Change Agents Corporation. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future. Accordingly, factors that may affect our results include, but are not limited to: ● our dependence on product candidates that are still in an early development stage; ● our ability to successfully complete research and further development, including preclinical and clinical studies; ● our anticipated timing for preclinical development, regulatory submissions, commencement and completion of clinical trials and product approvals; ● our ability to negotiate strategic partnerships, where appropriate, for our product candidates; ● our ability to manage multiple clinical trials for a variety of product candidates at different stages of development; ● the cost, timing, scope and results of ongoing preclinical and clinical testing; ● our expectations of the attributes of our product and development candidates, including pharmaceutical properties, efficacy, safety and dosing regimens; ● the cost, timing and uncertainty of obtaining regulatory approvals for our product candidates; ● the availability, cost, delivery and quality of clinical management services provided by our clinical research organization partners; ● the availability, cost, delivery and quality of clinical and commercial-grade materials produced by our own manufacturing facility or supplied by contract manufacturers, suppliers and partners; ● our ability to commercialize our product candidates and the growth of the markets for those product candidates; ● our ability to develop and commercialize products before competitors that are superior to the alternatives developed by such competitors; ● our ability to develop technological capabilities, including identification of novel and clinically important targets, exploiting our existing technology platforms to develop new product candidates and expand our focus to broader markets for our existing targeted therapeutics; ● our ability to raise sufficient capital to fund our preclinical and clinical studies and to meet our long-term liquidity needs, on terms acceptable to us, or at all. If we are unable to raise the funds necessary to meet our long-term liquidity needs, we may have to delay or discontinue the development of one or more programs, discontinue or delay ongoing or anticipated clinical trials, discontinue or delay our commercial manufacturing efforts, discontinue or delay our efforts to expand into additional indications for our product candidates, license out programs earlier than expected, raise funds at significant discount or on other unfavorable terms, if at all, or sell all or part of our business; ● our ability to protect our intellectual property rights and our ability to avoid intellectual property litigation, which can be costly and divert management time and attention; ● our ability to develop and commercialize products without infringing upon the intellectual property rights of third parties; 33 ● heightened competition from commercial clinical testing companies, IDNs, physicians and others; ● increased pricing pressure from customers, including payers and patients, and changing relationships with customers, payers, suppliers or strategic partners; ● impact of changes in payment mix, including increased patient financial responsibility and any shift from fee-for-service to discounted, capitated or bundled fee arrangements; ● adverse actions by the government, including healthcare reform that focuses on reducing healthcare costs but does not recognize the value and importance to healthcare of clinical testing or innovative solutions, unilateral reduction of fee schedules payable to us, unilateral recoupment of amounts allegedly owed and competitive bidding; ● the impact of increased prior authorization programs; ● adverse results from pending or future government investigations, lawsuits or private actions, which include in particular, monetary damages, loss or suspension of licenses or criminal penalties; ● the impact of the COVID-19 pandemic on our business or on the economy generally; and ● a decline in economic conditions, including the impact of an inflationary environment. All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the filing date of this Quarterly Report on Form 10-Q or the date of the document incorporated by reference into this Quarterly Report on Form 10-Q. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith, and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished. The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2024 and 2023 should be read in conjunction with our condensed consolidated financial statements and related notes to those condensed consolidated financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. Overview We are a commercial stage company dedicated to developing and delivering innovative, transformative, precision diagnostics and clinical laboratory services. We are working toward establishing a leading role in the innovation of diagnostic testing, utilizing proprietary technology to deliver precise, genetics-driven results. As a first step into the laboratory market, we completed an acquisition of a 40% membership interest in Laboratory Services MSO, LLC (“Lab Services MSO”), which closed in February 2023. We have the following areas of focus: Laboratory Acquisitions We have embarked on a laboratory rollup strategy focused on forming joint ventures and acquiring laboratories that are accretive to our commercial strategy. As a first step, in February 2023, we acquired a 40% membership interest in Lab Services MSO. ● Lab Services MSO is focused on delivering high quality services related to toxicology and wellness testing and provides a broad portfolio of diagnostic tests, including drug testing, toxicology, and a broad array of test services, from general bloodwork to anatomic pathology, and urine toxicology. Specific capabilities include STAT blood testing, qualitative drug screening, genetic testing, urinary testing, and sexually transmitted disease testing. The panels that Lab Services MSO tests for are thyroid panel, comprehensive metabolic panel, kidney profile, liver function tests, and other individual tests. Through Lab Services MSO, we use fast, accurate, and efficient equipment to provide practitioners with the tools to quickly determine if a patient is following their designated treatment plan. In most instances, we are able to provide a practitioner with qualitative drug class results the same day the sample is received. Lab Services MSO provides a menu of extensive chemistry tests that physicians can use to obtain information to better treat their patients and maintain their overall wellness. Lab Services MSO has developed a premier reputation for customer service and fast turnaround times. ● Lab Services MSO is also focused on commercialization of genetic-based proprietary testing. The first area of focus in this area is confirmatory genetic testing during toxicology screening and genetic testing to screen for addictive propensity. Lab Services MSO laboratory plans to focus on diagnostic testing utilizing proprietary technology to deliver precise genetic driven results. ● In the third quarter of 2023, Lab Services MSO acquired Merlin Technologies, Inc., which is a medical equipment retail company. 34 Research and Development We are focused on bringing forward intellectual property through joint patent filings with the Massachusetts Institute of Technology (“MIT”). We completed a sponsored research and co-development project with MIT led by Professor Shuguang Zhang as Principal Investigator. Using the unique QTY code protein design platform, six water-soluble variant cytokine receptors have been successfully designed and tested to show binding affinity to the respective cytokines. We currently are focused on bringing forward the intellectual property associated with this program through joint patent submissions. Product Commercialization We have begun the commercialization and development of a versatile breathalyzer system. We were granted exclusive distributorship rights for the KetoAir from Qi Diagnostics for the following territories: North America, South America, the EU and the UK. For our commercialization strategy, we intend to target the diabetes and obesity markets. We plan to sell the product through the KetoAir website and social media. We believe the KetoAir device has some competitive advantages to other methods for measuring ketosis and expect initial sales to occur in the United States. The KetoAir is a handheld device that allows the user to detect acetone levels in exhaled breath. The acetone level is in concentration units (ppm, part-per-million) such that the user will know his/her real-time ketosis status: inadequate ketosis (0-3.99 ppm), mild ketosis (4-9.99 ppm), optimal ketosis (10-40 ppm), or alarming level (> 40 ppm). The KetoAir is registered with the United States Food and Drug Administration as a Class I medical device. The device is also paired with an “AI Nutritionist” software program (via Bluetooth connection) which is downloadable from Google Play (for Android mobile phones, approved) and iPhone (the app is currently being reviewed by Apple iOS AppStore). It helps users monitor and manage their ketogenic diet and related programs. We believe the KetoAir can be an essential tool to help diabetic patients adhere to their therapeutic programs and optimize their ketogenic dietary management. Other Areas In order to preserve cash and focus on our core laboratory rollup strategy and product commercialization, we have currently suspended all research and development efforts related to cellular therapy in order to redirect our funding efforts to our core business strategies outlined above. Going Concern 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. In addition, we own commercial real estate that houses our headquarters in Freehold, New Jersey. We also have income from equity method investment through our 40% interest in Lab Services MSO. These condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, we had 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. We have a limited operating history and our continued growth is dependent upon the continuation of generating rental revenue from our income-producing real estate property in New Jersey and income from equity method investment through our 40% interest in Lab Services MSO and obtaining additional financing to fund future obligations and pay liabilities arising from ordinary course business operations. In addition, the current cash balance cannot be projected to cover our 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 our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital, implement our business plan, and generate sufficient revenues. There are no assurances that we will be successful in our efforts to generate sufficient revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. We plan on raising capital through the sale of equity to implement our business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to us on satisfactory terms and conditions, or at all. 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 we be unable to continue as a going concern. 35 Critical Accounting Policies Use of Estimates The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Changes in these estimates and assumptions may have a material impact on the 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 our equity interest in Lab Services MSO. Investment in Unconsolidated Company We use the equity method of accounting for our investment in, and earning or loss of, company that we do not control but over which we do exert significant influence. We apply the equity method by initially recording these investments at cost, as equity method investments, subsequently adjusted for equity in earnings and cash distributions. We consider whether the fair value of our equity method investment has declined below its carrying value whenever adverse event or change in circumstance indicates that recorded value may not be recoverable. If we consider any decline to be other than temporary (based on various factors, including historical financial results and the overall health of the investee), then a write-down would be recorded to estimated fair value. We classify distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities. Real Property Rental We have determined that the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“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. Income Taxes We are governed by the income tax laws of China and the United States. Income taxes are accounted for pursuant to ASC 740 “Accounting for Income Taxes,” which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge for taxes is based on the results for the period as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. 36 Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is changed to equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis. Recent Accounting Standards For details of applicable new accounting standards, please, refer to Recent Accounting Standards in Note 3 of our condensed consolidated financial statements accompanying this Quarterly Report on Form 10-Q. RESULTS OF OPERATIONS Comparison of Results of Operations for the Three and Six Months Ended June 30, 2024 and 2023 Real Property Rental Revenue For the three months ended June 30, 2024, we had real property rental revenue of $327,887, as compared to $306,905 for the three months ended June 30, 2023, an increase of $20,982, or 6.8%. For the six months ended June 30, 2024, we had real property rental revenue of $642,475, as compared to $603,070 for the six months ended June 30, 2023, an increase of $39,405, or 6.5%. The increase was primarily attributable to the increase in the number of tenants occupying the building in the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023. We expect that our revenue from real property rent will remain at its current level with minimal increase in the near future. Real Property Operating Expenses Real property operating expenses consist of property management fees, property insurance, real estate taxes, depreciation, repairs and maintenance fees, utilities and other expenses related to our rental properties. For the three months ended June 30, 2024, our real property operating expenses amounted to $285,488, as compared to $245,403 for the three months ended June 30, 2023, an increase of $40,085, or 16.3%. The increase was primarily due to an increase in repairs and maintenance fee of approximately $11,000, and an increase in utilities of approximately $32,000, offset by a decrease in other miscellaneous items of approximately $3,000. For the six months ended June 30, 2024, our real property operating expenses amounted to $548,614, as compared to $493,848 for the six months ended June 30, 2023, an increase of $54,766, or 11.1%. The increase was primarily due to an increase in repairs and maintenance fee of approximately $22,000, an increase in utilities of approximately $27,000, and an increase in other miscellaneous items of approximately $6,000. Real Property Operating Income Our real property operating income for the three months ended June 30, 2024 was $42,399, representing a decrease of $19,103, or 31.1%, as compared to $61,502 for the three months ended June 30, 2023. Our real property operating income for the six months ended June 30, 2024 was $93,861, representing a decrease of $15,361, or 14.1%, as compared to $109,222 for the six months ended June 30, 2023. The decrease was primarily attributable to the increase in real property operating expenses as described above. We expect our real property operating income will remain at its current quarterly level with minimal increase in the near future. (Loss) income from Equity Method Investment – Lab Services MSO For the three months ended June 30, 2024 and 2023, we had loss from our investment in Lab Services MSO of $329,337 and income from our investment in Lab Services MSO of $104,651, respectively, which consists of our share of Lab Services MSO’s net loss of $162,604 and our share of Lab Services MSO’s net income of $308,395, and amortization of identifiable intangible assets acquired from Lab Services MSO acquisition of $166,733 and $203,744, respectively. 37 For the six months ended June 30, 2024 and 2023, we had loss from our investment in Lab Services MSO of $221,868 and income from our investment in Lab Services MSO of $15,560, respectively, which consists of our share of Lab Services MSO’s net income of $111,598 and $355,134, and amortization of identifiable intangible assets acquired from Lab Services MSO acquisition of $333,466 and $339,574, respectively. We purchased 40% of Lab Services MSO on February 9, 2023. In the third quarter of 2023, Lab Services MSO acquired Merlin Technologies, Inc. which is a medical equipment retail company. Lab Services MSO has also opened a new laboratory, Veritas Laboratories LLC (“Veritas”). Veritas is a CLIA-certified and COLA-accredited laboratory located in Scottsdale, Arizona that offers a wide range of high-quality testing, including drug testing, genetic testing, urinary testing and COVID-19 PCR testing. We expect to continue to receive income from our investment in Lab Services MSO in the near future. Other Operating Expenses For the three and six months ended June 30, 2024 and 2023, other operating expenses consisted of the following: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 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 Miscellaneous taxes 225,157 9,320 254,498 40,331 Research and development - 17,810 - 110,160 Directors and officers’ liability insurance premium 69,306 103,802 138,613 207,603 Travel and entertainment 22,086 55,578 44,409 117,952 Rent and related utilities 15,414 15,973 31,006 33,261 Other general and administrative 21,111 74,186 45,635 109,771 $ 1,217,425 $ 2,234,521 $ 2,219,418 $ 4,946,477 ● For the three months ended June 30, 2024, advertising and marketing expenses decreased by $442,557, or 87.6%, as compared to the three months ended June 30, 2023. For the six months ended June 30, 2024, advertising and marketing expenses decreased by $1,089,310, or 91.0%, as compared to the six months ended June 30, 2023. The decrease was primarily due to decreased advertising activities in the three and six months ended June 30, 2024. We expect that our advertising and marketing expenses will decrease in the near future as we conserve cash . ● Professional fees primarily consisted of accounting fees, audit fees, legal service fees, consulting fees, investor relations service charges, valuation service fees and other fees. For the three months ended June 30, 2024, professional fees decreased by $554,054, or 55.5%, as compared to the three months ended June 30, 2023, which was primarily attributable to a decrease in audit fees of approximately $104,000, due to the decreased audit services related to our acquisition of Lab Services MSO, a decrease in accounting fees of approximately $271,000, mainly due to the decreased accounting services related to our acquisition of Lab Services MSO, a decrease in legal service fees of approximately $133,000, mainly due to the decreased legal services related to our acquisition of Lab Services MSO, and a decrease in other miscellaneous items of approximately $46,000. For the six months ended June 30, 2024, professional fees decreased by $1,337,958, or 60.1%, as compared to the six months ended June 30, 2023, which was primarily attributable to a decrease in consulting fees of approximately $506,000, mainly due to the decrease in use of consulting service providers related to our acquisition of Lab Services MSO, a decrease in audit fees of approximately $129,000, due to the decreased audit services related to our acquisition of Lab Services MSO, a decrease in accounting fees of approximately $481,000, mainly due to the decreased accounting services related to our acquisition of Lab Services MSO, a decrease in legal service fees of approximately $253,000, mainly due to the decreased legal services related to our acquisition of Lab Services MSO, and a decrease in other miscellaneous items of approximately $83,000, offset by an increase in valuation fee for our Lab Services MSO acquisition of $114,000. We expect that our professional fees will likely remain at their current quarterly level with minimal increase in the near future. ● For the three months ended June 30, 2024, compensation and related benefits decreased by $96,890, or 21.3%, as compared to the three months ended June 30, 2023. For the six months ended June 30, 2024, compensation and related benefits decreased by $194,874, or 21.5%, as compared to the six months ended June 30, 2023. The decrease was primarily attributable to the decreased compensation for two of our named executive officers, David Jin and Meng Li. We expect that our compensation and related benefits will remain relatively steady, with minimal increase, in the near future . 38 ● For the three months ended June 30, 2024, miscellaneous taxes increased by $215,837, or 2,315.8%, as compared to the three months ended June 30, 2023. For the six months ended June 30, 2024, miscellaneous taxes increased by $214,167, or 531.0%, as compared to the six months ended June 30, 2023. The increase was primarily attributable to increased Delaware state franchise tax. We expect that our miscellaneous taxes will decrease in the near future. ● For the three months ended June 30, 2024, research and development expenses decreased by $17,810, or 100.0%, as compared to the three months ended June 30, 2023. For the three months ended June 30, 2024, research and development expenses decreased by $110,160, or 100.0%, as compared to the three months ended June 30, 2023. In the three and six months ended June 30, 2024, we did not incur any activity with respect to research and development projects as we redirected our funding efforts to our core business strategies discussed above. ● For the three months ended June 30, 2024, Directors and Officers’ Liability Insurance premium decreased by $34,496, or 33.2%, as compared to the three months ended June 30, 2023. For the six months ended June 30, 2024, Directors and Officers’ Liability Insurance premium decreased by $68,990, or 33.2%, as compared to the six months ended June 30, 2023. The decrease was mainly due to our switching to a different insurance provider, resulting in a lower premium. ● For the three months ended June 30, 2024, travel and entertainment expense decreased by $33,492, or 60.3%, as compared to the three months ended June 30, 2023. For the six months ended June 30, 2024, travel and entertainment expense decreased by $73,543, or 62.3%, as compared to the six months ended June 30, 2023. The decrease was mainly due to decreased business travel activities in the first half of 2024. ● For the three months ended June 30, 2024, rent and related utilities expenses decreased by $559, or 3.5%, as compared to the three months ended June 30, 2023. For the six months ended June 30, 2024, rent and related utilities expenses decreased by $2,255, or 6.8%, as compared to the six months ended June 30, 2023. The decrease was attributable to decreased rental rate in the first half of 2024. ● Other general and administrative expenses mainly consisted of NASDAQ listing fee, office supplies, and other miscellaneous items. For the three months ended June 30, 2024, other general and administrative expenses decreased by $53,075, or 71.5%, as compared to the three months ended June 30, 2023, which was mainly attributable to a decrease in fees paid to government agencies and Financial Industry Regulatory Authority of approximately $31,000, and a decrease in other miscellaneous items of approximately $22,000 due to our efforts at stricter controls on corporate expenditure. For the six months ended June 30, 2024, other general and administrative expenses decreased by $64,136, or 58.4%, as compared to the six months ended June 30, 2023, which was mainly attributable to a decrease in fees paid to government agencies and Financial Industry Regulatory Authority of approximately $31,000, a decrease in office supplies of approximately $11,000, and a decrease in other miscellaneous items of approximately $22,000 due to our efforts at stricter controls on corporate expenditure. Loss from Operations As a result of the foregoing, for the three months ended June 30, 2024, loss from operations amounted to $1,504,363, as compared to $2,068,368 for the three months ended June 30, 2023, representing a decrease of $564,005, or 27.3%. As a result of the foregoing, for the six months ended June 30, 2024, loss from operations amounted to $2,347,425, as compared to $4,821,695 for the six months ended June 30, 2023, representing a decrease of $2,474,270, or 51.3%. Other (Expense) Income Other (expense) income mainly includes third party and related party interest expense, change in fair value of derivative liability, impairment of equity method investment on Epicon, and other miscellaneous expense. Other expense, net, totaled $627,663 for the three months ended June 30, 2024, as compared to $678,689 for the three months ended June 30, 2023, a decrease of $51,026, or 7.5%, which was primarily attributable to an increase in gain from change in fair value of derivative liability of approximately $139,000, a decrease in impairment of equity method investment on Epicon of approximately $464,000, a decrease in other expense of approximately $9,000, offset by an increase in third party interest expense of approximately $561,000, mainly driven by the increase in amortization of debt discount and debt issuance costs of approximately $495,000 and the increased interest expense of approximately $66,000 from third party debts. Other expense, net, totaled $1,152,114 for the six months ended June 30, 2024, as compared to $845,106 for the six months ended June 30, 2023, an increase of $307,008, or 36.3%, which was primarily attributable to an increase in third party interest expense of approximately $915,000, mainly driven by the increase in amortization of debt discount and debt issuance costs of approximately $745,000 and the increased interest expense of approximately $170,000 from third party debts, an increase in interest expense – related party of approximately $9,000, and an increase in other expense of approximately $17,000, offset by an increase in gain from change in fair value of derivative liability of approximately $170,000, a decrease in impairment of equity method investment on Epicon of approximately $464,000. 39 Income Taxes We did not have any income taxes expense for the three and six months ended June 30, 2024 and 2023 since we incurred losses in these periods. Net Loss As a result of the factors described above, our net loss was $2,132,026 for the three months ended June 30, 2024, as compared to $2,747,057 for the three months ended June 30, 2023, a decrease of $615,031, or 22.4%. As a result of the factors described above, our net loss was $3,499,539 for the six months ended June 30, 2024, as compared to $5,666,801 for the six months ended June 30, 2023, a decrease of $2,167,262, or 38.2%. Net Loss Attributable to Avalon GloboCare Corp. Common Shareholders The net loss attributable to our common shareholders was $2,132,026, or $0.19 per share (basic and diluted), for the three months ended June 30, 2024, as compared to $2,747,057, or $0.27 per share (basic and diluted), for the three months ended June 30, 2023, a decrease of $615,031, or 22.4%. The net loss attributable to our common shareholders was $3,499,539, or $0.31 per share (basic and diluted), for the six months ended June 30, 2024, as compared to $5,666,801, or $0.56 per share (basic and diluted), for the six months ended June 30, 2023, a decrease of $2,167,262, or 38.2%. Foreign Currency Translation Adjustment Our reporting currency is the U.S. dollar. The functional currency of our parent company, AHS, Avalon RT 9, and Avalon Lab is the U.S. dollar and the functional currency of Avalon Shanghai is the Chinese Renminbi (“RMB”). The financial statements of our subsidiary whose functional currency is the RMB are translated to U.S. dollars using period end rate of exchange for assets and liabilities, average rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rate for equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $2,706 and a foreign currency translation loss of $11,011 for the three months ended June 30, 2024 and 2023, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $214 and $7,341 for the six months ended June 30, 2024 and 2023, respectively. This non-cash gain/loss had the effect of decreasing/increasing our reported comprehensive loss in each respective period. Comprehensive Loss As a result of our foreign currency translation adjustment, we had comprehensive loss of $2,129,320 and $2,758,068 for the three months ended June 30, 2024 and 2023, respectively. As a result of our foreign currency translation adjustment, we had comprehensive loss of $3,499,753 and $5,674,142 for the six months ended June 30, 2024 and 2023, respectively. Liquidity and Capital Resources We have a limited operating history and our continued growth is dependent upon the continuation of generating rental revenue from our income-producing real estate property in New Jersey and income from equity method investment through our equity interest in Lab Services MSO, as well as obtaining additional financing to fund future obligations and pay liabilities arising from ordinary course business operations. In addition, the current cash balance cannot be projected to cover our 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 our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital, implement our business plan, and generate sufficient revenues. There are no assurances that we will be successful in our efforts to generate sufficient revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. As described below, we have raised additional capital through the sale of equity and debt and we plan to raise additional capital in the future through the sale of equity or debt to implement our business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to us on satisfactory terms and conditions, if at all. 40 Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations as they come due and otherwise operate on an ongoing basis. At June 30, 2024 and December 31, 2023, we had a cash balance of approximately $201,000 and $285,000, respectively. These funds are kept in financial institutions located 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 % The following table sets forth a summary of changes in our working capital deficit from December 31, 2023 to June 30, 2024: June 30, December 31, Changes in 2024 2023 Amount Percentage Working capital deficit: Total current assets $ 712,881 $ 850,867 $ (137,986 ) (16.2 )% Total current liabilities 8,593,186 6,762,686 1,830,500 27.1 % Working capital deficit $ (7,880,305 ) $ (5,911,819 ) $ (1,968,486 ) 33.3 % Our working capital deficit increased by $1,968,486 to $7,880,305 at June 30, 2024 from $5,911,819 at December 31, 2023. The increase in working capital deficit was primarily attributable to a decrease in rent receivable of approximately $108,000 driven by collection efforts in the six months ended June 30, 2024, an increase in accrued liabilities and other payables of approximately $177,000 mainly due to the increase in accrued Delaware state franchise tax in the six months ended June 30, 2024, an increase in accrued liabilities and other payables – related parties of approximately $515,000 mainly due to our equity method investment payable paid by a related party on our behalf, a significant increase in advance from pending sale of noncontrolling interest – related party of approximately $2,001,000 resulting from advance received in connection with the membership interest purchase agreement entered into in November 2023 in the six months ended June 30, 2024, and an increase in derivative liability of approximately $268,000 mainly due to warrants issued with convertible debts financing in the six months ended June 30, 2024, offset by a decrease in accrued professional fees of approximately $177,000 resulting from payments made to our professional service providers in the six months ended June 30, 2024, a decrease in equity method investment payable of approximately $667,000 resulting from payment of $100,000 made to investee and payment of approximately $567,000 made by a related party on our behalf in the first half of 2024, and a decrease in convertible note payable, net, of approximately $240,000 mainly due to the repayments made to lenders of $3,100,000 in the first half of 2024 which were netted off against the amortization of debt issuance costs and debt discount of approximately $475,000, offset by the issuances of March 2024 Convertible Note and June 2024 Convertible Note with principal of $3,545,000 in the first half of 2024 (as described below) which were netted off against the remaining balances of debt issuance costs and debt discount of approximately $1,160,000. Because the exchange rate conversion is different for the condensed consolidated balance sheets and the condensed consolidated statements of cash flows, the changes in assets and liabilities reflected on the condensed consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the condensed consolidated balance sheets. Cash Flows for the Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023 The following table summarizes the key components of our cash flows for the six months ended June 30, 2024 and 2023: Six Months Ended June 30, 2024 2023 Net cash used in operating activities $ (1,997,616 ) $ (4,359,759 ) Net cash used in investing activities (100,000 ) (22,201 ) 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 ) 41 Net cash flow used in operating activities for the six months ended June 30, 2024 was $1,997,616, which primarily reflected our consolidated net loss of approximately $3,500,000, and the non-cash items adjustment, primarily consisting of change in fair market value of derivative liability of approximately $212,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in accrued liabilities and other payables of approximately $151,000 resulting from payments made to our vendors in the first half of 2024, offset by a decrease in rent receivable of approximately $113,000 driven by our collection efforts, and the non-cash items adjustment, primarily consisting of stock-based compensation and service expense of approximately $150,000, loss from equity method investment of approximately $222,000, distribution of earnings from equity method investment of approximately $473,000, and amortization of debt issuance costs and debt discount of approximately $837,000. Net cash flow used in operating activities for the six months ended June 30, 2023 was $4,359,759, which primarily reflected our consolidated net loss of approximately $5,667,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in accrued liabilities and other payables of approximately $231,000, due to payments made to vendors in the six months ended June 30, 2023, offset by the non-cash items adjustment, primarily consisting of depreciation of approximately $123,000, stock-based compensation and service expense of approximately $867,000, and impairment of equity method investment of approximately $464,000. We expect our cash used in operating activities to increase in the next 12 months due to the following: ● the development and commercialization of new products; and ● an increase in public relations and/or sales promotions for existing and/or new brands as we expand within existing markets or enter new markets. Net cash flow used in investing activities was $100,000 for the six months ended June 30, 2024, as compared to $22,201 for the six months ended June 30, 2023. During the six months ended June 30, 2024, we paid $100,000 for the acquisition of a 40% interest in Lab Ser vices MSO. During the six months ended June 30, 2023, we paid approximately $22,000 for the purchase of property and equipment. Net cash flow provided by financing activities was $2,010,577 for the six months ended June 30, 2024, as compared to $3,046,564 for the six months ended June 30, 2023. During the six months ended June 30, 2024, we received net proceeds from the issuance of convertible debts and warrants of approximately $3,110,000 (net of original issue discount of approximately $177,000 and cash paid for convertible note issuance costs of approximately $258,000), and an advance from the pending sale of a noncontrolling interest in a subsidiary of approximately $2,001,000, offset by repayments made for convertible debt of $3,100,000. During the six months ended June 30, 2023, we received proceeds from related party borrowings of $850,000 and net proceeds from issuance of convertible debt and warrants of $1,261,000 (net of original issue discount of $75,000 and cash paid for convertible note issuance costs of $164,000), and net proceeds from issuance of a balloon promissory note of $936,000 (net of cash paid for promissory note issuance costs of approximately $64,000). The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term: ● an increase in working capital requirements to finance our current business; ● the use of capital for acquisitions and the development of business opportunities; and ● the cost of being a public company. 42 August 2019 Credit Facility In the third quarter of 2019, we entered into a $20 million credit facility (the “Line of Credit”) provided by our Chairman of the Board and a significant (and our largest) stockholder, Wenzhao Lu. The Line of Credit bears interest at a rate of 5% and provides for maturity on drawn loans 36 months after funding. As of June 30, 2024, we had used approximately $6.8 million of the Line of Credit and had approximately $13.2 million remaining available under the Line of Credit. ATM In June 2023, we entered into a sales agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (“Roth”) under which we may offer and sell from time to time shares of our common stock having an aggregate offering price of up to $3.5 million. From July 1, 2023 to August 16, 2024, we sold an aggregate of 4,684,278 shares of our common stock at an average price of $0.75 per share to investors pursuant to the Sales Agreement, and received net cash proceeds of $3,388,251, net of cash paid for Roth’s commissions and other fees of $104,992. March 2024 Convertible Note Financing In March 2024, we entered into a security purchase agreement with a lender (the “March 2024 Lender”) and closed on the issuance of a 13.0% senior secured convertible promissory note in the principal amount of $700,000 (the “March 2024 Convertible Note”), as well as the issuance of 105,000 shares of common stock as a commitment fee and warrants for the purchase of up to 252,404 shares of our common stock. We and our subsidiaries also entered into security agreements in connection with issuance of the March 2024 Convertible Note, creating a security interest in certain property of the Company and its subsidiaries to secure the prompt payment, performance and discharge in full of all of our obligations under the March 2024 Convertible Note. June 2024 Convertible Note Financing In June 2024, we entered into a security purchase agreement with a lender (the “June 2024 Lender”) and closed on the issuance of a 13.0% senior secured convertible promissory note in the principal amount of $2,845,000 (the “June 2024 Convertible Note”), as well as the issuance of 402,000 shares of common stock as a commitment fee and warrants for the purchase of up to 2,200,000 shares of our common stock. We and our subsidiaries also entered into security agreements in connection with issuance of the June 2024 Convertible Note, creating a security interest in certain property of the Company and its subsidiaries to secure the prompt payment, performance and discharge in full of all of our obligations under the June 2024 Convertible Note. We estimate that, based on current plans and assumptions, our available cash will be insufficient to satisfy our cash requirements under our present operating expectations through cash flow provided by operations, and cash available under our ATM, the Line of Credit and sales of equity. Other than funds received as described above and cash resources generated from our operations, we presently have no other significant alternative source of working capital. We have used these funds to fund our operating expenses, pay our obligations and grow our company. We will need to raise significant additional capital to fund our operations and to provide working capital for our ongoing operations and obligations. Therefore, our future operation is dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will be required to cease our operations. To date, we have not considered this alternative, nor do we view it as a likely occurrence. 43 Foreign Currency Exchange Rate Risk We ceased all operations in China in 2022, with the exception of a small administrative office. We did not during the six months ended June 30, 2024, and do not expect in the foreseeable future, to generate any additional revenue from PRC operations. Thus, exchange rate fluctuations between the RMB and the U.S. dollar do not have a material effect on us. For the three months ended June 30, 2024 and 2023, we had an unrealized foreign currency translation gain of approximately $2,700 and an unrealized foreign currency translation loss of approximately $11,000, respectively, because of changes in the exchange rate. For the six months ended June 30, 2024 and 2023, we had an unrealized foreign currency translation loss of approximately $200 and $7,300, respectively, because of changes in the exchange rate. Inflation The effect of inflation on our revenues and operating results was not significant for the six months ended June 30, 2024 and 2023. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.