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: ● 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; ● 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; 29 ● 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 in 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 relian ce 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 and six months ended June 30, 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. Overview The Company is dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. Our main strategy is to acquire ownership or license rights in precision diagnostic assets, genetic testing and clinical laboratory companies through joint ventures, share ownership structures or distribution rights. We plan to play a leading role in the innovation of diagnostic testing, utilizing proprietary technology to deliver precise, genetics-driven results. As a first major step into the laboratory market, we completed an acquisition of a 40% membership interest in Laboratory Services MSO, LLC, which closed in February 2023. We have the following areas of focus: Laboratory Acquisitions We have embarked on a laboratory rollup strategy focused on forming joint ventures and acquiring laboratories that are accretive to our commercial strategy. As a first step, in February of 2023, we acquired a 40% membership interest in Laborat ory Services MSO. ● 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, and sexually transmitted disease testing. 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. Lab Services MSO provides a menu of extensive chemistry tests that physicians can use to obtain information to better treat their patients and maintain their overall wellness. Lab Services MSO has developed a premier reputation for customer service and fast turnaround times. ● Lab Services MSO is also focused on commercialization of genetic-based proprietary testing. The first area of focus in this area is confirmatory genetic testing during toxicology screening and genetic testing to screen for addictive propensity. Lab Services MSO laboratory plans to focus on diagnostic testing utilizing proprietary technology to deliver precise genetic driven results. 30 Product Commercialization We are exploring the commercialization and development of a versatile breathalyzer system. ● The KetoAir breathalyzer is a handheld device that allows the user to detect acetone levels in exhaled breath. The acetone level is in concentration units (ppm, part-per-million) such that the user will know his/her real-time ketosis status: inadequate ketosis (0-3.99 ppm), mild ketosis (4-9.99 ppm), optimal ketosis (10-40 ppm), or alarming level (> 40 ppm). The breathalyzer is registered with the United States FDA as a Class I medical device. The device is also paired with an “AI Nutritionist” software program (via Bluetooth connection) which is downloadable from Google Play (for Android mobile phones, approved) and iPhone (the app is currently being reviewed by Apple iOS AppStore). It helps users to monitor and manage their ketogenic diet and related programs. We believe the KetoAir breathalyzer can be an essential tool to help diabetic patients adhere to their therapeutic programs and optimize their ketogenic dietary management. ● We were granted exclusive distributorship rights for the KetoAir breathalyzer in the following territories: North America, South America, the EU and the UK. We had a pilot launch and exhibition of the KetoAir breathalyzer in this year’s KetoCon conference in Austin, Texas (April 21-23, 2023). For our commercialization strategy, we intend to target the diabetes and obesity markets. We are evaluating options for commercialization, including identifying distribution partners or distributing KetoAir ourselves. Research and Development ● We are focused on bringing forward intellectual property through joint patent filings with the Massachusetts Institute of Technology (MIT). We completed a sponsored research and co-development project with MIT led by Professor Shuguang Zhang as Principal Investigator. 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 through joint patent submissions. Other Areas In order to preserve cash and focus on our core laboratory rollup strategy and product commercialization, we have currently suspen ded all research and development efforts related to cellular therapy in order to redirect our funding efforts to our core business strategies outlined above. Going Concern The Company is a commercial stage company dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. The Company is establishing a leading role in the innovation of diagnostic testing, utilizing proprietary technology to deliver precise, genetics-driven results. The Company also provides laboratory services, offering 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. 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 $4,542,000 at June 30, 2023 and had incurred recurring net losses and generated negative cash flow from operating activities of approximately $5,327,000 and $4,360,000 for the six months ended June 30, 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 income from equity method investment through its forty percent (40%) interest in Lab Services MSO 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. 31 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 and six months ended June 30, 2023 and 2022 include the valuation of deferred tax assets and the associated valuation allowances, the valuation of stock-based compensation, the assumptions used to determine fair value of warrants and embedded conversion features of convertible note payable, and the fair value of the consideration given in the purchase of 40% of Lab Services MSO. Investment in Unconsolidated Companies The Company uses the equity method of accounting for its investments in, and earning or loss of, companies that it does not control but over which it does exert significant influence. The Company considers whether the fair values of its equity method investments have declined below their carrying values whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If the Company considers any decline to be other than temporary (based on various factors, including historical financial results and the overall health of the investee), then a write-down would be recorded to estimated fair value. Impairment of equity method investment amounted to $464,406 for the six months ended June 30, 2023. See Note 5 for discussion of equity method investments. 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. 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. 32 Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is changed to equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis. Recent Accounting Standards For details of applicable new accounting standards, please, refer to Recent Accounting Standards in Note 3 of our condensed consolidated financial statements accompanying this report. RESULTS OF OPERATIONS Comparison of Results of Operations for the Three and Six Months Ended June 30, 2023 and 2022 Real Property Rental Revenue For the three months ended June 30, 2023, we had real property rental revenue of $306,905, as compared to $290,821 for the three months ended June 30, 2022, an increase of $16,084, or 5.5%. For the six months ended June 30, 2023, we had real property rental revenue of $603,070, as compared to $588,452 for the six months ended June 30, 2022, an increase of $14,618, or 2.5%. The increase was primarily attributable to the increase of tenants in the second quarter of 2023. We expect that our revenue from real property rent will remain in its current quarterly 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 June 30, 2023, our real property operating expenses amounted to $245,403, as compared to $211,703 for the three months ended June 30, 2022, an increase of $33,700, or 15.9%. The increase was mainly due to an increase in property management fees of approximately $6,000, an increase in repairs and maintenance fee of approximately $20,000, and an increase in utilities of approximately $11,000, offset by a decrease in other miscellaneous items of approximately $3,000. For the six months ended June 30, 2023, our real property operating expenses amounted to $493,848, as compared to $430,151 for the six months ended June 30, 2022, an increase of $63,697 or 14.8%. The increase was mainly due to an increase in property management fees of approximately $15,000, an increase in repairs and maintenance fee of approximately $36,000, and an increase in utilities of approximately $16,000, offset by a decrease in other miscellaneous items of approximately $3,000. Real Property Operating Income Our real property operating income for the three months ended June 30, 2023 was $61,502, representing a decrease of $17,616 or 22.3%, as compared to $79,118 for the three months ended June 30, 2022. Our real property operating income for the six months ended June 30, 2023 was $109,222, representing a decrease of $49,079 or 31.0%, as compared to $158,301 for the six months ended June 30, 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 quarterly level with minimal increase in the near future. Income from Equity Method Investment – Lab Services MSO For the three and six months ended June 30, 2023, we had income from our investment in Lab Services MSO of $308,395 and $355,134, respectively, which represents our share of Lab Services MSO’s net income. We purchased 40% of Lab Services MSO on February 9, 2023. We expect that our income from our investment in Lab Services MSO will continue to increase in the near future. 33 Other Operating Expenses For the three and six months ended June 30, 2023 and 2022, other operating expenses consisted of the following: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Advertising and marketing expenses $ 505,217 $ 130,395 $ 1,196,970 $ 657,201 Professional fees 998,512 436,447 2,224,751 1,257,755 Compensation and related benefits 454,123 503,541 905,678 1,026,586 Research and development 17,810 254,476 110,160 371,160 Litigation settlement - 1,350,000 - 1,350,000 Directors and officers liability insurance premium 103,802 103,584 207,603 207,168 Travel and entertainment 55,578 41,282 117,952 79,562 Rent and related utilities 15,973 19,656 33,261 40,212 Other general and administrative 83,506 83,308 150,102 139,170 $ 2,234,521 $ 2,922,689 $ 4,946,477 $ 5,128,814 ● For the three months ended June 30, 2023, advertising and marketing expenses increased by $374,822 or 287.5% as compared to the three months ended June 30, 2022. For the six months ended June 30, 2023, advertising and marketing expenses increased by $539,769 or 82.1% as compared to the six months ended June 30, 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 quarterly level with minimal increase in the near future. ● Professional fees primarily consisted of accounting fees, audit fees, legal service fees, consulting fees, investor relations service charges and other fees. For the three months ended June 30, 2023, professional fees increased by $562,065, or 128.8%, as compared to the three months ended June 30, 2022, which was primarily attributable to an increase in audit fees of approximately $173,000 mainly due to the increased audit services related to our purchase of 40% of Lab Services MSO, an increase in accounting fees of approximately $282,000 mainly due to the increased accounting services related to our purchase of 40% of Lab Services MSO, and an increase in legal service fees of approximately $141,000 mainly due to the increased legal services related to our purchase of 40% of Lab Services MSO, offset by a decrease in other miscellaneous items of approximately $34,000. For the six months ended June 30, 2023, professional fees increased by $966,996, or 76.9%, as compared to the six months ended June 30, 2022, which was primarily attributable to an increase in consulting fees of approximately $268,000 mainly due to the increase in use of consulting service providers related to our purchase of 40% of Lab Services MSO, an increase in audit fees of approximately $238,000 due to the increased audit services related to our purchase of 40% of Lab Services MSO, and an increase in accounting fees of approximately $500,000 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 $39,000. We expect that our professional fees will decrease in the near future. ● For the three months ended June 30, 2023, compensation and related benefits decreased by $49,418, or 9.8%, as compared to the three months ended June 30, 2022. For the six months ended June 30, 2023, compensation and related benefits decreased by $120,908, or 11.8%, as compared to the six months ended June 30, 2022. The decrease 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 quarterly level with minimal increase in the near future . ● For the three months ended June 30, 2023, research and development expenses decreased by $236,666, or 93.0%, as compared to the three months ended June 30, 2022. For the six months ended June 30, 2023, research and development expenses decreased by $261,000, or 70.3%, as compared to the six months ended June 30, 2022. The decrease was mainly attributable to we decreased research and development projects in the first half of 2023. We expect that our research and development expenses will remain in its current quarterly level with minimal increase in the near future. ● For the three months ended June 30, 2023, litigation settlement decreased by $1,350,000, or 100.0%, as compared to the three months ended June 30, 2022. For the six months ended June 30, 2023, litigation settlement decreased by $1,350,000, or 100.0%, as compared to the six months ended June 30, 2022. The decrease was due to a settlement signed in June 2022. ● For the three months ended June 30, 2023, Directors and Officers Liability Insurance premium increased by $218, or 0.2%, as compared to the three months ended June 30, 2022. For the six months ended June 30, 2023, Directors and Officers Liability Insurance premium increased by $435, or 0.2%, as compared to the six months ended June 30, 2022. ● For the three months ended June 30, 2023, travel and entertainment expense increased by $14,296, or 34.6%, as compared to the three months ended June 30, 2022. For the six months ended June 30, 2023, travel and entertainment expense increased by $38,390, or 48.3%, as compared to the six months ended June 30, 2022. The increase was mainly due to increased business travel activities in the first half of 2023. 34 ● For the three months ended June 30, 2023, rent and related utilities expenses decreased by $3,683, or 18.7%, as compared to the three months ended June 30, 2022. For the six months ended June 30, 2023, rent and related utilities expenses decreased by $6,951, or 17.3%, as compared to the six months ended June 30, 2022. The decrease was attributable to decreased rental rate in the first half 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 June 30, 2023, other general and administrative expenses increased by $198, or 0.2%, as compared to the three months ended June 30, 2022. For the six months ended June 30, 2023, other general and administrative expenses increased by $10,932, or 7.9%, as compared to the six months ended June 30, 2022, which was mainly attributable to an increase in franchise tax of approximately $26,000, offset by a decrease in other miscellaneous items of approximately $15,000 due to our efforts at stricter controls on corporate expenditure. Loss from Operations As a result of the foregoing, for the three months ended June 30, 2023, loss from operations amounted to $1,864,624, as compared to $2,843,571 for the three months ended June 30, 2022, a decrease of $978,947 or 34.4%. As a result of the foregoing, for the six months ended June 30, 2023, loss from operations amounted to $4,482,121, as compared to $4,970,513 for the six months ended June 30, 2022, a decrease of $488,392 or 9.8%. Other (Expense) Income Other (expense) income mainly includes third party and related party interest expense, loss from equity method investment, change in fair value of derivative liability, impairment of equity method investment, and other miscellaneous (expense) income. Other expense, net, totaled $678,689 for the three months ended June 30, 2023, as compared to other income, net, of $815,097 for the three months ended June 30, 2022, a decrease of $1,493,786, or 183.3%, which was primarily attributable to an increase in interest expense of approximately $153,000 mainly driven by the increase in outstanding borrowings in the second quarter of 2023, a decrease in gain from change in fair value of derivative liability of approximately $728,000, an increase in impairment of equity method investment of approximately $464,000, and a decrease in other miscellaneous income of approximately $152,000. Other expense, net, totaled $845,106 for the six months ended June 30, 2023, as compared to other income, net, of $871,501 for the six months ended June 30, 2022, a decrease of $1,716,607, or 197.0%, which was primarily attributable to an increase in interest expense of approximately $269,000 mainly driven by the increase in outstanding borrowings in the six months ended June 30, 2023, a decrease in gain from change in fair value of derivative liability of approximately $728,000, an increase in impairment of equity method investment of approximately $464,000, and a decrease in other miscellaneous income of approximately $262,000. Income Taxes We did not have any income taxes expense for the three and six months ended June 30, 2023 and 2022 since we incurred losses in these periods. Net Loss As a result of the factors described above, our net loss was $2,543,313 for the three months ended June 30, 2023, as compared to $2,028,474 for the three months ended June 30, 2022, an increase of $514,839 or 25.4%. As a result of the factors described above, our net loss was $5,327,227 for the six months ended June 30, 2023, as compared to $4,099,012 for the six months ended June 30, 2022, an increase of $1,228,215 or 30.0%. Net Loss Attributable to Avalon GloboCare Corp. Common Shareholders The net loss attributable to Avalon GloboCare Corp. common shareholders was $2,543,313 or $0.25 per share (basic and diluted) for the three months ended June 30, 2023, as compared with $2,028,474 or $0.23 per share (basic and diluted) for the three months ended June 30, 2022, an increase of $514,839 or 25.4%. The net loss attributable to Avalon GloboCare Corp. common shareholders was $5,327,227 or $0.52 per share (basic and diluted) for the six months ended June 30, 2023, as compared with $4,099,012 or $0.46 per share (basic and diluted) for the six months ended June 30, 2022, an increase of $1,228,215 or 30.0%. 35 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 $11,011 and $43,503 for the three months ended June 30, 2023 and 2022, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $7,341 and $41,482 for the six months ended June 30, 2023 and 2022, respectively. This non-cash loss had the effect of increasing our reported comprehensive loss. Comprehensive Loss As a result of our foreign currency translation adjustment, we had comprehensive loss of $2,554,324 and $2,071,977 for the three months ended June 30, 2023 and 2022, respectively. As a result of our foreign currency translation adjustment, we had comprehensive loss of $5,334,568 and $4,140,494 for the six months ended June 30, 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 income from equity method investment through its forty percent (40%) interest in Lab Services MSO 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. As described below, the Company has raised additional capital through the sale of equity and debt and the Company plans on raising additional capital in the future 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. 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 June 30, 2023 and December 31, 2022, we had cash balance of approximately $653,000 and $1,991,000, respectively. These funds are kept in financial institutions located as follows: Country: June 30, 2023 December 31, 2022 United States $ 552,404 84.6 % $ 1,806,083 90.7 % China 100,787 15.4 % 184,827 9.3 % Total cash $ 653,191 100.0 % $ 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. 36 The following table sets forth a summary of changes in our working capital deficit from December 31, 2022 to June 30, 2023: June 30, December 31, Changes in 2023 2022 Amount Percentage Working capital deficit: Total current assets $ 1,422,754 $ 2,373,526 $ (950,772 ) (40.1 )% Total current liabilities 5,965,232 3,579,805 2,385,427 66.6 % Working capital deficit $ (4,542,478 ) $ (1,206,279 ) $ (3,336,199 ) 276.6 % Our working capital deficit increased by $3,336,199 to $4,542,478 at June 30, 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 $1,338,000, 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, an increase in convertible note payable, net, of approximately $1,020,000 resulting from the issuance of May 2023 Convertible Note, offset by an increase in prepaid expense and other current assets of approximately $386,000 which was mainly attributable to an increase in prepaid professional fees of approximately $175,000 and an increase in deferred financing costs of approximately $191,000. 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. Cash Flows for the Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022 The following summarizes the key components of our cash flows for the six months ended June 30, 2023 and 2022: Six Months Ended June 30, 2023 2022 Net cash used in operating activities $ (4,359,759 ) $ (2,686,722 ) Net cash used in investing activities (22,201 ) (55,757 ) Net cash provided by financing activities 3,046,564 3,130,443 Effect of exchange rate on cash (2,323 ) (15,294 ) Net (decrease) increase in cash $ (1,337,719 ) $ 372,670 Net cash flow used in operating activities for the six months ended June 30, 2023 was $4,359,759, which primarily reflected our consolidated net loss of approximately $5,327,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in accrued liabilities and other payables of approximately $231,000 due to payments made to vendors in the six months ended June 30, 2023, and the non-cash items adjustment primarily consisting of income from equity method investment of approximately $337,000 resulting from our purchase of 40% of Lab Services MSO in February 2023, offset by depreciation of approximately $123,000, stock-based compensation and service expense of approximately $867,000, and impairment of equity method investment of approximately $464,000. Net cash flow used in operating activities for the six months ended June 30, 2022 was $2,686,722, which primarily reflected our consolidated net loss of approximately $4,099,000, and the non-cash item adjustment consisting of change in fair market value of derivative liability of approximately $769,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in operating lease obligation of approximately $80,000, offset by an increase in accounts payable of approximately $389,000, an increase in accrued liabilities and other payables of approximately $675,000, which was mainly attributable to the increase in accrued settlement of lawsuit of $1,350,000 resulting from a settlement signed in June 2022 offset by the decrease in accrued professional fees of approximately $396,000 due to payments made to our professional service providers in the first half of 2022 and the decrease in accrued research and development fees of approximately $319,000 resulting from payments made to research and development service provider in the six months ended June 30, 2022, and an increase in accrued liabilities and other payables – related parties of approximately $72,000, and the non-cash items adjustment primarily consisting of depreciation of approximately $169,000, amortization of right-of-use asset of approximately $68,000, stock-based compensation and service expense of approximately $821,000, and amortization of debt discount of approximately $55,000. 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. 37 Net cash flow used in investing activities was $22,201 for the six months ended June 30, 2023 as compared to $55,757 for the six months ended June 30, 2022. During the six months ended June 30, 2023, we made payment for purchase of property and equipment of approximately $22,000. During the six months ended June 30, 2022, we made payments for purchase of property and equipment of approximately $2,000 and made additional investment in equity method investment in Epicon of approximately $54,000. Net cash flow provided by financing activities was $3,046,564 for the six months ended June 30, 2023 as compared to $3,130,443 for the six months ended June 30, 2022. During the six months ended June 30, 2023, we received proceeds from related party borrowings of $850,000 and net proceeds from issuance of convertible debt and warrants of $1,261,000 (net of original issue discount of $75,000 and cash paid for convertible note issuance costs of $164,000), and net proceeds from issuance of balloon promissory note of $936,000 (net of cash paid for promissory note issuance costs of approximately $64,000) . During the six months ended June 30, 2022, we received proceeds from related party borrowings of $100,000 and net proceeds from equity offering of approximately $112,000 (net of cash paid for commission and other offering costs of approximately $24,000) and proceeds from issuance of convertible debt and warrants of approximately $3,719,000 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. 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. August 2019 Credit Facility 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 June 30, 2023, the total principal amount outstanding under the Credit Line was $850,000 and we used approximately $6.8 million of the credit facility and have approximately $13.2 million remaining available under the Line Credit. ATM In June 2023, the Company entered into a sales agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (“Roth) under which the Company may offer and sell from time to time shares of its common stock having an aggregate offering price of up to $3.5 million. From July 1, 2023 t o August 10, 2023, Roth sold an aggregate of 343,380 shares of common stock at an average price of $1.45 per share to investors. The Company received net cash proceeds of $483,235, net of commission paid for sales agent and other fees of $14,975 . Balloon Mortgage Note In May 2023, the Company, through Avalon RT9 Properties, LLC (“Avalon RT9”), executed a balloon mortgage note in favor of a lender (the “ Lender ”) in the original principal amount of $1,000,000 (the “ Balloon Mortgage Note ”), which Balloon Mortgage Note shall accrue interest at the annual rate of 13.0% and be paid in monthly installments of interest-only in the amount of $10,833 commencing in June 2023 and continuing through October, 2025 (at which point any unpaid balance of principal, interest and other charges shall be due and payable). The Balloon Mortgage Note is secured by a second-lien mortgage on the Company’s real property in Monmouth County, New Jersey, In addition, the Company and Avalon RT9 executed a guaranty related to the Balloon Mortgage Note. 38 May 2023 Convertible Note Financing In May 2023, the Company entered into a securities purchase agreement with certain lenders (the “May 2023 Lenders”) and closed on the issuance of a 13.0% senior secured convertible promissory note in the aggregate principal amount of $1,500,000 (the “May 2023 Note”), as well as the issuance of 75,000 shares of common stock as a commitment fee and warrants for the purchase of up to 230,000 shares of the Company’s common stock. The Company and its subsidiaries have also entered into a security agreement, creating a security interest in certain property of the Company and its subsidiaries to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the May 2023 Note. The May 2023 Lenders acquired the May 2023 Note for $1,425,000 after an original issue discount of $75,000. The May 2023 Note matures on May 23, 2024 and accrues interest at a rate of 13.0% per annum. The May 2023 Note contains certain negative covenants. If the May 2023 Note is accelerated following the occurrence of an event of default as described in such note, the Company is required to pay 120% of the principal and interest outstanding under the May 2023 Note. The principal amount and interest under the May 2023 Note is convertible into shares of Company common stock at a conversion price of $4.50 per share, unless the Company fails to make an amortization payment when due in accordance with the terms of the May 2023 Note, in which case the conversion price shall be the lower of (i) $4.50 or (ii) 85% of the lowest VWAP of the Company’s common stock on any trading day during the five (5) trading days prior to the respective conversion date, subject to a floor of $1.50 per share. The warrants are comprised of (i) a warrant to purchase 125,000 shares of the Company’s common stock at an exercise price of $4.50 and exercisable until May 23, 2028 and (ii) a warrant to purchase 105,5000 shares of Company common stock at an exercise price of $3.20 and exercisable until May 23, 2028 and which warrant shall be cancelled and extinguished upon the payment of the May 2023 Note. The conversion price of the May 2023 Note and the exercise price of the warrants issued thereunder contain certain price protection anti-dilution adjustments if an event of default occurs under the May 2023 Notes. July 2023 Convertible Note Financing In July 2023, the Company entered into a securities purchase agreement with certain lenders (the “July 2023 Lenders”) and closed on the issuance of a 13.0% senior secured convertible promissory note in the aggregate principal amount of $500,000 (the “July 2023 Note”), as well as the issuance of 25,000 shares of common stock as a commitment fee and warrants for the purchase of up to 76,830 shares of the Company’s common stock. The Company and its subsidiaries have also entered into a security agreement, creating a security interest in certain property of the Company and its subsidiaries to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the July 2023 Note. The July 2023 Lenders acquired the July 2023 Note for $475,000 after an original issue discount of $25,000. The July 2023 Note matures on July 6, 2024 and accrues interest at a rate of 13.0% per annum. The July 2023 Note contains certain negative covenants. If the July 2023 Note is accelerated following the occurrence of an event of default as described in such note, the Company is required to pay 120% of the principal and interest outstanding under the July 2023 Note. The principal amount and interest under the July 2023 Note is convertible into shares of Company common stock at a conversion price of $4.50 per share, unless the Company fails to make an amortization payment when due which commences in January 2024 in accordance with the terms of the July 2023 Note, in which case the conversion price shall be the lower of (i) $4.50 or (ii) 85% of the lowest VWAP of the Company’s common stock on any trading day during the five (5) trading days prior to the respective conversion date, subject to a floor of $1.50 per share. The warrants are comprised of (i) a warrant to purchase 41,665 shares of the Company’s common stock at an exercise price of $4.50 and exercisable until July 6, 2028 and (ii) a warrant to purchase 35,165 shares of Company common stock at an exercise price of $3.20 and exercisable until July 6, 2028 and which warrant shall be cancelled and extinguished upon the payment of the July 2023 Notes. The conversion price of the July 2023 Note and the exercise price of the warrants issued thereunder contain certain price protection anti-dilution adjustments if an event of default occurs under the July 2023 Notes. 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 ATM and lending facilities and sales of equity. Other than funds received as described above 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 June 30, 2023 and 2022, we had an unrealized foreign currency translation loss of approximately $11,000 and $44,000, respectively, because of changes in the exchange rate. For the six months ended June 30, 2023 and 2022, we had an unrealized foreign currency translation loss of approximately $7,000 and $41,000, respectively, because of changes in the exchange rate. 39 Inflation The effect of inflation on our revenue and operating results was not significant. 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.