UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No. 3)

 

Filed by the Registrant Filed by a Party other than the Registrant

 

Check the appropriate box:

 

  Preliminary Proxy Statement
   
  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
   
  Definitive Proxy Statement
   
  Definitive Additional Materials
   
  Soliciting Material Pursuant to §240.14a-12

  

AVALON GLOBOCARE CORP.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

  No fee required.
   
  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
     
    (1)   Title of each class of securities to which transaction applies:
       

Common shares, $1.00 par value per share, of Lonlon Biotech Ltd.

         
    (2)   Aggregate number of securities to which transaction applies:
       

10,001 shares, $1.00 par value, Lonlon Biotech Ltd.

         
    (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

$0.33 per share, calculated in accordance with Rule 0-11(c)(1)(i) based on the value of the shares of Lonlon Biotech Ltd. being acquired by the registrant, who is the acquiring person, established in accordance with Rule 0-11(a)(4) for securities of issuers with an accumulated capital deficit based on one-third of the par value of such shares, or $3,333.67 in the aggregate. In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, the filing fee was determined by multiplying the aggregate value calculated in the preceding sentence by $0.0001091.

         
    (4)   Proposed maximum aggregate value of transaction:
       

$3,333.67

         
    (5)   Total fee paid:
       

$0.37

   
  Fee paid previously with preliminary materials:
   
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
     
    (1)   Amount Previously Paid:
         
    (2)   Form, Schedule or Registration Statement No.:
         
    (3)   Filing Party:
         
    (4)   Date Filed:

 

Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

 

 

 

 

 

 

PRELIMINARY PROXY STATEMENT—SUBJECT TO COMPLETION

DATED OCTOBER 20, 2021

 

AVALON GLOBOCARE CORP.

4400 Route 9 South, Suite 3100

Freehold, New Jersey 07728

 

[_], 2021

 

Dear Stockholder:

 

You are cordially invited to attend the annual meeting of stockholders of Avalon GloboCare Corp., a Delaware corporation (“Avalon” or the “Company”), which will be held at [_] on [_], 2021, beginning at [_], local time (the “annual meeting”), for the purposes detailed below, including (i) the election of our directors as described herein, (ii) the ratification of the appointment of Marcum LLP as the Company’s independent auditors for the fiscal year ending December 31, 2021 as described herein and (iii) the approval of the issuance of the shares of common stock, par value US$0.0001 per share, of Avalon (the “Avalon Common Stock”) to be issued in connection with the proposed acquisition of Lonlon Biotech Ltd., a company incorporated in the British Virgin Islands (“BVI”) (“Sen Lang BVI”) by Avalon and the related facilitating transactions, including the Equity Financing (as defined below), pursuant to the rules of the Nasdaq Stock Market (“Nasdaq”) as described herein.

 

As previously announced, on June 13, 2021, Avalon entered into a Share Purchase Agreement (the “Purchase Agreement”), by and among the Company, Sen Lang BVI, the holders of the share capital of Sen Lang BVI (the “Sen Lang BVI Shareholders”), the ultimate beneficial owners of the Sen Lang BVI Shareholders (the “Sen Lang BVI Beneficial Shareholders” and, together with the Sen Lang BVI Shareholders, the “Sen Lang BVI Owners”) and a representative of the Sen Lang BVI Owners (the “Sen Lang BVI Representative”). Pursuant to the Purchase Agreement, subject to the satisfaction of the conditions to closing therein, including approval by the Avalon stockholders pursuant to the rules of Nasdaq, Avalon agreed to purchase (the “Acquisition”) all of the issued and outstanding share capital of Sen Lang BVI (the “Sen Lang BVI Shares”). A copy of the Purchase Agreement is attached as Annex A to the accompanying proxy statement, and you are encouraged to read it in its entirety.

 

Both before and immediately after the Acquisition, Avalon was not and will not become a Chinese operating company, but will remain a Delaware operating and holding company. While Avalon is not a PRC operating company, certain of its subsidiaries are PRC operating companies and through them Avalon currently has substantial operations in the PRC. Sen Lang BVI, the company Avalon is seeking to acquire, is a BVI holding company with its operations conducted by its subsidiaries and through contractual arrangements with variable interest entities (“VIEs”) based in China. Sen Lang BVI, through the VIE structure (described in more detail in the section of the accompanying proxy statement titled “The Acquisition—The VIE Structure”) of contractual rights held by its wholly-owned subsidiary Beijing Langlang Runfeng Biotechnology Co., Ltd., a wholly foreign owned enterprise with limited liability organized and existing under the laws of the People’s Republic of China (the “PRC”) (the “PRC Subsidiary”), has full economic benefit and management control over, and is consolidated for accounting purposes with, Senlang Biotechnology Co. Ltd., a PRC domestic company with limited liability organized and existing under the laws of the PRC (the “OpCo” or “SenlangBio”), however, the PRC Subsidiary is a holding company and is not a Chinese operating company. SenlangBio operates its business in China and is mainly engaged in the business of research and development in relation to CAR-T cell therapy, immune cell therapy and related drug development. SenlangBio is owned 100% by certain of the Sen Lang BVI Beneficial Shareholders. A wholly-owned subsidiary of SenlangBio, Shijiazhuang Senlang Medical Laboratory Co., Ltd., a company with limited liability organized and existing under the laws of the PRC (“SenlangBio Clinical Laboratory”) operates its business in China and is engaged in the business of testing of immunology, serology and molecular genetics specialties for patients, including hematology-tumor diagnostics and testing prior to clinical trials for cell therapy. Upon completion of the Acquisition, investors will not directly hold any equity interest in the VIEs.

 

The VIE structure poses unique risks to investors. The VIE structure is routinely adopted by many Chinese-based companies to replicate foreign investment in Chinese-based companies where Chinese law prohibits or limits direct foreign investment in Chinese operating companies. Investors investing in such a company that operates in China through a VIE structure may never hold any equity interest in the Chinese operating company. PRC regulatory authorities could consider the VIE structure as a violation of applicable PRC laws and therefore could prohibit this structure, which would likely result in a material change in Avalon’s operations and/or value of Avalon’s common stock, including that it could cause the value of such securities to significantly decline or become worthless. See “Risk Factors—Risks Related to the VIE Structure and SenlangBio being a PRC Domestic Entity—Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law, its implementing rules, Foreign Investment Security Review Measures, other regulations and how they may impact the viability of the VIE structure, business, financial condition, and results of operations.

 

Moreover, Avalon has a significant portion of its existing operation in China. SenlangBio and SenlangBio Clinical Laboratory also have their business operations in China. These business operations are governed by PRC laws, rules and regulations, the associated legal and operational risks could result in a material change in the business operations of Avalon’s existing PRC subsidiaries, SenlangBio and SenlangBio Clinical Laboratory and could negatively impact the value of Avalon’s common stock or could even cause the value of such securities to significantly decline or be worthless. The PRC government has recently announced its plans to enhance its regulatory oversight of Chinese companies listing overseas, and there is some uncertainty with respect to the interpretation and implementation of such plans. The PRC government has also issued statements and has undertaken regulatory actions related to the use of variable interest entities, data security and anti-monopoly concerns. The PRC government may promulgate relevant laws, internal rules and regulations that may impose additional and significant obligations and liabilities on overseas listed Chinese companies regarding data security, cross-border data flow, compliance with PRC securities laws and anti-monopoly laws. These laws and regulations can be complex and stringent, and can be subjected to change and uncertain interpretation, which could limit Avalon’s ability to conduct its business and accept foreign investments, or could significantly impact its operating results and stock price. See “Risk Factors—Risks Related to the VIE Structure and SenlangBio being a PRC Domestic Entity—There are uncertainties regarding the interpretation and enforcement of PRC laws, rules, and regulations in general, as well as the actions taken by PRC regulatory authorities.” However, because Avalon is the issuer of the common stock listed on Nasdaq and is a Delaware operating and holding company, no approval or permission is required under current applicable PRC laws and regulations for any future issuances of Avalon securities to non-PRC investors. Nevertheless, if changes in PRC securities laws and/or their application cause them to have an extraterritorial effect, Avalon may face the risk that the future regulatory actions by the PRC government could significantly limit or completely hinder Avalon’s ability to offer future securities to investors. See “Risk Factors—Risks Related to Avalon—The PRC government exerts substantial influence over the manner in which Avalon must conduct its business activities and Avalon may face the risk that the future regulatory actions by the PRC government could significantly limit or completely hinder Avalon’s ability to offer future securities to investors.

 

 

 

 

Prior to the execution of the Purchase Agreement, the Board of Directors of Avalon (the “Board”), unanimously (i) determined that the terms and provisions of the Purchase Agreement and the transactions contemplated thereby, including the Acquisition, are fair to, advisable and in the best interests of the Company and its stockholders, (ii) approved the Purchase Agreement and the transactions contemplated thereby, including the Acquisition and the issuance of the Acquisition Shares (as defined below), (iii) authorized, empowered and directed the Company to perform all of its obligations under the Purchase Agreement and the Exchange Agreement (as defined below) and related documents, and (iv) resolved to recommend the approval by the stockholders of the Company of the issuance of the Acquisition Shares in connection with the Acquisition and the issuance of the Exchange Shares (as defined below) in connection with the Exchange Agreement in compliance with the rules of Nasdaq (the “Company Board Recommendation”). Accordingly, the board recommends a vote “FOR” the proposal to approve the issuance of the Acquisition Shares in connection with the Acquisition and the issuance of the Exchange Shares in connection with the Exchange Agreement in compliance with the rules of Nasdaq and “FOR” each of the other proposals to be voted on at the annual meeting.

 

The purchase price being paid by Avalon to the Sen Lang BVI Shareholders under the Purchase Agreement for the Sen Lang BVI Shares is an aggregate of 81 million shares (the “Acquisition Shares”) of Avalon Common Stock. Ten percent (10%), or 8.1 million, of such shares will be held in escrow for 12 months following the closing to satisfy any indemnification obligations of the Sen Lang BVI Shareholders under the Share Purchase Agreement. In addition, at the closing of the Acquisition, it is expected that Dr. Jianqiang Li, scientific founder and CSO of SenlangBio, will join the board of the Company, and Dr. Li will also be appointed as Chief Technology Officer of the Company. The Acquisition Shares will not be registered under the Securities Act of 1933, as amended (the “Securities Act”) and, therefore, will be restricted securities under Rule 144 under the Securities Act for six months or longer after the closing of the Acquisition, subject to “affiliate” status with the Company under the Securities Act.

 

In connection with the Acquisition, on June 13, 2021, an institutional investor (the “Investor”) entered into an agreement, as amended on June 24, 2021, with SenlangBio related to the purchase of registered capital of SenlangBio (the “OpCo Capital Increase Agreement”) pursuant to which the Investor will acquire an aggregate of up to 13.5% of the equity ownership of SenlangBio for an aggregate purchase price (the “Subscription Amount) of approximately US$30,000,000 (represented by an actual investment of RMB200,000,000) (the “Equity Financing”), which funds will be invested in SenlangBio in three equal installments of approximately US$10,000,000, at a fixed price, the first to be upon the closing of the Acquisition, the second to be within three months after the closing and the third to be within six months after the closing. In addition, pursuant to a Securities Exchange Agreement, as amended on June 24, 2021 (the “Exchange Agreement”), by and among the Company, Sen Lang BVI, SenlangBio and the Investor, dated June 13, 2021, the Investor shall have the right, exercisable between the six-month and five year-anniversaries of the respective initial closing and installment closings, to elect to exchange, from time to time, all or part of its then-owned equity ownership of SenlangBio for shares (the “Exchange Shares”) of Avalon Common Stock at a fixed exchange price of US$1.21 per share of Avalon Common Stock, which was the market price of the Avalon Common Stock as of the date of the Exchange Agreement under Nasdaq rules. In addition, the Exchange Agreement provides that the Investor may only exchange up to 10% of its total investment amount in any 30 day period.

 

The proxy statement attached to this letter and the enclosed Annual Report of Avalon to stockholders for the fiscal year ended December 31, 2020, which includes the information required by Rule 14a-3 of the Securities Exchange Act of 1934, provides you with information about the proposed Acquisition and the annual meeting. I encourage you to read the entire proxy statement and accompanying Annual Report carefully.

 

At the Avalon annual meeting of stockholders, Avalon will ask its stockholders to, among other things, elect the nine director nominees named in the proxy statement to hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified, ratify the appointment of Marcum LLP as the Company’s independent auditors for the fiscal year ending December 31, 2021 and approve the issuance of the Acquisition Shares in connection with the Acquisition and the issuance of the Exchange Shares in connection with the Exchange Agreement in compliance with the rules of Nasdaq, each as described in the proxy statement.

 

Only stockholders of record at the close of business on [_], 2021, the record date for determining the stockholders entitled to notice of and to vote at the annual meeting, are entitled to notice of and to vote at the annual meeting and any adjournment thereof.

 

Your vote is very important. The Acquisition cannot be completed unless the issuances of the Acquisition Shares and the Exchange Shares are adopted by the affirmative vote of the holders of a majority of votes cast by the stockholders present in person or represented by proxy and entitled to vote thereon at the annual meeting.

 

Whether or not you are able to attend the annual meeting in person, please complete, sign and date the enclosed proxy card and return it in the envelope provided as soon as possible, or follow the instructions provided for submitting a proxy by telephone or the Internet. If you hold shares through a broker or other nominee, you should follow the procedures provided by your broker or other nominee. These actions will not limit your right to vote in person if you wish to attend the annual meeting and vote in person.

 

Thank you for your cooperation and your continued support of Avalon.

 

  Sincerely,
   
  Wenzhao “Daniel” Lu,
  Chairman of the Board of Directors

 

This proxy statement is dated [_], 2021 and is first being mailed along with the Annual Report to stockholders
on or about [_], 2021.

 

 

 

 

AVALON GLOBOCARE CORP.

4400 Route 9 South, Suite 3100

Freehold, New Jersey 07728

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON [    ], 2021

 

To the Stockholders of Avalon GloboCare Corp.:

 

NOTICE IS HEREBY GIVEN that the annual meeting of stockholders (the “annual meeting”) of Avalon GloboCare Corp., a Delaware corporation (the “Company,” “Avalon,” “we,” “our” or “us”), will be held on [    ], 2021, at [    ] [a/p.m.], Eastern time at [    ]. Only stockholders who hold shares of Avalon common stock, $0.0001 par value per share (“Avalon Common Stock”) at the close of business on [ ], 2021, the record date for the annual meeting, are entitled to vote at the annual meeting and any adjournments or postponements thereof.

 

The annual meeting is being held for the following purposes:

 

1.The “Director Election Proposal”—to elect the nine director nominees named in the proxy statement to hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified;

 

  2. The “Auditor Proposal”—to ratify the appointment of Marcum LLP as the Company’s independent auditors for the fiscal year ending December 31, 2021; and

 

  3. The “Nasdaq Proposal”—to approve, pursuant to the rules of the Nasdaq Stock Market as described herein, the issuance of (i) 81 million shares (the “Acquisition Shares”) of the common stock, par value US$0.0001 per share, of Avalon (the “Avalon Common Stock”) issuable to the holders (the “Sen Lang BVI Shareholders”) of the share capital of Lonlon Biotech Ltd., a company incorporated in the British Virgin Islands (“BVI”) (“Sen Lang BVI”), pursuant to the terms of the Share Purchase Agreement, dated as of June 13, 2021 (as may be amended from time to time, the “Purchase Agreement”), by and among Avalon, Sen Lang BVI, the ultimate beneficial owners of the Sen Lang BVI Shareholders (the “Sen Lang BVI Beneficial Shareholders” and, together with the Sen Lang BVI Shareholders, the “Sen Lang BVI Owners”) and a representative of the Sen Lang BVI Owners (the “Sen Lang BVI Representative”), pursuant to which Avalon will acquire (the “Acquisition”) all of the issued and outstanding share capital of Sen Lang BVI (the “Sen Lang BVI Shares”) and (ii) shares of Avalon Common Stock (the “Exchange Shares”) issuable upon the exchange of shares of Senlang Biotechnology Co. Ltd., a PRC domestic company with limited liability organized and existing under the laws of the PRC (the “OpCo” or “SenlangBio”) to be issued to an investor in a private placement of the equity of SenlangBio (all as described in more detail herein);
     
  4. The “Adjournment Proposal”—to approve the adjournment of the annual meeting to a later date or time, if necessary, to solicit additional proxies if, based upon the tabulated vote at the time of the annual meeting, there are not sufficient votes to approve the Nasdaq Proposal.

 

After careful consideration, Avalon’s board of directors has unanimously determined that the forms, terms and provisions of the Purchase Agreement and the Exchange Agreement, including the Acquisition and the Equity Financing, are advisable and in the best interests of Avalon and its stockholders, and unanimously recommends you vote “FOR” Proposals 1 through 3, as well as the Adjournment Proposal.

 

Avalon will transact no other business at the annual meeting, except such business as may properly be brought before the annual meeting or any adjournment or postponement thereof. Please refer to the proxy statement of which this notice is a part for further information with respect to the business to be transacted at the annual meeting.

 

 

 

 

The approval of the Auditor Proposal, the Nasdaq Proposal, and the Adjournment Proposal requires the affirmative vote of the holders of a majority of votes cast by the stockholders present in person or represented by proxy and entitled to vote thereon at the annual meeting. The approval of the Director Election Proposal requires the affirmative vote of a plurality of the votes properly cast on the election of directors.

 

Completion of the Acquisition is conditioned upon, among other things, approval of the Nasdaq Proposal.

 

Your attention is directed to the proxy statement and Annual Report of Avalon to stockholders for the fiscal year ended December 31, 2020, which includes the information required by Rule 14a-3 of the Securities Exchange Act of 1934, accompanying this notice (including the financial statements and annexes attached thereto) for a more complete description of the proposed Acquisition and related transactions and each of our proposals. We encourage you to read this proxy statement and Annual Report carefully in its entirety. In particular, we urge you to read carefully the sections entitled “Risk Factors” beginning on page 31 of the accompanying proxy statement and in the Annual Report. If you have any questions or need assistance voting your shares, please call Avalon at 732-780-4400.

 

Your vote is very important, regardless of the number of shares of Avalon Common Stock that you own. Even if you plan to attend the annual meeting, we request that you complete, sign, date and return the enclosed proxy card in the envelope provided, or submit your proxy by telephone or the Internet prior to the annual meeting, and thus ensure that your shares will be represented and voted at the annual meeting if you later become unable to attend. If your shares are held in a stock brokerage account or by a bank or other nominee, please follow the instructions that you receive from your broker, bank or other nominee to vote your shares.

 

  By Order of the Board of Directors,
   
  /s/ Wenzhao “Daniel” Lu
  Wenzhao “Daniel” Lu
[   ], 2021 Chairman of the Board of Directors

 

 

 

 

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND THE ACQUISITION   1
     
SUMMARY OF THE PROXY STATEMENT   9
Parties to the Acquisition   9
The Purchase Agreement   10
The Equity Financing   11
The VIE Structure   11
Interests of Certain Persons in the Acquisition   14
Reasons for the Approval of the Acquisition   14
Regulatory Approvals Required for the Acquisition   15
Accounting Treatment of the Acquisition   16
Material U.S. Federal Income Tax Consequences of the Acquisition   17
Ownership Following the Acquisition and the Equity Financing   17
     
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS   27
     
THE ANNUAL MEETING OF AVALON STOCKHOLDERS   28
The Avalon annual meeting   28
Date, Time and Place of the annual meeting   28
Purpose of the annual meeting   28
Recommendation of the Avalon Board of Directors   28
Record Date and Voting   29
Voting Your Shares   29
Who Can Answer Your Questions About Voting Your Shares   29
Quorum and Vote Required for the Proposals   29
Abstentions and Broker Non-Votes   30
Revocability of Proxies   30
Appraisal or Dissenters’ Rights   30
Solicitation of Proxies   30
RISK FACTORS   31
Risks Related to SenlangBio   31
Risks Related to the Acquisition   42
Risks Related to Avalon   50
     
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION   51
     
THE ACQUISITION   59
The Background of the Acquisition   59
Reasons for the Acquisition   60
The VIE Structure   62
Interests of Avalon’s Directors and Officers in the Acquisition   65
Regulatory Approvals Required for the Acquisition   66
Accounting Treatment of the Acquisition   66
     
THE PURCHASE AGREEMENT   67
     
THE EQUITY FINANCING   72
     
PROPOSAL NO. 1—THE DIRECTOR ELECTION PROPOSAL   73
     
PROPOSAL NO. 2—THE AUDITOR PROPOSAL   77
     
PROPOSAL NO. 3—THE NASDAQ PROPOSAL   79
     
PROPOSAL NO. 4—THE ADJOURNMENT PROPOSAL   80

 

i

 

 

INFORMATION ABOUT SENLANGBIO   81
     
SEN LANG BVI MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   92
     
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS   104
     
INFORMATION ABOUT AVALON   107
     
AVALON’S CORPORATE GOVERNANCE AND EXECUTIVE COMPENSATION   108
     
AVALON MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   119
     
MANAGEMENT AFTER THE ACQUISITION   135
     
DESCRIPTION OF AVALON’S SECURITIES   139
     
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT   140
     
ADDITIONAL INFORMATION   141
     
WHERE YOU CAN FIND MORE INFORMATION   142
     
INDEX TO FINANCIAL STATEMENTS   F-1
     
SEN LANG BVI FINANCIAL STATEMENTS   F-3
     
AVALON FINANCIAL STATEMENTS   F-63
     
ANNEX A: Purchase Agreement   A-1

 

ii

 

 

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND THE ACQUISITION

 

The following questions and answers briefly address some commonly asked questions regarding the proposed Acquisition and about the proposals to be presented at the Avalon annual meeting of stockholders, including with respect to the proposed Acquisition. The following questions and answers may not include all the information that is important to Avalon stockholders. Stockholders are urged to read carefully this entire proxy statement, including the financial statements and annexes attached hereto and the other documents referred to herein. Except where indicated, the information in this proxy statement does not give effect to the closing of the Equity Financing described in Proposal No. 3 of this proxy statement. References in this proxy statement to “$” refer to U.S. dollars. All references in this proxy statement to “Avalon,” the “Company,” “we,” “us,” or “our” mean Avalon GloboCare Corp. unless we state otherwise or the context otherwise indicates.

 

Q:Why am I receiving this proxy statement?

 

A:Avalon has furnished these materials to you by mail, in connection with the Company’s solicitation of proxies for use at the Annual Meeting of Stockholders to be held on [    ], 2021, at [ : ] [    ].m. Eastern Time. This year’s annual meeting of shareholders will be held as a virtual meeting. Stockholders attending the virtual meeting will be afforded the same rights and opportunities to participate as they would at an in-person meeting. You will be able to attend and participate in the annual meeting online via a live webcast by visiting [   ]. These materials have also been made available to you on the Internet. These materials describe the proposals on which the Company would like you to vote and also give you information on these proposals so that you can make an informed decision. We are furnishing our proxy materials on or about [    ], 2021 to all stockholders of record entitled to vote at the annual meeting.

 

In addition, on June 13, 2021, Avalon GloboCare Corp., a Delaware corporation (the “Company” or “Avalon”), entered into a Share Purchase Agreement (the “Purchase Agreement”), by and among the Company, Lonlon Biotech Ltd., a company incorporated in the British Virgin Islands (“BVI”) (“Sen Lang BVI”), the holders of the share capital of Sen Lang BVI (the “Sen Lang BVI Shareholders”), the ultimate beneficial owners of the Sen Lang BVI Shareholders (the “Sen Lang BVI Beneficial Shareholders” and, together with the Sen Lang BVI Shareholders, the “Sen Lang BVI Owners”) and a representative of the Sen Lang BVI Owners (the “Sen Lang BVI Representative”). Pursuant to the Purchase Agreement, subject to the satisfaction of the conditions to closing therein, including approval by the Avalon stockholders pursuant to the rules of the Nasdaq Stock Market (“Nasdaq”), Avalon agreed to purchase (the “Acquisition”) all of the issued and outstanding share capital of Sen Lang BVI (the “Sen Lang BVI Shares”).

 

Both before and immediately after the Acquisition, Avalon was not and will not become a Chinese operating company, but will remain as a Delaware corporation. While Avalon is not a PRC operating company, certain of its subsidiaries are PRC operating companies and through them Avalon currently has substantial operations in the PRC. Sen Lang BVI, the company Avalon is seeking to acquire, is a BVI holding company with its operations conducted by its subsidiaries and through contractual arrangements with variable interest entities (“VIEs”) based in China. Sen Lang BVI, through the VIE structure (described in more detail in the section of the accompanying proxy statement titled “The Acquisition—The VIE Structure”) of contractual rights held by its wholly-owned subsidiary Beijing Langlang Runfeng Biotechnology Co., Ltd., a wholly foreign owned enterprise with limited liability organized and existing under the laws of the People’s Republic of China (the “PRC”) (the “PRC Subsidiary”), has full economic benefit and management control over, and is consolidated for accounting purposes with, Senlang Biotechnology Co. Ltd., a PRC domestic company with limited liability organized and existing under the laws of the PRC (the “OpCo” or “SenlangBio”), however, the PRC Subsidiary is a holding company and is not a Chinese operating company. SenlangBio operates its business in China and is mainly engaged in the business of research and development in relation to CAR-T cell therapy, immune cell therapy and related drug development. SenlangBio is owned 100% by certain of the Sen Lang BVI Beneficial Shareholders. A wholly-owned subsidiary of SenlangBio, Shijiazhuang Senlang Medical Laboratory Co., Ltd., a company with limited liability organized and existing under the laws of the PRC (“SenlangBio Clinical Laboratory”) operates its business in China and is engaged in the business of testing of immunology, serology and molecular genetics specialties for patients, including hematology-tumor diagnostics and testing prior to clinical trials for cell therapy. For a more detailed discussion of the business of SenlangBio and SenlangBio Clinical Laboratory, please see the section entitled “Information about SenlangBio.”

  

Prior to the execution of the Purchase Agreement, the Board of Directors of Avalon (the “Board”), unanimously (i) determined that the terms and provisions of the Purchase Agreement and the transactions contemplated thereby, including the Acquisition, are fair to, advisable and in the best interests of the Company and its stockholders, (ii) approved the Purchase Agreement and the transactions contemplated thereby, including the Acquisition and the issuance of the Acquisition Shares (as defined below), (iii) authorized, empowered and directed the Company to perform all of its obligations under the Purchase Agreement and the Exchange Agreement (as defined below) and related documents, and (iv) resolved to recommend the approval by the stockholders of the Company of the issuance of the Acquisition Shares in connection with the Acquisition and the issuance of the Exchange Shares (as defined below) in connection with the Exchange Agreement in compliance with the rules of Nasdaq (the “Company Board Recommendation”).

 

1

 

 

The purchase price being paid by Avalon to the Sen Lang BVI Shareholders under the Purchase Agreement for the Sen Lang BVI Shares is an aggregate of 81 million shares (the “Acquisition Shares”) of the common stock, par value US$0.0001 per share, of Avalon (the “Avalon Common Stock”). Ten percent (10%), or 8.1 million, of such shares will be held in escrow for 12 months following the closing to satisfy any indemnification obligations of the Sen Lang BVI Shareholders under the Share Purchase Agreement. In addition, at the closing of the Acquisition, it is expected that Dr. Jianqiang Li, scientific founder and CSO of SenlangBio, will join the board of the Company, and Dr. Li will also be appointed as Chief Technology Officer of the Company. The Acquisition Shares will not be registered under the Securities Act of 1933, as amended (the “Securities Act”) and, therefore, will be restricted securities under Rule 144 under the Securities Act for six months or longer after the closing of the Acquisition, subject to “affiliate” status with the Company under the Securities Act.

 

A copy of the Purchase Agreement is attached to this proxy statement as Annex A. For a more detailed discussion of the Purchase Agreement, please see the section entitled “The Purchase Agreement.”

 

In connection with the Acquisition, on June 13, 2021, an institutional investor (the “Investor”) entered into an agreement, as amended on June 24, 2021, with SenlangBio related to the purchase of registered capital of SenlangBio (the “OpCo Capital Increase Agreement”) pursuant to which the Investor will acquire an aggregate of up to 13.5% of the equity ownership of SenlangBio for an aggregate purchase price (the “Subscription Amount) of approximately US$30,000,000 (represented by an actual investment of RMB200,000,000) (the “Equity Financing”), which funds will be invested in SenlangBio in three equal installments of approximately US$10,000,000, at a fixed price, the first to be upon the closing of the Acquisition, the second to be within three months after the closing and the third to be within six months after the closing. In addition, pursuant to a Securities Exchange Agreement, as amended on June 24, 2021 (the “Exchange Agreement”), by and among the Company, Sen Lang BVI, SenlangBio and the Investor, dated June 13, 2021, the Investor shall have the right, exercisable between the six-month and five year-anniversaries of the respective initial closing and installment closings, to elect to exchange, from time to time, all or part of its then-owned equity ownership of SenlangBio for shares (the “Exchange Shares”) of Avalon Common Stock at a fixed exchange price of US$1.21 per share of Avalon Common Stock, which was the market price of the Avalon Common Stock as of the date of the Exchange Agreement under Nasdaq rules. In addition, the Exchange Agreement provides that the Investor may only exchange up to 10% of its total investment amount in any 30 day period.

 

This proxy statement and its annexes contain important information about the proposed Acquisition and Equity Financing and the proposals to be acted upon at the annual meeting. You should read this proxy statement and its annexes and the Annual Report, which is incorporated in its entirety into this proxy statement by reference, carefully and in their entirety.

 

Q: What is included in these materials?

 

A: These materials include:

 

this Proxy Statement for the annual meeting; and

 

the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “Annual Report”).

 

Q: What is the proxy card?

 

A: The proxy card enables you to appoint David Jin, our Chief Executive Officer, and Luisa Ingargiola, our Chief Financial Officer, as your representatives at the annual meeting. By completing and returning a proxy card, you are authorizing these individuals to vote your shares at the annual meeting in accordance with your instructions on the proxy card. This way, your shares will be voted whether or not you attend the annual meeting.

 

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Q:What matters will stockholders consider at the Avalon annual meeting?

 

A:At the Avalon annual meeting of stockholders, Avalon will ask its stockholders to vote in favor of the following proposals (the “Avalon Proposals”):

 

Proposal 1—to elect the nine director nominees named in the proxy statement to hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified (the “Director Election Proposal”);

 

Proposal 2—to ratify the appointment of Marcum LLP as the Company’s independent auditors for the fiscal year ending December 31, 2021 (the “Auditor Proposal”); and

 

Proposal 3—to approve, pursuant to the rules of the Nasdaq Stock Market, the issuance of (i) the Acquisition Shares pursuant to the terms of the Purchase Agreement and (ii) the Exchange Shares (the “Nasdaq Proposal”);

 

Proposal 4—to adjourn the annual meeting, if necessary, to another time or place to solicit additional proxies if there are not sufficient votes in favor of Proposal 1 (the “Adjournment Proposal”).

 

Q:What will happen upon the consummation of the Acquisition and the Equity Financing?

 

A: On the date of closing of the Acquisition (the “Closing Date”), Avalon will issue the Acquisition Shares to the Sen Lang BVI Shareholders in exchange for all of the outstanding equity of Sen Lang BVI, and will thereby acquire the full economic benefit and management control over, and consolidate for accounting purposes with, SenlangBio. In addition, the Equity Financing will be consummated, whereby the Investor will begin to acquire up to approximately 13.5% of the equity ownership of SenlangBio for an aggregate purchase price of approximately US$30 million (represented by an actual investment of RMB200,000,000), which funds will be invested in SenlangBio in three equal installments of approximately US$10,000,000, at a fixed price, the first to be on the Closing Date, the second to be within three months after the closing and the third to be within six months after the closing.

 

Q:Why is Avalon proposing to effect the Acquisition?

 

A:Avalon believes that the post-Acquisition company will have several potential advantages, including: (i) a diverse pipeline of cell therapy product candidates, (ii) expanded footprint in China, (iii) operational synergies and (iv) an experienced management team.

 

For a more complete discussion of Avalon’s reasons for the Acquisition, please see the sections entitled “The Acquisition—Reasons for the Acquisition.

 

Q: What equity stake will current Avalon stockholders and the Sen Lang BVI Shareholders have in Avalon after the closing of the Acquisition and prior to the consummation of the Equity Financing?

 

A:It is anticipated that, upon the consummation of the Acquisition, the ownership of Avalon will be as follows:

 

  Current Avalon stockholders will own 51.4% of the total voting shares outstanding; and

 

  Current Sen Lang BVI Shareholders will own 48.6% of the total voting shares outstanding.

 

The numbers of shares and percentage interests set forth above do not take into account (i) shares of Avalon Common Stock issuable upon the exchange of shares of SenlangBio purchased by the Investor in the Equity Financing, pursuant to the Exchange Agreement, (ii) shares of Avalon Common Stock issuable upon the exercise of outstanding options and warrants and (iii) potential future issuances of Avalon securities.

 

In addition, under the Exchange Agreement, the Investor shall have the right, exercisable between the six-month and five year-anniversaries of the respective initial closing and installment closings, to elect to exchange, from time to time, all or part of its equity ownership of SenlangBio for Exchange Shares of Avalon at an effective exchange price of $1.21 per share of Avalon Common Stock. Following the completion of the financing and assuming the full funding by the investor in the financing, the aggregate number of shares of Avalon Common Stock that would be issuable under the Exchange Agreement (assuming the exchange of all shares) would be approximately 25,885,000 (using the conversion rate of US dollars to RMB of 6.3856 as of June 11, 2021). The resultant equity ownership of Avalon would be as follows:

 

  Current Avalon stockholders will own 44.5% of the total voting shares outstanding;

 

  Current Sen Lang BVI Shareholders will own 42.1% of the total voting shares outstanding and

 

  The Investor will own 13.4% of the total voting shares outstanding.

 

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Q:Who will be the officers and directors of the post-Acquisition company if the Acquisition is consummated?

 

A:It is currently expected that Dr. Jianqiang Li, scientific founder and CSO of SenlangBio, will join the board of Avalon, and Dr. Li will also be appointed as Chief Technology Officer of Avalon. Meng Li, Avalon’s Chief Operating Officer and a director, will resign from her position on the board of Avalon. The Avalon board and management will otherwise remain the same aside from Dr. Li, with Wenzhao Lu (Chairman), David Jin, MD, PhD, Steven A. Sanders, Yancen Lu, Wilbert J. Tauzin II, Willliam B. Stilley, III, Tevi Troy and Yue “Charles” Li continuing to serve on the board and Dr. Jin continuing to serve as President and Chief Executive Officer, Ms. Li as Chief Operating Officer and Luisa Ingargiola as Chief Financial Officer.

 

Please see the section entitled “Management After the Acquisition.”

 

Q:What is the VIE Structure?

 

A: As a part of the restructure of Sen Lang BVI, its subsidiaries and SenlangBio and its subsidiary (collectively, the “Acquired Companies”) before the closing of the Acquisition, SenlangBio and SenlangBio Clinical Laboratory will be controlled by the PRC Subsidiary by entering into a series of variable interest entities agreements among the PRC Subsidiary, SenlangBio and all current shareholders of SenlangBio, as well as the Investor (such agreements are collectively referred to as the “VIE Agreements”, and such contractual control arrangement is referred to as the “VIE Structure”).

 

In the PRC, the VIE structure has become a popular and widely used overseas listing mode for enterprises in the sectors which are foreign investment restricted or prohibited, like the development and application of genetic diagnosis and treatment technology, which includes SenlangBio’s business. The VIE structure refers to an agreement mode in which the PRC domestic operating entity is separated from the overseas-listed entity, and the overseas-listed party/holding company controls the domestic operating entity by signing relevant agreements with the parties who would otherwise receive the benefits of ownership of SenlangBio and control its operations (i.e., VIE Agreements), and is able to consolidate the financial statements of the PRC domestic operating entity into the overseas-listed entity/holding company. After the completion of the overall VIE Structure, the interests/profits from the domestic operation, as well as operational control, have been transferred to the overseas listing/holding company.

 

It is a condition to closing under the Purchase Agreement that SenlangBio, the PRC Subsidiary and the shareholders of SenlangBio (including the Investor) execute the VIE Agreements. These VIE Agreements include (i) an exclusive technical consultation and service agreement; (ii) an exclusive purchase option agreement; (iii) an entrustment agreement of shareholders’ rights; (iv) a share pledge agreement; and (v) a spouse consent letter.

 

The VIE structure poses unique risks to investors. The VIE structure is routinely adopted by many Chinese-based companies to replicate foreign investment in Chinese-based companies where Chinese law prohibits or limits direct foreign investment in the operating companies. Investors investing in such a company that operates in China through a VIE structure may never hold any equity interest in the operating company. PRC regulatory authorities could consider the VIE structure as a violation of applicable PRC laws and therefore could prohibit this structure, which would likely result in a material change in Avalon’s operations and/or value of Avalon’s common stock, including that it could cause the value of such securities to significantly decline or become worthless. See “Risk Factors—Risks Related to the VIE Structure and SenlangBio being a PRC Domestic Entity—Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law, its implementing rules, Foreign Investment Security Review Measures, other regulations and how they may impact the viability of the VIE structure, business, financial condition, and results of operations.

 

Q:What conditions must be satisfied to complete the Acquisition?

 

A:There are a number of closing conditions in the Purchase Agreement, including that Avalon’s stockholders approve the issuance of the Acquisition Shares and the Exchange Shares in accordance with Nasdaq rules and that Avalon consummate the Equity Financing. In addition, the VIE Agreements (as defined below) must have been executed and delivered. For a summary of the conditions that must be satisfied or waived prior to completion of the Acquisition, please see the section entitled “The Purchase Agreement—Conditions to the Closing of the Acquisition.”

 

Q:What vote is required to approve the proposals presented at the Avalon annual meeting of stockholders?

 

A:The approval of each of the Auditor Proposal, the Nasdaq Proposal, and the Adjournment Proposal requires the affirmative vote of the holders of a majority of votes cast by the stockholders present in person or represented by proxy and entitled to vote thereon at the annual meeting, and the approval of the Director Election Proposal requires the affirmative vote of a plurality of the votes properly cast on the election of directors. Accordingly, abstentions and broker non-votes, if any, will have no effect on the outcome of the Director Election Proposal, the Auditor Proposal, the Nasdaq Proposal and the Adjournment Proposal.

 

Q:How much stock is owned by 5% stockholders, directors, and executive officers?

 

A: As of September 30, 2021, Avalon’s directors and executive officers beneficially owned approximately 66.0% of the shares of Avalon Common Stock (calculated in accordance with SEC rules that define beneficial ownership) and owned 54,145,161 shares, 63.3% of the issued and outstanding Avalon Common Stock on such date. Although under no contractual or other obligation to do so, all of such directors and executive officers are currently expected to vote in favor of all of the Avalon Proposals, including the Nasdaq Proposal.

 

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Q:Are there any subsequent approvals required from the Acquired Companies’ shareholders to approve the Acquisition?

 

A: No. All of the Sen Lang BVI Shareholders and Sen Lang BVI Beneficial Shareholders executed the Purchase Agreement, and all of the equity of SenlangBio is owned by certain of the Sen Lang BVI Beneficial Shareholders. Therefore, no other proceedings are necessary for the consummation of the Acquisition, other than the execution and delivery of the VIE Agreements by the Investor and the Sen Lang BVI Beneficial Shareholders who are the owners of SenlangBio.

 

Q:How many votes do Avalon stockholders have at the annual meeting of stockholders?

 

A:Each share of Avalon Common Stock is entitled to one vote at the annual meeting for each share of Avalon Common Stock held of record as of the record date. As of the close of business on the record date, there were [  ] outstanding shares of Avalon Common Stock.

 

Q:What interests do Avalon’s current officers and directors have in the Acquisition?

 

A:Avalon’s board of directors and executive officers may have interests in the Acquisition that are different from, in addition to or in conflict with, yours.

 

As of September 30, 2021, Avalon’s directors and executive officers beneficially owned approximately 66.0% of the shares of Avalon Common Stock (calculated in accordance with SEC rules that define beneficial ownership). All of the current executive officers of Avalon will continue in their current positions after the Acquisition, and all of the directors except for Meng Li will continue on the Avalon board after the Acquisition. In addition, On April 10, 2020, in the ordinary course of business, SenlangBio entered into a scientific research project cooperation agreement with Beijing Lu Daopei Hospital Co., Ltd., under which Beijing Lu Daopei Hospital Co., Ltd. conducts scientific research for the interest of SenlangBio on the cytoplasmic CD79a antibody gated multicolor flow cytometry monitoring CD19-CAR-T bridging allogeneic transplantation for the treatment of refractory and relapsed acute B lymphocytic leukemia. SenlangBio provides research funds in the amount of RMB 2 million to Beijing Lu Daopei Hospital Co., Ltd. Beijing Lu Daopei Hospital Co., Ltd. is a wholly-owned subsidiary of an entity whose chairman is Wenzhao Lu, the Chairman and largest shareholder of Avalon.

 

For more information, please see the sections entitled “The Acquisition—Interests of Avalon’s Directors and Officers in the Acquisition.

 

Q:What are the U.S. federal income tax consequences of the Acquisition?

 

A:Neither Avalon nor its stockholders are expected to recognize federal income tax or gain as a result of the Acquisition.

 

Q:Do Avalon stockholders have appraisal rights if they object to the proposed Acquisition?

 

A:No. There are no appraisal rights available to holders of shares of Avalon Common Stock in connection with the Acquisition.

 

Q:What will happen to Avalon if, for any reason, the Acquisition does not close?

 

A:There are certain circumstances under which the Purchase Agreement may be terminated. Please see the section entitled “The Purchase Agreement—Termination of the Purchase Agreement” for information regarding the parties’ specific termination rights.

 

If, as a result of the termination of the Purchase Agreement or otherwise, Avalon is unable to complete the Acquisition by December 31, 2021 or obtain the approval to extend the deadline for Avalon to consummate the Acquisition, the Avalon board of directors may elect to, among other things, attempt to complete another strategic transaction like the Acquisition, attempt to purchase additional assets, enter into collaboration or joint venture agreements or attempt to sell or otherwise dispose of the various assets of Avalon.

 

Q:When is the Acquisition expected to be completed?

 

A:It is currently anticipated that the Acquisition will be consummated promptly following the Avalon annual meeting of stockholders, provided that all other conditions to the consummation of the Acquisition have been satisfied or waived, including consummation of the Equity Financing. For a description of the conditions to the completion of the Acquisition, please see the section entitled “The Purchase Agreement—Conditions to the Closing of the Acquisition.”

 

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Q:When and where will the annual meeting of Avalon stockholders be held?

 

A:The Avalon annual meeting will be held in a virtual meeting format only. The annual meeting will be held on [  ], 2021 at [  ] [a/p].m. Eastern time. In order to participate in the annual meeting live via the Internet, you must register at [   ] by 11:59 p.m. Eastern Time by [  ], 2021. On the day of the Avalon annual meeting, if you have properly registered, you may enter the annual meeting by logging in using the event password you received via email in your registration confirmation at [  ]. You will not be able to attend the Avalon annual meeting in-person.

 

If you are a registered holder, you must register using the virtual control number included in your proxy materials or your proxy card. If you hold your shares beneficially through a bank or broker, you must provide a legal proxy from your bank or broker during registration and you will be assigned a virtual control number in order to vote your shares during the Annual meeting. If you are unable to obtain a legal proxy to vote your shares, you will still be able to attend the Annual meeting (but will not be able to vote your shares) so long as you demonstrate proof of stock ownership. Instructions on how to connect and participate via the Internet, including how to demonstrate proof of stock ownership, are posted at [    ].

 

Q:What do I need to do now?

 

AYou are urged to carefully read and consider the information contained in this proxy statement, including the financial statements and annexes attached hereto, and in the Annual Report and to consider how the Acquisition will affect you. You should then vote as soon as possible in accordance with the instructions provided in this proxy statement on the enclosed proxy card or, if you hold your shares through a brokerage firm, bank or other nominee, on the voting instruction form provided by the broker, bank or nominee.

 

Q:How do I vote?

 

A:If you were a holder of Avalon Common Stock on [  ], 2021, the record date for the annual meeting of stockholders, you may provide your proxy instructions in one of three different ways. First, you can mail your signed proxy card in the enclosed return envelope. Second, you may provide your proxy instructions via the Internet by following the instructions on your proxy card or voting instruction form. You may also vote your shares at the annual meeting via live webcast. Please provide your proxy instructions only once, unless you are revoking a previously delivered proxy instruction, and as soon as possible so that your shares can be voted at the annual meeting of Avalon stockholders.

 

Q:What happens if I do not return a proxy card or otherwise provide proxy instructions, as applicable?

 

A:Signed and dated proxies received by Avalon without an indication of how the stockholder intends to vote on a proposal will be voted “FOR” each of the Avalon Proposals presented to Avalon’s stockholders in accordance with the recommendation of Avalon’s board of directors. The proxyholders may use their discretion to vote on any other matters which properly come before the Avalon annual meeting.

 

Q:May I vote in person at the annual meeting of stockholders of Avalon?

 

A:Due to the public health impact of the coronavirus outbreak (“COVID-19”) and to support the health and well-being of Avalon’s stockholders, the Avalon annual meeting will be held in a virtual meeting format only. If your shares of Avalon Common Stock are registered directly in your name with the Avalon transfer agent, you are considered to be the stockholder of record with respect to those shares, and the proxy materials and proxy card are being sent directly to you by Avalon. If you are an Avalon stockholder of record, you must register using the virtual control number included in your proxy materials or your proxy card (if you received a printed copy of the proxy materials) in order to vote at the annual meeting. If you hold your shares beneficially through a bank or broker, you are considered the beneficial owner of shares held in “street name” and you must provide a legal proxy from your bank or broker during registration and you will be assigned a virtual control number in order to vote your shares during the annual meeting. If you are unable to obtain a legal proxy to vote your shares, you will still be able to attend the annual meeting, so long as you demonstrate proof of stock ownership, but you will not be able to vote your shares. Even if you plan to attend the Avalon annual meeting live via the internet, Avalon encourages you to vote in advance by internet or mail so that your vote will be counted if you later decide not to attend the annual meeting live via the internet.

 

For more information, please see the section entitled “The Annual Meeting of Avalon Stockholders—Voting Your Shares.”

 

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Q:If my Avalon shares are held in “street name” by my broker, will my broker vote my shares for me?

 

A:If you are a beneficial owner of shares of Avalon Common Stock and do not instruct your broker, bank, or other agent how to vote your shares, the question of whether your broker or nominee will still be able to vote your shares depends on whether the New York Stock Exchange (the “NYSE”), deems the particular proposal to be a “routine” matter and how your broker or nominee exercises any discretion they may have in the voting of the shares that you beneficially own. Brokers and nominees can use their discretion to vote “uninstructed” shares with respect to matters that are considered to be “routine,” but not with respect to “non-routine” matters. Under the rules and interpretations of the NYSE, “non-routine” matters are matters that may substantially affect the rights or privileges of stockholder, such as mergers, stockholder proposals, elections of directors (even if not contested), executive compensation (including any advisory stockholder votes on executive compensation and on the frequency of stockholder votes on executive compensation), and certain corporate governance proposals, even if management-supported.

 

For any Avalon Proposal that is considered a “routine” matter, your broker or nominee may vote your shares in its discretion either for or against the proposal even in the absence of your instruction. For any Avalon Proposal that is considered a “non-routine” matter for which you do not give your broker instructions, the shares will be treated as broker non-votes. Broker non-votes occur when a beneficial owner of shares held in street name does not give instructions to the broker or nominee holding the shares as to how to vote on matters deemed “non-routine.” Broker non-votes will not be considered to be shares “entitled to vote” at the annual meeting and will not be counted as having been voted on the applicable proposal. Avalon currently anticipates that only the Auditor Proposal is likely to be deemed routine by the NYSE.

 

Q:May I change my vote after I have submitted a proxy or provided proxy instructions?

 

A:Yes. Avalon stockholders of record may change their vote at any time before their proxy is voted at the Avalon annual meeting, as applicable, in one of the following ways:

 

filing with the Secretary of Avalon, a letter revoking the proxy;

 

submitting another signed proxy with a later date; or

 

attending the Avalon annual meeting and voting online, provided you file a written revocation with the Secretary of the Avalon annual meeting prior to the voting of such proxy.

 

Q:What is the quorum requirement for the annual meeting of stockholders?

 

A:The holders of at least a majority of the voting power of the outstanding shares of Avalon Common Stock entitled to vote, as of the record date, represented in person or by proxy, will constitute a quorum for the transaction of business at the Avalon annual meeting. Proxies marked as abstentions and broker non-votes, if any, will be included to determine the number of shares present at the annual meeting. In the absence of a quorum, a majority of Avalon’s stockholders, present in person or represented by proxy, and voting thereon will have the power to adjourn the annual meeting. As of the record date for the annual meeting, [  ] shares of Avalon Common Stock would be required to achieve a quorum.

 

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Q:What risks should I consider in deciding whether to vote in favor of the Avalon Proposals?

 

A:You should carefully review this proxy statement and the Annual Report, including the sections entitled “Risk Factors,” which set forth certain risks and uncertainties related to the Acquisition, risks and uncertainties to which the post-Acquisition company’s business will be subject, and risks and uncertainties to which each of Avalon and SenlangBio, as an independent company, is subject.

 

Q: How are proxy materials delivered to households?

 

A: Only one copy of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and this Proxy Statement will be delivered to an address where two or more stockholders reside with the same last name or who otherwise reasonably appear to be members of the same family based on the stockholders’ prior express or implied consent.

 

We will deliver promptly upon written or oral request a separate copy of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and this Proxy Statement. If you share an address with at least one other stockholder, currently receive one copy of our Annual Report on Form 10-K and Proxy Statement at your residence, and would like to receive a separate copy of our Annual Report on Form 10-K and Proxy Statement for future stockholder meetings of the Company, please specify such request in writing and send such written request to Avalon GloboCare Corp., 4400 Route 9 South, Suite 3100, Freehold, New Jersey 07728; Attention: Chief Financial Officer.

 

If you want to receive separate copies of the Company’s proxy statement and annual report in the future, or if you are receiving multiple copies and would like to receive only one copy for your household, you should contact your bank, broker or other nominee record holder, or you may contact us at Avalon’s address and telephone number.

 

Q:Who will solicit and pay the cost of soliciting proxies?

 

A:Avalon will bear all costs and expenses in connection with the solicitation of proxies, including the costs of preparing, printing and mailing this proxy statement and the Annual Report for the Avalon annual meeting.

 

Q:Who can help answer my questions?

 

A:If you are an Avalon stockholder and would like additional copies, without charge, of this proxy statement and the Annual Report, or if you have questions about the Acquisition, including the procedures for voting your shares, you should contact Avalon at:

 

Avalon GloboCare Corp.

4400 Route 9 South, Suite 3100

Freehold, New Jersey 07728

732-780-4400

 

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SUMMARY OF THE PROXY STATEMENT

 

This summary highlights selected information from this proxy statement and does not contain all of the information that is important to you. To better understand the Acquisition and the other proposals to be considered at the annual meeting, you should read this entire proxy statement carefully, including the annexes. Please see the section entitled “Where You Can Find More Information.” All references in this proxy statement to “Avalon,” the “Company,” “we,” “us,” or “our” mean Avalon GloboCare Corp. unless we state otherwise or the context otherwise indicates.

 

The Annual Meeting

 

The annual meeting is being held for the following purposes:

 

1.The “Director Election Proposal”—to elect the nine director nominees named in the proxy statement to hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified;

 

2.The “Auditor Proposal”—to ratify the appointment of Marcum LLP as the Company’s independent auditors for the fiscal year ending December 31, 2021; and

 

  3. The “Nasdaq Proposal”— to approve, pursuant to the rules of the Nasdaq Stock Market, the issuance of (i) the Acquisition Shares pursuant to the terms of the Purchase Agreement and (ii) the Exchange Shares (the “Nasdaq Proposal”);
     
  4. The “Adjournment Proposal”—to approve the adjournment of the annual meeting to a later date or time, if necessary, to solicit additional proxies if, based upon the tabulated vote at the time of the annual meeting, there are not sufficient votes to approve the Nasdaq Proposal.

 

Parties to the Acquisition

 

Avalon

 

Avalon GloboCare Corp. 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. Avalon 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, Avalon is establishing a leading role in the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEX™), and regenerative therapeutics.

 

The principal executive offices of Avalon are located at 4400 Route 9 South, Suite 3100, Freehold, New Jersey 07728, and its telephone number is (732) 780-4400.

 

Sen Lang BVI

 

Lonlon Biotech Ltd., a company incorporated in the British Virgin Islands (“BVI”) (“Sen Lang BVI”), the ultimate beneficial owner and controlling entity of SenlangBio through the VIE Structure, was established on October 15, 2020 to be a holding company of Lonlon Biotech Investment Limited (“Senlang HK”), which owns 100% of the equity of Beijing Langlang Runfeng Biotechnology Co., Ltd., a wholly foreign owned enterprise with limited liability organized and existing under the laws of the PRC (the “PRC Subsidiary”), and the PRC Subsidiary is the beneficiary of SenlangBio through the VIE Structure.

 

The principal executive offices of Sen Lang BVI are located at 5F, Huabin Center, Jianguomen Wai Ave, Chaoyang District, Beijing, China, 100022.

 

SenlangBio

 

SenlangBio is a clinical-stage biotechnology company that focuses on three advanced technology platforms—CAR T-cells, CAR γδT-cells and armTILs—to develop a robust pipeline of innovative and transformative cellular immunotherapies for cancer patients. Chimeric antigen receptor (CAR) T-cells (CAR-T) are natural cell-killing T-cells that have been engineered to specifically recognize and kill cancerous cells. Allogeneic (universal) CAR γδT-cells (CAR-GDT) are a specific class of donor-derived T-cells that can provide superior anti-tumor effectiveness. Armored tumor infiltrating lymphocytes (armTILs) are cancer-killing T-cells that provide a unique “personalized” cellular immunotherapy approach. 

 

SenlangBio is currently the largest cell therapy company in Northern China in terms of the scale of bio-manufacturing, as well as the breadth and depth of active pre-clinical research and clinical development programs.

 

A wholly-owned subsidiary of SenlangBio, Shijiazhuang Senlang Medical Laboratory Co., Ltd., a company with limited liability organized and existing under the laws of the PRC (“SenlangBio Clinical Laboratory”) is engaged in the business of testing of immunology, serology and molecular genetics specialties for patients, including hematology-tumor diagnostics and testing prior to clinical trials for cell therapy.

 

The principal executive offices of SenlangBio are located at Room 512 and 513, Building 1, 136 Yellow River Avenue, Shijiazhuang High-tech Development Zone, Hebei Province, China, and its telephone number is +86-311-82970975.

 

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The Purchase Agreement

 

On June 13, 2021, Avalon GloboCare Corp., a Delaware corporation (the “Company” or “Avalon”), entered into a Share Purchase Agreement (the “Purchase Agreement”), by and among the Company, Lonlon Biotech Ltd., a company incorporated in the British Virgin Islands (“BVI”) (“Sen Lang BVI”), the holders of the share capital of Sen Lang BVI (the “Sen Lang BVI Shareholders”), the ultimate beneficial owners of the Sen Lang BVI Shareholders (the “Sen Lang BVI Beneficial Shareholders” and, together with the Sen Lang BVI Shareholders, the “Sen Lang BVI Owners”) and a representative of the Sen Lang BVI Owners (the “Sen Lang BVI Representative”). Pursuant to the Purchase Agreement, subject to the satisfaction of the conditions to closing therein, including approval by the Avalon stockholders pursuant to the rules of the Nasdaq Stock Market (“Nasdaq”), Avalon agreed to purchase (the “Acquisition”) all of the issued and outstanding share capital of Sen Lang BVI (the “Sen Lang BVI Shares”).

 

Both before and immediately after the Acquisition, Avalon was not and will not become a Chinese operating company, but will remain as a Delaware corporation. While Avalon is not a PRC operating company, certain of its subsidiaries are PRC operating companies and through them Avalon currently has substantial operations in the PRC. Sen Lang BVI, the company Avalon is seeking to acquire, is a BVI holding company with its operations conducted by its subsidiaries and through contractual arrangements with variable interest entities (“VIEs”) based in China. Sen Lang BVI, through the VIE structure (described in more detail in the section of the accompanying proxy statement titled “The Acquisition—The VIE Structure”) of contractual rights held by its wholly-owned subsidiary Beijing Langlang Runfeng Biotechnology Co., Ltd., a wholly foreign owned enterprise with limited liability organized and existing under the laws of the People’s Republic of China (the “PRC”) (the “PRC Subsidiary”), has full economic benefit and management control over, and is consolidated for accounting purposes with, Senlang Biotechnology Co. Ltd., a PRC domestic company with limited liability organized and existing under the laws of the PRC (the “OpCo” or “SenlangBio”), however, the PRC Subsidiary is a holding company and is not a Chinese operating company. SenlangBio operates its business in China and is mainly engaged in the business of research and development in relation to CAR-T cell therapy, immune cell therapy and related drug development. SenlangBio is owned 100% by certain of the Sen Lang BVI Beneficial Shareholders. A wholly-owned subsidiary of SenlangBio, Shijiazhuang Senlang Medical Laboratory Co., Ltd., a company with limited liability organized and existing under the laws of the PRC (“SenlangBio Clinical Laboratory”) operates its business in China and is engaged in the business of testing of immunology, serology and molecular genetics specialties for patients, including hematology-tumor diagnostics and testing prior to clinical trials for cell therapy. For a more detailed discussion of the business of SenlangBio and SenlangBio Clinical Laboratory, please see the section entitled “Information about SenlangBio.” Upon completion of the Acquisition, investors will not directly hold any equity interest in the VIEs.

  

The purchase price being paid by Avalon to the Sen Lang BVI Shareholders under the Purchase Agreement for the Sen Lang BVI Shares is an aggregate of 81 million shares (the “Acquisition Shares”) of the common stock, par value US$0.0001 per share, of Avalon (the “Avalon Common Stock”). Ten percent (10%), or 8.1 million, of such shares will be held in escrow for 12 months following the closing to satisfy any indemnification obligations of the Sen Lang BVI Shareholders under the Share Purchase Agreement. In addition, at the closing of the Acquisition, it is expected that Dr. Jianqiang Li, scientific founder and CSO of SenlangBio, will join the board of the Company, and Dr. Li will also be appointed as Chief Technology Officer of the Company. The Acquisition Shares will not be registered under the Securities Act of 1933, as amended (the “Securities Act”) and, therefore, will be restricted securities under Rule 144 under the Securities Act for six months or longer after the closing of the Acquisition, subject to “affiliate” status with the Company under the Securities Act.

 

A copy of the Purchase Agreement is attached to this proxy statement as Annex A. For a more detailed discussion of the Purchase Agreement, please see the section entitled “The Purchase Agreement.”

 

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Conditions to the Closing of the Acquisition

 

The Avalon stockholders must approve the Nasdaq Proposal. The approval of the Nasdaq Proposal requires the affirmative vote of the holders of a majority of votes cast by the stockholders present in person or represented by proxy and entitled to vote thereon at the annual meeting.

 

In addition, Avalon must consummate the Equity Financing and the VIE Agreements must have been executed and delivered. Please see the section entitled “The Purchase Agreement—Conditions to the Closing of the Acquisition.”

 

Non-Solicitation

 

In the Purchase Agreement, Sen Lang BVI and its affiliates agreed not to (i) solicit, initiate, or encourage the submission of any proposal or offer from any person relating to the acquisition of the equity or assets of Sen Lang BVI, its subsidiaries and SenlangBio and its subsidiaries (collectively, the “Acquired Companies”) or (ii) enter into or renew any distribution agreement related to the business of the Acquired Companies, in each case without the prior written consent of Avalon.

 

Termination of the Purchase Agreement

 

Either Avalon or the Sen Lang BVI Representative can terminate the Purchase Agreement under certain circumstances, which would prevent the Acquisition from being consummated. For more information, please see the section entitled “The Purchase Agreement—Termination of the Purchase Agreement.”

 

Equity Financing

 

In connection with the Acquisition, on June 13, 2021, an institutional investor (the “Investor”) entered into an agreement, as amended on June 24, 2021, with SenlangBio related to the purchase of registered capital of SenlangBio (the “OpCo Capital Increase Agreement”) pursuant to which the Investor will acquire an aggregate of up to 13.5% of the equity ownership of SenlangBio for an aggregate purchase price (the “Subscription Amount) of approximately US$30,000,000 (represented by an actual investment of RMB200,000,000) (the “Equity Financing”), which funds will be invested in SenlangBio in three equal installments of approximately US$10,000,000, at a fixed price, the first to be upon the closing of the Acquisition, the second to be within three months after the closing and the third to be within six months after the closing. In addition, pursuant to a Securities Exchange Agreement, as amended on June 24, 2021 (the “Exchange Agreement”), by and among the Company, Sen Lang BVI, SenlangBio and the Investor, dated June 13, 2021, the Investor shall have the right, exercisable between the six-month and five year-anniversaries of the respective initial closing and installment closings, to elect to exchange, from time to time, all or part of its then-owned equity ownership of SenlangBio for shares (the “Exchange Shares”) of Avalon Common Stock at a fixed exchange price of US$1.21 per share of Avalon Common Stock, which was the market price of the Avalon Common Stock as of the date of the Exchange Agreement under Nasdaq rules. In addition, the Exchange Agreement provides that the Investor may only exchange up to 10% of its total investment amount in any 30 day period.

 

The VIE Structure

 

As a part of the restructure of Sen Lang BVI, its subsidiaries and SenlangBio and its subsidiaries (collectively, the “Acquired Companies”) before the closing of the Acquisition, SenlangBio and SenlangBio Clinical Laboratory will be controlled by the PRC Subsidiary by entering into a series of variable interest entities agreements among the PRC Subsidiary, SenlangBio and all current shareholders of SenlangBio, as well as the Investor (such agreements are collectively referred to as the “VIE Agreements”, and such contractual control arrangement is referred to as the “VIE Structure”).

 

In the PRC, the VIE structure has become a popular and widely used overseas listing mode for enterprises in the sectors which are foreign investment restricted or prohibited, like the development and application of genetic diagnosis and treatment technology, which includes SenlangBio’s business. The VIE structure refers to an agreement mode in which the PRC domestic operating entity is separated from the overseas-listed entity, and the overseas-listed party/holding company controls the domestic operating entity by signing relevant agreements with the parties who would otherwise receive the benefits of ownership of SenlangBio and control its operations (i.e., VIE Agreements), and is able to consolidate the financial statements of the PRC domestic operating entity into the overseas-listed entity/holding company. After the completion of the overall VIE Structure, the interests/profits from the domestic operation, as well as operational control, have been transferred to the overseas listing/holding company. 

 

It is a condition to closing under the Purchase Agreement that SenlangBio, the PRC Subsidiary and the shareholders of SenlangBio (including the Investor) execute the VIE Agreements. These VIE Agreements include (i) an exclusive technical consultation and service agreement; (ii) an exclusive purchase option agreement; (iii) an entrustment agreement of shareholders’ rights; (iv) a share pledge agreement; and (v) a spouse consent letter.

 

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The following diagram illustrates the post-Acquisition corporate structure, including equity ownership.

 

 

 

The VIE Contractual Arrangements

 

In connection with the Acquisition, Sen Lang BVI, through the PRC Subsidiary, has entered into an Equity Pledge Agreement, Exclusive Purchase Option Agreement, Shareholder’s Rights Proxy Agreement, and Exclusive Technical Consultation and Service Agreement with SenlangBio and SenlangBio’s 13 shareholders that enable Sen Lang BVI to (1) have control over the activities that most significantly affect the economic performance of SenlangBio, and (2) receive significant economic benefits of SenlangBio. Accordingly, the PRC Subsidiary is currently, and upon the completion of the Acquisition will be, considered the primary beneficiary of SenlangBio, and SenlangBio and SenlangBio’s subsidiary’s financial results of operations, assets and liabilities are, and will be, consolidated with Sen Lang BVI’s consolidated financial statements, which will be consolidated with Avalon’s consolidated financial statements following the closing. After the Acquisition, investors in Avalon securities will continue to hold their interest in Avalon, a Delaware corporation, which will own 100% of the equity of Sen Lang BVI, the BVI holding company, and a portion of Avalon’s operations will be conducted by Sen Lang BVI’s wholly-owned PRC Subsidiary, a PRC entity, through its contractual arrangements among SenlangBio, based in China and SenlangBio’s shareholders.

 

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Among all the VIE Agreements, the Exclusive Purchase Option Agreement, Shareholder’s Rights Proxy Agreement and Equity Pledge Agreement give Sen Lang BVI effective control of SenlangBio. Under the Exclusive Purchase Option Agreement, SenlangBio’s shareholders irrevocably grant the PRC Subsidiary (or its designee) an exclusive right to purchase the equity held by SenlangBio’s shareholders in SenlangBio, or the assets owned by SenlangBio, in whole or in part to the extent permitted by PRC laws. This agreement will remain in effect indefinitely, unless the PRC Subsidiary terminates this Agreement. Under the Shareholder’s Rights Proxy Agreement, SenlangBio’s shareholders authorize any entity or individual designated by the PRC Subsidiary to act on their behalf as their exclusive agent to exercise all shareholder’s rights under the PRC laws and SenlangBio’s Articles of Association, including but not limited to: (a) to convene, attend and vote on all matters during shareholders’ meetings; (b) to transfer, pledge or dispose of, or create encumbrance on the equity; (c) to receive dividends; (d) to participate in judicial proceedings or execute legal documents in relation to shareholders’ rights; (e) to appoint legal representatives, directors and officers of SenlangBio; and (f) to enter into contracts and exercise the Exclusive Purchase Option Agreement. Under this agreement, the proxy period will terminate on the earlier of the following dates: (a) the date on which SenlangBio’s shareholders are no longer SenlangBio’s nominee or actual shareholder; (b) the date on which the PRC Subsidiary requests to terminate the proxy in writing; or (c) the date on which the assets and licenses of SenglangBio have been fully transferred to the PRC Subsidiary or the entity or individual designated by the PRC Subsidiary. Under the Equity Pledge Agreement, SenlangBio’s shareholders agree to pledge all of their equity interests in SenlangBio to the PRC Subsidiary to guarantee the performance of SenlangBio and SenlangBio’s shareholders’ obligations under the Exclusive Technical Consultation and Service Agreement, the Exclusive Purchase Option Agreement, the Shareholder’s Rights Proxy Agreement, and the Spousal Consent. The term of validity of the pledge is the same as the longest term of validity in the VIE Agreements. By signing the Spousal Consents, the spouses of the shareholders of SenlangBio confirm, among other things, that the equity held by SenlangBio shareholders in SenlangBio are not community property and the SenlangBio shareholders shall have the right to dispose of the equity without the spouses’ consent. The Spousal Consent will be effective until the date when the last of the other VIE Agreements stops being effective.

 

Among all the VIE Agreements, the Exclusive Technical Consultation and Service Agreement enables Sen Lang BVI to receive substantially all the economic benefits from SenlangBio. Pursuant to the Exclusive Technical Consultation and Service Agreement between the PRC Subsidiary and SenlangBio, the PRC Subsidiary provides SenlangBio with technical consultation and services. Additionally, the PRC Subsidiary agrees to grant SenlangBio its intellectual property in relation to its services on a chargeable and revocable basis, but such grant shall not result in the transfer of any intellectual property or create any restriction on the PRC Subsidiary’s full ownership. For services rendered to SenlangBio under this agreement, the PRC Subsidiary is entitled to collect a service fee calculated based on the complexity of services rendered, time required by the PRC Subsidiary, and the exact contents and commercial value of services rendered. The term of service provided by the PRC Subsidiary under this agreement is ten (10) years. Unless terminated at an earlier date by the PRC Subsidiary, such engagement will be automatically renewed for successive 10-year terms. During the term of this agreement, the PRC Subsidiary shall enjoy all the economic benefits derived from SenlangBio’s operations, and in the event of serious difficulties in SenlangBio’s operations, the PRC Subsidiary may provide SenlangBio with financial support, and the PRC Subsidiary has the right to request SenlangBio to cease operation.

 

Sen Lang BVI, its PRC Subsidiary, SenlangBio, and SenlangBio’s shareholders face uncertainty about potential future actions that could be undertaken by PRC administrative authorities and new regulations that could be promulgated by the PRC government that could affect the enforceability of the contractual arrangements between Sen Lang BVI’s PRC Subsidiary, SenlangBio and SenlangBio’s shareholders. Consequently, the business, financial condition, and results of operations of Sen Lang BVI and Avalon may be adversely affected by these potential regulatory changes. Although no law or regulation in the PRC explicitly prohibits the use of the VIE Structure, it is uncertain whether any new PRC laws or regulations relating to VIE Structures will be adopted, or if adopted, what they would provide. In particular, the National People’s Congress approved the Foreign Investment Law, or the 2019 PRC Foreign Investment Law on March 15, 2019, which came into effect on January 1, 2020. In addition, the PRC State Council approved the Implementation Rules of Foreign Investment Law on December 26, 2019, which came into effect on January 1, 2020. There are uncertainties as to how the 2019 PRC Foreign Investment Law and its Implementation Rules will be further interpreted and implemented and if it will represent a major change to the laws and regulations relating to the VIE Structure. Although Avalon believes that no approvals or permissions are required under current applicable PRC laws and regulations for Avalon to complete the Acquisition, if SenlangBio’s CAR-T cell therapies or other technologies that are being researched and developed are deemed by relevant PRC regulatory agencies as falling into certain categories of prohibited activities by foreign-invested entities, and if the VIE Structure is considered as “investment” in the context of the prohibition of foreign investment, SenlangBio would be prohibited from engaging in the research or development of such technologies. In that event, Avalon and the Sen Lang BVI Beneficial Shareholders would have to restructure Avalon’s control over SenlangBio. SenlangBio may also have to forfeit its income derived from the research and development of such technologies. See “Risk Factors—Risks Related to the VIE Structure and SenlangBio being a PRC Domestic Entity—The business of SenlangBio may fall into the prohibited foreign investment category under currently effective PRC laws” and “Risk Factors—Risks Related to the VIE Structure and SenlangBio being a PRC Domestic Entity—Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law, its implementing rules, Foreign Investment Security Review Measures, other regulations and how they may impact the viability of the VIE structure, business, financial condition, and results of operations.

 

Moreover, the VIE Structure, as a form of contractual arrangements, may be less effective than direct ownership, and Avalon may incur substantial costs to enforce the terms of the arrangements. As a result of the VIE Structure, the status of the rights of Sen Lang BVI with respect to its contractual arrangements with SenlangBio and its shareholders is uncertain. SenlangBio and its shareholders may not act in the best interests of Avalon or may not perform their obligations under these contractual arrangements. If Sen Lang BVI could have direct ownership of SenlangBio, Avalon would be able to exercise its rights as a shareholder through Sen Lang BVI to control SenlangBio to effect changes in the board of directors of SenlangBio, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the contractual arrangements, Avalon would rely on legal remedies under PRC laws for breach of contract if SenlangBio and its shareholders did not perform their obligations under the contractual arrangements. These legal remedies may not be as effective as direct ownership in providing Avalon with control over SenlangBio.

 

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If SenlangBio or its shareholders fail to perform their obligations under the contractual arrangements, Avalon may have to incur substantial costs and expend additional resources to enforce such arrangements, and rely on legal remedies under PRC laws, including contractual remedies, which may not be sufficient or effective. All the agreements under the VIE contractual arrangements are governed by and interpreted in accordance with PRC laws, and disputes arising from these contractual arrangements will be resolved through arbitration in China. However, the legal framework and system in China, in particularly those relating to arbitration proceedings, are not as developed as in some other jurisdictions, such as United States. As a result, uncertainties in the PRC legal system could limit Sen Lang BVI’s ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts for the same matter, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in the PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. If Sen Lang BVI is unable to enforce these contractual arrangements, or if Sen Lang BVI suffers significant delay or face other obstacles in the process of enforcing these contractual arrangements, Avalon may not be able to exert effective control over SenlangBio, and its ability to conduct businesses may be negatively affected. See “Risk Factors—Risks Related to the VIE Structure and SenlangBio being a PRC Domestic Entity—There are uncertainties regarding the interpretation and enforcement of PRC laws, rules, and regulations in general, as well as the actions taken by PRC regulatory authorities” and “Risk Factors—Risks Related to Acquisitions.”

 

The VIE Structure includes Senglang HK, a holding company incorporated under the laws of Hong Kong. Although Hong Kong remains a top destination for international business in Asia, recent events there and a continuous push for integration with the Mainland China’s economy may expose Senlang HK’s business and results of operations to political and economic influence from the PRC. However, the existence of Senlang HK does not violate any currently effective laws or regulations in the PRC and Hong Kong. In addition, Senglang HK is not an operating company in Hong Kong, but is a holding company. Therefore, Avalon does not expect that it will be heavily influenced by the political and economic influence from China. In addition, Senlang HK is not a contractual party to the VIE Agreements. Therefore, the adoption of the VIE Structure and Senlang HK’s position therein is not expected to cause a direct legal and operational risk to Senglang HK. However, the emerging legal and operational risks in relation to the VIE Structure generally apply to the overall VIE Structure and its holding companies, which include Senglang HK.

 

Interests of Certain Persons in the Acquisition

 

Avalon

 

In considering the recommendation of Avalon’s board of directors to vote in favor of the Avalon Proposals, stockholders should be aware that, aside from their interests as stockholders, certain Avalon directors and officers have interests in the Acquisition that are different from, or in addition to, those of other stockholders generally. Avalon’s directors were aware of and considered these interests, among other matters, in evaluating the Acquisition, and in recommending to stockholders that they approve the Avalon Proposals. Stockholders should take these interests into account in deciding whether to approve the Avalon Proposals.

 

As of September 30, 2021, Avalon’s directors and executive officers beneficially owned approximately 66.0% of the shares of Avalon Common Stock (calculated in accordance with SEC rules that define beneficial ownership). All of the current executive officers of Avalon will continue in their current positions after the Acquisition, and all of the directors except for Meng Li will continue on the Avalon board after the Acquisition. In addition, on April 10, 2020, in the ordinary course of business, SenlangBio entered into a scientific research project cooperation agreement with Beijing Lu Daopei Hospital Co., Ltd., under which Beijing Lu Daopei Hospital Co., Ltd. conducts scientific research for the interest of SenlangBio on the cytoplasmic CD79a antibody gated multicolor flow cytometry monitoring CD19-CAR-T bridging allogeneic transplantation for the treatment of refractory and relapsed acute B lymphocytic leukemia. SenlangBio provides research funds in the amount of RMB 2 million to Beijing Lu Daopei Hospital Co., Ltd. Beijing Lu Daopei Hospital Co., Ltd. is a wholly-owned subsidiary of an entity whose chairman is Wenzhao Lu, the Chairman and largest shareholder of Avalon.

 

These interests may influence Avalon’s board of directors in making their recommendation that you vote in favor of the approval of the Avalon Proposals.

 

For more information, please see the section entitled “The Acquisition—Interests of Avalon’s Directors and Officers in the Acquisition.”

 

Reasons for the Approval of the Acquisition

 

After careful consideration, Avalon’s board of directors recommends that Avalon stockholders vote “FOR” each of the Avalon Proposals being submitted to a vote of the Avalon stockholders at the Avalon annual meeting of stockholders.

 

For a description of Avalon’s reasons for the approval of the Acquisition and the recommendation of its board of directors, see the section entitled “The Acquisition—Reasons for the Acquisition.”

 

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Regulatory Approvals Required for Business Operation of VIEs, Completing the Acquisition and the Issuance of Future Securities to Investors 

 

Avalon must comply with applicable federal and state securities laws and the rules and regulations of Nasdaq in connection with the issuance of shares of Avalon Common Stock in connection with the Acquisition and the issuance of the Exchange Shares in the Equity Financing and the filing of this proxy statement with the SEC.

 

SenlangBio engages in (a) the research and development in relation to CAR-T cell therapy and immune cell therapy, (b) cooperating with various hospitals for investigator initiated clinical trials of CAR-T cell therapy and immune cell therapy, as well as (c) applying for drug approval in relation to CAR-T cell therapy and immune cell therapy. SenlangBio has obtained a business license, which permits SenlangBio to operate its business in the PRC. No other special permission is required for SenlangBio to conduct its current business under applicable PRC regulations and laws. In respect of its business operations, no additional permits, licenses, and approvals are currently materially necessary because of the use of the VIE Structure. An essential component of SenlangBio’s development activities is the collection and use of human genetic resources. Under PRC law, entities controlled by foreign investor shall not conduct such activities. If an entity controlled by a foreign investor needs to use the human genetic resources of China to conduct scientific research, such an entity must cooperate with a Chinese entity and obtain related approval. Since no laws or regulations explicitly prohibit VIE contractual arrangements with foreign investors as a way of control by foreign investors, the use of VIE contractual arrangements serves to avoid the need to obtain such approval. However, it is still uncertain whether in the future a PRC authority would determine that an entity that has entered into VIE agreements with any foreign investor shall be deemed as “an entity controlled by foreign investor.” If in the future the competent authority interprets the VIE Structure as a way of control by foreign investor, SenlangBio and SenlangBio Clinical Laboratory may be subject to a fine of a substantial amount and no longer be allowed to collect and use human genetic resources without approval. See “Risk Factors—Risks Related to the VIE Structure and SenlangBio being a PRC Domestic Entity—Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law, its implementing rules, Foreign Investment Security Review Measures, other regulations and how they may impact the viability of the VIE structure, business, financial condition, and results of operations.

 

SenlangBio Clinical Laboratory engages in the business of testing of immunology, serology, and molecular genetics specialties for patients, including hematologic tumor diagnostics and testing prior to clinical trials for cell therapy. SenlangBio Clinical Laboratory has obtained a business license, which permits SenlangBio Clinical Laboratory to operate in the PRC. SenlangBio Clinical Laboratory has also obtained other permits, licenses and approvals specifically required for the business operation it conducts, including a Medical Institution Practice License, a Pathogenic Microbiology Laboratory Filling Certificate, and a Certificate of Technical Acceptance of Clinical Gene Amplification Test Laboratory.

 

Avalon’s existing PRC subsidiaries have obtained their respective business licenses, which permit each of Avalon’s existing PRC subsidiaries to operate its business in the PRC. No other special permission is required for Avalon’s existing PRC subsidiaries to conduct their respective current business under applicable PRC regulations and laws. Additionally, the operation of Avalon and its existing PRC subsidiaries are not covered by permissions requirements of the China Securities Regulatory Commission (CSRC) or the Cyberspace Administration of China (CAC). No approvals or permissions are required under current applicable PRC laws and regulations for Avalon to complete the Acquisition. However, as discussed above, it is uncertain whether in the future a PRC authority would determine that an entity that has entered into VIE agreements with a foreign investor shall be deemed as “an entity controlled by foreign investor.” Any such determination in the future would necessitate approvals from competent PRC authorities. In addition, because Avalon is the issuer of the common stock listed on Nasdaq and is a Delaware operating and holding company, no approval or permission is required under current applicable PRC laws and regulations for any future issuances of Avalon securities to non-PRC investors. Based on the current VIE Structure of Sen Lang BVI, no permission or approval is required by the China Securities Regulatory Commission or the Cyberspace Administration of China for the operations of SenlangBIo as a VIE. See “Risk Factors—Risks Related to the VIE Structure and SenlangBio being a PRC Domestic Entity—Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law, its implementing rules, Foreign Investment Security Review Measures, other regulations and how they may impact the viability of the VIE structure, business, financial condition, and results of operations.

 

The Flow of Economic Benefits from SenlangBio to Avalon Stipulated under the Contractual Arrangements

 

Pursuant to the VIE contractual arrangements between Sen Lang BVI’s PRC Subsidiary, SenlangBio and SenlangBio’s shareholders, SenlangBio will pay the PRC Subsidiary the consulting service fee on a quarterly basis, which shall be the net income of SenlangBio during such quarter. Senlang HK will then receive the economic benefit from the PRC Subsidiary by way of dividends. Sen Lang BVI, the entity which will be 100% owned by Avalon after the Acquisition, will further receive the economic benefit from Senlang HK by way of dividends.

 

Pursuant to the Exclusive Technical Consultation and Service Agreement between the PRC Subsidiary and SenlangBio, upon the completion of the Acquisition, the PRC Subsidiary will grant SenlangBio its trademarks, software copyrights, management systems, management methods and other intellectual property in relation to the services on a chargeable and revocable basis, although the PRC Subsidiary currently does not possess any aforementioned intellectual property. Pursuant to the Exchange Agreement, Avalon will issue shares of Avalon Common Stock upon the exchange of shares of SenlangBio. Therefore, no cash will flow from Sen Lang BVI to SenlangBio upon the completion of Acquisition.

 

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The payment and amount of any future dividend of the PRC Subsidiary to Senlang HK will be restricted by PRC laws and regulations regarding dividends and PRC foreign exchange regulations. PRC laws require that dividends be paid only out of the profit for the year calculated according to PRC accounting principles, which differ in certain respects from the generally accepted accounting principles in other jurisdictions, including U.S. GAAP and IFRS. PRC laws also require foreign-invested enterprises to set aside at least 10% of their after-tax profits as the statutory common reserve fund until the cumulative amount of the statutory common reserve fund reaches 50% or more of such enterprises’ registered capital, if any, to fund its statutory common reserves, which are not available for distribution as cash dividends. See “Risk Factors - Risks Related to the VIE Structure and SenlangBio being a PRC Domestic Entity — Avalon intends to receive dividends and other distributions from VIEs, and any limitation on the ability of VIEs to make payments to Avalon could have an adverse effect on Avalon’s ability to conduct its business. Sen Lang BVI, Avalon and, ultimately, Avalon stockholders will receive the economic benefit of Senlang HK by way of dividends, which are subject to restrictions under current Hong Kong, BVI and US laws and regulations regarding dividends. Furthermore, under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. Avalon, its subsidiaries and SenlangBio may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements were not entered into on an arm’s length basis. See “Risk Factors - Risks Related to the VIE Structure and SenlangBio being a PRC Domestic Entity — VIE contractual arrangements may be subject to scrutiny by the PRC tax authorities and they may determine that Avalon or its subsidiaries or SenlangBio owe additional taxes, which could negatively affect Avalon’s financial condition and the value of its stock.

 

Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC resident enterprise to a foreign enterprise investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, such withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of the capital of a PRC enterprise and is the beneficial owner of the dividend income. Furthermore, the Announcement of State Taxation Administration on Promulgation of the Administrative Measures on Non-Resident Taxpayers Enjoying Treaty Benefits, issued on October 14, 2019 by the PRC State Taxation Administration, which became effective from January 1, 2020, requires non-resident enterprises to determine whether they are qualified to enjoy the preferential tax treatment under the tax treaties and make appropriate filings with the competent tax authorities. In addition, based on the Notice on Issues concerning Beneficial Owner in Tax Treaties, or Circular 9, issued on February 3, 2018 by the PRC State Taxation Administration, which became effective from April 1, 2018, when determining the applicant’s “beneficial owner” status regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including, without limitation, whether the applicant is obligated to pay more than 50% of the applicant’s income for twelve months to residents in a third country or region, whether the business operated by the applicant constitutes the actual business activities, and whether the counterparty country or region to the tax treaties does not levy any tax or grant tax exemption on relevant incomes or levy tax at an extremely low rate, will be taken into account, and it will be analyzed according to the actual circumstances of the specific cases. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. Therefore, Avalon currently believes that the PRC Subsidiary’s distribution of dividends to Senlang HK, if any, shall be subject to a withholding tax rate of 10%, unless the reduced rate of 5% under the tax treaty is applicable.

 

After receiving distribution of dividends from the PRC Subsidiary by way of dividends, Senlang HK will further make payments of dividends to Sen Lang BVI. Senlang HK is incorporated in Hong Kong and is subject to the Hong Kong Profits Tax law on the taxable income. According to Division 2 of Part 6 in the Companies Ordinance of Hong Kong, Senlang HK may only make a distribution out of its profits available for distribution. It may not pay any dividend out of its share capital, or in advance of the generation of distributable profits. However, under the current Hong Kong laws, payments of dividends by Senlang HK to Sen Lang BVI are not subject to any Hong Kong withholding or income tax.

 

SenlangBio reported net losses and had negative net cash flows from operations in 2020. No net income will be generated from SenlangBio’s operations in the foreseeable future and therefore no dividends or distributions will be paid by Sen Lang BVI (or its subsidiaries) to Avalon and its stockholders in the foreseeable future following the Acquisition. However, if Sen Lang BVI (or its subsidiaries) do make distributions of cash or property to Avalon, absent a distribution by Avalon to the U.S. holders of Avalon common stock, there would be no flow-through of such income to the U.S. holders of Avalon common stock for U.S. federal income tax purposes.

 

Restrictions on Foreign Exchange and Avalon’s Ability to Transfer Cash Across Borders

 

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval from or registration with appropriate governmental authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses. As a result, SAFE approval may need to be obtained to use cash generated from the operations of SenlangBio. Any failure to comply with applicable foreign exchange regulations may subject us to administrative fines. See “Risk Factors - Risks Related to the VIE Structure and SenlangBio being a PRC Domestic Entity — Governmental control of currency conversion may limit Avalon’s ability to utilize its revenues effectively and affect the value of Investor’s investment.”

 

Accounting Treatment of the Acquisition

 

The Acquisition is expected to be accounted for as a business acquisition, with Avalon identified as the accounting acquirer. Avalon is considered the accounting acquirer since immediately following the closing: (i) Avalon stockholders will own a majority of the voting rights of the post-Acquisition company; (ii) Avalon will have designate a majority (eight of nine) of the initial members of the board of directors of the post-Acquisition company; (iii) Avalon’s senior management will hold the majority of the key positions in senior management of the post-Acquisition company; and (iv) Avalon will continue to maintain its corporate headquarters in Freehold, New Jersey, United States. SenlangBio will continue to maintain operations in the Shijiazhuang High-tech Development Zone, Hebei Province, China.

 

16

 

 

The acquisition consideration is 81,000,000 shares of Avalon Common Stock. The purchase price will be allocated to the acquired assets and assumed liabilities based on their fair values at the closing date, and any excess is initially allocated to identifiable intangible assets mainly consisting of cell and gene engineering technologies with the ability to generate innovative and transformative cellular immunotherapies for solid and hematologic cancers, which will be amortized over 10 years. The initial allocation is subject to change upon the final valuation which is to be done at the time of closing. Such change could have a material impact on Avalon’s financial statements.

 

Holding Foreign Companies Accountable Act Compliance

 

The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. According to the HFCA Act, if the SEC determines that Avalon has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC will prohibit Avalon’s securities from being traded on a national securities exchange or in the over-the-counter trading market in the United States.

 

Avalon’s auditor is Marcum LLP, based in New York, New York. Sen Lang BVI’s auditor is Friedman LLP, based in Marlton, New Jersey. Both firms are registered with the PCAOB and are subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess their compliance with the applicable professional standards. Since both firms are located in the United States, the PCAOB has been able to conduct inspections of Marcum LLP and Friedman LLP.

 

However, on March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. Avalon will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above.

 

The SEC may propose additional regulatory or legislative requirements or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfill its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCA Act. However, some of the recommendations were more stringent than the HFCA Act. For example, if a company was not subject to PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022.

 

The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition to the requirements of the HFCA Act are uncertain. Although Avalon is currently not subject to the HFCA Act, any uncertainty of its applicability to Avalon, for example if Avalon or Sen Lang BVI switched to using a PRC-based auditing firm, could cause the market price of Avalon’s securities to be materially and adversely affected and could cause Avalon’s securities to be delisted or prohibited from being traded “over-the-counter”. If Avalon’s securities are unable to be listed on another securities exchange, such a delisting would substantially impair your ability to sell or purchase Avalon’s securities when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of Avalon’s securities.

 

Material U.S. Federal Income Tax Consequences of the Acquisition

 

Neither Avalon nor its stockholders are expected to recognize federal income tax or gain as a result of the Acquisition.

 

Ownership Following the Acquisition and the Equity Financing

 

It is anticipated that, upon the consummation of the Acquisition, the ownership of Avalon will be as follows:

 

Current Avalon stockholders will own 51.4% of the total voting shares outstanding; and

 

  Current Sen Lang BVI Shareholders will own 48.6% of the total voting shares outstanding.

 

The numbers of shares and percentage interests set forth above do not take into account (i) shares of Avalon Common Stock issuable upon the exchange of shares of SenlangBio purchased by the Investor in the Equity Financing, pursuant to the Exchange Agreement, (ii) shares of Avalon Common Stock issuable upon the exercise of outstanding options and warrants and (iii) potential future issuances of Avalon securities.

 

17

 

 

In addition, under the Exchange Agreement, the Investor shall have the right, exercisable following the six month anniversary of the closing of the Acquisition and until the five year anniversary of the closing of the Acquisition, to elect to exchange, from time to time, all or part of its equity ownership of SenlangBio for Exchange Shares of Avalon at an effective exchange price of $1.21 per share of Avalon Common Stock. Following the completion of the financing and assuming the full funding by the investor in the financing, the aggregate number of shares of Avalon Common Stock that would be issuable under the Exchange Agreement (assuming the exchange of all shares) would be approximately 25,885,000 (using the conversion rate of US dollars to RMB of 6.3856 as of June 11, 2021). The resultant equity ownership of Avalon would be as follows:

 

  Current Avalon stockholders will own 44.5% of the total voting shares outstanding;

 

  Current Sen Lang BVI Shareholders will own 42.1% of the total voting shares outstanding and

 

  The Investor will own 13.4% of the total voting shares outstanding.

 

China Operations – Condensed Consolidating Schedule

 

Following the Acquisition, the China-based SenlangBio business will represent a material part of the consolidated financial statements of Avalon through the VIE Structure. In addition, Avalon currently has a portion of its business based in China. The tables that follow depict the financial position as of December 31, 2020, cash flows and results of operations for the year ended December 31, 2020 for (i) the parent Avalon (excluding its existing China-based business), (ii) the parent’s existing China-based business only and (iii) the SenlangBio business that will be part of the VIE Structure, in each case shown separately as well as combined into the pro forma information, adjusted as if Avalon had acquired Sen Lang BVI.

  

The pro forma condensed consolidated combined balance sheet as of December 31, 2020 gives effect to the acquisition as if they had been consummated on December 31, 2020. The pro forma condensed consolidated combined statement of operations and comprehensive loss for the year ended December 31, 2020 and the pro forma condensed consolidated combined statement of cash flows for the year ended December 31, 2020 give effect to the acquisition as if they had been consummated on January 1, 2020.

 

18

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

PRO FORMA CONDENSED CONSOLIDATED COMBINED BALANCE SHEET

As of December 31, 2020

 

    Historical     Pro Forma  
    Parent (Excluding China     Parent’s China           Pro Forma Adjustments     Pro Forma  
    Subsidiaries)     Subsidiaries     VIE     Dr.     Cr.     Combined  
                                     
ASSETS                                    
                                     
CURRENT ASSETS:                                    
Cash   $ 559,711     $ 166,866     $ 18,935     $ -     $ -     $ 745,512  
Accounts receivable     -       -       45,271       -       -       45,271  
Rent receivable     35,395       -       -       -       -       35,395  
Deferred financing costs     222,141       -       -       -       -       222,141  
Recoverable VAT     -       -       335,150       -       335,150 a     -  
Inventory     -       -       125,962       -       125,962 a     -  
Prepaid expenses and other current assets     227,473       74,751       21,017       461,112 a     -       784,353  
Intercompany     3,113,204       -       -       -       3,113,204 f     -  
                                                 
Total Current Assets     4,157,924       241,617       546,335       461,112       3,574,316       1,832,672  
                                                 
NON-CURRENT ASSETS:                                                
Rent receivable - noncurrent portion     111,840       -       -       -       -       111,840  
Security deposit     -       -       50,012       -       -       50,012  
Deferred leasing costs     144,197       -       -       -       -       144,197  
Operating lease right-of-use assets, net     137,333       -       320,123       -       -       457,456  
Property and equipment, net     79,261       399,854       2,567,522       -       -       3,046,637  
Investment in real estate, net     7,685,686       -       -       -       -       7,685,686  
Equity method investment     -       521,758       -       -       -       521,758  
Intangible assets     -       -       -       97,420,815 b     -       97,420,815  
                                                 
Total Non-current Assets     8,158,317       921,612       2,937,657       97,420,815       -       109,438,401  
                                                 
Total Assets   $ 12,316,241     $ 1,163,229     $ 3,483,992     $ 97,881,927     $ 3,574,316     $ 111,271,073  
                                                 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)                                                
                                                 
CURRENT LIABILITIES:                                                
Accrued professional fees   $ 1,178,200     $ 34,622     $ -     $ -     $ 650,000 d   $ 1,862,822  
Accrued research and development fees     513,533       -       -       -       -       513,533  
Accrued payroll liability and directors’ compensation     132,500       21,792       105,810       -       -       260,102  
Accounts payable     -       -       310,330       310,330 e     -       -  
Accrued leasehold improvements liabilities     -       -       315,583       315,583 e     -       -  
Accrued liabilities and other payables     191,955       105,822       37,432       -       975,100 e     1,310,309  
Notes payable     -       -       918,752       -       -       918,752  
Accrued liabilities and other payables - related parties     267,956       -       -       -       -       267,956  
Deferred revenue     -       -       88,508       88,508 e     -       -  
Deferred grant income     -       -       260,679       260,679 e     -       -  
Operating lease obligation     76,379       -       155,470       -       -       231,849  
Note payable - related party     -       -       245,000       -       -       245,000  
Tenants’ security deposit     69,634       -       -       -       -       69,634  
Intercompany     -       3,113,204       -       3,113,204 f     -       -  
                                                 
Total Current Liabilities     2,430,157       3,275,440       2,437,564       4,088,304       1,625,100       5,679,957  
                                                 
NON-CURRENT LIABILITIES:                                                
Deferred grant income - noncurrent portion     -       -       351,677       -       -       351,677  
Operating lease obligation - noncurrent portion     66,954       -       105,566       -       -       172,520  
Note payable - related party     390,000       -       -       -       -       390,000  
Loan payable - related party     3,200,000       -       -       -       -       3,200,000  
                                                 
Total Non-current Liabilities     3,656,954       -       457,243       -       -       4,114,197  
                                                 
Total Liabilities     6,087,111       3,275,440       2,894,807       4,088,304       1,625,100       9,794,154  
                                                 
SHAREHOLDERS’ EQUITY (DEFICIT):                                                
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding     -       -       -       -       -       -  
Common stock, $0.0001 par value; 490,000,000 shares authorized; 82,795,297 shares issued and 82,275,297 shares outstanding 163,795,297 pro forma shares issued and 163,275,297 pro forma shares outstanding     8,279       -       -       -       8,100 b     16,379   
Additional paid-in capital     46,779,041       77,406       8,946,197       8,946,197 c     98,001,900 b     144,858,347  
Ordinary shares     -       -       10,001       10,001 c     -       -  
Less: common stock held in treasury, at cost; 520,000 shares     (522,500 )     -       -       -       -       (522,500 )
Accumulated deficit     (40,035,690 )     (2,005,685 )     (8,380,014 )     650,000 d     8,380,014 c     (42,691,375 )
Statutory reserve     -       6,578       -       -       -       6,578  
Accumulated other comprehensive (loss) income     -       (190,510 )     13,001       13,001 c     -       (190,510 )
                                                 
Total shareholders’ equity (deficit)     6,229,130       (2,112,211 )     589,185       9,619,199       106,390,014       101,476,919  
                                                 
Total Liabilities and Shareholders’ Equity (Deficit)   $ 12,316,241     $ 1,163,229     $ 3,483,992     $ 13,707,503     $ 108,015,114     $ 111,271,073  

 

19

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

PRO FORMA CONDENSED CONSOLIDATED COMBINED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

Year Ended December 31, 2020

 

    Historical     Pro Forma  
    Parent (Excluding China     Parent’s China           Pro Forma Adjustments     Pro Forma  
    Subsidiaries)     Subsidiaries     VIE     Dr.     Cr.     Combined  
                                     
REVENUES                                    
Real property rental   $ 1,206,854     $ -     $ -     $ -     $ -     $ 1,206,854  
Medical related consulting services - related parties     -       170,908       -       -       -       170,908  
General laboratory testing     -       -       649,932       -       -       649,932  
Immunology and hematology testing     -       -       440,183       -       -       440,183  
Total Revenues     1,206,854       170,908       1,090,115       -       -       2,467,877  
                                                 
COSTS AND EXPENSES                                                
Real property operating expenses     851,754       -       -       -       -       851,754  
Medical related consulting services - related parties     62,244       73,561       -       -       -       135,805  
General laboratory testing     -       -       343,794       -       -       343,794  
Immunology and hematology testing     -       -       197,444       -       -       197,444  
Total Costs and Expenses     913,998       73,561       541,238       -       -       1,528,797  
                                                 
Real Property Operating Income     355,100       -       -       -       -       355,100  
Gross (Loss) Profit from Medical Related Consulting Services     (62,244 )     97,347       -       -       -       35,103  
Gross Profit from General Laboratory Testing     -       -       306,138       -       -       306,138  
Gross Profit from Immunology and Hematology Testing     -       -       242,739       -       -       242,739  
Total Gross Profit     292,856       97,347       548,877       -       -       939,080  
                                                 
OTHER OPERATING EXPENSES:                                                
Professional fees     6,471,264       81,745       -       73,397 a     -       6,626,406  
Compensation and related benefits     3,799,545       356,605       -       292,439 a     -       4,448,589  
Research and development expenses     831,879       51,976       2,813,250       -       -       3,697,105  
General and administrative expenses     -       -       925,438       -       925,438 a     -  
Other general and administrative expenses     1,061,816       189,392       -       559,602 a     -       1,810,810  
Selling and marketing expenses     -       -       163,145       -       -       163,145  
Amortization     -       -       -       9,756,000 c     -       9,756,000  
Grant income     -       -       (929,505 )     -       -       (929,505 )
                                                 
Total Other Operating Expenses     12,164,504       679,718       2,972,328       10,681,438       925,438       25,572,550  
                                                 
LOSS FROM OPERATIONS     (11,871,648 )     (582,371 )     (2,423,451 )     (10,681,438 )     (925,438 )     (24,633,470 )
                                                 
OTHER (EXPENSE) INCOME                                                
Interest expense     -       -       (12,397 )     -       -       (12,397 )
Interest expense - related party     (168,762 )     -       (11,169 )     -       -       (179,931 )
Loss from equity method investment     -       (51,673 )     -       -       -       (51,673 )
Other (expense) income     (921 )     (4,063 )     4,654       -       -       (330 )
                                                 
Total Other Expense, net     (169,683 )     (55,736 )     (18,912 )     -       -       (244,331 )
                                                 
LOSS BEFORE INCOME TAXES     (12,041,331 )     (638,107 )     (2,442,363 )     (10,681,438 )     (925,438 )     (24,877,801 )
                                                 
INCOME TAXES     -       -       -       -       -       -  
                                                 
NET LOSS   $ (12,041,331 )   $ (638,107 )   $ (2,442,363 )   $ (10,681,438 )   $ (925,438 )   $ (24,877,801 )
                                                 
COMPREHENSIVE LOSS:                                                
NET LOSS   $ (12,041,331 )   $ (638,107 )   $ (2,442,363 )   $ (10,681,438 )   $ (925,438 )   $ (24,877,801 )
OTHER COMPREHENSIVE INCOME                                                
Unrealized foreign currency translation gain     -       67,237       58,807       -       -       126,044  
COMPREHENSIVE LOSS   $ (12,041,331 )   $ (570,870 )   $ (2,383,556 )   $ (10,681,438 )   $ (925,438 )   $ (24,751,757 )
                                                 
NET LOSS PER COMMON SHARE:                                                
Basic and diluted   $ (0.15 )   $ (0.01 )                           $ (0.15 )b
                                                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                                                
Basic and diluted     79,508,149       79,508,149                               160,508,149  

 

20

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

PRO FORMA CONDENSED CONSOLIDATED COMBINED STATEMENT OF CASH FLOWS

Year Ended December 31, 2020

 

    Historical     Pro Forma  
    Parent (Excluding China     Parent’s China           Pro Forma     Pro Forma  
    Subsidiaries)     Subsidiaries     VIE     Adjustments     Combined  
                               
CASH FLOWS FROM OPERATING ACTIVITIES:                              
Net loss   $ (12,041,331 )   $ (638,107 )   $ (2,442,363 )   $ (9,756,000 )a   $ (24,877,801 )
Adjustments to reconcile net loss to net cash used in operating activities:                                        
Bad debt provision     50,379       4,754       -       -       55,133  
Depreciation     193,329       121,451       1,147,115       -       1,461,895  
Amortization of intangible assets     -       -       -       9,756,000 a     9,756,000  
Amortization of straight-line rent receivable     7,554       -       -       -       7,554  
Amortization of right-of-use assets     63,695       -       189,283       -       252,978  
Stock-based compensation and service expense     5,494,033       -       -       -       5,494,033  
Loss from equity method investment     -       51,673       -       -       51,673  
Loss on disposal of property and equipment     -       2,679       12,855       -       15,534  
Changes in operating assets and liabilities:                                        
Accounts receivable     -       -       (41,306 )     -       (41,306 )
Accounts receivable - related party     -       217,394       -       -       217,394  
Rent receivable     (82,174 )     -       -       -       (82,174 )
Recoverable VAT     -       -       5,973       -       5,973  
Inventory     -       -       (13,907 )     -       (13,907 )
Prepaid expenses and other current assets     (209,655 )     3,023       38,647       -       (167,985 )
Security deposit and other long-term assets     -       -       3,116       -       3,116  
Accounts payable     -       -       213,553       -       213,553  
Salary payable     -       -       (7,849 )     -       (7,849 )
Accrued liabilities and other payables     (793,580 )     (43,681 )     (24,445 )     -       (861,706 )
Accrued liabilities and other payables - related parties     118,762       -       -       -       118,762  
Deferred revenue     -       -       80,924       -       80,924  
Deferred grant income     -       -       (93,261 )     -       (93,261 )
Operating lease obligation     (57,695 )     -       (190,279 )     -       (247,974 )
Tenants’ security deposit     (8,603 )     -       -       -       (8,603 )
                                         
NET CASH USED IN OPERATING ACTIVITIES     (7,265,286 )     (280,814 )     (1,121,944 )     -       (8,668,044 )
                                         
CASH FLOWS FROM INVESTING ACTIVITIES:                                        
Purchase of property and equipment     -       -       (128,109 )     -       (128,109 )
Improvement of commercial real estate     (111,213 )     -       -       -       (111,213 )
Additional investment in equity method investment     -       (57,972 )     -       -       (57,972 )
Intercompany     (100,000 )     -       -       100,000 b     -  
                                         
NET CASH USED IN INVESTING ACTIVITIES     (211,213 )     (57,972 )     (128,109 )     100,000       (297,294 )
                                         
CASH FLOWS FROM FINANCING ACTIVITIES                                        
Proceeds from borrowings     -       -       869,578       -       869,578  
Proceeds from related party’s borrowings     600,000       -       608,704       -       1,208,704  
Repayments for related party’s borrowings     (200,000 )     -       (376,817 )     -       (576,817 )
Proceeds received from offering     7,804,099       -       -       -       7,804,099  
Disbursements for offering costs     (539,818 )     -       -       -       (539,818 )
Intercompany     -       100,000       -       (100,000 )b     -  
                                         
NET CASH PROVIDED BY FINANCING ACTIVITIES     7,664,281       100,000       1,101,465       (100,000 )     8,765,746  
                                         
EFFECT OF EXCHANGE RATE ON CASH     -       12,690       2,529       -       15,219  
                                         
NET INCREASE (DECREASE) IN CASH     187,782       (226,096 )     (146,059 )     -       (184,373 )
                                         
CASH - beginning of year     371,929       392,962       164,994       -       929,885  
                                         
CASH - end of year   $ 559,711     $ 166,866     $ 18,935     $ -     $ 745,512  
                                         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                        
Cash paid for:                                        
Interest   $ 50,000     $ -     $ 20,782     $ -     $ 70,782  
                                         
NON-CASH INVESTING AND FINANCING ACTIVITIES:                                        
Property and equipment acquired on credit as payable   $ -     $ -     $ 297,251     $ -     $ 297,251  
Property and equipment acquired by decreasing prepayment for long-term assets   $ -     $ -     $ 26,087     $ -     $ 26,087  
Common stock issued for future services   $ 34,629     $ -     $ -     $ -     $ 34,629  
Common stock issued for accrued liabilities   $ 187,725     $ -     $ -     $ -     $ 187,725  

 

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[1] Basis of Pro Forma Presentation

 

The pro forma condensed consolidated combined financial statements have been prepared assuming the acquisition is accounted for as a business combination using the acquisition method of accounting under Financial Accounting Standards Board (“FASB”) ASC 805, Business Combinations (“ASC 805”). For business combinations under ASC 805, acquisition-related transaction costs are not included as a component of consideration transferred but are accounted for as expenses in the periods in which such costs are incurred. Acquisition-related transaction costs include advisory, legal, accounting fee and others.

 

The pro forma condensed consolidated combined financial statements reflect adjustments, based on available information and certain assumptions that Avalon believes are reasonable, attributable to the following:

 

The acquisition of Sen Lang BVI, which will be accounted for as a business combination, with Avalon identified as the acquirer, and the issuance of shares of Avalon common stock as acquisition consideration. Avalon is considered the accounting acquirer since immediately following the closing: (i) Avalon stockholders will own a majority of the voting rights of the combined company; (ii) Avalon will designate a majority (eight of nine) of the initial members of the board of directors of the combined company; (iii) Avalon’s senior management will hold the majority of the key positions in senior management of the combined company; and (iv) Avalon will continue to maintain its corporate headquarters in Freehold, New Jersey, United States. SenlangBio will continue to maintain operations in the Shijiazhuang High-tech Development Zone, Hebei Province, China;

 

Adjustments to conform the classification of certain assets and liabilities in Sen Lang BVI’s historical consolidated balance sheet to Avalon’s classification for similar assets and liabilities;

 

Adjustments to conform the classification of expenses in Sen Lang BVI’s historical consolidated statement of operations and comprehensive loss to Avalon’s classification for similar expenses; and

 

The incurrence of acquisition-related expenses.

 

The pro forma adjustments represent management’s estimates based on information available as of the date of this filing and are subject to change as additional information becomes available and additional analyses are performed. The pro forma financial statements are provided for illustrative purposes only and are not intended to represent what Avalon’s financial position, cash flow and results of operations would have been had the acquisition actually been consummated on the assumed dates nor do they purport to project the future operating results, financial position and cash flow of Avalon following the acquisition. The pro forma financial statements do not reflect future events that may occur after the acquisition, including, but not limited to, the anticipated realization of ongoing savings from potential operating efficiencies, cost savings, or economies of scale that Avalon may achieve with respect to the combined operations. Specifically, the pro forma statements of operations do not include the synergies expected to be achieved as a result of the acquisition and any associated costs that may be incurred to achieve the identified synergies. Additionally, Avalon cannot assure that additional charges will not be incurred in excess of those included in the pro forma additional legal, accounting, and advisory fees of $650,000 related to the acquisition, Avalon’s efforts to achieve operational synergies, or that management will be successful in its efforts to integrate the operations. The pro forma statement of operations also excludes the effects of costs associated with any restructuring and integration activities that may result from the acquisition. Further, the pro forma financial statements do not reflect the effect of any regulatory actions that may impact the results of Avalon following the acquisition.

 

Assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with the pro forma condensed consolidated combined financial statements. In Avalon’s opinion, all adjustments that are necessary to present fairly the pro forma information have been made. The historical financial statements have been adjusted in the pro forma condensed consolidated combined financial statements to give effect to the acquisition. These adjustments are directly attributable to the acquisition, factually supportable and, with respect to the pro forma condensed consolidated combined statements of operations, expected to have a continuing impact on Avalon following the acquisition.

 

22

 

 

[2] Pro Forma Adjustments and Assumptions

 

Pro Forma Adjustments to the Consolidated Balance Sheet at December 31, 2020:

 

a. Represents the reclassification of recoverable VAT and inventory into prepaid expenses and other current assets.

 

b. Reflects the issuance of 81,000,000 shares of Avalon common stock at a price of $1.21 per share (which was the market price of the Avalon common stock as of the date of the Purchase Agreement under the rules of the Nasdaq Stock Market) as consideration for acquisition of Sen Lang BVI and adjustments to state Sen Lang BVI’s assets acquired and liabilities assumed at fair value. A summary of the consideration paid and the preliminary fair value of the assets acquired and liabilities assumed is as follows:

 

Preliminary consideration:      
Avalon common stock issued to Sen Lang BVI shareholders     81,000,000  
Issued price   $ 1.21  
Total consideration   $ 98,010,000  
         
Preliminary fair value of assets acquired:        
Current assets        
Cash   $ 18,935  
Accounts receivable     45,271  
Recoverable VAT     335,150  
Inventory     125,962  
Other current assets     21,017  
Non-current assets        
Security deposit     50,012  
Operating lease right-of-use assets, net     320,123  
Property and equipment, net     2,567,522  
Goodwill     97,420,815  
Total preliminary fair value of assets acquired   $ 100,904,807  
Preliminary fair value of liabilities assumed:        
Current liabilities        
Notes payable   $ (918,752 )
Notes payable - related party     (245,000 )
Accounts payable     (310,330 )
Salary payable     (105,810 )
Accrued leasehold improvements liabilities     (315,583 )
Accrued liabilities and other payables     (37,432 )
Deferred revenue     (88,508 )
Deferred grant income     (260,679 )
Operating lease obligation     (155,470 )
Non-current liabilities        
Deferred grant income - noncurrent portion     (351,677 )
Operating lease obligation - noncurrent portion     (105,566 )
Total preliminary fair value of liabilities assumed   $ (2,894,807 )
Net Assets acquired and liabilities assumed   $ 98,010,000  

 

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The acquisition consideration is allocated to the acquired assets and assumed liabilities based on their estimated fair values, and any excess is initially allocated to identifiable intangible assets mainly consisting of cell and gene engineering technologies with the ability to generate innovative and transformative cellular immunotherapies for solid and hematologic cancers. The purchase price exceeded the fair value of net assets acquired by approximately $97 million. The Company allocated the $97 million excess to intangible assets, which will be amortized over 10 years. The initial allocation is subject to change upon the final valuation which is to be done at the time of closing. Such change could have a material impact on the Company’s financial statements.

 

c. Represents the elimination of Sen Lang BVI’s historical equity balances.

 

d. Represents the accrual of $650,000 in estimated legal, accounting, and advisory fees that are payable as a result of the acquisition of Sen Lang BVI, which were not reflected in either Avalon’s or Sen Lang BVI’s historical financial statements.

 

e. Represents the reclassification of accounts payable, accrued leasehold improvements liabilities, deferred revenue, deferred grant income into accrued liabilities and other payables.

 

f. Represents the elimination of all intercompany accounts and transactions in consolidation.

 

Pro Forma Adjustments to the Consolidated Statement of Operations and Comprehensive Loss for the Year Ended December 31, 2020:

 

a. Represents a reclassification of general and administrative expenses into professional fees, compensation and related benefits, and other general and administrative expenses.

 

b. The pro forma basic and diluted net loss per common share was computed by dividing pro forma net loss attributable to Avalon by the historical weighted average number of shares of common stock outstanding after giving effect to the issuance of 81,000,000 shares of Avalon common stock in connection with the acquisition of Sen Lang BVI, as if the issuance had been completed on January 1, 2020.

 

c. Represents amortization of intangible assets acquired from this acquisition.

 

Pro Forma Adjustments to the Consolidated Statement of Cash Flows for the Year Ended December 31, 2020:

 

a. Represents amortization of intangible assets acquired from this acquisition.

 

b. Represents the elimination of all intercompany accounts and transactions in consolidation.

 

[3] Unaudited Pro Forma Adjustment Reflects the Following Two Transactions:

 

Transaction 1:

 

Intangible assets     97,420,815          
Additional paid-in capital     8,946,197          
Ordinary shares     10,001          
Accumulated other comprehensive income     13,001          
Accumulated deficit             8,380,014  
Common stock             8,100  
Additional paid-in capital             98,001,900  

 

The transaction reflects (i) the elimination of Sen Lang BVI’s historical equity balances; (ii) the issuance of 81,000,000 shares of Avalon common stock at a price of $1.21 per share as consideration for acquisition of Sen Lang BVI; (iii) and acquisition consideration exceeded the fair value of net assets acquired by approximately $97 million, which the Company allocated to intangible assets mainly consisting of cell and gene engineering technologies with the ability to generate innovative and transformative cellular immunotherapies for solid and hematologic cancers.

 

Transaction 2:

 

Accumulated deficit     650,000          
Accrued professional fees             650,000  

 

To accrue $650,000 estimated additional legal, accounting, and advisory fees that are payable as a result of the acquisition of Sen Lang BVI, which were not reflected in either Avalon’s or Sen Lang BVI’s historical financial statements.

 

24

 

 

Summary of Risk Factors

 

In addition to the other information contained in this proxy statement, including the matters addressed under the heading “Cautionary Note Regarding Forward-Looking Statements,” you should carefully consider all of the risks and uncertainties described in the section of this proxy statement captioned “Risk Factors.” These risks include, but are not limited to, the following:

 

Risks Related to SenlangBio

 

SenlangBio is a biopharmaceutical company that will face many risks frequently encountered by clinical-stage businesses.
SenlangBio has incurred operating losses in each year since its inception and expects to continue to incur substantial losses for the foreseeable future. SenlangBio may never become profitable or, if achieved, be able to sustain profitability.
SenlangBio will require additional capital to fund its operations, and if SenlangBio fails to obtain necessary financing, it may not be able to complete the development and commercialization of its product candidates. SenlangBio’s cash or cash equivalent will only fund its operations for a limited time and it will need to raise additional capital to support its development and commercialization efforts.
The NMPA may refuse to consider the data from the investigator-initiated clinical trials of SenlangBio due to concerns that (1) this does not follow the mainstream regulatory pathway of relying on registered clinical trials, or that (2) the non-registered clinical trials of the product may not otherwise fully comply with the same requirements applicable to registered clinical trials, as further explained below.
SenlangBio’s preclinical programs may experience delays or may never advance to clinical trials, which would adversely affect its ability to obtain regulatory approvals or commercialize these product candidates on a timely basis or at all, which would have an adverse effect on its business.
If the clinical trials of any of SenlangBio’s product candidates fail to demonstrate safety and efficacy to the satisfaction of the NMPA, or do not otherwise produce favorable results, SenlangBio may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of its product candidates.
Coronavirus could adversely impact SenlangBio’s business, including SenlangBio’s clinical trials.
Obtaining and maintaining SenlangBio’s patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and SenlangBio’s patent protection could be reduced or eliminated for non-compliance with these requirements.

 

Risks Related to the Post-Acquisition Company Having the Majority of its Operations in China

 

Our growing operations in the PRC could expose us to risks that could have an adverse effect on our costs of operations.
Uncertainties with respect to the PRC legal system could limit the legal protections available to our stockholders and us.
The PRC government exerts substantial influence over the manner in which we must conduct our business activities.
All material aspects of the research, development, manufacturing and commercialization of biopharmaceutical products in China are heavily regulated. Any failure to comply with existing regulations and industry standards, or any adverse actions by the NMPA or other comparable regulatory authorities against us, could negatively impact SenlangBio’s reputation and its business, financial condition, results of operations and prospects.
Avalon intends to receive dividends and other distributions from SenlangBio through the VIE Structure, and any limitation on the ability of SenlangBio or Sen Lang BVI or its subsidiaires to make payments to Avalon could have an adverse effect on Avalon’s ability to conduct its business.
VIE contractual arrangements may be subject to scrutiny by the PRC tax authorities and they may determine that Avalon or its subsidiaries or SenlangBio owe additional taxes, which could negatively affect Avalon’s financial condition and the value of its stock.
SenlangBio’s business might be subject to various evolving PRC laws and regulations regarding data privacy and cybersecurity. Failure of cybersecurity and data security compliance could subject SenlangBio to penalties, damage its reputation and brand and harm its business and results of operations.
There are uncertainties regarding the interpretation and enforcement of PRC laws, rules, and regulations in general, as well as the actions taken by PRC regulatory authorities.
The business of SenlangBio may fall into the prohibited foreign investment category under currently effective PRC laws.
Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law, its implementing rules, Foreign Investment Security Review Measures, other regulations and how they may impact the viability of the VIE structure, business, financial condition, and results of operations.
The filing or change of the medical institution practice license of SenlangBio Clinical Laboratory may be affected by the VIE Structure.
Governmental control of currency conversion may limit Avalon’s ability to utilize its revenues effectively and affect the value of Avalon’s stock.

 

25

 

 

Risks Related to the Acquisition

 

The amount of Acquisition Shares being issued to the Sen Lang BVI Shareholders will not be adjusted in the event of any change in Avalon’s stock price.
The Acquisition is subject to a number of closing conditions and, if these conditions are not satisfied, the Purchase Agreement may be terminated in accordance with its terms and the Acquisition may not be completed. In addition, the parties have the right to terminate the Purchase Agreement under other specified circumstances, in which case the Acquisition would not be completed.
Avalon may not realize the anticipated benefits of the Acquisition.
Integrating Avalon’s and Sen Lang BVI’s businesses may be more difficult, time-consuming or costly than expected.
Executive officers and directors of Avalon may have interests in the Acquisition that are different from, or in addition to, the rights of Avalon stockholders.
Avalon and Sen Lang BVI will incur significant transaction and Acquisition-related transition costs in connection with the Acquisition.
The lack of a public market for Sen Lang BVI shares makes it difficult to determine the fair market value of the Sen Lang BVI shares, and Avalon may pay more than the fair market value of the Sen Lang BVI shares.

 

Risks Related to Avalon

 

  The PRC government exerts substantial influence over the manner in which Avalon must conduct its business activities and Avalon may face the risk that the future regulatory actions by the PRC government could significantly limit or completely hinder Avalon’s ability to offer future securities to investors.

  An investment in Avalon Common Stock involves a high degree of risk. In determining whether to purchase Avalon Common Stock, an investor should carefully consider all of the material risks described below, together with the other information contained in this proxy statement before making a decision to purchase Avalon’s securities.

 

26

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements in this proxy statement may constitute “forward-looking statements” for purposes of the federal securities laws. Our forward-looking statements include, but are not limited to, statements regarding Avalon, Avalon’s management team’s, SenlangBio and SenlangBio’s management team’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Actual results may differ materially from Avalon’s and SenlangBio’s current expectations depending upon a number of factors. These factors include, among others:

 

the inherent uncertainty associated with financial projections, restructuring in connection with, and successful consummation of, the Acquisition;

 

subsequent integration of Avalon’s and SenlangBio’s businesses and the ability to recognize the anticipated synergies and benefits of the Acquisition;

 

the inability to complete the Acquisition due to the failure to satisfy conditions to the closing in the Purchase Agreement and/or the failure the complete the Equity Financing;

 

the post-Acquisition company’s financial and business performance following the Acquisition, including plans to develop and commercialize additional products;

 

changes in SenlangBio’s and Avalon’s strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects and plans;

 

developments and projections relating to the post-Acquisition company’s competitors or industry;

 

the impact of health epidemics, including the COVID-19 pandemic, on the business of Avalon and SenlangBio;

 

the ability to protect and maintain the post-Acquisition company’s intellectual property protection and not infringe on the rights of others;

 

developments and projections relating to the post-Acquisition company’s competitors or industry;

 

future regulatory, judicial and legislative changes in Avalon’s or SenlangBio’s industry;

 

access to available financing (including the Equity Financing in connection with the Acquisition) on a timely basis and on reasonable terms;

 

the receipt of required regulatory approvals for the Acquisition;

 

the diversion of management time on Acquisition-related issues;

 

the inability to maintain the listing of Avalon Common Stock on Nasdaq following the Acquisition;

 

the outcome of any legal proceedings that may be instituted against Avalon following announcement of the proposed Acquisition and transactions contemplated thereby; and

 

other risks and uncertainties described in this proxy statement and in the Annual Report, including those in the sections entitled “Risk Factors.”

 

These forward-looking statements are based on information available as of the date of this proxy statement, and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Except as expressly required by law, including the securities laws of the United States, Avalon and SenlangBio disclaim any intent or obligation to update or revise these forward-looking statements.

 

27

 

 

THE ANNUAL MEETING OF AVALON STOCKHOLDERS

 

The Avalon Annual Meeting

 

Avalon is furnishing this proxy statement to you as part of the solicitation of proxies by its board of directors for use at the annual meeting, and at any adjournment or postponement thereof. This proxy statement is first being furnished to Avalon’s stockholders on or about [    ], 2021. This proxy statement provides you with information you need to know to be able to vote or instruct your vote to be cast at the annual meeting of stockholders.

 

Date, Time and Place of the Annual Meeting

 

Due to the public health impact of the coronavirus outbreak (COVID-19) and to support the health and well-being of Avalon’s stockholders, the Avalon annual meeting will be held in a virtual meeting format only. The annual meeting of stockholders of Avalon will be held at [ ] [a/p].m. Eastern time, on [ ], 2021, at [LINK], or such other date, time and place to which such meeting may be adjourned or postponed, for the purpose of considering and voting upon the proposals.

 

On the day of the Avalon annual meeting, if you have properly registered, you may enter the annual meeting by logging in using the event password you received via email in your registration confirmation at [OTHER LINK]. You will not be able to attend the Avalon annual meeting in-person.

 

Purpose of the Annual Meeting

 

At the Avalon annual meeting of stockholders, Avalon will ask the Avalon stockholders to vote in favor of the following proposals:

 

Proposal 1—to elect the nine director nominees named in the proxy statement to hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified (the “Director Election Proposal”);

 

Proposal 2—to ratify the appointment of Marcum LLP as the Company’s independent auditors for the fiscal year ending December 31, 2021 (the “Auditor Proposal”); and

 

Proposal 3—to approve, pursuant to the rules of the Nasdaq Stock Market, the issuance of (i) the Acquisition Shares pursuant to the terms of the Purchase Agreement and (ii) the Exchange Shares (the “Nasdaq Proposal”);

 

Proposal 4—to adjourn the annual meeting, if necessary, to another time or place to solicit additional proxies if there are not sufficient votes in favor of Proposal 1 (the “Adjournment Proposal”).

 

Recommendation of the Avalon Board of Directors

 

Avalon’s board of directors believes that each of the proposals to be presented at the annual meeting of stockholders is in the best interests of Avalon and its stockholders and unanimously recommends that its stockholders vote “FOR” each of the Avalon Proposals as further described below.

 

When you consider the recommendation of Avalon’s board of directors, you should keep in mind that certain of Avalon’s board of directors and officers have interests in the Acquisition that are different from, or in addition to, your interests as a stockholder. These interests include, among other things:

 

  as of September 30, 2021, Avalon’s directors and executive officers beneficially owned approximately 66.0% of the shares of Avalon Common Stock (calculated in accordance with SEC rules that define beneficial ownership);

 

all of the current executive officers of Avalon will continue in their current positions after the Acquisition, and all of the directors except for Meng Li will continue on the Avalon board after the Acquisition. In addition, On April 10, 2020, in the ordinary course of business, SenlangBio entered into a scientific research project cooperation agreement with Beijing Lu Daopei Hospital Co., Ltd., under which Beijing Lu Daopei Hospital Co., Ltd. conducts scientific research for the interest of SenlangBio on the cytoplasmic CD79a antibody gated multicolor flow cytometry monitoring CD19-CAR-T bridging allogeneic transplantation for the treatment of refractory and relapsed acute B lymphocytic leukemia. SenlangBio provides research funds in the amount of RMB 2 million to Beijing Lu Daopei Hospital Co., Ltd. Beijing Lu Daopei Hospital Co., Ltd. is a wholly-owned subsidiary of an entity whose chairman is Wenzhao Lu, the Chairman and largest shareholder of Avalon; and

 

the continued indemnification of current directors and officers of Avalon and the continuation of directors’ and officers’ liability insurance after the Acquisition.

 

28

 

 

Record Date and Voting

 

You will be entitled to vote or direct votes to be cast at the annual meeting of stockholders if you owned shares of Avalon Common Stock at the close of business on [    ], 2021, which is the record date for the annual meeting of stockholders. Each share of Avalon Common Stock is entitled to one vote per share. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker, bank or other nominee to ensure that votes related to the shares you beneficially own are properly counted. On the record date, there were [    ] shares of Avalon Common Stock issued and outstanding.

 

As of September 30, 2021, Avalon’s directors and executive officers beneficially owned 66.0% of the shares of Avalon Common Stock (calculated in accordance with SEC rules that define beneficial ownership) and owned 54,145,161 shares, 63.3% of the issued and outstanding Avalon Common Stock on such date. Although under no contractual or other obligation to do so, all of such directors and executive officers are currently expected to vote in favor of all of the Avalon Proposals, including the Nasdaq Proposal.

 

Voting Your Shares

 

Each share of Avalon Common Stock that you own in your name entitles you to one vote on each of the proposals for the annual meeting of stockholders. Your one or more proxy cards show the number of shares of Avalon Common Stock that you own.

 

If you are a holder of record, there are different ways to vote your shares at the annual meeting of stockholders:

 

You can vote by completing, signing and returning the enclosed proxy card in the postage-paid envelope provided. If you hold your shares in “street name” through a bank, broker or other nominee, you will need to follow the instructions provided to you by your bank, broker or other nominee to ensure that your shares are represented and voted at the applicable annual meeting(s). If you vote by proxy card, your “proxy,” whose name is listed on the proxy card, will vote your shares as you instruct on the proxy card. If you sign and return the proxy card but do not give instructions on how to vote your shares, your shares of Avalon Common Stock will be voted as recommended by Avalon’s board of directors. With respect to proposals for the annual meeting of stockholders, that means: “FOR” each of the Avalon Proposals.

 

You can vote via the Internet by following the instructions on the voting instruction form or proxy card in your proxy materials.

 

  You can vote via telephone by following the instructions on the voting instruction form or proxy card in your proxy materials.
     
  You can attend the annual meeting and vote via live website. If you wish to vote your shares electronically at the annual meeting, there will be a live link provided during the annual meeting. You will need the virtual control number assigned to you in order to vote.

  

Who Can Answer Your Questions About Voting Your Shares

 

If you have any questions about how to vote or direct a vote in respect of your shares of Avalon Common Stock, you may contact Avalon at 4400 Route 9 South, Suite 3100, Freehold, New Jersey 07728, telephone number (732) 780-4400.

 

Quorum and Vote Required for the Avalon Proposals

 

A quorum of Avalon’s stockholders is necessary to hold a valid meeting. The holders of at least the majority of the outstanding shares of Avalon Common Stock as of the record date, represented in person or by proxy, will constitute a quorum for the transaction of business at the Avalon annual meeting. Avalon will include proxies marked as abstentions and broker non-votes to determine the number of shares present at the Avalon annual meeting.

 

The approval of the Auditor Proposal, the Nasdaq Proposal and the Adjournment Proposal requires the affirmative vote of the holders of a majority of votes cast by the stockholders present in person or represented by proxy and entitled to vote thereon at the annual meeting, and the approval of the Director Election Proposal requires the affirmative vote of a plurality of the votes properly cast on the election of directors. Accordingly, abstentions and broker non-votes, if any, will have no effect on the outcome of the Director Election Proposal, the Auditor Proposal, the Nasdaq Proposal and the Adjournment Proposal.

 

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Abstentions and Broker Non-Votes

 

If your shares of Avalon Common Stock are held by your broker as your nominee, that is, in “street name,” the enclosed voting instruction card is sent by the institution that holds your shares. Please follow the instructions included on that proxy card regarding how to instruct your broker to vote your shares.

 

If you do not give instructions to your broker, the question of whether your broker or nominee will still be able to vote your shares depends on whether the NYSE deems the particular proposal to be a “routine” matter and how your broker or nominee exercises any discretion they may have in the voting of the shares that you beneficially own. Brokers and nominees can use their discretion to vote “uninstructed” shares with respect to matters that are considered to be “routine,” but not with respect to “non-routine” matters. Under the rules and interpretations of the NYSE, “non-routine” matters are matters that may substantially affect the rights or privileges of stockholder, such as mergers, stockholder proposals, elections of directors (even if not contested), executive compensation (including any advisory stockholder votes on executive compensation and on the frequency of stockholder votes on executive compensation), and certain corporate governance proposals, even if management-supported.

 

For any Avalon Proposal that is considered a “routine” matter, your broker or nominee may vote your shares in its discretion either for or against the proposal even in the absence of your instruction. For any Avalon Proposal that is considered a “non-routine” matter for which you do not give your broker instructions, the shares will be treated as broker non-votes. “Broker non-votes” occur when a beneficial owner of shares held in street name does not give instructions to the broker or nominee holding the shares as to how to vote on matters deemed “non-routine.” Broker non-votes will not be considered to be shares “entitled to vote” at the meeting and will not be counted as having been voted on the applicable proposal. Therefore, if you are a beneficial owner and want to ensure that shares you beneficially own are voted in favor or against any or all of the Avalon Proposals, the only way you can do so is to give your broker or nominee specific instructions as to how the shares are to be voted. Avalon currently anticipates that only the Auditor Proposal is likely to be deemed routine by the NYSE.

 

Revocability of Proxies

 

If you have submitted a proxy to vote your shares and wish to change your vote, you may do so by:

 

filing with Avalon’s Secretary, a letter revoking the proxy;

 

submitting another signed proxy with a later date; or

 

attending the Avalon annual meeting and voting online, provided you file a written revocation with the Secretary of the annual meeting prior to the voting of such proxy.

 

Appraisal or Dissenters’ Rights

 

No appraisal or dissenters’ rights are available to holders of shares of Avalon Common Stock in connection with the Acquisition.

 

Solicitation of Proxies

 

Avalon will pay the cost of soliciting proxies for the annual meeting, including the costs of preparing, printing and mailing this proxy statement and the Annual Report for the Avalon annual meeting. Avalon also will reimburse banks, brokers and other custodians, nominees and fiduciaries representing beneficial owners of shares of Avalon Common Stock for their expenses in forwarding soliciting materials to beneficial owners of Avalon Common Stock and in obtaining voting instructions from those owners. Avalon’s directors, officers and employees may also solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies.

 

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RISK FACTORS

 

The post-Acquisition company will face a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this proxy statement, you should carefully consider the material risks described below before deciding how to vote your shares of stock. In addition, you should consider the risks associated with the business of Avalon and SenlangBio because these risks may also affect the post-Acquisition company. You should also read and consider the other information in this proxy statement. Please see the section entitled “Where You Can Find More Information.”

 

Risks Related to SenlangBio

 

Risks Related to SenlangBio’s Financial Position and Capital Requirements

 

SenlangBio is a biopharmaceutical company that will face many risks frequently encountered by clinical-stage businesses.

 

Marketing approval of SenlangBio’s therapeutic product candidates requires extensive clinical testing data to support the safety and efficacy requirements needed for regulatory approval. The likelihood of success of SenlangBio’s business plan must be considered in light of the problems, substantial expenses, difficulties, complications and delays frequently encountered in connection with developing and expanding clinical-stage businesses and the regulatory and competitive environment in which SenlangBio operates. Biopharmaceutical product development is a highly speculative undertaking, involves a substantial degree of risk and is a capital-intensive business.

 

Accordingly, investors should consider SenlangBio’s prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the clinical stages of development. Potential investors should carefully consider the risks and uncertainties that a company with a limited operating history will face. In particular, potential investors should consider that SenlangBio cannot assure you that SenlangBio will be able to:

 

  successfully implement or execute SenlangBio’s current business plan, or that SenlangBio’s business plan is sound;
     
  receive approval by regulatory agencies, including the NMPA in the PRC, of clinical trial protocols so that anticipated clinical trials commence;

 

successfully complete clinical trials and obtain regulatory approval for the marketing of its product candidates;

 

manufacture clinical drug product and subsequently establish a commercial drug supply;

 

secure market exclusivity and/or adequate intellectual property protection for its product candidates;

 

achieve broad market acceptance of its product candidates in the medical community and with third party payors and consumers;

 

attract and retain an experienced management and advisory team; and

 

raise sufficient funds in the capital markets to effectuate its business plan including clinical development, product development/manufacture regulatory approval and commercialization for its product candidates.

 

If SenlangBio cannot successfully execute any one of the foregoing, SenlangBio’s business may not succeed and your investment will be adversely affected.

 

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SenlangBio has incurred operating losses in each year since its inception and expects to continue to incur substantial losses for the foreseeable future. SenlangBio may never become profitable or, if achieved, be able to sustain profitability.

 

SenlangBio expects to continue to incur substantial expenses and losses without sufficient revenues unless and until SenlangBio is able to obtain regulatory approval and successfully commercialize one or more of its product candidates. To date, SenlangBio has only generated limited revenue and it expects to incur significant expense to complete its clinical programs for its product candidates in the PRC and elsewhere. SenlangBio may never be able to obtain regulatory approval for the marketing of its product candidates in any indication in the PRC or elsewhere. Even if it is able to commercialize any product candidate, there can be no assurance that it will generate significant enough revenues to ever achieve profitability. SenlangBio’s net loss for the year ended December 31, 2020 and for the six months ended June 30, 2021 was $2,442,363 and $1,239,197, respectively. At June 30, 2021, SenlangBio’s accumulated deficit since inception was $9,619,211.

 

Until SenlangBio obtains FDA approval for any of its product candidates, which is not expected until after completion of several phases of clinical trials and submission and successful review of a new drug application and associated pre-marketing approval by regulatory agencies, it expects that its research and development expenses will continue to increase as it advances its clinical trials for its product candidates. As a result, SenlangBio expects to continue to incur substantial losses for the foreseeable future, and these losses will be increasing. SenlangBio is uncertain when or if it will be able to achieve or sustain profitability. If SenlangBio achieves profitability in the future, it may not be able to sustain profitability in subsequent periods. Failure to become and remain profitable would impair SenlangBio’s ability to sustain operations and adversely affect its ability to raise capital.

 

SenlangBio will require additional capital to fund its operations, and if SenlangBio fails to obtain necessary financing, it may not be able to complete the development and commercialization of its product candidates. SenlangBio’s cash or cash equivalent will only fund its operations for a limited time and it will need to raise additional capital to support its development and commercialization efforts.

 

SenlangBio expects to spend substantial amounts to complete the development of, seek regulatory approvals for and commercialize its product candidates. Even with the expected cash proceeds of approximately $30 million resulting from the Equity Financing and the revenues generated from the SenlangBio Clinical Laboratory business, SenlangBio will require substantial additional capital to complete the development and potential commercialization of its product candidates. Avalon and SenlangBio currently expect that SenlangBio’s cash reserves, based on cash balances at June 30, 2021, together with the proceeds from the Equity Financing, will fund SenlangBio’s operations for 18 months following the closing of the Acquisition, based on current plans and assumptions.

 

SenlangBio is currently operating at a loss and expects its operating costs will increase significantly as it incurs costs related to the clinical trials for its product candidates. At June 30, 2021, SenlangBio had a cash balance of $205,563. Currently, SenlangBio’s operations are focused on utilizing cell and gene engineering technologies to generate innovative and transformative cellular immunotherapies for solid and hematologic cancers. SenlangBio provides general laboratory testing and immunology and hematology testing services for patients and other customers in China for fees.

 

SenlangBio had a working capital deficit of $2,662,085 at June 30, 2021, and incurred net loss and generated negative cash flow from operating activities of $1,239,197 and $606,458, respectively, for the six months ended June 30, 2021. SenlangBio has a limited operating history and its continued growth is dependent upon the continuation of providing general laboratory testing and immunology and hematology testing services, 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 June 30, 2021. These matters raise substantial doubt about SenlangBio’s ability to continue as a going concern. The ability of SenlangBio to continue as a going concern is dependent on SenlangBio’s ability to raise additional capital, implement its business plan, and generate significant revenues. There are no assurances that SenlangBio 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. If the Acquisition and Equity Financing do not close, SenlangBio plans on raising capital through bank and other borrowings to implement its business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to SenlangBio on satisfactory terms and conditions, if any.

 

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SenlangBio does not currently have any arrangements or credit facilities in place as a source of funds, and there can be no assurance that it will be able to raise sufficient additional capital on acceptable terms, or at all. SenlangBio or the post-Acquisition company may seek, in addition to the Equity Financing, additional capital through a combination of private and public equity offerings, debt financings and strategic collaborations. Debt financing, if obtained, may involve agreements that include covenants limiting or restricting SenlangBio’s ability to take specific actions, such as incurring additional debt, and could increase its expenses and require that its assets secure such debt.

 

Equity financing, if obtained, could result in dilution to existing stockholders and/or require such stockholders to waive certain rights and preferences. If such financing is not available on satisfactory terms, or is not available at all, SenlangBio may be required to delay, scale back or eliminate the development of business opportunities and its operations and financial condition may be materially adversely affected. SenlangBio can provide no assurances that any additional sources of financing will be available to it on favorable terms, if at all. In addition, if SenlangBio is unable to secure sufficient capital to fund its operations, it might have to enter into strategic collaborations that could require it to share commercial rights to its product candidates with third parties in ways that it currently does not intend or on terms that may not be favorable to SenlangBio.

 

Risks Related to SenlangBio’s Business

 

The NMPA may refuse to consider the data from the investigator-initiated clinical trials of SenlangBio due to concerns that (1) this does not follow the mainstream regulatory pathway of relying on registered clinical trials, or that (2) the non-registered clinical trials of the product may not otherwise fully comply with the same requirements applicable to registered clinical trials, as further explained below.

 

While investigator-initiated trials may provide SenlangBio with clinical data that can inform its future development strategy, SenlangBio does not have full control over the protocols, administration, or conduct of the trials. As a result, SenlangBio is subject to risks associated with the way investigator-initiated trials are conducted, and there is no assurance the clinical data from any of SenlangBio’s investigator-initiated clinical trials in China will be accepted by the U.S. Food and Drug Administration (FDA), the European Medicines Agency (EMA), Japanese Pharmaceuticals and Medical Devices Agency (PMDA) or other comparable regulatory authorities outside of China, for any of its product candidates. Third parties in such investigator-initiated clinical trials may not perform their responsibilities for SenlangBio’s clinical trials on SenlangBio’s anticipated schedule or consistent with clinical trial protocols or applicable regulations. Further, any data integrity issues or patient safety issues arising out of any of these trials would be beyond SenlangBio’s control, yet could adversely affect its reputation and damage the clinical and commercial prospects for its product candidates. Additional risks include difficulties or delays in communicating with investigators or administrators, procedural delays and other timing issues, and difficulties or differences in interpreting data. Third-party investigators may design clinical trials with clinical endpoints that are more difficult to achieve, or in other ways that increase the risk of negative clinical trial results compared to clinical trials that SenlangBio may design on its own. As a result, SenlangBio’s lack of control over the design, conduct and timing of, and communications with the FDA, NMPA, EMA and PMDA regarding investigator-initiated trials expose SenlangBio to additional risks and uncertainties, many of which are outside its control, and the occurrence of which could adversely affect the prospects for SenlangBio’s product candidates.

 

Furthermore, there is no assurance the clinical data from any of SenlangBio’s investigator-initiated clinical trials in China, where the patients are predominately of Chinese descent, will produce similar results in patients of different races, ethnicities or those of non-Chinese descent.

 

All material aspects of the research, development, manufacturing and commercialization of biopharmaceutical products in China are heavily regulated. Any failure to comply with existing regulations and industry standards, or any adverse actions by the NMPA or other comparable regulatory authorities against us, could negatively impact SenlangBio’s reputation and its business, financial condition, results of operations and prospects.

 

The process of obtaining regulatory approvals and compliance with appropriate laws and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable requirements at any time during the product development or approval process, or after approval, may subject an applicant to administrative or judicial sanctions. These sanctions could include the regulator’s refusal to approve pending applications, withdrawal of an approval, license revocation, a clinical hold, or total or partial suspension of production or distribution. Failure to comply with these regulations could have a material adverse effect on SenlangBio’s business.

 

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SenlangBio’s preclinical programs may experience delays or may never advance to clinical trials, which would adversely affect its ability to obtain regulatory approvals or commercialize these product candidates on a timely basis or at all, which would have an adverse effect on its business.

 

SenlangBio’s product candidates are still in the preclinical development stage, and the risk of failure of preclinical programs is high. Before SenlangBio can commence clinical trials for a product candidate, it must complete extensive preclinical testing and studies to obtain regulatory clearance to initiate human clinical trials. SenlangBio cannot be certain of the timely completion or outcome of its preclinical testing and studies and cannot predict if the NMPA will accept its proposed clinical programs or if the outcome of its preclinical testing and studies will ultimately support the further development of its programs. As a result, SenlangBio cannot be sure that it will be able to submit IND applications for all of its preclinical programs on the timelines it expects, and SenlangBio cannot be sure that submission of IND applications will result in the NMPA allowing clinical trials to begin.

 

Clinical trials are difficult to design and implement, involve uncertain outcomes and may not be successful.

 

Human clinical trials are difficult to design and implement, in part because they are subject to rigorous regulatory requirements. The design of a clinical trial can determine whether its results will support approval of a product candidate and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. As an organization, SenlangBio has limited experience designing clinical trials and may be unable to design and execute clinical trials to support regulatory approval. There is a high failure rate for biologic products proceeding through clinical trials, which may be higher for SenlangBio’s product candidates because they are based on new technology and engineered on a patient-by-patient basis. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in preclinical testing and earlier-stage clinical trials. Data obtained from preclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, SenlangBio may experience regulatory delays or rejections as a result of many factors, including changes in regulatory policy during the period of its product candidate development. Any such delays could negatively impact SenlangBio’s business, financial condition, results of operations and prospects.

 

Success in preclinical studies or clinical trials may not be indicative of results in future clinical trials.

 

Results from preclinical studies are not necessarily predictive of future clinical trial results, and interim results of a clinical trial are not necessarily indicative of final results. While SenlangBio has received some positive data in previous preclinical and IIT trials, it is still in the process of producing and gathering more data and is still conducting more additional preclinical and IIT trials in order to seek regulatory approvals. For that reason, SenlangBio does not know whether these candidates will be effective and safe for the intended indications in humans. SenlangBio’s product candidates may fail to show the desired safety and efficacy in further, registered clinical development despite positive results in preclinical and IIT studies. This failure to establish sufficient efficacy and safety could cause SenlangBio to abandon clinical development of its product candidates.

 

SenlangBio depends on enrollment of patients in its clinical trials for its product candidates. If SenlangBio encounters difficulties enrolling patients in its clinical trials, its clinical development activities could be delayed or otherwise adversely affected.

 

Identifying and qualifying patients to participate in clinical trials of SenlangBio’s product candidates is critical to SenlangBio’s success. SenlangBio may experience difficulties in patient enrollment in its clinical trials for a variety of reasons. The timely completion of clinical trials in accordance with the protocols depends, among other things, on SenlangBio’s ability to enroll a sufficient number of patients who remain in the study until its conclusion. The enrollment of patients depends on many factors, including:

 

  the patient eligibility criteria defined in the protocol;
     
  the number of patients with the disease or condition being studied;
     
  the understanding of risks and benefits of the product candidate in the trial;
     
  clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications SenlangBio is investigating or drugs that may be used off-label for these indications;

 

  the size and nature of the patient population who meet inclusion criteria;
     
  the proximity of patients to study sites;
     
  the design of the clinical trial;
     
  clinical trial investigators’ ability to recruit clinical trial investigators with the appropriate competencies and experience;

 

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  competing clinical trials for similar therapies or other new therapeutics not involving T cell-based immunotherapy;
     
  SenlangBio’s ability to obtain and maintain patient consents; and
     
  the risk that patients enrolled in clinical trials will drop out of the clinical trials before completion of their treatment.

 

Delays in patient enrollment may result in increased costs or may affect the timing or outcome of the planned clinical trials, which could prevent completion of these clinical trials and adversely affect SenlangBio’s ability to advance the development of its product candidates. In addition, many of the factors that may lead to a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of SenlangBio’s product candidates.

 

If the clinical trials of any of SenlangBio’s product candidates fail to demonstrate safety and efficacy to the satisfaction of the NMPA, or do not otherwise produce favorable results, SenlangBio may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of its product candidates.

 

SenlangBio may not commercialize, market, promote or sell any product candidate without obtaining marketing approval from the NMPA, and it may never receive such approvals. It is impossible to predict accurately when or if any of SenlangBio’s product candidates will prove effective or safe in humans and will receive regulatory approval. Before obtaining marketing approval from regulatory authorities for the commercial sale of any of SenlangBio’s product candidates, SenlangBio must demonstrate through lengthy, complex and expensive preclinical studies and clinical trials that its product candidates are both safe and effective for use in each proposed indication. Clinical trials are expensive, difficult to design and implement, can take many years to complete and are uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of clinical development.

 

SenlangBio may experience numerous unforeseen events prior to, during or as a result of clinical trials that could delay or prevent its ability to receive marketing approval or commercialize any of its product candidates, including:

 

  the NMPA may disagree as to the number, design or implementation of SenlangBio’s clinical trials, or may not interpret the results from clinical trials as it does;
     
  regulators may not authorize SenlangBio or its investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
     
  SenlangBio may not reach agreement on acceptable terms with prospective clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different clinical trial sites;
     
  clinical trials of SenlangBio’s product candidates may produce negative or inconclusive results;
     
  SenlangBio may decide, or regulators may require SenlangBio, to conduct additional clinical trials or abandon product development programs;
     
  the number of patients required for clinical trials of SenlangBio’s product candidates may be larger than SenlangBio anticipates, enrollment in these clinical trials may be slower than SenlangBio anticipates, participants may drop out of these clinical trials at a higher rate than SenlangBio anticipates, or SenlangBio may fail to recruit eligible patients to participate in a trial;
     
  SenlangBio’s third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to SenlangBio in a timely manner, or at all;

 

  regulators may issue a clinical hold, or regulators may require that SenlangBio or its investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;
     
  the cost of clinical trials of SenlangBio’s product candidates may be greater than it anticipates;
     
  the NMPA may fail to approve SenlangBio’s manufacturing processes or facilities;

 

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  the supply or quality of SenlangBio’s product candidates or other materials necessary to conduct clinical trials of its product candidates may be insufficient or inadequate;
     
  SenlangBio’s product candidates may have undesirable side effects or other unexpected characteristics, particularly given their novel, first-in-human application, causing SenlangBio or its investigators, or regulators to suspend or terminate the clinical trials; and
     
  the approval policies or regulations of the NMPA may significantly change in a manner rendering SenlangBio’s clinical data insufficient for approval.

 

To the extent that the results of the trials are not satisfactory for the NMPA to approve SenlangBio’s new drug application, the commercialization of SenlangBio’s product candidates may be significantly delayed, or SenlangBio may be required to expend significant additional resources, which may not be available to SenlangBio, to conduct additional trials in support of potential approval of SenlangBio’s product candidates.

 

Coronavirus could adversely impact SenlangBio’s business, including SenlangBio’s clinical trials.

 

In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, the COVID-19 coronavirus has spread globally. The outbreak and government measures taken in response have also had a significant impact, both direct and indirect, on businesses, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies, has spiked. As a result, SenlangBio may experience disruptions that could severely impact its business and clinical trials, including:

 

delays or difficulties in enrolling patients in planned clinical trials;

 

delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;

 

diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as clinical trial sites and hospital staff supporting the conduct of SenlangBio’s clinical trials;

 

interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others;

 

limitations in employee resources that would otherwise be focused on the conduct of clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people;

 

delays in receiving approval from local regulatory authorities to initiate planned clinical trials;

 

delays in clinical sites receiving the supplies and materials needed to conduct clinical trials;

 

interruption in global shipping that may affect the transport of clinical trial materials, such as investigational drug product used in clinical trials;

 

changes in local regulations as part of a response to the COVID-19 coronavirus outbreak which may require changes in the ways in which clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether; and

 

delays in necessary interactions with local regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees.

 

The global outbreak of the COVID-19 coronavirus continues to rapidly evolve. The extent to which the COVID-19 coronavirus may impact SenlangBio’s business and clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing in the PRC and other countries, business closures or business disruptions and the effectiveness of actions taken in the PRC and other countries to contain and treat the disease. The COVID-19 pandemic could negatively impact SenlangBio’s operations even though the pandemic did not significantly impact its operation in the past. However, given the dynamic nature of these circumstances, the uncertainty around the potential resurgence of the COVID-19 cases in China and the instability of local policies and restrictions, the COVID-19 impact over SenlangBio’s business in the rest of year 2021 cannot be reasonably estimated at this time. If COVID-19 cases resurged in the area SenlangBio conducted its business and local government implemented new restrictions in the effort to contain the spread, it is expected SenlangBio’s business will be negatively impacted.

 

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SenlangBio faces competition from other biotechnology and pharmaceutical companies and its operating results will suffer if SenlangBio fails to compete effectively.

 

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapidly evolving technology and intense research and development efforts. SenlangBio has competitors in a number of jurisdictions that have substantially greater name recognition, commercial infrastructures and financial, technical and personnel resources than it has. Established competitors may invest heavily to quickly discover and develop novel compounds that could make SenlangBio’s product candidates obsolete or uneconomical. Any new product that competes with an approved product may need to demonstrate compelling advantages in efficacy, cost, convenience, tolerability and safety to be commercially successful. Other competitive factors, including generic competition, could force SenlangBio to lower prices or could result in reduced sales. In addition, new products developed by others could emerge as competitors to SenlangBio’s product candidates. If SenlangBio is not able to compete effectively against its current and future competitors, its business will not grow and its financial condition and operations will suffer.

 

The competitive landscape includes companies that are engaging in cell and gene therapies. Considering the CAR-T field, some notable competitors (in similar size and scale of business) include (but not limited to) Gracell Biotechnologies (NASDAQ: GRCL), Legend Biotech Corporation (NASDAQ: LEGN), and Poseida Therapeutics, Inc. (NASDAQ: PSTX). For CAR-GDT cell therapy field, some notable companies include (but not limited to) Adicet Bio Inc. (NASDAQ: ACET), Incysus Therapeutics, Inc and GammaDelta Therapeutics.

 

SenlangBio’s business might be subject to various evolving PRC laws and regulations regarding data privacy and cybersecurity. Failure of cybersecurity and data security compliance could subject SenlangBio to penalties, damage its reputation and brand and harm its business and results of operations.

 

SenlangBio faces challenges with respect to data privacy and regulations since SenlangBio is currently engaging in gathering clinical trial data through in-human “investigator-initiated” clinical trials, which could consist of personal information that will be analyzed and used to develop cellular immunotherapies for solid and hematologic cancers.

 

Regulatory requirements on cybersecurity and data privacy in China are constantly evolving and can be subject to varying interpretations or significant changes, resulting in uncertainties about the scope of SenlangBio’s responsibilities in that regard. On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Data Security Law, which will take effect in September 2021. The Data Security Law provides for a security review procedure for the data activities that may affect national security. Furthermore, Measures for Cybersecurity Review, which became effective on June 1, 2020, set forth the cybersecurity review mechanism for critical information infrastructure operators, and provided that critical information infrastructure operators who intend to purchase internet products and services that affect or may affect national security shall be subject to a cybersecurity review. On July 10, 2021, the Cyberspace Administration of China published the Measures for Cybersecurity Review (Revised Draft for Comments), which further restates and expands the applicable scope of the cybersecurity review. Pursuant to the draft measures, critical information infrastructure operators that intend to purchase internet products and services and data processing operators engaging in data processing activities that affect or may affect national security must be subject to the cybersecurity review. The draft measures further stipulate that if an operator has personal information of over one million users and intends to be listed in a foreign country, it must be subject to the cybersecurity review. As of now, it is uncertain under PRC regulations whether the data gathering and usage by SenlangBio will affect national security. Even though SenlangBio’s current data activities do not fall under the scope of cybersecurity review, it is also uncertain whether the cybersecurity review will be further expanded. Failure of cybersecurity and data security compliance could subject SenlangBio to penalties, damage its reputation and brand, and harm its business and results of operations.

 

Regulation requirements on personal information protection in China are also constantly evolving and can be subject to varying interpretations or significant changes, resulting in uncertainties about the scope of SenlangBio’s responsibilities in that regard. On August 20, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Personal Information Protection Law, which will take effect in November 2021. The Personal Information Protection Law provides that any entity involving processing of personal information (“Personal Information Processer”) shall take various measures to prevent the disclosure, modification or losing of the personal information processed by such entity, including, but not limited to, formulating a related internal management system and standard of operation, conducting classified management of personal information, taking safety technology measures to encrypt and de-identify the processed personal information, providing regular safety training and education for staff and formulating a personal information safety emergency accident plan. The Personal Information Protection Law further provides that a Personal Information Processer shall conduct a prior evaluation of the impact of personal information protection before the occurrence of various situations, including, but not limited to, processing of sensitive personal information (personal information that, once leaked or illegally used, may lead to discrimination against an individual or serious harm to an individual’s personal or property safety, including information on an individual’s race, ethnicity, religious beliefs, personal biological characteristics, medical health, financial accounts, personal whereabouts), using personal information to make automated decisions and providing personal information to any overseas entity. SenlangBio’s business involves the processing of personal information of patients in drug clinical trials, which may be deemed as sensitive personal information. If SenlangBio does not take measures to review and improve its mechanisms in protecting personal information after the new Personal Information Protection Law takes effect, failure of personal information protection compliance could subject SenlangBio to penalties, damage its reputation and brand and harm its business and results of operations.

 

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Risks Relating to SenlangBio’s Intellectual Property Rights

 

Obtaining and maintaining SenlangBio’s patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and SenlangBio’s patent protection could be reduced or eliminated for non-compliance with these requirements.

 

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and patent applications are due to be paid to the NIPA (National Intellectual Property Administration) in several stages over the lifetime of a patent. NIPA requires compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. Although an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which non-compliance can result in abandonment, loss of priority or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the PRC. Non-compliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In any such event, SenlangBio’s competitors or other third parties might be able to enter the market, which would have a material adverse effect on SenlangBio’s competitive position, business, financial condition, result of operations and prospects.

 

Changes in patent law could extend the expected expiry date of third party patents.

 

In China, intellectual property laws are constantly evolving, with efforts being made to improve intellectual property protection in China. For example, an Amendment to the PRC Patent Law introduced on June 1, 2021 proposes to introduce patent extensions to patents of new drugs that launched in the PRC. If adopted, patents owned by third parties may be extended, which may in turn affect SenlangBio’s ability to commercialize its products without facing infringement risks. The adoption of this draft amendment may enable the patent owner to submit applications for a patent term extension. The length of any such extension is uncertain. If SenlangBio is required to delay commercialization for an extended period of time, technological advances may develop and new products may be launched, which may in turn render SenlangBio’s products non-competitive. SenlangBio cannot guarantee that any other changes to PRC intellectual property laws would not have a negative impact on itsintellectual property protection.

 

Intellectual property rights do not necessarily address all potential threats.

 

The degree of future protection afforded by SenlangBio’s intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect SenlangBio’s business or permit it to maintain its competitive advantage. For example:

 

  others may be able to make products that are similar to any product candidates SenlangBio may develop or utilize similar technology that are not covered by the claims of the patents that SenlangBio owns or licenses now or in the future;

 

  SenlangBio or any of its future licensors and collaborators might not have been the first to make the inventions covered by the issued patent or pending patent application that SenlangBio owns or may license in the future;
     
  SenlangBio or any of its future licensors and collaborators might not have been the first to file patent applications covering certain of itsor their inventions;
     
  others may independently develop similar or alternative technologies or duplicate any of SenlangBio’s technologies without infringing, misappropriating or otherwise violating its intellectual property rights;
     
  it is possible that SenlangBio’s pending owned or licensed patent applications will not lead to issued patents;
     
  patents that SenlangBio holds rights to or that may be issued from its pending patent applications may not provide it with a competitive advantage, or may be held invalid or unenforceable, including as a result of legal challenges by SenlangBio’s competitors or third parties;
     
  SenlangBio’s competitors or other third parties might conduct research and development activities in jurisdictions where SenlangBio does not have patent rights and then use the information learned from such activities to develop competitive products for sale in SenlangBio’s major commercial markets;

 

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  SenlangBio may obtain patents for certain inventions many years before it obtains marketing approval for products containing such compounds, and because patents have a limited life, which may begin to run prior to the commercial sale of the related product, the commercial value of SenlangBio’s patents may be limited;
     
  SenlangBio may not develop additional proprietary technologies that are patentable;
     
  the patents of others may harm SenlangBio’s business; and
     
  SenlangBio may choose not to file a patent for certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property.

 

Should any of these events occur, they could have a material adverse effect on SenlangBio’s business, financial condition, results of operations and prospects.

 

Even if SenlangBio is able to obtain patent protection for its product candidates, the life of such protection, if any, is limited, and third parties could be able to circumvent its patents by developing similar or alternative products and technologies in a non-infringing manner, or develop and commercialize products and technologies similar or identical to SenlangBio’s and compete directly against it after the expiration of its patent rights, if any, and SenlangBio’s ability to successfully commercialize any product or technology would be materially adversely affected.

 

The life of a patent and the protection it affords is limited. For example, in China, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its filing date. Even if SenlangBio successfully obtains patent protection for an approved product candidate, it may face competition from generic or biosimilar medications. Manufacturers of generic or biosimilar drugs may challenge the scope, validity or enforceability of SenlangBio’s patents in court or before a patent office, and SenlangBio may not be successful in enforcing or defending those intellectual property rights and, as a result, may not be able to develop or market the relevant product exclusively, which would materially adversely affect any potential sales of that product.

 

General SenlangBio-Related Risks

 

If SenlangBio is not successful in attracting and retaining highly qualified personnel, it may not be able to successfully implement its business strategy. In addition, the loss of the services of certain key employees, including, Jianqiang Li, Ph.D., SenlangBio’s Scientific Founder and Chief Scientific Officer and Shengmin Guo, Co-founder and Chief Executive Officer, would adversely impact SenlangBio’s business prospects.

 

SenlangBio’s ability to compete in the highly competitive pharmaceuticals industry depends in large part upon its ability to attract highly qualified managerial, scientific and medical personnel.

 

SenlangBio’s management team has expertise in many different aspects of drug development and commercialization. However, it will need to hire additional personnel as it further develops its product candidates. Competition for skilled personnel in China is intense and competition for experienced scientists may limit SenlangBio’s ability to hire and retain highly qualified personnel on acceptable terms. Despite its efforts to retain valuable employees, members of its management, scientific and medical teams may terminate their employment with SenlangBio on short notice (30 days under PRC law). SenlangBio entered into an employment agreement with Dr. Li on September 1, 2017. The loss of the services of any of SenlangBio’s executive officers or other key employees could potentially harm its business, operating results or financial condition. In particular, SenlangBio believes that the loss of the services of Dr. Li and Ms. Guo would have a material adverse effect on its business. SenlangBio’s success also depends on its ability to continue to attract, retain and motivate highly skilled junior, mid-level, and senior managers as well as junior, mid-level, and senior scientific and medical personnel.

 

Other biopharmaceutical companies with which SenlangBio competes for qualified personnel have greater financial and other resources, different risk profiles, and a longer history in the industry than it does. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than what SenlangBio has have to offer. If SenlangBio is unable to continue to attract and retain high-quality personnel, the rate and success at which it can develop and commercialize product candidates would be limited.

 

Risks Related to the VIE Structure and SenlangBio being a PRC Domestic Entity

 

There are uncertainties regarding the interpretation and enforcement of PRC laws, rules, and regulations in general, as well as the actions taken by PRC regulatory authorities.

 

SenlangBio’s operations are conducted in the PRC, and are governed by PRC laws, rules, and regulations. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value. Recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to a significant degree of interpretation by PRC regulatory agencies and courts. Because these laws, rules and regulations are relatively new, and because of the limited number of published decisions and the non-precedential nature of these decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. Therefore, if the applicable regulations change or are interpreted differently, it is possible that SenlangBio’s existing operations or the contractual arrangements constituting part of the VIE structure are not in full compliance with relevant laws and regulations. Avalon’s operating results may be significantly impacted and its shares may decline in value or become worthless if Avalon is unable to assert its contractual control rights over the assets of its PRC subsidiaries that conduct a significant portion of its operations. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, SenlangBio or Avalon may not be aware of any violation of these policies and rules until after the occurrence of the violation. Overall, the significant uncertainties in the regulatory environment in China imposes significant risks on VIE and other contractual arrangements.

 

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Any administrative and court proceedings in China may be protracted, resulting in substantial costs and the diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings. These uncertainties may impede Avalon’s ability to enforce contracts, including the VIE Agreements, and could materially and adversely affect Avalon’s business, financial condition, and results of operations. Moreover, since the PRC administrative authorities have significant discretion in interpreting and implementing statutory and contractual terms, they may materially intervene with or influence Avalon’s or SenlangBio’s operations at any time, which could result in a material change in the value of Avalon’s common stock.

 

In addition, the PRC government has recently announced its plans to enhance its regulatory oversight of Chinese companies listing overseas. The Opinions on Intensifying Crack Down on Illegal Securities Activities issued on July 6, 2021, called for extraterritorial application of China’s securities laws. As the Opinions on Intensifying Crack Down on Illegal Securities Activities were recently issued, there are great uncertainties with respect to the interpretation and implementation thereof. The Chinese government may promulgate relevant laws, internal rules and regulations that may impose additional and significant obligations and liabilities on overseas listed Chinese companies regarding data security, cross-border data flow, and compliance with China’s securities laws. These laws and regulations can be complex and stringent, and many are subject to change and uncertain interpretation, which could result in claims, change to our data and other business practices, regulatory investigations, penalties, increased cost of operations, or declines in user growth or engagement, or otherwise affect our business. Currently, Avalon believes that it is unlikely to be directly subject to the above-mentioned securities laws because Avalon is a U.S. domiciled and listed corporation. However, any action taken by PRC regulatory authorities under such laws and regulations could change this and could cause the value of such securities to significantly decline or be worthless.

 

The business of SenlangBio may fall into the prohibited foreign investment category under currently effective PRC laws.

 

On March 15, 2019, the National People’s Congress (“NPC”) promulgated the Foreign Investment Law, which took effect on January 1, 2020, and replaced three existing laws regulating foreign investment in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint Venture Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law grants foreign invested entities the same treatment as PRC domestic entities, except for those foreign invested entities that operate in industries deemed to be either “restricted” or “prohibited” in the “negative list” published by the State Council. Sen Lang BVI is a BVI company, and the PRC Subsidiary is currently considered to be a foreign invested entity. 

 

The latest version of the “negative list,” namely, the Special Management Measures (Negative List) for the Access of Foreign Investment (2020), which became effective on July 23, 2020, provides that foreign investment is prohibited in the development and application of human stem cells, genetic diagnosis, and treatment technology. However, the PRC laws do not clarify the meaning of “development and application of human stem cells, genetic diagnosis and treatment technology” and do not explain whether transactions involving a VIE Structure should be considered as “investment” in the context of the prohibition of foreign investment. SenlangBio’s main business is conducting R&D and clinical transformation of immunotherapy cell therapy, which involves modifying the patient’s T-Cells genetically. Despite the foregoing lack of clarity, the applicable rules could be interpreted in a way unfavorable to the business of SenlangBio. In the context of law enforcement, if the competent PRC authorities and courts interpret “development and application of human stem cells, genetic diagnosis and treatment technology” broadly, the modification of T-Cells genetically could be considered as falling into the prohibited foreign investment category.

 

Although Avalon believes that no approvals or permissions are required under current applicable PRC laws and regulations for Avalon to complete the Acquisition, if SenlangBio’s CAR-T cell therapies or other technologies that are being researched and developed are deemed by relevant PRC regulatory agencies as falling into the category of “human stem cells, genetic diagnosis and treatment technology,” and if the VIE Structure is considered as “investment” in the context of the prohibition of foreign investment, SenlangBio would be prohibited from engaging in the research or development of such technologies. In that event, Avalon and the Sen Lang BVI Beneficial Shareholders would have to restructure Avalon’s control over SenlangBio. SenlangBio may also have to forfeit its income derived from the research and development of such technologies. Any of these occurrences may harm Avalon’s and SenlangBio’s business, prospects, financial condition, and results of operations significantly.

 

Avalon intends to receive dividends and other distributions from SenlangBio through the VIE Structure, and any limitation on the ability of SenlangBio or Sen Lang BVI or its subsidiaires to make payments to Avalon could have an adverse effect on Avalon’s ability to conduct its business.

 

Avalon intents to receive dividends and other distributions from SenlangBio through the VIE Structure. Current PRC regulations permit the PRC Subsidiary (the counter-party to the VIE Agreements with SenlangBio) to pay dividends up to Sen Lang BVI, the entity that will be acquired by Avalon in the Acquisition, only out of its accumulated after-tax profits upon satisfaction of relevant statutory conditions and procedures, if any, determined in accordance with Chinese accounting standards and regulations. In addition, the PRC Subsidiary is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. Additionally, the PRC tax authorities may require the PRC Subsidiary to adjust its taxable income under the contractual arrangements it currently has in place with SenlangBio in a manner that could materially and adversely affect the PRC Subsidiary’s ability to pay dividends and other distributions up to Avalon.

 

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Sen Lang BVI may not be able to obtain certain benefits under relevant tax treaty on dividends paid by PRC Subsidiary through Senlang HK.

 

Sen Lang BVI is a holding company incorporated under the laws of the British Virgin Islands and as such intends to receive dividends and other distributions from the PRC Subsidiary through Senlang HK. Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC resident enterprise to a foreign enterprise investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, such withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of the capital of a PRC enterprise and is the beneficial owner of the dividend income. Furthermore, the Announcement of State Taxation Administration on Promulgation of the Administrative Measures on Non-Resident Taxpayers Enjoying Treaty Benefits, issued on October 14, 2019 by the PRC State Taxation Administration, which became effective from January 1, 2020, requires non-resident enterprises to determine whether they are qualified to enjoy the preferential tax treatment under the tax treaties and make appropriate filings with the competent tax authorities. In addition, based on the Notice on Issues concerning Beneficial Owner in Tax Treaties, or Circular 9, issued on February 3, 2018 by the PRC State Taxation Administration, which became effective from April 1, 2018, when determining the applicant’s “beneficial owner” status regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including, without limitation, whether the applicant is obligated to pay more than 50% of the applicant’s income for twelve months to residents in a third country or region, whether the business operated by the applicant constitutes the actual business activities, and whether the counterparty country or region to the tax treaties does not levy any tax or grant tax exemption on relevant incomes or levy tax at an extremely low rate, will be taken into account, and it will be analyzed according to the actual circumstances of the specific cases. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. Therefore, Avalon currently believes that the PRC Subsidiary’s distribution of dividends to Senlang HK, if any, shall be subject to a withholding tax rate of 10%, unless the reduced rate of 5% under the tax treaty is applicable.

 

VIE contractual arrangements may be subject to scrutiny by the PRC tax authorities and they may determine that Avalon or its subsidiaries or SenlangBio owe additional taxes, which could negatively affect Avalon’s financial condition and the value of its stock.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. The PRC enterprise income tax law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. Avalon, its subsidiaries and SenlangBio may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements were not entered into on an arm’s length basis.

 

Governmental control of currency conversion may limit Avalon’s ability to utilize its revenues effectively and affect the value of Investor’s investment.

 

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval from or registration with appropriate governmental authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, SAFE approval may need to be obtained to use cash generated from the operations of the PRC Subsidiary. Any failure to comply with applicable foreign exchange regulations may subject Avalon to administrative fines or, if serious, criminal penalties, which could materially and adversely affect the value of Avalon’s stock. Since 2016, the PRC government has tightened its foreign exchange policies again and stepped up scrutiny of major outbound capital movement. More restrictions and a substantial vetting process have been put in place by SAFE to regulate cross-border transactions falling under the capital account. The PRC government may also restrict access in the future to foreign currencies for current account transactions, at its discretion. Therefore, Avalon may not be able to obtain revenues effectively from SenlangBio through the VIE Structure under the existing PRC foreign exchange control system.

 

Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law, its implementing rules, Foreign Investment Security Review Measures, other regulations and how they may impact the viability of the VIE structure, business, financial condition, and results of operations.

 

Sen Lang BVI, its PRC subsidiary, SenlangBio, and SenlangBio’s shareholders face uncertainty about potential future actions by the PRC government that could affect the enforceability of the VIE contractual arrangements between Sen Lang BVI’s PRC Subsidiary, SenlangBio and SenlangBio’s shareholders. The VIE structure has been adopted by many China-based companies to avoid restrictions on or prohibitions for foreign investment in many industries in China. The Ministry of Commerce (“MOFCOM”) published a discussion draft of the proposed Foreign Investment Law in January 2015, or the 2015 Draft Foreign Investment Law, according to which, variable interest entities that are controlled via contractual arrangements would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. Even though such language did not appear in the official Foreign Investment Law promulgated by the PRC State Council in 2019, there can be no assurance that the concept of “control” as reflected in the 2015 Draft of the Foreign Investment Law, will not be reintroduced, or that the VIE structure adopted by Sen Lang BVI will not be deemed as a method of foreign investment by other laws, regulations, and rules. In addition, as the 2019 Foreign Investment Law has a catch-all provision that broadly defines “foreign investments” as those made by foreign investors in China through methods as specified in laws, administrative regulations, or as stipulated by the PRC State Council, relevant government authorities may promulgate additional rules and regulations as to the interpretation and implementation of the 2019 Foreign Investment Law. Therefore, the use of a VIE Structure could be considered a violation of the applicable PRC laws.

 

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Accordingly, there are substantial uncertainties as to whether the VIE Structure may be deemed as a method of foreign investment in a restricted industry in the future. If the VIE Structure were to be deemed as a method of foreign investment under any future laws, regulations and rules, and if any of SenlangBio’s business operations were to fall under the “negative list” for foreign investment, then the VIE Structure may be found to be in violation of any existing or future PRC laws, rules or regulations, and the relevant PRC regulatory authorities would have broad discretion to take action in dealing with these violations or failures, including revoking the business and operating licenses of SenlangBio, requiring it to discontinue or restrict its operations, restricting its right to collect revenue, requiring Avalon to restructure its operations as a whole or taking other regulatory or enforcement actions against Avalon and/or SenlangBio. The imposition of any of these measures could result in a material adverse effect on SenlangBio’s ability to conduct all or any portion of its business operations. In addition, it is unclear what impact the PRC government actions would have on Avalon and on its ability to consolidate the financial results of SenlangBio in Avalon’s consolidated financial statements, if the PRC government authorities were to find Avalon’s legal structure and contractual arrangements to be in violation of PRC laws, rules, and regulations. If the imposition of any of these government actions causes Avalon to lose its right to direct the activities of SenlangBio or otherwise separate from SenlangBio, and if Avalon is not able to restructure its ownership and operations structure in a satisfactory manner, Avalon would no longer be able to consolidate the financial results of SenlangBio in its consolidated financial statements. Any of these events would have a material adverse effect on Avalon’s business, financial condition, and results of operations.

 

Furthermore, on December 19, 2020, the National Development and Reform Commission and MOFCOM promulgated the Foreign Investment Security Review Measures, which took effect on January 18, 2021. There are great uncertainties with respect to its interpretation and implementation. Under the Foreign Investment Security Review Measures, investments in military, national defense-related areas or in locations in proximity to military facilities, or investments that would result in acquiring the actual control of assets in certain key sectors, such as critical agricultural products, energy and resources, equipment manufacturing, infrastructure, transport, cultural products and services, IT, Internet products and services, financial services and technology sectors, are required to be approved by designated governmental authorities in advance. Since SenlangBio’s main business is conducting R&D and clinical transformation of immunotherapy cell therapy, Avalon cannot rule out the possibility that investment in SenlangBio may be regarded as “investment in technology sectors,” which would require approval from governmental authorities. Moreover, because the term “investment through other means” is not clearly defined under the Foreign Investment Security Review Measures, Avalon cannot rule out the possibility that control through contractual arrangement may be regarded as a form of actual control and therefore require approval from the competent governmental authority.

 

The filing or change of the medical institution practice license of SenlangBio Clinical Laboratory may be affected by the VIE Structure.

 

As SenlangBio Clinical Laboratory is a medical institution under the PRC laws, its operation is subject to the PRC regulation of foreign investment in medical institution, which provides that a foreign investor can acquire 70% (to the highest extent) of the equity interests in a PRC medical institution. The relevant PRC laws also provide that the related government authority shall not approve any application of licenses/permits if the application is related to a company failing to comply with PRC foreign investment regulation. Therefore, if the competent PRC authority responsible for the registration of the medical institution practice license of SenlangBio Clinical Laboratory adopts a broad understanding of foreign investment rules that controlling via agreements can be deemed as a way of investment, the authority may disapprove SenlangBio Clinical Laboratory’s application in relation to its medical institution practice license, including any extension of such license. In the worst case, theoretically, the competent authorities may deem the VIE Agreements unenforceable because they are in violation of the PRC laws. In that event, SenlangBio Clinical Laboratory would not be qualified to conduct any business of testing of immunology, serology and molecular genetics specialties for patients, including hematology-tumor diagnostics and testing prior to clinical trials for cell therapy, which would result in the loss of the license and thereby the loss of income to SenlangBio from this business.

 

It may be difficult for overseas shareholders and/or regulators to conduct investigation or collect evidence within China.

 

Stockholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. The SEC, U.S. Department of Justice, PCAOB and other authorities often have substantial difficulties in bringing and enforcing actions against non-U.S. companies and non-U.S. persons, including company directors and officers, in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC without first receiving approval from the China Securities Regulatory Commission, or the CSRC. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by Avalon’s stockholders in protecting their interests.

 

Risks Related to the Acquisition

 

The amount of Acquisition Shares being issued to the Sen Lang BVI Shareholders will not be adjusted in the event of any change in Avalon’s stock price.

 

The aggregate number of Acquisition Shares being issued to the Sen Lang BVI Shareholders is fixed. Therefore, the total value of the Acquisition Shares will depend on the market price of the Avalon Common Stock at the closing of the Acquisition.

 

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The market price of the Avalon Common Stock has fluctuated in the past, may fluctuate upon the announcement of the Purchase Agreement and may continue to fluctuate through the closing of the Acquisition and thereafter. The total market value of the Acquisition Shares to be issued at the closing will not be known until that time. Therefore, current and historical market prices of Avalon Common Stock may not reflect the value that the Sen Lang BVI Shareholders will receive in the Acquisition, and the current stock price quotations for Avalon Common Stock may not provide meaningful information to Avalon stockholders. Avalon Common Stock is traded on The Nasdaq Capital Market under the symbol “AVCO.” Changes in the market price of Avalon Common Stock may result from a variety of factors that are beyond the control of Avalon, including changes in its business, operations and prospects, regulatory considerations, governmental actions, and legal proceedings and developments. You are urged to obtain up-to-date prices for Avalon Common Stock.

 

Failure to complete the Acquisition could negatively impact the stock price and the future business and financial results of Avalon.

 

The parties’ respective obligations to complete the Acquisition are subject to the satisfaction or waiver of a number of conditions set forth in the Purchase Agreement and described elsewhere in this proxy statement. There can be no assurance that the conditions to completion of the Acquisition will be satisfied or waived or that the Acquisition will be completed. If the Acquisition is not completed for any reason, the ongoing business of Avalon may be materially and adversely affected and, without realizing any of the benefits of having completed the Acquisition, Avalon would be subject to a number of risks, including the following:

 

  Avalon may experience negative reactions from the financial markets, including negative impacts on the trading price of Avalon Common Stock, which could affect Avalon’s ability to secure sufficient financing in the future on attractive terms (or at all), and from its customers, vendors, regulators and employees;
     
  Avalon will be required to pay its expenses incurred in connection with the Acquisition, whether or not the Acquisition is completed;
     
  matters relating to the Acquisition (including integration planning) will require substantial commitments of time and resources by Avalon management and the expenditure of significant funds in the form of fees and expenses, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to Avalon otherwise.

 

If any of these risks materialize, they may materially and adversely affect Avalon’s business, financial condition, financial results and stock prices.

 

The Acquisition is subject to a number of closing conditions and, if these conditions are not satisfied, the Purchase Agreement may be terminated in accordance with its terms and the Acquisition may not be completed. In addition, the parties have the right to terminate the Purchase Agreement under other specified circumstances, in which case the Acquisition would not be completed.

 

The Acquisition is subject to a number of closing conditions and, if these conditions are not satisfied or waived (to the extent permitted by law), the Acquisition will not be completed. These conditions include, among others: (i) the absence of certain legal impediments, (ii) obtaining all governmental authorizations, (iii) obtaining the Avalon stockholders’ approval, (iv) the consummation of the Equity Financing, (v) the execution of the VIE Agreements and (vi) the listing of the Acquisition Shares and the Exchange Shares on Nasdaq. In addition, each party’s obligation to complete the Acquisition is subject to the accuracy of the other parties’ representations and warranties in the Purchase Agreement (subject in most cases to “material adverse effect” qualifications), the other parties’ compliance, in all material respects, with their respective covenants and agreements in the Purchase Agreement.

 

The conditions to the closing may not be fulfilled and, accordingly, the Acquisition may not be completed. In addition, if the Acquisition is not completed by December 31, 2021, any party may choose not to proceed with the Acquisition. Moreover, the parties can mutually decide to terminate the Purchase Agreement at any time prior to the consummation of the Acquisition, before or after receipt of the Avalon stockholders’ approval and each party may elect to terminate the Purchase Agreement in certain other circumstances, as described in the Purchase Agreement.

 

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There can be no assurance that Avalon will be able to complete the Equity Financing.

 

It is a condition to closing of the Acquisition that the Equity Financing shall have been consummated prior to or contemporaneously with the closing. The closing of the Equity Financing pursuant to the OpCo Capital Increase Agreement is subject to various conditions to closing, as well as the risk that the Investor does not abide by the terms of the OpCo Capital Increase Agreement. If the Equity Financing does not close for any reason, Avalon would need to waive or agree to amend the applicable condition to closing of the Acquisition. In addition, if the Equity Financing was not consummated and the Acquisition closed nevertheless, Avalon may not have sufficient capital for all planned expenses of the post-Acquisition company, and would likely need to raise additional capital. In such event, Avalon would likely seek to sell common or preferred equity or convertible debt securities, enter into a credit facility or another form of third-party funding, or seek other debt financing. The sale of equity and convertible debt securities may result in dilution to our stockholders and certain of those securities may have rights senior to those of the holders of Avalon Common Stock. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict its operations, fund raising capabilities or otherwise. The source, timing and availability of any future financing will depend principally upon market conditions, and, more specifically, on the progress of our clinical development programs following the Acquisition. Funding may not be available when needed, at all, or on terms acceptable to us. Lack of necessary funds may require us among other things, to delay, scale back or eliminate some or all of our planned clinical trials.

 

Avalon may not realize the anticipated benefits of the Acquisition.

 

While Avalon will continue to operate as in the past until the completion of the Acquisition, the success of the Acquisition will depend, in part, on Avalon’s ability to realize the anticipated benefits acquiring Sen Lang BVI’s business. Avalon’s ability to realize these anticipated benefits is subject to certain risks, including, among others:

 

  Avalon’s ability to successfully integrate the Sen Lang BVI business;
     
  the risk that Sen Lang BVI’s business will not perform as expected;
     
  the extent to which the parties will be able to realize the expected synergies, which include taking advantage of Sen Lang BVI’s manufacturing and laboratory facilities and geographic location in Northern China;
     
  the possibility that the aggregate consideration being paid for Sen Lang BVI is greater than the value Avalon will derive from the Acquisition;
     
  the reduction of cash available for operations and other uses;
     
  the assumption of known and unknown liabilities of Sen Lang BVI; and
     
  the possibility of costly litigation challenging the Acquisition.

 

Integrating Avalon’s and Sen Lang BVI’s businesses may be more difficult, time-consuming or costly than expected.

 

Avalon and Sen Lang BVI have operated and, until completion of the Acquisition will continue to operate, independently, and there can be no assurances that their businesses can be integrated successfully. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s or both companies’ ongoing businesses or unexpected integration issues, such as higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. Specifically, issues that must be addressed in integrating the operations of Avalon and Sen Lang BVI in order to realize the anticipated benefits of the Acquisition so the business performs as expected include, among others:

 

  combining the companies’ separate operational, financial, reporting and corporate functions;

 

  integrating the companies’ technologies, products and services;
     
  identifying and eliminating redundant and underperforming operations and assets;

 

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  harmonizing the companies’ operating practices, employee development, compensation and benefit programs, internal controls and other policies, procedures and processes;
     
  addressing possible differences in corporate cultures and management philosophies;
     
  maintaining employee morale and retaining key management and other employees;
     
  attracting and recruiting prospective employees;
     
  consolidating the companies’ corporate, administrative and information technology infrastructure;
     
  coordinating sales, distribution and marketing efforts;
     
  managing the movement of certain businesses and positions to different locations;
     
  maintaining existing agreements with customers and vendors and avoiding delays in entering into new agreements with prospective customers and vendors;
     
  coordinating geographically dispersed organizations; and
     
  effecting potential actions that may be required in connection with obtaining regulatory approvals.

 

In addition, at times, the attention of certain members of each company’s management and each company’s resources may be focused on completion of the Acquisition and the integration of the businesses of the two companies and diverted from day-to-day business operations, which may disrupt each company’s ongoing business and, consequently, the business of the Company.

 

Avalon and Sen Lang BVI will be subject to business uncertainties and contractual restrictions while the Acquisition is pending.

 

Uncertainty about the effect of the Acquisition on employees, vendors and customers may have an adverse effect on Avalon or Sen Lang BVI and consequently on us after the closing of the Acquisition. These uncertainties may impair Avalon’s and Sen Lang BVI’s ability to retain and motivate key personnel and could cause customers and others that deal with Avalon and Sen Lang BVI, as applicable, to defer or decline entering into contracts with Avalon or Sen Lang BVI, as applicable, or making other decisions concerning Avalon or Sen Lang BVI, as applicable, or seek to change existing business relationships with Avalon or Sen Lang BVI, as applicable. In addition, if key employees depart because of uncertainty about their future roles and the potential complexities of the Acquisition, Avalon’s and Sen Lang BVI’s businesses could be harmed. Furthermore, the Purchase Agreement places certain restrictions on the operation of Avalon’s and Sen Lang BVI’s businesses prior to the closing of the Acquisition, which may delay or prevent Avalon and Sen Lang BVI from undertaking certain actions or business opportunities that may arise prior to the consummation of the Acquisition. Please see the section entitled “The Purchase Agreement—Covenants; Conduct of Business Pending the Acquisition” for a description of the restrictive covenants applicable to Avalon and Sen Lang BVI.

 

Third parties may terminate or alter existing contracts or relationships with Avalon or Sen Lang BVI.

 

Each of Avalon and Sen Lang BVI has contracts with customers, vendors and other business partners which may require Avalon or Sen Lang BVI, as applicable, to obtain consents from these other parties in connection with the Acquisition. If these consents cannot be obtained, the counterparties to these contracts and other third parties with which Avalon and/or Sen Lang BVI currently have relationships may have the ability to terminate, reduce the scope of or otherwise materially adversely alter their relationships with either party in anticipation of the Acquisition, or with us following the Acquisition. The pursuit of such rights may result in Avalon and Sen Lang BVI suffering a loss of potential future revenue, incurring liabilities in connection with a breach of such agreements or losing rights that are material to its business. Any such disruptions could limit our ability to achieve the anticipated benefits of the Acquisition. The adverse effect of such disruptions could also be exacerbated by a delay in the completion of the Acquisition or the termination of the Acquisition.

 

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Avalon or Sen Lang BVI may waive one or more of the closing conditions to the Acquisition without re-soliciting stockholder approval.

 

Each of Avalon and Sen Lang BVI has the right to waive certain of the closing conditions to the Acquisition. Any such waiver may not require re-solicitation of stockholders, in which case stockholders of Avalon will not have the chance to change their votes as a result of any such waiver and Avalon will have the ability to complete the Acquisition without seeking further stockholder approval. Any determination whether to waive any condition to the Acquisition, whether stockholder approval would be re-solicited as a result of any such waiver or whether the proxy statement would be amended as a result of any waiver will be made Avalon at the time of such waiver based on the facts and circumstances as they exist at that time, and any such waiver could have an adverse effect on us.

 

Avalon’s stockholders will have a reduced ownership and voting interest after the Acquisition and the Equity Financing and will exercise less influence over management.

 

After the completion of the Acquisition and the Equity Financing, Avalon’s stockholders will own a smaller percentage of the Company than they currently own. Upon completion of the Acquisition, it is expected that Avalon stockholders will own 51.4% of the total voting shares outstanding of Avalon, and the Sen Lang BVI Shareholders will own 48.6% of the total voting shares outstanding of Avalon, in each case immediately after consummation of the Acquisition and not giving effect to the closing of the Equity Financing. As of the result of the Equity Financing and depending on the amount of shares of OpCo that the Investor elects to exchange for shares of Avalon Common Stock pursuant to the terms of the Exchange Agreement, the percentages set forth above will be reduced proportionately by the Exchange Shares. Consequently, Avalon stockholders, as a group, will have reduced ownership and voting power in us compared to their current ownership and voting power in Avalon and, therefore, will be able to exercise less collective influence over the management and policies of Avalon than they currently exercise.

 

Executive officers and directors of Avalon may have interests in the Acquisition that are different from, or in addition to, the rights of Avalon stockholders.

 

Executive officers of Avalon negotiated the terms of the Purchase Agreement, and the Avalon board of directors approved the Purchase Agreement and the Acquisition. These executive officers and directors may have interests in the Acquisition that are different from, or in addition to, the Avalon stockholders. These interests include the continued employment of certain executive officers of Avalon following the Acquisition, the continued service of certain directors following the Acquisition and the indemnification of Avalon executive officers and directors by Avalon. Avalon stockholders should be aware of these interests when they consider their board of directors’ recommendation that stockholders vote in favor of the Avalon Proposals. For a description of the interests of Avalon’s executive officers and directors in the Acquisition, please see the section entitled “The Acquisition—Interests of Avalon’s Directors and Officers in the Acquisition.”

 

Any issuance of Exchange Shares could cause dilution to then existing Avalon stockholders and may depress the market price of Avalon Common Stock, and the amount of Exchange Shares issuable is impacted by the RMB to US dollar exchange rate at the time of an exchange.

 

Under the Exchange Agreement, the Investor shall have the right, exercisable following the six month anniversary of the closing of the Acquisition and until the five year anniversary of the closing of the Acquisition, to elect to exchange, from time to time, all or part of its equity ownership of the OpCo for Exchange Shares of Avalon at an effective exchange price of $1.21 per share of Avalon Common Stock. Following the completion of the financing and assuming the full funding by the investor in the financing, the aggregate number of shares of Avalon Common Stock that would be issuable under the Exchange Agreement (assuming the exchange of all shares) would be approximately 25,885,000 (using the conversion rate of US dollars to RMB of 6.3856 as of June 11, 2021). The issuance of Exchange Shares could result in immediate and substantial dilution to the interests of holders of Avalon Common Stock at the time of any exchanges.

 

In addition, the Investor is entitled to receive a number of Exchange Shares equal to the portion of the Subscription Amount (which is measured in RMB) being exchanged (i) converted into US dollars at the RMB exchange rate on the date of the exchange notice and (ii) divided by the exchange price of $1.21. Therefore, the amount of Exchange Shares issuable upon exchanges of equity of the OpCo may vary based on changes in the RMB-US dollar exchange rate during the period in which exchanges may be made under the Exchange Agreement.

 

Avalon and Sen Lang BVI may have difficulty attracting, motivating and retaining executives and other key employees in light of the proposed Acquisition.

 

Our success after the Acquisition will depend in part on each of Avalon’s and Sen Lang BVI’s ability to retain key executives and other employees. Uncertainty about the effect of the Acquisition on Avalon’s and Sen Lang BVI’s employees may have an adverse effect on each company separately and consequently, the combined business. This uncertainty may impair our ability to attract, retain and motivate key personnel. Employee retention may be particularly challenging during the pendency of the Acquisition, as Avalon’s and Sen Lang BVI’s employees may experience uncertainty about their future roles in the combined business.

 

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Furthermore, if any of Avalon or Sen Lang BVI’s key employees depart or are at risk of departing, including because of issues relating to the uncertainty and difficulty of integration, financial security or a desire not to become employees of the combined business, Avalon or Sen Lang BVI, as applicable, may have to incur significant costs in retaining such individuals or in identifying, hiring and retaining replacements for departing employees and may lose significant expertise and talent, and our ability to realize the anticipated benefits of the Acquisition may be materially and adversely affected. No assurance can be given that we will be able to attract or retain key employees to the same extent that Avalon or Sen Lang BVI has been able to attract or retain employees in the past.

 

Avalon and Sen Lang BVI will incur significant transaction and Acquisition-related transition costs in connection with the Acquisition.

 

Avalon and Sen Lang BVI expect that they will incur significant, non-recurring costs in connection with consummating the Acquisition and integrating the operations of the two companies post-closing. Avalon and/or Sen Lang BVI may incur additional costs to retain key employees. Avalon and/or Sen Lang BVI will also incur significant fees and expenses relating to financing arrangements and legal services (including any costs that would be incurred in defending against any potential class action lawsuits and derivative lawsuits in connection with the Acquisition if any such proceedings are brought), accounting and other fees and costs, associated with consummating the Acquisition. Some of these costs are payable regardless of whether the Acquisition is completed. Though Avalon and Sen Lang BVI continue to assess the magnitude of these costs, additional unanticipated costs may be incurred in the Acquisition and the integration of the businesses of Avalon and Sen Lang BVI.

 

The unaudited pro forma financial information included in this proxy statement is preliminary and our actual financial position or results of operations after the Acquisition may differ materially.

 

The unaudited pro forma financial information in this proxy statement is presented for illustrative purposes only and is not necessarily indicative of what our actual financial position or results of operations would have been had the Acquisition been completed on the dates indicated. The unaudited pro forma financial information reflects adjustments, which are based upon estimates, to allocate the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated acquisition-date fair values. The purchase price allocation reflected in this document is preliminary, and a final determination of the fair value of assets acquired and liabilities assumed will be based on the actual net tangible and intangible assets and liabilities of Sen Lang BVI that existed as of the date of the completion of the Acquisition. Accordingly, the final purchase accounting adjustments may differ materially from the pro forma information reflected in this proxy statement. For more information, please see the section entitled “Unaudited Pro Forma Condensed Combined Financial Information.”

 

Avalon may be the target of securities class action and derivative lawsuits which could result in substantial costs and may delay or prevent the Acquisition from being completed.

 

Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into acquisition agreements. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on Avalon’s liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Acquisition, then that injunction may delay or prevent the Acquisition from being completed, which may adversely affect Avalon’s business, financial position and results of operations. As of the date of this proxy statement, no such lawsuits have been filed in connection with the Acquisition and we cannot predict whether any will be filed.

 

The lack of a public market for Sen Lang BVI shares makes it difficult to determine the fair market value of the Sen Lang BVI shares, and Avalon may pay more than the fair market value of the Sen Lang BVI shares.

 

Sen Lang BVI is privately held and its share capital is not traded in any public market. The lack of a public market makes it extremely difficult to determine Sen Lang BVI’s fair market value. Because the percentage of Avalon’s equity to be issued to the Sen Lang BVI Shareholders was determined based on negotiations between the parties, it is possible that Avalon may pay more than the aggregate fair market value for Sen Lang BVI.

 

Additional Risks Relating to the Post-Acquisition Company after Completion of the Acquisition

 

The post-Acquisition company will be subject to the risks that each of Avalon and Sen Lang BVI faces.

 

Following completion of the Acquisition, the post-Acquisition company will be subject to numerous risks and uncertainties, including the risks faced by each of Avalon and Sen Lang BVI, which are described in the sections of this proxy statement entitled “Risk Factors—Risks Related to SenlangBio” and entitled “Risk Factors—Risks Related to Avalon.” If any such risks actually occur, the business, financial condition, results of operations or cash flows of the post-Acquisition company could be materially adversely affected.

 

Our growing operations in the PRC could expose us to risks that could have an adverse effect on our costs of operations.

 

Our client base is currently located in the PRC, and after the Acquisition our SenlangBio operations through Sen Lang BVI and the PRC Subsidiary will be located in the PRC. As a result, we expect to continue to add personnel in the PRC. With a significant focus of our operations in the PRC, our reliance on a workforce in the PRC exposes us to disruptions in the business, political, and economic environment in that region. Maintenance of a stable political environment between the PRC and the United States is important to our operations, and any disruption in this relationship may directly negatively affect our operations. Our operations in the PRC require us to comply with complex local laws and regulatory requirements and expose us to foreign currency exchange rate risk. Our operations may also be subject to reduced or inadequate protection of our intellectual property rights, and security breaches. Further, it may be difficult to transfer funds from our Chinese operations to our company. Negative developments in any of these areas could increase our costs of operations or otherwise harm our business.

 

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We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act or Chinese anti-corruption law could have a material adverse effect on our business.

 

We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. Chinese anti-corruption law also strictly prohibits bribery of government officials. We have, and SenlangBio has, operations, agreements with third parties and make sales in China, where corruption may occur. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants, sales agents or distributors of our company, even though these parties are not always subject to our control. It is our policy to implement safeguards to prevent these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors of our company may engage in conduct for which we might be held responsible.

 

Violations of the FCPA or other anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the United States government may seek to hold our company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

 

If we become directly subject to the recent scrutiny, criticism and negative publicity involving certain U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved quickly.

 

Recently, U.S. public companies that have a significant portion of their operations in China, particularly companies like us which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, short sellers, financial commentators and regulatory agencies, such as the United States Securities and Exchange Commission. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what affect this sector-wide scrutiny, criticism and negative publicity will have on our company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation could be costly and time consuming and distract our management from growing our company. If such allegations are not proven to be groundless, our company and business operations will be severely impacted and your investment in our stock could be rendered worthless.

 

Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for our products and damage our business.

 

Presently, we generate our revenue in China and SenlangBio is based in China. Accordingly, our business, financial condition, results of operations and prospects are, and after the Acquisition will be, affected significantly by economic, political and legal developments in China. The PRC economy differs from the economies of most developed countries in many respects, including:

 

the higher level of government involvement;

 

the early stage of development of the market-oriented sector of the economy;

 

the rapid growth rate;

 

the higher level of control over foreign exchange; and

 

the allocation of resources.

 

As the PRC economy has been transitioning from a planned economy to a more market-oriented economy, the PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. While these measures may benefit the overall PRC economy, they may also have a negative effect on us or the healthcare industry in general.

 

Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways.

 

Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of new healthcare investments and expenditures in China, which in turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our business and prospects.

 

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Uncertainties with respect to the PRC legal system could limit the legal protections available to our stockholders and us.

 

We conduct a significant portion of our business through our operating subsidiaries in the PRC, and after the Acquisition of Sen Lang BVI will conduct the SenlangBio business through the VIE Structure. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to our stockholders and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Although the majority of Avalon’s directors and executive officers are United States citizens or residents, currently all of SenlangBio’s executive officers and directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiaries.

 

The PRC government exerts substantial influence over the manner in which we must conduct our business activities.

 

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations with little advance notice that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

 

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof.

 

Under the current Enterprise Income Tax, or EIT, law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non- PRC stockholders.

 

We are a holding company incorporated under the laws of Delaware. We conduct substantially all of our business through our wholly-owned and majority-owned subsidiaries, and we derive all of our income from these entities. Prior to January 1, 2008, dividends derived by foreign enterprises from business operations in China were not subject to the Chinese enterprise income tax. However, such tax exemption ceased as of January 1, 2008 and thereafter with the effectiveness of the new EIT law.

 

Under the EIT law, if we are not deemed to be a “resident enterprise” for Chinese tax purposes, a withholding tax at the rate of 10% would be applicable to any dividends paid by our Chinese subsidiaries to us. However, if we are deemed to be a “resident enterprise” established outside of China whose “place of effective management” is located in China, we would be classified as a resident enterprise for Chinese tax purposes and thus would be subject to an enterprise income tax rate of 25% on all of our income on a worldwide basis.

 

The regulations promulgated pursuant to the EIT law define the term “place of effective management” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The State Administration of Taxation issued a SAT Circular 82 on April 22, 2009, which provides that the “place of effective management” of a Chinese-controlled overseas-incorporated enterprise is located in China if the following requirements are satisfied: (i) the senior management and core management departments in charge of its daily operations function are mainly located in the PRC; (ii) its financial and human resources decisions are subject to determination or approval by persons or bodies located in the PRC; (iii) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (iv) no less than half of the enterprise’s directors or senior management with voting rights reside in the PRC. SAT Circular 82 applies only to overseas registered enterprises controlled by PRC enterprises, not to those controlled by PRC individuals. If our non-PRC incorporated entities are deemed PRC tax residents, such entities would be subject to PRC tax under the EIT law.

 

We have analyzed the applicability of the EIT law and related regulations, and for each of the applicable periods presented, we have not accrued for PRC tax on such basis. In addition, although under the EIT law and the related regulations dividends paid to us by our PRC subsidiaries would qualify as “tax-exempted income,” we cannot assure you that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. As a result of such changes, our historical operating results will not be indicative of our operating results for future periods and the value of our shares of common stock may be adversely affected. We are actively monitoring the possibility of “resident enterprise” treatment and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.

 

The market price for shares of Avalon Common Stock may be affected by factors different from those affecting the market price for Sen Lang BVI Shares.

 

Upon completion of the Acquisition, holders of Sen Lang BVI Shares will become holders of Avalon Common Stock. Avalon’s and Sen Lang BVI’s respective businesses differ, and accordingly the results of operations of the post-Acquisition company, and the market price of the common stock of the post-Acquisition company, will be affected by factors different from those currently affecting the results of operations of Avalon and Sen Lang BVI. For a discussion of the businesses of Avalon and Sen Lang BVI and of certain factors to consider in connection with those businesses, please see the sections entitled “Information About Sen Lang BVI,” “Information About Avalon,“Risk Factors—Risks Related to SenlangBio” and “Risk Factors—Risks Related to Avalon.

 

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The market price for shares of Avalon Common Stock may decline as a result of the Acquisition, including as a result of some Avalon stockholders adjusting their portfolios.

 

The market value of Avalon Common Stock at the time of consummation of the Acquisition may vary significantly from the price of Avalon Common Stock on the date the Purchase Agreement was executed, the date of this proxy statement and the date of the Avalon annual meeting. Following consummation of the Acquisition, the market price of Avalon Common Stock may decline if, among other things, the costs related to the Acquisition are greater than expected, Avalon does not achieve the perceived benefits of the Acquisition as rapidly or to the extent anticipated by financial or industry analysts or the effect of the Acquisition on Avalon’s financial position, results of operations or cash flows is not consistent with the expectations of financial or industry analysts.

 

In addition, sales of Avalon Common Stock by Avalon’s stockholders after the completion of the Acquisition may cause the market price of Avalon Common Stock to decrease. Based on the number of shares of Avalon Common Stock outstanding as of September 30, 2021, the latest practicable date before the date of this proxy statement, 166,532,367 shares of Avalon Common Stock are expected to be issued and outstanding immediately after the closing of the Acquisition (not taking into account any Exchange Shares that may be issued following the six month anniversary of the closing). Many Avalon stockholders and former Sen Lang BVI Shareholders may decide not to hold the shares of Avalon Common Stock that they receive in the Acquisition. Other Avalon stockholders, such as funds with limitations on their permitted holdings of stock in individual issuers, may be required to sell the shares of Avalon Common Stock that they receive in the Acquisition. Such sales of Avalon Common Stock could have the effect of depressing the market price for Avalon Common Stock and may take place promptly following the closing of the Acquisition.

 

Any of these events may make it more difficult for Avalon to sell equity or equity-related securities, dilute your ownership interest in Avalon and have an adverse impact on the price of Avalon Common Stock.

 

Avalon does not expect to declare any cash dividends in the foreseeable future.

 

After the completion of the Acquisition, Avalon does not anticipate declaring any cash dividends to holders of Avalon Common Stock in the foreseeable future. Consequently, investors may need to rely on sales of their shares after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

 

The Acquisition may not be accretive, and may be dilutive, to the post-Acquisition company’s earnings per share, which may negatively affect the market price of shares of Avalon Common Stock.

 

Avalon currently believes the Acquisition will result in a number of benefits, including (i) a diverse pipeline of cell therapy product candidates, (ii) expanded footprint in China, (iii) operational synergies and (iv) an experienced management team, and that the Acquisition will be accretive to the post-Acquisition company’s earnings. This belief is based, in part, on preliminary current estimates that may materially change. In addition, future events and conditions, including adverse changes in market conditions, additional transaction and integration-related costs and other factors such as the failure to realize some or all of the anticipated benefits of the Acquisition, could decrease or delay the accretion that is currently anticipated or could result in dilution. Any dilution of, or decrease in or delay of any accretion to, the post-Acquisition company’s earnings per share could cause the price of shares of Avalon Common Stock to decline or grow at a reduced rate.

 

Risks Related to Avalon

 

The PRC government exerts substantial influence over the manner in which Avalon must conduct its business activities and Avalon may face the risk that the future regulatory actions by the PRC government could significantly limit or completely hinder Avalon’s ability to offer future securities to investors.

 

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation. Avalon’s ability to operate in China may be harmed by changes in its laws and regulations. Avalon’s operations in China are currently in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of PRC in which Avalon operates may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on Avalon’s and its existing PRC subsidiaries’ part to ensure their compliance with such regulations or interpretations.

 

According to the Opinions of the General Office of the CPC Central Committee and the General Office of the State Council on Strictly Cracking Down on Illegal Securities Activities in accordance with the Law (“Opinions”), the PRC intends to establish and improve the system of extraterritorial application of the PRC securities laws. Although the details of the extraterritorial application of the PRC securities laws are still scarce as of the date of this proxy statement, if the PRC securities laws have an extraterritorial effect, Avalon may face the risk that the future regulatory actions by the PRC government could significantly limit or completely hinder Avalon’s ability to offer future securities to investors.

 

An investment in Avalon Common Stock involves a high degree of risk. In determining whether to purchase Avalon Common Stock, an investor should carefully consider all of the material risks described below, together with the other information contained in this proxy statement before making a decision to purchase Avalon’s securities.

 

Avalon is, and will continue to be, subject to the risks described in Part I, Item 1A in Avalon’s Annual Report on Form 10-K for the year ended December 31, 2020, which Annual Report is being sent to stockholders together with this proxy statement.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

On June 13, 2021, Avalon entered into a share purchase agreement (the “Purchase Agreement”) with Senlang. Pursuant to the Purchase Agreement, subject to the satisfaction of the conditions to closing, including approval by the Avalon stockholders pursuant to the rules of the Nasdaq Stock Market, Avalon will acquire all of the issued and outstanding securities of Senlang in consideration of 81,000,000 shares of Avalon common stock. The following unaudited pro forma consolidated combined financial statements present the historical consolidated financial statements of Avalon GloboCare Corp. and Subsidiaries (“Avalon”) and the historical consolidated financial statements of Lonlon Biotech Ltd. and Subsidiaries (“Senlang”), adjusted as if Avalon had acquired Senlang.

 

The unaudited pro forma consolidated combined balance sheet combines the historical consolidated balance sheet of Avalon and the historical consolidated balance sheet of Senlang as of June 30, 2021, giving effect to the acquisition as if they had been consummated on June 30, 2021. The unaudited pro forma consolidated combined statement of operations and comprehensive loss for the six months ended June 30, 2021 combines the historical consolidated statement of operations and comprehensive loss of Avalon and the historical consolidated statement of operations and comprehensive loss of Senlang, giving effect to the acquisition as if they had been consummated on January 1, 2020, the beginning of the earliest period presented. The unaudited pro forma consolidated combined statement of operations and comprehensive loss for the year ended December 31, 2020 combines the historical consolidated statement of operations and comprehensive loss of Avalon and the historical consolidated statement of operations and comprehensive loss of Senlang, giving effect to the acquisition as if they had been consummated on January 1, 2020, the beginning of the earliest period presented. The historical consolidated financial statements have been adjusted in the unaudited pro forma consolidated combined financial statements to give pro forma effect to events that are: (1) directly attributable to the acquisition; (2) factually supportable; and (3) with respect to the statement of operations, expected to have a continuing impact on Avalon’s results following the completion of the acquisition.

 

The unaudited pro forma consolidated combined financial statements have been developed from and should be read in conjunction with:

 

The accompanying notes to the unaudited pro forma consolidated combined financial statements;

 

  The historical consolidated financial statements and related notes of Avalon as of June 30, 2021, for the six months ended June 30, 2021 and for the year ended December 31, 2020, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in Avalon’s Quarterly Report on Form 10Q for the quarterly period ended June 30, 2021 and Annual Report on Form 10-K for the year ended December 31, 2020, which were filed with the Securities and Exchange Commission; and

 

  The historical consolidated financial statements of Senlang as of June 30, 2021 and for the quarterly period ended June 30, 2021 and for the year ended December 31, 2020, which are contained elsewhere in this proxy statement.

 

51

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED COMBINED BALANCE SHEET

As of June 30, 2021

 

    Historical        
    Avalon
GloboCareCorp.
    Lonlon
Biotech Ltd.
    Pro Forma  
    and     and     Pro Forma Adjustments   Pro Forma  
    Subsidiaries     Subsidiaries     Dr.   Cr.   Combined  
                           
ASSETS                          
                           
CURRENT ASSETS:                                    
Cash   $ 685,304     $ 205,563     $ -   $ -   $ 890,867  
Accounts receivable     -       1,375,691       -     -     1,375,691  
Rent receivable     23,650       -       -     -     23,650  
Deferred financing costs     168,531       -       -     -     168,531  
Recoverable VAT     -       313,440       -     313,440 a   -  
Inventory     -       196,889       -     196,889 a   -  
Prepaid expenses and other current assets     447,844       82,517       510,329 a   -     1,040,690  
                                     
Total Current Assets     1,325,329       2,174,100       510,329     510,329     3,499,429  
                                     
NON-CURRENT ASSETS:                                    
Rent receivable - noncurrent portion     106,558       -       -     -     106,558  
Security deposit     19,953       50,890       -     -     70,843  
Deferred leasing costs     125,503       -       -     -     125,503  
Operating lease right-of-use assets, net     210,781       211,216       -     -     421,997  
Property and equipment, net     442,668       2,017,427       -     -     2,460,095  
Investment in real estate, net     7,613,111       -       -     -     7,613,111  
Equity method investment     533,949       -       -     -     533,949  
Intangible assets     -       -       98,655,982 b   -     98,655,982  
                                     
Total Non-current Assets     9,052,523       2,279,533       98,655,982     -     109,988,038  
                                     
Total Assets   $ 10,377,852     $ 4,453,633     $ 99,166,311   $ 510,329   $ 113,487,467  
                                     
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)                                    
                                     
CURRENT LIABILITIES:                                    
Accrued professional fees   $ 1,688,929     $ -     $ -   $ 300,000  d  $ 1,988,929  
Accrued research and development fees     587,805       -       -     -     587,805  
Accrued payroll liability and directors’ compensation     182,474       -       -     -     182,474  
Accounts payable     -       1,657,523       1,657,523 e   -     -  
Accrued liabilities and other payables     330,710       521,254       -     1,850,615  e    2,702,579  
Notes payable     -       929,195       -     -     929,195  
Accrued liabilities and other payables - related parties     359,236       -       -     209,527  f    568,763  
Deferred grant income     -       193,092       193,092 e   -     -  
Due to related parties     -       209,527       209,527 f   -     -  
Operating lease obligation     140,978       148,613       -     -     289,591  
Note payable - related party     390,000       1,176,981       -     -     1,566,981  
                                     
Total Current Liabilities     3,680,132       4,836,185       2,060,142     2,360,142     8,816,317  
                                     
NON-CURRENT LIABILITIES:                                    
Deferred grant income - noncurrent portion     -       263,430       -     -     263,430  
Operating lease obligation - noncurrent portion     75,803       -       -     -     75,803  
Loan payable - related party     3,393,188       -       -     -     3,393,188  
                                     
Total Non-current Liabilities     3,468,991       263,430       -     -     3,732,421  
                                     
Total Liabilities     7,149,123       5,099,615       2,060,142     2,360,142     12,548,738  
                                     
SHAREHOLDERS’ EQUITY (DEFICIT):                                    
                                   
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding     -       -       -     -     -  
Common stock, $0.0001 par value; 490,000,000 shares authorized; 85,600,919 shares issued and 85,080,919 shares outstanding; 166,600,919 pro forma shares issued and 166,080,919 pro forma shares outstanding     8,560       -       -     8,100  b    16,660  
Additional paid-in capital     50,687,940       8,946,197       8,946,197 c   98,001,900  b    148,689,840  
Ordinary shares     -       10,001       10,001 c   -     -  
Less: common stock held in treasury, at cost; 520,000 shares     (522,500 )     -       -     -     (522,500 )
Accumulated deficit     (46,773,403 )     (9,619,211 )     300,000  d    9,619,211  c    (47,073,403 )
Statutory reserve     6,578       -       -     -     6,578  
Accumulated other comprehensive (loss) income     (178,446 )     17,031       17,031 c   -     (178,446 )
                                     
Total shareholders’ equity (deficit)     3,228,729       (645,982 )     9,273,229     107,629,211     100,938,729  
                                     
Total Liabilities and Shareholders’ Equity (Deficit)   $ 10,377,852     $ 4,453,633     $ 11,333,371   $ 109,989,353   $ 113,487,467  

 

52

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED COMBINED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

Six Months Ended June 30, 2021

 

    Historical     Pro Forma  
    Avalon     Lonlon                  
    GloboCare Corp.     Biotech Ltd.     Pro Forma Adjustments         Pro Forma  
    and Subsidiaries     and Subsidiaries     Dr.         Cr.         Combined  
                                       
REVENUES                                                
Real property rental   $ 570,006     $ -     $ -         $ -         $ 570,006  
General laboratory testing     -       2,133,868       -           -           2,133,868  
Immunology and hematology testing     -       719,368       -           -           719,368  
Total Revenues     570,006       2,853,236       -           -           3,423,242  
                                                 
COSTS AND EXPENSES                                                
Real property operating expenses     422,041       -       -           -           422,041  
General laboratory testing     -       1,515,483       -           -           1,515,483  
Immunology and hematology testing     -       197,340       -           -           197,340  
Total Costs and Expenses     422,041       1,712,823       -           -           2,134,864  
                                                 
Real Property Opearting Income     147,965       -       -           -           147,965  
Gross Profit from General Laboratory Testing     -       618,385       -           -           618,385  
Gross Profit from Immunology and Hematology Testing     -       522,028       -           -           522,028  
Total Gross Profit     147,965       1,140,413       -           -           1,288,378  
                                                 
OTHER OPERATING EXPENSES:                                                
Professional fees     2,738,257       -       277,213     a     -           3,015,470  
Compensation and related benefits     1,109,835       -       170,187     a     -           1,280,022  
Research and development expenses     451,981       1,753,291       -           -           2,205,272  
General and administrative expenses     -       701,636       -           701,636     a     -  
Other general and administrative expenses     453,760       -       254,236     a     -           707,996  
Selling and marketing expenses     -       214,460       -           -           214,460  
Amortization     -       -       4,933,000     c     -           4,933,000  
Grant income     -       (332,431 )     -           -           (332,431 )
                                                 
Total Other Operating Expenses     4,753,833       2,336,956       5,634,636           701,636           12,023,789  
                                                 
LOSS FROM OPERATIONS     (4,605,868 )     (1,196,543 )     (5,634,636 )         (701,636 )         (10,735,411 )
                                                 
OTHER EXPENSE                                                
Interest expense     -       (26,697 )     -           -           (26,697 )
Interest expense - related party     (91,280 )     (10,561 )     -           -           (101,841 )
Loss from equity method investment     (33,932 )     -       -           -           (33,932 )
Other expense     (948 )     (461 )     -           -           (1,409 )
                                                 
Total Other Expense     (126,160 )     (37,719 )     -           -           (163,879 )
                                                 
LOSS BEFORE INCOME TAXES     (4,732,028 )     (1,234,262 )     (5,634,636 )         (701,636 )         (10,899,290 )
                                                 
INCOME TAXES EXPENSE     -       (4,935 )     -           -           (4,935 )
                                                 
NET LOSS   $ (4,732,028 )   $ (1,239,197 )   $ (5,634,