Change Agents Corporation. 10-Q

Item 1. Financial Statements. AVALON GLOBOCARE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2023 December 31, 2022 (Unaudited) ASSETS CURRENT ASSETS: Cash $ 341,771 $ 1,990,910 Rent receivable 116,665 134,626 Prepaid expense and other current assets 405,599 247,990 Total Current Assets 864,035 2,373,526 NON-CURRENT ASSETS: Operating lease right-of-use assets, net 154,854 10,885 Property and equipment, net 40,334 138,294 Investment in real estate, net 7,233,575 7,360,087 Equity method investments, net 21,370,060 485,008 Advances for equity interest purchase - 8,999,722 Other non-current assets 304,323 384,383 Total Non-current Assets 29,103,146 17,378,379 Total Assets $ 29,967,181 $ 19,751,905 LIABILITIES AND EQUITY CURRENT LIABILITIES: Accrued professional fees $ 1,730,232 $ 1,673,411 Accrued research and development fees 891,751 838,001 Accrued payroll liability and compensation 385,754 223,722 Accrued litigation settlement 450,000 450,000 Accrued liabilities and other payables 383,287 283,234 Accrued liabilities and other payables - related parties 159,481 100,000 Operating lease obligation 124,438 11,437 Equity method investment payable 1,000,000 - Derivative liability 41,048 - Convertible note payable, net 1,525,834 - Total Current Liabilities 6,691,825 3,579,805 NON-CURRENT LIABILITIES: Operating lease obligation - noncurrent portion 36,416 - Accrued litigation settlement - noncurrent portion - 450,000 Note payable, net 5,566,412 4,563,152 Loan payable - related party 850,000 - Total Non-current Liabilities 6,452,828 5,013,152 Total Liabilities 13,144,653 8,592,957 Commitments and Contingencies (Note 15) EQUITY: Preferred stock, $ 0.0001 par value; 10,000,000 shares authorized; Series A Convertible Preferred Stock, 9,000 shares issued and outstanding at September 30, 2023 and December 31, 2022. Liquidation preference $ 9 million at September 30, 2023 9,000,000 9,000,000 Series B Convertible Preferred Stock, 11,000 and 0 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively. Liquidation preference $ 11 million at September 30, 2023 11,000,000 - Common stock, $ 0.0001 par value; 490,000,000 shares authorized; 10,981,534 shares issued and 10,929,534 shares outstanding at September 30, 2023; 10,013,576 shares issued and 9,961,576 shares outstanding at December 31, 2022 1,098 1,005 Additional paid-in capital 67,781,112 65,949,723 Less: common stock held in treasury, at cost; 52,000 shares at September 30, 2023 and December 31, 2022 ( 522,500 ) ( 522,500 ) Accumulated deficit ( 70,214,597 ) ( 63,062,721 ) Statutory reserve 6,578 6,578 Accumulated other comprehensive loss ( 229,163 ) ( 213,137 ) Total Avalon GloboCare Corp. stockholders' equity 16,822,528 11,158,948 Non-controlling interest - - Total Equity 16,822,528 11,158,948 Total Liabilities and Equity $ 29,967,181 $ 19,751,905 See accompanying notes to the condensed consolidated financial statements. 1 AVALON GLOBOCARE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 RENTAL REVENUE $ 331,290 $ 317,390 $ 934,360 $ 905,842 OPERATING EXPENSES 288,083 247,152 781,931 677,303 OPERATING INCOME 43,207 70,238 152,429 228,539 INCOME FROM EQUITY METHOD INVESTMENT - LAB SERVICES MSO 354,500 - 370,060 - OTHER OPERATING EXPENSES: Advertising and marketing expenses 437,750 150,620 1,634,720 807,821 Professional fees 435,144 628,807 2,659,895 1,886,562 Compensation and related benefits 469,959 488,373 1,375,637 1,514,959 Research and development expenses - 170,406 110,160 541,566 Litigation settlement - - - 1,350,000 Other general and administrative expenses 195,990 221,131 704,908 687,243 Total Other Operating Expenses 1,538,843 1,659,337 6,485,320 6,788,151 LOSS FROM OPERATIONS ( 1,141,136 ) ( 1,589,099 ) ( 5,962,831 ) ( 6,559,612 ) OTHER (EXPENSE) INCOME Interest expense - amortization of debt discount and debt issuance cost ( 199,136 ) ( 3,248,597 ) ( 290,794 ) ( 3,303,282 ) Interest expense - other ( 229,144 ) ( 46,547 ) ( 527,702 ) ( 53,751 ) Interest expense - related party ( 10,712 ) ( 8,358 ) ( 23,000 ) ( 79,898 ) Conversion inducement expense - ( 344,264 ) - ( 344,264 ) Loss from equity method investment - Epicon - ( 9,011 ) ( 18,564 ) ( 33,809 ) Change in fair value of derivative liability 87,173 ( 168,520 ) 128,894 600,749 Impairment of equity method investment - Epicon - - ( 464,406 ) - Other income 7,880 242 6,527 260,701 Total Other Expense, net ( 343,939 ) ( 3,825,055 ) ( 1,189,045 ) ( 2,953,554 ) LOSS BEFORE INCOME TAXES ( 1,485,075 ) ( 5,414,154 ) ( 7,151,876 ) ( 9,513,166 ) INCOME TAXES - - - - NET LOSS $ ( 1,485,075 ) $ ( 5,414,154 ) $ ( 7,151,876 ) $ ( 9,513,166 ) LESS: NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST - - - - NET LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS $ ( 1,485,075 ) $ ( 5,414,154 ) $ ( 7,151,876 ) $ ( 9,513,166 ) COMPREHENSIVE LOSS: NET LOSS $ ( 1,485,075 ) $ ( 5,414,154 ) $ ( 7,151,876 ) $ ( 9,513,166 ) OTHER COMPREHENSIVE LOSS Unrealized foreign currency translation loss ( 8,685 ) ( 37,033 ) ( 16,026 ) ( 78,515 ) COMPREHENSIVE LOSS ( 1,493,760 ) ( 5,451,187 ) ( 7,167,902 ) ( 9,591,681 ) LESS: COMPREHENSIVE LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST - - - - COMPREHENSIVE LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS $ ( 1,493,760 ) $ ( 5,451,187 ) $ ( 7,167,902 ) $ ( 9,591,681 ) NET LOSS PER COMMON SHARE ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS: Basic and diluted $ ( 0.14 ) $ ( 0.56 ) $ ( 0.69 ) $ ( 1.04 ) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic and diluted 10,795,489 9,703,603 10,372,447 9,152,168 See accompanying notes to the condensed consolidated financial statements. 2 AVALON GLOBOCARE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the Three and Nine Months Ended September 30, 2023 (Unaudited) Avalon GloboCare Corp. Stockholders' Equity Series A Preferred Stock Series B preferred Stock Common Stock Additional Treasury Stock Accumulated Other Number of Number of Number of Paid-in Number of Accumulated Statutory Comprehensive Non-controlling Total Shares Amount Shares Amount Shares Amount Capital Shares Amount Deficit Reserve Loss Interest Equity Balance, January 1, 2023 9,000 $ 9,000,000 - $ - 10,013,576 $ 1,005 $ 65,949,723 ( 52,000 ) $ ( 522,500 ) $ ( 63,062,721 ) $ 6,578 $ ( 213,137 ) $ - $ 11,158,948 Issuance of Series B Convertible Preferred Stock for equity method investment - - 11,000 11,000,000 - - - - - - - - - 11,000,000 Issuance of common stock for services - - - - 202,731 21 463,355 - - - - - - 463,376 Stock-based compensation - - - - - - 68,262 - - - - - - 68,262 Foreign currency translation adjustment - - - - - - - - - - - 3,670 - 3,670 Net loss for the three months ended March 31, 2023 - - ` - - - - - - - ( 2,919,744 ) - - - ( 2,919,744 ) Balance, March 31, 2023 9,000 9,000,000 11,000 11,000,000 10,216,307 1,026 66,481,340 ( 52,000 ) ( 522,500 ) ( 65,982,465 ) 6,578 ( 209,467 ) - 19,774,512 To correct shares issued for adjustments for 1:10 reverse split - - - - 50,000 1 ( 1 ) - - - - - - - Issuance of common stock for services - - - - 158,600 16 536,264 - - - - - - 536,280 Issuance of common stock as convertible note payable commitment fee - - - - 75,000 7 146,993 - - - - - - 147,000 Stock-based compensation - - - - - - 112,015 - - - - - - 112,015 Foreign currency translation adjustment - - - - - - - - - - - ( 11,011 ) - ( 11,011 ) Net loss for the three months ended June 30, 2023 - - - - - - - - - ( 2,747,057 ) - - - ( 2,747,057 ) Balance, June 30, 2023 9,000 9,000,000 11,000 11,000,000 10,499,907 1,050 67,276,611 ( 52,000 ) ( 522,500 ) ( 68,729,522 ) 6,578 ( 220,478 ) - 17,811,739 Sale of common stock, net - - - - 456,627 46 414,350 - - - - - - 414,396 Issuance of common stock as convertible note payable commitment fee - - - - 25,000 2 35,498 - - - - - - 35,500 Stock-based compensation - - - - - - 54,653 - - - - - - 54,653 Foreign currency translation adjustment - - - - - - - - - - - ( 8,685 ) - ( 8,685 ) Net loss for the three months ended September 30, 2023 - - - - - - - - - ( 1,485,075 ) - - - ( 1,485,075 ) Balance, September 30, 2023 9,000 $ 9,000,000 11,000 $ 11,000,000 10,981,534 $ 1,098 $ 67,781,112 ( 52,000 ) $ ( 522,500 ) $ ( 70,214,597 ) $ 6,578 $ ( 229,163 ) $ - $ 16,822,528 See accompanying notes to the condensed consolidated financial statements. 3 AVALON GLOBOCARE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the Three and Nine Months Ended September 30, 2022 (Unaudited) Avalon GloboCare Corp. Stockholders' Equity Preferred Stock Common Stock Common Stock Additional Treasury Stock Accumulated Other Non- Number of Number of to be Paid-in Number of Accumulated Statutory Comprehensive controlling Total Shares Amount Shares Amount Issued Capital Shares Amount Deficit Reserve Loss Interest Equity Balance, January 1, 2022 - $ - 8,897,517 $ 890 $ - $ 54,896,567 ( 52,000 ) $ ( 522,500 ) $ ( 51,131,874 ) $ 6,578 $ ( 165,266 ) $ - $ 3,084,395 Sale of common stock, net - - 17,064 2 - 112,326 - - - - - - 112,328 Stock-based compensation - - - - - 152,323 - - - - - - 152,323 Foreign currency translation adjustment - - - - - - - - - - 2,021 - 2,021 Net loss for the three months ended March 31, 2022 - - - - - - - - ( 2,070,538 ) - - - ( 2,070,538 ) Balance, March 31, 2022 - - 8,914,581 892 - 55,161,216 ( 52,000 ) ( 522,500 ) ( 53,202,412 ) 6,578 ( 163,245 ) - 1,280,529 Warrants issued with convertible debt offering - - - - - 498,509 - - - - - - 498,509 Issuance of common stock for services - - 40,896 4 - 340,946 - - - - - - 340,950 Stock-based compensation - - - - - 126,301 - - - - - - 126,301 Foreign currency translation adjustment - - - - - - - - - - ( 43,503 ) - ( 43,503 ) Net loss for the three months ended June 30, 2022 ( 2,028,474 ) ( 2,028,474 ) Balance, June 30, 2022 - - 8,955,477 896 - 56,126,972 ( 52,000 ) ( 522,500 ) ( 55,230,886 ) 6,578 ( 206,748 ) - 174,312 Conversion of convertible note payable and accrued interest into common stock - - 573,645 57 - 4,072,901 - - - - - - 4,072,958 Reclassification of derivative liability to equity - - - - - 2,181,820 - - - - - - 2,181,820 Issuance of common stock for settlement of loan payable and accrued interest - related party - - 444,399 44 - 2,888,549 - - - - - - 2,888,593 Sale of common stock - related party - - - - 350,000 - - - - - - - 350,000 Sale of common stock - - - - 250,000 - - - - - - - 250,000 Stock-based compensation - - - - - 110,442 - - - - - - 110,442 Foreign currency translation adjustment - - - - - - - - - - ( 37,033 ) - ( 37,033 ) Net loss for the three months ended September 30, 2022 - - - - - - - - ( 5,414,154 ) - - - ( 5,414,154 ) Balance, September 30, 2022 - $ - 9,973,521 $ 997 $ 600,000 $ 65,380,684 ( 52,000 ) $ ( 522,500 ) $ ( 60,645,040 ) $ 6,578 $ ( 243,781 ) $ - $ 4,576,938 See accompanying notes to the condensed consolidated financial statements. 4 AVALON GLOBOCARE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 7,151,876 ) $ ( 9,513,166 ) Adjustments to reconcile net loss to net cash used in operating activities: Bad debt provision - 2,295 Depreciation 167,390 250,553 Change in straight-line rent receivable ( 7,227 ) ( 19,581 ) Amortization of operating lease right-of-use asset 89,731 101,980 Stock-based compensation and service expense 1,056,214 983,036 (Income) loss from equity method investments ( 351,496 ) 33,809 Impairment of equity method investment 464,406 - Amortization of debt issuance costs and debt discount 290,794 3,303,282 Conversion inducement expense - 344,264 Change in fair market value of derivative liability ( 128,894 ) ( 600,749 ) Changes in operating assets and liabilities: Rent receivable 31,848 ( 33,049 ) Security deposit 398 ( 424 ) Deferred leasing costs 25,051 18,947 Prepaid expense and other assets ( 29,393 ) ( 65,963 ) Accounts payable - 86,826 Accrued liabilities and other payables ( 140,442 ) 63,089 Accrued liabilities and other payables - related parties 59,481 79,898 Operating lease obligation ( 84,387 ) ( 107,979 ) NET CASH USED IN OPERATING ACTIVITIES ( 5,708,402 ) ( 5,072,932 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 22,171 ) ( 1,749 ) Additional investment in equity method investment - ( 52,994 ) NET CASH USED IN INVESTING ACTIVITIES ( 22,171 ) ( 54,743 ) CASH FLOWS FROM FINANCING ACTIVITIES Repayments of note payable - related party - ( 390,000 ) Proceeds from loan payable - related party 850,000 100,000 Repayments of loan payable - related party - ( 410,000 ) Proceeds from issuance of convertible debt and warrants 1,900,000 3,718,943 Payments of convertible debt issuance costs ( 210,500 ) - Proceeds from issuance of balloon promissory note 1,000,000 4,800,000 Payments of balloon promissory note issuance costs ( 64,436 ) ( 266,454 ) Proceeds from equity offering 635,391 735,567 Disbursements for equity offering costs ( 19,132 ) ( 24,067 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 4,091,323 8,263,989 EFFECT OF EXCHANGE RATE ON CASH ( 9,889 ) ( 5,893 ) NET (DECREASE) INCREASE IN CASH ( 1,649,139 ) 3,130,421 CASH - beginning of period 1,990,910 807,538 CASH - end of period $ 341,771 $ 3,937,959 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Interest $ 442,222 $ 44,000 NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for future services $ 58,500 $ 19,680 Common stock issued for accrued liabilities $ 164,871 $ 30,000 Reclassification of advances for equity interest purchase to equity method investment $ 9,000,000 $ - Series B Convertible Preferred Stock issued related to equity method investment $ 11,000,000 $ - Accrued purchase price related to equity method investment $ 1,000,000 $ - Warrants issued as convertible note payable finder's fee $ 13,597 $ - Warrants issued with convertible note payable recorded as debt discount $ 156,345 $ 498,509 Bifurcated embedded conversion feature recorded as derivative liability and debt discount $ - $ 2,782,569 Common stock issued as convertible note payable commitment fee $ 182,500 $ - Deferred financing costs in accrued liabilities $ 152,892 $ - Conversion of convertible note payable and accrued interest into common stock $ - $ 4,072,958 Reclassification of derivative liability to equity $ - $ 2,181,820 Related party loan and accrued interest settled in shares $ - $ 2,888,593 See accompanying notes to the condensed consolidated financial statements. 5 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 — ORGANIZATION AND NATURE OF OPERATIONS Avalon GloboCare Corp. (the “Company” or “ALBT”) is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on July 28, 2014. On October 19, 2016, the Company entered into and closed a Share Exchange Agreement with the shareholders of Avalon Healthcare System, Inc., a Delaware corporation (“AHS”), each of which were accredited investors (“AHS Shareholders”), pursuant to which the Company acquired 100 % of the outstanding securities of AHS in exchange for 50,000,000 shares of the Company’s common stock (the “AHS Acquisition”). AHS was incorporated on May 18, 2015 under the laws of the State of Delaware. For accounting purposes, AHS was the surviving entity. The transaction was accounted for as a recapitalization of AHS, pursuant to which AHS was treated as the accounting acquirer, surviving and continuing entity although the Company was the legal acquirer. The Company did not recognize goodwill or any intangible assets in connection with this transaction. Accordingly, the Company’s historical financial statements are those of AHS and its wholly owned subsidiary, Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”) immediately following the consummation of this reverse merger transaction. AHS owns 100 % of the capital stock of Avalon Shanghai, which is a wholly foreign-owned enterprise organized under the laws of the People’s Republic of China (“PRC”). Avalon Shanghai was incorporated on April 29, 2016, had limited assets and was engaged in medical related consulting services for customers. Due to the winding down of the medical related consulting services in 2022, the Company decided to cease all operations of Avalon Shanghai and no longer has any material revenues or expenses in Avalon Shanghai. As a result, Avalon Shanghai is no longer an operating entity. 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. On February 7, 2017, the Company formed Avalon RT 9 Properties, LLC (“Avalon RT 9”), a New Jersey limited liability company. On May 5, 2017, Avalon RT 9 purchased a real property located in Township of Freehold, County of Monmouth, State of New Jersey, having a street address of 4400 Route 9 South, Freehold, NJ 07728. This property was purchased to serve as the Company’s world-wide headquarters for all corporate administration and operations. In addition, the property generates rental income. Avalon RT 9 owns this office building. Avalon RT 9’s business consists of the ownership and operation of the income-producing real estate property in New Jersey. As of September 30, 2023, the occupancy rate of the building is 89.4 %. On July 18, 2018, the Company formed a wholly owned subsidiary, Avactis Biosciences Inc. (“Avactis”), a Nevada corporation, which focuses on accelerating commercial activities related to cellular therapies as well as cellular immunotherapy including CAR-T, CAR-NK, TCR-T and others. Avactis is designed to integrate and optimize the Company’s global scientific and clinical resources to further advance the use of cellular therapies to treat certain cancers. Commencing on April 6, 2022, the Company owns 60 % of Avactis and Arbele Biotherapeutics Limited (“Arbele Biotherapeutics”) owns 40 % of Avactis. Avactis owns 100 % of the capital stock of Avactis Nanjing Biosciences Ltd., a company incorporated in the PRC on May 8, 2020 (“Avactis Nanjing”), which only owns a patent and is not considered an operating entity. On October 14, 2022, the Company formed a wholly owned subsidiary, Avalon Laboratory Services, Inc. (“Avalon Lab”), a Delaware company. On February 9, 2023, Avalon Lab purchased forty percent ( 40 %) of 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 (“Lab Services MSO”), and its subsidiaries. Lab Services MSO, through its two subsidiaries, Laboratory Services, LLC (“Lab Services LLC”) and Laboratory Services DME, LLC (“Lab Services DME”), is engaged in providing laboratory testing services. 6 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 — ORGANIZATION AND NATURE OF OPERATIONS (continued) The accompanying condensed consolidated financial statements reflect the activities of the Company and each of the following entities: Name of Subsidiary Place and Date of Incorporation Percentage of Ownership Principal Activities Avalon Healthcare System, Inc. (“AHS”) Delaware May 18, 2015 100% held by ALBT Developing Avalon Cell and Avalon Rehab in United States of America (“USA”) Avalon RT 9 Properties LLC (“Avalon RT 9”) New Jersey February 7, 2017 100% held by ALBT Owns and operates an income-producing real property and holds and manages the corporate headquarters Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”) PRC April 29, 2016 100% held by AHS Ceased operations and is not considered an operating entity Genexosome Technologies Inc. (“Genexosome”) Nevada July 31, 2017 60% held by ALBT No current activities to report, dormant Avactis Biosciences Inc. (“Avactis”) Nevada July 18, 2018 60% held by ALBT Patent holding company Avactis Nanjing Biosciences Ltd. (“Avactis Nanjing”) PRC May 8, 2020 100% held by Avactis Owns a patent and is not considered an operating entity International Exosome Association LLC (“Exosome”) Delaware June 13, 2019 100% held by ALBT No activity, dormant Avalon Laboratory Services, Inc. (“Avalon Lab”) Delaware October 14, 2022 100% held by ALBT Laboratory holding company with a 40% membership interest in Lab Services MSO NOTE 2 — BASIS OF PRESENTATION AND GOING CONCERN CONDITION Basis of Presentation These interim condensed consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements have been included. The results reported in the condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). The Company’s condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on March 30, 2023. 7 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 2 — BASIS OF PRESENTATION AND GOING CONCERN CONDITION (continued) 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 a working capital deficit of approximately $ 5,828,000 at September 30, 2023 and had incurred recurring net losses and generated negative cash flow from operating activities of approximately $ 7,152,000 and $ 5,708,000 for the nine months ended September 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. NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant Accounting Policies There have been no changes to the Company’s significant accounting policies described in the Company’s 2022 Annual Report on Form 10-K filed with the SEC that have had a material impact on the Company’s financial condition, and operating results. Use of Estimates The preparation of condensed consolidated financial statements in conformity with 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 condensed 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 nine months ended September 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 and assets acquired in the purchase of 40 % of Lab Services MSO. 8 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair Value of Financial Instruments and Fair Value Measurements The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows: · Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. · Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. · Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximates the carrying amounts represented in the accompanying condensed consolidated financial statements, primarily due to their short-term nature. Assets and liabilities measured at fair value on a recurring basis. Certain assets and liabilities are measured at fair value on a recurring basis. These assets and liabilities are measured at fair value on an ongoing basis. These assets and liabilities include derivative liability. Derivative liability. Derivative liability is carried at fair value and measured on an ongoing basis. The table below reflects the activity of derivative liability measured at fair value for the nine months ended September 30, 2023: Significant Unobservable Inputs (Level 3) Balance of derivative liability as of January 1, 2023 $ - Initial fair value of derivative liability attributable to warrants issuance with fund raise 169,942 Gain from change in the fair value of derivative liability ( 128,894 ) Balance of derivative liability as of September 30, 2023 $ 41,048 Assets and liabilities measured at fair value on a nonrecurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances. These assets and liabilities can include equity method investment that are written down to fair value when they are impaired. Equity method investment in Epicon Biotech Co., Ltd. The factors used to determine fair value are subject to management’s judgment and expertise and include, but are not limited to, the investee’s series of operating losses and the joint venture partner unable to obtain funds to commence operations. These assumptions represent Level 3 inputs. Impairment of equity method investment in Epicon Biotech Co., Ltd. for the nine months ended September 30, 2023 was $ 464,406 . ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments. 9 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash and Cash Equivalents At September 30, 2023 and December 31, 2022, the Company’s cash balances by geographic area were as follows: Country: September 30, 2023 December 31, 2022 United States $ 321,899 94.2 % $ 1,806,083 90.7 % China 19,872 5.8 % 184,827 9.3 % Total cash $ 341,771 100.0 % $ 1,990,910 100.0 % For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less when purchased and money market accounts to be cash equivalents. The Company had no cash equivalents at September 30, 2023 and December 31, 2022. Credit Risk and Uncertainties A portion of the Company’s cash is maintained with state-owned banks within the PRC. Balances at state-owned banks within the PRC are covered by insurance up to RMB 500,000 (approximately $ 69,000 ) per bank. Any balance over RMB 500,000 per bank in PRC will not be covered. At September 30, 2023, cash balances held in the PRC are RMB 144,963 (approximately $ 20,000 ), which was covered by such limited insurance. The Company maintains a portion of its cash on deposits with bank and financial institution within the U.S. that at times may exceed federally-insured limits of $ 250,000 . The Company manages this credit risk by concentrating its cash balances in high quality financial institutions and by periodically evaluating the credit quality of the primary financial institutions holding such deposits. The Company has not experienced any losses in such bank accounts and believes it is not exposed to any risks on its cash in bank accounts. At September 30, 2023, the Company’s cash balances in United States bank accounts had approximately $ 25,000 in excess of the federally-insured limits. The Company’s concentrations of credit risk with respect to its rent receivable is limited due to short-term payment terms. The Company also performs ongoing credit evaluations of its tenants to help further reduce credit risk. 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 nine months ended September 30, 2023. See Note 5 for discussion of equity method investments. Real Property Rental Revenue The Company has determined that 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 account receivable on the consolidated balance sheets. The Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers. 10 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Commitments and Contingencies In the normal course of business, the Company is subject to contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters. Liabilities for such contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Per Share Data ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution . Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the three and nine months ended September 30, 2023 and 2022, potentially dilutive common shares consist of the common shares issuable upon the conversion of convertible preferred stock and convertible note (using the if-converted method) and exercise of common stock options and warrants (using the treasury stock method). Common stock equivalents are not included in the calculation of diluted net loss per share if their effect would be anti-dilutive. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact. The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Options to purchase common stock 872,303 814,500 872,303 838,500 Warrants to purchase common stock 303,962 123,964 303,962 123,964 Series A convertible preferred stock (*) 900,000 - 900,000 - Series B convertible preferred stock (**) 2,910,053 - 2,910,053 - Convertible note (***) 444,444 572,145 444,444 572,145 Potentially dilutive securities 5,430,762 1,510,609 5,430,762 1,534,609 (*) Assumed the Series A convertible preferred stock was converted into shares of common stock of the Company at a conversion price of $ 10.0 per share . (**) Assumed the Series B convertible preferred stock was converted into shares of common stock of the Company at a conversion price of $ 3.78 per share. (***) Assumed the convertible note was converted into shares of common stock of the Company at a conversion price of $ 4.50 and $ 0.65 per share for the 2023 and 2022 periods, respectively. Segment Reporting The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the Chief Executive Officer (“CEO”) and president of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. During the three and nine months ended September 30, 2022, the Company operated in two reportable business segments - (1) the real property operating segment, and (2) the medical related consulting services segment. These reportable segments offer different services and products, have different types of revenue, and are managed separately as each requires different operating strategies and management expertise. Due to the winding down of the medical related consulting services segment in 2022, the Company decided to cease all operations of this segment and no longer has any material revenues or expenses in this segment. As a result, commencing from the first quarter of 2023, the Company’s chief operating decision maker no longer reviews medical related consulting services operating results. 11 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Segment Reporting (continued) On February 9, 2023, the Company purchased 40 % of Lab Services MSO. Commencing from the purchase date, February 9, 2023, the Company is active in the management of Lab Services MSO. During the three and nine months ended September 30, 2023, the Company operated in two reportable business segments: (1) the real property operating segment, and (2) laboratory testing services segment (which commenced with the purchase date, February 9, 2023) since Lab Services MSO’s operating results are regularly reviewed by the Company’s chief operating decision maker to determine the resources to be allocated to the segment and assess its performance. The Company regularly reviews the operating results and performance of Lab Services MSO, for which the Company accounts for under the equity method. Reclassification Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the previously reported financial position, results of operations and cash flows. Reverse Stock Split The Company effected a one-for-ten reverse stock split of its outstanding shares of common stock on January 5, 2023. The reverse split did not change the number of authorized shares of common stock or par value. All references in these condensed consolidated financial statements to shares, share prices, exercise prices, and other per share information in all periods have been adjusted, on a retroactive basis, to reflect the reverse stock split. Recent Accounting Standards In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“Topic 326”). The ASU introduces a new accounting model, the Current Expected Credit Losses model (“CECL”), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. ASU 2016-13 is effective for annual period beginning after December 15, 2022, including interim reporting periods within those annual reporting periods. The adoption of this new guidance did not have any material impact on the Company’s condensed consolidated financial statements. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends the accounting related to contract assets and liabilities acquired in business combinations. ASU 2021-08 requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to business combinations occurring on or after the effective date of the amendment. Early adoption is permitted, including adoption in an interim period. The adoption of this new guidance did not have any material impact on the Company’s condensed consolidated financial statements. Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures. NOTE 4 — PREPAID EXPENSE AND OTHER CURRENT ASSETS At September 30, 2023 and December 31, 2022, prepaid expense and other current assets consisted of the following: September 30, 2023 December 31, 2022 Prepaid professional fees $ 112,393 $ 93,817 Prepaid directors and officers liability insurance premium 25,862 29,301 Prepaid NASDAQ listing fee 25,313 - Deferred offering costs 125,136 34,821 Deferred leasing costs 33,402 33,402 Security deposit - 19,084 Others 83,493 37,565 Total $ 405,599 $ 247,990 12 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 5 — EQUITY METHOD INVESTMENTS Investment in Epicon Biotech Co., Ltd. As of September 30, 2023 and December 31, 2022, the equity method investment in Epicon Biotech Co., Ltd. (“Epicon”) amounted to $ 0 and $ 485,008 , respectively. The investment represents the Company’s subsidiary, Avalon Shanghai’s interest in Epicon. Epicon was incorporated on August 14, 2018 in PRC. Avalon Shanghai and an unrelated company, Jiangsu Unicorn Biological Technology Co., Ltd. (“Unicorn”), have an ownership interest in Epicon of 40 % and 60 %, respectively. Epicon is focused on cell preparation, third party testing, biological sample repository for commercial and scientific research purposes and clinical transformation of scientific achievements. The Company is not involved in the management of Epicon. Therefore, it is a passive investment. In June 2023, the Company assessed its equity method investment in Epicon for any impairment and concluded that there were indicators of impairment as of June 30, 2023. The impairment is due to the Company’s conclusion that it will be unable to recover the carrying amount of the investment due to the investee’s series of operating losses and the inability of Avalon Shanghai’s joint venture partner (Unicorn) to obtain adequate funding to commence operations. The Company calculated that the estimated undiscounted cash flows were less than the carrying amount related to the equity method investment. The Company has recognized an impairment loss of $ 464,406 related to the equity method investment for the three and nine months ended September 30, 2023, which reduced the investment value to zero. Under the equity method, if there is a commitment for the Company to fund the losses of its equity method investees, the Company would continue to record its share of losses resulting in a negative equity method investment, which would be presented as a liability on the condensed consolidated balance sheets. Commitments may be explicit and may include formal guarantees, legal obligations, or arrangements by contract. Implicit commitments may arise from reputational expectations, intercompany relationships, statements by the Company of its intention to provide support, a history of providing financial support or other facts and circumstances. When the Company has no commitment to fund the losses of its equity method investees, the carrying value of its equity method investments will not be reduced below zero. The Company had no commitment to fund additional losses of its equity method investments during the three months ended September 30, 2023. Investment in Laboratory Services MSO, LLC On February 9, 2023 (the “Closing Date”), the Company entered into and closed an Amended and Restated Membership Interest Purchase Agreement (the “Amended MIPA”), by and among Avalon Laboratory Services, Inc., a wholly owned subsidiary of the Company (the “Buyer”), SCBC Holdings LLC (the “Seller”), the Zoe Family Trust, Bryan Cox and Sarah Cox as individuals (each an “Owner” and collectively, the “Owners”), and Laboratory Services MSO, LLC Pursuant to the terms and conditions set forth in the Amended MIPA, the Buyer acquired from the Seller, forty percent ( 40 %) of the issued and outstanding equity interests of Lab Services MSO (the “Purchased Interests”). The consideration paid by Buyer to Seller for the Purchased Interests consisted of $21,000,000, which was comprised of (i) $9,000,000 in cash, (ii) $11,000,000 pursuant to the issuance of 11,000 shares of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”), stated value $1,000 (the “Series B Stated Value”), and (iii) a $1,000,000 cash payment on February 9, 2024. The Series B Preferred Stock will be convertible into shares of the Company’s common stock at a conversion price per share equal to $3.78 or an aggregate of 2,910,053 shares of the Company’s common stock, which are subject to a lock-up period and restrictions on sale (See Note 10 — Series B Convertible Preferred Stock Issued for Equity Method Investment). The Seller is also eligible, under the terms set forth in the Amended MIPA, to receive certain earnout payments upon achievement of certain operating results, up to $10,000,000, which may be comprised of(x) up to $5,000,000 paid in cash and (y) up to $5,000,000 paid pursuant to the issuance of the number of shares of the Company’s common stock valued at $5,000,000, calculated using the closing price of the Company’s common stock on December 31, 2023, rounded down to the nearest whole share (collectively, the “Earnout Payments”). At both February 9, 2023 and September 30, 2023, the estimated earnout liability amounted to $0 since the minimum thresholds set forth in the Amended MIPA are currently unlikely to be met. The estimated earnout is a level 3 valuation which will be measured at the end of the applicable reporting period. Lab Services MSO, through its two subsidiaries, Lab Services LLC and Lab Services DME, is engaged in providing laboratory testing services. Avalon Lab and an unrelated company, have an ownership interest in Lab Services MSO of 40 % and 60 %, respectively. As of September 30, 2023, the equity method investment in Lab Services MSO amounted to $ 21,370,060 . In accordance with ASC 810, the Company determined that Lab Services MSO does not qualify as a Variable Interest Entity, nor does it have a controlling financial interest over the legal entity. However, the Company determined that it does have significant influence as a result of its board representation. Therefore, the Company treats the equity investment in the condensed consolidated financial statements under the equity method. Under the equity method, the investment is initially recorded at cost, adjusted for any excess of the Company’s share of the purchased-date fair values of the investee’s identifiable net assets over the cost of the investment (if any). At February 9, 2023 (date of investment), the excess of the Company’s share of the fair values of the investee’s identifiable net assets over the cost of the investment was approximately $ 19,901,000 which was attributable to intangible assets and goodwill. Thereafter, the investment is adjusted for the post purchase change in the Company’s share of the investee’s net assets and any impairment loss relating to the investment. 13 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 5 — EQUITY METHOD INVESTMENTS (continued) Investment in Laboratory Services MSO, LLC (continued) For the three months ended September 30, 2023 and the period from February 9, 2023 (date of investment) through September 30, 2023, the Company’s share of Lab Services MSO’s net income was $ 354,500 and $ 370,060 , respectively, which was included in income from equity method investment — Lab Services MSO in the accompanying condensed consolidated statements of operations and comprehensive loss. In the nine months ended September 30, 2023, activity recorded for the Company’s equity method investment in Lab Services MSO is summarized in the following table: Equity investment carrying amount at January 1, 2023 $ - Payment for equity method investment: The Company’s interest in the net assets of Lab Services MSO’s carrying amount at February 9, 2023 which approximates fair value 1,099,387 The Company’s interest in the net excess of Lab Services MSO’s fair value over carrying value which was attributable to identifiable intangible assets at February 9, 2023 5,970,184 The Company’s interest in the net excess of Lab Services MSO’s fair value over carrying value which was attributable to goodwill at February 9, 2023 13,930,429 21,000,000 Lab Services MSO’s net income attributable to the Company 913,378 Intangible assets amortization amount ( 543,318 ) Equity investment carrying amount at September 30, 2023 $ 21,370,060 As of September 30, 2023, the Company’s carrying value of the identified intangible assets and goodwill which are included in the equity investment carrying amount was $ 5,426,866 and $ 13,930,429 , respectively. The tables below present the summarized financial information, as provided to the Company by the investee, for the unconsolidated company: September 30, 2023 Current assets $ 4,942,287 Noncurrent assets 5,631,040 Current liabilities 818,045 Noncurrent liabilities 4,731,503 Equity 5,023,779 For the Three Months Ended September 30, 2023 For the Period from February 9, 2023 (Date of Investment) through September 30, 2023 Net revenue $ 3,485,337 $ 9,147,554 Gross profit 1,607,102 3,634,508 Income from operation 1,014,236 1,710,118 Net income 1,395,611 2,283,446 According to the Amended MIPA, at any time during the period beginning on February 9, 2023 and ending on the date nine (9) months after February 9, 2023, the Buyer, or its designated affiliates under the Amended MIPA, may purchase from the Seller twenty percent ( 20 %) of the total issued and outstanding equity interests of Laboratory Services MSO for the purchase price of (i) $ 6,000,000 in cash and (ii) the issuance of an additional 4,000 shares of Series B Preferred Stock valued at $ 4,000,000 , in accordance with the terms and conditions set forth in the Amended MIPA. As of the date of this report, the Amended MIPA has expired. Currently, both parties are negotiating the purchase of additional eleven percent ( 11 %) of the total issued and outstanding equity interests of Laboratory Services MSO. 14 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 — CONVERTIBLE NOTE PAYABLE May 2023 Convertible Note On May 23, 2023, the Company entered into securities purchase agreements with Mast Hill Fund, L.P. (“Mast Hill”) for the issuance of 13.0 % senior secured promissory notes in the aggregate principal amount of $ 1,500,000 (collectively, the “May 2023 Convertible Note”) convertible into shares of common stock, par value $ 0.0001 per share, of the Company, as well as the issuance of 75,000 shares of common stock as a commitment fee and warrants for the purchase of 230,500 shares of common stock of the Company. 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 Convertible Note. Principal amount and interest under the May 2023 Convertible Note are convertible into shares of common stock of the Company at a conversion price of $ 4.50 per share unless the Company fails to make an amortization payment when due, in which case the conversion price shall be the lower of $ 4.50 or the trading price of the shares, subject to a floor of $ 1.50 . Mast Hill acquired the May 2023 Convertible Note with principal amount of $ 1,500,000 and paid the purchase price of $ 1,425,000 after an original issue discount of $ 75,000 . On May 23, 2023, the Company issued (i) a warrant to purchase 125,000 shares of common stock with an exercise price of $ 4.50 exercisable until the five-year anniversary of May 23, 2023, (ii) a warrant to purchase 105,500 shares of common stock with an exercise price of $ 3.20 exercisable until the five-year anniversary of May 23, 2023, which warrant shall be cancelled and extinguished against payment of the May 2023 Convertible Note, and (iii) 75,000 shares of common stock as a commitment fee for the purchase of the May 2023 Convertible Note, which were earned in full as of May 23, 2023. On May 23, 2023, the Company delivered such duly executed May 2023 Convertible Note, warrants and common stock to Mast Hill against delivery of such purchase price. The Company is obligated to make amortization payments in cash to Mast Hill towards the repayment of the May 2023 Convertible Note, as provided in the following table : Payment Date: Payment Amount: November 23, 2023 $150,000 plus accrued interest through November 23, 2023 December 23, 2023 $150,000 plus accrued interest through December 23, 2023 January 23, 2024 $200,000 plus accrued interest through January 23, 2024 February 23, 2024 $250,000 plus accrued interest through February 23, 2024 March 23, 2024 $250,000 plus accrued interest through March 23, 2024 April 23, 2024 $300,000 plus accrued interest through April 23, 2024 May 23, 2024 The entire remaining outstanding balance of the May 2023 Convertible Note In connection with the issuance of the May 2023 Convertible Note, the Company incurred debt issuance costs of $ 175,162 (including the issuance of 10,000 warrants as a finder’s fee) which is capitalized and will be amortized into interest expense over the term of the May 2023 Convertible Note. Based upon the Company’s analysis of the criteria contained in ASC 815, the Company determined that all the warrants issued to Mast Hill and a third party as a finder’s fee met the definition of a derivative liability, as the Company cannot avoid a net cash settlement under certain circumstances. Management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the 105,500 warrants with an exercise price of $ 3.20 exercisable until the five-year anniversary of May 23, 2023, which warrant shall be cancelled and extinguished against payment of the May 2023 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 135,000 warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of May 23, 2023 was classified as derivative liability on May 23, 2023. The fair values of the 135,000 warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of May 23, 2023 issued on May 23, 2023 were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $ 1.96 , volatility of 88.80 %, risk-free rate of 3.76 %, annual dividend yield of 0 % and expected life of 5 years. In accordance with ASC 470-20-25-2, proceeds from the sale of a debt instrument with stock purchase warrants are allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds allocated to the warrants are accounted for as derivative liability. The remainder of the proceeds are allocated to the debt instrument portion of the transaction. In accordance with ASC 480-10-25-14, the Company determined that the conversion provisions contain an embedded derivative feature and the Company valued the derivative feature separately, recording debt discount and derivative liability in accordance with the provisions of the convertible debt (see Note 7). However, management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the embedded conversion feature has been estimated to be zero. The Company recorded a total debt discount of $ 349,654 related to the original issue discount, common shares issued and warrants issued to Mast Hill, which will be amortized over the term of the May 2023 Convertible Note. 15 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 — CONVERTIBLE NOTE PAYABLE (continued) May 2023 Convertible Note (continued) For the three months ended September 30, 2023, amortization of debt discount and debt issuance costs and interest expense related to the May 2023 Convertible Note amounted to $ 131,204 and $ 49,151 , respectively, which have been included in interest expense — amortization of debt discount and debt issuance cost and interest expense — other on the accompanying condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2023, amortization of debt discount and debt issuance costs and interest expense related to the May 2023 Convertible Note amounted to $ 175,919 and $ 69,987 , respectively, which have been included in interest expense — amortization of debt discount and debt issuance cost and interest expense — other on the accompanying condensed consolidated statements of operations and comprehensive loss. July 2023 Convertible Note On July 6, 2023, the Company entered into securities purchase agreements with Firstfire Global Opportunities Fund, LLC (“Firstfire”) for the issuance of 13.0 % senior secured promissory notes in the aggregate principal amount of $ 500,000 (collectively, the “July 2023 Convertible Note”) convertible into shares of common stock, par value $ 0.0001 per share, of the Company, as well as the issuance of 25,000 shares of common stock as a commitment fee and warrants for the purchase of 76,830 shares of common stock of the Company. 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 Convertible Note. Principal amount and interest under the July 2023 Convertible Note are convertible into shares of common stock of the Company at a conversion price of $ 4.50 per share unless the Company fails to make an amortization payment when due, in which case the conversion price shall be the lower of $ 4.50 or the trading price of the shares, subject to a floor of $ 1.50 . Firstfire acquired the July 2023 Convertible Note with principal amount of $ 500,000 and paid the purchase price of $ 475,000 after an original issue discount of $ 25,000 . On July 6, 2023, the Company issued (i) a warrant to purchase 41,665 shares of common stock with an exercise price of $ 4.50 exercisable until the five-year anniversary of July 6, 2023, (ii) a warrant to purchase 35,165 shares of common stock with an exercise price of $ 3.20 exercisable until the five-year anniversary of July 6, 2023, which warrant shall be cancelled and extinguished against payment of the July 2023 Convertible Note, and (iii) 25,000 shares of common stock as a commitment fee for the purchase of the July 2023 Convertible Note, which were earned in full as of July 6, 2023. On July 6, 2023, the Company delivered such duly executed July 2023 Convertible Note, warrants and common stock to Firstfire against delivery of such purchase price. The Company is obligated to make amortization payments in cash to Firstfire towards the repayment of the July 2023 Convertible Note, as provided in the following table : Payment Date: Payment Amount: January 6, 2024 $50,000 plus accrued interest through January 6, 2024 February 6, 2024 $50,000 plus accrued interest through February 6, 2024 March 6, 2024 $66,000 plus accrued interest through March 6, 2024 April 6, 2024 $83,000 plus accrued interest through April 6, 2024 May 6, 2024 $83,000 plus accrued interest through May 6, 2024 June 6, 2024 $100,000 plus accrued interest through June 6, 2024 July 6, 2024 The entire remaining outstanding balance of the July 2023 Convertible Note In connection with the issuance of the July 2023 Convertible Note, the Company incurred debt issuance costs of $ 74,204 (including the issuance of 3,333 warrants as a finder’s fee), which is capitalized and will be amortized into interest expense over the term of the July 2023 Convertible Note. Based upon the Company’s analysis of the criteria contained in ASC 815, the Company determined that all the warrants issued to Firstfire and a third party as a finder’s fee meet the definition of a derivative liability, as the Company cannot avoid a net cash settlement under certain circumstances. Management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the 35,165 warrants with an exercise price of $ 3.20 exercisable until the five-year anniversary of July 6, 2023, which warrant shall be cancelled and extinguished against payment of the July 2023 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 44,998 warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of July 6, 2023 was classified as a derivative liability on July 6, 2023. The fair values of the 44,998 warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of July 6, 2023 issued on July 6, 2023 were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $ 1.42 , volatility of 88.52 %, risk-free rate of 4.37 %, annual dividend yield of 0 % and expected life of 5 years. In accordance with ASC 470-20-25-2, proceeds from the sale of a debt instrument with stock purchase warrants are allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds allocated to the warrants are accounted for as derivative liability. The remainder of the proceeds are allocated to the debt instrument portion of the transaction. 16 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 — CONVERTIBLE NOTE PAYABLE (continued) July 2023 Convertible Note (continued) In accordance with ASC 480-10-25-14, the Company determined that the conversion provisions contain an embedded derivative feature and the Company valued the derivative feature separately, recording debt discount and derivative liability in accordance with the provisions of the convertible debt (see Note 7). However, management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the embedded conversion feature has been estimated to be zero. The Company recorded a total debt discount of $ 89,191 related to the original issue discount, common shares issued and warrants issued to Firstfire, which will be amortized over the term of the July 2023 Convertible Note. For both the three and nine months ended September 30, 2023, amortization of debt discount and debt issuance costs and interest expense related to the July 2023 Convertible Note amounted to $ 38,125 and $ 15,493 , respectively, which have been included in interest expense — amortization of debt discount and debt issuance cost and interest expense — other on the accompanying condensed consolidated statements of operations and comprehensive loss. NOTE 7 — DERIVATIVE LIABILITY As stated in Note 6, May 2023 Convertible Note and July 2023 Convertible Note, the Company determined that the convertible note payable contains an embedded derivative feature in the form of a conversion provision which is adjustable based on future prices of the Company’s common stock. In accordance with ASC 815-10-25, each derivative feature is initially recorded at its fair value using the Black-Scholes option valuation method and then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. However, on May 23, 2023, July 6, 2023, and September 30, 2023, management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the embedded conversion feature has been estimated to be zero. On May 23, 2023, the Company issued 240,500 warrants to Mast Hill and a third party as a finder’s fee (see Note 6). Upon evaluation, the warrants meet the definition of a derivative liability under FASB ASC 815, as the Company cannot avoid a net cash settlement under certain circumstances. Management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the 105,500 warrants with an exercise price of $ 3.20 exercisable until the five-year anniversary of May 23, 2023, which warrant shall be cancelled and extinguished against payment of the May 2023 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 135,000 warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of May 23, 2023 was classified as a derivative liability on May 23, 2023. On May 23, 2023, the estimated fair value of the 135,000 warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of May 23, 2023 issued were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $ 1.96 , volatility of 88.80 %, risk-free rate of 3.76 %, annual dividend yield of 0 % and expected life of 5 years. On September 30, 2023, the estimated fair value of the 135,000 warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of May 23, 2023 as derivative liability was $ 39,688 . The estimated fair value of the warrants was computed as of September 30, 2023 using Black-Scholes option-pricing model, with the following assumptions: stock price of $ 0.80 , volatility of 86.97 %, risk-free rate of 4.60 %, annual dividend yield of 0 % and expected life of 4.6 years. On July 6, 2023, the Company issued 80,163 warrants to Firstfire and a third party as a finder’s fee (see Note 6). Upon evaluation, the warrants meet the definition of a derivative liability under FASB ASC 815, as the Company cannot avoid a net cash settlement under certain circumstances. Management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the 35,165 warrants with an exercise price of $ 3.20 exercisable until the five-year anniversary of July 6, 2023, which warrant shall be cancelled and extinguished against payment of the July 2023 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 44,998 warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of July 6, 2023 was classified as a derivative liability on July 6, 2023. On July 6, 2023, the estimated fair values of the 44,998 warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of July 6, 2023 issued were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $ 1.42 , volatility of 88.52 %, risk-free rate of 4.37 %, annual dividend yield of 0 % and expected life of 5 years. 17 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 7 — DERIVATIVE LIABILITY (continued) On September 30, 2023, the estimated fair value of the 44,998 warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of July 6, 2023 as derivative liability was $ 14,982 . The estimated fair value of the warrants was computed as of September 30, 2023 using Black-Scholes option-pricing model, with the following assumptions: stock price of $ 0.80 , volatility of 91.44 %, risk-free rate of 4.60 %, annual dividend yield of 0 % and expected life of 4.8 years. Increases or decreases in fair value of the derivative liability is included as a component of total other (expenses) income in the accompanying condensed consolidated statements of operations and comprehensive loss for the respective period. The changes to the derivative liability resulted in a decrease of $ 87,173 and $ 128,894 in the derivative liability and the corresponding increase in other income as a gain for the three and nine months ended September 30, 2023, respectively. NOTE 8 — NOTE PAYABLE, NET On September 1, 2022, the Company issued a balloon promissory note in the form of a mortgage on its headquarters to a third party company in the principal amount of $ 4,800,000 , which carries interest of 11.0 % per annum. Interest is due in monthly payments of $ 44,000 beginning November 1, 2022 and payable monthly thereafter until September 1, 2025 when the principal outstanding and all remaining interest is due. The principal of $ 4,800,000 can be extended for an additional 36 months, provided that the Company has not defaulted. The Company may not prepay the principal of $ 4,800,00 for a period of 12 months. The principal of $ 4,800,000 is secured by a first mortgage on the Company’s real property located in Township of Freehold, County of Monmouth, State of New Jersey, having a street address of 4400 Route 9 South, Freehold, NJ 07728. In May 2023, the Company borrowed $ 1,000,000 from the same lender. The principal of $ 1,000,000 accrues interest at an annual rate of 13.0 % and is payable 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 are due and payable). The loan is secured by a second-lien mortgage on certain real property and improvements located at 4400 Route 9, Freehold, Monmouth County, New Jersey. The note payable as of September 30, 2023 and December 31, 2022 is as follows: September 30, 2023 December 31, 2022 Principal amount $ 5,800,000 $ 4,800,000 Less: unamortized debt issuance costs ( 233,588 ) ( 236,848 ) Note payable, net $ 5,566,412 $ 4,563,152 For the three months ended September 30, 2023 and 2022, amortization of debt issuance costs related to note payable amounted to $ 29,807 and $ 22,204 , respectively, which have been included in interest expense — amortization of debt discount and debt issuance cost on the accompanying condensed consolidated statements of operations and comprehensive loss. For the three months ended September 30, 2023 and 2022, interest expense related to note payable amounted to $ 164,500 and $ 44,000 , respectively, which have been included in interest expense - other on the accompanying condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2023 and 2022, amortization of debt issuance costs related to note payable amounted to $ 76,750 and $ 22,204 , respectively, which have been included in interest expense — amortization of debt discount and debt issuance cost on the accompanying condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2023 and 2022, interest expense related to note payable amounted to $ 442,222 and $ 44,000 , respectively, which have been included in interest expense - other on the accompanying condensed consolidated statements of operations and comprehensive loss. NOTE 9 — RELATED PARTY TRANSACTIONS Rental Revenue from Related Party and Rent Receivable — Related Party The Company leases space of its commercial real property located in New Jersey to a company, D.P. Capital Investments LLC, which is controlled by Wenzhao Lu, the Company’s largest shareholder and chairman of the Board of Directors. The term of the related party lease agreement is five years commencing on May 1, 2021 and will expire on April 30, 2026. 18 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 9 — RELATED PARTY TRANSACTIONS (continued) Rental Revenue from Related Party and Rent Receivable — Related Party (continued) For both the three months ended September 30, 2023 and 2022, the related party rental revenue amounted to $ 12,600 and has been included in rental revenue on the accompanying condensed consolidated statements of operations and comprehensive loss. For both the nine months ended September 30, 2023 and 2022, the related party rental revenue amounted to $ 37,800 and has been included in rental revenue on the accompanying condensed consolidated statements of operations and comprehensive loss. At September 30, 2023 and December 31, 2022, the related party rent receivable totaled $ 36,900 and $ 74,100 , respectively, which has been included in rent receivable on the accompanying condensed consolidated balance sheets, and no allowance for doubtful accounts was deemed to be required on the receivable. Services Provided by Related Parties From time to time, Wilbert Tauzin, a director of the Company, and his son provide consulting services to the Company. As compensation for professional services provided, the Company recognized consulting expenses of $ 20,049 and $ 29,121 for the three months ended September 30, 2023 and 2022, respectively, which have been included in professional fees on the accompanying condensed consolidated statements of operations and comprehensive loss. As compensation for professional services provided, the Company recognized consulting expenses of $ 68,691 and $ 116,719 for the nine months ended September 30, 2023 and 2022, respectively, which have been included in professional fees on the accompanying condensed consolidated statements of operations and comprehensive loss. Accrued Liabilities and Other Payables — Related Parties In 2017, the Company acquired Beijing Genexosome for a cash payment of $ 450,000 . As of September 30, 2023 and December 31, 2022, the unpaid acquisition consideration of $ 100,000 , was payable to Dr. Yu Zhou, former director and former co-chief executive officer and 40 % owner of Genexosome, and has been included in accrued liabilities and other payables — related parties on the accompanying condensed consolidated balance sheets. During the period from June 2023 through September 2023, Lab Services MSO paid shared expense on behalf of the Company. As of September 30, 2023, the balance due to Lab Services MSO amounted to $ 36,481 , which has been included in accrued liabilities and other payables — related parties on the accompanying condensed consolidated balance sheets. As of September 30, 2023 and December 31, 2022, $ 23,000 and $ 0 of accrued and unpaid interest related to borrowings from Wenzhao Lu, the Company’s largest shareholder and chairman of the Board of Directors, respectively, have been included in accrued liabilities and other payables — related parties on the accompanying condensed consolidated balance sheets. Borrowings from Related Party Line of Credit On August 29, 2019, the Company entered into a Line of Credit Agreement (the “Line of Credit Agreement”) providing the Company with a $ 20 million line of credit (the “Line of Credit”) from Wenzhao Lu (the “Lender”), the largest shareholder and Chairman of the Board of Directors of the Company. The Line of Credit allows the Company to request loans thereunder and to use the proceeds of such loans for working capital and operating expense purposes until the facility matures on December 31, 2024 . The loans are unsecured and are not convertible into equity of the Company. Loans drawn under the Line of Credit bear interest at an annual rate of 5 % and each individual loan is payable three years from the date of issuance. The Company has a right to draw down on the line of credit and not at the discretion of the related party Lender. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to maturity, without premium or penalty. The Line of Credit Agreement includes customary events of default. If any such event of default occurs, the Lender may declare all outstanding loans under the Line of Credit to be due and payable immediately. 19 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 9 — RELATED PARTY TRANSACTIONS (continued) In the nine months ended September 30, 2023, activity recorded for the Line of Credit is summarized in the following table: Outstanding principal under the Line of Credit at January 1, 2023 $ - Draw down from Line of Credit 850,000 Outstanding principal under the Line of Credit at September 30, 2023 $ 850,000 For the three months ended September 30, 2023 and 2022, the interest expense related to related party borrowings amounted to $ 10,712 and $ 8,358 , respectively, and has been reflected as interest expense — related party on the accompanying condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2023 and 2022, the interest expense related to related party borrowings amounted to $ 23,000 and $ 79,898 , respectively, and has been reflected as interest expense — related party on the accompanying condensed consolidated statements of operations and comprehensive loss. As of September 30, 2023 and December 31, 2022, the related accrued and unpaid interest for Line of Credit was $ 23,000 and $ 0 , respectively, and has been included in accrued liabilities and other payables — related parties on the accompanying condensed consolidated balance sheets. As of September 30, 2023, the Company used approximately $ 6.8 million of the credit facility and has approximately $ 13.2 million remaining available under the Line of Credit. NOTE 10 — EQUITY Series A Convertible Preferred Stock The Company designated up to 15,000 shares of its previously undesignated preferred stock as Series A Preferred Stock. Each share of Series A Preferred Stock has a par value of $ 0.0001 per share and a stated value equal to $ 1,000 . As of September 30, 2023, 9,000 shares of Series A Preferred Stock were issued and outstanding. The Series A Preferred Stock is convertible into shares of the Company’s common stock at a conversion price per share equal to the greater of (i) ten dollars ($ 10.00 ), and (ii) ninety percent ( 90 %) of the closing price of the Company’s common stock on the Nasdaq Stock Market (“Nasdaq”) on the day prior to receipt of the conversion notice from the Series A Preferred stock-holder, subject to adjustment for stock splits and similar matters. Conversion of the Series A Preferred Stock is subject to restriction pursuant to the Nasdaq Stock Market Listing Rules. Series B Convertible Preferred Stock Issued for Equity Method Investment The Company designated up to 15,000 shares of its previously undesignated preferred stock as Series B Preferred Stock. Each share of Series B Preferred Stock has a par value of $ 0.0001 per share and a stated value equal to $ 1,000 . On February 9, 2023, the Company issued 11,000 shares of its Series B Convertible Preferred Stock as a part of consideration for the purchase of 40 % of equity interest of Lab Services MSO. The Series B Preferred Stock is convertible into shares of the Company’s common stock at a conversion price per share equal to $ 3.78 or an aggregate of 2,910,053 shares of the Company’s common stock and are subject to a lock-up period and restrictions on sale (See Note — 5 - Investment in Laboratory Services MSO, LLC). Common Shares Sold for Cash 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. During the nine months ended September 30, 2023, Roth sold an aggregate of 456,627 shares of common stock at an average price of $ 1.39 per share to investors and the Company recorded net proceeds of $ 414,396 , net of commission and other offering costs of $ 220,995 . Common Shares Issued for Services During the nine months ended September 30, 2023, the Company issued a total of 361,331 shares of its common stock for services rendered and to be rendered. These shares were valued at $ 999,656 , the fair market values on the grant dates using the reported closing share prices on the dates of grant, and the Company recorded stock-based compensation expense of $ 776,285 for the nine months ended September 30, 2023 and reduced accrued liabilities of $ 164,871 and recorded prepaid expense of $ 58,500 as of September 30, 2023 which will be amortized over the rest of corresponding service periods. 20 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 10 — EQUITY (continued) Common Shares Issued as Convertible Note Payable Commitment Fee On May 23, 2023, the Company issued 75,000 shares of its common stock to Mast Hill as a commitment fee for the purchase of the May 2023 Convertible Note. These shares were valued at $ 147,000 , the fair market value on the grant date using the reported closing share price on the date of grant, and the Company recorded it as debt discount. On July 6, 2023, the Company issued 25,000 shares of its common stock to FirstFire as a commitment fee for the purchase of the July 2023 Convertible Note. These shares were valued at $ 35,500 , the fair market value on the grant date using the reported closing share price on the date of grant, and the Company recorded it as debt discount. Options The following table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at September 30, 2023: Options Outstanding Options Exercisable Range of Exercise Price Number Outstanding at September 30, 2023 Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable at September 30, 2023 Weighted Average Exercise Price $ 1.86 — 2.08 131,000 4.43 $ 1.87 59,667 $ 1.87 3.25 — 8.20 307,803 3.29 5.26 298,136 5.27 10.20 — 20.00 414,500 2.20 16.42 414,500 16.42 27.50 19,000 0.25 27.50 19,000 27.50 $ 1.86 — 27.50 872,303 2.88 $ 10.54 791,303 $ 11.39 Stock option activity for the nine months ended September 30, 2023 was as follows: Number of Options Weighted Average Exercise Price Outstanding at January 1, 2023 800,500 $ 13.03 Granted 168,803 2.54 Expired ( 97,000 ) ( 17.21 ) Outstanding at September 30, 2023 872,303 $ 10.54 Options exercisable at September 30, 2023 791,303 $ 11.39 Options expected to vest 81,000 $ 2.22 The aggregate intrinsic value of both stock options outstanding and stock options exercisable at September 30, 2023 was $ 0 . The fair values of options granted during the nine months ended September 30, 2023 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 79.76 % - 96.37 %, risk-free rate of 3.58 % - 3.96 %, annual dividend yield of 0 %, and expected life of 3.00 - 5.00 years. The aggregate fair value of the options granted during the nine months ended September 30, 2023 was $ 313,144 . The fair values of options granted during the nine months ended September 30, 2022 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 74.8 % - 117.46 %, risk-free rate of 1.37 % - 3.56 %, annual dividend yield of 0 %, and expected life of 3.00 - 5.00 years. The aggregate fair value of the options granted during the nine months ended September 30, 2022 was $ 373,982 . 21 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 10 — EQUITY (continued) Options (continued) For the three months ended September 30, 2023 and 2022, stock-based compensation expense associated with stock options granted amounted to $ 54,654 and $ 110,442 , of which, $ 42,906 and $ 87,300 was recorded as compensation and related benefits, $ 11,748 and $ 14,121 was recorded as professional fees, and $ 0 and $ 9,021 was recorded as research and development expenses, respectively. For the nine months ended September 30, 2023 and 2022, stock-based compensation expense associated with stock options granted amounted to $ 234,931 and $ 389,066 , of which, $ 132,433 and $ 285,384 was recorded as compensation and related benefits, $ 97,029 and $ 71,719 was recorded as professional fees, and $ 5,469 and $ 31,963 was recorded as research and development expenses, respectively. A summary of the status of the Company’s nonvested stock options granted as of September 30, 2023 and changes during the nine months ended September 30, 2023 is presented below: Number of Options Weighted Average Exercise Price Nonvested at January 1, 2023 20,000 $ 4.29 Granted 168,803 2.54 Vested ( 107,803 ) ( 3.10 ) Nonvested at September 30, 2023 81,000 $ 2.22 Warrants The following table summarizes the shares of the Company’s common stock issuable upon exercise of warrants outstanding at September 30, 2023: Warrants Outstanding Warrants Exercisable Exercise Price Number Outstanding at September 30, 2023 Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable at September 30, 2023 Weighted Average Exercise Price $ 3.20 140,665 4.68 $ 3.20 - $ - 4.50 179,998 4.68 4.50 179,998 4.50 12.50 123,964 3.56 12.50 123,964 12.50 $ 3.20 — 12.50 444,627 4.37 $ 6.32 303,962 $ 7.76 Stock warrant activities for the nine months ended September 30, 2023 were as follows: Number of Warrants Weighted Average Exercise Price Outstanding at January 1, 2023 123,964 $ 12.50 Issued 320,663 3.93 Outstanding at September 30, 2023 444,627 $ 6.32 Warrants exercisable at September 30, 2023 303,962 $ 7.76 Warrants expected to vest 140,665 $ 3.20 The aggregate intrinsic value of both stock warrants outstanding and stock warrants exercisable at September 30, 2023 was $ 0 . 22 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 10 — EQUITY (continued) Warrants (continued) Warrants Issued in May 2023 In connection with the issuance of May 2023 Convertible Note (See Note 6), the Company issued (i) a warrant to purchase 125,000 shares of common stock with an exercise price of $4.50 exercisable until the five-year anniversary of May 23, 2023, and (ii) a warrant to purchase 105,500 shares of common stock with an exercise price of $3.20 exercisable until the five-year anniversary of May 23, 2023, which warrant shall be cancelled and extinguished against payment of the May 2023 Convertible Note, to Mast Hill; and issued a warrant to purchase 10,000 shares of common stock with an exercise price of $4.50 exercisable until the five-year anniversary of May 23, 2023 to a third party as a finder’s fee. Based upon the Company’s analysis of the criteria contained in ASC 815, the Company determined that all the warrants issued to Mast Hill and a third party as a finder’s fee meet the definition of derivative liability, as the Company cannot avoid a net cash settlement under certain circumstances. Management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the 105,500 warrants with an exercise price of $ 3.20 exercisable until the five-year anniversary of May 23, 2023, which warrant shall be cancelled and extinguished against payment of the May 2023 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 135,000 warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of May 23, 2023 was classified as derivative liability on May 23, 2023. The fair values of the 135,000 warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of May 23, 2023 issued on May 23, 2023 were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $ 1.96 , volatility of 88.80 %, risk-free rate of 3.76 %, annual dividend yield of 0 % and expected life of 5 years. The warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of May 23, 2023 issued to Mast Hill to purchase 125,000 shares of the Company’s common stock were treated as a discount on the convertible note payable and were valued at $ 127,654 and will be amortized over the term of the May 2023 Convertible Note. The warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of May 23, 2023 issued to a third party as a finder’s fee to purchase 10,000 shares of the Company’s common stock were treated as convertible debt issuance costs and were valued at $ 11,162 and will be amortized over the term of the May 2023 Convertible Note. Warrants Issued in July 2023 In connection with the issuance of July 2023 Convertible Note (See Note 6), the Company issued (i) a warrant to purchase 41,665 shares of common stock with an exercise price of $4.50 exercisable until the five-year anniversary of July 6, 2023, and (ii) a warrant to purchase 35,165 shares of common stock with an exercise price of $3.20 exercisable until the five-year anniversary of July 6, 2023, which warrant shall be cancelled and extinguished against payment of the July 2023 Convertible Note, to Firstfire; and issued a warrant to purchase 3,333 shares of common stock with an exercise price of $4.50 exercisable until the five-year anniversary of July 6, 2023 to a third party as a finder’s fee. Based upon the Company’s analysis of the criteria contained in ASC 815, the Company determined that all the warrants issued to Firstfire and a third party as a finder’s fee meet the definition of derivative liability, as the Company cannot avoid a net cash settlement under certain circumstances. Management determined the probability of failing to make an amortization payment when due to be remote and as such the fair value of the 35,165 warrants with an exercise price of $ 3.20 exercisable until the five-year anniversary of July 6, 2023, which warrant shall be cancelled and extinguished against payment of the July 2023 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 44,998 warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of July 6, 2023 was classified as derivative liability on July 6, 2023. The fair values of the 44,998 warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of July 6, 2023 issued on July 6, 2023 were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $ 1.42 , volatility of 88.52 %, risk-free rate of 4.37 %, annual dividend yield of 0 % and expected life of 5 years. The warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of July 6, 2023 issued to Firstfire to purchase 41,665 shares of the Company’s common stock were treated as a discount on the convertible note payable and were valued at $28,691 and will be amortized over the term of the July 2023 Convertible Note. 23 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 10 — EQUITY (continued) Warrants (continued) The warrants with an exercise price of $ 4.50 exercisable until the five-year anniversary of July 6, 2023 issued to a third party as a finder’s fee to purchase 3,333 shares of the Company’s common stock were treated as convertible debt issuance costs and were valued at $ 2,435 and will be amortized over the term of the July 2023 Convertible Note. A summary of the status of the Company’s nonvested stock warrants issued as of September 30, 2023 and changes during the nine months ended September 30, 2023 is presented below: Number of Warrants Weighted Average Exercise Price Nonvested at January 1, 2023 - $ - Issued 320,663 3.93 Vested ( 179,998 ) ( 4.50 ) Nonvested at September 30, 2023 140,665 $ 3.20 NOTE 11 - STATUTORY RESERVE AND RESTRICTED NET ASSETS The Company’s PRC subsidiary, Avalon Shanghai, is restricted in its ability to transfer a portion of its net asset to the Company. The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. The Company is required to make appropriations to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriations to the statutory surplus reserve are required to be at least 10 % of the after-tax net income determined in accordance with PRC GAAP until the reserve is equal to 50 % of the entity’s registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. The statutory reserve may be applied against prior year losses, if any, and may be used for general business expansion and production or increase in registered capital, but are not distributable as cash dividends. The Company did not make any appropriation to statutory reserve for Avalon Shanghai during the nine months ended September 30, 2023 and 2022 as it incurred net loss in the periods. As of September 30, 2023 and December 31, 2022, the restricted amount as determined pursuant to PRC statutory laws totaled $ 6,578 . Relevant PRC laws and regulations restrict the Company’s PRC subsidiary, Avalon Shanghai, from transferring a portion of its net assets, equivalent to their statutory reserves and their share capital, to the Company’s shareholders in the form of loans, advances or cash dividends. Only PRC entity’s accumulated profit may be distributed as dividend to the Company’s shareholders without the consent of a third party. As of September 30, 2023 and December 31, 2022, total restricted net assets amounted to $ 1,106,578 and $ 1,006,578 , respectively. NOTE 12 — CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY Pursuant to the requirements of Rule 12-04(a), 5-04(c) and 4-08(e)(3) of Regulation S-X, the condensed financial information of the parent company shall be filed when the restricted net assets of consolidated subsidiary exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of this test, restricted net assets of consolidated subsidiary shall mean that amount of the Company’s proportionate share of net assets of consolidated subsidiary (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiary in the form of loans, advances or cash dividends without the consent of a third party. The Company performed a test on the restricted net assets of consolidated subsidiary in accordance with such requirement and concluded that it was not applicable to the Company as the restricted net assets of the Company’s PRC subsidiary did not exceed 25 % of the consolidated net assets of the Company, therefore, the condensed financial statements for the parent company have not been required. 24 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 13 - CONCENTRATIONS Customers The following table sets forth information as to each customer that accounted for 10 % or more of the Company’s revenues for the three and nine months ended September 30, 2023 and 2022 . Three Months Ended September 30, Nine Months Ended September 30, Customer 2023 2022 2023 2022 A 32 % 32 % 31 % 31 % B 17 % 19 % 18 % 19 % C 11 % 12 % 12 % 12 % Two customers, of which, one is a related party and the other is a third party, whose outstanding receivable accounted for 10 % or more of the Company’s total outstanding rent receivable at September 30, 2023, accounted for 70.8 % of the Company’s total outstanding rent receivable at September 30, 2023. Two customers, of which, one is a related party and the other is a third party, whose outstanding receivable accounted for 10 % or more of the Company’s total outstanding rent receivable at December 31, 2022, accounted for 81.4 % of the Company’s total outstanding rent receivable at December 31, 2022. Suppliers No supplier accounted for 10 % or more of the Company’s purchase during the three and nine months ended September 30, 2023 and 2022. NOTE 14 — SEGMENT INFORMATION For the three and nine months ended September 30, 2022, the Company operated in two reportable business segments - (1) the real property operating segment, and (2) the medical related consulting services segment. The Company’s reportable segments are strategic business units that offer different services and products. They are managed separately based on the fundamental differences in their operations. Due to the winding down of the medical related consulting services segment in 2022, the Company decided to cease all operations of this segment and no longer has any material revenues or expenses in this segment. As a result, commencing from the first quarter of 2023, the Company’s chief operating decision maker no longer reviews medical related consulting services operating results. On February 9, 2023, the Company purchased 40 % of Lab Services MSO. Commencing from the purchase date, February 9, 2023, the Company is active in the management of Lab Services MSO. During the three and nine months ended September 30, 2023, the Company operated in two reportable business segments: (1) the real property operating segment, and (2) laboratory testing services segment (which commenced with the purchase date, February 9, 2023) since Lab Services MSO’s operating results are regularly reviewed by the Company’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. The Company regularly reviews the operating results and performance of Lab Services MSO, which is the Company’s an equity method investee. Information with respect to these reportable business segments for the three and nine months ended September 30, 2023 and 2022 was as follows: Three Months Ended September 30, 2023 Real Property Operations Lab Services MSO Corporate / Other Total Real property rental revenue $ 331,290 $ - $ - $ 331,290 Real property operating expenses ( 288,083 ) - - ( 288,083 ) Real property operating income 43,207 - - 43,207 Income from equity method investment - Lab Services MSO - 354,500 - 354,500 Other operating expenses ( 73,092 ) - ( 1,465,751 ) ( 1,538,843 ) Other (expense) income: Interest expense - - ( 438,992 ) ( 438,992 ) Other income 4 - 95,049 95,053 Net (loss) income $ ( 29,881 ) $ 354,500 $ ( 1,809,694 ) $ ( 1,485,075 ) 25 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 14 — SEGMENT INFORMATION (continued) Three Months Ended September 30, 2022 Real Property Operations Medical Related Consulting Services Corporate / Other Total Real property rental revenue $ 317,390 $ - $ - $ 317,390 Real property operating expenses ( 247,152 ) - - ( 247,152 ) Real property operating income 70,238 - - 70,238 Other operating expenses ( 76,299 ) ( 96,321 ) ( 1,486,717 ) ( 1,659,337 ) Other (expense) income: Interest expense - - ( 3,303,502 ) ( 3,303,502 ) Other income (expense) 4 ( 8,848 ) ( 512,709 ) ( 521,553 ) Net loss $ ( 6,057 ) $ ( 105,169 ) $ ( 5,302,928 ) $ ( 5,414,154 ) Nine Months Ended September 30, 2023 Real Property Operations Lab Services MSO Corporate / Other Total Real property rental revenue $ 934,360 $ - $ - $ 934,360 Real property operating expenses ( 781.931 ) - - ( 781,931 ) Real property operating income 152,429 - - 152,429 Income from equity method investment - Lab Services MSO - 370,060 - 370,060 Other operating expenses ( 266,433 ) - ( 6,218,887 ) ( 6,485,320 ) Other (expense) income: Interest expense - - ( 841,496 ) ( 841,496 ) Other income (expense) 11 - ( 347,560 ) ( 347,549 ) Net (loss) income $ ( 113,993 ) $ 370,060 $ ( 7,407,943 ) $ ( 7,151,876 ) Nine Months Ended September 30, 2022 Real Property Operations Medical Related Consulting Services Corporate / Other Total Real property rental revenue $ 905,842 $ - $ - $ 905,842 Real property operating expenses ( 677,303 ) - - ( 677,303 ) Real property operating income 228,539 - - 228,539 Other operating expenses ( 265,251 ) ( 289,671 ) ( 6,233,229 ) ( 6,788,151 ) Other (expense) income: Interest expense - - ( 3,436,931 ) ( 3,436,931 ) Other income 11 223,735 259,631 483,377 Net loss $ ( 36,701 ) $ ( 65,936 ) $ ( 9,410,529 ) $ ( 9,513,166 ) Identifiable long-lived tangible assets at September 30, 2023 and December 31, 2022 September 30, 2023 December 31, 2022 Real property operations $ 7,255,968 $ 7,367,360 Medical related consulting services - 408 Corporate/Other 17,941 130,613 Total $ 7,273,909 $ 7,498,381 Identifiable long-lived tangible assets at September 30, 2023 and December 31, 2022 September 30, 2023 December 31, 2022 United States $ 7,271,860 $ 7,393,307 China 2,049 105,074 Total $ 7,273,909 $ 7,498,381 26 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 15 — COMMITMENTS AND CONTINGENCIES Operating Leases Commitment The Company is a party to leases for office space. These lease agreements will expire through February 2025. Rent expense under all operating leases amounted to approximately $ 97,000 and $ 107,000 for the nine months ended September 30, 2023 and 2022, respectively. Supplemental cash flow information related to leases for the nine months ended September 30, 2023 and 2022 is as follows: Nine Months Ended September 30, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows paid for operating lease $ 93,458 $ 116,897 Right-of-use assets obtained in exchange for lease obligation: Operating lease $ 236,533 $ - The following table summarizes the lease term and discount rate for the Company’s operating lease as of September 30, 2023: Operating Lease Weighted average remaining lease term (in years) 1.34 Weighted average discount rate 11.0 % The following table summarizes the maturity of lease liabilities under operating lease as of September 30, 2023: For the Twelve-month Period Ending September 30: Operating Lease 2024 $ 135,061 2025 37,020 Total lease payments 172,081 Amount of lease payments representing interest ( 11,227 ) Total present value of operating lease liabilities $ 160,854 Current portion $ 124,438 Long-term portion 36,416 Total $ 160,854 Joint Venture — Avactis Biosciences Inc. On July 18, 2018, the Company formed a wholly owned subsidiary, Avactis Biosciences Inc. (“Avactis”), a Nevada corporation, which focuses on accelerating commercial activities related to cellular therapies as well as cellular immunotherapy including CAR-T, CAR-NK, TCR-T and others. When formed, Avactis was designed to integrate and optimize the Company’s global scientific and clinical resources to further advance the use of cellular therapies to treat certain cancers, however the Company is no longer pursuing any commercial activities with respect to cellular immunotherapy and CAR-T, in particular. As of April 6, 2022, the Company owns 60 % of Avactis and Arbele Biotherapeutics Limited (“Arbele Biotherapeutics”) owns 40 % of Avactis. Avactis owns 100 % of the capital stock of Avactis Nanjing Biosciences Ltd., a company incorporated in the PRC on May 8, 2020 (“Avactis Nanjing”), which only owns a patent and is not considered an operating entity. The Company is required to contribute $ 10 million (or equivalent in RMB) in cash and/or services, which shall be contributed in tranches based on milestones to be determined jointly by Avactis and the Company in writing subject to the Company’s cash reserves. Within 30 days, Arbele Biotherapeutics shall make contribution of $ 6.66 million in the form of entering into a License Agreement with Avactis granting Avactis an exclusive right and license in China to its technology and intellectual property pertaining to CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy technology and any additional technology developed in the future with terms and conditions to be mutually agreed upon the Company and Avactis and services. As of the date hereof, the License Agreement has not been finalized by the parties. In addition, the Company is responsible for contributing registered capital of RMB 5,000,000 (approximately $ 0.7 million) for working capital purposes as required by local regulation, which is not required to be contributed immediately and will be contributed subject to the Company’s discretion. As of the date hereof, Avactis’ activities have been limited to that of a patent holding company and there is no other activity or planned contributions in 2023. 27 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 15 — COMMITMENTS AND CONTINGENCIES (continued) Line of Credit Agreement On August 29, 2019, the Company entered into a Line of Credit Agreement (the “Line of Credit Agreement”) providing the Company with a $ 20 million line of credit (the “Line of Credit”) from Wenzhao Lu (the “Lender”), a significant shareholder and director of the Company. The Line of Credit allows the Company to request loans thereunder and to use the proceeds of such loans for working capital and operating expense purposes until the facility matures on December 31, 2024. The loans are unsecured and are not convertible into equity of the Company. Loans drawn under the Line of Credit bears interest at an annual rate of 5 % and each individual loan will be payable three years from the date of issuance. The Company has a right to draw down on the Line of Credit and not at the discretion of the related party Lender. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to maturity, without premium or penalty. The Line of Credit Agreement includes customary events of default. If any such event of default occurs, the Lender may declare all outstanding loans under the Line of Credit to be due and payable immediately. As of September 30, 2023, $ 850,000 was outstanding under the Line of Credit. NOTE 16 — RESTATEMENTS OF PREVIOUSLY ISSSUED FINANCIAL STATEMENTS Three months ended March 31, 2023 During the three months ended March 31, 2023, the Company misstated the equity method investment and income from equity method investments. The impact of these errors was an overstatement of total assets and total equity by approximately $ 136,000 and an overstatement of income from equity method investments of approximately $ 136,000 for the three months ended March 31, 2023. These errors did not have any impact on consolidated cash flow. The Company’s March 31, 2023 financial statements have been restated for the impact of these adjustments as follows: As As Reported Adjustment Restated Condensed Consolidated Balance Sheet As of March 31, 2023 Equity method investments $ 21,524,364 $ ( 135,830 ) $ 21,388,534 Total assets $ 30,972,242 $ ( 135,830 ) $ 30,836,412 Accumulated deficit $ ( 65,846,635 ) $ ( 135,830 ) $ ( 65,982,465 ) Total equity $ 19,910,342 $ ( 135,830 ) $ 19,774,512 Total liabilities and equity $ 30,972,242 $ ( 135,830 ) $ 30,836,412 As As Reported Adjustment Restated Condensed Consolidated Statement of Operations and Comprehensive Loss for the Three Months Ended March 31, 2023 Income from equity method investments $ 37,285 $ ( 135,830 ) $ ( 98,545 ) Total other expense, net $ ( 119,678 ) $ ( 135,830 ) $ ( 255,508 ) Loss before income taxes $ ( 2,783,914 ) $ ( 135,830 ) $ ( 2,919,744 ) Net loss $ ( 2,783,914 ) $ ( 135,830 ) $ ( 2,919,744 ) Net loss attributable to Avalon Globocare Corp. common shareholders $ ( 2,783,914 ) $ ( 135,830 ) $ ( 2,919,744 ) Comprehensive loss $ ( 2,780,244 ) $ ( 135,830 ) $ ( 2,916,074 ) Comprehensive loss attributable to Avalon Globocare Corp. common shareholders $ ( 2,780,244 ) $ ( 135,830 ) $ ( 2,916,074 ) Net loss per common share attributable to Avalon Globocare Corp. common shareholders: $ ( 0.28 ) $ ( 0.01 ) $ ( 0.29 ) Six months ended June 30, 2023 During the six months ended June 30, 2023, the Company misstated the equity method investment and income from equity method investments. The impact of these errors was an overstatement of total assets and total equity by approximately $ 340,000 and an overstatement of income from equity method investment — Lab Services MSO of approximately $ 204,000 and $ 340,000 for the three and six months ended June 30, 2023, respectively. These errors did not have any impact on consolidated cash flow. The Company’s June 30, 2023 financial statements have been restated for the impact of these adjustments as follows: As As Reported Adjustment Restated Condensed Consolidated Balance Sheet As of June 30, 2023 Equity method investments, net $ 21,355,134 $ ( 339,574 ) $ 21,015,560 Total assets $ 30,570,584 $ ( 339,574 ) $ 30,231,010 Accumulated deficit $ ( 68,389,948 ) $ ( 339,574 ) $ ( 68,729,522 ) Total equity $ 18,151,313 $ ( 339,574 ) $ 17,811,739 Total liabilities and equity $ 30,570,584 $ ( 339,574 ) $ 30,231,010 28 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 16 — RESTATEMENTS OF PREVIOUSLY ISSSUED FINANCIAL STATEMENTS (continued) Six months ended June 30, 2023 (continued) As As Reported Adjustment Restated Condensed Consolidated Statement of Operations and Comprehensive Loss for the Three Months Ended June 30, 2023 Income from equity method investment - Lab Services MSO $ 308,395 $ ( 203,744 ) $ 104,651 Loss from operations $ ( 1,864,624 ) $ ( 203,744 ) $ ( 2,068,368 ) Loss before income taxes $ ( 2,543,313 ) $ ( 203,744 ) $ ( 2,747,057 ) Net loss $ ( 2,543,313 ) $ ( 203,744 ) $ ( 2,747,057 ) Net loss attributable to Avalon Globocare Corp. common shareholders $ ( 2,543,313 ) $ ( 203,744 ) $ ( 2,747,057 ) Comprehensive loss $ ( 2,554,324 ) $ ( 203,744 ) $ ( 2,758,068 ) Comprehensive loss attributable to Avalon Globocare Corp. common shareholders $ ( 2,554,324 ) $ ( 203,744 ) $ ( 2,758,068 ) Net loss per common share attributable to Avalon Globocare Corp. common shareholders: $ ( 0.25 ) $ ( 0.02 ) $ ( 0.27 ) As As Reported Adjustment Restated Condensed Consolidated Statement of Operations and Comprehensive Loss for the Six Months Ended June 30, 2023 Income from equity method investment - Lab Services MSO $ 355,134 $ ( 339,574 ) $ 15,560 Loss from operations $ ( 4,482,121 ) $ ( 339,574 ) $ ( 4,821,695 ) Loss before income taxes $ ( 5,327,227 ) $ ( 339,574 ) $ ( 5,666,801 ) Net loss $ ( 5,327,227 ) $ ( 339,574 ) $ ( 5,666,801 ) Net loss attributable to Avalon Globocare Corp. common shareholders $ ( 5,327,227 ) $ ( 339,574 ) $ ( 5,666,801 ) Comprehensive loss $ ( 5,334,568 ) $ ( 339,574 ) $ ( 5,674,142 ) Comprehensive loss attributable to Avalon Globocare Corp. common shareholders $ ( 5,334,568 ) $ ( 339,574 ) $ ( 5,674,142 ) Net loss per common share attributable to Avalon Globocare Corp. common shareholders: $ ( 0.52 ) $ ( 0.04 ) $ ( 0.56 ) NOTE 17 — SUBSEQUENT EVENTS The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued. Based upon this review, other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements. October 2023 Convertible Note Financing In October 2023, the Company entered into securities purchase agreements with certain lenders (the “October 2023 Lenders”) and closed on the issuance of 13.0 % senior secured convertible promissory notes in the aggregate principal amount of $ 700,000 (the “October 2023 Note”), as well as the issuance of 70,000 shares of common stock as a commitment fee and warrants for the purchase of up to 105,000 shares of the Company’s common stock. The Company and its subsidiaries have also entered into security agreements, 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 October 2023 Note. 29