Change Agents Corporation. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations for the years ended December 31, 2023 and 2022 should be read in conjunction with our consolidated financial statements and related notes to those consolidated financial statements that are included elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Special Note Regarding Forward-looking Statements All statements other than statements of historical fact included in this Annual Report Form 10-K including, without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Annual Report on Form 10-K, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to us or our management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of a number of factors, including those set forth under the risk factors and business sections in this Annual Report on Form 10-K. Overview We are a commercial stage company dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. We are focused on establishing a leading role in the innovation of diagnostic testing, utilizing proprietary technology to deliver precise, genetics-driven results. As a first step into the laboratory market, we completed an acquisition of a 40% membership interest in Laboratory Services MSO, LLC (“Lab Services MSO”), which closed in February 2023. 46 We have the following areas of focus: Laboratory Acquisitions We have embarked on a laboratory rollup strategy focused on forming joint ventures and acquiring laboratories that are accretive to our commercial strategy. As a first step, in February of 2023, we acquired a 40% membership interest in Lab Services MSO. ● Lab Services MSO is focused on delivering high quality services related to toxicology and wellness testing and provides a broad portfolio of diagnostic tests, including drug testing, toxicology, and a broad array of test services, from general bloodwork to anatomic pathology, and urine toxicology. Specific capabilities include STAT blood testing, qualitative drug screening, genetic testing, urinary testing, and sexually transmitted disease testing. The panels that Lab Services MSO tests for are thyroid panel, comprehensive metabolic panel, kidney profile, liver function tests, and other individual tests. Through Lab Services MSO, we use fast, accurate, and efficient equipment to provide practitioners with the tools to quickly determine if a patient is following their designated treatment plan. In most instances, we are able to provide a practitioner with qualitative drug class results the same day the sample is received. Lab Services MSO provides a menu of extensive chemistry tests that physicians can use to obtain information to better treat their patients and maintain their overall wellness. Lab Services MSO has developed a premier reputation for customer service and fast turnaround times. ● Lab Services MSO is also focused on commercialization of genetic-based proprietary testing. The first area of focus in this area is confirmatory genetic testing during toxicology screening and genetic testing to screen for addictive propensity. Lab Services MSO laboratory plans to focus on diagnostic testing utilizing proprietary technology to deliver precise genetic driven results. ● In the third quarter of 2023, Lab Services MSO acquired Merlin Technologies, Inc. which is a medical equipment retail company. Research and Development We are focused on bringing forward intellectual property through joint patent filings with the Massachusetts Institute of Technology (MIT). We completed a sponsored research and co-development project with MIT led by Professor Shuguang Zhang as Principal Investigator. Using the unique QTY code protein design platform, six water-soluble variant cytokine receptors have been successfully designed and tested to show binding affinity to the respective cytokines. We currently are focused on bringing forward the intellectual property associated with this program through joint patent submissions. Product Commercialization We have begun the commercialization and development of a versatile breathalyzer system. We were granted exclusive distributorship rights for the KetoAir from Qi Diagnostics for the following territories: North America, South America, the EU and the UK. We had a pilot launch and exhibition of the KetoAir in this year’s KetoCon conference in Austin, Texas (April 21-23, 2023). For our commercialization strategy, we intend to target the diabetes and obesity markets. We are evaluating options for commercialization, including identifying distribution partners or distributing the KetoAir ourselves. The KetoAir is a handheld device that allows the user to detect acetone levels in exhaled breath. The acetone level is in concentration units (ppm, part-per-million) such that the user will know his/her real-time ketosis status: inadequate ketosis (0-3.99 ppm), mild ketosis (4-9.99 ppm), optimal ketosis (10-40 ppm), or alarming level (> 40 ppm). The KetoAir is registered with the United States FDA as a Class I medical device. The device is also paired with an “AI Nutritionist” software program (via Bluetooth connection) which is downloadable from Google Play (for Android mobile phones, approved) and iPhone (the app is currently being reviewed by Apple iOS AppStore). It helps users monitor and manage their ketogenic diet and related programs. We believe the KetoAir can be an essential tool to help diabetic patients adhere to their therapeutic programs and optimize their ketogenic dietary management. 47 Other Areas In order to preserve cash and focus on our core laboratory rollup strategy and product commercialization, we have currently suspended all research and development efforts related to cellular therapy in order to redirect our funding efforts to our core business strategies outlined above. Going Concern We are a commercial stage company dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. We are focused on establishing a leading role in the innovation of diagnostic testing, utilizing proprietary technology to deliver precise, genetics-driven results. We also provide 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, we own commercial real estate that houses our headquarters in Freehold, New Jersey. We also have income from equity method investment through our forty percent (40%) interest in Lab Services MSO. These consolidated financial statements have been prepared assuming that we 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 consolidated financial statements, we had working capital deficit of approximately $5,912,000 at December 31, 2023 and had incurred recurring net losses and generated negative cash flow from operating activities of approximately $16,707,000 and $6,505,000 for the year ended December 31, 2023, respectively. We have a limited operating history and our 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 ordinary course 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 our ability to continue as a going concern. The ability of us to continue as a going concern is dependent on our ability to raise additional capital, implement our business plan, and generate sufficient revenues. There are no assurances that we will be successful in its efforts to generate sufficient revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. We plan 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 us on satisfactory terms and conditions, if any. The accompanying consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should we be unable to continue as a going concern. Critical Accounting Policies Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Changes in these estimates and assumptions may have a material impact on the consolidated financial statements and accompanying notes. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates. Significant estimates during the years ended December 31, 2023 and 2022 include the useful life of property and equipment, investment in real estate, and intangible assets, the assumptions used in assessing impairment of long-term assets, 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 our equity interest in Lab Services MSO. 48 Investment in Unconsolidated Companies We use 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. We consider whether the fair values of our 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 we consider 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 $9,651,361 for the year ended December 31, 2023. See Note 7 for discussion of equity method investments. Real Property Rental We have 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 rent receivable on the consolidated balance sheets. We do not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers. Income Taxes We are governed by the income tax laws of China and the United States. Income taxes are accounted for pursuant to ASC 740 “Accounting for Income Taxes,” which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge for taxes is based on the results for the period as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is changed to equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis. 49 RESULTS OF OPERATIONS Comparison of Results of Operations for the Years Ended December 31, 2023 and 2022 Real Property Rental Revenue For the year ended December 31, 2023, we had real property rental revenue of $1,255,681, as compared to $1,202,169 for the year ended December 31, 2022, an increase of $53,512, or 4.5%. The increase was primarily attributable to the increase in the number of tenants occupying the building in the year ended December 31, 2023 as compared to the year ended December 31, 2022. We expect that our revenue from real property rent will remain at its current level with minimal increase in the near future. Real Property Operating Expenses Real property operating expenses consist of property management fees, property insurance, real estate taxes, depreciation, repairs and maintenance fees, utilities and other expenses related to our rental properties. For the year ended December 31, 2023, our real property operating expenses amounted to $1,017,493, as compared to $ 929,441 for the year ended December 31, 2022, an increase of $88,052 or 9.5%. The increase was primarily due to an increase in property management fees of approximately $15,000, an increase in repairs and maintenance fee of approximately $64,000, and an increase in other miscellaneous items of approximately $9,000. Real Property Operating Income Our real property operating income for the year ended December 31, 2023 was $238,188, representing a decrease of $34,540 or 12.7%, as compared to $ 272,728 for the year ended December 31, 2022. The decrease was primarily attributable to the increase in real property operating expenses as described above. We expect our real property operating income will remain at its current level with minimal increase in the near future. Loss from Equity Method Investment — Lab Services MSO For the year ended December 31, 2023, we had loss from our investment in Lab Services MSO of $8,571,647, which consists of our share of Lab Services MSO’s net income of $1,236,391 and amortization of identifiable intangible assets acquired from Lab Services MSO acquisition of $611,356 and impairment of goodwill acquired from Lab Services MSO acquisition of $9,196,682, which was primarily attributable to Lab Services MSO’s lower revenues and net incomes than anticipated and the decline in our stock price and market capitalization. We purchased 40% of Lab Services MSO on February 9, 2023. In the third quarter of 2023, Lab Services MSO acquired Merlin Technologies, Inc. which is a medical equipment retail company. Lab Services MSO has also opened a new laboratory, Veritas Laboratories LLC (“Veritas”). Veritas is a CLIA-certified and COLA-accredited laboratory located in Scottsdale, Arizona that offers a wide range of high-quality testing, including drug testing, genetic testing, urinary testing and COVID-19 PCR testing. We expect to receive income from our investment in Lab Services MSO in the near future. Other Operating Expenses For the years ended December 31, 2023 and 2022, other operating expenses consisted of the following: Years Ended December 31, 2023 2022 Advertising and marketing expenses $ 1,666,721 $ 1,325,313 Professional fees 3,076,477 2,909,652 Compensation and related benefits 1,768,449 1,863,188 Research and development 109,618 731,328 Litigation settlement - 1,350,000 Directors and officers’ liability insurance premium 349,745 414,757 Travel and entertainment 166,921 163,213 Rent and related utilities 64,149 77,352 Other general and administrative 218,144 230,820 $ 7,420,224 $ 9,065,623 ● For the year ended December 31, 2023, advertising and marketing expenses increased by $341,408 or 25.8% as compared to the year ended December 31, 2022. The increase was primarily due to increased advertising activities to enhance our visibility and marketability and to improve brand recognition and awareness. We expect that our advertising and marketing expenses will decrease in the near future as we conserve cash. 50 ● Professional fees primarily consisted of accounting fees, audit fees, legal service fees, consulting fees, investor relations service charges and other fees. For the year ended December 31, 2023, professional fees increased by $166,825, or 5.7%, as compared to the year ended December 31, 2022, which was primarily attributable to an increase in consulting fees of approximately $331,000, mainly due to the increase in use of consulting service providers related to our acquisition of Lab Services MSO, an increase in audit fees of approximately $242,000, due to the increased audit services related to our acquisition of Lab Services MSO, and an increase in accounting fees of approximately $425,000 mainly due to the increased accounting services related to our acquisition of Lab Services MSO, offset by a decrease in investor relations service charges of approximately $242,000, resulting from the decrease in investor relations service providers, a decrease in legal service fees of approximately $568,000, mainly due to the decreased legal services related to our acquisition of Lab Services MSO, and a decrease in other miscellaneous items of approximately $21,000. We expect that our professional fees are likely to decrease in the near future. ● For the year ended December 31, 2023, compensation and related benefits decreased by $94,739, or 5.1%, as compared to the year ended December 31, 2022. The decrease was primarily attributable to the decreased compensation for our two officers as further described in Item 11 of this report. We expect that our compensation and related benefits will continue to decrease in the near future . ● For the year ended December 31, 2023, research and development expenses decreased by $621,710, or 85.0%, as compared to the year ended December 31, 2022. The decrease was mainly attributable to our decreased activity with respect to research and development projects in the year ended December 31, 2023. We expect that our research and development expenses will continue to decrease in the near future as we redirect our funding efforts to our core business strategies discussed above . ● For the year ended December 31, 2023, litigation settlement decreased by $1,350,000, or 100.0%, as compared to the year ended December 31, 2022. The decrease was due to a settlement signed in June 2022. ● For the year ended December 31, 2023, Directors and Officers Liability Insurance premium decreased by $65,012, or 15.7%, as compared to the year ended December 31, 2022. The decrease was mainly due to us switching to a different insurance provider, resulting in a lower premium. ● For the year ended December 31, 2023, travel and entertainment expense increased by $3,708, or 2.3%, as compared to the year ended December 31, 2022. ● For the year ended December 31, 2023, rent and related utilities expenses decreased by $13,203, or 17.1%, as compared to the year ended December 31, 2022. The decrease was attributable to decreased rental rate in the year ended December 31, 2023 . ● Other general and administrative expenses mainly consisted of NASDAQ listing fee, office supplies, miscellaneous taxes, and other miscellaneous items. For the year ended December 31, 2023, other general and administrative expenses decreased by $12,676, or 5.5%, as compared to the year ended December 31, 2022, reflecting our efforts at stricter controls on corporate expenditures. Loss from Operations As a result of the foregoing, for the year ended December 31, 2023, loss from operations amounted to $15,753,683, as compared to $ 8,792,895 for the year ended December 31, 2022, an increase of $6,960,788 or 79.2%. Other (Expense) Income Other (expense) income mainly includes third party and related party interest expense, conversion inducement expense, loss from equity method investment - Epicon, change in fair value of derivative liability, impairment of equity method investment - Epicon, gain on debts extinguishment, and other miscellaneous (expense) income. 51 Other expense, net, totaled $953,327 for the year ended December 31, 2023, as compared to $ 3,137,952 for the year ended December 31, 2022, a decrease of $2,184,625, or 69.6%, which was primarily attributable to a decrease in third party interest expense of approximately $2,179,000, mainly driven by the decrease in amortization of debt discount and debt issuance cost of approximately $2,767,000 which was offset by the increased interest expense of approximately $588,000 from third party debts in the year ended December 31, 2023, a decrease in conversion inducement expense of approximately $344,000 resulted from the reduction in the conversion price which was incurred in the year ended December 31, 2022, and an increase in gain on debts extinguishment of approximately $683,000, offset by a decrease in gain from change in fair value of derivative liability of approximately $412,000, and an increase in impairment of equity method investment - Epicon of approximately $455,000 due to Epicon’s series of operating losses and the joint venture partner unable to obtain funds to commence operations, and a decrease in other miscellaneous income of approximately $224,000. Income Taxes We did not have any income taxes expense for the years ended December 31, 2023 and 2022 since we incurred losses in these periods. Net Loss As a result of the factors described above, our net loss was $16,707,010 for the year ended December 31, 2023, as compared to $11,930,847 for the year ended December 31, 2022, an increase of $4,776,163 or 40.0%. Net Loss Attributable to Avalon GloboCare Corp. Common Shareholders The net loss attributable to our common shareholders was $16,707,010 or $1.59 per share (basic and diluted) for the year ended December 31, 2023, as compared to $11,930,847 or $1.28 per share (basic and diluted) for the year ended December 31, 2022, an increase of $4,776,163 or 40.0%. Foreign Currency Translation Adjustment Our reporting currency is the U.S. dollar. The functional currency of our parent company, AHS, Avalon RT 9, and Avalon Lab is the U.S. dollar and the functional currency of Avalon Shanghai is the Chinese Renminbi (“RMB”). The financial statement of our subsidiary whose functional currency is the RMB are translated to U.S. dollars using period end rate of exchange for assets and liabilities, average rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rate for equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $18,590 and $47,871 for the years ended December 31, 2023 and 2022, respectively. This non-cash loss had the effect of increasing our reported comprehensive loss. Comprehensive Loss As a result of our foreign currency translation adjustment, we had comprehensive loss of $16,725,600 and $11,978,718 for the years ended December 31, 2023 and 2022, respectively. Liquidity and Capital Resources We have a limited operating history and our continued growth is dependent upon the continuation of generating rental revenue from our income-producing real estate property in New Jersey and income from equity method investment through our equity interest in Lab Services MSO, as well as obtaining additional financing to fund future obligations and pay liabilities arising from ordinary course 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 our ability to continue as a going concern. The ability of us to continue as a going concern is dependent on our ability to raise additional capital, implement its business plan, and generate sufficient revenues. There are no assurances that we will be successful in its efforts to generate sufficient revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. As described below, we have raised additional capital through the sale of equity and debt and our plans on raising additional capital in the future through the sale of equity or debt to implement its business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to us on satisfactory terms and conditions, if at all. 52 Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At December 31, 2023 and 2022, we had cash balance of approximately $285,000 and $1,991,000, respectively. These funds are kept in financial institutions located as follows: Country: December 31, 2023 December 31, 2022 United States $ 280,197 98.2 % $ 1,806,083 90.7 % China 5,203 1.8 % 184,827 9.3 % Total cash $ 285,400 100.0 % $ 1,990,910 100.0 % The following table sets forth a summary of changes in our working capital deficit from December 31, 2022 to December 31, 2023: December 31, Changes in 2023 2022 Amount Percentage Working capital deficit: Total current assets $ 850,867 $ 2,373,526 $ (1,522,659 ) (64.2 )% Total current liabilities 6,762,686 3,579,805 3,182,881 88.9 % Working capital deficit $ (5,911,819 ) $ (1,206,279 ) $ (4,705,540 ) 390.1 % Our working capital deficit increased by $4,705,540 to $5,911,819 at December 31, 2023 from $1,206,279 at December 31, 2022. The increase in working capital deficit was primarily attributable to a decrease in cash of approximately $1,706,000, an increase in accrued professional fees of approximately $131,000, an increase in accrued payroll liability and compensation of approximately $365,000, an increase in accrued liabilities and other payables – related parties of approximately $106,000, an increase in operating lease obligation of approximately $118,000, an increase in advance from sale of noncontrolling interest – related party of approximately $486,000 driven by advance received in connection with the membership interest purchase agreement signed in November 2023, an increase in equity method investment payable of $667,000 resulting from the purchase of 40% of Lab Services MSO incurred in February 2023, an increase in convertible note payable, net, of approximately $1,925,000 resulting from the issuance of May 2023 Convertible Note, July 2023 Convertible Note, and October 2023 Convertible Note, offset by an increase in prepaid expense and other current assets of approximately $120,000, and a decrease in accrued research and development fees of approximately $629,000 mainly due to the extinguishment of accrued liability. Because the exchange rate conversion is different for the consolidated balance sheets and the consolidated statements of cash flows, the changes in assets and liabilities reflected on the consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the consolidated balance sheets. Cash Flows for the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022 The following summarizes the key components of our cash flows for the years ended December 31, 2023 and 2022: Years Ended December 31, 2023 2022 Net cash used in operating activities $ (6,504,718 ) $ (7,037,224 ) Net cash used in investing activities (22,159 ) (9,053,470 ) Net cash provided by financing activities 4,825,337 17,263,989 Effect of exchange rate on cash (3,970 ) 10,077 Net (decrease) increase in cash $ (1,705,510 ) $ 1,183,372 53 Net cash flow used in operating activities for the year ended December 31, 2023 was $6,504,718, which primarily reflected our consolidated net loss of approximately $16,707,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in operating lease obligation of approximately $113,000, and the non-cash items adjustment, consisting of change in fair market value of derivative liability of approximately $188,000, and gain on debts extinguishment of approximately $683,000, offset by depreciation of approximately $212,000, amortization of operating lease right-of-use asset of approximately $118,000, stock-based compensation and service expense of approximately $1,180,000, loss from equity method investments of approximately $8,590,000 mainly due to the impairment of goodwill acquired from Lab Services MSO acquisition resulting from Lab Services MSO’s lower revenues and net incomes than anticipated and the decline in our stock price and market capitalization, impairment of equity method investment - Epicon of approximately $455,000 due to Epicon’s series of operating losses and the joint venture partner unable to obtain funds to commence operations, and amortization of debt issuance costs and debt discount of approximately $544,000 resulting from our outstanding convertible note payable and note payable, and the changes in operating assets and liabilities, primarily consisting of an increase in accrued liabilities and other payables – related parties of approximately $106,000 driven by the increased accrued interest for related party. Net cash flow used in operating activities for the year ended December 31, 2022 was $7,037,224, which primarily reflected our consolidated net loss of approximately $11,931,000, and the non-cash item adjustment consisting of change in fair market value of derivativ e liability of approximately $601,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in operating lease obligation of approximately $142,000, offset by an increase in accrued liabilities and other payables of approximately $331,000, an increase in accrued liabilities and other payables – related parties of approximately $80,000, and the non-cash items adjustment primarily consisting of depreciation of approximately $331,000, amortization of operating lease right-of-use asset of approximately $136,000, stock-based compensation and service expense of approximately $1,107,000, amortization of debt issuance costs and debt discount of approximately $3,311,000 mainly resulting from the conversion of convertible debt in July 2022, and conversion inducement expense of approximately $344,000 resulted from the reduction in the conversion price . We expect our cash used in operating activities to increase due to the following : ● the development and commercialization of new products; ● an increase in professional staff and services; and ● an increase in public relations and/or sales promotions for existing and/or new brands as we expand within existing markets or enter new markets. Net cash flow used in investing activities was $22,159 for the year ended December 31, 2023 as compared to $9,053,470 for the year ended December 31, 2022. During the year ended December 31, 2023, we made payment for purchase of property and equipment of approximately $22,000. During the year ended December 31, 2022, we made payments for purchase of property and equipment of approximately $2,000 and made additional investment in Epicon equity method investment of approximately $52,000 and made payments for acquisition of 40% interest in Laboratory Services MSO, LLC of approximately $9,000,000. Net cash flow provided by financing activities was $4,825,337 for the year ended December 31, 2023 as compared to $17,263,989 for the year ended December 31, 2022. During the year ended December 31, 2023, we received proceeds from related party borrowings of $850,000, and net proceeds from issuance of convertible debt and warrants of approximately $2,238,000 (net of original issue discount of $135,000 and cash paid for convertible note issuance costs of approximately $327,000), and net proceeds from issuance of balloon promissory note of approximately $936,000 (net of cash paid for promissory note issuance costs of approximately $64,000), and net proceeds from equity offering of approximately $616,000 (net of cash paid for commission and other offering costs of approximately $19,000), and advance from sale of noncontrolling interest in subsidiary of approximately $486,000, offset by repayments made for convertible debt of $300,000. During the year ended December 31, 2022, we received proceeds from related party borrowings of $100,000, and proceeds from issuance of convertible debt and warrants of approximately $3,719,000, and net proceeds from issuance of balloon promissory note of approximately $4,534,000 (net of cash paid for debt issuance costs of approximately $266,000), and net proceeds from equity offering of approximately $712,000 (net of cash paid for commission and other offering costs of approximately $24,000), and proceeds from issuance of Series A Preferred Stock of $9,000,000 to fund our working capital needs and equity interest purchase, offset by repayments made for note payable – related party of $390,000 and repayments made for loan payable – related party of $410,000. 54 The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term: ● an increase in working capital requirements to finance our current business; ● the use of capital for acquisitions and the development of business opportunities; and ● the cost of being a public company. August 2019 Credit Facility In the third quarter of 2019, we had secured a $20 million credit facility (Line of Credit) provided by our Chairman, Wenzhao Lu. The unsecured credit facility bears interest at a rate of 5% and provides for maturity on drawn loans 36 months after funding. As of December 31, 2023, we used approximately $6.8 million of the credit facility and have approximately $13.2 million remaining available un der the Line Credit. ATM In June 2023, we entered into a sales agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (“Roth”) under which we may offer and sell from time to time shares of our common stock having an aggregate offering price of up to $3.5 million. From July 1, 2023 to March 29, 2024, Roth has sold an aggregate of 456,627 shares of our common stock at an average price of $1.39 per share to investors. We received net cash proceeds of $616,259, net of cash paid for sales agent’s commission and other fees of $19,132. Balloon Mortgage Note In May 2023, we, through Avalon RT 9, executed a balloon mortgage note in favor of a lender (the “Lender”) in the original principal amount of $1,000,000 (the “Balloon Mortgage Note”). The Balloon Mortgage Note accrues interest at the annual rate of 13.0% and is paid in monthly installments of interest-only in the amount of $10,833 commencing in June 2023 and continuing through October 2025 (at which point any unpaid balance of principal, interest and other charges become due and payable). The Balloon Mortgage Note is secured by a second-lien mortgage on our real property in Monmouth County, New Jersey, In addition, we and Avalon RT 9 executed a guaranty related to the Balloon Mortgage Note. May 2023 Convertible Note Financing In May 2023, we entered into a securities purchase agreement with certain lenders (the “May 2023 Lenders”) and closed on the issuance of a 13.0% senior secured convertible promissory note in the aggregate principal amount of $1,500,000 (the “May 2023 Note”), as well as the issuance of 75,000 shares of our common stock as a commitment fee and warrants for the purchase of up to 230,000 shares of our common stock. We and our subsidiaries also entered into a security agreement in connection with the May 2023 Note, 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 our obligations under the May 2023 Note. The May 2023 Lenders acquired the May 2023 Note for $1,425,000 after an original issue discount of $75,000. The May 2023 Note matures on May 23, 2024 and accrues interest at a rate of 13.0% per annum. The May 2023 Note contains certain negative covenants. If the May 2023 Note is accelerated following the occurrence of an event of default as described in such note, we are required to pay 120% of the principal and interest outstanding under the May 2023 Note. The principal amount and interest under the May 2023 Note is convertible into shares of our common stock at a conversion price of $4.50 per share, unless we fail to make an amortization payment when due in accordance with the terms of the May 2023 Note, in which case the conversion price shall be the lower of (i) $4.50 or (ii) 85% of the lowest VWAP of our common stock on any trading day during the five (5) trading days prior to the respective conversion date, subject to a floor of $1.50 per share. The warrants are comprised of (i) a warrant to purchase 125,000 shares of our common stock at an exercise price of $4.50 and exercisable until May 23, 2028 and (ii) a warrant to purchase 105,500 shares of our common stock at an exercise price of $3.20 and exercisable until May 23, 2028 (which warrant shall be cancelled and extinguished upon the payment of the May 2023 Note). The conversion price of the May 2023 Note and the exercise price of the warrants issued thereunder contain certain price protection anti-dilution adjustments if an event of default occurs under the May 2023 Note. 55 July 2023 Convertible Note Financing In July 2023, we entered into a securities purchase agreement with certain lenders (the “July 2023 Lenders”) and closed on the issuance of a 13.0% senior secured convertible promissory note in the aggregate principal amount of $500,000 (the “July 2023 Note”), as well as the issuance of 25,000 shares of our common stock as a commitment fee and warrants for the purchase of up to 76,830 shares of our common stock. We and our subsidiaries also entered into a security agreement in connection with the July 2023 Note, 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 our obligations under the July 2023 Note. The July 2023 Lenders acquired the July 2023 Note for $475,000 after an original issue discount of $25,000. The July 2023 Note matures on July 6, 2024 and accrues interest at a rate of 13.0% per annum. The July 2023 Note contains certain negative covenants. If the July 2023 Note is accelerated following the occurrence of an event of default as described in such note, we are required to pay 120% of the principal and interest outstanding under the July 2023 Note. The principal amount and interest under the July 2023 Note is convertible into shares of our common stock at a conversion price of $4.50 per share, unless we fail to make an amortization payment when due which commences in January 2024 in accordance with the terms of the July 2023 Note, in which case the conversion price shall be the lower of (i) $4.50 or (ii) 85% of the lowest VWAP of our common stock on any trading day during the five (5) trading days prior to the respective conversion date, subject to a floor of $1.50 per share. The warrants are comprised of (i) a warrant to purchase 41,665 shares of our common stock at an exercise price of $4.50 and exercisable until July 6, 2028 and (ii) a warrant to purchase 35,165 shares of our common stock at an exercise price of $3.20 and exercisable until July 6, 2028 (which warrant shall be cancelled and extinguished upon the payment of the July 2023 Notes). The conversion price of the July 2023 Note and the exercise price of the warrants issued thereunder contain certain price protection anti-dilution adjustments if an event of default occurs under the July 2023 Notes. October 2023 Convertible Note Financing In October 2023, we 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 our common stock as a commitment fee and warrants for the purchase of up to 105,000 shares of our common stock. We and our subsidiaries also entered into security agreements in connection with the October 2023 Note, 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 our obligations under the October 2023 Note. The October 2023 Lenders acquired the October 2023 Note for $665,000 after an original issue discount of $35,000. The October 2023 Note matures on October 9, 2024 and accrues interest at a rate of 13.0% per annum. The October 2023 Note contains certain negative covenants. If the October 2023 Note is accelerated following the occurrence of an event of default as described in such note, we are required to pay 120% of the principal and interest outstanding under the October 2023 Note. The principal amount and interest under the October 2023 Note is convertible into shares of our common stock at a conversion price of $1.50 per share, unless we fail to make an amortization payment when due which commences in April 2024 in accordance with the terms of the October 2023 Note, in which case the conversion price shall be the lower of (i) $1.50 or (ii) 85% of the lowest VWAP of our common stock on any trading day during the five (5) trading days prior to the respective conversion date. The warrants are comprised of (i) a warrant to purchase 105,000 shares of our common stock at an exercise price of $2.50 and exercisable until October 9, 2028 and (ii) a warrant to purchase 87,500 shares of our common stock at an exercise price of $1.80 and exercisable until October 9, 2028 and which warrant shall be cancelled and extinguished upon the payment of the October 2023 Note. The conversion price of the October 2023 Note and the exercise price of the warrants issued thereunder contain certain price protection anti-dilution adjustments if an event of default occurs under the October 2023 Note. March 2024 Convertible Note Financing In March 2024, we entered into security purchase agreement with a lender (the “March 2024 Lender”) and closed on the issuance of 13.0% senior secured convertible promissory note in the principal amount of $700,000 (the “March 2024 Note”), as well as the issuance of 105,000 shares of common stock as a commitment fee and warrants for the purchase of up to 252,404 shares of our common stock. We and our subsidiaries also entered into security agreements in connection with the March 2024 Note, 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 our obligations under the March 2024 Note. 56 We estimate that based on current plans and assumptions, that our available cash will be insufficient to satisfy our cash requirements under our present operating expectations through cash flow provided by operations, and cash available under our ATM and lending facilities and sales of equity. Other than funds received as described above and cash resource generating from our operations, we presently have no other significant alternative source of working capital. We have used these funds to fund our operating expenses, pay our obligations and grow our company. We will need to raise significant additional capital to fund our operations and to provide working capital for our ongoing operations and obligations. Therefore, our future operation is dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will be required to cease our operations. To date, we have not considered this alternative, nor do we view it as a likely occurrence. Off-balance Sheet Arrangements We presently do not have off-balance sheet arrangements. Foreign Currency Exchange Rate Risk In November of 2022, we decided to cease all operations in China with the exception of a small administrative office, Avalon Shanghai. We do not expect nor do we plan that there will be further revenue generated from PRC operations in the foreseeable future. Thus, exchange rate fluctuations between the RMB and the US dollar do not have a material effect on us. For the years ended December 31, 2023 and 2022, we had an unrealized foreign currency translation loss of approximately $19,000 and $48,000, respectively, because of changes in the exchange rate. Inflation The effect of inflation on our revenue and operating results was not significant. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements begin on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.