Change Agents Corporation. 10-Q

Item 1. Financial Statements. AVALON GLOBOCARE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 2024 2023 (Unaudited) ASSETS CURRENT ASSETS: Cash $ 200,572 $ 285,400 Rent receivable 89,441 197,473 Prepaid expense and other current assets 422,868 367,994 Total Current Assets 712,881 850,867 NON-CURRENT ASSETS: Operating lease right-of-use assets, net 67,373 128,250 Property and equipment, net 33,418 38,083 Investment in real estate, net 7,107,062 7,191,404 Equity method investments, net 11,399,899 12,095,020 Other non-current assets 195,339 278,912 Total Non-current Assets 18,803,091 19,731,669 Total Assets $ 19,515,972 $ 20,582,536 LIABILITIES AND EQUITY CURRENT LIABILITIES: Accrued professional fees $ 1,626,863 $ 1,804,100 Accrued research and development fees 208,772 208,772 Accrued payroll liability and compensation 611,440 588,722 Accrued litigation settlement 424,450 450,000 Accrued liabilities and other payables 450,167 272,915 Accrued liabilities and other payables - related parties 721,570 206,458 Operating lease obligation 85,373 129,396 Advance from pending sale of noncontrolling interest - related party 2,486,241 485,714 Equity method investment payable - 666,667 Derivative liability 292,715 24,796 Convertible note payable, net 1,685,595 1,925,146 Total Current Liabilities 8,593,186 6,762,686 NON-CURRENT LIABILITIES: Operating lease obligation - noncurrent portion - 4,855 Note payable, net 5,655,833 5,596,219 Loan payable - related party 850,000 850,000 Total Non-current Liabilities 6,505,833 6,451,074 Total Liabilities 15,099,019 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 June 30, 2024 and December 31, 2023 Liquidation preference $ 9 million at June 30, 2024 9,000,000 9,000,000 Series B Convertible Preferred Stock, 11,000 shares issued and outstanding at June 30, 2024 and December 31, 2023 Liquidation preference $ 11 million at June 30, 2024 11,000,000 11,000,000 Common stock, $ 0.0001 par value; 490,000,000 shares authorized; 11,558,534 shares issued and 11,506,534 shares outstanding at June 30, 2024; 11,051,534 shares issued and 10,999,534 shares outstanding at December 31, 2023 1,156 1,105 Additional paid-in capital 68,432,930 67,885,051 Less: common stock held in treasury, at cost; 52,000 shares at June 30, 2024 and December 31, 2023 ( 522,500 ) ( 522,500 ) Accumulated deficit ( 83,269,270 ) ( 79,769,731 ) Statutory reserve 6,578 6,578 Accumulated other comprehensive loss ( 231,941 ) ( 231,727 ) Total Avalon GloboCare Corp. stockholders’ equity 4,416,953 7,368,776 Noncontrolling interest - - Total Equity 4,416,953 7,368,776 Total Liabilities and Equity $ 19,515,972 $ 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 For the Six Months Ended June 30, June 30, 2024 2023 2024 2023 REAL PROPERTY RENTAL REVENUE $ 327,887 $ 306,905 $ 642,475 $ 603,070 REAL PROPERTY OPERATING EXPENSES 285,488 245,403 548,614 493,848 REAL PROPERTY OPERATING INCOME 42,399 61,502 93,861 109,222 (LOSS) INCOME FROM EQUITY METHOD INVESTMENT - LAB SERVICES MSO ( 329,337 ) 104,651 ( 221,868 ) 15,560 OTHER OPERATING EXPENSES: Advertising and marketing expenses 62,660 505,217 107,660 1,196,970 Professional fees 444,458 998,512 886,793 2,224,751 Compensation and related benefits 357,233 454,123 710,804 905,678 Other general and administrative expenses 353,074 276,669 514,161 619,078 Total Other Operating Expenses 1,217,425 2,234,521 2,219,418 4,946,477 LOSS FROM OPERATIONS ( 1,504,363 ) ( 2,068,368 ) ( 2,347,425 ) ( 4,821,695 ) OTHER (EXPENSE) INCOME Interest expense - amortization of debt discount and debt issuance costs ( 564,426 ) ( 69,453 ) ( 836,622 ) ( 91,658 ) Interest expense - other ( 232,839 ) ( 166,558 ) ( 469,054 ) ( 298,558 ) Interest expense - related party ( 10,596 ) ( 10,267 ) ( 21,192 ) ( 12,288 ) Change in fair value of derivative liability 180,337 41,721 211,549 41,721 Impairment of equity method investment - Epicon - ( 464,406 ) - ( 464,406 ) Other expense ( 139 ) ( 9,726 ) ( 36,795 ) ( 19,917 ) Total Other Expense, net ( 627,663 ) ( 678,689 ) ( 1,152,114 ) ( 845,106 ) LOSS BEFORE INCOME TAXES ( 2,132,026 ) ( 2,747,057 ) ( 3,499,539 ) ( 5,666,801 ) INCOME TAXES - - - - NET LOSS $ ( 2,132,026 ) $ ( 2,747,057 ) $ ( 3,499,539 ) $ ( 5,666,801 ) LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST - - - - NET LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS $ ( 2,132,026 ) $ ( 2,747,057 ) $ ( 3,499,539 ) $ ( 5,666,801 ) NET LOSS PER COMMON SHARE ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS: Basic and diluted $ ( 0.19 ) $ ( 0.27 ) $ ( 0.31 ) $ ( 0.56 ) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic and diluted 11,219,391 10,248,193 11,123,886 10,157,419 COMPREHENSIVE LOSS: NET LOSS $ ( 2,132,026 ) $ ( 2,747,057 ) $ ( 3,499,539 ) $ ( 5,666,801 ) OTHER COMPREHENSIVE INCOME (LOSS) Unrealized foreign currency translation gain (loss) 2,706 ( 11,011 ) ( 214 ) ( 7,341 ) COMPREHENSIVE LOSS ( 2,129,320 ) ( 2,758,068 ) ( 3,499,753 ) ( 5,674,142 ) LESS: COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST - - - - COMPREHENSIVE LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS $ ( 2,129,320 ) $ ( 2,758,068 ) $ ( 3,499,753 ) $ ( 5,674,142 ) See accompanying notes to the condensed consolidated financial statements. 2 AVALON GLOBOCARE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the Three and Six Months Ended June 30, 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 Non- controlling 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 Issuance of common stock as convertible note payable commitment fee - - - - 402,000 40 278,506 - - - - - - 278,546 Stock-based compensation - - - - - - 12,256 - - - - - - 12,256 Beneficial conversion feature related to convertible note payable - - - - - - 201,595 - - - - - - 201,595 Foreign currency translation adjustment - - - - - - - - - - - 2,706 - 2,706 Net loss for the three months ended June 30, 2024 - - - - - - - - - ( 2,132,026 ) - - - ( 2,132,026 ) Balance, June 30, 2024 9,000 $ 9,000,000 11,000 $ 11,000,000 11,558,534 $ 1,156 $ 68,432,930 ( 52,000 ) $ ( 522,500 ) $ ( 83,269,270 ) $ 6,578 $ ( 231,941 ) $ - $ 4,416,953 See accompanying notes to the condensed consolidated financial statements. 3 AVALON GLOBOCARE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the Three and Six Months Ended June 30, 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 To correct shares issued for adjustments for 1:10 reverse split - - - - 50,000 1 ( 1 ) - - - - - - - Issuance of common stock for services - - - - 158,600 16 536,264 - - - - - - 536,280 Issuance of common stock as convertible note payable commitment fee - - - - 75,000 7 146,993 - - - - - - 147,000 Stock-based compensation - - - - - - 112,015 - - - - - - 112,015 Foreign currency translation adjustment - - - - - - - - - - - ( 11,011 ) - ( 11,011 ) Net loss for the three months ended June 30, 2023 - - - - - - - - - ( 2,747,057 ) - - - ( 2,747,057 ) Balance, June 30, 2023 9,000 $ 9,000,000 11,000 $ 11,000,000 10,499,907 $ 1,050 $ 67,276,611 ( 52,000 ) $ ( 522,500 ) $ ( 68,729,522 ) $ 6,578 $ ( 220,478 ) $ - $ 17,811,739 See accompanying notes to the condensed consolidated financial statements. 4 AVALON GLOBOCARE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended June 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 3,499,539 ) $ ( 5,666,801 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 88,959 123,298 Change in straight-line rent receivable 41,257 26,434 Amortization of operating lease right-of-use asset 59,565 62,169 Stock-based compensation and service expense 150,214 867,312 Loss from equity method investments 221,868 3,004 Distribution of earnings from equity method investment 473,253 - Impairment of equity method investment - 464,406 Amortization of debt issuance costs and debt discount 836,622 91,658 Change in fair market value of derivative liability ( 211,549 ) ( 41,721 ) Changes in operating assets and liabilities: Rent receivable 112,937 5,512 Security deposit - 404 Deferred leasing costs 16,701 16,701 Prepaid expense and other assets ( 37,839 ) ( 37,533 ) Accrued liabilities and other payables ( 150,945 ) ( 230,551 ) Accrued liabilities and other payables - related parties ( 51,555 ) 17,701 Operating lease obligation ( 47,565 ) ( 61,752 ) NET CASH USED IN OPERATING ACTIVITIES ( 1,997,616 ) ( 4,359,759 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment - ( 22,201 ) Payment for equity interest purchase ( 100,000 ) - NET CASH USED IN INVESTING ACTIVITIES ( 100,000 ) ( 22,201 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loan payable - related party - 850,000 Proceeds from issuance of convertible debts and warrants 3,367,750 1,425,000 Payments of convertible debts issuance costs ( 257,700 ) ( 164,000 ) Repayments of convertible debts ( 3,100,000 ) - Proceeds from issuance of balloon promissory note - 1,000,000 Payments of balloon promissory note issuance costs - ( 64,436 ) Advance from pending sale of noncontrolling interest in subsidiary 2,000,527 - NET CASH PROVIDED BY FINANCING ACTIVITIES 2,010,577 3,046,564 EFFECT OF EXCHANGE RATE ON CASH 2,211 ( 2,323 ) NET DECREASE IN CASH ( 84,828 ) ( 1,337,719 ) CASH - beginning of period 285,400 1,990,910 CASH - end of period $ 200,572 $ 653,191 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Interest $ 497,736 $ 266,889 NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for future services $ - $ 177,750 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 notes payable finder’s fee $ 40,900 $ 11,162 Warrants issued with convertible notes payable recorded as debt discount $ 438,568 $ 127,654 Common stock issued as convertible notes payable commitment fee $ 320,546 $ 147,000 Beneficial conversion feature related to convertible note payable $ 201,595 $ - Convertible debts issuance costs in accrued liabilities $ 25,000 $ - Deferred financing costs in accrued liabilities $ - $ 51,363 Equity method investment payable paid by a related party $ 566,667 $ - 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”) 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. 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 May 18, 2015, Avalon Healthcare System, Inc. (“AHS”) was incorporated under the laws of the State of Delaware. AHS owns 100 % of the capital stock of Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”), which is a wholly foreign-owned enterprise organized under the laws of the People’s Republic of China (“PRC”). Avalon Shanghai was incorporated on April 29, 2016, and was engaged in medical related consulting services for customers. Due to the winding down of the medical related consulting services in 2022, the Company decided to cease all operations of Avalon Shanghai and no longer has any material revenues or expenses in Avalon Shanghai. As a result, Avalon Shanghai is no longer an operating entity. 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 June 30, 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. Currently, Avactis and Avactis Nanjing are dormant and are in process of being dissolved. 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 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. On May 1, 2024, the Company formed a wholly owned subsidiary, Q&A Distribution LLC (“Q&A Distribution”), a Texas company. 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 June 30, 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 Dormant, is in process of being dissolved Avactis Nanjing Biosciences Ltd. (“Avactis Nanjing”) PRC May 8, 2020 100 % held by Avactis Dormant, is in process of being dissolved 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 Q&A Distribution LLC (“Q&A Distribution”) Texas May 1, 2024 100 % held by ALBT Distributes KetoAir device 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 (the “SEC”) 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 SEC 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 unaudited 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 unaudited condensed consolidated financial statements, the Company had a working capital deficit of approximately $7, 880,000 at June 30, 2024 and had incurred recurring net losses and generated negative cash flow from operating activities of approximately $ 3,500,000 and $ 1,998,000 for the six months ended June 30, 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 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 Quarterly Report on Form 10-Q. 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 to raise 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 and six months ended June 30, 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, beneficial conversion feature 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 the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows: ● Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. ● Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. ● Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximates the carrying amounts represented in the accompanying condensed consolidated financial statements, primarily due to their short-term nature. Assets and liabilities measured at fair value on a recurring basis. Certain assets and liabilities are measured at fair value on a recurring basis. These assets and liabilities are measured at fair value on an ongoing basis. These assets and liabilities include derivative liability. Derivative liability. Derivative liability is carried at fair value and measured on an ongoing basis. The table below reflects the activity of derivative liability measured at fair value for the six months ended June 30, 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 and June 2024 fund raises 479,468 Gain from change in the fair value of derivative liability ( 211,549 ) Balance of derivative liability as of June 30, 2024 $ 292,715 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 June 30, 2024 and December 31, 2023, the Company’s cash balances by geographic area were as follows: Country: June 30, 2024 December 31, 2023 United States $ 196,737 98.1 % $ 280,197 98.2 % China 3,835 1.9 % 5,203 1.8 % Total cash $ 200,572 100.0 % $ 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 June 30, 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 June 30, 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. Beneficial Conversion Feature and Warrants The Company evaluates the conversion feature of convertible debt instruments to determine whether the conversion feature is beneficial as described in ASC 470-20, Debt with Conversion and Other Options. The Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt that has conversion features at fixed or adjustable rates that are in-the-money when issued and records the relative fair value of any warrants issued with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to the warrants and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion features, both of which are credited to additional paid-in capital. The Company calculates the fair value of warrants with the convertible instruments using the Black-Scholes valuation model. Under these guidelines, the Company first allocates the value of the proceeds received from a convertible debt transaction between the convertible debt instrument and any other detachable instruments included in the transaction (such as warrants) on a relative fair value basis. A BCF is then measured as the intrinsic value of the conversion option at the commitment date, representing the difference between the effective conversion price and the Company’s stock price on the commitment date multiplied by the number of shares into which the debt instrument is convertible. The allocated value of the BCF and warrants are recorded as a debt discount and accreted over the expected term of the convertible debt as interest expense. If the intrinsic value of the BCF is greater than the proceeds allocated to the convertible debt instrument, the amount of the discount assigned to the BCF is limited to the amount of the proceeds allocated to the convertible debt instrument. 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. 10 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Commitments and Contingencies In the normal course of business, the Company is subject to contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters. Liabilities for such contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Per Share Data ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity . Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. For the three and six months ended June 30, 2024 and 2023, potentially dilutive common shares consist of the common shares issuable upon the conversion of convertible preferred stock and convertible notes (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 June 30, Six Months Ended June 30, 2024 2023 2024 2023 Options to purchase common stock 711,303 878,303 711,303 878,303 Warrants to purchase common stock 2,839,112 258,964 2,839,112 258,964 Series A convertible preferred stock (*) 900,000 900,000 900,000 900,000 Series B convertible preferred stock (**) 2,910,053 2,910,053 2,910,053 2,910,053 Convertible notes (***) 3,793,333 333,333 5,145,333 333,333 Potentially dilutive securities 11,153,801 5,280,653 12,505,801 5,280,653 (*) 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 and $ 0.75 per share for the three and six months ended June 30, 2024. Assumed the convertible note was converted into shares of common stock of the Company at a conversion price of $ 4.50 per share for the three and six months ended June 30, 2023. 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) 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 and six months ended June 30, 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. Recent Accounting Standards In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40), to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The adoption of ASU 2020-06 did not have a material effect on the Company’s consolidated financial statements and related disclosures. In December 2023, the FASB 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 June 30, 2024 and December 31, 2023, prepaid expense and other current assets consisted of the following: June 30, 2024 December 31, 2023 Advance to supplier $ 89,869 $ - Prepaid professional fees 16,239 33,062 Prepaid directors and officers’ liability insurance premium 6,305 27,192 Prepaid NASDAQ listing fee 32,750 - Deferred offering costs 175,136 175,136 Deferred leasing costs 33,402 33,402 Security deposit 17,729 - Due from broker 75 37,187 Others 51,363 62,015 Total $ 422,868 $ 367,994 12 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 Lab, SCBC Holdings LLC (the “Seller”), the Zoe Family Trust, Bryan Cox and Sarah Cox as individuals (each an “Owner” and collectively, the “Owners”), and Lab Services MSO. Pursuant to the terms and conditions set forth in the Amended MIPA, Avalon Lab acquired from the Seller, 40 % of the issued and outstanding equity interests of Lab Services MSO (the “Purchased Interests”). The consideration paid by Avalon Lab 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. 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 June 30, 2024 and 2023, amortization expense of these intangible assets amounted to $ 166,733 and $ 203,744 , respectively, which was included in (loss) income from equity method investment — Lab Services MSO in the accompanying condensed consolidated statements of operations and comprehensive loss. For the six months ended June 30, 2024 and for the period from February 9, 2023 (date of investment) through June 30, 2023, amortization expense of these intangible assets amounted to $ 333,466 and $ 339,574 , respectively, which was included in (loss) income 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 June 30, 2024 and 2023, the Company’s share of Lab Services MSO’s net loss was $ 162,604 and the Company’s share of Lab Services MSO’s net income was $ 104,651 , respectively, which was included in (loss) income from equity method investment — Lab Services MSO in the accompanying condensed consolidated statements of operations and comprehensive loss. For the six months ended June 30, 2024 and for the period from February 9, 2023 (date of investment) through June 30, 2023, the Company’s share of Lab Services MSO’s net income was $ 111,598 and $ 15,560 , respectively, which was included in (loss) income from equity method investment — Lab Services MSO in the accompanying condensed consolidated statements of operations and comprehensive loss. 13 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 5 – EQUITY METHOD INVESTMENTS (continued) In the six months ended June 30, 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 111,598 Intangible assets amortization amount ( 333,466 ) Distribution of earnings from equity investment ( 473,253 ) Equity investment carrying amount at June 30, 2024 $ 11,399,899 As of June 30, 2024, the Company’s carrying value of the identified intangible assets and goodwill which are included in the equity investment carrying amount was $ 9,059,178 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: June 30, 2024 December 31, 2023 Current assets $ 3,434,560 $ 4,930,254 Noncurrent assets 5,300,191 5,228,044 Current liabilities 692,649 828,713 Noncurrent liabilities 4,526,912 4,104,183 Equity 3,515,190 5,225,402 For the Three Months Ended June 30, 2024 For the Three Months Ended June 30, 2023 For the Six Months Ended June 30, 2024 For the Period from February 9, 2023 (Date of Investment) through June 30, 2023 Net revenue $ 2,687,129 $ 3,487,693 $ 6,063,501 $ 5,662,217 Gross profit 310,690 1,250,628 1,314,479 2,027,406 (Loss) income from operation ( 765,357 ) 579,036 ( 490,331 ) 695,882 Net (loss) income ( 406,509 ) 770,989 278,995 887,835 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 the Company’s common stock, 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 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 were convertible into shares of common stock of the Company at a conversion price of $ 4.50 per share unless the Company failed to make an amortization payment when due, in which case the conversion price would 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 (“First Warrant”), (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 (“Second Warrant”).The Second Warrant was never fair valued and was 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. 14 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued) May 2023 Convertible Note (continued) The Company was obligated to make amortization payments in cash to Mast Hill toward the repayment of the May 2023 Convertible Note, as described in the May 2023 Convertible Note. As of June 30, 2024, the May 2023 Convertible Note was repaid in full. 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 was capitalized and had been amortized into interest expense over the term of the May 2023 Convertible Note. Based upon the Company’s analysis of the criteria contained in ASC 815, the Company determined that all the warrants issued to Mast Hill and a third party as a finder’s fee meet the definition of a derivative liability, as the Company cannot avoid a net cash settlement under certain circumstances. Through life of the May 2023 Convertible Note, management determined the probability of failing to make an amortization payment when due was remote and as such the estimated fair value of the 105,500 warrants with an exercise price of $ 3.20 , which warrant was cancelled and extinguished against payment of the May 2023 Convertible Note, was 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 were 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 were accounted for as derivative liability. The remainder of the proceeds were 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, through life of the May 2023 Convertible Note, management determined the probability of failing to make an amortization payment when due was remote and as such the estimated fair value of the embedded conversion feature was 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 had been amortized over the term of the May 2023 Convertible Note. For the three months ended June 30, 2024 and 2023, amortization of debt discount and debt issuance costs related to the May 2023 Convertible Note amounted to $ 86,489 and $ 44,715 , 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 six months ended June 30, 2024 and 2023, amortization of debt discount and debt issuance costs related to the May 2023 Convertible Note amounted to $ 217,693 and $ 44,715 , 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 June 30, 2024 and 2023, interest expense related to the May 2023 Convertible Note amounted to $ 6,981 and $ 20,836 , respectively, which have been included in interest expense — other on the accompanying condensed consolidated statements of operations and comprehensive loss. For the six months ended June 30, 2024 and 2023, interest expense related to the May 2023 Convertible Note amounted to $ 36,774 and $ 20,836 , respectively, which have been included in interest expense — other on the accompanying condensed consolidated statements of operations and comprehensive loss. 15 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued) 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 the Company’s common stock, 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 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 were convertible into shares of common stock of the Company at a conversion price of $ 4.50 per share unless the Company failed to make an amortization payment when due, in which case the conversion price would 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 (“First Warrant”), (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 (“Second Warrant”). The Second Warrant was never fair valued and was cancelled and extinguished against payment of the July 2023 Convertible Note, and (iii) 25,000 shares of common stock as a commitment fee for the purchase of the July 2023 Convertible Note, which were earned in full as of July 6, 2023. On July 6, 2023, the Company delivered such duly executed July 2023 Convertible Note, warrants and common stock to Firstfire against delivery of such purchase price. The Company was obligated to make amortization payments in cash to Firstfire toward the repayment of the July 2023 Convertible Note, as described in the July 2023 Convertible Note. As of June 30, 2024, the July 2023 Convertible Note was repaid in full. 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 was capitalized and had been 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. Through life of the July 2023 Convertible Note, management determined the probability of failing to make an amortization payment when due was remote and as such the estimated fair value of the 35,165 warrants with an exercise price of $ 3.20 , which warrant was cancelled and extinguished against payment of the July 2023 Convertible Note, was 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 were 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 were accounted for as derivative liability. The remainder of the proceeds were 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, through life of the July 2023 Convertible Note, management determined the probability of failing to make an amortization payment when due was remote and as such the estimated fair value of the embedded conversion feature was 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 had been amortized over the term of the July 2023 Convertible Note. For the three and six months ended June 30, 2024, amortization of debt discount and debt issuance costs related to the July 2023 Convertible Note amounted to $ 43,572 and $ 84,420 , 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. 16 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued) July 2023 Convertible Note (continued) For the three and six months ended June 30, 2024, interest expense related to the July 2023 Convertible Note amounted to $ 5,122 and $ 18,123 , respectively, which have been included in interest expense — other on the accompanying condensed consolidated statements of operations and comprehensive loss. 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”) convertible into shares of the Company’s common stock, 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 also 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 were convertible into shares of common stock of the Company at a conversion price of $ 1.50 per share unless the Company failed to make an amortization payment when due, in which case the conversion price would 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 (“First Warrant”), (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 (“Second Warrant”). The Second Warrant was never fair valued and was 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 was obligated to make amortization payments in cash to Mast Hill toward the repayment of the October 2023 Convertible Note, as described in the October 2023 Convertible Note. As of June 30, 2024, the October 2023 Convertible Note was repaid in full. 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 was 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. The Company was obligated to make amortization payments in cash to Firstfire toward the repayment of the October 2023 Convertible Note, as described in the October 2023 Convertible Note. As of June 30, 2024, the October 2023 Convertible Note was repaid in full. 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 was capitalized and had been amortized into interest expense over the term of the October 2023 Convertible Note. 17 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued) October 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 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. Through life of the October 2023 Convertible Note, management determined the probability of failing to make an amortization payment when due was remote and as such the estimated fair value of the 87,500 warrants with an exercise price of $ 1.80 , which warrant was cancelled and extinguished against payment of the October 2023 Convertible Note, was 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 were accounted for as derivative liability. The remainder of the proceeds were 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, through life of the October 2023 Convertible Note, management determined the probability of failing to make an amortization payment when due was remote and as such the estimated fair value of the embedded conversion feature was 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 had been amortized over the term of the October 2023 Convertible Note. For the three and six months ended June 30, 2024, amortization of debt discount and debt issuance costs related to the October 2023 Convertible Note amounted to $ 116,717 and $ 172,741 , 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 and six months ended June 30, 2024, interest expense related to the October 2023 Convertible Note amounted to $ 14,036 and $ 36,724 , respectively, which have been included in interest expense — other on the accompanying condensed consolidated statements of operations and comprehensive loss. March 2024 Convertible Note On March 7, 2024, the Company entered into securities purchase agreements with Mast Hill 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 the Company’s common stock, 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 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 were convertible into shares of common stock of the Company at a conversion price of $ 1.00 per share unless the Company failed to make an amortization payment when due, in which case the conversion price would 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 (“First Warrant”), (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 (“Second Warrant”). The Second Warrant was never fair valued and was 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. 18 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued) March 2024 Convertible Note (continued) The Company was obligated to make amortization payments in cash to Mast Hill toward the repayment of the March 2024 Convertible Note, as described in the March 2024 Convertible Note. As of June 30, 2024, the March 2024 Convertible Note was repaid in full. In connection with the issuance of the March 2024 Convertible Note, the Company incurred debt issuance costs of $ 99,379 (including the issuance of 10,500 warrants as a finder’s fee) which was capitalized and had been 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 meet the definition of a derivative liability, as the Company cannot avoid a net cash settlement under certain circumstances. Through life of the March 2024 Convertible Note, management determined the probability of failing to make an amortization payment when due was remote and as such the estimated fair value of the 121,154 warrants with an exercise price of $ 1.30 , which warrant was cancelled and extinguished against payment of the March 2024 Convertible Note, was 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 were accounted for as derivative liability. The remainder of the proceeds were 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, through life of the March 2024 Convertible Note, management determined the probability of failing to make an amortization payment when due was remote and as such the estimated fair value of the embedded conversion feature was 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 had been amortized over the term of the March 2024 Convertible Note. For the three and six months ended June 30, 2024, amortization of debt discount and debt issuance costs related to the March 2024 Convertible Note amounted to $ 182,440 and $ 196,753 , 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 and six months ended June 30, 2024, interest expense related to the March 2024 Convertible Note amounted to $ 15,855 and $ 22,088 , respectively, which have been included in interest expense — other on the accompanying condensed consolidated statements of operations and comprehensive loss. June 2024 Convertible Note On June 5, 2024, the Company entered into securities purchase agreements with Mast Hill for the issuance of 13.0 % senior secured promissory notes in the aggregate principal amount of $ 2,845,000 (collectively, the “June 2024 Convertible Note”) convertible into shares of the Company’s common stock, as well as the issuance of 402,000 shares of common stock as a commitment fee and warrants for the purchase of 2,200,000 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 June 2024 Convertible Note. Principal amount and interest under the June 2024 Convertible Note are convertible into shares of common stock of the Company at a conversion price of $ 0.75 per share unless the Company fails to make an amortization payment when due, in which case the conversion price shall be the lesser of $ 0.75 or the market price (as defined in the June 2024 Convertible Note). 19 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued) June 2024 Convertible Note (continued) Mast Hill acquired the June 2024 Convertible Note with principal amount of $ 2,845,000 and paid the purchase price of $ 2,702,750 after an original issue discount of $ 142,250 . On June 5, 2024, the Company issued (i) a warrant to purchase 1,000,000 shares of common stock with an exercise price of $ 0.65 exercisable until the five-year anniversary of June 5, 2024 (“First Warrant”), (ii) a warrant to purchase 1,200,000 shares of common stock with an exercise price of $ 0.50 exercisable until the five-year anniversary of June 5, 2024 (“Second Warrant”). The Second Warrant will not be fair valued and shall be cancelled and extinguished against payment of the June 2024 Convertible Note, and (iii) 402,000 shares of common stock as a commitment fee for the purchase of the June 2024 Convertible Note, which were earned in full as of June 5, 2024. On June 5, 2024, the Company delivered such duly executed June 2024 Convertible Note, warrants and common stock to Mast Hill against delivery of such purchase price. The Company received net cash amount of $ 881,210 from the June 2024 Convertible Note financing after using the proceeds to pay off all previously issued convertible notes to Mast Hill of $ 1,206,867 and FirstFire of $ 454,673 , respectively, and to pay finder’s fee of $ 120,000 and lender’s costs of $ 40,000 related to this financing. The Company is obligated to make amortization payments in cash to Mast Hill toward the repayment of the June 2024 Convertible Note, as provided in the following table : Payment Date: Payment Amount: December 5, 2024 $284,500 plus accrued interest through December 5, 2024 January 5, 2025 $284,500 plus accrued interest through January 5, 2025 February 5, 2025 $379,336 plus accrued interest through February 5, 2025 March 5, 2025 $474,167 plus accrued interest through March 5, 2025 April 5, 2025 $474,167 plus accrued interest through April 5, 2025 May 5, 2025 $569,000 plus accrued interest through May 5, 2025 June 5, 2025 The entire remaining outstanding balance of the June 2024 Convertible Note In connection with the issuance of the June 2024 Convertible Note, the Company incurred debt issuance costs of $ 224,221 (including the issuance of 80,000 warrants as a finder’s fee) which is capitalized and will be amortized into interest expense over the term of the June 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 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 1,200,000 warrants with an exercise price of $ 0.50 exercisable until the five-year anniversary of June 5, 2024, which warrant shall be cancelled and extinguished against payment of the June 2024 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 1,080,000 warrants with an exercise price of $ 0.65 exercisable until the five-year anniversary of June 5, 2024 was classified as derivative liability on June 5, 2024. The fair values of the 1,080,000 warrants with an exercise price of $ 0.65 exercisable until the five-year anniversary of June 5, 2024 issued on June 5, 2024 were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $ 0.69 , volatility of 85.72 %, risk-free rate of 4.31 %, 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. In accordance with ASC 470-20, the Company determined that the conversion feature is beneficial and the Company valued the beneficial conversion feature (“BCF”) separately, recording debt discount and additional paid-in capital. 20 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6 – CONVERTIBLE NOTE PAYABLE (continued) June 2024 Convertible Note (continued) The Company recorded a total debt discount of $ 1,040,585 related to the original issue discount, BCF, common shares issued and warrants issued to Mast Hill, which will be amortized over the term of the June 2024 Convertible Note. For the three and six months ended June 30, 2024, amortization of debt discount and debt issuance costs related to the June 2024 Convertible Note amounted to $ 105,401 , 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 and six months ended June 30, 2024, interest expense related to the June 2024 Convertible Note amounted to $ 26,345 , which have been included in interest expense — other on the accompanying condensed consolidated statements of operations and comprehensive loss. NOTE 7 – DERIVATIVE LIABILITY As stated in Note 6, May 2023 Convertible Note, July 2023 Convertible Note, October 2023 Convertible Note, and March 2024 Convertible Note, the Company determined that these convertible notes payable contained an embedded derivative feature in the form of a conversion provision which was adjustable based on future prices of the Company’s common stock. In accordance with ASC 815-10-25, each derivative feature was initially recorded at its fair value using the Black-Scholes option valuation method and then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. However, on May 23, 2023, July 6, 2023, October 9, 2023, March 7, 2024, and March 31, 2024, management determined the probability of failing to make an amortization payment when due was remote and as such the estimated fair value of the embedded conversion feature was zero. As of June 5, 2024, these convertible notes were repaid in full. As stated in Note 6, June 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 June 5, 2024 and June 30, 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. Through life of the May 2023 Convertible Note, management determined the probability of failing to make an amortization payment when due was remote and as such the estimated fair value of the 105,500 warrants with an exercise price of $ 3.20 , which warrant was cancelled and extinguished against payment of the May 2023 Convertible Note, was 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 June 30, 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 $ 10,409 . The estimated fair value of the warrants was computed as of June 30, 2024 using Black-Scholes option-pricing model, with the following assumptions: stock price of $ 0.47 , volatility of 80.89 %, risk-free rate of 4.52 %, annual dividend yield of 0 % and expected life of 3.9 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 ASC 815, as the Company cannot avoid a net cash settlement under certain circumstances. Through life of the July 2023 Convertible Note, management determined the probability of failing to make an amortization payment when due was remote and as such the estimated fair value of the 35,165 warrants with an exercise price of $ 3.20 , which warrant was cancelled and extinguished against payment of the July 2023 Convertible Note, was 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 June 30, 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 $ 3,482 . The estimated fair value of the warrants was computed as of June 30, 2024 using Black-Scholes option-pricing model, with the following assumptions: stock price of $ 0.47 , volatility of 79.79 %, risk-free rate of 4.33 %, annual dividend yield of 0 % and expected life of 4.0 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 ASC 815, as the Company cannot avoid a net cash settlement under certain circumstances. Through life of the October 2023 Convertible Note, management determined the probability of failing to make an amortization payment when due was remote and as such the estimated fair value of the 87,500 warrants with an exercise price of $ 1.80 , which warrant was cancelled and extinguished against payment of the October 2023 Convertible Note, was 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 June 30, 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 $ 16,700 . The estimated fair value of the warrants was computed as of June 30, 2024 using Black-Scholes option-pricing model, with the following assumptions: stock price of $ 0.47 , volatility of 83.41 %, risk-free rate of 4.33 %, annual dividend yield of 0 % and expected life of 4.3 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. Through life of the March 2024 Convertible Note, management determined the probability of failing to make an amortization payment when due was remote and as such the estimated fair value of the 121,154 warrants with an exercise price of $ 1.30 , which warrant was cancelled and extinguished against payment of the March 2024 Convertible Note, was 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 June 30, 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 $ 27,699 . The estimated fair value of the warrants was computed as of June 30, 2024 using Black-Scholes option-pricing model, with the following assumptions: stock price of $ 0.47 , volatility of 86.34 %, risk-free rate of 4.33 %, annual dividend yield of 0 % and expected life of 4.7 years. On June 5, 2024, the Company issued 2,280,000 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 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 1,200,000 warrants with an exercise price of $ 0.50 exercisable until the five-year anniversary of June 5, 2024, which warrant shall be cancelled and extinguished against payment of the June 2024 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 1,080,000 warrants with an exercise price of $ 0.65 exercisable until the five-year anniversary of June 5, 2024 was classified as a derivative liability on June 5, 2024. On June 30, 2024, the estimated fair value of the 1,080,000 warrants with an exercise price of $ 0.65 exercisable until the five-year anniversary of June 5, 2024 as derivative liability was $ 323,130 . The estimated fair value of the warrants was computed as of June 30, 2024 using Black-Scholes option-pricing model, with the following assumptions: stock price of $ 0.47 , volatility of 85.15 %, risk-free rate of 4.33 %, annual dividend yield of 0 % and expected life of 4.9 years. Increases or decreases in fair value of the derivative liability are 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 $ 180,337 and $ 41,721 in the derivative liability and the corresponding increase in other income as a gain for the three months ended June 30, 2024 and 2023, respectively. The changes to the derivative liability resulted in a decrease of $ 211,549 and $ 41,721 in the derivative liability and the corresponding increase in other income as a gain for the six months ended June 30, 2024 and 2023, respectively. NOTE 8 – NOTE PAYABLE, NET On September 1, 2022, the Company issued a balloon promissory note in the form of a mortgage on its headquarters to a third party company in the principal amount of $ 4,800,000 , which carries interest of 11.0 % per annum. Interest is due in monthly payments of $ 44,000 beginning November 1, 2022 and payable monthly thereafter until September 1, 2025 when the principal outstanding and all remaining interest is due. The principal of $ 4,800,000 can be extended for an additional 36 months, provided that the Company has not defaulted. The Company may not prepay the principal of $ 4,800,00 for a period of 12 months. The principal of $ 4,800,000 is secured by a first mortgage on the Company’s real property located in Township of Freehold, County of Monmouth, State of New Jersey, having a street address of 4400 Route 9 South, Freehold, NJ 07728. 22 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 8 – NOTE PAYABLE, NET (continued) 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 June 30, 2024 and December 31, 2023 was as follows: June 30, 2024 December 31, 2023 Principal amount $ 5,800,000 $ 5,800,000 Less: unamortized debt issuance costs ( 144,167 ) ( 203,781 ) Note payable, net $ 5,655,833 $ 5,596,219 For the three months ended June 30, 2024 and 2023, amortization of debt issuance costs related to note payable amounted to $ 29,807 and $ 24,738 , 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 six months ended June 30, 2024 and 2023, amortization of debt issuance costs related to note payable amounted to $ 59,614 and $ 46,943 , 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 June 30, 2024 and 2023, interest expense related to note payable amounted to $ 164,500 and $ 145,722 , respectively, which have been included in interest expense - other on the accompanying condensed consolidated statements of operations and comprehensive loss. For the six months ended June 30, 2024 and 2023, interest expense related to note payable amounted to $ 329,000 and $ 277,722 , 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 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 June 30, 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. For both the six months ended June 30, 2024 and 2023, the related party rental revenue amounted to $ 25,200 and has been included in rental revenue on the accompanying condensed consolidated statements of operations and comprehensive loss. At June 30, 2024 and December 31, 2023, the related party rent receivable totaled $ 0 and $ 124,500 , respectively, which has been included in rent receivable on the accompanying condensed consolidated balance sheets. 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 $ 20,535 and $ 22,185 for the three months ended June 30, 2024 and 2023, respectively, which have been included in professional fees on the accompanying condensed consolidated statements of operations and comprehensive loss. As compensation for professional services provided, the Company recognized consulting expenses of $ 37,266 and $ 48,642 for the six months ended June 30, 2024 and 2023, respectively, which have been included in professional fees on the accompanying condensed consolidated statements of operations and comprehensive loss. As of both June 30, 2024 and December 31, 2023, the accrued and unpaid services charge related to this director’s son amounted to $ 15,000 , which have been included in accrued professional fees on the accompanying condensed consolidated balance sheets. 23 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 9 – RELATED PARTY TRANSACTIONS (continued) Accrued Liabilities and Other Payables – Related Parties In 2017, the Company acquired Beijing Genexosome for a cash payment of $ 450,000 . As of June 30, 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 June 30, 2024 and December 31, 2023, the balance due to Lab Services MSO amounted to $ 566,666 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 June 30, 2024 and December 31, 2023, $ 54,904 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 Mr. Lu, the Company’s 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 Mr. Lu, 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, Mr. Lu may declare all outstanding loans under the Line of Credit to be due and payable immediately. There was no Line of Credit activity during the six months ended June 30, 2024. As of both June 30, 2024 and December 31, 2023, the outstanding principal balance was $ 850,000 . For the three months ended June 30, 2024 and 2023, the interest expense related to related party borrowing amounted to $ 10,596 and $ 10,267 , respectively, and has been reflected as interest expense — related party on the accompanying condensed consolidated statements of operations and comprehensive loss. For the six months ended June 30, 2024 and 2023, the interest expense related to related party borrowing amounted to $ 21,192 and $ 12,288 , respectively, and has been reflected as interest expense — related party on the accompanying condensed consolidated statements of operations and comprehensive loss. As of June 30, 2024 and December 31, 2023, the related accrued and unpaid interest for Line of Credit was $ 54,904 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 June 30, 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. 24 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 9 – RELATED PARTY TRANSACTIONS (continued) Membership Interest Purchase Agreement On November 17, 2023, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Mr. Lu, the Company’s largest shareholder and Chairman of the Board of Directors of the Company, pursuant to which (i) Mr. Lu 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, Mr. Lu 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 $ 2,486,241 and $ 485,714 from Wenzhao Lu as of June 30, 2024 and December 31, 2023, respectively, which was recorded as advance from pending sale of noncontrolling interest – related party on the accompanying condensed consolidated balance sheets. NOTE 10 – EQUITY Common Shares Issued as Convertible Note Payable Commitment Fee During the six months ended June 30, 2024, the Company issued a total of 507,000 shares of its common stock as commitment fee for the purchase of March 2024 Convertible Note and June 2024 Convertible Note. These shares were valued at $ 320,546 , the fair market value on the grant dates using the reported closing share prices on the dates 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 June 30, 2024: Options Outstanding Options Exercisable Range of Exercise Price Number Outstanding at June 30, 2024 Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable at June 30, 2024 Weighted Average Exercise Price $ 0.27 – 2.08 205,000 3.64 $ 1.36 126,980 $ 1.49 3.25 – 8.20 307,803 2.54 5.26 307,803 5.26 10.30 – 19.30 198,500 3.54 14.20 198,500 14.20 $ 0.27 – 19.30 711,303 3.14 $ 6.63 633,283 $ 7.31 Stock option activity for the six months ended June 30, 2024 was as follows: Number of Options Weighted Average Exercise Price Outstanding at January 1, 2024 853,303 $ 9.94 Granted 56,000 0.41 Expired ( 198,000 ) ( 19.11 ) Outstanding at June 30, 2024 711,303 $ 6.63 Options exercisable at June 30, 2024 633,283 $ 7.31 Options expected to vest 78,020 $ 1.15 The aggregate intrinsic value of stock options outstanding and stock options exercisable at June 30, 2024 was $ 3,626 an $ 7 , respectively. The fair values of options granted during the six months ended June 30, 2024 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 83.10 % - 91.17 %, risk-free rate of 3.93 % - 4.79 %, annual dividend yield of 0 %, and expected life of 3.00 - 5.00 years. The aggregate fair value of the options granted during the six months ended June 30, 2024 was $ 15,483 . 25 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 10 – EQUITY (continued) Options (continued) The fair values of options granted during the six months ended June 30, 2023 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: volatility of 79.76 % - 96.37 %, risk-free rate of 3.58 % - 3.96 %, annual dividend yield of 0 %, and expected life of 3.00 - 5.00 years. The aggregate fair value of the options granted during the six months ended June 30, 2023 was $313 ,144. For the three months ended June 30, 2024 and 2023, stock-based compensation expense associated with stock options granted amounted to $ 12,256 and $ 112,015 , of which $ 4,488 and $ 38,191 was recorded as compensation and related benefits, $ 7,768 and $ 73,824 was recorded as professional fees, and $ 0 and $ 0 was recorded as research and development expenses, respectively. For the six months ended June 30, 2024 and 2023, stock-based compensation expense associated with stock options granted amounted to $ 25,789 and $ 180,277 , of which, $ 9,591 and $ 89,527 was recorded as compensation and related benefits, $ 16,198 and $ 85,281 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 June 30, 2024 and changes during the six months ended June 30, 2024 is presented below: Number of Options Weighted Average Exercise Price Nonvested at January 1, 2024 79,667 $ 1.57 Granted 56,000 0.41 Vested ( 57,647 ) ( 1.02 ) Nonvested at June 30, 2024 78,020 $ 1.15 Warrants The following table summarizes the shares of the Company’s common stock issuable upon exercise of warrants outstanding at June 30, 2024: Warrants Outstanding Warrants Exercisable Range of Exercise Price Number Outstanding at June 30, 2024 Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable at June 30, 2024 Weighted Average Exercise Price $ 0.50 – 2.50 2,535,150 4.89 $ 0.74 1,335,150 $ 0.95 4.50 179,998 3.93 4.50 179,998 4.50 12.50 123,964 2.81 12.50 123,964 12.50 $ 0.50 – 12.50 2,839,112 4.74 $ 1.49 1,639,112 $ 2.21 26 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 10 – EQUITY (continued) Warrants (continued) Stock warrant activity for the six months ended June 30, 2024 was as follows: Number of Warrants Weighted Average Exercise Price Outstanding at January 1, 2024 645,527 $ 5.04 Issued 2,542,904 0.69 Cancelled (*) ( 349,319 ) ( 2.19 ) Outstanding at June 30, 2024 2,839,112 $ 1.49 Warrants exercisable at June 30, 2024 1,639,112 $ 2.21 Warrants expected to vest 1,200,000 $ 0.50 * Second Warrant, which was issued on May 23, 2023, July 6, 2023, October 9, 2023, and March 7, 2024, was cancelled in June 2024. First Warrant, which was issued on May 23, 2023, July 6, 2023, October 9, 2023, and March 7, 2024, is still outstanding as of June 30, 2024. First Warrant and Second Warrant, which are issued on June 5, 2024, are still outstanding as of June 30, 2024. The aggregate intrinsic value of both stock warrants outstanding and stock warrants exercisable at June 30, 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, which warrant was 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. The 121,154 warrants with an exercise price of $ 1.30 were cancelled and extinguished against payment of the March 2024 Convertible Note. 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 were 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 were amortized over the term of the March 2024 Convertible Note. Warrants Issued in June 2024 In connection with the issuance of June 2024 Convertible Note (See Note 6), the Company issued (i) a warrant to purchase 1,000,000 shares of common stock with an exercise price of $0.65 exercisable until the five-year anniversary of June 5, 2024, (ii) a warrant to purchase 1,200,000 shares of common stock with an exercise price of $0.50 exercisable until the five-year anniversary of June 5, 2024, which warrant shall be cancelled and extinguished against payment of the June 2024 Convertible Note, to Mast Hill; and issued a warrant to purchase 80,000 shares of common stock with an exercise price of $0.65 exercisable until the five-year anniversary of June 5, 2024 to a third party as a finder’s fee. 27 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 10 – EQUITY (continued) Warrants (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 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 1,200,000 warrants with an exercise price of $ 0.50 exercisable until the five-year anniversary of June 5, 2024, which warrant shall be cancelled and extinguished against payment of the June 2024 Convertible Note, has been estimated to be zero. Accordingly, the fair value of the 1,080,000 warrants with an exercise price of $ 0.65 exercisable until the five-year anniversary of June 5, 2024 was classified as a derivative liability on June 5, 2024. The fair values of the 1,080,000 warrants with an exercise price of $ 0.65 exercisable until the five-year anniversary of June 5, 2024 issued on June 5, 2024 were computed using the Black-Scholes option-pricing model with the following assumptions: stock price of $ 0.69 , volatility of 85.72 %, risk-free rate of 4.31 %, annual dividend yield of 0 % and expected life of 5 years. The warrants with an exercise price of $ 0.65 exercisable until the five-year anniversary of June 5, 2024 issued to Mast Hill to purchase 1,000,000 shares of the Company’s common stock were treated as a discount on the convertible note payable and were valued at $ 418,194 and will be amortized over the term of the June 2024 Convertible Note. The warrants with an exercise price of $ 0.65 exercisable until the five-year anniversary of June 5, 2024 issued to a third party as a finder’s fee to purchase 80,000 shares of the Company’s common stock were treated as convertible debt issuance costs and were valued at $ 39,221 and will be amortized over the term of the June 2024 Convertible Note. Warrants Cancelled in June 2024 As of June 5, 2024, the Company paid in full of its outstanding May 2023 Convertible Note, July 2023 Convertible Note, October 2023 Convertible Note, and March 2024 Convertible Note and cancelled 349,319 warrants since these convertible notes were fully extinguished. A summary of the status of the Company’s nonvested stock warrants issued as of June 30, 2024 and changes during the six months ended June 30, 2024 is presented below: Number of Warrants Weighted Average Exercise Price Nonvested at January 1, 2024 228,165 $ 2.66 Issued 2,542,904 0.69 Cancelled ( 349,319 ) ( 2.19 ) Vested ( 1,221,750 ) ( 0.81 ) Nonvested at June 30, 2024 1,200,000 $ 0.50 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 six months ended June 30, 2024 as it incurred net loss in the period. As of June 30, 2024 and December 31, 2023, the restricted amount as determined pursuant to PRC statutory laws totaled $ 6,578 . 28 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 11 - STATUTORY RESERVE AND RESTRICTED NET ASSETS (continued) 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 June 30, 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 % 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 revenues for the three and six months ended June 30, 2024 and 2023. Three Months Ended June 30, Six Months Ended June 30, Customer 2024 2023 2024 2023 A 29 % 30 % 29 % 30 % B 18 % 19 % 18 % 19 % C 12 % 13 % 12 % 13 % Two customers, which are third parties, whose outstanding receivable accounted for 10% or more of the Company’s total outstanding rent receivable at June 30, 2024, accounted for 69.8 % of the Company’s total outstanding rent receivable at June 30, 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. Suppliers No supplier accounted for 10% or more of the Company’s purchase during the three and six months ended June 30, 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 and six months ended June 30, 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. 29 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 14 – SEGMENT INFORMATION (continued) Information with respect to these reportable business segments for the three and six months ended June 30, 2024 and 2023 was as follows: Three Months Ended June 30, 2024 Real Property Operations Lab Services MSO Corporate / Other Total Real property rental revenue $ 327,887 $ - $ - $ 327,887 Real property operating expenses ( 285,488 ) - - ( 285,488 ) Real property operating income 42,399 - - 42,399 Loss from equity method investment - Lab Services MSO - ( 329,337 ) - ( 329,337 ) Other operating expenses ( 94,054 ) - ( 1,123,371 ) ( 1,217,425 ) Other (expense) income: Interest expense ( 194,307 ) - ( 613,554 ) ( 807,861 ) Other (expense) income ( 148 ) - 180,346 180,198 Net loss $ ( 246,110 ) $ ( 329,337 ) $ ( 1,556,579 ) $ ( 2,132,026 ) Three Months Ended June 30, 2023 Real Property Operations Lab Services MSO Corporate / Other Total Real property rental revenue $ 306,905 $ - $ - $ 306,905 Real property operating expenses ( 245,403 ) - - ( 245,403 ) Real property operating income 61,502 - - 61,502 Income from equity method investment - Lab Services MSO - 104,651 - 104,651 Other operating expenses ( 79,630 ) - ( 2,154,891 ) ( 2,234,521 ) Other (expense) income: Interest expense - - ( 246,278 ) ( 246,278 ) Other income (expense) 3 - ( 432,414 ) ( 432,411 ) Net (loss) income $ ( 18,125 ) $ 104,651 $ ( 2,833,583 ) $ ( 2,747,057 ) Six Months Ended June 30, 2024 Real Property Operations Lab Services MSO Corporate / Other Total Real property rental revenue $ 642,475 $ - $ - $ 642,475 Real property operating expenses ( 548,614 ) - - ( 548,614 ) Real property operating income 93,861 - - 93,861 Loss from equity method investment - Lab Services MSO - ( 221,868 ) - ( 221,868 ) Other operating expenses ( 208,341 ) - ( 2,011,077 ) ( 2,219,418 ) Other (expense) income: Interest expense ( 388,614 ) - ( 938,254 ) ( 1,326,868 ) Other (expense) income ( 144 ) - 174,898 174,754 Net loss $ ( 503,238 ) $ ( 221,868 ) $ ( 2,774,433 ) $ ( 3,499,539 ) 30 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 14 – SEGMENT INFORMATION (continued) Six Months Ended June 30, 2023 Real Property Operations Lab Services MSO Corporate / Other Total Real property rental revenue $ 603,070 $ - $ - $ 603,070 Real property operating expenses ( 493,848 ) - - ( 493,848 ) Real property operating income 109,222 - - 109,222 Income from equity method investment - Lab Services MSO - 15,560 - 15,560 Other operating expenses ( 193,341 ) - ( 4,753,136 ) ( 4,946,477 ) Other (expense) income: Interest expense - - ( 402,504 ) ( 402,504 ) Other income (expense) 7 - ( 442,609 ) ( 442,602 ) Net (loss) income $ ( 84,112 ) $ 15,560 $ ( 5,598,249 ) $ ( 5,666,801 ) Identifiable long-lived tangible assets at June 30, 2024 and December 31, 2023 June 30, 2024 December 31, 2023 Real property operations $ 7,122,988 $ 7,211,641 Corporate/Other 17,492 17,846 Total $ 7,140,480 $ 7,229,487 Identifiable long-lived tangible assets at June 30, 2024 and December 31, 2023 June 30, 2024 December 31, 2023 United States $ 7,138,880 $ 7,227,533 China 1,600 1,954 Total $ 7,140,480 $ 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 $ 64,000 and $ 66,000 for the six months ended June 30, 2024 and 2023, respectively. Supplemental cash flow information related to leases for the six months ended June 30, 2024 and 2023 is as follows: Six Months Ended June 30, 2024 2023 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows paid for operating lease $ 48,085 $ 66,045 Right-of-use assets obtained in exchange for lease obligation: Operating lease $ - $ 243,169 31 AVALON GLOBOCARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 15 – COMMITMENTS AND CONTINGENCIES (continued) Operating Leases Commitment (continued) The following table summarizes the lease term and discount rate for the Company’s operating lease as of June 30, 2024: Operating Lease Weighted average remaining lease term (in years) 0.58 Weighted average discount rate 11.0 % The following table summarizes the maturity of lease liabilities under operating lease as of June 30, 2024: For the Twelve-month Period Ending June 30: Operating Lease 2025 $ 87,411 2026 and thereafter - Total lease payments 87,411 Amount of lease payments representing interest ( 2,038 ) Total present value of operating lease liabilities (current liability) $ 85,373 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 The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued. Based upon this review, other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements. ATM In June 2023, the Company entered into a sales agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (“Roth) under which the Company may offer and sell from time to time shares of its common stock having an aggregate offering price of up to $ 3.5 million. From July 1, 2024 to August 16, 2024, Roth sold an aggregate of 4,227,651 shares of common stock at an average price of $ 0.68 per share to investors. The Company received net cash proceeds of $ 2,771,992 , net of commission paid for sales agent and other fees of $ 85,860 . Common Shares Issued for Services In August 2024, the Company issued 250,000 shares of its common stock for services rendered and to be rendered. These shares were valued at $112,500, the fair market value on the grant date using the reported closing share price on the date of grant, and the Company recorded stock-based compensation expense of $112,500. 32