Change Agents Corporation. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future. Accordingly, factors that may affect our results include, but are not limited to: ● Avalon our dependence on product candidates that are still in an early development stage; ● our ability to successfully complete research and further development, including preclinical and clinical studies; ● our anticipated timing for preclinical development, regulatory submissions, commencement and completion of clinical trials and product approvals; ● our ability to negotiate strategic partnerships, where appropriate, for our product candidates; ● our ability to manage multiple clinical trials for a variety of product candidates at different stages of development; ● the cost, timing, scope and results of ongoing preclinical and clinical testing; ● our expectations of the attributes of our product and development candidates, including pharmaceutical properties, efficacy, safety and dosing regimens; ● the cost, timing and uncertainty of obtaining regulatory approvals for our product candidates; ● the availability, cost, delivery and quality of clinical management services provided by our clinical research organization partners; ● the availability, cost, delivery and quality of clinical and commercial-grade materials produced by our own manufacturing facility or supplied by contract manufacturers, suppliers and partners; ● our ability to commercialize our product candidates and the growth of the markets for those product candidates; ● our ability to develop and commercialize products before competitors that are superior to the alternatives developed by such competitors; ● our ability to develop technological capabilities, including identification of novel and clinically important targets, exploiting our existing technology platforms to develop new product candidates and expand our focus to broader markets for our existing targeted therapeutics; 23 ● our ability to raise sufficient capital to fund our preclinical and clinical studies and to meet our long-term liquidity needs, on terms acceptable to us, or at all. If we are unable to raise the funds necessary to meet our long-term liquidity needs, we may have to delay or discontinue the development of one or more programs, discontinue or delay ongoing or anticipated clinical trials, discontinue or delay our commercial manufacturing efforts, discontinue or delay our efforts to expand into additional indications for our product candidates, license out programs earlier than expected, raise funds at significant discount or on other unfavorable terms, if at all, or sell all or part of our business; ● our ability to protect our intellectual property rights and our ability to avoid intellectual property litigation, which can be costly and divert management time and attention; ● our ability to develop and commercialize products without infringing the intellectual property rights of third parties; ● heightened competition from commercial clinical testing companies, IDNs, physicians and others; ● increased pricing pressure from customers, including payers and patients, and changing relationships with customers, payers, suppliers or strategic partners; ● impact of changes in payment mix, including increased patient financial responsibility and any shift from fee-for-service to discounted, capitated or bundled fee arrangements; ● adverse actions by government, including healthcare reform that focuses on reducing healthcare costs but does not recognize the value and importance to healthcare of clinical testing or innovative solutions, unilateral reduction of fee schedules payable to us, unilateral recoupment of amounts allegedly owed and competitive bidding; ● the impact of increased prior authorization programs; ● adverse results from pending or future government investigations, lawsuits or private actions. These include, in particular, monetary damages, loss or suspension of licenses or criminal penalties; ● the impact of the COVID-19 pandemic on our business or on the economy generally, and ● a decline i n economic conditions, including the impact of an inflationary environment. All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference into this report. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith, and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished. The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2023 and 2022 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. 24 Overview The Company is a clinical-stage biotechnology company dedicated to developing and delivering innovative, transformative cellular therapeutics, precision diagnostics, and clinical laboratory services. 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). It has also embarked on a laboratory rollup strategy, for which its first acquisition to acquire 40% membership interest in Lab Services MSO closed in February 2023. 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: ● 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 which at this time is focused on advancing intellectual property in this area through joint patent development. 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. 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. 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 considering the next steps for this CAR-T candidate. ● 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. ● 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. We currently are focused on bringing forward the intellectual property associated with this program while we determine next steps, if any, on a clinical program. Avalon has embarked on a laboratory rollup strategy focused on forming joint ventures and acquiring laboratories that are accretive to our clinical strategy. We have identified several laboratories to further this effort. On February 9, 2023, Avalon Lab purchased forty percent (40%) of all the issued and outstanding equity interests of Laboratory Services MSO, LLC, a private limited company formed under the laws of the State of Delaware on September 6, 2019 and its subsidiaries. Lab Services MSO , through its two subsidiaries, Laboratory Services, LLC and Laboratory Services DME, LLC, is engaged in providing laboratory testing services. Lab Services MSO is focused on delivering high quality services related to toxicology and wellness testing and provides a broad portfolio of diagnostic tests including drug testing, toxicology, and a broad array of test services, from general bloodwork to anatomic pathology, and urine toxicology. Specific capabilities include STAT blood testing, qualitative drug screening, genetic testing, urinary testing, sexually transmitted disease testing and more. The panels that Lab Services MSO tests for are thyroid panel, comprehensive metabolic panel, kidney profile, liver function tests, and other individual tests. Through Lab Services MSO, we use fast, accurate, and efficient equipment to provide practitioners with the tools to quickly determine if a patient is following their designated treatment plan. In most instances, we are able to provide a practitioner with qualitative drug class results the same day the sample is received. We provide an extensive chemistry test menu that gives physicians the information to better treat their patients and maintain their overall wellness and have developed a premier reputation for customer service and fast turnaround times in the industry. 25 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. 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). In addition, the Company owns commercial real estate that houses its headquarters in Freehold, New Jersey. The Company also has income from equity method investment through its forty percent (40%) interest in Lab Services MSO. These condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, the Company had working capital deficit of approximately $3,785,000 at March 31, 2023 and had incurred recurring net losses and generated negative cash flow from operating activities of approximately $2,784,000 and $1,835,000 for the three months ended March 31, 2023, respectively. The Company has a limited operating history and its continued growth is dependent upon the continuation of 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 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 The preparation of the condensed 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 three months ended March 31, 2023 and 2022 include the valuation of deferred tax assets and the associated valuation allowances, the valuation of stock-based compensation, and the fair value of assets acquired and liabilities assumed in the purchase of 40% of Lab Services MSO. Real Property Rental 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. 26 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. 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 Months Ended March 31, 2023 and 2022 Real Property Rental Revenue For the three months ended March 31, 2023, we had real property rental revenue of $296,165, as compared to $297,631 for the three months ended March 31, 2022, a decrease of $1,466, or 0.5%. We expect that our revenue from real property rent will remain in its current level with minimal increase in the near future. Real Property Operating 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 March 31, 2023, our real property operating expenses amounted to $248,445, as compared to $218,448 for the three months ended March 31, 2022, an increase of $29,997, or 13.7%. The increase was mainly due to an increase in property management fees of approximately $9,000, an increase in repairs and maintenance fee of approximately $16,000, an increase in utilities of approximately $5,000. Real Property Operating Income Our real property operating income for the three months ended March 31, 2023 was $47,720, representing a decrease of $31,463 or 39.7%, as compared to $79,183 for the three months ended March 31, 2022. 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. 27 Other Operating Expenses For the three months ended March 31, 2023 and 2022, other operating expenses consisted of the following: Three Months Ended March 31, 2023 2022 Advertising and marketing expenses $ 691,753 $ 526,806 Professional fees 1,226,239 821,308 Compensation and related benefits 451,555 523,045 Research and development 92,350 116,684 Travel and entertainment 62,374 38,280 Directors and officers liability insurance 103,801 103,584 Rent and related utilities 17,288 20,556 Other general and administrative 66,596 55,862 $ 2,711,956 $ 2,206,125 ● For the three months ended March 31, 2023, advertising and marketing expenses increased by $164,947 or 31.3% as compared to the three months ended March 31, 2022. 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 and marketing 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 and other fees. For the three months ended March 31, 2023, professional fees increased by $404,931, or 49.3%, as compared to the three months ended March 31, 2022, which was primarily attributable to an increase in consulting fees of approximately $278,000 mainly due to the increase in use of consulting service providers related to our purchase of 40% of Lab Services MSO, and an increase in accounting fees of approximately $218,000 mainly due to the increased accounting services related to our purchase of 40% of Lab Services MSO, offset by a decrease in other miscellaneous items of approximately $91,000. We expect that our professional fees will decrease in the near future. ● For the three months ended March 31, 2023, compensation and related benefits decreased by $71,490, or 13.7%, as compared to the three months ended March 31, 2022, 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 three months ended March 31, 2023, research and development expenses decreased by $24,334, or 20.9%, as compared to the three months ended March 31, 2022. The decrease was mainly attributable to we decreased research and development projects in the first quarter of 2023. We expect that our research and development expenses will remain in its current level with minimal increase in the near future. ● For the three months ended March 31, 2023, travel and entertainment expense increased by $24,094, or 62.9%, as compared to the three months ended March 31, 2022. The increase was mainly due to increased business travel activities in the first quarter of 2023. ● For the three months ended March 31, 2023, Directors and Officers Liability Insurance premium increased by $217, or 0.2%, as compared to the three months ended March 31, 2022. ● For the three months ended March 31, 2023, rent and related utilities expenses decreased by $3,268, or 15.9%, as compared to the three months ended March 31, 2022. The decrease was attributable to decreased rental rate in the first quarter of 2023. ● Other general and administrative expenses mainly consisted of NASDAQ listing fee, office supplies, miscellaneous taxes , and other miscellaneous items. For the three months ended March 31, 2023, other general and administrative expenses increased by $10,734, or 19.2%, as compared to the three months ended March 31, 2022. The increase was mainly attributable to an increase in franchise tax of approximately $21,000, offset by a decrease in other miscellaneous items of approximately $10,000 due to our efforts at stricter controls on corporate expenditure. Loss from Operations As a result of the foregoing, for the three months ended March 31, 2023, loss from operations amounted to $2,664,236, as compared to $2,126,942 for the three months ended March 31, 2022, a decrease of $537,294 or 25.3%. 28 Other (Expense) Income Other (expense) income mainly includes third party and related party interest expense, income (loss) from equity method investments, and other miscellaneous (expense) income. Other expense, net, totaled $119,678 for the three months ended March 31, 2023, as compared to other income, net, of $56,404 for the three months ended March 31, 2022, a decrease of $176,082, or 312.2%, which was primarily attributable to an increase in interest expense of approximately $116,000 mainly driven by the amortization of debt discount and the increase in outstanding borrowings in the first quarter of 2023, and a decrease in other miscellaneous income of approximately $110,000, offset by a decrease in loss from equity method investment of approximately $50,000. Income Taxes We did not have any income taxes expense for the three months ended March 31, 2023 and 2022 since we incurred losses in these periods. Net Loss As a result of the factors described above, our net loss was $2,783,914 for the three months ended March 31, 2023, as compared to $2,070,538 for the three months ended March 31, 2022, an increase of $713,376 or 34.5%. Net Loss Attributable to Avalon GloboCare Corp. Common Shareholders The net loss attributable to Avalon GloboCare Corp. common shareholders was $2,783,914 or $0.28 per share (basic and diluted) for the three months ended March 31, 2023, as compared with $2,070,538 or $0.23 per share (basic and diluted) for the three months ended March 31, 2022, an increase of $713,376 or 34.5%. 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 gain of $3,670 and $2,021 for the three months ended March 31, 2023 and 2022, respectively. This non-cash gain had the effect of decreasing our reported comprehensive loss. Comprehensive Loss As a result of our foreign currency translation adjustment, we had comprehensive loss of $2,780,244 and $2,068,517 for the three months ended March 31, 2023 and 2022, respectively. Liquidity and Capital Resources The Company has a limited operating history and its continued growth is dependent upon the continuation of 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 or debt 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. 29 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 March 31, 2023 and December 31, 2022, we had cash balance of approximately $887,000 and $1,991,000, respectively. These funds are kept in financial institutions located as follows: Country: March 31, 2023 December 31, 2022 United States $ 787,978 88.8 % $ 1,806,083 90.7 % China 99,053 11.2 % 184,827 9.3 % Total cash $ 887,031 100.0 % $ 1,990,910 100.0 % Under the applicable People’s Republic of China (“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, an FIE 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, 2022 to March 31, 2023: March 31, December 31 Changes in 2023 2022 Amount Percentage Working capital (deficit): Total current assets $ 1,391,381 $ 2,373,526 $ (982,145 ) (41.4 )% Total current liabilities 5,176,471 3,579,805 1,596,666 44.6 % Working capital (deficit) $ (3,785,090 ) $ (1,206,279 ) $ (2,578,811 ) 213.8 % Our working capital deficit increased by $2,578,811 to $3,785,090 at March 31, 2023 from $1,206,279 at December 31, 2022. The increase in working capital deficit was primarily attributable to a decrease in cash of approximately $1,104,000, an increase in accrued professional fees of approximately $414,000 which was mainly attributable to the increase in professional service related to our purchase of 40% of Lab Services MSO, an increase in operating lease obligation of approximately $110,000, an increase in equity method investment payable of $1,000,000 resulting from the purchase of 40% of Lab Services MSO incurred in February 2023, offset by an increase in prepaid expense and other current assets of approximately $123,000. 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. 30 Cash Flows for the Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022 The following summarizes the key components of our cash flows for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 Net cash used in operating activities $ (1,834,810 ) $ (511,208 ) Net cash used in investing activities (20,185 ) (1,749 ) Net cash provided by financing activities 750,000 231,500 Effect of exchange rate on cash 1,116 209 Net decrease in cash $ (1,103,879 ) $ (281,248 ) Net cash flow used in operating activities for the three months ended March 31, 2023 was $1,834,810, which primarily reflected our consolidated net loss of approximately $2,784,000, and the changes in operating assets and liabilities, primarily consisting of an increase in prepaid expense and other assets of approximately $87,000, offset by an increase in accrued liabilities and other payables of approximately $635,000 which was primarily attributable to an increase in accrued professional fees of approximately $414,000 resulting from the increase in professional service related to our purchase of 40% of Lab Services MSO and an increase in accrued research and development fees of approximately $62,000 and an increase in other payables of approximately $159,000, and the non-cash items adjustment primarily consisting of depreciation of approximately $61,000, and stock-based compensation and service expense of approximately $327,000. Net cash flow used in operating activities for the three months ended March 31, 2022 was $511,208, which primarily reflected our consolidated net loss of approximately $2,071,000, offset by the changes in operating assets and liabilities, primarily consisting of an increase in accrued liabilities and other payables of approximately $794,000 which was primarily attributable to an increase in accrued professional fees of approximately $686,000 resulting from the increase in professional service providers and an increase in other miscellaneous items of approximately $108,000, and the non-cash items adjustment primarily consisting of depreciation of approximately $85,000, and stock-based compensation and service expense of approximately $606,000. 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 $20,185 for the three months ended March 31, 2023 as compared to $1,749 for the three months ended March 31, 2022. During the three months ended March 31, 2023 and 2022, we made payment for purchase of property and equipment of approximately $20,000 and $2,000, respectively. Net cash flow provided by financing activities was $750,000 for the three months ended March 31, 2023 as compared to $231,500 for the three months ended March 31, 2022. During the three months ended March 31, 2023, we received proceeds from related party borrowings of $750,000. During the three months ended March 31, 2022, we received proceeds from related party borrowings of approximately $100,000 and net proceeds from equity offering of approximately $132,000 (net of cash paid for commission of approximately $4,000). 31 Our capital requirements primarily relate to working capital requirements, including salaries, fees related to professional services, reduction of accrued liabilities, 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 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 March 31, 2023, the total principal amount outstanding under the Credit Line was $750,000 and we used approximately $6.7 million of the credit facility and have approximately $13.3 million remaining available under the Line Credit. 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 flow provided by operations, and cash available under our Credit Line and sales of equity. Under the Line of Credit, the Company received a loan from the Lender of $100,000 in April 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. 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 three months ended March 31, 2023 and 2022, we had an unrealized foreign currency translation gain of approximately $4,000 and $2,000, respectively, because of changes in the exchange rate. Inflation The effect of inflation on our revenue and operating results was not significant. 32 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 .