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 September 30, 20172020
☐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 | |
(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 November 9, 2020 | |
Common Stock, $0.0001 par value per share | 81,398,764 shares |
AVALON GLOBOCARE CORP.
FORM 10-Q
September 30, 20172020
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.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.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-0330.1-800-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.prospects.
Unless otherwise indicated, references in this report to “we,” “us”, “Avalon” or the “Company” refer to Avalon GloboCare Corp. and its consolidated subsidiaries.
ii |
PART 1I - 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 |
September 30, | December 31, | |||||||
2020 | 2019 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 1,395,510 | $ | 764,891 | ||||
Accounts receivable | - | 4,710 | ||||||
Accounts receivable - related party | - | 215,418 | ||||||
Rent receivable | 97,385 | 23,759 | ||||||
Deferred financing costs | 228,309 | 311,177 | ||||||
Prepaid expenses and other current assets | 432,295 | 251,140 | ||||||
Total Current Assets | 2,153,499 | 1,571,095 | ||||||
NON-CURRENT ASSETS: | ||||||||
Rent receivable - noncurrent portion | 135,905 | 99,235 | ||||||
Prepaid realtors’ commission - noncurrent portion | 74,822 | - | ||||||
Right-of-use asset, operating lease | 153,556 | - | ||||||
Property and equipment, net | 500,513 | 601,425 | ||||||
Investment in real estate, net | 7,649,441 | 7,735,680 | ||||||
Equity method investment | 488,374 | 483,101 | ||||||
Total Non-current Assets | 9,002,611 | 8,919,441 | ||||||
Total Assets | $ | 11,156,110 | $ | 10,490,536 | ||||
LIABILITIES AND EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accrued professional fees | $ | 963,084 | $ | 1,243,190 | ||||
Accrued research and development fees | 442,435 | 650,000 | ||||||
Accrued payroll liability | 246,469 | 373,083 | ||||||
Accrued liabilities and other payables | 369,495 | 303,911 | ||||||
Accrued liabilities and other payables - related parties | 262,452 | 187,042 | ||||||
Operating lease obligation | 76,379 | - | ||||||
Tenants’ security deposit | 79,180 | 78,237 | ||||||
Total Current Liabilities | 2,439,494 | 2,835,463 | ||||||
NON-CURRENT LIABILITIES: | ||||||||
Operating lease obligation - noncurrent portion | 83,177 | - | ||||||
Note payable - related party | 390,000 | 590,000 | ||||||
Loan payable - related party | 2,900,000 | 2,600,000 | ||||||
Total Non-current Liabilities | 3,373,177 | 3,190,000 | ||||||
Total Liabilities | 5,812,671 | 6,025,463 | ||||||
Commitments and Contingencies - (Note 13) | ||||||||
EQUITY: | ||||||||
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2020 and December 31, 2019 | - | - | ||||||
Common stock, $0.0001 par value; 490,000,000 shares authorized; 81,876,855 shares issued and 81,356,855 shares outstanding at September 30, 2020; 76,730,802 shares issued and 76,210,802 shares outstanding at December 31, 2019 | 8,188 | 7,673 | ||||||
Additional paid-in capital | 45,029,038 | 34,593,006 | ||||||
Less: common stock held in treasury, at cost; 520,000 shares at September 30, 2020 and December 31, 2019 | (522,500 | ) | (522,500 | ) | ||||
Accumulated deficit | (38,941,059 | ) | (29,361,937 | ) | ||||
Statutory reserve | 6,578 | 6,578 | ||||||
Accumulated other comprehensive loss - foreign currency translation adjustment | (236,806 | ) | (257,747 | ) | ||||
Total Avalon GloboCare Corp. stockholders’ equity | 5,343,439 | 4,465,073 | ||||||
Non-controlling interest | - | - | ||||||
Total Equity | 5,343,439 | 4,465,073 | ||||||
Total Liabilities and Equity | $ | 11,156,110 | $ | 10,490,536 |
TheSee accompanying notes are an integral part of these unauditedto the 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 |
TheAVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
REVENUES | ||||||||||||||||
Real property rental | $ | 324,982 | $ | 264,141 | $ | 923,205 | $ | 795,656 | ||||||||
Medical related consulting services - related party | - | 108,520 | - | 234,214 | ||||||||||||
Development services and sales of developed products | - | 10,555 | - | 37,237 | ||||||||||||
Total Revenues | 324,982 | 383,216 | 923,205 | 1,067,107 | ||||||||||||
COSTS AND EXPENSES | ||||||||||||||||
Real property operating expenses | 135,821 | 193,738 | 663,086 | 617,173 | ||||||||||||
Medical related consulting services - related party | - | 94,442 | - | 202,908 | ||||||||||||
Development services and sales of developed products | - | 41,808 | - | 103,899 | ||||||||||||
Total Costs and Expenses | 135,821 | 329,988 | 663,086 | 923,980 | ||||||||||||
REAL PROPERTY OPERATING INCOME | 189,161 | 70,403 | 260,119 | 178,483 | ||||||||||||
GROSS PROFIT FROM MEDICAL RELATED CONSULTING SERVICES | - | 14,078 | - | 31,306 | ||||||||||||
GROSS LOSS FROM DEVELOPMENT SERVICES AND SALES OF DEVELOPED PRODUCTS | - | (31,253 | ) | - | (66,662 | ) | ||||||||||
Total Gross Profit | 189,161 | 53,228 | 260,119 | 143,127 | ||||||||||||
OTHER OPERATING EXPENSES: | ||||||||||||||||
Professional fees | 1,753,182 | 1,630,827 | 4,868,530 | 3,891,539 | ||||||||||||
Compensation and related benefits | 1,058,570 | 2,187,959 | 3,241,090 | 6,388,292 | ||||||||||||
Research and development expenses | 238,432 | 265,139 | 674,935 | 1,367,310 | ||||||||||||
Other general and administrative | 329,535 | 435,639 | 891,141 | 1,771,387 | ||||||||||||
Impairment loss | - | 1,010,011 | - | 1,010,011 | ||||||||||||
Total Other Operating Expenses | 3,379,719 | 5,529,575 | 9,675,696 | 14,428,539 | ||||||||||||
LOSS FROM OPERATIONS | (3,190,558 | ) | (5,476,347 | ) | (9,415,577 | ) | (14,285,412 | ) | ||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Interest expense | - | (2,356 | ) | - | (36,875 | ) | ||||||||||
Interest expense - related party | (41,531 | ) | (8,842 | ) | (126,169 | ) | (23,425 | ) | ||||||||
Change in fair value of warrants liabilities | - | 1,160,137 | - | 1,621,630 | ||||||||||||
Financing expense | - | - | - | (525,418 | ) | |||||||||||
Loss from equity method investment | (14,966 | ) | (25,266 | ) | (35,382 | ) | (48,353 | ) | ||||||||
Other (expense) income | (4,904 | ) | 18,616 | (1,994 | ) | 20,043 | ||||||||||
Total Other Income (Expense), net | (61,401 | ) | 1,142,289 | (163,545 | ) | 1,007,602 | ||||||||||
LOSS BEFORE INCOME TAXES | (3,251,959 | ) | (4,334,058 | ) | (9,579,122 | ) | (13,277,810 | ) | ||||||||
INCOME TAXES | - | - | - | - | ||||||||||||
NET LOSS | $ | (3,251,959 | ) | $ | (4,334,058 | ) | $ | (9,579,122 | ) | $ | (13,277,810 | ) | ||||
LESS: NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST | - | (475,863 | ) | - | (656,575 | ) | ||||||||||
NET LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS | $ | (3,251,959 | ) | $ | (3,858,195 | ) | $ | (9,579,122 | ) | $ | (12,621,235 | ) | ||||
COMPREHENSIVE LOSS: | ||||||||||||||||
NET LOSS | $ | (3,251,959 | ) | $ | (4,334,058 | ) | $ | (9,579,122 | ) | $ | (13,277,810 | ) | ||||
OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||
Unrealized foreign currency translation gain (loss) | 39,698 | (69,388 | ) | 20,941 | (60,009 | ) | ||||||||||
COMPREHENSIVE LOSS | (3,212,261 | ) | (4,403,446 | ) | (9,558,181 | ) | (13,337,819 | ) | ||||||||
LESS: COMPREHENSIVE LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST | - | (471,411 | ) | - | (651,421 | ) | ||||||||||
COMPREHENSIVE LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS | $ | (3,212,261 | ) | $ | (3,932,035 | ) | $ | (9,558,181 | ) | $ | (12,686,398 | ) | ||||
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS: | ||||||||||||||||
Basic and diluted | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.12 | ) | $ | (0.17 | ) | ||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
Basic and diluted | 80,622,003 | 75,665,676 | 78,747,345 | 74,859,871 |
See accompanying notes are an integral part of these unauditedto the 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 |
TheAVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Three and Nine Months Ended September 30, 2020
(Unaudited)
Avalon GloboCare Corp. Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Treasury Stock | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||
Number | Number | Additional | Number | Other | ||||||||||||||||||||||||||||||||||||||||||||
of | of | Paid-in | of | Accumulated | Statutory | Comprehensive | Non-controlling | Total | ||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Reserve | Loss | Interest | Equity | |||||||||||||||||||||||||||||||||||||
Balance, January 1, 2020 | - | $ | - | 76,730,802 | $ | 7,673 | $ | 34,593,006 | (520,000 | ) | $ | (522,500 | ) | $ | (29,361,937 | ) | $ | 6,578 | $ | (257,747 | ) | $ | - | $ | 4,465,073 | |||||||||||||||||||||||
Sale of common stock, net | - | - | 980,358 | 98 | 1,539,153 | - | - | - | - | - | - | 1,539,251 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for services | - | - | 222,577 | 22 | 213,278 | - | - | - | - | - | - | 213,300 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 785,350 | - | - | - | - | - | - | 785,350 | ||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | (22,066 | ) | - | (22,066 | ) | ||||||||||||||||||||||||||||||||||
Net loss for the three months ended March 31, 2020 | - | - | - | - | - | - | - | (3,270,781 | ) | - | - | - | (3,270,781 | ) | ||||||||||||||||||||||||||||||||||
Balance, March 31, 2020 | - | - | 77,933,737 | 7,793 | 37,130,787 | (520,000 | ) | (522,500 | ) | (32,632,718 | ) | 6,578 | (279,813 | ) | - | 3,710,127 | ||||||||||||||||||||||||||||||||
Sale of common stock, net | - | - | 1,795,150 | 180 | 2,959,687 | - | - | - | - | - | - | 2,959,867 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for services | - | - | 380,000 | 38 | 398,692 | - | - | - | - | - | - | 398,730 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 726,600 | - | - | - | - | - | - | 726,600 | ||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | 3,309 | - | 3,309 | ||||||||||||||||||||||||||||||||||||
Net loss for the three months ended June 30, 2020 | - | - | - | - | - | - | - | (3,056,382 | ) | - | - | - | (3,056,382 | ) | ||||||||||||||||||||||||||||||||||
Balance, June 30, 2020 | - | - | 80,108,887 | 8,011 | 41,215,766 | (520,000 | ) | (522,500 | ) | (35,689,100 | ) | 6,578 | (276,504 | ) | - | 4,742,251 | ||||||||||||||||||||||||||||||||
Sale of common stock, net | - | - | 1,337,968 | 134 | 2,376,503 | - | - | - | - | - | - | 2,376,637 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for services | - | - | 430,000 | 43 | 697,407 | - | - | - | - | - | - | 697,450 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 739,362 | - | - | - | - | - | - | 739,362 | ||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | 39,698 | - | 39,698 | ||||||||||||||||||||||||||||||||||||
Net loss for the three months ended September 30, 2020 | - | - | - | - | - | - | - | (3,251,959 | ) | - | - | - | (3,251,959 | ) | ||||||||||||||||||||||||||||||||||
Balance, September 30, 2020 | - | $ | - | 81,876,855 | $ | 8,188 | $ | 45,029,038 | (520,000 | ) | $ | (522,500 | ) | $ | (38,941,059 | ) | $ | 6,578 | $ | (236,806 | ) | $ | - | $ | 5,343,439 |
See accompanying notes are an integral part of these unauditedto the 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 | $ | — |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Three and Nine Months Ended September 30, 2019
(Unaudited)
Avalon GloboCare Corp. Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Treasury Stock | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||
Number | Number | Additional | Number | Other | ||||||||||||||||||||||||||||||||||||||||||||
of | of | Paid-in | of | Accumulated | Statutory | Comprehensive | Non-controlling | Total | ||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Reserve | Loss | Interest | Equity | |||||||||||||||||||||||||||||||||||||
Balance, January 1, 2019 | - | $ | - | 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 cashless exercise of stock 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 | ||||||||||||||||||||||||||||||||||||
Sale of common stock | - | - | 1,714,288 | 171 | 1,411,710 | - | - | - | - | - | - | 1,411,881 | ||||||||||||||||||||||||||||||||||||
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 | 29,675,711 | (520,000 | ) | (522,500 | ) | (20,054,816 | ) | 6,578 | (228,183 | ) | (1,042,210 | ) | 7,842,198 | |||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 1,916,193 | - | - | - | - | - | - | 1,916,193 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for service | - | - | 115,417 | 11 | 391,856 | - | - | - | - | - | - | 391,867 | ||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | (73,840 | ) | 4,452 | (69,388 | ) | ||||||||||||||||||||||||||||||||||
Net loss for the three months ended September 30, 2019 | - | - | - | - | - | - | - | (3,858,195 | ) | - | - | (475,863 | ) | (4,334,058 | ) | |||||||||||||||||||||||||||||||||
Balance, September 30, 2019 | - | $ | - | 76,291,056 | $ | 7,629 | $ | 31,983,760 | (520,000 | ) | $ | (522,500 | ) | $ | (23,913,011 | ) | $ | 6,578 | $ | (302,023 | ) | $ | (1,513,621 | ) | $ | 5,746,812 |
See accompanying notes to the condensed consolidated financial statements.
4 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2020 | 2019 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (9,579,122 | ) | $ | (13,277,810 | ) | ||
Adjustments to reconcile net loss to | ||||||||
net cash used in operating activities: | ||||||||
Bad debt provision | 4,689 | - | ||||||
Depreciation and amortization | 232,772 | 430,039 | ||||||
Amortization of straight-line rent receivable | (15,947 | ) | - | |||||
Stock-based compensation and service expense | 3,965,164 | 7,003,077 | ||||||
Loss from equity method investment | 35,382 | 48,353 | ||||||
Loss on fixed asset disposal | 2,643 | - | ||||||
Changes in warrants derivative liabilities | - | (1,621,630 | ) | |||||
Allocated financing costs | - | 525,418 | ||||||
Impairment loss | - | 1,010,011 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | - | 48 | ||||||
Accounts receivable - related party | 214,454 | (174,818 | ) | |||||
Rent receivable | (94,349 | ) | (15,047 | ) | ||||
Prepaid expenses - related parties | - | 34,257 | ||||||
Prepaid expenses and other current assets | (352,526 | ) | 240,563 | |||||
Security deposit | - | 101,318 | ||||||
Accrued liabilities and other payables | (680,758 | ) | 326,686 | |||||
Accrued liabilities and other payables - related parties | 75,457 | 39,833 | ||||||
Operating lease obligation | 6,000 | - | ||||||
Tenants’ security deposit | 943 | 11,537 | ||||||
NET CASH USED IN OPERATING ACTIVITIES | (6,185,198 | ) | (5,318,165 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of property and equipment | - | (379,279 | ) | |||||
Improvement of commercial real estate | - | (16,321 | ) | |||||
Prepayment made for purchase of long-term assets | - | (26,223 | ) | |||||
Additional investment in equity method investment | (28,594 | ) | (116,545 | ) | ||||
NET CASH USED IN INVESTING ACTIVITIES | (28,594 | ) | (538,368 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds received from note payable - related party | - | 1,000,000 | ||||||
Repayments of note payable - related party | (200,000 | ) | (410,000 | ) | ||||
Proceeds received from loan payable - related party | 300,000 | - | ||||||
Proceeds received from offering | 7,233,678 | 6,000,008 | ||||||
Disbursements for offering costs | (491,895 | ) | (896,304 | ) | ||||
Repayments of loan payable | - | (1,000,000 | ) | |||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 6,841,783 | 4,693,704 | ||||||
EFFECT OF EXCHANGE RATE ON CASH | 2,628 | (17,118 | ) | |||||
NET INCREASE (DECREASE) IN CASH | 630,619 | (1,179,947 | ) | |||||
CASH - beginning of period | 764,891 | 2,252,287 | ||||||
CASH - end of period | $ | 1,395,510 | $ | 1,072,340 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for: | ||||||||
Interest | $ | 50,000 | $ | 112,217 | ||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Property and equipment acquired on credit as payable | $ | - | $ | 80,723 | ||||
Improvement of commercial real estate acquired on credit as payable | $ | 38,400 | $ | - | ||||
Common stock issued for future services | $ | 25,996 | $ | - | ||||
Deferred financing costs in accrued liabilities | $ | 13,390 | $ | - |
See accompanying notes to the condensed consolidated financial statements.
5 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(Unaudited)
NOTE 1 –ORGANIZATION AND NATURE OF OPERATIONS
Avalon GloboCare Corp. (f/k/a Global Technologies Corp.) (the “Company” or “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 arewere accredited investors (“AHS Shareholders”) pursuant to which we acquired 100% of the outstanding securities of AHS in exchange for 50,000,000 shares of ourthe Company’s common stock (the “AHS Acquisition”). AHS was incorporated on May 18, 2015 under the laws of the State of Delaware. As a result of such acquisition, the Company’s operations now are focused on integrating and managing global healthcare services and resources, as well as empowering high-impact biomedical innovations and technologies to accelerate their clinical applications. Operating through two major platforms, namely “Avalon Cell”, and “Avalon Rehab”, our “technology + service” ecosystem covers the areas of regenerative medicine, cell-based immunotherapy, exosome technology, as well as fertility and rehabilitation medicine. We plan to integrate these services through joint ventures and acquisitions that bring shareholder value both in the short term, through operational entities as part of Avalon Rehab and in the long term, through biomedical innovations as part of Avalon Cell. AHS owns 100% of the capital stock of Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”), which is a wholly foreign-owned enterprise organized under the laws of the People’s Republic of China (“PRC”). Avalon Shanghai was incorporated on April 29, 2016 and is engaged in medical related consulting services for customers.
For accounting purposes, AHS was the surviving entity. The transaction was accounted for as a recapitalization of AHS pursuant to which AHS was treated as the accounting acquirer, surviving and continuing entity although the Company 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(Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”) immediately following the consummation of this reverse merger transaction. AHS owns 100% of the capital stock of Avalon Shanghai, which is a wholly foreign-owned enterprise organized under the laws of the People’s Republic of China (“PRC”). Avalon Shanghai was incorporated on April 29, 2016 and is engaged in medical related consulting services for customers.
The Company is a clinical-stage, vertically integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative, transformative immune effector cell therapy, exosome technology, as well as Coronavirus (“COVID-19”) related diagnostics and therapeutics. The Company also provides strategic advisory and outsourcing services to facilitate and enhance its clients’ growth and development, as well as competitiveness in healthcare and CellTech industry markets. Through its subsidiary structure with unique integration of verticals from innovative research and development (“R&D”) to automated bioproduction and accelerated clinical development, the Company is establishing a leading role in the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEX™), and regenerative therapeutics.
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 September 30, 2017.2020. 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 operations. 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 officeAs of September 30, 2020, the occupancy rate of the building in New Jersey.is 87.0%.
On July 31, 2017, the Company formed GenExosomeGenexosome Technologies Inc. (“GenExosome”Genexosome”) in Nevada.
On October 25, 2017, GenExosome andJuly 18, 2018, the Company entered intoformed a Securities Purchase Agreement pursuantwholly owned subsidiary, Avactis Biosciences Inc., a Nevada corporation, which will focus on accelerating commercial activities related to whichcellular 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.
On June 13, 2019, the Company acquired 60% offormed a wholly owned subsidiary, International Exosome Association LLC, a Delaware company. There was no activity for the total equity ownership of GenExosome. There were no operations for GenExosomesubsidiary since its incorporation through September 30, 2017.2020.
6 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS (continued)
Details of the Company’s subsidiaries which are included in these consolidated financial statements as of September 30, 2020 are as follows:
Name of Subsidiary | Place and date of Incorporation | Percentage of Ownership | Principal Activities | |||
Avalon Healthcare System, Inc. (“AHS”) | Delaware May 18, 2015 | 100% held by 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 using exosomes | |||
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 (“Exosome”) | Delaware June 13, 2019 | 100% held by AVCO | Promotes standardization related to exosome industry |
NOTE 2 –BASIS OF PRESENTATION AND GOING CONCERN CONDITION
Basis of presentationPresentation
These interim condensed consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements have been included. The results reported in the unaudited condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162019 filed with the Securities and Exchange Commission on March 28, 2017.April 6, 2020.
7 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(Unaudited)
NOTE 2 –BASIS OF PRESENTATION AND GOING CONCERN CONDITION (continued)
Going concernConcern
TheCompany currently has limited operations.is a clinical-stage, vertically integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative, transformative immune effector cell therapy, exosome technology, as well as COVID-19 related diagnostics and therapeutics. The Company’s operations now are focused on providing outsourced, customized international healthcareCompany also provides strategic advisory and outsourcing services to facilitate and enhance its clients’ growth and development, as well as competitiveness in healthcare and CellTech industry markets. The Company also develops related products for sale and licensure in the rapidly changing health care industry primarily focused inUnited States and the People’s Republic of China andChina. In addition, the Company owns commercial real estate property ownership and operationthat houses its headquarters in the United States.Freehold, New Jersey. The Company is also pursuingdid not generate any revenue from medical related consulting services segment and development services and sales of developed products segment during the provision of healthcare services in the United States.nine months ended September 30, 2020. These unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business.business.
As reflected in the accompanying unaudited condensed consolidated financial statements, the Company had working capital deficit (total current liabilities in excess of total current assets) and an accumulated deficit of $5,294,818 and $1,743,939$38,941,059 at September 30, 2017, respectively,2020, and had ahas incurred recurring net loss and netnegative cash flow used infrom operating activities of $1,690,570$9,579,122 and $747,056$6,185,198 for the nine months ended September 30, 2017,2020, respectively. The Company has a limited operating history and its continued growth is dependent upon the continuationre-commencing of providing medical consulting services which was completed in December 2019 to its only threefew 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 occurrence of an uncontrollable event such as the COVID-19 pandemic had negatively impact on the Company’s operations. Some tenants have delayed on rent payment and our occupancy of our rental property has decreased. Our general development operations have continued during the COVID-19 pandemic and we have not had significant disruption. However, we are uncertain if the COVID-19 pandemic will impact future operations at our laboratory, or our ability to collaborate with other laboratories and universities. In addition, we are unsure if the COVID-19 pandemic will impact future clinical trials. Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related financial effect cannot be reasonably estimated at this time but is expected to adversely impact the Company’s business for the year of 2020.
The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimatesEstimates
The preparation of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States of AmericaU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates during the nine months ended September 30, 20172020 and 20162019 include the allowance for doubtful accounts, the useful life of property plant,and equipment and investment in real estate, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets accruals for taxes due,and the associated valuation allowances, and valuation of options.stock-based compensation.
8 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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:follows:
● | Level1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement |
● | Level2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market |
● | Level3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments and fair value measurements (continued)
The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, accountsrent receivable, – related parties, tenants receivable, security deposit,deferred financing costs, prepaid expenses and other accounts payable,current assets, accrued liabilities and other payables, accrued liabilities and other payables – related parties, deferred rental income, loan payable, income taxes payable, Value Added Tax (“VAT”) and other taxes payable,operating lease obligation, tenants’ security deposit, due to related parties, and refundable deposit, approximate their fair market value based on the short-term maturity of these instruments. The Company did not have any non-financial assets or liabilities that are measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016.
ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
Cashinstruments.
Cash consistsand Cash Equivalents
A portion of the Company’s cash on hand andis maintained with state-owned banks within the PRC. Balances at state-owned banks within the PRC are covered by insurance up to RMB 500,000 (approximately $74,000) per bank. Any balance over RMB 500,000 per bank in PRC will not be covered. At September 30, 2020, cash in banks. The Company maintains cash with various financial institutionsbalances held in the PRC and United States. At September 30, 2017 and December 31, 2016, cash balances in PRC are $128,301 and $2,525,630, respectively, are uninsured. At September 30, 2017 and December 31, 2016, cash balances in United States are $228,521 and $360,559, respectively.RMB 1,302,475 (approximately $192,000), of which, RMB 793,010 (approximately $117,000) was not covered by such limited insurance. The Company has not experienced any losses in banksuch accounts and believes it is not exposed to any risks on its cash in bank accounts.
ConcentrationsThe Company maintains a portion of its cash in bank and financial institution deposits within U.S. that at times may exceed federally-insured limits of $250,000. The Company manages this credit risk by concentrating its cash balances in high quality financial institutions and by periodically evaluating the credit quality of the primary financial institutions holding such deposits. The Company has not experienced any losses in such bank accounts and believes it is not exposed to any risks on its cash in bank accounts. At September 30, 2020, the Company’s cash balances in United States bank accounts had approximately $539,000 in excess of the federally-insured limits.
At September 30, 2020, the Company’s cash balances by geographic area were as follows:
Country: | September 30, 2020 | |||||||
United States | $ | 1,203,710 | 86.3 | % | ||||
China | 191,800 | 13.7 | % | |||||
Total cash | $ | 1,395,510 | 100.0 | % |
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less when purchased and money market accounts to be cash equivalents. The Company had no cash equivalents at September 30, 2020 and December 31, 2019.
9 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of Credit Risk
Currently, a portion of the Company’s operations are carried out in PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.things.
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts 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 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 September 30, 2017 and December 31, 2016, the Company’s cash balances by geographic area were as follows:Investment in Unconsolidated Company – Epicon Biosciences Co., Ltd.
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 | % |
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 5 for discussion of equity method investment.
Revenue Recognition
The Company recognizes revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of this new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration 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 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 good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct). |
● | The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good 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.
10 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(Unaudited)
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounts receivable – related parties and allowance for doubtful accountsRevenue Recognition (continued)
Accounts receivable – relatedThe transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties are presented net of an allowance for doubtful accounts.(for example, some sales taxes). The Company maintains allowances for doubtful accounts for estimated losses. The Company reviewsconsideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration is included in the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt astransaction price only to the collectabilityextent that it is probable that a significant reversal in the amount of individual balances. In evaluatingcumulative revenue recognized will not occur when the collectability of individual receivable balances,uncertainty associated with 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.variable consideration is subsequently resolved.
Management believesThe 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 time or over time as appropriate.
Types of revenue:
● | 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. |
Revenue recognition criteria:
● | 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 has determined that the accounts receivableASC 606 does not apply to rental contracts, which are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its accounts receivable – related parties at September 30, 2017 and December 31, 2016. The Company historically has not experienced uncollectible accounts from customers granted with credit sales.within the scope of other revenue recognition accounting standards.
Tenants receivable and allowance for doubtful accounts
Tenants receivableRental income from operating leases is recognized on a straight-line basis under the guidance of ASC 842. Lease payments under tenant leases are presented net of an allowance for doubtful accounts. Tenants receivable balance consists of base rents, tenant reimbursements and receivables arising from straight-lining of rents primarily represent amounts accrued and unpaid from tenants in accordance with the terms of the respective leases, subject to the Company’s revenue recognition policy. An allowance for the uncollectible portion of tenant receivable is determined based upon an analysis of the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in Freehold, New Jersey in which the property is located.
Management believes that the tenants receivable is fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its tenants receivable at September 30, 2017.
Property, plant and equipment
Property, plant and equipment are carried at cost and are depreciatedrecognized on a straight-line basis over the estimated useful livesterm of the assets.related leases. The cost of repairscumulative difference between lease revenue recognized under the straight-line method 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 lossescontractual lease payments are included in income inrent receivable on the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Investment in real estate and depreciation
Investment in real estate is carried at cost less accumulated depreciation. The Company depreciates real estate building on a straight-line basis over estimated useful life. The Company capitalizes all capital improvements associated with replacements, improvements or major repairs to real property that extend its useful life and depreciate them using the straight-line method over its estimated useful life. Real estate depreciation expense was $20,066 and $53,009 for the three and nine months ended September 30, 2017, respectively.
The Company charges maintenance and repair costs that do not extend an asset’s useful life to expense as incurred.
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for 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 nine months ended September 30, 2017 and 2016.
Deferred rental income
Deferred rental income represents rental income collected but not earned as of the report date. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. As of September 30, 2017 and December 31, 2016, deferred rental income totaled $19,914 and $0, respectively.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Value added tax
The Company is subject to a value added tax (“VAT”) of 6% for providing consulting service. The amount ofVATliability is determined by applying the applicable tax rate to the invoiced amount of consulting services provided (outputVAT) lessVATpaid on purchases made with the relevant supporting invoices (inputVAT). The Company reports revenue net of PRC’s value added tax for all the periods presented in the unaudited condensed consolidated statements of operations and comprehensive (loss) income.
Revenue recognition
Pursuant to the guidance of ASC Topic 605, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been provided, the purchase price is fixed or determinable and collectability is reasonably assured.balance sheets.
The Company provides medical related consulting servicesdoes not offer promotional payments, customer coupons, rebates or other cash redemption offers to its clients. The Company is paid for its services by its clients pursuant to the terms of the written consulting agreements. Each contract calls for a fixed payment in a fixed period of time. The Company recognizes revenue by providing medical related consulting services under written service contracts with its customers. Revenue related to its service offerings is recognized as the services are performed and amounts are earned, using the straight-line method over the term of the related services agreement. Prepayments, if any, received from customers prior to the services being performed are recorded as advance from customers. In these cases, when the services are performed, the amount recorded as advance from customers is recognized as revenue.
The Company leases commercial property under operating leases with terms of generally two years or more. The Company recognizes rental revenue from its commercial leases on a straight-line basis over the life of the lease including rent holidays, if any. Straight-line rent receivable consists of the difference between the tenants’ rents calculated on a straight-line basis from the date of lease commencement over the remaining terms of the related leases and the tenants’ actual rents due under the lease agreements and is included in tenants receivable in the accompanying consolidated balance sheets. Revenues associated with operating expense recoveries are recognized in the period in which the expenses are incurred.
Consulting services costs
Costs of consulting services includes the cost of internal labor and related benefits, travel expenses related to consulting services, subcontractor costs, other related consulting costs, and other overhead costs. Subcontractor costs were costs related to consulting services incurred by our subcontractor, such as medical professional’s compensation and travel costs.
Real estate operating expenses
Real property operating expenses consist of property management fees, property insurance, real estate taxes, depreciation, repairs and maintenance fees, utilities and other expenses related to the Company’s rental properties.
Stock-based compensation
Stock based compensation is accounted for based on the requirements of the Share-Based Payment topic of Accounting Standards Codification (“ASC”) 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an 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.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Research and development
Expenditures for research and product development costs are expensed as incurred. The Company did not incur any research and development costs during the three and nine months ended September 30, 2017 and 2016.
Advertising
All costs related to advertising are expensed as incurred. The Company did not incur any advertising expenses during the three and nine months ended September 30, 2017 and 2016.
Income taxes
The Company accounts for income taxes using the asset/liability method prescribed by ASC 740, “Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of September 30, 2017 and December 31, 2016, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Tax year that remains subject to examination is the years ended December 31, 2016 and 2015. The Company recognizes interest and penalties related to uncertain income tax positions in other expense. However, no such interest and penalties were recorded as of September 30, 2017 and December 31, 2016.
Foreign currency translation
The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company and its wholly-owned U.S. subsidiaries, Avalon Healthcare System Inc., Avalon RT 9 Properties, LLC, and Avalon (BVI) Ltd., is the U.S. dollar and the functional currency of the Company’s wholly-owned PRC subsidiary, Avalon (Shanghai) Healthcare Technology Co., Ltd., is the Chinese Renminbi (“RMB”). For the subsidiary whose functional currency is the RMB, result of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income/loss. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
All of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries. The Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
Asset and liability accounts at September 30, 2017 and December 31, 2016 were translated at 6.6536 RMB to $1.00 and at 6.9448 RMB to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rates. The average translation rates applied to the statements of operations for the nine months ended September 30, 2017 and 2016 were 6.8071 RMB and 6.57924 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) income
Comprehensive (loss) income is comprised of net (loss) income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive (loss) income for the three and nine months ended September 30, 2017 and 2016 consisted of net (loss) income 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.
11 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Per Share Data (continued)
Basic net (loss) 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) income per share:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net (loss) income for basic and diluted net (loss) income per share of common stock | $ | (710,729 | ) | $ | 207,874 | $ | (1,690,570 | ) | $ | 102,403 | ||||||
Weighted average common stock outstanding - basic and diluted | 64,628,622 | 50,000,000 | 63,958,292 | 50,000,000 | ||||||||||||
Net (loss) income per common shares - basic and diluted | $ | (0.011 | ) | $ | 0.004 | $ | (0.026 | ) | $ | 0.002 |
For the three and nine months ended September 30, 2017, stock options to purchase 484,448 shares of common stock have been excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
Segment reporting
TheCompany uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments.
The Company has determinedfollowing table summarizes the securities that it has two reportable business segments: real property operating segment and medical related consulting services segment. These reportable segments offer different typeswere excluded from the diluted per share calculation because the effect of service, have different types of revenue, and are managed separately as each requires different operating strategies and management expertise.including these potential shares was antidilutive:
Related parties
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, 2017
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Stock options | 7,020,000 | 5,070,000 | 7,020,000 | 5,070,000 | ||||||||||||
Warrants | - | 1,714,288 | - | 1,714,288 | ||||||||||||
Potentially dilutive securities | 7,020,000 | 6,784,288 | 7,020,000 | 6,784,288 |
Reclassification
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the previously reported financial position, results of operations and cash flows.
Reverse stock split
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 end
TheCompany has adopted a fiscal year end of December 31st.
Recent accounting pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. This pronouncement is effective for reporting periods beginning after December 15, 2018 using a modified retrospective adoption method. The Company is currently evaluating the impact of adopting the new lease standard on its consolidated financial statements.
In August 2016,2018, the FASB issued ASU 2016-15, StatementNo. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The objective of Cash Flows (Topic 230): ClassificationASU 2018-13 is to improve the effectiveness of Certain Cash Receiptsdisclosures in the notes to the financial statements by removing, modifying, and Cash Payments. This ASU addressesadding certain fair value disclosure requirements to facilitate clear communication of 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 isinformation required by generally accepted accounting principles. The amendments are effective for all entities for fiscal years, beginning after December 15, 2017, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted. An entity that elects earlypermitted upon issuance of this ASU. The adoption must adopt all of ASU 2018 – 13 did not have a material impact on the amendments in the same period. The Company is currently evaluating the impact it may have on itsCompany’s consolidated financial statements.
In May 2017,June 2016, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation: Scope2016-13, Financial Instruments - Credit Losses (“Topic 326”). The ASU introduces a new accounting model, the Current Expected Credit Losses model (“CECL”), which requiresearlier recognition of Modification Accounting.credit losses and additional disclosures related to credit risk. The guidance clarifies when changes toCECL model utilizes a lifetime expected credit loss measurement objective for the termsrecognition of credit losses at the time the financial asset is originated 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 guidanceacquired. ASU 2016-13 is effective for annual periods,period beginning after December 15, 2022, including interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted.reporting periods. The Company is currently evaluatingexpects that the adoption will not have a material impact it may have on itsthe Company’s consolidated financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.
12 |
NOTE 4 –PREPAID EXPENSES AND OTHER
At September 30, 2017 and December 31, 2016, prepaid expenses and other 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 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(Unaudited)
NOTE 54 –PROPERTY, PLANTPREPAID EXPENSES AND EQUIPMENTOTHER CURRENT ASSETS
At September 30, 20172020 and December 31, 2016, property, plant2019, prepaid expenses and equipmentother current assets consisted of the following:
Useful life | September 30, 2017 | December 31, 2016 | ||||||||
Office equipment | 3 – 10 Years | $ | 27,966 | $ | 320 | |||||
Leasehold improvement | 1.75 Years | 24,009 | — | |||||||
51,975 | 320 | |||||||||
Less: accumulated depreciation | (5,610 | ) | (25 | ) | ||||||
$ | 46,365 | $ | 295 |
September 30, 2020 | December 31, 2019 | |||||||
Prepaid professional fees | $ | 139,274 | $ | 153,478 | ||||
Prepaid research and development fees | 90,915 | - | ||||||
Prepaid directors and officers liability insurance premium | 67,820 | 4,990 | ||||||
Prepaid VAT on purchase | 47,026 | 40,602 | ||||||
Security deposit | 25,478 | 24,847 | ||||||
Prepaid NASDAQ listing fee | 23,417 | - | ||||||
Other | 38,365 | 27,223 | ||||||
Total | $ | 432,295 | $ | 251,140 |
NOTE 5 – EQUITY METHOD INVESTMENT
As of September 30, 2020 and December 31, 2019, the equity method investment amounted to $488,374 and $483,101, 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 months ended September 30, 2020 and 2019, the Company’s share of Epicon’s net loss was $14,966 and $25,266, respectively, which was included in loss from equity-method investment in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2017, depreciation expense amounted to $4,2562020 and $5,469, respectively,2019, the Company’s share of which, $502Epicon’s net loss was $35,382 and $502 was included in real property operating expenses and $3,754 and $4,967 was included in other operating expenses, respectively. For the three and nine months ended September 30, 2016, the Company did not have any depreciation expense.
NOTE 6 –INVESTMENT IN REAL ESTATE
At September 30, 2017 and December 31, 2016, investment in real estate consisted of the following:
Useful life | September 30, 2017 | December 31, 2016 | ||||||||
Commercial real property | 39 Years | $ | 7,708,571 | $ | — | |||||
Less: accumulated depreciation | (53,009 | ) | — | |||||||
$ | 7,655,562 | $ | — |
For the three and nine months ended September 30, 2017, depreciation expense amounted to $20,066 and $53,009,$48,353, respectively, which was included in real property operating expenses.loss from equity-method investment in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
Activity recorded for the Company’s equity method investment in Epicon is summarized in the following table:
Equity investment carrying amount at January 1, 2020 | $ | 483,101 | ||
Payment made for equity method investment | 28,594 | |||
Epicon's net loss attributable to the Company | (35,382 | ) | ||
Foreign currency fluctuation | 12,061 | |||
Equity investment carrying amount at September 30, 2020 | $ | 488,374 |
The tables below present the summarized financial information, as provided to the Company by the investee, for the unconsolidated company:
September 30, 2020 | December 31, 2019 | |||||||
Current assets | $ | 8,414 | $ | 77,272 | ||||
Noncurrent assets | 268,969 | 247,590 | ||||||
Current liabilities | 6,264 | 324 | ||||||
Noncurrent liabilities | - | - | ||||||
Equity | 271,119 | 324,538 |
13 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – EQUITY METHOD INVESTMENT (continued)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net revenue | $ | - | $ | - | $ | - | $ | - | ||||||||
Gross profit | - | - | - | - | ||||||||||||
Loss from operation | 37,418 | 63,165 | 88,587 | 120,882 | ||||||||||||
Net loss | 37,417 | �� | 63,165 | 88,456 | 120,882 |
NOTE 76 –ACCRUED LIABILITIES AND OTHER PAYABLES
At September 30, 20172020 and December 31, 2016,2019, accrued liabilities and other payables consisted of the following:
September 30, 2017 | December 31, 2016 | |||||||
Accrued professional fees | $ | 239,927 | $ | 14,080 | ||||
Accrued interest | 94,932 | — | ||||||
Other | 8,143 | 8,254 | ||||||
$ | 343,002 | $ | 22,334 |
NOTE 8 –LOAN 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. 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.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 9 –VAT AND OTHER TAXES PAYABLE
At September 30, 2017 and December 31, 2016, VAT and other taxes payable consisted of the following:
September 30, 2017 | December 31, 2016 | |||||||
VAT tax payable | $ | — | $ | 8,768 | ||||
Other taxes payable | 2,091 | 2,502 | ||||||
$ | 2,091 | $ | 11,270 |
September 30, 2020 | December 31, 2019 | |||||||
Accrued professional fees | $ | 963,084 | $ | 1,243,190 | ||||
Accrued research and development fees | 442,435 | 650,000 | ||||||
Accrued payroll liability | 246,469 | 373,083 | ||||||
Accrued directors’ compensation | 107,500 | 115,000 | ||||||
Accounts payable | 83,850 | 84,316 | ||||||
Accrued utilities | 32,711 | 12,260 | ||||||
Deferred rental income | 60,239 | 13,136 | ||||||
Other | 85,195 | 79,199 | ||||||
$ | 2,021,483 | $ | 2,570,184 |
NOTE 107 –RELATED PARTY TRANSACTIONS
Medical Related Consulting Services Revenue from related partiesRelated Parties and accounts receivableAccounts Receivable – related partiesRelated Party
During the three and nine months ended September 30, 20172020 and 2016,2019, medical related consulting services revenue from related parties was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Medical related consulting services provided to: | ||||||||||||||||
Beijing Nanshan (1) | $ | 2,166 | $ | 108,333 | $ | 154,663 | $ | 108,333 | ||||||||
Shanghai Daopei (2) | — | 125,001 | 66,286 | 125,001 | ||||||||||||
Hebei Yanda (3) | — | 93,333 | — | 93,333 | ||||||||||||
$ | 2,166 | $ | 326,667 | $ | 220,949 | $ | 326,667 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Medical related consulting services provided to: | ||||||||||||||||
Beijing Daopei * | $ | - | $ | - | $ | - | $ | 55,908 | ||||||||
Shanghai Daopei * | - | - | - | 14,180 | ||||||||||||
Hebei Daopei * | - | 108,520 | - | 164,126 | ||||||||||||
$ | - | $ | 108,520 | $ | - | $ | 234,214 |
Beijing |
Accounts receivable – related parties, net of allowance for doubtful accounts,party at September 30, 20172020 and December 31, 20162019 amounted to $166,874$0 and $70,228,$215,418, 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 September 30, 20172020 and December 31, 2016.2019.
14 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – RELATED PARTY TRANSACTIONS (continued)
Accrued liabilitiesLiabilities and other payablesOther Payables – related partiesRelated Parties
AtAs of September 30, 20172020 and December 31, 2016,2019, the Company owed David Jin, its shareholder, chief executive officer, president and board member, of $19,420$33,968 and $6,278, respectively, for travel and other miscellaneous reimbursements which have been included in accrued liabilities and other payable – related parties on the accompanying consolidated balance sheets.
At September 30, 2017 and December 31, 2016, the Company owed Meng Li, its shareholder, chief operating officer and board member, of $2,214 and $309,$24,254, 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.
On October 17, 2016, the Company 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 was $1,000. The AHS Office Lease was terminated in August 2017. As of September 30, 20172020 and December 31, 2016,2019, the accruedCompany owed Meng Li, its shareholder and unpaid rent expense related to this AHS Office Lease amounted to $10,000chief operating officer, $0 and $2,000,$10,473, respectively, for travel and other miscellaneous reimbursements, which washave been included in accrued liabilities and other payables – related parties on the accompanying consolidated balance sheets.
At September 30, 2020 and December 31, 2019, the Company owed Yu Zhou, director and former co-chief executive officer and 40% owner of Genexosome, of $3,121 for travel and other miscellaneous reimbursements, which have been included in accrued liabilities and other payables – related parties on the accompanying consolidated balance sheets.
The Company acquired Beijing Genexosome for a cash payment of $450,000. As of September 30, 2020 and December 31, 2019, the unpaid acquisition consideration of $100,000, was payable to Yu Zhou, director and former co-chief executive officer and 40% owner of Genexosome, and has been included in accrued liabilities and other payables – related parties on the accompanying consolidated balance sheets.
As of September 30, 2020 and December 31, 2019, the accrued and unpaid interest related to borrowings from Wenzhao Lu, the Company’s largest shareholder and chairman of the Board of Directors, amounted to $125,363 and $49,194, respectively, and have been included in accrued liabilities and other payables – related parties on the accompanying consolidated balance sheets.
Borrowings from Related Party
Promissory Note
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. The Company repaid principal of $410,000 and $200,000 in the third quarter of 2019 and second quarter of 2020, respectively. As of September 30, 2020 and December 31, 2019, the outstanding principal balance was $390,000 and $590,000, respectively.
Line of Credit
On August 29, 2019, the Company entered into a Line of Credit Agreement (the “Line of Credit Agreement”) providing the Company with a $20 million line of credit (the “Line of Credit”) from Wenzhao Lu (the “Lender”), the largest shareholder and Chairman of the Board of Directors of the Company. The Line of Credit allows the Company to request loans thereunder and to use the proceeds of such loans for working capital and operating expense purposes until the facility matures on December 31, 2024. The loans are unsecured and are not convertible into equity of the Company. Loans drawn under the Line of Credit bears interest at an annual rate of 5% and each individual loan will be payable three years from the date of issuance. The Company has a right to draw down on the line of credit and not at the discretion of the related party Lender. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to maturity, without premium or penalty. The Line of Credit Agreement includes customary events of default. If any such event of default occurs, the Lender may declare all outstanding loans under the Line of Credit to be due and payable immediately. As of September 30, 2020 and December 31, 2019, $2,900,000 and $2,600,000 was outstanding under the Line of Credit, respectively.
For the three months ended September 30, 2020 and 2019, the interest expense related to above borrowings amounted to $41,531 and $8,842, respectively, and has been included in interest expense – related party on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2020 and 2019, the interest expense related to above borrowings amounted to $126,169 and $23,425, respectively, and has been included in interest expense – related party on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
15 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(Unaudited)
NOTE 107 –RELATED PARTY TRANSACTIONS (continued)
Due to related partiesBorrowings from Related Party (continued)
From time to time, David Jin, shareholder, chief executive officer, president and board memberLine 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. Credit (continued)
As of September 30, 20172020 and December 31, 2016,2019, the working capital advance balancerelated accrued and unpaid interest for above borrowings was $0$125,363 and $500,$49,194, respectively, which was reflected as due toand has been included in accrued liabilities and other payables – related parties on the accompanying condensed consolidated balance sheets.sheets.
From timeCommon Shares Sold to time, Meng Li, shareholder, chief operating officer and board member ofRelated Party
On April 1, 2020, the Company provided advancessold 645,161 shares of its common stock 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,WLM Limited (“WLM”), an entity owned by Wenzhao Lu, major shareholder and chairmanChairman 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 advanceat a price per share 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$1.55 for an aggregate purchase price of $1,000,000 (See Note 8 – Common Shares Sold for Cash).
Office Space from Related Party
Beijing Genexosome uses office space of a related party, free of rent, which is considered immaterial.
NOTE 8 – EQUITY
2020 Incentive Stock Plan
The Company held its annual meeting on August 4, 2020. During the nine months ended September 30, 2017,its annual meeting, the Company received advance fromapproved 2020 Incentive Stock Plan and reserved 5,000,000 shares of common stock for issuance thereunder.
Common Shares Sold for Cash
On April 1, 2020, the Company entered into a company, which is controlledSubscription Agreement with WLM, an entity owned by Wenzhao Lu, the Company’s major shareholder and chairmanChairman 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 agreement
The Company pays a company, which is controlled by Wenzhao Lu, the Company’s major 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 commencing on May 5, 2017 and will expire on May 4, 2019. For the three and nine months ended September 30, 2017, the management fee related to the property management agreement amounted to $16,251 and $27,085, respectively.
NOTE 11 –STOCKHOLDERS’ EQUITY
Shares authorized
The Company is authorized to issue 10,000,000 shares of preferred stock and 490,000,000 shares of common shares with a par value of $0.0001.
There are no shares of its preferred stock issued and outstanding as of September 30, 2017 and December 31, 2016.
There are 64,628,622 and 61,628,622 shares of its common stock issued and outstanding as of September 30, 2017 and December 31, 2016, respectively.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 11 –STOCKHOLDERS’ EQUITY (continued)
Common shares issued for Share Subscription Agreement
On March 3, 2017, the Company entered into and closed a Subscription Agreement with an accredited investor (the “March 2017 Accredited Investor”) pursuant to which the March 2017 Accredited InvestorWLM purchased 3,000,000645,161 shares of the Company’s common stock (“March 2017 Shares”)at a price per share of $1.55 for aan aggregate purchase price of $3,000,000 (the “Purchase Price”).$1,000,000. The closing occurred on April 1, 2020.
The offer, sale and issuance of the above securities was made to an accredited investor andOn December 13, 2019, the Company relied upon entered into an Open Market Sale AgreementSM (the exemptions contained in Section 4(2) of“Sales Agreement”) with Jefferies LLC, as sales agent (“Jefferies”), pursuant to which 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. TheCompany may offer and sale was madesell, from time to an accredited investor and transfertime, through Jefferies, shares of theits common stock, issued was restricted bypar value $0.0001 per share, having an aggregate offering price of up to $20.0 million. On April 6, 2020, the date on which the Company in accordance withfiled its Annual Report on Form 10-K for 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 onefiscal year of the closing then Avalon Shanghai shall transfer $3,000,000 with an annual interest of 20% to DOING upon the request of DOING (the “BCC Repayment Obligation”). As of the date hereof, the Company is obligated to DOING in the principal amount of $3,000,000. The BCC Repayment Obligation is a debt obligation arising other than in the ordinary course of business, which constitutes a direct financial obligation of the Company. Further, Wenzhao Lu, a director and shareholder of the Company, and DOING entered into a Warranty Agreement. Pursuant to the Warranty Agreement, Mr. Lu agreed to (i) cause the Company to be liable to DOING in the event the March 2017 Accredited Investor defaults in its obligations to DOING, (ii) cause the March 2017 Accredited Investor to transfer the March 2017 Shares to DOING upon DOING’s receipt of the Investment Certificate from BCC, (iii) within three years from the date of the Warranty Agreement, DOING may require Mr. Lu to acquire the March 2017 Shares at $1.20 per share upon three-month notice, and (iv) in the event Mr. Lu does not acquire the March 2017 Shares within the three-month period, interest of 15% per annum will be added to the purchase price.
The Company received cash payment of $3,000,000 as an earnest money from DOING in connection with the 3,000,000 common stock issued to the March 2017 Accredited Investor who is an entrusted party that holds the shares on behalf of DOING and recorded the $3,000,000 as refundable deposit on the accompanying condensed consolidated balance sheets. Upon DOING completing the registration of the acquisition of the March 2017 Shares with the BCC and obtaining an Enterprise Overseas Investment Certificate from BCC, the Company will cancel the stock certificate issued under the March 2017 Accredited Investor’s name as an entrusted holder of the shares and the Company will issue a new stock certificate under DOING’s name. The $3,000,000 refundable deposit, which paid by DOING as an earnest money will be applied as the proceeds for issuance of the 3,000,000 shares ofended December 31, 2019, the Company’s common stock under DOING’s name at the closing date.
The Company isregistration statement became subject to the contingencyoffering limits set forth in General Instruction I.B.6 of paying interest liability uponForm S-3. During the requestnine months ended September 30, 2020, Jefferies sold an aggregate of DOING if DOING fails3,468,315 shares of common stock at an average price of $1.80 per share to complete the registration and obtain the Enterprise Overseas Investment Certificate within one year.investors. The Company records accrual for such contingency based upon the assessmentrecorded net proceeds of the probability$5,875,755, net of occurrencecommission and where determinable, an estimateother offering costs 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.$357,923.
OptionsCommon Shares Issued for Services
During the nine months ended September 30, 2017,2020, the Company grantedissued a total of 444,448 options1,032,577 shares of its common stock for services rendered and to be rendered. These shares were valued at $1,309,480, the Company’s Chief Financial Officer (“CFO”) at a fixed exercise pricefair market values on the grant dates using the reported closing share prices on the dates 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 yearsgrant and the 40,000 options granted toCompany recorded stock-based compensation expense of $1,248,159 for the Company’s two directors are exercisable for five years. The fair valuenine months ended September 30, 2020 and reduced accrued liabilities of $35,325 and recorded prepaid expense of $25,996 as of September 30, 2020 which will be amortized over the options was $602,224 which was determined using the Black-Scholes option-pricing model and using the following assumptions:rest of corresponding service periods.
16 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(Unaudited)
NOTE 118 –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 September 30, 2017:2020:
Options Outstanding | Options Outstanding | Options Exercisable | ||||||||||||||||||||||||||||||||||||||||||
Range of Exercise Price | Range of Exercise Price | Number Outstanding at September 30, 2020 | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at September 30, 2020 | Weighted Average Exercise Price | ||||||||||||||||||||||||||||||||||||||
$ | 0.50 | 2,000,000 | 6.36 | $ | 0.50 | 2,000,000 | $ | 0.50 | ||||||||||||||||||||||||||||||||||||
1.00 – 1.93 | 2,250,000 | 6.01 | 1.47 | 1,748,334 | 1.43 | |||||||||||||||||||||||||||||||||||||||
Options Outstanding | Options Exercisable | 2.00 – 2.80 | 2,740,000 | 3.02 | 2.17 | 2,740,000 | 2.17 | |||||||||||||||||||||||||||||||||||||
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 | 4.76 | 30,000 | 3.51 | 4.76 | 30,000 | 4.76 | |||||||||||||||||||||||||||||||||
$ | 0.50 | 444,448 | 9.71 | $ | 0.50 | 444,448 | $ | 0.50 | 0.50 – 4.76 | 7,020,000 | 4.93 | $ | 1.48 | 6,518,334 | $ | 1.47 | ||||||||||||||||||||||||||||
1.49 | 40,000 | 4.63 | 1.49 | 40,000 | 1.49 | |||||||||||||||||||||||||||||||||||||||
$ | 0.50–1.49 | 484,448 | 9.29 | $ | 0.58 | 484,448 | $ | 0.58 |
Stock option activities for the nine months ended September 30, 2020 were as follows:
Number of Options | Weighted Average Exercise Price | |||||||
Outstanding at January 1, 2020 | 5,260,000 | $ | 1.45 | |||||
Granted | 1,760,000 | 1.57 | ||||||
Terminated / Exercised | - | - | ||||||
Outstanding at September 30, 2020 | 7,020,000 | $ | 1.48 | |||||
Options exercisable at September 30, 2020 | 6,518,334 | $ | 1.47 | |||||
Options expected to vest | 501,666 | $ | 1.59 |
The aggregate intrinsic values of both stock options outstanding and stock options exercisable at September 30, 2020 was $1,597,500.
The fair values of options granted during the nine months ended September 30, 2020 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 134.32% - 139.58%, risk-free rate of 0.25% - 1.67%, annual dividend yield of 0% and expected life of 3.00 – 10.00 years. The aggregate fair value of the options granted during the nine months ended September 30, 2020 was $2,702,401.
Stock-based compensation expense associated with stock options granted amounted to $739,362 and $1,916,193, of which, $605,555 and $1,803,829 was recorded as compensation and related benefits, $110,970 and $112,364 was recorded as professional fees, $22,837 and $0 was recorded as research and development expenses, for the three months ended September 30, 2020 and 2019, respectively.
Stock-based compensation expense associated with stock options granted amounted to $2,251,312 and $5,713,079, of which, $1,975,245 and $5,155,983 was recorded as compensation and related benefits, $240,162 and $557,096 was recorded as professional fees, $35,905 and $0 was recorded as research and development expenses, for the nine months ended September 30, 2020 and 2019, respectively.
A summary of the status of the Company’s nonvested stock options granted as of September 30, 2020 and changes during the nine months ended September 30, 2020 is presented below:
Number of Options | Weighted Average Exercise Price | |||||||
Nonvested at January 1, 2020 | 264,723 | $ | 2.00 | |||||
Granted | 1,760,000 | 1.57 | ||||||
Vested | (1,523,057 | ) | (1.63 | ) | ||||
Nonvested at September 30, 2020 | 501,666 | $ | 1.59 |
17 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 129 -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 nine months ended September 30, 2017 since it2020 as they incurred a lossnet losses in the period.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017NOTE 10 – RESTRICTED NET ASSETS
NOTE 13 –SEGMENT INFORMATIONA 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 three and nine months ended September 30, 2017,registrant’s proportionate share of net assets of its consolidated subsidiaries (after intercompany eliminations) which as of the Company operatedend of the most recent fiscal year may not be transferred to the parent company in two reportable business segments - (1) the real property operating segment, and (2)form of loans, advances or cash dividends without 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, 2017consent of a third party.
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 $302,000Company’s PRC subsidiaries’ net assets as of September 30, 20172020 and December 31, 2016, which have2019 did not been reflected in itsexceed 25% of the Company’s consolidated net assets. Accordingly, the Parent Company’s condensed consolidated financial statements since the Company concluded that the likelihood is remote at this moment.have not been required in accordance with Rule 5-04 and Rule 12-04 of SEC Regulation S-X.
Legal service contractNOTE 11 - CONCENTRATIONS
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 revenuerevenues for the three and nine months ended September 30, 20172020 and 2016.2019.
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 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Customer | 2020 | 2019 | 2020 | 2019 | ||||||||||||
A (Hebei Daopei, a related party) | * | 28 | % | * | 15 | % | ||||||||||
B | 28 | % | 21 | % | 29 | % | 23 | % | ||||||||
C | 18 | % | 14 | % | 18 | % | 15 | % | ||||||||
D | 14 | % | 11 | % | 14 | % | 12 | % |
* | Less than 10% |
* Less than 10%
Two customers, one of which was a related party,whose outstanding receivable accounted for 86.1%10% or more of the Company’s total outstanding accounts receivable, accounts receivable – related party, and tenantsrent receivable at September 30, 2017.
One customer, who was a related party,2020, accounted for 100%62.6% of the Company’s total outstanding accounts receivable, accounts receivable – related party, and rent receivable at September 30, 2020.
18 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – CONCENTRATIONS (continued)
Customers (continued)
Two customers, whose outstanding receivable accounted for 10% or more of the Company’s total outstanding accounts receivable, accounts receivable – related party, and rent receivable at December 31, 2016.2019, accounted for 93.0% of the Company’s total outstanding accounts receivable, accounts receivable – related party, and rent receivable at December 31, 2019.
Suppliers
No supplier accounted for 10% or more of the Company’s purchase during the three and nine months ended September 30, 20172020 and 2016.2019.
Two suppliersOne supplier, whose outstanding payable accounted for 89.4%10% or more of the Company’s total outstanding accounts payable at September 30, 2017.2020, accounted for 93.6% of the Company’s total outstanding accounts payable at September 30, 2020.
NoOne supplier, whose outstanding payable accounted for 10% or more of the Company’s total outstanding accounts payable at December 31, 2016.
Concentrations2019, accounted for 90.8% of credit risk
At September 30, 2017 andthe Company’s total outstanding accounts payable at 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.2019.
The Company maintains its cash in United States bank and financial institution deposits that at times may exceed federally insured limits. At September 30, 2017 and December 31, 2016, the Company’s cash balances in United States bank accounts had approximately $0 and $80,000 in excess of the federally-insured limits, respectively. The Company has not experienced any losses in its United States bank accounts through and as of the date of this report.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
NOTE 1612 –RESTRICTED NET ASSETSSEGMENT INFORMATION
A portionFor the three and nine months ended September 30, 2020 and 2019, 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 reportable 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 these reportable business segments for the three and nine months ended September 30, 2020 and 2019 was as follows:
19 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 – SEGMENT INFORMATION (continued)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues | ||||||||||||||||
Real property operations | $ | 324,982 | $ | 264,141 | $ | 923,205 | $ | 795,656 | ||||||||
Medical related consulting services - related party | - | 108,520 | - | 234,214 | ||||||||||||
Development services and sales of developed products | - | 10,555 | - | 37,237 | ||||||||||||
Total | 324,982 | 383,216 | 923,205 | 1,067,107 | ||||||||||||
Costs and expenses | ||||||||||||||||
Real property operations | 135,821 | 193,738 | 663,086 | 617,173 | ||||||||||||
Medical related consulting services - related party | - | 94,442 | - | 202,908 | ||||||||||||
Development services and sales of developed products | - | 41,808 | - | 103,899 | ||||||||||||
Total | 135,821 | 329,988 | 663,086 | 923,980 | ||||||||||||
Gross profit (loss) | ||||||||||||||||
Real property operations | 189,161 | 70,403 | 260,119 | 178,483 | ||||||||||||
Medical related consulting services - related party | - | 14,078 | - | 31,306 | ||||||||||||
Development services and sales of developed products | - | (31,253 | ) | - | (66,662 | ) | ||||||||||
Total | 189,161 | 53,228 | 260,119 | 143,127 | ||||||||||||
Other operating expenses | ||||||||||||||||
Real property operations | 77,852 | 75,750 | 291,886 | 253,347 | ||||||||||||
Medical related consulting services - related party | 160,557 | 206,085 | 491,683 | 446,156 | ||||||||||||
Development services and sales of developed products | 28,002 | 1,132,015 | 94,241 | 1,574,973 | ||||||||||||
Corporate/Other | 3,113,308 | 4,115,725 | 8,797,886 | 12,154,063 | ||||||||||||
Total | 3,379,719 | 5,529,575 | 9,675,696 | 14,428,539 | ||||||||||||
Other income (expense) | �� | |||||||||||||||
Interest expense | ||||||||||||||||
Real property operations | - | - | - | (32,877 | ) | |||||||||||
Corporate/Other | (41,531 | ) | (11,198 | ) | (126,169 | ) | (27,423 | ) | ||||||||
Total | (41,531 | ) | (11,198 | ) | (126,169 | ) | (60,300 | ) | ||||||||
Other income (expense) | ||||||||||||||||
Real property operations | 4 | 2,157 | (927 | ) | 2,172 | |||||||||||
Medical related consulting services - related party | (20,095 | ) | (8,825 | ) | (36,673 | ) | (30,679 | ) | ||||||||
Development services and sales of developed products | 221 | 18 | 224 | 197 | ||||||||||||
Corporate/Other | - | 1,160,137 | - | 1,096,212 | ||||||||||||
Total | (19,870 | ) | 1,153,487 | (37,376 | ) | 1,067,902 | ||||||||||
Total other income (expense) | (61,401 | ) | 1,142,289 | (163,545 | ) | 1,007,602 | ||||||||||
Net income (loss) | ||||||||||||||||
Real property operations | 111,313 | (3,190 | ) | (32,694 | ) | (105,569 | ) | |||||||||
Medical related consulting services - related party | (180,652 | ) | (200,832 | ) | (528,356 | ) | (445,529 | ) | ||||||||
Development services and sales of developed products | (27,781 | ) | (1,163,250 | ) | (94,017 | ) | (1,641,438 | ) | ||||||||
Corporate/Other | (3,154,839 | ) | (2,966,786 | ) | (8,924,055 | ) | (11,085,274 | ) | ||||||||
Total | $ | (3,251,959 | ) | $ | (4,334,058 | ) | $ | (9,579,122 | ) | $ | (13,277,810 | ) |
20 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 – SEGMENT INFORMATION (continued)
Identifiable long-lived tangible assets at September 30, 2020 and December 31, 2019 | September 30, 2020 | December 31, 2019 | ||||||
Real property operating | $ | 7,662,047 | $ | 7,750,743 | ||||
Medical related consulting services | 228,606 | 263,621 | ||||||
Development services and sales of developed products | 259,301 | 322,741 | ||||||
Total | $ | 8,149,954 | $ | 8,337,105 |
Identifiable long-lived tangible assets at September 30, 2020 and December 31, 2019 | September 30, 2020 | December 31, 2019 | ||||||
United States | $ | 7,734,740 | $ | 7,839,093 | ||||
China | 415,214 | 498,012 | ||||||
Total | $ | 8,149,954 | $ | 8,337,105 |
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, the Company is subject to ordinary routine litigation incidental to its normal business operations. The Company is not currently a party to, and its property is not subject to, any material legal proceedings, except as set forth below.
On October 25, 2017, Genexosome entered into and closed a Stock Purchase Agreement with Beijing Genexosome and Yu Zhou, MD, PhD, the sole shareholder of Beijing Genexosome, pursuant to which Genexosome acquired all of the Company’s operations are conducted through its PRC subsidiary, which can only pay dividends outissued and outstanding securities of its retained earnings determinedBeijing Genexosome in accordance with the accounting standards and regulationsconsideration of a cash payment in the PRCamount of $450,000, of which $100,000 is still owed. Further, on October 25, 2017, Genexosome entered into and afterclosed an Asset Purchase Agreement with Dr. Zhou, pursuant to which the Company acquired all assets, including all intellectual property and exosome separation systems, held by Dr. Zhou pertaining to the business of researching, developing and commercializing exosome technologies. In consideration of the assets, Genexosome paid Dr. Zhou $876,087 in cash, transferred 500,000 shares of common stock of the Company to Dr. Zhou and issued Dr. Zhou 400 shares of common stock of Genexosome. Further, The Company had not been able to realize the financial projections provided by Dr. Zhou at the time of the acquisition and has decided to impair the intangible asset associated with this acquisition to zero. Dr. Zhou was terminated as Co-CEO of Genexosome on August 14, 2019. Further, on October 28, 2019, Research Institute at Nationwide Children’s Hospital (“Research Institute”) filed a Complaint in the United States District Court for the Southern District of Ohio Eastern Division against Dr. Zhou, Li Chen, the Company and Genexosome with various claims against the Company and Genexosome including misappropriation of trade secrets in violation of the Defend Trade Secrets Act of 2016 and violation of Ohio Uniform Trade Secrets Act. Research Institute is seeking monetary damages, injunctive relief, exemplary damages, injunctive relief and other equitable relief. The Company intends to vigorously defend against this action and pursue all available legal remedies. The civil case against Avalon is stayed pending resolution of the criminal proceedings against Dr. Zhou and Li Chen, and while there can be no assurances, the Company believes it has metsubstantial legal and factual defenses to the PRC requirementsResearch Institute’s claims and the likelihood of any findings of liability for appropriationthe Company cannot be assessed at this time.
Operating Leases
Avalon Shanghai Office Lease
On February 24, 2020, Avalon Shanghai entered into a lease for office space in Beijing, China, with a third party (the “Beijing Office Lease”). Pursuant to statutory reserve.the Beijing Office Lease, the monthly rent is RMB 50,586 (approximately $7,000) with a required security deposit of RMB 164,764 (approximately $24,000). In addition, a portionAvalon Shanghai needs to pay monthly maintenance fees of RMB 4,336 (approximately $600). The term of the Beijing Office Lease is 12 months commencing on March 1, 2020 and expires on February 28, 2021. For the three and nine months ended September 30, 2020, rent expense and maintenance fees related to the Beijing Office Lease amounted to approximately $36,000 and $67,000, respectively. As of September 30, 2020, the future minimum rental payment required under this Beijing Office Lease is $40,438.
21 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 – COMMITMENTS AND CONTINGENCIES (continued)
Operating Leases (continued)
Operating Lease for General Business
In December 2019, the Company entered into a lease in New York, U.S., with a third party (the “New York Lease”). Pursuant to the New York Lease, the monthly rent is $6,000. The term of the New York Lease is 3 years commencing on January 1, 2020 and expires on December 31, 2022. For the three and nine months ended September 30, 2020, rent expense related to the New York Lease amounted to $18,000 and $54,000, respectively.
Operating lease right-of-use asset related to the New York Lease is included in “Right-of-use asset, operating lease” and is included in the accompanying consolidated balance sheets. With respect to lease liability, operating lease liability is included in “Operating lease obligation” and “Operating lease obligation – noncurrent portion,” in the accompanying consolidated balance sheets. The Company’s businessesleases as of December 31, 2019 did not meet the requirements to be recorded as a right-of-use asset and assets are denominatedoperating lease obligation as they were immaterial and less than 12 months in term.
Supplemental cash flow information related to the New York lease for the nine months ended September 30, 2020 is as follows:
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flows paid for operating lease | $ | 48,000 | ||
Right-of-use asset obtained in exchange for lease obligation: | ||||
Operating lease | $ | 201,028 |
Supplemental balance sheet information related to the New York Lease as of September 30, 2020 is as follows:
Operating Lease: | ||||
Operating lease right-of-use asset | $ | 153,556 | ||
Current portion of operating lease liability | $ | 76,379 | ||
Long-term operating lease liability | 83,177 | |||
Total operating lease liability | $ | 159,556 | ||
Weighted Average Remaining Lease Term (in years): | ||||
Operating lease | 2.25 | |||
Weighted Average Discount Rate: | ||||
Operating lease | 5.0 | % |
The following table summarizes the maturity of lease liability under the New York Lease as of September 30, 2020:
For the Year Ending September 30: | Operating Lease | |||
2021 | $ | 72,000 | ||
2022 | 72,000 | |||
2023 | 18,000 | |||
2024 and thereafter | - | |||
Total lease payments | 162,000 | |||
Amount of lease payments representing interest | (8,444 | ) | ||
Total present value of operating lease liability | $ | 153,556 |
22 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 – COMMITMENTS AND CONTINGENCIES (continued)
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 five years of execution of the Joint Venture Agreement, Unicorn shall invest cash into Epicon in an amount not less than RMB which8,000,000 (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 not freely convertible into foreign currencies. All foreign exchange transactions take place either throughfocused on cell preparation, third party testing, biological sample repository for commercial and scientific research purposes and the People’s Bankclinical transformation of China or other banks authorizedscientific achievements. As of September 30, 2020, Avalon Shanghai has contributed RMB 4,300,000 (approximately $0.6 million) that was included in equity method investment on the accompanying consolidated balance sheets. Avalon Shanghai intends 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 formuse its present working capital together with suppliers’ invoices, shipping documentsborrowings from related party and signed contracts. These currency exchange control procedures imposed byequity raises to fund the PRC government authorities may restrict the abilityproject cost.
Joint Venture – AVAR BioTherapeutics (China) Co. Ltd.
On October 23, 2018, Avactis Biosciences, Inc. (“Avactis”), a wholly-owned subsidiary of the Company’s PRC subsidiary to transfer its net assetsCompany, and Arbele Limited (“Arbele”) agreed to the Parent Company through loans, advances or cash dividends.
Schedule Iestablishment of Article 5-04 of Regulation S-X requires the condensed financial informationAVAR 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 parent companyJoint 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 $10 million (or equivalent in RMB) in cash and/or services, which shall be contributed in tranches based on milestones to be filed when the restricted net assetsdetermined jointly by AVAR and Avactis in writing subject to Avactis’ cash reserves. Within 30 days, Arbele shall make a contribution 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$6.66 million in the form of loans, advances or cash dividends withoutentering 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 consent of a third party.future with terms and conditions to be mutually agreed upon Avactis and AVAR and services.
The Company’s PRC subsidiary’s net assetsIn addition, Avactis is responsible for:
● | Contributing registered capital of RMB 5,000,000 (approximately $0.7 million) for working capital purposes as required by local regulation, which is not required to be contributed immediately and will be contributed subject to 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 September 30, 20172020, Avactis has paid $900,000 to Arbele as research and development fee, and License Agreement has not been finalized.
23 |
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 – COMMITMENTS AND CONTINGENCIES (continued)
Line of Credit Agreement
On August 29, 2019, the Company entered into a Line of Credit Agreement (the “Line of Credit Agreement”) providing the Company with a $20 million line of credit (the “Line of Credit”) from Wenzhao Lu (the “Lender”), a significant shareholder and director of the Company. The Line of Credit allows the Company to request loans thereunder and to use the proceeds of such loans for working capital and operating expense purposes until the facility matures on December 31, 2016 did2024. The loans are unsecured and are not exceed 25%convertible into equity of the Company’s consolidated net assets. Accordingly, Parent Company’s condensed consolidated financial statements haveCompany. Loans drawn under the Line of Credit bears interest at an annual rate of 5% and each individual loan will be payable three years from the date of issuance. The Company has a right to draw down on the line of credit and not been requiredat the discretion of the related party Lender. The Company may, at its option, prepay any borrowings under the Line of Credit, in accordance with Rule 5-04whole or in part at any time prior to maturity, without premium or penalty. The Line of Credit Agreement includes customary events of default. If any such event of default occurs, the Lender may declare all outstanding loans under the Line of Credit to be due and Rule 12-04payable immediately. As of SEC Regulation S-X.September 30, 2020, $2,900,000 was outstanding under the Line of Credit.
NOTE 1714 –SUBSEQUENT EVENTS
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.
The offer, sale and issuance of the above securities was made to accredited investors and the Company relied upon the exemptions contained in Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated there under with regard to the sale. No advertising or general solicitation was employed in offering the securities. The offer and sale was made to accredited investors and transfer of the common stock issued was restricted by the Company in accordance with the requirements of the Securities Act of 1933, as amended.The accredited investors acknowledged that they were not aware of nor did it review any registration statement or prospectus filed by the Company with the SEC.
GenExosome Technologies Inc.
In July 2017, the Company formed GenExosome Technologies Inc., a Nevada corporation (“GenExosome”). On September 29, 2017, Dr. David K. Jin was appointed as the sole director and as the Chief Executive Officer, Chief Medical Officer and President, Meng Li was appointed as Chief Operating Officer and Secretary and Luisa Ingargiola was appointed as Chief Financial Officer. On October 25, 2017, GenExosome and2020, the Company entered into a Securities PurchaseDistribution Agreement pursuantwith Adial Pharmaceuticals, Inc. (“Adial”) (the “Adial Agreement”). Pursuant to whichthe Adial Agreement, the Company acquired 600 shareswas appointed as a non-exclusive sub-distributor of GenExosome in considerationAdial’s SARS-CoV-2 antibody tests and antigen tests and other medical devices and equipment worldwide. Mr. Stilley, a director of $1,326,087the Company as well as a member of the Nominating and 500,000Corporate Governance Committee and Audit Committee, is the Chief Executive Officer and a director of Adial.
On December 13, 2019, the Company entered into an Open Market Sale AgreementSM (the “Sales Agreement”) with Jefferies LLC, as sales agent (“Jefferies”). From October 1, 2020 to November 9, 2020, Jefferies sold an aggregate of 41,909 shares of common stock at an average price of the Company.$1.55 per share to investors. The Company is requiredreceived net cash proceeds of $63,197, net of commission paid to pay $876,087sales agent 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$1,955.
NOTE 17 –SUBSEQUENT EVENTS (continued)
24 |
GenExosome Technologies Inc. (continued)
On October 25, 2017, GenExosome entered into and closed an Asset Purchase Agreement with Yu Zhou, MD, PhD, pursuant to which the Company acquired all assets, including all 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. As a result of the above transactions, the Company holds 60% of GenExosome and Dr. Zhou holds 40% of GenExosome.
On October 25, 2017, GenExosome entered into and closed a Stock Purchase Agreement with Beijing Jieteng (GenExosome) Biotech Co. Ltd., a corporation incorporated in the People’s Republic of China (“Beijing GenExosome”) and Dr. Zhou, the sole shareholder of Beijing GenExosome, pursuant to which GenExosome acquired all of the issued and outstanding securities of Beijing GenExosome in consideration of a cash payment 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.
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 nine months ended September 30, 20172020 and 20162019 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.April 6, 2020. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
Unless otherwise indicated, references to the “Company,” “us” or “we” refer to Avalon GloboCare Corp.Impact of COVID-19 on our Operations, Financial Condition, Liquidity and its subsidiaries.Results of Operations
The ultimate impact of the COVID-19 pandemic on our operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or us, may determine are needed.
The occurrence of COVID-19 pandemic had negatively impact on our operations. Some tenants have delayed on rent payment. Our general development operations have continued during the COVID-19 pandemic and we have not had significant disruption. However, we are uncertain if the COVID-19 pandemic will impact future operations at our laboratory, or our ability to collaborate with other laboratories and universities. In addition, we are unsure if the COVID-19 pandemic will impact future clinical trials. Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related financial effect cannot be reasonably estimated at this time but is expected to adversely impact the Company’s business for the year of 2020.
We have limited cash available to fund planned operations and although we have other sources of capital described below under “Liquidity and Capital Resources,” management continues to pursue various financing alternatives to fund our operations so we can continue as a going concern. However, the COVID-19 pandemic has created significant economic uncertainty and volatility in the credit and capital markets. Management plans to secure the necessary financing through the issue of new equity and/or the entering into of strategic partnership arrangements but the ultimate impact of the COVID-19 pandemic on our ability to raise additional capital is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak and new information which may emerge concerning the severity of the COVID-19 pandemic. We may not be able to raise sufficient additional capital and may tailor our operations based on the amount of funding we are able to raise in the future. Nevertheless, there is no assurance that these initiatives will be successful. Further, there is no assurance that capital available to us in any future financing will be on acceptable terms.
Overview
We are Overviewa clinical-stage, vertically integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative, transformative immune effector cell therapy, exosome technology, as well as COVID-19 related diagnostics and therapeutics. We also provide strategic advisory and outsourcing services to facilitate and enhance our clients' growth and development, as well as competitiveness in healthcare and CellTech industry markets. Through our subsidiary structure with unique integration of verticals from innovative R&D to automated bioproduction and accelerated clinical development, we are establishing a leading role in the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEX™), and regenerative therapeutics.
Avalon GloboCareachieves and fosters 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 (“ACTEX™”) with Weill Cornell Medicine. |
● | Novel therapeutic and diagnostic targets development utilizing QTY-code protein design technology with Massachusetts Institute of Technology (MIT) including using the QTY code protein design technology for development of a hemofiltration device to treat Cytokine Storm. |
● | Co-development of next generation, transposon-based, multi-target CAR-T, CAR-NK and other immune effector cell therapeutic modalities with Arbele Corp | |
● | Strategic partnership with the University of Natural Resources and Life Sciences (BOKU) in Vienna, Austria to develop an S-layer vaccine that can be administered by an intranasal or oral route against SARS-CoV-2, the novel coronavirus that causes COVID-19 disease. |
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Avalon’s midstream bio-processing and bio-production facility is dedicated to integratinglocated in Nanjing, China with state-of-the-art, automated GMP and managing global healthcare services and resources,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 empowering high-impact biomedical innovationsbio-banking.
Avalon’s downstream medical team and technologies to accelerate their clinical applications. Operating through two major platforms, namely “Avalon Cell”,facility consists of top-rated affiliated hospital network and “Avalon Rehab”, our “Technology + Service” ecosystem covers the areas of regenerative medicine, cell-basedexperts specialized in hematology, oncology, cellular immunotherapy, exosome technology, telemedicine with medical second opinion/referral services,hematopoietic stem/progenitor cell transplant, as well as fertility and rehabilitation medicine. We plan to integrate these services through joint ventures and accretive acquisitions that bring shareholder value both in the short term, through operational entities as part of Avalon Rehab, and long term, through biomedical innovation development as part of Avalon Cell.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 (co-developed with China Immunotech Co. Ltd) 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 the advantage of prompt treatment to patients where timing is important related hematologic malignancies. Avalon has plans to recruit 20 patients (under registered clinical trial NCT03952923) 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. 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. Following the pre-clinical process development and validation phase, Avalon anticipates that it intends to pursue first-in-human clinical study of this next generation of potentially more effective and safer CAR-T candidate. |
● | ACTEX™: Stem cell-derived Avalon Clinical-grade Tissue-specific Exosomes (ACTEX™) is one of the core technology platforms that has been co-developed by Avalon GloboCare and Weill Cornell Medicine. The Company formed a strategic partnership with HydroPeptide, LLC, a leading epigenetics skin care company, to engage in co-development and commercialization of a series of clinical-grade, exosome-based cosmeceutical and orthopedic products. As part of this agreement, the Company signed a three-way Material Transfer Agreement between Avalon GloboCare, HydroPeptide and Weill Cornell Medicine. |
● | FLASH-CAR™: The Company advanced its next generation immune cell therapy using FLASH-CAR™ technology co-developed with the Company’s strategic partner Arbele Limited. The adaptable FLASH-CAR™ platform can be used to create personalized cell therapy from a patient’s own cells, as well as off-the-shelf cell therapy from a universal donor. |
● | AVA-Trap™: Avalon’s AVA-Trap™ therapeutic program plans to enter animal model testing followed by expedited clinical studies with the goal of providing an effective therapeutic option to combat COVID-19 and other life-threatening conditions involving cytokine storms. The Company initiated a sponsored research and co-development project with Massachusetts Institute of Technology (MIT) led by Professor Shuguang Zhang as Principal Investigator in May 2019. Using the unique QTY code protein design platform, six water-soluble variant cytokine receptors have been successfully designed and tested to show binding affinity to the respective cytokines. |
We currently producegenerated revenue throughby providing 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. We discontinued sales of exosome isolation systems in China and the United States through our joint venture Genexosome Technologies, Inc. However, we are actively developing other unrelated proprietary exosome related products for sale or licensure.
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
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We have a limited operating history and our continued growth is dependent upon the continuation of providing medical consulting services to our only three clients who are our related parties, and real estate property ownership and operation; 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 and $1,743,939 at September 30, 2017, respectively, and had a net loss and net cash flow used in operating activities of $1,690,570 and $747,056 for the nine months ended September 30, 2017, respectively. In addition, the current cash balance cannot be projected to cover the operating expenses for the next twelve months from the release date of this report. These factors, among others, raised 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.
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
Use of 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, the useful life of property plant,and equipment and investment in real estate, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets accruals for taxes due,and the associated valuation allowances, 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
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured.
We provide medical related consultingrecognize revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of this new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to our clients. Wecustomers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are paidapplied 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 the amount of consideration to which an entity expects to be entitled in exchange for ourtransferring promised goods or services by our clients pursuantto a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration is included 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. We recognize revenue by providing medical related consulting services under written service contracts with our customers. Revenue relatedrelative standalone selling price basis. The transaction price allocated to our service offeringseach performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
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Types of revenue:
● | 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 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 have determined that the servicesASC 606 does not apply to rental contracts, which are performed and amountswithin the scope of other revenue recognition accounting standards.
Rental income from operating leases is recognized on a straight-line basis under the guidance of ASC 842. Lease payments under tenant leases are earned, using therecognized on a straight-line methodbasis over the term of the related services agreement. Prepayments, if any, received from customers prior toleases. The cumulative difference between lease revenue recognized under the services being performedstraight-line method and contractual lease payments are recorded as advance from customers. In these cases, whenincluded in rent receivable on the services are performed, the amount recorded as advance from customers is recognized as revenue.consolidated balance sheets.
We lease commercial property under operating leases with terms of generally two yearsdo not offer promotional payments, customer coupons, rebates or more. We recognize rental revenue fromother cash redemption offers to 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.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.
Stock-based Compensationbasis.
Stock based compensation is accounted for based on the requirements of the Share-Based Payment topic ofRecent Accounting Standards Codification (“ASC”) 718 which requires recognition in the financial statements 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.
PursuantFor details of applicable new accounting standards, please, refer 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 Recent Accounting Standards in Note 3of services or the vesting period, whichever is applicable. Until the measurement date is reached, the total amount of compensation expense remains uncertain.our unaudited condensed consolidatedfinancial statements accompanying this report.
Recent Accounting Pronouncements
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RESULTS OF OPERATIONS
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. This pronouncement is effective for reporting periods beginning after December 15, 2018 using a modified retrospective adoption method. We are currently evaluating the impact of adopting the new lease standard on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. We are currently evaluating the impact it may have on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting. The guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. This guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact it may have on our consolidated financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on 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.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Three and Nine Months Ended September 30, 20172020 and 20162019
Revenues
We generated revenue from medical related consulting services commencing on July 2016 andFor the three months ended September 30, 2020, we generatedhad real property rental revenue commencingof $324,982, as compared to $264,141 for the three months ended September 30, 2019, an increase of $60,841, or 23.0%. For the nine months ended September 30, 2020, we had real property rental revenue of $923,205, as compared to $795,656 for the nine months ended September 30, 2019, an increase of $127,549, or 16.0%. The increase was primarily attributable to the increase of tenants in 2020 periods. We expect that our revenue from real property rent will remain in its current quarterly level with minimal increase in the near future. We are unsure of the short and long term financial impact of COVID -19 on May 2017.our ability to collect rental income or on our overall building occupancy rate.
For the three and nine months ended September 30, 2017,2020, we had real property rental revenue of $315,284 and $537,538, respectively. We did not generatehave any real property rentalmedical related consulting services revenue since there was no demand for our consulting service from our related parties and there was no order for our medical related consulting services from third party in these periods. Although we maintain close working relationships with our related parties, the consulting agreements with our related parties expired as of December 31, 2019. There was no order from related party and third party customers in the nine months ended September 30, 2020. Currently, we are negotiating with our potential customers and expect to enter consulting services agreements in the first quarter of 2021. For the three and nine months ended September 30, 2016.
For the three months ended September 30, 2017,2019, we had medical related consulting services revenue from related parties of $2,166, as compared to consulting services revenue from related parties of $326,667 for$108,520 and $234,214, respectively.
For the three months ended September 30, 2016, a decrease of $324,501, or 99.3%. For theand nine months ended September 30, 2017,2020, we had consulting servicesdid not have any revenue from related partiescontract services through performing development services for hospitals and other customers and sales of $220,949, as compareddeveloped products to consulting services revenue from related parties of $326,667 forhospitals and other customers. For the three and nine months ended September 30, 2016, a decrease2019, we had revenue from contract services through performing development services for hospitals and other customers and sales of $105,718, or 32.4%. The decrease was mainly attributabledeveloped products to the decreased demand for our consulting servicehospitals and other customers of $10,555 and $37,237, respectively. 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 and needs revision. We have discontinued sales of our exosome isolation system product. However, we are actively developing other unrelated proprietary exosome related parties.products for sale or licensure.
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 September 30, 2017,2020, our real property operating expenses amounted to $180,722 and $342,576, respectively. Since we started generating real property rental revenue during the second quarter of 2017, we had neither real property rental revenue nor real property operating expenses in$135,821, as compared to $193,738 for the three months ended September 30, 2019, a decrease of $57,917, or 29.9%. The decrease was mainly due to a decrease in maintenance fees of approximately $10,000, and a decrease in other miscellaneous items of approximately $48,000.
For the nine months ended September 30, 2016.2020, our real property operating expenses amounted to $663,086, as compared to $617,173 for the nine months ended September 30, 2019, an increase of $45,913, or 7.4%. The increase was mainly due to an increase in real property repairs and maintenance expenses of approximately $9,000, an increase in electric utility of approximately $14,000, and an increase in other miscellaneous items of approximately $23,000.
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.
Costs of consulting services forFor the three months ended September 30, 2017 was $47,033, representing an increase of $13,485, or 40.2%, as compared to $33,548 for the three months ended September 30, 2016. Costs of consulting services for theand nine months ended September 30, 2017 was $271,845, representing an increase2019, costs of $238,297, or 710.3%, as comparedmedical related consulting services amounted to $33,548 for the nine months ended September 30, 2016. The increase was primarily attributable to the allocation of fixed costs, mainly consisting of internal labor$94,442 and $202,908, respectively. There were no comparative revenue and related benefits, tocosts of revenue from our cost ofmedical related consulting services.
Real Property Operating Income
Our real property operating income was $134,562 and $194,962, respectively,services for the three and nine months ended September 30, 2017. We did not generate any real property operating income2020 since there was no demand for the threeour consulting service from our related parties in these periods and nine months ended September 30, 2016.there was no order for our medical related consulting services from third party.
Gross Profit (Loss) from Consulting ServicesCosts of development services and Gross Margin
Our gross loss from consulting services for the three months ended September 30, 2017 was $44,867, representing a changesales of $337,986, or (115.3)%, as compared to gross profit of $293,119 for the three months ended September 30, 2016, mainly due to the significant decrease in our consulting services revenuedeveloped products include inventory costs, materials and the increase in our consulting services costs. Gross margin decreased to (2,071.4)% for the three months ended September 30, 2017 from 89.7% for the three months ended September 30, 2016.
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. Gross margin decreased to (23.0)% for the nine months ended September 30, 2017 from 89.7% for the nine months ended September 30, 2016.
The decrease in gross margin for the three and nine months ended September 30, 2017 as compared to the three and nine months ended September 30, 2016 was primarily resulted from low consulting services revenue and the allocation of fixedsupplies costs, mainly consisting of internal labor and related benefits, todepreciation, other overhead costs of the low level of consulting revenue.
Other Operating Expensesand shipping and handling costs incurred.
For the three and nine months ended September 30 20172019, costs of development services for hospitals and 2016,other customers and sales of developed products to hospitals and other customers amounted to $41,808 and $103,899, respectively. We had neither revenue nor cost of revenue from this segment in the three and nine months ended September 30, 2020.
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Real Property Operating Income
Our real property operating income for the three months ended September 30, 2020 was $189,161, representing an increase of $118,758, or 168.7%, as compared to $70,403 for the three months ended September 30, 2019. The increase was mainly attributable to the increase in rental revenue resulting from the increase of tenants and the decrease in real property operating expenses as described above. Our real property operating income for the nine months ended September 30, 2020 was $260,119, representing an increase of $81,636, or 45.7%, as compared to $178,483 for the nine months ended September 30, 2019. The increase was mainly attributable to the increase in rental revenue resulting from the increase of tenants as described above, offset by the increase in real property operating expenses. We expect our real property operating income will remain in its current quarterly level with minimal decrease in the near future. We are unsure of the short and long term financial impact of COVID -19 on our ability to collect rental income or on our overall building occupancy rate.
Gross Profit from Medical Related Consulting Services and Gross Margin
We did not generate any gross profit from medical related consulting services in the three months ended September 30, 2020. Our gross profit from medical related consulting services for the three months ended September 30, 2019 was $14,078, with a gross margin of 13.0%.
We did not generate any gross profit from medical related consulting services in the nine months ended September 30, 2020. Our gross profit from medical related consulting services for the nine months ended September 30, 2019 was $31,306, with a gross margin of 13.4%.
Gross Loss from Development Services and Sales of Developed Products and Gross Margin
We did not generate any gross profit from development services and sales of developed products in the three months ended September 30, 2020. Our gross loss from development services and sales of developed products for the three months ended September 30, 2019 was $31,253, with a gross margin of (296.1)%.
We did not generate any gross profit from development services and sales of developed products in the nine months ended September 30, 2020. Our gross loss from development services and sales of developed products for the nine months ended September 30, 2019 was $66,662, with a gross margin of (179.0)%.
Other Operating Expenses
For the three and nine months ended September 30, 2020 and 2019, other operating expenses consisted of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Selling expense | $ | 148 | $ | 121 | $ | 15,138 | $ | 121 | ||||||||
Compensation and related benefits | 468,837 | — | 857,237 | — | ||||||||||||
Professional fees | 186,208 | 84,038 | 566,131 | 161,113 | ||||||||||||
Rent | 34,846 | — | 103,173 | — | ||||||||||||
Other general and administrative | 57,575 | 1,127 | 141,907 | 29,583 | ||||||||||||
$ | 747,614 | $ | 85,286 | $ | 1,683,586 | $ | 190,817 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Professional fees | $ | 1,753,182 | $ | 1,630,827 | $ | 4,868,530 | $ | 3,891,539 | ||||||||
Compensation and related benefits | 1,058,570 | 2,187,959 | 3,241,090 | 6,388,292 | ||||||||||||
Research and development | 238,432 | 265,139 | 674,935 | 1,367,310 | ||||||||||||
Advertising expenses | 102,472 | 141,100 | 216,317 | 606,922 | ||||||||||||
Amortization | - | 81,892 | - | 245,678 | ||||||||||||
Travel and entertainment | 32,735 | 92,087 | 137,548 | 389,101 | ||||||||||||
Directors and officers liability insurance premium | 78,862 | 55,057 | 194,887 | 122,720 | ||||||||||||
Other general and administrative | 115,466 | 65,503 | 342,389 | 406,966 | ||||||||||||
Impairment loss | - | 1,010,011 | - | 1,010,011 | ||||||||||||
$ | 3,379,719 | $ | 5,529,575 | $ | 9,675,696 | $ | 14,428,539 |
● | Professional fees primarily consisted of accounting fees, audit fees, legal service fees, consulting fees, investor relations service charges and other fees incurred for service related to |
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● | For the three months ended September 30, 2020, compensation and related benefits decreased by $1,129,389, or 51.6%, as compared to the three months ended September 30, 2019. The significant decrease was primarily attributable to a decrease in |
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● | For the three months ended September 30, 2020, advertising expenses decreased by $38,628 or 27.4% as compared to the three months ended September 30, 2019. For the nine months ended September 30, 2020, advertising expenses decreased by $390,605 or 64.4% as compared to the nine months ended September 30, 2019. The decrease was primarily due to decreased advertising activities incurred as a result of stricter control on corporation spending. We expect that our advertising expenses will continue to decrease in the near future. |
● | For the three months ended September 30, 2020, amortization expense from intangible assets decreased by $81,892, or 100.0%, as compared to the three months ended September 30, 2019. For the nine months ended September 30, 2020, amortization expense from intangible assets decreased by $245,678, or 100.0%, as compared to the nine months ended September 30, 2019. At the end of September 2019, our intangible assets were impaired to zero and therefore, no amortization expense was recorded related to intangible assets in the nine months ended September 30, 2020. |
● | For the three months ended September 30, 2020, travel and entertainment expense decreased by $59,352, or 64.5%, as compared to the three months ended September 30, 2019. For the nine months ended September 30, 2020, travel and entertainment expense decreased by $251,553, or 64.6%, as compared to the nine months ended September 30, 2019. The decrease was mainly due to decreased business travel activities and decreased entertainment expenditure resulting from COVID-19. In the nine months ended September 30, 2020, the spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, such as, cease traveling to non-essential jobs and curtail all unnecessary travel, and stay at home as much as possible. |
● | For the three months ended September 30, 2020, directors and officers liability insurance premium increased by $23,805, or 43.2%, as compared to the three months ended September 30, 2019. For the nine months ended September 30, 2020, directors and officers liability insurance premium increased by $72,167, or 58.8%, as compared to the nine months ended September 30, 2019. The increase was mainly due to different insurance provider with different premium. |
● | Other general and administrative expenses mainly consisted of |
● | In September 2019, we assessed our |
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(Loss) IncomeLoss from Operations
As a result of the foregoing, for the three months ended September 30, 2017,2020, loss from operations amounted to $657,919,$3,190,558, as compared to income from operations of $207,833$5,476,347 for the three months ended September 30, 2016,2019, a changedecrease of $865,752,$2,285,789, or 416.6%41.7%.
As a result of the foregoing, for the nine months ended September 30, 2017,2020, loss from operations amounted to $1,539,520,$9,415,577, as compared to income from operations of $102,302$14,285,412 for the nine months ended September 30, 2016,2019, a changedecrease of $1,641,822,$4,869,835, or 1,604.9%34.1%.
Other Income (Expense)
Other income (expense) mainly includes interest incomeexpense, change in fair value of warrants liabilities, allocated financing costs, 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$61,401 for the three months ended September 30, 2017,2020, as compared to other income, net, of $41$1,142,289 for the three months ended September 30, 2016,2019, a changedecrease of $52,851,$1,203,690, or 105.4%, which was mainlyprimarily attributable to a decrease in change in fair value of warrants liabilities of approximately $1,160,000, an increase in interest expense of approximately $53,000.$30,000, a decrease in other income approximately $24,000, offset by a decrease in loss from equity method investment of approximately $10,000.
Other expense, net, totaled $151,050$163,545 for the nine months ended September 30, 2017,2020, as compared to other income, net, of $101$1,007,602 for the nine months ended September 30, 2016,2019, a changedecrease of $151,151,$1,171,147, or 116.2%, which was mainlyprimarily attributable to a decrease in change in fair value of warrants liabilities of approximately $1,622,000, an increase in interest expense of approximately $95,000, and an increase$66,000, a decrease in foreign currency transaction lossother income approximately $22,000, offset by a decrease in allocated financing expense of approximately $57,000, offset by an increase$525,000 and a decrease in interest incomeloss from equity method investment of approximately $1,000.$13,000.
Income Taxes
We did not have any income taxes expense for the three and nine months ended September 30, 20172020 and 20162019 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,$3,251,959 for the three months ended September 30, 2020, as compared to $4,334,058 for the three months ended September 30, 2019, a decrease of $1,082,099 or $(0.026) per share (basic and diluted),25.0%.
As a result of the factors described above, our net loss was $9,579,122 for the nine months ended September 30, 2017. Our net income was $102,403, or $0.002 per share (basic and diluted),2020, as compared to $13,277,810 for the nine months ended September 30, 2016.2019, a decrease of $3,698,688 or 27.9%.
Net Loss Attributable to Avalon GloboCare Corp. Common Shareholders
The net loss attributable to Avalon GloboCare Corp. common shareholders was $3,251,959 or $(0.04) per share (basic and diluted) for the three months ended September 30, 2020, as compared with $3,858,195, or $(0.05) per share (basic and diluted) for the three months ended September 30, 2019, a change of $606,236 or 15.7%.
The net loss attributable to Avalon GloboCare Corp. common shareholders was $9,579,122 or $(0.12) per share (basic and diluted) for the nine months ended September 30, 2020, as compared with $12,621,235, or $(0.17) per share (basic and diluted) for the nine months ended September 30, 2019, a change of $3,042,113 or 24.1%.
Foreign Currency Translation Adjustment
Our reporting currency is the U.S. dollar. The functional currency of our parent company, and our wholly-owned U.S. subsidiaries, Avalon Healthcare System Inc.,AHS, Avalon RT 9, Properties, LLC,Genexosome, Avactis, and Avalon (BVI) Ltd.,Exosome, is the U.S. dollar and the functional currency of our wholly-owned PRC subsidiary, Avalon (Shanghai) Healthcare Technology Co., Ltd. which is incorporated in China,Shanghai 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 gain of $6,151$39,698 and $216a foreign currency translation loss of $69,388 for the three months ended September 30, 20172020 and 2016,2019, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation lossgain of $25,973$20,941 and a foreign currency translation gainloss of $431$60,009 for the nine months ended September 30, 20172020 and 2016,2019, respectively. This non-cash gain had the effect of decreasing our reported comprehensive loss and increasing our reported comprehensive income. This non-cash gain/loss had the effect of decreasing/increasing our reported comprehensive loss and decreasing our reported comprehensive income.loss.
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Comprehensive (Loss) IncomeLoss
As a result of our foreign currency translation adjustment, we had comprehensive loss of $704,578$3,212,261 and comprehensive income of $208,090$4,403,446 for the three months ended September 30, 20172020 and 2016,2019, respectively.
As a result of our foreign currency translation adjustment, we had comprehensive loss of $1,716,543$9,558,181 and comprehensive income of $102,834$13,337,819 for the nine months ended September 30, 20172020 and 2016,2019, respectively.
Liquidity and Capital Resources
The Company has a limited operating history and its continued growth is dependent upon the re-commencing of medical consulting services which was completed in December 2019 to its only few clients who are related parties and generating rental revenue from its income-producing real estate property in New 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 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 occurrence of an uncontrollable event such as the COVID-19 pandemic is likely to negatively affect the Company’s operations. Efforts to contain the spread of the coronavirus have intensified, including social distancing, travel bans and quarantine, and these are likely to negatively impact our tenants, employees and consultants. These, in turn, will not only impact our operations, financial condition and demand for our medical related consulting services but our overall ability to react timely to mitigate the impact of this event. Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related financial effect cannot be reasonably estimated at this time but is expected to adversely impact our business for the year of 2020.
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At September 30, 20172020 and December 31, 2016,2019, we had cash balance of approximately $357,000$1,396,000 and $2,886,000,$765,000, respectively. These funds are kept in financial institutions located as follows:
Country: | September 30, 2017 | December 31, 2016 | September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||
United States | $ | 228,521 | 64.0 | % | $ | 360,559 | 12.5 | % | $ | 1,203,710 | 86.3 | % | $ | 371,929 | 48.6 | % | ||||||||||||||||
China | 128,301 | 36.0 | % | 2,525,630 | 87.5 | % | 191,800 | 13.7 | % | 392,962 | 51.4 | % | ||||||||||||||||||||
Total cash | $ | 356,822 | 100.0 | % | $ | 2,886,189 | 100.0 | % | $ | 1,395,510 | 100.0 | % | $ | 764,891 | 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.
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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, 20162019 to September 30, 2017:2020:
December 31, 2016 to September 30, 2017 | September 30, | December 31, | Changes in | |||||||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | Change | Percentage Change | 2020 | 2019 | Amount | Percentage | |||||||||||||||||||||||||
Working capital (deficit): | ||||||||||||||||||||||||||||||||
Working capital deficit: | ||||||||||||||||||||||||||||||||
Total current assets | $ | 622,361 | $ | 3,706,213 | $ | (3,083,852 | ) | (83.2 | )% | $ | 2,153,499 | $ | 1,571,095 | $ | 582,404 | 37.1 | % | |||||||||||||||
Total current liabilities | 5,917,179 | 160,317 | 5,756,862 | 3,590.9 | % | 2,439,494 | 2,835,463 | (395,969 | ) | (14.0 | )% | |||||||||||||||||||||
Working capital (deficit): | $ | (5,294,818 | ) | $ | 3,545,896 | $ | (8,840,714 | ) | (249.3 | )% | ||||||||||||||||||||||
Working capital deficit | $ | (285,995 | ) | $ | (1,264,368 | ) | $ | 978,373 | (77.4 | )% |
Our working capital deficit increaseddecreased by $8,840,714$978,373 to working capital deficit $5,294,818$285,995 at September 30, 20172020 from working capital $3,545,896$1,264,368 at December 31, 2016.2019. The increasedecrease 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$631,000, an increase in rent receivable of New Jersey real property, a decreaseapproximately $74,000, an increase in prepaid expenses and other current assets of approximately $713,000 primarily due to the$181,000, a decrease in prepayment for acquisition of real propertyaccrued professional fees of approximately $700,000,$280,000, a decrease in accrued research and development fees of approximately $208,000, a decrease in accrued payroll liability of approximately $127,000, offset by a decrease in accounts receivable – related party of approximately $215,000, a decrease in deferred financing costs of approximately $83,000, an increase in accrued liabilities and other payables of approximately $321,000 resulting from the$66,000, an increase in accrued professional fees of approximately $226,000liabilities 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 in due toother payables – related parties of approximately $210,000 mainly due to the increase in working capital advance from our related parties,$75,000, and an increase in refundable depositoperating lease obligation 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.$76,000.
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 Nine Months Ended September 30, 20172020 Compared to the Nine Months Ended September 30, 20162019
The following summarizes the key components of our cash flows for the nine months ended September 30, 20172020 and 2016:2019:
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||
Net cash (used in) provided by operating activities | $ | (747,056 | ) | $ | 327,898 | |||||||||||
Net cash used in operating activities | $ | (6,185,198 | ) | $ | (5,318,165 | ) | ||||||||||
Net cash used in investing activities | (7,059,565 | ) | (230,395 | ) | (28,594 | ) | (538,368 | ) | ||||||||
Net cash provided by financing activities | 5,309,500 | 150,000 | 6,841,783 | 4,693,704 | ||||||||||||
Effect of exchange rate on cash | (32,246 | ) | (1,262 | ) | 2,628 | (17,118 | ) | |||||||||
Net (decrease) increase in cash | $ | (2,529,367 | ) | $ | 246,241 | |||||||||||
Net increase (decrease) in cash | $ | 630,619 | $ | (1,179,947 | ) |
Net cash flow used in operating activities for the nine months ended September 30, 20172020 was $747,056,$6,185,198, which primarily reflected our consolidated net loss of approximately $1,691,000,$9,579,000, and the changes in operating assets and liabilities, primarily consisting of an increase in rent receivable of approximately $94,000, an increase in prepaid expenses and other current assets of approximately $353,000, a decrease in accrued liabilities and other payables of approximately $681,000, offset by a decrease in accounts receivable – related party of approximately $214,000, an increase in accrued liabilities and other payables – related parties of approximately $75,000, and the non-cash items adjustment primarily consisting of depreciation and amortization of approximately $233,000, and stock-based compensation and service expense of approximately $3,965,000.
Net cash flow used in operating activities for the nine months ended September 30, 2019 was $5,318,165, which primarily reflected our consolidated net loss of approximately $13,278,000, the non-cash item adjustment consisting of change in warrants derivative liabilities of approximately $1,622,000, and the changes in operating assets and liabilities, primarily consisting of an increase in accounts receivable – related parties of approximately $91,000, an increase$175,000, offset by a decrease in tenants receivableprepaid expenses and other current assets of approximately $56,000, an increase$241,000, a decrease in security deposit of approximately $30,000,$101,000, and a decrease in income taxes payable of approximately $21,000, 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,$327,000, and the add-back of non-cash items mainly consisting of depreciation and amortization of approximately $430,000, stock-based compensation and service expense of approximately $58,000 and stock-based compensation$7,003,000, allocated financing costs of approximately $602,000.$525,000, and impairment loss of approximately $1,010,000.
Net
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We expect our cash flow provided byused in operating activities forto increase due to the nine months ended September 30, 2016 was $327,898, which primarily reflected our net income of approximately $102,000, and changes in operating assets and liabilities consisting of an increase in accrued liabilities and other payables – related parties of approximately $6,000, and an increase in advance from customers – related parties of approximately $227,000, offset by changes in operating assets and liabilities consisting of an increase in prepaid expenses and other of approximately $5,000, and a decrease in accrued liabilities and other payables of approximately $3,000.following:
● | the development and commercialization of new products; |
● | an increase in professional staff and services; and |
● | an increase in public relations and/or sales promotions for existing and/or new brands as we expand within existing markets or enter new markets. |
Net cash flow used in investing activities was $7,059,565$28,594 for the nine months ended September 30, 20172020 as compared to $230,395$538,368 for the nine months ended September 30, 2016.2019. During the nine months ended September 30, 2017,2020, we made payments for purchase of property, plant and equipmentadditional investment in equity method investment of approximately $51,000, and made payments for purchase of commercial real estate of approximately $7,009,000.$29,000. During the nine months ended September 30, 2016,2019, 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 $379,000, made payment for improvement of commercial real estate of approximately $16,000, made prepayment for purchase of long-term assets of approximately $26,000, and made payment for equity method investment of approximately $117,000.
Net cash flow provided by financing activities was $5,309,500$6,841,783 for the nine months ended September 30, 20172020 as compared to $150,000$4,693,704 for the nine months ended September 30, 2016.2019. During the nine months ended September 30, 2017,2020, we received $2,100,000 proceeds from loan payable,related party borrowings of $300,000 and received $210,000 advancenet proceeds from related parties,equity offering of approximately $6,742,000 (net of cash paid for commission and received $3,000,000 proceedsoffering costs 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,approximately $492,000), offset by repaymentrepayments made for note payable – related parties’ advanceparty of $500.$200,000. During the nine months ended September 30, 2016,2019, we received proceeds from note payable – related parties’ advanceparty of $9,000$1,000,000, and receivednet proceeds from AHS’s founders’ contributionfor equity offering of $141,000, in funding our operations.approximately $5,104,000, offset by repayments made for note payable – related party of $410,000, and repayments for loan payable of $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:
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In the third quarter of 2019, we had secured a $20 million credit facility (Line of Credit) provided by our Chairman, Wenzhao Lu. The unsecured credit facility bears interest at a rate of 5% and provides for maturity on drawn loans 36 months after funding. The note is not convertible to equity. As of September 30, 2020, the total principal amount outstanding under the Credit Line was $2.9 million and we have approximately $17.1 million remaining available under the Line Credit.
On December 13, 2019, we entered into an Open Market Sale AgreementSM (the “Sales Agreement”) with Jefferies LLC, as sales agent (“Jefferies”), pursuant to which we may offer and sell, from time to time, through Jefferies, shares of our common stock, par value $0.0001 per share, having an aggregate offering price of up to $20.0 million. On April 6, 2020, the date on which we filed our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, our registration statement became subject to the offering limits set forth in General Instruction I.B.6 of Form S-3. As of April 6, 2020, the aggregate market value of our outstanding common stock held by non-affiliates, or public float, was $39,564,237, based on 23,691,160 shares of our outstanding common stock that were held by non-affiliates on such date and a price of $1.67 per share, which was the price at which our common stock was last sold on The Nasdaq Capital Market on February 19, 2020 (a date within 60 days of the date hereof), calculated in accordance with General Instruction I.B.6 of Form S-3. We will needhave not offered any securities pursuant to raise additional funds, particularly ifGeneral Instruction I.B.6 of Form S-3 in the 12 calendar months preceding the date of this prospectus supplement. We filed a prospectus supplement to amend and supplement the information in our prospectus and original prospectus supplement based on the amount of securities that we are unableeligible to generate positive cash flow as a resultsell under General Instruction I.B.6 of Form S-3. After giving effect to the $13,000,000 offering limit imposed by General Instruction I.B.6 of Form S-3, we may offer and sell additional shares of our operations. common stock having an aggregate offering price of up to $13,000,000 from time to time through Jefferies acting as our sales agent in accordance with the terms of the sales agreement. As of September 30, 2020, we sold a total of 3,606,910 shares of our common stock through Jefferies with an aggregate offering price of $6,507,414 and we have approximately $8.5 million offering price remaining available under the Sales Agreement.
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We estimate that based on current plans and assumptions, that our available cash will be insufficient to satisfy our cash requirements under our present operating expectations.expectations through cash available under our Credit Line and sales of equity through our Sales Agreement. Other than funds received from the sale of our equity and advances from our related parties,party, 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 September 30, 2017,2020, 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 | |||||||||||||||
Operating lease commitment | $ | 202,438 | $ | 112,438 | $ | 90,000 | $ | - | $ | - | ||||||||||
Acquisition consideration | 100,000 | 100,000 | - | - | - | |||||||||||||||
Borrowings from related party (principal) | 3,290,000 | - | 3,290,000 | - | - | |||||||||||||||
Accrued interest – related party | 125,363 | 125,363 | - | - | - | |||||||||||||||
Epicon equity investment obligation | 839,371 | 279,790 | 559,581 | - | - | |||||||||||||||
AVAR joint venture commitment | 10,736,290 | 736,290 | 5,000,000 | 5,000,000 | - | |||||||||||||||
Total | $ | 15,293,462 | $ | 1,353,881 | $ | 8,939,581 | $ | 5,000,000 | $ | - |
Off-balance Sheet Arrangements
We presently do not have off-balance sheet arrangements.
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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 September 30, 20172020 and 2016,2019, we had an unrealized foreign currency translation gain of approximately $40,000 and an unrealized foreign currency translation loss of approximately $26,000$69,000, respectively, because of changes in the exchange rate. For the nine months ended September 30, 2020 and 2019, we had an unrealized foreign currency translation gain of approximately $400,$21,000 and an unrealized foreign currency translation loss of approximately $60,000, 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 September 30, 2017,2020, 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.disclosure.
Based on this evaluation, management concluded that our internal control over financial reporting were not effective as of September 30, 20172020 due to the significant deficiencies which aggregate to a material weakness weand was previously reported in our 2016Form 10-K which hasAnnual Report for the year ended December 31, 2019 (“2019 10-K”), that have 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) in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to, and our property is not subject to, any litigationmaterial legal proceedings, except as set forth below.
On October 25, 2017, Genexosome entered into and closed a Stock Purchase Agreement with Beijing Genexosome and Yu Zhou, MD, PhD, the outcomesole 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, of which if determined adversely$100,000 is still owed. Further, on October 25, 2017, Genexosome entered into and closed an Asset Purchase Agreement with Dr. Zhou, pursuant to us, would individually orwhich the Company acquired all assets, including all intellectual property and exosome separation systems, held by Dr. Zhou pertaining to the business of researching, developing and commercializing exosome technologies. In consideration of the assets, Genexosome paid Dr. Zhou $876,087 in cash, transferred 500,000 shares of common stock of the Company to Dr. Zhou and issued Dr. Zhou 400 shares of common stock of Genexosome. Further, The Company had not been able to realize the financial projections provided by Dr. Zhou at the time of the acquisition and has decided to impair the intangible asset associated with this acquisition to zero. Dr. Zhou was terminated as Co-CEO of Genexosome on August 14, 2019. Further, on October 28, 2019, Research Institute at Nationwide Children’s Hospital (“Research Institute”) filed a Complaint in the aggregateUnited States District Court for the Southern District of Ohio Eastern Division against Dr. Zhou, Li Chen, the Company and Genexosome with various claims against the Company and Genexosome including misappropriation of trade secrets in violation of the Defend Trade Secrets Act of 2016 and violation of Ohio Uniform Trade Secrets Act. Research Institute is seeking monetary damages, injunctive relief, exemplary damages, injunctive relief and other equitable relief. The case number is 2:19-cv-4574. The Company intends to vigorously defend against this action and pursue all available legal remedies. The civil case against Avalon is stayed pending resolution of the criminal proceedings against Dr. Zhou and Li Chen, and while there can be reasonably expectedno assurances, the Company believes it has substantial legal and factual defenses to have a material adverse effect on our business, operating results, cash flows or financial condition.the Research Institute’s claims.
AsThere were no material changes from the risk factors set forth under Part I, Item 1A., “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. You should carefully consider these factors in addition to the other information set forth in this report which could materially affect our business, financial condition or future results. The risks and uncertainties described in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019, as well as other reports and statements that we file with the SEC, are not the only risks and uncertainties facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also have a smaller reporting company, as defined in Rule 12b-2material adverse effect on our financial position, results of operations or cash flows.
Amidst the COVID-19 outbreak, some tenants have delayed on rent payment. Our general development operations have continued during the COVID-19 pandemic and we have not had significant disruption. Currently we are unable to accurately predict the future impact of COVID-19 due to the developing circumstances and uncertainty surrounding this current pandemic, including the ultimate geographic spread of COVID-19, the severity of the Exchange Act,disease, the duration of the outbreak, and effectiveness of the actions that may be taken by governmental authorities. Our management has been closely monitoring the impact caused by COVID-19 and we are not requiredwill continue to provide the information required by this Item.operate our business as steadily and safely as we can.
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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, 2017 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 2,000,000 shares of common stock at an exercise price of $0.50 per share for a period of ten years. The Stock Options vest in 36 equal tranches commencing on the grant date. On April 28, 2017, Steven P. Sukel and Yancen Lu were appointed to the Board 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, 2017,2020, we grantedissued a total of 444,448 options1,032,577 shares of our common stock for services rendered and to our Chief Financial Officerbe rendered. These shares were valued at a fixed exercise price$1,309,480, the fair market values on the grant dates using the reported closing share prices on the dates of $0.50 per sharegrant 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 expense of $602,224$1,248,159 for the nine months ended September 30, 2017.2020 and reduced accrued liabilities of $35,325 and recorded prepaid expense of $25,996 as of September 30, 2020 which will be amortized over the rest of corresponding service periods.
DOING Biomedical Technology Co., Ltd.Common Shares Sold for Cash
DOING Biomedical Technology Co., Ltd. (“DOING”) and Avalon discussed DOING potentially investing in Avalon. However, prior to such investment, DOING needed to obtainOn April 1, 2020, 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, weCompany 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 obtainWLM, 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,entity owned by Wenzhao Lu, major shareholder and chairmanChairman 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 3,750,000WLM purchased 645,161 shares of the Company’s common stock (“October 2017 Shares”)at a price per share of $1.55 for aan aggregate purchase price of $3,750,000 (the “Purchase Price”).$1,000,000. 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.April 1, 2020.
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.
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On April 19, 2017,October 20, 2020, the Company entered into a loan agreement, providingDistribution Agreement with Adial Pharmaceuticals, Inc. (“Adial”) (the “Adial Agreement”). Pursuant to the Adial Agreement, the Company was appointed as a non-exclusive sub-distributor of Adial’s SARS-CoV-2 antibody tests and antigen tests and other medical devices and equipment worldwide. Mr. Stilley, a director of the Company as well as a member of the Nominating and Corporate Governance Committee and Audit Committee, is the Chief Executive Officer and a director of Adial.
On August 17, 2020, the Company entered into a Commercialization Partnership Agreement with Cellex, Inc. (“Cellex”), which was dated August 10, 2020 (the “Cellex Agreement”). Pursuant to the Cellex Agreement, the Company was granted a right to promote, market, transfer, distribute, and/or sell Cellex’s qSARS-COV-2 IgG/IgM Rapid Test Kit and Kit Control on a non-exclusive basis. The Cellex Agreement provides that the Company may purchase the products at a set per unit price and, in the event of bulk sales or tender offers, the Company may receive a commission.
On December 13, 2019, the Company entered into an Open Market Sale AgreementSM (the “Sales Agreement”) with Jefferies LLC, as sales agent (“Jefferies”), pursuant to which the Company may offer and sell, from time to time, through Jefferies, shares of its common stock, par value $0.0001 per share, having an aggregate offering price of up to $20.0 million. On April 6, 2020, the date on which the Company filed its Annual Report on Form 10-K for the issuance of a loan in the principal amount of $2,100,000. The term of the loan is one year. The annual interest rate for the loan is 10%. The loan is guaranteed byfiscal year ended December 31, 2019, the Company’s Chairman, Mr. Wenzhao Lu. Atregistration statement became subject to the offering limits set forth in General Instruction I.B.6 of Form S-3. During the nine months ended September 30, 2017, the outstanding principal balance2020, Jefferies sold an aggregate of the loan3,468,315 shares of common stock at an average price of $1.80 per share to investors. The Company recorded net proceeds of $5,875,755, net of commission and related accrued and unpaid interest for the loan was $2,100,000 and $94,932, respectively.other offering costs of $357,923. From October 1, 2020 to November 9, 2020, Jefferies sold an aggregate of 41,909 shares of common stock at an average price of $1.55 per share to investors. The Company received net cash proceeds of $63,197, net of commission paid to sales agent of $1,955.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
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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 |
† | Management contract or compensatory plan or arrangement. |
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
AVALON GLOBOCARE CORP. | |||
(Registrant) | |||
Date: November | By: | /s/ David K. Jin | |
David K. Jin | |||
Chief Executive Officer, President and Director (Principal Executive Officer) | |||
Date: November | By: | /s/ Luisa Ingargiola | |
Luisa Ingargiola | |||
Chief Financial Officer (Principal Financial and Accounting Officer) |
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