| Class | Outstanding August 14, 2019 | |
| Common Stock, $0.0001 par value per share | 75,655,639 shares |
AVALON GLOBOCARE CORP.
FORM 10-Q
SeptemberJune 30, 20172019
TABLE OF CONTENTS
i
FORWARD LOOKING STATEMENTS
Thisreport contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
Althoughforward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.
Wefile reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Weundertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Unless otherwise indicated, references in this report to “we,” “us” or the “Company” refer to Avalon GloboCare Corp. and its consolidated subsidiaries.
ii
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 356,822 | $ | 2,886,189 | ||||
| Accounts receivable - related parties, net of allowance for doubtful accounts | 166,874 | 70,228 | ||||||
| Tenants receivable, net of allowance for doubtful accounts | 56,239 | — | ||||||
| Security deposit | 6,012 | �� | — | |||||
| Prepaid expenses and other | 36,414 | 749,796 | ||||||
| Total Current Assets | 622,361 | 3,706,213 | ||||||
| OTHER ASSETS: | ||||||||
| Security deposit - noncurrent portion | 24,763 | — | ||||||
| Property, plant and equipment, net | 46,365 | 295 | ||||||
| Investment in real estate, net | 7,655,562 | — | ||||||
| Total Other Assets | 7,726,690 | 295 | ||||||
| Total Assets | $ | 8,349,051 | $ | 3,706,508 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 21,600 | $ | — | ||||
| Accrued liabilities and other payables | 343,002 | 22,334 | ||||||
| Accrued liabilities and other payables - related parties | 31,634 | 8,587 | ||||||
| Deferred rental income | 19,914 | — | ||||||
| Loan payable | 2,100,000 | — | ||||||
| Income taxes payable | — | 20,976 | ||||||
| VAT and other taxes payable | 2,091 | 11,270 | ||||||
| Tenants’ security deposit | 92,288 | — | ||||||
| Due to related parties | 306,650 | 97,150 | ||||||
| Refundable deposit | 3,000,000 | — | ||||||
| Total Current Liabilities | 5,917,179 | 160,317 | ||||||
| Commitments and Contingencies - (Note 14) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2017 and December 31, 2016 | — | — | ||||||
| Common stock, $0.0001 par value; 490,000,000 shares authorized; 64,628,622 and 61,628,622 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 6,463 | 6,163 | ||||||
| Additional paid-in capital | 4,283,311 | 3,681,387 | ||||||
| Accumulated deficit | (1,743,939 | ) | (53,369 | ) | ||||
| Statutory reserve | 6,578 | 6,578 | ||||||
| Accumulated other comprehensive loss - foreign currency translation adjustment | (120,541 | ) | (94,568 | ) | ||||
| Total Stockholders’ Equity | 2,431,872 | 3,546,191 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 8,349,051 | $ | 3,706,508 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| REVENUES | ||||||||||||||||
| Real property rental revenue | $ | 315,284 | $ | — | $ | 537,538 | $ | — | ||||||||
| Consulting services revenue - related parties | 2,166 | 326,667 | 220,949 | 326,667 | ||||||||||||
| Total Revenues | 317,450 | 326,667 | 758,487 | 326,667 | ||||||||||||
| COSTS AND EXPENSES | ||||||||||||||||
| Real property operating expenses | 180,722 | — | 342,576 | — | ||||||||||||
| Consulting services costs - related parties | 47,033 | 33,548 | 271,845 | 33,548 | ||||||||||||
| Total Costs and Expenses | 227,755 | 33,548 | 614,421 | 33,548 | ||||||||||||
| REAL PROPERTY OPERATING INCOME | 134,562 | — | 194,962 | — | ||||||||||||
| GROSS (LOSS) PROFIT FROM CONSULTING SERVICES | (44,867 | ) | 293,119 | (50,896 | ) | 293,119 | ||||||||||
| OTHER OPERATING EXPENSES: | ||||||||||||||||
| Selling expense | 148 | 121 | 15,138 | 121 | ||||||||||||
| Compensation and related benefits | 468,837 | — | 857,237 | — | ||||||||||||
| Professional fees | 186,208 | 84,038 | 566,131 | 161,113 | ||||||||||||
| Other general and administrative | 92,421 | 1,127 | 245,080 | 29,583 | ||||||||||||
| Total Other Operating Expenses | 747,614 | 85,286 | 1,683,586 | 190,817 | ||||||||||||
| (LOSS) INCOME FROM OPERATIONS | (657,919 | ) | 207,833 | (1,539,520 | ) | 102,302 | ||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest income | 122 | 41 | 1,126 | 101 | ||||||||||||
| Interest expense | (52,932 | ) | — | (94,932 | ) | — | ||||||||||
| Foreign currency transaction loss | — | — | (57,244 | ) | — | |||||||||||
| Total Other (Expense) Income, net | (52,810 | ) | 41 | (151,050 | ) | 101 | ||||||||||
| (LOSS) INCOME BEFORE INCOME TAXES | (710,729 | ) | 207,874 | (1,690,570 | ) | 102,403 | ||||||||||
| INCOME TAXES | — | — | — | — | ||||||||||||
| NET (LOSS) INCOME | $ | (710,729 | ) | $ | 207,874 | $ | (1,690,570 | ) | $ | 102,403 | ||||||
| COMPREHENSIVE (LOSS) INCOME | ||||||||||||||||
| NET (LOSS) INCOME | (710,729 | ) | 207,874 | (1,690,570 | ) | 102,403 | ||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||
| Unrealized foreign currency translation gain (loss) | 6,151 | 216 | (25,973 | ) | 431 | |||||||||||
| COMPREHENSIVE (LOSS) INCOME | $ | (704,578 | ) | $ | 208,090 | $ | (1,716,543 | ) | $ | 102,834 | ||||||
| NET (LOSS) INCOME PER COMMON SHARES: | ||||||||||||||||
| Basic and diluted | $ | (0.011 | ) | $ | 0.004 | $ | (0.026 | ) | $ | 0.002 | ||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic and diluted | 64,628,622 | 50,000,000 | 63,958,292 | 50,000,000 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| Preferred Stock | Common Stock | Additional | Accumulated | Total | ||||||||||||||||||||||||||||||||
| Number of | Number of | Paid-in | Accumulated | Statutory | Other | Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Reserve | Comprehensive Loss | Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2016 | — | $ | — | 61,628,622 | $ | 6,163 | $ | 3,681,387 | $ | (53,369 | ) | $ | 6,578 | $ | (94,568 | ) | $ | 3,546,191 | ||||||||||||||||||
| Common shares issued in connection with Share Subscription Agreement | — | — | 3,000,000 | 300 | (300 | ) | — | — | — | — | ||||||||||||||||||||||||||
| Options granted for service | — | — | — | — | 602,224 | — | — | — | 602,224 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | — | (25,973 | ) | (25,973 | ) | |||||||||||||||||||||||||
| Net loss for the nine months ended September 30, 2017 | — | — | — | — | — | (1,690,570 | ) | — | — | (1,690,570 | ) | |||||||||||||||||||||||||
| Balance, September 30, 2017 | — | $ | — | 64,628,622 | $ | 6,463 | $ | 4,283,311 | $ | (1,743,939 | ) | $ | 6,578 | $ | (120,541 | ) | $ | 2,431,872 | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| For the Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income | $ | (1,690,570 | ) | $ | 102,403 | |||
| Adjustments to reconcile net (loss) income from operations to | ||||||||
| net cash (used in) provided by operating activities: | ||||||||
| Depreciation expense | 58,478 | — | ||||||
| Options granted for service | 602,224 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable - related parties | (91,463 | ) | — | |||||
| Tenants receivable | (56,239 | ) | — | |||||
| Prepaid expenses and other | 14,151 | (5,125 | ) | |||||
| Security deposit | (30,081 | ) | — | |||||
| Accounts payable | 21,600 | — | ||||||
| Accrued liabilities and other payables | 320,505 | (2,790 | ) | |||||
| Accrued liabilities and other payables - related parties | 22,990 | 6,226 | ||||||
| Deferred rental income | 19,914 | — | ||||||
| Advance from customers - related parties | — | 227,184 | ||||||
| Income taxes payable | (21,400 | ) | — | |||||
| VAT and other taxes payable | (9,453 | ) | — | |||||
| Tenants’ security deposit | 92,288 | — | ||||||
| NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | (747,056 | ) | 327,898 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of Avalon GloboCare Corp.’s shares | — | (230,000 | ) | |||||
| Purchase of property, plant and equipment | (50,994 | ) | (395 | ) | ||||
| Purchase of commercial real estate | (7,008,571 | ) | — | |||||
| NET CASH USED IN INVESTING ACTIVITIES | (7,059,565 | ) | (230,395 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds received from loan payable | 2,100,000 | — | ||||||
| Proceeds received from related parties’ advance | 210,000 | 9,000 | ||||||
| Repayment for related parties’ advance | (500 | ) | — | |||||
| Proceeds received from AHS’s founders’ contribution | — | 141,000 | ||||||
| Refundable deposit in connection with Share Subscription Agreement | 3,000,000 | — | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 5,309,500 | 150,000 | ||||||
| EFFECT OF EXCHANGE RATE ON CASH | (32,246 | ) | (1,262 | ) | ||||
| NET (DECREASE) INCREASE IN CASH | (2,529,367 | ) | 246,241 | |||||
| CASH - beginning of period | 2,886,189 | 109,586 | ||||||
| CASH - end of period | $ | 356,822 | $ | 355,827 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | — | $ | — | ||||
| Income taxes | $ | 21,400 | $ | — | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Stock issued in connection with Share Subscription Agreement | $ | 300 | $ | — | ||||
| Distribution of Avalon GloboCare Corp.’s shares to owners | $ | — | $ | 230,000 | ||||
| Acquisition of real estate by decreasing prepayment for property | $ | 700,000 | $ | — | ||||
| As of | ||||||||
| June 30, 2019 | December 31, 2018 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 3,401,304 | $ | 2,252,287 | ||||
| Accounts receivable, net of allowance for doubtful accounts | 100,788 | 9,739 | ||||||
| Tenants receivable, net of allowance for doubtful accounts | 29,504 | 42,484 | ||||||
| Security deposit | 27,309 | 127,263 | ||||||
| Inventory | 13,001 | 12,994 | ||||||
| Prepaid expenses - related parties | - | 34,190 | ||||||
| Prepaid expenses and other current assets | 420,473 | 1,146,475 | ||||||
| Total Current Assets | 3,992,379 | 3,625,432 | ||||||
| NON-CURRENT ASSETS: | ||||||||
| Property and equipment, net | 374,906 | 249,555 | ||||||
| Investment in real estate, net | 7,810,549 | 7,879,885 | ||||||
| Intangible assets, net | 1,091,903 | 1,255,689 | ||||||
| Equity method investment | 363,002 | 385,162 | ||||||
| Total Non-current Assets | 9,640,360 | 9,770,291 | ||||||
| Total Assets | $ | 13,632,739 | $ | 13,395,723 | ||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 47,508 | $ | 6,695 | ||||
| Advance from customer - related party | - | 14,829 | ||||||
| Accrued liabilities and other payables | 747,346 | 859,350 | ||||||
| Accrued liabilities and other payables - related parties | 36,806 | - | ||||||
| Deferred rental income | 13,786 | 14,136 | ||||||
| Interest payable | - | 75,342 | ||||||
| Interest payable - related party | 14,583 | - | ||||||
| VAT and other taxes payable | 10,727 | 4,668 | ||||||
| Tenants’ security deposit | 64,037 | 66,700 | ||||||
| Due to related party | 100,000 | 100,000 | ||||||
| Total Current Liabilities | 1,034,793 | 1,141,720 | ||||||
| NON-CURRENT LIABILITIES: | ||||||||
| Loan payable - noncurrent portion | - | 1,000,000 | ||||||
| Note payable - related party | 1,000,000 | - | ||||||
| Derivative liabilities | 3,055,748 | - | ||||||
| Total Non-current Liabilities | 4,055,748 | 1,000,000 | ||||||
| Total Liabilities | 5,090,541 | 2,141,720 | ||||||
| Commitments and Contingencies - (Note 18) | ||||||||
| EQUITY: | ||||||||
| Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding at June 30, 2019 and December 31, 2018 | - | - | ||||||
| Common stock, $0.0001 par value; 490,000,000 shares authorized; 76,175,639 shares issued and 75,655,639 shares outstanding at June 30, 2019; 73,830,751 shares issued and 73,310,751 shares outstanding at December 31, 2018 | 7,618 | 7,383 | ||||||
| Additional paid-in capital | 30,375,711 | 24,153,378 | ||||||
| Less: common stock held in treasury, at cost; | ||||||||
| 520,000 shares at June 30, 2019 and December 31, 2018 | (522,500 | ) | (522,500 | ) | ||||
| Accumulated deficit | (20,054,816 | ) | (11,291,776 | ) | ||||
| Statutory reserve | 6,578 | 6,578 | ||||||
| Accumulated other comprehensive loss - foreign currency translation adjustment | (228,183 | ) | (236,860 | ) | ||||
| Total Avalon GloboCare Corp. stockholders’ equity | 9,584,408 | 12,116,203 | ||||||
| Non-controlling interest | (1,042,210 | ) | (862,200 | ) | ||||
| Total Equity | 8,542,198 | 11,254,003 | ||||||
| Total Liabilities and Equity | $ | 13,632,739 | $ | 13,395,723 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| For the Three Months Ended | For the Three Months Ended | For the Six Months Ended | For the Six Months Ended | |||||||||||||
| June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | |||||||||||||
| REVENUES | ||||||||||||||||
| Real property rental | $ | 264,889 | $ | 278,872 | $ | 531,515 | $ | 575,495 | ||||||||
| Medical related consulting services - related party | 111,434 | 141,996 | 125,694 | 141,996 | ||||||||||||
| Development services and sales of developed products | 23,404 | 75,225 | 26,682 | 86,515 | ||||||||||||
| Total Revenues | 399,727 | 496,093 | 683,891 | 804,006 | ||||||||||||
| COSTS AND EXPENSES | ||||||||||||||||
| Real property operating expenses | 192,676 | 195,941 | 423,435 | 406,215 | ||||||||||||
| Medical related consulting services - related party | 95,375 | 124,715 | 108,466 | 124,715 | ||||||||||||
| Development services and sales of developed products | 31,784 | 42,093 | 62,091 | 58,613 | ||||||||||||
| Total Costs and Expenses | 319,835 | 362,749 | 593,992 | 589,543 | ||||||||||||
| REAL PROPERTY OPERATING INCOME | 72,213 | 82,931 | 108,080 | 169,280 | ||||||||||||
| GROSS PROFIT FROM MEDICAL RELATED CONSULTING SERVICES | 16,059 | 17,281 | 17,228 | 17,281 | ||||||||||||
| GROSS (LOSS) PROFIT FROM DEVELOPMENT SERVICES AND SALES OF DEVELOPED PRODUCTS | (8,380 | ) | 33,132 | (35,409 | ) | 27,902 | ||||||||||
| OTHER OPERATING EXPENSES: | ||||||||||||||||
| Advertising expenses | 221,222 | - | 465,822 | - | ||||||||||||
| Compensation and related benefits | 2,100,178 | 487,452 | 4,200,333 | 1,026,266 | ||||||||||||
| Professional fees | 792,486 | 593,025 | 2,260,712 | 1,164,797 | ||||||||||||
| Research and development expenses | 949,711 | 263 | 1,102,171 | 263 | ||||||||||||
| Other general and administrative | 360,047 | 265,858 | 869,926 | 551,110 | ||||||||||||
| Total Other Operating Expenses | 4,423,644 | 1,346,598 | 8,898,964 | 2,742,436 | ||||||||||||
| LOSS FROM OPERATIONS | (4,343,752 | ) | (1,213,254 | ) | (8,809,065 | ) | (2,527,973 | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest income | 433 | 1,300 | 1,201 | 1,708 | ||||||||||||
| Interest expense | (8,822 | ) | (24,932 | ) | (34,519 | ) | (261,918 | ) | ||||||||
| Interest expense - related party | (12,639 | ) | - | (14,583 | ) | - | ||||||||||
| Change in fair value of warrants liability | 461,493 | - | 461,493 | - | ||||||||||||
| Financing expense | (525,418 | ) | (525,418 | ) | ||||||||||||
| Loss from equity-method investment | (10,344 | ) | - | (23,087 | ) | - | ||||||||||
| Foreign currency transaction loss | - | (106,929 | ) | - | (106,929 | ) | ||||||||||
| Other income | 226 | - | 226 | 328 | ||||||||||||
| Total Other Expense, net | (95,071 | ) | (130,561 | ) | (134,687 | ) | (366,811 | ) | ||||||||
| LOSS BEFORE INCOME TAXES | (4,438,823 | ) | (1,343,815 | ) | (8,943,752 | ) | (2,894,784 | ) | ||||||||
| INCOME TAXES | - | - | - | - | ||||||||||||
| NET LOSS | $ | (4,438,823 | ) | $ | (1,343,815 | ) | $ | (8,943,752 | ) | $ | (2,894,784 | ) | ||||
| LESS: NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST | (81,599 | ) | (49,421 | ) | (180,712 | ) | (118,811 | ) | ||||||||
| NET LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS | $ | (4,357,224 | ) | $ | (1,294,394 | ) | $ | (8,763,040 | ) | $ | (2,775,973 | ) | ||||
| COMPREHENSIVE LOSS: | ||||||||||||||||
| NET LOSS | (4,438,823 | ) | (1,343,815 | ) | (8,943,752 | ) | (2,894,784 | ) | ||||||||
| OTHER COMPREHENSIVE INCOME | ||||||||||||||||
| Unrealized foreign currency translation gain (loss) | (34,103 | ) | (96,207 | ) | 9,379 | (43,369 | ) | |||||||||
| COMPREHENSIVE LOSS | $ | (4,472,926 | ) | $ | (1,440,022 | ) | $ | (8,934,373 | ) | $ | (2,938,153 | ) | ||||
| LESS: COMPREHENSIVE GAIN (LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTEREST | (79,699 | ) | (49,540 | ) | (180,010 | ) | (118,770 | ) | ||||||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS | $ | (4,393,227 | ) | $ | (1,390,482 | ) | $ | (8,754,363 | ) | $ | (2,819,383 | ) | ||||
| NET LOSS PER COMMON SHARE ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS: | ||||||||||||||||
| Basic and diluted | $ | (0.06 | ) | $ | (0.02 | ) | $ | (0.12 | ) | $ | (0.04 | ) | ||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic and diluted | 75,183,354 | 71,979,678 | 74,437,336 | 71,122,356 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Six Months Ended June 30, 2018 and 2019
| Avalon GloboCare Corp. Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Treasury Stock | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||
| Number of | Number of | Additional Paid-in | Number of | Accumulated | Statutory | Other Comprehensive | Non-controlling | Total | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Reserve | Loss | Interest | Equity | |||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | - | - | 70,278,622 | $ | 7,028 | $ | 11,490,285 | - | $ | - | $ | (3,517,654 | ) | $ | 6,578 | $ | (91,994 | ) | $ | (585,394 | ) | $ | 7,308,849 | |||||||||||||||||||||||||
| Treasury stock purchase | - | - | - | - | - | (520,000 | ) | (522,500 | ) | - | - | - | - | (522,500 | ) | |||||||||||||||||||||||||||||||||
| Stock-based compensation and service fees | - | - | - | - | 526,348 | - | - | - | - | - | - | 526,348 | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | 52,678 | 160 | 52,838 | ||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2018 | - | - | - | - | - | - | - | (1,481,579 | ) | - | - | (69,390 | ) | (1,550,969 | ) | |||||||||||||||||||||||||||||||||
| Balance, March 31, 2018 | - | - | 70,278,622 | $ | 7,028 | $ | 12,016,633 | (520,000 | ) | $ | (522,500 | ) | $ | (4,999,233 | ) | $ | 6,578 | $ | (39,316 | ) | $ | (654,624 | ) | $ | 5,814,566 | |||||||||||||||||||||||
| Common shares issued in equity raise, net of fees associated with equity raise | - | - | 3,107,000 | 311 | 4,529,984 | - | - | - | - | - | - | 4,530,295 | ||||||||||||||||||||||||||||||||||||
| Common shares issued for services | - | - | 175,000 | 17 | 466,983 | - | - | - | - | - | - | 467,000 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 1,021,173 | - | - | - | - | - | - | 1,021,173 | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | (96,088 | ) | (119 | ) | (96,207 | ) | |||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2018 | - | - | - | - | - | - | - | (1,294,394 | ) | - | - | (49,421 | ) | (1,343,815 | ) | |||||||||||||||||||||||||||||||||
| Balance, June 30, 2018 | - | - | 73,560,622 | $ | 7,356 | $ | 18,034,773 | (520,000 | ) | $ | (522,500 | ) | $ | (6,293,627 | ) | $ | 6,578 | $ | (135,404 | ) | $ | (704,164 | ) | $ | 10,393,012 | |||||||||||||||||||||||
| Balance, December 31, 2018 | - | $ | - | 73,830,751 | $ | 7,383 | $ | 24,153,378 | (520,000 | ) | $ | (522,500 | ) | $ | (11,291,776 | ) | $ | 6,578 | $ | (236,860 | ) | $ | (862,200 | ) | $ | 11,254,003 | ||||||||||||||||||||||
| Issuance of common stock upon cashless exercise of stock warrants | - | - | 350,856 | 35 | (35 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Issuance of common stock upon cashlessexcercise of options | - | - | 158,932 | 16 | (16 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 2,272,747 | - | - | - | - | - | - | 2,272,747 | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | 44,680 | (1,198 | ) | 43,482 | |||||||||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2019 | - | - | - | - | - | - | - | (4,405,816 | ) | - | - | (99,113 | ) | (4,504,929 | ) | |||||||||||||||||||||||||||||||||
| Balance, March 31, 2019 | - | $ | - | 74,340,539 | $ | 7,434 | $ | 26,426,074 | (520,000 | ) | $ | (522,500 | ) | $ | (15,697,592 | ) | $ | 6,578 | $ | (192,180 | ) | $ | (962,511 | ) | $ | 9,065,303 | ||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 1,524,139 | - | - | - | - | - | - | 1,524,139 | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for service | - | - | 120,812 | 13 | 313,788 | - | - | - | - | - | - | 313,801 | ||||||||||||||||||||||||||||||||||||
| S-3 financing | - | - | 1,714,288 | 171 | 2,111,710 | - | - | - | - | - | - | 2,111,881 | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | (36,003 | ) | 1,900 | (34,103 | ) | ||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2019 | - | - | - | - | - | - | - | (4,357,224 | ) | - | - | (81,599 | ) | (4,438,823 | ) | |||||||||||||||||||||||||||||||||
| Balance, June 30, 2019 | - | $ | - | 76,175,639 | $ | 7,618 | $ | 30,375,711 | (520,000 | ) | $ | (522,500 | ) | $ | (20,054,816 | ) | $ | 6,578 | $ | (228,183 | ) | $ | (1,042,210 | ) | $ | 8,542,198 | ||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Six Months Ended | For the Six Months Ended | |||||||
| June 30, 2019 | June 30, 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (8,943,752 | ) | $ | (2,894,784 | ) | ||
| Adjustments to reconcile net loss from operations to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 284,494 | 247,975 | ||||||
| Stock-based compensation and service expense | 4,717,907 | 1,082,923 | ||||||
| Loss on equity method investment | 23,087 | - | ||||||
| Changes in warrants derivative liabilities | (461,493 | ) | - | |||||
| Allocation of financing expense | 525,418 | - | ||||||
| Chang in operating assets and liabilities: | ||||||||
| Accounts receivable | (92,113 | ) | (67,542 | ) | ||||
| Accounts receivable-related parties | - | (150,516 | ) | |||||
| Tenants receivable | 12,980 | (58 | ) | |||||
| Inventory | (74 | ) | (19,892 | ) | ||||
| Prepaid expenses - related parties | 34,629 | - | ||||||
| Prepaid expenses and other current assets | 379,070 | (153,785 | ) | |||||
| Security deposit | 100,000 | (308,694 | ) | |||||
| Accounts payable | 41,286 | 1,740 | ||||||
| Advance from customer - related party | (15,030 | ) | - | |||||
| Accrued liabilities and other payables | (472,671 | ) | 176,584 | |||||
| Accrued liabilities and other payables - related parties | 3,633 | 9,811 | ||||||
| Deferred rental income | (350 | ) | (1,587 | ) | ||||
| Interest payable | (75,342 | ) | (113,179 | ) | ||||
| Interest payable - related party | 14,583 | - | ||||||
| VAT and other taxes payable | 6,143 | 9,850 | ||||||
| Tenants’ security deposit | (2,663 | ) | (18,888 | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | (3,920,258 | ) | (2,200,042 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (140,400 | ) | (10,192 | ) | ||||
| Prepayment for purchase of long-term assets | - | (22,606 | ) | |||||
| Improvement of commercial real estate | (10,588 | ) | (165,155 | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | (150,988 | ) | (197,953 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds received from note payable - related party | 1,000,000 | - | ||||||
| Refund deposit in connection with Share Subscription Agreement- | - | (1,000,000 | ) | |||||
| Proceeds received from equity offering | 6,000,008 | 5,437,250 | ||||||
| Disbursements for equity offering costs | (896,304 | ) | (380,607 | ) | ||||
| Repayment of loan payable | (1,000,000 | ) | (500,000 | ) | ||||
| Repurchase of common stock | - | (522,500 | ) | |||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 5,103,704 | 3,034,143 | ||||||
| EFFECT OF EXCHANGE RATE ON CASH | 116,559 | (19,865 | ) | |||||
| NET INCREASE IN CASH | 1,149,017 | 616,283 | ||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH - beginning of period | 2,252,287 | 3,027,033 | ||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH - end of period | $ | 3,401,304 | $ | 3,643,316 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | 1,039 | $ | 375,096 | ||||
| Income taxes | $ | - | $ | - | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Property and equipment acquired on credit as payable | $ | 25,896 | $ | - | ||||
| Acquisition of equipment by decreasing prepayment for long-term assets | $ | - | $ | 109,889 | ||||
| Common stock issued for future services | $ | - | $ | 405,250 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 1 –ORGANIZATION AND NATURE OF OPERATIONS
Avalon GloboCare Corp. (f/k/a Global Technologies Corp.) (the “Company” or “AVCO”) is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on July 28, 2014. On October 18, 2016, the Company changed its name to Avalon GloboCare Corp. and completed a reverse split its shares of common stock at a ratio of 1:4. On October 19, 2016, the Company entered into and closed a Share Exchange Agreement with the shareholders of Avalon Healthcare System, Inc., a Delaware corporation (“AHS”), each of which are accredited investors (“AHS Shareholders”) pursuant to which we acquired 100% of the outstanding securities of AHS in exchange for 50,000,000 shares of our common stock (the “AHS Acquisition”). AHS was incorporated on May 18, 2015 under the laws of the State of Delaware. As a result of such acquisition, the Company’s operations now are focused on integrating and managing global healthcare services and resources, as well as empowering high-impact biomedical innovations and technologies to accelerate their clinical applications. Operating through two major platforms, namely “Avalon Cell”,We are dedicated to advancing cell-based technologies and “Avalon Rehab”, our “technology + service”therapeutics, as well as empowering high-impact biomedical innovations to accelerate their clinical applications. Our ecosystem covers the areas of regenerative medicine, cell-based immunotherapy, exosome technology as well as fertility(including liquid biopsy and rehabilitation medicine.regenerative therapeutics) and cellular immunotherapy. We plan to integrate thesetechnologies and services through joint venturesventure and acquisitionssubsidiary structures that bring shareholder value both in the short term, through operational entities as part of Avalon Rehab and in the long term, through biomedical innovationsinnovation development, such as partour recent joint venture for the advancement of Avalon Cell.exosome isolation systems and related products. AHS owns 100% of the capital stock of Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”), which is a wholly foreign-owned enterprise organized under the laws of the People’s Republic of China (“PRC”). Avalon Shanghai was incorporated on April 29, 2016 and is engaged in medical related consulting services for customers.
For accounting purposes, AHS was the surviving entity. The transaction was accounted for as a recapitalization of AHS pursuant to which AHS was treated as the accounting acquirer, surviving and continuing entity although the Company is the legal acquirer. The Company did not recognize goodwill or any intangible assets in connection with this transaction. Accordingly, the Company’s historical financial statements are those of AHS and its wholly-owned subsidiary, Avalon Shanghai immediately following the consummation of this reverse merger transaction.
On January 23, 2017, the Company incorporated Avalon (BVI) Ltd,Ltd., a British Virgin Island company. There was no activity for the subsidiary since its incorporation through SeptemberJune 30, 2017.2019. Avalon (BVI) Ltd. is dormant and is in process of being dissolved.
On February 7, 2017, the Company formed Avalon RT 9 Properties, LLC (“Avalon RT 9”), a New Jersey limited liability company. On May 5, 2017, Avalon RT 9 purchased a real property located in Township of Freehold, County of Monmouth, State of New Jersey, having a street address of 4400 Route 9S,9 South, Freehold, NJ 07728. This property was purchased to serve as the Company’s world-wide headquarters for all corporate administration and operation. In addition, the property generates rental income. Avalon RT 9 owns this office building. Currently, Avalon RT 9’s business consists of the ownership and operation of the income-producing real estate property in New Jersey. Avalon RT 9 owns an office building in New Jersey.
On July 31, 2017, the Company formed GenExosome Technologies Inc. (“GenExosome”) in Nevada. Nevada.
On October 25, 2017, GenExosome and the Company entered into a Securities Purchase Agreement pursuant to which the Company acquired 600 shares of GenExosome in consideration of $1,326,087 in cash and 500,000 shares of common stock of the Company.
On October 25, 2017, GenExosome entered into and closed an Asset Purchase Agreement with Yu Zhou, MD, PhD, pursuant to which the Company acquired all assets, including all intellectual property, held by Dr. Zhou pertaining to the business of researching, developing and commercializing exosome technologies including, but not limited to, patent application number CN 2016 1 0675107.5 (application of an Exosomal MicroRNA in plasma as biomaker to diagnosis liver cancer), patent application number CN 2016 1 0675110.7 (clinical application of circulating exosome carried miRNA-33b in the diagnosis of liver cancer), patent application number CN 2017 1 0330847.X (saliva exosome based methods and composition for the diagnosis, staging and prognosis of oral cancer) and patent application number CN 2017 1 0330835.7 (a novel exosome-based therapeutics against proliferative oral diseases). In consideration of the assets, GenExosome agreed to pay Dr. Zhou $876,087 in cash, transfered 500,000 shares of common stock of the Company to Dr. Zhou and issued Dr. Zhou 400 shares of common stock of GenExosome.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS (continued)
As a result of the above transactions, effective October 25, 2017, the Company holds 60% of the total equity ownershipGenExosome and Dr. Zhou holds 40% of GenExosome. GenExosome is engaged in developing proprietary diagnostic and therapeutic products leveraging its exosome technology.
On October 25, 2017, GenExosome entered into and closed a Stock Purchase Agreement with Beijing Jieteng (GenExosome) Biotech Co. Ltd., a corporation incorporated in the People’s Republic of China on August 7, 2015 (“Beijing GenExosome”) and Dr. Zhou, the sole shareholder of Beijing GenExosome, pursuant to which GenExosome acquired all of the issued and outstanding securities of Beijing GenExosome in consideration of a cash payment in the amount of $450,000.
Beijing GenExosome is engaged in the development of exosome technology to improve diagnosis and management of diseases. Exosomes are tiny, subcellular, membrane-bound vesicles in diameter of 30-150 nm that are released by almost all cell types and that can carry membrane and cellular proteins, as well as genetic materials that are representative of the cell of origin. Profiling various bio-molecules in exosomes may serve as useful biomarkers for a wide variety of diseases. Beijing GenExosome is seeking to decode proteomic and genomic alterations underlying a wide-range of pathologies, thus allowing for the introduction of novel non-invasive “liquid biopsies”. Its mission is focused toward diagnostic advancements in the fields of oncology, infectious diseases and fibrotic diseases, and discovery of disease-specific exosomes to provide disease origin insight necessary to enable personalized clinical management.
On July 18, 2018, the Company formed a wholly owned subsidiary, Avactis Biosciences Inc., a Nevada corporation, which will focus on accelerating commercial activities related to cellular therapies, including regenerative medicine with stem/progenitor cells as well as cellular immunotherapy including CAR-T, CAR-NK, TCR-T and others. The subsidiary is designed to integrate and optimize our global scientific and clinical resources to further advance the use of cellular therapies to treat certain cancers. There werewas no operationsactivity for GenExosomethe subsidiary since its incorporation through SeptemberJune 30, 2017.2019.
On June 13, 2019, the Company formed a wholly owned subsidiary, International Exosome Association LLC, a Delaware company. There was no activity for the subsidiary since its incorporation through June 30, 2019.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS (continued)
Details of the Company’s subsidiaries which are included in these consolidated financial statements as of June 30, 2019 are as follows:
| Name of Subsidiaries | Place and date of Incorporation | Percentage of Ownership | Principal Activities | |||
Avalon Healthcare System, Inc. (“AHS”) | Delaware May 18, 2015 | 100% held by AVCO | Provides medical related consulting services and developing Avalon Cell and Avalon Rehab in United States of America (“USA”) | |||
Avalon (BVI) Ltd. (“Avalon BVI”) | British Virgin Island January 23, 2017 | 100% held by AVCO | Dormant, is in process of being dissolved | |||
Avalon RT 9 Properties LLC (“Avalon RT 9”) | New Jersey February 7, 2017 | 100% held by AVCO | Owns and operates an income-producing real property and holds and manages the corporate headquarters | |||
Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”) | PRC April 29, 2016 | 100% held by AHS | Provides medical related consulting services and developing Avalon Cell and Avalon Rehab in China | |||
GenExosome Technologies Inc. (“GenExosome”) | Nevada July 31, 2017 | 60% held by AVCO | Develops proprietary diagnostic and therapeutic products leveraging exosome technology and markets | |||
Beijing Jieteng (GenExosome) Biotech Co., Ltd. (“Beijing GenExosome”) | PRC August 7, 2015 | 100% held by GenExosome | Provides development services for hospitals and other customers and sells developed items to hospitals and other customers in China | |||
Avactis Biosciences Inc. (“Avactis”) | Nevada July 18, 2018 | 100% held by AVCO | Integrate and optimize global scientific and clinical resources to further advance cellular therapies, including regenerative medicine with stem/progenitor cells as well as cellular immunotherapy including CAR-T, CAR-NK, TCR-T and others to treat certain cancers | |||
| International Exosome Association LLC | Delaware June 13, 2019 | 100% held by AVCO | Provides development services for hospitals and other customers and sells developed items in USA |
7
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 –BASIS OF PRESENTATION AND GOING CONCERN
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 unaudited condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.consolidation.
Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162018 filed with the Securities and Exchange Commission on March 28, 2017.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 201726, 2019.
NOTE 2 –BASIS OF PRESENTATION AND GOING CONCERN (continued)Going Concern
Going concern
TheCompany currently has limited operations. TheCurrently, the Company’s operations now are focused onon: (i) real estate property ownership and operation in the United States; (ii) providing outsourced, customized international healthcare services to the rapidly changing health care industry primarily focused in the People’s Republic of ChinaChina; (iii) performing development services for hospitals and real estate property ownershipother customers and operation in the United States.sales of developed products to hospitals and other customers. The Company is also pursuing the provision of healthcare services in the United States. These unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business.
As reflected in the accompanying unaudited condensed consolidated financial statements, the Company had working capital deficit (total current liabilities in excess of total current assets) and an accumulated deficit of $5,294,818$20,054,816 at June 30, 2019, and $1,743,939 at September 30, 2017, respectively, and had ahas incurred recurring net loss and netnegative cash flow used infrom operating activities of $1,690,570$8,943,752 and $747,056$3,920,258 for the ninesix months ended SeptemberJune 30, 2017,2019, respectively. The Company has a limited operating history and its continued growth is dependent upon the continuation of providing medical consulting services to its only threefour clients who are related parties and generating rental revenue from its income-producing real estate property in New Jersey;Jersey and performing development services for hospitals and other customers and sales of developed products to hospitals and other customers; hence generating revenues, and obtaining additional financing to fund future obligations and pay liabilities arising from normal business operations. In addition, the current cash balance cannot be projected to cover the operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital, implement its business plan, and generate significant revenues. There are no assurances that the Company will be successful in its efforts to generate significant revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. The Company plans on raising capital through the sale of equity or debt instruments to implement its business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to the Company on satisfactory terms and conditions, if any.
The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimatesEstimates
The preparation of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States of America 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. Actual results could differ from these estimates. Significant estimates during the ninethree and six months ended SeptemberJune 30, 20172019 and 20162018 include the allowance for doubtful accounts, reserve for obsolete inventory, the useful life of property plant,and equipment and investment in real estate and intangible assets, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets accruals for taxes due,and the associated valuation allowances, and valuation of options.stock-based compensation.
Fair valueValue of financial instrumentsFinancial Instruments and fair value measurementsFair Value Measurements
The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
| ● | Level1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. |
| ● | Level2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. |
| ● | Level3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments and fair value measurements (continued)
The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, accounts receivable, – related parties, tenants receivable, security deposit, inventory, prepaid expenses and other current assets, accounts payable, accrued liabilities and other payables, accrued liabilities and other payables – related parties, deferred rental income, loan payable, income taxesinterest payable, interest payable – related party, Value Added Tax (“VAT”) and other taxes payable, tenants’ security deposit, and due to related parties, and refundable deposit,party, approximate their fair market value based on the short-term maturity of these instruments. The Company did not have any non-financialinstruments.
9
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments and Fair Value Measurements (continued)
At June 30, 2019 and December 31, 2018, intangible assets or liabilities that arewere measured at fair value on a recurringnonrecurring basis as of September 30, 2017 and December 31, 2016.shown in the following tables.
| Quoted Price in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance at June 30, 2019 | Impairment Loss | ||||||||||||||||
| Patents and other technologies | $ | - | $ | - | $ | 1,091,903 | $ | 1,091,903 | $ | - | ||||||||||
| Quoted Price in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance at December 31, 2018 | Impairment Loss | ||||||||||||||||
| Patents and other technologies | $ | - | $ | - | $ | 1,255,689 | $ | 1,255,689 | $ | - | ||||||||||
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 instrumentsCash.
Cash
Cash consists of cash on hand and cash in banks. The Company maintains cash with various financial institutions in the PRC and United States. At SeptemberJune 30, 20172019 and December 31, 2016,2018, cash balances in PRC are $128,301$640,253 and $2,525,630, respectively,$1,216,485, respectively. Since March 31, 2015, balances at financial institutions and state-owned banks within the PRC are uninsured.covered by insurance up to RMB 500,000 (USD 73,678) per bank. At SeptemberJune 30, 20172019 and December 31, 2016,2018, cash balances in United States are $228,521$2,761,051 and $360,559,$1,035,802, respectively. The Company has not experienced any losses in bank accounts and believes it is not exposed to any risks on its cash in bank accounts.
Concentrations of credit riskCredit Risk
Currently, a portion of the Company’s operations are carried out in PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.things.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, and trade accounts receivable and tenants receivable. A portion of the Company’s cash is maintained with state-owned banks within the PRC, and none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A portion of the Company’s sales are credit sales which is to the customer whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivablesreceivable and tenants receivable is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.risk.
At SeptemberJune 30, 20172019 and December 31, 2016,2018, the Company’s cash balances by geographic area were as follows:
| Country: | September 30, 2017 | December 31, 2016 | ||||||||||||||
| United States | $ | 228,521 | 64.0 | % | $ | 360,559 | 12.5 | % | ||||||||
| China | 128,301 | 36.0 | % | 2,525,630 | 87.5 | % | ||||||||||
| Total cash | $ | 356,822 | 100.0 | % | $ | 2,886,189 | 100.0 | % | ||||||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
| Country: | June 30, 2019 | December 31, 2018 | ||||||||||||||
| United States | $ | 2,761,051 | 81.2 | % | $ | 1,035,802 | 46.0 | % | ||||||||
| China | 640,253 | 18.8 | % | 1,216,485 | 54.0 | % | ||||||||||
| Total cash | $ | 3,401,304 | 100.0 | % | $ | 2,252,287 | 100.0 | % | ||||||||
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable – related parties and allowance for doubtful accounts
Accounts receivable – related parties are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.
Management believes that the accounts receivable are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its accounts receivable – related parties at SeptemberJune 30, 20172019 and December 31, 2016.2018. The Company historically has not experienced uncollectible accounts from customers granted with credit sales.
Tenants receivableReceivable and allowanceAllowance for doubtful accountsDoubtful Accounts
Tenants receivable are presented net of an allowance for doubtful accounts. Tenants receivable balance consistsconsist of base rents, tenant reimbursements and receivables arising from straight-lining of rents primarily represent amounts accrued and unpaid from tenants in accordance with the terms of the respective leases, subject to the Company’s revenue recognition policy. An allowance for the uncollectible portion of tenant receivable is determined based upon an analysis of the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in Freehold, New Jersey in which the property is located.
Management believes that the tenants receivable isare fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its tenants receivable at SeptemberJune 30, 2017.2019 and December 31, 2018.
Inventory
Inventory is stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) method. A reserve is established when management determines that certain inventory may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record a write down in inventory for the difference between the cost and the lower of cost or estimated net realizable value. The reserve and write down are recorded based on estimates. The Company determined that certain raw material and finished goods were impaired and has written off a total of $10,074 in the six months ended June 30, 2019, as compared to none in the six months ended June 30, 2018.
Property and Equipment
Property plant and equipment
Property, plant and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the yearperiod of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Investment in real estate and depreciationAVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment in Real Estate and Depreciation
Investment in real estate is carried at cost less accumulated depreciation.depreciation and consists of building and improvement. The Company depreciates real estate building and improvement on a straight-line basis over estimated useful life. The Company capitalizes all capitalExpenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditure for improvements, associated withrenovations, and replacements improvements or major repairs toof real property that extend its useful lifeestate asset is capitalized and depreciate them using the straight-line methoddepreciated over its estimated useful life.life if the expenditure qualifies as betterment. Real estate depreciation expense was $20,066$39,962 and $53,009$31,806 for the three and nine months ended SeptemberJune 30, 2017,2019 and 2018, respectively.Real estate depreciation expense was $79,923 and $63,611 for the six months ended June 30, 2019 and 2018, respectively.
The Company charges maintenance and repair costs that do not extend an asset’s useful life to expense as incurredIntangible Assets.
Intangible assets consist of patents and other technologies. Patents and other technologies are being amortized on a straight-line method over the estimated useful life of 5 years.
Investment in Unconsolidated Company – Epicon Biotech Co., Ltd.
The Company uses the equity method of accounting for its investment in, and earning or loss of, company that it does not control but over which it does exert significant influence. The Company considers whether the fair value of its equity method investment has declined below its carrying value whenever adverse events or changes in circumstances indicate that recorded value may not be recoverable. If the Company considers any decline to be other than temporary (based on various factors, including historical financial results and the overall health of the investee), then a write-down would be recorded to estimated fair value. See Note 9 for discussion of equity method investment.
Impairment of long-lived assetsLong-lived Assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not record any impairment charge for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.
Deferred rental income2018 as there was no impairment indicator noted as of the filing date of this report.
Deferred Rental Income
Deferred rental income represents rental income collected but not earned as of the reportreporting date. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. As of SeptemberJune 30, 20172019 and December 31, 2016,2018, deferred rental income totaled $19,914$13,786 and $0, respectively.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Value added tax$14,136, respectively.
The Company isValue Added Tax
Avalon Shanghai and Beijing GenExosome are subject to a value added tax (“VAT”VAT”) of 6% for providing medical related consulting service.services and performing development services and sales of developed products. The amount ofVATliability is determined by applying the applicable tax raterates to the invoiced amount of medical related consulting services provided and the invoiced amount of development services provided and sales of developed products (output VAT) less VAT) lessVATpaid on purchases made with the relevant supporting invoices (inputVAT) VAT). The Company reports revenue net of PRC’s value added tax for all the periods presented in the unaudited condensed consolidated statements of operations and comprehensive (loss) income.operations.
Revenue recognitionAVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PursuantNOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
Effective January 1, 2018, the Company began recognizing revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. The impact of adopting the new revenue standard was not material to the guidanceCompany’s consolidated financial statements and there was no adjustment to beginning accumulated deficit on January 1, 2018. The core principle of ASC Topic 605,this new revenue standard is that a company should recognize revenue to depict the Company recognizes revenue when persuasive evidencetransfer of an arrangement exists, delivery has occurredpromised goods or services have been provided,to customers in an amount that reflects the purchaseconsideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
| ● | Step 1: Identify the contract with the customer |
| ● | Step 2: Identify the performance obligations in the contract |
| ● | Step 3: Determine the transaction price |
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract |
| ● | Step 5: Recognize revenue when the company satisfies a performance obligation |
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised goods or service that is fixeddistinct. A performance obligation meets ASC 606’s definition of a “distinct” goods or determinable and collectabilityservice (or bundle of goods or services) if both of the following criteria are met:
| ● | The customer can benefit from the goods or service either on its own or together with other resources that are readily available to the customer (i.e., the goods or service is capable of being distinct). |
| ● | The entity’s promise to transfer the goods or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the goods or service is distinct within the context of the contract). |
If a goods or service is reasonably assured.not distinct, the goods or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The Company provides medical related consultingtransaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to its clients.a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The Companyconsideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration is paid for its services by its clients pursuantincluded in the transaction price only to the termsextent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the written consulting agreements. Each contract calls foruncertainty associated with the variable consideration is subsequently resolved.
The transaction price is allocated to each performance obligation on a fixed payment in a fixed period of time.relative standalone selling price basis. The Company recognizes revenue by providing medical related consulting services under written service contracts with its customers. Revenue relatedtransaction price allocated to its service offeringseach performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as the services are performed and amounts are earned, using the straight-line method over the term of the related services agreement. Prepayments, if any, received from customers prior to the services being performed are recorded as advance from customers. In these cases, when the services are performed, the amount recorded as advance from customers is recognized as revenue.appropriate.
The Company leases commercial property under operating leases with termsTypes of generally two years or more. revenue:
| ● | Rental revenue from leasing commercial property under operating leases with terms of generally three years or more. |
| ● | Service fees under consulting agreements with related parties to provide medical related consulting services to its clients. The Company is paid for its services by its clients pursuant to the terms of the written consulting agreements. Each contract calls for a fixed payment. |
| ● | Service fees under agreements to perform development services for hospitals and other customers. The Company does not perform contracts that are contingent upon successful results. |
| ● | Sales of developed products to hospitals and other customers. |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition criteria:
| ● | The Company recognizes rental revenue from its commercial leases on a straight-line basis over the life of the lease including rent holidays, if any. Straight-line rent receivable consists of the difference between the tenants’ rents calculated on a straight-line basis from the date of lease commencement over the remaining terms of the related leases and the tenants’ actual rents due under the lease agreements and is included in tenants receivable in the accompanying consolidated balance sheets. Revenues associated with operating expense recoveries are recognized in the period in which the expenses are incurred. |
| ● | The Company recognizes revenue by providing medical related consulting services under written service contracts with its customers. Revenue related to its service offerings is recognized as the services are performed. |
| ● | Revenue from development services performed under written contracts is recognized as services are provided. |
| ● | Revenue from sales of developed items to hospitals and other customers is recognized when items are shipped to customers and titles are transferred. |
The Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers.
Office Lease
When a lease contains “rent holidays”, the Company records rental expense on a straight-line basis over the lifeterm of the lease including rent holidays, if any. Straight-line rent receivable consists ofand the difference between the tenants’ rents calculated on a straight-line basis from the date of lease commencement over the remaining terms of the related leasesaverage rental amount charged to expense and the tenants’ actual rents dueamount payable under the lease agreements and is included in tenants receivablerecorded as prepaid expenses in the accompanying consolidated balance sheets. Revenues associated with operatingThe Company begins recording rent expense recoveries are recognized inon the period in which the expenses are incurredlease possession date.
Consulting services costs
Costs of consulting services includes the cost of internal labor and related benefits, travel expenses related to consulting services, subcontractor costs, other related consulting costs, and other overhead costs. Subcontractor costs were costs related to consulting services incurred by our subcontractor, such as medical professional’s compensation and travel costs.
Real estate operating expensesProperty Operating Expenses
Real property operating expenses consist of property management fees, property insurance, real estate taxes, depreciation, repairs and maintenance fees, utilities and other expenses related to the Company’s rental properties.
Stock-based compensationMedical Related Consulting Services Costs
Stock based compensation is accounted for based on the requirementsCosts of the Share-Based Payment topic of Accounting Standards Codification (“ASC”) 718 which requires recognition in the financial statements ofmedical related consulting services includes the cost of employeeinternal labor and directorrelated benefits, travel expenses related to consulting services, receivedsubcontractor costs, other related consulting costs, and other overhead costs. Subcontractor costs were costs related to medical related consulting services incurred by our subcontractor, such as medical professional’s compensation and travel costs.
Development Services and Sales of Developed Products Costs
Costs of development services and sales of developed items includes inventory costs, materials and supplies costs, depreciation, internal labor and related benefits, other overhead costs and shipping and handling costs incurred.
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and are included in exchangecost of sales. For the three months ended June 30, 2019 and 2018, shipping and handling costs amounted to $0 and $0, respectively. For the six months ended June 30, 2019 and 2018, shipping and handling costs amounted to $0 and $25, respectively.
Research and Development
Expenditures for an awardresearch and product development costs are expensed as incurred. The Company incurred research and development expense in the amount of equity instruments over the period the employee or director is required to perform the services in exchange$949,711 and $263 for the award.three months ended June 30, 2019 and 2018, respectively. The Accounting Standards Codification also requires measurementCompany incurred research and development expense in the amount of $1,102,171 and $263 for the cost of employeesix months ended June 30, 2019 and director services received in exchange for an award based on the grant-date fair value of the award.2018, respectively.
PursuantAdvertising Costs
All costs related to ASC Topic 505-50, for share-based paymentsadvertising are expensed as incurred. For the three and six months ended June 30, 2019, advertising costs amounted to consultants$221,222 and other third-parties, compensation$465,822, respectively. We did not incur any advertising expense is determined atduring the “measurement date.” The expense is recognized over the period of services or the vesting period, whichever is applicable. Until the measurement date is reached, the total amount of compensation expense remains uncertain.three and six months ended June 30, 2018.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Research and development
Expenditures for research and product development costs are expensed as incurred. The Company did not incur any research and development costs during the three and nine months ended September 30, 2017 and 2016Stock-based Compensation.
AdvertisingThe Company accounts for its stock-based compensation awards in accordance with Accounting Standards Codification (“ASC”) Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees and non-employees including grants of stock options, to be recognized as expense in the statements of operations based on their grant date fair values. The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock.
The Company periodically issues common stock, warrants and common stock options to consultants for various services. Costs of these transactions are measured at the fair value of the service received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete.
All costs related to advertising are expensed as incurred. The Company did not incur any advertising expenses during the three and nine months ended September 30, 2017 and 2016Income Taxes.
Income taxes
The Company accounts for income taxes using the asset/liability method prescribed by ASC 740, “Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.date.
The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of SeptemberJune 30, 20172019 and December 31, 2016,2018, the Company had no significant uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Tax year that remains subject to examination is the years ended December 31, 20162018, 2017 and 2015.2016. The Company recognizes interest and penalties related to significant uncertain income tax positions in other expense. However, no such interest and penalties were recorded as of SeptemberJune 30, 20172019 and December 31, 2016.2018.
Foreign currency translationIn December 2017, the United States Government passed new tax legislation that, among other provisions, lowered the corporate tax rate from 35% to 21%. In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income the Company may have, the legislation affects the way the Company can use and carryforward net operating losses previously accumulated and results in a revaluation of deferred tax assets and liabilities recorded on the balance sheet. Given that current deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on the balance sheet. However, when the Company becomes profitable, the Company will receive a reduced benefit from such deferred tax assets.
Foreign Currency Translation
The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company, and its wholly-owned U.S. subsidiaries, Avalon Healthcare System Inc.,AHS, Avalon RT 9, Properties, LLC,GenExosome, and Avalon (BVI) Ltd.,Avactis, is the U.S. dollar and the functional currency of the Company’s wholly-owned PRC subsidiary, Avalon (Shanghai) Healthcare Technology Co., Ltd.,Shanghai and Beijing GenExosome, is the Chinese Renminbi (“RMB”). For the subsidiarysubsidiaries whose functional currency is the RMB, result of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income/loss. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurredincurred.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued).
All of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries. The Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
Asset and liability accounts at SeptemberJune 30, 20172019 and December 31, 20162018 were translated at 6.65366,8668 RMB to $1.00 and at 6.94486.8785 RMB to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rates. The average translation rates applied to the statements of operations for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 were 6.80716.7863 RMB and 6.579246.3701 RMB to $1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)Comprehensive Loss
Comprehensive (loss) income
Comprehensive (loss) incomeloss is comprised of net (loss) incomeloss and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive (loss) incomeloss for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 consisted of net (loss) incomeloss and unrealized gain (loss) from foreign currency translation adjustment.
Per share dataShare Data
ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.entity.
Basic net (loss) incomeloss per share are computed by dividing net (loss) incomeloss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net (loss) incomeloss per share is computed by dividing net (loss) incomeloss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common shares consist of the common shares issuable upon the exercise of common stock options and warrants (using the treasury stock method). Common stock equivalents are not included in the calculation of diluted net loss per share if their effect would be anti-dilutive. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact.
The following table presents a reconciliation of basic and diluted net (loss) incomeloss per share:share:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net (loss) income for basic and diluted net (loss) income per share of common stock | $ | (710,729 | ) | $ | 207,874 | $ | (1,690,570 | ) | $ | 102,403 | ||||||
| Weighted average common stock outstanding - basic and diluted | 64,628,622 | 50,000,000 | 63,958,292 | 50,000,000 | ||||||||||||
| Net (loss) income per common shares - basic and diluted | $ | (0.011 | ) | $ | 0.004 | $ | (0.026 | ) | $ | 0.002 | ||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Net loss available to Avalon GloboCare Corp. common shareholders for basic and diluted net loss per share of common stock | $ | (4,357,224 | ) | $ | (1,294,394 | ) | $ | (8,763,040 | ) | $ | (2,775,973 | ) | ||||
| Weighted average common stock outstanding - basic and diluted | 75,183,354 | 71,979,678 | 74,437,336 | 71,122,356 | ||||||||||||
| Net loss per common share attributable to Avalon GloboCare Corp. common shareholders - basic and diluted | $ | (0.06 | ) | $ | (0.02 | ) | $ | (0.12 | ) | $ | (0.04 | ) | ||||
ForThe following table summarizes the three and nine months ended September 30, 2017, stock options to purchase 484,448 shares of common stock have beensecurities that were excluded from the computation of diluted loss per share as theircalculation because the effect would be anti-dilutive.of including these potential shares was antidilutive:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Stock options | 5,070,000 | 2,610,000 | 5,070,000 | 2,610,000 | ||||||||||||
| Warrants | 1,714,288 | 578,891 | 1,714,288 | 578,891 | ||||||||||||
| Potentially dilutive securities | 6,784,288 | 3,188,891 | 6,784,288 | 3,188,891 | ||||||||||||
16
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Segment reportingNOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Business Acquisition
The Company accounts for business acquisition in accordance with ASC No. 805, Business Combinations. The assets acquired and liabilities assumed from the acquired business are recorded at fair value, with the residual of the purchase price recorded as goodwill. The result of operations of the acquired business is included in the Company’s operating result from the date of acquisition.
Non-controlling Interest
As of June 30, 2019, Dr. Yu Zhou, director and Co-Chief Executive Officer of GenExosome, who owned 40% of the equity interests of GenExosome, which is not under the Company’s control.
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. The Company has determined that it has twothree reportable business segments: real property operating segment, and medical related consulting services segment, and development services and sales of developed products segment. These reportable segments offer different types of service,services and products, have different types of revenue, and are managed separately as each requires different operating strategies and management expertise.
Related partiesParties
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all significant related party transactions.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017transactions.
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reclassification
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the previously reported financial position, results of operations and cash flows.
Reverse stock splitStock Split
TheCompany effected a one-for-four reverse stock split of its common stock on October 18, 2016. All share and per share information has been retroactively adjusted to reflect this reverse stock split..
Fiscal year endYear End
TheCompany has adopted a fiscal year end of December 31st.
Recent accounting pronouncementsAccounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842)“Leases”, (“ASU 2016-02”842”), which modifiedamended the existing accounting standards for lease accounting, for bothincluding requiring lessees to recognize most leases on their balance sheets and lessorsmaking targeted changes to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. This pronouncementlessor accounting. ASU 842 is effective for public companies during interim and annual reporting periods beginning after December 15, 2018, using a modified retrospectivewith early adoption method. The Company is currently evaluating the impact of adopting the new lease standard on its consolidated financial statements.
permitted. In August 2016,July 2018, the FASB issued ASU 2016-15, StatementNo. 2018-11, which permits entities to record the right-of-use asset and lease liability on the date of Cash Flowsadoption, with no requirement to recast comparative periods.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company adopted ASU 842 effective January 1, 2019 using the optional transition method of recognizing a cumulative-effect adjustment to the opening balance of accumulated deficit on January 1, 2019. Therefore, comparative financial information was not adjusted and continues to be reported under the prior lease accounting guidance in ASU 840. The Company elected the transition relief package of practical expedients, and as a result, the Company did not assess 1) whether existing or expired contracts contain embedded leases, 2) lease classification for any existing or expired leases, and 3) whether lease origination costs qualified as initial direct costs. The Company elected the short-term lease practical expedient by establishing an accounting policy to exclude leases with a term of 12 months or less, as well as the land easement practical expedient for maintaining its current accounting policy for existing or expired land easements.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 230)718): ClassificationImprovements to Nonemployee Share-Based Payment Accounting, to expand the scope of Certain Cash ReceiptsTopic 718 to include share-based payment transactions for acquiring goods and Cash Payments. Thisservices from nonemployees and supersedes the guidance in Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. Under ASU addresses2018-07, equity-classified nonemployee share-based payment awards are measured at the classificationgrant date fair value on the grant date. The probability of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. Thissatisfying performance conditions must be considered for equity-classified nonemployee share-based payment awards with such conditions. ASU 2018-07 is effective for fiscal years beginning after December 15, 2017,2018, with early adoption permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The objective of ASU 2018-13 is to improve the effectiveness of disclosures in the notes to the financial statements by removing, modifying, and adding certain fair value disclosure requirements to facilitate clear communication of the information required by generally accepted accounting principles. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted. An entity that elects early adoption must adopt allpermitted upon issuance of the amendments in the same period.this ASU. The Company is currently evaluating the potential impact it may have on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting. The guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. This guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements.this new guidance.
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 EXPENSES AND OTHERINVENTORY
At SeptemberJune 30, 20172019 and December 31, 2016, prepaid expenses and other2018, inventory consisted of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| Prepayment for acquisition of real property | $ | — | $ | 700,000 | ||||
| Other | 36,414 | 49,796 | ||||||
| $ | 36,414 | $ | 749,796 | |||||
| June 30, 2019 | December 31, 2018 | |||||||
| Raw material | $ | 12,553 | $ | 12,953 | ||||
| Finished goods | 448 | 41 | ||||||
| 13,001 | 12,994 | |||||||
| Less: reserve for obsolete inventory | - | - | ||||||
| $ | 13,001 | $ | 12,994 | |||||
NOTE 5 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
At June 30, 2019 and December 31, 2018, prepaid expenses and other current assets consisted of the following:
| June 30, 2019 | December 31, 2018 | |||||||
| Prepaid professional fees | $ | 279,433 | $ | 607,833 | ||||
| Prepaid research and development service fees | 3,609 | 300,000 | ||||||
| Prepaid insurance expense | 4,640 | 72,352 | ||||||
| Prepaid listing fee | 61,667 | - | ||||||
| Prepaid dues and subscriptions | 12,500 | 70,000 | ||||||
| Other | 58,624 | 96,290 | ||||||
| $ | 420,473 | $ | 1,146,475 | |||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 56 –PROPERTY PLANT AND EQUIPMENT
At SeptemberJune 30, 20172019 and December 31, 2016,2018, property plant and equipment consisted of the following:
| Useful life | September 30, 2017 | December 31, 2016 | Useful life | June 30, 2019 | December 31, 2018 | |||||||||||||||
| Office equipment | 3 – 10 Years | $ | 27,966 | $ | 320 | |||||||||||||||
| Laboratory equipment | 5 Years | $ | 422,976 | $ | 258,345 | |||||||||||||||
| Office equipment and furniture | 3 – 10 Years | 36,791 | 35,627 | |||||||||||||||||
| Leasehold improvement | 1.75 Years | 24,009 | — | Shorter of useful life or lease term | - | 24,446 | ||||||||||||||
| 51,975 | 320 | 459,767 | 318,418 | |||||||||||||||||
| Less: accumulated depreciation | (5,610 | ) | (25 | ) | (84,861 | ) | (68,863 | ) | ||||||||||||
| $ | 46,365 | $ | 295 | $ | 374,906 | $ | 249,555 | |||||||||||||
For the three and nine months ended SeptemberJune 30, 2017,2019 and 2018, depreciation expense of property and equipment amounted to $4,256$23,508 and $5,469,$10,897, respectively, of which, $502$818 and $502$819 was included in real property operating expenses, $17,130 and $3,754$5,864 was included in costs of development services and $4,967sales of developed products, and $5,560 and $4,214 was included in other operating expenses, respectively. respectively.
For the three and ninesix months ended SeptemberJune 30, 2016, the Company did not have any2019 and 2018, depreciation expense.expense of property and equipment amounted to $40,785 and $20,578, respectively, of which, $1,637 and $1,638 was included in real property operating expenses, $30,485 and $9,632 was included in costs of development services and sales of developed products, and $8,662 and $9,308 was included in other operating expenses, respectively.
NOTE 67 –INVESTMENT IN REAL ESTATE
At SeptemberJune 30, 20172019 and December 31, 2016,2018, investment in real estate consisted of the following:
| Useful life | September 30, 2017 | December 31, 2016 | Useful life | June 30, 2019 | December 31, 2018 | |||||||||||||||
| Commercial real property | 39 Years | $ | 7,708,571 | $ | — | |||||||||||||||
| Commercial real property building | 39 Years | $ | 7,708,571 | $ | 7,708,571 | |||||||||||||||
| Improvement | 12 Years | 402,094 | 391,506 | |||||||||||||||||
| 8,110,665 | 8,100,077 | |||||||||||||||||||
| Less: accumulated depreciation | (53,009 | ) | — | (300,116 | ) | (220,192 | ) | |||||||||||||
| $ | 7,655,562 | $ | — | $ | 7,810,549 | $ | 7,879,885 | |||||||||||||
For the three and nine months ended SeptemberJune 30, 2017,2019 and 2018, depreciation expense of this commercial real property amounted to $20,066$39,962 and $53,009, respectively,$31,806, which was included in real property operating expenses.
For the six months ended June 30, 2019 and 2018, depreciation expense of this commercial real property amounted to $79,923 and $63,611, which was included in real property operating expenses.
NOTE 8 – INTANGIBLE ASSETS
At June 30, 2019 and December 31, 2018, intangible assets consisted of the following:
| Useful Life | June 30, 2019 | December 31, 2018 | ||||||||
| Patents and other technologies | 5 Years | $ | 1,583,260 | $ | 1,583,260 | |||||
| Less: accumulated amortization | (491,357 | ) | (327,571 | ) | ||||||
| $ | 1,091,903 | $ | 1,255,689 | |||||||
For the three months ended June 30, 2019 and 2018, amortization expense amounted to $81,893. For the six months ended June 30, 2019 and 2018, amortization expense amounted to $163,786.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INTANGIBLE ASSETS (continued)
Amortization of intangible assets attributable to future periods is as follows:
| Year ending June 30: | Amortization amount | |||
| 2020 | $ | 327,571 | ||
| 2021 | 327,571 | |||
| 2022 | 327,571 | |||
| 2023 | 109,190 | |||
| $ | 1,091,903 | |||
NOTE 9 – EQUITY METHOD INVESTMENT
As of June 30, 2019 and December 31, 2018, equity method investment amounted to $363,002 and $385,162, respectively. The investment represents the Company’s subsidiary, Avalon Shanghai’s interest in Epicon Biotech Co., Ltd. (“Epicon”). Epicon was incorporated on August 14, 2018 in PRC. Avalon Shanghai and the other unrelated company, Jiangsu Unicorn Biological Technology Co., Ltd. (“Unicorn”), accounted for 40% and 60% of the total ownership, respectively. Epicon is focused on cell preparation, third party testing, biological sample repository for commercial and scientific research purposes and the clinical transformation of scientific achievements.
The Company treats the equity investment in the 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 incorporated-date fair values of the investee’s identifiable net assets over the cost of the investment (if any). Thereafter, the investment is adjusted for the post incorporation change in the Company’s share of the investee’s net assets and any impairment loss relating to the investment. For the three and six months ended June 30, 2019, the Company’s share of Epicon’s net loss was $10,344 and $23,087, respectively, which was included in loss from equity-method investment in the accompanying consolidated statements of operations and comprehensive loss.
The tables below present the summarized financial information, as provided to the Company by the investee, for the unconsolidated company:
| June 30, 2019 | December 31, 2018 | |||||||
| Current assets | $ | 48,033 | $ | 301,714 | ||||
| Noncurrent assets | 204,181 | 7,015 | ||||||
| Current liabilities | 38 | 38 | ||||||
| Noncurrent liabilities | - | - | ||||||
| Equity | 252,177 | 308,691 | ||||||
| For the Three Months Ended June 30, 2019 | For the Six Months Ended June 30, 2019 | |||||||
| Net revenue | $ | - | $ | - | ||||
| Gross profit | - | - | ||||||
| Loss from operation | 25,861 | 57,717 | ||||||
| Net loss | 25,861 | 57,717 | ||||||
20
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 710 –ACCRUED LIABILITIES AND OTHER PAYABLES
At SeptemberJune 30, 20172019 and December 31, 2016,2018, accrued liabilities and other payables consisted of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| Accrued professional fees | $ | 239,927 | $ | 14,080 | ||||
| Accrued interest | 94,932 | — | ||||||
| Other | 8,143 | 8,254 | ||||||
| $ | 343,002 | $ | 22,334 | |||||
| June 30, 2019 | December 31, 2018 | |||||||
| Accrued payroll liability | $ | 109,318 | $ | 529,472 | ||||
| Accrued professional fees | 484,453 | 166,077 | ||||||
| Lab equipment purchase payable | - | |||||||
| Insurance payable | 45,088 | |||||||
| Accrued dues and subscriptions | 82,776 | 42,500 | ||||||
| Other | 70,799 | 76,213 | ||||||
| $ | 747,346 | $ | 859,350 | |||||
NOTE 811 –LOAN PAYABLE
On April 19, 2017, the Company entered into a loan agreement, providing for the issuance of a loan in the principal amount of $2,100,000. The term of the loan is one year. On May 3, 2018, the Company signed an extension agreement with the maturity date of March 31, 2019. On August 3, 2018, the Company signed an extension agreement for the loan with the maturity date of March 31, 2020. The annual interest rate for the loan is 10%. The loan is guaranteed by the Company’s Chairman, Mr. Wenzhao Lu. At September The Company repaid principal of $600,000, $500,000 and $1,000,000 in November 2017, April 2018 and April 2019, respectively. As of June 30, 2017,2019, the outstanding principal balance of the loan and related accrued and unpaid interest for the loan was $2,100,000 and $94,932, respectively.$0.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 912 –VAT AND OTHER TAXES PAYABLE
At SeptemberJune 30, 20172019 and December 31, 2016,2018, VAT and other taxes payable consisted of the following:amounted to $10,727 and 4,668, respectively.
| September 30, 2017 | December 31, 2016 | |||||||
| VAT tax payable | $ | — | $ | 8,768 | ||||
| Other taxes payable | 2,091 | 2,502 | ||||||
| $ | 2,091 | $ | 11,270 | |||||
NOTE 1013 –RELATED PARTY TRANSACTIONS
Medical Related Consulting Services Revenue from related partiesRelated Party and accounts receivableAccounts Receivable – related partiesRelated Party
During the three and ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, medical related consulting services revenue from related parties was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
| Medical related consulting services provided to: | ||||||||||||||||||||||||||||||||
| Beijing Nanshan (1) | $ | 2,166 | $ | 108,333 | $ | 154,663 | $ | 108,333 | ||||||||||||||||||||||||
| Beijing Daopei (1) | $ | 41,648 | $ | 141,996 | $ | 55,908 | $ | 141,996 | ||||||||||||||||||||||||
| Shanghai Daopei (2) | — | 125,001 | 66,286 | 125,001 | 14,180 | - | 14,180 | - | ||||||||||||||||||||||||
| Hebei Yanda (3) | — | 93,333 | — | 93,333 | ||||||||||||||||||||||||||||
| Hebei Daopei (3) | 55,606 | - | 55,606 | - | ||||||||||||||||||||||||||||
| $ | 2,166 | $ | 326,667 | $ | 220,949 | $ | 326,667 | $ | 111,434 | $ | 141,996 | $ | 125,694 | $ | 141,996 | |||||||||||||||||
| (1) | Beijing |
| (2) | Shanghai Daopei is a subsidiary of an entity whose chairman is Wenzhao Lu, the major shareholder of the Company. |
| (3) | Hebei |
Accounts receivable – related parties,party, net of allowance for doubtful accounts, at SeptemberJune 30, 20172019 and December 31, 20162018 amounted to $166,874$58,251 and $70,228,$0, respectively, and were related to consulting services provided to Beijing Nanshan and Shanghai Daopei, two Chinese entities whose chairman is Wenzhao Lu, the major shareholder of the Company. Management believes that the accounts receivable are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its accounts receivable – related partiesparty at SeptemberJune 30, 20172019 and December 31, 2016.2018.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Accrued liabilities and other payablesNOTE 13 – related partiesRELATED PARTY TRANSACTIONS (continued)
At SeptemberPrepaid Expenses – Related Parties
As of June 30, 20172019 and December 31, 2016,2018, the Company owedmade prepayment of $0 and $1,897, respectively, to David Jin, its shareholder, chief executive officer, president and board member, of $19,420 and $6,278, respectively, for business travel and other miscellaneous reimbursementsreimbursement, which have been included in accrued liabilities and other payableprepaid expenses – related parties on the accompanying consolidated balance sheets.
At SeptemberAs of June 30, 20172019 and December 31, 2016,2018, the Company owedmade prepayment of $0 and $32,293, respectively, to Meng Li, its shareholder and chief operating officer, for business travel reimbursement, which have been included in prepaid expenses – related parties on the accompanying consolidated balance sheets.
Advance from Customer – Related Party
At June 30, 2019 and board member,December 31, 2018, advance from customer – related party amounted to $0 and $14,829, respectively, which represents prepayment received from our related party, Beijing Daopei, for medical related consulting services. When the services are performed, the amount recorded as advance from customer – related party is recognized as revenue.
Accrued Liabilities and Other Payables – Related Parties
At June 30, 2019 and December 31, 2018, the Company owed Luisa Ingargiola, its chief financial officer, of $2,214$36,806 and $309,$0, respectively, for travel and other miscellaneous reimbursements, which have been included in accrued liabilities and other payables – related parties on the accompanying consolidated balance sheets.
Due to Related Party
In connection with the acquisition discussed elsewhere in this report, the Company acquired Beijing GenExosome in cash payment of $450,000. On October 17, 2016,25, 2017, Dr. Yu Zhou, the Company entered into a lease for office space in New Jersey with a related party (the “AHS Office Lease”). Pursuantformer sole shareholder of Beijing GenExosome, was appointed to the AHS Office Lease, the monthly rent was $1,000. The AHS Office Lease was terminated in August 2017.board of directors of GenExosome and served as co-chief executive officer of GenExosome. As of SeptemberJune 30, 20172019 and December 31, 2016,2018, the accruedunpaid acquisition consideration of $100,000, was payable to Dr. Yu Zhou, co-chief executive officer and unpaid rent expenseboard member of GenExosome, and reflected as due to related to this AHS Office Lease amounted to $10,000 and $2,000, respectively, which was included in accrued liabilities and other payables – related partiesparty on the accompanying consolidated balance sheets.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 10 –RELATED PARTY TRANSACTIONS (continued)
Due to related parties
From time to time, David Jin, shareholder, chief executive officer, president and board member of the Company, provided advances to the Company to supplement its working capital needs. Those advances are short-term in nature, non-interest bearing, unsecured and payable on demand. During the nine months ended September 30, 2017, the Company repaid $500 working capital advance to David Jin. As of September 30, 2017 and December 31, 2016, the working capital advance balance was $0 and $500, respectively, which was reflected as due to related parties on the accompanying consolidated balance sheets.
From time to time, Meng Li, shareholder, chief operating officer and board member of the Company, provided advances to the Company to supplement its working capital needs. Those advances are short-term in nature, non-interest bearing, unsecured and payable on demand. The working capital advance of $87,650 at September 30, 2017 and December 31, 2016, was reflected as due to related parties on the accompanying consolidated balance sheets.
From time to time, Wenzhao Lu, major shareholder and chairman of the Board of Directors of the Company, provided advances to the Company to supplement its working capital needs. Those advances are short-term in nature, non-interest bearing, unsecured and payable on demand. The working capital advance of $29,000 and $9,000, respectively, at September 30, 2017 and December 31, 2016, was reflected as due to related parties on the accompanying consolidated balance sheets.
During the nine months ended September 30, 2017, the Company received advance from a company, which is controlled by Wenzhao Lu, the Company’s major shareholder and chairman of the Board of Directors of the Company, of $190,000 for general working capital purpose. The advance is unsecured, non-interest bearing and repayable on demand. The working capital advance of $190,000 at September 30, 2017 was reflected as due to related parties on the accompanying consolidated balance sheets.
Operating lease
On October 17, 2016, AHS entered into a lease for office space in New Jersey with a related party (the “AHS Office Lease”). Pursuant to the AHS Office Lease, the monthly rent is $1,000. The AHS Office Lease was terminated in August 2017. For the three and nine months ended September 30, 2017, rent expense related to the AHS Office Lease amounted to $2,000 and $8,000, respectively.
Real property management agreementProperty Management Agreement
The Company pays a company, which is controlled by Wenzhao Lu, the Company’s majorlargest shareholder and chairman of the Board of Directors, for the management of its commercial real property located in New Jersey. The monthly property management fee is $5,417. The term of the property management agreement is two years commencingcommenced on May 5,25, 2017 and will expire on May 4,expired in March 2019. On March 1, 2019, the Company entered into a contract with a third-party consultant to manage its real property till February 2020. For the three and nine months ended SeptemberJune 30, 2017,2019 and 2018, the management fee related to the property management agreement amounted to $30,753 and $16,251, respectively. For the six months ended June 30, 2019 and $27,085,2018, the management fee related to the property management agreement amounted to $54,087 and $32,502, respectively.
Note Payable – Related Party
On March 18, 2019, the Company issued Wenzhao Lu, the Company’s largest shareholder and chairman of the Board of Directors, a Promissory Note in the principal amount of $1,000,000 (“Promissory Note”) in consideration of cash in the amount of $1,000,000. The Promissory Note accrues interest at the rate of 5% per annum and matures March 19, 2022.
As of June 30, 2019, the outstanding principal balance of the note and related accrued and unpaid interest for the note was $1,000,000 and $14,583, respectively.
Office Space from Related Party
Beijing GenExosome uses office space of a related party, free of rent, which is considered immaterial.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1114 –STOCKHOLDERS’ EQUITYDERIVATIVE LIABILITIES
On April 25, 2019, the Company issued 1,714,288 five-year warrants to several third party institutional investors in a registered direct offering (see Note 15). The warrants include the fundamental transaction provisions and the exercise price of the warrants is protected against down-round financing throughout the term of the warrants. Upon evaluation, the warrants meet the definition of derivative liabilities under FASB ASC 815, as the Company cannot avoid a net cash settlement under certain circumstances. Accordingly, the fair value of the warrants was classified as derivative liabilities of $3,517,241 on the issuance date, April 25, 2019. The estimated fair value of the warrants were computed at issuance using Black-Scholesoption-pricing model, with the following assumptions: stock price of $2.82, volatility of 100.87%, risk-free rate of 2.33%, annual dividend yield of 0% and expected life of 5 years.
The estimated fair value of the outstanding warrant as derivative liabilities was $3,055,748 at June 30, 2019.The estimated fair value of the warrants were computed as of June 30, 2019 using Black-Scholesoption-pricing model, with the following assumptions: stock price of $2.60, volatility of 97.69%, risk-free rate of 1.76%, annual dividend yield of 0% and expected life of 4.82 years.
Increases or decreases in fair value of the derivative liabilities are included as a component of total other income / expenses in the accompanying consolidated statements of operations for the respective period. The changes to the derivative liabilities for the warrants resulted in a decrease of $461,493 in the derivative liabilities and the corresponding increase in other income as a gain forthe three and six months ended June 30, 2019.
NOTE 15 – EQUITY
Shares authorizedAuthorized
The Company is authorized to issue 10,000,000 shares of preferred stock and 490,000,000 shares of common shares with a par value of $0.0001.$0.0001 per share.
There are no shares of its preferred stock issued and outstanding as of SeptemberJune 30, 20172019 and December 31, 2016.2018.
There are 64,628,62276,175,639 and 61,628,62273,830,751 shares of its common stock issued as of June 30, 2019 and December 31, 2018, respectively.
There are 75,655,639 and 73,310,751 shares of its common stock outstanding as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively.
Common Shares Issued for Warrant Exercise
On January 9, 2019, the Company issued 350,856 shares of its common stock upon cashless exercise of warrants to purchase 578,891 shares of common stock.
Common Shares Issued for Option Exercise
On February 27, 2019, the Company issued 158,932 shares of its common stock upon cashless exercise of options to purchase 200,000 shares of common stock.
Common Shares Issued for Service Fee
On April 1, 2019, the Company issued a total of 120,812 shares of its common stock in payment of service fee from certain consultants.
Units Sold for Cash
On April 25, 2019, the Company entered into a purchase agreement with several third party institutional investors for the purchase of 1,714,288 units in a registered direct offering, for gross proceeds of $6,000,008 before placement agent fees and other offering expenses payable by the Company. Each unit was sold at a public offering price of $3.50 and consists of one share of common stock and a warrant to purchase one share of common stock. The Company received net cash proceeds of $5,103,704, net of cash paid for placement agent fees and other offering expenses.
The warrants are exercisable immediately as of the date of issuance (the “Initial Exercise Date”), at an exercise price of $3.50 per share, subject to adjustment as provided in the warrants, and expire on the fifth (5th) anniversary of the Initial Exercise Date. The warrants include anti-dilution rights, which provide that if at any time the warrants are outstanding, the Company issues or is deemed to have issued any common stock or common stock equivalents for consideration less than the then current exercise price of the warrants, the exercise price of such warrants is automatically reduced to the lowest price per share of consideration provided or deemed to have been provided for such securities (subject to adjustment for reverse and forward stock splits, recapitalizations and similar transactions). The warrants include the fundamental transaction provisions and the exercise price of the warrants is protected against down-round financing throughout the term of the warrants. Upon evaluation, the warrants meet the definition of a derivative under FASB ASC 815, as the Company cannot avoid a net cash settlement under certain circumstances (see Note 14).
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 11 –STOCKHOLDERS’ EQUITY (continued)
Common shares issued for Share Subscription Agreement
On March 3, 2017, the Company entered into and closed a Subscription Agreement with an accredited investor (the “March 2017 Accredited Investor”) pursuant to which the March 2017 Accredited Investor purchased 3,000,000 shares of the Company’s common stock (“March 2017 Shares”) for a purchase price of $3,000,000 (the “Purchase Price”).
The offer, sale and issuance of the above securities was made to an accredited investor and the Company relied upon the exemptions contained in Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated there under with regard to the sale. No advertising or general solicitation was employed in offering the securities. The offer and sale was made to an accredited investor and transfer of the common stock issued was restricted by the Company in accordance with the requirements of the Securities Act of 1933, as amended.
The Company, Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”), Beijing DOING Biomedical Technology Co., Ltd. (“DOING”), who is an unaffiliated third party, and the March 2017 Accredited Investor entered into a Share Subscription Agreement whereby the parties acknowledged, among other things, that DOING agreed to transfer the Purchase Price to Avalon Shanghai on behalf of the March 2017 Accredited Investor and the March 2017 Accredited Investor agreed to transfer the March 2017 Shares to DOING upon DOING completing the registration of the acquisition of the March 2017 Shares with the Beijing Commerce Commission (“BCC”) and obtaining an Enterprise Overseas Investment Certificate (the “Investment Certificate”) from BCC. If DOING fails to complete the registration and acquire the Investment Certificate within one year of the closing then Avalon Shanghai shall transfer $3,000,000 with an annual interest of 20% to DOING upon the request of DOING (the “BCC Repayment Obligation”). As of the date hereof, the Company is obligated to DOING in the principal amount of $3,000,000. The BCC Repayment Obligation is a debt obligation arising other than in the ordinary course of business, which constitutes a direct financial obligation of the Company. Further, Wenzhao Lu, a director and shareholder of the Company, and DOING entered into a Warranty Agreement. Pursuant to the Warranty Agreement, Mr. Lu agreed to (i) cause the Company to be liable to DOING in the event the March 2017 Accredited Investor defaults in its obligations to DOING, (ii) cause the March 2017 Accredited Investor to transfer the March 2017 Shares to DOING upon DOING’s receipt of the Investment Certificate from BCC, (iii) within three years from the date of the Warranty Agreement, DOING may require Mr. Lu to acquire the March 2017 Shares at $1.20 per share upon three-month notice, and (iv) in the event Mr. Lu does not acquire the March 2017 Shares within the three-month period, interest of 15% per annum will be added to the purchase priceNOTE 15 – EQUITY (continued).
The Company received cash payment of $3,000,000 as an earnest money from DOING in connection with the 3,000,000 common stock issued to the March 2017 Accredited Investor who is an entrusted party that holds the shares on behalf of DOING and recorded the $3,000,000 as refundable deposit on the accompanying condensed consolidated balance sheets. Upon DOING completing the registration of the acquisition of the March 2017 Shares with the BCC and obtaining an Enterprise Overseas Investment Certificate from BCC, the Company will cancel the stock certificate issued under the March 2017 Accredited Investor’s name as an entrusted holder of the shares and the Company will issue a new stock certificate under DOING’s name. The $3,000,000 refundable deposit, which paid by DOING as an earnest money will be applied as the proceeds for issuance of the 3,000,000 shares of the Company’s common stock under DOING’s name at the closing dateOptions.
The Company is subject to the contingency of paying interest liability upon the request of DOING if DOING fails to complete the registration and obtain the Enterprise Overseas Investment Certificate within one year. The Company records accrual for such contingency based upon the assessment of the probability of occurrence and, where determinable, an estimate of the liability. Management may consider many factors in making these assessments including past history and the specifics of this matter. The Company did not accrue any interest for theBCC Repayment Obligation sincemanagement has evaluated the claim and concluded the likelihood of the claim is remote.
Options
During the nine months ended September 30, 2017, the Company granted a total of 444,448 options to the Company’s Chief Financial Officer (“CFO”) at a fixed exercise price of $0.50 per share and granted a total of 40,000 options to the Company’s two directors at a fixed exercise price of $1.49 per share. The 444,448 options granted to the Company’s CFO are exercisable for ten years and the 40,000 options granted to the Company’s two directors are exercisable for five years. The fair value of the options was $602,224 which was determined using the Black-Scholes option-pricing model and using the following assumptions:
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 11 –STOCKHOLDERS’ EQUITY (continued)
Options (continued)
In connection with the option grant, for the three and nine months ended September 30, 2017, the Company recognized stock-based compensation of $335,757 and $602,224, respectively, on the accompanying condensed consolidated statements of operations because the options were deemed fully earned and non-cancellable on the grant date. Stock Option activities for the nine months ended September 30, 2017 were as follows:
| Number of Options | Weighted Average Exercise Price | ||||||||
| Balance at December 31, 2016 | — | $ | — | ||||||
| Granted | 484,448 | 0.58 | |||||||
| Exercised | — | — | |||||||
| Balance at September 30, 2017 | 484,448 | 0.58 | |||||||
| Option exercisable at September 30, 2017 | 484,448 | $ | 0.58 | ||||||
The total intrinsic value of the stock options outstanding and exercisable at September 30, 2017 was $1,098,853.
The following table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at SeptemberJune 30, 2017:2019:
| Options Outstanding | Options Exercisable | Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||||||||||||
| Range of Exercise Price | Number Outstanding at September 30, 2017 | Range of Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at September 30, 2017 | Weighted Average Exercise Price | Range of Exercise Price | Number Outstanding at 2019 | Range of Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at June 30, 2019 | Weighted Average Exercise Price | |||||||||||||||||||||||||||||||||
| $ | 0.50 | 444,448 | 9.71 | $ | 0.50 | 444,448 | $ | 0.50 | 0.50 | 2,000,000 | 7.62 | $ | 0.50 | 1,611,111 | $ | 0.50 | ||||||||||||||||||||||||||||
| 1.49 | 40,000 | 4.63 | 1.49 | 40,000 | 1.49 | 1.49 | 60,000 | 2.83 | 1.49 | 60,000 | 1.49 | |||||||||||||||||||||||||||||||||
| 1.00 | 50,000 | 3.34 | 1.00 | 50,000 | 1.00 | |||||||||||||||||||||||||||||||||||||||
| 1.00 | 80,000 | 1.34 | 1.00 | 80,000 | 1.00 | |||||||||||||||||||||||||||||||||||||||
| 2.50 | 110,000 | 3.51 | 2.50 | 110,000 | 2.50 | |||||||||||||||||||||||||||||||||||||||
| 1.00 | 80,000 | 1.84 | 1.00 | 80,000 | 1.00 | |||||||||||||||||||||||||||||||||||||||
| 2.30 | 20,000 | 3.93 | 2.30 | 20,000 | 2.30 | |||||||||||||||||||||||||||||||||||||||
| 2.30 | 20,000 | 4.01 | 2.30 | 20,000 | 2.30 | |||||||||||||||||||||||||||||||||||||||
| 2.80 | 20,000 | 4.08 | 2.80 | 20,000 | 2.80 | |||||||||||||||||||||||||||||||||||||||
| 2.80 | 20,000 | 4.12 | 2.80 | 20,000 | 2.80 | |||||||||||||||||||||||||||||||||||||||
| 1.00 | 180,000 | 2.34 | 1.00 | 180,000 | 1.00 | |||||||||||||||||||||||||||||||||||||||
| 2.75 | 240,000 | 4.51 | 2.75 | 120,000 | 2.75 | |||||||||||||||||||||||||||||||||||||||
| 2.00 | 1,950,000 | 4.51 | 2.00 | 975,000 | 2.00 | |||||||||||||||||||||||||||||||||||||||
| 4.76 | 60,000 | 4.77 | 4.76 | 20,000 | 4.76 | |||||||||||||||||||||||||||||||||||||||
| 2.52 | 180,000 | 2.84 | 2.52 | 60,000 | 2.52 | |||||||||||||||||||||||||||||||||||||||
| $ | 0.50–1.49 | 484,448 | 9.29 | $ | 0.58 | 484,448 | $ | 0.58 | 0.50–4.76 | 5,070,000 | 5.45 | $ | 1.43 | 3,426,111 | $ | 1.25 | ||||||||||||||||||||||||||||
Stock options granted to employee and director
Employee and director stock option activities for the six months ended June 30, 2019 were as follows:
| Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding at December 31, 2018 | 2,280,000 | $ | 0.69 | |||||
| Granted | 2,250,000 | 2.15 | ||||||
| Terminated / Exercised | - | - | ||||||
| Outstanding at June 30, 2019 | 4,530,000 | $ | 1.41 | |||||
| Options exercisable at June 30, 2019 | 3,006,111 | $ | 1.25 | |||||
| Options expected to vest | 1,523,889 | $ | 1.75 | |||||
24
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 -15 – EQUITY (continued)
Options (continued)
Stock options granted to employee and director (continued)
The fair values of options granted to employee and director during the six months ended June 30, 2019 and 2018, respectively, were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| Six Months Ended June 30, 2019 | Six Months | |||||||
| Dividend rate | 0 | 0 | ||||||
| Terms (in years) | 5.0 | 5.0 | ||||||
| Volatility | 149.74% -150.61 | % | 175.94% - 185.28% | |||||
| Risk-free interest rate | 2.31% - 2.49% | 2.25% - 2.78% | ||||||
The aggregate fair value of the options granted to employee and director during the six months ended June 30, 2019 was $5,956,574, of which, $1,510,545 and $2,935,484 for the three and six months ended June 30, 2019, respectively, has been reflected as compensation and related benefits on the accompanying unaudited condensed consolidated statements of operations because the options were fully earned and non-cancellable.
The aggregate fair value of the options granted to employee and director during the six months ended June 30, 2018 was $337,523, of which, $79,193 and $151,480 for the three and six months ended June 30, 2018, respectively, has been reflected as compensation and related benefits on the accompanying unaudited condensed consolidated statements of operations because the options were fully earned and non-cancellable.
As of June 30, 2019, the aggregate value of nonvested employee and director options was $3,507,201, which will be amortized as stock-based compensation expense as the options are vesting, over the remaining 0.58 years.
The aggregate intrinsic values of the employee and director stock options outstanding and the employee and director stock options exercisable at June 30, 2019 was $5,539,600 and $4,137,933, respectively.
A summary of the status of the Company’s nonvested employee and director stock options granted as of June 30, 2019 and changes during the six months ended June 30, 2019 is presented below:
| Number of Options | Weighted Average Exercise Price | Grant Date Fair Value | ||||||||||
| Nonvested at December 31, 2018 | 722,222 | $ | 0.50 | $ | 902,779 | |||||||
| Granted | 2,250,000 | 2.15 | 5,956,574 | |||||||||
| Vested | (1,448,333 | ) | (1.76 | ) | (3,352,152 | ) | ||||||
| Nonvested at June 30, 2019 | 1,523,889 | $ | 1.75 | $ | 3,507,201 | |||||||
Stock Options Granted to Non-employee
Non-employee stock option activities for the six months ended June 30, 2019 were as follows:
| Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding at December 31, 2018 | 560,000 | $ | 1.06 | |||||
| Granted | 180,000 | 2.52 | ||||||
| Exercised | (200,000 | ) | 1.00 | |||||
| Outstanding at June 30, 2019 | 540,000 | 1.57 | ||||||
| Options exercisable at June 30, 2019 | 420,000 | $ | 1.30 | |||||
| Options expected to vest | - | $ | - | |||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – EQUITY (continued)
Options (continued)
Stock Options Granted to Non-employee (continued)
The fair values of these non-employee options vested in six months ended June 30, 2019 and 2018, and nonvested non-employee options as of June 30, 2019 and 2018, respectively, were estimated using the Black-Scholes option-pricing model with the following assumptions:
| Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | |||||||
| Dividend rate | 0 | 0 | ||||||
| Terms (in years) | 3.00 – 5.00 | 2.51 - 3.0 | ||||||
| Volatility | 150.35% – 151.70% | 172.87% - 188.29% | ||||||
| Risk-free interest rate | 2.28% - 2.51% | 2.29% - 2.66% | ||||||
Stock-based compensation expense associated with stock options granted to non-employee is recognized as the stock options vest. The stock-based compensation expense related to non-employee will fluctuate as the fair value of the Company’s common stock fluctuates. Stock-based compensation expense associated with stock options granted to non-employee amounted to $444,732 and $383,042 for the six months ended June 30, 2019 and 2018, respectively.
As of June 30, 2019, the aggregate value of vested and nonvested non-employee options was $905,696, which will be amortized as stock-based compensation expense over the remaining 0.33 years.
The aggregate intrinsic values of the non-employee stock options outstanding and the non-employee stock options exercisable at June 30, 2019 was $557,900 and $548,800, respectively.
A summary of the status of the Company’s nonvested non-employee stock options granted as of June 30, 2019 and changes during the six months ended June 30, 2019 is presented below:
| Number of Options | Weighted Average Exercise Price | Fair Value at June 30, 2019 | ||||||||||
| Nonvested at December 31, 2018 | 193,333 | $ | 1.12 | |||||||||
| Granted | 180,000 | 2.52 | ||||||||||
| Vested | (193,333 | ) | (1.12 | ) | ||||||||
| Forfeited | - | - | ||||||||||
| Nonvested at June 30, 2019 | 180,000 | $ | 2.52 | $ | - | |||||||
In the three months ended June 30, 2019, the overall value of common stock granted at unit price below $3.50 and stock options granted at exercise price below $3.50 to non-employee is $490,098.
NOTE 16 – STATUTORY RESERVE
Avalon Shanghai operatesand Beijing GenExosome operate in the PRC, are required to reserve 10% of itstheir net profit after income tax, as determined in accordance with the PRC accounting rules and regulations. Appropriation to the statutory reserve by the Company is based on profit arrived at under PRC accounting standards for business enterprises for each year.
The profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is made to the statutory reserve. Appropriation to the statutory reserve must be made before distribution of dividends to shareholders. The appropriation is required until the statutory reserve reaches 50% of the registered capital. This statutory reserve is not distributable in the form of cash dividends. The Company did not make any appropriation to statutory reserve for Avalon Shanghai and Beijing GenExosome during the ninesix months ended SeptemberJune 30, 2017 since it2019 as they incurred a lossnet losses in the period.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 13 –SEGMENT INFORMATION
For the three and nine months ended September 30, 2017, the Company operated in two reportable business segments - (1) the real property operating segment, and (2) the medical related consulting services segment. For the three and nine months ended September 30, 2016, the Company operated in one reportable business segment – the medical related consulting services segment. The Company’s reportable segments are strategic business units that offer different services. They are managed separately based on the fundamental differences in their operations. Information with respect to these reportable business segments for the three and nine months ended September 30, 2017 and 2016 was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | ||||||||||||||||
| Real property operating | $ | 315,284 | $ | — | $ | 537,538 | $ | — | ||||||||
| Medical related consulting services | 2,166 | 326,667 | 220,949 | 326,667 | ||||||||||||
| 317,450 | 326,667 | 758,487 | 326,667 | |||||||||||||
| Depreciation | ||||||||||||||||
| Real property operating | 20,568 | — | 53,511 | — | ||||||||||||
| Medical related consulting services | 3,754 | — | 4,967 | — | ||||||||||||
| 24,322 | — | 58,478 | — | |||||||||||||
| Interest expense | ||||||||||||||||
| Real property operating | 52,932 | — | 94,932 | — | ||||||||||||
| Medical related consulting services | — | — | — | — | ||||||||||||
| 52,932 | — | 94,932 | — | |||||||||||||
| Net (loss) income | ||||||||||||||||
| Real property operating | (119,782 | ) | — | (121,016 | ) | — | ||||||||||
| Medical related consulting services | (116,230 | ) | 207,874 | (278,019 | ) | 102,403 | ||||||||||
| Other (a) | (474,717 | ) | — | (1,291,535 | ) | — | ||||||||||
| $ | (710,729 | ) | $ | 207,874 | $ | (1,690,570 | ) | $ | 102,403 | |||||||
| Identifiable long-lived tangible assets at September 30, 2017 and December 31, 2016 | September 30, 2017 | December 31, 2016 | ||||||
| Real property operating | $ | 7,677,995 | $ | — | ||||
| Medial related consulting services | 23,932 | 295 | ||||||
| $ | 7,701,927 | $ | 295 | |||||
| Identifiable long-lived tangible assets at September 30, 2017 and December 31, 2016 | September 30, 2017 | December 31, 2016 | ||||||
| United States | $ | 7,677,995 | $ | — | ||||
| China | 23,932 | 295 | ||||||
| $ | 7,701,927 | $ | 295 | |||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 14 –COMMITMENTS AND CONTINCENGIES
Severance payments
The Company has employment agreements with certain employees that provided severance payments upon termination of employment under certain circumstances, as defined in the applicable agreements. The Company has estimated its possible severance payments of approximately $302,000 as of September 30, 2017 and December 31, 2016, which have not been reflected in its condensed consolidated financial statements since the Company concluded that the likelihood is remote at this moment.
Legal service contract
On November 22, 2016, the Company entered into a legal service agreement with a law firm who has agreed to provide legal and corporate advisory services to the Company. The term of this agreement is on a month to month basis. In accordance to this service agreement, the Company pays a flat cash fee of $15,000 per month. At September 30, 2017 and December 31, 2016, the accrued legal service fees related to the service agreement was $60,000 and $10,000, respectively, which was included in accrued liabilities and other payables on the accompanying condensed consolidated balance sheets.
Financial consulting service contract
On October 17, 2016, the Company entered into a one-year consulting service agreement with a consultant who has agreed to provide financial consulting service to the Company. In accordance with this agreement, the Company pays a flat fee of $4,800 per month commencing on October 20, 2016. On April 19, 2017, the Company renewed the consulting agreement. In accordance with the renewed agreement, the Company pays a flat fee of $10,000 per month commencing on April 19, 2017. At September 30, 2017 and December 31, 2016, the accrued service fees related to the service agreement was $34,000 and $1,600, respectively, which was included in accrued liabilities and other payables on the accompanying condensed consolidated balance sheets.
Real property management agreement
On June 6, 2017, the Company entered into a two-year real property management agreement with a related party which agreed to provide real property management service to the Company. In accordance with this agreement, the Company pays a flat fee of $5,417 per month commencing on May 5, 2017 (see Note 10 for real property management agreement).
Operating leases
Avalon Shanghai office leases
On January 19, 2017, Avalon Shanghai entered into a lease for office space in Beijing, China with a third party (the “Beijing Office Lease”). Pursuant to the Beijing Office Lease, the monthly rent is RMB 50,586 (approximately $7,600) with a required security deposit of RMB 164,764 (approximately $24,800). In addition, Avalon Shanghai needs to pay monthly maintenance fees of RMB 4,336 (approximately $700). The term of the Beijing Office Lease is 26 months commencing on January 1, 2017 and will expire on February 28, 2019 with two months of free rent in the months of December 2017 and February 2019. For the three and nine months ended September 30, 2017, rent expense and maintenance fees related to the Beijing Office Lease amounted to approximately $21,900 and $64,400, respectively. Future minimum rental payment required under the Beijing Office Lease is as follows:
| Twelve-month Period Ending September 30: | Amount | ||||
| 2018 | $ | 91,450 | |||
| 2019 | 33,669 | ||||
| Total | $ | 125,119 | |||
In December 2016, Avalon Shanghai entered into a lease for office space in Shanghai, China with a third party (the “Shanghai Office Lease”). Pursuant to the Shanghai Office Lease, the monthly rent is RMB 20,000 (approximately $3,000). The term of the Shanghai Office Lease is one year commencing on January 1, 2017 and will expire on December 31, 2017. For the three and nine months ended September 30, 2017, rent expense related to the Shanghai Office Lease amounted to approximately $8,600 and $25,200, respectively. Future minimum rental payment required under the Shanghai Office Lease is as follows:
| Twelve-month Period Ending September 30: | Amount | |||||
| 2018 | $ | 9,018 | ||||
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 15 -CONCENTRATIONS
Customers
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenue for the three and nine months ended September 30, 2017 and 2016.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Customer | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| A (Beijing Nanshan, a related party) | * | 33 | % | 20 | % | 33 | % | |||||||||
| B (Shanghai Daopei, a related party) | * | 38 | % | * | 38 | % | ||||||||||
| C (Hebei Yanda, a related party) | * | 29 | % | * | 29 | % | ||||||||||
| D | 27 | % | 0 | 18 | % | 0 | ||||||||||
| E | 16 | % | 0 | 11 | % | 0 | ||||||||||
| F | 13 | % | 0 | * | 0 | |||||||||||
* Less than 10%
Two customers, one of which was a related party, accounted for 86.1% of the Company’s total outstanding accounts receivable and tenants receivable at September 30, 2017.
One customer, who was a related party, accounted for 100% of the Company’s total outstanding accounts receivable at December 31, 2016.
Suppliers
No supplier accounted for 10% or more of the Company’s purchase during the three and nine months ended September 30, 2017 and 2016.
Two suppliers accounted for 89.4% of the Company’s total outstanding accounts payable at September 30, 2017.
No supplier accounted for 10% of the Company’s total outstanding accounts payable at December 31, 2016.
Concentrations of credit risk
At September 30, 2017 and December 31, 2016, cash balances in the PRC are $128,301 and $2,525,630, respectively, are uninsured. The Company has not experienced any losses in PRC bank accounts and believes it is not exposed to any risks on its cash in PRC bank accounts.
The Company maintains its cash in United States bank and financial institution deposits that at times may exceed federally insured limits. At September 30, 2017 and December 31, 2016, the Company’s cash balances in United States bank accounts had approximately $0 and $80,000 in excess of the federally-insured limits, respectively. The Company has not experienced any losses in its United States bank accounts through and as of the date of this report.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER
NOTE 17 –NONCONTROLLING INTEREST
As of June 30, 20172019, Dr. Yu Zhou, director and Co-Chief Executive Officer of GenExsome, who owned 40% of the equity interests of GenExosome, which is not under the Company’s control. The following is a summary of noncontrolling interest activities in the six months ended June 30, 2019.
| Amount | ||||
| Noncontrolling interest at December 31, 2018 | $ | (862,200 | ) | |
| Net loss attributable to noncontrolling interest | (180,712 | ) | ||
| Foreign currency translation adjustment attributable to noncontrolling interest | 702 | |||
| Noncontrolling interest at June 30, 2019 | $ | (1,042,210 | ) | |
NOTE 18 –RESTRICTED NET ASSETS
A portion of the Company’s operations are conducted through its PRC subsidiaries, which can only pay dividends out of their retained earnings determined in accordance with the accounting standards and regulations in the PRC and after they have met the PRC requirements for appropriation to statutory reserve. In addition, a portion of the Company’s businesses and assets are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the ability of the Company’s PRC subsidiaries to transfer their net assets to the Parent Company through loans, advances or cash dividends.
Schedule I of Article 5-04 of Regulation S-X requires the condensed financial information of the parent company to be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of this test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets of its consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company in the form of loans, advances or cash dividends without the consent of a third party.
The Company’s PRC subsidiaries’ net assets as of June 30, 2019 and December 31, 2018 did not exceed 25% of the Company’s consolidated net assets. Accordingly, Parent Company’s condensed financial statements have not been required in accordance with Rule 5-04 and Rule 12-04 of SEC Regulation S-X.
NOTE 1619 –RESTRICTED NET ASSETSCOMMITMENTS AND CONTINCENGIES
A portionOperating Leases
Beijing GenExosome Beijing Office Lease
In March 2019, Beijing GenExosome signed an agreement to lease its office space under operating lease. Pursuant to the signed lease, the annual rent is RMB 7,000 (approximately $1,000). The term of this lease is one year commencing on March 15, 2019 and expires on March 14, 2020. For the three and six months ended June 30, 2019, rent expense related to the lease amounted to $255 and $510, respectively.
Future minimum rental payment required under this operating lease is as follows:
| Year Ending June 30: | Amount | |||
| 2020 | $ | 680 | ||
| Total | $ | 680 | ||
27
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 – COMMITMENTS AND CONTINCENGIES (continued)
Avalon Shanghai Office Lease
On January 19, 2017, Avalon Shanghai entered into a lease for office space in Beijing, China, with a third party (the “Beijing Office Lease”). Pursuant to the Beijing Office Lease, the monthly rent is RMB 50,586 (approximately $7,367) with a required security deposit of RMB 164,764 (approximately $23,994). In addition, Avalon Shanghai needs to pay monthly maintenance fees of RMB 4,336 (approximately $631). The term of the Company’s operations are conducted through its PRC subsidiary, which can only pay dividends outBeijing Office Lease is 26 months commencing on January 1, 2017 and expired on February 28, 2019 with two months of its retained earnings determined in accordance with the accounting standards and regulationsfree rent in the PRCmonths of December 2017 and after it has metFebruary 2019. On December 27, 2018, Avalon Shanghai signed an extension for the PRC requirementslease with expiration date of February 29, 2020. For the three months ended June 30, 2019 and 2018, rent expense and maintenance fees related to the Beijing Office Lease amounted to approximately $20,000 and $23,000, respectively. For the six months ended June 30, 2019 and 2018, rent expense and maintenance fees related to the Beijing Office Lease amounted to approximately $42,000- and $49,000, respectively.
Future minimum rental payment required under the Beijing Office Lease is as follows:
| Year Ending June 30: | Amount | |||
| 2020 | $ | 63,985 | ||
| Total | $ | 63,985 | ||
Insurance Premium Financing Agreement
On July 18, 2018, the Company entered into a financing agreement, providing for appropriation to statutory reserve. In addition,the issuance of a portionloan in the principal amount of $108,528. The term of the Company’s businesses and assets are denominated in RMB, whichloan is not freely convertible into foreign currencies. All foreign exchange transactions take place either throughfor a period of 10 months from the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the abilityexecution of the Company’s PRC subsidiaryagreement. The annual interest rate for the loan is 6.9%. All of financed amount is used to transfer its net assets to the Parent Company through loans, advances or cash dividends.
Schedule I of Article 5-04 of Regulation S-X requires the condensed financial information of the parent company to be filed when the restricted net assets of consolidated subsidiary exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of this test, restricted net assets of consolidated subsidiary shall mean that amount of the registrant’s proportionate share of net assets of its consolidated subsidiary (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company in the form of loans, advances or cash dividends without the consent of a third party.
The Company’s PRC subsidiary’s net assets as of Septemberpay for Directors & Officers Insurance premium. At June 30, 20172019 and December 31, 2016 did not exceed 25%2018, the outstanding principal balance of the Company’sloan and related unpaid interest was $0 and $45,088, respectively, which was included in the accrued liabilities and other payables on the accompanying consolidated net assets. Accordingly, Parent Company’s condensedbalance sheets.
Equity Investment Commitment
On May 29, 2018, Avalon Shanghai entered into a Joint Venture Agreement with Jiangsu Unicorn Biological Technology Co., Ltd. (“Unicorn”), pursuant to which a company named Epicon Biotech Co., Ltd. (“Epicon”) was formed on August 14, 2018. Epicon is owned 60% by Unicorn and 40% by Avalon Shanghai. Within two years of execution of the Joint Venture Agreement, Unicorn shall invest cash into Epicon in an amount not less than RMB 8,000,000 (approximately $1.2 million) and the premises of the laboratories of Nanjing Hospital of Chinese Medicine for exclusive use by Epicon, and Avalon Shanghai shall invest cash into Epicon in an amount not less than RMB 10,000,000 (approximately $1.5 million). Epicon is focused on cell preparation, third party testing, biological sample repository for commercial and scientific research purposes and the clinical transformation of scientific achievements. As of June 30, 2019, Avalon Shanghai has contributed RMB 3,000,000 (approximately $0.4 million) that was included in equity method investment on the accompanying consolidated financial statements have not been required in accordancebalance sheets. Avalon Shanghai intends to use its present working capital together with Rule 5-04 and Rule 12-04 of SEC Regulation S-X.loans/borrowings/equity raise to fund the project cost.
28
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1719 –SUBSEQUENT EVENTSCOMMITMENTS AND CONTINCENGIES (continued)
October 2017 Private PlacementJoint Venture – AVAR BioTherapeutics (China) Co. Ltd.
On October 20, 2017,23, 2018, Avactis Biosciences, Inc. (“Avactis”), a wholly-owned subsidiary of the Company, entered into Subscription Agreements with accredited investors (the “October 2017 Accredited Investors”and Arbele Limited (“Arbele”) agreed to the establishment of AVAR BioTherapeutics (China) Co. Ltd. (“AVAR”), a Sino-foreign equity joint venture, pursuant to an Equity Joint Venture Agreement (the “AVAR Agreement”), which the October 2017 Accredited Investors agreed to purchase 3,750,000 shareswill be owned 60% by Avactis and 40% by Arbele. The purpose and business scope of the Joint Venture is to research, develop, produce, sell, distribute and generally commercialize CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy in China. Avactis is required to contribute USD $10 million (or equivalent in RMB) in cash and/or services, which shall be contributed in tranches based on milestones to be determined jointly by AVAR and Avactis in writing subject to Avactis’ cash reserves. Within 30 days, Arbele shall make contribution of USD $6.66 million in the form of entering into a License Agreement with AVAR granting AVAR with an exclusive right and license in China to its technology and intellectual property pertaining to CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy technology and any additional technology developed in the future with terms and conditions to be mutually agreed upon Avactis and AVAR and services.
In addition, Avactis is responsible for:
| ● | Contributing registered capital of RMB 5,000,000 (approximately $730,000) for working capital purposes as required by local regulation, which is not required to be contributed immediately and will be contributed subject to Avactis’ discretion; |
| ● | assist AVAR in setting up its business operations and obtaining all required permits and licenses from the Chinese government; |
| ● | assisting AVAR in recruiting, hiring and retaining personnel; |
| ● | providing AVAR with access to various hospital networks in China to assist in the testing and commercialization of the CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy technology in China; |
| ● | assisting AVAR in managing the Good Manufacturing Practices (GMP) facility and clinic to be developed by AVAR; |
| ● | providing AVAR with advice pertaining to conducting clinicals in China; and |
| ● | Within 6 days of signing the AVAR Agreement, Avactis is required to pay to Arbele $300,000 as a research and development fee with an additional two payments of $300,000 (for a total of $900,000) to be paid upon mutually agreed upon milestones. |
Under AVAR Agreement, Arbele shall be responsible for the following:
| ● | Entering into a License Agreement with AVAR; and |
| ● | Providing AVAR with research and development expertise pertaining to clinical laboratory medicine when hired by AVAR. |
As of the date of this report, Avactis has paid $600,000 to Arbele as research and development fee, AVAR is in process of being established and the License Agreement has not been finalized.
NOTE 20 – SEGMENT INFORMATION
For the three and six months ended June 30, 2019 and 2018, the Company operated in three reportable business segments - (1) the real property operating segment, (2) the medical related consulting services segment, and (3) the performing development services for hospitals and other customers and sales of developed products to hospitals and other customers segment. The Company’s common stock (“October 2017 Shares”) for a purchase price of $3,750,000 (the “Purchase Price”). The closingreportable segments are strategic business units that offer different services and products. They are managed separately based on the fundamental differences in their operations. Information with respect to $200,000 ofthese reportable business segments for the Purchase occurred on October 24, 2017. As of November 10, 2017, the Company has received $2,090,000 of the Purchase Price. The balance of the Purchase Price is expected to close on or before December 6, 2017 if not sooner.
The offer, salethree and issuance of the above securitiessix months ended June 30, 2019 and 2018 was made to accredited investors and the Company relied upon the exemptions contained in Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated there under with regard to the sale. No advertising or general solicitation was employed in offering the securities. The offer and sale was made to accredited investors and transfer of the common stock issued was restricted by the Company in accordance with the requirements of the Securities Act of 1933, as amended.followsThe accredited investors acknowledged that they were not aware of nor did it review any registration statement or prospectus filed by the Company with the SEC.:
GenExosome Technologies Inc.
In July 2017, the Company formed GenExosome Technologies Inc., a Nevada corporation (“GenExosome”). On September 29, 2017, Dr. David K. Jin was appointed as the sole director and as the Chief Executive Officer, Chief Medical Officer and President, Meng Li was appointed as Chief Operating Officer and Secretary and Luisa Ingargiola was appointed as Chief Financial Officer. On October 25, 2017, GenExosome and the Company entered into a Securities Purchase Agreement pursuant to which the Company acquired 600 shares of GenExosome in consideration of $1,326,087 and 500,000 shares of common stock of the Company. The Company is required to pay $876,087 of the cash purchase price by November 24, 2017 and $450,000 of the cash purchase price by December 24, 2017. In addition, the Company is required to deliver the 500,000 shares of its common stock no later than November 24, 2017.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 1720 –SUBSEQUENT EVENTSSEGMENT INFORMATION (continued)
| Three Months | Three Months | Six Months | Six Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | |||||||||||||
| Revenues | ||||||||||||||||
| Real property operating | $ | 264,889 | $ | 278,872 | $ | 531,515 | $ | 575,495 | ||||||||
| Medical related consulting services – related party | 111,434 | 141,996 | 125,694 | 141,996 | ||||||||||||
| Development services and sales of developed products | 23,404 | 75,225 | 26,682 | 86,515 | ||||||||||||
| 399,727 | 496,093 | 683,891 | 804,006 | |||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Real property operating | 40,780 | 32,625 | 81,561 | 65,249 | ||||||||||||
| Medical related consulting services | 4,766 | 3,991 | 7,706 | 7,997 | ||||||||||||
| Development services and sales of developed products | 100,443 | 87,980 | 195,853 | 174,729 | ||||||||||||
| 145,989 | 124,596 | 285,120 | 247,975 | |||||||||||||
| Interest expense | ||||||||||||||||
| Real property operating | 8,819 | 24,932 | 32,877 | 261,918 | ||||||||||||
| Medical related consulting services | - | - | - | - | ||||||||||||
| Development services and sales of developed products | - | - | - | - | ||||||||||||
| 8,819 | 24,932 | 32,877 | 261,918 | |||||||||||||
| Net income (loss) | ||||||||||||||||
| Real property operating | (3,690 | ) | 5,617 | (102,379 | ) | (232,083 | ) | |||||||||
| Medical related consulting services | (54,627 | ) | 16,456 | (244,697 | ) | (157,018 | ) | |||||||||
| Development services and sales of developed products | (230,406 | ) | (196,896 | ) | (478,188 | ) | (297,028 | ) | ||||||||
| Other (a) | (4,150,100 | ) | (1,168,992 | ) | (8,118,488 | ) | (2,208,655 | ) | ||||||||
| $ | (4,438,823 | ) | $ | (1,343,815 | ) | $ | (8,943,752 | ) | $ | (2,894,784 | ) | |||||
| Identifiable long-lived tangible assets at June 30, 2019 and December 31, 2018 | June 30, 2019 | December 31, 2018 | ||||||
| Real property operating | $ | 7,810,549 | $ | 7,898,224 | ||||
| Medical related consulting services | 3,417 | 6,852 | ||||||
| Development services and sales of developed products | 371,489 | 224,364 | ||||||
| $ | 8,185,455 | $ | 8,129,440 | |||||
| Identifiable long-lived tangible assets at June 30, 2019 and December 31, 2018 | June 30, 2019 | December 31, 2018 | ||||||
| United States | $ | 7,907,804 | $ | 7,898,806 | ||||
| China | 277,651 | 230,634 | ||||||
| $ | 8,185,455 | $ | 8,129,440 | |||||
| (a) | The Company does not allocate any interest expense and general and administrative expense of its being a public company activities to its reportable segments as these activities are managed at a corporate level. |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 – GenExosome Technologies Inc. (continued)CONCENTRATIONS
On October 25, 2017, GenExosome entered intoCustomers
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the three and closed an Asset Purchase Agreement with Yu Zhou, MD, PhD, pursuant to whichsix months ended June 30, 2019 and 2018.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Customer | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| A (Beijing Daopei, a related party) | 14.0 | % | 29 | % | 8.2 | % | 18 | % | ||||||||
| B (Hebei Daopei, a related party) | 13.9 | % | 16 | % | 8.1 | % | 20 | % | ||||||||
| C | 20.2 | % | 11 | % | 23.8 | % | 13 | % | ||||||||
| D | 13.5 | % | * | 15.9 | % | 11 | % | |||||||||
| * | Less than 10% |
Three customers, whose outstanding receivable accounted for 10% or more of the Company acquired all assets, including all intellectual property, held by Dr. Zhou pertaining toCompany’s total outstanding accounts receivable and accounts receivable – related party and tenants receivable at June 30, 2019, accounted for 83.5% of the businessCompany’s total outstanding accounts receivable and accounts receivable – related party and tenants receivable at June 30, 2019.
Two customers, whose outstanding receivable accounted for 10% or more of researching, developingthe Company’s total outstanding accounts receivable and commercializing exosome technologies including, but not limited to, patent application number CN 2016 1 0675107.5 (applicationaccounts receivable – related party and tenants receivable at December 31, 2018, accounted for 56.0% of an Exosomal MicroRNA in plasma as biomaker to diagnosis liver cancer), patent application number CN 2016 1 0675110.7 (clinical applicationthe Company’s total outstanding accounts receivable and accounts receivable – related party and tenants receivable at December 31, 2018.
Suppliers
Four suppliers accounted for 10% or more of circulating exosome carried miRNA-33bthe Company’s purchase during the three and six months ended June 30, 2019. Three suppliers accounted for 10% or more of the Company’s purchase during the three and six months ended June 30, 2018.
Four suppliers, whose outstanding payable accounted for 10% or more of the Company’s total outstanding accounts payable at June 30, 2019, accounted for 87.5% of the Company’s total outstanding accounts payable at June 30, 2019.
Three supplier, whose outstanding payable accounted for 10% or more of the Company’s total outstanding accounts payable at December 31, 2018, accounted for 95.5% of the Company’s total outstanding accounts payable at December 31, 2018.
Concentrations of Credit Risk
At June 30, 2019 and December 31, 2018, cash balances in the diagnosis of liver cancer), patent application number CN 2017 1 0330847.X (saliva exosome based methodsPRC are $640,253 and composition for$1,216,485, respectively, are uninsured. The Company has not experienced any losses in PRC bank accounts and believes it is not exposed to any risks on its cash in PRC bank accounts.
The Company maintains its cash in United States bank and financial institution deposits that at times may exceed federally insured limits. At June 30, 2019 and December 31, 2018, the diagnosis, stagingCompany’s cash balances in United States bank accounts had approximately $2,761,051 and prognosis of oral cancer) and patent application number CN 2017 1 0330835.7 (a novel exosome-based therapeutics against proliferative oral diseases). In consideration$239,000 in excess of the assets, GenExosome agreed to pay Dr. Zhou $876,087federally-insured limits, respectively. The Company has not experienced any losses in cash no later than November 24, 2017, transfer 500,000 shares of common stockits United States bank accounts through and as of the Company to Dr. Zhou no later than November 24, 2017 and issue Dr. Zhou 400 sharesdate of common stock of GenExosome no later than November 24, 2017. As a resultthis report.
NOTE 22 – SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date of the above transactions, the Company holds 60% of GenExosome and Dr. Zhou holds 40% of GenExosome.
On October 25, 2017, GenExosome entered into and closed a Stock Purchase Agreement with Beijing Jieteng (GenExosome) Biotech Co. Ltd., a corporation incorporated in the People’s Republic of China (“Beijing GenExosome”) and Dr. Zhou, the sole shareholder of Beijing GenExosome, pursuant to which GenExosome acquired all of the issued and outstanding securities of Beijing GenExosome in consideration of a cash payment in the amount of $450,000, which shall be paid upon Beijing GenExosome recording the change in ownership with the Ministry of Commerce of the People’s Republic of China in accordance with the Interim Measures for Record Management regarding the Establishment and Change of Foreign-invested Enterprises.
On October 25, 2017, GenExosome increased its size of its board of directors from one to four and appointed Wenzhao “Daniel” Lu, Meng Li and Dr. Zhou to the board of directors. In addition, Dr. Zhou was appointed as Co-Chief Executive Officer of GenExosome.
On October 25, 2017, Dr. Zhou and GenExosome entered into an Executive Retention Agreement pursuant to which Dr. Zhou agreed to serve as Co-Chief Executive Officer in consideration of an annual salary of $160,000. Dr. Zhou and GenExosome also entered into an Invention Assignment, Confidentiality, Non-Compete and Non-Solicit Agreement.
Beijing GenExosome is engaged in the development of exosome technology to improve diagnosis and management of diseases. Exosomes are tiny, subcellular, membrane-bound vesicles in diameter of 30-150 nm that are released by almost all cell types and that can carry membrane and cellular proteins, as well as genetic materials that are representative of the cell of origin. Profiling various bio-molecules in exosomes may serve as useful biomarkers for a wide variety of diseases. Beijing GenExosome’s research kits are designed to be used by researchers for biomarker discovery and clinical diagnostic development, and the advancement of targeted therapies. Currently, research kits and service are available to isolate exosomes or extract exosomal RNA/protein from serum/plasma, urine and saliva samples. Beijing GenExosome is seeking to decode proteomic and genomic alterations underlying a wide-range of pathologies, thus allowing for the introduction of novel non-invasive “liquid biopsies”. Its mission is focused toward diagnostic advancements in the fields of oncology, infectious diseases and fibrotic diseases, and discovery of disease-specific exosomes to provide disease origin insight necessary to enable personalized clinical management. There is no guarantee that Beijing GenExosome will be able to successfully achieve its stated mission.filing.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of theour financial condition and results of operations and financial condition of Avalon GloboCare Corp. for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 should be read in conjunction with the Avalon GloboCare Corp.our unaudited condensed consolidated financial statements and therelated notes thereto containedto those unaudited condensed consolidated financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Special Note Regarding Forward-Looking Statements and Business sections in our Form 10-K as filed with the Securities and Exchange Commission on March 28, 2017.26, 2019. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.statements.
Unless otherwise indicated, references to the “Company,”“Company”, “us” or “we” refer to Avalon GloboCare Corp. and its subsidiaries.consolidated subsidiaries.
Overview
Avalon GloboCare Corp. is a clinical-stage, leading CellTech bio-developer dedicated to integratingadvancing and managing global healthcareempowering innovative, transformative immune effector cell therapy and exosome technology. Avalon also provides strategic advisory and outsourcing services to facilitate and resources,enhance its clients’ growth, development, as well as empowering high-impact biomedical innovationscompetitiveness in healthcare and technologiesCellTech industry markets.
Avalon’s subsidiary and joint venture structure contribute to accelerate their clinical applications. Operating through two major platforms, namely “Avalon Cell”investor flexibility and R&D focus, enabling Avalon to establish our leading role in the fields of immune effector cell therapy (including CAR-T and CAR-NK), and “Avalon Rehab”, our “Technology + Service” ecosystem covers the areas ofexosome-based regenerative medicine, cell-based immunotherapy, exosome technology, telemedicine with medical second opinion/referral services,therapeutics (our ACTEXTM platform), as well as fertility“liquid biopsy” diagnostics.
Avalon achieves and rehabilitation medicine. Wefosters seamless integration of unique verticals to bridge and accelerate innovative research, bio-process development, clinical programs and product commercialization.
Avalon’s upstream innovative research includes:
| - | Co-development of Avalon Clinical-grade Tissue-specific Exosome (“ACTEXTM”) with Weill Cornell Medicine |
| - | Novel therapeutic and diagnostic targets development utilizing QTY-code protein design technology with Massachusetts Institute of Technology (MIT) |
| - | Co-development of next generation, transposon-based, multi-target CAR-T, CAR-NK and other immune effector cell therapeutic modalities with Arbele Corp. |
Avalon’s midstream bio-processing and bio-production facility is located in Nanjing, China with state-of-the-art, automated GMP and QC/QA infrastructure for standardized bio-manufacturing of clinical-grade cellular products involved in our clinical programs in immune effector cell therapy, regenerative therapeutics, as well as bio-banking.
Avalon’s downstream medical team and facility consists of top-rated affiliated hospital network and experts specialized in hematology, oncology, cellular immunotherapy, hematopoietic stem/progenitor cell transplant, as well as regenerative therapeutics. Our major clinical programs include:
AVA-001:Avalon has initiated its first-in-human clinical trial of CD19 CAR-T candidate, AVA-001 in August 2019 at the Hebei Yanda Lu Daopei Hospital and Beijing Lu Daopei Hospital in China (the world’s single largest CAR-T treatment network with over 600 patients being treated with CAR-T) for the indication of relapsed/refractory B-cell acute lymphoblastic leukemia and non-Hodgkin Lymphoma. The AVA-001 candidate is characterized by the utilization of 4-1BB (CD137) co-stimulatory signaling pathway, conferring a strong anti-cancer activity during pre-clinical study. It also features a shorter bio-manufacturing time which leads to advantage of prompt treatment to patients with these dreadful hematologic malignancies. Avalon plans to recruit 20 patients (under registered clinical trial NCT03952523) for safety and efficacy studies.
AVA-101:Avalon’s transposon-based, multi-targeted CAR-T candidate, AVA-101 (co-developed with Arbele Corp.) will enter pre-clinical process development and validation phase during Q3 2019 as scheduled. AVA-101 features non-viral, transposon-engineered CAR-T with multiple anti-cancer targets, as well as possessing molecular safety-switch mechanism to minimize the side effects, such as cytokine release syndrome and neurotoxicity, often associated with conventional CAR-T cellular therapy. Avalon anticipates this next generation of potentially more effective and safer CAR-T candidate will proceed to first-in-human clinical study in later part of 2020.
AVA-202:Avalon has recently completed the standardized bio-production process of tissue-specific, clinical-grade exosomes, a co-development endeavor with Weill Cornell Medicine with focus on angiogenic exosomes derived from endothelial cells which promote blood vessel formation and wound healing. Avalon is further developing this technology platform into a therapeutic candidate, AVA-202, and plan to integrate these services through joint venturesinitiate international multi-centered clinical studies in unmet medical areas of vascular diseases and accretive acquisitions that bring shareholder value both in the short term, through operational entities as partwound healing, including treatment of Avalon Rehab, and long term, through biomedical innovation development as part of Avalon Cell.diabetic foot ulcer.
We currently produceThe commercialization phase of Avalon’s ACTEXTM-based product development is underway to enter the markets of skin care, scar removal, and hair growth through in-house development and strategic partnership.
In the period ending June 30, 2019 we generated revenue by selling exosome isolation systems in China through our joint venture GenExosome Technologies, Inc. In addition, we provide medical related party strategic relationships in the Peoples Republic of China (“China”) that provide consultativeconsulting services in advanced areas of immunotherapy and second opinion/referral services. Our services include research studies; executive education; daily online executive briefings; tailored expert advisory services; and consulting and management services. We typically charge an annual fee. Throughthrough our services we attempt to focus our clients on important problems by providing an analysis of the evolving healthcare industry and the methods prevalent in the industry to solve those problems through counsel, business planning and support.
wholly-owned subsidiary Avalon (Shanghai) Healthcare Technology Co., Ltd., or Avalon Shanghai. We also own and operate rental commercial real property in New Jersey.Jersey, where we are headquartered. Recent feedback received from our research partners is that our exosome isolation system does not produce consistent results and does not deliver high exosome yields and concentrations. It is unclear if this is a result of incorrect use of the system or a flaw in the underlying system. As a result, we have discontinued sales of these isolation systems until we complete our internal assessment and determine if the system is viable for broad commercial use.
On May 29, 2018, Avalon Shanghai entered into a Joint Venture Agreement with Jiangsu Unicorn Biological Technology Co., Ltd., or Unicorn, pursuant to which a company named Epicon Biotech Co., Ltd. (“Epicon”) was formed on August 14, 2018. Epicon is owned 60% by Unicorn and 40% by Avalon Shanghai. Within two years of execution of the Joint Venture Agreement, Unicorn shall invest cash into Epicon in an amount not less than RMB 8,000,000 (approximately $1.2 million) and the premises of the laboratories of Nanjing Hospital of Chinese Medicine for exclusive use by Epicon, and Avalon Shanghai shall invest cash into Epicon in an amount not less than RMB 10,000,000 (approximately $1.5 million). The board of directors of Epicon shall consist of five members with Unicorn appointing three members and Avalon Shanghai appointing two members. Epicon will be focused on cell preparation, third party testing, biological sample repository for commercial and scientific research purposes and the clinical transformation of scientific achievements. As of the date hereof, Unicorn has invested the premises of the laboratories of Nanjing Hospital of Chinese Medicine and Avalon Shanghai has contributed RMB 3,000,000 (approximately $0.4 million). Epicon is focused on cell preparation, third party testing, biological sample repository for commercial and scientific research purposes and the clinical transformation of scientific achievements.
On July 18, 2018, the Company formed a wholly owned subsidiary, Avactis Biosciences, Inc., a Nevada corporation, which will be focused on accelerating commercial activities related to Chimeric Antigen Receptor (CAR)-T technologies. The subsidiary is designed to integrate and optimize our global scientific and clinical resources to further advance the use of CAR-T to treat certain cancers.
On July 30, 2018, the Company signed a Letter of Intent with Arbele Limited, a Hong Kong company (“Arbele”) for a proposed strategic partnership agreement. The purpose of the proposed transaction is to form a joint venture company, AVAR BioTherapeutics (China) Co. Ltd., to develop, manufacture, and commercializing CAR-T immunotherapy for treating cancer patients in China, utilizing intellectual property from Arbele and the clinical platform of the LuDaopei Medical Group in China. The Company paid a $100,000 fee to Arbele for a five-month exclusive right to complete the definitive agreements for the transaction. On October 23, 2018, Avactis Biosciences, Inc. (“Avactis”), a wholly-owned subsidiary of the Company, and Arbele agreed to the establishment of AVAR BioTherapeutics (China) Co. Ltd. (“AVAR”), a Sino-foreign equity joint venture, pursuant to an Equity Joint Venture Agreement (the “AVAR Agreement”), which will be owned 60% by Avactis and 40% by Arbele. The purpose and business scope of the Joint Venture is to research, develop, produce, sell, distribute and generally commercialize CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy in China. Avactis is required to contribute USD $10 million (or equivalent in RMB) in cash and/or services, which shall be contributed in tranches based on milestones to be determined jointly by AVAR and Avactis in writing subject to Avactis’ cash reserves. Within 30 days, Arbele shall make contribution of USD $6.66 million in the form of entering into a License Agreement with AVAR granting AVAR with an exclusive right and license in China to its technology and intellectual property pertaining to CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy technology and any additional technology developed in the future with terms and conditions to be mutually agreed upon Avactis and AVAR and services.
In addition, Avactis is responsible for:
| ● | Contributing registered capital of RMB 5,000,000 (approximately $730,000) for working capital purposes as required by local regulation, which is not required to be contributed immediately and will be contributed subject to Avactis’ discretion; |
| ● | assist AVAR in setting up its business operations and obtaining all required permits and licenses from the Chinese government; |
| ● | assisting AVAR in recruiting, hiring and retaining personnel; |
| ● | providing AVAR with access to various hospital networks in China to assist in the testing and commercialization of the CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy technology in China; |
| ● | assisting AVAR in managing the Good Manufacturing Practices (GMP) facility and clinic to be developed by AVAR; |
| ● | providing AVAR with advice pertaining to conducting clinicals in China; and |
| ● | Within 6 days of signing the AVAR Agreement, Avactis is required to pay to Arbele $300,000 as a research and development fee with an additional two payments of $300,000 (for a total of $900,000) to be paid upon mutually agreed upon milestones. |
Under AVAR Agreement, Arbele shall be responsible for the following:
| ● | Entering into a License Agreement with AVAR; and |
| ● | Providing AVAR with research and development expertise pertaining to clinical laboratory medicine when hired by AVAR. |
As of the date of this report, Avactis has paid $600,000 to Arbele as research and development fee, AVAR is in process of being established and the License Agreement has not been finalized.
AVAR’s Board of Directors shall consist of three directors, of which two (2) directors shall be appointed by Avactis who shall initially be David Jin, M.D., Ph.D and one other director to be determined by Avactis and agreed to by Arbele. One director shall be appointed by Arbele who shall initially be John Luk, Dr. Med.Sc., EMBA.
On August 6, 2018, the Company entered into a strategic partnership agreement with Weill Cornell’s cGMP Cellular Therapy Facility and Laboratory for Advanced Cellular Engineering headed by Dr. Yen-Michael Hsu. This strategic partnership aims to co-develop bio-production and standardization procedures in procurement, storage, processing, clinical study protocols, and bio-banking for Chimeric Antigen Receptor (CAR)-T therapy, in accordance with the Foundation of Accreditation for Cellular Therapy (FACT) and American Association of Blood Banks (AABB) standards. This partnership also includes a CAR-T education program to support and foster collaborative research and training programs for scientists and clinicians between Weill Cornell and Hebei Yanda LuDaopei Hospital, which is our main affiliated clinical facility as well as the world’s single largest medical institution in CAR-T therapy.
The value of the Renminbi (“RMB”), the main currency used in China, fluctuates and is affected by, among other things, changes in China’s political and economic conditions. The conversion of RMB into foreign currencies such as the U.S. dollar have generally been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets.
Going Concern
We have a limited operating history and our continued growth is dependent upon the continuation of providing medical consulting services to our only threefour clients who are our related parties and generating rental revenue from our income-producing real estate property ownershipin New Jersey and operation;performing development services for hospitals and other customers and sales of developed products to hospitals and other customers; hence generating revenues, and obtaining additional financing to fund future obligations and pay liabilities arising from normal business operations. We had working capital deficit (total current liabilities in excess of total current assets) and an accumulated deficit of $5,294,818$20,054,816 at June 30, 2019, and $1,743,939 at September 30, 2017, respectively, and had aincurred recurring net loss and netnegative cash flow used inflows from operating activities of $1,690,570$8,943,752 and $747,056$3,920,258 for the ninesix months ended SeptemberJune 30, 2017,2019, respectively. In addition, the current cash balance cannot be projected to cover the operating expenses for the next twelve months from the release date of this report. These factors, among others, raisedmatters raise substantial doubt about our ability to continue as a going concern. Our unaudited condensed consolidated financial statements appearing elsewhere in this report do not include any adjustments that might result from the outcome of this uncertainty. There are no assurances we will be successful in our efforts to generate significant revenues or report profitable operations or to continue as a going concern, in which event investors would lose their entire investment in our company.
Our ability to continue as a going concern is dependent upon our ability to carry out our business plan, achieve profitable operations, obtain additional working capital funds from our significant shareholders, and or through debt and equity financings. However, there can be no assurance that any additional financings will be available to us on satisfactory terms and conditions, if any.
Currently, the Company is planning to either borrow funds or raise additional capital through equity or debt financings. However, we cannot be certain that such capital (from our stockholders or third parties) will be available to us or whether such capital will be available on terms that are acceptable to us. Any such financing likely would be dilutive to existing stockholders and could result in significant financial operating covenants that would negatively impact our business. If we are unable to raise sufficient additional capital on acceptable terms, we will have insufficient funds to operate our business or pursue our planned growth.
The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to the allowance for doubtful accounts, reserve for obsolete inventory, the useful life of property plant,and equipment and investment in real estate and intangible assets, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets accruals for taxes due,and the associated valuation allowances, and valuation of options.stock-based compensation.
We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the unaudited consolidated financial statements.
Revenue Recognition
WeEffective January 1, 2018, we began recognizing revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. The impact of adopting the new revenue standard was not material to our consolidated financial statements and there was no adjustment to beginning accumulated deficit on January 1, 2018. The core principle of this new revenue standard is that a company should recognize revenue when persuasive evidenceto depict the transfer of an arrangement exists, delivery has occurredpromised goods or services have been rendered,to customers in an amount that reflects the purchaseconsideration to which we expect to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
| ● | Step 1: Identify the contract with the customer |
| ● | Step 2: Identify the performance obligations in the contract |
| ● | Step 3: Determine the transaction price |
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract |
| ● | Step 5: Recognize revenue when the company satisfies a performance obligation |
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised goods or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” goods or service (or bundle of goods or services) if both of the following criteria are met:
The customer can benefit from the goods or service either on its own or together with other resources that are readily available to the customer (i.e., the goods or service is capable of being distinct).
The entity’s promise to transfer the goods or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the goods or service is distinct within the context of the contract).
If a goods or service is not distinct, the goods or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is fixedthe amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or determinable and collectability is reasonably assured.
We provide medical related consulting services to our clients. We are paid for our services by our clients pursuant to the termsa customer, excluding amounts collected on behalf of the written consulting agreements. Each contract calls for a fixed paymentthird parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed period of time. We recognize revenue by providing medical related consulting services under written service contracts with our customers. Revenue related to our service offerings is recognized as the services are performed and amounts, are earned, using the straight-line method over the term of the related services agreement. Prepayments, if any, received from customers prior to the services being performed are recorded as advance from customers. In these cases, when the services are performed, the amount recorded as advance from customers is recognized as revenue.
We lease commercial property under operating leases with terms of generally two yearsvariable amounts, or more. We recognize rental revenue from our commercial leases on a straight-line basis over the life of the lease including rent holidays, if any. Straight-line rent receivable consists of the difference between the tenants’ rents calculated on a straight-line basis from the date of lease commencement over the remaining terms of the related leases and the tenants’ actual rents due under the lease agreements andboth. Variable consideration is included in tenants receivablethe transaction price only to the extent that it is probable that a significant reversal in the accompanying consolidated balance sheets. Revenuesamount of cumulative revenue recognized will not occur when the uncertainty associated with operating expense recoveries arethe variable consideration is subsequently resolved.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in the period in which the expenses are incurredtime or over time as appropriate.
.Types of revenue:
| ● | Rental revenue from leasing commercial property under operating leases with terms of generally three years or more. |
| ● | Service fees under consulting agreements with related parties to provide medical related consulting services to our clients. We are paid for our services by our clients pursuant to the terms of the written consulting agreements. Each contract calls for a fixed payment. |
| ● | Service fees under agreements to perform development services for hospitals and other customers. We do not perform contracts that are contingent upon successful results. |
| ● | Sales of developed products to hospitals and other customers. |
Revenue recognition criteria:
| ● | We recognize rental revenue from our commercial leases on a straight-line basis over the life of the lease including rent holidays, if any. Straight-line rent receivable consists of the difference between the tenants’ rents calculated on a straight-line basis from the date of lease commencement over the remaining terms of the related leases and the tenants’ actual rents due under the lease agreements and is included in tenants receivable in the accompanying consolidated balance sheets. Revenues associated with operating expense recoveries are recognized in the period in which the expenses are incurred. |
| ● | We recognize revenue by providing medical related consulting services under written service contracts with our customers. Revenue related to our service offerings is recognized as the services are performed. |
| ● | Revenue from development services performed under written contracts is recognized as services are provided. |
| ● | Revenue from sales of developed items to hospitals and other customers is recognized when items are shipped to customers and titles are transferred. |
We do not offer promotional payments, customer coupons, rebates or other cash redemption offers to our customers.
Income Taxes
We are governed by the income tax laws of the PRCChina and the United States. Income taxes are accounted for pursuant to ASC 740 “Accounting for Income Taxes,” which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge for taxes is based on the results for the period as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is changed to equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis.basis.
Stock-based CompensationNon-controlling Interest
Stock based compensation is accounted for based on the requirementsAs of June 30, 2019, Dr. Yu Zhou, director and co- chief executive officer of GenExosome, who owned 40% of the Share-Based Payment topicequity interests of Accounting Standards Codification (“ASC”) 718GenExosome, which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award. The Accounting Standards Codification also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the period of services or the vesting period, whichever is applicable. Until the measurement date is reached, the total amount of compensation expense remains uncertain.not under our control.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previousFor details of applicable new accounting standards, and disclosing key information about leasing arrangements. This pronouncement is effective for reporting periods beginning after December 15, 2018 using a modified retrospective adoption method. We are currently evaluating the impactplease, refer to Recent Accounting Pronouncements in Note 3 of adopting the new lease standard on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. We are currently evaluating the impact it may have on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting. The guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. This guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact it may have on our consolidated financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our consolidated financial condition, results of operations, cash flows or disclosures.accompanying this report.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Three and NineSix Months Ended SeptemberJune 30, 20172019 and 20162018
Revenues
We generated revenue from medical related consulting services commencing on July 2016 and we generated real property rental revenue commencing on May 2017.
For the three and nine months ended SeptemberJune 30, 2017,2019, we had real property rental revenue of $315,284 and $537,538, respectively. We did not generate any$264,889, as compared to $278,872 for the three months ended June 30, 2018, a decrease of $13,983, or 5.0%. For the six months ended June 30, 2019, we had real property rental revenue of $531,515, as compared to $575,495 for the three and ninesix months ended SeptemberJune 30, 2016.2018, a decrease of $43,980, or 7.6%. The decrease in the six months ended June 30, 2019 was primarily attributable to the loss of a tenant in December 2018.
For the three months ended SeptemberJune 30, 2017,2019, we had medical related consulting services revenue from related partiesparty of $2,166,$111,434, as compared to $141,996 for the three months ended June 30, 2018, a decrease of $30,562, or 21.5%. For the six months ended June 30, 2019, we had medical related consulting services revenue from related partiesparty of $326,667$125,694, as compared to $141,996 for the six months ended June 30, 2018, a decrease of $16,302, or 11.5%. The decrease was primarily attributable to business fluctuation period over period.
For the three months ended June 30, 2019, we had revenue from contract services through performing development services for hospitals and other customers and sales of developed products to hospitals and other customers of $23,404, as compared to $75,225 for the three months ended SeptemberJune 30, 2016,2018, a decrease of $324,501,$51,821, or 99.3%68.9%. For the ninesix months ended SeptemberJune 30, 2017,2019, we had consulting services revenue from related partiescontract services through performing development services for hospitals and other customers and sales of $220,949,developed products to hospitals and other customers of $26,682, as compared to consulting services revenue from related parties of $326,667$86,515 for the ninesix months ended SeptemberJune 30, 2016,2018, a decrease of $105,718,$59,833, or 32.4%69.2%. The decrease was mainly attributable to the decreased demand for our consulting service from our related parties.business fluctuation period over period.
Costs and Expenses
Real property operating expenses consist of property management fees, property insurance, real estate taxes, depreciation, repairs and maintenance fees, utilities and other expenses related to our rental properties.
For the three and nine months ended SeptemberJune 30, 2017,2019, our real property operating expenses amounted to $180,722 and $342,576, respectively. Since we started generating real property rental revenue during$192,676, as compared to $195,941 for the second quarterthree months ended June 30, 2018, a decrease of 2017, we had neither real property rental revenue nor$3,265, or 1.7%. For the six months ended June 30, 2019, our real property operating expenses amounted to $423,435, as compared to $406,215 for the six months ended June 30, 2018, an increase of $17,220 or 4.2%. The change in the three and ninesix months ended SeptemberJune 30, 2016.2019 was mainly due to increase in real property management fee.
Costs of medical related consulting services includesinclude the cost of internal labor and related benefits, travel expenses related to medical related consulting services, subcontractor costs, other related consulting costs, and other overhead costs. Subcontractor costs were costs related to medical related consulting services incurred by our subcontractor, such as medical professional’s compensation and travel costs.
CostsFor the three months ended June 30, 2019, costs of medical related consulting services amounted to $95,375, as compared to $124,715 for the three months ended SeptemberJune 30, 2017 was $47,033, representing an increase2018, a decrease of $13,485,$29,340, or 40.2%23.5%, which mainly attributable to the decrease in revenue. For the six months ended June 30, 2019, costs of medical related consulting services amounted to $108,466, as compared to $33,548$124,715 for the six months ended June 30, 2018, a decrease of $16,249, or 13.0%, which mainly attributable to the decrease in revenue.
Costs of development services and sales of developed products include inventory costs, materials and supplies costs, internal labor and related benefits, depreciation, other overhead costs and shipping and handling costs incurred.
For the three months ended June 30, 2019, costs of development services for hospitals and other customers and sales of developed products to hospitals and other customers amounted to $31,784, as compared to $42,093 for the three months ended SeptemberJune 30, 2016. Costs2018, a decrease of consulting$10,309, or 24.5%. For the six months ended June 30, 2019, costs of development services for hospitals and other customers and sales of developed products to hospitals and other customers amounted to $62,091, as compared to $58,613 for the ninesix months ended SeptemberJune 30, 2017 was $271,845, representing2018, an increase of $238,297,$3,478, or 710.3%, as compared to $33,548 for5.9%. The increase in the ninesix months ended SeptemberJune 30, 2016. The2019 was mainly due to (i) the increase was primarily attributable to the allocation of fixed costs, mainly consisting of internal labor andin depreciation related benefits, to our costnewly purchased manufacturing equipment which we started depreciating from the fourth quarter of consulting services.2018 and the first quarter of 2019; (ii) the slight increase in labor costs.
Real Property Operating Income
Our real property operating income was $134,562 and $194,962, respectively, for the three and nine months ended September 30, 2017. We did not generate any real property operating income for the three and nine months ended SeptemberJune 30, 2016.2019 was $72,213, representing a decrease of $10,718, or 12.9%, as compared to $82,931 for the three months ended June 30, 2018. Our real property operating income for the six months ended June 30, 2019 was $108,080, representing a decrease of $61,200, or 36.2%, as compared to $169,280 for the six months ended June 30, 2018. The three and six months decrease was mainly attributable the decrease in rental revenue resulting from the loss of a tenant.
Gross Profit (Loss) from Medical Related Consulting Services and Gross Margin
Gross profit from medical related consulting services for the three months ended June 30, 2019 was $16,059, as compared to $17,281 for the three months ended June 30, 2018, a change of $1,222, or 7.1%. Gross profit from medical related consulting services for the six months ended June 30, 2019 was $17,228, as compared to $17,281 for the six months ended June 30, 2018, a change of $53, or 0.3%.
Gross margin increased to 14.4% for the three months ended June 30, 2019 from gross margin of 12.2% for the three months ended June 30, 2018. Gross margin increased to 13.7% for the six months ended June 30, 2019 from gross margin of 12.2% for the six months ended June 30, 2018. The increase in gross margin for the three and six months ended June 30, 2019 as compared to the corresponding 2018 periods were primarily attributable to business fluctuation period over period.
Gross Profit from Development Services and Sales of Developed Products and Gross Margin
Our gross loss from consultingdevelopment services and sales of developed products for the three months ended SeptemberJune 30, 20172019 was $44,867, representing a change of $337,986, or (115.3)%,$8,380, as compared to gross profit of $293,119$33,132 for the three months ended SeptemberJune 30, 2016, mainly due2018, a change of $41,512, or 125.3%. Our gross loss from development services and sales of developed products for the six months ended June 30, 2019 was $35,409, as compared to gross profit $27,902 for the significant decrease in our consulting services revenue and the increase in our consulting services costs. six months ended June 30, 2018, a change of $63,311, or 226.9%.
Gross margin decreased to (2,071.4)%-35.8% for the three months ended SeptemberJune 30, 20172019 from 89.7%44.0% for the three months ended SeptemberJune 30, 2016.
Our gross loss from consulting services for the nine months ended September 30, 2017 was $50,896, representing a change of $344,015, or (117.4)%, as compared to gross profit of $293,119 for the nine months ended September 30, 2016, mainly due to the decrease in our consulting services revenue and increase in our consulting services costs.2018. Gross margin decreased to (23.0)%-132.7% for the ninesix months ended SeptemberJune 30, 20172019 from 89.7%32.3% for the ninesix months ended SeptemberJune 30, 2016.
2018. The decrease in gross margin for the three and ninesix months ended SeptemberJune 30, 20172019 as compared to the three and nine months ended September 30, 2016 wascomparable 2018 periods were primarily resulted from low consulting services revenue andattributable to the allocation of fixed costs, mainly consisting of internal labor and related benefits, to costs of the low level of consultingsignificant decrease in revenue.
Other Operating Expenses
For the three and ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, other operating expenses consisted of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Selling expense | $ | 148 | $ | 121 | $ | 15,138 | $ | 121 | ||||||||
| Compensation and related benefits | 468,837 | — | 857,237 | — | ||||||||||||
| Professional fees | 186,208 | 84,038 | 566,131 | 161,113 | ||||||||||||
| Rent | 34,846 | — | 103,173 | — | ||||||||||||
| Other general and administrative | 57,575 | 1,127 | 141,907 | 29,583 | ||||||||||||
| $ | 747,614 | $ | 85,286 | $ | 1,683,586 | $ | 190,817 | |||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Advertising expenses | $ | 221,222 | $ | - | $ | 465,822 | $ | - | ||||||||
| Compensation and related benefits | 2,100,178 | 487,452 | 4,200,333 | 1,026,266 | ||||||||||||
| Professional fees | 792,486 | 593,025 | 2,260,712 | 1,164,797 | ||||||||||||
| Research and development | 949,711 | 263 | 1,102,171 | 263 | ||||||||||||
| Amortization | 81,893 | 81,893 | 163,786 | 163,786 | ||||||||||||
| Travel and entertainment | 109,578 | 82,085 | 297,014 | 140,033 | ||||||||||||
| Other general and administrative | 168,576 | 101,880 | 409,126 | 247,291 | ||||||||||||
| $ | 4,423,644 | $ | 1,346,598 | $ | 8,898,964 | $ | 2,742,436 | |||||||||
| ● |
| ● | For the three months ended June 30, 2019, compensation and related benefits |
| ● | Professionalfees primarily consisted of accounting fees, audit fees, legal service fees, consulting fees, investor relations service charges and other fees incurred for service related to |
| ● |
| ● | Amortizationexpense from intangible assets remained materially consistent with prior year comparable periods. |
| ● | Forthe three months ended June 30, 2019, travel and entertainment expense increased by $27,493, or 33.5%, as compared to the three months ended June 30, 2018.Forthe six months ended June 30, 2019, travel and entertainment expense increased by $156,981, or 112.1%, as compared to the six months ended June 30, 2018. The increase was mainly due to increased business travel activities incurred and increased entertainment expenditure in order to enhance our visibility in the three and six months ended June 30, 2019. |
| ● | Othergeneral and administrative expenses mainly consisted of |
(Loss) IncomeLoss from Operations
As a result of the foregoing, for the three months ended SeptemberJune 30, 2017,2019, loss from operations amounted to $657,919,$4,343,752, as compared to income from operations of $207,833$1,213,254 for the three months ended SeptemberJune 30, 2016,2018, a change of $865,752,$3,130,498, or 416.6%258.0%.
As a result of the foregoing, for the ninesix months ended SeptemberJune 30, 2017,2019, loss from operations amounted to $1,539,520,$8,809,065, as compared to income from operations of $102,302$2,527,973 for the ninesix months ended SeptemberJune 30, 2016,2018, a change of $1,641,822,$6,281,092, or 1,604.9%248.5%.
Other Income (Expense)
Other income (expense) mainly includes interest incomeexpense and loss from bank deposits, interest expense generated from loan payable, and foreign currency transaction loss. equity-method investment.
Other expense, net, totaled $52,810$95,071 for the three months ended SeptemberJune 30, 2017,2019, as compared to other income,expense, net, of $41$130,561 for the three months ended SeptemberJune 30, 2016,2018, a change of $52,851,$35,490, which was mainlyprimarily attributable to a decrease in Foreign currency transaction loss of $106,929 And an increase in gain from change in derivative liabilities of approximately $461,000, offset by an increase in financing costs of approximately $525,000.
Other expense, net, totaled $134,687 for the six months ended June 30, 2019, as compared to other expense, net, $366,811 for the six months ended June 30, 2018, a change of $232,124, which was primarily attributable to a decrease in Foreign currency transaction loss of $106,929, and a decrease in interest expense of approximately $53,000.
Other expense, net, totaled $151,050 for the nine months ended September 30, 2017, as compared to other income, net, of $101 for the nine months ended September 30, 2016, a change of $151,151, which was mainly attributable to an increase in interest expense of approximately $95,000, and an increase in foreign currency transaction loss of approximately $57,000, offset by an increase in interest income of approximately $1,000.$227,399.
Income Taxes
We did not have any income taxes expense for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 since we did not generate any taxable incomeincurred losses in the periods.periods.
Net Loss
As a result of the factors described above, our net loss was $710,729, or $(0.011) per share (basic and diluted), for the three months ended September 30, 2017. Our net income was $207,874, or $0.004 per share (basic and diluted), for the three months ended September 30, 2016.
As a result of the factors described above, our net loss was $1,690,570,$4,438,823 for the three months ended June 30, 2019, as compared to $1,343,815 for the three months ended June 30, 2018, a change of $3,095,008 or $(0.026)230.3%. As a result of the factors described above, our net loss was $8,943,752 for the six months ended June 30, 2019, as compared to $2,894,784 for the six months ended June 30, 2018, a change of $6,048,968 or 209.0%.
Net Loss Attributable to Avalon GloboCare Corp. Common Shareholders
The net loss attributable to Avalon GloboCare Corp. common shareholders was $4,357,224 or $(0.06) per share (basic and diluted), for the ninethree months ended SeptemberJune 30, 2017. Our net income was $102,403,2019, as compared with $1,294,394, or $0.002$(0.02) per share (basic and diluted), for the ninethree months ended SeptemberJune 30, 2016.2018, a change of $3,062,830 or 236.6%.
The net loss attributable to Avalon GloboCare Corp. common shareholders was $8,763,040 or $(0.12) per share (basic and diluted) for the six months ended June 30, 2019, as compared with $2,775,973, or $(0.04) per share (basic and diluted) for the six months ended June 30, 2018, a change of $5,987,067 or 215.7%.
Foreign Currency Translation Adjustment
Our reporting currency is the U.S. dollar. The functional currency of our parent company, and our wholly-owned U.S. subsidiaries,AHS, Avalon Healthcare System Inc.(BVI) Ltd. (dormant, is in process of being dissolved), Avalon RT 9, Properties, LLC,GenExosome, and Avalon (BVI) Ltd.,Avactis is the U.S. dollar and the functional currency of our wholly-owned PRC subsidiary, Avalon (Shanghai) Healthcare Technology Co., Ltd. which is incorporated in China,Shanghai and Beijing GenExosome, is the Chinese Renminbi (“RMB”). The financial statements of our subsidiarysubsidiaries whose functional currency is the RMB are translated to U.S. dollars using period end rates of exchange for assets and liabilities, average rate of exchange (for the period) for revenue,revenues, costs, and expenses and cash flows, and at historical exchange rates for equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation gainloss of $6,151$34,103 and $216a foreign currency translation loss of $96,207 for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation lossgain of $25,973$9,379 and a foreign currency translation gainloss of $431$43,369 for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. This non-cash gain had the effect of decreasing our reported comprehensive loss and increasing our reported comprehensive income. This non-cash loss had the effect of increasing our reported comprehensive loss and decreasing our reported comprehensive income.loss.
Comprehensive (Loss) IncomeLoss
As a result of our foreign currency translation adjustment, we had comprehensive loss of $704,578$4,472,926 and comprehensive income of $208,090$1,440,022 for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. As a result of our foreign currency translation adjustment, we had comprehensive loss of $1,716,543$8,934,373 and comprehensive income of $102,834$2,938,153 for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At SeptemberJune 30, 20172019 and December 31, 2016,2018, we had cash balance of approximately $357,000$3,400,000 and $2,886,000,$2,252,000, respectively. These funds are kept in financial institutions located as follows:
| Country: | September 30, 2017 | December 31, 2016 | June 30, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||
| United States | $ | 228,521 | 64.0 | % | $ | 360,559 | 12.5 | % | $ | 2,761,051 | 81.2 | % | $ | 1,035,802 | 46.0 | % | ||||||||||||||||
| China | 128,301 | 36.0 | % | 2,525,630 | 87.5 | % | 640,253 | 18.8 | % | 1,216,485 | 54.0 | % | ||||||||||||||||||||
| Total cash | $ | 356,822 | 100.0 | % | $ | 2,886,189 | 100.0 | % | $ | 3,401,304 | 100.0 | % | $ | 2,252,287 | 100.0 | % | ||||||||||||||||
Under applicable PRC regulations, foreign invested enterprises, or FIEs, in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign invested enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the cumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends.dividends.
In addition, a portion of our businesses and assets are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the ability of our PRC subsidiary to transfer its net assets to the Parent Company through loans, advances or cash dividends.dividends.
The current PRC Enterprise Income Tax (“EIT”) Law and its implementing rules generally provide that a 10% withholding tax applies to China-sourced income derived by non-resident enterprises for PRC enterprise income tax purposes unless the jurisdiction of incorporation of such enterprises’ shareholder has a tax treaty with China that provides for a different withholding arrangement.arrangement.
The following table sets forth a summary of changes in our working capital from December 31, 20162018 to SeptemberJune 30, 2017:2019:
December 31, 2016 to September 30, 2017 | ||||||||||||||||
September 30, 2017 | December 31, 2016 | Change | Percentage Change | |||||||||||||
| Working capital (deficit): | ||||||||||||||||
| Total current assets | $ | 622,361 | $ | 3,706,213 | $ | (3,083,852 | ) | (83.2 | )% | |||||||
| Total current liabilities | 5,917,179 | 160,317 | 5,756,862 | 3,590.9 | % | |||||||||||
| Working capital (deficit): | $ | (5,294,818 | ) | $ | 3,545,896 | $ | (8,840,714 | ) | (249.3 | )% | ||||||
| December 31, 2018 to June 30, 2019 | ||||||||||||||||
| June 30, 2019 | December 31, 2018 | Change | Percentage Change | |||||||||||||
| Working capital: | ||||||||||||||||
| Total current assets | $ | 3,992,379 | $ | 3,625,432 | $ | 366,947 | 10.1 | % | ||||||||
| Total current liabilities | 1,034,793 | 1,141,720 | (106,927 | ) | (9.4 | )% | ||||||||||
| Working capital | $ | 2,957,586 | $ | 2,483,712 | $ | 473,874 | 19.1 | % | ||||||||
Our working capital deficit increased by $8,840,714$473,874 to working capital deficit $5,294,818of $2,957,586 at SeptemberJune 30, 20172019 from working capital $3,545,896of $2,483,712 at December 31, 2016.2018. The increase in working capital deficit was primarily attributable to a decreasean increase in cash of approximately $2,529,000 mainly due to cash payment made for acquisition$1,150,000, an increase in accounts receivable of New Jersey real property,approximately $91,000, a decrease in prepaid expenses and otherinterest payable of approximately $713,000 primarily due to the$75,000, a decrease in prepayment for acquisition of real property of approximately $700,000, an increase in accrued liabilities and other payables of approximately $321,000 resulting from the increase$112,000, and a decrease in accrued professional fees of approximately $226,000 and the increase in accrued interest for our outstanding loan of approximately $95,000, an increase in loan payable of approximately $2,100,000 borrowed in connection with our purchase of New Jersey real property, an increase in tenants’ security deposit of approximately $92,000, an increase$100,000, offset by a decrease in due toprepaid expenses – related parties of approximately $210,000 mainly due to the increase$34,000, a decrease in working capital advance from our related parties,prepaid expenses and other current assets of approximately $726,000, and an increase in refundable depositaccounts payable of approximately $3,000,000 related to our March 2017 Subscription Agreement (see note 11 – Common shares issued for Share Subscription Agreement), offset by an increase in accounts receivable – related parties, net of allowance for doubtful accounts, of approximately $97,000, and an increase in tenants receivable, net of allowance for doubtful accounts, of approximately $56,000.$40,000.
Because the exchange rate conversion is different for the consolidated balance sheets and the consolidated statements of cash flows, the changes in assets and liabilities reflected on the consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the consolidated balance sheets.
Cash Flows for the NineSix Months Ended SeptemberJune 30, 20172019 Compared to the NineSix Months Ended SeptemberJune 30, 20162018
The following summarizes the key components of our cash flows for the ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Net cash (used in) provided by operating activities | $ | (747,056 | ) | $ | 327,898 | |||
| Net cash used in investing activities | (7,059,565 | ) | (230,395 | ) | ||||
| Net cash provided by financing activities | 5,309,500 | 150,000 | ||||||
| Effect of exchange rate on cash | (32,246 | ) | (1,262 | ) | ||||
| Net (decrease) increase in cash | $ | (2,529,367 | ) | $ | 246,241 | |||
| Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | |||||||
| Net cash used in operating activities | $ | (3,920,258 | ) | $ | (2,200,042 | ) | ||
| Net cash used in investing activities | (150,988 | ) | (197,953 | ) | ||||
| Net cash provided by financing activities | 5,103,704 | 3,034,143 | ||||||
| Effect of exchange rate on cash | 116,559 | (19,865 | ) | |||||
| Net increase in cash | $ | 1,149,017 | $ | 616,283 | ||||
Net cash flow used in operating activities for the six months ended June 30, 2019 was $3,920,258, which primarily reflected our net loss of approximately $8,943,752, and the changes in operating assets and liabilities, primarily consisting of a decrease in change in fair value of warrant derivative liability of approximately $460,000,a decrease in accrued labilities and other payables of approximately $473,000, a decrease in interest payable of approximately $75,000, and a decrease in accounts receivable of approximately $92,000 offset by an increase in prepaid expenses and other current assets of approximately $380,000, an increase in allocation of financing expense of approximately $526,000, an increase in security deposit of approximately $100,000,and the add-back of non-cash items consisting of depreciation and amortization of approximately $285,000, stock-based compensation expense of approximately $4,718,000, and loss on equity method investment of approximately $23,000.
Net cash flow used in operating activities for the ninesix months ended SeptemberJune 30, 20172018 was $747,056,$2,200,042, which primarily reflected our net loss of approximately $1,691,000,$2,895,000, and the changes in operating assets and liabilities, primarily consisting of an increase in accounts receivable – related parties of approximately $91,000,$151,000, an increase in tenants receivableprepaid expenses and other current assets of approximately $56,000,$154,000, an increase in security deposit of approximately $30,000, and$309,000 mainly due to the deposit made pursuant to a Joint Venture Agreement entered in May 2018, a decrease in income taxesinterest payable of approximately $21,000,$113,000, offset by an increase in accounts payable of approximately $22,000, an increase in accrued liabilities and other payables of approximately $321,000 resulting from the increase in accrued professional fees of approximately $226,000 and the increase in accrued interest for our outstanding loan of approximately $95,000, an increase in accrued liabilities and other payables – related parties of approximately $23,000, and an increase in tenants’ security deposit of approximately $92,000,$177,000, and the add-back of non-cash items consisting of depreciation and amortization expense of approximately $58,000$248,000, and stock-based compensation expense of approximately $602,000$1,083,000.
NetWe expect our cash flow provided byused in operating activities forto increase due to the nine months ended September 30, 2016 was $327,898, which primarily reflected our net income of approximately $102,000, and changes in operating assets and liabilities consisting of an increase in accrued liabilities and other payables – related parties of approximately $6,000, and an increase in advance from customers – related parties of approximately $227,000, offset by changes in operating assets and liabilities consisting of an increase in prepaid expenses and other of approximately $5,000, and a decrease in accrued liabilities and other payables of approximately $3,000.following:
| ● | the development and commercialization of exosome products; |
| ● | an increase in professional staff and services including increased costs of being a public company; and |
| ● | an increase in public relations and/or sales promotions for existing and/or new brands as we expand within existing markets or enter new markets. |
Net cash flow used in investing activities was $7,059,565$150,988 for the ninesix months ended SeptemberJune 30, 20172019 as compared to $230,395$197,953 for the ninesix months ended SeptemberJune 30, 2016.2018. During the ninesix months ended SeptemberJune 30, 2017,2019, we made paymentspayment for purchase of property plant and equipment of approximately $51,000,$140,000 and made paymentspayment for purchaseimprovement of commercial real estate of approximately $7,009,000. $11,000. During the ninesix months ended SeptemberJune 30, 2016,2018, we made payment forthe purchase of Avalon GloboCare Corp.’s shares of $230,000 and made payments for the purchase of property plant and equipment of $395.approximately $10,000, made prepayment for purchase of long-term assets of approximately $23,000, and made payment for improvement of commercial real estate of approximately $165,000.
Net cash flow provided by financing activities was $5,309,500$5,103,704 for the ninesix months ended SeptemberJune 30, 20172019 as compared to $150,000net cash flow provided by financing activities of $3,034,143 for the ninesix months ended SeptemberJune 30, 2016.2018. During the ninesix months ended SeptemberJune 30, 2017, we received $2,100,000 proceeds from loan payable, and received $210,000 advance from related parties, and received $3,000,000 proceeds of refundable deposit as earnest money in connection with the Share Subscription Agreement related to the 3,000,000 common stock issued to the March 2017 Accredited Investor who is an entrusted party that holds the shares on behalf of DOING, offset by repayment for related parties’ advance of $500.During the nine months ended September 30, 2016,2019, we received proceeds from note payable – related parties’ advanceparty of $9,000 and received$1,000,000, net proceeds from AHS’s founders’ contributionfinancing of $141,000,approximately $5,104,000, offset by repayment of $1,000,000 made for loan payable. During the six months ended June 30, 2018, we received net proceeds from equity offering of approximately $5,057,000, offset by repayments made for loan of approximately $500,000, repurchase of common stock of approximately $523,000, and refund for refundable deposit in funding our operations.connection with Share Subscription Agreement of approximately $1,000,000.
Our capital requirements for the next twelve months primarily relate to working capital requirements, including salaries, fees related to third parties’ professional services, reduction of accrued liabilities, mergers, acquisitions and the development of business opportunities. In addition, we expectThese uses of cash will depend on numerous factors including our sales and other revenues, and our ability to use cash to pay salaries and fees related to third parties’ professional services.control costs. All funds received have been expended in the furtherance of growing the business. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:term:
| ● |
| ● |
| ● | the use of capital for mergers, acquisitions and the development of business opportunities; |
| ● |
| ● |
We will need to raise additional funds, particularly if we are unable to generate positive cash flow as a result of our operations. We estimate that based on current plans and assumptions, that our available cash will be insufficient to satisfy our cash requirements under our present operating expectations. Other than funds received from the sale of our equity and advances from our related parties, and cash resource generating from our operations, we presently have no other significant alternative source of working capital. We have used these funds to fund our operating expenses, pay our obligations and grow our company. We will need to raise significant additional capital to fund our operations and to provide working capital for our ongoing operations and obligations. Therefore, our future operation is dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will be required to cease our operations. To date, we have not considered this alternative, nor do we view it as a likely occurrence.occurrence.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of SeptemberJune 30, 2017,2019, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
| Payments Due by Period | ||||||||||||||||||||
| Contractual obligations: | Total | Less than 1 year | 1-3 years | 3-5 years | 5+years | |||||||||||||||
| Legal service contract | $ | 60,000 | $ | 60,000 | $ | — | $ | — | $ | — | ||||||||||
| Financial consulting service contract | 34,000 | 34,000 | — | — | — | |||||||||||||||
| Real property management agreement | 102,923 | 65,004 | 37,919 | — | — | |||||||||||||||
| Office leases commitment | 134,137 | 100,468 | 33,669 | — | — | |||||||||||||||
| Loan payable (principal) | 2,100,000 | 2,100,000 | — | — | — | |||||||||||||||
| Accrued interest for loan | 94,932 | 94,932 | — | — | — | |||||||||||||||
| Total | $ | 2,525,992 | $ | 2,454,404 | $ | 71,588 | $ | — | $ | — | ||||||||||
| Payments Due by Period | ||||||||||||||||||||
| Contractual obligations: | Total | Less than 1 year | 1-3 years | 3-5 years | 5+years | |||||||||||||||
| Office leases commitment | $ | 64,665 | $ | 64,665 | $ | - | $ | - | $ | - | ||||||||||
| Acquisition consideration | 100,000 | 100,000 | - | - | - | |||||||||||||||
| Note payable – related party (principal) | 1,000,000 | - | 1,000,000 | - | - | |||||||||||||||
| Accrued interest | 14,583 | 14,583 | - | - | - | |||||||||||||||
| Equity investment obligation | 1,019,398 | 509,699 | 509,699 | - | - | |||||||||||||||
| Joint venture commitment | 11,028,141 | - | 5,514,070 | 5,514,071 | - | |||||||||||||||
| Total | $ | 13,226,787 | $ | 668,947 | $ | 7,023,769 | $ | 5,514,071 | $ | - | ||||||||||
Off-balance Sheet Arrangements
We presently do not have off-balance sheet arrangements.
Foreign Currency Exchange Rate Risk
A portion of our operations are in China. Thus, a portion of our revenuerevenues and operating results may be impacted by exchange rate fluctuations between RMB and US dollars. For the ninethree months ended SeptemberJune 30, 20172019 and 2016,2018, we had unrealized foreign currency translation loss of approximately $26,000$34,000 and unrealized foreign currency translation loss of approximately $96,000, respectively, because of changes in the exchange rate. For the six months ended June 30, 2019 and 2018, we had unrealized foreign currency translation gain of approximately $400,$9,400 and unrealized foreign currency translation loss of approximately $43,000, respectively, because of changes in the exchange rate.
Inflation
The effect of inflation on our revenue and operating results was not significant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
In connection with the preparation of the quarterly report on Form 10-Q for the quarter ended SeptemberJune 30, 2017,2019, our management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, which are defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based on this evaluation, management concluded that our internal control over financial reporting were not effective as of SeptemberJune 30, 20172019 due to the material weaknesssignificant deficiencies caused by the lack of segregation of duties resulting from our small size, which we previously reported in our 2016Form 10-K whichAnnual Report for the year ended December 31, 2018 (“2018 10-K”), has not yet been remediated. In our 2016 10-K we reported that we did not maintain a sufficient complement of personnel with an appropriate level of experience and training in the application of U.S. GAAP commensurate with our financial reporting requirements and we did not form a formal audit committee.
Changes in Internal Controls Over Financial Reporting
There were no changes (including corrective actions with regard to material weakness)significant deficiencies) in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business, operating results, cash flows or financial condition.
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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Common Shares Issued for Services
On February 21, 2017, Ms. Ingariola and the Company entered into an Executive Retention Agreement effective February 9, 2017April 1, 2019, pursuant to which Ms. Ingariola agreed to serve as Chief Financial Officer. As partial compensation, the Company granted Ms. Ingariola a Stock Option to acquire 2,000,000service agreements, we issued an aggregate of 120,812 shares of common stock for professional services rendered. These shares were valued at an exercise price of $0.50 per share for a period of ten years. The Stock Options vest in 36 equal tranches commencing$313,800, the fair market values on the grant date. On April 28, 2017, Steven P. Sukeldates using the reported closing share prices on the dates of grant, and Yancen Lu were appointed to the Boardwe reduced accrued liabilities of Directors of our company to serve as directors. Mr. Sukel and Mr. Yancen Lu both entered into agreements pursuant to which they will serve as directors. The director agreements provide that they will receive options to receive 40,000 shares of common stock per year at an exercise price equal to the closing price on December 31st of the prior year. The options shall vest in equal amounts quarterly and shall be exercisable for a period of five years.During the nine months ended September 30, 2017, we granted a total of 444,448 options to our Chief Financial Officer at a fixed exercise price of $0.50 per share and granted a total of 40,000 options to our two directors at a fixed exercise price of $1.49 per share. The 444,448 options granted to our Chief Financial Officer are exercisable for ten years and the 40,000 options granted to our two directors are exercisable for five years. In connection with the option vest, we recorded stock-based compensation of $602,224for the nine months ended September 30, 2017.$313,800.
DOING Biomedical Technology Co., Ltd.
DOING Biomedical Technology Co., Ltd. (“DOING”) and Avalon discussed DOING potentially investing in Avalon. However, prior to such investment, DOING needed to obtain the required approvals from the government, which is a timely and costly process. In lieu of acquiring shares directly from Avalon, DOING agreed to fund the purchase of shares of common stock of Avalon on behalf of an accredited investor (the “March 2017 Accredited Investor”), which is permitted under Chinese law.
Accordingly, we entered into and closed a Subscription Agreement with the March 2017 Accredited Investor pursuant to which the March 2017 Accredited Investor purchased 3,000,000 shares of common stock (“March 2017 Shares”) for a purchase price of $3,000,000 (the “Purchase Price”). The closing occurred on March 3, 2017.
Avalon Shanghai, DOING, the March 2017 Accredited Investor and our company entered into a Share Subscription Agreement whereby the parties acknowledged, among other things, that DOING agreed to transfer the Purchase Price to Avalon Shanghai on behalf of the March 2017 Investor and the March 2017 Accredited Investor agreed to transfer the March 2017 Shares to DOING upon DOING completing the registration of the acquisition of the March 2017 Shares with the Beijing Commerce Commission (“BCC”).
The BCC is responsible for guiding foreign investment, trade and technology transfer in China. DOING is required to obtain an Enterprise Overseas Investment Certificate (the “Investment Certificate”) from BCC in order to acquire the March 2017 Shares.
If DOING fails to complete the registration and acquire the Investment Certificate within one year of the closing then Avalon Shanghai shall transfer $3,000,000 with interest of 20% to DOING upon the request of DOING (the “BCC Repayment Obligation”). As of the date hereof, the Company is obligated to DOING in the principal amount of $3,000,000. The BCC Repayment Obligation is a debt obligation arising other than in the ordinary course of business, which constitutes a direct financial obligation of our company. In the event we are required to repay the BCC Repayment Obligation, our operations will be negatively impacted.
Further, Wenzhao Lu, major shareholder and chairman of the Board of Directors of our company, and DOING entered into a Warranty Agreement. Pursuant to the Warranty Agreement, Mr. Wenzhao Lu agreed to (i) cause us to be liable to DOING in the event the March 2017 Accredited Investor defaults in its obligations to DOING, (ii) cause the March 2017 Accredited Investor to transfer the March 2017 Shares to DOING upon DOING’s receipt of the Investment Certificate from BCC, (iii) within three years from the date of the Warranty Agreement, DOING may require Mr. Wenzhao Lu to acquire the March 2017 Shares at $1.20 per share upon three months notice, and (iv) in the event Mr. Wenzhao Lu does not acquire the March 2017 Shares within the three month period, interest of 15% per annum will be added to the purchase price.
October 2017 Private Placement
On October 20, 2017, the Company entered into Subscription Agreements with accredited investors (the “October 2017 Accredited Investors”) pursuant to which the October 2017 Accredited Investors agreed to purchase 3,750,000 shares of the Company’s common stock (“October 2017 Shares”) for a purchase price of $3,750,000 (the “Purchase Price”). The closing with respect to $200,000 of the Purchase occurred on October 24, 2017. As of November 10, 2017, the Company has received $2,090,000 of the Purchase Price. The balance of the Purchase Price is expected to close on or before December 6, 2017 if not sooner.
GenExosome Technologies Inc.
In July 2017, the Company formed GenExosome Technologies Inc., a Nevada corporation (“GenExosome”). On September 29, 2017, Dr. David K. Jin was appointed as the sole director and as the Chief Executive Officer, Chief Medical Officer and President, Meng Li was appointed as Chief Operating Officer and Secretary and Luisa Ingargiola was appointed as Chief Financial Officer. On October 25, 2017, GenExosome and the Company entered into a Securities Purchase Agreement pursuant to which the Company acquired 600 shares of GenExosome in consideration of $1,326,087 and 500,000 shares of common stock of the Company. The Company is required to deliver the 500,000 shares of its common stock no later than November 24, 2017. On October 25, 2017, GenExosome entered into and closed an Asset Purchase Agreement with Yu Zhou, MD, PhD, pursuant to which the Company acquired all assets, including all intellectual property, held by Dr. Zhou pertaining to the business of researching, developing and commercializing exosome technologies including, but not limited to, patent application number CN 2016 1 0675107.5 (application of an Exosomal MicroRNA in plasma as biomaker to diagnosis liver cancer), patent application number CN 2016 1 0675110.7 (clinical application of circulating exosome carried miRNA-33b in the diagnosis of liver cancer), patent application number CN 2017 1 0330847.X (saliva exosome based methods and composition for the diagnosis, staging and prognosis of oral cancer) and patent application number CN 2017 1 0330835.7 (a novel exosome-based therapeutics against proliferative oral diseases). In consideration of the assets, GenExosome agreed to pay Dr. Zhou $876,087 in cash no later than November 24, 2017, transfer 500,000 shares of common stock of the Company to Dr. Zhou no later than November 24, 2017 and issue Dr. Zhou 400 shares of common stock of GenExosome no later than November 24, 2017.
The offers, sales, and issuances of the securities described above were deemed to be exempt from registration under the Securities Act of 1933 in reliance on Section 4(a)(2) of the Securities Act of 1933 or Regulation D promulgated thereunder as transactions by an issuer not involving a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited or sophisticated person and had adequate access, through employment, business or other relationships, to information about us.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
On April 19, 2017,August 14, 2019, Genexosome Technologies Inc. (“Genexosome”) terminated Yu Zhou as Co-Chief Executive Officer. In addition, Dr. Zhou’s Executive Retention Agreement was also terminated. Dr. Jin, Chief Executive Officer of the Company, entered into a loan agreement, providing for the issuancewill continue to serve as Chief Executive Officer of a loan in the principal amount of $2,100,000. The term of the loan is one year. The annual interest rate for the loan is 10%. The loan is guaranteed by the Company’s Chairman, Mr. Wenzhao Lu. At September 30, 2017, the outstanding principal balance of the loan and related accrued and unpaid interest for the loan was $2,100,000 and $94,932, respectively.Genexosome.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| 101.INS* | XBRL INSTANCE DOCUMENT | |
| 101.SCH* | XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT | |
| 101.CAL* | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT | |
| 101.DEF* | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT | |
| 101.LAB* | XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT | |
| 101.PRE* | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT |
| * | Filed herewith |
* Filed herewith
| † | Management contract or compensatory plan or arrangement. |
48
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. | |||
| (Registrant) | |||
| Date: | By: | /s/ David K. Jin | |
| David K. Jin | |||
| Chief Executive Officer, President and Director (Principal Executive Officer) | |||
| Date: | By: | /s/ Luisa Ingargiola | |
| Luisa Ingargiola | |||
Chief Financial Officer (Principal Financial and Accounting Officer) | |||
49
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