AVALON GLOBOCARE CORP. The following discussion and analysis of our financial condition and results of operations for the three and six months endedJune 30, 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 companion
diagnostics. 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 vertical segments 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
regenerative therapeutics.
28
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™")
? Novel therapeutic and diagnostic targets development utilizing QTY-code
protein design technology with
including using the QTY code protein design technology for development of
a hemofiltration device to treat Cytokine Storm.
? Co-development of next generation, mRNA-based immune effector cell
therapeutic modalities with Arbele Limited .
Avalon's midstream bio-processing and bio-production facility is co-developed at
the University of Pittsburgh Medical Center (UPMC) with state-of-the-art
infrastructure and standardization accredited with cGMP, FACT, aaBB, CLIA and
CAP, as well as stringent QC/QA facility for standardized bio-manufacturing of
clinical-grade cellular products involved in our clinical programs in immune
effector cell therapy and ACTEX-based regenerative therapeutics.
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
Hospital and
largest CAR-T treatment network with over 1,200 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
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 Lu Daopei
Hospital (registered clinical trial number NCT03952923) with excellent
efficacy (90% complete remission rate) and minimal adverse side effects.
Avalon is currently expanding the patient recruitment and indication for
AVA-001 to include relapsed/refractory non-Hodgkin lymphoma patients.
? AVA-011 and FLASH-CAR™: The Company advanced its next generation immunecell therapy using RNA-based, non-viral FLASH-CAR™ technology co-developed
with the Company's strategic partner
FLASH-CAR™ platform can be used to create personalized ("autologous') 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 a
dual-target (anti-CD19/CD22) CAR-T which has completed pre-clinicalresearch stage, and currently at IND-enabling process development stage at
clinical-grade cell-therapy products for subsequent clinical studies.
29
? 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 Avalon GloboCare , HydroPeptide and the University of
Pittsburgh Medical Center .
? 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 companion diagnostics. 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 vertical segments 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 regenerative 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$5,557,470 as ofJune 30, 2022 and has incurred recurring net losses and generated negative cash flow from operating activities of$4,099,012 and$2,686,722 for the six months endedJune 30, 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. 30 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, and assumptions used to determine fair value of warrants and embedded conversion features of convertible note payable. 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.
31
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.
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.
32
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Three and Six Months Ended
Revenues For the three months endedJune 30, 2022 , we had real property rental revenue of$290,821 , as compared to$280,232 for the three months endedJune 30, 2021 , an increase of$10,589 , or 3.8%. For the six months endedJune 30, 2022 , we had real property rental revenue of$588,452 , as compared to$570,006 for the six months endedJune 30, 2021 , an increase of$18,446 , or 3.2%. The slight increase was primarily attributable to the increase of tenants in the first half of 2022. We expect that our revenue from real property rent will remain in its current quarterly 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 endedJune 30, 2022 , our real property operating expenses amounted to$211,703 , as compared to$205,147 for the three months endedJune 30, 2021 , an increase of$6,556 , or 3.2%. For the six months endedJune 30, 2022 , our real property operating expenses amounted to$430,151 , as compared to$422,041 for the six months endedJune 30, 2021 , an increase of$8,110 , or 1.9%.
Real Property Operating Income
Our real property operating income for the three months endedJune 30, 2022 was$79,118 , representing an increase of$4,033 , or 5.4%, as compared to$75,085 for the three months endedJune 30, 2021 . Our real property operating income for the six months endedJune 30, 2022 was$158,301 , representing an increase of$10,336 , or 7.0%, as compared to$147,965 for the six months endedJune 30, 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 quarterly level with minimal increase in the near future. Other Operating Expenses
For the three and six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Advertising and marketing expenses
436,447 1,357,079 1,257,755 2,738,257
Compensation and related benefits 503,541 547,829 1,026,586 1,109,835 Research and development 254,476 238,793 371,160 451,981 Litigation settlement 1,350,000 - 1,350,000 - Directors and officers liability insurance premium 103,584 81,141 207,168 162,282 Travel and entertainment 41,282 40,069 79,562 72,219 Rent and related utilities 19,656 18,661 40,212 41,288
Other general and administrative 83,308 86,293
139,170 161,648
$ 2,922,689 $ 2,377,365 $ 5,128,814 $ 4,753,833
33
? For the three months ended
increased by
30, 2021. For the six months ended
expenses increased by
activities. We expect that our advertising expenses will remain in its current
quarterly level with minimal increase in the near future.
? Professional fees primarily consisted of accounting fees, audit fees, legal
service fees, consulting fees, investor relations service charges, valuation
service fees and other fees. For the three months ended
professional fees decreased by
months ended
consulting fees of approximately
consulting service providers, a decrease in legal service fees of approximately
decrease in investor relations service charges of
decrease in use of investor relations service providers, and a decrease in
valuation service fees of
miscellaneous items of approximately
2022, professional fees decreased by
six months ended
in consulting fees of approximately
of consulting service providers, a decrease in legal service fees of
approximately
providers, and a decrease in one time valuation service fees of
offset by an increase in other miscellaneous items of approximately
expect that our professional fees will remain in its current quarterly level
with minimal increase in the near future.
? For the three months ended
decreased by
2021, which 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
ended
7.5%, as compared to the six months ended
attributable to a decrease in stock-based compensation of approximately
which reflected the value of options granted and vested to our management and a
decrease in management's compensation and related benefits of approximately
current quarterly level with minimal decrease in the near future.
? For the three months ended
increased by
2021. The increase was mainly attributable to we increased research and
development projects in the second quarter of 2022. For the six months ended
17.9%, as compared to the six months ended
mainly attributable to we decreased research and development projects in the
first half of 2022. We expect that our research and development expenses will
remain in its current quarterly level with minimal decrease in the near future.
? For the three months ended
the six months ended
increase was due to a settlement signed in
? For the three months ended
Insurance premium increased by
months ended
and
compared to the six months ended
different insurance provider with different premium.
34
? For the three months ended
increased by
2021. For the six months ended
increased by
2021. The increase was mainly due to increased business travel activities in
the first half of 2022.
? For the three months ended
increased by
2021. For the six months ended
expenses decreased by
30, 2021.
? Other general and administrative expenses mainly consisted of NASDAQ listing
fee, office supplies, and other miscellaneous items. For the three months ended
or 3.5%, as compared to the three months ended
months ended
by
decrease was mainly due to our efforts at stricter controls on corporate expenditure. Loss from Operations As a result of the foregoing, for the three months endedJune 30, 2022 , loss from operations amounted to$2,843,571 , as compared to$2,302,280 for the three months endedJune 30, 2021 , an increase of$541,291 or 23.5%. As a result of the foregoing, for the six months endedJune 30, 2022 , loss from operations amounted to$4,970,513 , as compared to$4,605,868 for the six months endedJune 30, 2021 , an increase of$364,645 or 7.9%. Other (Expense) Income
Other (expense) income mainly includes interest expense, loss from equity method investment, change in fair value of derivative liability, and other miscellaneous income (expense).
Other income, net, totaled$815,097 for the three months endedJune 30, 2022 , as compared to other expense, net, of$62,630 for the three months endedJune 30, 2021 , a change of$877,727 , or 1,401.4%, which was primarily attributable to an increase in other miscellaneous income of approximately$153,000 mainly driven by reagent sale in the second quarter of 2022, an increase in gain from change in fair value of derivative liability of approximately$769,000 , and a decrease in loss from equity method investment of approximately$4,000 , offset by an increase in interest expense of approximately$48,000 due to the increase in outstanding borrowings.
Other income, net, totaled$871,501 for the six months endedJune 30, 2022 , as compared to other expense, net, of$126,160 for the six months endedJune 30, 2021 , a change of$997,661 , or 790.8%, which was primarily attributable to an increase in other miscellaneous income of approximately$261,000 mainly driven by reagent sale in the first half of 2022, an increase in gain from change in fair value of derivative liability of approximately$769,000 , and a decrease in loss from equity method investment of approximately$9,000 , offset by an increase in interest expense of approximately$42,000 due to the increase in outstanding borrowings. Income Taxes We did not have any income taxes expense for the three months endedJune 30, 2022 and 2021 since we incurred losses in these periods. We did not have any income taxes expense for the six months endedJune 30, 2022 and 2021 since we incurred losses in these periods. 35 Net Loss
As a result of the factors described above, our net loss was$2,028,474 for the three months endedJune 30, 2022 , as compared to$2,364,910 for the three months endedJune 30, 2021 , a decrease of$336,436 or 14.2%. As a result of the factors described above, our net loss was$4,099,012 for the six months endedJune 30, 2022 , as compared to$4,732,028 for the six months endedJune 30, 2021 , a decrease of$633,016 or 13.4%.
Net Loss Attributable to
The net loss attributable to
The net loss attributable toAvalon GloboCare Corp. common shareholders was$4,099,012 or$0.05 per share (basic and diluted) for the six months endedJune 30, 2022 , as compared with$4,732,028 , or$0.06 per share (basic and diluted) for the six months endedJune 30, 2021 , a change of$633,016 or 13.4%.
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 loss of$43,503 and a foreign currency translation gain of$14,786 for the three months endedJune 30, 2022 and 2021, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of$41,482 and a foreign currency translation gain of$12,064 for the six months endedJune 30, 2022 and 2021, respectively. This non-cash loss/gain had the effect of increasing/decreasing our reported comprehensive loss. Comprehensive Loss As a result of our foreign currency translation adjustment, we had comprehensive loss of$2,071,977 and$2,350,124 for the three months endedJune 30, 2022
and 2021, respectively. As a result of our foreign currency translation adjustment, we had comprehensive loss of$4,140,494 and$4,719,964 for the six months endedJune 30, 2022 and 2021, respectively. 36
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. 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. AtJune 30, 2022 andDecember 31, 2021 , we had cash balance of approximately$1,180,000 and$808,000 , respectively. These funds are kept in financial institutions located as follows: Country: June 30, 2022 December 31, 2021 United States$ 716,240 60.7 %$ 767,605 95.1 % China 463,968 39.3 % 39,933 4.9 % Total cash$ 1,180,208 100.0 %$ 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. 37
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
June 30, December 31, Changes in
2022 2021 Amount Percentage
Working capital deficit:
Total current assets $ 1,652,958 $ 1,323,042 $ 329,916 24.9 %
Total current liabilities 7,210,428 4,401,658 2,808,770
63.8 %
Working capital deficit $ (5,557,470 ) $ (3,078,616 ) $ (2,478,854 ) 80.5 %
Our working capital deficit increased by $2,478,854 to $5,557,470 at June 30,
2022 from $3,078,616 at December 31, 2021 . The increase in working capital
deficit was primarily attributable to an increase in accounts payable of
approximately $376,000 , an increase in accrued settlement of lawsuit of $900,000
due to a settlement signed in June 2022 , an increase in convertible note
payable, net, of approximately $493,000 resulting from the issuance of 2022
Convertible Note, and an increase in derivative liability of approximately
$2,013,000 which was related to our 2022 Convertible Note, offset by an increase
in cash of approximately $373,000 , a decrease in accrued professional fees of
approximately $396,000 , which was mainly due to payments made to our
professional service providers in the first half of 2022, a decrease in accrued
research and development fees of approximately $319,000 resulting from payments
made to research and development service provider in the six months ended June
30, 2022 , and a decrease in note payable - related party of $390,000 due to
repayment made to this related party in the first half of 2022.
Because the exchange rate conversion is different for the condensed consolidated balance sheets and the condensed consolidated statements of cash flows, the changes in assets and liabilities reflected on the condensed consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the condensed consolidated balance sheets.
Cash Flows for the Six Months Ended
The following summarizes the key components of our cash flows for the six months endedJune 30, 2022 and 2021: Six Months EndedJune 30, 2022 2021
Net cash used in operating activities
(55,757 ) (50,511 )
Net cash provided by financing activities 3,130,443 2,600,151 Effect of exchange rate on cash
(15,294 ) 2,635
Net increase (decrease) in cash $ 372,670 $ (41,273 )
Net cash flow used in operating activities for the six months ended June 30,
2022 was $2,686,722 , which primarily reflected our consolidated net loss of
approximately $4,099,000 , and the non-cash item adjustment consisting of change
in fair market value of derivative liability of approximately $769,000 , and the
changes in operating assets and liabilities, primarily consisting of a decrease
in operating lease obligation of approximately $80,000 , offset by an increase in
accounts payable of approximately $389,000 , an increase in accrued liabilities
and other payables of approximately $675,000 , which was mainly attributable the
increase in accrued settlement of lawsuit of $1,350,000 resulting from a
settlement signed in June 2022 offset by the decrease in accrued professional
fees of approximately $396,000 due to payments made to our professional service
providers in the first half of 2022 and the decrease in accrued research and
development fees of approximately $319,000 resulting from payments made to
research and development service provider in the six months ended June 30, 2022 ,
and an increase in accrued liabilities and other payables - related parties of
approximately $72,000 , and the non-cash items adjustment primarily consisting of
depreciation of approximately $169,000 , amortization of right-of-use asset of
approximately $68,000 , stock-based compensation and service expense of
approximately $821,000 , and amortization of debt discount of approximately
$55,000 .
Net cash flow used in operating activities for the six months ended June 30,
2021 was $2,593,548 , which primarily reflected our consolidated net loss of
approximately $4,732,000 , and the changes in operating assets and liabilities,
primarily consisting of a decrease in operating lease obligation of
approximately $60,000 , offset by an increase accrued liabilities and other
payables of approximately $714,000 , and an increase in accrued liabilities and
other payables - related parties of approximately $91,000 , and the non-cash
items adjustment primarily consisting of depreciation of approximately $141,000 ,
amortization of right-of-use asset of approximately $60,000 , and stock-based
compensation and service expense of approximately $1,087,000 .
38
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$55,757 for the six months endedJune 30, 2022 as compared to$50,511 for the six months endedJune 30, 2021 . During the six months endedJune 30, 2022 , we made payments for purchase of property and equipment of approximately$2,000 and made additional investment in equity method investment of approximately$54,000 . During the six months endedJune 30, 2021 , we made payment for improvement of commercial real estate of approximately$10,000 and made additional investment in equity method investment of approximately$40,000 . Net cash flow provided by financing activities was$3,130,443 for the six months endedJune 30, 2022 as compared to$2,600,151 for the six months endedJune 30, 2021 . During the six months endedJune 30, 2022 , we received proceeds from related party borrowings of approximately$100,000 and net proceeds from equity offering of approximately$112,000 (net of cash paid for commission and other offering costs of approximately$24,000 ) and proceeds from issuance of convertible debt and warrants of approximately$3,719,000 to fund our working capital needs, offset by repayments made for note payable - related party of$390,000 and repayments made for loan payable - related party of$410,000 . During the six months endedJune 30, 2021 , we received proceeds from related party borrowings of approximately$193,000 and net proceeds from equity offering of approximately$2,407,000 (net of cash paid for commission of approximately$74,000 ). 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 ofJune 30, 2022 , the total principal amount outstanding under the Credit Line was$2.4 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 ofJune 30, 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. 39
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 ofJune 30, 2022 , and the effect these obligations are expected to have on our liquidity and cash flows in future
periods.
Payments Due by Period
Less than 1
Contractual obligations: Total year 1-3 years 3-5 years 5+ years
Operating lease commitment $ 79,792 $ 79,792 $ - $ - $ -
Acquisition consideration 100,000 100,000 - - -
Borrowings from related party
(principal) 2,440,262 - 2,440,262 - -
Accrued interest - related
party 439,974 439,974 - - -
Convertible debt 3,718,943 3,718,943 - - -
Accrued interest for
convertible debt 7,204 7,204 - - -
Epicon equity investment
obligation 729,905 243,302 486,603 - -
Avactis joint venture
commitment 10,746,324 - 5,746,324 5,000,000 -
Total $ 18,262,404 $ 4,589,215 $ 8,673,189 $ 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 endedJune 30, 2022 and 2021, we had an unrealized foreign currency translation loss of approximately$44,000 and an unrealized foreign currency translation gain of approximately$15,000 , respectively, because of changes in the exchange rate. For the six months endedJune 30, 2022 and 2021, we had an unrealized foreign currency translation loss of approximately$42,000 and an unrealized foreign currency translation gain of approximately$12,000 , 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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