UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2022

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

COMMISSION FILE NUMBER: 001-38728

 

AVALON GLOBOCARE CORP.

(Exact name of Registrant as specified in its charter)

 

Delaware   47-1685128
(State of incorporation)   (I.R.S. Employer
Identification No.)

 

4400 Route 9 South, Suite 3100, Freehold, New Jersey 07728

(Address of principal executive offices) (zip code)

 

(732) 780-4400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Trading Symbol   Name of each exchange on which registered
Common Stock, $0.0001 par value per share   ALBT   The NASDAQ Stock Market LLC

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

 

Class   Outstanding November 14, 2022
Common Stock, $0.0001 par value per share  

99,215,208 shares

 

 

 

 

 

 

AVALON GLOBOCARE CORP.

 

FORM 10-Q

 

September 30, 2022

 

TABLE OF CONTENTS

 

    Page No.
  PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements 1
  Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021 1
  Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2022 and 2021 2
  Unaudited Condensed Consolidated Statement of Changes in Equity for the Three and Nine Months Ended September 30, 2022 and 2021 3
  Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 5
  Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Item 3 Quantitative and Qualitative Disclosures About Market Risk 41
Item 4 Controls and Procedures 41
PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 42
Item 1A. Risk Factors 42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
Item 3. Defaults upon Senior Securities 43
Item 4. Mine Safety Disclosures 43
Item 5. Other Information 43
Item 6. Exhibits 44

 

i

 

 

FORWARD LOOKING STATEMENTS

 

This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.

 

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

 

We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

Unless otherwise indicated, references in this report to “we,” “us”, “Avalon” or the “Company” refer to Avalon GloboCare Corp. and its consolidated subsidiaries.

 

ii

 

 

PART 1 - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,
2022
   December 31,
2021
 
   (Unaudited)     
ASSETS        
         
CURRENT ASSETS:        
Cash  $3,937,959   $807,538 
Rent receivable   50,830    33,618 
Rent receivable - related party   71,400    33,600 
Deferred financing costs, net   139,170    138,631 
Other current assets   250,042    309,655 
           
Total Current Assets   4,449,401    1,323,042 
           
NON-CURRENT ASSETS:          
Operating lease right-of-use assets, net   44,161    145,303 
Property and equipment, net   214,135    361,547 
Investment in real estate, net   7,402,258    7,528,770 
Equity method investment   478,362    515,632 
Other non-current assets   322,356    367,922 
           
Total Non-current Assets   8,461,272    8,919,174 
           
Total Assets  $12,910,673   $10,242,216 
           
LIABILITIES AND EQUITY          
           
CURRENT LIABILITIES:          
Accounts payable  $80,585   $
-
 
Accrued professional fees   1,234,846    1,881,349 
Accrued research and development fees   708,000    928,111 
Accrued payroll liability and directors’ compensation   379,558    307,043 
Accrued settlement of lawsuit   450,000    - 
Accrued liabilities and other payables   330,116    275,320 
Accrued liabilities and other payables - related parties   100,000    468,433 
Operating lease obligation   44,880    151,402 
Note payable - related party   
-
    390,000 
           
Total Current Liabilities   3,327,985    4,401,658 
           
NON-CURRENT LIABILITIES:          
Operating lease obligation - noncurrent portion   
-
    5,901 
Accrued settlement of lawsuit - noncurrent portion   450,000    
-
 
Note payable, net   4,555,750    
-
 
Loan payable - related party   
-
    2,750,262 
           
Total Non-current Liabilities   5,005,750    2,756,163 
           
Total Liabilities   8,333,735    7,157,821 
           
Commitments and Contingencies (Note 16)   
 
    
 
 
           
EQUITY:          
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2022 and December 31, 2021   
-
    
-
 
Common stock, $0.0001 par value; 490,000,000 shares authorized; 99,735,208 shares issued and 99,215,208 shares outstanding at September 30, 2022; 88,975,169 shares issued and 88,455,169 shares outstanding at December 31, 2021   9,973    8,898 
Common stock to be issued   600,000    
-
 
Additional paid-in capital   65,371,708    54,888,559 
Less: common stock held in treasury, at cost; 520,000 shares at September 30, 2022 and December 31, 2021   (522,500)   (522,500)
Accumulated deficit   (60,645,040)   (51,131,874)
Statutory reserve   6,578    6,578 
Accumulated other comprehensive loss - foreign currency translation adjustment   (243,781)   (165,266)
Total Avalon GloboCare Corp. stockholders’ equity   4,576,938    3,084,395 
Non-controlling interest   
-
    
-
 
           
Total Equity   4,576,938    3,084,395 
           
Total Liabilities and Equity  $12,910,673   $10,242,216 

 

See accompanying notes to the condensed consolidated financial statements.

 

1 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
   2022   2021   2022   2021 
                 
REVENUES                
Real property rental    $317,390   $355,459   $905,842   $925,465 
Medical related consulting services - related party   -    131,305    -    131,305 
Total Revenues   317,390    486,764    905,842    1,056,770 
                     
COSTS AND EXPENSES                    
Real property operating expenses   247,152    215,622    677,303    637,663 
Medical related consulting services - related party   -    102,442    -    102,442 
Total Costs and Expenses   247,152    318,064    677,303    740,105 
                     
GROSS PROFIT                    
Real property operating income   70,238    139,837    228,539    287,802 
Gross profit from medical related consulting services   -    28,863    -    28,863 
Total Gross Profit   70,238    168,700    228,539    316,665 
                     
OTHER OPERATING EXPENSES:                    
Advertising and marketing   150,620    27,833    807,821    44,156 
Professional fees   628,807    1,221,952    1,886,562    3,960,209 
Compensation and related benefits   488,373    434,602    1,514,959    1,544,437 
Research and development expenses   170,406    224,072    541,566    676,053 
Litigation settlement   -    
-
    1,350,000    
-
 
Other general and administrative   221,131    225,212    687,243    662,649 
                     
Total Other Operating Expenses   1,659,337    2,133,671    6,788,151    6,887,504 
                     
LOSS FROM OPERATIONS   (1,589,099)   (1,964,971)   (6,559,612)   (6,570,839)
                     
OTHER (EXPENSE) INCOME                    
Interest expense - amortization of debt discount and debt issuance cost   (3,248,597)   -    (3,303,282)   - 
Interest expense - other   (46,547)   
-
    (53,751)   
-
 
Interest expense - related party   (8,358)   (50,248)   (79,898)   (141,528)
Conversion inducement expense   (344,264)   -    (344,264)   - 
Loss from equity method investment   (9,011)   (14,203)   (33,809)   (48,135)
Change in fair value of derivative liability   (168,520)   
-
    600,749    
-
 
Other income   242    5,203    260,701    4,255 
                     
Total Other Expense, net   (3,825,055)   (59,248)   (2,953,554)   (185,408)
                     
LOSS BEFORE INCOME TAXES   (5,414,154)   (2,024,219)   (9,513,166)   (6,756,247)
                     
INCOME TAXES   
-
    
-
    -    - 
                     
NET LOSS    $(5,414,154)  $(2,024,219)  $(9,513,166)  $(6,756,247)
                     
LESS: NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST   
-
    
-
    -    - 
                     
NET LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS    $(5,414,154)  $(2,024,219)  $(9,513,166)  $(6,756,247)
                     
COMPREHENSIVE LOSS:                    
NET LOSS    $(5,414,154)  $(2,024,219)  $(9,513,166)  $(6,756,247)
OTHER COMPREHENSIVE (LOSS) INCOME                    
Unrealized foreign currency translation (loss) gain   (37,033)   1,285    (78,515)   13,349 
COMPREHENSIVE LOSS   (5,451,187)   (2,022,934)   (9,591,681)   (6,742,898)
LESS: COMPREHENSIVE LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST   
-
    
-
    -    - 
COMPREHENSIVE LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS    $(5,451,187)  $(2,022,934)  $(9,591,681)  $(6,742,898)
                     
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS:                    
Basic and diluted  
  $(0.06)  $(0.02)  $(0.10)  $(0.08)
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                    
Basic and diluted
   97,036,029    85,362,416    91,521,683    84,473,569 

 

See accompanying notes to the condensed consolidated financial statements.

 

2 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three and Nine Months Ended September 30, 2022

(Unaudited)

 

   Avalon GloboCare Corp. Stockholders’ Equity         
   Preferred Stock   Common Stock           Treasury Stock           Accumulated         
   Number
of
       Number
of
       Common
Stock to be
   Additional
Paid-in
   Number
of
       Accumulated   Statutory   Other
Comprehensive
   Non-controlling   Total 
   Shares   Amount   Shares   Amount   Issued   Capital   Shares   Amount   Deficit   Reserve   Loss   Interest   Equity 
                                                     
Balance, January 1, 2022        -   $      -    88,975,169   $8,898   $     -   $54,888,559    (520,000)  $(522,500)  $(51,131,874)  $6,578   $(165,266)  $         -   $3,084,395 
                                                                  
Sale of common stock, net   -    -    170,640    17    -    112,311    -    -    -    -    -    -    112,328 
                                                                  
Stock-based compensation   -    -    -    -    -    152,323    -    -    -    -    -    -    152,323 
                                                                  
Foreign currency translation adjustment   -    -    -    -    -    -    -    -    -    -    2,021    -    2,021 
                                                                  
Net loss for the three months ended March 31, 2022   -    -    -    -    -    -    -    -    (2,070,538)   -    -    -    (2,070,538)
                                                                  
Balance, March 31, 2022   -    -    89,145,809    8,915    -    55,153,193    (520,000)   (522,500)   (53,202,412)   6,578    (163,245)   -    1,280,529 
                                                                  
Warrants issued with convertible debt offering   -    -    -    -    -    498,509    -    -    -    -    -    -    498,509 
                                                                  
Issuance of common stock for services   -    -    408,957    40    -    340,910    -    -    -    -    -    -    340,950 
                                                                  
Stock-based compensation   -    -    -    -    -    126,301    -    -    -    -    -    -    126,301 
                                                                  
Foreign currency translation adjustment   -    -    -    -    -    -    -    -    -    -    (43,503)   -    (43,503)
                                                                  
Net loss for the three months ended June 30, 2022   -    -    -    -    -    -    -    -    (2,028,474)   -    -    -    (2,028,474)
                                                                  
Balance, June 30, 2022   -    -    89,554,766    8,955    -    56,118,913    (520,000)   (522,500)   (55,230,886)   6,578    (206,748)   -    174,312 
                                                                  
Conversion of convertible note payable and accrued interest into common stock   -    -    5,736,452    574    -    4,072,384    -    -    -    -    -    -    4,072,958 
                                                                  
Reclassification of derivative liability to equity   -    -    -    -    -    2,181,820    -    -    -    -    -    -    2,181,820 
                                                                  
Issuance of common stock for settlement of loan payable and accrued interest - related party   -    -    4,443,990    444    -    2,888,149    -    -    -    -    -    -    2,888,593 
                                                                  
Sale of common stock - related party   -    -    -    -    350,000    -    -    -    -    -    -    -    350,000 
                                                                  
Sale of common stock   -    -    -    -    250,000    -    -    -    -    -    -    -    250,000 
                                                                  
Stock-based compensation   -    -    -    -    -    110,442    -    -    -    -    -    -    110,442 
                                                                  
Foreign currency translation adjustment   -    -    -    -    -    -    -    -    -    -    (37,033)   -    (37,033)
                                                                  
Net loss for the three months ended September 30, 2022   -    -    -    -    -    -    -    -    (5,414,154)   -    -    -    (5,414,154)
                                                                  
Balance, September 30, 2022   -   $-    99,735,208   $9,973   $600,000   $65,371,708    (520,000)  $(522,500)  $(60,645,040)  $6,578   $(243,781)  $-   $4,576,938 

 

See accompanying notes to the condensed consolidated financial statements.

 

3 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three and Nine Months Ended September 30, 2021

(Unaudited)

 

   Avalon GloboCare Corp. Stockholders’ Equity         
   Preferred Stock   Common Stock       Treasury Stock           Accumulated         
   Number
of
       Number
of
       Additional
Paid-in
   Number
of
       Accumulated   Statutory   Other
Comprehensive
   Non-controlling   Total 
   Shares   Amount   Shares   Amount   Capital   Shares   Amount   Deficit   Reserve   Loss   Interest   Equity 
                                                 
Balance, January 1, 2021       -   $      -    82,795,297   $8,279   $46,856,447    (520,000)  $(522,500)  $(42,041,375)  $6,578   $(190,510)  $       -   $4,116,919 
                                                             
Sale of common stock, net   -    -    1,848,267    185    2,337,074    -    -    -    -    -    -    2,337,259 
                                                             
Issuance of common stock for services   -    -    300,000    30    359,970    -    -    -    -    -    -    360,000 
                                                             
Stock-based compensation   -    -    -    -    202,505    -    -    -    -    -    -    202,505 
                                                             
Foreign currency translation adjustment   -    -    -    -    -    -    -    -    -    (2,722)   -    (2,722)
                                                             
Net loss for the three months ended March 31, 2021   -    -    -    -    -    -    -    (2,367,118)   -    -    -    (2,367,118)
                                                             
Balance, March 31, 2021   -    -    84,943,564    8,494    49,755,996    (520,000)   (522,500)   (44,408,493)   6,578    (193,232)   -    4,646,843 
                                                             
Issuance of common stock for settlement of accrued professional fees   -    -    167,355    17    202,483    -    -    -    -    -    -    202,500 
                                                             
Issuance of common stock for services   -    -    490,000    49    534,251    -    -    -    -    -    -    534,300 
                                                             
Stock-based compensation   -    -    -    -    195,209    -    -    -    -    -    -    195,209 
                                                             
Foreign currency translation adjustment   -    -    -    -    -    -    -    -    -    14,786    -    14,786 
                                                             
Net loss for the three months ended June 30, 2021   -    -    -    -    -    -    -    (2,364,910)   -    -    -    (2,364,910)
                                                             
Balance, June 30, 2021   -    -    85,600,919    8,560    50,687,939    (520,000)   (522,500)   (46,773,403)   6,578    (178,446)   -    3,228,728 
                                                             
Sale of common stock, net   -    -    35,769    4    33,789    -    -    -    -    -    -    33,793 
                                                             
Issuance of common stock for services   -    -    415,679    41    425,146    -    -    -    -    -    -    425,187 
                                                             
Stock-based compensation   -    -    -    -    188,859    -    -    -    -    -    -    188,859 
                                                             
Foreign currency translation adjustment   -    -    -    -    -    -    -    -    -    1,285    -    1,285 
                                                             
Net loss for the three months ended September 30, 2021   -    -    -    -    -    -    -    (2,024,219)   -    -    -    (2,024,219)
                                                             
Balance, September 30, 2021   -   $-    86,052,367   $8,605   $51,335,733    (520,000)  $(522,500)  $(48,797,622)  $6,578   $(177,161)  $-   $
1,853,633
 

 

See accompanying notes to the condensed consolidated financial statements.

 

4 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Nine Months
Ended September 30,
 
   2022   2021 
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(9,513,166)  $(6,756,247)
Adjustments to reconcile net loss to net cash used in operating activities:          
Bad debt provision   2,295    6,252 
Depreciation   250,553    226,735 
Change in straight-line rent receivable   (19,581)   (59,117)
Amortization of right-of-use asset   101,980    93,342 
Stock-based compensation and service expense   983,036    1,621,452 
Loss on equity method investment   33,809    48,135 
Amortization of debt discount   3,281,078    
-
 
Amortization of debt issuance costs   22,204    
-
 
Conversion inducement expense   344,264    
-
 
Change in fair market value of derivative liability   (600,749)   
-
 
Changes in operating assets and liabilities:          
Rent receivable   4,751    1,802 
Rent receivable - related party   (37,800)   (21,000)
Security deposit   (424)   6,826 
Deferred leasing costs   18,947    13,348 
Other assets   (65,963)   21,218 
Accounts payable   86,826    
-
 
Accrued liabilities and other payables   63,089    1,435,548 
Accrued liabilities and other payables - related parties   79,898    141,528 
Operating lease obligation   (107,979)   (87,342)
           
NET CASH USED IN OPERATING ACTIVITIES   (5,072,932)   (3,307,520)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (1,749)   (17,449)
Improvement of commercial real estate   
-
    (10,332)
Additional investment in equity method investment   (52,994)   (40,179)
           
NET CASH USED IN INVESTING ACTIVITIES   (54,743)   (67,960)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Repayments of note payable - related party   (390,000)   
-
 
Proceeds from loan payable - related party   100,000    763,189 
Repayments of loan payable - related party   (410,000)   
-
 
Proceeds from issuance of convertible debt and warrants   3,718,943    
-
 
Proceeds from issuance of balloon promissory note   4,800,000    
-
 
Payments of debt issuance costs   (266,454)   
-
 
Proceeds from equity offering   735,567    2,518,708 
Disbursements for equity offering costs   (24,067)   (103,561)
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   8,263,989    3,178,336 
           
EFFECT OF EXCHANGE RATE ON CASH   (5,893)   2,818 
           
NET INCREASE (DECREASE) IN CASH   3,130,421    (194,326)
           
CASH  - beginning of period   807,538    726,577 
           
CASH - end of period  $3,937,959   $532,251 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for:          
Interest  $44,000   $
-
 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Common stock issued for future services  $19,680   $258,655 
Common stock issued for accrued liabilities  $30,000   $276,032 
Deferred financing costs in accrued liabilities  $
-
   $165,024 
Accrued professional fees relieved for shares issued  $
-
   $202,500 
Warrants issued with convertible note payable recorded as debt discount  $498,509   $
-
 
Bifurcated embedded conversion feature recorded as derivative liability and debt discount  $2,782,569   $
-
 
Conversion of convertible note payable and accrued interest into common stock  $4,072,958   $
-
 
Reclassification of derivative liability to equity  $2,181,820   $
-
 
Related party loan and accrued interest settled in shares  $2,888,593   $
-
 

 

See accompanying notes to the condensed consolidated financial statements.

 

5 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

 

Avalon GloboCare Corp. (the “Company” or “ALBT”) is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on July 28, 2014. 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 cell therapy related companion diagnostics. 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 regenerative 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 September 30, 2022. 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 September 30, 2022, the occupancy rate of the building is 87.0%.

 

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”) which was dissolved in June 2022, 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. (“Avactis”), 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. Commencing on April 6, 2022, the Company owns 60% of Avactis and Arbele Biotherapeutics Limited (“Arbele Biotherapeutics”) owns 40% of Avactis.

 

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 September 30, 2022.

6 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS (continued)

 

Details of the Company’s subsidiaries which are included in these condensed consolidated financial statements as of September 30, 2022 are as follows:

 

Name of Subsidiary   Place and date of Incorporation   Percentage of Ownership   Principal Activities

Avalon Healthcare System, Inc.
(“AHS”)

 

Delaware

May 18, 2015

  100% held by ALBT   Provides medical related consulting services and developing Avalon Cell and Avalon Rehab in United States of America (“USA”)
             

Avalon (BVI) Ltd.

(“Avalon BVI”)

 

British Virgin Island

January 23, 2017

  100% held by ALBT  

Dormant,

is in process of being dissolved

             

Avalon RT 9 Properties LLC

(“Avalon RT 9”)

 

New Jersey

February 7, 2017

  100% held by ALBT   Owns and operates an income-producing real property and holds and manages the corporate headquarters
             

Avalon (Shanghai) Healthcare Technology Co., Ltd.
(“Avalon Shanghai”)

 

PRC

April 29, 2016

  100% held by AHS   Ceased operations
             

Genexosome Technologies Inc.

(“Genexosome”)

 

Nevada

July 31, 2017

  60% held by ALBT   Dormant
             

Avactis Biosciences Inc.

(“Avactis”)

 

Nevada

July 18, 2018

  60% held by ALBT   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
             

Avactis Nanjing Biosciences Ltd.

(“Avactis Nanjing”)

 

PRC

May 8, 2020

 

100% held by

Avactis

  Owns a patent
             

International Exosome Association LLC

(“Exosome”)

 

Delaware

June 13, 2019

  100% held by ALBT   Promotes standardization related to exosome industry

 

NOTE 2 – BASIS OF PRESENTATION AND GOING CONCERN CONDITION

 

Basis of Presentation

 

These interim condensed consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements have been included. The results reported in the condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). The Company’s condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on March 30, 2022.

 

7 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – BASIS OF PRESENTATION AND GOING CONCERN CONDITION (continued)

 

Going Concern

 

The Company is a clinical-stage, vertically integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative, transformative immune effector cell therapy, exosome technology, as well as cell therapy related companion diagnostics. 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 regenerative 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 condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business.

 

As reflected in the accompanying condensed consolidated financial statements, the Company has incurred recurring net losses and generated negative cash flow from operating activities of $9,513,166 and $5,072,932 for the nine months ended September 30, 2022, 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 rest of 2022.

 

The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates during the three and nine months ended September 30, 2022 and 2021 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, valuation of stock-based compensation, and assumptions used to determine fair value of warrants and embedded conversion features of convertible note payable.

 

8 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Fair Value of Financial Instruments and Fair Value Measurements

 

The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

  Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
     
  Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
     
  Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximates the carrying amounts represented in the accompanying condensed consolidated financial statements, primarily due to their short-term nature.

 

Assets and liabilities measured at fair value on a recurring basis. Certain assets and liabilities are measured at fair value on a recurring basis. These assets and liabilities are measured at fair value on an ongoing basis. These assets and liabilities include derivative liability.

 

Derivative liability. Derivative liability is carried at fair value and measured on an ongoing basis. The table below reflects the activity of derivative liability measured at fair value for the nine months ended September 30, 2022:

 

   Significant
Unobservable
Inputs
(Level 3)
 
Balance of derivative liability as of January 1, 2022  $
-
 
Initial fair value of derivative liability attributable to embedded conversion feature of convertible note payable   2,782,569 
Gain from change in the fair value of derivative liability   (600,749)
Reclassification of derivative liability to equity   2,181,820 
Balance of derivative liability as of September 30, 2022  $
-
 

 

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 September 30, 2022 and December 31, 2021, the Company’s cash balances by geographic area were as follows:

 

Country:  September 30, 2022   December 31, 2021 
United States  $3,578,273    90.9%  $767,605    95.1%
China   359,686    9.1%   39,933    4.9%
Total cash  $3,937,959    100.0%  $807,538    100.0%

 

For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less when purchased and money market accounts to be cash equivalents. The Company had no cash equivalents at September 30, 2022 and December 31, 2021.

 

9 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Credit Risk and Uncertainties

 

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 $70,000) per bank. Any balance over RMB 500,000 per bank in PRC will not be covered. At September 30, 2022, cash balances held in the PRC are RMB 2,559,525 (approximately $360,000), of which, RMB 2,034,731 (approximately $286,000) was not 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 September 30, 2022, the Company’s cash balances in United States bank accounts had approximately $2,951,000 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.

 

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

 

10 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Revenue Recognition (continued)

 

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.

 

Per Share Data

 

ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

 

Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the three and nine months ended September 30, 2022 and 2021, potentially dilutive common shares consist of the common shares issuable upon the conversion of convertible note (using the if-converted method) and exercise of common stock options and warrants (using the treasury stock method). Common stock equivalents are not included in the calculation of diluted net loss per share if their effect would be anti-dilutive. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact.

 

11 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Per Share Data (continued)

 

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:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2022   2021   2022   2021 
Stock options   8,145,000    7,720,000    8,385,000    7,720,000 
Warrants   1,239,647    
-
    1,239,647    - 
Convertible note (*)   5,721,450    
-
    5,721,450    
-
 
Potentially dilutive securities   15,106,097    7,720,000    15,346,097    7,720,000 

 

(*)Assumed the convertible note was converted into shares of common stock of the Company at a conversion price of $0.65 per share.

 

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 September 30, 2022 and December 31, 2021, deferred financing costs amounted to $214,107 and $213,279, of which $74,937 and $74,648 were included in other noncurrent assets, respectively.

 

Debt Issuance Costs

 

Debt issuance costs are those costs that have been incurred in connection with the issuance of balloon promissory note payable and are offset against note payable in the condensed consolidated balance sheets. Such costs are being amortized to interest expense over the term of the underlying debt using the straight-line method, as the difference between that and the effective interest method are immaterial. As of September 30, 2022, debt issuance costs amounted to $244,250

 

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 three and nine months ended September 30, 2022 and 2021, the Company operates through two business segments: real property operating segment and medical related consulting services 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.

 

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.

 

12 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recent Accounting Standards

 

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. ASU 2020-06 is effective for public business entities for fiscal years beginning after December 15, 2021 (or December 15, 2023 for companies who meet the SEC definition of Smaller Reporting Companies), and interim periods within those fiscal years. The guidance is to be adopted through either a fully retrospective or modified retrospective method of transition. However, early adoption is permitted as early as fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted the new standard on January 1, 2022, which adoption required the Company to bifurcate the embedded conversion feature from the convertible note it issued during the second quarter of 2022.

 

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 condensed 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 – OTHER CURRENT AND NON-CURRENT ASSETS

 

At September 30, 2022 and December 31, 2021, other current and non-current assets consisted of the following:

 

   September 30,
2022
   December 31,
2021
 
Prepaid directors and officers liability insurance premium  $20,764   $49,656 
Prepaid professional fees   52,562    186,609 
Recoverable VAT   31,557    23,655 
Deferred leasing costs   122,267    141,214 
Security deposit   18,499    20,271 
Prepaid NASDAQ listing fee   24,563    
-
 
Prepaid property tax   36,537    
-
 
Long-term straight-line rent receivable   158,534    163,211 
Long-term deferred financing costs   74,937    74,648 
Others   32,178    18,313 
Total  $572,398   $677,577 
Current portion  $250,042   $309,655 
Non-current portion   322,356    367,922 
Total  $572,398   $677,577 

 

13 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5 – EQUITY METHOD INVESTMENT

 

As of September 30, 2022 and December 31, 2021, the equity method investment amounted to $478,362 and $515,632, 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 condensed consolidated financial statements under the equity method. Under the equity method, the investment is initially recorded at cost, adjusted for any excess of the Company’s share of the incorporated-date fair values of the investee’s identifiable net assets over the cost of the investment (if any). Thereafter, the investment is adjusted for the post incorporation change in the Company’s share of the investee’s net assets and any impairment loss relating to the investment.

 

For the three months ended September 30, 2022 and 2021, the Company’s share of Epicon’s net loss was $9,011 and $14,203, respectively, which was included in loss from equity method investment in the accompanying condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2022 and 2021, the Company’s share of Epicon’s net loss was $33,809 and $48,135, respectively, which was included in loss from equity method investment in the accompanying condensed consolidated statements of operations and comprehensive loss.

 

In the nine months ended September 30, 2022, activity recorded for the Company’s equity method investment in Epicon is summarized in the following table: 

 

Equity investment carrying amount at January 1, 2022  $515,632 
Payment made for equity method investment   52,994 
Epicon’s net loss attributable to the Company   (33,809)
Foreign currency fluctuation   (56,455)
Equity investment carrying amount at September 30, 2022  $478,362 

 

The tables below present the summarized financial information, as provided to the Company by the investee, for the unconsolidated company:

 

   September 30,
2022
   December 31,
2021
 
Current assets  $2,487   $5,479 
Noncurrent assets   153,057    216,864 
Current liabilities   36,790    56,626 
Noncurrent liabilities   
-
    
-
 
Equity   118,754    165,717 

 

   For the Three Months
Ended September 30,
   For the Nine Months
Ended September 30,
 
   2022   2021   2022   2021 
Net revenue  $
-
   $
-
   $
-
   $
-
 
Gross profit   
-
    
-
    
-
    
-
 
Loss from operation   22,526    35,509    84,552    120,338 
Net loss   22,527    35,509    84,521    120,338 

 

14 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6 – ACCRUED LIABILITIES AND OTHER PAYABLES

 

At September 30, 2022 and December 31, 2021, accrued liabilities and other payables consisted of the following:

 

   September 30,
2022
   December 31,
2021
 
Accrued tenants’ improvement reimbursement  $43,500   $43,500 
Tenants’ security deposit   73,733    73,733 
Accrued business expense reimbursement   43,986    68,172 
Accrued utilities   30,220    14,372 
Deferred rental income   23,397    8,638 
Accrued equity offering costs   40,000    40,000 
Taxes payable   14,547    14,459 
Others   60,733    12,446 
Total  $330,116   $275,320 

 

NOTE 7 – CONVERTIBLE NOTE PAYABLE

 

On March 28, 2022, the Company entered into Securities Purchase Agreement with an accredited investor, which was amended on June 8, 2022, providing for the sale by the Company to the investor of a Convertible Note in the amount of $3,718,943 (“2022 Convertible Note”). In addition to the 2022 Convertible Note, the investor also received a Stock Purchase Warrant (“2022 Warrant”) to acquire an aggregate of 1,239,647 shares of common stock. The 2022 Warrant is exercisable for five years at an exercise price of $1.25. The financing closed with respect to: 

 

$2,669,522 of the financing on April 15, 2022,

 

$659,581 of the financing on April 29, 2022,

 

$199,840 of the financing on May 18, 2022, and

 

$190,000 of the financing on May 25, 2022.

 

As a result of each of the closings, the Company issued the investor a 2022 Convertible Note in the principal amount of $2,669,522 and a 2022 Warrant to acquire 889,840 shares of common stock dated April 15, 2022, a 2022 Convertible Note in the principal amount of $659,581 and a 2022 Warrant to acquire 219,860 shares of common stock dated April 29, 2022, a 2022 Convertible Note in the principal amount of $199,840 and a 2022 Warrant to acquire 66,614 shares of common stock dated May 18, 2022, and a 2022 Convertible Note in the principal amount of $190,000 and a 2022 Warrant to acquire 63,333 shares of common stock dated May 25, 2022.

 

The 2022 Convertible Note bears 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 Warrant 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, the 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.

 

15 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 7 – CONVERTIBLE NOTE PAYABLE (continued)

 

Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging - Contracts in an Entity’s Own Equity”, the Company determined that all the warrants issued to the investor with this private placement are classified as equity in additional paid in-capital.

 

In accordance with ASC 470-20-25-2, proceeds from the sale of a debt instrument with stock purchase warrants are allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds so allocated to the warrants are accounted for as additional paid-in capital. The remainder of the proceeds are allocated to the debt instrument portion of the transaction.

 

The fair values of the warrants issued to the investor with this private placement were computed using the Black-Scholes option-pricing model with the following assumptions: volatility of 111.94%, risk-free rate of 2.71% - 2.92%, annual dividend yield of 0% and expected life of 5 years.

 

In accordance with ASC 480-10-25-14, the Company determined that the conversion provisions contain an embedded derivative feature and the Company valued the derivative feature separately, recording debt discount and derivative liabilities in accordance with the provisions of the convertible debt (see Note 8). The Company calculates the fair value of conversion option at the commitment dates using the Black-Scholes valuation model with the following assumptions: volatility of 95.97%, risk-free rate of 2.75% - 2.89%, annual dividend yield of 0% and expected life of 10 years.

 

The warrants issued to the investor to purchase 1,239,647 shares of the Company’s common stock were treated as a discount on the convertible note payable and were valued at $498,509 and had been amortized over the term of the 2022 Convertible Note. Additionally, the fair value of embedded conversion option at commitment dates, which was valued at $2,782,569, was recorded as a discount on the convertible note payable and had been amortized over the term of the 2022 Convertible Note. Hence, in connection with the issuance of the 2022 Convertible Note and 2022 Warrant, the Company recorded a total debt discount of $3,281,078, which had been amortized over the term of the convertible note payable.

 

On July 25, 2022, the Company and the investor entered into a Conversion Agreement (“Conversion Agreement”) pursuant to which the investor converted all of its Convertible Notes in the principal amount of $3,718,943 and unpaid interest of $9,751 into 5,736,452 shares of common stock of the Company at a per share price of $0.65 (see Note 11 - Common Shares Issued for Debt Conversion). The Company recorded a conversion inducement charge of $344,264 as a result of the Conversion Agreement, representing the value of common stock issued upon conversion in excess of the common stock issuable under the original terms of the 2022 Convertible Note.

 

For the three months ended September 30, 2022, amortization of debt discount and interest expense related to the 2022 Convertible Note amounted to $3,226,393 and $2,547, respectively, both of which have been reflected as interest expense on the accompanying condensed consolidated statements of operation and comprehensive loss. For the nine months ended September 30, 2022, amortization of debt discount and interest expense related to the 2022 Convertible Note amounted to $3,281,078 and $9,751, respectively, both of which have been reflected as interest expense on the accompanying condensed consolidated statements of operation and comprehensive loss.

 

NOTE 8 – DERIVATIVE LIABILITY

 

As stated in Note 7, 2022 Convertible Note, the Company determined that the convertible note payable contained an embedded derivative feature in the form of a conversion provision which was adjustable based on future prices of the Company’s common stock. In accordance with ASC 815-10-25, each derivative feature was initially recorded at its fair value using the Black-Scholes option valuation method and then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The estimated fair value of the derivative feature of convertible debt was $2,782,569 at commitment dates, which was calculated using the following assumptions: volatility of 95.97%, risk-free rate of 2.75% - 2.89%, annual dividend yield of 0% and expected life of 10 years.

 

On July 25, 2022, the Company and the 2022 Convertible Note holder entered into a Conversion Agreement pursuant to which the investor converted all of its Convertible Notes into shares of common stock of the Company.

 

The estimated fair value of the derivative feature of convertible debt was $2,181,820 on July 25, 2022, which was computed using the following assumptions: volatility of 95.53%, risk-free rate of 2.81%, annual dividend yield of 0% and expected life of 9.7 – 9.8 years.

 

16 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 8 – DERIVATIVE LIABILITY (continued)

 

Increases or decreases in fair value of the derivative liability is included as a component of total other (expenses) income in the accompanying condensed consolidated statements of operations and comprehensive loss for the respective period. The change to the derivative liability for the embedded conversion option from July 1, 2022 through July 25, 2022 resulted in an increase of $168,520 in the derivative liability and the corresponding increase in other expense as a loss for the three months ended September 30, 2022. The change to the derivative liability for the embedded conversion option from commitment dates through July 25, 2022 resulted in a decrease of $600,749 in the derivative liability and the corresponding increase in other income as a gain for the nine months ended September 30, 2022. There was no derivative liability in the three and nine months ended September 30, 2021.

 

NOTE 9 – NOTE PAYABLE, NET

 

On September 1, 2022, the Company issued a balloon promissory note to a third party company in the principal amount of $4,800,000 which carries interest of 11.0% per annum (the “2022 Note Payable”). Interest is due in monthly payments of $44,000 beginning November 1, 2022 and payable monthly thereafter until September 1, 2025 when the principal outstanding and all remaining interest is due. The 2022 Note Payable can be extended for an additional 36 months provided that the Company has not defaulted. The Company may not prepay the 2022 Note Payable for a period of 12 months. The 2022 Note Payable is secured by a first mortgage on the Company’s 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.

 

As of September 30, 2022, the carrying balance of the 2022 Note Payable was $4,555,750 and the remaining unamortized debt issuance costs balance was $244,250. For the three and nine months ended September 30, 2022, the interest expense related to the 2022 Note Payable (including amortization of debt issuance costs of $22,204) totaled $66,204.

 

NOTE 10 – RELATED PARTY TRANSACTIONS

 

Rental Revenue from Related Party and Rent Receivable – Related Party

 

The Company leases space of its commercial real property located in New Jersey to a company, D.P. Capital Investments LLC, which is controlled by Wenzhao Lu, the Company’s largest shareholder and chairman of the Board of Directors. The term of the related party lease agreement is five years commencing on May 1, 2021 and will expire on April 30, 2026.

 

For both the three months ended September 30, 2022 and 2021, the related party rental revenue amounted to $12,600 and has been included in real property rental on the accompanying condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2022 and 2021, the related party rental revenue amounted to $37,800 and $21,000, respectively, and has been included in real property rental on the accompanying condensed consolidated statements of operations and comprehensive loss.

 

The related party rent receivable totaled $71,400 and $33,600, respectively, and no allowance for doubtful accounts was deemed to be required on rent receivable – related party at September 30, 2022 and December 31, 2021.

 

Medical Related Consulting Services Revenue from Related Party

 

During the three and nine months ended September 30, 2022 and 2021, medical related consulting services revenue from related party was as follows:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
Medical related consulting services provided to:                
Hebei Daopei *  $
-
   $131,305   $
-
   $131,305 

 

*Hebei Daopei is subsidiary of an entity whose chairman is Wenzhao Lu, the largest shareholder of the Company.

 

17 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 10 – RELATED PARTY TRANSACTIONS (continued)

 

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 $29,121 and $52,596 for the three months ended September 30, 2022 and 2021, respectively, which have been included in professional fees on the accompanying condensed consolidated statements of operations and comprehensive loss. As compensation for professional services provided, the Company recognized consulting expenses of $116,719 and $164,546 for the nine months ended September 30, 2022 and 2021, respectively, which have been included in professional fees on the accompanying condensed 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 September 30, 2022 and December 31, 2021, 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 condensed consolidated balance sheets.

 

As of September 30, 2022 and December 31, 2021, $0 and $368,433 of accrued and unpaid interest related to borrowings from Wenzhao Lu, the Company’s largest shareholder and chairman of the Board of Directors, respectively, have been included in accrued liabilities and other payables – related parties on the accompanying condensed 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, $200,000 and $390,000 in the third quarter of 2019, second quarter of 2020 and second quarter of 2022, respectively. As of September 30, 2022 and December 31, 2021, the outstanding principal balance was $0 and $390,000, respectively.

 

Line of Credit

 

On August 29, 2019, the Company entered into a Line of Credit Agreement (the “Line of Credit Agreement”) providing the Company with a $20 million line of credit (the “Line of Credit”) from Wenzhao Lu (the “Lender”), the largest shareholder and Chairman of the Board of Directors of the Company. The Line of Credit allows the Company to request loans thereunder and to use the proceeds of such loans for working capital and operating expense purposes until the facility matures on December 31, 2024. The loans are unsecured and are not convertible into equity of the Company. Loans drawn under the Line of Credit bears interest at an annual rate of 5% and each individual loan will be payable three years from the date of issuance. The Company has a right to draw down on the line of credit and not at the discretion of the related party Lender. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to maturity, without premium or penalty. The Line of Credit Agreement includes customary events of default. If any such event of default occurs, the Lender may declare all outstanding loans under the Line of Credit to be due and payable immediately.

 

On July 25, 2022, the Company and Mr. Lu entered into and closed a Debt Settlement Agreement and Release pursuant to which the Company settled $2,440,262 debt owed under the Line of Credit and unpaid interest of $448,331 by issuance of 4,443,990 shares of common stock of the Company (see Note 11 - Common Shares Issued Pursuant to Related Party Debt Settlement Agreement and Release). The total amount of the debt settled of $2,888,593 exceeded the fair market value of the shares issued by $888,353 which was treated as a capital transaction due to Mr. Lu's relationship with the Company.

 

18 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 10 – RELATED PARTY TRANSACTIONS (continued)

 

In the nine months ended September 30, 2022, activity recorded for the Line of Credit is summarized in the following table:

 

Borrowings from Related Party (continued)

 

Outstanding principal under the Line of Credit at January 1, 2022  $2,750,262 
Draw down from Line of Credit   100,000 
Repayment of Line of Credit   (410,000)
Settlement of Line of Credit in shares   (2,440,262)
Outstanding principal under the Line of Credit at September 30, 2022  $
-
 

 

For the three months ended September 30, 2022 and 2021, the interest expense related to above borrowings amounted to $8,358 and $50,248, respectively, and has been included in interest expense – related party on the accompanying condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2022 and 2021, the interest expense related to above borrowings amounted to $79,898 and $141,528, respectively, and has been included in interest expense – related party on the accompanying condensed consolidated statements of operations and comprehensive loss.

 

As of September 30, 2022 and December 31, 2021, the related accrued and unpaid interest for above borrowings was $0 and $368,433, respectively, has been included in accrued liabilities and other payables – related parties on the accompanying condensed consolidated balance sheets.

 

Common Shares Sold to Related Party for Cash

 

On August 5, 2022, the Company sold 448,718 shares of common stock at a purchase price of $0.78 per share to Wenzhao Lu pursuant to a subscription agreement. The Company received proceeds of $350,000 (see Note 11 - Common Shares Sold for Cash). As of September 30, 2022, the shares have not been issued and have been included in common stock to be issued at a value of $350,000 on the accompanying condensed consolidated balance sheets.

 

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 nine months ended September 30, 2022, Jefferies sold an aggregate of 170,640 shares of common stock at an average price of $0.79 per share to investors and the Company recorded net proceeds of $112,328, net of commission and other offering costs of $23,239.

 

On August 5, 2022, the Company sold 448,718 shares of common stock at a purchase price of $0.78 per share to Wenzhao Lu pursuant to a subscription agreement. The Company received proceeds of $350,000 (see Note 10 - Common Shares Sold to Related Party for Cash). As of September 30, 2022, the shares have not been issued and have been included in common stock to be issued at a value of $350,000 on the accompanying condensed consolidated balance sheets.

 

On August 5, 2022, the Company sold 320,513 shares of common stock at a purchase price of $0.78 per share to an investor pursuant to a subscription agreement. The Company received proceeds of $250,000. As of September 30, 2022, the shares have not been issued and have been included in common stock to be issued at a value of $250,000 on the accompanying condensed consolidated balance sheets.

 

Common Shares Issued for Services

 

During the nine months ended September 30, 2022, the Company issued a total of 408,957 shares of its common stock for services rendered and to be rendered. These shares were valued at $340,950, 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 $291,270 for the nine months ended September 30, 2022 and reduced accrued liabilities of $30,000 and recorded prepaid expense of $19,680 as of September 30, 2022 which will be amortized over the rest of corresponding service periods.

 

19 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 11 – EQUITY (continued)

 

Common Shares Issued for Debt Conversion

 

On July 25, 2022, the Company and 2022 Convertible Note holder entered into a Conversion Agreement pursuant to which the investor converted its Convertible Notes in the principal amount of $3,718,943 and unpaid interest of $9,751 into 5,736,452 shares of common stock of the Company at a per share price of $0.65 (see Note 7). The Company recorded a conversion inducement charge of $344,264 as a result of the Conversion Agreement, representing the value of common stock issued upon conversion in excess of the common stock issuable under the original terms of the 2022 Convertible Note.

 

Common Shares Issued Pursuant to Related Party Debt Settlement Agreement and Release

 

On July 25, 2022, the Company and Mr. Lu entered into and closed a Debt Settlement Agreement and Release pursuant to which the Company settled $2,440,262 debt owed under the Line of Credit and unpaid interest of $448,331 by issuance of 4,443,990 shares of common stock of the Company (see Note 10 - Line of Credit). The total amount of the debt settled of $2,888,593 exceeded the fair market value of the shares issued by $888,353 which was treated as a capital transaction due to Mr. Lu's relationship with the Company.

 

Options

 

The following table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at September 30, 2022:

 

Options Outstanding   Options Exercisable 
Range of
Exercise Price
   Number
Outstanding at
September 30,
2022
   Weighted Average
Remaining
Contractual Life
(Years)
   Weighted
Average
Exercise
Price
   Number
Exercisable at
September 30,
2022
   Weighted
Average
Exercise
Price
 
$0.500.82    2,660,000    4.23   $0.56    2,440,000   $0.55 
 1.001.93    2,895,000    4.15    1.38    2,895,000    1.38 
 2.002.80    2,560,000    1.12    2.15    2,560,000    2.15 
 4.76    30,000    1.51    4.76    30,000    4.76 
$0.504.76    8,145,000    3.21   $1.37    7,925,000   $1.38 

 

Stock option activities for the nine months ended September 30, 2022 were as follows:

 

   Number of
Options
   Weighted
Average
Exercise
Price
 
Outstanding at January 1, 2022   7,725,000   $1.45 
Granted   660,000    0.73 
Expired/forfeited/exercised   (240,000)   (2.26)
Outstanding at September 30, 2022   8,145,000   $1.37 
Options exercisable at September 30, 2022   7,925,000   $1.38 
Options expected to vest   220,000   $0.68 

 

The aggregate intrinsic value of stock options outstanding and stock options exercisable at September 30, 2022 was $303,800 and $292,597, respectively.

 

The fair values of options granted during the nine months ended September 30, 2022 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 74.8% - 117.46%, risk-free rate of 1.37% - 3.56%, annual dividend yield of 0%, and expected life of 3.00 - 5.00 years. The aggregate fair value of the options granted during the nine months ended September 30, 2022 was $373,982.