Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations for the years ended December 31, 2022 and 2021 should be read in conjunction with our consolidated
financial statements and related notes to those consolidated financial statements that are included elsewhere in this report. Certain
information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Special Note Regarding Forward-looking Statements
All statements other than statements of historical
fact included in this Form 10-K including, without limitation, statements under “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” regarding our financial position, business strategy and the plans and objectives of management
for future operations, are forward-looking statements. When used in this Form 10-K, words such as “anticipate,” “believe,”
“estimate,” “expect,” “intend” and similar expressions, as they relate to us or our management, identify
forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and
information currently available to, our management. Actual results could differ materially from those contemplated by the forward-looking
statements as a result of a number of factors, including those set forth under the risk factors and business sections in this Form 10-K.
Impact of COVID-19 on Our Operations, Financial
Condition, Liquidity and Results of Operations
Although the COVID-19 vaccines have generally
been introduced to the public, the ultimate impact of the COVID-19 pandemic on our operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which
may emerge concerning the severity of the COVID-19 pandemic, a significant increase in new and variant strains of COVID-19 cases, availability
and effectiveness of COVID-19 vaccines and therapeutics, the level of acceptance of the vaccine by the general population and any additional
preventative and protective actions that governments, or us, may determine are needed.
51
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.
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 biotechnology
company dedicated to developing and delivering innovative, transformative cellular therapeutics, precision diagnostics, and clinical laboratory
services. The Company also provides strategic advisory and outsourcing services to facilitate and enhance its clients’ growth and
development, as well as competitiveness in healthcare and CellTech industry markets. Through its subsidiary structure with unique integration
of verticals from innovative research and development 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.
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.
52
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.
Going Concern
The Company is a clinical-stage biotechnology
company dedicated to developing and delivering innovative, transformative cellular therapeutics, precision diagnostics, and clinical laboratory
services. The Company also provides strategic advisory and outsourcing services to facilitate and enhance its clients’ growth and
development, as well as competitiveness in healthcare and CellTech industry markets. Through its subsidiary structure with unique integration
of verticals from innovative research and development 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. These consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of
liabilities in the normal course of business.
53
As reflected in the accompanying consolidated financial statements,
the Company had working capital deficit of $1,206,279 at December 31, 2022 and had incurred recurring net losses and generated negative
cash flow from operating activities of $11,930,847 and $7,037,224 for the year ended December 31, 2022, respectively. The Company has
a limited operating history and its continued growth is dependent upon the generating rental revenue from its income-producing real estate
property in New Jersey 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.
The accompanying consolidated financial statements
do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification
of liabilities that may result should the Company be unable to continue as a going concern.
Critical Accounting Policies
Use of Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Changes in these estimates
and assumptions may have a material impact on the consolidated financial statements and accompanying notes. Making estimates requires
management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation
or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate,
could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly
from those estimates. Significant estimates during the years ended December 31, 2022 and 2021 include the useful life of property and
equipment and investment in real estate, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets
and the associated valuation allowances, valuation of stock-based compensation, and assumptions used to determine fair value of warrants
and embedded conversion features of convertible note payable.
Revenue Recognition
The Company recognizes revenue under Accounting
Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle
of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following
five steps are applied to achieve that core principle:
●
Step 1: Identify the contract with the customer
●
Step 2: Identify the performance obligations in the contract
54
●
Step 3: Determine the transaction price
●
Step 4: Allocate the transaction price to the performance obligations in the contract
●
Step 5: Recognize revenue when the company satisfies a performance obligation
In order to identify the performance obligations
in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised goods or
service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” goods or service (or bundle
of goods or services) if both of the following criteria are met:
● The customer can benefit from the goods or service
either on its own or together with other resources that are readily available to the customer (i.e., the goods or service is capable of
being distinct).
● The entity’s promise to transfer the goods
or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the goods or
service is distinct within the context of the contract).
If a goods or service is not distinct, the goods
or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration
to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected
on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed
amounts, variable amounts, or both. Variable consideration is included in the transaction price only to the extent that it is probable
that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable
consideration is subsequently resolved.
The transaction price is allocated to each performance
obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized
when that performance obligation is satisfied, at a point in time or over time as appropriate.
The Company’s revenues are derived from
providing medial related consulting services for its’ related parties. Revenues related to its service offerings are recognized
at a point in time when service is rendered. Any payments received in advance of the performance of services are recorded as deferred
revenue until such time as the services are performed.
The Company has determined that the ASC 606 does
not apply to rental contracts, which are within the scope of other revenue recognition accounting standards.
Rental income from operating leases is recognized
on a straight-line basis under the guidance of ASC 842. Lease payments under tenant leases are recognized on a straight-line basis over
the term of the related leases. The cumulative difference between lease revenue recognized under the straight-line method and contractual
lease payments are included in rent receivable on the consolidated balance sheets.
The Company does not offer promotional payments,
customer coupons, rebates or other cash redemption offers to its customers.
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.
55
Recent Accounting Standards
For details of applicable new accounting standards,
please, refer to Recent Accounting Standards in Note 3 of our consolidated financial statements accompanying this report.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the
Years Ended December 31, 2022 and 2021
Revenues
For the year ended December 31, 2022, we had real
property rental revenue of $1,202,169, as compared to $1,203,560 for the year ended December 31, 2021, a decrease of $1,391, or 0.1%.
We expect that our revenue from real property rent will remain in its current level with minimal increase in the near future.
For the year ended December 31, 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 were no orders for our medical related consulting services from third party in 2022. Due to the winding down of the medical related
consulting services segment in 2022, the Company decided to cease all operations of this segment and no longer has any material revenues
or expenses in this segment. For the year ended December 31, 2021, we had medical related consulting services revenue from related party
of $187,412.
Costs and Expenses
Real property operating expenses consist of property
management fees, property insurance, real estate taxes, depreciation, repairs and maintenance fees, utilities and other expenses related
to our rental properties.
For the year ended December 31, 2022, our real
property operating expenses amounted to $929,441, as compared to $829,287 for the year ended December 31, 2021, an increase of $100,154,
or 12.1%. The increase was mainly due to an increase in building cleaning fees of approximately $15,000, an increase in property
management fees of approximately $21,000, an increase in repairs and maintenance fee of approximately $32,000, an increase in utilities
of approximately $30,000, and an increase in other miscellaneous items of approximately $2,000.
Costs of medical related consulting services include
the cost of labor and related benefits, travel expenses related to medical related consulting services, and other overhead costs.
There were no comparative revenue and related
costs of revenue from our medical related consulting services for the year ended December 31, 2022 since there was no demand for our consulting
service from our related parties and there were no orders for our medical related consulting services from third party in 2022. For the
year ended December 31, 2021, costs of medical related consulting services amounted to $147,167.
Real Property Operating Income
Our real property operating income for the year
ended December 31, 2022 was $272,728, representing a decrease of $101,545, or 27.1%, as compared to $374,273 for the year ended December
31, 2021. The decrease was primarily attributable to the increase in real property operating expenses as described above. We expect our
real property operating income will remain in its current level with minimal increase in the near future.
Gross Profit from Medical Related Consulting
Services and Gross Margin
We did not generate any gross profit from medical
related consulting services in the year ended December 31, 2022. Our gross profit from medical related consulting services for the year
ended December 31, 2021 was $40,245, with a gross margin of 21.5%.
56
Other Operating Expenses
For the years ended December 31, 2022 and 2021,
other operating expenses consisted of the following:
Years Ended December 31,
2022
2021
Advertising and marketing
$ 1,325,313
$ 328,565
Professional fees
2,909,652
4,946,696
Compensation and related benefits
1,863,188
2,042,278
Research and development
731,328
1,025,009
Litigation settlement
1,350,000
-
Directors and officers liability insurance premium
414,757
367,365
Travel and entertainment
163,213
156,483
Rent and related utilities
77,352
78,547
Other general and administrative
230,820
303,405
$ 9,065,623
$ 9,248,348
● For the year ended December 31, 2022, advertising
and marketing expenses increased by $996,748 or 303.4% as compared to the year ended December 31, 2021. The increase was primarily due
to increased advertising activities to enhance the visibility and marketability of our company and to improve brand recognition and awareness.
We expect that our advertising expenses will remain in its current 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 year ended December 31, 2022, professional fees decreased by $2,037,044, or 41.2%, as compared to the year ended
December 31, 2021, which was primarily attributable to a decrease in consulting fees of approximately $1,648,000 mainly due to the
decrease in use of consulting service providers, a decrease in legal service fees of approximately $262,000 mainly due to the
decrease in use of legal service providers related to the acquisition of a British Virgin Island company 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 $53,000. We expect that our professional fees will remain in its current level with
minimal increase in the near future.
● For the year ended December 31, 2022, compensation
and related benefits decreased by $179,090, or 8.8%, as compared to the year ended December 31, 2021, which was primarily attributable
to the decrease in stock-based compensation which reflected the value of options granted and vested to our management. We expect that
our compensation and related benefits will remain in its current level with minimal increase in the near future.
● For the year ended December 31, 2022, research
and development expenses decreased by $293,681, or 28.7%, as compared to the year ended December 31, 2021. The decrease was mainly attributable
to decreased research and development projects in year 2022. We expect that our research and development expenses will remain in its current
level with minimal decrease in the near future.
● For the year ended December 31, 2022, litigation
settlement increased by $1,350,000, or 100.0%, as compared to the year ended December 31, 2021. The increase was due to a settlement signed
in June 2022 related to Research Institute litigation.
● For the year ended December 31, 2022, Directors
and Officers Liability Insurance premium increased by $47,392, or 12.9%, as compared to the year ended December 31, 2021. The increase
was mainly due to different insurance provider with different premium.
57
● For the year ended December 31, 2022, travel
and entertainment expense increased by $6,730, or 4.3%, as compared to the year ended December 31, 2021. The increase was mainly due to
increased business travel activities in year 2022.
● For the year ended December 31, 2022, rent and
related utilities expenses decreased by $1,195, or 1.5%, as compared to the year ended December 31, 2021.
● Other general and administrative expenses mainly
consisted of NASDAQ listing fee, office supplies, and other miscellaneous items. For the year ended December 31, 2022, other general and
administrative expenses decreased by $72,585, or 23.9%, as compared to the year ended December 31, 2021. The decrease was mainly attributable
to a decrease in depreciation of approximately $19,000, which was primarily due to certain office equipment and furniture had reached
the end of depreciation period and no further depreciation is required for these fixed assets in year 2022, a decrease in office supplies
of approximately $13,000, and a decrease in other miscellaneous items of approximately $40,000 due to our efforts at stricter controls
on corporate expenditure.
Loss from Operations
As a result of the foregoing, for the year ended
December 31, 2022, loss from operations amounted to $8,792,895, as compared to $8,833,830 for the year ended December 31, 2021, a decrease
of $40,935 or 0.5%.
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 $3,137,952 for the year ended December
31, 2022, as compared to $256,669 for the year ended December 31, 2021, an increase of $2,881,283, or 1,122.6%, which was primarily attributable
to an increase in third party interest expense of approximately $3,496,000 mainly driven by the amortization of debt discount and debt
issuance cost of approximately $3,311,000 and the increased interest expense of approximately $186,000 from third party debts in year
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 $219,000, mainly driven by reagent sale in year 2022, a decrease in interest expense – related party of
approximately $121,000 due to the decrease in outstanding borrowing in year 2022, and a decrease in loss from equity method investment
of approximately $19,000.
Income Taxes
We did not have any income taxes expense for the
years ended December 31, 2022 and 2021 since we incurred losses in these periods.
Net Loss
As a result of the factors described above, our net loss was $11,930,847
for the year ended December 31, 2022, as compared to $9,090,499 for the year ended December 31, 2021, an increase of $2,840,348 or 31.2%.
58
Net Loss Attributable to Avalon GloboCare
Corp. Common Shareholders
The net loss attributable to Avalon GloboCare Corp. common shareholders
was $11,930,847 or $1.28 per share (basic and diluted) for the year ended December 31, 2022, as compared with $9,090,499 or $1.07 per
share (basic and diluted) for the year ended December 31, 2021, an increase of $2,840,348 or 31.2%.
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 $47,871 and a foreign currency translation gain of $ 25,244 for the years ended December 31, 2022
and 2021, respectively. This non-cash loss/gain had the effect of increasing/decreasing our reported comprehensive loss.
Comprehensive Loss
As a result of our foreign currency translation adjustment, we had
comprehensive loss of $11,978,718 and $9,065,255 for the years ended December 31, 2022 and 2021, respectively.
Liquidity and Capital Resources
The Company has a limited operating history and
its continued growth is dependent upon generating rental revenue from its income-producing real estate property in New Jersey 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.
59
Liquidity is the ability of a company to generate
funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At December 31,
2022 and 2021, we had cash balance of approximately $1,991,000 and $808,000, respectively. These funds are kept in financial institutions
located as follows:
Country:
December 31, 2022
December 31, 2021
United States
$ 1,806,083
90.7 %
$ 767,605
95.1 %
China
184,827
9.3 %
39,933
4.9 %
Total cash
$ 1,990,910
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 small portion of our 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 deficit from December 31, 2021 to December 31, 2022:
December 31,
Changes in
2022
2021
Amount
Percentage
Working capital deficit:
Total current assets
$ 2,373,526
$ 1,323,042
$ 1,050,484
79.4 %
Total current liabilities
3,579,805
4,401,658
(821,853 )
(18.7 )%
Working capital deficit
$ (1,206,279 )
$ (3,078,616 )
$ 1,872,337
(60.8 )%
Our working capital deficit decreased by $1,872,337
to $1,206,279 at December 31, 2022 from $3,078,616 at December 31, 2021. The decrease in working capital deficit was primarily attributable
to an increase in cash of approximately $1,183,000 mainly due to the issuance of convertible debt and balloon promissory note in year
2022, a decrease in accrued professional fees of approximately $208,000 which was mainly due to payments made to our professional service
providers in the year ended December 31, 2022, a decrease in accrued research and development fees of approximately $90,000 resulting
from payments made to research and development service providers in the year ended December 31, 2022, a decrease in accrued payroll liability
and directors’ compensation of approximately $83,000, 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
year ended December 31, 2022, a decrease in operating lease obligation of approximately $140,000, a decrease in note payable – related
party of $390,000 due to repayment made to this related party in the year ended December 31, 2022, offset by a decrease in other current
assets of approximately $200,000, which was mainly attributable to the decrease in prepaid professional fee of approximately $93,000,
which were recognized as expense over the related service period in year 2022, and the decrease in recoverable VAT of approximately $20,000
and the decrease in other miscellaneous items of approximately $87,000, and an increase in accrued settlement of lawsuit of $450,000 due
to a settlement signed in June 2022.
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Because the exchange rate conversion is different
for the consolidated balance sheets and the consolidated statements of cash flows, the changes in assets and liabilities reflected on
the consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the consolidated balance
sheets.
Cash Flows for the Year Ended December 31,
2022 Compared to the Year Ended December 31, 2021
The following summarizes the key components of
our cash flows for the years ended December 31, 2022 and 2021:
Years Ended December 31,
2022
2021
Net cash used in operating activities
$ (7,037,224 )
$ (5,024,479 )
Net cash used in investing activities
(9,053,470 )
(68,135 )
Net cash provided by financing activities
17,263,989
5,170,132
Effect of exchange rate on cash and restricted cash
10,077
3,443
Net increase in cash and restricted cash
$ 1,183,372
$ 80,961
Net cash flow used in operating activities for the year ended December
31, 2022 was $7,037,224, which primarily reflected our consolidated net loss of approximately $11,931,000, 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 a decrease in operating lease obligation of approximately $142,000, offset by an increase in accrued liabilities
and other payables of approximately $331,000, 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 $331,000, amortization of right-of-use
asset of approximately $136,000, stock-based compensation and service expense of approximately $1,107,000, 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 year ended December 31, 2021 was $5,024,479, which primarily reflected our consolidated net loss of approximately $9,090,000, and
the changes in operating assets and liabilities, primarily consisting of a decrease in operating lease obligation of approximately $121,000,
offset by an increase accrued liabilities and other payables of approximately $1,331,000, which was mainly attributable the increase in
accrued professional fees of approximately $669,000 due to increased professional service providers, the increase in accrued research
and development fees of approximately $415,000 which was primarily attributable to we increased research and development projects in 2021,
and the increase in accrued payroll liability and directors’ compensation of approximately $153,000, and an increase in accrued
liabilities and other payables – related parties of approximately $200,000 resulting from the increase in accrued interest for related
party borrowings, and the non-cash items adjustment primarily consisting of depreciation of approximately $312,000, amortization of right-of-use
asset of approximately $127,000, and stock-based compensation and service expense of approximately $2,110,000.
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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
$5,053,748 for the year ended December 31, 2022 as compared to $68,135 for the year ended December 31, 2021. During the year ended December
31, 2022, we made payments for purchase of property and equipment of approximately $2,000 and made additional investment in Epicon equity
method investment of approximately $52,000 and made payments for acquisition of 40% interest in Laboratory Services MSO, LLC of approximately
$9,000,000. During the year ended December 31, 2021, we made payments for purchase of property and equipment of approximately $18,000
and for improvement of commercial real estate of approximately $10,000, and made additional investment in equity method investment of
approximately $40,000.
Net cash flow provided by financing activities
was $17,263,989 for the year ended December 31, 2022 as compared to $5,170,132 for the year ended December 31, 2021. During the year ended
December 31, 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 approximately $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), and proceeds from issuance of Series A preferred stock of $9,000,000
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 year ended December 31, 2021, we received proceeds from related party borrowings
of approximately $2,550,000 and net proceeds from equity offering of approximately $2,620,000 (net of cash paid for commission and other
offering costs of approximately $240,000) to fund our working capital needs.
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 revenues and our ability to control costs. All funds received have been expended in the furtherance of growing the
business. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
● an increase in working capital requirements to
finance our current business, including ongoing research and development programs, clinical studies, as well as commercial strategies;
● the use of capital for mergers, acquisitions
and the development of business opportunities;
● addition of administrative personnel as the business
grows; and
● the cost of being a public company.
In the third quarter of 2019, we had secured a
$20 million credit facility (Line of Credit) provided by our Chairman, Wenzhao Lu. The unsecured credit facility bears interest at a rate
of 5% and provides for maturity on drawn loans 36 months after funding. As of December 31, 2022, the total principal amount outstanding
under the Credit Line was $0 and we used approximately $5.9 million of the credit facility and have approximately $14.1 million remaining
available under the Line Credit.
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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 2,369,116 shares of our outstanding common stock that were held by non-affiliates on
such date and a price of $16.7 per share, which was the price at which our common stock was last sold on The Nasdaq Capital Market on
February 19, 2020 (a date within 60 days of the date hereof), calculated in accordance with General Instruction I.B.6 of Form S-3. We
have not offered any securities pursuant to General Instruction I.B.6 of Form S-3 in the 12 calendar months preceding the date
of this prospectus supplement. We filed a prospectus supplement to amend and supplement the information in our prospectus and original
prospectus supplement based on the amount of securities that we are eligible to sell under General Instruction I.B.6 of Form S-3. After
giving effect to the $13,000,000 offering limit imposed by General Instruction I.B.6 of Form S-3, we may offer and sell
additional shares of our common stock having an aggregate offering price of up to $13,000,000 from time to time through Jefferies acting
as our sales agent in accordance with the terms of the sales agreement. As of December 31, 2022, we sold a total of 642,949 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. Under the Line of Credit, the Company received a loan from the
Lender of $750,000 in March 2023. 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.
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Off-balance Sheet Arrangements
We presently do not have off-balance sheet arrangements.
Foreign Currency Exchange Rate Risk
In November of 2022, we decided to cease all operations
in China with the exception of a small administrative office, Avalon Shanghai. We do not expect nor do we plan that there will be further
revenue generated from PRC operations in the foreseeable future. Thus, exchange rate fluctuations between RMB and US dollars do not have
a material effect on us. For the years ended December 31, 2022 and 2021, we had an unrealized foreign currency translation loss of approximately
$48,000 and an unrealized foreign currency translation gain of approximately $25,000, respectively, because of changes in the exchange
rate.
Inflation
The effect of inflation on our revenue and operating
results was not significant.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As a smaller reporting company, as defined in
Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.