Change Agents Corporation. 10-Q

Item 1. Financial Statements. AVALON GLOBOCARE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 2021 2020 (Unaudited) ASSETS CURRENT ASSETS: Cash $ 685,304 $ 726,577 Rent receivable 23,650 35,395 Deferred financing costs 168,531 222,141 Prepaid expenses and other current assets 447,844 302,224 Total Current Assets 1,325,329 1,286,337 NON-CURRENT ASSETS: Rent receivable - noncurrent portion 106,558 111,840 Security deposit 19,953 - Deferred leasing costs 125,503 144,197 Operating lease right-of-use assets, net 210,781 137,333 Property and equipment, net 442,668 479,115 Investment in real estate, net 7,613,111 7,685,686 Equity method investment 533,949 521,758 Total Non-current Assets 9,052,523 9,079,929 Total Assets $ 10,377,852 $ 10,366,266 LIABILITIES AND EQUITY CURRENT LIABILITIES: Accrued professional fees $ 1,688,929 $ 1,212,822 Accrued research and development fees 587,805 513,533 Accrued payroll liability and directors' compensation 182,474 154,292 Accrued liabilities and other payables 330,710 367,411 Accrued liabilities and other payables - related parties 359,236 267,956 Operating lease obligation 140,978 76,379 Note payable - related party 390,000 - Total Current Liabilities 3,680,132 2,592,393 NON-CURRENT LIABILITIES: Operating lease obligation - noncurrent portion 75,803 66,954 Note payable - related party - 390,000 Loan payable - related party 3,393,188 3,200,000 Total Non-current Liabilities 3,468,991 3,656,954 Total Liabilities 7,149,123 6,249,347 Commitments and Contingencies EQUITY: Preferred stock, $ 0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding at June 30, 2021 and December 31, 2020 - - Common stock, $ 0.0001 par value; 490,000,000 shares authorized; 85,600,919 shares issued and 85,080,919 shares outstanding at June 30, 2021; 82,795,297 shares issued and 82,275,297 shares outstanding at December 31, 2020 8,560 8,279 Additional paid-in capital 50,687,940 46,856,447 Less: common stock held in treasury, at cost; 520,000 shares at June 30, 2021 and December 31, 2020 ( 522,500 ) ( 522,500 ) Accumulated deficit ( 46,773,403 ) ( 42,041,375 ) Statutory reserve 6,578 6,578 Accumulated other comprehensive loss - foreign currency translation adjustment ( 178,446 ) ( 190,510 ) Total Avalon GloboCare Corp. stockholders' equity 3,228,729 4,116,919 Non-controlling interest - - Total Equity 3,228,729 4,116,919 Total Liabilities and Equity $ 10,377,852 $ 10,366,266 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 June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 REVENUES Real property rental $ 280,232 $ 301,267 $ 570,006 $ 598,223 COSTS AND EXPENSES Real property operating expenses 205,147 272,764 422,041 527,265 GROSS PROFIT Real property operating income 75,085 28,503 147,965 70,958 OTHER OPERATING EXPENSES: Professional fees 1,357,079 1,561,650 2,738,257 3,115,348 Compensation and related benefits 547,829 1,054,052 1,109,835 2,182,520 Research and development expenses 238,793 161,101 451,981 436,503 Other general and administrative 233,664 254,527 453,760 561,606 Total Other Operating Expenses 2,377,365 3,031,330 4,753,833 6,295,977 LOSS FROM OPERATIONS ( 2,302,280 ) ( 3,002,827 ) ( 4,605,868 ) ( 6,225,019 ) OTHER INCOME (EXPENSE) Interest expense - related party ( 46,131 ) ( 42,469 ) ( 91,280 ) ( 84,638 ) Loss from equity method investment ( 15,418 ) ( 11,332 ) ( 33,932 ) ( 20,416 ) Other (expense) income ( 1,081 ) 246 ( 948 ) 2,910 Total Other Expense, net ( 62,630 ) ( 53,555 ) ( 126,160 ) ( 102,144 ) LOSS BEFORE INCOME TAXES ( 2,364,910 ) ( 3,056,382 ) ( 4,732,028 ) ( 6,327,163 ) INCOME TAXES - - - - NET LOSS $ ( 2,364,910 ) $ ( 3,056,382 ) $ ( 4,732,028 ) $ ( 6,327,163 ) LESS: NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST - - - - NET LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS $ ( 2,364,910 ) $ ( 3,056,382 ) $ ( 4,732,028 ) $ ( 6,327,163 ) COMPREHENSIVE LOSS: NET LOSS $ ( 2,364,910 ) $ ( 3,056,382 ) $ ( 4,732,028 ) $ ( 6,327,163 ) OTHER COMPREHENSIVE INCOME (LOSS) Unrealized foreign currency translation gain (loss) 14,786 3,309 12,064 ( 18,757 ) COMPREHENSIVE LOSS ( 2,350,124 ) ( 3,053,073 ) ( 4,719,964 ) ( 6,345,920 ) LESS: COMPREHENSIVE LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST - - - - COMPREHENSIVE LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS $ ( 2,350,124 ) $ ( 3,053,073 ) $ ( 4,719,964 ) $ ( 6,345,920 ) NET LOSS PER COMMON SHARE ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS: Basic and diluted $ ( 0.03 ) $ ( 0.04 ) $ ( 0.06 ) $ ( 0.08 ) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic and diluted 84,623,723 78,887,380 84,021,787 77,799,722 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 Six Months Ended June 30, 2021 (Unaudited) Avalon GloboCare Corp. Stockholders' Equity Preferred Stock Common Stock Treasury Stock Accumulated Number Number Additional Number Other of of Paid-in of Accumulated Statutory Comprehensive Non-controlling Total Shares Amount Shares Amount Capital Shares Amount Deficit Reserve Loss Interest Equity Balance, January 1, 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 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 Six Months Ended June 30, 2020 (Unaudited) Avalon GloboCare Corp. Stockholders' Equity Preferred Stock Common Stock Treasury Stock Accumulated Number Number Additional Number Other of of Paid-in of Accumulated Statutory Comprehensive Non-controlling Total Shares Amount Shares Amount Capital Shares Amount Deficit Reserve Loss Interest Equity Balance, January 1, 2020 - $ - 76,730,802 $ 7,673 $ 34,593,006 ( 520,000 ) $ ( 522,500 ) $ ( 29,361,937 ) $ 6,578 $ ( 257,747 ) $ - $ 4,465,073 Sale of common stock, net - - 980,358 98 1,539,153 - - - - - - 1,539,251 Issuance of common stock for services - - 222,577 22 213,278 - - - - - - 213,300 Stock-based compensation - - - - 785,350 - - - - - - 785,350 Foreign currency translation adjustment - - - - - - - - - ( 22,066 ) - ( 22,066 ) Net loss for the three months ended March 31, 2020 - - - - - - - ( 3,270,781 ) - - - ( 3,270,781 ) Balance, March 31, 2020 - - 77,933,737 7,793 37,130,787 ( 520,000 ) ( 522,500 ) ( 32,632,718 ) 6,578 ( 279,813 ) - 3,710,127 Sale of common stock, net - - 1,795,150 180 2,959,687 - - - - - - 2,959,867 Issuance of common stock for services - - 380,000 38 398,692 - - - - - - 398,730 Stock-based compensation - - - - 726,600 - - - - - - 726,600 Foreign currency translation adjustment - - - - - - - - - 3,309 - 3,309 Net loss for the three months ended June 30, 2020 - - - - - - - ( 3,056,382 ) - - - ( 3,056,382 ) Balance, June 30, 2020 - $ - 80,108,887 $ 8,011 $ 41,215,766 ( 520,000 ) $ ( 522,500 ) $ ( 35,689,100 ) $ 6,578 $ ( 276,504 ) $ - $ 4,742,251 See accompanying notes to the condensed consolidated financial statements. 4 AVALON GLOBOCARE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended June 30, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 4,732,028 ) $ ( 6,327,163 ) Adjustments to reconcile net loss to net cash used in operating activities: Bad debt provision - 4,664 Depreciation 141,285 152,579 Amortization of straight-line rent receivable 4,934 16,910 Amortization of right-of-use asset 60,254 - Stock-based compensation and service expense 1,086,546 2,448,748 Loss on equity method investment 33,932 20,416 Loss on fixed assets disposal - 2,628 Changes in operating assets and liabilities: Accounts receivable - related party - 213,274 Rent receivable 12,093 ( 36,749 ) Security deposit 6,015 - Deferred leasing costs 5,492 - Prepaid expenses and other current assets 42,555 ( 124,246 ) Accrued liabilities and other payables 714,348 ( 385,791 ) Accrued liabilities and other payables - related parties 91,280 83,828 Operating lease obligation ( 60,254 ) 6,000 NET CASH USED IN OPERATING ACTIVITIES ( 2,593,548 ) ( 3,924,902 ) CASH FLOWS FROM INVESTING ACTIVITIES: Improvement of commercial real estate ( 10,332 ) - Additional investment in equity method investment ( 40,179 ) ( 28,437 ) NET CASH USED IN INVESTING ACTIVITIES ( 50,511 ) ( 28,437 ) CASH FLOWS FROM FINANCING ACTIVITIES Repayments of note payable - related party - ( 200,000 ) Proceeds received from loan payable - related party 193,188 300,000 Proceeds received from equity offering 2,481,405 4,703,890 Disbursements for equity offering costs ( 74,442 ) ( 361,947 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 2,600,151 4,441,943 EFFECT OF EXCHANGE RATE ON CASH 2,635 ( 4,394 ) NET (DECREASE) INCREASE IN CASH ( 41,273 ) 484,210 CASH - beginning of period 726,577 764,891 CASH - end of period $ 685,304 $ 1,249,101 NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for future services $ 234,750 $ 17,500 Common stock issued for accrued liabilities $ 261,032 $ - Deferred financing costs in accrued liabilities $ 16,093 $ 33,025 Accrued professional fees relieved for shares issued $ 202,500 $ - 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 “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 research and development (“R&D”) to automated bioproduction and accelerated clinical development, the Company is establishing a leading role in the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEX™), and regenerative therapeutics. On January 23, 2017, the Company incorporated Avalon (BVI) Ltd., a British Virgin Island company. There was no activity for the subsidiary since its incorporation through June 30, 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. Currently, Avalon RT 9’s business consists of the ownership and operation of the income-producing real estate property in New Jersey. As of June 30, 2021, the occupancy rate of the building is 89.4 %. 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 June 30, 2021. 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 June 30, 2021 are as follows: Name of Subsidiary Place and date of Incorporation Percentage of Ownership Principal Activities Avalon Healthcare System, Inc. (“AHS”) Delaware May 18, 2015 100% held by AVCO Provides medical related consulting services and developing Avalon Cell and Avalon Rehab in United States of America (“USA”) Avalon (BVI) Ltd. (“Avalon BVI”) British Virgin Island January 23, 2017 100% held by AVCO Dormant, is in process of being dissolved Avalon RT 9 Properties LLC (“Avalon RT 9”) New Jersey February 7, 2017 100% held by AVCO Owns and operates an income-producing real property and holds and manages the corporate headquarters Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”) PRC April 29, 2016 100% held by AHS Provides medical related consulting services and developing Avalon Cell and Avalon Rehab in China Genexosome Technologies Inc. (“Genexosome”) Nevada July 31, 2017 60% held by AVCO Dormant Beijing Jieteng (Genexosome) Biotech Co., Ltd. (“Beijing Genexosome”) PRC August 7, 2015 100% held by Genexosome 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 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, 2020 filed with the Securities and Exchange Commission on March 30, 2021. 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 COVID-19 related diagnostics and therapeutics. The Company also provides strategic advisory and outsourcing services to facilitate and enhance its clients' growth and development, as well as competitiveness in healthcare and CellTech industry markets. Through its subsidiary structure with unique integration of verticals from innovative research and development (“R&D”) to automated bioproduction and accelerated clinical development, the Company is establishing a leading role in the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEX™), and regenerative therapeutics. 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. The Company did not generate any revenue from medical related consulting services segment during the three and six months ended June 30, 2021. 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 had working capital deficit of $ 2,354,803 as of June 30, 2021 and has incurred recurring net loss and generated negative cash flow from operating activities of $ 4,732,028 and $ 2,593,548 for the six months ended June 30, 2021, respectively. The Company has a limited operating history and its continued growth is dependent upon the continuation of providing medical consulting services to its only 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 2021. 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 six months ended June 30, 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. 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 carrying amounts reported in the condensed consolidated balance sheets for cash, rent receivable, accrued liabilities and other payables, accrued liabilities and other payables – related parties, operating lease obligation, and note payable, approximate their fair market value as of June 30, 2021 and December 31, 2020 based on the short-term maturity of these instruments. 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 June 30, 2021 and December 31, 2020, the Company’s cash balances by geographic area were as follows: Country: June 30, 2021 December 31, 2020 United States $ 587,538 85.7 % $ 559,711 77.0 % China 97,766 14.3 % 166,866 23.0 % Total cash $ 685,304 100.0 % $ 726,577 100.0 % 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 June 30, 2021 and December 31, 2020. 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 $77,000) per bank. Any balance over RMB 500,000 per bank in PRC will not be covered. At June 30, 2021, cash balances held in the PRC are RMB 631,294 (approximately $ 98,000 ), of which, RMB 126,589 (approximately $ 20,000 ) 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 June 30, 2021, the Company’s cash balances in United States bank accounts had approximately $ 63,000 in excess of the federally-insured limits. 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 (continued) 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. 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 5 for discussion of equity method investment. Revenue Recognition The Company recognizes revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of 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. 10 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue Recognition (continued) 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 condensed 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 six months ended June 30, 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. 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Stock options 7,700,000 6,980,000 7,700,000 6,980,000 Potentially dilutive securities 7,700,000 6,980,000 7,700,000 6,980,000 11 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Segment Reporting The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the Chief Executive Officer (“CEO”) and president of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. The Company previously had three reportable business segments: real property operating segment, medical related consulting services segment, and development services and sales of developed products 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 and the Company no longer reports in three segments. During the three and six months ended June 30, 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. 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. 12 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS At June 30, 2021 and December 31, 2020, prepaid expenses and other current assets consisted of the following: June 30, 2021 December 31, 2020 Prepaid professional fee $ 273,583 $ 78,639 Prepaid directors and officers liability insurance premium 33,064 64,929 Prepaid NASDAQ listing fee 43,667 - Recoverable VAT 31,676 40,446 Deferred leasing costs 31,422 18,220 Prepaid research and development fees - 60,610 Other 34,432 39,380 Total $ 447,844 $ 302,224 NOTE 5 – EQUITY METHOD INVESTMENT As of June 30, 2021 and December 31, 2020, the equity method investment amounted to $ 533,949 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 three months ended June 30, 2021 and 2020, the Company’s share of Epicon’s net loss was $ 15,418 and $ 11,332 , respectively, which was included in loss from equity method investment in the accompanying condensed consolidated statements of operations and comprehensive loss. For the six months ended June 30, 2021 and 2020, the Company’s share of Epicon’s net loss was $ 33,932 and $ 20,416 , respectively, which was included in loss from equity method investment in the accompanying condensed consolidated statements of operations and comprehensive loss. In the six months ended June 30, 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, 2021 $ 521,758 Payment made for equity method investment 40,179 Epicon's net loss attributable to the Company ( 33,932 ) Foreign currency fluctuation 5,944 Equity investment carrying amount at June 30, 2021 $ 533,949 The tables below present the summarized financial information, as provided to the Company by the investee, for the unconsolidated company: June 30, 2021 December 31, 2020 Current assets $ 8,575 $ 13,023 Noncurrent assets 244,199 264,390 Current liabilities 23,645 6,615 Noncurrent liabilities - - Equity 229,129 270,798 13 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 5 – EQUITY METHOD INVESTMENT (continued) For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 Net revenue $ - $ - $ - $ - Gross profit - - - - Loss from operation 38,543 28,458 84,829 51,169 Net loss 38,543 28,328 84,829 51,039 NOTE 6 – ACCRUED LIABILITIES AND OTHER PAYABLES At June 30, 2021 and December 31, 2020, accrued liabilities and other payables consisted of the following: June 30, 2021 December 31, 2020 Accrued professional fees $ 1,688,929 $ 1,212,822 Accrued research and development fees 587,805 513,533 Accrued payroll liability and directors’ compensation 182,474 154,292 Accrued tenants’ improvement reimbursement 43,500 81,900 Tenants’ security deposit 73,733 69,634 Accounts payable 57,208 87,190 Deferred rental income 17,661 23,510 Other 138,608 105,177 Total $ 2,789,918 $ 2,248,058 NOTE 7 – RELATED PARTY TRANSACTIONS Accrued Liabilities and Other Payables – Related Parties The Company acquired Beijing Genexosome for a cash payment of $ 450,000 . As of June 30, 2021 and December 31, 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 condensed consolidated balance sheets. As of June 30, 2021 and December 31, 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 $ 259,236 and $ 167,956 , respectively, and 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. The Company repaid principal of $ 410,000 and $ 200,000 in the third quarter of 2019 and second quarter of 2020, respectively. As of both June 30, 2021 and December 31, 2020, the outstanding principal balance was $ 390,000 . 14 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 7 – RELATED PARTY TRANSACTIONS (continued) Borrowings from Related Party (continued) Line of Credit On August 29, 2019, the Company entered into a Line of Credit Agreement (the “Line of Credit Agreement”) providing the Company with a $ 20 million line of credit (the “Line of Credit”) from Wenzhao Lu (the “Lender”), the largest shareholder and Chairman of the Board of Directors of the Company. The Line of Credit allows the Company to request loans thereunder and to use the proceeds of such loans for working capital and operating expense purposes until the facility matures on December 31, 2024 . The loans are unsecured and are not convertible into equity of the Company. Loans drawn under the Line of Credit bears interest at an annual rate of 5 % and each individual loan will be payable three years from the date of issuance. The Company has a right to draw down on the line of credit and not at the discretion of the related party Lender. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to maturity, without premium or penalty. The Line of Credit Agreement includes customary events of default. If any such event of default occurs, the Lender may declare all outstanding loans under the Line of Credit to be due and payable immediately. As of June 30, 2021 and December 31, 2020, $ 3,393,188 and $ 3,200,000 was outstanding under the Line of Credit, respectively. For the three months ended June 30, 2021 and 2020, the interest expense related to above borrowings amounted to $ 46,131 and $ 42,469 , respectively, and has been included in interest expense – related party on the accompanying condensed consolidated statements of operations and comprehensive loss. For the six months ended June 30, 2021 and 2020, the interest expense related to above borrowings amounted to $ 91,280 and $ 84,638 , respectively, and has been included in interest expense – related party on the accompanying condensed consolidated statements of operations and comprehensive loss. As of June 30, 2021 and December 31, 2020, the related accrued and unpaid interest for above borrowings was $ 259,236 and $ 167,956 , respectively, and has been included in accrued liabilities and other payables – related parties on the accompanying condensed consolidated balance sheets. Office Space from Related Party Beijing Genexosome uses office space of a related party, free of rent, which is considered immaterial. NOTE 8 – EQUITY 2020 Incentive Stock Plan The Company held its annual meeting on August 4, 2020. During its annual meeting, the Company approved 2020 Incentive Stock Plan and reserved 5,000,000 shares of common stock for issuance thereunder. Common Shares Sold for Cash On December 13, 2019, the Company entered into an Open Market Sale Agreement SM (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 six months ended June 30, 2021, Jefferies sold an aggregate of 1,848,267 shares of common stock at an average price of $ 1.34 per share to investors. The Company recorded net proceeds of $ 2,337,259 , net of commission and other offering costs of $ 144,146 . Common Shares Issued for Services During the six months ended June 30, 2021, the Company issued a total of 790,000 shares of its common stock for services rendered and to be rendered. These shares were valued at $ 894,300 , 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 $ 398,518 for the six months ended June 30, 2021 and reduced accrued liabilities of $ 261,032 and recorded prepaid expense of $ 234,750 as of June 30, 2021 which will be amortized over the rest of corresponding service periods. 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 . 15 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 8 – EQUITY (continued) Options The following table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at June 30, 2021: Options Outstanding Options Exercisable Range of Exercise Price Number Outstanding at June 30, 2021 Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable at June 30, 2021 Weighted Average Exercise Price $ 0.50 2,000,000 5.61 $ 0.50 2,000,000 $ 0.50 1.00 – 1.93 2,930,000 5.12 1.39 2,510,000 1.44 2.00 – 2.80 2,740,000 2.27 2.17 2,740,000 2.17 4.76 30,000 2.76 4.76 30,000 4.76 $ 0.50 – 4.76 7,700,000 4.22 $ 1.45 7,280,000 $ 1.47 Stock option activities for the six months ended June 30, 2021 were as follows: Number of Options Weighted Average Exercise Price Outstanding at January 1, 2021 7,140,000 $ 1.48 Granted 640,000 1.10 Terminated / Exercised / Expired ( 80,000 ) ( 1.00 ) Outstanding at June 30, 2021 7,700,000 $ 1.45 Options exercisable at June 30, 2021 7,280,000 $ 1.47 Options expected to vest 420,000 $ 1.08 The aggregate intrinsic value of both stock options outstanding and stock options exercisable at June 30, 2021 was $ 965,000 . The fair values of options granted during the six months ended June 30, 2021 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 123.27 % - 128.42 %, risk-free rate of 0.33 % - 0.80 %, annual dividend yield of 0 % and expected life of 3.00 - 5.00 years. The aggregate fair value of the options granted during the six months ended June 30, 2021 was $ 575,078 . The fair values of options granted during the six months ended June 30, 2020 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 137.42% - 139.58%, risk-free rate of 0.25% - 1.67%, annual dividend yield of 0% and expected life of 3.00 – 10.00 years. The aggregate fair value of the options granted during the six months ended June 30, 2020 was $2,644,161. For the three months ended June 30, 2021 and 2020, stock-based compensation expense associated with stock options granted amounted to $ 195,209 and $ 726,600 , respectively, of which, $ 136,392 and $ 694,692 was recorded as compensation and related benefits, $ 39,545 and $ 25,374 was recorded as professional fees, and $ 19,272 and $ 6,534 was recorded as research and development expenses, respectively. For the six months ended June 30, 2021 and 2020, stock-based compensation expense associated with stock options granted amounted to $ 397,714 and $ 1,511,950 , respectively, of which, $ 275,899 and $ 1,369,690 was recorded as compensation and related benefits, $ 82,988 and $ 129,192 was recorded as professional fees, and $ 38,827 and $ 13,068 was recorded as research and development expenses, respectively. 16 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 8 – EQUITY (continued) Options (continued) A summary of the status of the Company’s nonvested stock options granted as of June 30, 2021 and changes during the six months ended June 30, 2021 is presented below: Number of Options Weighted Average Exercise Price Nonvested at January 1, 2021 218,334 $ 1.18 Granted 640,000 1.10 Vested ( 438,334 ) ( 1.15 ) Nonvested at June 30, 2021 420,000 $ 1.08 NOTE 9 – STATUTORY RESERVE Avalon Shanghai and Beijing Genexosome operate in the PRC, are required to reserve 10 % of their net profit after income tax, as determined in accordance with the PRC accounting rules and regulations. Appropriation to the statutory reserve by the Company is based on profit arrived at under PRC accounting standards for business enterprises for each year. The profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is made to the statutory reserve. Appropriation to the statutory reserve must be made before distribution of dividends to shareholders. The appropriation is required until the statutory reserve reaches 50 % of the registered capital. This statutory reserve is not distributable in the form of cash dividends. The Company did not make any appropriation to statutory reserve for Avalon Shanghai and Beijing Genexosome during the six months ended June 30, 2021 and 2020 as they incurred net losses in these periods. NOTE 10 – RESTRICTED NET ASSETS A portion of the Company’s operations are conducted through its PRC subsidiaries, which can only pay dividends out of their retained earnings determined in accordance with the accounting standards and regulations in the PRC and after they have met the PRC requirements for appropriation to statutory reserve. In addition, a portion of the Company’s businesses and assets are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the ability of the Company’s PRC subsidiaries to transfer their net assets to the Parent Company through loans, advances or cash dividends. Schedule I of Article 5-04 of Regulation S-X requires the condensed financial information of the parent company to be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of this test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets of its consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company in the form of loans, advances or cash dividends without the consent of a third party. The Company’s PRC subsidiaries’ net assets as of June 30, 2021 and December 31, 2020 did not exceed 25 % of the Company’s consolidated net assets. Accordingly, the Parent Company’s condensed consolidated financial statements have not been required in accordance with Rule 5-04 and Rule 12-04 of SEC Regulation S-X. 17 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 11 – 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 three and six months ended June 30, 2021 and 2020. Three Months Ended June 30, Six Months Ended June 30, Customer 2021 2020 2021 2020 A 31 % 28 % 31 % 29 % B 20 % 17 % 20 % 17 % C 13 % 14 % 13 % 14 % One customer, whose outstanding receivable accounted for 10 % or more of the Company’s total outstanding accounts receivable, accounts receivable – related party, and rent receivable at June 30, 2021, accounted for 71.5 % of the Company’s total outstanding accounts receivable, accounts receivable – related party, and rent receivable at June 30, 2021. Two customers, whose outstanding receivable accounted for 10 % or more of the Company’s total outstanding accounts receivable, accounts receivable – related party, and rent receivable at December 31, 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 three and six months ended June 30, 2021 and 2020. One supplier, whose outstanding payable accounted for 10 % or more of the Company’s total outstanding accounts payable at June 30, 2021, accounted for 90.2 % of the Company’s total outstanding accounts payable at June 30, 2021. 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. NOTE 12 – SEGMENT INFORMATION For the three and six months ended June 30, 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 three and six months ended June 30, 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 three and six months ended June 30, 2021 and 2020 was as follows: 18 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 12 – SEGMENT INFORMATION (continued) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenues Real property operations $ 280,232 $ 301,267 $ 570,006 $ 598,223 Costs and expenses Real property operations 205,147 272,764 422,041 527,265 Gross profit Real property operations 75,085 28,503 147,965 70,958 Other operating expenses Real property operations 78,830 103,218 180,253 214,034 Medical related consulting services - related parties 167,275 175,891 328,828 331,126 Development services and sales of developed products - 30,240 - 66,239 Corporate/Other 2,131,260 2,721,981 4,244,752 5,684,578 Total 2,377,365 3,031,330 4,753,833 6,295,977 Other income (expense) Interest expense Corporate/Other ( 46,131 ) ( 42,469 ) ( 91,280 ) ( 84,638 ) Total ( 46,131 ) ( 42,469 ) ( 91,280 ) ( 84,638 ) Other income (expense) Real property operations 4 4 108 ( 931 ) Medical related consulting services - related parties ( 16,503 ) ( 11,091 ) ( 34,989 ) ( 16,578 ) Development services and sales of developed products - 1 - 3 Corporate/Other - - 1 - Total ( 16,499 ) ( 11,086 ) ( 34,880 ) ( 17,506 ) Total other expense, net ( 62,630 ) ( 53,555 ) ( 126,160 ) ( 102,144 ) Net loss Real property operations 3,741 74,711 32,180 144,007 Medical related consulting services - related parties 183,778 186,982 363,817 347,704 Development services and sales of developed products - 30,239 - 66,236 Corporate/Other 2,177,391 2,764,450 4,336,031 5,769,216 Total $ 2,364,910 $ 3,056,382 $ 4,732,028 $ 6,327,163 Identifiable long-lived tangible assets at June 30, 2021 and December 31, 2020 June 30, 2021 December 31, 2020 Real property operations $ 7,623,260 $ 7,697,473 Medical related consulting services 196,347 223,459 Development services and sales of developed products - 243,869 Corporate/Other 236,172 - Total $ 8,055,779 $ 8,164,801 19 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 12 – SEGMENT INFORMATION (continued) Identifiable long-lived tangible assets at June 30, 2021 and December 31, 2020 June 30, 2021 December 31, 2020 United States $ 7,680,296 $ 7,764,947 China 375,483 399,854 Total $ 8,055,779 $ 8,164,801 NOTE 13 – COMMITMENTS AND CONTINGENCIES Litigation From time to time, the Company is subject to ordinary routine litigation incidental to its normal business operations. The Company is not currently a party to, and its property is not subject to, any material legal proceedings, except as set forth below. On October 25, 2017, Genexosome entered into and closed a Stock Purchase Agreement with Beijing Genexosome and Yu Zhou, MD, PhD, the sole shareholder of Beijing Genexosome, pursuant to which Genexosome acquired all of the 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 on September 30, 2019. 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 continues. While there can be no assurances, the Company believes it has substantial legal and factual defenses to the Research Institute’s claims and the likelihood of any findings of liability for the Company cannot be assessed at this time. Operating Leases Commitment The Company is a party to leases for office space. Rent expense under all operating leases amounted to approximately $ 73,000 and $ 78,000 for the six months ended June 30, 2021 and 2020, respectively. Supplemental cash flow information related to leases for the six months ended June 30, 2021 and 2020 is as follows: Six Months ended June 30, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows paid for operating lease $ 65,035 $ 30,000 Right-of-use assets obtained in exchange for lease obligation: Operating lease $ 133,473 $ 169,578 The following table summarizes the lease term and discount rate for the Company’s operating lease as of June 30, 2021: Operating Lease Weighted average remaining lease term (in years) 1.58 Weighted average discount rate 4.88 % 20 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 13 – COMMITMENTS AND CONTINCENGIES (continued) Operating Leases Commitment (continued) The following table summarizes the maturity of lease liabilities under operating lease as of June 30, 2021: For the Twelve-month Period Ending June 30: Operating Lease 2022 $ 147,834 2023 76,737 2024 and thereafter - Total lease payments 224,571 Amount of lease payments representing interest ( 7,790 ) Total present value of operating lease liabilities $ 216,781 Current portion $ 140,978 Long-term portion 75,803 Total $ 216,781 Equity Investment Commitment On May 29, 2018, Avalon Shanghai entered into a Joint Venture Agreement with Jiangsu Unicorn Biological Technology Co., Ltd. (“Unicorn”), pursuant to which a company named Epicon Biotech Co., Ltd. (“Epicon”) was formed on August 14, 2018. Epicon is owned 60% by Unicorn and 40% by Avalon Shanghai. Within five years of execution of the Joint Venture Agreement, Unicorn shall invest cash into Epicon in an amount not less than RMB 8,000,000 (approximately $1.2 million) and the premises of the laboratories of Nanjing Hospital of Chinese Medicine for exclusive use by Epicon, and Avalon Shanghai shall invest cash into Epicon in an amount not less than RMB 10,000,000 (approximately $1.5 million). Epicon is focused on cell preparation, third party testing, biological sample repository for commercial and scientific research purposes and the clinical transformation of scientific achievements. As of June 30, 2021, Avalon Shanghai has contributed RMB 4,760,000 (approximately $0.7 million) that was included in equity method investment on the accompanying condensed 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. 21 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 13 – COMMITMENTS AND CONTINGENCIES (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 the Chinese government; ● assisting AVAR in recruiting, hiring and retaining personnel; ● providing AVAR with access to various hospital networks in China to assist in the testing and commercialization of the CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy technology in China; ● assisting AVAR in managing the Good Manufacturing Practices (GMP) facility and clinic to be developed by AVAR; ● providing AVAR with advice pertaining to conducting clinicals in China; and ● Within 6 days of signing the AVAR Agreement, Avactis is required to pay to Arbele $300,000 as a research and development fee with an additional two payments of $300,000 (for a total of $900,000) to be paid upon mutually agreed upon milestones. As of June 30, 2021, Avactis has paid the $ 900,000 to Arbele as research and development fee. 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 June 30, 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 June 30, 2021, $ 3,393,188 was outstanding under the Line of Credit. NOTE 14 – SUBSEQUENT EVENTS Merger 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”), the holders of the share capital of Sen Lang (the “Sen Lang Shareholders”), the ultimate beneficial owners of the Sen Lang Shareholders (the “Sen Lang Beneficial Shareholders” and, together with the Sen Lang Shareholders, the “Sen Lang Owners”) and a representative of the Sen Lang Owners (the “Sen Lang Representative”). Pursuant to the Purchase Agreement, subject to the satisfaction of the conditions to closing therein, including approval by the Avalon stockholders pursuant to the rules of the Nasdaq Stock Market (“Nasdaq”), Avalon agreed to purchase (the “Acquisition”) all of the issued and outstanding share capital of Sen Lang (the “Sen Lang Shares”). 22 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 14 – SUBSEQUENT EVENTS (continued) Merger (continued) Sen Lang, through a variable interest entity (“VIE”) structure of contractual rights held by its wholly-owned subsidiary Beijing Langlang Runfeng Biotechnology Co., Ltd., a wholly foreign owned enterprise with limited liability organized and existing under the laws of the People’s Republic of China (the “PRC”) (the “PRC Subsidiary”), has full economic benefit and management control over, and is consolidated for accounting purposes with, Senlang Biotechnology Co. Ltd., a PRC domestic company with limited liability organized and existing under the laws of the PRC (the “OpCo” or “SenlangBio”). The OpCo is mainly engaged in the business of research and development in relation to CAR-T cell therapy, immune cell therapy and related drug development. The OpCo is owned 100 % by certain of the Sen Lang Beneficial Shareholders. A wholly-owned subsidiary of the OpCo, Shijiazhuang Senlang Medical Laboratory Co., Ltd., a company with limited liability organized and existing under the laws of the PRC (“SenlangBio Clinical Laboratory”) is engaged in the business of testing of immunology, serology and molecular genetics specialties for patients, including hematology-tumor diagnostics and testing prior to clinical trials for cell therapy. Prior to the execution of the Purchase Agreement, the Board of Directors of Avalon (the “Board”), unanimously (i) determined that the terms and provisions of the Purchase Agreement and the transactions contemplated thereby, including the Acquisition, are fair to, advisable and in the best interests of the Company and its stockholders, (ii) approved the Purchase Agreement and the transactions contemplated thereby, including the Acquisition, (iii) authorized, empowered and directed the Company to perform all of its obligations under the Purchase Agreement and related documents, and (iv) resolved to recommend the adoption of the Purchase Agreement by the stockholders of the Company in compliance with the rules of Nasdaq (the “Company Board Recommendation”). The purchase price being paid by Avalon to the Sen Lang Shareholders under the Purchase Agreement for the Sen Lang Shares is an aggregate of 81 million shares (the “Acquisition Shares”) of the common stock, par value US$ 0.0001 per share, of Avalon (the “Avalon Common Stock”). Ten percent ( 10 %), or 8.1 million, of such shares will be held in escrow for 12 months following the closing to satisfy any indemnification obligations of the Sen Lang Shareholders under the Share Purchase Agreement. In addition, at the closing of the Acquisition, it is expected that Dr. Jianqiang Li, scientific founder and CSO of the OpCo, will join the board of the Company, and Dr. Li will also be appointed as Chief Technology Officer of the Company. The Acquisition Shares will not be registered under the Securities Act of 1933, as amended (the “Securities Act”) and, therefore, will be restricted securities under Rule 144 under the Securities Act for six months or longer after the closing of the Acquisition, subject to “affiliate” status with the Company under the Securities Act. The Purchase Agreement contains customary representations, warranties and covenants made by the parties thereto, including covenants relating to obtaining the requisite approvals of the stockholders of Avalon and Sen Lang, regulatory approvals and Avalon’s and Sen Lang’s conduct of their respective businesses (and that of the OpCo) between the date of signing of the Purchase Agreement and the closing of the Acquisition. The Acquisition is expected to be accounted for as a business acquisition, with the Company identified as the accounting acquirer. The Company is considered the accounting acquirer since immediately following the closing: (i) the Company’s stockholders will own a majority of the voting rights of the post-Acquisition company; (ii) the Company will have designate a majority (eight of nine) of the initial members of the board of directors of the post-Acquisition company; (iii) the Company’s senior management will hold the majority of the key positions in senior management of the post-Acquisition company; and (iv) the Company will continue to maintain its corporate headquarters in Freehold, New Jersey, United States. SenlangBio will continue to maintain operations in the Shijiazhuang High-tech Development Zone, Hebei Province, China. The acquisition consideration is 81,000,000 shares of the Company’s Common Stock. The purchase price will be allocated to the acquired assets and assumed liabilities based on their fair values at the closing date, and any excess is initially allocated to identifiable intangible assets mainly consisting of cell and gene engineering technologies with the ability to generate innovative and transformative cellular immunotherapies for solid and hematologic cancers, which will be amortized over 10 years. The initial allocation is subject to change upon the final valuation which is to be done at the time of closing. Such change could have a material impact on the Company’s financial statements. As of June 30, 2020, the Company had incurred costs of $ 938,073 with respect to the Merger and these costs have been expensed. 23 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 14 – SUBSEQUENT EVENTS (continued) Equity Financing In connection with the Acquisition mentioned above, on June 13, 2021, an institutional investor (the “Investor”) entered into an agreement with the OpCo related to the purchase of registered capital of the OpCo (the “OpCo Capital Increase Agreement”) pursuant to which the Investor will acquire an aggregate of up to 13.5 % of the equity ownership of the OpCo for an aggregate purchase price of approximately US$ 30,000,000 (the “Equity Financing”), which funds will be invested in the OpCo in three equal installments of US$ 10,000,000 , at a fixed price, the first to be upon the closing of the Acquisition, the second to be within three months after the closing and the third to be within six months after the closing. In addition, pursuant to a Securities Exchange Agreement (the “Exchange Agreement”), by and among the Company, Sen Lang, the OpCo and the Investor, dated June 13, 2021, the Investor has the right, exercisable between the six-month and five year -anniversaries of the respective initial closing and installment closings, to elect to exchange, from time to time, all or part of its then-owned equity ownership of the OpCo for shares (the “Exchange Shares”) of Avalon Common Stock at a fixed exchange price of US$ 1.21 per share of Avalon Common Stock, which was the market price of the Avalon Common Stock as of the date of the Exchange Agreement under Nasdaq rules. In addition, the Exchange Agreement provides that the Investor may only exchange up to 10 % of its total investment amount in any 30-day period. China eCapital Holdings, Ltd. (CEC Capital) served as financial advisor to Avalon in connection with the Equity Financing and will receive a cash fee of approximately $ 900,000 , representing 3 % of the gross proceeds from the Equity Financing. Common Shares Issued for Services In August 2021, the Company issued a total of 325,000 shares of its common stock for services rendered and to be rendered. These shares were valued at $ 301,750 , the fair market values on the grant dates using the reported closing share prices on the dates of grant. 24