AVALON GLOBOCARE CORP. The following discussion and analysis of our financial condition and results of operations for the three months endedMarch 31, 2022 and 2021 should be read in conjunction with our condensed consolidated financial statements and related notes to those condensed consolidated financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Special Note Regarding Forward-Looking Statements and Business sections in our Form 10-K as filed with theSecurities and Exchange Commission onMarch 30, 2022 . We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements.
Impact of COVID-19 on Our Operations, Financial Condition, Liquidity and Results of Operations
Although the COVID-19 vaccines have generally been introduced to the public, the ultimate impact of the COVID-19 pandemic on our operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, a significant increase in new and variant strains of COVID-19 cases, availability and effectiveness of COVID-19 vaccines and therapeutics, the level of acceptance of the vaccine by the general population and any additional preventative and protective actions that governments, or us, may determine are needed. The occurrence of COVID-19 pandemic had negative impact on our operations. Some of the universities and laboratories with which we collaborate were temporarily closed. Our general development operations have continued during the COVID-19 pandemic and we have not had significant disruption. However, we are uncertain if the COVID-19 pandemic will impact future operations at our laboratory, or our ability to collaborate with other laboratories and universities. In addition, we are unsure if the COVID-19 pandemic will impact future clinical trials. Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related financial effect cannot be reasonably estimated at this time but is expected to adversely impact the Company's business for
the rest of 2022. We have limited cash available to fund planned operations and although we have other sources of capital described below under "Liquidity and Capital Resources," management continues to pursue various financing alternatives to fund our operations so we can continue as a going concern. However, the COVID-19 pandemic has created significant economic uncertainty and volatility in the credit and capital markets. Management plans to secure the necessary financing through the issue of new equity and/or the entering into of strategic partnership arrangements but the ultimate impact of the COVID-19 pandemic on our ability to raise additional capital is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak and new information which may emerge concerning the severity of the COVID-19 pandemic. We may not be able to raise sufficient additional capital and may tailor our operations based on the amount of funding we are able to raise in the future. Nevertheless, there is no assurance that these initiatives will be successful. Further, there is no assurance that capital available to us in any future financing will be on acceptable terms. Overview The Company is a clinical-stage, vertically integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative, transformative immune effector cell therapy, exosome technology, as well as COVID-19 related diagnostics and therapeutics. The Company also provides strategic advisory and outsourcing services to facilitate and enhance its clients' growth and development, as well as competitiveness in healthcare and CellTech industry markets. Through its subsidiary structure with unique integration of verticals from innovative R&D to automated bioproduction and accelerated clinical development, the Company is establishing a leading role in the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEX™), and COVID-19 related vaccine and therapeutics. Avalon achieves and fosters seamless integration of unique verticals to bridge and accelerate innovative research, bio-process development, clinical programs and product commercialization. Avalon's upstream innovative research includes:
? Development of Avalon Clinical-grade Tissue-specific Exosome ("ACTEX™")
22
? Novel therapeutic and diagnostic targets development utilizing QTY-code protein
design technology with
using the QTY code protein design technology for development of a
hemofiltration device to treat Cytokine Storm.
? Co-development of next generation, transposon-based, multi-target CAR-T, CAR-NK
and other immune effector cell therapeutic modalities with
? Strategic partnership with the
Sciences (BOKU) in
administered by an intranasal or oral route against SARS-CoV-2, the novel
coronavirus that causes COVID-19 disease.
Avalon's midstream bio-processing and bio-production facility is located inNanjing ,China with state-of-the-art, automated GMP and QC/QA infrastructure for standardized bio-manufacturing of clinical-grade cellular products involved in our clinical programs in immune effector cell therapy, regenerative therapeutics, as well as bio-banking.
Avalon's downstream medical team and facility consists of top-rated affiliated hospital network and experts specialized in hematology, oncology, cellular immunotherapy, hematopoietic stem/progenitor cell transplant, as well as regenerative therapeutics. Our major clinical programs include:
? AVA-001: Avalon has initiated its first-in-human clinical trial of CD19 CAR-T
candidate, AVA-001 in
network with over 600 patients being treated with CAR-T) for the indication of
relapsed/refractory B-cell acute lymphoblastic leukemia and non-Hodgkin
Lymphoma. The AVA-001 candidate (co-developed with
characterized by the utilization of 4-1BB (CD137) co-stimulatory signaling
pathway, conferring a strong anti-cancer activity during pre-clinical study. It
also features a shorter bio-manufacturing time which leads to the advantage of
prompt treatment to patients where timing is important related hematologic
malignancies. Avalon has successfully completed the first-in-human clinical
trial of its AVA-001 anti-CD19 CAR-T cell therapy as a bridge to allogeneic
bone marrow transplantation for patients with relapsed/refractory B-cell acute
lymphoblastic leukemia at the
number NCT03952923) with excellent efficacy (90% complete remission rate) and
minimal adverse side effects. Avalon is currently expanding the patient
recruitment for AVA-001 to include relapsed/refractory non-Hodgkin lymphoma
patients.
? AVA-011 and FLASH-CAR™: The Company advanced its next generation immune cell
therapy using RNA-based, non-viral FLASH-CAR™ technology co-developed with the
Company's strategic partner
can be used to create personalized cell therapy from a patient's own cells, as
well as off-the-shelf cell therapy from a universal donor. Our leading
candidate, AVA-011, is currently at process development stage to generate
clinical-grade cell-therapy products for subsequent clinical studies. On July
8, 2021, the Company and the
System of Higher Education (the "University") entered into a
Agreement (the "University Agreement"). Pursuant to the University Agreement,
for a term of two years the University agreed to use its reasonable efforts to
perform academic research funded by the Company in connection with the
development of point-of-care modular autonomous processing system to generate
clinical-grade AVA-011, a RNA-based chimeric antigen receptor (CAR) T-cell
therapy candidate (the "Project") subject to the appointment of Dr.
eight payments of
did not make any payment. The Company and the University shall each own an
undivided, one half interest in any intellectual property rights jointly
developed by both parties. The Company has been granted a worldwide,
irrevocable, non-exclusive, royalty free, fully paid-up, perpetual right to use
intellectual property developed by the University in connection with the
Project for commercial purposes research activities and other purposes.
Further, the Company will have an exclusive right of first offer to an
exclusive royalty-bearing license to intellectual property developed by the
University or co-developed by the Company and the University in connection with
the Project.
? ACTEX™: Stem cell-derived Avalon Clinical-grade Tissue-specific Exosomes
(ACTEX™) is one of the core technology platforms that has been co-developed by
formed a strategic partnership with
skin care company, to engage in co-development and commercialization of a
series of clinical-grade, exosome-based cosmeceutical and orthopedic products.
As part of this agreement, the Company signed a three-way Material Transfer
Agreement between
Pittsburgh Medical Center . 23
? AVA-Trap™: Avalon's AVA-Trap™ therapeutic program plans to enter animal model
testing followed by expedited clinical studies with the goal of providing an
effective therapeutic option to combat COVID-19 and other life-threatening
conditions involving cytokine storms. The Company initiated a sponsored
research and co-development project with
(MIT) led by Professor
Using the unique QTY code protein design platform, six water-soluble variant
cytokine receptors have been successfully designed and tested to show binding
affinity to the respective cytokines. Going Concern The Company is a clinical-stage, vertically integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative, transformative immune effector cell therapy, exosome technology, as well as COVID-19 related diagnostics and therapeutics. The Company also provides strategic advisory and outsourcing services to facilitate and enhance its clients' growth and development, as well as competitiveness in healthcare and CellTech industry markets. Through its subsidiary structure with unique integration of verticals from innovative R&D to automated bioproduction and accelerated clinical development, the Company is establishing a leading role in the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEX™), and COVID-19 related vaccine and therapeutics. In addition, the Company owns commercial real estate that houses its headquarters inFreehold, New Jersey and provides outsourced and customized international healthcare services to the rapidly changing health care industry primarily focused inthe People's Republic of China . These condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, the Company had a working capital deficit of$4,234,370 as ofMarch 31, 2022 and has incurred recurring net losses and generated negative cash flow from operating activities of$2,070,538 and$511,208 for the three months endedMarch 31, 2022 , respectively. The Company has a limited operating history and its continued growth is dependent upon the continuation of providing medical related consulting services to its only few clients who are related parties and generating rental revenue from its income-producing real estate property inNew Jersey ; hence generating revenues, and obtaining additional financing to fund future obligations and pay liabilities arising from normal business operations. In addition, the current cash balance cannot be projected to cover the operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company's ability to raise additional capital, implement its business plan, and generate significant revenues. There are no assurances that the Company will be successful in its efforts to generate significant revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. The Company plans on raising capital through the sale of equity to implement its business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to the Company on satisfactory terms and conditions, if any. The occurrence of an uncontrollable event such as the COVID-19 pandemic had negatively impact on the Company's operations. Our general development operations have continued during the COVID-19 pandemic and we have not had significant disruption. However, we are uncertain if the COVID-19 pandemic will impact future operations at our laboratory, or our ability to collaborate with other laboratories and universities. In addition, we are unsure if the COVID-19 pandemic will impact future clinical trials. Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related financial effect cannot be reasonably estimated at this time but is expected to adversely impact the Company's business for the rest of 2022. The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. Critical Accounting Policies Use of Estimates Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to the useful life of property and equipment and investment in real estate, 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. 24 We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Revenue Recognition
We recognize revenue under Accounting Standards Codification ("ASC") Topic 606,
Revenue from Contracts with Customers ("ASC 606"). The core principle of the
revenue standard is that a company should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects
the consideration to which the company expects to be entitled in exchange for
those goods or services. The following five steps are applied to achieve that
core principle:
? Step 1: Identify the contract with the customer
? Step 2: Identify the performance obligations in the contract
? Step 3: Determine the transaction price
? Step 4: Allocate the transaction price to the performance obligations in the
contract
? Step 5: Recognize revenue when the company satisfies a performance obligation
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised goods or service that is distinct. A performance obligation meets ASC 606's definition of a "distinct" goods or service (or bundle of goods or services) if both of the following criteria are met:
? The customer can benefit from the goods or service either on its own or
together with other resources that are readily available to the customer (i.e.,
the goods or service is capable of being distinct).
? The entity's promise to transfer the goods or service to the customer is
separately identifiable from other promises in the contract (i.e., the promise
to transfer the goods or service is distinct within the context of the contract).
If a goods or service is not distinct, the goods or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
The Company's revenues are derived from providing medial related consulting services for its' related parties. Revenues related to its service offerings are recognized at a point in time when service is rendered. Any payments received in advance of the performance of services are recorded as deferred revenue until such time as the services are performed.
We have determined that the ASC 606 does not apply to rental contracts, which are within the scope of other revenue recognition accounting standards.
25
Rental income from operating leases is recognized on a straight-line basis under the guidance of ASC 842. Lease payments under tenant leases are recognized on a straight-line basis over the term of the related leases. The cumulative difference between lease revenue recognized under the straight-line method and contractual lease payments are included in rent receivable on the condensed consolidated balance sheets.
We do not offer promotional payments, customer coupons, rebates or other cash redemption offers to our customers.
Income Taxes We are governed by the income tax laws ofChina andthe United States . Income taxes are accounted for pursuant to ASC 740 "Accounting for Income Taxes," which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge for taxes is based on the results for the period as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is changed to equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis. Recent Accounting Standards
For details of applicable new accounting standards, please, refer to Recent Accounting Standards in Note 3 of our condensed consolidated financial statements accompanying this report.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Three Months Ended
Revenues For the three months endedMarch 31, 2022 , we had real property rental revenue of$297,631 , as compared to$289,774 for the three months endedMarch 31, 2021 , an increase of$7,857 , or 2.7%. The slight increase was primarily attributable to the increase of tenants in the first quarter of 2021. We expect that our revenue from real property rent will remain in its current level with minimal increase in the near future. Costs and Expenses
Real property operating expenses consist of property management fees, property insurance, real estate taxes, depreciation, repairs and maintenance fees, utilities and other expenses related to our rental properties.
For the three months endedMarch 31, 2022 , our real property operating expenses amounted to$218,448 , as compared to$216,894 for the three months endedMarch 31, 2021 , an increase of$1,554 , or 0.7%.
Real Property Operating Income
Our real property operating income for the three months endedMarch 31, 2022 was$79,183 , representing an increase of$6,303 , or 8.6%, as compared to$72,880 for the three months endedMarch 31, 2021 . The increase was mainly attributable to the increase in real property rental revenue as described above. We expect our real property operating income will remain in its current level with minimal increase in the near future. 26 Other Operating Expenses For the three months endedMarch 31, 2022 and 2021, other operating expenses consisted of the following: Three Months EndedMarch 31, 2022 2021
Advertising and marketing expenses$ 526,806 $
8,823
Professional fees 821,308
1,381,178
Compensation and related benefits 523,045 562,006 Research and development 116,684 213,188 Travel and entertainment 38,280 32,150
Directors and officers liability insurance premium 103,584 81,141 Rent and related utilities
20,556 22,627
Other general and administrative 55,862 75,355
$ 2,206,125 $ 2,376,468 ? For the three months ended
increased by
31, 2021. The increase was primarily due to increased advertising activities.
We expect that our advertising expenses will decrease in the near future.
? Professional fees primarily consisted of accounting fees, audit fees, legal
service fees, consulting fees, investor relations service charges and other
fees. For the three months ended
decrease was primarily attributable to a decrease in consulting fees of
approximately
providers, a decrease in legal service fees of approximately
due to the decrease in use of legal service providers, and a decrease in
valuation service fee of
service fees of approximately
investor relations service providers, and an increase in other miscellaneous
items of approximately
remain in its current level with minimal increase in the near future.
? For the three months ended
decreased by
2021. The decrease was primarily attributable to a decrease in stock-based
compensation of approximately
granted and vested to our management and a decrease in management's
compensation and related benefits of approximately
compensation and related benefits will remain in its current level with minimal
decrease in the near future.
? For the three months ended
decreased by
2021. The decrease was mainly attributable to we decreased research and
development projects in the first quarter of 2022. We expect that our research
and development expenses will continue to decrease in the near future.
? For the three months ended
increased by
2021. The increase was mainly due to increased business travel activities in
the first quarter of 2022.
? For the three months ended
Insurance premium increased by
months ended
provider with different premium.
? For the three months ended
decreased by
2021. The decrease was mainly due to the decreased monthly rent in Avalon
Shanghai's office.
? Other general and administrative expenses mainly consisted of NASDAQ listing
fee, office supplies, and other miscellaneous items. For the three months ended
or 25.9%, as compared to the three months ended
efforts at stricter controls on corporate expenditure.
27
Loss from Operations
As a result of the foregoing, for the three months ended March 31, 2022 , loss
from operations amounted to $2,126,942 , as compared to $2,303,588 for the three
months ended March 31, 2021 , a decrease of $176,646 or 7.7%.
Other (Expense) Income
Other (expense) income mainly includes interest expense, loss from equity method investment, and other miscellaneous income.
Other income, net, totaled$56,404 for the three months endedMarch 31, 2022 , as compared to other expense, net, of$63,530 for the three months endedMarch 31, 2021 , a change of$119,934 , or 188.8%, which was primarily attributable to a decrease in interest expense of approximately$5,000 , and a decrease in loss from equity method investment of approximately$6,000 , and an increase in other miscellaneous income of approximately$109,000 . Income Taxes
We did not have any income taxes expense for the three months ended
Net Loss
As a result of the factors described above, our net loss was
Net Loss Attributable to
The net loss attributable to
Foreign Currency Translation Adjustment
Our reporting currency is theU.S. dollar. The functional currency of our parent company, AHS, Avalon RT 9, Genexosome, Avactis, and Exosome, is theU.S. dollar and the functional currency of Avalon Shanghai and Beijing Genexosome is the Chinese Renminbi ("RMB"). The financial statements of our subsidiaries whose functional currency is the RMB are translated toU.S. dollars using period end rates of exchange for assets and liabilities, average rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rates for equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation gain of$2,021 and a foreign currency translation loss of$2,722 for the three months endedMarch 31, 2022 and 2021, respectively. This non-cash gain/loss had the effect of decreasing/increasing our reported comprehensive loss. Comprehensive Loss As a result of our foreign currency translation adjustment, we had comprehensive loss of$2,068,517 and$2,369,840 for the three months endedMarch 31, 2022
and 2021, respectively.
Liquidity and Capital Resources
The Company has a limited operating history and its continued growth is dependent upon the continuation of providing medical related consulting services to its only few clients who are related parties and generating rental revenue from its income-producing real estate property inNew Jersey ; hence generating revenues, and obtaining additional financing to fund future obligations and pay liabilities arising from normal business operations. In addition, the current cash balance cannot be projected to cover the operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company's ability to raise additional capital, implement its business plan, and generate significant revenues. There are no assurances that the Company will be successful in its efforts to generate significant revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. The Company plans on raising capital through the sale of equity to implement its business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to the Company on satisfactory terms and conditions, if any. 28
The occurrence of an uncontrollable event such as the COVID-19 pandemic is likely to negatively affect the Company's operations. Efforts to contain the spread of the coronavirus have intensified, including social distancing, travel bans and quarantine, and these are likely to negatively impact our tenants, employees and consultants. These, in turn, will not only impact our operations, financial condition and demand for our medical related consulting services but our overall ability to react timely to mitigate the impact of this event. Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related financial effect cannot be reasonably estimated at this time but is expected to adversely impact our business for the rest
of 2022. Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. AtMarch 31, 2022 andDecember 31, 2021 , we had cash balance of approximately$526,000 and$808,000 , respectively. These funds are kept in financial institutions located as follows: Country: March 31, 2022 December 31,2021 United States$ 398,459 75.7 %$ 767,605 95.1 % China 127,831 24.3 % 39,933 4.9 % Total cash$ 526,290 100.0 %$ 807,538 100.0 %
Under applicable PRC regulations, foreign invested enterprises, or FIEs, inChina may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign invested enterprise inChina is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the cumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends. In addition, a portion of our businesses and assets are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through thePeople's Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by thePeople's Bank of China . Approval of foreign currency payments by thePeople'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 our PRC subsidiary to transfer its net assets to the Parent Company through loans, advances or cash dividends. The current PRC Enterprise Income Tax ("EIT") Law and its implementing rules generally provide that a 10% withholding tax applies toChina -sourced income derived by non-resident enterprises for PRC enterprise income tax purposes unless the jurisdiction of incorporation of such enterprises' shareholder has a tax treaty withChina that provides for a different withholding arrangement.
The following table sets forth a summary of changes in our working capital from
March 31, December 31, Changes in
2022 2021 Amount Percentage
Working capital deficit:
Total current assets $ 913,516 $ 1,323,042 $ (409,526 ) (31.0 )%
Total current liabilities 5,147,886 4,401,658 746,228
17.0 %
Working capital deficit $ (4,234,370 ) $ (3,078,616 ) $ (1,155,754 ) 37.5 %
Our working capital deficit increased by$1,155,754 to$4,234,370 atMarch 31, 2022 from$3,078,616 atDecember 31, 2021 . The increase in working capital deficit was primarily attributable to a decrease in cash of approximately$281,000 , a decrease in prepaid expenses and other current assets of approximately$152,000 , an increase in accrued professional fees of approximately$686,000 , an increase in accrued payroll liability and directors' compensation of approximately$173,000 , and an increase in accrued liabilities and other payables of approximately$382,000 , offset by a decrease in accrued research and development fees of approximately$116,000 and a decrease in note payable - related party of$390,000 resulting from the reclassification of note payable - related party from current to non-current. 29
Because the exchange rate conversion is different for the condensed consolidated balance sheets and the condensed consolidated statements of cash flows, the changes in assets and liabilities reflected on the condensed consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the condensed consolidated balance sheets.
Cash Flows for the Three Months Ended
The following summarizes the key components of our cash flows for the three
months ended
Three Months Ended
March 31,
2022 2021
Net cash used in operating activities
(1,749 ) (30,844 )
Net cash provided by financing activities 231,500 2,512,212 Effect of exchange rate on cash
209 120
Net (decrease) increase in cash $ (281,248 ) $ 965,963
Net cash flow used in operating activities for the three months ended March 31,
2022 was $511,208 , which primarily reflected our consolidated net loss of
approximately $2,071,000 , and the changes in operating assets and liabilities,
primarily consisting of a decrease in operating lease obligation of
approximately $34,000 , offset by a decrease in prepaid expenses and other assets
of approximately $30,000 , an increase accrued liabilities and other payables of
approximately $794,000 , and an increase in accrued liabilities and other
payables - related parties of approximately $40,000 , and the non-cash items
adjustment primarily consisting of depreciation of approximately $85,000 ,
amortization of right-of-use asset of approximately $34,000 , and stock-based
compensation and service expense of approximately $606,000 .
Net cash flow used in operating activities for the three months ended March 31,
2021 was $1,515,525 , which primarily reflected our consolidated net loss of
approximately $2,367,000 , and the changes in operating assets and liabilities,
primarily consisting of an increase in prepaid expenses and other assets of
approximately $41,000 , and a decrease in operating lease obligation of
approximately $33,000 , offset by an increase in accrued liabilities and other
payables of approximately $163,000 , an increase in accrued liabilities and other
payables - related parties of approximately $45,000 , and the non-cash items
adjustment primarily consisting of depreciation of approximately $79,000 , and
stock-based compensation and service expense of approximately $574,000 .
We expect our cash used in operating activities to increase due to the following:
? the development and commercialization of new products;
? an increase in professional staff and services; and
? an increase in public relations and/or sales promotions for existing and/or new
brands as we expand within existing markets or enter new markets.
Net cash flow used in investing activities was$1,749 for the three months endedMarch 31, 2022 as compared to$30,844 for the three months endedMarch 31, 2021 . During the three months endedMarch 31, 2022 , we made payments for purchase of property and equipment of approximately$2,000 . During the three months endedMarch 31, 2021 , we made additional investment in equity method investment of approximately$31,000 . Net cash flow provided by financing activities was$231,500 for the three months endedMarch 31, 2022 as compared to$2,512,212 for the three months endedMarch 31, 2021 . During the three months endedMarch 31, 2022 , we received proceeds from related party borrowings of approximately$100,000 and net proceeds from equity offering of approximately$132,000 (net of cash paid for commission of approximately$4,000 ). During the three months endedMarch 31, 2021 , we received proceeds from related party borrowings of approximately$105,000 and net proceeds from equity offering of approximately$2,407,000 (net of cash paid for commission of approximately$74,000 ). 30 Our capital requirements for the next twelve months primarily relate to working capital requirements, including salaries, fees related to third parties' professional services, reduction of accrued liabilities, mergers, acquisitions and the development of business opportunities. These uses of cash will depend on numerous factors including our sales and other revenues, and our ability to control costs. All funds received have been expended in the furtherance of growing the business. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
? an increase in working capital requirements to finance our current business,
including ongoing research and development programs, clinical studies, as well
as commercial strategies;
? the use of capital for mergers, acquisitions and the development of business
opportunities;
? addition of administrative personnel as the business grows; and
? the cost of being a public company.
In the third quarter of 2019, we had secured a$20 million credit facility (Line of Credit) provided by our Chairman,Wenzhao Lu . The unsecured credit facility bears interest at a rate of 5% and provides for maturity on drawn loans 36 months after funding. As ofMarch 31, 2022 , the total principal amount outstanding under the Credit Line was$2.9 million and we have approximately$14.1 million remaining available under the Line Credit. OnDecember 13, 2019 , we entered into an Open Market Sale AgreementSM (the "Sales Agreement") withJefferies LLC , as sales agent ("Jefferies"), pursuant to which we may offer and sell, from time to time, through Jefferies, shares of our common stock, par value$0.0001 per share, having an aggregate offering price of up to$20.0 million . OnApril 6, 2020 , the date on which we filed our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , our registration statement became subject to the offering limits set forth in General Instruction I.B.6 of Form S-3. As ofApril 6, 2020 , the aggregate market value of our outstanding common stock held by non-affiliates, or public float, was$39,564,237 , based on 23,691,160 shares of our outstanding common stock that were held by non-affiliates on such date and a price of$1.67 per share, which was the price at which our common stock was last sold onThe Nasdaq Capital Market onFebruary 19, 2020 (a date within 60 days of the date hereof), calculated in accordance with General Instruction I.B.6 of Form S-3. We have not offered any securities pursuant to General Instruction I.B.6 of Form S-3 in the 12 calendar months preceding the date of this prospectus supplement. We filed a prospectus supplement to amend and supplement the information in our prospectus and original prospectus supplement based on the amount of securities that we are eligible to sell under General Instruction I.B.6 of Form S-3. After giving effect to the$13,000,000 offering limit imposed by General Instruction I.B.6 of Form S-3, we may offer and sell additional shares of our common stock having an aggregate offering price of up to$13,000,000 from time to time through Jefferies acting as our sales agent in accordance with the terms of the sales agreement. As ofMarch 31, 2022 , we sold a total of 6,429,486 shares of our common stock through Jefferies with an aggregate offering price of$10,073,707 and we have approximately$4.9 million offering price remaining available under the Sales Agreement.
We estimate that based on current plans and assumptions, that our available cash will be insufficient to satisfy our cash requirements under our present operating expectations through cash available under our Credit Line and sales of equity through our Sales Agreement. Other than funds received from the sale of our equity and advances from our related party, and cash resource generating from our operations, we presently have no other significant alternative source of working capital. We have used these funds to fund our operating expenses, pay our obligations and grow our company. We will need to raise significant additional capital to fund our operations and to provide working capital for our ongoing operations and obligations. Therefore, our future operation is dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in theU.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will be required to cease our operations. To date, we have not considered this alternative, nor do we view it as a likely occurrence.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as ofMarch 31, 2022 , and the effect these obligations are expected to have on our liquidity and cash flows in future
periods.
31
Payments Due by Period
Less than 1
Contractual obligations: Total year 1-3 years 3-5 years 5+ years
Operating lease commitment $ 132,110 $ 132,110 $ - $ - $ -
Acquisition consideration 100,000 100,000 - - -
Borrowings from related party
(principal) 3,240,262 - 3,240,262 - -
Accrued interest - related
party 408,120 408,120 - - -
Epicon equity investment
obligation 826,498 275,499 550,999 - -
AVAR joint venture commitment 10,788,644 - 5,788,644 5,000,000 -
Total $ 15,495,634 $ 915,729 $ 9,579,905 $ 5,000,000 $ -
Off-balance Sheet Arrangements
We presently do not have off-balance sheet arrangements.
Foreign Currency Exchange Rate Risk
A portion of our operations are inChina . Thus, a portion of our revenues and operating results may be impacted by exchange rate fluctuations between RMB and US dollars. For the three months endedMarch 31, 2022 and 2021, we had an unrealized foreign currency translation gain of approximately$2,000 and an unrealized foreign currency translation loss of approximately$3,000 , respectively, because of changes in the exchange rate. Inflation
The effect of inflation on our revenue and operating results was not significant.
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