Change Agents Corporation. 10-Q

Item 1. Financial Statements. AVALON GLOBOCARE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, December 31, 2024 2023 (Unaudited) ASSETS CURRENT ASSETS: Cash $ 305,468 $ 285,400 Rent receivable 88,139 197,473 Prepaid expense and other current assets 384,210 367,994 Total Current Assets 777,817 850,867 NON-CURRENT ASSETS: Operating lease right-of-use assets, net 102,535 128,250 Property and equipment, net 35,735 38,083 Investment in real estate, net 7,149,233 7,191,404 Equity method investments, net 12,041,701 12,095,020 Other non-current assets 226,215 278,912 Total Non-current Assets 19,555,419 19,731,669 Total Assets $ 20,333,236 $ 20,582,536 LIABILITIES AND EQUITY CURRENT LIABILITIES: Accrued professional fees $ 1,813,274 $ 1,804,100 Accrued research and development fees 208,772 208,772 Accrued payroll liability and compensation 575,989 588,722 Accrued litigation settlement 450,000 450,000 Accrued liabilities and other payables 292,988 272,915 Accrued liabilities and other payables - related parties 810,974 206,458 Operating lease obligation 109,732 129,396 Advance from pending sale of noncontrolling interest - related party 1,696,186 485,714 Equity method investment payable - 666,667 Derivative liability 15,637 24,796 Convertible note payable, net 1,829,782 1,925,146 Total Current Liabilities 7,803,334 6,762,686 NON-CURRENT LIABILITIES: Operating lease obligation - noncurrent portion - 4,855 Note payable, net 5,626,026 5,596,219 Loan payable - related party 850,000 850,000 Total Non-current Liabilities 6,476,026 6,451,074 Total Liabilities 14,279,360 13,213,760 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 March 31, 2024 and December 31, 2023 Liquidation preference $ 9 million at March 31, 2024 9,000,000 9,000,000 Series B Convertible Preferred Stock, 11,000 shares issued and outstanding at March 31, 2024 and December 31, 2023 Liquidation preference $ 11 million at March 31, 2024 11,000,000 11,000,000 Common stock, $ 0.0001 par value; 490,000,000 shares authorized; 11,156,534 shares issued and 11,104,534 shares outstanding at March 31, 2024; 11,051,534 shares issued and 10,999,534 shares outstanding at December 31, 2023 1,116 1,105 Additional paid-in capital 67,940,573 67,885,051 Less: common stock held in treasury, at cost; 52,000 shares at March 31, 2024 and December 31, 2023 ( 522,500 ) ( 522,500 ) Accumulated deficit ( 81,137,244 ) ( 79,769,731 ) Statutory reserve 6,578 6,578 Accumulated other comprehensive loss ( 234,647 ) ( 231,727 ) Total Avalon GloboCare Corp. stockholders’ equity 6,053,876 7,368,776 Noncontrolling interest - - Total Equity 6,053,876 7,368,776 Total Liabilities and Equity $ 20,333,236 $ 20,582,536 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 March 31, 2024 2023 REAL PROPERTY RENTAL REVENUE $ 314,588 $ 296,165 REAL PROPERTY OPERATING EXPENSES 263,126 248,445 REAL PROPERTY OPERATING INCOME 51,462 47,720 INCOME (LOSS) FROM EQUITY METHOD INVESTMENT - LAB SERVICES MSO 107,469 ( 89,091 ) OTHER OPERATING EXPENSES: Advertising and marketing expenses 45,000 691,753 Professional fees 442,335 1,226,239 Compensation and related benefits 353,571 451,555 Other general and administrative expenses 161,087 342,409 Total Other Operating Expenses 1,001,993 2,711,956 LOSS FROM OPERATIONS ( 843,062 ) ( 2,753,327 ) OTHER (EXPENSE) INCOME Interest expense - amortization of debt discount and debt issuance cost ( 272,196 ) ( 22,205 ) Interest expense - other ( 236,215 ) ( 132,000 ) Interest expense - related party ( 10,596 ) ( 2,021 ) Change in fair value of derivative liability 31,212 - Other expense ( 36,656 ) ( 10,191 ) Total Other Expense, net ( 524,451 ) ( 166,417 ) LOSS BEFORE INCOME TAXES ( 1,367,513 ) ( 2,919,744 ) INCOME TAXES - - NET LOSS $ ( 1,367,513 ) $ ( 2,919,744 ) LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST - - NET LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS $ ( 1,367,513 ) $ ( 2,919,744 ) NET LOSS PER COMMON SHARE ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS: Basic and diluted $ ( 0.12 ) $ ( 0.29 ) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic and diluted 11,028,380 10,015,637 COMPREHENSIVE LOSS: NET LOSS $ ( 1,367,513 ) $ ( 2,919,744 ) OTHER COMPREHENSIVE (LOSS) INCOME Unrealized foreign currency translation (loss) gain ( 2,920 ) 3,670 COMPREHENSIVE LOSS ( 1,370,433 ) ( 2,916,074 ) LESS: COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST - - COMPREHENSIVE LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS $ ( 1,370,433 ) $ ( 2,916,074 ) 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 Months Ended March 31, 2024 (Unaudited) Avalon GloboCare Corp. Stockholders’ Equity Series A Preferred Stock Series B Preferred Stock Common Stock Treasury Stock Accumulated Number of Number of Number of Additional Paid-in Number of Accumulated Statutory Other Comprehensive Noncontrolling Total Shares Amount Shares Amount Shares Amount Capital Shares Amount Deficit Reserve Loss Interest Equity Balance, January 1, 2024 9,000 $ 9,000,000 11,000 $ 11,000,000 11,051,534 $ 1,105 $ 67,885,051 ( 52,000 ) $ ( 522,500 ) $ ( 79,769,731 ) $ 6,578 $ ( 231,727 ) $ - $ 7,368,776 Issuance of common stock as convertible note payable commitment fee - - - - 105,000 11 41,989 - - - - - - 42,000 Stock-based compensation - - - - - - 13,533 - - - - - - 13,533 Foreign currency translation adjustment - - - - - - - - - - - ( 2,920 ) - ( 2,920 ) Net loss for the three months ended March 31, 2024 - - - - - - - - - ( 1,367,513 ) - - - ( 1,367,513 ) Balance, March 31, 2024 9,000 $ 9,000,000 11,000 $ 11,000,000 11,156,534 $ 1,116 $ 67,940,573 ( 52,000 ) $ ( 522,500 ) $ ( 81,137,244 ) $ 6,578 $ ( 234,647 ) $ - $ 6,053,876 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 Months Ended March 31, 2023 (Unaudited) Avalon GloboCare Corp. Stockholders’ Equity Series A Preferred Stock Series B Preferred Stock Common Stock Treasury Stock Accumulated Number of Number of Number of Additional Paid-in Number of Accumulated Statutory Other 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 See accompanying notes to the condensed consolidated financial statements. 4 AVALON GLOBOCARE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Three Months Ended March 31, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 1,367,513 ) $ ( 2,919,744 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 44,481 61,056 Change in straight-line rent receivable 20,548 13,196 Amortization of operating lease right-of-use asset 29,448 34,888 Stock-based compensation and service expense 45,746 327,190 (Income) loss from equity method investments ( 107,469 ) 98,545 Distribution of earnings from equity method investment 160,788 - Amortization of debt issuance costs and debt discount 272,196 22,205 Change in fair market value of derivative liability ( 31,212 ) - Changes in operating assets and liabilities: Rent receivable 113,024 4,309 Security deposit - 409 Deferred leasing costs 8,350 8,350 Prepaid expense and other assets ( 3,739 ) ( 87,328 ) Accrued liabilities and other payables ( 14,758 ) 634,558 Accrued liabilities and other payables - related parties ( 62,151 ) 2,021 Operating lease obligation ( 23,448 ) ( 34,465 ) NET CASH USED IN OPERATING ACTIVITIES ( 915,709 ) ( 1,834,810 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment - ( 20,185 ) NET CASH USED IN INVESTING ACTIVITIES - ( 20,185 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loan payable - related party - 750,000 Proceeds from issuance of convertible debt and warrants 665,000 - Payments of convertible debt issuance costs ( 72,700 ) - Repayments of convertible debt ( 866,000 ) - Advance from sale of noncontrolling interest in subsidiary 1,210,472 - NET CASH PROVIDED BY FINANCING ACTIVITIES 936,772 750,000 EFFECT OF EXCHANGE RATE ON CASH ( 995 ) 1,116 NET INCREASE (DECREASE) IN CASH 20,068 ( 1,103,879 ) CASH - beginning of period 285,400 1,990,910 CASH - end of period $ 305,468 $ 887,031 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Interest $ 238,782 $ 132,000 NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for future services $ - $ 54,576 Common stock issued for accrued liabilities $ - $ 164,871 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 $ 1,679 $ - Warrants issued with convertible note payable recorded as debt discount $ 20,374 $ - Common stock issued as convertible note payable commitment fee $ 42,000 $ - Equity method investment payable paid by a related party $ 666,667 $ - 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. The Company is a commercial stage company dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. The Company is working to establish a leading role in the innovation of diagnostic testing, utilizing proprietary technology to deliver precise, genetics-driven results. Through its membership interest in a laboratory, 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 March 31, 2024, 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 is a patent holding company. 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 subsidiaries, 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) Details of the Company’s subsidiaries which are included in these condensed consolidated financial statements as of March 31, 2024 are as follows: 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 Holding company for payroll and other expenses 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 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 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, 2023 filed with the Securities and Exchange Commission on April 15, 2024. 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 through its 40 % equity investment in Lab Services MSO, 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. 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 $ 7,026,000 at March 31, 2024 and had incurred recurring net losses and generated negative cash flow from operating activities of approximately $ 1,368,000 and $ 916,000 for the three months ended March 31, 2024, 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 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 months ended March 31, 2024 and 2023 include the useful life of 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 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 d efinition 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 v alue 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 three months ended March 31, 2024: Significant Unobservable Inputs (Level 3) Balance of derivative liability as of January 1, 2024 $ 24,796 Initial fair value of derivative liability attributable to warrants issuance with March 2024 fund raise 22,053 Gain from change in the fair value of derivative liability ( 31,212 ) Balance of derivative liability as of March 31, 2024 $ 15,637 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. Cash and Cash Equivalents At March 31, 2023 and December 31, 2023, the Company’s cash balances by geographic area were as follows: Country: March 31, 2024 December 31, 2023 United States $ 297,232 97.3 % $ 280,197 98.2 % China 8,236 2.7 % 5,203 1.8 % Total cash $ 305,468 100.0 % $ 285,400 100.0 % 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 March 31, 2024 and December 31, 2023. 9 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Credit Risk and Uncertainties 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 March 31, 2024, there were no balances 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 Company The Company uses the equity method of accounting for its investment in, and earning or loss of, investees that it does not control but over which it does exert significant influence. The Company applies the equity method by initially recording these investments at cost, as equity method investments, subsequently adjusted for equity in earnings and cash distributions. The Company considers whether the fair value of its equity method investment has declined below its carrying value whenever adverse events or changes in circumstances indicate that recorded value 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. See Note 5 for discussion of equity method investments. The Company classifies distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities. 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 rent receivable on the condensed consolidated balance sheets. 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 . 10 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Per Share Data (continued) 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 months ended March 31, 2024 and 2023, 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 March 31, 2024 2023 Options to purchase common stock 709,303 767,303 Warrants to purchase common stock 908,431 123,964 Series A convertible preferred stock (*) 900,000 900,000 Series B convertible preferred stock (**) 2,910,053 2,910,053 Convertible notes (***) 1,352,000 - Potentially dilutive securities 6,779,787 4,701,320 (*) Assumed the Series A convertible preferred stock was converted into shares of common stock of the Company at a conversion price of $ 10.00 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 notes were converted into shares of common stock of the Company at a conversion price of $ 4.50 and $ 1.50 and $ 1.00 per share for the three months ended March 31, 2024. 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. 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 months ended March 31, 2024 and 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. 11 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Recent Accounting Standards In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This guidance is intended to enhance the transparency and decision-usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to disclosure regarding rate reconciliation and income taxes paid both in the U.S. and in foreign jurisdictions. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 on a prospective basis, with the option to apply the standard retrospectively. Early adoption is permitted. The company is currently evaluating this guidance to determine the impact it may have on its condensed consolidated financial statements disclosures. 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 March 31, 2024 and December 31, 2023, prepaid expense and other current assets consisted of the following: March 31, 2024 December 31, 2023 Prepaid professional fees $ 15,529 $ 33,062 Prepaid directors and officers’ liability insurance premium 28,521 27,192 Prepaid NASDAQ listing fee 49,125 - Deferred offering costs 175,136 175,136 Deferred leasing costs 33,402 33,402 Security deposit 17,842 - Due from broker 74 37,187 Others 64,581 62,015 Total $ 384,210 $ 367,994 NOTE 5 – EQUITY METHOD INVESTMENTS 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 $ 20,666,667 , 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”), which approximated the fair value, and (iii) a $ 666,667 cash payment on February 9, 2024. 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 , which approximated the market price at the date of closing, 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. 12 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 5 – EQUITY METHOD INVESTMENTS (continued) Lab Services MSO, through its subsidiaries, 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. 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 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 $ 19,460,000 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. Intangible assets consist of the valuation of identifiable intangible assets acquired, representing trade names and customers relationships, which are being amortized on a straight-line method over the estimated useful life of 15 years. The straight-line method of amortization represents the Company’s best estimate of the distribution of the economic value of the identifiable intangible assets. For the three months ended March 31, 2024 and for the period from February 9, 2023 (date of investment) through March 31, 2023, amortization expense of these intangible assets amounted to $ 166,733 and $ 135,830 , respectively, which was included in income (loss) from equity method investment — Lab Services MSO in the accompanying condensed consolidated statements of operations and comprehensive loss. Goodwill represents the excess of the purchase price paid over the fair value of net assets acquired in the business acquisition of Lab Services MSO incurred on February 9, 2023. Goodwill is not amortized but is tested for impairment at least once annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. For the three months ended March 31, 2024 and for the period from February 9, 2023 (date of investment) through March 31, 2023, the Company’s share of Lab Services MSO’s net income was $ 274,202 and $ 46,739 , respectively, which was included in income (loss) from equity method investment — Lab Services MSO in the accompanying condensed consolidated statements of operations and comprehensive loss. In the three months ended March 31, 2024, 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, 2024 $ 12,095,020 Lab Services MSO’s net income attributable to the Company 274,202 Intangible assets amortization amount ( 166,733 ) Distribution of earnings from equity investment ( 160,788 ) Equity investment carrying amount at March 31, 2024 $ 12,041,701 As of March 31, 2024, the Company’s carrying value of the identified intangible assets and goodwill which are included in the equity investment carrying amount was $ 9,225,911 and $ 259,579 , respectively. As of December 31, 2023, the Company’s carrying value of the identified intangible assets and goodwill which are included in the equity investment carrying amount was $ 9,392,644 and $ 259,579 , respectively. The tables below present the summarized financial information, as provided to the Company by the investee, for the unconsolidated company: March 31, 2024 December 31, 2023 Current assets $ 5,219,444 $ 4,930,254 Noncurrent assets 5,323,650 5,228,044 Current liabilities 929,507 828,713 Noncurrent liabilities 4,767,821 4,104,183 Equity 4,845,766 5,225,402 13 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 5 – EQUITY METHOD INVESTMENTS (continued) For the Three Months Ended March 31, 2024 For the Period from February 9, 2023 (Date of Investment) through March 31, 2023 Net revenue $ 3,376,372 $ 2,174,524 Gross profit 1,003,789 776,778 Income from operation 275,026 116,846 Net income 685,504 116,846 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. 14 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued) May 2023 Convertible Note (continued) 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. For the three months ended March 31, 2024, amortization of debt discount and debt issuance costs and interest expense related to the May 2023 Convertible Note amounted to $ 131,204 and $ 29,793 , 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. 15 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued) July 2023 Convertible Note (continued) 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. 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 the three months ended March 31, 2024, amortization of debt discount and debt issuance costs and interest expense related to the July 2023 Convertible Note amounted to $ 40,848 and $ 13,001 , 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. 16 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued) October 2023 Convertible Note On October 9, 2023, the Company entered into securities purchase agreements with Mast Hill and Firstfire for the issuance of 13.0 % senior secured promissory notes in the aggregate principal amount of $ 700,000 (collectively, the “October 2023 Convertible Note,” and, collectively with the May 2023 Convertible Note and the July 2023 Convertible Note, the “2023 Convertible Notes”) convertible into shares of common stock, par value $ 0.0001 per share, of the Company, as well as the issuance of 70,000 shares of common stock as a commitment fee and warrants for the purchase of 192,500 shares of common stock of the Company. The Company and its subsidiaries have entered into that certain 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 Convertible Note. Principal amount and interest under the October 2023 Convertible Note are convertible into shares of common stock of the Company at a conversion price of $ 1.50 per share unless the Company fails to make an amortization payment when due, in which case the conversion price shall be the lower of $ 1.50 or the market price (as defined in the October 2023 Convertible Note) of the shares. Mast Hill acquired the October 2023 Convertible Note with principal amount of $ 350,000 and paid the purchase price of $ 332,500 after an original issue discount of $ 17,500 . On October 9, 2023, the Company issued (i) a warrant to purchase 52,500 shares of common stock with an exercise price of $ 2.50 exercisable until the five-year anniversary of October 9, 2023, (ii) a warrant to purchase 43,750 shares of common stock with an exercise price of $ 1.80 exercisable until the five-year anniversary of October 9, 2023, which warrant shall be cancelled and extinguished against payment of the October 2023 Convertible Note, and (iii) 35,000 shares of common stock as a commitment fee for the purchase of the October 2023 Convertible Note, which were earned in full as of October 9, 2023. On October 9, 2023, the Company delivered such duly executed October 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 October 2023 Convertible Note, as provided in the following table: Payment Date: Payment Amount: April 9, 2024 $35,000 plus accrued interest through April 9, 2024 May 9, 2024 $35,000 plus accrued interest through May 9, 2024 June 9, 2024 $46,667 plus accrued interest through June 9, 2024 July 9, 2024 $58,333 plus accrued interest through July 9, 2024 August 9, 2024 $58,333 plus accrued interest through August 9, 2024 September 9, 2024 $70,000 plus accrued interest through September 9, 2024 October 9, 2024 The entire remaining outstanding balance of the October 2023 Convertible Note Firstfire acquired the October 2023 Convertible Note with principal amount of $ 350,000 and paid the purchase price of $ 332,500 after an original issue discount of $ 17,500 . On October 9, 2023, the Company issued (i) a warrant to purchase 52,500 shares of common stock with an exercise price of $ 2.50 exercisable until the five-year anniversary of October 9, 2023, (ii) a warrant to purchase 43,750 shares of common stock with an exercise price of $ 1.80 exercisable until the five-year anniversary of October 9, 2023, which warrant shall be cancelled and extinguished against payment of the October 2023 Convertible Note, and (iii) 35,000 shares of common stock as a commitment fee for the purchase of the October 2023 Convertible Note, which were earned in full as of October 9, 2023. On October 9, 2023, the Company delivered such duly executed October 2023 Convertible Note, warrants and common stock to Firstfire against delivery of such purchase price. 17 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued) October 2023 Convertible Note (continued) The Company is obligated to make amortization payments in cash to Firstfire towards the repayment of the October 2023 Convertible Note, as provided in the following table: Payment Date: Payment Amount: April 9, 2024 $35,000 plus accrued interest through April 9, 2024 May 9, 2024 $35,000 plus accrued interest through May 9, 2024 June 9, 2024 $46,667 plus accrued interest through June 9, 2024 July 9, 2024 $58,333 plus accrued interest through July 9, 2024 August 9, 2024 $58,333 plus accrued interest through August 9, 2024 September 9, 2024 $70,000 plus accrued interest through September 9, 2024 October 9, 2024 The entire remaining outstanding balance of the October 2023 Convertible Note In connection with the issuance of the October 2023 Convertible Note, the Company incurred debt issuance costs of $ 95,349 (including the issuance of 8,400 warrants as a finder’s fee), which is capitalized and will be amortized into interest expense over the term of the October 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 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 87,500 warrants with an exercise price of $ 1.80 exercisable until the five-year anniversary of October 9, 2023, which warrant shall be cancelled and extinguished against payment of the October 2023 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 113,400 warrants with an exercise price of $ 2.50 exercisable until the five-year anniversary of October 9, 2023 was classified as a derivative liability on October 9, 2023. The fair values of the 113,400 warrants with an exercise price of $ 2.50 exercisable until the five-year anniversary of October 9, 2023 issued on October 9, 2023 were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $ 0.77 , volatility of 89.70 %, risk-free rate of 4.75 %, 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 $ 128,748 related to the original issue discount, common shares issued and warrants issued to Mast Hill and Firstfire, which will be amortized over the term of the October 2023 Convertible Note. For the three months ended March 31, 2024, amortization of debt discount and debt issuance costs and interest expense related to the October 2023 Convertible Note amounted to $ 56,024 and $ 22,688 , 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. 18 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued) March 2024 Convertible Note On March 7, 2024, the Company entered into securities purchase agreements with Mast Hill Fund, L.P. for the issuance of 13.0 % senior secured promissory notes in the aggregate principal amount of $ 700,000 (collectively, the “March 2024 Convertible Note”) convertible into shares of common stock, par value $ 0.0001 per share, of the Company, as well as the issuance of 105,000 shares of common stock as a commitment fee and warrants for the purchase of 252,404 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 March 2024 Convertible Note. Principal amount and interest under the March 2024 Convertible Note are convertible into shares of common stock of the Company at a conversion price of $ 1.00 per share unless the Company fails to make an amortization payment when due, in which case the conversion price shall be the lower of $ 1.00 or the market price (as defined in the March 2024 Convertible Note) of the shares. Mast Hill acquired the March 2024 Convertible Note with principal amount of $ 700,000 and paid the purchase price of $ 665,000 after an original issue discount of $ 35,000 . On March 7, 2024, the Company issued (i) a warrant to purchase 131,250 shares of common stock with an exercise price of $ 2.00 exercisable until the five-year anniversary of March 7, 2024, (ii) a warrant to purchase 121,154 shares of common stock with an exercise price of $ 1.30 exercisable until the five-year anniversary of March 7, 2024, which warrant shall be cancelled and extinguished against payment of the March 2024 Convertible Note, and (iii) 105,000 shares of common stock as a commitment fee for the purchase of the March 2024 Convertible Note, which were earned in full as of March 7, 2024. On March 7, 2024, the Company delivered such duly executed March 2024 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 March 2024 Convertible Note, as provided in the following table : Payment Date: Payment Amount: September 7, 2024 $70,000 plus accrued interest through September 7, 2024 October 7, 2024 $70,000 plus accrued interest through October 7, 2024 November 7, 2024 $93,334 plus accrued interest through November 7, 2024 December 7, 2024 $116,667 plus accrued interest through December 7, 2024 January 7, 2025 $116,667 plus accrued interest through January 7, 2025 February 7, 2025 $140,000 plus accrued interest through February 7, 2025 March 7, 2025 The entire remaining outstanding balance of the March 2024 Convertible Note In connection with the issuance of the March 2024 Convertible Note, the Company incurred debt issuance costs of $ 74,379 (including the issuance of 10,500 warrants as a finder’s fee) which is capitalized and will be amortized into interest expense over the term of the March 2024 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 121,154 warrants with an exercise price of $ 1.30 exercisable until the five-year anniversary of March 7, 2024, which warrant shall be cancelled and extinguished against payment of the March 2024 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 141,750 warrants with an exercise price of $ 2.00 exercisable until the five-year anniversary of March 7, 2024 was classified as derivative liability on March 7, 2024. The fair values of the 141,750 warrants with an exercise price of $ 2.00 exercisable until the five-year anniversary of March 7, 2024 issued on March 7, 2024 were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $ 0.40 , volatility of 85.24 %, risk-free rate of 4.07 %, 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. 19 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued) March 2024 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 $ 97,374 related to the original issue discount, common shares issued and warrants issued to Mast Hill, which will be amortized over the term of the March 2024 Convertible Note. For the three months ended March 31, 2024, amortization of debt discount and debt issuance costs and interest expense related to the March 2024 Convertible Note amounted to $ 14,313 and $ 6,233 , 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. 2023 Convertible Notes and March 2024 Convertible Notes – Events of Default The 2023 Convertible Notes and the March 2024 Convertible Note contain customary events of default, upon the occurrence of which (after giving effect to the right to cure of the borrower), the notes shall become due and payable and the borrower shall pay to the lender/s an amount equal to the principal amount then outstanding under such notes plus accrued interest (including any Default Interest, as defined in the 2023 Convertible Notes and the March 2024 Convertible Note, respectively), provided, however, that Mast Hill and Firstfire (collectively, the “Convertible Notes Lenders”) may in their sole discretion determine to accept payment part in shares of the Company’s common stock (pursuant to the conversion formula set forth in the 2023 Convertible Notes and the March 2024 Convertible Note) and part in cash. During the quarter ended March 31, 2024, the Company’s market capitalization fell below $ 5 million, which constitutes an event of default under the 2023 Convertible Notes and the March 2024 Convertible Note. Pursuant to Section 3.22 of the 2023 Convertible Notes (and the March 2024 Convertible Note), the Company (as borrower under such notes) has a right to cure such default within ten (10) calendar days (the “Cure Period”) after the earlier of (i) the date the borrower receives notice from the lenders demanding cure of such default, or (ii) the first date that the then Chief Executive Officer, Chief Financial Officer, or Board of Directors of the borrower has actual knowledge of the existence of the default. The Company did not receive any notice from the Convertible Notes Lenders with respect to the event of default. The Company first had actual knowledge of the existence of the default on April 29, 2024 and received a waiver from the Convertible Notes Lenders, waiving this event of default on May 29, 2024. Although this waiver was not within the Cure Period, the Convertible Notes Lenders provided a full waiver to the event of default prior to the issuance of this report. On May 23, 2024, the Company received a waiver to the required amortization payment under the May 2023 Convertible Note. Pursuant to the waiver, the Company received an extension until June 10, 2024 to allow time for the payment to be made or to allow the Company to refinance the Convertible Notes. In addition, the Company failed to file this report in a timely manner during the prescribed period following the Company’s filing of a 12b-25 extension with respect thereto, which would have triggered an event of default under the 2023 Convertible Notes and the March 2024 Convertible Note but for receipt by the Company of the waiver with respect to this event of default from the Convertible Notes Lenders on the original due date of this report (which was reaffirmed by the waiver dated May 29, 2024) . As a result, the 2023 Convertible Notes and the March 2024 Convertible Note are no longer in default as of the date of this report. The events of default described above did not have an accounting impact on the Company’s unaudited financial statements for the quarter ended March 31, 2024 since the events of default were cured either within the Cure Period or prior to the date of this report and no penalties associated with such events of default under the 2023 Convertible Notes and the March 2024 Convertible Note were ever triggered. In addition, the Company is in the process of refinancing the 2023 Convertible Notes and the March 2024 Convertible Note into one new note, which will also remove the $ 5 million market capitalization covenant so that it is not an event of default in the future. 20 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 7 – DERIVATIVE LIABILITY As stated in Note 6, May 2023 Convertible Note, July 2023 Convertible Note, October 2023 Convertible Note, and March 2024 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-value at each reporting date, with changes in the fair value reported in the statements of operations. However, on May 23, 2023, July 6, 2023, October 9, 2023, March 7, 2024, and March 31, 2024, 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 March 31, 2024, 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 $ 5,796 . The estimated fair value of the warrants was computed as of March 31, 2024 using Black-Scholes option-pricing model, with the following assumptions: stock price of $ 0.32 , volatility of 81.49 %, risk-free rate of 4.21 %, annual dividend yield of 0 % and expected life of 4.1 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 March 31, 2024, 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 $ 2,314 . The estimated fair value of the warrants was computed as of March 31, 2024 using Black-Scholes option-pricing model, with the following assumptions: stock price of $ 0.32 , volatility of 84.10 %, risk-free rate of 4.21 %, annual dividend yield of 0 % and expected life of 4.3 years. 21 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 7 – DERIVATIVE LIABILITY (continued) On October 9, 2023, the Company issued 200,900 warrants to Mast Hill and 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 87,500 warrants with an exercise price of $ 1.80 exercisable until the five-year anniversary of October 9, 2023, which warrant shall be cancelled and extinguished against payment of the October 2023 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 113,400 warrants with an exercise price of $ 2.50 exercisable until the five-year anniversary of October 9, 2023 was classified as a derivative liability on October 9, 2023. On March 31, 2024, the estimated fair value of the 113,400 warrants with an exercise price of $ 2.50 exercisable until the five-year anniversary of October 9, 2023 as derivative liability was $ 9,422 . The estimated fair value of the warrants was computed as of March 31, 2024 using Black-Scholes option-pricing model, with the following assumptions: stock price of $ 0.32 , volatility of 82.77 %, risk-free rate of 4.21 %, annual dividend yield of 0 % and expected life of 4.5 years. On March 7, 2024, the Company issued 262,904 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 121,154 warrants with an exercise price of $ 1.30 exercisable until the five-year anniversary of March 7, 2024, which warrant shall be cancelled and extinguished against payment of the March 2024 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 141,750 warrants with an exercise price of $ 2.00 exercisable until the five-year anniversary of March 7, 2024 was classified as a derivative liability on March 7, 2024. On March 31, 2024, the estimated fair value of the 141,750 warrants with an exercise price of $ 2.00 exercisable until the five-year anniversary of March 7, 2024 as derivative liability was $ 14,742 . The estimated fair value of the warrants was computed as of March 31, 2024 using Black-Scholes option-pricing model, with the following assumptions: stock price of $ 0.32 , volatility of 81.89 %, risk-free rate of 4.21 %, annual dividend yield of 0 % and expected life of 4.9 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. The changes to the derivative liability resulted in a decrease of $ 31,212 in the derivative liability and the corresponding increase in other income as a gain for the three months ended March 31, 2024. 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 March 31, 2024 and December 31, 2023 is as follows: March 31, 2024 December 31, 2023 Principal amount $ 5,800,000 $ 5,800,000 Less: unamortized debt issuance costs ( 173,974 ) ( 203,781 ) Note payable, net $ 5,626,026 $ 5,596,219 22 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 8 – NOTE PAYABLE, NET (continued) For the three months ended March 31, 2024 and 2023, amortization of debt issuance costs related to note payable amounted to $ 29,807 and $ 22,205 , 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 March 31, 2024 and 2023, interest expense related to note payable amounted to $ 164,500 and $ 132,000 , 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. For both the three months ended March 31, 2024 and 2023, 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. At March 31, 2024 and December 31, 2023, the related party rent receivable totaled $ 12,100 and $ 124,500 , 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 Party 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 $ 16,731 and $ 26,457 for the three months ended March 31, 2024 and 2023, 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 March 31, 2024 and December 31, 2023, 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. From time to time, Lab Services MSO paid shared expense on behalf of the Company. In addition, Lab Services MSO made a payment of $ 666,667 for equity method investment payable on behalf of the Company in the first quarter of 2024. As of March 31, 2024 and December 31, 2023, the balance due to Lab Services MSO amounted to $ 666,666 and $ 72,746 , respectively, which has been included in accrued liabilities and other payables — related parties on the accompanying condensed consolidated balance sheets. As of March 31, 2024 and December 31, 2023, $ 44,308 and $ 33,712 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. Borrowing from Related Party 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. 23 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 9 – RELATED PARTY TRANSACTIONS (continued) Borrowing from Related Party (continued) There was no Line of Credit activity during the three months ended March 31, 2024. As of both March 31, 2024 and December 31, 2023, the outstanding principal balance was $ 850,000 . For the three months ended March 31, 2024 and 2023, the interest expense related to related party borrowing amounted to $ 10,596 and $ 2,021 , respectively, and has been reflected as interest expense — related party on the accompanying condensed consolidated statements of operations and comprehensive loss. As of March 31, 2024 and December 31, 2023, the related accrued and unpaid interest for Line of Credit was $ 44,308 and $ 33,712 , respectively, and has been included in accrued liabilities and other payables — related parties on the accompanying condensed consolidated balance sheets. As of March 31, 2024, the Company has used approximately $ 6.8 million of the credit facility, and has approximately $ 13.2 million remaining available under the Line of Credit. Membership Interest Purchase Agreement On November 17, 2023, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Wenzhao Lu (the “Purchaser”), the largest shareholder and Chairman of the Board of Directors of the Company, pursuant to which (i) the Purchaser will acquire from the Company 30 % of the total outstanding membership interests of Avalon RT 9, a wholly owned subsidiary of the Company for a cash purchase price of $ 3,000,000 (the “Acquisition”), and (ii) for a period of twelve months following the closing of the Acquisition, the Purchaser shall have the option to purchase from the Company up to an additional 70 % of the outstanding membership interests of Avalon RT 9 for a purchase price of up to $ 7,000,000 (the “Option”), subject to the terms and conditions of a membership interest purchase agreement to be negotiated and entered into between the Purchaser and the Company at such time that the Purchaser desires to exercise the Option The Company received $ 1,696,186 and $ 485,714 from Wenzhao Lu as of March 31, 2024 and December 31, 2023, respectively, which was recorded as advance from sale of noncontrolling interest – related party on the accompanying condensed consolidated balance sheets. As of the date of this report, the Acquisition has not been consummated and the performance of the Company’s obligations under the Purchase Agreement is subject to the Company obtaining written consent from Mast Hill and Firstfire under the 2023 Convertible Notes, so the consummation of the Acquisition would not constitute an event of default under such notes. In addition, the Company received a waiver from Mast Hill and First Fire on May 29, 2024 stating that the consummation of this transaction in the future will not be considered an event of default under the provisions of the Convertible Notes. NOTE 10 – EQUITY Common Shares Issued as Convertible Note Payable Commitment Fee During the three months ended March 31, 2024, the Company issued a total of 105,000 shares of its common stock as commitment fee for the purchase of March 2024 Convertible Note. These shares were valued at $ 42,000 , 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. Options The following table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at March 31, 2024: Options Outstanding Options Exercisable Range of Exercise Price Number Outstanding at March 31, 2024 Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable at March 31, 2024 Weighted Average Exercise Price $ 0.48 – 2.08 185,000 3.96 $ 1.48 88,000 $ 1.61 3.25 – 8.20 307,803 2.79 5.26 307,803 5.26 10.20 – 19.30 216,500 3.48 13.87 216,500 13.87 $ 0.48 – 19.30 709,303 3.31 $ 6.90 612,303 $ 7.78 24 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 10 – EQUITY (continued) Options (continued) Stock option activity for the three months ended March 31, 2024 was as follows: Number of Options Weighted Average Exercise Price Outstanding at January 1, 2024 853,303 $ 9.94 Granted 36,000 0.48 Expired ( 180,000 ) ( 20.00 ) Outstanding at March 31, 2024 709,303 $ 6.90 Options exercisable at March 31, 2024 612,303 $ 7.78 Options expected to vest 97,000 $ 1.36 The aggregate intrinsic value of both stock options outstanding and stock options exercisable at March 31, 2024 was $ 0 . The fair values of options granted during the three months ended March 31, 2024 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 91.17 %, risk-free rate of 3.93 %, annual dividend yield of 0 %, and expected life of 5.00 years. The aggregate fair value of the options granted during the three months ended March 31, 2024 was $ 12,137 . The fair values of options granted during the three months ended March 31, 2023 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 143.99 % - 145.73 %, risk-free rate of 3.58 % - 3.94 %, annual dividend yield of 0 %, and expected life of 5.00 years. The aggregate fair value of the options granted during the three months ended March 31, 2023 was $ 176,786 . For the three months ended March 31, 2024 and 2023, stock-based compensation expense associated with stock options granted amounted to $ 13,533 and $ 68,262 , of which, $ 5,103 and $ 51,336 was recorded as compensation and related benefits, $ 8,430 and $ 11,457 was recorded as professional fees, and $ 0 and $ 5,469 was recorded as research and development expenses, respectively. A summary of the status of the Company’s nonvested stock options granted as of March 31, 2024 and changes during the three months ended March 31, 2024 is presented below: Number of Options Weighted Average Exercise Price Nonvested at January 1, 2024 79,667 $ 1.57 Granted 36,000 0.48 Vested ( 18,667 ) ( 0.59 ) Nonvested at March 31, 2024 97,000 $ 1.36 Warrants The following table summarizes the shares of the Company’s common stock issuable upon exercise of warrants outstanding at March 31, 2024: Warrants Outstanding Warrants Exercisable Range of Exercise Price Number Outstanding at March 31, 2024 Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable at March 31, 2024 Weighted Average Exercise Price $ 1.30 – 2.50 463,804 4.76 $ 1.90 255,150 $ 2.22 3.20 - 4.50 320,663 4.18 3.93 179,998 4.50 12.50 123,964 3.06 12.50 123,964 12.50 $ 1.30 – 12.50 908,431 4.32 $ 4.06 559,112 $ 5.23 25 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 10 – EQUITY (continued) Warrants (continued) Stock warrant activity for the three months ended March 31, 2024 was as follows: Number of Warrants Weighted Average Exercise Price Outstanding at January 1, 2024 645,527 $ 5.04 Issued 262,904 1.68 Outstanding at March 31, 2024 908,431 $ 4.06 Warrants exercisable at March 31, 2024 559,112 $ 5.23 Warrants expected to vest 349,319 $ 2.19 The aggregate intrinsic value of both stock warrants outstanding and stock warrants exercisable at March 31, 2024 was $ 0 . Warrants Issued in March 2024 In connection with the issuance of March 2024 Convertible Note (See Note 6), the Company issued (i) a warrant to purchase 131,250 shares of common stock with an exercise price of $2.00 exercisable until the five-year anniversary of March 7, 2024, (ii) a warrant to purchase 121,154 shares of common stock with an exercise price of $1.30 exercisable until the five-year anniversary of March 7, 2024, which warrant shall be cancelled and extinguished against payment of the March 2024 Convertible Note, to Mast Hill; and issued a warrant to purchase 10,500 shares of common stock with an exercise price of $2.00 exercisable until the five-year anniversary of March 7, 2024 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 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 121,154 warrants with an exercise price of $ 1.30 exercisable until the five-year anniversary of March 7, 2024, which warrant shall be cancelled and extinguished against payment of the March 2024 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 141,750 warrants with an exercise price of $ 2.00 exercisable until the five-year anniversary of March 7, 2024 was classified as a derivative liability on March 7, 2024. The fair values of the 141,750 warrants with an exercise price of $ 2.00 exercisable until the five-year anniversary of March 7, 2024 issued on March 7, 2024 were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $ 0.40 , volatility of 85.24 %, risk-free rate of 4.07 %, annual dividend yield of 0 % and expected life of 5 years. The warrants with an exercise price of $ 2.00 exercisable until the five-year anniversary of March 7, 2024 issued to Mast Hill to purchase 131,250 shares of the Company’s common stock were treated as a discount on the convertible note payable and were valued at $ 20,374 and will be amortized over the term of the March 2024 Convertible Note. The warrants with an exercise price of $ 2.00 exercisable until the five-year anniversary of March 7, 2024 issued to a third party as a finder’s fee to purchase 10,500 shares of the Company’s common stock were treated as convertible debt issuance costs and were valued at $ 1,679 and will be amortized over the term of the March 2024 Convertible Note. A summary of the status of the Company’s nonvested stock warrants issued as of March 31, 2024 and changes during the three months ended March 31, 2024 is presented below: Number of Warrants Weighted Average Exercise Price Nonvested at January 1, 2024 228,165 $ 2.66 Issued 262,904 1.68 Vested ( 141,750 ) ( 2.00 ) Nonvested at March 31, 2024 349,319 $ 2.19 26 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 three months ended March 31, 2024 as it incurred net loss in the period. As of March 31, 2024 and December 31, 2023, 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 its statutory reserve and its 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 both March 31, 2024 and December 31, 2023, total restricted net assets amounted to $ 1,106,578 . 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. NOTE 13 - CONCENTRATIONS Customers The following table sets forth information as to each customer that accounted for 10 % or more of the Company’s revenue for the three months ended March 31, 2024 and 2023 . Three Months Ended March 31, Customer 2024 2023 A 28 % 31 % B 18 % 20 % C 12 % 13 % Two customers, which are third party, whose outstanding receivable accounted for 10 % or more of the Company’s total outstanding rent receivable at March 31, 2024, accounted for 72.7 % of the Company’s total outstanding rent receivable at March 31, 2024. 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, 2023, accounted for 80.6 % of the Company’s total outstanding rent receivable at December 31, 2023. 27 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 13 - CONCENTRATIONS (continued) Suppliers No supplier accounted for 10% or more of the Company’s purchase during the three months ended March 31, 2024 and 2023. NOTE 14 – SEGMENT INFORMATION 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 months ended March 31, 2024 and 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 equity method investee. Information with respect to these reportable business segments for the three months ended March 31, 2024 and 2023 was as follows: Three Months Ended March 31, 2024 Real Property Operations Lab Services MSO Corporate / Other Total Real property rental revenue $ 314,588 $ - $ - $ 314,588 Real property operating expenses ( 263,126 ) - - ( 263,126 ) Real property operating income 51,462 - - 51,462 Income from equity method investment - Lab Services MSO - 107,469 - 107,469 Other operating expenses ( 114,287 ) - ( 887,706 ) ( 1,001,993 ) Other (expense) income: Interest expense ( 194,307 ) - ( 324,700 ) ( 519,007 ) Other income (expense) 4 - ( 5,448 ) ( 5,444 ) Net (loss) income $ ( 257,128 ) $ 107,469 $ ( 1,217,854 ) $ ( 1,367,513 ) Three Months Ended March 31, 2023 Real Property Operations Lab Services MSO Corporate / Other Total Real property rental revenue $ 296,165 $ - $ - $ 296,165 Real property operating expenses ( 248,445 ) - - ( 248,445 ) Real property operating income 47,720 - - 47,720 Loss from equity method investment - Lab Services MSO - ( 89,091 ) - ( 89,091 ) Other operating expenses ( 113,711 ) - ( 2,598,245 ) ( 2,711,956 ) Other (expense) income: Interest expense - - ( 156,226 ) ( 156,226 ) Other income (expense) 4 - ( 10,195 ) ( 10,191 ) Net loss $ ( 65,987 ) $ ( 89,091 ) $ ( 2,764,666 ) $ ( 2,919,744 ) Identifiable long-lived tangible assets at March 31, 2024 and December 31, 2023 March 31, 2024 December 31, 2023 Real property operations $ 7,167,314 $ 7,211,641 Corporate/Other 17,654 17,846 Total $ 7,184,968 $ 7,229,487 28 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 14 – SEGMENT INFORMATION (continued) Identifiable long-lived tangible assets at March 31, 2024 and December 31, 2023 March 31, 2024 December 31, 2023 United States $ 7,183,206 $ 7,227,533 China 1,762 1,954 Total $ 7,184,968 $ 7,229,487 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 $ 32,000 and $ 33,000 for the three months ended March 31, 2024 and 2023, respectively. Supplemental cash flow information related to leases for the three months ended March 31, 2024 and 2023 is as follows: Three Months Ended March 31, 2024 2023 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows paid for operating lease $ 26,533 $ 33,209 Right-of-use assets obtained in exchange for lease obligation: Operating lease $ - $ 244,577 The following table summarizes the lease term and discount rate for the Company’s operating lease as of March 31, 2024: Operating Lease Weighted average remaining lease term (in years) 0.83 Weighted average discount rate 11.0 % The following table summarizes the maturity of lease liabilities under operating lease as of March 31, 2024: For the Twelve-month Period Ending March 31: Operating Lease 2025 $ 114,035 2026 and thereafter - Total lease payments 114,035 Amount of lease payments representing interest ( 4,303 ) Total present value of operating lease liabilities (current liability) $ 109,732 29 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 15 – COMMITMENTS AND CONTINGENCIES (continued) 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 the rest of 2024. NOTE 16 – SUBSEQUENT EVENTS Management has evaluated subsequent events through the date of the issuance date of these financial statements. Management is not aware of any significant events that occurred subsequent to the balance sheet date that would have a material effect on the financial statements and would require adjustment or disclosure thereto. 30