Change Agents Corporation. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2022 and 2021 should be read in conjunction with our condensed consolidated financial statements and related notes to those condensed consolidated financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Special Note Regarding Forward-Looking Statements and Business sections in our Form 10-K as filed with the Securities and Exchange Commission on March 30, 2022. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Impact of COVID-19 on Our Operations, Financial Condition, Liquidity and Results of Operations Although the COVID-19 vaccines have generally been introduced to the public, the ultimate impact of the COVID-19 pandemic on our operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, a significant increase in new and variant strains of COVID-19 cases, availability and effectiveness of COVID-19 vaccines and therapeutics, the level of acceptance of the vaccine by the general population and any additional preventative and protective actions that governments, or us, may determine are needed. The occurrence of COVID-19 pandemic had negative impact on our operations. Some of the universities and laboratories with which we collaborate were temporarily closed. Our general development operations have continued during the COVID-19 pandemic and we have not had significant disruption. However, we are uncertain if the COVID-19 pandemic will impact future operations at our laboratory, or our ability to collaborate with other laboratories and universities. In addition, we are unsure if the COVID-19 pandemic will impact future clinical trials. Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related financial effect cannot be reasonably estimated at this time but is expected to adversely impact the Company’s business for the rest of 2022. We have limited cash available to fund planned operations and although we have other sources of capital described below under “Liquidity and Capital Resources,” management continues to pursue various financing alternatives to fund our operations so we can continue as a going concern. However, the COVID-19 pandemic has created significant economic uncertainty and volatility in the credit and capital markets. Management plans to secure the necessary financing through the issue of new equity and/or the entering into of strategic partnership arrangements but the ultimate impact of the COVID-19 pandemic on our ability to raise additional capital is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak and new information which may emerge concerning the severity of the COVID-19 pandemic. We may not be able to raise sufficient additional capital and may tailor our operations based on the amount of funding we are able to raise in the future. Nevertheless, there is no assurance that these initiatives will be successful. Further, there is no assurance that capital available to us in any future financing will be on acceptable terms. Overview The Company is a clinical-stage, vertically integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative, transformative immune effector cell therapy, exosome technology, as well as cell therapy related companion diagnostics. The Company also provides strategic advisory and outsourcing services to facilitate and enhance its clients’ growth and development, as well as competitiveness in healthcare and CellTech industry markets. Through its subsidiary structure with unique integration of verticals from innovative R&D to automated bioproduction and accelerated clinical development, the Company is establishing a leading role in the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEX™), and regenerative therapeutics. 29 Avalon achieves and fosters seamless integration of unique verticals to bridge and accelerate innovative research, bio-process development, clinical programs and product commercialization. Avalon’s upstream innovative research includes : ● Development of Avalon Clinical-grade Tissue-specific Exosome (“ACTEX™”); ● Novel therapeutic and diagnostic targets development utilizing QTY-code protein design technology with Massachusetts Institute of Technology (MIT) including using the QTY code protein design technology for development of a hemofiltration device to treat Cytokine Storm; ● Co-development of next generation, mRNA-based immune effector cell therapeutic modalities with Arbele Limited. Avalon’s midstream bio-processing and bio-production facility is co-developed at the University of Pittsburgh Medical Center (UPMC) with state-of-the-art infrastructure and standardization accredited with cGMP, FACT, aaBB, CLIA and CAP, as well as stringent QC/QA facility for standardized bio-manufacturing of clinical-grade cellular products involved in our clinical programs in immune effector cell therapy and ACTEX-based regenerative therapeutics. Avalon’s downstream medical team and facility consists of top-rated affiliated hospital network and experts specialized in hematology, oncology, cellular immunotherapy, hematopoietic stem/progenitor cell transplant, as well as regenerative therapeutics. Our major clinical programs include: ● AVA-001: Avalon has initiated its first-in-human clinical trial of CD19 CAR-T candidate, AVA-001 in August 2019 at the Hebei Yanda Lu Daopei Hospital and Beijing Lu Daopei Hospital in China (the world’s single largest CAR-T treatment network with over 1,200 patients being treated with CAR-T) for the indication of relapsed/refractory B-cell acute lymphoblastic leukemia and non-Hodgkin Lymphoma). The AVA-001 candidate (co-developed with China Immunotech Co. Ltd) is characterized by the utilization of 4-1BB (CD137) co-stimulatory signaling pathway, conferring a strong anti-cancer activity during pre-clinical study. It also features a shorter bio-manufacturing time which leads to the advantage of prompt treatment to patients where timing is important related hematologic malignancies. Avalon has successfully completed the first-in-human clinical trial of its AVA-001 anti-CD19 CAR-T cell therapy as a bridge to allogeneic bone marrow transplantation for patients with relapsed/refractory B-cell acute lymphoblastic leukemia at the Lu Daopei Hospital (registered clinical trial number NCT03952923) with excellent efficacy (90% complete remission rate) and minimal adverse side effects. Avalon is currently expanding the patient recruitment and indication for AVA-001 to include relapsed/refractory non-Hodgkin lymphoma patients. ● AVA-011 and FLASH-CAR™: The Company advanced its next generation immune cell therapy using RNA-based, non-viral FLASH-CAR™ technology co-developed with the Company’s strategic partner Arbele Limited. The multiplex FLASH-CAR™ platform can be used to create personalized (“autologous’) cell therapy from a patient’s own cells, as well as “off-the-shelf” cell therapy from a universal donor. Our leading candidate, AVA-011, is a dual-target (anti-CD19/CD22) CAR-T which has completed pre-clinical research stage, and currently at IND-enabling process development stage at UPMC (Dr. Yen-Michael Hsu as Principal Investigator) to generate clinical-grade cell-therapy products for subsequent clinical studies. ● ACTEX™: Stem cell-derived Avalon Clinical-grade Tissue-specific Exosomes (ACTEX™) is one of the core technology platforms that has been co-developed by Avalon GloboCare and the University of Pittsburgh Medical Center. The Company formed a strategic partnership with HydroPeptide, LLC, a leading epigenetics skin care company, to engage in co-development and commercialization of a series of clinical-grade, exosome-based cosmeceutical and orthopedic products. As part of this agreement, the Company signed a three-way Material Transfer Agreement between Avalon GloboCare, HydroPeptide and the University of Pittsburgh Medical Center. ● AVA-Trap™: Avalon’s AVA-Trap™ therapeutic program plans to enter animal model testing followed by expedited clinical studies with the goal of providing an effective therapeutic option to combat COVID-19 and other life-threatening conditions involving cytokine storms. The Company initiated a sponsored research and co-development project with Massachusetts Institute of Technology (MIT) led by Professor Shuguang Zhang as Principal Investigator in May 2019. Using the unique QTY code protein design platform, six water-soluble variant cytokine receptors have been successfully designed and tested to show binding affinity to the respective cytokines. 30 Going Concern The Company is a clinical-stage, vertically integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative, transformative immune effector cell therapy, exosome technology, as well as cell therapy related companion diagnostics. The Company also provides strategic advisory and outsourcing services to facilitate and enhance its clients’ growth and development, as well as competitiveness in healthcare and CellTech industry markets. Through its subsidiary structure with unique integration of verticals from innovative R&D to automated bioproduction and accelerated clinical development, the Company is establishing a leading role in the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEX™), and regenerative therapeutics. In addition, the Company owns commercial real estate that houses its headquarters in Freehold, New Jersey and provides outsourced and customized international healthcare services to the rapidly changing health care industry primarily focused in the People’s Republic of China. These condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, the Company has incurred recurring net losses and generated negative cash flow from operating activities of $9,513,166 and $5,072,932 for the nine months ended September 30, 2022, respectively. The Company has a limited operating history and its continued growth is dependent upon the continuation of providing medical related consulting services to its only few clients who are related parties and generating rental revenue from its income-producing real estate property in New Jersey; hence generating revenues, and obtaining additional financing to fund future obligations and pay liabilities arising from normal business operations. In addition, the current cash balance cannot be projected to cover the operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital, implement its business plan, and generate significant revenues. There are no assurances that the Company will be successful in its efforts to generate significant revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. The Company plans on raising capital through the sale of equity to implement its business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to the Company on satisfactory terms and conditions, if any. The occurrence of an uncontrollable event such as the COVID-19 pandemic had negatively impact on the Company’s operations. Our general development operations have continued during the COVID-19 pandemic and we have not had significant disruption. However, we are uncertain if the COVID-19 pandemic will impact future operations at our laboratory, or our ability to collaborate with other laboratories and universities. In addition, we are unsure if the COVID-19 pandemic will impact future clinical trials. Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related financial effect cannot be reasonably estimated at this time but is expected to adversely impact the Company’s business for the rest of 2022. The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. Critical Accounting Policies Use of Estimates Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to the useful life of property and equipment and investment in real estate, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances, and valuation of stock-based compensation, and assumptions used to determine fair value of warrants and embedded conversion features of convertible note payable. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. 31 Revenue Recognition We recognize revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle: ● Step 1: Identify the contract with the customer ● Step 2: Identify the performance obligations in the contract ● Step 3: Determine the transaction price ● Step 4: Allocate the transaction price to the performance obligations in the contract ● Step 5: Recognize revenue when the company satisfies a performance obligation In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised goods or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” goods or service (or bundle of goods or services) if both of the following criteria are met: ● The customer can benefit from the goods or service either on its own or together with other resources that are readily available to the customer (i.e., the goods or service is capable of being distinct). ● The entity’s promise to transfer the goods or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the goods or service is distinct within the context of the contract). If a goods or service is not distinct, the goods or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate. The Company’s revenues are derived from providing medial related consulting services for its’ related parties. Revenues related to its service offerings are recognized at a point in time when service is rendered. Any payments received in advance of the performance of services are recorded as deferred revenue until such time as the services are performed. We have determined that the ASC 606 does not apply to rental contracts, which are within the scope of other revenue recognition accounting standards. Rental income from operating leases is recognized on a straight-line basis under the guidance of ASC 842. Lease payments under tenant leases are recognized on a straight-line basis over the term of the related leases. The cumulative difference between lease revenue recognized under the straight-line method and contractual lease payments are included in rent receivable on the condensed consolidated balance sheets. We do not offer promotional payments, customer coupons, rebates or other cash redemption offers to our customers. 32 Income Taxes We are governed by the income tax laws of China and the United States. Income taxes are accounted for pursuant to ASC 740 “Accounting for Income Taxes,” which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge for taxes is based on the results for the period as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is changed to equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis. Recent Accounting Standards For details of applicable new accounting standards, please, refer to Recent Accounting Standards in Note 3 of our condensed consolidated financial statements accompanying this report. RESULTS OF OPERATIONS Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 Revenues For the three months ended September 30, 2022, we had real property rental revenue of $317,390, as compared to $355,459 for the three months ended September 30, 2021, a decrease of $38,069, or 10.7%. For the nine months ended September 30, 2022, we had real property rental revenue of $905,842, as compared to $925,465 for the nine months ended September 30, 2021, a decrease of $19,623, or 2.1%. The decrease was primarily attributable to one tenant moved out in 2022. We expect that our revenue from real property rent will remain in its current quarterly level with minimal increase in the near future. For the three and nine months ended September 30, 2022, we did not have any medical related consulting services revenue since there was no demand for our consulting service from our related parties and there was no order for our medical related consulting services from third party in these periods. For the three and nine months ended September 30, 2021, we had medical related consulting services revenue from related party of $131,305. Currently, we are negotiating with our potential customers and expect to enter consulting services agreement in the near future. Costs and Expenses Real property operating expenses consist of property management fees, property insurance, real estate taxes, depreciation, repairs and maintenance fees, utilities and other expenses related to our rental properties. For the three months ended September 30, 2022, our real property operating expenses amounted to $247,152, as compared to $215,622 for the three months ended September 30, 2021, an increase of $31,530, or 14.6%. The increase was mainly due to an increase in building cleaning fees of approximately $5,000, an increase in property management fees of approximately $9,000, an increase in repairs and maintenance fees of approximately $5,000, an increase in utilities of approximately $9,000, and an increase in other miscellaneous items of approximately $4,000. For the nine months ended September 30, 2022, our real property operating expenses amounted to $677,303, as compared to $637,663 for the nine months ended September 30, 2021, an increase of $39,640, or 6.2%. The increase was mainly due to an increase in building cleaning fees of approximately $11,000, an increase in property management fees of approximately $12,000, an increase in air conditioner maintenance fee of approximately $6,000, an increase in utilities of approximately $4,000, and an increase in other miscellaneous items of approximately $7,000. 33 Costs of medical related consulting services include the cost of labor and related benefits, travel expenses related to medical related consulting services, and other overhead costs. There were no comparative revenue and related costs of revenue from our medical related consulting services for the three and nine months ended September 30, 2022 since there was no demand for our consulting service from our related parties and there was no order for our medical related consulting services from third party in these periods. For the three and nine months ended September 30, 2021, costs of medical related consulting services amounted to $102,442. Real Property Operating Income Our real property operating income for the three months ended September 30, 2022 was $70,238, representing a decrease of $69,599, or 49.8%, as compared to $139,837 for the three months ended September 30, 2021. Our real property operating income for the nine months ended September 30, 2022 was $228,539, representing a decrease of $59,263, or 20.6%, as compared to $287,802 for the nine months ended September 30, 2021. The decrease was attributable to a decrease in real property rental revenue and an increase in real property operating expenses as described above. We expect our real property operating income will remain in its current quarterly level with minimal increase in the near future. Gross Profit from Medical Related Consulting Services and Gross Margin We did not generate any gross profit from medical related consulting services in the three and nine months ended September 30, 2022. Our gross profit from medical related consulting services for the three and nine months ended September 30, 2021 was $28,863, with a gross margin of 22.0%. Other Operating Expenses For the three and nine months ended September 30, 2022 and 2021, other operating expenses consisted of the following: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Advertising and marketing expenses $ 150,620 $ 27,833 $ 807,821 $ 44,156 Professional fees 628,807 1,221,952 1,886,562 3,960,209 Compensation and related benefits 488,373 434,602 1,514,959 1,544,437 Research and development 170,406 224,072 541,566 676,053 Litigation settlement - - 1,350,000 - Directors and officers liability insurance premium 103,787 101,499 310,955 263,781 Travel and entertainment 40,662 48,646 120,224 120,865 Rent and related utilities 18,938 18,487 59,150 59,775 Other general and administrative 57,744 56,580 196,914 218,228 $ 1,659,337 $ 2,133,671 $ 6,788,151 $ 6,887,504 ● For the three months ended September 30, 2022, advertising and marketing expenses increased by $122,787 or 441.2% as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, advertising and marketing expenses increased by $763,665 or 1,729.5% as compared to the nine months ended September 30, 2021. The increase was primarily due to increased advertising activities. We expect that our advertising expenses will remain in its current quarterly level with minimal increase in the near future. ● Professional fees primarily consisted of accounting fees, audit fees, legal service fees, consulting fees, investor relations service charges, valuation service fees and other fees. For the three months ended September 30, 2022, professional fees decreased by $593,145, or 48.5%, as compared to the three months ended September 30, 2021, which was primarily attributable to a decrease in consulting fees of approximately $433,000 mainly due to the decrease in use of consulting service providers, a decrease in legal service fees of approximately $127,000 mainly due to the decrease in use of legal service providers related to Sen Lang BVI acquisition which was terminated on January 1, 2022, and a decrease in in other miscellaneous items of approximately $33,000. For the nine months ended September 30, 2022, professional fees decreased by $2,073,647, or 52.4%, as compared to the nine months ended September 30, 2021, which was primarily attributable to a decrease in consulting fees of approximately $1,319,000 mainly due to the decrease in use of consulting service providers, a decrease in legal service fees of approximately $619,000 mainly due to the decrease in use of legal service providers related to Sen Lang BVI acquisition which was terminated on January 1, 2022, and a decrease in one time valuation service fees of $180,000, offset by an increase in other miscellaneous items of approximately $45,000. We expect that our professional fees will remain in its current quarterly level with minimal increase in the near future. 34 ● For the three months ended September 30, 2022, compensation and related benefits increased by $53,771, or 12.4%, as compared to the three months ended September 30, 2021, which was primarily attributable to the increase in management’s compensation and related benefits of approximately $54,000. For the nine months ended September 30, 2022, compensation and related benefits decreased by $29,478, or 1.9%, as compared to the nine months ended September 30, 2021, which was primarily attributable to a decrease in management’s compensation and related benefits of approximately $29,000. We expect that our compensation and related benefits will remain in its current quarterly level with minimal increase in the near future. ● For the three months ended September 30, 2022, research and development expenses decreased by $53,666, or 24.0%, as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, research and development expenses decreased by $134,487, or 19.9%, as compared to the nine months ended September 30, 2021. The decrease was mainly attributable to we decreased research and development projects in 2022 periods. We expect that our research and development expenses will remain in its current quarterly level with minimal decrease in the near future. ● For both the three months ended September 30, 2022 and 2021, we did not have any litigation settlement. For the nine months ended September 30, 2022, litigation settlement increased by $1,350,000, or 100.0%, as compared to the nine months ended September 30, 2021. The increase was due to a settlement signed in June 2022. ● For the three months ended September 30, 2022, Directors and Officers Liability Insurance premium increased by $2,288, or 2.3%, as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, Directors and Officers Liability Insurance premium increased by $47,174, or 17.9%, as compared to the nine months ended September 30, 2021. The increase was mainly due to different insurance provider with different premium. ● For the three months ended September 30, 2022, travel and entertainment expense decreased by $7,984, or 16.4%, as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, travel and entertainment expense decreased by $641, or 0.5%, as compared to the nine months ended September 30, 2021. The decrease was mainly due to decreased business travel activities in 2022 periods. ● For the three months ended September 30, 2022, rent and related utilities expenses increased by $451, or 2.4%, as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, rent and related utilities expenses decreased by $625, or 1.0%, as compared to the nine months ended September 30, 2021. ● Other general and administrative expenses mainly consisted of NASDAQ listing fee, office supplies, and other miscellaneous items. For the three months ended September 30, 2022, other general and administrative expenses increased by $1,164, or 2.1%, as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, other general and administrative expenses decreased by $21,314, or 9.8%, as compared to the nine months ended September 30, 2021. The decrease was mainly due to our efforts at stricter controls on corporate expenditure. Loss from Operations As a result of the foregoing, for the three months ended September 30, 2022, loss from operations amounted to $1,589,099, as compared to $1,964,971 for the three months ended September 30, 2021, a decrease of $375,872 or 19.1%. As a result of the foregoing, for the nine months ended September 30, 2022, loss from operations amounted to $6,559,612, as compared to $6,570,839 for the nine months ended September 30, 2021, a decrease of $11,227 or 0.2%. 35 Other (Expense) Income Other (expense) income mainly includes third party and related party interest expense, conversion inducement expense, loss from equity method investment, change in fair value of derivative liability, and other miscellaneous income. Other expense, net, totaled $3,825,055 for the three months ended September 30, 2022, as compared to $59,248 for the three months ended September 30, 2021, an increase of $3,765,807, or 6,356.0%, which was primarily attributable to an increase in third party interest expense of approximately $3,295,000 mainly driven by the amortization of convertible debt discount upon conversion of approximately $3,226,000 and the increased interest expense of approximately $69,000 from third party debts in the third quarter of 2022, an increase in conversion inducement expense of approximately $344,000 resulted from the reduction in the conversion price, an increase in loss from change in fair value of derivative liability of approximately $169,000, and a decrease in other miscellaneous income of approximately $5,000, offset by a decrease in interest expense – related party of approximately $42,000 due to the decrease in outstanding borrowing in the third quarter of 2022, and a decrease in loss from equity method investment of approximately $5,000. Other expense, net, totaled $2,953,554 for the nine months ended September 30, 2022, as compared to $185,408 for the nine months ended September 30, 2021, an increase of $2,768,146, or 1,493.0%, which was primarily attributable to an increase in third party interest expense of approximately $3,357,000 mainly driven by the amortization of convertible debt discount of approximately $3,281,000 and the increased interest expense of approximately $76,000 from third party debts in the nine months ended September 30, 2022, and an increase in conversion inducement expense of approximately $344,000 resulted from the reduction in the conversion price, offset by an increase in gain from change in fair value of derivative liability of approximately $601,000, an increase in other miscellaneous income of approximately $256,000, mainly driven by reagent sale in the nine months ended September 30, 2022, a decrease in interest expense – related party of approximately $62,000 due to the decrease in outstanding borrowing in the nine months ended September 30, 2022, and a decrease in loss from equity method investment of approximately $14,000. Income Taxes We did not have any income taxes expense for the three months ended September 30, 2022 and 2021 since we incurred losses in these periods. We did not have any income taxes expense for the nine months ended September 30, 2022 and 2021 since we incurred losses in these periods. Net Loss As a result of the factors described above, our net loss was $5,414,154 for the three months ended September 30, 2022, as compared to $2,024,219 for the three months ended September 30, 2021, an increase of $3,389,935 or 167.5%. As a result of the factors described above, our net loss was $9,513,166 for the nine months ended September 30, 2022, as compared to $6,756,247 for the nine months ended September 30, 2021, an increase of $2,756,919 or 40.8%. Net Loss Attributable to Avalon GloboCare Corp. Common Shareholders The net loss attributable to Avalon GloboCare Corp. common shareholders was $5,414,154 or $0.06 per share (basic and diluted) for the three months ended September 30, 2022, as compared with $2,024,219, or $0.02 per share (basic and diluted) for the three months ended September 30, 2021, an increase of $3,389,935 or 167.5%. The net loss attributable to Avalon GloboCare Corp. common shareholders was $9,513,166 or $0.10 per share (basic and diluted) for the nine months ended September 30, 2022, as compared with $6,756,247, or $0.08 per share (basic and diluted) for the nine months ended September 30, 2021, an increase of $2,756,919 or 40.8%. Foreign Currency Translation Adjustment Our reporting currency is the U.S. dollar. The functional currency of our parent company, AHS, Avalon RT 9, Genexosome, Avactis, and Exosome, is the U.S. dollar and the functional currency of Avalon Shanghai is the Chinese Renminbi (“RMB”). The financial statement of our subsidiary whose functional currency is the RMB are translated to U.S. dollars using period end rate of exchange for assets and liabilities, average rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rate for equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $37,033 and a foreign currency translation gain of $1,285 for the three months ended September 30, 2022 and 2021, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $78,515 and a foreign currency translation gain of $13,349 for the nine months ended September 30, 2022 and 2021, respectively. This non-cash loss/gain had the effect of increasing/decreasing our reported comprehensive loss. 36 Comprehensive Loss As a result of our foreign currency translation adjustment, we had comprehensive loss of $5,451,187 and $2,022,934 for the three months ended September 30, 2022 and 2021, respectively. As a result of our foreign currency translation adjustment, we had comprehensive loss of $9,591,681 and $6,742,898 for the nine months ended September 30, 2022 and 2021, respectively. Liquidity and Capital Resources The Company has a limited operating history and its continued growth is dependent upon the continuation of providing medical related consulting services to its only few clients who are related parties and generating rental revenue from its income-producing real estate property in New Jersey; hence generating revenues, and obtaining additional financing to fund future obligations and pay liabilities arising from normal business operations. In addition, the current cash balance cannot be projected to cover the operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital, implement its business plan, and generate significant revenues. There are no assurances that the Company will be successful in its efforts to generate significant revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. The Company plans on raising capital through the sale of equity to implement its business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to the Company on satisfactory terms and conditions, if any. The occurrence of an uncontrollable event such as the COVID-19 pandemic is likely to negatively affect the Company’s operations. Efforts to contain the spread of the coronavirus have intensified, including social distancing, travel bans and quarantine, and these are likely to negatively impact our tenants, employees and consultants. These, in turn, will not only impact our operations, financial condition and demand for our medical related consulting services but our overall ability to react timely to mitigate the impact of this event. Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related financial effect cannot be reasonably estimated at this time but is expected to adversely impact our business for the rest of 2022. Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At September 30, 2022 and December 31, 2021, we had cash balance of approximately $3,938,000 and $808,000, respectively. These funds are kept in financial institutions located as follows: Country: September 30, 2022 December 31, 2021 United States $ 3,578,273 90.9 % $ 767,605 95.1 % China 359,686 9.1 % 39,933 4.9 % Total cash $ 3,937,959 100.0 % $ 807,538 100.0 % Under applicable PRC regulations, foreign invested enterprises, or FIEs, in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign invested enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the cumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends. In addition, a portion of our businesses and assets are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the ability of our PRC subsidiary to transfer its net assets to the Parent Company through loans, advances or cash dividends. The current PRC Enterprise Income Tax (“EIT”) Law and its implementing rules generally provide that a 10% withholding tax applies to China-sourced income derived by non-resident enterprises for PRC enterprise income tax purposes unless the jurisdiction of incorporation of such enterprises’ shareholder has a tax treaty with China that provides for a different withholding arrangement. The following table sets forth a summary of changes in our working capital from December 31, 2021 to September 30, 2022: September 30, December 31, Changes in 2022 2021 Amount Percentage Working capital (deficit): Total current assets $ 4,449,401 $ 1,323,042 $ 3,126,359 236.3 % Total current liabilities 3,327,985 4,401,658 (1,073,673 ) (24.4 )% Working capital (deficit) $ 1,121,416 $ (3,078,616 ) $ 4,200,032 (136.4 )% 37 Our working capital increased by $4,200,032 to $1,121,416 at September 30, 2022 from working capital deficit of $3,078,616 at December 31, 2021. The increase in working capital was primarily attributable to an significant increase in cash of approximately $3,130,000 mainly due to the issuance of convertible debt and balloon promissory note, a decrease in accrued professional fees of approximately $647,000 which was mainly due to payments made to our professional service providers in the nine months ended September 30, 2022, a decrease in accrued research and development fees of approximately $220,000 resulting from payments made to research and development service providers in the nine months ended September 30, 2022, a decrease in accrued liabilities and other payables – related parties of approximately $368,000 which was mainly attributable to the accrued and unpaid related party interest was settled in shares in the nine months ended September 30, 2022, a decrease in operating lease obligation of approximately $107,000, a decrease in note payable – related party of $390,000 due to repayment made to this related party in the nine months ended September 30, 2022, offset by an increase in accrued settlement of lawsuit of $450,000 due to a settlement signed in June 2022. Because the exchange rate conversion is different for the condensed consolidated balance sheets and the condensed consolidated statements of cash flows, the changes in assets and liabilities reflected on the condensed consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the condensed consolidated balance sheets. Cash Flows for the Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021 The following summarizes the key components of our cash flows for the nine months ended September 30, 2022 and 2021: Nine Months Ended September 30, 2022 2021 Net cash used in operating activities $ (5,072,932 ) $ (3,307,520 ) Net cash used in investing activities (54,743 ) (67,960 ) Net cash provided by financing activities 8,263,989 3,178,336 Effect of exchange rate on cash (5,893 ) 2,818 Net increase (decrease) in cash $ 3,130,421 $ (194,326 ) Net cash flow used in operating activities for the nine months ended September 30, 2022 was $5,072,932, which primarily reflected our consolidated net loss of approximately $9,513,000, and the non-cash item adjustment consisting of change in fair market value of derivative liability of approximately $601,000, and the changes in operating assets and liabilities, primarily consisting of an increase in other assets of approximately $66,000, a decrease in operating lease obligation of approximately $108,000, offset by an increase in accounts payable of approximately $87,000, an increase in accrued liabilities and other payables of approximately $63,000, an increase in accrued liabilities and other payables – related parties of approximately $80,000, and the non-cash items adjustment primarily consisting of depreciation of approximately $251,000, amortization of right-of-use asset of approximately $102,000, stock-based compensation and service expense of approximately $983,000, amortization of debt discount of approximately $3,281,000 mainly resulting from the conversion of convertible debt in July 2022, and conversion inducement expense of approximately $344,000 resulted from the reduction in the conversion price. Net cash flow used in operating activities for the nine months ended September 30, 2021 was $3,307,520, which primarily reflected our consolidated net loss of approximately $6,756,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in operating lease obligation of approximately $87,000, offset by an increase accrued liabilities and other payables of approximately $1,436,000, which was mainly attributable the increase in accrued professional fees of approximately $994,000 due to increased professional service providers, the increase in accrued research and development fees of approximately $227,000, and the increase in accrued payroll liability and directors’ compensation of approximately $147,000, and an increase in accrued liabilities and other payables – related parties of approximately $142,000 resulting from the increase in accrued interest for related party borrowings, and the non-cash items adjustment primarily consisting of depreciation of approximately $227,000, amortization of right-of-use asset of approximately $93,000, and stock-based compensation and service expense of approximately $1,621,000. We expect our cash used in operating activities to increase due to the following: ● the development and commercialization of new products; ● an increase in professional staff and services; and ● an increase in public relations and/or sales promotions for existing and/or new brands as we expand within existing markets or enter new markets. Net cash flow used in investing activities was $54,743 for the nine months ended September 30, 2022 as compared to $67,960 for the nine months ended September 30, 2021. During the nine months ended September 30, 2022, we made payments for purchase of property and equipment of approximately $2,000 and made additional investment in equity method investment of approximately $53,000. During the nine months ended September 30, 2021, we made payments for purchase of property and equipment of approximately $17,000 and for improvement of commercial real estate of approximately $10,000, and made additional investment in equity method investment of approximately $40,000 . 38 Net cash flow provided by financing activities was $8,263,989 for the nine months ended September 30, 2022 as compared to $3,178,336 for the nine months ended September 30, 2021. During the nine months ended September 30, 2022, we received proceeds from related party borrowings of $100,000, and proceeds from issuance of convertible debt and warrants of approximately $3,719,000, and net proceeds from issuance of balloon promissory note of $4,534,000 (net of cash paid for debt issuance costs of approximately $266,000), and net proceeds from equity offering of approximately $712,000 (net of cash paid for commission and other offering costs of approximately $24,000) to fund our working capital needs, offset by repayments made for note payable – related party of $390,000 and repayments made for loan payable – related party of $410,000. During the nine months ended September 30, 2021, we received proceeds from related party borrowings of approximately $763,000 and net proceeds from equity offering of approximately $2,415,000 (net of cash paid for commission and other offering costs of approximately $104,000). Our capital requirements for the next twelve months primarily relate to working capital requirements, including salaries, fees related to third parties’ professional services, reduction of accrued liabilities, mergers, acquisitions and the development of business opportunities. These uses of cash will depend on numerous factors including our sales and other revenues, and our ability to control costs. All funds received have been expended in the furtherance of growing the business. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term: ● an increase in working capital requirements to finance our current business, including ongoing research and development programs, clinical studies, as well as commercial strategies; ● the use of capital for mergers, acquisitions and the development of business opportunities; ● addition of administrative personnel as the business grows; and ● the cost of being a public company. In the third quarter of 2019, we had secured a $20 million credit facility (Line of Credit) provided by our Chairman, Wenzhao Lu. The unsecured credit facility bears interest at a rate of 5% and provides for maturity on drawn loans 36 months after funding. As of September 30, 2022, the total principal amount outstanding under the Credit Line was $0 and we have approximately $14.1 million remaining available under the Line Credit. On December 13, 2019, we entered into an Open Market Sale Agreement SM (the “Sales Agreement”) with Jefferies LLC, as sales agent (“Jefferies”), pursuant to which we may offer and sell, from time to time, through Jefferies, shares of our common stock, par value $0.0001 per share, having an aggregate offering price of up to $20.0 million. On April 6, 2020, the date on which we filed our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, our registration statement became subject to the offering limits set forth in General Instruction I.B.6 of Form S-3. As of April 6, 2020, the aggregate market value of our outstanding common stock held by non-affiliates, or public float, was $39,564,237, based on 23,691,160 shares of our outstanding common stock that were held by non-affiliates on such date and a price of $1.67 per share, which was the price at which our common stock was last sold on The Nasdaq Capital Market on February 19, 2020 (a date within 60 days of the date hereof), calculated in accordance with General Instruction I.B.6 of Form S-3. We have not offered any securities pursuant to General Instruction I.B.6 of Form S-3 in the 12 calendar months preceding the date of this prospectus supplement. We filed a prospectus supplement to amend and supplement the information in our prospectus and original prospectus supplement based on the amount of securities that we are eligible to sell under General Instruction I.B.6 of Form S-3. After giving effect to the $13,000,000 offering limit imposed by General Instruction I.B.6 of Form S-3, we may offer and sell additional shares of our common stock having an aggregate offering price of up to $13,000,000 from time to time through Jefferies acting as our sales agent in accordance with the terms of the sales agreement. As of September 30, 2022, we sold a total of 6,429,486 shares of our common stock through Jefferies with an aggregate offering price of $10,073,707 and we have approximately $4.9 million offering price remaining available under the Sales Agreement. We estimate that based on current plans and assumptions, that our available cash will be insufficient to satisfy our cash requirements under our present operating expectations through cash available under our Credit Line and sales of equity through our Sales Agreement. Other than funds received from the sale of our equity and advances from our related party, and cash resource generating from our operations, we presently have no other significant alternative source of working capital. We have used these funds to fund our operating expenses, pay our obligations and grow our company. We will need to raise significant additional capital to fund our operations and to provide working capital for our ongoing operations and obligations. Therefore, our future operation is dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will be required to cease our operations. To date, we have not considered this alternative, nor do we view it as a likely occurrence. 39 Contractual Obligations and Off-Balance Sheet Arrangements Contractual Obligations We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of September 30, 2022, and the effect these obligations are expected to have on our liquidity and cash flows in future periods. Payments Due by Period Contractual obligations: Total Less than 1 year 1-3 years 3-5 years 5 + years Operating lease commitment $ 47,560 $ 47,560 $ - $ - $ - Acquisition consideration 100,000 100,000 - - - Litigation settlement 900,000 450,000 450,000 - - Balloon promissory note (principal) 4,800,000 - - 4,800,000 - Epicon equity investment obligation 687,184 229,061 458,123 - - Avactis joint venture commitment 10,702,642 - 5,702,642 5,000,000 - Total $ 17,237,386 $ 826,621 $ 6,610,765 $ 9,800,000 $ - Off-balance Sheet Arrangements We presently do not have off-balance sheet arrangements. Foreign Currency Exchange Rate Risk A portion of our operations are in China. Thus, a portion of our revenues and operating results may be impacted by exchange rate fluctuations between RMB and US dollars. For the three months ended September 30, 2022 and 2021, we had an unrealized foreign currency translation loss of approximately $37,000 and an unrealized foreign currency translation gain of approximately $1,000, respectively, because of changes in the exchange rate. For the nine months ended September 30, 2022 and 2021, we had an unrealized foreign currency translation loss of approximately $79,000 and an unrealized foreign currency translation gain of approximately $13,000, respectively, because of changes in the exchange rate. Inflation The effect of inflation on our revenue and operating results was not significant. 40 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item .