AVALON
GLOBOCARE CORP. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
For the
Three Months Ended
|
|
|
For the
Three Months Ended
|
|
|
For the
Six Months Ended
|
|
|
For the
Six Months Ended
|
|
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Real
property rental
|
|
$
|
278,872
|
|
|
$
|
222,254
|
|
|
$
|
575,495
|
|
|
$
|
222,254
|
|
Medical
related consulting services - related parties
|
|
|
141,996
|
|
|
|
152,497
|
|
|
|
141,996
|
|
|
|
218,783
|
|
Development
services and sales of developed products
|
|
|
75,225
|
|
|
|
—
|
|
|
|
86,515
|
|
|
|
—
|
|
Total
Revenues
|
|
|
496,093
|
|
|
|
374,751
|
|
|
|
804,006
|
|
|
|
441,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
property operating expenses
|
|
|
195,941
|
|
|
|
161,854
|
|
|
|
406,215
|
|
|
|
161,854
|
|
Medical
related consulting services - related parties
|
|
|
124,715
|
|
|
|
125,231
|
|
|
|
124,715
|
|
|
|
224,812
|
|
Development
services and sales of developed products
|
|
|
42,093
|
|
|
|
—
|
|
|
|
58,613
|
|
|
|
—
|
|
Total
Costs and Expenses
|
|
|
362,749
|
|
|
|
287,085
|
|
|
|
589,543
|
|
|
|
386,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REAL
PROPERTY OPERATING INCOME
|
|
|
82,931
|
|
|
|
60,400
|
|
|
|
169,280
|
|
|
|
60,400
|
|
GROSS
PROFIT (LOSS) FROM MEDICAL RELATED CONSULTING SERVICES
|
|
|
17,281
|
|
|
|
27,266
|
|
|
|
17,281
|
|
|
|
(6,029
|
)
|
GROSS
PROFIT FROM DEVELOPMENT SERVICES AND SALES OF DEVELOPED PRODUCTS
|
|
|
33,132
|
|
|
|
—
|
|
|
|
27,902
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
—
|
|
|
|
6,279
|
|
|
|
—
|
|
|
|
14,990
|
|
Compensation
and related benefits
|
|
|
487,452
|
|
|
|
205,473
|
|
|
|
1,026,266
|
|
|
|
388,400
|
|
Professional
fees
|
|
|
593,025
|
|
|
|
172,705
|
|
|
|
1,164,797
|
|
|
|
379,923
|
|
Other
general and administrative
|
|
|
266,121
|
|
|
|
91,927
|
|
|
|
551,373
|
|
|
|
152,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Operating Expenses
|
|
|
1,346,598
|
|
|
|
476,384
|
|
|
|
2,742,436
|
|
|
|
935,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(1,213,254
|
)
|
|
|
(388,718
|
)
|
|
|
(2,527,973
|
)
|
|
|
(881,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,300
|
|
|
|
210
|
|
|
|
1,708
|
|
|
|
1,004
|
|
Interest
expense
|
|
|
(24,932
|
)
|
|
|
(42,000
|
)
|
|
|
(261,918
|
)
|
|
|
(42,000
|
)
|
Foreign
currency transaction loss
|
|
|
(106,929
|
)
|
|
|
—
|
|
|
|
(106,929
|
)
|
|
|
(57,244
|
)
|
Other
income
|
|
|
—
|
|
|
|
—
|
|
|
|
328
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Expense, net
|
|
|
(130,561
|
)
|
|
|
(41,790
|
)
|
|
|
(366,811
|
)
|
|
|
(98,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME
TAXES
|
|
|
(1,343,815
|
)
|
|
|
(430,508
|
)
|
|
|
(2,894,784
|
)
|
|
|
(979,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(1,343,815
|
)
|
|
$
|
(430,508
|
)
|
|
$
|
(2,894,784
|
)
|
|
$
|
(979,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS:
NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST
|
|
|
(49,421
|
)
|
|
|
—
|
|
|
|
(118,811
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS
|
|
$
|
(1,294,394
|
)
|
|
$
|
(430,508
|
)
|
|
$
|
(2,775,973
|
)
|
|
$
|
(979,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(1,343,815
|
)
|
|
|
(430,508
|
)
|
|
|
(2,894,784
|
)
|
|
|
(979,841
|
)
|
OTHER
COMPREHENSIVE (LOSS) INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
foreign currency translation (loss) gain
|
|
|
(96,207
|
)
|
|
|
7,647
|
|
|
|
(43,369
|
)
|
|
|
(32,124
|
)
|
COMPREHENSIVE
LOSS
|
|
$
|
(1,440,022
|
)
|
|
$
|
(422,861
|
)
|
|
$
|
(2,938,153
|
)
|
|
$
|
(1,011,965
|
)
|
LESS:
COMPREHENSIVE LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST
|
|
|
(49,540
|
)
|
|
|
—
|
|
|
|
(118,770
|
)
|
|
|
—
|
|
COMPREHENSIVE
LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS
|
|
$
|
(1,390,482
|
)
|
|
$
|
(422,861
|
)
|
|
$
|
(2,819,383
|
)
|
|
$
|
(1,011,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON
SHARE ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
71,979,678
|
|
|
|
64,628,622
|
|
|
|
71,122,356
|
|
|
|
63,617,572
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AVALON
GLOBOCARE CORP. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For
the Six Months Ended June 30, 2018
|
|
Avalon GloboCare Corp. Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Statutory
|
|
|
Comprehensive
|
|
|
Non-controlling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Reserve
|
|
|
Loss
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
—
|
|
|
$
|
—
|
|
|
|
70,278,622
|
|
|
$
|
7,028
|
|
|
$
|
11,490,285
|
|
|
$
|
—
|
|
|
$
|
(3,517,654
|
)
|
|
$
|
6,578
|
|
|
$
|
(91,994
|
)
|
|
$
|
(585,394
|
)
|
|
$
|
7,308,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchase
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(522,500
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(522,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued in equity raise, net of fees associated with equity raise
|
|
|
—
|
|
|
|
—
|
|
|
|
3,107,000
|
|
|
|
311
|
|
|
|
5,056,332
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,056,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued for services
|
|
|
—
|
|
|
|
—
|
|
|
|
175,000
|
|
|
|
17
|
|
|
|
466,983
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
467,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,021,173
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,021,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,410
|
)
|
|
|
41
|
|
|
|
(43,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the six months ended June 30, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,775,973
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(118,811
|
)
|
|
|
(2,894,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2018
|
|
|
—
|
|
|
$
|
—
|
|
|
|
73,560,622
|
|
|
$
|
7,356
|
|
|
$
|
18,034,773
|
|
|
$
|
(522,500
|
)
|
|
$
|
(6,293,627
|
)
|
|
$
|
6,578
|
|
|
$
|
(135,404
|
)
|
|
$
|
(704,164
|
)
|
|
$
|
10,393,012
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AVALON
GLOBOCARE CORP. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Six Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,894,784
|
)
|
|
$
|
(979,841
|
)
|
Adjustments to reconcile net loss from operations to
|
|
|
|
|
|
|
|
|
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
247,975
|
|
|
|
34,156
|
|
Stock-based compensation expense
|
|
|
1,082,923
|
|
|
|
266,467
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(67,542
|
)
|
|
|
—
|
|
Accounts receivable - related parties
|
|
|
(150,516
|
)
|
|
|
(160,964
|
)
|
Tenants receivable
|
|
|
(58
|
)
|
|
|
(25,433
|
)
|
Inventory
|
|
|
(19,892
|
)
|
|
|
—
|
|
Prepaid expenses and other current assets
|
|
|
(153,785
|
)
|
|
|
21,653
|
|
Security deposit
|
|
|
(308,694
|
)
|
|
|
(29,786
|
)
|
Accounts payable
|
|
|
1,740
|
|
|
|
22,646
|
|
Accrued liabilities and other payables
|
|
|
176,584
|
|
|
|
146,680
|
|
Accrued liabilities and other payables - related parties
|
|
|
9,811
|
|
|
|
32,135
|
|
Deferred rental income
|
|
|
(1,587
|
)
|
|
|
4,178
|
|
Interest payable
|
|
|
(113,179
|
)
|
|
|
—
|
|
Income taxes payable
|
|
|
—
|
|
|
|
(21,191
|
)
|
VAT and other taxes payable
|
|
|
9,850
|
|
|
|
(3,841
|
)
|
Tenants’ security deposit
|
|
|
(18,888
|
)
|
|
|
92,288
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(2,200,042
|
)
|
|
|
(600,853
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(10,192
|
)
|
|
|
(27,784
|
)
|
Prepayment for purchase of long-term assets
|
|
|
(22,606
|
)
|
|
|
—
|
|
Purchase of commercial real estate
|
|
|
—
|
|
|
|
(7,008,571
|
)
|
Improvement of commercial real estate
|
|
|
(165,155
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(197,953
|
)
|
|
|
(7,036,355
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds received from loan payable
|
|
|
—
|
|
|
|
2,100,000
|
|
Repayments of loan
|
|
|
(500,000
|
)
|
|
|
—
|
|
Proceeds received from related parties’ advance
|
|
|
—
|
|
|
|
70,000
|
|
Repayment of related parties’ advance
|
|
|
—
|
|
|
|
(500
|
)
|
Repurchase of common stock
|
|
|
(522,500
|
)
|
|
|
—
|
|
Refundable deposit in connection with Share Subscription Agreement
|
|
|
—
|
|
|
|
3,000,000
|
|
Refund for refundable deposit in connection with Share Subscription Agreement
|
|
|
(1,000,000
|
)
|
|
|
—
|
|
Proceeds received from equity offering
|
|
|
5,437,250
|
|
|
|
—
|
|
Disbursements for equity offering costs
|
|
|
(380,607
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
3,034,143
|
|
|
|
5,169,500
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE ON CASH
|
|
|
(19,865
|
)
|
|
|
(36,527
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
616,283
|
|
|
|
(2,504,235
|
)
|
|
|
|
|
|
|
|
|
|
CASH - beginning of period
|
|
|
3,027,033
|
|
|
|
2,886,189
|
|
|
|
|
|
|
|
|
|
|
CASH - end of period
|
|
$
|
3,643,316
|
|
|
$
|
381,954
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
375,096
|
|
|
$
|
—
|
|
Income taxes
|
|
$
|
—
|
|
|
$
|
21,190
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Common stock issued in connection with Share Subscription Agreement
|
|
$
|
—
|
|
|
$
|
300
|
|
Acquisition of equipment by decreasing prepayment for long-term assets
|
|
$
|
109,889
|
|
|
$
|
—
|
|
Acquisition of real estate by decreasing prepayment for property
|
|
$
|
—
|
|
|
$
|
700,000
|
|
Common stock issued for future services
|
|
$
|
405,250
|
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
1 –
ORGANIZATION AND NATURE OF OPERATIONS
Avalon
GloboCare Corp. (f/k/a Global Technologies Corp.) (the “Company” or “AVCO”) is a Delaware corporation.
The Company was incorporated under the laws of the State of Delaware on July 28, 2014. On October 18, 2016, the Company changed
its name to Avalon GloboCare Corp. and completed a reverse split its shares of common stock at a ratio of 1:4. On October 19,
2016, the Company entered into and closed a Share Exchange Agreement with the shareholders of Avalon Healthcare System, Inc.,
a Delaware corporation (“AHS”), each of which are accredited investors (“AHS Shareholders”) pursuant to
which we acquired 100% of the outstanding securities of AHS in exchange for 50,000,000 shares of our common stock (the “AHS
Acquisition”). AHS was incorporated on May 18, 2015 under the laws of the State of Delaware. As a result of such acquisition,
the Company’s operations now are focused on integrating and managing global healthcare services and resources, as well as
empowering high-impact biomedical innovations and technologies to accelerate their clinical applications. Operating through two
major platforms, namely “Avalon Cell”, and “Avalon Rehab”, our “technology + service” ecosystem
covers the areas of regenerative medicine, cell-based immunotherapy, exosome technology, as well as rehabilitation medicine. We
plan to integrate these services through joint ventures and acquisitions that bring shareholder value both in the short term,
through operational entities as part of Avalon Rehab and in the long term, through biomedical innovations as part of Avalon Cell.
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 is engaged in medical related consulting services for customers.
For
accounting purposes, AHS was the surviving entity. The transaction was accounted for as a recapitalization of AHS pursuant to
which AHS was treated as the accounting acquirer, surviving and continuing entity although the Company is the legal acquirer.
The Company did not recognize goodwill or any intangible assets in connection with this transaction. Accordingly, the Company’s
historical financial statements are those of AHS and its wholly-owned subsidiary, Avalon Shanghai immediately following the consummation
of this reverse merger transaction.
On
January 23, 2017, the Company incorporated Avalon (BVI) Ltd, a British Virgin Island company (dormant, will be dissolved in 2018).
There was no activity for the subsidiary since its incorporation through June 30, 2018.
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 operation. In addition, the property generates rental income. Avalon
RT 9 owns this office building. Currently, Avalon RT 9’s business consists of the ownership and operation of the income-producing
real estate property in New Jersey.
On
July 31, 2017, the Company formed GenExosome Technologies Inc. (“GenExosome”) in Nevada.
On
October 25, 2017, GenExosome and the Company entered into a Securities Purchase Agreement pursuant to which the Company acquired
600 shares of GenExosome in consideration of $1,326,087 in cash and 500,000 shares of common stock of the Company.
On
October 25, 2017, GenExosome entered into and closed an Asset Purchase Agreement with Yu Zhou, MD, PhD, pursuant to which the
Company acquired all assets, including all intellectual property, held by Dr. Zhou pertaining to the business of researching,
developing and commercializing exosome technologies including, but not limited to, patent application number CN 2016 1 0675107.5
(application of an Exosomal MicroRNA in plasma as biomaker to diagnosis liver cancer), patent application number CN 2016 1 0675110.7
(clinical application of circulating exosome carried miRNA-33b in the diagnosis of liver cancer), patent application number CN
2017 1 0330847.X (saliva exosome based methods and composition for the diagnosis, staging and prognosis of oral cancer) and patent
application number CN 2017 1 0330835.7 (a novel exosome-based therapeutics against proliferative oral diseases). In consideration
of the assets, GenExosome agreed to pay Dr. Zhou $876,087 in cash, transfer 500,000 shares of common stock of the Company to Dr.
Zhou and issue Dr. Zhou 400 shares of common stock of GenExosome.
As
a result of the above transactions, effective October 25, 2017, the Company holds 60% of GenExosome and Dr. Zhou holds 40% of
GenExosome. GenExosome is engaged in developing proprietary diagnostic and therapeutic products leveraging its exosome technology
and marketing and distributing its proprietary Exosome Isolation Systems.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
1 –
ORGANIZATION AND NATURE OF OPERATIONS (continued)
On
October 25, 2017, GenExosome entered into and closed a Stock Purchase Agreement with Beijing Jieteng (GenExosome) Biotech Co.
Ltd., a corporation incorporated in the People’s Republic of China on August 7, 2015 (“Beijing GenExosome”)
and Dr. Zhou, the sole shareholder of Beijing GenExosome, pursuant to which GenExosome acquired all of the issued and outstanding
securities of Beijing GenExosome in consideration of a cash payment in the amount of $450,000, which shall be paid upon Beijing
GenExosome recording the change in ownership with the Ministry of Commerce of the People’s Republic of China in accordance
with the Interim Measures for Record Management regarding the Establishment and Change of Foreign-invested Enterprises (revised).
Beijing
GenExosome is engaged in the development of exosome technology to improve diagnosis and management of diseases. Exosomes are tiny,
subcellular, membrane-bound vesicles in diameter of 30-150 nm that are released by almost all cell types and that can carry membrane
and cellular proteins, as well as genetic materials that are representative of the cell of origin. Profiling various bio-molecules
in exosomes may serve as useful biomarkers for a wide variety of diseases. Beijing GenExosome’s research kits are designed
to be used by researchers for biomarker discovery and clinical diagnostic development, and the advancement of targeted therapies.
Currently, research kits and service are available to isolate exosomes or extract exosomal RNA/protein from serum/plasma, urine
and saliva samples. Beijing GenExosome is seeking to decode proteomic and genomic alterations underlying a wide-range of pathologies,
thus allowing for the introduction of novel non-invasive “liquid biopsies”. Its mission is focused toward diagnostic
advancements in the fields of oncology, infectious diseases and fibrotic diseases, and discovery of disease-specific exosomes
to provide disease origin insight necessary to enable personalized clinical management.
Details
of the Company’s subsidiaries which are included in these consolidated financial statements as of June 30, 2018 are as follows:
Name
of Subsidiaries
|
|
Place
and date of Incorporation
|
|
Percentage
of Ownership
|
|
Principal
Activities
|
Avalon
Healthcare System, Inc.
(“AHS”)
|
|
Delaware
May
18, 2015
|
|
100%
held by AVCO
|
|
Provides
medical related consulting services and developing Avalon Cell and Avalon Rehab in United States of America (“USA”)
|
|
|
|
|
|
|
|
Avalon
(BVI) Ltd.
(“Avalon
BVI”)
|
|
British
Virgin Island
January
23, 2017
|
|
100%
held by AVCO
|
|
Dormant,
will
be dissolved in 2018
|
|
|
|
|
|
|
|
Avalon
RT 9 Properties LLC
(“Avalon
RT 9”)
|
|
New
Jersey
February
7, 2017
|
|
100%
held by AVCO
|
|
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
|
|
Provides
medical related consulting services and developing Avalon Cell and Avalon Rehab in China
|
|
|
|
|
|
|
|
GenExosome
Technologies Inc.
(“GenExosome”)
|
|
Nevada
July
31, 2017
|
|
60%
held by AVCO
|
|
Develops
proprietary diagnostic and therapeutic products leveraging exosome technology and markets and distributes proprietary Exosome
Isolation Systems in USA
|
|
|
|
|
|
|
|
Beijing
Jieteng (GenExosome) Biotech Co., Ltd. (“Beijing GenExosome”)
|
|
PRC
August
7, 2015
|
|
100%
held by GenExosome
|
|
Provides
development services for hospitals and other customers and sells developed items to hospitals and other customers in China
|
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
2 –
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 unaudited 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
unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements
in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). The Company’s
unaudited 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 unaudited 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, 2017 filed with the Securities and Exchange Commission on March 13, 2018.
NOTE
3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles
in the United States of America 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. Actual results could differ from these estimates. Significant estimates
during the three and six months ended June 30, 2018 and 2017 include the allowance for doubtful accounts, reserve for obsolete
inventory, the useful life of property and equipment and investment in real estate and intangible assets, assumptions used in
assessing impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances, and valuation
of stock-based compensation.
Fair
Value of Financial Instruments and Fair Value Measurements
The
Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies
the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify
the inputs used in measuring fair value as follows:
|
●
|
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities
available at the measurement date.
|
|
●
|
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets and liabilities in markets that are not
active, inputs other than quoted prices that are observable, and inputs derived from
or corroborated by observable market data.
|
|
●
|
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own
assumptions on what assumptions the market participants would use in pricing the asset
or liability based on the best available information.
|
The
carrying amounts reported in the condensed consolidated balance sheets for cash, accounts receivable, account receivable –
related party, tenants receivable, security deposit, inventory, prepaid expenses and other current assets, accounts payable, accrued
liabilities and other payables, accrued liabilities and other payables – related parties, deferred rental income, loan payable,
interest payable, Value Added Tax (“VAT”) and other taxes payable, tenants’ security deposit, due to related
party, and refundable deposit, approximate their fair market value based on the short-term maturity of these instruments. At June
30, 2018 and December 31, 2017, intangible assets were measured at fair value on a nonrecurring basis as shown in the following
tables.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair
Value of Financial Instruments and Fair Value Measurements (continued)
|
|
Quoted Price in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance at
June 30, 2018
|
|
|
Impairment Loss
|
|
Patents and other technologies
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,419,474
|
|
|
$
|
1,419,474
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Price in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance at
December 31, 2017
|
|
|
Impairment Loss
|
|
Patents and other technologies
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,583,260
|
|
|
$
|
1,583,260
|
|
|
$
|
923,769
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
397,569
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,583,260
|
|
|
$
|
1,583,260
|
|
|
$
|
1,321,338
|
|
In
December 2017, the Company assessed its long-lived assets for any impairment and concluded that there were indicators of impairment
as of December 31, 2017 and it calculated that the estimated undiscounted cash flows were less than the carrying amount of the
intangible assets. Based on its analysis, the Company recognized an impairment loss of $1,321,338 for the year ended December
31, 2017, which reduced the value of intangible assets acquired to $1,583,260. The Company did not record any impairment charge
for the three and six months ended June 30, 2018.
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
Cash
consists of cash on hand and cash in banks. The Company maintains cash with various financial institutions in the PRC and United
States. At June 30, 2018 and December 31, 2017, cash balances in PRC are $1,318,799 and $1,327,009, respectively, are uninsured.
At June 30, 2018 and December 31, 2017, cash balances in United States are $2,324,517 and $1,700,024, respectively. The Company
has not experienced any losses in bank accounts and believes it is not exposed to any risks on its cash in bank accounts.
Concentrations
of Credit Risk
Currently,
a portion of the Company’s operations are carried out in PRC. Accordingly, the Company’s business, financial condition
and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state
of the PRC’s economy. The Company’s operations in PRC are subject to specific considerations and significant risks
not typically associated with companies in North America. The Company’s results may be adversely affected by changes in
governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad,
and rates and methods of taxation, among other things.
Financial
instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, trade accounts
receivable and tenants receivable. A portion of the Company’s cash is maintained with state-owned banks within the PRC,
and none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes
it is not exposed to any risks on its cash in bank accounts. A portion of the Company’s sales are credit sales which is
to the customer whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations
of credit risk with respect to trade accounts receivable and tenants receivable is limited due to generally short payment terms.
The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations
of Credit Risk (continued)
At
June 30, 2018 and December 31, 2017, the Company’s cash balances by geographic area were as follows:
Country:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
United States
|
|
$
|
2,324,517
|
|
|
|
63.8
|
%
|
|
$
|
1,700,024
|
|
|
|
56.2
|
%
|
China
|
|
|
1,318,799
|
|
|
|
36.2
|
%
|
|
|
1,327,009
|
|
|
|
43.8
|
%
|
Total cash
|
|
$
|
3,643,316
|
|
|
|
100.0
|
%
|
|
$
|
3,027,033
|
|
|
|
100.0
|
%
|
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for
estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when
there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current
credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.
Management
believes that the accounts receivable are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required
on its accounts receivable at June 30, 2018 and December 31, 2017. The Company historically has not experienced uncollectible
accounts from customers granted with credit sales.
Tenants
Receivable and Allowance for Doubtful Accounts
Tenants
receivable are presented net of an allowance for doubtful accounts. Tenants receivable balance consist of base rents, tenant reimbursements
and receivables arising from straight-lining of rents primarily represent amounts accrued and unpaid from tenants in accordance
with the terms of the respective leases, subject to the Company’s revenue recognition policy. An allowance for the uncollectible
portion of tenant receivable is determined based upon an analysis of the tenant’s payment history, the financial condition
of the tenant, business conditions in the industry in which the tenant operates and economic conditions in Freehold, New Jersey
in which the property is located.
Management
believes that the tenants receivable are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required
on its tenants receivable at June 30, 2018 and December 31, 2017.
Inventory
Inventory is stated at the lower of cost
and net realizable value. Cost is determined using the first-in, first-out (FIFO) method. A reserve is established when
management determines that certain inventory may not be saleable. If inventory costs exceed expected market value due to obsolescence
or quantities in excess of expected demand, the Company will record reserve for the difference between the cost and the lower
of cost or estimated net realizable value. These reserve is recorded based on estimates. The Company did not record any inventory
reserve at June 30, 2018 and December 31, 2017.
Property
and Equipment
Property
and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets.
The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets
are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses
are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets
when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment
in Real Estate and Depreciation
Investment
in real estate is carried at cost less accumulated depreciation and consists of building and improvement. The Company depreciates
real estate building and improvement on a straight-line basis over estimated useful life. Expenditures for ordinary repair and
maintenance costs are charged to expense as incurred. Expenditure for improvements, renovations, and replacements of real estate
asset is capitalized and depreciated over its estimated useful life if the expenditure qualifies as betterment. Real estate depreciation
expense was $31,806 and $32,943 for the three months ended June 30, 2018 and 2017, respectively. Real estate depreciation expense
was $63,611 and $32,943 for the six months ended June 30, 2018 and 2017, respectively.
Intangible
Assets
Intangible
assets consist of patents and other technologies. Patents and other technologies are being amortized on a straight-line method
over the estimated useful life of 5 years.
Impairment
of Long-lived Assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an
impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount
of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did
not record any impairment charge for the three and six months ended June 30, 2018 and 2017.
Acquisition
Consideration
On
October 25, 2017, GenExosome entered into and closed a Stock Purchase Agreement with Beijing Jieteng (GenExosome) Biotech Co.
Ltd., a corporation incorporated in the People’s Republic of China (“Beijing GenExosome”) and Dr. Zhou, the
sole shareholder of Beijing GenExosome, pursuant to which GenExosome acquired all of the issued and outstanding securities of
Beijing GenExosome in consideration of a cash payment in the amount of $450,000, which shall be paid upon Beijing GenExosome recording
the change in ownership with the Ministry of Commerce of the People’s Republic of China in accordance with the Interim Measures
for Record Management regarding the Establishment and Change of Foreign-invested Enterprises (revised).
On
October 25, 2017, Dr. Zhou was appointed to the board of directors of GenExosome and served as Co-chief executive officer of GenExosome.
As of June 30, 2018 and December 31, 2017, the unpaid acquisition consideration of $450,000 was recorded as due to related party
on the accompanying condensed consolidated balance sheets.
Deferred
Rental Income
Deferred
rental income represents rental income collected but not earned as of the reporting date. The Company defers the revenue related
to lease payments received from tenants in advance of their due dates. As of June 30, 2018 and December 31, 2017, deferred rental
income totaled $11,182 and $12,769, respectively.
Value
Added Tax
Avalon
Shanghai is subject to a value added tax (“VAT”) of 6% for providing medical related consulting services and Beijing
GenExosome is subject to a VAT of 3% for performing development services and sales of developed products. The amount of VAT liability
is determined by applying the applicable tax rates to the invoiced amount of medical related consulting services provided and
the invoiced amount of development services provided and sales of developed products (output VAT) less VAT paid on purchases made
with the relevant supporting invoices (input VAT). The Company reports revenue net of PRC’s value added tax for all the
periods presented in the unaudited condensed consolidated statements of operations and comprehensive loss.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue
Recognition
In May 2014,
the Financial Accounting Standards Board (“FASB”) issued an update Accounting Standards Update (“ASU”)
(“ASU 2014-09”) establishing Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts
with Customers (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue
recognition guidance. This standard, which is effective for interim and annual reporting periods in fiscal years that begin after
December 15, 2017, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and
also requires certain additional disclosures. The Company adopted this standard in 2018 using the modified retrospective approach,
which requires applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect
adjustment to retained earnings as of the beginning of the fiscal year of adoption. Based on an evaluation of the impact ASU 2014-09
will have on the Company’s sources of revenue, the Company has concluded that ASU 2014-09 did not have a material impact
on the process for, timing of, and presentation and disclosure of revenue recognition from customers.
Types
of revenue:
|
●
|
Rental revenue from
leasing commercial property under operating leases with terms of generally three years or more.
|
|
●
|
Service fees under
consulting agreements with related parties to provide medical related consulting services to its clients. The Company is paid
for its services by its clients pursuant to the terms of the written consulting agreements. Each contract calls for a fixed
payment.
|
|
●
|
Service fees under
agreements to perform development services for hospitals other customers. The Company does not perform contracts that are
contingent upon successful results.
|
|
●
|
Sales of developed
products to hospitals and other customers.
|
Revenue
recognition criteria:
|
●
|
The Company recognizes
rental revenue from its commercial leases on a straight-line basis over the life of the lease including rent holidays, if
any. Straight-line rent receivable consists of the difference between the tenants’ rents calculated on a straight-line
basis from the date of lease commencement over the remaining terms of the related leases and the tenants’ actual rents
due under the lease agreements and is included in tenants receivable in the accompanying consolidated balance sheets. Revenues
associated with operating expense recoveries are recognized in the period in which the expenses are incurred.
|
|
●
|
The Company recognizes
revenue by providing medical related consulting services under written service contracts with its customers. Revenue related
to its service offerings is recognized as the services are performed and amounts are earned and all other elements of revenue
recognition have been satisfied. Prepayments, if any, received from customers prior to the services being performed are recorded
as advance from customers. In these cases, when the services are performed, the amount recorded as advance from customers
is recognized as revenue.
|
|
●
|
Revenue from development
services performed under written contracts is recognized when it is earned pursuant to the terms of the contract. Each contract
calls for a fixed dollar amount with a specified time period. These contracts generally involve up-front payment. Revenue
is recognized for these projects as services are provided.
|
|
●
|
Revenue from sales
of developed items to hospitals and other customers is recognized when items are shipped to customers and titles are transferred.
|
The
Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers.
Sales
tax collected is not recognized as revenue and amounts outstanding are included in accrued liabilities and other payables in the
consolidated balance sheets.
Office
Lease
When
a lease contains “rent holidays”, the Company records rental expense on a straight-line basis over the term of the
lease and the difference between the average rental amount charged to expense and the amount payable under the lease is recorded
as prepaid expenses in the consolidated balance sheets. The Company begins recording rent expense on the lease possession date.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Shipping
and Handling Costs
Shipping
and handling costs are expensed as incurred and are included in cost of sales. For the three months ended June 30, 2018 and 2017,
the Company did not incur shipping and handling costs. For the six months ended June 30, 2018 and 2017, shipping and handling
costs amounted to $25 and $0, respectively.
Research
and Development
Expenditures for research and product development costs are expensed as incurred. The Company incurred
research and development expense in the amount of $263 related to the development of proprietary diagnostic and therapeutic products
leveraging exosome technology and optimization of Exosome Isolation Systems in the three and six months ended June 30, 2018. The
Company did not incur any research and development costs during the three and six months ended June 30, 2017.
Advertising
and Marketing Costs
All
costs related to advertising and marketing are expensed as incurred. The Company did not incur any advertising and marketing expenses
during the three and six months ended June 30, 2018 and 2017.
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 the Company’s rental properties.
Medical
Related Consulting Services Costs
Costs
of medical related consulting services includes the cost of internal labor and related benefits, travel expenses related to consulting
services, subcontractor costs, other related consulting costs, and other overhead costs. Subcontractor costs were costs related
to medical related consulting services incurred by our subcontractor, such as medical professional’s compensation and travel
costs.
Development
Services and Sales of Developed Products Costs
Costs
of development services and sales of developed items includes inventory costs, materials and supplies costs, depreciation, internal
labor and related benefits, other overhead costs and shipping and handling costs incurred.
Stock-based
Compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment topic of Accounting Standards Codification
(“ASC”) 718 which requires recognition in the financial statements of the cost of employee and director services received
in exchange for an award of equity instruments over the period the employee or director is required to perform the services in
exchange for the award. The Accounting Standards Codification also requires measurement of the cost of employee and director services
received in exchange for an award based on the grant-date fair value of the award.
Pursuant
to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is recognized over
the period of services or the vesting period, whichever is applicable. Until the measurement date is reached, the total amount
of compensation expense remains uncertain. The Company’s compensation expense for unvested options to non-employees is re-measured
at each balance sheet date and is being amortized over the vesting period of the options.
Income
Taxes
The
Company accounts for income taxes using the asset/liability method prescribed by ASC 740, “Income Taxes.” Under this
method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases
of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to
reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence,
it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred
taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income
Taxes (continued)
The
Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”.
Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not
the position will be sustained upon examination by the tax authorities. As of June 30, 2018 and December 31, 2017, the Company
had no significant uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Tax
year that remains subject to examination is the years ended December 31, 2017, 2016 and 2015. The Company recognizes interest
and penalties related to significant uncertain income tax positions in other expense. However, no such interest and penalties
were recorded as of June 30, 2018 and December 31, 2017.
Foreign
Currency Translation
The
reporting currency of the Company is the U.S. dollar. The functional currency of the parent company, AHS, Avalon RT 9, and GenExosome,
is the U.S. dollar and the functional currency of Avalon Shanghai and Beijing GenExosome, is the Chinese Renminbi (“RMB”).
For the subsidiaries whose functional currency is the RMB, result of operations and cash flows are translated at average exchange
rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity
is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements
of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments
resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining
comprehensive income/loss. Transactions denominated in foreign currencies are translated into the functional currency at the exchange
rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional
currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange
rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of
operations as incurred.
All
of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries. The Company
does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected
to have, a material effect on the results of operations of the Company.
Asset
and liability accounts at June 30, 2018 and December 31, 2017 were translated at 6.6225 RMB to $1.00 and at 6.5067 RMB to $1.00,
respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rates.
The average translation rates applied to the statements of operations for the six months ended June 30, 2018 and 2017 were 6.3701
RMB and 6.8745 RMB to $1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local
currencies using the average translation rate.
Comprehensive
Loss
Comprehensive
loss is comprised of net loss and all changes to the statements of equity, except those due to investments by stockholders, changes
in paid-in capital and distributions to stockholders. For the Company, comprehensive loss for the six months ended June 30, 2018
and 2017 consisted of net loss and unrealized (loss) gain from foreign currency translation adjustment.
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 are 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.
Potentially dilutive common shares consist of the common shares issuable upon the 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
presents a reconciliation of basic and diluted net loss per share:
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Per
Share Data (continued)
|
|
Three
Months
|
|
|
Three
Months
|
|
|
Six
Months
|
|
|
Six
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
Net loss available to Avalon GloboCare Corp. common shareholders for basic and diluted net loss per share of common stock
|
|
$
|
(1,294,394
|
)
|
|
$
|
(430,508
|
)
|
|
$
|
(2,775,973
|
)
|
|
$
|
(979,841
|
)
|
Weighted average common stock outstanding - basic and diluted
|
|
|
71,979,678
|
|
|
|
64,628,622
|
|
|
|
71,122,356
|
|
|
|
63,617,572
|
|
Net loss per common share attributable to Avalon GloboCare Corp. common shareholders - basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
|
2,610,000
|
|
|
|
297,780
|
|
|
|
2,610,000
|
|
|
|
297,780
|
|
Warrants
|
|
|
578,891
|
|
|
|
—
|
|
|
|
578,891
|
|
|
|
—
|
|
Potentially dilutive securities
|
|
|
3,188,891
|
|
|
|
297,780
|
|
|
|
3,188,891
|
|
|
|
297,780
|
|
Business
Acquisition
The
Company accounts for business acquisition in accordance with ASC No. 805, Business Combinations. The assets acquired and
liabilities assumed from the acquired business are recorded at fair value, with the residual of the purchase price recorded as
goodwill. The result of operations of the acquired business is included in the Company’s operating result from the date
of acquisition.
Non-controlling
Interest
As
of June 30, 2018, Dr. Yu Zhou, director and Co-Chief Executive Officer of GenExosome, who owned 40% of the equity interests of
GenExosome, which is not under the Company’s control.
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. The Company has determined that
it has three reportable business segments: real property operating segment, medical related consulting services segment, and development
services and sales of developed products segment. These reportable segments offer different types of services and products, have
different types of revenue, and are managed separately as each requires different operating strategies and management expertise.
Related
Parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal with if one party controls or can significantly influence the management or operating policies of the
other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The
Company discloses all significant related party transactions.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reclassification
Certain
prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect
on the previously reported financial position, results of operations and cash flows.
Reverse
Stock Split
The Company
effected a one-for-four reverse stock split of its common stock on October 18, 2016. All share and per share information has been
retroactively adjusted to reflect this reverse stock split.
Fiscal
Year End
The
Company has adopted a fiscal year end of December 31st.
Recent
Accounting Pronouncements
In
July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”, which provides new guidance
regarding the measurement of inventory. The new guidance requires most inventory to be measured at the lower of cost
or net realizable value. The standard defines net realizable value as estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal and transportation. The standard applies to companies other than those
that measure inventory using last-in, first-out ("LIFO") or the retail inventory method. The standard is
effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods.
Early application is permitted. Effective January 1, 2017, the Company adopted ASU No. 2015-11 and it had no material impact on
the Company’s consolidated financial statements.
In
February 2016, the FASB issued ASU
2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase
transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating
leases under previous accounting standards and disclosing key information about leasing arrangements. This pronouncement is effective
for reporting periods beginning after December 15, 2018 using a modified retrospective adoption method. The adoption of this
guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU
2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test,
which requires a hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests
in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance
is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2017,
the FASB issued ASU No. 2017-09, “Modification Accounting for Share-Based Payment Arrangements”, which amends the
scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the
terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under
ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification
of the awards are the same immediately before and after the modification. The ASU is effective for annual reporting periods, including
interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including
adoption in any interim period. Effective January 1, 2018, the Company adopted ASU No. 2017-09 and it had no material impact on
the Company’s consolidated financial statements.
On
December 22, 2017 the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance
on accounting for the tax effects of the Tax Cuts and Jobs Act (the TCJA). SAB 118 provides a measurement period that
should not extend beyond one year from the enactment date for companies to complete the accounting under ASC 740. In accordance
with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC
740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete
but for which they are able to determine a reasonable estimate, it must record a provisional amount in the financial statements. Provisional
treatment is proper in light of anticipated additional guidance from various taxing authorities, the SEC, the FASB, and even the
Joint Committee on Taxation. If a company cannot determine a provisional amount to be included in the financial statements,
it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the
enactment of the TCJA. The Company has applied this guidance to its consolidated financial statements.
In
February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220)—Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income. This update was issued to address the income tax accounting
treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income
tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the Tax
Cuts and Jobs Ac t on December 22, 2017, which changed the Company’s income tax rate from 35% to 21%. The ASU changed
current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income
to retained earnings. The ASU is effective for periods beginning after December 15, 2018, although early adoption is permitted.
The Company does not anticipate that the adoption of this ASU will have a material impact on its consolidated financial statements.
In
March 2018, the FASB issued ASU No. 2018-05 (“ASU 2018-05), Income Taxes (Topic 740): Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 118. This standard amends ASC 740, Income Taxes, to provide guidance on accounting
for tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) pursuant to Staff Accounting Bulletin No. 118, which
allows companies to complete the accounting under ASC 740 within one-year measurement period from the Tax Act enactment date.
This standard is effective upon issuance. The Company has decided to follow the guidance provided by ASU 2018-05 and will
leave the one-year measurement period open to evaluate the impact of the Tax Act.
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 –
ACQUISITION
The
Company accounts for acquisition using the acquisition method of accounting, whereby the results of operations are included in
the financial statements from the date of acquisition. The purchase price is allocated to the acquired assets and assumed liabilities
based on their estimated fair values at the date of acquisition, and any excess is allocated to goodwill.
Effective
October 25, 2017, pursuant to the Stock Purchase Agreement as discussed in elsewhere in this report, the Company’s majority
owned subsidiary, GenExosome, acquired 100% of Beijing GenExosome.
In
according to the acquisition, Beijing GenExosome’s assets and liabilities were recorded at their fair values as of the effective
date, October 25, 2017, and the results of operations of Beijing GenExosome are consolidated with results of operations of the
Company, starting on October 25, 2017.
AVALON
GLOBOCARE CORP. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
4 –
ACQUISITION (continued)
The
following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Beijing GenExosome
had occurred as of the beginning of the following periods:
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30, 2017
|
|
|
June 30, 2017
|
|
Net revenues
|
|
$
|
374,751
|
|
|
$
|
441,037
|
|
Net loss
|
|
$
|
(441,384
|
)
|
|
$
|
(1,497,762
|
)
|
Net loss attributable to Avalon GloboCare Corp. common shareholders
|
|
$
|
(437,034
|
)
|
|
$
|
(1,490,116
|
)
|
Net loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
Pro
forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at
the beginning of the periods presented and is not intended to be a projection of future results.
NOTE
5 –
INVENTORY
At
June 30, 2018 and December 31, 2017, inventory consisted of the following:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Raw material
|
|
$
|
20,479
|
|
|
$
|
2,667
|
|
Work-in-process
|
|
|
1,570
|
|
|
|
—
|
|
|
|
|
22,049
|
|
|
|
2,667
|
|
Less: reserve for obsolete inventory
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
22,049
|
|
|
$
|
2,667
|
|
NOTE
6 –
PREPAID EXPENSES AND OTHER CURRENT ASSETS
At
June 30, 2018 and December 31, 2017, prepaid expenses and other current assets consisted of the following:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Prepaid professional fees
|
|
$
|
638,133
|
|
|
$
|
65,000
|
|
Prepaid dues and subscriptions
|
|
|
4,169
|
|
|
|
49,167
|
|
Other
|
|
|
65,623
|
|
|
|
35,546
|
|
|
|
$
|
707,925
|
|
|
$
|
149,713
|
|
NOTE
7 –
PREPAYMENT FOR LONG-TERM ASSETS
At
June 30, 2018 and December 31, 2017, prepayment for long-term assets consisted of the following:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Prepayment for manufacturing equipment purchased
|
|
$
|
67,044
|
|
|
$
|
153,688
|
|
|
|
$
|
67,044
|
|
|
$
|
153,688
|
|
AVALON
GLOBOCARE CORP. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
8 –
PROPERTY AND EQUIPMENT
At
June 30, 2018 and December 31, 2017, property and equipment consisted of the following:
|
|
Useful
life
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Laboratory
equipment
|
|
5
Years
|
|
$
|
118,887
|
|
|
$
|
3,685
|
|
Office equipment and
furniture
|
|
3
– 10 Years
|
|
|
31,546
|
|
|
|
31,440
|
|
Leasehold
improvement
|
|
Shorter
of useful life or lease term
|
|
|
24,122
|
|
|
|
24,551
|
|
|
|
|
|
|
174,555
|
|
|
|
59,676
|
|
Less:
accumulated depreciation
|
|
|
|
|
(31,329
|
)
|
|
|
(11,647
|
)
|
|
|
|
|
$
|
143,226
|
|
|
$
|
48,029
|
|
For
the three months ended June 30, 2018 and 2017, depreciation expense of property and equipment amounted to $10,897 and $1,187,
respectively, of which, $819 and $0 was included in real property operating expenses, $5,864 and $0 was included in costs of development
services and sales of developed products, and $4,214 and $1,187 was included in other operating expenses, respectively.
For
the six months ended June 30, 2018 and 2017, depreciation expense of property and equipment amounted to $20,578 and $1,213, respectively,
of which, $1,638 and $0 was included in real property operating expenses, $9,632 and $0 was included in costs of development services
and sales of developed products, and $9,308 and $1,213 was included in other operating expenses, respectively.
NOTE
9 –
INVESTMENT IN REAL ESTATE
At
June 30, 2018 and December 31, 2017, investment in real estate consisted of the following:
|
|
Useful
life
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Commercial
real property building
|
|
39
Years
|
|
$
|
7,708,571
|
|
|
$
|
7,708,571
|
|
Improvement
|
|
12
Years
|
|
|
165,155
|
|
|
|
—
|
|
|
|
|
|
|
7,873,726
|
|
|
|
7,708,571
|
|
Less:
accumulated depreciation
|
|
|
|
|
(148,425
|
)
|
|
|
(84,814
|
)
|
|
|
|
|
$
|
7,725,301
|
|
|
$
|
7,623,757
|
|
For
the three months ended June 30, 2018 and 2017, depreciation expense of this commercial real property amounted to $31,806 and $32,943,
which was included in real property operating expenses.
For
the six months ended June 30, 2018 and 2017, depreciation expense of this commercial real property amounted to $63,611 and $32,943,
which was included in real property operating expenses.
NOTE
10 –
INTANGIBLE ASSETS
At
June 30, 2018 and December 31, 2017, intangible assets consisted of the following:
|
|
Useful
Life
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Patents
and other technologies
|
|
5
Years
|
|
$
|
1,583,260
|
|
|
$
|
2,593,478
|
|
Goodwill
|
|
|
|
|
—
|
|
|
|
397,569
|
|
Less:
accumulated amortization
|
|
|
|
|
(163,786
|
)
|
|
|
(86,449
|
)
|
Less:
impairment loss
|
|
|
|
|
—
|
|
|
|
(1,321,338
|
)
|
|
|
|
|
$
|
1,419,474
|
|
|
$
|
1,583,260
|
|
For
the three months ended June 30, 2018 and 2017, amortization expense amounted to $81,893 and $0, respectively. For the six months
ended June 30, 2018 and 2017, amortization expense amounted to $163,786 and $0, respectively.
AVALON
GLOBOCARE CORP. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
10 –
INTANGIBLE ASSETS (continued)
Amortization
of intangible assets attributable to future periods is as follows:
Twelve-month
periods ending June 30:
|
|
|
Amortization
amount
|
|
2019
|
|
|
$
|
327,571
|
|
2020
|
|
|
|
327,571
|
|
2021
|
|
|
|
327,571
|
|
2022
|
|
|
|
327,571
|
|
2023
|
|
|
|
109,190
|
|
|
|
|
$
|
1,419,474
|
|
NOTE
11 –
ACCRUED LIABILITIES AND OTHER PAYABLES
At
June 30, 2018 and December 31, 2017, accrued liabilities and other payables consisted of the following:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Accrued
professional fees
|
|
$
|
151,825
|
|
|
$
|
82,913
|
|
Commercial real property building improvement payable
|
|
|
43,136
|
|
|
|
—
|
|
Accrued dues and subscriptions
|
|
|
25,000
|
|
|
|
—
|
|
Accrued payroll liability
|
|
|
6,649
|
|
|
|
6,767
|
|
Other
|
|
|
73,178
|
|
|
|
34,384
|
|
|
|
$
|
299,788
|
|
|
$
|
124,064
|
|
NOTE
12 –
LOAN PAYABLE
On
April 19, 2017, the Company entered into a loan agreement, providing for the issuance of a loan in the principal amount of $2,100,000.
The term of the loan is one year. On May 3, 2018, the Company signed an extension agreement with the maturity date of March 31,
2019. The annual interest rate for the loan is 10%. The loan is guaranteed by the Company’s Chairman, Mr. Wenzhao Lu. The
Company repaid principal of $600,000 and $500,000 in November 2017 and in April 2018, respectively.
As
of June 30, 2018, the outstanding principal balance of the loan and related accrued and unpaid interest for the loan was $1,000,000
and $24,931, respectively.
On August 3, 2018, the Company signed an extension agreement for the loan with the maturity date of March
31, 2020 (See Note 22 –
Loan Payable
).
NOTE
13 –
VAT AND OTHER TAXES PAYABLE
At
June 30, 2018 and December 31, 2017, VAT and other taxes payable consisted of the following:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
VAT
payable
|
|
$
|
7,848
|
|
|
$
|
819
|
|
Other
taxes payable
|
|
|
4,668
|
|
|
|
2,178
|
|
|
|
$
|
12,516
|
|
|
$
|
2,997
|
|
AVALON
GLOBOCARE CORP. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
14 –
RELATED PARTY TRANSACTIONS
Medical
Related Consulting Services Revenue from Related Parties and Accounts Receivable – Related Party
During
the three and six months ended June 30, 2018 and 2017, medical related consulting services revenue from related parties was as
follows:
|
|
Three
Months
|
|
|
Three
Months
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
Medical related consulting
services provided to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing
Daopei (1)
|
|
$
|
141,996
|
|
|
$
|
—
|
|
|
$
|
141,996
|
|
|
$
|
—
|
|
Shanghai
Daopei (2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,286
|
|
Beijing
Nanshan (3)
|
|
|
—
|
|
|
|
152,497
|
|
|
|
—
|
|
|
|
152,497
|
|
|
|
$
|
141,996
|
|
|
$
|
152,497
|
|
|
$
|
141,996
|
|
|
$
|
218,783
|
|
|
(1)
|
Beijing
Daopei is a subsidiary of an entity whose chairman is Wenzhao Lu, the largest shareholder
of the Company.
|
|
(2)
|
Shanghai
Daopei is a subsidiary of an entity whose chairman is Wenzhao Lu, the largest shareholder
of the Company.
|
|
(3)
|
Beijing
Nanshan is a subsidiary of an entity whose chairman is Wenzhao Lu, the largest shareholder
of the Company.
|
Accounts
receivable – related party, net of allowance for doubtful accounts, at June 30, 2018 and December 31, 2017 amounted to $144,779
and $0, respectively, and no allowance for doubtful accounts is deemed to be required on accounts receivable – related party
at June 30, 2018 and December 31, 2017.
Accrued
Liabilities and Other Payables – Related Parties
At
June 30, 2018 and December 31, 2017, the Company owed David Jin, its shareholder, chief executive officer, president and board
member, of $21,563 and $15,387, respectively, for travel and other miscellaneous reimbursements, which have been included in accrued
liabilities and other payable – related parties on the accompanying condensed consolidated balance sheets.
At
June 30, 2018 and December 31, 2017, the Company owed Yu Zhou, co-chief executive officer of GenExosome, of $14,254 and $24,540,
respectively, for accrued payroll, travel and other miscellaneous reimbursements, which have been included in accrued liabilities
and other payable – related parties on the accompanying condensed consolidated balance sheets.
At
June 30, 2018 and December 31, 2017, the Company owed Meng Li, its shareholder and chief operating officer, of $12,145 and $0,
respectively, for travel and other miscellaneous reimbursements, which have been included in accrued liabilities and other payables
– related parties on the accompanying condensed consolidated balance sheets.
At
June 30, 2018 and December 31, 2017, the Company owed Luisa Ingargiola, its chief financial officer, of $732 and $0, respectively,
for travel reimbursement, which have been included in accrued liabilities and other payables – related parties on the accompanying
condensed consolidated balance sheets.
Due
to Related Party
In
connection with the acquisition discussed elsewhere in this report, the Company acquired Beijing GenExosome in cash payment of
$450,000, which will be paid upon Beijing GenExosome recording the change in ownership with the Ministry of Commerce of the People’s
Republic of China in accordance with the Interim Measures for Record Management regarding the Establishment and Change of Foreign-invested
Enterprises (revised). On October 25, 2017, Dr. Yu Zhou, the former sole shareholder of Beijing GenExosome, was appointed to the
board of directors of GenExosome and served as co-chief executive officer of GenExosome. As of June 30, 2018 and December 31,
2017, the unpaid acquisition consideration of $450,000 was payable to Dr. Yu Zhou, co-chief executive officer and board member
of GenExosome, and reflected as due to related party on the accompanying condensed consolidated balance sheets.
AVALON
GLOBOCARE CORP. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
14 –
RELATED PARTY TRANSACTIONS (continued)
Real
Property Management Agreement
The
Company pays a company, which is controlled by Wenzhao Lu, the Company’s largest shareholder and chairman of the Board of
Directors, for the management of its commercial real property located in New Jersey. The monthly property management fee is $5,417.
The term of the property management agreement is two years commencing on May 5, 2017 and will expire on May 4, 2019. For the three
months ended June 30, 2018 and 2017, the management fee related to the property management agreement amounted to $16,251 and $10,834,
respectively. For the six months ended June 30, 2018 and 2017, the management fee related to the property management agreement
amounted to $32,502 and $10,834, respectively.
NOTE
15 –
EQUITY
Shares
Authorized
The
Company is authorized to issue 10,000,000 shares of preferred stock and 490,000,000 shares of common shares with a par value of
$0.0001 per share.
There
are no shares of its preferred stock issued and outstanding as of June 30, 2018 and December 31, 2017.
There
are 73,560,622 and 70,278,622 shares of its common stock issued as of June 30, 2018 and December 31, 2017, respectively.
There
are 73,040,622 and 70,278,622 shares of its common stock outstanding as of June 30, 2018 and December 31, 2017, respectively.
Treasury
Stock
The
Company records treasury stock using the cost method. On March 27, 2018, the Company repurchased 520,000 shares of its common
stock from a third party through a privately negotiated transaction at an aggregate price of $522,500, of which $2,500 was paid
to an escrow agent as share repurchase cost.
Common
Shares Sold for Cash
During the second
quarter of 2018, the Company sold 3,107,000 shares of common stock at $1.75 per share to four investors pursuant to subscription
agreements. The Company received net cash proceeds of $5,056,643, net of cash fee paid to an investment banking firm of $380,607.
In connection with this private offering, the Company issued a total of 218,391 stock warrants to the placement agent for the
transaction. Among these warrants, 151,235 warrants with a fixed exercise price of $1.62 per share, 5,960 warrants with a fixed
exercise price of $1.85 per share, 36,750 warrants with a fixed exercise price of $1.90 per share, 24,446 warrants with a fixed
exercise price of $2.24 per share. These warrants are exercisable at any time for a five-year period.
The
offer, sale and issuance of the above securities was made to accredited investors and the Company relied upon the exemptions contained
in Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated there under with regard to the sale. No advertising
or general solicitation was employed in offering the securities. The offer and sales were made to accredited investors and transfer
of the common stock issued was restricted by the Company in accordance with the requirements of the Securities Act of 1933, as
amended.
The accredited investors acknowledged
that they were not aware of nor did it review any registration statement or prospectus filed by the Company with the SEC.
Common
Shares Issued for Services
During
the six months ended June 30, 2018, pursuant to consulting agreements, the Company issued an aggregate of 175,000 shares of common
stock to 3 consulting companies for the services rendered and to be rendered. These shares were valued at $467,000, the fair market
values on the grant dates using the reported closing share prices on the dates of grant, and the Company recorded stock-based
compensation expense of $61,750 for the three and six months ended June 30, 2018 and recorded prepaid expense of $405,250 as of June 30, 2018 which will be
amortized over the rest of corresponding service periods.
AVALON
GLOBOCARE CORP. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
15 –
EQUITY (continued)
Common
Shares Issued for Share Subscription Agreement
On
March 3, 2017, the Company entered into and closed a Subscription Agreement with an accredited investor (the “March 2017
Accredited Investor”) pursuant to which the March 2017 Accredited Investor purchased 3,000,000 shares of the Company’s
common stock (“March 2017 Shares”) for a purchase price of $3,000,000 (the “Purchase Price”).
The
offer, sale and issuance of the above securities was made to an accredited investor and the Company relied upon the exemptions
contained in Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated there under with regard to the sale.
No advertising or general solicitation was employed in offering the securities. The offer and sale was made to an accredited investor
and transfer of the common stock issued was restricted by the Company in accordance with the requirements of the Securities Act
of 1933, as amended.
The
Company, Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”), Beijing DOING Biomedical Technology
Co., Ltd. (“DOING”), who is an unaffiliated third party, and the March 2017 Accredited Investor entered into a Share
Subscription Agreement whereby the parties acknowledged, among other things, that DOING agreed to transfer the Purchase Price
to Avalon Shanghai on behalf of the March 2017 Accredited Investor and the March 2017 Accredited Investor agreed to transfer the
March 2017 Shares to DOING upon DOING completing the registration of the acquisition of the March 2017 Shares with the Beijing
Commerce Commission (“BCC”) and obtaining an Enterprise Overseas Investment Certificate (the “Investment Certificate”)
from BCC. If DOING fails to complete the registration and acquire the Investment Certificate within one year of the closing then
Avalon Shanghai shall transfer $3,000,000 with an annual interest of 20% to DOING upon the request of DOING (the “BCC Repayment
Obligation”). Further, Wenzhao Lu, a director and shareholder of the Company, and DOING entered into a Warranty Agreement.
Pursuant to the Warranty Agreement, Mr. Lu agreed to (i) cause the Company to be liable to DOING in the event the March 2017 Accredited
Investor defaults in its obligations to DOING, (ii) cause the March 2017 Accredited Investor to transfer the March 2017 Shares
to DOING upon DOING’s receipt of the Investment Certificate from BCC, (iii) within three years from the date of the Warranty
Agreement, DOING may require Mr. Lu to acquire the March 2017 Shares at $1.20 per share upon three-month notice, and (iv) in the
event Mr. Lu does not acquire the March 2017 Shares within the three-month period, interest of 15% per annum will be added to
the purchase price
.
On
April 23, 2018, the Company, Avalon Shanghai, DOING and March 2017 Accredited Investor entered into a Supplementary Agreement
Related to Share Subscription pursuant to which Avalon Shanghai agreed to pay RMB 8,256,000 (approximately $1.3 million based
on the exchange rate on April 23, 2018) to DOING representing one-third of the DOING Investment plus 20% interest for the one-third
DOING Investment resulting in a reduction in the March 2017 Shares by one-third to 2,000,000 shares. Further, the parties agreed
that the BCC Repayment Obligation shall be extended to July 31, 2018 at which time DOING may require that the Company pay $2,000,000
plus 20% interest to DOING resulting in the cancellation of the remaining March 2017 Shares. However, DOING may, in its discretion,
require that the remaining March 2017 Shares be transferred to a new nominal holder who shall pay the required subscription price,
which funds will, in turn, be used to satisfy the BCC Repayment Obligation. The $1 million BCC Repayment Obligation and related
interest was paid in full in May 2018.
As
of June 30, 2018, the Company is obligated to DOING in the remaining principal amount of $2,000,000. The BCC Repayment Obligation
is a debt obligation arising other than in the ordinary course of business, which constitutes a direct financial obligation of
the Company. The Company recorded the $2,000,000 as refundable deposit as of June 30, 2018 on the accompanying consolidated balance
sheets, which was an earnest money from DOING in connection with the 2,000,000 common stock issued to the March 2017 Accredited
Investor who is an entrusted party that holds the shares on behalf of DOING.
As
of June 30, 2018 the Company is subject to the contingency of paying interest liability for the remaining $2,000,000 BCC Repayment
Obligation upon the request of DOING. The Company records accrual for such contingency based upon the assessment of the probability
of occurrence and, where determinable, an estimate of the liability. Management may consider many factors in making these assessments
including past history and the specifics of this matter. The Company did not accrue any interest for the remaining $2,000,000
BCC Repayment Obligation since
management has evaluated the claim and concluded the
likelihood of the claim is remote.
On August 8,
2018, DOING and the March 2017 Accredited Investor sold the remaining 2,000,000 shares of common stock to a third party in consideration
of $2,000,000. Therefore, the BCC Repayment Obligation was satisfied in full and the Company has no further obligation for DOING
and the March 2017 Accredited Investor (See Note 22 –
DOING Biomedical Technology Co., Ltd. Investment
)
AVALON
GLOBOCARE CORP. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
15 –
EQUITY (continued)
Options
The
following table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at June
30, 2018:
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range
of Exercise Price
|
|
|
Number
Outstanding at June 30, 2018
|
|
|
Range
of Weighted Average Remaining Contractual Life (Years)
|
|
|
Weighted
Average Exercise Price
|
|
|
Number
Exercisable at June 30, 2018
|
|
|
Weighted
Average Exercise Price
|
|
$
|
0.50
|
|
|
|
2,000,000
|
|
|
|
8.62
|
|
|
$
|
0.50
|
|
|
|
944,444
|
|
|
$
|
0.50
|
|
|
1.49
|
|
|
|
60,000
|
|
|
|
3.83
|
|
|
|
1.49
|
|
|
|
60,000
|
|
|
|
1.49
|
|
|
1.00
|
|
|
|
230,000
|
|
|
|
2.77
|
|
|
|
1.00
|
|
|
|
210,000
|
|
|
|
1.00
|
|
|
2.50
|
|
|
|
120,000
|
|
|
|
4.51
|
|
|
|
2.50
|
|
|
|
60,000
|
|
|
|
2.50
|
|
|
1.00
|
|
|
|
180,000
|
|
|
|
2.84
|
|
|
|
1.00
|
|
|
|
0
|
|
|
|
1.00
|
|
|
2.30
|
|
|
|
20,000
|
|
|
|
4.93
|
|
|
|
2.30
|
|
|
|
10,000
|
|
|
|
2.30
|
|
$
|
0.50–2.50
|
|
|
|
2,610,000
|
|
|
|
7.38
|
|
|
$
|
0.71
|
|
|
|
1,284,444
|
|
|
$
|
0.74
|
|
Stock
options granted to employee and director
Employee
and director stock option activities for the six months ended June 30, 2018 were as follows:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
Outstanding at December 31,
2017
|
|
|
2,110,000
|
|
|
$
|
0.54
|
|
Granted
|
|
|
140,000
|
|
|
|
2.47
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding at
June 30, 2018
|
|
|
2,250,000
|
|
|
|
0.66
|
|
Options exercisable at June 30, 2018
|
|
|
1,104,444
|
|
|
$
|
0.69
|
|
Options expected to
vest
|
|
|
1,145,556
|
|
|
$
|
0.63
|
|
The
fair values of these options granted to employee and director during the six months ended June 30, 2018 were estimated at the
date of grant using the Black-Scholes option-pricing model with the following assumptions:
Dividend
rate
|
0
|
Terms
(in years)
|
5.0
|
Volatility
|
175.94
- 185.28%
|
Risk-free
interest rate
|
2.25%
- 2.78%
|
The
aggregate fair value of the options granted to employee and director during the six months ended June 30, 2018 was $337,523, of
which, for the three and six months ended June 30, 2018, $79,193 and $151,480, respectively, has been reflected as compensation
and related benefits on the accompanying unaudited condensed consolidated statements of operations because the options were fully
earned and non-cancellable.
As
of June 30, 2018, the aggregate value of nonvested employee and director options was $1,575,471, which will be amortized as stock-based
compensation expense as the options are vesting, over the remaining 1.58 years.
The
aggregate intrinsic values of the employee and director stock options outstanding and the employee and director stock options
exercisable at June 30, 2018 was $4,702,100 and $2,272,599, respectively.
AVALON
GLOBOCARE CORP. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
15 –
EQUITY (continued)
Options
(continued)
Stock
options granted to employee and director (continued)
A
summary of the status of the Company’s nonvested employee and director stock options granted as of June 30, 2018 and changes
during the six months ended June 30, 2018 is presented below:
|
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Grant
Date Fair Value
|
|
Nonvested
at December 31, 2017
|
|
|
|
1,428,889
|
|
|
$
|
0.51
|
|
|
$
|
1,876,079
|
|
Granted
|
|
|
|
140,000
|
|
|
|
2.47
|
|
|
|
337,523
|
|
Vested
|
|
|
|
(423,333
|
)
|
|
|
(0.85
|
)
|
|
|
(638,131
|
)
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Nonvested
at June 30, 2018
|
|
|
|
1,145,556
|
|
|
$
|
0.63
|
|
|
$
|
1,575,471
|
|
Stock
options granted to non-employee
Non-employee
stock option activities for the six months ended June 30, 2018 were as follows:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
Outstanding at December 31,
2017
|
|
|
180,000
|
|
|
$
|
1.00
|
|
Granted
|
|
|
180,000
|
|
|
|
1.00
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding at
June 30, 2018
|
|
|
360,000
|
|
|
|
1.00
|
|
Options exercisable at June 30, 2018
|
|
|
180,000
|
|
|
$
|
1.00
|
|
Options expected to
vest
|
|
|
180,000
|
|
|
$
|
1.00
|
|
Stock-based
compensation expense associated with stock options granted to non-employee is recognized as the stock options vest. The stock-based
compensation expense related to non-employee will fluctuate as the fair value of the Company’s common stock fluctuates. Stock-based compensation expense associated with stock options granted to non-employee amounted to $172,305 and $383,042 for the three and six months ended June 30, 2018, respectively.
The
fair values of these non-employee options vested in the six months ended June 30, 2018 and nonvested non-employee options as of
June 30, 2018 were estimated using the Black-Scholes option-pricing model with the following assumptions:
Dividend
rate
|
0
|
Terms
(in years)
|
2.51
- 3.0
|
Volatility
|
172.87%
- 188.29%
|
Risk-free
interest rate
|
2.29%
- 2.66%
|
As
of June 30, 2018, the aggregate value of nonvested non-employee options was $303,319, which will be amortized as stock-based compensation
expense over the remaining 0.33 years. The aggregate intrinsic values of the non-employee stock options outstanding and the non-employee
stock options exercisable at June 30, 2018 was $630,000 and $315,000, respectively.
AVALON
GLOBOCARE CORP. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
15 –
EQUITY (continued)
Options
(continued)
Stock
options granted to non-employee (continued)
A
summary of the status of the Company’s nonvested non-employee stock options granted as of June 30, 2018 and changes during
the six months ended June 30, 2018 is presented below:
|
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Fair
Value at June 30, 2018
|
|
Nonvested
at December 31, 2017
|
|
|
|
180,000
|
|
|
$
|
1.00
|
|
|
|
|
|
Granted
|
|
|
|
180,000
|
|
|
|
1.00
|
|
|
|
|
|
Vested
|
|
|
|
(180,000
|
)
|
|
|
(1.00
|
)
|
|
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Nonvested
at June 30, 2018
|
|
|
|
180,000
|
|
|
$
|
1.00
|
|
|
$
|
454,979
|
|
Warrants
In connection
with equity raise, the Company issued a total of 578,891 stock warrants at various fixed exercise price to an investment banking
firm. These warrants are exercisable at any time for a five-year period. The fair value of these warrants was debited to the account
of additional paid-in capital and was fully offset by the corresponding credit to the additional paid-in capital, resulting in
no change in net equity of the balance sheet.
Stock
warrants activities during the six months ended June 30, 2018 were as follows:
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
Outstanding at December 31, 2017
|
|
|
—
|
|
|
$
|
—
|
|
Issued
|
|
|
578,891
|
|
|
|
1.28
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding
and exercisable at June 30, 2018
|
|
|
578,891
|
|
|
|
1.28
|
|
The
aggregate intrinsic value of the warrants outstanding and exercisable at June 30, 2018 was $850,840.
The
following table summarizes the shares of the Company’s common stock issuable upon exercise of warrants outstanding and exercisable
at June 30, 2018:
Warrants Outstanding
and Exercisable
|
|
Range of Exercise
Price
|
|
|
Number Outstanding
at June 30, 2018
|
|
|
Range of Weighted
Average Remaining Contractual Life (Years)
|
|
|
Weighted Average
Exercise Price
|
|
$
|
1.00
|
|
|
|
360,500
|
|
|
|
4.75
|
|
|
$
|
1.00
|
|
|
1.62
|
|
|
|
151,235
|
|
|
|
4.81
|
|
|
|
1.62
|
|
|
1.85
|
|
|
|
5,960
|
|
|
|
4.82
|
|
|
|
1.85
|
|
|
1.90
|
|
|
|
36,750
|
|
|
|
4.85
|
|
|
|
1.90
|
|
|
2.24
|
|
|
|
24,446
|
|
|
|
4.90
|
|
|
|
2.24
|
|
$
|
1.00–2.24
|
|
|
|
578,891
|
|
|
|
4.78
|
|
|
$
|
1.28
|
|
NOTE
16 -
STATUTORY RESERVE
Avalon
Shanghai and Beijing GenExosome operate in the PRC, are required to reserve 10% of their net profit after income tax, as determined
in accordance with the PRC accounting rules and regulations. Appropriation to the statutory reserve by the Company is based on
profit arrived at under PRC accounting standards for business enterprises for each year.
The
profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is
made to the statutory reserve. Appropriation to the statutory reserve must be made before distribution of dividends to shareholders.
The appropriation is required until the statutory reserve reaches 50% of the registered capital. This statutory reserve is not
distributable in the form of cash dividends.
The
Company did not make any appropriation to statutory reserve for Avalon Shanghai and Beijing GenExosome during the six months ended
June 30, 2018 as they incurred net losses in the period.
AVALON
GLOBOCARE CORP. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
17 -
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, 2018 and 2017.
|
|
Three
Months
|
|
|
Three
Months
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
Customer
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
A (Beijing
Daopei, a related party)
|
|
|
29
|
%
|
|
|
*
|
|
|
|
18
|
%
|
|
|
*
|
|
B (Beijing Nanshan,
a related party)
|
|
|
0
|
%
|
|
|
41
|
%
|
|
|
0
|
%
|
|
|
35
|
%
|
C (Shanghai Daopei,
a related party)
|
|
|
0
|
%
|
|
|
*
|
|
|
|
0
|
%
|
|
|
15
|
%
|
D
|
|
|
16
|
%
|
|
|
14
|
%
|
|
|
20
|
%
|
|
|
12
|
%
|
E
|
|
|
11
|
%
|
|
|
*
|
|
|
|
13
|
%
|
|
|
*
|
|
F
|
|
|
*
|
|
|
|
*
|
|
|
|
11
|
%
|
|
|
*
|
|
*Less
than 10%
Two
customers, whose outstanding receivable accounted for 10% or more of the Company’s total outstanding accounts receivable
and accounts receivable – related party and tenants receivable at June 30, 2018, accounted for 74.9% of the Company’s
total outstanding accounts receivable and accounts receivable – related party and tenants receivable at June 30, 2018.
Two
customers, whose outstanding receivable accounted for 10% or more of the Company’s total outstanding accounts receivable
and tenants receivable at December 31, 2017, accounted for 48.9% of the Company’s total outstanding accounts receivable
and tenants receivable at December 31, 2017.
Suppliers
No
supplier accounted for 10% or more of the Company’s purchase during the three and six months ended June 30, 2018 and 2017.
One
supplier accounted for 100% of the Company’s total outstanding accounts payable at June 30, 2018.
One
supplier accounted for 100% of the Company’s total outstanding accounts payable at December 31, 2017.
Concentrations
of Credit Risk
At
June 30, 2018 and December 31, 2017, cash balances in the PRC are $1,318,799 and $1,327,009, respectively, are uninsured. The
Company has not experienced any losses in PRC bank accounts and believes it is not exposed to any risks on its cash in PRC bank
accounts.
The
Company maintains its cash in United States bank and financial institution deposits that at times may exceed federally insured
limits. At June 30, 2018 and December 31, 2017, the Company’s cash balances in United States bank accounts had approximately
$1,507,000 and $1,162,000 in excess of the federally-insured limits, respectively. The Company has not experienced any losses
in its United States bank accounts through and as of the date of this report.
NOTE
18 –
SEGMENT INFORMATION
For
the three and six months ended June 30, 2018, the Company operated in three reportable business segments - (1) the real property
operating segment, (2) the medical related consulting services segment, and (3) the performing development services for hospitals
and other customers and sales of developed products to hospitals and other customers segment.
For
the three and six months ended June 30, 2017, the Company operated in two reportable business segments - (1) the real property
operating segment, and (2) the medical related consulting services segment.
The Company’s reportable segments are
strategic business units that offer different services and products. They are managed separately based on the fundamental differences
in their operations. Information with respect to these reportable business segments for the three and six months ended June 30,
2018 and 2017 was as follows:
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
18 –
SEGMENT INFORMATION (continued)
|
|
Three Months
|
|
|
Three Months
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real property operating
|
|
$
|
278,872
|
|
|
$
|
222,254
|
|
|
$
|
575,495
|
|
|
$
|
222,254
|
|
Medical related consulting services – related parties
|
|
|
141,996
|
|
|
|
152,497
|
|
|
|
141,996
|
|
|
|
218,783
|
|
Development services and sales of developed products
|
|
|
75,225
|
|
|
|
—
|
|
|
|
86,515
|
|
|
|
—
|
|
|
|
|
496,093
|
|
|
|
374,751
|
|
|
|
804,006
|
|
|
|
441,037
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real property operating
|
|
|
32,625
|
|
|
|
32,943
|
|
|
|
65,249
|
|
|
|
32,943
|
|
Medical related consulting services
|
|
|
3,991
|
|
|
|
1,187
|
|
|
|
7,997
|
|
|
|
1,213
|
|
Development services and sales of developed products
|
|
|
87,980
|
|
|
|
—
|
|
|
|
174,729
|
|
|
|
—
|
|
|
|
|
124,596
|
|
|
|
34,130
|
|
|
|
247,975
|
|
|
|
34,156
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real property operating
|
|
|
24,932
|
|
|
|
42,000
|
|
|
|
261,918
|
|
|
|
42,000
|
|
Medical related consulting services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Development services and sales of developed products
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
24,932
|
|
|
|
42,000
|
|
|
|
261,918
|
|
|
|
42,000
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real property operating
|
|
|
5,617
|
|
|
|
(1,234
|
)
|
|
|
(232,083
|
)
|
|
|
(1,234
|
)
|
Medical related consulting services
|
|
|
16,456
|
|
|
|
54,782
|
|
|
|
(157,018
|
)
|
|
|
(161,789
|
)
|
Development services and sales of developed products
|
|
|
(196,896
|
)
|
|
|
—
|
|
|
|
(297,028
|
)
|
|
|
—
|
|
Other (a)
|
|
|
(1,168,992
|
)
|
|
|
(484,056
|
)
|
|
|
(2,208,655
|
)
|
|
|
(816,818
|
)
|
|
|
$
|
(1,343,815
|
)
|
|
$
|
(430,508
|
)
|
|
$
|
(2,894,784
|
)
|
|
$
|
(979,841
|
)
|
Identifiable long-lived tangible assets at June 30, 2018 and December 31, 2017
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Real property operating
|
|
$
|
7,745,277
|
|
|
$
|
7,645,371
|
|
Medical related consulting services
|
|
|
12,507
|
|
|
|
20,558
|
|
Development services and sales of developed products
|
|
|
110,743
|
|
|
|
5,857
|
|
|
|
$
|
7,868,527
|
|
|
$
|
7,671,786
|
|
Identifiable long-lived tangible assets at June 30, 2018 and December 31, 2017
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
United States
|
|
$
|
7,746,017
|
|
|
$
|
7,646,270
|
|
China
|
|
|
122,510
|
|
|
|
25,516
|
|
|
|
$
|
7,868,527
|
|
|
$
|
7,671,786
|
|
|
(a)
|
The
Company does not allocate any general and administrative expense of its being a public
company activities to its reportable segments as these activities are managed at a corporate
level.
|
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
19 –
NONCONTROLLING INTEREST
As
of June 30, 2018, Dr. Yu Zhou, director and Co-Chief Executive Officer of GenExsome, who owned 40% of the equity interests of
GenExosome, which is not under the Company’s control. The following is a summary of noncontrolling interest activities in
the six months ended June 30, 2018.
|
|
Amount
|
|
Noncontrolling interest at December 31, 2017
|
|
$
|
(585,394
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
(118,811
|
)
|
Foreign currency translation adjustment attributable to noncontrolling interest
|
|
|
41
|
|
Noncontrolling interest at June 30, 2018
|
|
$
|
(704,164
|
)
|
NOTE
20 –
COMMITMENTS AND CONTINCENGIES
Severance
Payments
The
Company has employment agreements with certain employees that provided severance payments upon termination of employment under
certain circumstances, as defined in the applicable agreements. The Company has estimated its possible severance payments of approximately
$528,900 as of June 30, 2018 and December 31, 2017, which have not been reflected in its condensed consolidated financial statements
since the Company concluded that the likelihood is remote at this moment.
Real
Property Management Agreement
On
June 6, 2017, the Company entered into a two-year real property management agreement with a related party which agreed to provide
real property management service to the Company. In accordance with this agreement, the Company pays a flat fee of $5,417 per
month commencing on May 5, 2017 (See Note 14 -
Real Property Management Agreement
).
Underwritten
and Financial Advisory Service Agreement
In
October 2017, the Company entered into a service agreement with an investment bank with respect to a planned underwritten public
offering and NASDAQ listing advisory service. In accordance with this agreement, the Company pays:
|
●
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Debt
Financing:
For any debt financing: (i) a Success Fee, payable in cash, equal to 3%
of the gross proceeds received by the Company from such closing; plus (ii) warrants in
the entity financed, equal to 3% of the gross proceeds received by the Company from such
closing, divisible by and exercisable at a strike price equal to 100% of the fair market
value of the common stock for the Company as of the date of the closing of the transaction,
in whole or in part, at any time within 5 years from issuance.
|
|
●
|
Equity
Financing:
For any equity investment into the Company: (i) a Success Fee, payable
in cash, equal to 7% of the gross proceeds received by the Company from such closing;
plus (ii) warrants in the entity financed, equal to 7% of the gross proceeds received
by the Company from such closing, divisible by and exercisable at a strike price equal
to 100% of the fair market value of the common stock for the Company as of the date of
the closing of the transaction, in whole or in part, at any time within 5 years from
issuance.
|
|
b)
|
Expenses:
The Company agrees to reimburse for all reasonable out-of-pocket invoiced expenses.
|
|
c)
|
Advisory
Fees: (i) an initial advisory fee of $30,000 upon the execution of this agreement; plus
(ii) an additional advisory fee of $30,000 upon the issuance of a conditional approval
letter to list on NASDAQ.
|
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
20 –
COMMITMENTS AND CONTINCENGIES (continued)
Education
Program Agreement
On
February 12, 2018, the Company entered into an education program agreement with a third party. The term of this agreement is one
year. In accordance to this agreement, the Company pays an annual fee of $200,000. At June 30, 2018, the accrued fee related to
the agreement was $25,000, which was included in accrued liabilities and other payables on the accompanying condensed consolidated
balance sheets.
Operating
Leases
Beijing
GenExosome Office Lease
In
March 2017, Beijing GenExosome signed an agreement to lease its facilities and equipment under operating lease. Pursuant to the
signed lease, the annual rent is RMB 41,000 (approximately $6,000). The term of the lease is one year commencing on March 15,
2017 and expired on March 14, 2018. Beijing GenExosome renewed the lease in fiscal 2018. Pursuant to the renewed lease, the annual
rent is RMB 41,000 (approximately $6,000) and the renewed lease expires on March 14, 2019. During the three and six months ended
June 30, 2018, rent expense related to the operating lease amounted to approximately $1,600 and $3,200, respectively.
Future
minimum rental payment required under this operating lease is as follows:
Twelve-month Period Ending June 30:
|
|
|
Amount
|
|
|
2019
|
|
|
$
|
4,385
|
|
GenExosome
Office Lease
In
December 2017, GenExosome signed an agreement to lease its office space in Ohio, United States under operating lease. Pursuant
to the executed lease, the monthly rent is $300. The term of the lease is one year commencing on January 1, 2018 and expires on
December 31, 2018. During the three and six months ended June 30, 2018, rent expense related to the operating lease amounted to
$900 and $1,800, respectively. Future minimum rental payment required under this operating lease is as follows:
Twelve-month Period Ending June 30:
|
|
|
Amount
|
|
|
2019
|
|
|
$
|
1,800
|
|
Avalon
Shanghai Office Lease
On
January 19, 2017, Avalon Shanghai entered into a lease for office space in Beijing, China with a third party (the “Beijing
Office Lease”). Pursuant to the Beijing Office Lease, the monthly rent is RMB 50,586 (approximately $8,000) with a required
security deposit of RMB 164,764 (approximately $25,000). In addition, Avalon Shanghai needs to pay monthly maintenance fees of
RMB 4,336 (approximately $700). The term of the Beijing Office Lease is 26 months commencing on January 1, 2017 and will expire
on February 28, 2019 with two months of free rent in the months of December 2017 and February 2019. For the three months ended
June 30, 2018 and 2017, rent expense and maintenance fees related to the Beijing Office Lease amounted to approximately $23,000
and $18,500, respectively. For the six months ended June 30, 2018 and 2017, rent expense and maintenance fees related to the Beijing
Office Lease amounted to approximately $49,000 and $42,500, respectively. Future minimum rental payment required under the Beijing
Office Lease is as follows:
Twelve-month Period Ending June 30:
|
|
|
Amount
|
|
|
2019
|
|
|
$
|
58,707
|
|
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
21 –
RESTRICTED NET ASSETS
A
portion of the Company’s operations are conducted through its PRC subsidiaries, which can only pay dividends out of their
retained earnings determined in accordance with the accounting standards and regulations in the PRC and after they have met the
PRC requirements for appropriation to statutory reserve. In addition, a portion of the Company’s businesses and assets are
denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either
through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted
by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory
institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed
contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the ability of the
Company’s PRC subsidiaries to transfer their net assets to the Parent Company through loans, advances or cash dividends.
Schedule
I of Article 5-04 of Regulation S-X requires the condensed financial information of the parent company to be filed when the restricted
net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed
fiscal year. For purposes of this test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s
proportionate share of net assets of its consolidated subsidiaries (after intercompany eliminations) which as of the end of the
most recent fiscal year may not be transferred to the parent company in the form of loans, advances or cash dividends without
the consent of a third party.
The
Company’s PRC subsidiaries’ net assets as of June 30, 2018 and December 31, 2017 did not exceed 25% of the Company’s
consolidated net assets. Accordingly, Parent Company’s condensed financial statements have not been required in accordance
with Rule 5-04 and Rule 12-04 of SEC Regulation S-X.
NOTE
22 –
SUBSEQUENT EVENTS
Avactis
Biosciences
On
July 18, 2018, the Company formed a wholly owned subsidiary, Avactis Biosciences, Inc., a Nevada corporation, which will be focused on accelerating commercial
activities related to Chimeric Antigen Receptor (CAR)-T technologies. The new subsidiary is designed to integrate and optimize
our global scientific and clinical resources to further advance the use of CAR-T to treat certain cancers.
Letter
of Intent with Arbele Limited, a Hong Kong Company
On
July 30, 2018, the Company signed a Letter of Intent with Arbele Limited, a Hong Kong Company for a proposed strategic partnership
agreement
. The purpose of the proposed Transaction
is to form a joint venture company, AVAR (China) Biotherapeutics (“
JV
”), to develop, manufacture, and commercializing
CAR-T immunotherapy for treating cancer patients in China, utilizing intellectual property from Arbele and the clinical platform
of the LuDaopei Medical Group in China. The intention of the parties is to enter into definitive agreements by December 31, 2018.
The Company paid a $100,000 fee to Arbele for a five-month exclusive right to complete the definitive agreements for the transaction.
Strategic
Partnership with Weill Cornell Medical College
On
August 6, 2018, the Company entered into a strategic partnership agreement with Weill Cornell’s cGMP Cellular Therapy Facility and
Laboratory for Advanced Cellular Engineering headed by Dr. Yen-Michael Hsu. This strategic partnership aims to co-develop bio-production
and standardization procedures in procurement, storage, processing, clinical study protocols, and bio-banking for Chimeric Antigen
Receptor (CAR)-T therapy, in accordance with the Foundation of Accreditation for Cellular Therapy (FACT) and American Association
of Blood Banks (AABB) standards. This partnership also includes a CAR-T education program to support and foster collaborative
research and training programs for scientists and clinicians between Weill Cornell and Hebei Yanda LuDaopei Hospital, which is
our main affiliated clinical facility as well as the world’s single largest medical institution in CAR-T therapy.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
NOTE
22 –
SUBSEQUENT EVENTS (continued)
Changes
to Board of Directors
On July 5, 2018, William B. Stilley, III was appointed to the Board of Directors. Mr. Stilley will receive
options to acquire 40,000 shares of common stock per year commencing January 1, 2019 at an exercise price equal to the closing
price on December 31st of the prior year. The options shall vest in equal amounts quarterly and shall be exercisable for a period
of five years. For 2018, the Company granted Mr. Stilley options to acquire 20,000 shares of common stock at an exercise price
of $2.30 for a term of five years with 10,000 options vesting immediately and the balance vesting October 1, 2018. In addition,
Mr. Stilley will receive $7,500 per quarter for serving as chairman of the audit committee commencing upon formation.
On
July 9, 2018, Meng Li resigned as a director of the Company. Ms. Li will continue to serve as our Chief Operating Officer and
Secretary and will also serve as an observer to the Board of Directors without voting capacity.
On July 30, 2018, Steven A. Sanders was appointed to the Board of Directors. Mr. Sanders will receive
options to acquire 40,000 shares of common stock per year commencing January 1, 2019 at an exercise price equal to the closing
price on December 31st of the prior year. The options shall vest in equal amounts quarterly and shall be exercisable for a period
of five years. For 2018, the Company granted Mr. Sanders options to acquire 20,000 shares of common stock at an exercise price
of $2.80 for a term of five years with 10,000 options vesting immediately and the balance vesting October 1, 2018. In addition,
Mr. Sanders will receive $5,000 per quarter for serving as a member of our audit committee and nominating and corporate governance
committee, respectively, commencing upon formation.
On
July 30, 2018, Steven P. Sukel resigned as a director of the Company.
DOING Biomedical Technology Co., Ltd.
Investment
On
March 3, 2017, the Company entered into and closed a Subscription Agreement with an accredited investor (the “March 2017
Accredited Investor”) pursuant to which the March 2017 Accredited Investor purchased 3,000,000 shares of the Company’s
common stock (“March 2017 Shares”) for a purchase price of $3,000,000 (the “DOING Investment”). The Company,
Avalon
(Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”), Beijing DOING Biomedical Technology Co., Ltd. (“DOING”),
and the March 2017 Accredited Investor entered into a Share Subscription Agreement whereby the parties acknowledged, among other
things, that DOING agreed to transfer the purchase price to Avalon Shanghai on behalf of the March 2017 Accredited Investor and
the March 2017 Accredited Investor agreed to transfer the March 2017 Shares to DOING upon DOING completing the registration of
the acquisition of the March 2017 Shares with the Beijing Commerce Commission (“BCC”), and obtaining an Enterprise
Overseas Investment Certificate (the “Investment Certificate”) from BCC. If DOING fails to complete the registration
and acquire the Investment Certificate within one year of the closing then Avalon Shanghai was required to transfer $3,000,000
with interest of 20% to DOING upon the request of DOING (the “BCC Repayment Obligation”).
Further,
Wenzhao
Lu, the Company’s director and major shareholder, and DOING entered into a Warranty Agreement. Pursuant to the Warranty
Agreement, Mr. Wenzhao agreed to (i) cause us to be liable to DOING in the event the March 2017 Accredited Investor defaults in
its obligations to DOING, (ii) cause the March 2017 Accredited Investor to transfer the March 2017 Shares to DOING upon DOING’s
receipt of the Investment Certificate from BCC, (iii) within three years from the date of the Warranty Agreement, DOING may require
Mr. Wenzhao to acquire the March 2017 Shares at $1.20 per share upon three-month notice, and (iv) in the event Mr. Wenzhao does
not acquire the March 2017 Shares within the three month period, interest of 15% per annum will be added to the purchase price.
On April 23, 2018, the Company,
Avalon Shanghai, DOING and March 2017 Accredited Investor entered into a Supplementary Agreement Related to Share Subscription
pursuant to which Avalon Shanghai agreed to pay RMB 8,256,000 (approximately $1.3 million based on the exchange rate on April
23, 2018) to DOING representing one-third of the DOING Investment plus 20% interest for the one-third DOING Investment resulting
in a reduction in the March 2017 Shares by one-third to 2,000,000 shares. Further, the parties agreed that the BCC Repayment Obligation
shall be extended to July 31, 2018 at which time DOING may require that the Company pay $2,000,000 plus 20% interest to DOING
resulting in the cancellation of the remaining March 2017 Shares. However, DOING may, in its discretion, require that the remaining
March 2017 Shares be transferred to a new nominal holder who shall pay the required subscription price, which funds will, in turn,
be used to satisfy the BCC Repayment Obligation (See Note 15 -
Common Shares Issued for Share Subscription Agreement
).
On August 8,
2018, DOING and the March 2017 Accredited Investor sold the remaining 2,000,000 shares of common stock to a third party in consideration
of $2,000,000. Therefore, the BCC Repayment Obligation was satisfied in full and the Company has no further obligation for DOING
and the March 2017 Accredited Investor.
Loan Payable
On August 3, 2018, the Company signed an extension agreement for its loan with the maturity date of March
31, 2020 (See Note 12).
Common Shares Sold for Cash
On August 13, 2018, the Company sold 939,450 shares of common
stock at $2.25 per share to investors pursuant to subscription agreements. The Company receive gross proceeds of $2,113,763.