UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission file number: 000-55709
(Name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
4400 Route 9 South, Suite 3100
Freehold, New Jersey 07728
(Address of principal executive offices)
47-1685128
(I.R.S. Employer
Identification No.)
732-780-4400
(Registrant’s telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
Title of each Class:
Common Stock, $0.0001 par value per share
Trading Symbol
AVCO
Name of Each Exchange
The NASDAQ Stock Market LLC
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
None.
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to
the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
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
Non-accelerated filer
☐
☒
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2021, the last business day of the Registrant’s most recently completed second fiscal quarter, the market value of our common stock held by non-affiliates was
approximately $30,394,000.
The number of shares of the Registrant’s common stock, $0.0001 par value per share, outstanding as of March 30, 2022, was 88,625,709.
Documents incorporated by reference: NONE
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
[Reserved]
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits
Item 16.
Form 10-K Summary
Signatures
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Forward-Looking Statements
CERTAIN STATEMENTS IN THIS ANNUAL REPORT MAY CONSTITUTE “FORWARD LOOKING STATEMENTS”. WHEN THE WORDS “BELIEVES,”
“EXPECTS,” “PLANS,” “PROJECTS,” “ESTIMATES” AND SIMILAR EXPRESSIONS ARE USED, THEY IDENTIFY FORWARD-LOOKING STATEMENTS.
THESE FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT’S CURRENT BELIEFS AND ASSUMPTIONS AND INFORMATION CURRENTLY
AVAILABLE TO MANAGEMENT AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. INFORMATION CONCERNING FACTORS
THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS CAN BE FOUND IN OUR
PERIODIC REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT FUTURE EVENTS OR CIRCUMSTANCES OR REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
Unless otherwise indicated, references to “we,” “us,” “our,” “Company,” or “Avalon” mean Avalon GloboCare Corp. and its subsidiaries, and references to “fiscal” mean
the Company’s fiscal year ended December 31. References to the “parent company” mean Avalon GloboCare Corp.
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ITEM 1. BUSINESS
Overview
PART I
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 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 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 COVID-19 related vaccine and therapeutics.
Avalon achieves 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:
● Development of Avalon Clinical-grade Tissue-specific Exosome (“ACTEX™”)
● 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 Limited.
●
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.
Avalon’s midstream bio-processing and bio-production facility is located in Nanjing, China with state-of-the-art, automated GMP and QC/QA infrastructure for
standardized bio-manufacturing of clinical-grade cellular products involved in our clinical programs in immune effector cell therapy, regenerative therapeutics, as well as bio-
banking.
Avalon’s downstream medical team and facility consists of top-rated affiliated hospital network and experts specialized in hematology, oncology, cellular
immunotherapy, hematopoietic stem/progenitor cell transplant, as well as regenerative therapeutics. Our major clinical programs include:
● AVA-001: Avalon has initiated its first-in-human clinical trial of CD19 CAR-T candidate, AVA-001 in August 2019 at the Hebei Yanda Lu Daopei Hospital and
Beijing Lu Daopei Hospital in China (the world’s single largest CAR-T treatment network with over 600 patients being treated with CAR-T) for the indication of
relapsed/refractory B-cell acute lymphoblastic leukemia and non-Hodgkin Lymphoma. The AVA-001 candidate (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 successfully completed the first-in-human clinical trial of its AVA-001 anti-CD19 CAR-T cell therapy as a bridge to allogeneic bone marrow
transplantation for patients with relapsed/refractory B-cell acute lymphoblastic leukemia at the Lu Daopei Hospital (registered clinical trial number NCT03952923)
with excellent efficacy (90% complete remission rate) and minimal adverse side effects. Avalon is currently expanding the patient recruitment for AVA-001 to
include relapsed/refractory non-Hodgkin lymphoma patients.
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● AVA-011 and FLASH-CAR™: The Company advanced its next generation immune cell therapy using RNA-based, non-viral 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. Our leading candidate, AVA-011, is currently at process development stage to
generate clinical-grade cell-therapy products for subsequent clinical studies. On July 8, 2021, the Company and the University of Pittsburgh of the Commonwealth
System of Higher Education (the “University”) entered into a Corporate Research Agreement (the “University Agreement”). Pursuant to the University Agreement,
for a term of two years the University agreed to use its reasonable efforts to perform academic research funded by the Company in connection with the
development of point-of-care modular autonomous processing system to generate clinical-grade AVA-011, a RNA-based chimeric antigen receptor (CAR) T-cell
therapy candidate (the “Project”) subject to the appointment of Dr. Yen Michael S. Hsu as Principal Investigator. During the term, the Company agreed to make
eight payments of $125,000 to the University. As of December 31, 2021, the Company did not make any payment. The Company and the University shall each own
an undivided, one half interest in any intellectual property rights jointly developed by both parties. The Company has been granted a worldwide, irrevocable, non-
exclusive, royalty free, fully paid-up, perpetual right to use intellectual property developed by the University in connection with the Project for commercial
purposes research activities and other purposes. Further, the Company will have an exclusive right of first offer to an exclusive royalty-bearing license to
intellectual property developed by the University or co-developed by the Company and the University in connection with the Project.
● 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 the University of Pittsburgh Medical Center. 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 the University of Pittsburgh
Medical Center.
● 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.
For the year ended December 31, 2021 we generated revenue by providing medical related consulting services in advanced areas of immunotherapy and second
opinion/referral services through our wholly-owned subsidiary Avalon (Shanghai) Healthcare Technology Co., Ltd., or Avalon Shanghai. We also own and operate rental
commercial real property in New Jersey, where we are headquartered.
COVID-19 has not significantly impacted Company operations or the work performed as part of our clinical trials in China. The clinical trials are being conducted at
Hebei Yanda Lu Daopei Hospital and Beijing Lu Daopei Hospital. Both hospitals are considered primarily hematology specialty hospitals and experienced minor disruption as
part of the pandemic.
While Avalon is not a People’s Republic of China (the “PRC”) operating company, certain of its subsidiaries are PRC operating companies and through them Avalon
currently has operations in PRC, which involves unique risks. See “China Operations” below, and “Risk Factors—Risks Related to Doing Business in China.”
Corporate Information/Company History
We were incorporated under the laws of the State of Delaware on July 28, 2014 under the name Global Technologies Corp.
We own 100% of the capital stock of Avalon Healthcare Systems, Inc., a Delaware corporation, or AHS, which we acquired on October 19, 2016. AHS was
incorporated on May 18, 2015 under the laws of the State of Delaware. In addition, we own through AHS 100% of the capital stock of Avalon (Shanghai) Healthcare Technology
Co., Ltd., or Avalon Shanghai, which is a wholly foreign-owned enterprise, or WOFE, organized under the laws of the People’s Republic of China, or PRC or China. Avalon
Shanghai was incorporated on April 29, 2016 and is engaged in medical related consulting services for customers. On January 23, 2017, we incorporated Avalon (BVI) Ltd, a
British Virgin Islands company (dormant and in process of being dissolved). On February 7, 2017, we formed Avalon RT 9 Properties, LLC, a New Jersey limited liability
company. In July 2017, we formed Genexosome Technologies Inc., a Nevada corporation, or Genexosome. Effective October 25, 2017, Genexosome owns 100% of the capital
stock of Beijing Jieteng (Genexosome) Biotech Co., Ltd., a corporation incorporated in the People’s Republic of China on August 7, 2015 (“Beijing Genexosome”), and the
Company holds 60% of Genexosome and Dr. Yu Zhou holds 40% of Genexosome. Both Genexosome and Beijing Genexosome are inactive now.
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On May 29, 2018, Avalon Shanghai entered into a Joint Venture Agreement with Jiangsu Unicorn Biological Technology Co., Ltd., or Unicorn, pursuant to which a
company named Epicon Biotech Co., Ltd. (“Epicon”) was formed on August 14, 2018. Epicon is owned 60% by Unicorn and 40% by Avalon Shanghai. Within five years of
execution of the Joint Venture Agreement, Unicorn shall invest cash into Epicon in an amount not less than RMB 8,000,000 (approximately $1.2 million) and the premises of the
laboratories of Nanjing Hospital of Chinese Medicine for exclusive operation by Epicon, and Avalon Shanghai shall invest cash into Epicon in an amount not less than RMB
10,000,000 (approximately $1.5 million). The board of directors of Epicon shall consist of five members with Unicorn appointing three members and Avalon Shanghai
appointing two members. As of December 31, 2021, Unicorn has invested the premises of the laboratories of Nanjing BENQ hospital as GMP level research and manufacture
facility and Avalon Shanghai has contributed RMB 4,760,000 (approximately $0.7 million). Epicon is focused on cell preparation, third party testing, biological sample
repository for commercial and scientific research purposes and the clinical transformation of scientific achievements.
On July 18, 2018, we formed a wholly owned subsidiary, Avactis Biosciences Inc. (“Avactis”), a Nevada corporation, which will be focused on accelerating commercial
activities related to cellular therapies, including regenerative medicine with stem/progenitor cells as well as cellular immunotherapy including CAR-T, CAR-NK, TCR-T and
others. The subsidiary is designed to integrate and optimize our global scientific and clinical resources to further advance the use of cellular therapies to treat certain cancers. On
October 23, 2018, Avactis and Arbele Limited (“Arbele”) agreed to the establishment of AVAR BioTherapeutics (China) Co. Ltd. (“AVAR”), a Sino-foreign equity joint venture,
pursuant to an Equity Joint Venture Agreement (the “AVAR Agreement”), which will be owned 60% by Avactis and 40% by Arbele. The purpose and business scope of the Joint
Venture is to research, develop, produce, sell, distribute and generally commercialize CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy in China. Avactis is required to
contribute $10 million (or equivalent in RMB) in cash and/or services, which shall be contributed in tranches based on milestones to be determined jointly by AVAR and Avactis
in writing subject to Avactis’ cash reserves. Within 30 days, Arbele shall make contribution of $6.66 million in the form of entering into a License Agreement with AVAR
granting AVAR with an exclusive right and license in China to its technology and intellectual property pertaining to CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy
technology and any additional technology developed in the future with terms and conditions to be mutually agreed upon Avactis and AVAR and services. As of the date hereof,
the License Agreement has not been finalized.
The following diagram illustrates our corporate structure:
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On June 13, 2021, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”), by and among the Company, Lonlon Biotech Ltd., a company
incorporated in the British Virgin Islands (“BVI”) (“Sen Lang BVI”), the holders of the share capital of Sen Lang BVI (the “Sen Lang BVI Shareholders”), the ultimate
beneficial owners of the Sen Lang BVI Shareholders (the “Sen Lang BVI Beneficial Shareholders” and, together with the Sen Lang BVI Shareholders, the “Sen Lang BVI
Owners”) and a representative of the Sen Lang BVI Owners (the “Sen Lang BVI Representative”). On January 1, 2022, the Company, on the one hand, and Sen Lang BVI, the
Sen Lang Shareholders, the Sen Lang Beneficial Shareholders and Ding Wei, in his capacity as the Sen Lang Representative, on the other hand, terminated the Purchase
Agreement.
China Operations
Certain of Avalon’s subsidiaries are PRC operating companies, and through them Avalon currently has operations in the People’s Republic of China, which involves
unique risks.
The method by which cash is transferred in Avalon’s organization, in light of its PRC subsidiaries, is complex. The payment and amount of any future dividend of the
PRC subsidiaries to Avalon will be restricted by PRC laws and regulations regarding dividends and PRC foreign exchange regulations. PRC laws require that dividends be paid
only out of the profit for the year calculated according to PRC accounting principles. PRC laws also require foreign-invested enterprises to set aside at least 10% of their after-tax
profits as the statutory common reserve fund until the cumulative amount of the statutory common reserve fund reaches 50% or more of such enterprises’ registered capital, if
any, to fund its statutory common reserves, which are not available for distribution as cash dividends. Avalon and, ultimately, Avalon stockholders will receive the economic
benefit of its PRC subsidiaries by way of dividends, which are subject to restrictions under current United States (“U.S.”) laws and regulations regarding dividends. Furthermore,
under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years
after the taxable year when the transactions are conducted. Avalon and its subsidiaries may face material and adverse tax consequences if the PRC tax authorities determine that
the contractual arrangements were not entered into on an arm’s length basis.
Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC resident enterprise to a foreign enterprise
investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. Avalon currently believes that its
PRC subsidiaries’ distribution of dividends to Avalon, if any, shall be subject to a withholding tax rate of 10%, unless a reduced rate under a tax treaty is applicable. Avalon
reported net losses and had negative net cash flows from operations in 2021. No net income will be generated from Avalon’s PRC subsidiaries’ operations in the foreseeable
future and therefore no dividends or distributions will be paid by such subsidiaries to Avalon and its stockholders in the foreseeable future. However, if such subsidiaries do
make distributions of cash or property to Avalon, absent a distribution by Avalon to the U.S. holders of Avalon common stock, there would be no flow-through of such income to
the U.S. holders of Avalon common stock for U.S. federal income tax purposes. As of the date of this report, no transfers, dividends or distributions from our PRC subsidiaries to
Avalon have been made to date.
As described below under “Holding Foreign Companies Accountable Act Compliance,” the Holding Foreign Companies Accountable Act, or the HFCA Act, was
enacted on December 18, 2020. According to the HFCA Act, if the SEC determines that Avalon has filed audit reports issued by a registered public accounting firm that has not
been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC will prohibit Avalon’s securities from being traded on a national securities
exchange or in the over-the-counter trading market in the United States. Avalon’s auditor is Marcum LLP (“Marcum”), based in New York, New York. Marcum is registered with
the PCAOB and is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess their compliance with the applicable professional
standards. Since Marcum is located in the United States, the PCAOB has been able to conduct inspections of Marcum. In addition, Marcum is not among the PCAOB registered
public accounting firms registered in mainland China or Hong Kong that are subject to PCAOB’s determination on December 16, 2021. Although Avalon is currently not subject
to the HFCA Act, any uncertainty of its applicability to Avalon, for example if Avalon switched to using a PRC-based auditing firm, could cause the market price of Avalon’s
securities to be materially and adversely affected and could cause Avalon’s securities to be delisted or prohibited from being traded “over-the-counter”. If Avalon’s securities are
unable to be listed on another securities exchange, such a delisting would substantially impair your ability to sell or purchase Avalon’s securities when you wish to do so, and the
risk and uncertainty associated with a potential delisting would have a negative impact on the price of Avalon’s securities.
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Moreover, Avalon’s business operations in the PRC are governed by PRC laws, rules and regulations. The associated legal and operational risks could result in a
material change in the business operations of Avalon’s PRC subsidiaries and could negatively impact the value of Avalon’s common stock or could even cause the value of such
securities to significantly decline or be worthless. The PRC government has recently announced its plans to enhance its regulatory oversight of Chinese companies listing
overseas, and there is some uncertainty with respect to the interpretation and implementation of such plans. The PRC government has also issued statements and has undertaken
regulatory actions related to the use of variable interest entities, data security and anti-monopoly concerns. The PRC government may promulgate relevant laws, internal rules
and regulations that may impose additional and significant obligations and liabilities on overseas listed Chinese companies regarding data security, cross-border data flow,
compliance with PRC securities laws and anti-monopoly laws. These laws and regulations can be complex and stringent, and can be subjected to change and uncertain
interpretation, which could limit Avalon’s ability to conduct its business and accept foreign investments, or could significantly impact its operating results and stock price.
However, because Avalon is the issuer of the common stock listed on Nasdaq and is a Delaware operating and holding company, no approval or permission is required under
current applicable PRC laws and regulations for any future issuances of Avalon securities to non-PRC investors. Nevertheless, PRC laws, regulations and/or their interpretations
may change in the future, such that they may have an extraterritorial effect, whereby Avalon may be required to obtain such approval or permission under PRC laws and
regulations. In such event, Avalon may face the risk that these future regulatory actions by the PRC government could significantly limit or completely hinder Avalon’s ability to
offer future securities to investors. Under this scenario, Avalon’s ability to raise capital and thereby execute its business plan would be significantly limited or completely
hindered, which would likely result in a material change in Avalon’s operations and the value of Avalon’s common stock, including that it could cause the value of such
securities to significantly decline or become worthless. In addition, Avalon faces the risk that Avalon may not currently ascertain, and therefore may not actually have, all
requisite permissions to offer securities, which would likely result in a material change in Avalon’s operations and/or value of Avalon’s common stock, including that it could
cause the value of such securities to significantly decline or become worthless. See “Risk Factors—The PRC government exerts substantial influence over the manner in which
Avalon must conduct its business activities and Avalon may face the risk that the future regulatory actions by the PRC government could significantly limit or completely hinder
Avalon’s ability to offer future securities to investors.
Sales and Marketing
We seek to develop new business through relationships driven by our senior management, which have extensive contacts throughout the healthcare system. Our senior
management will be seeking opportunities for joint ventures, strategic relationships and acquisitions in consulting, biomedical innovations, laboratory, and medical device
companies.
Services
We currently generate revenue from related party strategic relationships through Avalon Shanghai that provide consultative services in advanced areas of
immunotherapy and second opinion/referral services. In addition, our services are targeted at serving our clients and using our insights and deep expertise to produce tangible
and significant results. 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. Through our services, we attempt to have our clients focus 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. We tailor these solutions to the
client’s specific strategic challenges, operational issues, and management concerns.
Strategic Partnerships and Acquisitions
We are actively seeking potential strategic partnerships in our area of focus. In addition, we are actively seeking target acquisitions that add accretive value to our
strategic plan. There is no guarantee that we will be able to successfully sign a definitive agreement, close or implement such business arrangement.
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Markets
We focus on the following markets in developing our core business:
● Cellular Immunotherapy in Oncology: Regarded as the future of medicine, we believe cell-based technologies and therapeutics will replace pharmaceuticals as a
more effective and functional modality in certain unmet medical areas. We are actively engaging in this revolutionary trend and positioning to take a leading role in
immune effector cell therapies in the immuno-oncology domain, particularly related to the development of Chimeric Antigen Receptor (CAR) T cell and CAR-NK
cell therapies against hematologic malignancies. CAR-T cell therapy is considered as a “living drug” which involves isolation of a patient’s peripheral T cells and
re-engineering these T cells with CAR molecules equipped with a weapon attacking a specific target on tumor cells. Our leading candidate is “AVA-001”, an anti-
CD19 CAR-T which has successfully completed first-in-human clinical trial for relapsed/refractory (R/R) B-cell lymphoblastic leukemia (B-ALL); we are in the
process of expanding patient recruitment to include R/R non-Hodgkin’s lymphoma. We are also developing a RNA-based “FASH-CARTM” cell therapy platform,
which may potentially reduce manufacturing time and cost. The lead candidate, “AVA-011”, has completed pre-clinical laboratory studies and currently undergoing
IND-enabling process development stage to generate cGMP-grade AVA-011 CAR-T cells for upcoming clinical trials.
● Regenerative Medicine: Avalon Clinical-grade Tissue-specific Exosome (“ACTEX™”) is a technology platform to generate clinical-grade exosomes from
stem/progenitor cells, with potential regenerative applications in skin care and orthopedic joint repair.
● QTY-Code Protein Design: 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 (aka Cytokine
Release Syndrome). QTY-code can be applied to generate water-soluble, antibody-like molecular variants of native membrane-bound receptors, which may expand
the repertoire of therapeutic targets in CAR-T cell therapies.
● S-Layer based Vaccine Development: Strategic partnership with the University of Natural Resources and Life Sciences (BOKU) in Vienna, Austria to develop an S-
layer based vaccine that can be administered by an intranasal or oral route against SARS-CoV-2 (the novel coronavirus that causes COVID-19), Influenza A/B and
other respiratory pathogens.
Revenue
Avalon RT 9 Properties, LLC
In May 2017, we acquired commercial property located in Freehold, New Jersey. This property is now our corporate headquarters and contains several commercial
tenants that generate revenue through rental income.
Avalon Shanghai
We currently generate revenue by providing medical related consulting services in advanced areas of immunotherapy and second opinion/referral services through
Avalon (Shanghai) Healthcare Technology Co., Ltd., or Avalon Shanghai. Our medical related consulting services include research studies, executive education, daily online
executive briefings, tailored expert advisory services, and consulting and management services. Through our services we attempt to have our clients focus 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.
The revenue generated from our related parties in China is managed by our employees residing in China and contactors who are retained as needed. Consulting services have
been provided by Avalon Shanghai under the contract include:
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●
●
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providing scientific research consulting services;
integrating experts, medical institutions and other resources in the United States in support of scientific research;
providing technical education and training; and
assisting in publication of academic papers.
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Strategic Development
We intend to pursue the acquisition and development of healthcare related technologies for cell related diagnostics and therapeutics through acquisition, licensing or
joint ventures with major universities and biotech companies. We will also consider a third avenue of investing in certain technologies for cell related diagnostics and
therapeutics and are seeking laboratory or medical device acquisitions.
Intellectual Property
Our goal is to obtain, maintain and enforce patent rights for our products, formulations, processes, methods of use and other proprietary technologies, preserve our trade
secrets, and operate without infringing on the proprietary rights of other parties, both in the United States and abroad. Our policy is to actively seek to obtain, where appropriate,
the broadest intellectual property protection possible for our current product candidates and any future product candidates, proprietary information and proprietary technology
through a combination of contractual arrangements and patents, both in the United States and abroad. Even patent protection, however, may not always afford us with complete
protection against competitors who seek to circumvent our patents. If we fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others,
the value of our intellectual property rights would diminish. To this end, we require all of our employees, consultants, advisors and other contractors to enter into confidentiality
agreements that prohibit the disclosure and use of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries
and inventions relevant to our technologies and important to our business.
Competition
Avalon Shanghai
In our current consulting business in the People’s Republic of China, or PRC or China, we compete with a number of advisory firms offering similar service including
consulting and strategy firms; market research, data, benchmarking, and forecasting providers; technology vendors and services firms; healthcare information technology firms;
technology advisory firms; outsourcing firms; and specialized providers of educational and training services. Other organizations, such as state and national trade associations,
group purchasing organizations, non-profit think-tanks, and database companies, also may offer research, consulting, tools, and education services to health care and education
organizations.
We believe that the principal competitive factors in our market include quality and timeliness of our services, strength and depth of relationships with our clients, ability
to meet the changing needs of current and prospective clients, measurable returns on customer investment, and service and affordability.
As our business develops and we expand through joint ventures, acquisitions and strategic partnerships in the U.S. and PRC, we will have competition with other direct
service providers, emerging technologies and medical communication platforms. We will seek to maintain a competitive advantage through intellectual property, superior quality
management and cutting-edge technology.
Avalon RT 9 Properties LLC
Our executive commercial building in Freehold, New Jersey is located on a major highway and is one of the largest buildings in the surrounding areas. It is centrally
located and maintains high occupancy. There are other commercial properties in the vicinity that offer similar amenities. However, premier executive offices are limited and as
such we expect to continue to maintain high occupancy in the near term.
Employees
As of March 30, 2022, we employed six employees, five of which are full time employees. None of our employees are represented by a collective bargaining
arrangement.
Government Regulation
Overview
The healthcare industry in the PRC and U.S. is highly regulated and subject to changing political, legislative, regulatory, and other influences. Further, the healthcare
industry is currently undergoing rapid change. We are uncertain how, when or in what context these new changes will be adopted or implemented. These new regulations could
create unexpected liabilities for us, could cause us or our members to incur additional costs and could restrict our or our clients’ operations. Many of the laws are complex and
their application to us, our clients, or the specific services and relationships we have with our members are not always clear. Our failure to anticipate accurately the application of
these laws and regulations, or our other failure to comply, could create liability for us, result in adverse publicity, and otherwise negatively affect our business.
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PRC Regulation
Despite efforts to develop its legal system over the past several decades, including but not limited to legislation dealing with economic matters such as foreign
investment, corporate organization and governance, commerce, taxation and trade, the PRC continues to lack a comprehensive system of laws. Further, the laws that do exist in
the PRC are often vague, ambiguous and difficult to enforce, which could negatively affect our ability to do business in China and compete with other companies in our
segments.
In September 2006, the Ministry of Commerce, or MOFCOM, promulgated the Regulations on Foreign Investors’ Mergers and Acquisitions of Domestic Enterprises, or
the M&A Regulations, in an effort to better regulate foreign investment in the PRC. The M&A Regulations were adopted in part as a needed codification of certain joint venture
formation and operating practices, and also in response to the government’s increasing concern about protecting domestic companies in perceived key industries and those
associated with national security, as well as the outflow of well-known trademarks, including traditional Chinese brands.
As a U.S. based company doing business in the PRC, we seek to comply with all PRC laws, rules and regulations and pronouncements, and endeavor to obtain all
necessary approvals from applicable PRC regulatory agencies such as the MOFCOM, the State Assets Supervision and Administration Commission, the State Administration for
Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange, or SAFE.
Our PRC subsidiary, Avalon Shanghai, provides outsourced and customized healthcare services to the rapidly changing health care industry. Currently, our PRC
subsidiary, Beijing Genexosome, is dormant. These subsidiaries have obtained their respective business licenses, which permit each of them to operate its business in the PRC.
No other special permission is required for our PRC subsidiaries to conduct their respective current business under applicable PRC regulations and laws. Additionally, the
operation of Avalon and its PRC subsidiaries are not covered by permissions requirements of the China Securities Regulatory Commission (CSRC) or the Cyberspace
Administration of China (CAC).
Because Avalon is the issuer of the common stock listed on Nasdaq and is a Delaware operating and holding company, no approval or permission is required under
current applicable PRC laws and regulations for any future issuances of Avalon securities to non-PRC investors. Nevertheless, according to the Opinions of the General Office of
the CPC Central Committee and the General Office of the State Council on Strictly Cracking Down on Illegal Securities Activities in accordance with the Law (“Opinions”), the
PRC intends to establish and improve the system of extraterritorial application of the PRC securities laws. Although the details of the extraterritorial application of the PRC
securities laws are still scarce as of the date of this report, PRC laws, regulations and/or their interpretations may change in the future, such that they have may an extraterritorial
effect, whereby Avalon may be required to obtain such approval or permission under PRC laws and regulations. In such event, Avalon may face the risk that these future
regulatory actions by the PRC government could significantly limit or completely hinder Avalon’s ability to offer future securities to investors. Under this scenario, Avalon’s
ability to raise capital and thereby execute its business plan would be significantly limited or completely hindered, which would likely result in a material change in Avalon’s
operations and the value of Avalon’s common stock, including that it could cause the value of such securities to significantly decline or become worthless. In addition, Avalon
faces the risk that Avalon may not currently ascertain, and therefore may not actually have, all requisite permissions to offer securities, which would likely result in a material
change in Avalon’s operations and/or value of Avalon’s common stock, including that it could cause the value of such securities to significantly decline or become worthless.
The Flow of Economic Benefits from PRC Subsidiaries
The payment and amount of any future dividend of Avalon’s PRC subsidiaries to Avalon will be restricted by PRC laws and regulations regarding dividends and PRC
foreign exchange regulations. PRC laws require that dividends be paid only out of the profit for the year calculated according to PRC accounting principles, which differ in
certain respects from the generally accepted accounting principles in other jurisdictions, including accounting principles generally accepted in the United States of America, or
US GAAP, and international financial reporting standards as issued by the International Accounting Standards Board, or IFRS. PRC laws also require foreign-invested
enterprises to set aside at least 10% of their after-tax profits as the statutory common reserve fund until the cumulative amount of the statutory common reserve fund reaches
50% or more of such enterprises’ registered capital, if any, to fund its statutory common reserves, which are not available for distribution as cash dividends. Furthermore, under
applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after
the taxable year when the transactions are conducted.
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Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC resident enterprise to a foreign enterprise
investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. Furthermore, the Announcement
of State Taxation Administration on Promulgation of the Administrative Measures on Non-Resident Taxpayers Enjoying Treaty Benefits, issued on October 14, 2019 by the PRC
State Taxation Administration, which became effective from January 1, 2020, requires non-resident enterprises to determine whether they are qualified to enjoy the preferential
tax treatment under the tax treaties and make appropriate filings with the competent tax authorities. In addition, based on the Notice on Issues concerning Beneficial Owner in
Tax Treaties, or Circular 9, issued on February 3, 2018 by the PRC State Taxation Administration, which became effective from April 1, 2018, when determining the applicant’s
“beneficial owner” status regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including, without limitation, whether the
applicant is obligated to pay more than 50% of the applicant’s income for twelve months to residents in a third country or region, whether the business operated by the applicant
constitutes the actual business activities, and whether the counterparty country or region to the tax treaties does not levy any tax or grant tax exemption on relevant incomes or
levy tax at an extremely low rate, will be taken into account, and it will be analyzed according to the actual circumstances of the specific cases. There are also other conditions
for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. Therefore, Avalon currently believes that dividends from its PRC subsidiaries
to Avalon, if any, shall be subject to a withholding tax rate of 10%, unless a reduced rate under a tax treaty is applicable. Avalon reported net losses and had negative net cash
flows from operations in 2021. No net income will be generated from Avalon’s PRC subsidiaries’ operations in the foreseeable future and therefore no dividends or distributions
will be paid by such subsidiaries to Avalon and its stockholders in the foreseeable future. However, if such subsidiaries do make distributions of cash or property to Avalon,
absent a distribution by Avalon to the U.S. holders of Avalon common stock, there would be no flow-through of such income to the U.S. holders of Avalon common stock for
U.S. federal income tax purposes.
As of the date of this report, no transfers, dividends or distributions from our PRC subsidiaries to Avalon have been made to date.
Restrictions on Foreign Exchange and Avalon’s Ability to Transfer Cash Across Borders
The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. Under
existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be
made in foreign currencies without prior approval from the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However,
approval from or registration with appropriate governmental authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital
expenses. As a result, SAFE approval may need to be obtained to use cash generated from the operations of Avalon’s PRC subsidiaries. Any failure to comply with applicable
foreign exchange regulations may subject us to administrative fines.
Holding Foreign Companies Accountable Act Compliance
The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. According to the HFCA Act, if the SEC determines that
Avalon has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021,
the SEC will prohibit Avalon’s securities from being traded on a national securities exchange or in the over-the-counter trading market in the United States.
On December 16, 2021, the PCAOB issued a Determination Report which reported that the PCAOB is unable to inspect or investigate completely registered public
accounting firms headquartered in: (1) mainland China of the People’s Republic of China, because of a position taken by one or more authorities in mainland China; and (2)
Hong Kong, a Special Administrative Region of the PRC, because of a position taken by one or more authorities in Hong Kong.
Avalon’s auditor is Marcum LLP (“Marcum”), based in New York, New York. Marcum is registered with the PCAOB and is subject to laws in the United States pursuant
to which the PCAOB conducts regular inspections to assess their compliance with the applicable professional standards. Since Marcum is located in the United States, the
PCAOB has been able to conduct inspections of Marcum. In addition, Marcum is not among the PCAOB registered public accounting firms registered in mainland China or
Hong Kong that are subject to PCAOB’s determination on December 16, 2021.
Although the audit reports of Avalon are prepared by U.S. auditors that are subject to inspection by the PCAOB, the PCAOB is currently unable to conduct inspections
over the audit work of Avalon’s independent registered public accounting firms with respect to Avalon’s operations in mainland China without the approval of certain Chinese
authorities. Also, there is no guarantee that future audit reports will be prepared by auditors that are completely inspected by the PCAOB and, as such, future investors may be
deprived of such inspections, which could result in limitations or restrictions to Avalon’s access of the U.S. capital markets.
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Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control
procedures, which may be addressed as part of the inspection process to improve future audit quality. However, the PCAOB is currently unable to inspect an auditor’s audit work
related to a company’s operations in China where such documentation of the audit work is located in China. As a result, Avalon’s investors may be deprived of the benefits of the
PCAOB’s oversight of auditors that are located in China through such inspections.
On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. Avalon
will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is
assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above.
On June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive
non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two, which would shorten the timeframe before Avalon’s share may be
delisted and before the trading in Avalon’s shares is prohibited.
On November 5, 2021, the SEC approved Rule 6100 adopted by the PCAOB to determine its inability to inspect or investigate registered firms completely under the
HFCA Act. This rule establishes the framework for the PCAOB to make these required determinations. The trading in Avalon’s securities may be prohibited under the HFCA
Act if the PCAOB subsequently determines Avalon’s audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely pursuant to Rule 6100,
and as a result, U.S. national securities exchanges, such as Nasdaq, may determine to delist Avalon’s securities. Such a delisting would likely cause the value of such securities to
significantly decline or become worthless.
The SEC may propose additional regulatory or legislative requirements or guidance that could impact us if our auditor is not subject to PCAOB inspection. For
example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks
from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions
that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of
the HFCA Act. However, some of the recommendations were more stringent than the HFCA Act. For example, if a company was not subject to PCAOB inspection, the report
recommended that the transition period before a company would be delisted would end on January 1, 2022.
The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the
recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG
recommendations will be adopted. The implications of this possible regulation in addition to the requirements of the HFCA Act are uncertain. Although Avalon is currently not
subject to the HFCA Act, any uncertainty of its applicability to Avalon, for example if Avalon switched to using a PRC-based auditing firm, could cause the market price of
Avalon’s securities to be materially and adversely affected and could cause Avalon’s securities to be delisted or prohibited from being traded “over-the-counter”. If Avalon’s
securities are unable to be listed on another securities exchange, such a delisting would substantially impair your ability to sell or purchase Avalon’s securities when you wish to
do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of Avalon’s securities. See “Risk Factors— Trading in Avalon’s
securities may be restricted under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or fully investigate Avalon’s auditors, and as
a result, U.S. national securities exchanges, such as Nasdaq, may determine to delist Avalon’s securities.
Drug Approval Process
The research, development, testing, manufacture, labeling, promotion, advertising, distribution and marketing, among other things, of our product candidates are
extensively regulated by governmental authorities in the United States and other countries. In the United States, the FDA regulates drugs under the Federal Food, Drug, and
Cosmetic Act, or the FDCA, and its implementing regulations. Failure to comply with the applicable U.S. requirements may subject us to administrative or judicial sanctions,
such as the FDA’s refusal to approve a pending new drug application, or NDA, or a pending biologics license application, or BLA, warning letters, product recalls, product
seizures, total or partial suspension of production or distribution, injunctions and/or criminal prosecution.
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Pharmaceutical products such as ours may not be commercially marketed without prior approval from the FDA and comparable regulatory agencies in other countries.
In the United States, the process to receiving such approval is long, expensive and risky, and includes the following steps:
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pre-clinical laboratory tests, animal studies, and formulation studies;
submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials may begin;
adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for each indication;
submission to the FDA of an NDA or BLA;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with current good
manufacturing practices, or cGMPs;
a potential FDA audit of the preclinical and clinical trial sites that generated the data in support of the NDA or BLA;
the ability to obtain clearance or approval of companion diagnostic tests, if required, on a timely basis, or at all; and
FDA review and approval of the NDA or BLA.
Regulation by U.S. and foreign governmental authorities is a significant factor affecting our ability to commercialize any of our products, as well as the timing of such
commercialization and our ongoing research and development activities. The commercialization of drug products requires regulatory approval by governmental agencies prior to
commercialization. Various laws and regulations govern or influence the research and development, non-clinical and clinical testing, manufacturing, processing, packing,
validation, safety, labeling, storage, record keeping, registration, listing, distribution, advertising, sale, marketing and post-marketing commitments of our products. The lengthy
process of seeking these approvals, and the subsequent compliance with applicable laws and regulations, require expending substantial resources.
The results of pre-clinical testing, which include laboratory evaluation of product chemistry and formulation, animal studies to assess the potential safety and efficacy of
the product and its formulations, details concerning the drug manufacturing process and its controls, and a proposed clinical trial protocol and other information must be
submitted to the FDA as part of an IND that must be reviewed and become effective before clinical testing can begin. The study protocol and informed consent information for
patients in clinical trials must also be submitted to an independent Institutional Review Board, or IRB, for approval covering each institution at which the clinical trial will be
conducted. Once a sponsor submits an IND, the sponsor must wait 30 calendar days before initiating any clinical trials. If the FDA has comments or questions within this 30-day
period, the issue(s) must be resolved to the satisfaction of the FDA before clinical trials can begin. In addition, the FDA, an IRB or the company may impose a clinical hold on
ongoing clinical trials due to safety concerns. If the FDA imposes a clinical hold, clinical trials can only proceed under terms authorized by the FDA. Our pre-clinical and
clinical studies must conform to the FDA’s Good Laboratory Practice, or GLP, and Good Clinical Practice, or GCP, requirements, respectively, which are designed to ensure the
quality and integrity of submitted data and protect the rights and well-being of study patients. Information for certain clinical trials also must be publicly disclosed within certain
time limits on the clinical trial registry and results databank maintained by the NIH.
Typically, clinical testing involves a three-phase process; however, the phases may overlap or be combined:
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Phase I clinical trials typically are conducted in a small number of volunteers or patients to assess the early tolerability and safety profile, and the pattern of drug
absorption, distribution and metabolism;
Phase II clinical trials typically are conducted in a limited patient population with a specific disease in order to assess appropriate dosages and dose regimens,
expand evidence of the safety profile and evaluate preliminary efficacy; and
Phase III clinical trials typically are larger scale, multicenter, well-controlled trials conducted on patients with a specific disease to generate enough data to
statistically evaluate the efficacy and safety of the product, to establish the overall benefit-risk relationship of the drug and to provide adequate information for the
registration of the drug.
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A therapeutic product candidate being studied in clinical trials may be made available for treatment of individual patients, in certain circumstances. Pursuant to the 21st
Century Cures Act (Cures Act), which was signed into law in December 2016. The manufacturer of an investigational product for a serious disease or condition is required to
make available, such as by posting on its website, its policy on evaluating and responding to requests for individual patient access to such investigational product.
The results of the pre-clinical and clinical testing, chemistry, manufacturing and control information, proposed labeling and other information are then submitted to the
FDA in the form of either an NDA or BLA for review and potential approval to begin commercial sales. In responding to an NDA or BLA, the FDA may grant marketing
approval, request additional information in a Complete Response Letter, or CRL, or deny the approval if it determines that the NDA or BLA does not provide an adequate basis
for approval. A CRL generally contains a statement of specific conditions that must be met in order to secure final approval of an NDA or BLA and may require additional
testing. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter, which authorizes commercial marketing of the
product with specific prescribing information for specific indications, and sometimes with specified post-marketing commitments and/or distribution and use restrictions
imposed under a Risk Evaluation and Mitigation Strategy program. Any approval required from the FDA might not be obtained on a timely basis, if at all.
Among the conditions for an NDA or BLA approval is the requirement that the manufacturing operations conform on an ongoing basis with cGMPs. In complying with
cGMPs, we must expend time, money and effort in the areas of training, production and quality control within our own organization and at our contract manufacturing facilities.
A successful inspection of the manufacturing facility by the FDA is usually a prerequisite for final approval of a pharmaceutical product. Following approval of the NDA or
BLA, we and our manufacturers will remain subject to periodic inspections by the FDA to assess compliance with cGMPs requirements and the conditions of approval. We will
also face similar inspections coordinated by foreign regulatory authorities.
Disclosure of Clinical Trial Information
Sponsors of certain clinical trials of FDA-regulated products are required to register and disclose certain clinical trial information. Information related to the product,
patient population, phase of investigation, trial sites and investigators, and other aspects of the clinical trial are then made public as part of the registration. Sponsors are also
obligated to disclose the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed in certain circumstances for up to two years after
the date of completion of the trial. Competitors may use this publicly available information to gain knowledge regarding the progress of development programs.
Expedited Development and Review Programs
The FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new drugs and biological products that meet certain criteria.
Specifically, new drugs and biological products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition and demonstrate the
potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product and the specific indication for which it is being
studied. The sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a Fast Track product at any time during the clinical development of the
product. Unique to a Fast Track product, the FDA may consider for review sections of the marketing application on a rolling basis before the complete application is submitted,
if the sponsor provides a schedule for the submission of the sections of the application, the FDA agrees to accept sections of the application and determines that the schedule is
acceptable, and the sponsor pays any required user fees upon submission of the first section of the application.
Any product submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended to expedite
development and review, such as priority review and accelerated approval. Under the Breakthrough Therapy program, products intended to treat a serious or life-threatening
disease or condition may be eligible for the benefits of the Fast Track program when preliminary clinical evidence demonstrates that such product may have substantial
improvement on one or more clinically significant endpoints over existing therapies. Additionally, FDA will seek to ensure the sponsor of a breakthrough therapy product
receives timely advice and interactive communications to help the sponsor design and conduct a development program as efficiently as possible. Any product is eligible for
priority review if it has the potential to provide safe and effective therapy where no satisfactory alternative therapy exists or a significant improvement in the treatment, diagnosis
or prevention of a disease compared to marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug or biological
product designated for priority review in an effort to facilitate the review. Additionally, a product may be eligible for accelerated approval. Drug or biological products studied
for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated
approval, which means that they may be approved on the basis of adequate and well-controlled clinical studies establishing that the product has an effect on a surrogate endpoint
that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint other than survival or irreversible morbidity. As a condition of approval, the
FDA may require that a sponsor of a drug or biological product receiving accelerated approval perform adequate and well-controlled post-marketing clinical studies. In addition,
the FDA currently requires as a condition for accelerated approval the pre-approval of promotional materials, which could adversely impact the timing of the commercial launch
of the product. Fast Track designation, Breakthrough Therapy designation, priority review and accelerated approval do not change the standards for approval but may expedite
the development or approval process.
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Regenerative Medicine Advanced Therapies (RMAT) Designation
The FDA has established a Regenerative Medicine Advanced Therapy, or RMAT, designation as part of its implementation of the 21st Century Cures Act, or Cures Act.
The RMAT designation program is intended to fulfill the Cures Act requirement that the FDA facilitate an efficient development program for, and expedite review of, any drug
that meets the following criteria: (1) it qualifies as a RMAT, which is defined as a cell therapy, therapeutic tissue engineering product, human cell and tissue product, or any
combination product using such therapies or products, with limited exceptions; (2) it is intended to treat, modify, reverse, or cure a serious or life-threatening disease or
condition; and (3) preliminary clinical evidence indicates that the drug has the potential to address unmet medical needs for such a disease or condition. Like breakthrough
therapy designation, RMAT designation provides potential benefits that include more frequent meetings with FDA to discuss the development plan for the product candidate, and
eligibility for rolling review and priority review. Products granted RMAT designation may also be eligible for accelerated approval on the basis of a surrogate or intermediate
endpoint reasonably likely to predict long-term clinical benefit, or reliance upon data obtained from a meaningful number of sites, including through expansion to additional
sites. RMAT-designated products that receive accelerated approval may, as appropriate, fulfill their post-approval requirements through the submission of clinical evidence,
clinical studies, patient registries, or other sources of real world evidence (such as electronic health records); through the collection of larger confirmatory data sets; or via post-
approval monitoring of all patients treated with such therapy prior to approval of the therapy.
Post-Approval Requirements
Oftentimes, even after a drug has been approved by the FDA for sale, the FDA may require that certain post-approval requirements be satisfied, including the conduct
of additional clinical studies. If such post-approval requirements are not satisfied, the FDA may withdraw its approval of the drug. In addition, holders of an approved NDA or
BLA are required to report certain adverse reactions to the FDA, comply with certain requirements concerning advertising and promotional labeling for their products, and
continue to have quality control and manufacturing procedures conform to cGMPs after approval. The FDA periodically inspects the sponsor’s records related to safety reporting
and/or manufacturing facilities; this latter effort includes assessment of compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money, and effort in
the area of production and quality control to maintain cGMPs compliance.
Other Healthcare Fraud and Abuse Laws
In the U.S., our activities are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including but not limited to, the
Centers for Medicare and Medicaid Services, or CMS, other divisions of the U.S. Department of Health and Human Services (such as the Office of Inspector General and the
Health Resources and Service Administration), the U.S. Department of Justice, or the DOJ, and individual U.S. Attorney offices within the DOJ, and state and local
governments. For example, sales, marketing and scientific/educational grant programs may have to comply with the anti-fraud and abuse provisions of the Social Security Act,
the false claims laws, the privacy and security provisions of the Health Insurance Portability and Accountability Act, or HIPAA, and similar state laws, each as amended, as
applicable.
The federal Anti-Kickback Statute prohibits, among other things, any person or entity from knowingly and willfully offering, paying, soliciting or receiving any
remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of
any item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal healthcare programs. The term remuneration has been interpreted broadly to
include anything of value. The Anti-Kickback Statute has been interpreted to apply to arrangements between therapeutic product manufacturers on one hand and prescribers,
purchasers, and formulary managers on the other. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution.
The exceptions and safe harbors are drawn narrowly and practices that involve remuneration that may be alleged to be intended to induce prescribing, purchasing or
recommending may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory
exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-
by-case basis based on a cumulative review of all of its facts and circumstances. Additionally, the intent standard under the Anti-Kickback Statute was amended by the ACA to a
stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In
addition, the ACA codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim
for purposes of the federal False Claims Act, or FCA.
The federal false claims and civil monetary penalty laws, including the FCA, which imposes significant penalties and can be enforced by private citizens through civil
qui tam actions, prohibit any person or entity from, among other things, knowingly presenting, or causing to be presented, a false or fraudulent claim for payment to, or approval
by, the federal healthcare programs, including Medicare and Medicaid, or knowingly making, using, or causing to be made or used a false record or statement material to a false
or fraudulent claim to the federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. For instance, historically,
pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers
would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of the product
for unapproved, off-label, and thus generally non-reimbursable, uses.
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HIPAA created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud
or to obtain, by means of false or fraudulent pretenses, representations or promises, any money or property owned by, or under the control or custody of, any healthcare benefit
program, including private third-party payors, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or
covering up by trick, scheme or device, a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for
healthcare benefits, items or services. Like the Anti-Kickback Statute, the ACA amended the intent standard for certain healthcare fraud statutes under HIPAA such that a person
or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
Many states have similar, and typically more prohibitive, fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other
state programs, or, in several states, apply regardless of the payor. Additionally, to the extent that our product candidates may in the future be sold in a foreign country, we may
be subject to similar foreign laws.
We may be subject to data privacy and security regulations by both the federal government and the states in which we conduct our business. HIPAA, as amended by the
Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, imposes requirements relating to the privacy, security and
transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to business
associates, independent contractors, or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered
entity. HITECH also created four new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave
state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA and seek attorneys’ fees and costs associated with
pursuing federal civil actions. In addition, many state laws govern the privacy and security of health information in specified circumstances, many of which differ from each
other in significant ways, are often not pre-empted by HIPAA, and may have a more prohibitive effect than HIPAA, thus complicating compliance efforts.
We expect our product, after approval, may be eligible for coverage under Medicare, the federal health care program that provides health care benefits to the aged and
disabled, and covers outpatient services and supplies, including certain pharmaceutical products, that are medically necessary to treat a beneficiary’s health condition. In
addition, the product may be covered and reimbursed under other government programs, such as Medicaid and the 340B Drug Pricing Program. The Medicaid Drug Rebate
Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services
as a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. Under the 340B Drug Pricing Program, the
manufacturer must extend discounts to entities that participate in the program. As part of the requirements to participate in certain government programs, many pharmaceutical
manufacturers must calculate and report certain price reporting metrics to the government, such as average manufacturer price, or AMP, and best price. Penalties may apply in
some cases when such metrics are not submitted accurately and timely.
Additionally, the federal Physician Payments Sunshine Act, or the Sunshine Act, within the ACA, and its implementing regulations, require that certain manufacturers
of drugs, devices, biological and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain
exceptions) report annually to CMS information related to certain payments or other transfers of value made or distributed to physicians and teaching hospitals, or to entities or
individuals at the request of, or designated on behalf of, the physicians and teaching hospitals and to report annually certain ownership and investment interests held by
physicians and their immediate family members. Failure to report accurately could result in penalties. In addition, many states also govern the reporting of payments or other
transfers of value, many of which differ from each other in significant ways, are often not pre-empted, and may have a more prohibitive effect than the Sunshine Act, thus further
complicating compliance efforts.
New Legislation and Regulations
From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the testing, approval,
manufacturing and marketing of products regulated by the FDA. In addition to new legislation, FDA regulations and policies are often revised or interpreted by the agency in
ways that may significantly affect our business and our products. It is impossible to predict whether further legislative changes will be enacted or whether FDA regulations,
guidance, policies or interpretations will be changed or what the effect of such changes, if any, may be.
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ITEM 1A. RISK FACTORS
You should carefully consider the following material risk factors as well as all other information set forth or referred to in this report before purchasing shares of our
common stock. Investing in our common stock involves a high degree of risk. We may not be successful in preventing the material adverse effects that any of the following risks
and uncertainties may cause. These potential risks and uncertainties may not be a complete list of the risks and uncertainties facing us. There may be additional risks and
uncertainties that we are presently unaware of, or presently consider immaterial, that may become material in the future and have a material adverse effect on us. You could lose
all or a significant portion of your investment due to any of these risks and uncertainties.
Summary of Risk Factors
Our business is subject to numerous risks and uncertainties that you should consider before investing in our company, as fully described below. The principal factors
and uncertainties that make investing in our company risky include, among others:
General Operating and Business Risks
● Our business is subject to risks arising from epidemic diseases, such as the recent outbreak of the COVID-19 illness.
● Our limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those estimates of our future
performance.
● Our results of operations have not resulted in profitability and we may not be able to achieve profitability going forward.
● We depend upon key personnel and need additional personnel.
● Currently, we have several consulting contracts with related parties in China. The loss of such customers could adversely impact our financial condition and results
of operations.
● Our auditors have issued an audit opinion which raises substantial doubt about our ability to continue as a going concern.
● We must effectively manage the growth of our operations, or our company will suffer.
● Our business requires substantial capital, and if we are unable to maintain adequate financing sources our profitability and financial condition will suffer and
jeopardize our ability to continue operations.
● Our revenue and results of operations may suffer if we are unable to attract new clients, continue to engage existing clients, or sell additional products and services.
● Our prospects will suffer if we are not able to hire, train, motivate, manage, and retain a significant number of highly skilled employees.
●
●
Potential liability claims may adversely affect our business.
In accordance with our strategic development policy, we may invest in companies for strategic reasons and may not realize a return on our investments.
● Our growing operations in the PRC could expose us to risks that could have an adverse effect on our costs of operations.
● We face intense competition which could cause us to lose market share.
●
If we fail to comply with our obligations in the agreements under which we license intellectual property rights from third parties or otherwise experience
disruptions to our business relationships with our licensors, we could lose intellectual property rights that are important to our business.
● We may face uncertainty and difficulty in obtaining and enforcing our patents and other proprietary rights.
● We may not be able to protect our intellectual property rights throughout the world.
●
Patent terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.
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● Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed
by governmental patent agencies, and any patent protection we may obtain in the future could be reduced or eliminated for non-compliance with these
requirements.
●
It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection. If we fail to protect or enforce our intellectual property
rights adequately or secure rights to patents of others, the value of our intellectual property rights would diminish.
● We may be subject to claims challenging the inventorship of patents and other intellectual property.
●
If any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be
significantly impaired and our business and competitive position would suffer.
● We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect
our rights to, or use of, our technology.
● Breaches or compromises of our information security systems or our information technology systems or infrastructure could result in exposure of private
information, disruption of our business and damage to our reputation, which could harm our business, results of operation and financial condition.
● We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act or Chinese
anti-corruption law could have a material adverse effect on our business.
Risk Factors Related to Clinical and Commercialization Activity
● We may not be able to file INDs to commence additional clinical trials on the timelines we expect, and even if we are able to do so, the FDA may not permit us to
proceed.
● We have limited experience in conducting clinical trials.
● Delays in the commencement, enrollment, and completion of clinical testing could result in increased costs to us and delay or limit our ability to obtain regulatory
approval for our product candidates.
● Our success depends upon the viability of our product candidates and we cannot be certain any of them will receive regulatory approval to be commercialized.
● As the results of earlier pre-clinical studies or clinical trials are not necessarily predictive of future results, any product candidate we advance into clinical trials
may not have favorable results in later clinical trials or receive regulatory approval.
● Our business faces significant government regulation, and there is no guarantee that our product candidates will receive regulatory approval.
●
●
Even if our product candidates receive regulatory approval, we may still face future development and regulatory difficulties.
If we or current or future collaborators, manufacturers, or service providers fail to comply with healthcare laws and regulations, we or they could be subject to
enforcement actions and substantial penalties, which could affect our ability to develop, market and sell our products and may harm our reputation.
● Any cell based therapies we develop may become subject to unfavorable pricing regulations, third party coverage and reimbursement practices or healthcare
reform initiatives, thereby harming our business.
●
The healthcare industry is heavily regulated in the U.S. at the federal, state, and local levels, and our failure to comply with applicable requirements may subject us
to penalties and negatively affect our financial condition.
● Our ability to obtain reimbursement or funding from the federal government may be impacted by possible reductions in federal spending.
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Risks Related to Doing Business in China
●
Trading in Avalon’s securities may be restricted under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or fully
investigate Avalon’s auditors, and as a result, U.S. national securities exchanges, such as Nasdaq, may determine to delist Avalon’s securities.
● Our business might be subject to various evolving PRC laws and regulations regarding data privacy and cybersecurity. Failure of cybersecurity and data security
compliance could subject us to penalties, damage our reputation and brand and harm our business and results of operations.
●
If we become directly subject to the recent scrutiny, criticism and negative publicity involving certain U.S.-listed Chinese companies, we may have to expend
significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your
investment in our stock, especially if such matter cannot be addressed and resolved quickly.
● Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand
for our products and damage our business.
● Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.
●
The PRC government exerts substantial influence over the manner in which Avalon must conduct its business activities and Avalon may face the risk that the future
regulatory actions by the PRC government could significantly limit or completely hinder Avalon’s ability to offer future securities to investors.
● Under the current Enterprise Income Tax, or EIT, law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable
tax consequences to us and our non- PRC stockholders.
● We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations
implemented on September 8, 2006.
● We may be subject to fines and legal sanctions if we or our Chinese employees fail to comply with PRC regulations relating to employee stock options granted by
overseas listed companies to PRC citizens.
●
The new M&A Rules establish more complex procedures for some acquisitions of Chinese companies by foreign investor which could make it more difficult for us
to pursue growth through acquisitions in China.
● Government control of currency conversion and future movements in exchange rates may adversely affect our operations and financial results.
Risks Related to Our Securities
●
If we are unable to maintain listing of our securities on the Nasdaq Capital Market or another reputable stock exchange, it may be more difficult for our
stockholders to sell their securities.
● The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for our stockholders.
●
Future sales of our common stock or securities convertible or exchangeable for our common stock may cause our stock price to decline.
● You may experience dilution of your ownership interests because of the future issuance of additional shares of our common or preferred stock or other securities
that are convertible into or exercisable for our common or preferred stock.
●
The ability of our Board of Directors to issue additional stock may prevent or make more difficult certain transactions, including a sale or merger.
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● We are a “smaller reporting company,” and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our
common stock less attractive to investors.
●
If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our
stock price and trading volume could decline.
● Our officers, directors and principal stockholders own a significant percentage of our stock and will be able to exert significant control over matters subject to
stockholder approval.
● We do not anticipate paying dividends on our common stock, and investors may lose the entire amount of their investment.
● Applicable regulatory requirements, including those contained in and issued under the Sarbanes-Oxley Act of 2002, may make it difficult for us to retain or attract
qualified officers and directors, which could adversely affect the management of our business and our ability to obtain or retain listing of our common stock on a
national securities exchange.
●
If we cannot satisfy, or continue to satisfy, the initial listing requirements and other rules of the Nasdaq Capital Market, our securities may be delisted, which could
negatively impact the price of our securities and your ability to sell them.
● We could be subject to securities class action litigation.
General Operating and Business Risks
Our business is subject to risks arising from epidemic diseases, such as the recent outbreak of the COVID-19 illness.
The recent outbreak of the Coronavirus Disease 2019, or COVID-19, which has been declared by the World Health Organization to be a “public health emergency of
international concern,” has spread across the globe and is impacting worldwide economic activity. Although several vaccines have been developed, a public health epidemic,
including COVID-19, poses the risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite
period of time, including due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that
COVID-19 could have on our business, the continued spread of COVID-19 and the measures taken by the governments of countries affected could disrupt the supply chain and
adversely impact our business, financial condition or results of operations. The COVID-19 outbreak and mitigation measures may also have an adverse impact on global
economic conditions which could have an adverse effect on our business and financial condition. The extent to which the COVID-19 outbreak impacts our results will depend on
future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain
its impact.
Our limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those estimates of our future
performance.
We did not begin operations of our business through AHS until May 2015. We have a limited operating history and limited revenue. As a consequence, it is difficult, if
not impossible, to forecast our future results based upon our historical data. Reliance on the historical results may not be representative of the results we will achieve, particularly
in our combined form. Because of the uncertainties related to our lack of historical operations, we may be hindered in our ability to anticipate and timely adapt to increases or
decreases in revenues or expenses. If we make poor budgetary decisions as a result of unreliable historical data, we could be less profitable or incur losses, which may result in a
decline in our stock price.
Our results of operations have not resulted in profitability and we may not be able to achieve profitability going forward.
We incurred net losses amounting to $9,090,499 and $12,679,438 for the years ended December 31, 2021 and 2020, respectively. If we incur additional significant
losses, our stock price may decline, perhaps significantly. Our management is developing plans to achieve profitability. Our business plan is speculative and unproven. There is
no assurance that we will be successful in executing our business plan or that even if we successfully implement our business plan, that we will be able to curtail our losses now
or in the future. Further, as we are a new enterprise, we expect that net losses will continue.
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We depend upon key personnel and need additional personnel.
Our success depends on the continuing services of Wenzhao Lu, our Chairman of the Board, and David Jin, Meng Li and Luisa Ingargiola, our executive officers. The
loss of Mr. Lu, Dr. Jin, Ms. Li or Ms. Ingargiola could have a material and adverse effect on our business operations. Additionally, the success of our operations will largely
depend upon our ability to successfully attract and maintain competent and qualified key management personnel. As with any company with limited resources, there can be no
guaranty that we will be able to attract such individuals or that the presence of such individuals will necessarily translate into profitability for us. Our inability to attract and
retain key personnel may materially and adversely affect our business operations.
Currently, we have several consulting contracts with related parties in China. The loss of such customers could adversely impact our financial condition and results of
operations.
During the years ended December 31, 2021 and 2020, we recognized an aggregate of $1,390,972 and $1,377,762 in revenues, respectively, of which, $187,412 and
$170,908 was generated from medical related consulting services provided to related parties, respectively. Wenzhao Lu, our Chairman and significant shareholder, is the
Chairman of each of the related parties. The loss of any related party customer would have a material adverse effect on our financial condition or results of operation, the loss of
more than one such related party customer, or our failure to replace such customer with other customers, could have a material adverse effect on our financial condition and our
results of operations.
Our auditors have issued an audit opinion which raises substantial doubt about our ability to continue as a going concern.
Our independent auditors have indicated, in their report on our December 31, 2021 consolidated financial statements, that there is substantial doubt about our ability to
continue as a going concern. We had a working capital deficit of $3,078,616 at December 31, 2021. We have a limited operating history, incurred recurring net losses and
negative cash flows from operating activities, and our continued growth is dependent upon the continuation of providing medical related consulting services to our related parties
and generating rental revenue from our income-producing real estate property in New Jersey, and obtaining additional financing to fund future obligations and pay liabilities
arising from normal business operations. Our ability to continue as a going concern is dependent on our ability to raise additional capital, implement our business plan, and
generate significant revenues. There are no assurances that we will be successful in our efforts to generate significant revenues, maintain sufficient cash balance or report
profitable operations or to continue as a going concern. We plan on raising capital through the sale of equity to implement our business plan. However, there is no assurance
these plans will be realized and that any additional financings will be available to our company on satisfactory terms and conditions, if any.
We must effectively manage the growth of our operations, or our company will suffer.
To manage our growth, we believe we must continue to implement and improve our services and products. We may not have adequately evaluated the costs and risks
associated with our planned expansion, and our systems, procedures, and controls may not be adequate to support our operations. In addition, our management may not be able
to achieve the rapid execution necessary to successfully offer our products and services and implement our business plan on a profitable basis. The success of our future
operating activities will also depend upon our ability to expand our support system to meet the demands of our growing business. Any failure by our management to effectively
anticipate, implement, and manage changes required to sustain our growth would have a material adverse effect on our business, financial condition, and results of operations.
Our business requires substantial capital, and if we are unable to maintain adequate financing sources our profitability and financial condition will suffer and
jeopardize our ability to continue operations.
In connection with the strategic development portion of our business, we will need significant capital in order to implement acquisitions of technologies. In addition, we
will need a significant amount of capital in order to fully implement our advisory business and maintain our rental property. If we are unable to maintain adequate financing or
other sources of capital are not available, we could be forced to suspend, curtail or reduce our operations, which could harm our revenues, profitability, financial condition and
business prospects.
Our revenue and results of operations may suffer if we are unable to attract new clients, continue to engage existing clients, or sell additional products and services.
We presently derive our revenue from providing medical related consulting services to related parties and generating rental revenue from our income-producing real
estate property in New Jersey. Our growth therefore depends on our ability to attract new clients, maintain existing clients and properties and sell additional products and
services to existing clients. This depends on our ability to understand and anticipate market and pricing trends and our clients’ needs and our ability to deliver consistent, reliable,
high-quality services. Our failure to engage new clients, continue to re-engage with our existing clients or cross-sell additional services could materially and adversely affect our
operating results.
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Our prospects will suffer if we are not able to hire, train, motivate, manage, and retain a significant number of highly skilled employees.
We only recently commenced business and we presently generate medical related consulting services from related parties and generate rental revenue from our income-
producing real estate property in New Jersey. On the consulting side, Wenzhao Lu, our Chairman and significant shareholder, is the Chairman of each of the clients in which we
have provided consulting services. Our future success depends upon our ability to hire, train, motivate, manage, and retain a significant number of highly skilled employees,
particularly research analysts, technical experts, and sales and marketing staff. We will experience competition for professional personnel in each of our business lines. Hiring,
training, motivating, managing, and retaining employees with the skills we need is time consuming and expensive. Any failure by us to address our staffing needs in an effective
manner could hinder our ability to continue to provide high-quality products and services and to grow our business.
Potential liability claims may adversely affect our business.
Our services, which may include recommendations and advice to organizations regarding complex business and operational processes and regulatory and compliance
issues may give rise to liability claims by our clients or by third parties who bring claims against our clients. Healthcare organizations often are the subject of regulatory scrutiny
and litigation, and we also may become the subject of such litigation based on our advice and services. Any such litigation, whether or not resulting in a judgment against us,
may adversely affect our reputation and could have a material adverse effect on our financial condition and results of operations. We may not have adequate insurance coverage
for claims against us.
In accordance with our strategic development policy, we may invest in companies for strategic reasons and may not realize a return on our investments.
From time to time, we may make investments in companies. These investments may be for strategic objectives to support our key business initiatives but may also be
standalone investments or acquisitions. Such investments or acquisitions could include equity or debt instruments in private companies, many of which may not be marketable at
the time of our initial investment. These companies may range from early-stage companies that are often still defining their strategic direction to more mature companies with
established revenue streams and business models. The success of these companies may depend on product development, market acceptance, operational efficiency, and other key
business factors. The companies in which we invest may fail because they may not be able to secure additional funding, obtain favorable investment terms for future financings,
or take advantage of liquidity events such as public offerings, mergers, and private sales. If any of these private companies fails, we could lose all or part of our investment in
that company. If we determine that impairment indicators exist and that there are other-than-temporary declines in the fair value of the investments, we may be required to write
down the investments to their fair value and recognize the related write-down as an investment loss.
Our growing operations in the PRC could expose us to risks that could have an adverse effect on our costs of operations.
Avalon Shanghai’s client base is currently located in the PRC. As a result, we expect to continue to add personnel in the PRC. With a significant focus of our operations
in the PRC, our reliance on a workforce in the PRC exposes us to disruptions in the business, political, and economic environment in that region. Maintenance of a stable
political environment between the PRC and the United States is important to our operations, and any disruption in this relationship may directly negatively affect our operations.
Our operations in the PRC require us to comply with complex local laws and regulatory requirements and expose us to foreign currency exchange rate risk. Our operations may
also be subject to reduced or inadequate protection of our intellectual property rights, and security breaches. Further, it may be difficult to transfer funds from our Chinese
operations to our company. Negative developments in any of these areas could increase our costs of operations or otherwise harm our business.
We face intense competition which could cause us to lose market share.
In the healthcare markets in the United States and the People’s Republic of China, we will compete with large healthcare providers who have more significant financial
resources, established market positions, long-standing relationships, and who have more significant name recognition, technical, marketing, sales, distribution, financial and
other resources than we do. The resources available to our competitors to develop new services and products and introduce them into the marketplace exceed the resources
currently available to us. This intense competitive environment may require us to make changes in our services, products, pricing, licensing, distribution, or marketing to develop
a market position.
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If we fail to comply with our obligations in the agreements under which we license intellectual property rights from third parties or otherwise experience disruptions
to our business relationships with our licensors, we could lose intellectual property rights that are important to our business.
We are party to a research agreement with the Massachusetts Institute of Technology (“MIT”) for development of chimeric antigen receptor (CAR) technology. MIT has
granted us options to non-exclusively or exclusively license MIT inventions arising under this research agreement. We may need to negotiate commercially reasonable terms and
conditions with MIT to advance our research and development activities or allow the commercialization of CAR technology or any other product candidates we may identify and
pursue.
Avalon GloboCare and Arbele Limited (“Arbele”) are parties to the joint venture Avactis Biosciences, Inc. (“Avactis”) for development of AVA-011, a mRNA-based
dual anti-CD19-CD22 CAR-T cell therapy candidate. Arbele has granted Avactis an exclusive license to its rights in this technology. We and Arbele may need to obtain
additional licenses from others to advance our research and development activities or allow the commercialization of mRNA-based CAR technology or any other product
candidates we may identify and pursue.
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 the University of Pittsburgh Medical Center.
The Company and the University of Pittsburgh of the Commonwealth System of Higher Education (the “University”) entered into a Corporate Research Agreement (the
“University Agreement”). Pursuant to the University Agreement, for a term of two years the University agreed to use its reasonable efforts to perform academic research funded
by the Company in connection with the development of point-of-care modular autonomous processing system to generate clinical-grade AVA-011, a RNA-based chimeric
antigen receptor (CAR) T-cell therapy candidate (the “Project”) subject to the appointment of Dr. Yen Michael S. Hsu as Principal Investigator.
Our agreements with MIT, Hydropeptide, University of Pittsburg and Arbele impose, and we expect that future agreements will impose, various development, diligence,
commercialization, or other obligations on AVAR and us. In spite of our efforts, these partners may conclude that we have materially breached its obligations under such
agreements and might therefore terminate the agreements, thereby removing or limiting our ability or our subsidiary AVAR’s ability to develop and commercialize products and
technology covered by these license agreements. If these in-licenses are terminated, or if the underlying patents fail to provide the intended exclusivity, competitors or other third
parties would have the freedom to seek regulatory approval of, and to market, products identical to ours and we may be required to cease our development and
commercialization of CAR or exosome technology or other product candidates that we may identify. Any of the foregoing could have a material adverse effect on our
competitive position, business, financial conditions, results of operations, and prospects.
Moreover, disputes may arise regarding intellectual property subject to a licensing agreement, including:
● the scope of rights granted under the license agreement and other interpretation-related issues;
● the extent to which our product candidates, technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;
● the sublicensing of patent and other rights under our collaborative development relationships;
● our diligence obligations under the license agreement and what activities satisfy those diligence obligations;
● the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our
partners; and
● the priority of invention of patented technology.
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In addition, the agreements under which we currently license intellectual property or technology from third parties are complex, and certain provisions in such
agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the
scope of our rights to the relevant intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant agreement, either of
which could have a material adverse effect on our business, financial condition, results of operations, and prospects. Moreover, if disputes over intellectual property that we have
licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, we may be unable to successfully develop and
commercialize the affected product candidates, which could have a material adverse effect on our business, financial conditions, results of operations, and prospects.
We may face uncertainty and difficulty in obtaining and enforcing our patents and other proprietary rights.
There can be no assurance that any patent applications we file or license will be approved, or that challenges will not be instituted against the validity or enforceability
of any patent licensed-in or owned by us. Our pending and future patent applications may not result in patents being issued that protect our product candidates, in whole or in
part, or which effectively prevent others from commercializing competitive product candidates. Even if our patent applications issue as patents, they may not issue in a form that
will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be
able to circumvent our patents by developing similar or alternative product candidates in a non-infringing manner. The cost of litigation to uphold the validity and prevent
infringement of a patent is substantial. Furthermore, there can be no assurance that others will not independently develop substantially equivalent technologies not covered by
patents to which we have rights or obtain access to our know-how. In addition, the laws of certain countries may not adequately protect our intellectual property. Our competitors
may possess or obtain patents on products or processes that are necessary or useful to the development, use, or manufacture of our product candidates. There can also be no
assurance that our proposed technology will not infringe upon patents or proprietary rights owned by others, with the result that others may bring infringement claims against us
and require us to license such proprietary rights, which may not be available on commercially reasonable terms, if at all. Any such litigation, if instituted, could have a material
adverse effect, potentially including monetary penalties, diversion of management resources, and injunction against continued manufacture, use, or sale of certain products or
processes.
We rely upon non-patented proprietary know-how. There can be no assurance that we can adequately protect our rights in such non-patented proprietary know-how, or
that others will not independently develop substantially equivalent proprietary information or techniques or gain access to our proprietary know-how. Any of the foregoing
events could have a material adverse effect on us. In addition, if any of our trade secrets, know-how or other proprietary information were to be disclosed, or misappropriated,
the value of our trade secrets, know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.
In September 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes
to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. In particular, under the Leahy-Smith
Act, the United States transitioned in March 2013 to a “first to file” system in which the first inventor to file a patent application will be entitled to the patent. Third parties are
allowed to submit prior art before the issuance of a patent by the U.S. Patent and Trademark Office, or USPTO, and may become involved in opposition, derivation, post-grant
and inter partes review, or interference proceedings challenging our patent rights. An adverse determination in any such submission, proceeding or litigation could reduce the
scope of, or invalidate, our patent rights, which could adversely affect our competitive position.
The USPTO has developed new and untested regulations and procedures to govern the full implementation of the Leahy-Smith Act, and many of the substantive
changes to patent law associated with the Leahy-Smith Act, and in particular, the “first-to-file” provisions, only became effective in March 2013. The Leahy-Smith Act has also
introduced procedures that may make it easier for third parties to challenge issued patents, as well as to intervene in the prosecution of patent applications. Finally, the Leahy-
Smith Act contains new statutory provisions that still require the USPTO to issue new regulations for their implementation, and it may take the courts years to interpret the
provisions of the new statute. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. The Leahy-Smith Act and its
implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.
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We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual
property rights in some countries outside the United States may be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect
intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our
inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions.
Competitors may use our technologies in jurisdictions where we do not obtain patent protection to develop their own products and may also export infringing products to
territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other
intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain
countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly those relating to
biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights
generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and attention from
other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third
parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful.
Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual
property that we develop or license.
Patent terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.
Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S.
non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering our product candidates
are obtained, once the patent life has expired, we may be open to competition from competitive products, including generics or biosimilars. Given the amount of time required
for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are
commercialized. As a result, any patents we may obtain may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by
governmental patent agencies, and any patent protection we may obtain in the future could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and
various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications. The USPTO and various non-U.S.
governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process.
There are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the
relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstance would have a material adverse effect on our business.
It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection. If we fail to protect or enforce our intellectual property
rights adequately or secure rights to patents of others, the value of our intellectual property rights would diminish.
Our commercial viability will depend in part on obtaining and maintaining patent protection and trade secret protection of our product candidates, and the methods used
to manufacture them, as well as successfully defending these patents against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell,
or importing our products is dependent upon the extent to which we obtain rights under valid and enforceable patents or trade secrets that cover these activities.
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The patent positions of pharmaceutical and biopharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important
legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in biopharmaceutical patents has emerged to date in the United States. The
biopharmaceutical patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and
other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in the patents we own.
Further, if any of our patents are deemed invalid and unenforceable, it could impact our ability to commercialize or license our technology.
The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or
permit us to gain or keep our competitive advantage. For example:
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others may be able to make products that are similar to our product candidates but that are not covered by the claims of any patents;
● we might not have been the first to make the inventions covered by any issued patents or patent applications;
● we might not have been the first to file patent applications for these inventions;
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it is possible that any patent applications we own or license will not result in issued patents;
any issued patents may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges by third parties;
● we may not develop additional proprietary technologies that are patentable or protectable under trade secrets law; or
●
the patents of others may have an adverse effect on our business.
We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are
difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators, and other advisors
may unintentionally or willfully disclose our information to competitors. In addition, courts outside the United States are sometimes less willing to protect trade secrets.
Moreover, our competitors may independently develop equivalent knowledge, methods, and know-how.
We may be subject to claims challenging the inventorship of patents and other intellectual property.
We or our licensors may be subject to claims that former employees, collaborators or other third parties have an interest as an inventor or co-inventor in intellectual
property we own or license. For example, we or our licensors may have inventorship disputes arise from conflicting obligations of employees, consultants or others who are
involved in developing our product candidates. We may be subject to claims by third parties asserting that our licensors, employees or we have misappropriated their intellectual
property, or claiming ownership of what we regard as our own intellectual property. Litigation may be necessary to defend against these and other claims challenging
inventorship or our or our licensors’ ownership of our owned or in-licensed patents, trade secrets or other intellectual property. If we or our licensors fail in defending any such
claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property that is
important to our product candidates. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management
and other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.
If any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be
significantly impaired and our business and competitive position would suffer.
Our viability also depends upon the skills, knowledge and experience of our scientific and technical personnel, and our consultants and advisors. To help protect our
proprietary know-how and our inventions for which patents may be unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements. To this
end, we require all of our employees, consultants, advisors and contractors to enter into agreements which prohibit unauthorized disclosure and use of confidential information
and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business. These agreements are often
limited in duration and may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure
or the lawful development by others of such information. There is no assurance that such agreements will be honored by such parties or enforced in whole or part by the courts.
We cannot be certain that others will not gain access to these trade secrets or that our patents will provide adequate protection. Others may independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to our trade secrets. In addition, enforcing a claim that a third party illegally obtained and is using any
of our trade secrets is expensive and time consuming, and the outcome is unpredictable. If any of our trade secrets, know-how or other proprietary information is improperly
disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.
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We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect
our rights to, or use of, our technology.
If we choose to go to court to stop a third party from using the inventions claimed in our patents, that individual or company has the right to ask the court to rule that
such patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive and would consume time and other resources, even if we were
successful in discontinuing the infringement of our patents. In addition, there is a risk that the court will decide that these patents are not valid and that we do not have the right
to stop the other party from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop the other party on the
ground that such other party’s activities do not infringe our rights to these patents. In addition, the U.S. Supreme Court has in the past invalidated tests used by the USPTO in
granting patents over the past 20 years. As a consequence, issued patents may be found to contain invalid claims according to the newly revised standards. Some of our own
patents may be subject to challenge and subsequent invalidation in a variety of post-grant proceedings, particularly inter partes review, before the USPTO or during litigation
under the revised criteria, which make it more difficult to defend the validity of claims in already issued patents.
Furthermore, a third party may claim that we or our manufacturing or commercialization partners are using inventions covered by the third party’s patent rights and may
go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could affect our
results of operations and divert the attention of managerial and technical personnel. There is a risk that a court could decide that we or our commercialization partners are
infringing the third party’s patents and order us or our partners to stop the activities covered by the patents. In addition, there is a risk that a court could order us or our partners to
pay the other party damages for having violated the other party’s patents. The biotechnology industry has produced a proliferation of patents, and it is not always clear to
industry participants, including us, which patents cover various types of products, manufacturing processes or methods of use. The coverage of patents is subject to interpretation
by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products, manufacturing processes or
methods of use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may not be able to do this. Proving invalidity, in
particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.
As some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many
foreign jurisdictions are typically not published until eighteen months after filing, and because publications in the scientific literature often lag behind actual discoveries, we
cannot be certain that others have not filed patent applications for technology covered by our issued patents or our pending applications, or that we were the first to invent the
technology. Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent applications may have priority
over our patent applications or patents, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a United States
patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the USPTO to determine priority of invention in the United
States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently
arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions.
Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In
addition, any uncertainties resulting from the initiation and continuation of any litigation or inter partes review proceedings could have a material adverse effect on our ability to
raise the funds necessary to continue our operations.
Some jurisdictions in which we operate have enacted legislation which allows members of the public to access information under statutes similar to the U.S. Freedom of
Information Act. Even though we believe our information would be excluded from the scope of such statutes, there are no assurances that we can protect our confidential
information from being disclosed under the provisions of such laws. If any confidential or proprietary information is released to the public, such disclosures may negatively
impact our ability to protect our intellectual property rights.
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Breaches or compromises of our information security systems or our information technology systems or infrastructure could result in exposure of private information,
disruption of our business and damage to our reputation, which could harm our business, results of operation and financial condition.
We utilize information security and information technology systems and websites that allow for the secure storage and transmission of proprietary or private information
regarding our clients, patients, employees, vendors and others, including individually identifiable health information. A security breach of our network, hosted service providers,
or vendor systems, may expose us to a risk of loss or misuse of this information, litigation and potential liability. Hackers and data thieves are increasingly sophisticated and
operate large-scale and complex automated attacks, including on companies within the healthcare industry. Although we believe that we take appropriate measures to safeguard
sensitive information within our possession, we may not have the resources or technical sophistication to anticipate or prevent rapidly-evolving types of cyber-attacks targeted at
us, our clients, our patients, or others who have entrusted us with information. Actual or anticipated attacks may cause us to incur costs, including costs to deploy additional
personnel and protection technologies, train employees, and engage third-party experts and consultants. We invest in industry standard security technology to protect personal
information. Advances in computer capabilities, new technological discoveries, or other developments may result in the technology used by us to protect personal information or
other data being breached or compromised. To our knowledge, we have not experienced any material breach of our cybersecurity systems. If our or our third-party service
provider systems fail to operate effectively or are damaged, destroyed, or shut down, or there are problems with transitioning to upgraded or replacement systems, or there are
security breaches in these systems, any of the aforementioned could occur as a result of natural disasters, software or equipment failures, telecommunications failures, loss or
theft of equipment, acts of terrorism, circumvention of security systems, or other cyber-attacks, we could experience delays or decreases in revenue, and reduced efficiency of
our operations. Additionally, any of these events could lead to violations of privacy laws, loss of customers, or loss, misappropriation or corruption of confidential information,
trade secrets or data, which could expose us to potential litigation, regulatory actions, sanctions or other statutory penalties, any or all of which could adversely affect our
business, and cause us to incur significant losses and remediation costs.
We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act or Chinese anti-
corruption law could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their
officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. Chinese anti-corruption law also strictly
prohibits bribery of government officials. We have operations, agreements with third parties and make sales in China, where corruption may occur. Our activities in China create
the risk of unauthorized payments or offers of payments by one of the employees, consultants, sales agents or distributors of our company, even though these parties are not
always subject to our control. It is our policy to implement safeguards to prevent these practices by our employees. However, our existing safeguards and any future
improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors of our company may engage in conduct for which we might be
held responsible.
Violations of the FCPA or other anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively
affect our business, operating results and financial condition. In addition, the United States government may seek to hold our company liable for successor liability FCPA
violations committed by companies in which we invest or that we acquire.
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Risk Factors Related to Clinical and Commercialization Activity
We may not be able to file INDs to commence additional clinical trials on the timelines we expect, and even if we are able to do so, the FDA may not permit us to
proceed.
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. We hope to file a number of investigational new drug applications, or INDs, for cell based therapies and diagnostic
systems through INDs over the next several years. However, the timing of our filing of these INDs is primarily dependent on receiving further data from our pre-clinical studies,
and our timing of filing on all product candidates is subject to further research. Additionally, our submission of INDs is contingent upon having sufficient financial resources to
prepare and complete the application.
We cannot be sure that submission of an IND will result in the United States Food and Drug Administration, or FDA, allowing further clinical trials to begin, or that,
once begun, issues will not arise that result in the suspension or termination of such clinical trials. Any IND we submit could be denied by the FDA or the FDA could place any
future investigation of ours on clinical hold until we provide additional information, either before or after clinical trials are initiated. Additionally, even if such regulatory
authorities agree with the design and implementation of the clinical trials set forth in an IND or clinical trial application, we cannot guarantee that such regulatory authorities will
not change their requirements in the future. Unfavorable future trial results or other factors, such as insufficient capital to continue development of a product candidate or
program, could also cause us to voluntarily withdraw an effective IND.
We have limited experience in conducting clinical trials.
We have limited human clinical trial experience with respect to our product candidates. Although our CEO, Dr. David Jin, is formerly with the FDA, this will not
provide assurance of success. The clinical testing process is governed by stringent regulation and is highly complex, costly, time-consuming, and uncertain as to outcome, and
pharmaceutical products and products used in the regeneration of tissue may invite particularly close scrutiny and requirements from the FDA and other regulatory bodies. Our
failure or the failure of our collaborators to conduct human clinical trials successfully or our failure to capitalize on the results of human clinical trials for our product candidates
would have a material adverse effect on us. If our clinical trials of our product candidates or future product candidates do not sufficiently enroll or produce results necessary to
support regulatory approval in the United States or elsewhere, or if they show undesirable side effects, we will be unable to commercialize these product candidates.
To receive regulatory approval for the commercial sale of our product candidates, we must conduct adequate and well-controlled clinical trials to demonstrate efficacy
and safety in humans. Clinical failure can occur at any stage of the testing. Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may
require us, to conduct additional clinical and/or non-clinical testing. In addition, the results of our clinical trials may show that our product candidates are ineffective or may
cause undesirable side effects, which could interrupt, delay or halt clinical trials, resulting in the denial of regulatory approval by the FDA and other regulatory authorities. In
addition, negative, delayed or inconclusive results may result in:
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the withdrawal of clinical trial participants;
the termination of clinical trial sites or entire trial programs;
costs of related litigation;
substantial monetary awards to patients or other claimants;
impairment of our business reputation;
loss of revenues; and
the inability to commercialize our product candidates.
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Delays in the commencement, enrollment, and completion of clinical testing could result in increased costs to us and delay or limit our ability to obtain regulatory
approval for our product candidates.
Delays in the commencement, enrollment or completion of clinical testing could significantly affect our product development costs. A clinical trial may be suspended or
terminated by us, the FDA, or other regulatory authorities due to a number of factors. The commencement and completion of clinical trials require us to identify and maintain a
sufficient number of trial sites, many of which may already be engaged in other clinical trial programs for the same indication as our product candidates. We may be required to
withdraw from a clinical trial as a result of changing standards of care, or we may become ineligible to participate in clinical studies. We do not know whether planned clinical
trials will begin on time or be completed on schedule, if at all. The commencement, enrollment and completion of clinical trials can be delayed for a number of reasons,
including, but not limited to, delays related to:
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findings in pre-clinical studies;
reaching agreements on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive
negotiation and may vary significantly among different CROs and trial sites;
obtaining regulatory approval to commence a clinical trial;
complying with conditions imposed by a regulatory authority regarding the scope or term of a clinical trial, or being required to conduct additional trials before
moving on to the next phase of trials;
obtaining institutional review board, or IRB, approval to conduct a clinical trial at numerous prospective sites;
recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including the size of the patient population, nature of trial protocol, meeting
the enrollment criteria for our studies, screening failures, the inability of the sites to conduct trial procedures properly, the availability of approved effective
treatments for the relevant disease and competition from other clinical trial programs for similar indications;
retaining patients who have initiated their participation in a clinical trial but may be prone to withdraw due to the treatment protocol, lack of efficacy, personal
issues, or side effects from the therapy, or who are lost to further follow-up;
● manufacturing sufficient quantities of a product candidate for use in clinical trials on a timely basis;
●
complying with design protocols of any applicable special protocol assessment we receive from the FDA;
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● severe or unexpected cell therapy side effects experienced by patients in a clinical trial;
● collecting, analyzing and reporting final data from the clinical trials;
● breaches in quality of manufacturing runs that compromise all or some of the doses made; positive results in FDA-required viral testing; karyotypic abnormalities
in our cell product; or contamination in our manufacturing facilities, all of which events would necessitate disposal of all cells made from that source;
● availability of materials provided by third parties necessary to manufacture our product candidates;
● availability of adequate amounts of acceptable tissue for preparation of master cell banks for our products; and
● requirements to conduct additional trials and studies, and increased expenses associated with the services of our CROs and other third parties.
If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, we or our development
partners, if any, may be delayed in obtaining, or may not be able to obtain or maintain, clinical or marketing approval for these product candidates. We may not be able to obtain
approval for indications that are as broad as intended, or we may be able to obtain approval only for indications that are entirely different from those indications for which we
sought approval.
Changes in regulatory requirements and guidance may occur, and we may need to amend clinical trial protocols to reflect these changes with appropriate regulatory
authorities. Amendments may require us to resubmit our clinical trial protocols to IRBs for re-examination, which may impact the costs, timing, or successful completion of a
clinical trial. If we experience delays in the completion of, or if we terminate, our clinical trials, the commercial prospects for our product candidates will be harmed, and our
ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also
ultimately lead to the denial of regulatory approval of a product candidate. Even if we are able to ultimately commercialize our product candidates, other therapies for the same
or similar indications may have been introduced to the market and already established a competitive advantage. Any delays in obtaining regulatory approvals may:
● delay commercialization of, and our ability to derive product revenues from, our product candidates;
● impose costly procedures on us; or
● diminish any competitive advantages that we may otherwise enjoy.
Our success depends upon the viability of our product candidates and we cannot be certain any of them will receive regulatory approval to be commercialized.
We will need FDA approval to market and sell any of our product candidates in the United States and approvals from FDA-equivalent regulatory authorities in foreign
jurisdictions to commercialize our product candidates in those jurisdictions. In order to obtain FDA approval of any of our product candidates, we must submit to the FDA a new
drug application, or NDA, or a biologics license application, or BLA, demonstrating that the product candidate is safe for humans and effective for its intended use. This
demonstration requires significant research and animal tests, which are referred to as pre-clinical studies, as well as human tests, which are referred to as clinical trials.
Satisfaction of the FDA’s regulatory requirements typically takes many years, depends upon the type, complexity, and novelty of the product candidate, and requires substantial
resources for research, development, testing and manufacturing. We cannot predict whether our research and clinical approaches will result in cell therapies that the FDA
considers safe for humans and effective for indicated uses. The FDA has substantial discretion in the drug approval process and may require us to conduct additional pre-clinical
and clinical testing or to perform post-marketing studies. The approval process may also be delayed by changes in government regulation, future legislation, administrative
action or changes in FDA policy that occur prior to or during our regulatory review.
Even if we comply with all FDA requests, the FDA may ultimately reject one or more of our NDAs or BLAs, as applicable. We cannot be sure that we will ever obtain
regulatory clearance for our product candidates. Failure to obtain FDA approval of any of our product candidates will reduce our number of potentially salable products and,
therefore, corresponding product revenues, and will have a material and adverse impact on our business.
As the results of earlier pre-clinical studies or clinical trials are not necessarily predictive of future results, any product candidate we advance into clinical trials may
not have favorable results in later clinical trials or receive regulatory approval.
Even if our pre-clinical studies and clinical trials are completed as planned, clinical trials, we cannot be certain that their results will support the claims of our product
candidates. Positive results in pre-clinical testing and early clinical trials do not ensure that results from later clinical trials will also be positive, and we cannot be sure that the
results of later clinical trials will replicate the results of prior clinical trials and pre-clinical testing. A number of companies in the pharmaceutical industry, including those with
greater resources and experience, have suffered significant setbacks in Phase II or Phase III clinical trials, even after seeing promising results in earlier clinical trials.
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Our clinical trial process may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure would cause us to
abandon a product candidate and may delay development of other product candidates. Any delay in, or termination of, our clinical trials will delay or cause us to refrain from the
filing of our NDAs and/or BLAs with the FDA and, ultimately, our ability to commercialize our product candidates and generate product revenues. In addition, our clinical trials
to date involve small patient populations. Because of the small sample size, the results of these clinical trials may not be indicative of future results.
Our business faces significant government regulation, and there is no guarantee that our product candidates will receive regulatory approval.
Our research and development activities, pre-clinical studies, anticipated human clinical trials, and anticipated manufacturing and marketing of our potential products
are subject to extensive regulation by the FDA and other regulatory authorities in the United States, as well as by regulatory authorities in other countries. In the United States,
our product candidates are subject to regulation as biological products or as combination biological products/medical devices under the Federal Food, Drug and Cosmetic Act,
the Public Health Service Act and other statutes, as outlined in the Code of Federal Regulations. Different regulatory requirements may apply to our products depending on how
they are categorized by the FDA under these laws. These regulations can be subject to substantial and significant interpretation, addition, amendment or revision by the FDA and
by the legislative process. The FDA may determine that we will need to undertake clinical trials beyond those currently planned. Furthermore, the FDA may determine that
results of clinical trials do not support approval for the product. Similar determinations may be encountered in foreign countries. The FDA will continue to monitor products in
the market after approval, if any, and may determine to withdraw its approval or otherwise seriously affect the marketing efforts for any such product. The same possibilities
exist for trials to be conducted outside of the United States that are subject to regulations established by local authorities and local law. Any such determinations would delay or
deny the introduction of our product candidates to the market and have a material adverse effect on our business, financial condition, and results of operations.
Cell based therapeutics are subject to ongoing periodic unannounced inspection by the FDA, the Drug Enforcement Agency, other federal agencies and corresponding
state agencies to ensure strict compliance with good manufacturing practices, and other government regulations and corresponding foreign standards. We do not have control
over third-party manufacturers’ compliance with these regulations and standards, nor can we guarantee that we will maintain compliance with such regulations in regards to our
own manufacturing processes. Other risks include:
● regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication, or field alerts to physicians and pharmacies;
● regulatory authorities may withdraw their approval of the IND or the product or require us to take our approved products off the market;
● we may be required to change the way the product is manufactured or administered and we may be required to conduct additional clinical trials or change the
labeling of our products;
● we may have limitations on how we promote our products; and
● we may be subject to litigation or product liability claims.
Even if our product candidates receive regulatory approval in the United States, we may never receive approval or commercialize our product candidates outside of the
United States. In order to market and commercialize any product candidate outside of the United States, we must establish and comply with numerous and varying regulatory
requirements of other countries regarding manufacturing, safety and efficacy. Approval procedures vary among countries and can involve additional product testing and
additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval
process in other countries may include all of the risks detailed above regarding FDA approval in the United States as well as other risks. Regulatory approval in one country does
not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in
others. Failure to obtain regulatory approval in other countries, or any delay or setback in obtaining such approval, could have the same adverse effects detailed above regarding
FDA approval in the United States. Such effects include the risks that our product candidates may not be approved for all indications requested, which could limit the uses of our
product candidates and have an adverse effect on product sales and potential royalties, and that such approval may be subject to limitations on the indicated uses for which the
product may be marketed or require costly, post-marketing follow-up studies.
Even if our product candidates receive regulatory approval, we may still face future development and regulatory difficulties.
Even if U.S. regulatory approval is obtained, the FDA may still impose significant restrictions on a product’s indicated uses or marketing, or impose ongoing
requirements for potentially costly post-approval studies. If any of our products were granted accelerated approval, FDA could require post-marketing confirmatory trials to
verify and describe the anticipated effect on irreversible morbidity or mortality or other clinical benefit. FDA may withdraw approval of a drug or indication approved under the
accelerated approval pathway if a trial required to verify the predicted clinical benefit of the product fails to verify such benefit; other evidence demonstrates that the product is
not shown to be safe or effective under the conditions of use; the applicant fails to conduct any required post-approval trial of the drug with due diligence; or the applicant
disseminates false or misleading promotional materials relating to the product. In addition, the FDA currently requires as a condition for accelerated approval the pre-approval of
promotional materials, which could adversely impact the timing of the commercial launch of the product.
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Given the number of recent high-profile adverse safety events with certain drug and cell related products, the FDA may require, as a condition of approval, costly risk
management programs, which may include safety surveillance, restricted distribution and use, patient education, enhanced labeling, special packaging or labeling, expedited
reporting of certain adverse events, pre-approval of promotional materials, and restrictions on direct-to-consumer advertising. Furthermore, heightened Congressional scrutiny on
the adequacy of the FDA’s drug approval process and the FDA’s efforts to assure the safety of marketed cell based therapy has resulted in the proposal of new legislation
addressing drug safety issues. If enacted, any new legislation could result in delays or increased costs during the period of product development, clinical trials, and regulatory
review and approval, as well as increased costs to assure compliance with any new post-approval regulatory requirements. Any of these restrictions or requirements could force
us to conduct costly studies or increase the time for us to become profitable. For example, any labeling approved for any of our product candidates may include a restriction on
the term of its use, or it may not include one or more of our intended indications.
Our product candidates will also be subject to ongoing FDA requirements for the labeling, packaging, storage, advertising, promotion, record-keeping, and submission
of safety and other post-market information on the cell based therapy. New issues may arise during a product lifecycle that did not exist, or were unknown, at the time of product
approval, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured. Since approved products,
manufacturers, and manufacturers’ facilities are subject to continuous review and periodic inspections, these new issues post-approval may result in voluntary actions by us or
may result in a regulatory agency imposing restrictions on that product or us, including requiring withdrawal of the product from the market or for use in a clinical study. If our
product candidates fail to comply with applicable regulatory requirements, such as good manufacturing practices, a regulatory agency may:
● issue warning letters;
● require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions,
and penalties for noncompliance;
● impose other civil or criminal penalties;
● suspend regulatory approval;
● suspend any ongoing clinical trials;
● refuse to approve pending applications or supplements to approved applications filed by us;
● impose restrictions on operations, including costly new manufacturing requirements; or
● seize or detain products or require a product recall.
If we or current or future collaborators, manufacturers, or service providers fail to comply with healthcare laws and regulations, we or they could be subject to
enforcement actions and substantial penalties, which could affect our ability to develop, market and sell our products and may harm our reputation.
Although we do not currently have any products on the market, once our therapeutic candidates or clinical trials are covered by federal health care programs, we will be
subject to additional healthcare statutory and regulatory requirements and enforcement by the federal, state and foreign governments of the jurisdictions in which we conduct our
business. Healthcare providers, physicians and third party payors play a primary role in the recommendation and prescription of any therapeutic candidates for which we obtain
marketing approval. Our future arrangements with third party payors and customers may expose us to broadly applicable fraud and abuse, transparency, and other healthcare
laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our therapeutic candidates for
which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include, but are not limited to, the following:
● the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons from soliciting, receiving, offering or providing remuneration, directly or
indirectly, to induce either the referral of an individual for a healthcare item or service, or the purchasing or ordering of an item or service, for which payment may
be made, in whole or in part, under a federal healthcare program such as Medicare or Medicaid;
● federal civil and criminal false claims laws and civil monetary penalty laws, such as the U.S. federal FCA, which imposes criminal and civil penalties, including
through civil whistleblower or qui tam actions, against, individuals or entities for knowingly presenting or causing to be presented, to the federal government,
claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. In
addition, the government may assert that a claim including items and services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or
fraudulent claim for purposes of the FCA;
● HIPAA includes a fraud and abuse provision referred to as the HIPAA All-Payor Fraud Law, which imposes criminal and civil liability for executing a scheme to
defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in
connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need
to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
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● HIPAA, as amended by HITECH, and its implementing regulations, which impose obligations on certain covered entity healthcare providers, health plans, and
healthcare clearinghouses as well as their business associates that perform certain services involving the use or disclosure of individually identifiable health
information, including mandatory contractual terms, with respect to safeguarding, the privacy, security, and transmission of individually identifiable health
information, and require notification to affected individuals and regulatory authorities of certain breaches of security of individually identifiable health information;
● federal and state consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;
● the federal Physician Payment Sunshine Act and the implementing regulations, also referred to as “Open Payments,” issued under the ACA, which require that
manufacturers of pharmaceutical and biological drugs reimbursable under Medicare, Medicaid, and Children’s Health Insurance Programs report to the Department
of Health and Human Services all consulting fees, travel reimbursements, research grants, and other payments, transfers of value or gifts made to physicians and
teaching hospitals with limited exceptions; and
● analogous state laws and regulations, such as, state anti-kickback and false claims laws potentially applicable to sales or marketing arrangements and claims
involving healthcare items or services reimbursed by nongovernmental third party payors, including private insurers; and some state laws require pharmaceutical
companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal
government in addition to requiring drug and cell based therapy manufacturers to report information related to payments to physicians and other healthcare
providers or marketing expenditures, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from
each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack
of applicable precedent and regulations. Federal and state enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare
providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time-and
resource-consuming and can divert management’s attention from the business. Any such investigation or settlement could increase our costs or otherwise have an adverse effect
on our business.
Ensuring that our business arrangements with third-parties comply with applicable healthcare laws and regulations could involve substantial costs. If our operations are
found to be in violation of any such requirements, we may be subject to penalties, including civil or criminal penalties, monetary damages, the curtailment or restructuring of our
operations, or exclusion from participation in government contracting, healthcare reimbursement or other government programs, including Medicare and Medicaid, any of which
could adversely affect our financial results. Although effective compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, these
risks cannot be entirely eliminated. Any action against us for an alleged or suspected violation could cause us to incur significant legal expenses and could divert our
management’s attention from the operation of our business, even if our defense is successful. In addition, achieving and sustaining compliance with applicable laws and
regulations may be costly to us in terms of money, time and resources.
Any cell based therapies we develop may become subject to unfavorable pricing regulations, third party coverage and reimbursement practices or healthcare reform
initiatives, thereby harming our business.
The regulations that govern marketing approvals, pricing, coverage and reimbursement for new drugs and cell based therapies vary widely from country to country.
Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing
approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted.
Although we intend to monitor these regulations, our programs are currently in earlier stages of development and we will not be able to assess the impact of price regulations for
a number of years. As a result, we might obtain regulatory approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch
of the product and negatively impact the revenues we are able to generate from the sale of the product in that country.
Our ability to commercialize any products successfully also will depend in part on the extent to which coverage and reimbursement for these products and related
treatments will be available from government health administration authorities, private health insurers and other organizations. However, there may be significant delays in
obtaining coverage for newly-approved cell based therapies. Moreover, eligibility for coverage does not necessarily signify that a cell based therapy will be reimbursed in all
cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution costs. Also, interim payments for new cell based therapy if applicable,
may be insufficient to cover our costs and may not be made permanent. Thus, even if we succeed in bringing one or more products to the market, these products may not be
considered medically necessary or cost-effective, and the amount reimbursed for any products may be insufficient to allow us to sell our products on a competitive basis.
Because our programs are in earlier stages of development, we are unable at this time to determine their cost effectiveness, or the likely level or method of reimbursement. In
addition, obtaining coverage and reimbursement approval of a product from a government or other third-party payor is a time-consuming and costly process that could require us
to provide to each payor supporting scientific, clinical and cost-effectiveness data for the use of our product on a payor-by-payor basis, with no assurance that coverage and
adequate reimbursement will be obtained. A payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Further,
one payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage for the product. Adequate third-party reimbursement
may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. If reimbursement is not available
or is available only at limited levels, we may not be able to successfully commercialize any product candidate that we successfully develop.
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Increasingly, the third party payors who reimburse patients or healthcare providers, such as government and private insurance plans, are seeking greater upfront
discounts, additional rebates and other concessions to reduce the prices for pharmaceutical products. If the price we are able to charge for any products we develop, or the
reimbursement provided for such products, is inadequate in light of our development and other costs, our return on investment could be adversely affected.
We currently expect that certain drugs we develop may need to be administered under the supervision of a physician on an outpatient basis. Under currently applicable
U.S. law, certain drugs that are not usually self-administered (including injectable cell based therapies) may be eligible for coverage under Medicare through Medicare Part B.
Specifically, Medicare Part B coverage may be available for eligible beneficiaries when the following, among other requirements have been satisfied:
● the product is reasonable and necessary for the diagnosis or treatment of the illness or injury for which the product is administered according to accepted standards
of medical practice;
● the product is typically furnished incident to a physician’s services;
● the indication for which the product will be used is included or approved for inclusion in certain Medicare-designated pharmaceutical compendia (when used for an
off-label use); and
● the product has been approved by the FDA.
Average prices for cell therapies may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future
relaxation of laws that presently restrict imports of drugs and cell based therapy from countries where they may be sold at lower prices than in the U.S. Reimbursement rates
under Medicare Part B would depend in part on whether the newly approved product would be eligible for a unique billing code. Self-administered, outpatient drugs and cell
based therapies are typically reimbursed under Medicare Part D, and cell based therapies that are administered in an inpatient hospital setting are typically reimbursed under
Medicare Part A under a bundled payment. It is difficult for us to predict how Medicare coverage and reimbursement policies will be applied to our products in the future and
coverage and reimbursement under different federal healthcare programs are not always consistent. Medicare reimbursement rates may also reflect budgetary constraints placed
on the Medicare program.
Third party payors often rely upon Medicare coverage policies and payment limitations in setting their own reimbursement rates. These coverage policies and
limitations may rely, in part, on compendia listings for approved therapeutics. Our inability to promptly obtain relevant compendia listings, coverage, and adequate
reimbursement from both government-funded and private payors for new cell based therapies that we develop and for which we obtain regulatory approval could have a material
adverse effect on our operating results, our ability to raise capital needed to commercialize products and our financial condition.
We expect that these and other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and lower reimbursement,
and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government-funded
programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from
being able to generate revenue, attain profitability or commercialize our cell based therapies, once marketing approval is obtained.
We believe that the efforts of governments and third party payors to contain or reduce the cost of healthcare and legislative and regulatory proposals to broaden the
availability of healthcare will continue to affect the business and financial condition of pharmaceutical and biopharmaceutical companies. A number of legislative and regulatory
changes in the healthcare system in the U.S. and other major healthcare markets have been proposed, and such efforts have expanded substantially in recent years. These
developments could, directly or indirectly, affect our ability to sell our products, if approved, at a favorable price. For example, in the United States, in 2010, the U.S. Congress
passed the ACA, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of health spending, enhance remedies against fraud and abuse,
add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional policy reforms.
Among the provisions of the ACA addressing coverage and reimbursement of pharmaceutical products, of importance to our potential therapeutic candidates are the following:
● increases to pharmaceutical manufacturer rebate liability under the Medicaid Drug Rebate Program due to an increase in the minimum basic Medicaid rebate on
most branded prescription drugs and the application of Medicaid rebate liability to drugs used in risk-based Medicaid managed care plans;
● the expansion of the 340B Drug Pricing Program to require discounts for “covered outpatient drugs” sold to certain children’s hospitals, critical access hospitals,
freestanding cancer hospitals, rural referral centers, and sole community hospitals;
● requirements imposed on pharmaceutical companies are required to offer discounts on brand-name cell based therapy to patients who fall within the Medicare Part
D coverage gap, commonly referred to as the “Donut Hole”;
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● requirements imposed on pharmaceutical companies to pay an annual non-tax-deductible fee to the federal government based on each company’s market share of
prior year total sales of branded drugs to certain federal healthcare programs, such as Medicare, Medicaid, Department of Veterans Affairs and Department of
Defense; and
● for products classified as biologics, marketing approval for a follow-on biologic product may not become effective until 12 years after the date on which the
reference innovator biologic product was first licensed by the FDA, with a possible six-month extension for pediatric products. After this exclusivity ends, it may
be possible for biosimilar manufacturers to enter the market, which is likely to reduce the pricing for the innovator product and could affect our profitability if our
products are classified as biologics.
Separately, pursuant to the health reform legislation and related initiatives, the Centers for Medicare and Medicaid Services, or CMS, is working with various healthcare
providers to develop, refine, and implement Accountable Care Organizations, or ACOs, and other innovative models of care for Medicare and Medicaid beneficiaries, including
the Bundled Payments for Care Improvement Initiative, the Comprehensive Primary Care Initiative, the Duals Demonstration, and other models. The continued development and
expansion of ACOs and other innovative models of care will have an uncertain impact on any future reimbursement we may receive for approved therapeutics administered by
these organizations.
The healthcare industry is heavily regulated in the U.S. at the federal, state, and local levels, and our failure to comply with applicable requirements may subject us to
penalties and negatively affect our financial condition.
As a healthcare company, our operations, clinical trial activities and interactions with healthcare providers may be subject to extensive regulation in the U.S.,
particularly if we receive FDA approval for any of its products in the future. For example, if we receive FDA approval for a product for which reimbursement is available under
a federal healthcare program (e.g., Medicare, Medicaid), it would be subject to a variety of federal laws and regulations, including those that prohibit the filing of false or
improper claims for payment by federal healthcare programs (e.g. the federal False Claims Act), prohibit unlawful inducements for the referral of business reimbursable by
federal healthcare programs (e.g. the federal Anti-Kickback Statute), and require disclosure of certain payments or other transfers of value made to U.S.-licensed physicians and
teaching hospitals or Open Payments. We are not able to predict how third parties will interpret these laws and apply applicable governmental guidance and may challenge our
practices and activities under one or more of these laws. If our past or present operations are found to be in violation of any of these laws, we could be subject to civil and
criminal penalties, which could hurt our business, our operations and financial condition.
The federal Anti-Kickback Statute prohibits, among other things, any person or entity, from knowingly and willfully offering, paying, soliciting or receiving any
remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of
any item or service reimbursable under Medicare, Medicaid or other federal healthcare programs. The term remuneration has been interpreted broadly to include anything of
value. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary
managers on the other. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution. The exceptions and safe
harbors are drawn narrowly and practices that involve remuneration that may be alleged to be intended to induce prescribing, purchasing or recommending may be subject to
scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does
not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative
review of all of its facts and circumstances. Our practices may not in all cases meet all of the criteria for protection under a statutory exception or regulatory safe harbor.
Additionally, the intent standard under the Anti-Kickback Statute was amended by the ACA, to a stricter standard such that a person or entity no longer needs to have
actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the ACA codified case law that a claim including items or
services resulting from a violation of the federal Anti- Kickback Statute constitutes a false or fraudulent claim for purposes of the federal FCA.
The civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a
claim to a federal healthcare program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.
Federal false claims and false statement laws, including the federal FCA, prohibit, among other things, any person or entity from knowingly presenting, or causing to be
presented, a false or fraudulent claim for payment to, or approval by, the federal healthcare programs, including Medicare and Medicaid, or knowingly making, using, or causing
to be made or used a false record or statement material to a false or fraudulent claim to the federal government. A claim includes “any request or demand” for money or property
presented to the U.S. government. For instance, historically, pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free
product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be
submitted because of the companies’ marketing of the product for unapproved, off-label, and thus generally non-reimbursable, uses.
HIPAA prohibits, among other offenses, knowingly and willfully executing a scheme to defraud any health care benefit program, including private payors, or falsifying,
concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for items or services
under a health care benefit program. To the extent that we act as a business associate to a healthcare provider engaging in electronic transactions, we may also be subject to the
privacy and security provisions of HIPAA, as amended by HITECH, which restricts the use and disclosure of patient-identifiable health information, mandates the adoption of
standards relating to the privacy and security of patient-identifiable health information, and requires the reporting of certain security breaches to healthcare provider customers
with respect to such information. Additionally, many states have enacted similar laws that may impose more stringent requirements on entities like ours. Failure to comply with
applicable laws and regulations could result in substantial penalties and adversely affect our financial condition and results of operations.
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Many states also have similar fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several
states, apply regardless of the payor. Additionally, to the extent that our product is sold in a foreign country, we may be subject to similar foreign laws.
Our products, once approved, may be eligible for coverage under Medicare and Medicaid, among other government healthcare programs. Accordingly, we may be
subject to a number of obligations based on their participation in these programs, such as a requirement to calculate and report certain price reporting metrics to the government,
such as average sales price (ASP) and best price. Penalties may apply in some cases when such metrics are not submitted accurately and timely. Further, these prices for drugs
may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict
imports of drugs and biological products from countries where they may be sold at lower prices than in the United States. It is difficult to predict how Medicare coverage and
reimbursement policies will be applied to our products in the future and coverage and reimbursement under different federal healthcare programs are not always consistent.
Medicare reimbursement rates may also reflect budgetary constraints placed on the Medicare program.
In order to distribute products commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors of drug and
biological products in a state, including, in certain states, manufacturers and distributors who ship products into the state even if such manufacturers or distributors have no place
of business within the state. Some states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including
some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. Several states have
enacted legislation requiring pharmaceutical and biotechnology companies to establish marketing compliance programs, file periodic reports with the state, make periodic public
disclosures on sales, marketing, pricing, clinical trials and other activities, and/or register their sales representatives, as well as to prohibit pharmacies and other healthcare
entities from providing certain physician prescribing data to pharmaceutical and biotechnology companies for use in sales and marketing, and to prohibit certain other sales and
marketing practices. All of our activities are potentially subject to federal and state consumer protection and unfair competition laws.
If our operations are found to be in violation of any of the federal and state healthcare laws described above or any other governmental regulations that apply to us, we
may be subject to penalties, including without limitation, civil, criminal and/or administrative penalties, damages, fines, disgorgement, exclusion from participation in
government programs, such as Medicare and Medicaid, injunctions, private “qui tam” actions brought by individual whistleblowers in the name of the government, or refusal to
allow us to enter into government contracts, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or
restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
Our ability to obtain reimbursement or funding from the federal government may be impacted by possible reductions in federal spending.
U.S. federal government agencies currently face potentially significant spending reductions. The Budget Control Act of 2011, or the BCA, established a Joint Select
Committee on Deficit Reduction, which was tasked with achieving a reduction in the federal debt level of at least $1.2 trillion. That committee did not draft a proposal by the
BCA’s deadline. As a result, automatic cuts, referred to as sequestration, in various federal programs were scheduled to take place, beginning in January 2013, although the
American Taxpayer Relief Act of 2012 delayed the BCA’s automatic cuts until March 1, 2013. While the Medicare program’s eligibility and scope of benefits are generally
exempt from these cuts, Medicare payments to providers and Part D health plans are not exempt. The BCA did, however, provide that the Medicare cuts to providers and Part D
health plans would not exceed two percent. President Obama issued the sequestration order on March 1, 2013, and cuts went into effect on April 1, 2013. Additionally, the
Bipartisan Budget Act of 2015 extended sequestration for Medicare through fiscal year 2027.
The U.S. federal budget remains in flux, which could, among other things, cut Medicare payments to providers. The Medicare program is frequently mentioned as a
target for spending cuts. The full impact on our business of any future cuts in Medicare or other programs is uncertain. In addition, we cannot predict any impact President
Trump’s administration and the U.S. Congress may have on the federal budget. If federal spending is reduced, anticipated budgetary shortfalls may also impact the ability of
relevant agencies, such as the FDA or the National Institutes of Health, to continue to function at current levels. Amounts allocated to federal grants and contracts may be
reduced or eliminated. These reductions may also impact the ability of relevant agencies to timely review and approve drug research and development, manufacturing, and
marketing activities, which may delay our ability to develop, market and sell any products we may develop.
Risks Related to Doing Business in China
Trading in Avalon’s securities may be restricted under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or fully
investigate Avalon’s auditors, and as a result, U.S. national securities exchanges, such as Nasdaq, may determine to delist Avalon’s securities.
The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. According to the HFCA Act, if the SEC determines that
Avalon has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021,
the SEC will prohibit Avalon’s securities from being traded on a national securities exchange or in the over-the-counter trading market in the United States.
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On December 16, 2021, the PCAOB issued a Determination Report which reported that the PCAOB is unable to inspect or investigate completely registered public
accounting firms headquartered in: (1) mainland China of the People’s Republic of China, because of a position taken by one or more authorities in mainland China; and (2)
Hong Kong, a Special Administrative Region of the PRC, because of a position taken by one or more authorities in Hong Kong.
Avalon’s auditor is Marcum LLP, based in New York, New York. Marcum LLP registered with the PCAOB and is subject to laws in the United States pursuant to which
the PCAOB conducts annual inspections to assess their compliance with the applicable professional standards. As the firm is located in the United States, the PCAOB has been
able to conduct inspections of Marcum LLP. In addition, Marcum LLP is not among the PCAOB registered public accounting firms registered in mainland China or Hong Kong
that are subject to PCAOB’s determination on December 16, 2021.
Although the audit reports of Avalon are prepared by U.S. auditors that are subject to inspection by the PCAOB, the PCAOB is currently unable to conduct inspections
over the audit work of Avalon’s independent registered public accounting firms with respect to Avalon’s respective operations in mainland China without the approval of certain
Chinese authorities. Also, there is no guarantee that future audit reports will be prepared by auditors that are completely inspected by the PCAOB and, as such, future investors
may be deprived of such inspections, which could result in limitations or restrictions to Avalon’s access of the U.S. capital markets.
Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control
procedures, which may be addressed as part of the inspection process to improve future audit quality. However, the PCAOB is currently unable to inspect an auditor’s audit work
related to a company’s operations in China where such documentation of the audit work is located in China. As a result, Avalon’s investors may be deprived of the benefits of the
PCAOB’s oversight of auditors that are located in China through such inspections.
On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. Avalon
will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is
assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above.
On June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive
non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two, which would shorten the timeframe before Avalon’s shares may be
delisted and before the trading in Avalon’s shares is prohibited.
On November 5, 2021, the SEC approved Rule 6100 adopted by the PCAOB to determine its inability to inspect or investigate registered firms completely under the
HFCA Act. This rule establishes the framework for the PCAOB to make these required determinations. The trading in Avalon’s securities may be prohibited under the HFCA
Act if the PCAOB subsequently determines Avalon’s audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely pursuant to Rule 6100,
and as a result, U.S. national securities exchanges, such as Nasdaq, may determine to delist Avalon’s securities. Such a delisting would likely cause the value of such securities to
significantly decline or become worthless.
The SEC may propose additional regulatory or legislative requirements or guidance that could impact us if our auditor is not subject to PCAOB inspection. For
example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks
from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions
that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of
the HFCA Act. However, some of the recommendations were more stringent than the HFCA Act. For example, if a company was not subject to PCAOB inspection, the report
recommended that the transition period before a company would be delisted would end on January 1, 2022.
The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the
recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG
recommendations will be adopted. The implications of this possible regulation in addition to the requirements of the HFCA Act are uncertain. Although Avalon is currently not
subject to the HFCA Act, any uncertainty of its applicability to Avalon, for example if Avalon switched to using a PRC-based auditing firm, could cause the market price of
Avalon’s securities to be materially and adversely affected and could cause Avalon’s securities to be delisted or prohibited from being traded “over-the-counter”. If Avalon’s
securities are unable to be listed on another securities exchange, such a delisting would substantially impair your ability to sell or purchase Avalon’s securities when you wish to
do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of Avalon’s securities.
The PCAOB’s inability to conduct inspections in China prevents it from fully evaluating the audits and quality control procedures of our independent registered public
accounting firm. As a result, we and investors in our securities are deprived of the full benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections
of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as
compared to audit work located solely outside of China that are fully subject to the PCAOB inspections, which could cause investors and potential investors in our stock to lose
confidence in our audit procedures and reported financial information and the quality of our financial statements.
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Our business might be subject to various evolving PRC laws and regulations regarding data privacy and cybersecurity. Failure of cybersecurity and data security compliance
could subject us to penalties, damage our reputation and brand and harm our business and results of operations.
Our PRC subsidiaries face challenges with respect to data privacy and regulations since those subsidiaries are currently engaging in providing outsourced and
customized healthcare services to the rapidly changing health care industry, which could consist of personal information that will be analyzed and used to healthcare services.
Regulatory requirements on cybersecurity and data privacy in China are constantly evolving and can be subject to varying interpretations or significant changes,
resulting in uncertainties about the scope of our responsibilities in that regard. On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the
PRC Data Security Law, which took effect in September 2021. The Data Security Law provides for a security review procedure for the data activities that may affect national
security. Furthermore, Measures for Cybersecurity Review, which became effective on June 1, 2020, set forth the cybersecurity review mechanism for critical information
infrastructure operators, and provided that critical information infrastructure operators who intend to purchase internet products and services that affect or may affect national
security shall be subject to a cybersecurity review. On July 10, 2021, the Cyberspace Administration of China published the Measures for Cybersecurity Review (Revised Draft
for Comments), which further restates and expands the applicable scope of the cybersecurity review. Pursuant to the draft measures, critical information infrastructure operators
that intend to purchase internet products and services and data processing operators engaging in data processing activities that affect or may affect national security must be
subject to the cybersecurity review. On December 28, 2021, the Cyberspace Administration of China, together with twelve other PRC regulatory authorities jointly revised and
issued the Cyber Security Review Measures (“the Review Measures”), which has been effective since February 15, 2022. The Review Measures provides, among others, (i) the
purchase of cyber products and services by critical information infrastructure operators (the “CIIOs”) and the network platform operators (the “Network Platform Operators”)
which engage in data processing activities that affects or may affect national security shall be subject to the cybersecurity review by the Cybersecurity Review Office, the
department which is responsible for the implementation of cybersecurity review under the CAC; and (ii) the Network Platform Operators with personal information data of more
than one million users that seek for listing in a foreign country are obliged to apply for a cybersecurity review by the Cybersecurity Review Office. We believe that we and our
PRC subsidiaries will not be subject to cybersecurity review with the CAC since (i) we currently do not have over one million users’ personal information and do not anticipate
that we will be collecting over one million users’ personal information in the foreseeable future, which we understand might otherwise subject us to the Review Measures; (ii)
our PRC subsidiary’s business operations do not involve any Critical Information Infrastructure such as any important network facilities or information systems of the important
industry or field such as public communication and information service, energy, communications, water conservation, finance, public services, e-government affairs and national
defense science, which may endanger national security, people’s livelihood and public interest of China in case of damage, function loss or data leakage; and (iii) we listed our
Ordinary Shares on the Nasdaq before the effective date of the Review Measures and the requirement of Article 7 of the Review Measures that “Network Platform Operators
with personal information of more than one million users that seek for listing in a foreign country are obliged to apply for a cybersecurity review by the Cybersecurity Review
Office” should not be applicable to us or our PRC subsidiaries. However, the Review Measures do not provide any explanation or interpretation of “overseas listing” or “affect or
may affect national security”, and Chinese government may have broad discretion in interpreting and enforcing these laws and regulations. Even though our current data
activities do not fall under the scope of cybersecurity review, it is also uncertain whether the cybersecurity review will be further expanded. Failure of cybersecurity and data
security compliance could subject our PRC subsidiaries to penalties, damage their reputation and brand, and harm their business and results of operations.
In addition, regulation requirements on personal information protection in China are also constantly evolving and can be subject to varying interpretations or significant
changes, resulting in uncertainties about the scope of our responsibilities in that regard. On August 20, 2021, the Standing Committee of the National People’s Congress
promulgated the PRC Personal Information Protection Law, which took effect in November 2021. The Personal Information Protection Law provides that any entity involving
processing of personal information (“Personal Information Processer”) shall take various measures to prevent the disclosure, modification or losing of the personal information
processed by such entity, including, but not limited to, formulating a related internal management system and standard of operation, conducting classified management of
personal information, taking safety technology measures to encrypt and de-identify the processed personal information, providing regular safety training and education for staff
and formulating a personal information safety emergency accident plan. The Personal Information Protection Law further provides that a Personal Information Processer shall
conduct a prior evaluation of the impact of personal information protection before the occurrence of various situations, including, but not limited to, processing of sensitive
personal information (personal information that, once leaked or illegally used, may lead to discrimination against an individual or serious harm to an individual’s personal or
property safety, including information on an individual’s race, ethnicity, religious beliefs, personal biological characteristics, medical health, financial accounts, personal
whereabouts), using personal information to make automated decisions and providing personal information to any overseas entity. Our PRC subsidiaries’ businesses involve the
processing of personal information of medical related health, which may be deemed as sensitive personal information. If we do not take measures to review and improve our
mechanisms in protecting personal information after the new Personal Information Protection Law takes effect, failure of personal information protection compliance could
subject us to penalties, damage its reputation and brand and harm its business and results of operations.
If we become directly subject to the recent scrutiny, criticism and negative publicity involving certain U.S.-listed Chinese companies, we may have to expend
significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your
investment in our stock, especially if such matter cannot be addressed and resolved quickly.
Recently, U.S. public companies that have a significant portion of their operations in China, particularly companies like us, have been the subject of intense scrutiny,
criticism and negative publicity by investors, short sellers, financial commentators and regulatory agencies, such as the United States Securities and Exchange Commission.
Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, inadequate corporate governance policies or a
lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed
Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC
enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what affect this sector-wide scrutiny, criticism and negative
publicity will have on our company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or
untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation could be costly and time consuming and distract
our management from growing our company. If such allegations are not proven to be groundless, our company and business operations will be severely impacted and your
investment in our stock could be rendered worthless.
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Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for
our products and damage our business.
Presently, we generate our revenue in China although we intend to pursue various opportunities in the United States and our headquarters is based in the United States.
Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The PRC
economy differs from the economies of most developed countries in many respects, including:
● the higher level of government involvement;
● the early stage of development of the market-oriented sector of the economy;
● the rapid growth rate;
● the higher level of control over foreign exchange; and
● the allocation of resources.
As the PRC economy has been transitioning from a planned economy to a more market-oriented economy, the PRC government has implemented various measures to
encourage economic growth and guide the allocation of resources. While these measures may benefit the overall PRC economy, they may also have a negative effect on us or the
healthcare industry in general.
Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government
continues to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and imposing policies that impact particular industries or companies in different ways.
Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of
new healthcare investments and expenditures in China, which in turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our
business and prospects.
Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.
We conduct a significant portion of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally subject to laws and regulations
applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court
decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections
afforded to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and
rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to you and us. In addition,
any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. In addition, all of our executive officers and almost
all of our directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could
be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiaries.
The PRC government exerts substantial influence over the manner in which Avalon must conduct its business activities and Avalon may face the risk that the future
regulatory actions by the PRC government could significantly limit or completely hinder Avalon’s ability to offer future securities to investors.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation. Avalon’s ability to
operate in China may be harmed by changes in its laws and regulations. Avalon’s operations in China are currently in material compliance with all applicable legal and
regulatory requirements. However, the central or local governments of PRC in which Avalon operates may impose new, stricter regulations or interpretations of existing
regulations that would require additional expenditures and efforts on Avalon’s and its existing PRC subsidiaries’ part to ensure their compliance with such regulations or
interpretations.
Because Avalon is the issuer of the common stock listed on Nasdaq and is a Delaware operating and holding company, no approval or permission is required under current
applicable PRC laws and regulations for any future issuances of Avalon securities to non-PRC investors. Nevertheless, according to the Opinions of the General Office of the
CPC Central Committee and the General Office of the State Council on Strictly Cracking Down on Illegal Securities Activities in accordance with the Law (“Opinions”), the
PRC intends to establish and improve the system of extraterritorial application of the PRC securities laws. Although the details of the extraterritorial application of the PRC
securities laws are still scarce as of the date of this proxy statement, PRC laws, regulations and/or their interpretations may change in the future, such that they may have an
extraterritorial effect, whereby Avalon may be required to obtain such approval or permission under PRC laws and regulations. In such event, Avalon may face the risk that these
future regulatory actions by the PRC government could significantly limit or completely hinder Avalon’s ability to offer future securities to investors. Under this scenario,
Avalon’s ability to raise capital and thereby execute its business plan would be significantly limited or completely hindered, which would likely result in a material change in
Avalon’s operations and the value of Avalon’s common stock, including that it could cause the value of such securities to significantly decline or become worthless. In addition,
Avalon faces the risk that Avalon may not currently ascertain, and therefore may not actually have, all requisite permissions to offer securities, which would likely result in a
material change in Avalon’s operations and/or value of Avalon’s common stock, including that it could cause the value of such securities to significantly decline or become
worthless.
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Under the current Enterprise Income Tax, or EIT, law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax
consequences to us and our non- PRC stockholders.
We are a holding company incorporated under the laws of Delaware. We conduct substantially all of our business through our wholly-owned and majority-owned
subsidiaries, and we derive all of our income from these entities. Prior to January 1, 2008, dividends derived by foreign enterprises from business operations in China were not
subject to the Chinese enterprise income tax. However, such tax exemption ceased as of January 1, 2008 and thereafter with the effectiveness of the new EIT law.
Under the EIT law, if we are not deemed to be a “resident enterprise” for Chinese tax purposes, a withholding tax at the rate of 10% would be applicable to any
dividends paid by our Chinese subsidiaries to us. However, if we are deemed to be a “resident enterprise” established outside of China whose “place of effective management” is
located in China, we would be classified as a resident enterprise for Chinese tax purposes and thus would be subject to an enterprise income tax rate of 25% on all of our income
on a worldwide basis.
The regulations promulgated pursuant to the EIT law define the term “place of effective management” as “establishments that carry out substantial and overall
management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The State Administration of Taxation issued a
SAT Circular 82 on April 22, 2009, which provides that the “place of effective management” of a Chinese-controlled overseas-incorporated enterprise is located in China if the
following requirements are satisfied: (i) the senior management and core management departments in charge of its daily operations function are mainly located in the PRC; (ii)
its financial and human resources decisions are subject to determination or approval by persons or bodies located in the PRC; (iii) its major assets, accounting books, company
seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (iv) no less than half of the enterprise’s directors or senior management
with voting rights reside in the PRC. SAT Circular 82 applies only to overseas registered enterprises controlled by PRC enterprises, not to those controlled by PRC individuals. If
our non-PRC incorporated entities are deemed PRC tax residents, such entities would be subject to PRC tax under the EIT law.
We have analyzed the applicability of the EIT law and related regulations, and for each of the applicable periods presented, we have not accrued for PRC tax on such
basis. In addition, although under the EIT law and the related regulations dividends paid to us by our PRC subsidiaries would qualify as “tax-exempted income,” we cannot
assure you that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet
issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. As a result of
such changes, our historical operating results will not be indicative of our operating results for future periods and the value of our shares of common stock may be adversely
affected. We are actively monitoring the possibility of “resident enterprise” treatment and are evaluating appropriate organizational changes to avoid this treatment, to the extent
possible.
We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations
implemented on September 8, 2006.
The recent PRC Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors also governs the approval process by which a PRC company
may participate in an acquisition of its assets or its equity interests. Depending on the structure of the transaction, the new regulation will require the Chinese parties to make a
series of applications and supplemental applications to the government agencies. In some instances, the application process may require the presentation of economic data
concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction.
Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with the new regulations is
likely to be more time consuming and expensive than in the past and the government can now exert more control over the combination of two businesses. Accordingly, due to the
new regulation, our ability to engage in business combination transactions is extremely complicated, time consuming and expensive, and we may not be able to negotiate a
transaction that is acceptable to our stockholders or sufficiently protect their interests in a transaction.
The new regulation allows PRC government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction
may have to submit to the Ministry of Commerce, or MOFCOM, and the other government agencies an appraisal report, an evaluation report and the acquisition agreement, all
of which form part of the application for approval, depending on the structure of the transaction. The regulations also prohibit a transaction at an acquisition price obviously
lower than the appraised value of the Chinese business or assets and in certain transaction structures, require that consideration must be paid within defined periods, generally not
in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration,
holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts,
nominees and similar entities are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction on financial terms
that satisfy our investors and protect our stockholders’ economic interests.
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We may be subject to fines and legal sanctions if we or our Chinese employees fail to comply with PRC regulations relating to employee stock options granted by
overseas listed companies to PRC citizens.
On December 25, 2006, the People’s Bank of China issued the Administration Measures on Individual Foreign Exchange Control, and its Implementation Rules were
issued by the State Administration of Foreign Exchange, or SAFE, on January 5, 2007. Both took effect on February 1, 2007. Under these regulations, all foreign exchange
matters involved in an employee stock holding plan, stock option plan or similar plan in which PRC citizens’ participation requires approval from the SAFE or its authorized
branch. On March 28, 2007, the SAFE issued the Application Procedure for Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock
Holding Plans or Stock Option Plans of Overseas Listed Companies, or Notice 78. Under Notice 78, PRC individuals who participate in an employee stock option holding plan
or a stock option plan of an overseas listed company are required, through a PRC domestic agent or PRC subsidiary of the overseas listed company, to register with the SAFE
and complete certain other procedures. If we and our Chinese employees are granted shares or stock options pursuant to our share incentive plan they would be subject to Notice
78. However, in practice, there are significant uncertainties with regard to the interpretation and implementation of Notice 78. We are committed to complying with the
requirements of Notice 78. However, we cannot provide any assurance that we or our Chinese employees will be able to qualify for or obtain any registration required by Notice
78. In particular, if we and/or our Chinese employees fail to comply with the provisions of Notice 78, we and/or our Chinese employees may be subject to fines and legal
sanctions imposed by the SAFE or other PRC government authorities, as a result of which our business operations and employee option plans could be materially and adversely
affected.
The new M&A Rules establish more complex procedures for some acquisitions of Chinese companies by foreign investor which could make it more difficult for us to
pursue growth through acquisitions in China.
The New M&A Rules that became effective on September 8, 2006 established additional procedures and requirements that could make merger and acquisition activities
by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change- of-
control transaction in which a foreign investor takes control of a PRC domestic enterprise. Complying with the requirements of the M&A Rules to complete such transactions
could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such
transactions, which could materially adversely affect our ability to grow our business through acquisitions in China.
Government control of currency conversion and future movements in exchange rates may adversely affect our operations and financial results.
The value of the Renminbi, or 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. Foreign exchange transactions continue to be
subject to significant foreign exchange controls and require the approval of the State Administration of Foreign Exchange in China. These limitations could affect our ability to
obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures.
The Chinese government controls its foreign currency reserves through restrictions on imports and conversion of RMB into foreign currency. In July 2005, the Chinese
government has adjusted its exchange rate policy from “Fixed Rate” to “Floating Rate”. Between July 2005 to December 2017, the exchange rate between the RMB and the U.S.
dollar appreciated from RMB1.00 to $0.1205 to RMB1.00 to $0.1513. Any significant appreciation of the RMB may adversely affect our operations and financial results.
Risks Related to Our Securities
If we are unable to maintain listing of our securities on the Nasdaq Capital Market or another reputable stock exchange, it may be more difficult for our stockholders
to sell their securities.
Nasdaq requires listing issuers to comply with certain standards in order to remain listed on its exchange. If, for any reason, Nasdaq should delist our securities from
trading on its exchange and we are unable to obtain listing on another reputable national securities exchange, a reduction in some or all of the following may occur, each of
which could materially adversely affect our stockholders.
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On February 9, 2022, the Company received notice from The Nasdaq Stock Market (“Nasdaq”) that the closing bid price for the Company’s common stock had been
below $1.00 per share for the previous 30 consecutive business days, and that the Company is therefore not in compliance with the minimum bid price requirement for continued
inclusion on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Rule”). Nasdaq’s notice has no immediate effect on the listing or trading of the Company’s
common stock on The Nasdaq Capital Market. The notice indicates that the Company will have 180 calendar days, until August 8, 2022, to regain compliance with this
requirement. The Company can regain compliance with the $1.00 minimum bid listing requirement if the closing bid price of its common stock is at least $1.00 per share for a
minimum of ten (10) consecutive business days during the 180-day compliance period. If the Company does not regain compliance during the initial compliance period, it may
be eligible for additional time to regain compliance. To qualify, the Company will be required to meet the continued listing requirement for market value of its publicly held
shares and all other Nasdaq initial listing standards, except the bid price requirement, and will need to provide written notice to Nasdaq of its intention to cure the deficiency
during the second compliance period by effecting a reverse stock split, if necessary. If the Company is not eligible or it appears to Nasdaq that the Company will not be able to
cure the deficiency during the second compliance period, Nasdaq will provide written notice to the Company that the Company’s common stock will be subject to delisting. In
the event of such notification, the Company may appeal Nasdaq’s determination to delist its securities, but there can be no assurance that Nasdaq would grant the Company’s
request for continued listing. The Company intends to actively monitor the minimum bid price of its common stock and may, as appropriate, consider available options to regain
compliance with the Rule. There can be no assurance that the Company will be able to regain compliance with the Rule or will otherwise be in compliance with other Nasdaq
listing criteria.
A delisting of our common stock is likely to reduce the liquidity of our common stock and may inhibit or preclude our ability to raise additional financing.
The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for our stockholders.
Our common stock has been listed on the Nasdaq Capital Market under the symbol “AVCO” since November 5, 2018. Our common shares were traded previously on
the OTC Market Group Inc.’s Venture Market (the “OTCQB”) since February 22, 2016, under the symbol “AVCO” since October 18, 2016 and “GTHC” prior to October 18,
2016.
The price of our common stock has been, and we expect it to continue to be, volatile. The stock market in general and the market for smaller healthcare companies in
particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be
able to sell your shares of common stock at or above the price you paid for your shares of common stock. The market price for our common stock may be influenced by many
factors, including:
● the success of competitive products or technologies;
● developments related to our existing or any future collaborations;
● regulatory or legal developments in the United States, China and other countries;
● developments or disputes concerning patent applications, issued patents or other proprietary rights;
● the recruitment or departure of key personnel;
● actual or anticipated changes in estimates as to financial results or recommendations by securities analysts;
● variations in our financial results or those of companies that are perceived to be similar to us;
● changes in the structure of healthcare payment systems;
● market conditions in the healthcare, pharmaceutical and biotechnology sectors;
● general economic, industry and market conditions; and
● the other factors described in this “Risk Factors” section.
Future sales of our common stock or securities convertible or exchangeable for our common stock may cause our stock price to decline.
If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the price of our common stock could
decline. The perception in the market that these sales may occur could also cause the price of our common stock to decline.
In addition, as of December 31, 2021, 7,725,000 shares of common stock issuable upon exercise of outstanding stock options, which will become eligible for sale in the
public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 under the Securities Act. If the shares we may issue
from time to time upon exercise of outstanding options are sold, or if it is perceived that they will be sold, by the award recipients in the public market, the price of our common
stock could decline.
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You may experience dilution of your ownership interests because of the future issuance of additional shares of our common or preferred stock or other securities that
are convertible into or exercisable for our common or preferred stock.
In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our stockholders. We are
authorized to issue an aggregate of 490,000,000 shares of common stock and 10,000,000 shares of “blank check” preferred stock. We may issue additional shares of our common
stock or other securities that are convertible into or exercisable for our common stock in connection with hiring or retaining employees, future acquisitions, future sales of our
securities for capital raising purposes, or for other business purposes. The future issuance of any such additional shares of our common stock may create downward pressure on
the trading price of the common stock. We expect we will need to raise additional capital in the near future to meet our working capital needs, and there can be no assurance that
we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with these capital raising efforts, including at a price (or
exercise prices) below the price you paid for your stock.
The ability of our Board of Directors to issue additional stock may prevent or make more difficult certain transactions, including a sale or merger.
Our Board of Directors is authorized to issue up to 10,000,000 shares of preferred stock with powers, rights and preferences designated by it. Shares of voting or
convertible preferred stock could be issued, or rights to purchase such shares could be issued, to create voting impediments or to frustrate persons seeking to effect a takeover or
otherwise gain control of us. The ability of the Board of Directors to issue such additional shares of preferred stock, with rights and preferences it deems advisable, could
discourage an attempt by a party to acquire control of us by tender offer or other means. Such issuances could therefore deprive stockholders of benefits that could result from
such an attempt, such as the realization of a premium over the market price for their shares in a tender offer or the temporary increase in market price that such an attempt could
cause. Moreover, the issuance of such additional shares of preferred stock to persons friendly to the Board of Directors could make it more difficult to remove incumbent
managers and directors from office even if such change were to be favorable to stockholders generally.
We are a “smaller reporting company,” and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our
common stock less attractive to investors.
We are currently a “smaller reporting company”, meaning that we are not an investment company, an asset- backed issuer, or a majority-owned subsidiary of a parent
company that is not a smaller reporting company and have a non-affiliated public float of less than $250.0 million and annual revenues of less than $100.0 million during the
most recently completed fiscal year and no public float or a public float less than $700 million. “Smaller reporting companies” are able to provide simplified executive
compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting
firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in their SEC filings,
including, among other things, only being required to provide two years of audited financial statements in annual reports. Decreased disclosures in our SEC filings due to our
status as a “smaller reporting company” may make it harder for investors to analyze our results of operations and financial prospects.
If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock
price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not
currently have and may never obtain research coverage by securities and industry analysts. If no or few securities or industry analysts commence coverage of us, the trading price
for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us issue an adverse or misleading
opinion regarding us, our business model, our intellectual property or our stock performance, or if our operating results fail to meet the expectations of analysts, our stock price
would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in
turn could cause our stock price or trading volume to decline.
Our officers, directors and principal stockholders own a significant percentage of our stock and will be able to exert significant control over matters subject to
stockholder approval.
Our officers, directors and 5% stockholders and their affiliates beneficially own a significant percentage of our outstanding common stock. As a result, these
stockholders have significant influence and may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections
of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transactions. This concentration of ownership
could delay or prevent any acquisition of our company on terms that other stockholders may desire, and may adversely affect the market price of our common stock.
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We do not anticipate paying dividends on our common stock, and investors may lose the entire amount of their investment.
We have never declared or paid cash dividends on our common stock, and we do not anticipate such a declaration or payment for the foreseeable future.
We expect to use future earnings, if any, to fund business growth. Therefore, stockholders will not receive any funds absent a sale of their shares of common stock. We
cannot assure stockholders of a positive return on their investment when they sell their shares, nor can we assure that stockholders will not lose the entire amount of their
investment.
Applicable regulatory requirements, including those contained in and issued under the Sarbanes-Oxley Act of 2002, may make it difficult for us to retain or attract
qualified officers and directors, which could adversely affect the management of our business and our ability to obtain or retain listing of our common stock on a
national securities exchange.
We may be unable to attract and retain those qualified officers, directors and members of board committees required to provide for effective management because of the
rules and regulations that govern publicly held companies, including, but not limited to, certifications by principal executive officers. The enactment of the Sarbanes-Oxley Act
has resulted in the issuance of a series of related rules and regulations and the strengthening of existing rules and regulations by the SEC, as well as the adoption of new and
more stringent rules by national securities exchanges. The perceived increased personal risk associated with these changes may deter qualified individuals from accepting roles
as directors and executive officers.
Further, some of these changes heighten the requirements for board or committee membership, particularly with respect to an individual’s independence from the
corporation and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable
to attract and retain qualified officers and directors, the management of our business and our ability to obtain or retain listing of our shares of common stock on any national
securities exchange could be adversely affected.
If we cannot satisfy, or continue to satisfy, the initial listing requirements and other rules of the Nasdaq Capital Market, our securities may be delisted, which could
negatively impact the price of our securities and your ability to sell them.
Our common stock has been listed on the Nasdaq Capital Market under the symbol “AVCO” since November 5, 2018. In order to maintain our listing on the Nasdaq
Capital Market, we are required to comply with certain rules of the applicable trading market, including those regarding minimum stockholders’ equity, minimum share price and
certain corporate governance requirements. We may not be able to continue to satisfy the listing requirements and other applicable rules of the Nasdaq Capital Market. If we are
unable to satisfy the criteria for maintaining our listing, our securities could be subject to delisting.
If our common stock is delisted from trading by the applicable trading market we could face significant consequences, including.
● a limited availability for market quotations for our securities;
● reduced liquidity with respect to our securities;
● a determination that our common stock is a “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules and possibly
result in a reduced level of trading activity in the secondary trading market for our common stock;
● limited amount of news and analyst coverage; and
● a decreased ability to issue additional securities or obtain additional financing in the future.
We could be subject to securities class action litigation.
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially
relevant for us because companies in our industry have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs
and a diversion of management’s attention and resources, which could harm our business.
43
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal offices are located at 4400 Route 9 South, Freehold, NJ 07728. The office building is owned by our subsidiary, Avalon RT 9 Properties, LLC, which is in
business of owning and operating an income-producing real property. Our property is well maintained, adequately meets our needs, and is being utilized for its intended purpose.
We lease additional office space for operations. Office location is not crucial to our operations, and we anticipate no difficulty in extending these leases or obtaining
comparable office space.
We are obligated under various lease agreements providing for office space that expire at various dates through the year 2023. Total rent expense under these lease
agreements was approximately $143,000 and $164,000 for the years ended December 31, 2021 and 2020, respectively.
We believe that our current office space is adequate for our current and immediately foreseeable operating needs.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to, and our property is not
subject to, any material legal proceedings, 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 issued and outstanding securities of Beijing Genexosome in consideration of a cash payment in the
amount of $450,000, of which $100,000 is still owed. Further, on October 25, 2017, Genexosome entered into and closed 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 criminal proceedings against Dr. Zhou and Li Chen have been concluded and the civil litigation continue. The Company and
Nationwide Children’s Hospital have reached a verbal settlement agreement. Both parties are in the process of drafting the related written agreements. There can be no
assurances that these settlement agreements will be signed.
ITEM 4. MINE SAFETY DISCLOSURES
None.
44
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock has been listed on the Nasdaq Capital Market under the symbol “AVCO” since November 5, 2018. Our common shares were traded previously on
the OTC Market Group Inc.’s Venture Market (the “OTCQB”) since February 22, 2016, under the symbol “AVCO” since October 18, 2016 and “GTHC” prior to October 18,
2016.
The following table sets forth, for each of the calendar periods indicated, the quarterly high and low bid prices for our common stock quoted on the Nasdaq Capital
Market. The prices in the table represent prices between dealers and do not include adjustments for retail mark-up, markdown or commission and may not represent actual
transactions.
2021
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2020
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$
$
$
$
$
$
$
$
1.65 $
1.57 $
1.19 $
1.15 $
2.04 $
2.19 $
2.16 $
1.33 $
1.03
0.87
0.80
0.79
0.50
1.05
1.10
1.06
On March 28, 2022, the closing trading price of our shares of common stock was $0.73 per share and there were 88,625,709 common shares outstanding. On that date,
there were approximately 217 registered holders of record of our shares of common stock, based upon information received from our stock transfer agent. However, this number
does not include beneficial owners whose shares were held of record by nominees or broker dealers.
Dividends
The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain future earnings, if any, to finance the
expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The Company held its annual meeting on August 4, 2020. During its annual meeting, the Company approved 2020 Incentive Stock Plan and reserved 5,000,000 shares
of common stock for issuance thereunder.
Recent Sales of Unregistered Securities
Common Shares Issued for Services
During the year ended December 31, 2021, the Company issued a total of 1,405,679 shares of its common stock for services rendered and to be rendered. These shares
were valued at $1,507,488, the fair market values on the grant dates using the reported closing share prices on the dates of grant, and the Company recorded stock-based
compensation expense of $1,075,756 for the year ended December 31, 2021 and reduced accrued liabilities of $276,032 and recorded prepaid expense of $155,700 as of
December 31, 2021 which will be amortized over the rest of corresponding service periods.
Common Shares Issued Pursuant to Related Party Debt Settlement Agreement and Release
On December 21, 2021, the Company and Mr. Lu entered into and closed a Debt Settlement Agreement and Release pursuant to which $3.0 million debt owed under the
Line of Credit were settled by issuance of the Company’s 2,400,000 shares of common stock. The 2.4 million shares issued had a fair value of $3 million.
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.
45
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations for the years ended December 31, 2021 and 2020 should be read in
conjunction with our consolidated financial statements and related notes to those consolidated financial statements that are included elsewhere in this report. Certain information
contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Special Note Regarding Forward-looking Statements
All statements other than statements of historical fact included in this Form 10-K including, without limitation, statements under “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy and the plans and objectives of management for future operations,
are forward-looking statements. When used in this Form 10-K, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to us
or our management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and
information currently available to, our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of a number of
factors, including those set forth under the risk factors and business sections in this Form 10-K.
Impact of COVID-19 on Our Operations, Financial Condition, Liquidity and Results of Operations
Although the COVID-19 vaccines have generally been introduced to the public, 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, a significant increase in new and variant strains of COVID-19 cases, availability and effectiveness of COVID-
19 vaccines and therapeutics, the level of acceptance of the vaccine by the general population and any additional preventative and protective actions that governments, or us, may
determine are needed.
The occurrence of COVID-19 pandemic had negative impact on our operations. Some of the universities and laboratories with which we collaborate were temporarily
closed. 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 2022.
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
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 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 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 COVID-19 related vaccine and therapeutics.
46
Avalon achieves 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:
● Development of Avalon Clinical-grade Tissue-specific Exosome (“ACTEX™”)
● 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 Limited.
● 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.
Avalon’s midstream bio-processing and bio-production facility is located in Nanjing, China with state-of-the-art, automated GMP and QC/QA infrastructure for
standardized bio-manufacturing of clinical-grade cellular products involved in our clinical programs in immune effector cell therapy, regenerative therapeutics, as well as bio-
banking.
Avalon’s downstream medical team and facility consists of top-rated affiliated hospital network and experts specialized in hematology, oncology, cellular
immunotherapy, hematopoietic stem/progenitor cell transplant, as well as regenerative therapeutics. Our major clinical programs include:
● AVA-001: Avalon has initiated its first-in-human clinical trial of CD19 CAR-T candidate, AVA-001 in August 2019 at the Hebei Yanda Lu Daopei Hospital and
Beijing Lu Daopei Hospital in China (the world’s single largest CAR-T treatment network with over 600 patients being treated with CAR-T) for the indication of
relapsed/refractory B-cell acute lymphoblastic leukemia and non-Hodgkin Lymphoma. The AVA-001 candidate (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 successfully completed the first-in-human clinical trial of its AVA-001 anti-CD19 CAR-T cell therapy as a bridge to allogeneic bone marrow
transplantation for patients with relapsed/refractory B-cell acute lymphoblastic leukemia at the Lu Daopei Hospital (registered clinical trial number NCT03952923)
with excellent efficacy (90% complete remission rate) and minimal adverse side effects. Avalon is currently expanding the patient recruitment for AVA-001 to
include relapsed/refractory non-Hodgkin lymphoma patients.
● AVA-011 and FLASH-CAR™: The Company advanced its next generation immune cell therapy using RNA-based, non-viral 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. Our leading candidate, AVA-011, is currently at process development stage to
generate clinical-grade cell-therapy products for subsequent clinical studies. On July 8, 2021, the Company and the University of Pittsburgh of the Commonwealth
System of Higher Education (the “University”) entered into a Corporate Research Agreement (the “University Agreement”). Pursuant to the University
Agreement, for a term of two years the University agreed to use its reasonable efforts to perform academic research funded by the Company in connection with the
development of point-of-care modular autonomous processing system to generate clinical-grade AVA-011, a RNA-based chimeric antigen receptor (CAR) T-cell
therapy candidate (the “Project”) subject to the appointment of Dr. Yen Michael S. Hsu as Principal Investigator. During the term, the Company agreed to make
eight payments of $125,000 to the University. As of December 31, 2021, the Company did not make any payment. The Company and the University shall each own
an undivided, one half interest in any intellectual property rights jointly developed by both parties. The Company has been granted a worldwide, irrevocable, non-
exclusive, royalty free, fully paid-up, perpetual right to use intellectual property developed by the University in connection with the Project for commercial
purposes research activities and other purposes. Further, the Company will have an exclusive right of first offer to an exclusive royalty-bearing license to
intellectual property developed by the University or co-developed by the Company and the University in connection with the Project.
● 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 the University of Pittsburgh Medical Center. 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 the University of Pittsburgh
Medical Center.
● 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.
For the year ended December 31, 2021 we generated revenue by providing medical related consulting services in advanced areas of immunotherapy and second
opinion/referral services through our wholly-owned subsidiary Avalon (Shanghai) Healthcare Technology Co., Ltd., or Avalon Shanghai. We also own and operate rental
commercial real property in New Jersey, where we are headquartered.
47
Going Concern
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 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 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 COVID-19 related vaccine and therapeutics.
In addition, the Company owns commercial real estate that houses its headquarters in Freehold, New Jersey and provides outsourced and customized international
healthcare services to the rapidly changing health care industry primarily focused in the People’s Republic of China. These consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal
course of business.
As reflected in the accompanying consolidated financial statements, the Company had a working capital deficit of $3,078,616 as of December 31, 2021 and has incurred
recurring net losses and generated negative cash flow from operating activities of $9,090,499 and $5,024,479 for the year ended December 31, 2021, respectively. The Company
has a limited operating history and its continued growth is dependent upon the continuation of providing medical related consulting services to its only few clients who are
related parties and generating rental revenue from its income-producing real estate property in New Jersey; 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 had negatively impact on the Company’s operations. 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 2022.
The accompanying consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the
amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
Critical Accounting Policies
Use of Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these 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 useful life of property and equipment and investment in real estate, assumptions used in assessing impairment of long-term assets,
valuation of deferred tax assets and the associated valuation allowances, and valuation of 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.
Revenue Recognition
We recognize revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of the
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
48
● 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 transferring promised goods or services to 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 extent that it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance
obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
The Company’s revenues are derived from providing medial related consulting services for its’ related parties. Revenues related to its service offerings are recognized at
a point in time when service is rendered. Any payments received in advance of the performance of services are recorded as deferred revenue until such time as the services are
performed.
We have determined that the ASC 606 does not apply to rental contracts, which are within the scope of other revenue recognition accounting standards.
Rental income from operating leases is recognized on a straight-line basis under the guidance of ASC 842. Lease payments under tenant leases are recognized on a
straight-line basis over the term of the related leases. The cumulative difference between lease revenue recognized under the straight-line method and contractual lease payments
are included in rent receivable on the consolidated balance sheets.
We do not offer promotional payments, customer coupons, rebates or other cash redemption offers to our customers.
Income Taxes
We are governed by the income tax laws of China and the United States. Income taxes are accounted for pursuant to ASC 740 “Accounting for Income Taxes,” which is
an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in
our financial statements or tax returns. The charge for taxes is based on the results for the period as adjusted for items, which are non-assessable or disallowed. It is calculated
using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets
and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for
all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary
differences can be utilized.
Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited
in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is changed to equity. Deferred tax assets and
liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis.
Recent Accounting Standards
For details of applicable new accounting standards, please, refer to Recent Accounting Standards in Note 3 of our consolidated financial statements accompanying this
report.
49
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Years Ended December 31, 2021 and 2020
Revenues
For the year ended December 31, 2021, we had real property rental revenue of $1,203,560, as compared to $1,206,854 for the year ended December 31, 2020, a
decrease of $3,294, or 0.3%. We expect that our revenue from real property rent will remain in its current level with minimal increase in the near future.
For the year ended December 31, 2021, we had medical related consulting services revenue from related party of $187,412, as compared to $170,908 for the year ended
December 31, 2020, an increase of $16,504, or 9.7%. In 2021, we strengthened our efforts in expanding our services to various medical related fields. Therefore, our medical
related consulting services revenue increased. We expect our revenue from medical related consulting services will remain at or near the current level for the near future.
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 year ended December 31, 2021, our real property operating expenses amounted to $829,287, as compared to $851,754 for the year ended December 31, 2020, a
decrease of $22,467, or 2.6%. The decrease was mainly due to a decrease in repairs and maintenance fees of approximately $16,000 and a decrease in other miscellaneous items
of approximately $6,000.
Costs of medical related consulting services include the cost of labor and related benefits, travel expenses related to medical related consulting services, and other
overhead costs.
For the year ended December 31, 2021, costs of medical related consulting services amounted to $147,167, as compared to $135,805 for the year ended December 31,
2020, an increase of $11,362, or 8.4%. The increase was primarily attributable to increase in medical related consulting services revenue.
Real Property Operating Income
Our real property operating income for the year ended December 31, 2021 was $374,273, representing an increase of $19,173, or 5.4%, as compared to $355,100 for the
year ended December 31, 2020. The increase was mainly attributable to the decrease in real property operating expenses as described above. We expect our real property
operating income will remain in its current level with minimal increase in the near future.
Gross Profit from Medical Related Consulting Services and Gross Margin
Gross profit from medical related consulting services for the year ended December 31, 2021 was $40,245, as compared to $35,103 for the year ended December 31,
2020, a change of $5,142, or 14.6%.
Gross margin increased to 21.5% for the year ended December 31, 2021 from gross margin of 20.5% for the year ended December 31, 2020. The different medical
related consulting services agreement in the year ended December 31, 2021 had an effect of improving gross margin as compared to the year ended December 31 2020. We
estimate that our gross margin from medical related consulting services segment will remain at its current level.
Other Operating Expenses
For the years ended December 31, 2021 and 2020, other operating expenses consisted of the following:
Professional fees
Compensation and related benefits
Research and development
Advertising expenses
Travel and entertainment
Directors and officers liability insurance premium
Rent and related utilities
Other general and administrative
50
Years Ended December 31,
2020
2021
4,946,696 $
2,042,278
1,025,009
328,565
156,483
367,365
78,547
303,405
9,248,348 $
6,553,009
4,156,150
883,855
294,352
175,300
276,028
92,370
413,158
12,844,222
$
$
● Professional fees primarily consisted of accounting fees, audit fees, legal service fees, consulting fees, investor relations service charges and other fees. During the
year ended December 31, 2021, in connection with the Purchase Agreement signed on June 13, 2021, we incurred Sen Lang BVI acquisition related costs of
approximately $1,375,000 which were included in professional fees and the intended acquisition was terminated on January 1, 2022. For the year ended December
31, 2021, professional fees decreased by $1,606,313, or 24.5%, as compared to the year ended December 31, 2020. The decrease was primarily attributable to a
decrease in consulting fees of approximately $2,027,000 mainly due to the decrease in use of consulting service providers, and a decrease in investor relations
service fees of approximately $441,000 mainly due to the decrease in use of investor relations service providers, offset by an increase in legal service fees of
approximately $653,000 mainly due to increased legal service related to our potential acquisition, an increase in valuation fee for our potential acquisition of
$180,000, and an increase in other miscellaneous items of approximately $29,000. We expect that our professional fees will decrease in the near future.
● For the year ended December 31, 2021, compensation and related benefits decreased by $2,113,872, or 50.9%, as compared to the year ended December 31, 2020.
The significant decrease was primarily attributable to a decrease in stock-based compensation of approximately $2,125,000 which reflected the value of options
granted and vested to our management, offset by an increase in management’s compensation and related benefits of approximately $11,000. We expect that our
compensation and related benefits will remain in its current level with minimal increase in the near future.
● For the year ended December 31, 2021, research and development expenses increased by $141,154, or 16.0%, as compared to the year ended December 31, 2020.
The increase was mainly attributable to we increased research and development projects in year 2021. We expect that our research and development expenses will
continue to increase in the near future.
● For the year ended December 31, 2021, advertising expenses increased by $34,213 or 11.6% as compared to the year ended December 31, 2020. The increase was
primarily due to increased advertising activities. We expect that our advertising expenses will remain in its current level with minimal increase in the near future.
● For the year ended December 31, 2021, travel and entertainment expense decreased by $18,817, or 10.7%, as compared to the year ended December 31, 2020. The
decrease was mainly due to decreased business travel activities and decreased entertainment expenditure resulting from COVID-19.
● For the year ended December 31, 2021, Directors and Officers Liability Insurance premium increased by $91,337, or 33.1%, as compared to the year ended
December 31, 2020. The increase was mainly due to different insurance provider with different premium.
● For the year ended December 31, 2021, rent and related utilities expenses decreased by $13,823, or 15.0%, as compared to the year ended December 31, 2020. The
decrease was mainly due to the decreased monthly rent in Avalon Shanghai’s office.
● Other general and administrative expenses mainly consisted of NASDAQ listing fee, office supplies, and other miscellaneous items. For the year ended December
31, 2021, other general and administrative expenses decreased by $109,753, or 26.6%, as compared to the year ended December 31, 2020. The decrease was
primarily attributable to a decrease in bad debt expense of approximately $47,000, a decrease in depreciation expense of approximately $50,000, and a decrease in
other miscellaneous items of approximately $12,000.
Loss from Operations
As a result of the foregoing, for year ended December 31, 2021, loss from operations amounted to $8,833,830, as compared to $12,454,019 for the year ended
December 31, 2020, a decrease of $3,620,189, or 29.1%.
Other Income (Expense)
Other income (expense) mainly includes interest expense and loss from equity method investment.
Other expense, net, totaled $256,669 for the year ended December 31, 2021, as compared to $225,419 for the year ended December 31, 2020, an increase of $31,250, or
13.9%, which was primarily attributable to an increase in interest expense of approximately $32,000, and an increase in loss from equity method investment of approximately
$9,000, offset by a decrease in other miscellaneous expense of approximately $9,000.
51
Income Taxes
We did not have any income taxes expense for the years ended December 31, 2021 and 2020 since we incurred losses in these periods.
Net Loss
As a result of the factors described above, our net loss was $9,090,499 for the year ended December 31, 2021, as compared to $12,679,438 for the year ended December
31, 2020, a decrease of $3,588,939 or 28.3%.
Net Loss Attributable to Avalon GloboCare Corp. Common Shareholders
The net loss attributable to Avalon GloboCare Corp. common shareholders was $9,090,499 or $0.11 per share (basic and diluted) for the year ended December 31, 2021,
as compared with $12,679,438, or $0.16 per share (basic and diluted) for the year ended December 31, 2020, a change of $3,588,939 or 28.3%.
Foreign Currency Translation Adjustment
Our reporting currency is the U.S. dollar. The functional currency of our parent company, AHS, Avalon RT 9, Genexosome, Avactis, and Exosome, is the U.S. dollar
and the functional currency of Avalon Shanghai and Beijing Genexosome is the Chinese Renminbi (“RMB”). The financial statements of our subsidiaries 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 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 $25,244 and $67,237 for the years ended December 31, 2021
and 2020, respectively. This non-cash gain had the effect of decreasing our reported comprehensive loss.
Comprehensive Loss
As a result of our foreign currency translation adjustment, we had comprehensive loss of $9,065,255 and $12,612,201 for the years ended December 31, 2021 and 2020,
respectively.
Liquidity and Capital Resources
The Company has a limited operating history and its continued growth is dependent upon the continuation of providing medical related consulting services to its only
few clients who are related parties and generating rental revenue from its income-producing real estate property in New Jersey; 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 2022.
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
December 31, 2021 and 2020, we had cash balance of approximately $808,000 and $727,000, respectively. These funds are kept in financial institutions located as follows:
Country:
United States
China
Total cash
$
$
December 31, 2021
767,605
39,933
807,538
95.1% $
4.9%
100.0% $
December 31, 2020
559,711
166,866
726,577
77.0%
23.0%
100.0%
52
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.
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.
The current PRC Enterprise Income Tax (“EIT”) Law and its implementing rules generally provide that a 10% withholding tax applies to China-sourced income derived
by non-resident enterprises for PRC enterprise income tax purposes unless the jurisdiction of incorporation of such enterprises’ shareholder has a tax treaty with China that
provides for a different withholding arrangement.
The following table sets forth a summary of changes in our working capital from December 31, 2020 to December 31, 2021:
Working capital deficit:
Total current assets
Total current liabilities
Working capital deficit
December 31,
Changes in
2021
2020
Amount
Percentage
$
$
$
1,323,042
4,401,658
(3,078,616) $
1,286,337 $
2,592,393
(1,306,056) $
36,705
1,809,265
(1,772,560)
2.9%
69.8%
135.7%
Our working capital deficit increased by $1,772,560 to $3,078,616 at December 31, 2021 from $1,306,056 at December 31, 2020. The increase in working capital
deficit was primarily attributable to a decrease in prepaid expenses and other current assets of approximately $101,000, an increase in accrued professional fees of approximately
$669,000, mainly due to an increase in professional services providers, an increase in accrued research and development fees of approximately $415,000, an increase in accrued
payroll liability and directors’ compensation of approximately $153,000, an increase in accrued liabilities and other payables – related parties of approximately $200,000, and an
increase in note payable – related party of $390,000, offset by an increase in prepaid professional fees of approximately $108,000.
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 Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
The following summarizes the key components of our cash flows for the years ended December 31, 2021 and 2020:
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of exchange rate on cash
Net increase (decrease) in cash
53
Years Ended December 31,
2020
2021
(7,546,100)
(5,024,479) $
(169,185)
(68,135)
7,664,281
5,170,132
12,690
3,443
(38,314)
80,961 $
$
$
Net cash flow used in operating activities for the year ended December 31, 2021 was $5,024,479, which primarily reflected our consolidated net loss of approximately
$9,090,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in operating lease obligation of approximately $121,000, offset by an increase
accrued liabilities and other payables of approximately $1,331,000, and an increase in accrued liabilities and other payables – related parties of approximately $200,000, and the
non-cash items adjustment primarily consisting of depreciation of approximately $312,000, amortization of right-of-use asset of approximately $127,000, and stock-based
compensation and service expense of approximately $2,110,000.
Net cash flow used in operating activities for the year ended December 31, 2020 was $7,546,100, which primarily reflected our consolidated net loss of approximately
$12,679,000, and the changes in operating assets and liabilities, primarily consisting of an increase in prepaid expenses and other current assets of approximately $207,000, a
decrease in accrued liabilities and other payables of approximately $846,000, offset by a decrease in accounts receivable – related party of approximately $217,000, an increase
in accrued liabilities and other payables – related parties of approximately $119,000, and the non-cash items adjustment primarily consisting of depreciation of approximately
$315,000, and stock-based compensation and service expense of approximately $5,494,000.
We expect our cash used in operating activities to increase due to the following:
● the development and commercialization of new products;
● an increase in professional staff and services; and
● an increase in public relations and/or sales promotions for existing and/or new brands as we expand within existing markets or enter new markets.
Net cash flow used in investing activities was $68,135 for the year ended December 31, 2021 as compared to $169,185 for the year ended December 31, 2020. During
the year ended December 31, 2021, we made payments for purchase of property and equipment of approximately $18,000 and for improvement of commercial real estate of
approximately $10,000, and made additional investment in equity method investment of approximately $40,000. During the year ended December 31, 2020, we made payment
for improvement of commercial real estate of approximately $111,000 and made additional investment in equity method investment of approximately $58,000.
Net cash flow provided by financing activities was $5,170,132 for the year ended December 31, 2021 as compared to $7,664,281 for the year ended December 31,
2020. During the year ended December 31, 2021, we received proceeds from related party borrowings of approximately $2,550,000 and net proceeds from equity offering of
approximately $2,620,000 (net of cash paid for commission and other offering costs of approximately $240,000). During the year ended December 31, 2020, we received
proceeds from related party borrowings of $600,000 and net proceeds from equity offering of approximately $7,264,000 (net of cash paid for commission and other offering
costs of approximately $540,000), offset by repayments made for note payable – related party of $200,000.
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. These uses of cash will depend on numerous factors including our
sales and other revenues, and our ability to 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:
● an increase in working capital requirements to finance our current business, including ongoing research and development programs, clinical studies, as well as
commercial strategies;
● the use of capital for mergers, acquisitions and the development of business opportunities;
● addition of administrative personnel as the business grows; and
● the cost of being a public company.
In the third quarter of 2019, we had secured a $20 million credit facility (Line of Credit) provided by our Chairman, Wenzhao Lu. The unsecured credit facility bears
interest at a rate of 5% and provides for maturity on drawn loans 36 months after funding. As of December 31, 2021, the total principal amount outstanding under the Credit Line
was $2.8 million and we have approximately $14.2 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 have not offered any securities pursuant to General 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 eligible to sell 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 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 December 31, 2021, we sold a total of 6,258,846 shares of our common stock through
Jefferies with an aggregate offering price of $9,938,140 and we have approximately $5.0 million offering price remaining available under the Sales Agreement.
54
We estimate that based on current plans and assumptions, that our available cash will be insufficient to satisfy our cash requirements under our present operating
expectations through cash 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 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.
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 December 31, 2021, and the effect
these obligations are expected to have on our liquidity and cash flows in future periods.
Contractual obligations:
Operating lease commitment
Acquisition consideration
Borrowings from related party (principal)
Accrued interest – related party
Epicon equity investment obligation
AVAR joint venture commitment
Total
Off-balance Sheet Arrangements
We presently do not have off-balance sheet arrangements.
Foreign Currency Exchange Rate Risk
Payments Due by Period
Total
169,722
100,000
3,140,262
368,433
824,431
10,786,671
15,389,519
Less than 1 year
163,128
$
100,000
390,000
368,433
274,810
786,671
2,083,042
$
$
$
$
$
1-3 years
3-5 years
5+ years
6,594 $
-
2,750,262
-
549,621
5,000,000
8,306,477 $
- $
-
-
-
-
5,000,000
5,000,000 $
-
-
-
-
-
-
-
A portion of our operations are in China. Thus, a portion of our revenues and operating results may be impacted by exchange rate fluctuations between RMB and US
dollars. For the year ended December 31, 2021 and 2020, we had an unrealized foreign currency translation gain of approximately $25,000 and $67,000, respectively, because of
changes in the exchange rate.
Inflation
The effect of inflation on our revenue and operating results was not significant.
55
ITEM 7A. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the
Securities Exchange Act of 1934, as amended, or 1934 Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and
to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) as
appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including
the principal executive officer and the principal financial officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rule 13(a)-15(e) under the 1934 Act, as of the end of the period covered by this report. During evaluation of disclosure controls and procedures as of
December 31, 2021 conducted as part of our annual audit and preparation of our annual financial statements, the CEO and CFO conducted an evaluation of the effectiveness of
the design and operations of our disclosure controls and procedures and concluded that our disclosure controls and procedures were not effective due to the lack of segregation of
duties resulting from our small size.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for the preparation and fair presentation of the financial statements included in this annual report. The financial statements have been
prepared in conformity with accounting principles generally accepted in the United States of America and reflect management’s judgment and estimates concerning effects of
events and transactions that are accounted for or disclosed.
Management is also responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting
includes those policies and procedures that pertain to our ability to record, process, summarize and report reliable data. Management recognizes that there are inherent limitations
in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly,
even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement presentation. Further, because of changes in
conditions, the effectiveness of internal control over financial reporting may vary over time.
Management regularly assesses controls and did so most recently for our financial reporting as of December 31, 2021. This assessment was based on criteria for
effective internal control over financial reporting described in the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission. Based on this assessment, management has concluded that our internal control over financial reporting was not effective as of December 31, 2021 due to
the lack of segregation of duties resulting from our small size. In addition, due to the lack of segregation of duties and limited resources, the Company has a small accounting
staff to prepare and review its financial statements.
56
In light of the material weakness, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the year ended
December 31, 2021 included in this Annual Report on Form 10-K were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material
weakness, our consolidated financial statements for the year ended December 31, 2021 are fairly stated, in all material respects, in accordance with US GAAP.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) under the Exchange Act, during the quarter ended
December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report by our independent registered public accounting firm, regarding internal control over financial
reporting. As a smaller reporting company, our internal control over financial reporting was not subject to audit by our independent registered public accounting firm pursuant to
rules of the Securities and Exchange Commission that permit us to provide only management’s report.
ITEM 9B. OTHER INFORMATION
Nasdaq Notice
On February 9, 2022, the Company received notice from The Nasdaq Stock Market (“Nasdaq”) that the closing bid price for the Company’s common stock had been
below $1.00 per share for the previous 30 consecutive business days, and that the Company is therefore not in compliance with the minimum bid price requirement for continued
inclusion on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Rule”). Nasdaq’s notice has no immediate effect on the listing or trading of the Company’s
common stock on The Nasdaq Capital Market. The notice indicates that the Company will have 180 calendar days, until August 8, 2022, to regain compliance with this
requirement. The Company can regain compliance with the $1.00 minimum bid listing requirement if the closing bid price of its common stock is at least $1.00 per share for a
minimum of ten (10) consecutive business days during the 180-day compliance period. If the Company does not regain compliance during the initial compliance period, it may
be eligible for additional time to regain compliance. To qualify, the Company will be required to meet the continued listing requirement for market value of its publicly held
shares and all other Nasdaq initial listing standards, except the bid price requirement, and will need to provide written notice to Nasdaq of its intention to cure the deficiency
during the second compliance period by effecting a reverse stock split, if necessary. If the Company is not eligible or it appears to Nasdaq that the Company will not be able to
cure the deficiency during the second compliance period, Nasdaq will provide written notice to the Company that the Company’s common stock will be subject to delisting. In
the event of such notification, the Company may appeal Nasdaq’s determination to delist its securities, but there can be no assurance that Nasdaq would grant the Company’s
request for continued listing. The Company intends to actively monitor the minimum bid price of its common stock and may, as appropriate, consider available options to regain
compliance with the Rule. There can be no assurance that the Company will be able to regain compliance with the Rule or will otherwise be in compliance with other Nasdaq
listing criteria.
A delisting of our common stock is likely to reduce the liquidity of our common stock and may inhibit or preclude our ability to raise additional financing.
2022 Convertible Note
On March 28, 2022, the Company entered into Securities Purchase Agreement with an accredited investor providing for the sale by the Company to the investor of a
Convertible Note in the amount of $4,000,000 (the “2022 Convertible Note”). In addition to the 2022 Convertible Note, the investor will also receive a Stock Purchase Warrant
(the “2022 Warrant”) to acquire an aggregate of 1,333,333 shares of common stock. The 2022 Warrants will be exercisable for five years at an exercise price of $1.25. The
financing will close on or about April 15, 2022.
The 2022 Convertible Note will bear interest at 1% per annum payable at maturity and matures ten years from issuance. The investor may elect to convert all or part of
the 2022 Convertible Note, plus accrued interest, at any time into shares of common stock of the Company at a conversion price equal to 95% of the average of the highest three
trading prices for the common stock during the 20-trading day period ending one trading day prior to the conversion date but in no event will the conversion price be lower than
$0.75 per share.
The investor agreed to restrict its ability to convert the 2022 Convertible Note and exercise the 2022 Warrants and receive shares of common stock such that the number
of shares of common stock held by the investor after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. Further,
Investor agreed to not sell or transfer any or all of the shares of common stock underlying the 2022 Convertible Note or the 2022 Warrant for a period of 90 days beginning on
the closing date (the “Lock-Up Period”). Following the expiration of the Lock-Up Period, the investor has agreed to limit its sale or transfer of such shares of common stock to a
maximum monthly amount equal to 20% of the shares of common stock issuable upon conversion of the 2022 Convertible Note. The Company agreed to use its reasonable best
efforts to file a registration statement on Form S-3 (or other appropriate form) providing for the resale by the investor of the shares of common stock underlying the 2022
Convertible Note and the 2022 Warrant.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
57
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
PART III
Below are the names of and certain information regarding our executive officers and directors as of the date hereof:
Name
Wenzhao Lu
David Jin, MD, PhD
Meng Li
Luisa Ingargiola
Steven A. Sanders
Yancen Lu
Wilbert J. Tauzin II
William B. Stilley, III
Tevi Troy
Yue “Charles” Li
Age
Position
64
54
44
54
76
47
78
54
54
48
Chairman of the Board of Directors
Chief Executive Officer, President and Director
Chief Operating Officer, Secretary and Director
Chief Financial Officer
Director
Director
Director
Director
Director
Director
Officers are elected annually by the Board of Directors (subject to the terms of any employment agreement), at our annual meeting, to hold such officer until an officer’s
successor has been duly appointed and qualified, unless an officer sooner dies, resigns or is removed by the Board.
The principal occupation and business experience during at least the past five years for our executive officers and directors is as follows:
Wenzhao Lu, Chairman of the Board of Directors
Mr. Wenzhao Lu is our Chairman of the Board. He is a seasoned healthcare entrepreneur with extensive operational knowledge and experience in China. He has been
serving as Chairman of the Board for the Daopei Medical Group, or DPMG, since 2010. Under his leadership, DPMG has recently expanded its clinical network involving a
state-of-the-art stem cell bank at Wuhan Biolake, three top-ranked private hospitals (located in Beijing, Shanghai, and Hebei), specialty hematology laboratories, as well as a
hematology research institute, with more than 100 partnering and collaborating hospitals in China. DPMG was founded by Professor Daopei Lu, a renowned hematologist
pioneering in hematopoietic stem cell transplant and member of the Academy of Engineering in China. Mr. Wenzhao Lu received a Bachelor of Arts from Temple University
Tyler School of Arts in 1988 and subsequently worked as senior Art Director at Ogilvy & Mather Advertising Company. Prior to joining DPMG, Mr. Lu served as Chief
Operating Officer for BioTime Asia Limited, which is a subsidiary of BioTime, Inc. (NYSE American: BTX) in 2009. Mr. Lu is qualified to serve as a director because of his
extensive operational knowledge of, and executive level management experience in, the healthcare industry.
David Jin, Chief Executive Officer, President and Director
Dr. David Jin, MD, PhD, is our Chief Executive Officer, President and a member of the Board of Directors. From 2009 to 2017, Dr. Jin has served as the Chief Medical
Officer of BioTime, Inc. (NYSE American: BTX), a clinical stage regenerative medicine company with a focus on pluripotent stem cell technology. Dr. Jin also acts as a senior
translational clinician-scientist at the Howard Hughes Medical Institute and the Ansary Stem Cell Center at Weill Cornell Medical College of Cornell University. Prior to his
current endeavors, Dr. Jin was Chief Consultant/Advisor for various biotech/pharmaceutical companies regarding hematology, oncology, immunotherapy and stem cell-based
technology development. Dr. Jin has been Principle Investigator in more than 15 pre-clinical and clinical trials, as well as author/co-author of over 80 peer-reviewed scientific
abstracts, articles, reviews, and book chapters. Dr. Jin studied medicine at SUNY Downstate College of Medicine in Brooklyn, New York. He received his clinical training and
subsequent faculty tenure at the New York-Presbyterian Hospital (the teaching hospital for both Cornell and Columbia Universities) in the areas of internal medicine,
hematology, and clinical oncology. Dr. Jin was honored as Top Chief Medical Officer by ExecRank in 2012, as well as recognized by Leading Physicians of the World in 2015.
Dr. Jin is qualified to serve as a director because of his role with us, and his extensive operational knowledge of, and executive level management experience in, the healthcare
industry.
58
Meng Li, Chief Operating Officer and Secretary
Ms. Meng Li is our Chief Operating Officer and Secretary and a former member of the Board of Directors. Ms. Li has over 15 years of executive experience in
international marketing, branding, communications, and media investment consultancy. Ms. Li served as Managing Director at Maxus/GroupM (a WPP Group company) where
she was responsible for business P&L and corporate management from 2006 to 2015. Prior to joining Maxus/Group M, Ms. Li worked for Zenith Media (a Publicis Group
company) from 2000 to 2006 as Senior Manager. Ms. Li received a Bachelor of Arts in International Economic Law from Dalian Maritime University in China.
Luisa Ingargiola, Chief Financial Officer
Luisa Ingargiola is our Chief Financial Officer. Ms Ingargiola has significant experience serving as Chief Financial Officer or Audit Chair for multiple NASDAQ and
NYSE companies. She currently serves as Director and Audit Chair for several public companies including ElectraMeccanica (NASDAQ:SOLO), AgEagle (NYSE:UAVS) and
Progress Acquisition Corporation (NASDAQ:PGRWU). From 2007 through 2016, Ms. Ingargiola served as the Chief Financial Officer and then Director at MagneGas
Corporation (Nasdaq: MNGA. Prior to 2007, Ms. Ingargiola held various roles as Budget Director and Investment Analyst in several private companies. Ms. Ingargiola
graduated in 1989 from Boston University with a Bachelor’s degree in Business Administration and a concentration in Finance. In 1996, she received her MBA in Health
Administration from the University of South Florida. Ms. Ingargiola is qualified to serve as a Chief Financial Officer because of her extensive knowledge corporate governance,
regulatory requirements, executive leadership and knowledge of, and experience in, financing and M&A transactions.
Steven A. Sanders, Director
Steven A. Sanders is a member of the Board of Directors. Since January 2017, Mr. Sanders has been Of Counsel to the law firm of Ortoli Rosenstadt LLP. From July
2007 until January 2017, Mr. Sanders was a Senior Partner of Ortoli Rosenstadt LLP. From January 1, 2004 until June 30, 2007, he was Of Counsel to the law firm of Rubin,
Bailin, Ortoli, LLP. From January 1, 2001 to December 31, 2003, he was Counsel to the law firm of Spitzer & Feldman PC. Mr. Sanders also serves as a Director of Helijet
International, Inc. and Electrameccanica Vehicles Corp. (NASDAQ:SOLO). Additionally, he has been a director at the American Academy of Dramatic Arts since October 2013
and has been a director of the Bay Street Theater since February 2015. Mr. Sanders received his JD from Cornell University and his BBA from The City College of New York.
Mr. Sanders is qualified to serve as a director because of his corporate, securities and international law experience, including working with companies in the life sciences
industry.
Yancen Lu, Director
Yancen Lu is a member of the Board of Directors. Mr. Lu has more than 20 years of experience in investment banking and equity investment management. He is the
Founder and CEO of PagodaTree Partners, a healthcare PE fund. Before this, Mr. Lu was the Managing Director of FountainVest Partners. In addition to his professionalism in
securities, investment and capital management, Mr. Lu has a special focus and comprehensive understanding of the global medical and healthcare industry. He served as Director
of leading healthcare corporations including Sino Hospital Investment Corporation (Hong Kong), Chang’an Hospital (the largest private hospital in Northwest China), and DIH
Medical Technologies. Mr. Lu received Bachelor’s and Master’s degrees in Engineering Economics from Tianjin University. Mr. Lu is qualified to serve as a director because of
his extensive operational knowledge of, and executive level management experience in, the healthcare industry.
Wilbert J. Tauzin II, Director
Wilbert J. Tauzin II is a member of the Board of Directors. From December 2010 until March 1, 2014, Congressman Tauzin served as Special Legislative Counsel to
Alston & Bird LLP. From December 2004 to June 2010, Congressman Tauzin was President and Chief Executive Officer of the Pharmaceutical Research and Manufacturers of
America, a trade group that serves as one of the pharmaceutical industry’s top lobbying groups. He served 12.5 terms in the U.S. House of Representatives, representing
Louisiana’s 3rd Congressional District. From January 2001 through February 2004, Congressman Tauzin served as Chairman of the House Committee on Energy and
Commerce. He also served as a senior member of the House Resources Committee and Deputy Majority Whip. Prior to serving as a member of Congress, Congressman Tauzin
was a member of the Louisiana State Legislature, where he served as Chairman of the House Natural Resources Committee and Chief Administration Floor Leader. He served as
Lead Independent Director of LHC Group, a publicly traded provider of quality home health care, from 2005 to 2021 and retains the role of Lead Independent Emeritus today.
The Congressman also served on the Board of Entergy, a Fortune 500 company. In addition, the Congressman chartered a Louisiana State Savings and Loan Association and
Chaired its first Board. He received a Bachelor of Arts Degree from Nicholls State University and a Juris Doctor degree from Louisiana State University. Congressman Tauzin is
qualified to serve as a director because of his extensive knowledge of the pharmaceutical industry and his experience as a director of several publicly-traded and privately-held
companies.
59
William B. Stilley, III, Director
William B. Stilley is a member of the Board of Directors. Mr. Stilley has been the chief executive officer and member of the board of directors of Adial
Pharmaceuticals, Inc. since December 2010. From August 2008 until December 2010, he was the vice president, business development and strategic projects at Clinical Data,
Inc. (NASDQ: CLDA). In September 2021, Mr. Stilley was appointed to serve as a member of the board of directors of Sysorex, Inc., where he serves as chair of the audit
committee. From February 2002, Mr. Stilley was the COO and CFO of Adenosine Therapeutics, LLC until certain assets of Adenosine Therapeutics were acquired by Clinical
Data, Inc. in August 2008. Mr. Stilley has advised both public and private companies on financing and M&A transactions, has been the interim CFO of a public company, the
interim Chief Business Officer and then Advisor for Diffusion Pharmaceuticals from September 2015 through March 2018, and the COO and CFO of a number of private
companies. Before entering the business community, Mr. Stilley served as Captain in the U.S. Marine Corps. Mr. Stilley has an MBA with honors from the Darden School of
Business and a B.S. in Commerce/Marketing from the McIntire School of Commerce at the University of Virginia. He currently serves on the Advisory Board of Virginia BIO,
the statewide biotechnology organization. Mr. Stilley is qualified to serve as a director because of his extensive knowledge of the biotechnology industry, significant executive
leadership and operational experience, and knowledge of, and experience in, financing and M&A transactions.
Tevi Troy, Director
Tevi Troy is a member of the Board of Directors and a former Deputy Secretary of the U.S. Department of Health and Human Services. Dr. Troy is a Senior Fellow at
the Bipartisan Policy Center in Washington. He has previously been the founder and CEO of the American Health Policy Institute and a Senior Fellow at Hudson Institute. On
August 3, 2007, Dr. Troy was unanimously confirmed by the U.S. Senate as the Deputy Secretary of HHS. As Deputy Secretary, Dr. Troy was the chief operating officer of the
largest civilian department in the federal government, with a budget of $716 billion and over 67,000 employees. Dr. Troy has extensive White House experience, having served
in several high-level positions over a five-year period, culminating in his service as Deputy Assistant and then Acting Assistant to the President for Domestic Policy. Dr. Troy
has held high-level positions on Capitol Hill as well. From 1998 to 2000, Dr. Troy served as the Policy Director for Senator John Ashcroft. From 1996 to 1998, Dr. Troy was
Senior Domestic Policy Adviser and later Domestic Policy Director for the House Policy Committee, chaired by Christopher Cox. In addition to his senior level government
work and health care expertise, Dr. Troy is also a best-selling presidential historian and the author of five books, including, most recently, “Fight House: Rivalries in the White
House from Truman to Trump,” which the Wall Street Journal listed as one of the top political books of 2020. Dr. Troy’s many other affiliations include: contributing editor for
Washingtonian magazine; member of the publication committee of National Affairs; member of the Board of Fellows of the Jewish Policy Center; a Senior Fellow at the
Potomac Institute; and a member of the Bipartisan Commission on Biodefense. Dr. Troy has a B.S. in Industrial and Labor Relations from Cornell University and an M.A and
Ph.D. in American Civilization from the University of Texas at Austin. Dr. Troy is qualified to serve as a director because of his extensive knowledge of the healthcare industry
and his significant leadership experience.
Yue “Charles” Li
Mr. Li has about 20 years of experience in M&A and capital markets in China and the U.S. Mr. Li currently is a Managing Director at PagodaTree Partners, a private
equity company with a focus on healthcare in Beijing. Prior to PagodaTree, he was a senior executive at a major conglomerate in China where he successfully closed $2 billion
M&A transactions in healthcare and insurance areas. Previously, Mr. Li spent 8 years in Deloitte, as a director of financial advisory services in Beijing and capital markets in
New York. His key clients included Merrill Lynch, Blackrock, KKR etc. In his early career, Mr. Li served for top tier financial institutions such as Credit Suisse and Fannie Mae,
responsible for asset allocation strategy and risk management for multibillion USD portfolios. Mr. Li received Master’s degree from the Olin School of Business at Washington
University in 2000 and a Bachelor of Engineering from Tianjin University in 1996. He is a CFA charter holder. Mr. Li is qualified to serve as a director because of his extensive
investment and executive level management experience.
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Board Composition
Our business and affairs are organized under the direction of our board of directors, which currently consists of nine members. The primary responsibility of our board
of directors is to provide oversight, strategic guidance, counseling, and direction to our management team. Our board of directors meets on a regular basis and additionally as
required.
A majority of the authorized number of directors constitutes a quorum of the Board of Directors for the transaction of business. The directors must be present at the
meeting to constitute a quorum. However, any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all members of the Board of
Directors individually or collectively consent in writing to the action.
Director Independence
Our board of directors currently consists of nine members. Our board of directors has determined that Yancen Lu, William B. Stilley, III, Steven A. Sanders, Tevi Troy
and Yue “Charles” Li, qualify as independent directors in accordance with the Nasdaq Capital Market (“Nasdaq”) listing requirements. Mr. Wenzhao Lu, Dr. Jin, Meng Li and
Wilbert Tauzin II are not considered independent. Nasdaq’s independence definition includes a series of objective tests, such as that the director is not, and has not been for at
least three (3) years, one of our employees and that neither the director nor any of his or her family members has engaged in various types of business dealings with us. In
addition, as required by Nasdaq rules, our board of directors has made a subjective determination as to each independent director that no relationships exist that, in the opinion of
our board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations, our board of
directors reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate
to us and our management. There are no family relationships among any of our directors or executive officers.
As required under Nasdaq rules and regulations, our independent directors meet in regularly scheduled executive sessions at which only independent directors are
present.
Family Relationships
There are no family relationships among our directors or executive officers.
Board Leadership Structure and Role in Risk Oversight
Our Board of Directors, or the Board, is primarily responsible for overseeing our risk management processes on behalf of our company. The Board receives and reviews
periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. In addition, the Board focuses on
the most significant risks facing our company and our company’s general risk management strategy, and also ensures that risks undertaken by our company are consistent with
the board’s appetite for risk. While the Board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this
division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure supports this approach.
Involvement in Certain Legal Proceedings
To our knowledge, our directors and executive officers have not been involved in any of the following events during the past ten years:
● any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
● any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
● being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person
practicing in banking or securities activities;
● being found by a court of competent jurisdiction in a civil action, the SEC or the Commodity Futures Trading Commission to have violated a Federal or state
securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
● being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated,
relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or
insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
● being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any
equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
61
Board Committees
Establishment of Board Committees and Adoption of Charters
In November 2018, the Company established a Nominating and Corporate Governance Committee, a Compensation Committee and an Audit Committee (collectively,
the “Committees”) and approved and adopted charters to govern each of the Committees.
In connection with the establishment of the Nominating and Corporate Governance Committee, Compensation Committee and Audit Committee, the Board of Directors
of the Company appointed members to each such committee. Currently, all three committees are comprised of at least three (3) directors meeting the requirements set forth in
each applicable charter. The membership of these three standing committees of the Board of Directors of the Company is as follows:
Nominating and Corporate
Governance Committee
Steven Sanders (Chairman)
Tevi Troy
William Stilley
Compensation Committee
Audit Committee
Yancen Lu (Chairman)
Steven Sanders
Tevi Troy
William Stilley (Chairman)
Yancen Lu
Steve Sanders
Nominating and Corporate Governance Committee
Our board of directors has determined that each of the members of the Nominating and Governance Committee (the “Governance Committee”) are “independent
directors” as defined by Nasdaq. The Governance Committee generally responsible for recommending to our full board of directors’ policies, procedures, and practices designed
to help ensure that our corporate governance policies, procedures, and practices continue to assist the board of directors and our management in effectively and efficiently
promoting the best interests of our stockholders. The Governance Committee is also responsible for selecting and recommending for approval by our board of directors and our
stockholders a slate of director nominees for election at each of our annual meetings of stockholders, and otherwise for determining the board committee members and chairmen,
subject to board of directors ratification, as well as recommending to the board director nominees to fill vacancies or new positions on the board of directors or its committees
that may occur or be created from time to time, all in accordance with our bylaws and applicable law. The Governance Committee’s principal functions include:
● developing and maintaining our corporate governance policy guidelines;
● developing and maintaining our codes of conduct and ethics;
● overseeing the interpretation and enforcement of our Code of Conduct and our Code of Ethics for Chief Executive Officer and Senior Financial and Accounting
Officers;
● evaluating the performance of our board of directors, its committees, and committee chairmen and our directors; and
● selecting and recommending a slate of director nominees for election at each of our annual meetings of the stockholders and recommending to the board director
nominees to fill vacancies or new positions on the board of directors or its committees that may occur from time to time.
During 2021, the Nominating and Corporate Governance Committee did not meet. The Governance Committee is governed by a written charter approved by our board
of directors. A copy of the Governance Committee’s charter is posted on the Company’s website at www.avalon-globocare.com in the “Investors” section of the website. In
identifying potential independent board of directors’ candidates with significant senior-level professional experience, the Governance Committee solicits candidates from the
board of directors, senior management and others and may engage a search firm in the process. The Governance Committee reviews and narrows the list of candidates and
interviews potential nominees. The final candidate is also introduced and interviewed by the board of directors and the lead director if one has been appointed. In general, in
considering whether to recommend any particular candidate for inclusion in our board of directors’ slate of recommended director nominees, the Governance Committee will
apply the criteria set forth in our corporate governance guidelines. These criteria include the candidate’s integrity, business acumen, commitment to understanding our business
and industry, experience, conflicts of interest and the ability to act in the interests of our stockholders. Further, specific consideration is given to, among other things, diversity of
background and experience that a candidate would bring to our board of directors. The Governance Committee does not assign specific weights to particular criteria and no
particular criterion is a prerequisite for each prospective nominee. We believe that the backgrounds and qualifications of our directors, considered as a group, should provide a
composite mix of experience, knowledge and abilities that will allow our board of directors to fulfill its responsibilities. Stockholders may recommend individuals to the
Governance Committee for consideration as potential director candidates by submitting their names, together with appropriate biographical information and background
materials to our Governance Committee. Assuming that appropriate biographical and background material has been provided on a timely basis, the Governance Committee will
evaluate stockholder recommended candidates by following substantially the same process, and applying substantially the same criteria, as it follows for candidates submitted by
others.
62
Audit Committee
We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). Our board of directors has determined that the members are all “independent directors” as defined by the rules of Nasdaq applicable to members of an
audit committee and Rule 10A-3(b)(i) under the Exchange Act. In addition, Mr. Stilley is an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K
and demonstrates “financial sophistication” as defined by the rules of The NASDAQ Stock Market, Inc. The Audit Committee is appointed by our board of directors to assist our
board of directors in monitoring (1) the integrity of our financial statements, (2) our compliance with legal and regulatory requirements, and (3) the independence and
performance of our internal and external auditors. The Audit Committee’s principal functions include:
● reviewing our annual audited financial statements with management and our independent auditors, including major issues regarding accounting and auditing
principles and practices and financial reporting that could significantly affect our financial statements;
● reviewing our quarterly financial statements with management and our independent auditor prior to the filing of our Quarterly Reports on Form 10-Q, including the
results of the independent auditors’ reviews of the quarterly financial statements;
● recommending to the board of directors the appointment of, and continued evaluation of the performance of, our independent auditor;
● approving the fees to be paid to our independent auditor for audit services and approving the retention of our independent auditor for non-audit services and all fees
for such services;
● reviewing periodic reports from our independent auditor regarding our auditor’s independence, including discussion of such reports with the auditor;
● reviewing the adequacy of our overall control environment, including internal financial controls and disclosure controls and procedures; and
● reviewing with our management and legal counsel legal matters that may have a material impact on our financial statements or our compliance policies and any
material reports or inquiries received from regulators or governmental agencies.
During the year ended December 31, 2021, the audit committee met four times. A copy of the Audit Committee’s charter is posted on the Company’s website at
www.avalon-globocare.com in the “Investors” section of the website.
Meetings may be held from time to time to consider matters for which approval of our Board of Directors is desirable or is required by law.
Compensation Committee
Our compensation committee consists of Yancen Lu, Steven Sanders and Tevi Troy. Our board of directors has determined that each of the members are an
“independent director” as defined by the Nasdaq rules applicable to members of a compensation committee. The Compensation Committee is responsible for establishing the
compensation of our senior management, including salaries, bonuses, termination arrangements, and other executive officer benefits as well as director compensation. The
Compensation Committee also administers our equity incentive plans. During the year ended December 31, 2021, the Compensation Committee did not meet. The Compensation
Committee is governed by a written charter approved by the board of directors. A copy of the Compensation Committee’s charter is posted on the Company’s website at
www.avalon-globocare.com in the “Investors” section of the website. The Compensation Committee works with the Chairman of the Board and Chief Executive Officer and
reviews and approves compensation decisions regarding senior management including compensation levels and equity incentive awards. The Compensation Committee also
approves employment and compensation agreements with our key personnel and directors. The Compensation Committee has the power and authority to conduct or authorize
studies, retain independent consultants, accountants or others, and obtain unrestricted access to management, our internal auditors, human resources and accounting employees
and all information relevant to its responsibilities.
The responsibilities of the Compensation Committee, as stated in its charter, include the following:
● review and approve the Company’s compensation guidelines and structure;
● review and approve on an annual basis the corporate goals and objectives with respect to compensation for the Chief Executive Officer;
63
● review and approve on an annual basis the evaluation process and compensation structure for the Company’s other officers, including salary, bonus, incentive and
equity compensation; and
● periodically review and make recommendations to the Board of Directors regarding the compensation of non-management directors.
The Compensation Committee is responsible for developing the executive compensation philosophy and reviewing and recommending to the Board of Directors for
approval all compensation policies and compensation programs for the executive team.
Compensation Committee Interlocks and Insider Participation
None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has
one or more executive officers on our board of directors or compensation committee.
Code of Ethics
We have a code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer and principal accounting officer, and
the Board. A copy of this code is available in our employee handbook and under the “About Us – Code of Conduct” section of our website at www.avalon-globocare.com. In
addition, we intend to post on our website all disclosures that are required by law or the listing standards of our applicable trading market concerning any amendments to, or
waivers from, any provision of the code. The reference to our website address does not constitute incorporation by reference of the information contained at or available through
our website, and you should not consider it to be a part of this report.
Indemnification of Directors and Officers
Our directors and executive officers are indemnified as provided by the Delaware law and our Bylaws. These provisions state that our directors may cause us to
indemnify a director or former director against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, actually and reasonably
incurred by him or her as a result of him or her acting as a director. The indemnification of costs can include an amount paid to settle an action or satisfy a judgment. Such
indemnification is at the discretion of our board of directors and is subject to the Securities and Exchange Commission’s policy regarding indemnification.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, or otherwise. We have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires the Company’s executive officers, directors, and persons who beneficially own more than ten percent of a registered class of
the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of the Company’s common stock. Such officers, directors,
and persons are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms that they file with the SEC.
To our knowledge, based solely on review of the copies of such reports and amendments to such reports with respect to the year ended December 31, 2021 filed with the
SEC, all required Section 16 reports under the Exchange Act for our directors, executive officers, principal accounting officer and beneficial owners of greater than 10% of our
common stock were filed on a timely basis during the year ended December 31, 2021.
64
ITEM 11. EXECUTIVE COMPENSATION
Executive Officers’ Compensation
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our Chief Executive Officer, Chief Financial
Officer and Chief Operation Officer during the last two (2) years. No other executive officer received compensation in excess of $100,000 during the fiscal year ended December
31, 2021.
Summary Annual Compensation Table
Change in
Pension Value
and Non-
Qualified
Non-Equity
Deferred
Option
Incentive Plan
Compensation
All Other
Awards
($)
Compensation
($)
Earnings
($)
-
-
-
-
-
-
-
642,584
-
712,028
-
481,942
-
-
-
-
-
-
($)
-
-
-
-
-
-
-
Total
($)
360,000
- 1,002,584
-
350,000
- 1,062,028
340,000
-
821,942
-
Compensation
Name and
Principal
Position
Dr. David Jin
CEO
Luisa Ingargiola
CFO
Meng Li
COO
Fiscal
Year
2021
2020
2021
2020
2021
2020
Employment Agreements
David Jin
Stock
Award
($)
Salary
($)
360,000
360,000
350,000
350,000
340,000
340,000
On December 1, 2016, the Company entered into an Executive Employment Agreement with David Jin, the Company’s CEO and President. Pursuant to the agreement,
Mr. Jin will be employed as President and Chief Executive Officer of the Company which agreement had a term initially through November 30, 2017 unless earlier terminated
pursuant to the terms of the agreement. On February 20, 2020, the Company entered into a Letter Agreement with Dr. Jin pursuant to which the term of Dr. Jin’s Executive
Employment Agreement was extended an additional three years and granted Dr. Jin a Stock Option to acquire 400,000 shares of common stock at an exercise price of $1.52 per
share for a period of ten years.
During the term of the agreement, Mr. Jin is entitled to a base salary and will be eligible for a discretionary performance bonus, equity awards and to participate in
employee benefits plans as the Company may institute from time to time at the discretion of the Company’s Board of Directors. On January 3, 2019, the Company entered into a
Letter Agreement with Dr. Jin, pursuant to which his annual base salary set forth in his employment agreement was increased to $360,000 effective January 1, 2019. Further, the
Company agreed to grant Dr. Jin additional stock options to acquire 150,000 shares of common stock at an exercise price of $2.00 per share. Pursuant to the agreement, Mr. Jin
may be terminated for “cause” as defined and Mr. Jin may resign for “good reason” as defined. In the event Mr. Jin is terminated without cause or resigns for good reason, the
Company will be required to pay Mr. Jin all accrued salary and bonuses, reimbursement for all business expenses and Mr. Jin’s salary for one year. In the event Mr. Jin is
terminated with cause, resigns without good reason, dies or is disabled, the Company will be required to pay Mr. Jin all accrued salary and bonuses and reimbursement for all
business expenses. Under the agreement Mr. Jin is subject to confidentiality, non-compete and non-solicitation restrictions.
Meng Li
On January 11, 2017, Avalon Shanghai entered into an Executive Employment Agreement with Meng Li, the Company’s COO and Secretary. Pursuant to the
agreement, Ms. Li will be employed as Chief Operating Officer and President of Avalon Shanghai initially through November 30, 2019, unless earlier terminated pursuant to the
terms of the agreement. On February 20, 2020, the Company entered into a Letter Agreement with Meng Li pursuant to which the term of Ms. Li’s Executive Employment
Agreement entered between the Company’ subsidiary and Ms. Li dated January 11, 2017 was extended an additional three years and granted Ms. Li a Stock Option to acquire
300,000 shares of common stock at an exercise price of $1.52 per share for a period of ten years.
During the term of the agreement, Ms. Li is be entitled to a base salary and will be eligible for a discretionary performance bonus, equity awards and to participate in
employee benefits plans as the Avalon Shanghai may institute from time to time at the discretion of its Board of Directors. On January 3, 2019, the Company entered into a
Letter Agreement with Ms. Li, pursuant to which her annual base salary set forth in her employment agreement was increased to $340,000 effective January 1, 2019. Further, the
Company agreed to grant Ms. Li stock options to acquire 150,000 shares of common stock at an exercise price of $2.00 per share. Pursuant to the agreement, Ms. Li may be
terminated for “cause” as defined and Ms. Li may resign for “good reason” as defined. In the event Ms. Li is terminated without cause or resigns for good reason, Avalon
Shanghai will be required to pay Ms. Li all accrued salary and bonuses, reimbursement for all business expenses and Ms. Li’s salary for one year. In the event Ms. Li is
terminated with cause, resigns without good reason, dies or is disabled, Avalon Shanghai will be required to pay Ms. Li all accrued salary and bonuses and reimbursement for all
business expenses. Under the agreement Ms. Li is subject to confidentiality, non-compete and non-solicitation restrictions.
65
Luisa Ingargiola
On February 21, 2017, Ms. Ingargiola and the Company entered into an Executive Retention Agreement effective February 9, 2017 pursuant to which Ms. Ingargiola
agreed to serve as Chief Financial Officer in consideration of an annual salary. On January 3, 2019, the Company entered into a Letter Agreement with Ms. Ingargiola, pursuant
to which her annual base salary set forth in her employment agreement was increased to $350,000 effective January 1, 2019. The Company has agreed to provide a bonus of 50%
of her base salary upon the Company timely filing its annual report on Form 10-K for the year ended December 31, 2017 and the Company raising gross proceeds of $20 million
in debt and/or equity capital and a bonus of 100% of her base salary upon the Company achieving (i) any merger or sale of the Company or its assets, (ii) the Company achieving
adjusted EBITDA of $10 million in a fiscal year, (iii) the Company achieving a listing on a national exchange and then or subsequently raising gross proceeds in the amount of
$10 million. The Company also granted Ms. Ingargiola a Stock Option to acquire two million shares of common stock of the Company 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. The Company and Ms. Ingargiola also entered into an Indemnification
Agreement.
The employment of Ms. Ingargiola is at will and may be terminated at any time, with or without formal cause. Pursuant to the terms of executive retention agreement
with Ms. Ingargiola, the Company has agreed to provide specified severance and bonus amounts and to accelerate the vesting on their equity awards upon termination upon a
change of control or an involuntary termination, as each term is defined in the agreements.
In the event of a termination upon a change of control, Ms. Ingargiola is entitled to receive an amount equal to 12 months of her base salary and the target bonus then in
effect for the executive officer for the year in which such termination occurs, such bonus payment to be pro-rated to reflect the full number of months the executive remained in
the Company’s employ. In addition, the vesting on any stock option held by the executive officer will be accelerated in full. At the election of the executive officer, the Company
will also continue to provide health related employee insurance coverage for twelve months, at the Company’s expense.
In the event of an involuntary termination, Ms. Ingargiola is entitled to receive an amount equal to six months of her base salary and the target bonus then in effect for
the executive officer for the six months in which such termination occurs, such bonus payment to be pro-rated to reflect the full number of months the executive remained in the
Company’s employ. Such payment will be increased to 12 months upon the one-year anniversary of the retention agreement. In addition, the vesting on any stock option held by
the executive officer will be accelerated in full. At the election of the executive officer, the Company will also continue to provide health related employee insurance coverage
for twelve months, at the Company’s expense.
On February 20, 2020, the Company entered into a Letter Agreement with Ms. Ingargiola granting Ms. Ingargiola a Stock Option to acquire 400,000 shares of common
stock at an exercise price of $1.52 per share for a period of ten years.
Option Exercises and Stock Vested
There were no options exercised by our executive officers or stock vested to our executive officers during the year ended December 31, 2021.
66
Outstanding Equity Awards
The following table sets forth information with respect to the outstanding equity awards of our principal executive officers and principal financial officer during 2021,
and each person who served as an executive officer of the Company as of December 31, 2021:
Option Awards
Stock Awards
Outstanding Equity Awards
Number of
securities
underlying
unexercised
options
Exercisable
(#)
Number of
securities
underlying
unexercised
options
Unexercisable
(#)
Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
options
(#)
Options
exercise
price
($)
Option
expiration
Date
Equity
incentive
plan
awards:
Number of
unearned
shares,
units or
other
rights that
have not
vested
Number of
shares or
units of
stock that
have not
vested
Market
value of
shares or
units of
stock that
have not
vested
(#)
($)
(#)
Equity
incentive
plan
awards:
Market or
payout
value
of
unearned
shares,
units
or other
rights that
have not
vested
($)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Name and
principal
position
Luisa Ingargiola,
CFO
David Jin, CEO
Meng Li, COO
No Pension Benefits
The Company does not maintain any plan that provides for payments or other benefits to its executive officers at, following or in connection with retirement and
including, without limitation, any tax-qualified defined benefit plans or supplemental executive retirement plans.
No Nonqualified Deferred Compensation
The Company does not maintain any defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified.
Director Compensation
Name
Yue (Charles) Li (1)
Yancen Lu (2)
Wilbert Tauzin (3)
Wenzhao Lu
David Jin
Meng Li
Steven Sanders (4)
Tevi Troy (5)
William Stilley (6)
Stock
Fees Earned or
Paid in Cash
Awards
Option Awards
Non-equity
Incentive Plan
Compensation
$
$
$
$
Change in
Pension Value
and Non-
Qualified
Deferred
Compensation
Earnings
$
All Other
Compensation
$
60,000
70,000
-
100,000
-
-
70,000
60,000
70,000
-
-
-
-
-
-
-
-
-
76,185
76,185
163,858
-
-
-
76,185
76,185
76,185
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
$
136,185
146,185
163,858
100,000
-
-
146,185
136,185
146,185
(1) Mr. Li’s 2021 compensation consisted of cash of $60,000 and 80,000 options vested and valued at $76,185.
(2) Mr. Lu’s 2021 compensation consisted of cash of $70,000 and 80,000 options vested and valued at $76,185.
(3) Mr. Tauzin’s 2021 compensation consisted of 200,000 options vested and valued at $163,858.
(4) Mr. Sanders’s 2021 compensation consisted of cash of $70,000 and 80,000 options vested and valued at $76,185.
(5) Mr. Troy’s 2021 compensation consisted of cash of $60,000 and 80,000 options vested and valued at $76,185.
(6) Mr. Stilley’s 2021 compensation consisted of cash of $70,000 and 80,000 options vested and valued at $76,185.
67
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. In accordance
with SEC rules, shares of our common stock which may be acquired upon exercise of stock options or warrants which are currently exercisable or which become exercisable
within 60 days of the date of the applicable table below are deemed beneficially owned by the holders of such options and warrants and are deemed outstanding for the purpose
of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage of ownership of any other person.
Subject to community property laws, where applicable, the persons or entities named in the tables below have sole voting and investment power with respect to all shares of our
common stock indicated as beneficially owned by them.
The following table sets forth certain information, as of March 29, 2022 with respect to the beneficial ownership of the outstanding common stock by (i) any holder of
more than five (5%) percent; (ii) each of our executive officers and directors; and (iii) our directors and executive officers as a group. The numbers below reflect a 1:4 reverse
stock split implemented on October 18, 2016. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares
beneficially owned.
Name of Beneficial Owner (1)
Wenzhao Lu* (3)
David Jin, MD, PhD* (4)
Meng Li* (5)
Luisa Ingargiola* (6)
Yancen Lu* (7)
Steven A. Sanders* (8)
Wilbert J. Tauzin II* (9)
William B. Stilley III* (10)
Tevi Troy* (11)
Yue (Charles) Li* (12)
All officers and directors as a group (10 persons)
* Officer and/or director of our company.
** Less than 1.0%.
Common Stock
Beneficially
Owned
Percentage of
Common
Stock (2)
32,445,161
16,000,000
5,600,000
2,400,000
5,450,000
250,000
700,000
250,000
250,000
210,000
63,555,161
33.9%
16.7%
5.9%
2.5%
5.7%
**
**
**
**
**
66.5%
(1) Except as otherwise indicated, the address of each beneficial owner is c/o Avalon GloboCare Corp., 4400 Route 9 South, Suite 3100, Freehold, New Jersey 07728.
(2) Applicable percentage ownership is based on 88,625,709 shares of common stock outstanding as of March 29, 2022, together with securities exercisable or convertible into
shares of common stock within 60 days of March 29, 2022 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable
within 60 days of March 29, 2022 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of
such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(3) Wenzhao Lu holds (i) 30,945,161 shares of common stock and (ii) 1,500,000 vested options to acquire 1,500,000 shares of common stock of our company.
(4) David Jin holds (i) 15,450,000 shares of common stock and (ii) 550,000 vested options to acquire 550,000 shares of common stock of our company.
(5) Meng Li holds (i) 5,150,000 shares of common stock and (ii) 450,000 vested options to acquire 450,000 shares of common stock of our company.
68
(6) Represents 2,400,000 vested options to acquire 2,400,000 shares of common stock of our company.
(7) Yancen Lu holds (i) 5,000,000 shares of common stock and (ii) 450,000 options, of which 430,000 shares have vested and an additional 20,000 shares shall vest within 60
days.
(8) Represents stock option to acquire 250,000 shares of common stock of our company, which included 20,000 shares to be vested within 60 days.
(9) Represents stock option to acquire 700,000 shares of common stock of our company, which included 10,000 shares to be vested within 60 days.
(10) Represents stock option to acquire 250,000 shares of common stock of our company, which included 20,000 shares to be vested within 60 days.
(11) Represents stock option to acquire 250,000 shares of common stock of our company, which included 20,000 shares to be vested within 60 days.
(12) Represents stock option to acquire 210,000 shares of common stock of our company, which included 20,000 shares to be vested within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Rental Revenue from Related Party and Rent Receivable – Related Party
The Company leases space of its commercial real property located in New Jersey to a company, which is controlled by Wenzhao Lu, the Company’s largest shareholder
and chairman of the Board of Directors. The term of the related party lease agreement is five years commencing on May 1, 2021 and will expire on April 30, 2026. For the year
ended December 31, 2021, the related party rental revenue amounted to $33,600, and has been included in real property rental on the accompanying consolidated statements of
operations and comprehensive loss. As of December 31, 2021, the related party rent receivable totaled $33,600 and no allowance for doubtful accounts was deemed to be
required on rent receivable – related party at December 31, 2021.
Medical Related Consulting Services Revenue from Related Parties
During the years ended December 31, 2021 and 2020, medical related consulting services revenue from related parties was as follows:
Medical related consulting services provided to:
Hebei Daopei *
Shanghai Daopei *
Years Ended December 31,
2020
2021
$
$
187,412 $
-
187,412 $
-
170,908
170,908
* Hebei Daopei and Shanghai Daopei are subsidiaries of an entity whose chairman is Wenzhao Lu, the largest shareholder of the Company.
Accrued Liabilities and Other Payables – Related Parties
In 2017, the Company acquired Beijing Genexosome for a cash payment of $450,000. As of December 31, 2021 and 2020, the unpaid acquisition consideration of
$100,000, was payable to Dr. Yu Zhou, former 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 December 31, 2021 and 2020, 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 $368,433 and $167,956, respectively, and have been included in accrued liabilities and other payables – related parties on the accompanying
consolidated balance sheets.
69
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 December 31, 2021 and
2020, the outstanding principal balance was $390,000.
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.
In the years ended December 31, 2021 and 2020, activity recorded for the Line of Credit is summarized in the following table:
Outstanding principal under the Line of Credit at January 1, 2020
Draw down from Line of Credit
Outstanding principal under the Line of Credit at December 31, 2020
Draw down from Line of Credit
Settlement pursuant to Debt Settlement Agreement and Release *
Outstanding principal under the Line of Credit at December 31, 2021
$
$
2,600,000
600,000
3,200,000
2,550,262
(3,000,000)
2,750,262
* On December 21, 2021, the Company and Mr. Lu entered into and closed a Debt Settlement Agreement and Release pursuant to which the $3.0 million debt was settled by
issuance of the Company’s 2,400,000 shares of common stock. The 2.4 million shares issued had a fair value of $3 million.
For the years ended December 31, 2021 and 2020, the interest expense related to above borrowings amounted to $200,477 and $168,762, respectively, and has been
included in interest expense – related party on the accompanying consolidated statements of operations and comprehensive loss.
As of December 31, 2021 and 2020, the related accrued and unpaid interest for above borrowings was $368,433 and $167,956, respectively, and has been included in
accrued liabilities and other payables – related parties on the accompanying consolidated balance sheets.
Common Shares Sold to Related Party
On April 1, 2020, the Company sold 645,161 shares of its common stock to WLM Limited (“WLM”), an entity owned by Wenzhao Lu, Chairman of the Board of
Directors of the Company, at a price per share of $1.55, the fair market value on transaction date, for an aggregate purchase price of $1,000,000.
70
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Marcum LLP served as our independent auditors for the years ended December 31, 2021 and 2020.
Aggregate fees billed to the Company for professional services rendered by Marcum LLP during the last two years were as follows:
Audit Fees
Audit Related Fees
Tax Fees
All Other Fees
Totals
Years Ended December 31,
2020
2021
$
$
223,229 $
-
-
-
223,229 $
252,144
-
15,450
-
267,594
AUDIT FEES. Consists of fees billed for professional services rendered for the audit of our annual consolidated financial statements, review of the Form 10-K, and
review of the interim consolidated financial statements included in quarterly reports, and services that are normally provided by our independent auditors in connection with
statutory and regulatory filings or engagements, including registration statements.
AUDIT-RELATED FEES. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit and or review of our
consolidated financial statements and are not reported under “Audit Fees”, such as audits and reviews in connection with acquisitions.
TAX FEES. Consists of fees billed for professional services for tax compliance, tax advice and tax planning.
ALL OTHER FEES. Consists of fees for products and services other than the services reported above. There were no management consulting services provided in 2021
or 2020.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
The current policy of the directors, acting as the audit committee, is to approve the appointment of the principal auditing firm and any permissible audit-related services.
The audit and audit related fees include fees for the annual audit of the financial statements and review of financial statements included in 10Q filings. Fees charged by the
auditor were approved by the Board with engagement letters signed by the audit committee chairman.
The Audit Committee is responsible for the pre-approval of audit and permitted non-audit services to be performed by the Company’s independent auditor. The Audit
Committee will, on an annual basis, consider and, if appropriate, approve the provision of audit and non-audit services by the auditor. Thereafter, the Audit Committee will, as
necessary, consider and, if appropriate, approve the provision of additional audit and non-audit services by the auditor which are not encompassed by the Audit Committee’s
annual pre-approval and are not prohibited by law. The Audit Committee has delegated to the Chair of the Audit Committee the authority to pre-approve, on a case-by-case
basis, non-audit services to be performed by the auditor. The Audit Committee has approved all audit and permitted non-audit services performed by the auditor for the year
ended December 31, 2021.
71
PART IV
Description
ITEM 15. EXHIBITS
Exhibit
Number
1.1
3.1
3.2
4.1
Open Market Sale AgreementSM, dated as of December 13, 2019, by and between Avalon GloboCare Corp. and Jefferies LLC. (incorporated by reference to
Exhibit 1.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 13, 2019)
Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K/A filed
with the Securities and Exchange Commission on April 26, 2018)
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K/A filed with the Securities and
Exchange Commission on April 26, 2018)
Form of Subscription Agreement by and between Avalon GloboCare Corp. and the December 2016 Accredited Investors (incorporated by reference to
Exhibit 4.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2016)
4.2 †
Stock Option issued to Luisa Ingargiola dated February 21, 2017 (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 21, 2017)
4.3
4.4
4.5
4.6
4.7
4.8
4.9*
10.1
Form of Subscription Agreement by and between Avalon GloboCare Corp. and the March 2017 Accredited Investor (incorporated by reference to Exhibit 4.1
of the Current Report on Form 8-K filed with the Securities and Exchange Commission on March 7, 2017)
Share Subscription Agreement between Avalon GloboCare Corp., Avalon (Shanghai) Healthcare Technology Co., Ltd., Beijing DOING Biomedical
Technology Co., Ltd. and Daron Liang (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 7, 2017)
Warranty Agreement between Lu Wenzhao and Beijing DOING Biomedical Technology Co., Ltd. (incorporated by reference to Exhibit 4.3 of the Current
Report on Form 8-K filed with the Securities and Exchange Commission on March 7, 2017)
Form of Subscription Agreement between Avalon GloboCare Corp. and the October 2017 Accredited Investors (incorporated by reference to Exhibit 4.1 of
the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 26, 2017)
Form of Warrant to Boustead Securities, LLC in connection with the private placements (incorporated by reference to Exhibit 4.8 of the Registration
Statement on Form S-1/A filed with the Securities and Exchange Commission on July 27, 2018)
Form of Warrant (April 2019) (Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 26, 2019)
Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934
Share Exchange Agreement dated as of October 19, 2016 by and among Avalon Healthcare System, Inc., the shareholders of Avalon Healthcare System, Inc.
and Avalon GloboCare Corp. (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 19, 2016)
10.2 †
Executive Employment Agreement, effective December 1, 2016, by and between Avalon GloboCare Corp. and David Jin (incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 2, 2016)
10.3
Agreement of Sale by and between Freehold Craig Road Partnership, as Seller, and Avalon GloboCare Corp., as Buyer dated as of December 22, 2016
(incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 23, 2016)
10.4 †
Executive Employment Agreement by and between Avalon (Shanghai) Healthcare Technology Ltd. and Meng Li dated January 11, 2017 (incorporated by
reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 11, 2017)
72
10.5 †
Executive Retention Agreement by and between Avalon GloboCare Corp. and Luisa Ingargiola dated February 21, 2017 (incorporated by reference to Exhibit
10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 21, 2017)
10.6 †
Indemnification Agreement by and between Avalon GloboCare Corp. and Luisa Ingargiola dated February 21, 2017 (incorporated by reference to Exhibit
10.2 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 21, 2017)
10.7 †
Director Agreement by and between Avalon GloboCare Corp. and Steven P. Sukel dated April 28, 2017 (incorporated by reference to Exhibit 10.1 of the
Current Report on Form 8-K filed with the Securities and Exchange Commission on April 28, 2017)
10.8 †
Director Agreement by and between Avalon GloboCare Corp. and Yancen Lu dated April 28, 2017 (incorporated by reference to Exhibit 10.2 of the Current
Report on Form 8-K filed with the Securities and Exchange Commission on April 28, 2017)
10.9
10.10
10.11
10.12
Consultation Service Contract between Daopei Investment Management (Shanghai) Co., Ltd. and Avalon HealthCare System Inc. dated April 1, 2016
(English translation) (incorporated by reference to Exhibit 10.8 of Amendment No. 1 to the Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on July 7, 2017)
Consultation Service Contract between Hebei Yanda Ludaopei Hospital Co., Ltd and Avalon HealthCare System Inc. dated April 1, 2016 (English
translation) (incorporated by reference to Exhibit 10.9 of Amendment No. 1 to the Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on July 7, 2017)
Consultation Service Contract between Nanshan Memorial Stem Cell Biotechnology Co., Ltd. and Avalon HealthCare System Inc. dated April 1, 2016
(English translation) (incorporated by reference to Exhibit 10.10 of Amendment No. 1 to the Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on July 7, 2017)
Loan Agreement between Lotus Capital Overseas Limited and Avalon (Shanghai) Healthcare Technology Co., Ltd. dated April 19, 2017 (English translation)
(incorporated by reference to Exhibit 10.12 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2017)
10.13
Securities Purchase Agreement between Avalon GloboCare Corp. and Genexosome Technologies Inc. dated October 25, 2017 (incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 26, 2017)
10.14
Asset Purchase Agreement between Genexosome Technologies Inc. and Yu Zhou dated October 25, 2017 (incorporated by reference to Exhibit 10.2 of the
Current Report on Form 8-K filed with the Securities and Exchange Commission on October 26, 2017)
10.15
Stock Purchase Agreement between Genexosome Technologies Inc., Beijing Jieteng (Genexosome) Biotech Co. Ltd. and Yu Zhou dated October 25, 2017
(incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 26, 2017)
10.16 †
Executive Retention Agreement between Genexosome Technologies Inc. and Yu Zhou dated October 25, 2017 (incorporated by reference to Exhibit 10.4 of
the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 26, 2017)
10.17
Invention Assignment, Confidentiality, Non-Compete and Non-Solicit Agreement between Genexosome Technologies Inc. and Yu Zhou dated October 25,
2017 (incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 26, 2017)
10.18 †
Director Agreement by and between Avalon GloboCare Corp. and Wilbert J. Tauzin II dated November 1, 2017 (incorporated by reference to Exhibit 10.1 of
the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 7, 2017)
10.19
Agreement between Avalon GloboCare Corp. and Tauzin Consultants, LLC dated November 1, 2017 (incorporated by reference to Exhibit 10.2 of the
Current Report on Form 8-K filed with the Securities and Exchange Commission on November 7, 2017)
10.20 †
Letter Agreement by and between Avalon GloboCare Corp. and David Jin dated April 3, 2018 (incorporated by reference to Exhibit 10.1 of the Current
Report on Form 8-K filed with the Securities and Exchange Commission on April 4, 2018)
73
10.21 †
Letter Agreement by and between Avalon GloboCare Corp. and Meng Li dated April 3, 2018 (incorporated by reference to Exhibit 10.2 of the Current Report
on Form 8-K filed with the Securities and Exchange Commission on April 4, 2018)
10.22
Advisory Service Contract between Ludaopei Hematology Research Institute Co., Ltd. and Avalon (Shanghai) Healthcare Technology Co., Ltd. dated April
1, 2018 (English translation) (Incorporated by reference to that Form S-1 Registration Statement filed with the Securities and Exchange Commission on April
19, 2018)
10.23
Form of Subscription Agreement by and between Avalon GloboCare Corp. and the April 2018 Accredited Investors (incorporated by reference to Exhibit 4.1
of the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2018)
10.24
10.25
Supplementary Agreement Related to Share Subscription by and between Avalon GloboCare Corp., Avalon (Shanghai) Healthcare Technology Co., Ltd.,
Beijing DOING Biomedical Technology Co., Ltd. and Daron Liang dated April 23, 2018 (English translation) (incorporated by reference to Exhibit 4.2 of the
Current Report on Form 8-K/A filed with the Securities and Exchange Commission on April 26, 2018)
Loan Extension Agreement between Lotus Capital Overseas Limited and Avalon (Shanghai) Healthcare Technology Co., Ltd. dated May 3, 2018 (English
translation) (incorporated by reference to Exhibit 10.18 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May
11, 2018)
10.26 †
Director Agreement by and between Avalon GloboCare Corp. and Tevi Troy dated June 4, 2018 (incorporated by reference to Exhibit 10.1 of the Current
Report on Form 8-K filed with the Securities and Exchange Commission on June 6, 2018)
10.27
Joint Venture Agreement by and between Avalon (Shanghai) Healthcare Technology Co., Ltd. and Jiangsu Unicorn Biological Technology Co., Ltd. dated
May 29, 2018 (English translation) (incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 6, 2018)
10.28 †
Director Agreement by and between Avalon GloboCare Corp. and William Stilley, III dated July 5, 2018 (incorporated by reference to Exhibit 10.1 of the
Current Report on Form 8-K filed with the Securities and Exchange Commission on July 10, 2018)
10.29 †
Director Agreement by and between Avalon GloboCare Corp. and Steven A. Sanders dated July 30, 2018 (incorporated by reference to Exhibit 10.1 of the
Current Report on Form 8-K filed with the Securities and Exchange Commission on July 31, 2018)
10.30
10.31
10.32
Loan Extension Agreement between Lotus Capital Overseas Limited and Avalon (Shanghai) Healthcare Technology Co., Ltd. dated August 3, 2018 (English
translation) (incorporated by reference to Exhibit 10.30 of the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on
August 7, 2018)
Strategic Partnership Agreement between Avalon GloboCare Corp. and Weill Cornell Medical College of Cornell University dated August 6, 2018
(incorporated by reference to Exhibit 10.31 of the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on August 7,
2018)
Equity Joint Venture Agreement by and between Avactis Biosciences, Inc., a wholly-owned subsidiary of Avalon GloboCare Corp., and Arbele Limited for
the establishment of AVAR (China) BioTherapeutics Ltd. dated October 23, 2018 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-
K filed with the Securities and Exchange Commission on October 29, 2018)
10.33
Letter Agreement by and between Avalon GloboCare Corp. and David Jin dated January 3, 2019 (incorporated by reference to Exhibit 10.1 of the Current
Report on Form 8-K filed with the Securities and Exchange Commission on January 4, 2019)
10.34
Letter Agreement by and between Avalon GloboCare Corp. and Luisa Ingargiola dated January 3, 2019 (incorporated by reference to Exhibit 10.2 of the
Current Report on Form 8-K filed with the Securities and Exchange Commission on January 4, 2019)
10.35
Letter Agreement by and between Avalon (Shanghai) Healthcare Technology Co. Ltd. and Meng Li dated January 3, 2019 (incorporated by reference to
Exhibit 10.3 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 4, 2019)
10.36
Promissory Note issued to Daniel Lu dated Mach 18, 2019 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 22, 2019)
10.37†
Director Agreement by and between Avalon GloboCare Corp. and Meng Li dated April 5, 2019 (Incorporated by reference to Exhibit 10.1 of the Current
Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2019)
10.38†
Director Agreement by and between Avalon GloboCare Corp. and Yue “Charles” Li dated April 5, 2019 (Incorporated by reference to Exhibit 10.2 of the
Current Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2019)
10.39
Form of Securities Purchase Agreement dated April 25, 2019 (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 26, 2019)
74
10.40
Revolving Line of Credit Agreement dated as of August 29, 2019 between Avalon GloboCare Corp. and Wenzhao “Daniel” Lu dated August 29, 2019
(Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 3, 2019)
10.41
Form of Warrant Redemption and Cancellation Agreement (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 21, 2019)
10.42
Letter Agreement by and between Avalon GloboCare Corp. and David Jin dated February 20, 2020 (Incorporated by reference to Exhibit 10.1 of the Current
Report on Form 8-K filed with the Securities and Exchange Commission on February 24, 2020)
10.43
Letter Agreement by and between Avalon GloboCare Corp. and Meng Li dated February 20, 2020 (Incorporated by reference to Exhibit 10.2 of the Current
Report on Form 8-K filed with the Securities and Exchange Commission on February 24, 2020)
10.44
Letter Agreement by and between Avalon GloboCare Corp. and Luisa Ingargiola dated February 20, 2020 (Incorporated by reference to Exhibit 10.3 of the
Current Report on Form 8-K filed with the Securities and Exchange Commission on February 24, 2020)
10.45
Debt Settlement Agreement and Release between Avalon GloboCare Corp. and Wenzhao “Daniel” Lu (Incorporated by reference to Exhibit 10.2 of the
Current Report on Form 8-K filed with the Securities and Exchange Commission on December 12, 2021)
10.46
10.47*
10.48*
10.49*
21.1
23.1*
31.1*
31.2*
32.1*
32.2*
Corporate Research Agreement by and between Avalon GloboCare Corp. and the University of Pittsburgh of the Commonwealth System of Higher
Education dated July 8, 2021 (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 14, 2021)
Form of Securities Purchase Agreement dated March 28, 2022
Form of Convertible Note – March 2022
Loan Extension and Modification Agreement between Avalon GloboCare Corp. and Wenzhao Lu dated March 28, 2022
List of Subsidiaries (incorporated by reference to Exhibit 21.1 of the Registration Statement on Form S-1/A filed with the Securities and Exchange
Commission on July 20, 2018)
Consent of Independent Registered Accounting Firm
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
101.INS*
Inline XBRL Instance Document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
Filed herewith
† Management contract or compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY.
None.
75
Pursuant to the requirements of Section 13 or 15(d) of the Securities and 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.
SIGNATURES
Dated: March 30, 2022
Dated: March 30, 2022
/s/ David Jin
By:
Name: David Jin
Title:
Chief Executive Officer, President and Director
(Principal Executive Officer)
/s/ Luisa Ingargiola
By:
Name: Luisa Ingargiola
Title:
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the following persons on March 30, 2022, on behalf of the registrant and in the capacities
(Principal Financial and Accounting Officer)
indicated.
/s/ David Jin
David Jin
/s/ Luisa Ingargolia
Luisa Ingargolia
/s/ Wenzhao Lu
Wenzhao Lu
/s/ Meng Li
Meng Li
/s/ Steven A. Sanders
Steven A. Sanders
/s/ Yancen Lu
Yancen Lu
/s/ Wilbert J. Tauzin II
Wilbert J. Tauzin II
/s/ William B. Stilley III
William B. Stilley III
/s/ Tevi Troy
Tevi Troy
/s/ Yue “Charles” Li
Yue “Charles” Li
Signature
Title
Chief Executive Officer, President and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chairman of the Board of Directors
Chief Operating Officer, Secretary and Director
Director
Director
Director
Director
Director
Director
76
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
CONTENTS
Report of Independent Registered Public Accounting Firm (PCAOB No. 688)
Consolidated Financial Statements:
Consolidated Balance Sheets - As of December 31, 2021 and 2020
Consolidated Statements of Operations and Comprehensive Loss - For the Years Ended December 31, 2021 and 2020
Consolidated Statements of Changes in Equity - For the Years Ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows – For the Years Ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Avalon GloboCare Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Avalon GloboCare Corp. (the “Company”) as of December 31, 2021 and 2020, the related consolidated
statements of operations and comprehensive loss, changes in equity and cash flows for each of the two years in the period ended December 31, 2021, and the related notes
(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting
principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the
Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These
conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical Audit Matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit
committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex
judgments. We determined that there are no critical audit matters.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2019.
New York, NY
March 30, 2022
F-2
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
CURRENT ASSETS:
Cash
Rent receivable
Rent receivable - related party
Deferred financing costs, net
Prepaid professional fees
Prepaid expenses and other current assets
Total Current Assets
NON-CURRENT ASSETS:
Rent receivable - noncurrent portion
Deferred financing costs - noncurrent portion, net
Security deposit
Deferred leasing costs
Operating lease right-of-use assets, net
Property and equipment, net
Investment in real estate, net
Equity method investment
Total Non-current Assets
Total Assets
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accrued professional fees
Accrued research and development fees
Accrued payroll liability and directors’ compensation
Accrued liabilities and other payables
Accrued liabilities and other payables - related parties
Operating lease obligation
Note payable - related party
Total Current Liabilities
NON-CURRENT LIABILITIES:
Operating lease obligation - noncurrent portion
Note payable - related party
Loan payable - related party
Total Non-current Liabilities
Total Liabilities
Commitments and Contingencies (Note 17)
EQUITY:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized;
no shares issued and outstanding at December 31, 2021 and 2020
Common stock, $0.0001 par value; 490,000,000 shares authorized; 88,975,169 shares issued and 88,455,169 shares outstanding at
December 31, 2021; 82,795,297 shares issued and 82,275,297 shares outstanding at December 31, 2020
Additional paid-in capital
Less: common stock held in treasury, at cost; 520,000 shares at and December 31, 2021 and 2020
Accumulated deficit
Statutory reserve
Accumulated other comprehensive loss - foreign currency translation adjustment
Total Avalon GloboCare Corp. stockholders’ equity
Non-controlling interest
Total Equity
Total Liabilities and Equity
See accompanying notes to the consolidated financial statements.
$
December 31,
2021
2020
807,538 $
33,618
33,600
138,631
186,609
123,046
726,577
35,395
-
222,141
78,639
223,585
1,323,042
1,286,337
163,211
74,648
20,271
109,792
145,303
361,547
7,528,770
515,632
111,840
-
-
144,197
137,333
479,115
7,685,686
521,758
8,919,174
9,079,929
$
10,242,216 $
10,366,266
$
1,881,349 $
928,111
307,043
275,320
468,433
151,402
390,000
1,212,822
513,533
154,292
367,411
267,956
76,379
-
4,401,658
2,592,393
5,901
-
2,750,262
66,954
390,000
3,200,000
2,756,163
3,656,954
7,157,821
6,249,347
-
-
8,898
54,888,559
(522,500)
(51,131,874)
6,578
(165,266)
3,084,395
-
8,279
46,856,447
(522,500)
(42,041,375)
6,578
(190,510)
4,116,919
-
3,084,395
4,116,919
$
10,242,216 $
10,366,266
F-3
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
REVENUES
Real property rental
Medical related consulting services - related party
Total Revenues
COSTS AND EXPENSES
Real property operating expenses
Medical related consulting services - related party
Total Costs and Expenses
Real property operating income
Gross profit from medical related consulting services - related party
Total Gross Profit
OTHER OPERATING EXPENSES:
Professional fees
Compensation and related benefits
Research and development expenses
Other general and administrative
Total Other Operating Expenses
LOSS FROM OPERATIONS
OTHER INCOME (EXPENSE)
Interest expense - related party
Loss from equity method investment
Other income (expense)
Total Other Expense, net
LOSS BEFORE INCOME TAXES
INCOME TAXES
NET LOSS
LESS: NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST
For the Years
Ended
December 31,
2021
2020
$
1,203,560 $
187,412
1,390,972
1,206,854
170,908
1,377,762
829,287
147,167
976,454
374,273
40,245
414,518
851,754
135,805
987,559
355,100
35,103
390,203
4,946,696
2,042,278
1,025,009
1,234,365
6,553,009
4,156,150
883,855
1,251,208
9,248,348
12,844,222
(8,833,830)
(12,454,019)
(200,477)
(60,463)
4,271
(168,762)
(51,673)
(4,984)
(256,669)
(225,419)
(9,090,499)
(12,679,438)
-
-
$
(9,090,499) $
(12,679,438)
-
-
NET LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS
$
(9,090,499) $
(12,679,438)
COMPREHENSIVE LOSS:
NET LOSS
OTHER COMPREHENSIVE INCOME
Unrealized foreign currency translation gain
COMPREHENSIVE LOSS
LESS: COMPREHENSIVE LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST
COMPREHENSIVE LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS:
Basic and diluted
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted
See accompanying notes to the consolidated financial statements.
F-4
$
(9,090,499) $
(12,679,438)
25,244
(9,065,255)
-
(9,065,255) $
67,237
(12,612,201)
-
(12,612,201)
(0.11) $
(0.16)
$
$
84,911,032
79,508,149
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Years Ended December 31, 2021 and 2020
Avalon GloboCare Corp. Stockholders’ Equity
Preferred Stock Common Stock
Treasury Stock
Number
of
Number of
Paid-in
Number
of
Additional
Shares Amount Shares
Amount Capital
Shares Amount
Accumulated
Other
Non-
Accumulated Statutory
Reserve
Deficit
Comprehensive
Loss
controlling
Interest
Total
Equity
Balance,
January 1,
2020
Sale of
common
stock, net
Issuance of
common
stock for
services
Stock-based
compensation
Foreign
currency
translation
adjustment
Net loss for the
year
Balance,
December 31,
2020
Sale of
common
stock, net
Issuance of
common
stock for
settlement of
accrued
professional
fees
Issuance of
common
stock for
settlement of
loan payable
- related party
Issuance of
common
stock for
services
Stock-based
compensation
Foreign
currency
translation
adjustment
Net loss for the
year
Balance,
December 31,
2021
- $ - 76,730,802 $ 7,673 $34,593,006 (520,000) $(522,500) $ (29,361,937) $
6,578 $
(257,747) $ - $ 4,465,073
-
- 4,558,574
456 7,405,019
-
-
-
-
-
-
-
-
- 1,505,921
150 1,892,370
-
-
- 2,966,052
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- (12,679,438)
-
-
-
-
-
-
-
-
7,405,475
-
1,892,520
-
2,966,052
67,237
-
67,237
-
- (12,679,438)
-
- 82,795,297
8,279 46,856,447 (520,000) (522,500) (42,041,375)
6,578
(190,510)
-
4,116,919
-
- 2,206,838
221 2,553,188
-
-
-
-
-
-
2,553,409
-
-
167,355
17
202,483
-
-
-
-
-
-
202,500
-
- 2,400,000
240 2,999,760
-
-
-
-
-
-
-
-
- 1,405,679
141 1,507,347
-
-
-
769,334
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(9,090,499)
-
-
-
-
-
-
-
-
3,000,000
-
1,507,488
-
769,334
25,244
-
25,244
-
-
(9,090,499)
- $
- 88,975,169 $ 8,898 $54,888,559 (520,000) $(522,500) $ (51,131,874) $
6,578 $
(165,266) $
- $ 3,084,395
See accompanying notes to the consolidated financial statements.
F-5
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt provision
Depreciation
Change in straight-line rent receivable
Amortization of right-of-use asset
Stock-based compensation and service expense
Loss on equity method investment
Loss on fixed assets disposal
Changes in operating assets and liabilities:
Accounts receivable - related party
Rent receivable
Rent receivable - related party
Security deposit
Deferred leasing costs
Prepaid expenses and other assets
Accrued liabilities and other payables
Accrued liabilities and other payables - related parties
Operating lease obligation
NET CASH USED IN OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Improvement of commercial real estate
Additional investment in equity method investment
CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of note payable - related party
Proceeds received from loan payable - related party
Proceeds received from equity offering
Disbursements for equity offering costs
NET CASH PROVIDED BY FINANCING ACTIVITIES
EFFECT OF EXCHANGE RATE ON CASH
NET INCREASE (DECREASE) IN CASH
CASH - beginning of year
CASH - end of year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for future services
Common stock issued for accrued liabilities
Deferred financing costs in accrued liabilities
Accrued professional fees relieved for shares issued
Related party loan settled in shares
See accompanying notes to the consolidated financial statements.
F-6
For the Years
Ended
December 31,
2021
2020
$
(9,090,499) $
(12,679,438)
8,091
311,761
(51,246)
127,020
2,110,169
60,463
-
-
(168)
(33,600)
6,847
21,203
95,133
1,330,890
200,477
(121,020)
55,133
314,780
7,554
63,695
5,494,033
51,673
2,679
217,394
(82,174)
-
-
-
(206,632)
(845,864)
118,762
(57,695)
(5,024,479)
(7,546,100)
(17,502)
(10,332)
(40,301)
-
(111,213)
(57,972)
(68,135)
(169,185)
-
2,550,262
2,860,304
(240,434)
(200,000)
600,000
7,804,099
(539,818)
5,170,132
7,664,281
3,443
12,690
80,961
(38,314)
726,577
764,891
$
807,538 $
726,577
$
$
$
$
$
$
- $
50,000
155,700 $
276,032 $
57,599 $
202,500 $
3,000,000 $
34,629
187,725
-
-
-
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Avalon GloboCare 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 19, 2016, the Company entered into and closed a Share Exchange Agreement with the shareholders of Avalon Healthcare System, Inc., a Delaware corporation
(“AHS”), each of which were accredited investors (“AHS Shareholders”) pursuant to which we acquired 100% of the outstanding securities of AHS in exchange
for 50,000,000 shares of the Company’s common stock (the “AHS Acquisition”). AHS was incorporated on May 18, 2015 under the laws of the State of Delaware.
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) 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 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 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 COVID-19 related vaccine and therapeutics.
On January 23, 2017, the Company incorporated Avalon (BVI) Ltd., a British Virgin Island company. There was no activity for the subsidiary since its incorporation through
December 31, 2021. 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 9 South, Freehold, NJ 07728. This property was
purchased to serve as the Company’s world-wide headquarters for all corporate administration and operations. In addition, the property generates rental income. Avalon RT 9
owns this office building. Avalon RT 9’s business consists of the ownership and operation of the income-producing real estate property in New Jersey. As of March 24, 2022, the
occupancy rate of the building is 83.5%.
On July 31, 2017, the Company formed Genexosome Technologies Inc. (“Genexosome”) in Nevada. Genexosome was engaged in developing proprietary diagnostic and
therapeutic products using exosomes. Genexosome owns 100% of the capital stock of Beijing Jieteng (Genexosome) Biotech Co., Ltd., a corporation incorporated in the
People’s Republic of China on August 7, 2015 (“Beijing Genexosome”), and the Company holds 60% of Genexosome and Dr. Yu Zhou holds 40% of Genexosome. 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. Since the fourth quarter of 2019, the non-controlling interest has remained
inactive.
On July 18, 2018, the Company formed a wholly owned subsidiary, Avactis Biosciences Inc., a Nevada corporation, which will focus on accelerating commercial activities
related to cellular therapies, including regenerative medicine with stem/progenitor cells as well as cellular immunotherapy including CAR-T, CAR-NK, TCR-T and others. The
subsidiary is designed to integrate and optimize our global scientific and clinical resources to further advance the use of cellular therapies to treat certain cancers.
On June 13, 2019, the Company formed a wholly owned subsidiary, International Exosome Association LLC, a Delaware company. There was no activity for the subsidiary
since its incorporation through December 31, 2021.
F-7
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS (continued)
Details of the Company’s subsidiaries which are included in these consolidated financial statements as of December 31, 2021 are as follows:
Name of Subsidiary
Avalon Healthcare System, Inc.
(“AHS”)
Avalon (BVI) Ltd.
(“Avalon BVI”)
Avalon RT 9 Properties LLC
(“Avalon RT 9”)
Avalon (Shanghai) Healthcare Technology
Co., Ltd.
(“Avalon Shanghai”)
Genexosome Technologies Inc.
(“Genexosome”)
Beijing Jieteng (Genexosome) Biotech Co.,
Ltd.
(“Beijing Genexosome”)
Place and date of
Incorporation
Delaware
May 18, 2015
British Virgin Island
January 23, 2017
New Jersey
February 7, 2017
PRC
April 29, 2016
Percentage of
Ownership
100% held by
AVCO
100% held by
AVCO
100% held by
AVCO
Principal Activities
Provides medical related consulting services and developing Avalon Cell
and Avalon Rehab in United States of America (“USA”)
Dormant,
is in process of being dissolved
Owns and operates an income-producing real property and holds and
manages the corporate headquarters
100% held by AHS Provides medical related consulting services and developing Avalon Cell
and Avalon Rehab in China
Nevada
July 31, 2017
PRC
August 7, 2015
60% held by AVCO
100% held by
Genexosome
Dormant
Dormant
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
F-8
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – BASIS OF PRESENTATION AND GOING CONCERN CONDITION
Basis of Presentation
The accompanying consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission for financial information.
The Company’s consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Going Concern
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 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 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 COVID-19 related vaccine and therapeutics.
In addition, the Company owns commercial real estate that houses its headquarters in Freehold, New Jersey and provides outsourced, customized international healthcare
services to the rapidly changing health care industry primarily focused in the People’s Republic of China. These consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of
business.
As reflected in the accompanying consolidated financial statements, the Company had a working capital deficit of $3,078,616 as of December 31, 2021 and has incurred
recurring net losses and generated negative cash flow from operating activities of $9,090,499 and $5,024,479 for the year ended December 31, 2021, respectively. The Company
has a limited operating history and its continued growth is dependent upon the continuation of providing medical related consulting services to its only few clients who are
related parties and generating rental revenue from its income-producing real estate property in New Jersey; 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 had negatively impact on the Company’s operations. 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 2022.
The accompanying 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.
F-9
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates. Significant estimates during the years ended December 31, 2021 and 2020 include the useful life of
property and equipment and investment in real estate, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets and the associated valuation
allowances, and valuation of stock-based compensation.
Fair Value of Financial Instruments and Fair Value Measurements
The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes
methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
● Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
● Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that
are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
● Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset
or liability based on the best available information.
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximates the carrying
amounts represented in the accompanying consolidated financial statements, primarily due to their short-term nature.
ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option
may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains
and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding
instruments.
Cash and Cash Equivalents
At December 31, 2021 and 2020, the Company’s cash balances by geographic area were as follows:
Country:
United States
China
Total cash
December 31,
December 31,
$
$
2021
767,605
39,933
807,538
95.1% $
4.9%
100.0% $
2020
559,711
166,866
726,577
77.0%
23.0%
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 December 31, 2021 and 2020.
F-10
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Credit Risk and Uncertainties
A portion of the Company’s cash is maintained with state-owned banks within the PRC. Balances at state-owned banks within the PRC are covered by insurance up to RMB
500,000 (approximately $79,000) per bank. Any balance over RMB 500,000 per bank in PRC will not be covered. At December 31, 2021, cash balances held in the PRC were
RMB 253,813 (approximately $40,000), which were covered by such limited 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.
The 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
December 31, 2021, the Company’s cash balances in United States bank accounts had approximately $228,000 in excess of the federally-insured limits.
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.
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. 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 receivable is limited due to short-term payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce
credit risk.
Rent Receivable and Allowance for Doubtful Accounts
Rent receivable is presented net of an allowance for doubtful accounts. Rent receivable balance consists of base rents, tenant reimbursements and receivables arising from
straight-lining of rents 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 rent 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 rent receivable is fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its rent receivable at December 31,
2021 and 2020.
Deferred Financing Costs
Deferred financing costs consist of legal, accounting and other costs that are directly related to the Company’s open market sale equity financing and will be charged to
stockholders’ equity upon the completion of the equity offering. As of December 31, 2021 and 2020, deferred financing costs amounted to $213,279 and $222,141, respectively.
Deferred Leasing Costs
Costs incurred to obtain tenant leases are amortized using the straight-line method over the term of the related lease agreement. Such costs include lease incentives and leasing
commissions. If the lease is terminated early, the remaining unamortized deferred leasing cost is written off.
F-11
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and Equipment
Property and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is
expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the
accounts, and any resulting gains or losses are included in income in the period 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 and consists of building and improvement. The Company depreciates real estate building and
improvement on a straight-line basis over estimated useful life. Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditure for
improvements, renovations, and replacements of real estate asset is capitalized and depreciated over its estimated useful life if the expenditure qualifies as betterment.
Investment in Unconsolidated Company – Epicon Biosciences Co., Ltd.
The Company uses the equity method of accounting for its investment in, and earning or loss of, company that it does not control but over which it does exert significant
influence. The Company considers whether the fair value of its equity method investment has declined below its carrying value whenever adverse events or changes in
circumstances indicate that recorded value may not be recoverable. If the Company considers any decline to be other than temporary (based on various factors, including
historical financial results and the overall health of the investee), then a write-down would be recorded to estimated fair value. See Note 7 for discussion of equity method
investment.
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 years ended December 31, 2021 and 2020.
Deferred Rental Income
Deferred rental income represents rental income collected but not earned as of the reporting date. The Company defers the revenue related to lease payments received from
tenants in advance of their due dates. As of December 31, 2021 and 2020, deferred rental income totaled $8,638 and $23,510, respectively, which were included in accrued
liabilities and other payables on the accompanying consolidated balance sheets.
Value Added Tax
Avalon Shanghai is subject to a value added tax (“VAT”) for providing medical related consulting services. The amount of VAT liability is determined by applying the applicable
tax rates to the invoiced amount of medical related consulting services provided (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input
VAT). The Company reports revenue net of PRC’s value added tax for all the periods presented in the consolidated statements of operations and comprehensive loss.
F-12
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
The Company recognizes revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of
the 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 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 transferring promised goods or services to 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 extent that it is probable that a significant reversal in the amount of cumulative revenue
recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is
recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
The Company’s revenues are derived from providing medial related consulting services for its’ related parties. Revenues related to its service offerings are recognized at a point
in time when service is rendered. Any payments received in advance of the performance of services are recorded as deferred revenue until such time as the services are
performed.
The Company has determined that the ASC 606 does not apply to rental contracts, which are within the scope of other revenue recognition accounting standards.
Rental income from operating leases is recognized on a straight-line basis under the guidance of ASC 842. Lease payments under tenant leases are recognized on a straight-line
basis over the term of the related leases. The cumulative difference between lease revenue recognized under the straight-line method and contractual lease payments are included
in rent receivable on the consolidated balance sheets.
The Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers.
F-13
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Office Lease
When a lease contains “rent holidays”, the Company records rental expense on a straight-line basis over the term of the lease. The Company begins recording rent expense on the
lease possession date.
Real Property Operating Expenses
Real property operating expenses consist of property management fees, property insurance, real estate taxes, depreciation, repairs and maintenance fees, utilities and other
expenses related to the Company’s rental properties.
Medical Related Consulting Services Costs
Costs of medical related consulting services include the cost of labor and related benefits, travel expenses related to consulting services, and other overhead costs.
Research and Development
Expenditures for research and product development costs are expensed as incurred. The Company incurred research and development expense of $1,025,009 and $883,855 in the
years ended December 31, 2021 and 2020, respectively.
Advertising Costs
All costs related to advertising are expensed as incurred. For the years ended December 31, 2021 and 2020, advertising costs amounted to $328,565 and $294,352, respectively.
Stock-based Compensation
The Company accounts for its stock-based compensation awards in accordance with Accounting Standards Codification (“ASC”) Topic 718, Compensation—Stock
Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees and non-employees including grants of stock options, to be recognized as expense in the
statements of operations based on their grant date fair values. The Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing
model.
The Company periodically issues common stock and common stock options to consultants for various services. Costs of these transactions are measured at the fair value of the
service received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is measured at the earlier of (i) the date
at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete.
Income Taxes
The Company is governed by the income tax laws of China and the United States. 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, the benefit for tax
positions taken can only 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
December 31, 2021 and 2020, the Company had no significant uncertain tax positions which would require either recognition of a liability or disclosure in the financial
statements. For United States entities, tax year that remains subject to examination is the years ended December 31, 2021, 2020, 2019 and 2018. For China entities, income tax
returns for the tax years ended December 31, 2017 through December 31, 2021 remain open for statutory examination by PRC tax authorities. The Company recognizes interest
and penalties related to significant uncertain income tax positions in income tax expense. However, no such interest and penalties were recorded as of December 31, 2021 and
2020.
F-14
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign Currency Translation
The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company, AHS, Avalon RT 9, Genexosome, Avactis, and Exosome, is the U.S.
dollar and the functional currency of Avalon Shanghai and Beijing Genexosome, is the Chinese Renminbi (“RMB”). For the subsidiaries 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 December 31, 2021 and 2020 were translated at 6.3559 RMB and 6.5306 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 years ended December 31,
2021 and 2020 were 6.4515 RMB and 6.8999 RMB to $1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local currencies using the
average translation rate.
Comprehensive Loss
Comprehensive loss is comprised of net loss and all changes to the statements of equity, except those due to investments by stockholders, changes in paid-in capital and
distributions to stockholders. For the Company, comprehensive loss for the years ended December 31, 2021 and 2020 consisted of net loss and unrealized gain from foreign
currency translation adjustment.
Per Share Data
ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the
earnings of the entity.
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the
period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially
dilutive securities outstanding during each period. For the years ended December 31, 2021 and 2020, potentially dilutive common shares consist of the common shares issuable
upon the exercise of common stock options (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.
F-15
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive:
Stock options
Potentially dilutive securities
Non-controlling Interest
Years Ended
December 31,
2021
8,000,000
8,000,000
2020
7,140,000
7,140,000
As of December 31, 2021, Dr. Yu Zhou, former director and former Co-Chief Executive Officer of Genexosome, who owns 40% of the equity interests of Genexosome, which is
not under the Company’s control. Since the fourth quarter of 2019, the non-controlling interest has remained inactive.
Segment Reporting
The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used
by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments.
The Company’s chief operating decision maker is the Chief Executive Officer (“CEO”) and president of the Company, who reviews operating results to make decisions about
allocating resources and assessing performance for the entire Company. During the year ended December 31, 2021, the Company operates through two business segments: real
property operating segment and medical related consulting services segment. During the year ended December 31, 2020, the Company operates through three reportable business
segments: real property operating segment, medical related consulting services segment, and development services and sales of developed products segment. These reportable
segments offer different types of services and products, have different types of revenue, and are managed separately as each requires different operating strategies and
management expertise.
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.
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.
Fiscal Year End
The Company has adopted a fiscal year end of December 31st.
F-16
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“Topic 326”). The ASU introduces a new accounting model, the Current Expected Credit
Losses model (“CECL”), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit
loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. ASU 2016-13 is effective for annual period beginning after
December 15, 2022, including interim reporting periods within those annual reporting periods. The Company expects that the adoption will not have a material impact on the
Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, as part of its Simplification Initiative to reduce the cost and complexity in
accounting for income taxes. This standard removes certain exceptions related to the approach for intra period tax allocation, the methodology for calculating income taxes in an
interim period and the recognition of deferred tax liabilities for outside basis differences. It also amends other aspects of the guidance to help simplify and promote consistent
application of GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The adoption of ASU 2019 –
12 did not have a material impact on the 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.
NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
At December 31, 2021 and 2020, prepaid expenses and other current assets consisted of the following:
Prepaid directors and officers liability insurance premium
Recoverable VAT
Deferred leasing costs
Prepaid research and development fees
Other
Total
NOTE 5 – PROPERTY AND EQUIPMENT
At December 31, 2021 and 2020, property and equipment consisted of the following:
Laboratory equipment
Office equipment and furniture
Less: accumulated depreciation
December 31,
December 31,
2021
2020
$
$
$
$
49,656 $
23,655
31,422
-
18,313
123,046 $
64,929
40,446
18,220
60,610
39,380
223,585
December 31,
December 31,
2021
2020
579,508 $
34,092
613,600
(252,053)
361,547 $
741,842
39,573
781,415
(302,300)
479,115
Useful life
5 Years
3 – 10 Years
For the years ended December 31, 2021 and 2020, depreciation expense of property and equipment amounted to $144,513 and $145,603, respectively, of which, $3,276 and
$3,276 was included in real property operating expenses, $19,914 and $70,241 was included in other operating expenses, and $121,323 and $72,086 was included in research
and development expense, respectively.
F-17
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – INVESTMENT IN REAL ESTATE
At December 31, 2021 and 2020, investment in real estate consisted of the following:
Commercial real property building
Improvement
Less: accumulated depreciation
Useful life
39 Years
12 Years
December 31,
December 31,
2021
2020
7,708,571 $
529,372
8,237,943
(709,173)
7,528,770 $
7,708,571
519,040
8,227,611
(541,925)
7,685,686
$
$
For the years ended December 31, 2021 and 2020, depreciation expense of this commercial real property amounted to $167,248 and $169,177, which was included in real
property operating expenses.
NOTE 7 – EQUITY METHOD INVESTMENT
As of December 31, 2021 and 2020, the equity method investment amounted to $515,632 and $521,758, 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 years ended December 31, 2021 and 2020, the Company’s share of Epicon’s net loss was $60,463 and $51,673, respectively, which was included in loss from equity
method investment in the accompanying consolidated statements of operations and comprehensive loss.
In the years ended December 31, 2021 and 2021, 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
Payment made for equity method investment
Epicon’s net loss attributable to the Company
Foreign currency fluctuation
Equity investment carrying amount at December 31, 2020
Payment made for equity method investment
Epicon’s net loss attributable to the Company
Foreign currency fluctuation
Equity investment carrying amount at December 31, 2021
F-18
$
$
483,101
57,972
(51,673)
32,358
521,758
40,301
(60,463)
14,036
515,632
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – EQUITY METHOD INVESTMENT (continued)
The tables below present the summarized financial information, as provided to the Company by the investee, for the unconsolidated company:
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Equity
Net revenue
Gross profit
Loss from operation
Net loss
NOTE 8 – ACCRUED LIABILITIES AND OTHER PAYABLES
At December 31, 2021 and 2020, accrued liabilities and other payables consisted of the following:
Accrued tenants’ improvement reimbursement
Tenants’ security deposit
Accrued business expense reimbursement
Accounts payable
Accrued utilities
Taxes payable
Deferred rental income
Others
Total
F-19
December 31,
December 31,
2021
2020
5,479 $
216,864
56,626
-
165,717
13,023
264,390
6,615
-
270,798
For the Years
Ended
December 31,
2021
2020
- $
-
151,158
151,158
-
-
129,316
129,183
December 31,
December 31,
2021
2020
43,500 $
73,733
68,172
-
14,372
14,459
8,638
52,446
275,320 $
81,900
69,634
36,657
87,190
14,911
15,790
23,510
37,819
367,411
$
$
$
$
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – RELATED PARTY TRANSACTIONS
Rental Revenue from Related Party and Rent Receivable – Related Party
The Company leases space of its commercial real property located in New Jersey to a company, which is controlled by Wenzhao Lu, the Company’s largest shareholder and
chairman of the Board of Directors. The term of the related party lease agreement is five years commencing on May 1, 2021 and will expire on April 30, 2026. For the year
ended December 31, 2021, the related party rental revenue amounted to $33,600, and has been included in real property rental on the accompanying consolidated statements of
operations and comprehensive loss. As of December 31, 2021, the related party rent receivable totaled $33,600 and no allowance for doubtful accounts was deemed to be
required on rent receivable – related party at December 31, 2021.
Medical Related Consulting Services Revenue from Related Parties
During the years ended December 31, 2021 and 2020, medical related consulting services revenue from related parties was as follows:
Medical related consulting services provided to:
Hebei Daopei *
Shanghai Daopei *
Years Ended
December 31,
2021
2020
$
$
187,412 $
-
187,412 $
-
170,908
170,908
* Hebei Daopei and Shanghai Daopei are subsidiaries of an entity whose chairman is Wenzhao Lu, the largest shareholder of the Company.
Services Provided by Related Party
From time to time, Wilbert Tauzin, a director of the Company, and his son provide consulting services to the Company. As compensation for professional services provided, the
Company recognized consulting expenses of $216,169 and $282,582 for the years ended December 31, 2021 and 2020, respectively, which have been included in professional
fees on the accompanying consolidated statements of operations and comprehensive loss.
Accrued Liabilities and Other Payables – Related Parties
In 2017, the Company acquired Beijing Genexosome for a cash payment of $450,000. As of December 31, 2021 and 2020, the unpaid acquisition consideration of $100,000, was
payable to Dr. Yu Zhou, former 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 December 31, 2021 and 2020, 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 $368,433 and $167,956, 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. In March 2022, the Company and Wenzhao Lu entered into a Loan Extension and Modification Agreement (the “Extension”) to extend the maturity date to March 19,
2024.The Company repaid principal of $410,000 and $200,000 in the third quarter of 2019 and second quarter of 2020, respectively. As of December 31, 2021 and 2020, the
outstanding principal balance was $390,000.
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.
F-20
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – RELATED PARTY TRANSACTIONS (continued)
Borrowings from Related Party (continued)
Line of Credit (continued)
In the years ended December 31, 2021 and 2020, activity recorded for the Line of Credit is summarized in the following table:
Outstanding principal under the Line of Credit at January 1, 2020
Draw down from Line of Credit
Outstanding principal under the Line of Credit at December 31, 2020
Draw down from Line of Credit
Settlement pursuant to Debt Settlement Agreement and Release *
Outstanding principal under the Line of Credit at December 31, 2021
$
$
2,600,000
600,000
3,200,000
2,550,262
(3,000,000)
2,750,262
* On December 21, 2021, the Company and Mr. Lu entered into and closed a Debt Settlement Agreement and Release pursuant to which the $3.0 million debt was settled by
issuance of the Company’s 2,400,000 shares of common stock (See Note 11 – Common Shares Issued Pursuant to for Related Party Debt Settlement Agreement and Release).
The 2.4 million shares issued had a fair value of $3 million.
For the years ended December 31, 2021 and 2020, the interest expense related to above borrowings amounted to $200,477 and $168,762, respectively, and has been included in
interest expense – related party on the accompanying consolidated statements of operations and comprehensive loss.
As of December 31, 2021 and 2020, the related accrued and unpaid interest for above borrowings was $368,433 and $167,956, respectively, and has been included in accrued
liabilities and other payables – related parties on the accompanying consolidated balance sheets.
Common Shares Sold to Related Party
On April 1, 2020, the Company sold 645,161 shares of its common stock to WLM Limited (“WLM”), an entity owned by Wenzhao Lu, Chairman of the Board of Directors of
the Company, at a price per share of $1.55, the fair market value on transaction date, for an aggregate purchase price of $1,000,000 (See Note 11 – Common Shares Sold for
Cash).
NOTE 10 – INCOME TAXES
The Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. Under the Income Tax Laws of PRC, Chinese
companies are generally subject to an income tax at an effective rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. The
Company has a cumulative deficit from its foreign subsidiaries of $2,591,758 as of December 31, 2021, which is included in the consolidated accumulated deficit.
The Company’s loss before income taxes includes the following components:
United States loss before income taxes
China loss before income taxes
Total loss before income taxes
F-21
Years Ended
December 31,
2021
(8,504,426) $
(586,073)
(9,090,499) $
2020
(12,041,331)
(638,107)
(12,679,438)
$
$
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – INCOME TAXES (continued)
Components of income taxes expense (benefit) consisted of the following:
Current:
U.S. federal
U.S. state and local
China
Total current income taxes expense
Deferred:
U.S. federal
U.S. state and local
China
Total deferred income taxes (benefit)
Change in valuation allowance
Total income taxes expense
Years Ended
December 31,
2021
2020
$
$
$
$
$
- $
-
-
- $
-
-
-
-
(1,810,264) $
(612,904)
(152,015)
(2,575,183) $
2,575,183
- $
(2,333,680)
(790,117)
(132,578)
(3,256,375)
3,256,375
-
The table below summarizes the differences between the U.S. statutory rate and the Company’s effective tax rate for the years ended December 31, 2021 and 2020:
U.S. federal rate
U.S. state rate
Non-US rate differential
Prior year true-up
U.S. valuation allowance
Total provision for income taxes
Years Ended
December 31,
2021
2020
21.0%
6.7%
0.3%
4.9%
(32.9)%
0.0%
21.0%
6.8%
0.2%
0.0%
(28.0)%
0.0%
For the years ended December 31, 2021 and 2020, the Company did not incur any income taxes expense since it did not generate any taxable income in those periods. The
Company’s foreign entities did not pay any income taxes during the years ended December 31, 2021 and 2020. The Company’s components of deferred taxes as of December 31,
2021 and 2020 were as follows:
Deferred tax assets
Stock-based compensation
Disallowed business interest deduction
Accrued directors’ compensation
Lease liability
Net operating loss carryforward
Total deferred tax assets, gross
Valuation allowance
Total deferred tax assets, net
Deferred tax liabilities
Fixed assets and intangible assets book/tax basis difference
Right-of-use assets
Total deferred tax liabilities
Net deferred tax assets
F-22
December 31,
December 31,
2021
2020
$
$
$
$
3,696,463 $
103,567
80,816
23,156
11,441,503
15,345,505
(15,224,188)
121,317 $
(101,534)
(19,783)
(121,317) $
- $
3,667,375
33,384
-
40,291
9,079,127
12,820,177
(12,649,005)
171,172
(132,568)
(38,604)
(171,172)
-
NOTE 10 – INCOME TAXES (continued)
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2021 and 2020, the Company’s both federal and state net operating loss carryforwards amounted to $38,420,422 and $30,557,167, respectively. As of
December 31, 2021, the Company has $35,932,868 of U.S. federal net operating loss carryovers that have no expiration date, and $2,487,554 of the federal net operating loss and
state net operating loss carry-forwards begin to expire in 2034.
As of December 31, 2021, the Company had net operating loss carryforwards in China of $2,566,087 that begin to expire in 2022.
Additionally, as of December 31, 2021, $61,847 of the future utilization of the net operating loss carryforward to offset future taxable income is subject to special tax rules which
may limit their usage under IRS Section 382 (Change of Ownership) and possibly the Separate Return Limitation Year (“SRLY”) rules.
A full valuation allowance has been provided against the Company’s deferred tax assets at December 31, 2021 as the Company believes it is more likely than not that sufficient
taxable income will not be generated to realize these temporary differences.
The Company has been notified and assessed an IRS Section 6038 penalty of $10,000 for failure to file a foreign entity tax disclosure. The Company has appealed the penalty
and awaits the Internal Revenue Service’s review of the appeal. There is no assurance such appeal will be successful.
The Company has not been audited by any jurisdiction since its inception. The Company is open for audit by the U.S. Internal Revenue Service and U.S. state tax jurisdictions
from 2018 to 2021, and open for audit by the Chinese Ministry of Finance from 2017 to 2021.
There were no material uncertain tax positions as of December 31, 2021 and 2020. The Company recognizes interest and penalties related to unrecognized tax benefits as income
tax expense, if any. The Company does not have any significant uncertain tax positions or events leading to uncertainty in a tax position.
NOTE 11 – EQUITY
Common Shares Sold for Cash
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. During the year ended December 31, 2021, Jefferies sold an aggregate
of 2,206,838 shares of common stock at an average price of $1.30 per share to investors and the Company recorded net proceeds of $2,553,409, net of commission and other
offering costs of $306,895. During the year ended December 31, 2020, Jefferies sold an aggregate of 3,913,413 shares of common stock at an average price of $1.74 per share to
investors and the Company recorded net proceeds of $6,405,475, net of commission and other offering costs of $398,624.
On April 1, 2020, the Company entered into a Subscription Agreement with WLM, an entity owned by Wenzhao Lu, Chairman of the Board of Directors of the Company,
pursuant to which WLM purchased 645,161 shares of the Company’s common stock at a price per share of $1.55, the fair market value on transaction date, for an aggregate
purchase price of $1,000,000. The closing occurred on April 1, 2020 (See Note 9 - Common Shares Sold to Related Party).
Common Shares Issued for Services
During the year ended December 31, 2021, the Company issued a total of 1,405,679 shares of its common stock for services rendered and to be rendered. These shares were
valued at $1,507,488, the fair market values on the grant dates using the reported closing share prices on the dates of grant, and the Company recorded stock-based compensation
expense of $1,075,756 for the year ended December 31, 2021 and reduced accrued liabilities of $276,032 and recorded prepaid expense of $155,700 as of December 31, 2021
which will be amortized over the rest of corresponding service periods.
During the year ended December 31, 2020, the Company issued a total of 1,505,921 shares of its common stock for services rendered and to be rendered. These shares were
valued at $1,892,520, the fair market values on the grant dates using the reported closing share prices on the dates of grant and the Company recorded stock-based compensation
expense of $1,670,166 for the year ended December 31, 2020 and reduced accrued liabilities of $187,725 and recorded prepaid expense of $34,629 as of December 31, 2020
which will be amortized over the rest of corresponding service periods.
F-23
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – EQUITY (continued)
Common Shares Issued for Settlement of Accrued Professional Fees
In June 2021, the Company issued 167,355 shares of its common stock to settle accrued and unpaid professional fees of $202,500. The 167,355 shares issued had a fair value of
$202,500.
Common Shares Issued Pursuant to Related Party Debt Settlement Agreement and Release
On December 21, 2021, the Company and Mr. Lu entered into and closed a Debt Settlement Agreement and Release pursuant to which The Company settled $3.0 million debt
owed under the Line of Credit by issuance of the Company’s 2,400,000 shares of common stock (See Note 9 – Borrowings from Related Party – Line of Credit). The 2.4 million
shares issued had a fair value of $3 million.
Options
The following table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at December 31, 2021:
Options Outstanding
Options Exercisable
Range of
Exercise
Price
$
$
0.50
1.00 – 1.93
2.00 – 2.80
4.76
0.50 – 4.76
Number
Weighted
Average
Outstanding at
Remaining
December 31,
Contractual Life
2021
(Years)
Weighted
Number
Weighted
Average
Exercise
Price
Exercisable at
December 31,
2021
Average
Exercise
Price
2,000,000
2,955,000
2,740,000
30,000
7,725,000
5.11
4.80
1.76
2.26
3.97
$
$
0.50
1.39
2.17
4.76
1.45
2,000,000 $
2,749,166
2,740,000
30,000
7,519,166 $
0.50
1.41
2.17
4.76
1.46
Stock option activities for the years ended December 31, 2021 and 2020 were as follows:
Outstanding at January 1, 2020
Granted
Expired
Outstanding at December 31, 2020
Granted
Forfeited / Expired
Outstanding at December 31, 2021
Options exercisable at December 31, 2021
Options expected to vest
The aggregate intrinsic value of both stock options outstanding and stock options exercisable at December 31, 2021 was $640,000.
F-24
Weighted
Average
Number of
Exercise
Options
Price
5,260,000 $
1,960,000
(80,000)
7,140,000
860,000
(275,000)
7,725,000 $
7,519,166 $
205,834 $
1.45
1.52
(1.00)
1.48
1.08
(1.01)
1.45
1.46
1.04
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – EQUITY (continued)
Options (continued)
The fair values of options granted during the year ended December 31, 2021 were estimated at the date of grant using the Black-Scholes option-pricing model with the following
assumptions: volatility of 119.21% - 128.42%, risk-free rate of 0.33% - 1.20%, annual dividend yield of 0%, and expected life of 3.00 - 5.00 years. The aggregate fair value of
the options granted during the year ended December 31, 2021 was $726,952.
The fair values of options granted during the year ended December 31, 2020 were estimated at the date of grant using the Black-Scholes option-pricing model with the following
assumptions: volatility of 131.16% - 139.58%, risk-free rate of 0.20% - 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 year ended December 31, 2020 was $2,878,773.
Stock-based compensation expense associated with stock options granted amounted to $769,334 and $2,966,052, of which, $544,785 and $2,669,729 was recorded as
compensation and related benefits, $157,207 and $240,354 was recorded as professional fees, and $67,342 and $55,969 was recorded as research and development expenses, for
the years ended December 31, 2021 and 2020, respectively.
A summary of the status of the Company’s nonvested stock options granted as of December 31, 2021 and changes during the years ended December 31, 2021 and 2020 is
presented below:
Nonvested at January 1, 2020
Granted
Vested
Nonvested at December 31, 2020
Granted
Forfeited
Vested
Nonvested at December 31, 2021
2020 Incentive Stock Plan
Weighted
Average
Number of
Exercise
Options
Price
264,723 $
1,960,000
(2,006,389)
218,334
860,000
(15,000)
(857,500)
205,834 $
2.00
1.52
(1.62)
1.18
1.08
(1.11)
(1.11)
1.04
The Company held its annual meeting on August 4, 2020. During its annual meeting, the Company approved 2020 Incentive Stock Plan and reserved 5,000,000 shares of
common stock for issuance thereunder.
NOTE 12 - STATUTORY RESERVE AND RESTRICTED NET ASSETS
The Company’s PRC subsidiaries, Avalon Shanghai and Beijing Genexosome, are restricted in their ability to transfer a portion of their net assets to the Company. The payment
of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in the PRC currently permit payment of dividends only out of
accumulated profits as determined in accordance with accounting standards and regulations in China.
The Company is required to make appropriations to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus reserve, based on after-tax net
income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriations to the statutory surplus reserve are required to be at
least 10% of the after-tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entity’s registered capital. Appropriations to the
discretionary surplus reserve are made at the discretion of the Board of Directors. The statutory reserve may be applied against prior year losses, if any, and may be used for
general business expansion and production or increase in registered capital, but are not distributable as cash dividends.
Relevant PRC laws and regulations restrict the Company’s PRC subsidiaries, Avalon Shanghai and Beijing Genexosome, from transferring a portion of their net assets,
equivalent to their statutory reserves and their share capital, to the Company’s shareholders in the form of loans, advances or cash dividends. Only PRC entities’ accumulated
profits may be distributed as dividends to the Company’s shareholders without the consent of a third party.
The Company did not make any appropriation to statutory reserve for Avalon Shanghai and Beijing Genexosome during the years ended December 31, 2021 and 2020 as they
incurred net losses in these periods. As of December 31, 2021 and 2020, the restricted amounts as determined pursuant to PRC statutory laws totaled $6,578 and $6,578,
respectively, and total restricted net assets amounted to $783,984 and $683,984, respectively.
F-25
NOTE 13 – NONCONTROLLING INTEREST
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2021, Dr. Yu Zhou, former director and former co-chief executive officer of Genexosome, who owns 40% of the equity interests of Genexosome, which is
not under the Company’s control.
During the years ended December 31, 2021 and 2020, the Company did not allocate any net loss and foreign currency translation adjustment to the noncontrolling interest holder
due to its inability to satisfy these deficits.
NOTE 14 – CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Pursuant to the requirements of Rule 12-04(a), 5-04(c) and 4-08(e)(3) of Regulation S-X, the condensed financial information of the parent company shall be filed when the
restricted net assets of consolidated subsidiary exceed 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 Company’s proportionate share of net assets of consolidated subsidiary (after intercompany
eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiary in the form of loans, advances or cash dividends
without the consent of a third party.
The Company performed a test on the restricted net assets of consolidated subsidiary in accordance with such requirement and concluded that it was not applicable to the
Company as the restricted net assets of the Company’s PRC subsidiaries did not exceed 25% of the consolidated net assets of the Company, therefore, the condensed financial
statements for the parent company have not been required.
NOTE 15 - CONCENTRATIONS
Customers
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the years ended December 31, 2021 and 2020.
Customer
A (Shanghai Daopei, a related party)
B (Hebei Daopei, a related party)
C
D
E
*
Less than 10%
Years Ended
December 31,
2021
2020
*
13%
28%
16%
11%
12%
*
24%
16%
12%
Two customers, of which, one is a related party and the other is a third party, whose outstanding receivable accounted for 10% or more of the Company’s total outstanding
accounts receivable, accounts receivable – related party, rent receivable, and rent receivable – related party at December 31, 2021, accounted for 80.6% of the Company’s total
outstanding accounts receivable, accounts receivable – related party, rent receivable, and rent receivable – related party at December 31, 2021.
Two third party 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, 2020, accounted for 78.3% of the Company’s total outstanding accounts receivable, accounts receivable – related party, and rent receivable
at December 31, 2020.
Suppliers
No supplier accounted for 10% or more of the Company’s purchase during the years ended December 31, 2021 and 2020.
One supplier, whose outstanding payable accounted for 10% or more of the Company’s total outstanding accounts payable at December 31, 2020, accounted for 93.6% of the
Company’s total outstanding accounts payable at December 31, 2020.
F-26
NOTE 16 – SEGMENT INFORMATION
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2020, 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.
Due to the winding down of the development services and sales of developed products segment in 2020, the Company no longer has any material revenues or expenses in
this segment. As a result, commencing from the first quarter of 2021, the Company’s chief operating decision maker no longer reviews development services and sales of
developed products operating results.
For the year ended December 31, 2021, the Company operated in two reportable business segments - (1) the real property operating segment, and (2) the medical related
consulting services segment.
The Company’s reportable segments are strategic business units that offer different services and products. They are managed separately based on the fundamental differences in
their operations. Information with respect to these reportable business segments for the years ended December 31, 2021 and 2020 was as follows:
Revenues
Real property operations
Medical related consulting services
Total
Costs and expenses
Real property operations
Medical related consulting services
Total
Gross profit
Real property operations
Medical related consulting services
Total
Other operating expenses
Real property operations
Medical related consulting services
Development services and sales of developed products
Corporate/Other
Total
Other (expense) income
Interest expense
Corporate/Other
Total
Other income (expense)
Real property operations
Medical related consulting services
Development services and sales of developed products
Corporate/Other
Total
Total other expense, net
Net loss
Real property operations
Medical related consulting services
Development services and sales of developed products
Corporate/Other
Total
F-27
Years Ended
December 31,
2021
2020
$
1,203,560 $
187,412
1,390,972
1,206,854
170,908
1,377,762
829,287
147,167
976,454
374,273
40,245
414,518
851,754
135,805
987,559
355,100
35,103
390,203
381,266
469,942
-
8,397,140
9,248,348
418,863
577,962
123,546
11,723,851
12,844,222
(200,477)
(200,477)
115
(61,494)
-
5,187
(56,192)
(256,669)
(168,762)
(168,762)
(921)
(55,964)
228
-
(56,657)
(225,419)
6,878
491,191
-
8,592,430
9,090,499 $
64,684
598,823
123,318
11,892,613
12,679,438
$
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 – SEGMENT INFORMATION (continued)
Identifiable long-lived tangible assets at December 31, 2021 and 2020
Real property operations
Medical related consulting services
Development services and sales of developed products
Corporate/Other
Total
Identifiable long-lived tangible assets at December 31, 2021 and 2020
United States
China
Total
NOTE 17 – COMMITMENTS AND CONTINCENGIES
Litigation
December 31,
December 31,
2021
2020
7,537,281 $
742
-
352,294
7,890,317 $
7,697,473
223,459
243,869
-
8,164,801
December 31,
December 31,
2021
7,583,880 $
306,437
7,890,317 $
2020
7,764,947
399,854
8,164,801
$
$
$
$
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 issued and outstanding securities of Beijing Genexosome in consideration of a cash payment in the amount of
$450,000, of which $100,000 is still owed. Further, on October 25, 2017, Genexosome entered into and closed 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 criminal proceedings against Dr. Zhou and Li Chen have been concluded and the civil litigation continue. The Company and
Nationwide Children’s Hospital have reached a verbal settlement agreement. Both parties are in the process of drafting the related written agreements. There can be no
assurances that these settlement agreements will be signed.
F-28
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – COMMITMENTS AND CONTINCENGIES (continued)
Operating Leases Commitment
The Company is a party to leases for office space. Rent expense under all operating leases amounted to approximately $143,000 and $157,000 for the years ended December 31,
2021 and 2020, respectively.
Supplemental cash flow information related to leases for the years ended December 31, 2021 and 2020 is as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows paid for operating lease
Right-of-use assets obtained in exchange for lease obligation:
Operating lease
The following table summarizes the lease term and discount rate for the Company’s operating lease as of December 31, 2021:
Weighted average remaining lease term (in years)
Weighted average discount rate
The following table summarizes the maturity of lease liabilities under operating lease as of December 31, 2021:
For the Year Ending December 31:
2022
2023
2024 and thereafter
Total lease payments
Amount of lease payments representing interest
Total present value of operating lease liabilities
Current portion
Long-term portion
Total
Equity Investment Commitment
Years Ended
December 31,
2021
2020
$
$
130,071 $
66,000
133,879 $
201,028
Operating
Lease
1.08
4.88%
Operating
Lease
154,947
5,913
-
160,860
(3,557)
157,303
151,402
5,901
157,303
$
$
$
$
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 8,000,000 (approximately $1.3 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 $1.6 million). Epicon is focused on cell preparation, third party testing, biological sample repository for commercial and scientific research purposes and the
clinical transformation of scientific achievements. As of December 31, 2021, Avalon Shanghai has contributed RMB 4,760,000 (approximately $0.7 million) that was included
in equity method investment on the accompanying consolidated balance sheets. The Company intends to use its present working capital together with borrowings from related
party and equity raises to fund the project cost.
Joint Venture – AVAR BioTherapeutics (China) Co. Ltd.
On October 23, 2018, Avactis Biosciences, Inc. (“Avactis”), a wholly-owned subsidiary of the Company, and Arbele Limited (“Arbele”) agreed to the establishment of AVAR
BioTherapeutics (China) Co. Ltd. (“AVAR”), a Sino-foreign equity joint venture, pursuant to an Equity Joint Venture Agreement (the “AVAR Agreement”), which will be owned
60% by Avactis and 40% by Arbele. The purpose and business scope of the Joint Venture is to research, develop, produce, sell, distribute and generally commercialize CAR-
T/CAR-NK/TCR-T/universal cellular immunotherapy in China. Avactis is required to contribute $10 million (or equivalent in RMB) in cash and/or services, which shall be
contributed in tranches based on milestones to be determined jointly by AVAR and Avactis in writing subject to Avactis’ cash reserves. Within 30 days, Arbele shall make a
contribution of $6.66 million in the form of entering into a License Agreement with AVAR granting AVAR with an exclusive right and license in China to its technology and
intellectual property pertaining to CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy technology and any additional technology developed in the future with terms and
conditions to be mutually agreed upon Avactis and AVAR and services.
F-29
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – COMMITMENTS AND CONTINCENGIES (continued)
Joint Venture – AVAR BioTherapeutics (China) Co. Ltd. (continued)
In addition, Avactis is responsible for:
● Contributing registered capital of RMB 5,000,000 (approximately $0.8 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 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 both December 31, 2021 and 2020, Avactis paid the $900,000 to Arbele as research and development fee. As of December 31, 2021, License Agreement has not been
finalized.
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, 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 December 31, 2021,
$2,750,262 was outstanding under the Line of Credit.
F-30
NOTE 18 – SUBSEQUENT EVENTS
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued. Based upon this
review, other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.
Common Shares Sold for Cash
On December 13, 2019, the Company entered into an Open Market Sale AgreementSM with Jefferies LLC, as sales agent (“Jefferies”). From January 1, 2022 to March 30, 2022,
Jefferies sold an aggregate of 170,540 shares of common stock at an average price of $0.79 per share to investors. The Company received net cash proceeds of $131,427, net of
commission paid to sales agent of $4,065.
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 (“Original Note”) in consideration of cash in the amount of $1,000,000. The Original Note had a maturity date of March 19, 2022. In March 2022, the Company and
Wenzhao Lu entered into a Loan Extension and Modification Agreement (the “Extension”) to extend the maturity date to March 19, 2024.
2022 Convertible Note
On March 28, 2022, the Company entered into Securities Purchase Agreement with an accredited investor providing for the sale by the Company to the investor of a Convertible
Note in the amount of $4,000,000 (the “2022 Convertible Note”). In addition to the 2022 Convertible Note, the investor will also receive a Stock Purchase Warrant (the “2022
Warrant”) to acquire an aggregate of 1,333,333 shares of common stock. The 2022 Warrants will be exercisable for five years at an exercise price of $1.25. The financing will
close on or about April 15, 2022.
The 2022 Convertible Note will bear interest at 1% per annum payable at maturity and matures ten years from issuance. The investor may elect to convert all or part of the 2022
Convertible Note, plus accrued interest, at any time into shares of common stock of the Company at a conversion price equal to 95% of the average of the highest three trading
prices for the common stock during the 20-trading day period ending one trading day prior to the conversion date but in no event will the conversion price be lower than $0.75
per share.
The investor agreed to restrict its ability to convert the 2022 Convertible Note and exercise the 2022 Warrants and receive shares of common stock such that the number of
shares of common stock held by the investor after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. Further,
Investor agreed to not sell or transfer any or all of the shares of common stock underlying the 2022 Convertible Note or the 2022 Warrant for a period of 90 days beginning on
the closing date (the “Lock-Up Period”). Following the expiration of the Lock-Up Period, the investor has agreed to limit its sale or transfer of such shares of common stock to a
maximum monthly amount equal to 20% of the shares of common stock issuable upon conversion of the 2022 Convertible Note. The Company agreed to use its reasonable best
efforts to file a registration statement on Form S-3 (or other appropriate form) providing for the resale by the investor of the shares of common stock underlying the 2022
Convertible Note and the 2022 Warrant.
F-31
DESCRIPTION OF THE REGISTRANT’S SECURITIES REGISTERED PURSUANT
TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
We have authorized capital stock consisting of 490,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value
Exhibit 4.9
$0.0001 per share.
Common Stock
All outstanding shares of common stock are of the same class and have equal rights and attributes. The holders of common stock are entitled to one vote per share on
all matters submitted to a vote of stockholders of the company. All stockholders are entitled to share equally in dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available. In the event of liquidation, the holders of common stock are entitled to share ratably in all assets remaining after payment of
all liabilities. The stockholders do not have cumulative or preemptive rights.
Preferred Stock
Our Certificate of Incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock with designations, rights and preferences determined from time
to time by our Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting, or other rights which could adversely affect the voting power or other rights of the holders of the common stock. In the event of issuance, the preferred
stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of our company, which is sometimes referred to in
corporate parlance as a “poison pill”.
Stockholder Action by Written Consent
Any action required or permitted to be taken at any annual or special meetings of the stockholders of the company may be taken without a meeting, without prior
notice and without a vote, by a consent or consents in writing, setting forth the action so taken, (a) signed by stockholders of the company holding not less than the minimum
number of votes that would be necessary to authorize or take such action at a meeting at which all the shares of the company entitled to vote thereon were present and voted and
(b) delivered to the company in accordance with Section 228 of the DGCL.
Anti-Takeover Effects of Provisions of our Certificate of Incorporation, our Bylaws and Delaware Law
Some provisions of Delaware law, our certificate of incorporation and our bylaws contain provisions that could make the following transactions more difficult:
acquisition of us by means of a tender offer; acquisition of us by means of a proxy contest or otherwise; or removal of our incumbent officers and directors. It is possible that
these provisions could make it more difficult to accomplish or could deter transactions that stockholders may otherwise consider to be in their best interest or in our best
interests, including transactions that might result in a premium over the price of our common stock.
These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to
encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because
negotiation of these proposals could result in an improvement of their terms.
Delaware Anti-Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law, which regulates corporate takeovers. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the board of directors, such as discouraging takeover attempts that might result in a premium over the
price of our common stock.
Undesignated Preferred Stock
The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that
could impede the success of any attempt to change control. These and other provisions may have the effect of deterring hostile takeovers or delaying changes in control or
management.
Transfer Agent
The stock transfer agent for our securities is Vstock Transfer, LLC, 18 Lafayette Place, Woodmere, NY 11598, (212) 828-8436.
SECURITIES PURCHASE AGREEMENT
Exhibit 10.47
SECURITIES PURCHASE AGREEMENT (this “Agreement”), dated as of March 28, 2022, by and among Avalon GloboCare Corp., a Delaware corporation, with
headquarters located at 4400 Route 9 South, Suite 3100, Freehold, New Jersey 07728 (the “Company”), and each of the purchasers set forth on the signature pages hereto (the
“Buyers”).
WHEREAS:
A. The Company and the Buyers are executing and delivering this Agreement in reliance upon an exemption from securities registration afforded by the rules and
regulations as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”);
B. Buyers desire to purchase and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement (i) 1% convertible notes of the
Company, in the form attached hereto as Exhibit “A”, in the aggregate principal amount of up to Four Million Dollars ($4,000,000) (the “Notes”) convertible into shares of
common stock, par value $.0001 per share, of the Company (the “Common Stock”), upon the terms and subject to the limitations, conditions and adjustments set forth in such
Notes; (ii) warrants to purchase 33,333 shares of Common Stock (the “Warrants”) for every $100,000 invested (the “Warrants”)i; and
C. Each Buyer wishes to purchase, upon the terms and conditions stated in this Agreement, such principal amount of Notes, number of Shares and number of Warrants
as is set forth immediately below its name on the signature pages hereto.
NOW THEREFORE, the Company and each of the Buyers severally (and not jointly) hereby agree as follows:
1. PURCHASE AND SALE OF NOTES AND WARRANTS.
a. Purchase of Notes and Warrants. On the Closing Date (as defined below), the Company shall issue and sell to each Buyer and each Buyer
severally agrees to purchase from the Company such principal amount of Notes and number of Warrants as is set forth immediately below such Buyer’s name on the signature
pages hereto, which will represent up to aggregate Four Million Dollars ($4,000,000) principal amount of Notes and Warrants to purchase an aggregate of up to 1,333,333
shares of Common Stockii.
b. Form of Payment. On the Closing Date (as defined below), (i) each Buyer shall pay the purchase price for the Notes and the Warrants to be
issued and sold to it at the Closing (as defined below) (the “Purchase Price”) by wire transfer of immediately available funds to the Company, in accordance with the
Company’s written wiring instructions, against delivery of the Notes in the principal amount equal to the Purchase Price and the number of Warrants as is set forth immediately
below such Buyer’s name on the signature pages hereto and (ii) the Company shall deliver such Notes and the Warrants duly executed on behalf of the Company, to such Buyer,
against delivery of such Purchase Price.
c. Closing Date. Subject to the satisfaction (or written waiver) of the conditions thereto set forth in Section 6 and Section 7 below, the date and time
of the issuance and sale of the Notes and the Warrants pursuant to this Agreement (the “Closing Date”) shall be 12:00 noon, Eastern Standard Time on April 15, 2022 or such
other mutually agreed upon time. The closing of the transactions contemplated by this Agreement (the “Closing”) shall occur on the Closing Date at such location as may be
agreed to by the parties. In addition, if the full amount of the Purchase Price is not funded on the Closing Date, subsequent Buyers and the Company may set additional Closing
Dates until the full Purchase Price is reached.
i Warrants Calculation: $100,000 investment at 75 cents is 133,333 shares x 25% is 33,333 warrants per each $100,000 invested.
ii Warrant Calculation: $4,000,000 investment at 75 cents is 5,333,333 common shares x 25% equals 1,333,333 warrants
2. BUYERS’ REPRESENTATIONS AND WARRANTIES. Each Buyer severally (and not jointly) represents and warrants to the Company solely as to
such Buyer that:
a. Investment Purpose. As of the date hereof, the Buyer is purchasing the Notes and the shares of Common Stock issuable upon conversion of or
otherwise pursuant to the Notes pursuant to this Agreement, such shares of Common Stock being collectively referred to herein as the “Conversion Shares”) and the Warrants
and the shares of Common Stock issuable upon exercise thereof (the “Warrant Shares” and collectively with the Notes, Warrants, Conversion Shares and Warrant Shares are
hereinafter referred to as the “Securities”) for its own account and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or
exempted from registration under the 1933 Act.
Investor”).
b. Accredited Investor Status. The Buyer is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D (an “Accredited
c. Reliance on Exemptions. The Buyer understands that the Securities are being offered and sold to it in reliance upon specific exemptions from the
registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer’s compliance with, the
representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the
eligibility of the Buyer to acquire the Securities.
d. Information. The Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Securities which have been requested by the Buyer or its advisors. The Buyer and its advisors, if any, have been
afforded the opportunity to ask questions of the Company. The Buyer understands that its investment in the Securities involves a significant degree of risk.
passed upon or made any recommendation or endorsement of the Securities.
e. Governmental Review. The Buyer understands that no United States federal or state agency or any other government or governmental agency has
f. Transfer or Re-sale. The Buyer understands that (i) the sale or re-sale of the Securities has not been and is not being registered under the 1933
Act or any applicable state securities laws, and the Securities may not be transferred unless (a) the Securities are sold pursuant to an effective registration statement under the
1933 Act, (b) the Buyer shall have delivered to the Company an opinion of counsel that shall be in form, substance and scope customary for opinions of counsel in comparable
transactions to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration, which opinion shall be accepted
by the Company, (c) the Securities are sold or transferred to an “affiliate” (as defined in Rule 144 promulgated under the 1933 Act (or a successor rule) (“Rule 144”)) of the
Buyer who agrees to sell or otherwise transfer the Securities only in accordance with this Section 2(f) and who is an Accredited Investor, (d) the Securities are sold pursuant to
Rule 144, or (e) the Securities are sold pursuant to Regulation S under the 1933 Act (or a successor rule) (“Regulation S”), and the Buyer shall have delivered to the Company
an opinion of counsel that shall be in form, substance and scope customary for opinions of counsel in corporate transactions, which opinion shall be accepted by the Company;
(ii) any sale of such Securities made in reliance on Rule 144 may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any re-sale
of such Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the
1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any
other person is under any obligation to register such Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption
thereunder. Notwithstanding the foregoing or anything else contained herein to the contrary, the Securities may be pledged as collateral in connection with a bona fide margin
account or other lending arrangement.
2
g. Legends. The Buyer understands that the Notes, the Warrants and until such time as the Conversion Shares and the Warrant Shares have been
registered under the 1933 Act or otherwise may be sold pursuant to Rule 144 or Regulation S without any restriction as to the number of securities as of a particular date that
can then be immediately sold, the Conversion Shares and Warrant Shares may bear a restrictive legend in substantially the following form (and a stop-transfer order may be
placed against transfer of the certificates for such Securities):
“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended. The securities may not
be sold, transferred or assigned in the absence of an effective registration statement for the securities under said Act, or an opinion of
counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, that registration is not required under
said Act or unless sold pursuant to Rule 144 or Regulation S under said Act.”
The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of any Security upon which it is stamped, if,
unless otherwise required by applicable state securities laws, (a) such security is registered for sale under an effective registration statement filed under the 1933 Act or
otherwise may be sold pursuant to Rule 144 or Regulation S without any restriction as to the number of securities as of a particular date that can then be immediately sold, or
(b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that
a public sale or transfer of such Security may be made without registration under the 1933 Act, which opinion shall be accepted by the Company so that the sale or transfer is
effected or (c) such holder provides the Company with reasonable assurances that such Security can be sold pursuant to Rule 144 or Regulation S. The Buyer agrees to sell all
Securities, including those represented by a certificate(s) from which the legend has been removed, in compliance with applicable prospectus delivery requirements, if any.
behalf of the Buyer, and this Agreement constitutes a valid and binding agreements of the Buyer enforceable in accordance with their terms.
h. Authorization; Enforcement. This Agreement has been duly and validly authorized. This Agreement has been duly executed and delivered on
i. Residency. The Buyer is a resident of the jurisdiction set forth immediately below such Buyer’s name on the signature pages hereto.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Buyer that:
a. Organization and Qualification. The Company and each of its Subsidiaries (as defined below), if any, is a corporation duly organized, and
validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, with full power and authority (corporate and other) to own, lease, use and
operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. The SEC Documents set forth all of the Subsidiaries of the
Company and the jurisdiction in which each is incorporated. The Company and each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary except where the failure
to be so qualified or in good standing would not have a Material Adverse Effect. “Material Adverse Effect” means any material adverse effect on the business, operations,
assets, financial condition or prospects of the Company or its Subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements or
instruments to be entered into in connection herewith. “Subsidiaries” means any corporation or other organization, whether incorporated or unincorporated, in which the
Company owns, directly or indirectly, any equity or other ownership interest.
3
b. Authorization; Enforcement. (i) The Company has all requisite corporate power and authority to enter into and perform this Agreement, the
Notes and the Warrants and to consummate the transactions contemplated hereby and thereby and to issue the Securities, in accordance with the terms hereof and thereof, (ii)
the execution and delivery of this Agreement, the Notes and the Warrants by the Company and the consummation by it of the transactions contemplated hereby and thereby
(including without limitation, the issuance of the Notes and the Warrants and the issuance and reservation for issuance of the Conversion Shares and Warrant Shares issuable
upon conversion or exercise thereof) have been duly authorized by the Company’s Board of Directors (iii) this Agreement has been duly executed and delivered by the
Company by its authorized representative, and such authorized representative is the true and official representative with authority to sign this Agreement and the other
documents executed in connection herewith and bind the Company accordingly, and (iv) this Agreement constitutes, and upon execution and delivery by the Company of the
Notes and the Warrants, each of such instruments will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its
terms.
c. Capitalization. As of the date hereof, the authorized capital stock of the Company consists of (i) 490,000,000 shares of Common Stock, of which
[ ] shares are issued and outstanding and (ii) 10,000,000 shares of preferred stock, of which no shares are issued and outstanding. All of such outstanding shares of capital stock
are, or upon issuance will be, duly authorized, validly issued, fully paid and nonassessable. No shares of capital stock of the Company are subject to preemptive rights or any
other similar rights of the shareholders of the Company or any liens or encumbrances imposed through the actions or failure to act of the Company. Except as disclosed in the
SEC Documents, as of the effective date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal,
agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights convertible into or exchangeable for any
shares of capital stock of the Company or any of its Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional
shares of capital stock of the Company or any of its Subsidiaries, (ii) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated
to register the sale of any of its or their securities under the 1933 Act and (iii) there are no anti-dilution or price adjustment provisions contained in any security issued by the
Company (or in any agreement providing rights to security holders) that will be triggered by the issuance of the Securities. The Company has furnished to the Buyer true and
correct copies of the Company’s Articles of Incorporation as in effect on the date hereof (“Articles of Incorporation”), the Company’s By-laws, as in effect on the date hereof
(the “By-laws”), and the terms of all securities convertible into or exercisable for Common Stock of the Company and the material rights of the holders thereof in respect
thereto.
d. Issuance of Shares. The Conversion Shares and Warrant Shares are duly authorized and reserved for issuance and, upon conversion of the Notes
and exercise of the Warrants in accordance with their respective terms, will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and
encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of shareholders of the Company and will not impose personal
liability upon the holder thereof.
e. Acknowledgment of Dilution. The Company understands and acknowledges the potentially dilutive effect to the Common Stock upon the
issuance of the Conversion Shares and Warrant Shares upon conversion of the Note or exercise of the Warrants. The Company further acknowledges that its obligation to issue
Conversion Shares and Warrant Shares upon conversion of the Notes or exercise of the Warrants in accordance with this Agreement, the Notes and the Warrants is absolute and
unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company.
4
f. No Conflicts. The execution, delivery and performance of this Agreement, the Notes and the Warrants by the Company and the consummation by
the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance and reservation for issuance of the Conversion Shares and
Warrant Shares) will not (i) conflict with or result in a violation of any provision of the Articles of Incorporation or By-laws or (ii) violate or conflict with, or result in a breach
of any provision of, or constitute a default (or an event which with notice or lapse of time or both could become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument to which the Company or any of its Subsidiaries is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and regulations of any self-regulatory
organizations to which the Company or its securities are subject) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any
of its Subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in
the aggregate, have a Material Adverse Effect).
g. SEC Documents; Financial Statements. The Company has timely filed all reports, schedules, forms, statements and other documents required to
be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “1934 Act”) (all of the foregoing filed prior to the
date hereof and all exhibits included therein and financial statements and schedules thereto and documents (other than exhibits to such documents) incorporated by reference
therein, being hereinafter referred to herein as the “SEC Documents”). The Company has delivered to each Buyer true and complete copies of the SEC Documents, except for
such exhibits and incorporated documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the
rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
h. Absence of Certain Changes. Except as set forth below, since December 31, 2021, there has been no material adverse change and no material
adverse development in the assets, liabilities, business, properties, operations, financial condition, results of operations or prospects of the Company or any of its Subsidiaries.
On February 9, 2022, the Company received notice from The Nasdaq Stock Market (“Nasdaq”) that the closing bid price for the Company’s common stock had been below
$1.00 per share for the previous 30 consecutive business days, and that the Company is therefore not in compliance with the minimum bid price requirement for continued
inclusion on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Rule”). The notice indicates that the Company will have 180 calendar days, until August
8, 2022, to regain compliance with this requirement. The Company can regain compliance with the $1.00 minimum bid listing requirement if the closing bid price of its
common stock is at least $1.00 per share for a minimum of ten (10) consecutive business days during the 180-day compliance period. If the Company does not regain
compliance during the initial compliance period, it may be eligible for additional time to regain compliance. To qualify, the Company will be required to meet the continued
listing requirement for market value of its publicly held shares and all other Nasdaq initial listing standards, except the bid price requirement, and will need to provide written
notice to Nasdaq of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. If the Company is not eligible or it
appears to Nasdaq that the Company will not be able to cure the deficiency during the second compliance period, Nasdaq will provide written notice to the Company that the
Company’s common stock will be subject to delisting. In the event of such notification, the Company may appeal Nasdaq’s determination to delist its securities, but there can
be no assurance that Nasdaq would grant the Company’s request for continued listing.
i. Absence of Litigation. Except as set forth in the SEC Documents, there is no action, suit, claim, proceeding, inquiry or investigation before or by
any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against or
affecting the Company or any of its Subsidiaries, or their officers or directors in their capacity as such, that could have a Material Adverse Effect. The Company and its
Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing.
5
j. Patents, Copyrights, etc. The Company and each of its Subsidiaries owns or possesses the requisite licenses or rights to use all patents, patent
applications, patent rights, inventions, know-how, trade secrets, trademarks, trademark applications, service marks, service names, trade names and copyrights (“Intellectual
Property”) necessary to enable it to conduct its business as now operated. The Company and each of its Subsidiaries have taken reasonable security measures to protect the
secrecy, confidentiality and value of their Intellectual Property.
k. No Materially Adverse Contracts, Etc. Neither the Company nor any of its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company’s officers has or is expected in the future to have a Material Adverse
Effect. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement which in the judgment of the Company’s officers has or is expected to have a
Material Adverse Effect.
l. Tax Status. The Company and each of its Subsidiaries has made or filed all federal, state and foreign income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount,
shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provisions reasonably
adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material
amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. The Company has not executed a
waiver with respect to the statute of limitations relating to the assessment or collection of any foreign, federal, state or local tax. None of the Company’s tax returns is presently
being audited by any taxing authority.
m. Disclosure. All information relating to or concerning the Company or any of its Subsidiaries set forth in this Agreement is true and correct in all
material respects and the Company has not omitted to state any material fact necessary in order to make the statements made herein or therein, in light of the circumstances
under which they were made, not misleading. No event or circumstance has occurred or exists with respect to the Company or any of its Subsidiaries or its or their business,
properties, prospects, operations or financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which
has not been so publicly announced or disclosed (assuming for this purpose that the Company’s reports filed under the 1934 Act are being incorporated into an effective
registration statement filed by the Company under the 1933 Act).
n. Acknowledgment Regarding Buyers’ Purchase of Securities. The Company acknowledges and agrees that the Buyers are acting solely in the
capacity of arm’s length purchasers with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that no Buyer is acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any statement made by
any Buyer or any of their respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation
and is merely incidental to the Buyers’ purchase of the Securities. The Company further represents to each Buyer that the Company’s decision to enter into this Agreement has
been based solely on the independent evaluation of the Company and its representatives.
o. No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made
any offers or sales in any security or solicited any offers to buy any security under circumstances that would require registration under the 1933 Act of the issuance of the
Securities to the Buyers. The issuance of the Securities to the Buyers will not be integrated with any other issuance of the Company’s securities (past, current or future) for
purposes of any shareholder approval provisions applicable to the Company or its securities.
6
similar payments relating to this Agreement or the transactions contemplated hereby.
p. No Brokers. The Company has taken no action which would give rise to any claim by any person for brokerage commissions, transaction fees or
q. Permits; Compliance. The Company and each of its Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being
conducted (collectively, the “Company Permits”), and there is no action pending or, to the knowledge of the Company, threatened regarding suspension or cancellation of any
of the Company Permits. Neither the Company nor any of its Subsidiaries is in conflict with, or in default or violation of, any of the Company Permits, except for any such
conflicts, defaults or violations which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect.
4. COVENANTS.
a. Best Efforts. The parties shall use their best efforts to satisfy timely each of the conditions described in Section 6 and 7 of this Agreement.
b. Form D; Blue Sky Laws. The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a
copy thereof to each Buyer promptly after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is
necessary to qualify the Securities for sale to the Buyers at the applicable closing pursuant to this Agreement under applicable securities or “blue sky” laws of the states of the
United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to each Buyer on or prior to the Closing Date.
c. Use of Proceeds. The Company shall use the proceeds from the sale of the Securities for general working capital purposes.
d. Authorization and Reservation of Shares. The Company shall at all times have authorized, and reserved for the purpose of issuance, a sufficient
number of shares of Common Stock to provide for the full conversion or exercise of the outstanding Notes and Warrants and issuance of the Conversion Shares and Warrant
Shares in connection therewith (based on the Conversion Price of the Notes or Exercise Price of the Warrants) and as otherwise required by the Notes. The Company shall not
reduce the number of shares of Common Stock reserved for issuance upon conversion of Notes and exercise of the Warrants without the consent of each Buyer.
e. Listing. The Company shall promptly secure the listing of the Conversion Shares and Warrant Shares upon each national securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and, so long as any Buyer owns any of the
Securities, shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Conversion Shares and Warrant Shares from time to time issuable
upon conversion of the Notes or exercise of the Warrants.
h. No Integration. The Company shall not make any offers or sales of any security (other than the Securities) under circumstances that would
require registration of the Securities being offered or sold hereunder under the 1933 Act or cause the offering of the Securities to be integrated with any other offering of
securities by the Company for the purpose of any stockholder approval provision applicable to the Company or its securities.
7
5. Other Agreements.
providing for the resale by the Buyers of the Conversion Shares and the Warrant Shares.
a. Registration Statement. The Company shall use reasonable best efforts to file a registration statement on Form S-3 (or other appropriate form)
b. Lock-Up; Leak-Out. Buyer hereby agrees to not sell or transfer any or all of the Conversion Shares and the Warrant Shares for a period of ninety
(90) days beginning on the Closing Date (the “Lock-Up Period”). Following the expiration of the Lock-Up Period, Buyer hereby agrees to limit Buyer’s sale or transfer of
shares of the Conversion Shares and the Warrant Shares to a maximum monthly amount equal to twenty percent (20%) of the Conversion Shares held by such Buyer.
6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL. The obligation of the Company hereunder to issue and sell the Notes and the
Warrants to a Buyer at the Closing is subject to the satisfaction, at or before the Closing Date of each of the following conditions thereto, provided that these conditions are for
the Company’s sole benefit and may be waived by the Company at any time in its sole discretion:
a. The applicable Buyer shall have executed this Agreement and delivered the same to the Company.
b. The applicable Buyer shall have delivered the Purchase Price in accordance with Section 1(b) above.
c. The representations and warranties of the applicable Buyer shall be true and correct in all material respects as of the date when made and as of the
Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and the applicable Buyer shall have performed, satisfied
and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the applicable
Buyer at or prior to the Closing Date.
d. No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by
or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits
the consummation of any of the transactions contemplated by this Agreement.
7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE. The obligation of each Buyer hereunder to purchase the Notes and the
Warrants at the Closing is subject to the satisfaction, at or before the Closing Date of each of the following conditions, provided that these conditions are for such Buyer’s sole
benefit and may be waived by such Buyer at any time in its sole discretion:
a. The Company shall have executed this Agreement and delivered the same to the Buyer.
accordance with Section 1(b) above.
b. The Company shall have delivered to such Buyer duly executed Notes (in such denominations as the Buyer shall request) and Warrants in
8
c. The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the
Closing Date as though made at such time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or
prior to the Closing Date. The Buyer shall have received a certificate or certificates, executed by the chief executive officer of the Company, dated as of the Closing Date, to the
foregoing effect and as to such other matters as may be reasonably requested by such Buyer including, but not limited to certificates with respect to the Company’s Articles of
Incorporation, By-laws and Board of Directors’ resolutions relating to the transactions contemplated hereby.
d. No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by
or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits
the consummation of any of the transactions contemplated by this Agreement.
e. No event shall have occurred which could reasonably be expected to have a Material Adverse Effect on the Company.
8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT
REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED
STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS AGREEMENT, THE
AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES
IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES
FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE
SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY’S RIGHT TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR
PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL
MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS AGREEMENT SHALL BE RESPONSIBLE FOR ALL FEES AND
EXPENSES, INCLUDING ATTORNEYS’ FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE.
b. Counterparts; Signatures by Facsimile. This Agreement may be executed in one or more counterparts, each of which shall be deemed an
original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other
party. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the
party so delivering this Agreement.
Agreement.
c. Headings. The headings of this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this
d. Severability. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision
hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof.
e. Entire Agreement; Amendments. This Agreement and the instruments referenced herein contain the entire understanding of the parties with
respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to
be charged with enforcement.
9
f. Notices. Any notices required or permitted to be given under the terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective five days after being placed in
the mail, if mailed by regular United States mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in
each case addressed to a party. The addresses for such communications shall be:
If to the Company:
Avalon GloboCare Corp.
4400 Route 9 South, Suite 3100
Freehold, New Jersey 07728
Attention: Chief Executive Officer
Telephone:
With a copy to:
Fleming PLLC
30 Wall Street, 8th Floor
New York, New York 10005
Attention: Stephen M. Fleming, Esq.
Telephone: (516) 833-5034
If to a Buyer: To the address set forth immediately below such Buyer’s name on the signature pages hereto. Each party shall provide notice to the other party of any
change in address.
g. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. Neither the
Company nor any Buyer shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other. Notwithstanding the foregoing,
subject to Section 2(f), any Buyer may assign its rights hereunder to any person that purchases Securities in a private transaction from a Buyer or to any of its “affiliates,” as
that term is defined under the 1934 Act, without the consent of the Company.
and is not for the benefit of, nor may any provision hereof be enforced by, any other person.
h. Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns,
i. Survival. The representations and warranties of the Company and the agreements and covenants set forth in Sections 3 and 4 shall survive the
closing hereunder notwithstanding any due diligence investigation conducted by or on behalf of the Buyers for a period of 12 months following the Closing Date. The
Company agrees to indemnify and hold harmless each of the Buyers and all their officers, directors, employees and agents for loss or damage arising as a result of or related to
any breach or alleged breach by the Company of any of its representations, warranties and covenants set forth in Sections 3 and 4 hereof or any of its covenants and obligations
under this Agreement, including advancement of expenses as they are incurred.
j. Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated hereby.
intent, and no rules of strict construction will be applied against any party.
k. No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
10
IN WITNESS WHEREOF, the undersigned Buyers and the Company have caused this Agreement to be duly executed as of the date first above written.
AVALON GLOBOCARE CORP.
By:
David K. Jin, MD, PhD
Chief Executive Officer
[BUYER(S) SIGNATURE PAGES FOLLOW]
11
[insert name of entity]
By:
Name:
Title:
RESIDENCE:
ADDRESS:
Facsimile:
Telephone:
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Principal Amount of Notes:
Number of Warrants:
Aggregate Purchase Price:
( ) -
( ) -
12
$
$
4,000,000
1,333,333
4,000,000
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “ACT”). THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND
SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER SAID ACT.
CONVERTIBLE NOTE
Exhibit 10.48
Freehold, NJ
March __, 2022 (the “Issue Date”)
$[ ]
FOR VALUE RECEIVED, AVALON GLOBOCARE CORP., a Delaware corporation (hereinafter called the “Borrower”), hereby promises to pay to the
order of [ ] or registered assigns (the “Holder”) the sum of $4,000,000, on March 30, 2032 (the “Maturity Date”), and to pay interest on the unpaid principal balance hereof
at the rate of one percent (1%) per annum on the Maturity Date which shall accrue commencing on March __, 2022 (the “Issue Date”). Interest shall commence accruing on the
issue date, shall be computed on the basis of a 365-day year and the actual number of days elapsed and shall be payable on the Maturity Date. All payments due hereunder (to
the extent not converted into common stock, $.0001 par value per share, of the Borrower (the “Common Stock”) in accordance with the terms hereof) shall be made in lawful
money of the United States of America. All payments shall be made at such address as the Holder shall hereafter give to the Borrower by written notice made in accordance
with the provisions of this Note. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a business day, the same shall instead be
due on the next succeeding day which is a business day and, in the case of any interest payment date which is not the date on which this Note is paid in full, the extension of the
due date thereof shall not be taken into account for purposes of determining the amount of interest due on such date. As used in this Note, the term “business day” shall mean
any day other than a Saturday, Sunday or a day on which commercial banks in the city of New York, New York are authorized or required by law or executive order to remain
closed. Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in that certain Securities Purchase Agreement, dated March __,
2022, pursuant to which this Note was originally issued (the “Purchase Agreement”).
The following terms shall apply to this Note:
ARTICLE I. CONVERSION RIGHTS
1.1 Conversion Right. The Holder shall have the right from time to time, and at any time on or prior to repayment, to convert all or any part of the
outstanding and unpaid principal amount of this Note into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any
shares of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at the conversion price (the “Conversion
Price”) determined as provided herein (a “Conversion”); provided, however, that in no event shall the Holder be entitled to convert any portion of this Note in excess of that
portion of this Note upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Notes or the unexercised or unconverted portion of any
other security of the Borrower (including, without limitation, the warrants issued by the Borrower pursuant to the Purchase Agreement) subject to a limitation on conversion or
exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the conversion of the portion of this Note with respect to
which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.9% of the outstanding shares of
Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such proviso. The number of shares of Common Stock to
be issued upon each conversion of this Note shall be determined by dividing the Conversion Amount (as defined below) by the Conversion Price on the date specified in the
notice of conversion, in the form attached hereto as Exhibit A (the “Notice of Conversion”), delivered to the Borrower by the Holder in accordance with Section 1.4 below;
provided that the Notice of Conversion is submitted by facsimile (or by other means resulting in, or reasonably expected to result in, notice) to the Borrower before 6:00 p.m.,
New York, New York time on such conversion date (the “Conversion Date”). The term “Conversion Amount” means, with respect to any conversion of this Note, the sum of
(1) the principal amount of this Note to be converted in such conversion plus (2) accrued and unpaid interest, if any, on such principal amount at the interest rates provided in
this Note to the Conversion Date.
1.2 Conversion Price. The Conversion Price is the Applicable Percentage (as defined herein) multiplied by the Market Price (as defined herein). “Market
Price” means the average of the highest three (3) Trading Prices (as defined below) for the Common Stock during the twenty (20) Trading Day period ending one Trading Day
prior to the Conversion Date. “Trading Price” means the closing price as quoted on the Nasdaq Capital Market or any successor exchange or quotation service. “Trading Day”
shall mean any day on which the Common Stock is traded for any period on the principal securities exchange or other securities market on which the Common Stock is then
being traded. “Applicable Percentage” shall mean 95.0%. In no event shall the Conversion Price be less than $0.75 per share.
1.3 Authorized Shares. The Borrower covenants that during the period the conversion right exists, the Borrower will reserve from its authorized and
unissued Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of this Note and the
other Notes issued pursuant to the Purchase Agreement.
1.4 Method of Conversion.
(a) Mechanics of Conversion. Subject to Section 1.1, this Note may be converted by the Holder in whole or in part at any time from time to time
after the Issue Date, by (A) submitting to the Borrower a Notice of Conversion (by facsimile or other reasonable means of communication dispatched on the Conversion Date
prior to 6:00 p.m., New York, New York time) and (B) subject to Section 1.4(b), surrendering this Note at the principal office of the Borrower.
2
(b) Surrender of Note Upon Conversion. Notwithstanding anything to the contrary set forth herein, upon conversion of this Note in accordance
with the terms hereof, the Holder shall not be required to physically surrender this Note to the Borrower unless the entire unpaid principal amount of this Note is so converted.
The Holder and the Borrower shall maintain records showing the principal amount so converted and the dates of such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Borrower, so as not to require physical surrender of this Note upon each such conversion. In the event of any dispute or discrepancy, such
records of the Borrower shall be controlling and determinative in the absence of manifest error. Notwithstanding the foregoing, if any portion of this Note is converted as
aforesaid, the Holder may not transfer this Note unless the Holder first physically surrenders this Note to the Borrower, whereupon the Borrower will forthwith issue and
deliver upon the order of the Holder a new Note of like tenor, registered as the Holder (upon payment by the Holder of any applicable transfer taxes) may request, representing
in the aggregate the remaining unpaid principal amount of this Note. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note represented by this Note may be less than
the amount stated on the face hereof.
(c) Payment of Taxes. The Borrower shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock or other securities or property on conversion of this Note in a name other than that of the Holder (or in street name), and the Borrower
shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons (other than the Holder or the custodian in whose
street name such shares are to be held for the Holder’s account) requesting the issuance thereof shall have paid to the Borrower the amount of any such tax or shall have
established to the satisfaction of the Borrower that such tax has been paid.
(d) Delivery of Common Stock Upon Conversion. Upon receipt by the Borrower from the Holder of a facsimile transmission (or other reasonable
means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this Section 1.4, the Borrower shall issue and deliver or cause to be
issued and delivered to or upon the order of the Holder certificates for the Common Stock issuable upon such conversion within two (2) business days after such receipt (and,
solely in the case of conversion of the entire unpaid principal amount hereof, surrender of this Note) in accordance with the terms hereof and the Purchase Agreement.
(e) Obligation of Borrower to Deliver Common Stock. Upon receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed to be
the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued and unpaid interest on this Note shall be
reduced to reflect such conversion, and, unless the Borrower defaults on its obligations under this Article I, all rights with respect to the portion of this Note being so converted
shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion. If the Holder shall have
given a Notice of Conversion as provided herein, the Borrower’s obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional,
irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against
any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Borrower to the holder of record, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder of any obligation to the Borrower, and irrespective of any other
circumstance which might otherwise limit such obligation of the Borrower to the Holder in connection with such conversion. The Conversion Date specified in the Notice of
Conversion shall be the Conversion Date so long as the Notice of Conversion is received by the Borrower before 6:00 p.m., New York, New York time, on such date.
3
(f) Delivery of Common Stock by Electronic Transfer. In lieu of delivering physical certificates representing the Common Stock issuable upon
conversion and if such shares are available for resale in accordance with Rule 144, provided the Borrower’s transfer agent is participating in the Depository Trust Company
(“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of the Holder and its compliance with the provisions contained in Section 1.1 and in this Section
1.4, the Borrower shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the
account of Holder’s Prime Broker with DTC through its Deposit Withdrawal Agent Commission (“DWAC”) system.
1.5 Concerning the Shares. The shares of Common Stock issuable upon conversion of this Note may not be sold or transferred unless (i) such shares are sold
pursuant to an effective registration statement under the Act or (ii) the Borrower or its transfer agent shall have been furnished with an opinion of counsel (which opinion shall
be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred
pursuant to an exemption from such registration or (iii) such shares are sold or transferred pursuant to Rule 144 under the Act (or a successor rule) (“Rule 144”) or (iv) such
shares are transferred to an “affiliate” (as defined in Rule 144) of the Borrower who agrees to sell or otherwise transfer the shares only in accordance with this Section 1.5 and
who is an Accredited Investor (as defined in the Purchase Agreement). Except as otherwise provided in the Purchase Agreement (and subject to the removal provisions set forth
below), until such time as the shares of Common Stock issuable upon conversion of this Note have been registered under the Act or otherwise may be sold pursuant to Rule 144
without any restriction as to the number of securities as of a particular date that can then be immediately sold, each certificate for shares of Common Stock issuable upon
conversion of this Note that has not been so included in an effective registration statement or that has not been sold pursuant to an effective registration statement or an
exemption that permits removal of the legend, shall bear a legend substantially in the following form, as appropriate:
“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY
FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT UNLESS
SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER SAID ACT.”
The legend set forth above shall be removed and the Borrower shall issue to the Holder a new certificate therefor free of any transfer legend if (i) the
Borrower or its transfer agent shall have received an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the
effect that a public sale or transfer of such Common Stock may be made without registration under the Act and the shares are so sold or transferred, (ii) such Holder provides
the Borrower or its transfer agent with reasonable assurances that the Common Stock issuable upon conversion of this Note (to the extent such securities are deemed to have
been acquired on the same date) can be sold pursuant to Rule 144 or (iii) in the case of the Common Stock issuable upon conversion of this Note, such security is registered for
sale by the Holder under an effective registration statement filed under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of
securities as of a particular date that can then be immediately sold.
1.6 Effect of Certain Events.
(a) Effect of Merger, Consolidation, Etc. At the option of the Holder, the sale, conveyance or disposition of all or substantially all of the assets of
the Borrower shall be deemed to be an Event of Default (as defined in Article III) pursuant to which the Borrower shall be required to pay to the Holder upon the
consummation of and as a condition to such transaction an amount equal to the Default Amount (as defined in Article III)
4
(b) Adjustment Due to Merger, Consolidation, Etc. If, at any time when this Note is issued and outstanding and prior to conversion of all of the
Notes, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the
Borrower shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Borrower or another entity, or in case of any sale
or conveyance of all or substantially all of the assets of the Borrower other than in connection with a plan of complete liquidation of the Borrower, then the Holder of this Note
shall thereafter have the right to receive upon conversion of this Note, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common
Stock immediately theretofore issuable upon conversion, such stock, securities or assets which the Holder would have been entitled to receive in such transaction had this Note
been converted in full immediately prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate provisions shall
be made with respect to the rights and interests of the Holder of this Note to the end that the provisions hereof (including, without limitation, provisions for adjustment of the
Conversion Price and of the number of shares issuable upon conversion of the Note) shall thereafter be applicable, as nearly as may be practicable in relation to any securities
or assets thereafter deliverable upon the conversion hereof.
(c) Adjustment Due to Dividend, Distribution or Split. If the Borrower, at any time while the Note is outstanding: (A) shall pay a stock dividend
or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock, (B)
subdivide outstanding shares of Common Stock into a larger number of shares, (C) combine (including by way of reverse stock split) outstanding shares of Common Stock into
a smaller number of shares, or (D) issue by reclassification of shares of the Common Stock any shares of capital stock of the Borrower, then the Conversion Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which
the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
1.7 Trading Market Limitations. Unless permitted by the applicable rules and regulations of the principal securities market on which the Common Stock is
then listed or traded, in no event shall the Borrower issue upon conversion of or otherwise pursuant to this Note and the other Notes issued pursuant to the Purchase Agreement
more than the maximum number of shares of Common Stock that the Borrower can issue pursuant to any rule of the principal United States securities market on which the
Common Stock is then traded (the “Maximum Share Amount”), which shall be 19.99% of the total shares outstanding on the Closing Date (as defined in the Purchase
Agreement), subject to equitable adjustment from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the
Common Stock occurring after the date hereof. Once the Maximum Share Amount has been issued, the Borrower will use its reasonable efforts to seek and obtain shareholder
approval as soon as practicable.
1.8 Status as Shareholder. Upon submission of a Notice of Conversion by a Holder, (i) the shares covered thereby shall be deemed converted into shares of
Common Stock and (ii) the Holder’s rights as a Holder of such converted portion of this Note shall cease and terminate, excepting only the right to receive certificates for such
shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such Holder because of a failure by the Borrower to comply with the
terms of this Note.
5
If any of the following events of default (each, an “Event of Default”) shall occur:
ARTICLE II. EVENTS OF DEFAULT
2.1 Failure to Pay Principal or Interest. The Borrower fails to pay the principal hereof or interest thereon when due on this Note and, if such failure is to
pay interest, is not cured within ninety (90) days of such failure;
appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed;
2.2 Receiver or Trustee. The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the
2.3 Judgments. Any money judgment, writ or similar process shall be entered or filed against the Borrower or any subsidiary of the Borrower or any of its
property or other assets for more than $500,000, and shall remain unvacated, unbonded or unstayed for a period of sixty (60) days unless otherwise consented to by the Holder,
which consent will not be unreasonably withheld;
2.4 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for
the relief of debtors shall be instituted by or against the Borrower or any subsidiary of the Borrower;
then, upon the occurrence and during the continuation of any Event of Default, at the option of the Holders of a majority of the aggregate principal amount of the outstanding
Notes issued pursuant to the Purchase Agreement exercisable through the delivery of written notice to the Borrower by such Holders (the “Default Notice”), the Notes shall
become immediately due and payable and the Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the sum of (w) the then
outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note to the date of payment and all other amounts payable
hereunder and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity.
ARTICLE III. MISCELLANEOUS
3.1 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or
privileges. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.
3.2 Notices. Any notice herein required or permitted to be given shall be in writing and may be personally served or delivered by courier or sent by United
States mail and shall be deemed to have been given upon receipt if personally served (which shall include telephone line facsimile transmission) or sent by courier or three (3)
days after being deposited in the United States mail, certified, with postage pre-paid and properly addressed, if sent by mail. For the purposes hereof, the address of the Holder
shall be as shown on the records of the Borrower; and the address of the Borrower shall be as set forth in the Purchase Agreement. Both the Holder and the Borrower may
change the address for service by service of written notice to the other as herein provided.
6
3.3 Amendments. This Note and any provision hereof may only be amended by an instrument in writing signed by the Borrower and the Holder. The term
“Note” and all reference thereto, as used throughout this instrument, shall mean this instrument (and the other Notes issued pursuant to the Purchase Agreement) as originally
executed, or if later amended or supplemented, then as so amended or supplemented.
3.4 Assignability. This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to be the benefit of the Holder and its
successors and assigns. Each transferee of this Note must be an “accredited investor” (as defined in Rule 501(a) of the 1933 Act). Notwithstanding anything in this Note to the
contrary, this Note may only be assigned with the express written consent of the Borrower.
attorneys’ fees.
3.5 Cost of Collection. If default is made in the payment of this Note, the Borrower shall pay the Holder hereof costs of collection, including reasonable
3.6 Governing Law. THIS NOTE SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICT OF LAWS. THE BORROWER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL
COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS NOTE, THE AGREEMENTS ENTERED INTO IN
CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF
AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS
UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY
SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY
LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE
ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN
ANY DISPUTE ARISING UNDER THIS NOTE SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS’ FEES, INCURRED BY
THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE.
3.7 Purchase Agreement. By its acceptance of this Note, each Holder agrees to be bound by the applicable terms of the Purchase Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized officer this ____ day of March, 2022.
AVALON GLOBOCARE CORP.
By:
David K. Jin, MD, PhD
Chief Executive Officer
8
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Notes)
The undersigned hereby irrevocably elects to convert $__________ principal amount of the Note (defined below) into shares of common stock, par value
$.0001 per share (“Common Stock”), of Avalon GloboCare Corp., a Delaware corporation (the “Borrower”) according to the conditions of the convertible Notes of the
Borrower dated as of March __, 2022 (the “Notes”), as of the date written below. If securities are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates. A copy of each Note is attached hereto (or evidence of loss, theft
or destruction thereof).
its nominee with DTC through its Deposit Withdrawal Agent Commission system (“DWAC Transfer”).
If available, the Borrower shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or
Name of DTC Prime Broker:______________________________________
Account Number: _____________________________________________
In lieu of receiving shares of Common Stock issuable pursuant to this Notice of Conversion by way of a DWAC Transfer, the undersigned hereby requests
that the Borrower issue a certificate or certificates for the number of shares of Common Stock set forth below (which numbers are based on the Holder’s calculation attached
hereto) in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto:
Name:____________________________________________
Address: _________________________________________
The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable to the undersigned upon conversion of the
Notes shall be made pursuant to registration of the securities under the Securities Act of 1933, as amended (the “Act”), or pursuant to an exemption from registration under the
Act.
Date of Conversion:___________________________
Applicable Conversion Price: $
Number of Shares of Common Stock to be Issued Pursuant to
Conversion of the Notes:______________
Signature:___________________________________
Name:______________________________________
Address:____________________________________
9
LOAN EXTENSION AND MODIFICATION AGREEMENT
Exhibit 10.49
This Loan Extension and Modification Agreement (the “Agreement”) is dated as of this 28th day of March, 2022, by and between Avalon GloboCare Corp., a
Delaware corporation (the “Company”) and Daniel Lu (“Holder”).
Terms not otherwise defined herein shall have the meaning ascribed to such terms in the Promissory Note in the principal amount of $1,000,000 issued March 18, 2019
by the Company to the Holder (the “Promissory Note”).
WITNESSETH:
WHEREAS, the Company obtained a loan from Holder in the principal amount of $1,000,000 (the “Loan”);
WHEREAS, the Loan is evidenced by the Promissory Note.
WHEREAS, under the Promissory Note, the Maturity Date is March 19, 2022 (the “Original Maturity Date”). Upon the Original Maturity Date, all outstanding
principal and any accrued and unpaid interest becomes due and owing under such Promissory Note and is to be immediately paid by the Company to Holder;
WHEREAS, the Company seeks Holder’s consent to modify and extend the Original Maturity Date to the date specified hereinafter.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged the Company and Holder agree as follows:
1. Extension. Effective March 18, 2022, the Promissory Note is amended to extend the Original Maturity Date from March 19, 2022 to March 19, 2024.
2. No Defaults. The Company and the Holder, by execution of this Agreement, hereby represents and warrants that as of the date hereof, no Event of Default exists or
is continuing with respect to the Promissory Note.
3. Loan Extension Agreement. It is the intention and understanding of the parties hereto that this Agreement shall act as an extension of the Promissory Note and that
this Agreement shall not act as a novation of such note.
4. Except as specifically amended hereby, the parties hereto acknowledge and confirm that the Promissory Note remain in full force and effect and enforceable in
accordance with their terms.
IN WITNESS WHEREOF, intending to be legally bound, the parties hereto have caused this Agreement to be signed by their duly authorized officers.
Dated: March 28, 2022 (effective March 18, 2022)
Avalon GloboCare Corp.
/s/ Luisa Ingargiola
Name: Luisa Ingargiola
Title: Chief Financial Officer
/s/ Daniel Lu
Daniel Lu
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statements of Avalon GloboCare Corp. on Form S-3 (File No. 333-229118) and Form S-8 (File No. 333-
251196) of our report dated March 30, 2022, which included an explanatory paragraph as to the Company’s ability to continue as a going concern, with respect to our audits of
the consolidated financial statements of Avalon GloboCare Corp. as of December 31, 2021 and 2020 and for each of the two years in the period ended December 31, 2021,
which report is included in this Annual Report on Form 10-K of Avalon GloboCare Corp. for the year ended December 31, 2021.
Exhibit 23.1
/s/ Marcum LLP
Marcum LLP
New York, NY
March 30, 2022
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Dr. David K. Jin, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2021, of Avalon GloboCare Corp.;
Exhibit 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, and evaluated the effectiveness of our internal control over financial reporting, and printed in this report our conclusions about
the effectiveness of our internal control over financial reporting, as of the end of the period covered by this report based on such evaluation;
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent function):
a)
b)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and
report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial
reporting.
Dated: March 30, 2022
/s/ Dr. David K. Jin
Dr. David K. Jin
Chief Executive Officer and President
(principal executive officer)
CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Luisa Ingargiola, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2021, of Avalon GloboCare Corp.;
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, and evaluated the effectiveness of our internal control over financial reporting, and printed in this report our conclusions about
the effectiveness of our internal control over financial reporting, as of the end of the period covered by this report based on such evaluation;
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent function):
a)
b)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and
report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial
reporting.
Dated: March 30, 2022
/s/ Luisa Ingargiola
Luisa Ingargiola
Chief Financial Officer
(principal financial and accounting officer)
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the annual report on Form 10-K of Avalon GloboCare Corp. (the “Company”) for the year ended December 31, 2021, as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Dr. David K. Jin, the Chief Executive Officer and President, of the Company, do hereby certify pursuant to 18
U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 30, 2022
/s/ Dr. David K. Jin
Dr. David K. Jin
Chief Executive Officer and President
(principal executive officer)
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the annual report on Form 10-K of Avalon GloboCare Corp. (the “Company”) for the year ended December 31, 2021, as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Luisa Ingargiola, the Chief Financial Officer, of the Company, do hereby certify pursuant to 18 U.S.C. §1350, as
adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 30, 2022
/s/ Luisa Ingargiola
Luisa Ingargiola
Chief Financial Officer
(principal financial and accounting officer)