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Item 1A. Risk Factors

2021-11-15 compared with 2021-08-16 · 250 added, 158 removed, 37 unchanged (92% of the section changed)

Except for the

additional risk factors addressed below, there were no material changes from the risk factors set forth under Part I, Item 1A., “Risk

Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

You should carefully consider these

factors in addition to the other information set forth in this report which could materially affect our business, financial condition

for the additional risk factors addressed below, there were no material changes from the risk factors set forth under Part I, Item 1A.,

“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

You should carefully consider

these factors in addition to the other information set forth in this report which could materially affect our business, financial condition

or future results.

1 unchanged sentence

2020, as well as other reports and statements that we file with the SEC, are not the only risks and uncertainties facing us.

risks and uncertainties not currently known to us or that we currently deem to be immaterial may also have a material adverse effect on

our financial position, results of operations or cash flows.

risks and uncertainties not currently known to us or that we currently deem to be immaterial may also have a material adverse effect

on our financial position, results of operations or cash flows.

general development operations have continued during the COVID-19 pandemic and we have not had significant disruption.

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and we will continue to operate our business as steadily and safely as we can.

We have entered into two third-party research

agreements to advance our sponsored research programs.

These arrangements may not ultimately yield any promising product candidates for

preclinical or clinical development.

We may not be able to fully realize the benefits of any intellectual property generated by these

arrangements.

Part of our strategy involves collaborative sponsored

research to be performed by third-party research institutions.

Avalon has entered into various research agreements including an agreement

with Massachusetts Institute of Technology (MIT) to research novel therapeutic and diagnostic targets development utilizing QTY-code protein

design technology including using the QTY code protein design technology for development of a hemofiltration device to treat Cytokine

Storm Strategic as well as a partnership with the University of Natural Resources and Life Sciences (BOKU) in Vienna, Austria to develop

an S-layer vaccine that can be administered by an intranasal or oral route against SARS-CoV-2, the novel coronavirus that causes COVID-19

Although we seek

to direct this research and advise on the design of these projects as well as critical development decisions, this research is being performed

by individuals who are not our employees and the timeline and quality of the research efforts are outside of our direct control.

investigators and other researchers may have different priorities than we do as a CellTech bio-developer.

The sponsored research agreements

we enter into for these programs generally provide that any inventions resulting from the research will be owned by the research institution

performing the research, and that we have an option to negotiate for a license to develop and exploit any such inventions.

information and new inventions derived from these research efforts may be disclosed through publications or other means prior to our third-party

research collaborators being able to protect such intellectual property through the filing of patent applications.

Our third-party research

collaborators may not be able to obtain or maintain full ownership of inventions that are derived from the research or associated rights,

which may limit their ability to provide us with a license to all relevant intellectual property on terms and conditions that are acceptable

Even if our collaborative research efforts yield promising results or new technological advances, they may not ultimately result

in our being able to protect, develop or exploit the resulting intellectual property.

Risks Related

to the VIE Structure and SenlangBio being a PRC Domestic Entity

are uncertainties regarding the interpretation and enforcement of PRC laws, rules, and regulations in general.

have entered into two third-party research agreements to advance our sponsored research programs.

These arrangements may not ultimately

yield any promising product candidates for preclinical or clinical development.

We may not be able to fully realize the benefits of any

intellectual property generated by these arrangements.

of our strategy involves collaborative sponsored research to be performed by third-party research institutions.

Avalon has entered into

various research agreements including an agreement with Massachusetts Institute of Technology (MIT) to research novel therapeutic and

diagnostic targets development utilizing QTY-code protein design technology including using the QTY code protein design technology for

development of a hemofiltration device to treat Cytokine Storm Strategic as well as a partnership with the University of Natural Resources

and Life Sciences (BOKU) in Vienna, Austria to develop an S-layer vaccine that can be administered by an intranasal or oral route against

SARS-CoV-2, the novel coronavirus that causes COVID-19 disease.

we seek to direct this research and advise on the design of these projects as well as critical development decisions, this research is

being performed by individuals who are not our employees and the timeline and quality of the research efforts are outside of our direct

Academic investigators and other researchers may have different priorities than we do as a CellTech bio-developer.

The sponsored

research agreements we enter into for these programs generally provide that any inventions resulting from the research will be owned

by the research institution performing the research, and that we have an option to negotiate for a license to develop and exploit any

such inventions.

Confidential information and new inventions derived from these research efforts may be disclosed through publications

or other means prior to our third-party research collaborators being able to protect such intellectual property through the filing of

patent applications.

Our third-party research collaborators may not be able to obtain or maintain full ownership of inventions that are

derived from the research or associated rights, which may limit their ability to provide us with a license to all relevant intellectual

property on terms and conditions that are acceptable to us.

Even if our collaborative research efforts yield promising results or new

technological advances, they may not ultimately result in our being able to protect, develop or exploit the resulting intellectual property.

Related to the VIE Structure and SenlangBio being a PRC Domestic Entity

are uncertainties regarding the interpretation and enforcement of PRC laws, rules, and regulations in general, as well as the actions

taken by PRC regulatory authorities.

operations are conducted in the PRC, and are governed by PRC laws, rules, and regulations.

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Unlike the common law system, prior court decisions may be cited for reference but have limited precedential

enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to a significant

degree of interpretation by PRC regulatory agencies and courts.

Because these laws, rules and regulations are relatively new, and because

of the limited number of published decisions and the non-precedential nature of these decisions, and because the laws, rules and regulations

often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules

and regulations involve uncertainties and can be inconsistent and unpredictable.

Therefore, it is possible that our existing operations

may be found not to be in full compliance with relevant laws and regulations in the future.

In addition, the PRC legal system is based

in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive

As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.

administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management

Recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be

subject to a significant degree of interpretation by PRC regulatory agencies and courts.

Because these laws, rules and regulations are

relatively new, and because of the limited number of published decisions and the non-precedential nature of these decisions, and because

the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and

enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable.

Therefore, if the applicable

regulations change or are interpreted differently, it is possible that SenlangBio’s existing operations or the contractual arrangements

constituting part of the VIE structure are not in full compliance with relevant laws and regulations.

Avalon’s operating results

may be significantly impacted and its shares may decline in value or become worthless if Avalon is unable to assert its contractual control

rights over the assets of its PRC subsidiaries that conduct a significant portion of its operations.

In addition, the PRC legal system

is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may

have a retroactive effect.

As a result, SenlangBio or Avalon may not be aware of any violation of these policies and rules until after

the occurrence of the violation.

Overall, the significant uncertainties in the regulatory environment in China imposes significant risks

on VIE and other contractual arrangements.

administrative and court proceedings in China may be protracted, resulting in substantial costs and the diversion of resources and management

Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and

contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection

we enjoy than in more developed legal systems.

These uncertainties may impede our ability to enforce the contracts, including the VIE

agreements, and could materially and adversely affect our business, financial condition, and results of operations.

contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings.

These uncertainties may

impede Avalon’s ability to enforce contracts, including the VIE Agreements, and could materially and adversely affect Avalon’s

business, financial condition, and results of operations.

Moreover, since the PRC administrative authorities have significant discretion

in interpreting and implementing statutory and contractual terms, they may materially intervene with or influence Avalon’s or SenlangBio’s

operations at any time, which could result in a material change in the value of Avalon’s common stock.

addition, the PRC government has recently announced its plans to enhance its regulatory oversight of Chinese companies listing overseas.

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can be complex and stringent, and many are subject to change and uncertain interpretation, which could result in claims, change to our

data and other business practices, regulatory investigations, penalties, increased cost of operations, or declines in user growth or engagement,

or otherwise affect our business.” It is uncertain whether or how these new laws, rules and regulations and the interpretation and

implementation thereof may affect SenlangBio.

The business of SenlangBio

may fall into the prohibited foreign investment category under currently effective PRC laws.

On March 15, 2019, the National

People’s Congress (“NPC”) promulgated the Foreign Investment Law, which took effect on January 1, 2020, and replaced

three existing laws regulating foreign investment in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint Venture

Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations.

The Foreign Investment

Law grants foreign invested entities the same treatment as PRC domestic entities, except for those foreign invested entities that operate

in industries deemed to be either “restricted” or “prohibited” in the “negative list” published by

the State Council.

Sen Lang is a BVI company and the PRC Subsidiary is currently considered to be a foreign invested entity.

The latest version of the “negative

list,” namely, the Special Management Measures (Negative List) for the Access of Foreign Investment (2020), which became effective

on July 23, 2020, provides that foreign investment is prohibited in the development and application of human stem cells, genetic diagnosis

and treatment technology.

However, the PRC laws do not clarify the meaning of “development and application of human stem cells,

genetic diagnosis and treatment technology” and do not explain whether transactions involving a VIE Structure should be considered

as “investment” in the context of the prohibition of foreign investment.

SenlangBio’s main business is conducting R&D

and clinical transformation of immunotherapy cell therapy, which involves modifying the patient’s T-Cells genetically.

foregoing lack of clarity, the applicable rules could be interpreted in a way unfavorable to the business of SenlangBio.

In the context

of law enforcement, if the competent PRC authorities and courts interpret “development and application of human stem cells, genetic

diagnosis and treatment technology” broadly, the modification of T-Cells genetically could be considered as falling into the prohibited

foreign investment category.

If SenlangBio’s CAR-T cell therapies or other technologies that are being researched and developed

are deemed by relevant PRC regulatory agencies as falling into the category of “human stem cells, genetic diagnosis and treatment

technology,” SenlangBio would be prohibited from engaging in the research or development of such technologies.

In that event, Avalon

and the Sen Lang Beneficial Shareholders would have to restructure Avalon’s control over SenlangBio.

SenlangBio may also have to

forfeit its income derived from the research and development of such technologies.

Any of these occurrences may harm Avalon’s and

SenlangBio’s business, prospects, financial condition, and results of operations significantly.

uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law, its implementing rules, Foreign

Investment Security Review Measures, other regulations and how they may impact the viability of the VIE structure, business, financial

condition, and results of operations.

VIE structure has been adopted by many China-based companies to obtain licenses and permits necessary to operate in industries that currently

are subject to restrictions on or prohibitions for foreign investment in China.

The Ministry of Commerce (“MOFCOM”) published

a discussion draft of the proposed Foreign Investment Law in January 2015, or the 2015 Draft Foreign Investment Law, according to which,

variable interest entities that are controlled via contractual arrangements would be deemed as foreign-invested enterprises if they are

ultimately “controlled” by foreign investors.

Even though such language did not appear in the official Foreign Investment

Law promulgated by the PRC State Council in 2019, there can be no assurance that the concept of “control” as reflected in

the 2015 Draft of the Foreign Investment Law, will not be reintroduced, or that the VIE structure adopted by us will not be deemed as

a method of foreign investment by other laws, regulations and rules.

data and other business practices, regulatory investigations, penalties, increased cost of operations, or declines in user growth or

engagement, or otherwise affect our business.

Currently, Avalon believes that it is unlikely to be directly subject to the above-mentioned

securities laws because Avalon is a U.S.

domiciled and listed corporation.

However, any action taken by PRC regulatory authorities under

such laws and regulations could change this and could cause the value of such securities to significantly decline or be worthless.

business of SenlangBio may fall into the prohibited foreign investment category under currently effective PRC laws.

March 15, 2019, the National People’s Congress (“NPC”) promulgated the Foreign Investment Law, which took effect on

January 1, 2020, and replaced three existing laws regulating foreign investment in China, namely, the PRC Equity Joint Venture Law, the

PRC Cooperative Joint Venture Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary

The Foreign Investment Law grants foreign invested entities the same treatment as PRC domestic entities, except for those

foreign invested entities that operate in industries deemed to be either “restricted” or “prohibited” in the

“negative list” published by the State Council.

Sen Lang BVI is a BVI company, and the PRC Subsidiary is currently considered

to be a foreign invested entity.

latest version of the “negative list,” namely, the Special Management Measures (Negative List) for the Access of Foreign

Investment (2020), which became effective on July 23, 2020, provides that foreign investment is prohibited in the development and application

of human stem cells, genetic diagnosis, and treatment technology.

However, the PRC laws do not clarify the meaning of “development

and application of human stem cells, genetic diagnosis and treatment technology” and do not explain whether transactions involving

a VIE Structure should be considered as “investment” in the context of the prohibition of foreign investment.

main business is conducting R&D and clinical transformation of immunotherapy cell therapy, which involves modifying the patient’s

T-Cells genetically.

Despite the foregoing lack of clarity, the applicable rules could be interpreted in a way unfavorable to the business

of SenlangBio.

In the context of law enforcement, if the competent PRC authorities and courts interpret “development and application

of human stem cells, genetic diagnosis and treatment technology” broadly, the modification of T-Cells genetically could be considered

as falling into the prohibited foreign investment category.

Avalon believes that no approvals or permissions are required under current applicable PRC laws and regulations for Avalon to complete

the Acquisition, if SenlangBio’s CAR-T cell therapies or other technologies that are being researched and developed are deemed

by relevant PRC regulatory agencies as falling into the category of “human stem cells, genetic diagnosis and treatment technology,”

and if the VIE Structure is considered as “investment” in the context of the prohibition of foreign investment, SenlangBio

would be prohibited from engaging in the research or development of such technologies.

In that event, Avalon and the Sen Lang BVI Beneficial

Shareholders would have to restructure Avalon’s control over SenlangBio.

SenlangBio may also have to forfeit its income derived

from the research and development of such technologies.

Any of these occurrences may harm Avalon’s and SenlangBio’s business,

prospects, financial condition, and results of operations significantly.

Avalon intends to receive dividends and other

distributions from SenlangBio through the VIE Structure, and any limitation on the ability of SenlangBio or Sen Lang BVI or its subsidiaries

to make payments to Avalon could have an adverse effect on Avalon’s ability to conduct its business.

intents to receive dividends and other distributions from SenlangBio through the VIE Structure.

Current PRC regulations permit the PRC

Subsidiary (the counter-party to the VIE Agreements with SenlangBio) to pay dividends up to Sen Lang BVI, the entity that will be acquired

by Avalon in the Acquisition, only out of its accumulated after-tax profits upon satisfaction of relevant statutory conditions and procedures,

if any, determined in accordance with Chinese accounting standards and regulations.

In addition, the PRC Subsidiary is required to set

aside at least 10% of its after-tax profits each year, if any, to fund certain reserve funds until the total amount set aside reaches

50% of its registered capital.

Additionally, the PRC tax authorities may require the PRC Subsidiary to adjust its taxable income under

the contractual arrangements it currently has in place with SenlangBio in a manner that could materially and adversely affect the PRC

Subsidiary’s ability to pay dividends and other distributions up to Avalon.

Lang BVI may not be able to obtain certain benefits under relevant tax treaty on dividends paid by PRC Subsidiary through Senlang HK.

Lang BVI is a holding company incorporated under the laws of the British Virgin Islands and as such intends to receive dividends and

other distributions from the PRC Subsidiary through Senlang HK.

Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate

of 10% currently applies to dividends paid by a PRC resident enterprise to a foreign enterprise investor, unless any such foreign investor’s

jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment.

Pursuant to the Arrangement between

the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, such

withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of the capital of a PRC enterprise

and is the beneficial owner of the dividend income.

Furthermore, the Announcement of State Taxation Administration on Promulgation of

the Administrative Measures on Non-Resident Taxpayers Enjoying Treaty Benefits, issued on October 14, 2019 by the PRC State Taxation

Administration, which became effective from January 1, 2020, requires non-resident enterprises to determine whether they are qualified

to enjoy the preferential tax treatment under the tax treaties and make appropriate filings with the competent tax authorities.

based on the Notice on Issues concerning Beneficial Owner in Tax Treaties, or Circular 9, issued on February 3, 2018 by the PRC State

Taxation Administration, which became effective from April 1, 2018, when determining the applicant’s “beneficial owner”

status regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including,

without limitation, whether the applicant is obligated to pay more than 50% of the applicant’s income for twelve months to residents

in a third country or region, whether the business operated by the applicant constitutes the actual business activities, and whether

the counterparty country or region to the tax treaties does not levy any tax or grant tax exemption on relevant incomes or levy tax at

an extremely low rate, will be taken into account, and it will be analyzed according to the actual circumstances of the specific cases.

There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations.

Therefore, Avalon currently believes that the PRC Subsidiary’s distribution of dividends to Senlang HK, if any, shall be subject

to a withholding tax rate of 10%, unless the reduced rate of 5% under the tax treaty is applicable.

contractual arrangements may be subject to scrutiny by the PRC tax authorities and they may determine that Avalon or its subsidiaries

or SenlangBio owe additional taxes, which could negatively affect Avalon’s financial condition and the value of its stock.

applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the

PRC tax authorities within ten years after the taxable year when the transactions are conducted.

The PRC enterprise income tax law requires

every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties

to the relevant tax authorities.

The tax authorities may impose reasonable adjustments on taxation if they have identified any related

party transactions that are inconsistent with arm’s length principles.

Avalon, its subsidiaries and SenlangBio may face material

and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements were not entered into on an arm’s

length basis.

control of currency conversion may limit Avalon’s ability to utilize its revenues effectively and affect the value of Investor’s

PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency

out of China.

Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade

and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration

of Foreign Exchange, or SAFE, by complying with certain procedural requirements.

However, approval from or registration with appropriate

governmental authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses

such as the repayment of loans denominated in foreign currencies.

As a result, SAFE approval may need to be obtained to use cash generated

from the operations of the PRC Subsidiary.

Any failure to comply with applicable foreign exchange regulations may subject Avalon to administrative

fines or, if serious, criminal penalties, which could materially and adversely affect the value of Avalon’s stock.

the PRC government has tightened its foreign exchange policies again and stepped up scrutiny of major outbound capital movement.

restrictions and a substantial vetting process have been put in place by SAFE to regulate cross-border transactions falling under the

capital account.

The PRC government may also restrict access in the future to foreign currencies for current account transactions, at

its discretion.

Therefore, Avalon may not be able to obtain revenues effectively from SenlangBio through the VIE Structure under the

existing PRC foreign exchange control system.

uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law, its implementing rules,

Foreign Investment Security Review Measures, other regulations and how they may impact the viability of the VIE structure, business,

financial condition, and results of operations.

Lang BVI, its PRC subsidiary, SenlangBio, and SenlangBio’s shareholders face uncertainty about potential future actions by the

PRC government that could affect the enforceability of the VIE contractual arrangements between Sen Lang BVI’s PRC Subsidiary,

SenlangBio and SenlangBio’s shareholders.

The VIE structure has been adopted by many China-based companies to avoid restrictions

on or prohibitions for foreign investment in many industries in China.

The Ministry of Commerce (“MOFCOM”) published a discussion

draft of the proposed Foreign Investment Law in January 2015, or the 2015 Draft Foreign Investment Law, according to which, variable

interest entities that are controlled via contractual arrangements would be deemed as foreign-invested enterprises if they are ultimately

“controlled” by foreign investors.

Even though such language did not appear in the official Foreign Investment Law promulgated

by the PRC State Council in 2019, there can be no assurance that the concept of “control” as reflected in the 2015 Draft

of the Foreign Investment Law, will not be reintroduced, or that the VIE structure adopted by Sen Lang BVI will not be deemed as a method

of foreign investment by other laws, regulations, and rules.

In addition, as the 2019 Foreign Investment Law has a catch-all provision

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If the VIE Structure were to be deemed as a method of foreign investment under any future laws, regulations and rules,

and if any of our business operations were to fall under the “negative list” for foreign investment, the VIE structure may

be found to be in violation of any existing or future PRC laws, rules or regulations, then the relevant PRC regulatory authorities would

have broad discretion to take action in dealing with these violations or failures, including revoking the business and operating licenses

of SenlangBio, requiring it to discontinue or restrict its operations, restricting its right to collect revenue, requiring it to restructure

our operations or taking other regulatory or enforcement actions against it.

The imposition of any of these measures could result in a

material adverse effect on SenlangBio’s ability to conduct all or any portion of its business operations.

In addition, it is unclear

what impact the PRC government actions would have on us and on our ability to consolidate the financial results of SenlangBio in our consolidated

financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in violation

of PRC laws, rules, and regulations.

If the imposition of any of these government actions causes us to lose our right to direct the activities

of SenlangBio or otherwise separate from SenlangBio and if we are not able to restructure our ownership structure and operations in a

satisfactory manner, we would no longer be able to consolidate the financial results of SenlangBio in our consolidated financial statements.

Any of these events would have a material adverse effect on our business, financial condition, and results of operations.

and if any of SenlangBio’s business operations were to fall under the “negative list” for foreign investment, then

the VIE Structure may be found to be in violation of any existing or future PRC laws, rules or regulations, and the relevant PRC regulatory

authorities would have broad discretion to take action in dealing with these violations or failures, including revoking the business

and operating licenses of SenlangBio, requiring it to discontinue or restrict its operations, restricting its right to collect revenue,

requiring Avalon to restructure its operations as a whole or taking other regulatory or enforcement actions against Avalon and/or SenlangBio.

The imposition of any of these measures could result in a material adverse effect on SenlangBio’s ability to conduct all or any

portion of its business operations.

In addition, it is unclear what impact the PRC government actions would have on Avalon and on its

ability to consolidate the financial results of SenlangBio in Avalon’s consolidated financial statements, if the PRC government

authorities were to find Avalon’s legal structure and contractual arrangements to be in violation of PRC laws, rules, and regulations.

If the imposition of any of these government actions causes Avalon to lose its right to direct the activities of SenlangBio or otherwise

separate from SenlangBio, and if Avalon is not able to restructure its ownership and operations structure in a satisfactory manner, Avalon

would no longer be able to consolidate the financial results of SenlangBio in its consolidated financial statements.

Any of these events

would have a material adverse effect on Avalon’s business, financial condition, and results of operations.

on December 19, 2020, the National Development and Reform Commission and MOFCOM promulgated the Foreign Investment Security Review Measures,

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There are great uncertainties with respect to its interpretation and implementation.

Foreign Investment Security Review Measures, investments in military, national defense-related areas or in locations in proximity to military

facilities, or investments that would result in acquiring the actual control of assets in certain key sectors, such as critical agricultural

products, energy and resources, equipment manufacturing, infrastructure, transport, cultural products and services, IT, Internet products

and services, financial services and technology sectors, are required to be approved by designated governmental authorities in advance.

Since SenlangBio’s main business is conducting R&D and clinical transformation of immunotherapy cell therapy, we cannot rule

out the possibility that investment in SenlangBio may be regarded as “investment in technology sectors,” which would require

approval from governmental authorities.

Moreover, because the term “investment through other means” is not clearly defined

under the Foreign Investment Security Review Measures, we cannot rule out the possibility that control through contractual arrangement

may be regarded as a form of actual control and therefore require approval from the competent governmental authority.

The filing or change of the medical

institution practice license of SenlangBio Clinical Laboratory may be affected by the VIE Structure.

As SenlangBio Clinical Laboratory is a medical

institution under the PRC laws, its operation is subject to the PRC regulation of foreign investment in the area of medical institution,

which provides that a foreign investor can acquire 70% (to the highest extent) of the equity interests in a PRC medical institution.

The relevant PRC laws also provide that the related government authority shall not approve any application of licenses/permits if the

application is related to a company failing to comply with PRC foreign investment regulation.

Therefore, if the competent PRC authority

responsible for the registration of the medical institution practice license of SenlangBio Clinical Laboratory adopts a broad understanding

of foreign investment rules that controlling via agreements can be deemed as a way of investment, the authority may disapprove SenlangBio

Clinical Laboratory’s application in relation to its medical institution practice license, including any extension of such license.

In the worst case, theoretically, the competent authorities may deem the VIE Agreements unenforceable because they are in violation of

the PRC laws.

In that event, SenlangBio Clinical Laboratory would not be qualified to conduct any 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, which would result in the loss of the license and thereby the loss of income to SenlangBio from this business.

in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the

profitability of our business.

The PRC’s economy is in a transition from a

planned economy to a market-oriented economy subject to five-year and annual plans adopted by the government that set national economic

development goals.

Policies of the PRC government can have significant effects on the economic conditions within the PRC.

no assurance that the PRC government will continue to support a market orientated economy.

A change in policies by the PRC government

could adversely affect our interests by, among other factors:

changes in laws, regulations or the interpretation thereof, confiscatory

taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of private enterprises.

Although the PRC government has been pursuing economic reform policies for more than two decades, there is no assurance that the government

will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership,

social or political disruption, or other circumstances affecting the PRC’s political, economic and social environment.

Foreign Investment Security Review Measures, investments in military, national defense-related areas or in locations in proximity to

military facilities, or investments that would result in acquiring the actual control of assets in certain key sectors, such as critical

agricultural products, energy and resources, equipment manufacturing, infrastructure, transport, cultural products and services, IT,

Internet products and services, financial services and technology sectors, are required to be approved by designated governmental authorities

Since SenlangBio’s main business is conducting R&D and clinical transformation of immunotherapy cell therapy, Avalon

cannot rule out the possibility that investment in SenlangBio may be regarded as “investment in technology sectors,” which

would require approval from governmental authorities.

Moreover, because the term “investment through other means” is not

clearly defined under the Foreign Investment Security Review Measures, Avalon cannot rule out the possibility that control through contractual

arrangement may be regarded as a form of actual control and therefore require approval from the competent governmental authority.

filing or change of the medical institution practice license of SenlangBio Clinical Laboratory may be affected by the VIE Structure.

SenlangBio Clinical Laboratory is a medical institution under the PRC laws, its operation is subject to the PRC regulation of foreign

investment in medical institution, which provides that a foreign investor can acquire 70% (to the highest extent) of the equity interests

in a PRC medical institution.

The relevant PRC laws also provide that the related government authority shall not approve any application

of licenses/permits if the application is related to a company failing to comply with PRC foreign investment regulation.

Therefore, if

the competent PRC authority responsible for the registration of the medical institution practice license of SenlangBio Clinical Laboratory

adopts a broad understanding of foreign investment rules that controlling via agreements can be deemed as a way of investment, the authority

may disapprove SenlangBio Clinical Laboratory’s application in relation to its medical institution practice license, including

any extension of such license.

In the worst case, theoretically, the competent authorities may deem the VIE Agreements unenforceable

because they are in violation of the PRC laws.

In that event, SenlangBio Clinical Laboratory would not be qualified to conduct any 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, which would result in the loss of the license and thereby the loss of income to SenlangBio

from this business.

may be difficult for overseas shareholders and/or regulators to conduct investigation or collect evidence within China.

claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality

The SEC, U.S.

Department of Justice, PCAOB and other authorities often have substantial difficulties in bringing and enforcing

actions against non-U.S.

companies and non-U.S.

persons, including company directors and officers, in China.

For example, in China, there

are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside

Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities

of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory

authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism.

Furthermore, according

to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed

to directly conduct investigation or evidence collection activities within the territory of the PRC without first receiving approval

from the China Securities Regulatory Commission, or the CSRC.

While detailed interpretation of or implementation rules under Article

177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection

activities within China may further increase difficulties faced by Avalon’s stockholders in protecting their interests.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors