UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

COMMISSION FILE NUMBER: 000-55709

 

AVALON GLOBOCARE CORP.

(Exact name of Registrant as specified in its charter)

 

Delaware
(State of incorporation)
 

47-1685128

(I.R.S. Employer Identification No.)

 

4400 Route 9 South, Suite 3100, Freehold, New Jersey 07728

(Address of principal executive offices) (zip code)

 

(646) 762-4517

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer  ☐ (Do not check if a smaller reporting company) Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

 

Class   Outstanding August 14, 2018
Common Stock, $0.0001 par value per share   73,560,622 shares

 

 

 

AVALON GLOBOCARE CORP.

 

FORM 10-Q

 

June 30, 2018

 

TABLE OF CONTENTS

 

    Page No.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements  
  Condensed Consolidated Balance Sheets as of June 30, 2018 (Unaudited) and December 31, 2017
  Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017
  Unaudited Condensed Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2018
  Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017
  Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 3 Quantitative and Qualitative Disclosures About Market Risk 41
Item 4 Controls and Procedures 41
     

PART II - OTHER INFORMATION

     
Item 1. Legal Proceedings 42
Item 1A. Risk Factors 42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
Item 3. Defaults upon Senior Securities 43
Item 4. Mine Safety Disclosures 43
Item 5. Other Information 43
Item 6. Exhibits 43

 

 

 

FORWARD LOOKING STATEMENTS

 

This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.

 

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

 

We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

Unless otherwise indicated, references in this report to “we,” “us” or the “Company” refer to Avalon GloboCare Corp. and its subsidiaries.

 

 

 

PART 1 - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

   As of 
   June 30, 2018   December 31, 2017 
   (Unaudited)     
ASSETS    
         
CURRENT ASSETS:          
Cash  $3,643,316   $3,027,033 
Accounts receivable, net of allowance for doubtful accounts   74,969    10,179 
Accounts receivable - related party, net of allowance for doubtful accounts   144,779     
Tenants receivable, net of allowance for doubtful accounts   38,527    38,469 
Security deposit   328,615    6,916 
Inventory   22,049    2,667 
Prepaid expenses and other current assets   707,925    149,713 
           
Total Current Assets   4,960,180    3,234,977 
           
OTHER ASSETS:          
Security deposit - noncurrent portion       25,322 
Prepayment for long-term assets   67,044    153,688 
Property and equipment, net   143,226    48,029 
Investment in real estate, net   7,725,301    7,623,757 
Intangible assets, net   1,419,474    1,583,260 
           
Total Other Assets   9,355,045    9,434,056 
           
Total Assets  $14,315,225   $12,669,033 
           
LIABILITIES AND EQUITY          
           
CURRENT LIABILITIES:          
Accounts payable  $1,702   $29 
Accrued liabilities and other payables   299,788    124,064 
Accrued liabilities and other payables - related parties   48,694    39,927 
Deferred rental income   11,182    12,769 
Loan payable   1,000,000    1,500,000 
Interest payable   24,931    138,110 
VAT and other taxes payable   12,516    2,997 
Tenants’ security deposit   73,400    92,288 
Due to related party   450,000    450,000 
Refundable deposit   2,000,000    3,000,000 
           
Total Current Liabilities   3,922,213    5,360,184 
           
Commitments and Contingencies - (Note 20)        
           
EQUITY:          
Preferred stock, $0.0001 par value; 10,000,000 shares authorized;          
no shares issued and outstanding at June 30, 2018 and December 31, 2017        
Common stock, $0.0001 par value; 490,000,000 shares authorized;          
73,560,622 shares issued and 73,040,622 shares outstanding at June 30, 2018;          
70,278,622 shares issued and outstanding at December 31, 2017   7,356    7,028 
Additional paid-in capital   18,034,773    11,490,285 
Less: common stock held in treasury, at cost;          
520,000 and 0 shares at June 30, 2018 and December 31, 2017, respectively   (522,500)    
Accumulated deficit   (6,293,627)   (3,517,654)
Statutory reserve   6,578    6,578 
Accumulated other comprehensive loss - foreign currency translation adjustment   (135,404)   (91,994)
Total Avalon GloboCare Corp. stockholders’ equity   11,097,176    7,894,243 
Non-controlling interest   (704,164)   (585,394)
           
Total Equity   10,393,012    7,308,849 
           
Total Liabilities and Equity  $14,315,225   $12,669,033 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 1

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

   For the Three Months Ended   For the Three Months Ended   For the Six Months Ended   For the Six Months Ended 
   June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017 
                 
REVENUES            
Real property rental  $278,872   $222,254   $575,495   $222,254 
Medical related consulting services - related parties   141,996    152,497    141,996    218,783 
Development services and sales of developed products   75,225        86,515     
Total Revenues   496,093    374,751    804,006    441,037 
                     
COSTS AND EXPENSES                    
Real property operating expenses   195,941    161,854    406,215    161,854 
Medical related consulting services - related parties   124,715    125,231    124,715    224,812 
Development services and sales of developed products   42,093        58,613     
Total Costs and Expenses   362,749    287,085    589,543    386,666 
                     
REAL PROPERTY OPERATING INCOME   82,931    60,400    169,280    60,400 
GROSS PROFIT (LOSS) FROM MEDICAL RELATED CONSULTING SERVICES   17,281    27,266    17,281    (6,029)
GROSS PROFIT FROM DEVELOPMENT SERVICES AND SALES OF DEVELOPED PRODUCTS   33,132        27,902     
                     
OTHER OPERATING EXPENSES:                    
Selling expenses       6,279        14,990 
Compensation and related benefits   487,452    205,473    1,026,266    388,400 
Professional fees   593,025    172,705    1,164,797    379,923 
Other general and administrative   266,121    91,927    551,373    152,659 
                     
Total Other Operating Expenses   1,346,598    476,384    2,742,436    935,972 
                     
LOSS FROM OPERATIONS   (1,213,254)   (388,718)   (2,527,973)   (881,601)
                     
OTHER INCOME (EXPENSE)                    
Interest income   1,300    210    1,708    1,004 
Interest expense   (24,932)   (42,000)   (261,918)   (42,000)
Foreign currency transaction loss   (106,929)       (106,929)   (57,244)
Other income           328     
                     
Total Other Expense, net   (130,561)   (41,790)   (366,811)   (98,240)
                     
LOSS BEFORE INCOME TAXES   (1,343,815)   (430,508)   (2,894,784)   (979,841)
                     
INCOME TAXES                
                     
NET LOSS  $(1,343,815)  $(430,508)  $(2,894,784)  $(979,841)
                     
LESS: NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST   (49,421)       (118,811)    
                     
NET LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS  $(1,294,394)  $(430,508)  $(2,775,973)  $(979,841)
                     
COMPREHENSIVE LOSS:                    
NET LOSS   (1,343,815)   (430,508)   (2,894,784)   (979,841)
OTHER COMPREHENSIVE (LOSS) INCOME                    
Unrealized foreign currency translation (loss) gain   (96,207)   7,647    (43,369)   (32,124)
COMPREHENSIVE LOSS  $(1,440,022)  $(422,861)  $(2,938,153)  $(1,011,965)
LESS: COMPREHENSIVE LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST   (49,540)       (118,770)    
COMPREHENSIVE LOSS ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS  $(1,390,482)  $(422,861)  $(2,819,383)  $(1,011,965)
                     
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO AVALON GLOBOCARE CORP. COMMON SHAREHOLDERS:                    
Basic and diluted  $(0.02)  $(0.01)  $(0.04)  $(0.02)
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                    
Basic and diluted   71,979,678    64,628,622    71,122,356    63,617,572 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 2

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

  For the Six Months Ended June 30, 2018

 

   Avalon GloboCare Corp. Stockholders’ Equity         
   Preferred Stock   Common Stock   Additional               Accumulated Other          
   Number of       Number of       Paid-in   Treasury   Accumulated   Statutory   Comprehensive    Non-controlling   Total 
   Shares   Amount   Shares   Amount   Capital   Stock   Deficit   Reserve   Loss   Interest   Equity 
                                             
Balance, December 31, 2017      $    70,278,622   $7,028   $11,490,285   $   $(3,517,654)  $6,578   $(91,994)  $(585,394)  $7,308,849 
                                                        
Treasury stock purchase                       (522,500)                   (522,500)
                                                        
Common shares issued in equity raise, net of fees associated with equity raise           3,107,000    311    5,056,332                        5,056,643 
                                                        
Common shares issued for services           175,000    17    466,983                        467,000 
                                                        
Stock-based compensation                   1,021,173                        1,021,173 
                                                        
Foreign currency translation adjustment                                   (43,410)   41    (43,369)
                                                        
Net loss for the six months ended June 30, 2018                           (2,775,973)           (118,811)   (2,894,784)
                                                        
Balance, June 30, 2018      $    73,560,622   $7,356   $18,034,773   $(522,500)  $(6,293,627)  $6,578   $(135,404)  $(704,164)  $10,393,012 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 3

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the Six Months Ended   For the Six Months Ended 
   June 30, 2018   June 30, 2017 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(2,894,784)  $(979,841)
Adjustments to reconcile net loss from operations to          
net cash used in operating activities:          
Depreciation and amortization   247,975    34,156 
Stock-based compensation expense   1,082,923    266,467 
Changes in operating assets and liabilities:          
Accounts receivable   (67,542)    
Accounts receivable - related parties   (150,516)   (160,964)
Tenants receivable   (58)   (25,433)
Inventory   (19,892)    
Prepaid expenses and other current assets   (153,785)   21,653 
Security deposit   (308,694)   (29,786)
Accounts payable   1,740    22,646 
Accrued liabilities and other payables   176,584    146,680 
Accrued liabilities and other payables - related parties   9,811    32,135 
Deferred rental income   (1,587)   4,178 
Interest payable   (113,179)    
Income taxes payable       (21,191)
VAT and other taxes payable   9,850    (3,841)
Tenants’ security deposit   (18,888)   92,288 
           
NET CASH USED IN OPERATING ACTIVITIES   (2,200,042)   (600,853)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (10,192)   (27,784)
Prepayment for purchase of long-term assets   (22,606)    
Purchase of commercial real estate       (7,008,571)
Improvement of commercial real estate   (165,155)    
           
NET CASH USED IN INVESTING ACTIVITIES   (197,953)   (7,036,355)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds received from loan payable       2,100,000 
Repayments of loan   (500,000)    
Proceeds received from related parties’ advance       70,000 
Repayment of related parties’ advance       (500)
Repurchase of common stock   (522,500)    
Refundable deposit in connection with Share Subscription Agreement       3,000,000 
Refund for refundable deposit in connection with Share Subscription Agreement   (1,000,000)    
Proceeds received from equity offering   5,437,250     
Disbursements for equity offering costs   (380,607)    
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   3,034,143    5,169,500 
           
EFFECT OF EXCHANGE RATE ON CASH   (19,865)   (36,527)
           
NET INCREASE (DECREASE) IN CASH   616,283    (2,504,235)
           
CASH  - beginning of period   3,027,033    2,886,189 
           
CASH - end of period  $3,643,316   $381,954 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for:          
Interest  $375,096   $ 
Income taxes  $   $21,190 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Common stock issued in connection with Share Subscription Agreement  $   $300 
Acquisition of equipment by decreasing prepayment for long-term assets  $109,889   $ 
Acquisition of real estate by decreasing prepayment for property  $   $700,000 
Common stock issued for future services  $405,250   $ 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 4

 

 

 

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

 

Avalon GloboCare Corp. (f/k/a Global Technologies Corp.) (the “Company” or “AVCO”) is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on July 28, 2014. On October 18, 2016, the Company changed its name to Avalon GloboCare Corp. and completed a reverse split its shares of common stock at a ratio of 1:4. On October 19, 2016, the Company entered into and closed a Share Exchange Agreement with the shareholders of Avalon Healthcare System, Inc., a Delaware corporation (“AHS”), each of which are accredited investors (“AHS Shareholders”) pursuant to which we acquired 100% of the outstanding securities of AHS in exchange for 50,000,000 shares of our common stock (the “AHS Acquisition”). AHS was incorporated on May 18, 2015 under the laws of the State of Delaware. As a result of such acquisition, the Company’s operations now are focused on integrating and managing global healthcare services and resources, as well as empowering high-impact biomedical innovations and technologies to accelerate their clinical applications. Operating through two major platforms, namely “Avalon Cell”, and “Avalon Rehab”, our “technology + service” ecosystem covers the areas of regenerative medicine, cell-based immunotherapy, exosome technology, as well as rehabilitation medicine. We plan to integrate these services through joint ventures and acquisitions that bring shareholder value both in the short term, through operational entities as part of Avalon Rehab and in the long term, through biomedical innovations as part of Avalon Cell. AHS owns 100% of the capital stock of Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”), which is a wholly foreign-owned enterprise organized under the laws of the People’s Republic of China (“PRC”). Avalon Shanghai was incorporated on April 29, 2016 and is engaged in medical related consulting services for customers.

 

For accounting purposes, AHS was the surviving entity. The transaction was accounted for as a recapitalization of AHS pursuant to which AHS was treated as the accounting acquirer, surviving and continuing entity although the Company is the legal acquirer. The Company did not recognize goodwill or any intangible assets in connection with this transaction. Accordingly, the Company’s historical financial statements are those of AHS and its wholly-owned subsidiary, Avalon Shanghai immediately following the consummation of this reverse merger transaction.

 

On January 23, 2017, the Company incorporated Avalon (BVI) Ltd, a British Virgin Island company (dormant, will be dissolved in 2018). There was no activity for the subsidiary since its incorporation through June 30, 2018.

 

On February 7, 2017, the Company formed Avalon RT 9 Properties, LLC (“Avalon RT 9”), a New Jersey limited liability company. On May 5, 2017, Avalon RT 9 purchased a real property located in Township of Freehold, County of Monmouth, State of New Jersey, having a street address of 4400 Route 9 South, Freehold, NJ 07728. This property was purchased to serve as the Company’s world-wide headquarters for all corporate administration and operation. In addition, the property generates rental income. Avalon RT 9 owns this office building. Currently, Avalon RT 9’s business consists of the ownership and operation of the income-producing real estate property in New Jersey.

 

On July 31, 2017, the Company formed GenExosome Technologies Inc. (“GenExosome”) in Nevada.

 

On October 25, 2017, GenExosome and the Company entered into a Securities Purchase Agreement pursuant to which the Company acquired 600 shares of GenExosome in consideration of $1,326,087 in cash and 500,000 shares of common stock of the Company.

 

On October 25, 2017, GenExosome entered into and closed an Asset Purchase Agreement with Yu Zhou, MD, PhD, pursuant to which the Company acquired all assets, including all intellectual property, held by Dr. Zhou pertaining to the business of researching, developing and commercializing exosome technologies including, but not limited to, patent application number CN 2016 1 0675107.5 (application of an Exosomal MicroRNA in plasma as biomaker to diagnosis liver cancer), patent application number CN 2016 1 0675110.7 (clinical application of circulating exosome carried miRNA-33b in the diagnosis of liver cancer), patent application number CN 2017 1 0330847.X (saliva exosome based methods and composition for the diagnosis, staging and prognosis of oral cancer) and patent application number CN 2017 1 0330835.7 (a novel exosome-based therapeutics against proliferative oral diseases). In consideration of the assets, GenExosome agreed to pay Dr. Zhou $876,087 in cash, transfer 500,000 shares of common stock of the Company to Dr. Zhou and issue Dr. Zhou 400 shares of common stock of GenExosome.

 

As a result of the above transactions, effective October 25, 2017, the Company holds 60% of GenExosome and Dr. Zhou holds 40% of GenExosome. GenExosome is engaged in developing proprietary diagnostic and therapeutic products leveraging its exosome technology and marketing and distributing its proprietary Exosome Isolation Systems.

 

 5

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS (continued)

 

On October 25, 2017, GenExosome entered into and closed a Stock Purchase Agreement with Beijing Jieteng (GenExosome) Biotech Co. Ltd., a corporation incorporated in the People’s Republic of China on August 7, 2015 (“Beijing GenExosome”) and Dr. Zhou, the sole shareholder of Beijing GenExosome, pursuant to which GenExosome acquired all of the issued and outstanding securities of Beijing GenExosome in consideration of a cash payment in the amount of $450,000, which shall be paid upon Beijing GenExosome recording the change in ownership with the Ministry of Commerce of the People’s Republic of China in accordance with the Interim Measures for Record Management regarding the Establishment and Change of Foreign-invested Enterprises (revised).

 

Beijing GenExosome is engaged in the development of exosome technology to improve diagnosis and management of diseases. Exosomes are tiny, subcellular, membrane-bound vesicles in diameter of 30-150 nm that are released by almost all cell types and that can carry membrane and cellular proteins, as well as genetic materials that are representative of the cell of origin. Profiling various bio-molecules in exosomes may serve as useful biomarkers for a wide variety of diseases. Beijing GenExosome’s research kits are designed to be used by researchers for biomarker discovery and clinical diagnostic development, and the advancement of targeted therapies. Currently, research kits and service are available to isolate exosomes or extract exosomal RNA/protein from serum/plasma, urine and saliva samples. Beijing GenExosome is seeking to decode proteomic and genomic alterations underlying a wide-range of pathologies, thus allowing for the introduction of novel non-invasive “liquid biopsies”. Its mission is focused toward diagnostic advancements in the fields of oncology, infectious diseases and fibrotic diseases, and discovery of disease-specific exosomes to provide disease origin insight necessary to enable personalized clinical management.

 

Details of the Company’s subsidiaries which are included in these consolidated financial statements as of June 30, 2018 are as follows:

 

Name of Subsidiaries   Place and date of Incorporation   Percentage of Ownership   Principal Activities

Avalon Healthcare System, Inc.

(“AHS”)

 

Delaware

May 18, 2015

 

100% held by AVCO

  Provides medical related consulting services and developing Avalon Cell and Avalon Rehab in United States of America (“USA”)
             

Avalon (BVI) Ltd.

(“Avalon BVI”)

 

British Virgin Island

January 23, 2017

  100% held by AVCO  

Dormant,

will be dissolved in 2018

             

Avalon RT 9 Properties LLC

(“Avalon RT 9”)

 

New Jersey

February 7, 2017

 

100% held by AVCO

  Owns and operates an income-producing real property and holds and manages the corporate headquarters
             

Avalon (Shanghai) Healthcare Technology Co., Ltd.

(“Avalon Shanghai”)

 

PRC

April 29, 2016

 

100% held by AHS

 

Provides medical related consulting services and developing Avalon Cell and Avalon Rehab in China

 

             

GenExosome Technologies Inc.

(“GenExosome”)

 

Nevada

July 31, 2017

 

60% held by AVCO

  Develops proprietary diagnostic and therapeutic products leveraging exosome technology and markets and distributes proprietary Exosome Isolation Systems in USA
             
Beijing Jieteng (GenExosome) Biotech Co., Ltd. (“Beijing GenExosome”)  

PRC

August 7, 2015

 

100% held by GenExosome

  Provides development services for hospitals and other customers and sells developed items to hospitals and other customers in China

 

 6

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 2 – BASIS OF PRESENTATION

 

These interim condensed consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements have been included. The results reported in the unaudited condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on March 13, 2018.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates during the three and six months ended June 30, 2018 and 2017 include the allowance for doubtful accounts, reserve for obsolete inventory, the useful life of property and equipment and investment in real estate and intangible assets, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances, and valuation of stock-based compensation.

 

Fair Value of Financial Instruments and Fair Value Measurements

 

The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the condensed consolidated balance sheets for cash, accounts receivable, account receivable – related party, tenants receivable, security deposit, inventory, prepaid expenses and other current assets, accounts payable, accrued liabilities and other payables, accrued liabilities and other payables – related parties, deferred rental income, loan payable, interest payable, Value Added Tax (“VAT”) and other taxes payable, tenants’ security deposit, due to related party, and refundable deposit, approximate their fair market value based on the short-term maturity of these instruments. At June 30, 2018 and December 31, 2017, intangible assets were measured at fair value on a nonrecurring basis as shown in the following tables.

 

 7

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Fair Value of Financial Instruments and Fair Value Measurements (continued)

 

   Quoted Price in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Balance at
June 30, 2018
   Impairment Loss 
Patents and other technologies  $   $   $1,419,474   $1,419,474   $ 
                          

   Quoted Price in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Balance at
December 31, 2017
   Impairment Loss 
Patents and other technologies  $   $   $1,583,260   $1,583,260   $923,769 
Goodwill                   397,569 
Total  $   $   $1,583,260   $1,583,260   $1,321,338 

 

In December 2017, the Company assessed its long-lived assets for any impairment and concluded that there were indicators of impairment as of December 31, 2017 and it calculated that the estimated undiscounted cash flows were less than the carrying amount of the intangible assets. Based on its analysis, the Company recognized an impairment loss of $1,321,338 for the year ended December 31, 2017, which reduced the value of intangible assets acquired to $1,583,260. The Company did not record any impairment charge for the three and six months ended June 30, 2018.

 

ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

 

Cash

 

Cash consists of cash on hand and cash in banks. The Company maintains cash with various financial institutions in the PRC and United States. At June 30, 2018 and December 31, 2017, cash balances in PRC are $1,318,799 and $1,327,009, respectively, are uninsured. At June 30, 2018 and December 31, 2017, cash balances in United States are $2,324,517 and $1,700,024, respectively. The Company has not experienced any losses in bank accounts and believes it is not exposed to any risks on its cash in bank accounts.

 

Concentrations of Credit Risk

 

Currently, a portion of the Company’s operations are carried out in PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, trade accounts receivable and tenants receivable. A portion of the Company’s cash is maintained with state-owned banks within the PRC, and none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A portion of the Company’s sales are credit sales which is to the customer whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivable and tenants receivable is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.

 

 8

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Concentrations of Credit Risk (continued)

 

At June 30, 2018 and December 31, 2017, the Company’s cash balances by geographic area were as follows:

 

Country:  June 30, 2018   December 31, 2017 
United States  $2,324,517    63.8%  $1,700,024    56.2%
China   1,318,799    36.2%   1,327,009    43.8%
Total cash  $3,643,316    100.0%  $3,027,033    100.0%

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.

 

Management believes that the accounts receivable are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its accounts receivable at June 30, 2018 and December 31, 2017. The Company historically has not experienced uncollectible accounts from customers granted with credit sales.

 

Tenants Receivable and Allowance for Doubtful Accounts

 

Tenants receivable are presented net of an allowance for doubtful accounts. Tenants receivable balance consist of base rents, tenant reimbursements and receivables arising from straight-lining of rents primarily represent amounts accrued and unpaid from tenants in accordance with the terms of the respective leases, subject to the Company’s revenue recognition policy. An allowance for the uncollectible portion of tenant receivable is determined based upon an analysis of the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in Freehold, New Jersey in which the property is located.

 

Management believes that the tenants receivable are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its tenants receivable at June 30, 2018 and December 31, 2017.

 

Inventory

 

Inventory is stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) method. A reserve is established when management determines that certain inventory may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserve for the difference between the cost and the lower of cost or estimated net realizable value. These reserve is recorded based on estimates. The Company did not record any inventory reserve at June 30, 2018 and December 31, 2017.

 

Property and Equipment

 

Property and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

 

 9

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Investment in Real Estate and Depreciation

 

Investment in real estate is carried at cost less accumulated depreciation and consists of building and improvement. The Company depreciates real estate building and improvement on a straight-line basis over estimated useful life. Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditure for improvements, renovations, and replacements of real estate asset is capitalized and depreciated over its estimated useful life if the expenditure qualifies as betterment. Real estate depreciation expense was $31,806 and $32,943 for the three months ended June 30, 2018 and 2017, respectively. Real estate depreciation expense was $63,611 and $32,943 for the six months ended June 30, 2018 and 2017, respectively.

 

Intangible Assets

 

Intangible assets consist of patents and other technologies. Patents and other technologies are being amortized on a straight-line method over the estimated useful life of 5 years.

 

Impairment of Long-lived Assets

 

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not record any impairment charge for the three and six months ended June 30, 2018 and 2017.

 

Acquisition Consideration

 

On October 25, 2017, GenExosome entered into and closed a Stock Purchase Agreement with Beijing Jieteng (GenExosome) Biotech Co. Ltd., a corporation incorporated in the People’s Republic of China (“Beijing GenExosome”) and Dr. Zhou, the sole shareholder of Beijing GenExosome, pursuant to which GenExosome acquired all of the issued and outstanding securities of Beijing GenExosome in consideration of a cash payment in the amount of $450,000, which shall be paid upon Beijing GenExosome recording the change in ownership with the Ministry of Commerce of the People’s Republic of China in accordance with the Interim Measures for Record Management regarding the Establishment and Change of Foreign-invested Enterprises (revised).

 

On October 25, 2017, Dr. Zhou was appointed to the board of directors of GenExosome and served as Co-chief executive officer of GenExosome. As of June 30, 2018 and December 31, 2017, the unpaid acquisition consideration of $450,000 was recorded as due to related party on the accompanying condensed consolidated balance sheets.

 

Deferred Rental Income

 

Deferred rental income represents rental income collected but not earned as of the reporting date. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. As of June 30, 2018 and December 31, 2017, deferred rental income totaled $11,182 and $12,769, respectively.

 

Value Added Tax

 

Avalon Shanghai is subject to a value added tax (“VAT”) of 6% for providing medical related consulting services and Beijing GenExosome is subject to a VAT of 3% for performing development services and sales of developed products. The amount of VAT liability is determined by applying the applicable tax rates to the invoiced amount of medical related consulting services provided and the invoiced amount of development services provided and sales of developed products (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). The Company reports revenue net of PRC’s value added tax for all the periods presented in the unaudited condensed consolidated statements of operations and comprehensive loss.

 

 10

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an update Accounting Standards Update (“ASU”) (“ASU 2014-09”) establishing Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard, which is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. The Company adopted this standard in 2018 using the modified retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Based on an evaluation of the impact ASU 2014-09 will have on the Company’s sources of revenue, the Company has concluded that ASU 2014-09 did not have a material impact on the process for, timing of, and presentation and disclosure of revenue recognition from customers.

 

Types of revenue:

 

  Rental revenue from leasing commercial property under operating leases with terms of generally three years or more.

 

  Service fees under consulting agreements with related parties to provide medical related consulting services to its clients. The Company is paid for its services by its clients pursuant to the terms of the written consulting agreements. Each contract calls for a fixed payment.

 

  Service fees under agreements to perform development services for hospitals other customers. The Company does not perform contracts that are contingent upon successful results.

 

  Sales of developed products to hospitals and other customers.

 

Revenue recognition criteria:

 

  The Company recognizes rental revenue from its commercial leases on a straight-line basis over the life of the lease including rent holidays, if any. Straight-line rent receivable consists of the difference between the tenants’ rents calculated on a straight-line basis from the date of lease commencement over the remaining terms of the related leases and the tenants’ actual rents due under the lease agreements and is included in tenants receivable in the accompanying consolidated balance sheets. Revenues associated with operating expense recoveries are recognized in the period in which the expenses are incurred.

 

  The Company recognizes revenue by providing medical related consulting services under written service contracts with its customers. Revenue related to its service offerings is recognized as the services are performed and amounts are earned and all other elements of revenue recognition have been satisfied. Prepayments, if any, received from customers prior to the services being performed are recorded as advance from customers. In these cases, when the services are performed, the amount recorded as advance from customers is recognized as revenue.

 

  Revenue from development services performed under written contracts is recognized when it is earned pursuant to the terms of the contract. Each contract calls for a fixed dollar amount with a specified time period. These contracts generally involve up-front payment. Revenue is recognized for these projects as services are provided.

 

  Revenue from sales of developed items to hospitals and other customers is recognized when items are shipped to customers and titles are transferred.

 

The Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers.

 

Sales tax collected is not recognized as revenue and amounts outstanding are included in accrued liabilities and other payables in the consolidated balance sheets.

 

Office Lease

 

When a lease contains “rent holidays”, the Company records rental expense on a straight-line basis over the term of the lease and the difference between the average rental amount charged to expense and the amount payable under the lease is recorded as prepaid expenses in the consolidated balance sheets. The Company begins recording rent expense on the lease possession date.

 

 11

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Shipping and Handling Costs

 

Shipping and handling costs are expensed as incurred and are included in cost of sales. For the three months ended June 30, 2018 and 2017, the Company did not incur shipping and handling costs. For the six months ended June 30, 2018 and 2017, shipping and handling costs amounted to $25 and $0, respectively.

 

Research and Development

 

Expenditures for research and product development costs are expensed as incurred. The Company incurred research and development expense in the amount of $263 related to the development of proprietary diagnostic and therapeutic products leveraging exosome technology and optimization of Exosome Isolation Systems in the three and six months ended June 30, 2018. The Company did not incur any research and development costs during the three and six months ended June 30, 2017.

 

Advertising and Marketing Costs

 

All costs related to advertising and marketing are expensed as incurred. The Company did not incur any advertising and marketing expenses during the three and six months ended June 30, 2018 and 2017.

 

Real Property Operating Expenses

 

Real property operating expenses consist of property management fees, property insurance, real estate taxes, depreciation, repairs and maintenance fees, utilities and other expenses related to the Company’s rental properties.

 

Medical Related Consulting Services Costs

 

Costs of medical related consulting services includes the cost of internal labor and related benefits, travel expenses related to consulting services, subcontractor costs, other related consulting costs, and other overhead costs. Subcontractor costs were costs related to medical related consulting services incurred by our subcontractor, such as medical professional’s compensation and travel costs.

 

Development Services and Sales of Developed Products Costs

 

Costs of development services and sales of developed items includes inventory costs, materials and supplies costs, depreciation, internal labor and related benefits, other overhead costs and shipping and handling costs incurred.

 

Stock-based Compensation

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of Accounting Standards Codification (“ASC”) 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award. The Accounting Standards Codification also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

 

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is recognized over the period of services or the vesting period, whichever is applicable. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company’s compensation expense for unvested options to non-employees is re-measured at each balance sheet date and is being amortized over the vesting period of the options.

 

Income Taxes

 

The Company accounts for income taxes using the asset/liability method prescribed by ASC 740, “Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

 

 12

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Income Taxes (continued)

 

The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of June 30, 2018 and December 31, 2017, the Company had no significant uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Tax year that remains subject to examination is the years ended December 31, 2017, 2016 and 2015. The Company recognizes interest and penalties related to significant uncertain income tax positions in other expense. However, no such interest and penalties were recorded as of June 30, 2018 and December 31, 2017.

 

Foreign Currency Translation

 

The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company, AHS, Avalon RT 9, and GenExosome, is the U.S. dollar and the functional currency of Avalon Shanghai and Beijing GenExosome, is the Chinese Renminbi (“RMB”). For the subsidiaries whose functional currency is the RMB, result of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income/loss. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

All of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries. The Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

 

Asset and liability accounts at June 30, 2018 and December 31, 2017 were translated at 6.6225 RMB to $1.00 and at 6.5067 RMB to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rates. The average translation rates applied to the statements of operations for the six months ended June 30, 2018 and 2017 were 6.3701 RMB and 6.8745 RMB to $1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate.

 

Comprehensive Loss

 

Comprehensive loss is comprised of net loss and all changes to the statements of equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive loss for the six months ended June 30, 2018 and 2017 consisted of net loss and unrealized (loss) gain from foreign currency translation adjustment.

 

Per Share Data

 

ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

 

Basic net loss per share are computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common shares consist of the common shares issuable upon the exercise of common stock options and warrants (using the treasury stock method). Common stock equivalents are not included in the calculation of diluted net loss per share if their effect would be anti-dilutive. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact. The following table presents a reconciliation of basic and diluted net loss per share:

 

 13

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Per Share Data (continued)

 

   Three
Months
   Three
Months
   Six
Months
   Six
Months
 
   Ended   Ended   Ended   Ended 
   June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017 
Net loss available to Avalon GloboCare Corp. common shareholders for basic and diluted net loss per share of common stock  $(1,294,394)  $(430,508)  $(2,775,973)  $(979,841)
Weighted average common stock outstanding - basic and diluted   71,979,678    64,628,622    71,122,356    63,617,572 
Net loss per common share attributable to Avalon GloboCare Corp. common shareholders - basic and diluted  $(0.02)  $(0.01)  $(0.04)  $(0.02)

 

The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
Stock options   2,610,000    297,780    2,610,000    297,780 
Warrants   578,891        578,891     
Potentially dilutive securities   3,188,891    297,780    3,188,891    297,780 

 

Business Acquisition

 

The Company accounts for business acquisition in accordance with ASC No. 805, Business Combinations. The assets acquired and liabilities assumed from the acquired business are recorded at fair value, with the residual of the purchase price recorded as goodwill. The result of operations of the acquired business is included in the Company’s operating result from the date of acquisition.

 

Non-controlling Interest

 

As of June 30, 2018, Dr. Yu Zhou, director and Co-Chief Executive Officer of GenExosome, who owned 40% of the equity interests of GenExosome, which is not under the Company’s control.

 

Segment Reporting

 

The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the chief executive officer (“CEO”) and president of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. The Company has determined that it has three reportable business segments: real property operating segment, medical related consulting services segment, and development services and sales of developed products segment. These reportable segments offer different types of services and products, have different types of revenue, and are managed separately as each requires different operating strategies and management expertise.

 

Related Parties

 

Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all significant related party transactions.

 

 14

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Reclassification

 

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on the previously reported financial position, results of operations and cash flows.

 

Reverse Stock Split

 

The Company effected a one-for-four reverse stock split of its common stock on October 18, 2016. All share and per share information has been retroactively adjusted to reflect this reverse stock split.

 

Fiscal Year End

 

The Company has adopted a fiscal year end of December 31st.

 

Recent Accounting Pronouncements

 

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, “Inventory (Topic 330):   Simplifying the Measurement of Inventory”, which provides new guidance regarding the measurement of inventory.  The new guidance requires most inventory to be measured at the lower of cost or net realizable value. The standard defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The standard applies to companies other than those that measure inventory using last-in, first-out ("LIFO") or the retail inventory method.  The standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. Early application is permitted. Effective January 1, 2017, the Company adopted ASU No. 2015-11 and it had no material impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. This pronouncement is effective for reporting periods beginning after December 15, 2018 using a modified retrospective adoption method. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, “Modification Accounting for Share-Based Payment Arrangements”, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. Effective January 1, 2018, the Company adopted ASU No. 2017-09 and it had no material impact on the Company’s consolidated financial statements.

 

On December 22, 2017 the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the TCJA).  SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but for which they are able to determine a reasonable estimate, it must record a provisional amount in the financial statements. Provisional treatment is proper in light of anticipated additional guidance from various taxing authorities, the SEC, the FASB, and even the Joint Committee on Taxation. If a company cannot determine a provisional amount to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA. The Company has applied this guidance to its consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the Tax Cuts and Jobs Ac t on December 22, 2017, which changed the Company’s income tax rate from 35% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The ASU is effective for periods beginning after December 15, 2018, although early adoption is permitted. The Company does not anticipate that the adoption of this ASU will have a material impact on its consolidated financial statements.

 

In March 2018, the FASB issued ASU No. 2018-05 (“ASU 2018-05), Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This standard amends ASC 740, Income Taxes, to provide guidance on accounting for tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Company has decided to follow the guidance provided by ASU 2018-05 and will leave the one-year measurement period open to evaluate the impact of the Tax Act.

 

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.

 

NOTE 4 – ACQUISITION

 

The Company accounts for acquisition using the acquisition method of accounting, whereby the results of operations are included in the financial statements from the date of acquisition. The purchase price is allocated to the acquired assets and assumed liabilities based on their estimated fair values at the date of acquisition, and any excess is allocated to goodwill.

 

Effective October 25, 2017, pursuant to the Stock Purchase Agreement as discussed in elsewhere in this report, the Company’s majority owned subsidiary, GenExosome, acquired 100% of Beijing GenExosome.

 

In according to the acquisition, Beijing GenExosome’s assets and liabilities were recorded at their fair values as of the effective date, October 25, 2017, and the results of operations of Beijing GenExosome are consolidated with results of operations of the Company, starting on October 25, 2017.

 

 15

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 4 – ACQUISITION (continued)

 

The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Beijing GenExosome had occurred as of the beginning of the following periods:

 

   Three Months   Six Months 
   Ended   Ended 
   June 30, 2017   June 30, 2017 
Net revenues  $374,751   $441,037 
Net loss  $(441,384)  $(1,497,762)
Net loss attributable to Avalon GloboCare Corp. common shareholders  $(437,034)  $(1,490,116)
Net loss per share  $(0.01)  $(0.02)

 

Pro forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented and is not intended to be a projection of future results. 

 

NOTE 5 – INVENTORY

 

At June 30, 2018 and December 31, 2017, inventory consisted of the following:

 

   June 30, 2018   December 31, 2017 
Raw material  $20,479   $2,667 
Work-in-process   1,570     
    22,049    2,667 
Less: reserve for obsolete inventory        
   $22,049   $2,667 

 

NOTE 6 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

At June 30, 2018 and December 31, 2017, prepaid expenses and other current assets consisted of the following:

 

   June 30, 2018   December 31, 2017 
Prepaid professional fees  $638,133   $65,000 
Prepaid dues and subscriptions   4,169    49,167 
Other   65,623    35,546 
   $707,925   $149,713 

NOTE 7 – PREPAYMENT FOR LONG-TERM ASSETS

 

At June 30, 2018 and December 31, 2017, prepayment for long-term assets consisted of the following:

 

   June 30, 2018   December 31, 2017 
Prepayment for manufacturing equipment purchased  $67,044   $153,688 
   $67,044   $153,688 

 

 16

 

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 8 – PROPERTY AND EQUIPMENT

 

At June 30, 2018 and December 31, 2017, property and equipment consisted of the following:

 

   Useful life  June 30, 2018   December 31, 2017 
Laboratory equipment  5 Years  $118,887   $3,685 
Office equipment and furniture  3 – 10 Years   31,546    31,440 
Leasehold improvement  Shorter of useful life or lease term   24,122    24,551 
       174,555    59,676 
Less: accumulated depreciation      (31,329)   (11,647)
      $143,226   $48,029 

 

For the three months ended June 30, 2018 and 2017, depreciation expense of property and equipment amounted to $10,897 and $1,187, respectively, of which, $819 and $0 was included in real property operating expenses, $5,864 and $0 was included in costs of development services and sales of developed products, and $4,214 and $1,187 was included in other operating expenses, respectively.

 

For the six months ended June 30, 2018 and 2017, depreciation expense of property and equipment amounted to $20,578 and $1,213, respectively, of which, $1,638 and $0 was included in real property operating expenses, $9,632 and $0 was included in costs of development services and sales of developed products, and $9,308 and $1,213 was included in other operating expenses, respectively.

 

NOTE 9 – INVESTMENT IN REAL ESTATE

 

At June 30, 2018 and December 31, 2017, investment in real estate consisted of the following:

 

   Useful life  June 30, 2018   December 31, 2017 
Commercial real property building  39 Years  $7,708,571   $7,708,571 
Improvement  12 Years   165,155     
       7,873,726    7,708,571 
Less: accumulated depreciation      (148,425)   (84,814)
      $7,725,301   $7,623,757 

 

For the three months ended June 30, 2018 and 2017, depreciation expense of this commercial real property amounted to $31,806 and $32,943, which was included in real property operating expenses.

 

For the six months ended June 30, 2018 and 2017, depreciation expense of this commercial real property amounted to $63,611 and $32,943, which was included in real property operating expenses.

 

NOTE 10 – INTANGIBLE ASSETS

 

At June 30, 2018 and December 31, 2017, intangible assets consisted of the following:

 

   Useful Life  June 30, 2018   December 31, 2017 
Patents and other technologies  5 Years  $1,583,260   $2,593,478 
Goodwill          397,569 
Less: accumulated amortization      (163,786)   (86,449)
Less: impairment loss          (1,321,338)
      $1,419,474   $1,583,260 

 

For the three months ended June 30, 2018 and 2017, amortization expense amounted to $81,893 and $0, respectively. For the six months ended June 30, 2018 and 2017, amortization expense amounted to $163,786 and $0, respectively.

 

 17

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 

 

NOTE 10 – INTANGIBLE ASSETS (continued)

 

Amortization of intangible assets attributable to future periods is as follows:

 

Twelve-month periods ending June 30:   Amortization amount 
2019   $327,571 
2020    327,571 
2021    327,571 
2022    327,571 
2023    109,190 
    $1,419,474 

 

NOTE 11 – ACCRUED LIABILITIES AND OTHER PAYABLES

 

At June 30, 2018 and December 31, 2017, accrued liabilities and other payables consisted of the following:

 

   June 30, 2018   December 31, 2017 
Accrued professional fees  $151,825   $82,913 
Commercial real property building improvement payable   43,136     
Accrued dues and subscriptions   25,000     
Accrued payroll liability   6,649    6,767 
Other   73,178    34,384 
   $299,788   $124,064 

 

NOTE 12 – LOAN PAYABLE

 

On April 19, 2017, the Company entered into a loan agreement, providing for the issuance of a loan in the principal amount of $2,100,000. The term of the loan is one year. On May 3, 2018, the Company signed an extension agreement with the maturity date of March 31, 2019. The annual interest rate for the loan is 10%. The loan is guaranteed by the Company’s Chairman, Mr. Wenzhao Lu. The Company repaid principal of $600,000 and $500,000 in November 2017 and in April 2018, respectively.

 

As of June 30, 2018, the outstanding principal balance of the loan and related accrued and unpaid interest for the loan was $1,000,000 and $24,931, respectively.

 

On August 3, 2018, the Company signed an extension agreement for the loan with the maturity date of March 31, 2020 (See Note 22 – Loan Payable).

  

NOTE 13 – VAT AND OTHER TAXES PAYABLE

 

At June 30, 2018 and December 31, 2017, VAT and other taxes payable consisted of the following:

 

   June 30, 2018   December 31, 2017 
VAT payable  $7,848   $819 
Other taxes payable   4,668    2,178 
   $12,516   $2,997 

 

 18

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 

 

NOTE 14 – RELATED PARTY TRANSACTIONS

 

Medical Related Consulting Services Revenue from Related Parties and Accounts Receivable – Related Party

 

During the three and six months ended June 30, 2018 and 2017, medical related consulting services revenue from related parties was as follows:

 

   Three Months   Three Months   Six Months   Six Months 
   Ended   Ended   Ended   Ended 
   June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017 
Medical related consulting services provided to:                    
                     
Beijing Daopei (1)  $141,996   $   $141,996   $ 
Shanghai Daopei (2)               66,286 
Beijing Nanshan (3)       152,497        152,497 
   $141,996   $152,497   $141,996   $218,783 

 

(1)Beijing Daopei is a subsidiary of an entity whose chairman is Wenzhao Lu, the largest shareholder of the Company.

(2)Shanghai Daopei is a subsidiary of an entity whose chairman is Wenzhao Lu, the largest shareholder of the Company.

(3)Beijing Nanshan is a subsidiary of an entity whose chairman is Wenzhao Lu, the largest shareholder of the Company.

 

Accounts receivable – related party, net of allowance for doubtful accounts, at June 30, 2018 and December 31, 2017 amounted to $144,779 and $0, respectively, and no allowance for doubtful accounts is deemed to be required on accounts receivable – related party at June 30, 2018 and December 31, 2017.

 

Accrued Liabilities and Other Payables – Related Parties

 

At June 30, 2018 and December 31, 2017, the Company owed David Jin, its shareholder, chief executive officer, president and board member, of $21,563 and $15,387, respectively, for travel and other miscellaneous reimbursements, which have been included in accrued liabilities and other payable – related parties on the accompanying condensed consolidated balance sheets.

 

At June 30, 2018 and December 31, 2017, the Company owed Yu Zhou, co-chief executive officer of GenExosome, of $14,254 and $24,540, respectively, for accrued payroll, travel and other miscellaneous reimbursements, which have been included in accrued liabilities and other payable – related parties on the accompanying condensed consolidated balance sheets.

 

At June 30, 2018 and December 31, 2017, the Company owed Meng Li, its shareholder and chief operating officer, of $12,145 and $0, respectively, for travel and other miscellaneous reimbursements, which have been included in accrued liabilities and other payables – related parties on the accompanying condensed consolidated balance sheets.

 

At June 30, 2018 and December 31, 2017, the Company owed Luisa Ingargiola, its chief financial officer, of $732 and $0, respectively, for travel reimbursement, which have been included in accrued liabilities and other payables – related parties on the accompanying condensed consolidated balance sheets.

 

Due to Related Party

 

In connection with the acquisition discussed elsewhere in this report, the Company acquired Beijing GenExosome in cash payment of $450,000, which will be paid upon Beijing GenExosome recording the change in ownership with the Ministry of Commerce of the People’s Republic of China in accordance with the Interim Measures for Record Management regarding the Establishment and Change of Foreign-invested Enterprises (revised). On October 25, 2017, Dr. Yu Zhou, the former sole shareholder of Beijing GenExosome, was appointed to the board of directors of GenExosome and served as co-chief executive officer of GenExosome. As of June 30, 2018 and December 31, 2017, the unpaid acquisition consideration of $450,000 was payable to Dr. Yu Zhou, co-chief executive officer and board member of GenExosome, and reflected as due to related party on the accompanying condensed consolidated balance sheets.

 

 19

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 14 – RELATED PARTY TRANSACTIONS (continued)

 

Real Property Management Agreement

 

The Company pays a company, which is controlled by Wenzhao Lu, the Company’s largest shareholder and chairman of the Board of Directors, for the management of its commercial real property located in New Jersey. The monthly property management fee is $5,417. The term of the property management agreement is two years commencing on May 5, 2017 and will expire on May 4, 2019. For the three months ended June 30, 2018 and 2017, the management fee related to the property management agreement amounted to $16,251 and $10,834, respectively. For the six months ended June 30, 2018 and 2017, the management fee related to the property management agreement amounted to $32,502 and $10,834, respectively.

 

NOTE 15 – EQUITY

 

Shares Authorized

 

The Company is authorized to issue 10,000,000 shares of preferred stock and 490,000,000 shares of common shares with a par value of $0.0001 per share.

 

There are no shares of its preferred stock issued and outstanding as of June 30, 2018 and December 31, 2017.

 

There are 73,560,622 and 70,278,622 shares of its common stock issued as of June 30, 2018 and December 31, 2017, respectively.

 

There are 73,040,622 and 70,278,622 shares of its common stock outstanding as of June 30, 2018 and December 31, 2017, respectively.

 

Treasury Stock

 

The Company records treasury stock using the cost method. On March 27, 2018, the Company repurchased 520,000 shares of its common stock from a third party through a privately negotiated transaction at an aggregate price of $522,500, of which $2,500 was paid to an escrow agent as share repurchase cost.

 

Common Shares Sold for Cash

 

During the second quarter of 2018, the Company sold 3,107,000 shares of common stock at $1.75 per share to four investors pursuant to subscription agreements. The Company received net cash proceeds of $5,056,643, net of cash fee paid to an investment banking firm of $380,607. In connection with this private offering, the Company issued a total of 218,391 stock warrants to the placement agent for the transaction. Among these warrants, 151,235 warrants with a fixed exercise price of $1.62 per share, 5,960 warrants with a fixed exercise price of $1.85 per share, 36,750 warrants with a fixed exercise price of $1.90 per share, 24,446 warrants with a fixed exercise price of $2.24 per share. These warrants are exercisable at any time for a five-year period.

 

The offer, sale and issuance of the above securities was made to accredited investors and the Company relied upon the exemptions contained in Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated there under with regard to the sale. No advertising or general solicitation was employed in offering the securities. The offer and sales were made to accredited investors and transfer of the common stock issued was restricted by the Company in accordance with the requirements of the Securities Act of 1933, as amended. The accredited investors acknowledged that they were not aware of nor did it review any registration statement or prospectus filed by the Company with the SEC.

 

Common Shares Issued for Services

 

During the six months ended June 30, 2018, pursuant to consulting agreements, the Company issued an aggregate of 175,000 shares of common stock to 3 consulting companies for the services rendered and to be rendered. These shares were valued at $467,000, the fair market values on the grant dates using the reported closing share prices on the dates of grant, and the Company recorded stock-based compensation expense of $61,750 for the three and six months ended June 30, 2018 and recorded prepaid expense of $405,250 as of June 30, 2018 which will be amortized over the rest of corresponding service periods.

 

 20

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 15 – EQUITY (continued)

 

Common Shares Issued for Share Subscription Agreement

 

On March 3, 2017, the Company entered into and closed a Subscription Agreement with an accredited investor (the “March 2017 Accredited Investor”) pursuant to which the March 2017 Accredited Investor purchased 3,000,000 shares of the Company’s common stock (“March 2017 Shares”) for a purchase price of $3,000,000 (the “Purchase Price”).

 

The offer, sale and issuance of the above securities was made to an accredited investor and the Company relied upon the exemptions contained in Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated there under with regard to the sale. No advertising or general solicitation was employed in offering the securities. The offer and sale was made to an accredited investor and transfer of the common stock issued was restricted by the Company in accordance with the requirements of the Securities Act of 1933, as amended.

 

The Company, Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”), Beijing DOING Biomedical Technology Co., Ltd. (“DOING”), who is an unaffiliated third party, and the March 2017 Accredited Investor entered into a Share Subscription Agreement whereby the parties acknowledged, among other things, that DOING agreed to transfer the Purchase Price to Avalon Shanghai on behalf of the March 2017 Accredited Investor and the March 2017 Accredited Investor agreed to transfer the March 2017 Shares to DOING upon DOING completing the registration of the acquisition of the March 2017 Shares with the Beijing Commerce Commission (“BCC”) and obtaining an Enterprise Overseas Investment Certificate (the “Investment Certificate”) from BCC. If DOING fails to complete the registration and acquire the Investment Certificate within one year of the closing then Avalon Shanghai shall transfer $3,000,000 with an annual interest of 20% to DOING upon the request of DOING (the “BCC Repayment Obligation”). Further, Wenzhao Lu, a director and shareholder of the Company, and DOING entered into a Warranty Agreement. Pursuant to the Warranty Agreement, Mr. Lu agreed to (i) cause the Company to be liable to DOING in the event the March 2017 Accredited Investor defaults in its obligations to DOING, (ii) cause the March 2017 Accredited Investor to transfer the March 2017 Shares to DOING upon DOING’s receipt of the Investment Certificate from BCC, (iii) within three years from the date of the Warranty Agreement, DOING may require Mr. Lu to acquire the March 2017 Shares at $1.20 per share upon three-month notice, and (iv) in the event Mr. Lu does not acquire the March 2017 Shares within the three-month period, interest of 15% per annum will be added to the purchase price.

 

On April 23, 2018, the Company, Avalon Shanghai, DOING and March 2017 Accredited Investor entered into a Supplementary Agreement Related to Share Subscription pursuant to which Avalon Shanghai agreed to pay RMB 8,256,000 (approximately $1.3 million based on the exchange rate on April 23, 2018) to DOING representing one-third of the DOING Investment plus 20% interest for the one-third DOING Investment resulting in a reduction in the March 2017 Shares by one-third to 2,000,000 shares. Further, the parties agreed that the BCC Repayment Obligation shall be extended to July 31, 2018 at which time DOING may require that the Company pay $2,000,000 plus 20% interest to DOING resulting in the cancellation of the remaining March 2017 Shares. However, DOING may, in its discretion, require that the remaining March 2017 Shares be transferred to a new nominal holder who shall pay the required subscription price, which funds will, in turn, be used to satisfy the BCC Repayment Obligation. The $1 million BCC Repayment Obligation and related interest was paid in full in May 2018.

 

As of June 30, 2018, the Company is obligated to DOING in the remaining principal amount of $2,000,000. The BCC Repayment Obligation is a debt obligation arising other than in the ordinary course of business, which constitutes a direct financial obligation of the Company. The Company recorded the $2,000,000 as refundable deposit as of June 30, 2018 on the accompanying consolidated balance sheets, which was an earnest money from DOING in connection with the 2,000,000 common stock issued to the March 2017 Accredited Investor who is an entrusted party that holds the shares on behalf of DOING.

 

As of June 30, 2018 the Company is subject to the contingency of paying interest liability for the remaining $2,000,000 BCC Repayment Obligation upon the request of DOING. The Company records accrual for such contingency based upon the assessment of the probability of occurrence and, where determinable, an estimate of the liability. Management may consider many factors in making these assessments including past history and the specifics of this matter. The Company did not accrue any interest for the remaining $2,000,000 BCC Repayment Obligation since management has evaluated the claim and concluded the likelihood of the claim is remote.

 

On August 8, 2018, DOING and the March 2017 Accredited Investor sold the remaining 2,000,000 shares of common stock to a third party in consideration of $2,000,000. Therefore, the BCC Repayment Obligation was satisfied in full and the Company has no further obligation for DOING and the March 2017 Accredited Investor (See Note 22 – DOING Biomedical Technology Co., Ltd. Investment)

 

 21

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 15 – EQUITY (continued)

 

Options

 

The following table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at June 30, 2018:

 

Options Outstanding   Options Exercisable 
Range of Exercise Price   Number Outstanding at June 30, 2018   Range of Weighted Average Remaining Contractual Life (Years)   Weighted Average Exercise Price   Number Exercisable at June 30, 2018   Weighted Average Exercise Price 
$0.50    2,000,000    8.62   $0.50    944,444   $0.50 
 1.49    60,000    3.83    1.49    60,000    1.49 
 1.00    230,000    2.77    1.00    210,000    1.00 
 2.50    120,000    4.51    2.50    60,000    2.50 
 1.00    180,000    2.84    1.00    0    1.00 
 2.30    20,000    4.93    2.30    10,000    2.30 
$0.50–2.50    2,610,000    7.38   $0.71    1,284,444   $0.74 

 

Stock options granted to employee and director

 

Employee and director stock option activities for the six months ended June 30, 2018 were as follows:

 

   Number of Options   Weighted Average Exercise Price 
Outstanding at December 31, 2017   2,110,000   $0.54 
Granted   140,000    2.47 
Exercised        
Outstanding at June 30, 2018   2,250,000    0.66 
Options exercisable at June 30, 2018   1,104,444   $0.69 
Options expected to vest   1,145,556   $0.63 

 

The fair values of these options granted to employee and director during the six months ended June 30, 2018 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

Dividend rate 0
Terms (in years) 5.0
Volatility 175.94 - 185.28%
Risk-free interest rate 2.25% - 2.78%

 

The aggregate fair value of the options granted to employee and director during the six months ended June 30, 2018 was $337,523, of which, for the three and six months ended June 30, 2018, $79,193 and $151,480, respectively, has been reflected as compensation and related benefits on the accompanying unaudited condensed consolidated statements of operations because the options were fully earned and non-cancellable.

 

As of June 30, 2018, the aggregate value of nonvested employee and director options was $1,575,471, which will be amortized as stock-based compensation expense as the options are vesting, over the remaining 1.58 years.

 

The aggregate intrinsic values of the employee and director stock options outstanding and the employee and director stock options exercisable at June 30, 2018 was $4,702,100 and $2,272,599, respectively.

 

 22

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 15 – EQUITY (continued)

 

Options (continued)

 

Stock options granted to employee and director (continued)

 

A summary of the status of the Company’s nonvested employee and director stock options granted as of June 30, 2018 and changes during the six months ended June 30, 2018 is presented below:

 

    Number of Options   Weighted Average Exercise Price   Grant Date Fair Value 
Nonvested at December 31, 2017    1,428,889   $0.51   $1,876,079 
Granted    140,000    2.47    337,523 
Vested    (423,333)   (0.85)   (638,131)
Forfeited             
Nonvested at June 30, 2018    1,145,556   $0.63   $1,575,471 

 

Stock options granted to non-employee

 

Non-employee stock option activities for the six months ended June 30, 2018 were as follows:

 

   Number of Options   Weighted Average Exercise Price 
Outstanding at December 31, 2017   180,000   $1.00 
Granted   180,000    1.00 
Exercised        
Outstanding at June 30, 2018   360,000    1.00 
Options exercisable at June 30, 2018   180,000   $1.00 
Options expected to vest   180,000   $1.00 

 

Stock-based compensation expense associated with stock options granted to non-employee is recognized as the stock options vest. The stock-based compensation expense related to non-employee will fluctuate as the fair value of the Company’s common stock fluctuates. Stock-based compensation expense associated with stock options granted to non-employee amounted to $172,305 and $383,042 for the three and six months ended June 30, 2018, respectively.

 

The fair values of these non-employee options vested in the six months ended June 30, 2018 and nonvested non-employee options as of June 30, 2018 were estimated using the Black-Scholes option-pricing model with the following assumptions:

 

Dividend rate 0
Terms (in years) 2.51 - 3.0
Volatility 172.87% - 188.29%
Risk-free interest rate 2.29% - 2.66%

 

As of June 30, 2018, the aggregate value of nonvested non-employee options was $303,319, which will be amortized as stock-based compensation expense over the remaining 0.33 years. The aggregate intrinsic values of the non-employee stock options outstanding and the non-employee stock options exercisable at June 30, 2018 was $630,000 and $315,000, respectively.

 

 23

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 15 – EQUITY (continued)

 

Options (continued)

 

Stock options granted to non-employee (continued)

 

A summary of the status of the Company’s nonvested non-employee stock options granted as of June 30, 2018 and changes during the six months ended June 30, 2018 is presented below:

 

    Number of Options   Weighted Average Exercise Price   Fair Value at June 30, 2018 
Nonvested at December 31, 2017    180,000   $1.00      
Granted    180,000    1.00      
Vested    (180,000)   (1.00)     
Forfeited              
Nonvested at June 30, 2018    180,000   $1.00   $454,979 

 

Warrants

 

In connection with equity raise, the Company issued a total of 578,891 stock warrants at various fixed exercise price to an investment banking firm. These warrants are exercisable at any time for a five-year period. The fair value of these warrants was debited to the account of additional paid-in capital and was fully offset by the corresponding credit to the additional paid-in capital, resulting in no change in net equity of the balance sheet.

 

Stock warrants activities during the six months ended June 30, 2018 were as follows:

 

   Number of Warrants   Weighted Average Exercise Price 
Outstanding at December 31, 2017      $ 
Issued   578,891    1.28 
Exercised        
Outstanding and exercisable at June 30, 2018   578,891    1.28 

 

The aggregate intrinsic value of the warrants outstanding and exercisable at June 30, 2018 was $850,840.

 

The following table summarizes the shares of the Company’s common stock issuable upon exercise of warrants outstanding and exercisable at June 30, 2018:

 

Warrants Outstanding and Exercisable  
Range of Exercise Price     Number Outstanding at June 30, 2018     Range of Weighted Average Remaining Contractual Life (Years)     Weighted Average Exercise Price  
$ 1.00       360,500       4.75     $ 1.00  
  1.62       151,235       4.81       1.62  
  1.85       5,960       4.82       1.85  
  1.90       36,750       4.85       1.90  
  2.24       24,446       4.90       2.24  
$ 1.00–2.24       578,891       4.78     $ 1.28  

 

NOTE 16 - STATUTORY RESERVE

 

Avalon Shanghai and Beijing GenExosome operate in the PRC, are required to reserve 10% of their net profit after income tax, as determined in accordance with the PRC accounting rules and regulations. Appropriation to the statutory reserve by the Company is based on profit arrived at under PRC accounting standards for business enterprises for each year.

 

The profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is made to the statutory reserve. Appropriation to the statutory reserve must be made before distribution of dividends to shareholders. The appropriation is required until the statutory reserve reaches 50% of the registered capital. This statutory reserve is not distributable in the form of cash dividends. The Company did not make any appropriation to statutory reserve for Avalon Shanghai and Beijing GenExosome during the six months ended June 30, 2018 as they incurred net losses in the period.

 

 24

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 17 - CONCENTRATIONS

 

Customers

 

The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the three and six months ended June 30, 2018 and 2017.

 

   Three Months   Three Months   Six Months   Six Months 
   Ended   Ended   Ended   Ended 
Customer  June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017 
A (Beijing Daopei, a related party)   29%   *    18%   * 
B (Beijing Nanshan, a related party)   0%   41%   0%   35%
C (Shanghai Daopei, a related party)   0%   *    0%   15%
D   16%   14%   20%   12%
E   11%   *    13%   * 
F   *    *    11%   * 

 

*Less than 10%

 

Two customers, whose outstanding receivable accounted for 10% or more of the Company’s total outstanding accounts receivable and accounts receivable – related party and tenants receivable at June 30, 2018, accounted for 74.9% of the Company’s total outstanding accounts receivable and accounts receivable – related party and tenants receivable at June 30, 2018.

 

Two customers, whose outstanding receivable accounted for 10% or more of the Company’s total outstanding accounts receivable and tenants receivable at December 31, 2017, accounted for 48.9% of the Company’s total outstanding accounts receivable and tenants receivable at December 31, 2017.

 

Suppliers

 

No supplier accounted for 10% or more of the Company’s purchase during the three and six months ended June 30, 2018 and 2017.

 

One supplier accounted for 100% of the Company’s total outstanding accounts payable at June 30, 2018.

 

One supplier accounted for 100% of the Company’s total outstanding accounts payable at December 31, 2017.

 

Concentrations of Credit Risk

 

At June 30, 2018 and December 31, 2017, cash balances in the PRC are $1,318,799 and $1,327,009, respectively, are uninsured. The Company has not experienced any losses in PRC bank accounts and believes it is not exposed to any risks on its cash in PRC bank accounts.

 

The Company maintains its cash in United States bank and financial institution deposits that at times may exceed federally insured limits. At June 30, 2018 and December 31, 2017, the Company’s cash balances in United States bank accounts had approximately $1,507,000 and $1,162,000 in excess of the federally-insured limits, respectively. The Company has not experienced any losses in its United States bank accounts through and as of the date of this report.

 

NOTE 18 – SEGMENT INFORMATION

 

For the three and six months ended June 30, 2018, the Company operated in three reportable business segments - (1) the real property operating segment, (2) the medical related consulting services segment, and (3) the performing development services for hospitals and other customers and sales of developed products to hospitals and other customers segment. For the three and six months ended June 30, 2017, the Company operated in two reportable business segments - (1) the real property operating segment, and (2) the medical related consulting services segment. The Company’s reportable segments are strategic business units that offer different services and products. They are managed separately based on the fundamental differences in their operations. Information with respect to these reportable business segments for the three and six months ended June 30, 2018 and 2017 was as follows:

 

 25

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 18 – SEGMENT INFORMATION (continued)

 

   Three Months   Three Months   Six Months   Six Months 
   Ended   Ended   Ended   Ended 
   June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017 
Revenues                    
Real property operating  $278,872   $222,254   $575,495   $222,254 
Medical related consulting services – related parties   141,996    152,497    141,996    218,783 
Development services and sales of developed products   75,225        86,515     
    496,093    374,751    804,006    441,037 
Depreciation and amortization                    
Real property operating   32,625    32,943    65,249    32,943 
Medical related consulting services   3,991    1,187    7,997    1,213 
Development services and sales of developed products   87,980        174,729     
    124,596    34,130    247,975    34,156 
Interest expense                    
Real property operating   24,932    42,000    261,918    42,000 
Medical related consulting services                
Development services and sales of developed products                
    24,932    42,000    261,918    42,000 
Net income (loss)                    
Real property operating   5,617    (1,234)   (232,083)   (1,234)
Medical related consulting services   16,456    54,782    (157,018)   (161,789)
Development services and sales of developed products   (196,896)       (297,028)    
Other (a)   (1,168,992)   (484,056)   (2,208,655)   (816,818)
   $(1,343,815)  $(430,508)  $(2,894,784)  $(979,841)

 

Identifiable long-lived tangible assets at June 30, 2018 and December 31, 2017  June 30, 2018   December 31, 2017 
Real property operating  $7,745,277   $7,645,371 
Medical related consulting services   12,507    20,558 
Development services and sales of developed products   110,743    5,857 
   $7,868,527   $7,671,786 

 

Identifiable long-lived tangible assets at June 30, 2018 and December 31, 2017  June 30, 2018   December 31, 2017 
United States  $7,746,017   $7,646,270 
China   122,510    25,516 
   $7,868,527   $7,671,786 

 

(a)The Company does not allocate any general and administrative expense of its being a public company activities to its reportable segments as these activities are managed at a corporate level.

 

 26

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 19 – NONCONTROLLING INTEREST

 

As of June 30, 2018, Dr. Yu Zhou, director and Co-Chief Executive Officer of GenExsome, who owned 40% of the equity interests of GenExosome, which is not under the Company’s control. The following is a summary of noncontrolling interest activities in the six months ended June 30, 2018.

 

   Amount 
Noncontrolling interest at December 31, 2017  $(585,394)
Net loss attributable to noncontrolling interest   (118,811)
Foreign currency translation adjustment attributable to noncontrolling interest   41 
Noncontrolling interest at June 30, 2018  $(704,164)

 

NOTE 20 – COMMITMENTS AND CONTINCENGIES

 

Severance Payments

 

The Company has employment agreements with certain employees that provided severance payments upon termination of employment under certain circumstances, as defined in the applicable agreements. The Company has estimated its possible severance payments of approximately $528,900 as of June 30, 2018 and December 31, 2017, which have not been reflected in its condensed consolidated financial statements since the Company concluded that the likelihood is remote at this moment.

 

Real Property Management Agreement

 

On June 6, 2017, the Company entered into a two-year real property management agreement with a related party which agreed to provide real property management service to the Company. In accordance with this agreement, the Company pays a flat fee of $5,417 per month commencing on May 5, 2017 (See Note 14 - Real Property Management Agreement).

 

Underwritten and Financial Advisory Service Agreement

 

In October 2017, the Company entered into a service agreement with an investment bank with respect to a planned underwritten public offering and NASDAQ listing advisory service. In accordance with this agreement, the Company pays:

 

a)Success Fees:

 

Debt Financing: For any debt financing: (i) a Success Fee, payable in cash, equal to 3% of the gross proceeds received by the Company from such closing; plus (ii) warrants in the entity financed, equal to 3% of the gross proceeds received by the Company from such closing, divisible by and exercisable at a strike price equal to 100% of the fair market value of the common stock for the Company as of the date of the closing of the transaction, in whole or in part, at any time within 5 years from issuance.

 

Equity Financing: For any equity investment into the Company: (i) a Success Fee, payable in cash, equal to 7% of the gross proceeds received by the Company from such closing; plus (ii) warrants in the entity financed, equal to 7% of the gross proceeds received by the Company from such closing, divisible by and exercisable at a strike price equal to 100% of the fair market value of the common stock for the Company as of the date of the closing of the transaction, in whole or in part, at any time within 5 years from issuance.

 

b)Expenses: The Company agrees to reimburse for all reasonable out-of-pocket invoiced expenses.

 

c)Advisory Fees: (i) an initial advisory fee of $30,000 upon the execution of this agreement; plus (ii) an additional advisory fee of $30,000 upon the issuance of a conditional approval letter to list on NASDAQ.

 

 27

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 20 – COMMITMENTS AND CONTINCENGIES (continued)

 

Education Program Agreement

 

On February 12, 2018, the Company entered into an education program agreement with a third party. The term of this agreement is one year. In accordance to this agreement, the Company pays an annual fee of $200,000. At June 30, 2018, the accrued fee related to the agreement was $25,000, which was included in accrued liabilities and other payables on the accompanying condensed consolidated balance sheets.

 

Operating Leases

 

Beijing GenExosome Office Lease

 

In March 2017, Beijing GenExosome signed an agreement to lease its facilities and equipment under operating lease. Pursuant to the signed lease, the annual rent is RMB 41,000 (approximately $6,000). The term of the lease is one year commencing on March 15, 2017 and expired on March 14, 2018. Beijing GenExosome renewed the lease in fiscal 2018. Pursuant to the renewed lease, the annual rent is RMB 41,000 (approximately $6,000) and the renewed lease expires on March 14, 2019. During the three and six months ended June 30, 2018, rent expense related to the operating lease amounted to approximately $1,600 and $3,200, respectively. Future minimum rental payment required under this operating lease is as follows:

 

Twelve-month Period Ending June 30:   Amount 
 2019   $4,385 

 

GenExosome Office Lease

 

In December 2017, GenExosome signed an agreement to lease its office space in Ohio, United States under operating lease. Pursuant to the executed lease, the monthly rent is $300. The term of the lease is one year commencing on January 1, 2018 and expires on December 31, 2018. During the three and six months ended June 30, 2018, rent expense related to the operating lease amounted to $900 and $1,800, respectively. Future minimum rental payment required under this operating lease is as follows:

 

Twelve-month Period Ending June 30:   Amount 
 2019   $1,800 

 

Avalon Shanghai Office Lease

 

On January 19, 2017, Avalon Shanghai entered into a lease for office space in Beijing, China with a third party (the “Beijing Office Lease”). Pursuant to the Beijing Office Lease, the monthly rent is RMB 50,586 (approximately $8,000) with a required security deposit of RMB 164,764 (approximately $25,000). In addition, Avalon Shanghai needs to pay monthly maintenance fees of RMB 4,336 (approximately $700). The term of the Beijing Office Lease is 26 months commencing on January 1, 2017 and will expire on February 28, 2019 with two months of free rent in the months of December 2017 and February 2019. For the three months ended June 30, 2018 and 2017, rent expense and maintenance fees related to the Beijing Office Lease amounted to approximately $23,000 and $18,500, respectively. For the six months ended June 30, 2018 and 2017, rent expense and maintenance fees related to the Beijing Office Lease amounted to approximately $49,000 and $42,500, respectively. Future minimum rental payment required under the Beijing Office Lease is as follows:

 

Twelve-month Period Ending June 30:   Amount 
 2019   $58,707 

 

 28

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 21 – RESTRICTED NET ASSETS

 

A portion of the Company’s operations are conducted through its PRC subsidiaries, which can only pay dividends out of their retained earnings determined in accordance with the accounting standards and regulations in the PRC and after they have met the PRC requirements for appropriation to statutory reserve. In addition, a portion of the Company’s businesses and assets are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the ability of the Company’s PRC subsidiaries to transfer their net assets to the Parent Company through loans, advances or cash dividends.

 

Schedule I of Article 5-04 of Regulation S-X requires the condensed financial information of the parent company to be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of this test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets of its consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company in the form of loans, advances or cash dividends without the consent of a third party.

 

The Company’s PRC subsidiaries’ net assets as of June 30, 2018 and December 31, 2017 did not exceed 25% of the Company’s consolidated net assets. Accordingly, Parent Company’s condensed financial statements have not been required in accordance with Rule 5-04 and Rule 12-04 of SEC Regulation S-X.

 

NOTE 22 – SUBSEQUENT EVENTS

 

Avactis Biosciences

 

On July 18, 2018, the Company formed a wholly owned subsidiary, Avactis Biosciences, Inc., a Nevada corporation, which will be focused on accelerating commercial activities related to Chimeric Antigen Receptor (CAR)-T technologies. The new subsidiary is designed to integrate and optimize our global scientific and clinical resources to further advance the use of CAR-T to treat certain cancers.

 

Letter of Intent with Arbele Limited, a Hong Kong Company

 

On July 30, 2018, the Company signed a Letter of Intent with Arbele Limited, a Hong Kong Company for a proposed strategic partnership agreement. The purpose of the proposed Transaction is to form a joint venture company, AVAR (China) Biotherapeutics (“JV”), to develop, manufacture, and commercializing CAR-T immunotherapy for treating cancer patients in China, utilizing intellectual property from Arbele and the clinical platform of the LuDaopei Medical Group in China. The intention of the parties is to enter into definitive agreements by December 31, 2018. The Company paid a $100,000 fee to Arbele for a five-month exclusive right to complete the definitive agreements for the transaction.

 

Strategic Partnership with Weill Cornell Medical College

 

On August 6, 2018, the Company entered into a strategic partnership agreement with Weill Cornell’s cGMP Cellular Therapy Facility and Laboratory for Advanced Cellular Engineering headed by Dr. Yen-Michael Hsu. This strategic partnership aims to co-develop bio-production and standardization procedures in procurement, storage, processing, clinical study protocols, and bio-banking for Chimeric Antigen Receptor (CAR)-T therapy, in accordance with the Foundation of Accreditation for Cellular Therapy (FACT) and American Association of Blood Banks (AABB) standards. This partnership also includes a CAR-T education program to support and foster collaborative research and training programs for scientists and clinicians between Weill Cornell and Hebei Yanda LuDaopei Hospital, which is our main affiliated clinical facility as well as the world’s single largest medical institution in CAR-T therapy.

  

 29

 

AVALON GLOBOCARE CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018

 

NOTE 22 – SUBSEQUENT EVENTS (continued)

 

Changes to Board of Directors

 

On July 5, 2018, William B. Stilley, III was appointed to the Board of Directors. Mr. Stilley will receive options to acquire 40,000 shares of common stock per year commencing January 1, 2019 at an exercise price equal to the closing price on December 31st of the prior year. The options shall vest in equal amounts quarterly and shall be exercisable for a period of five years. For 2018, the Company granted Mr. Stilley options to acquire 20,000 shares of common stock at an exercise price of $2.30 for a term of five years with 10,000 options vesting immediately and the balance vesting October 1, 2018. In addition, Mr. Stilley will receive $7,500 per quarter for serving as chairman of the audit committee commencing upon formation.

 

On July 9, 2018, Meng Li resigned as a director of the Company. Ms. Li will continue to serve as our Chief Operating Officer and Secretary and will also serve as an observer to the Board of Directors without voting capacity.

 

On July 30, 2018, Steven A. Sanders was appointed to the Board of Directors. Mr. Sanders will receive options to acquire 40,000 shares of common stock per year commencing January 1, 2019 at an exercise price equal to the closing price on December 31st of the prior year. The options shall vest in equal amounts quarterly and shall be exercisable for a period of five years. For 2018, the Company granted Mr. Sanders options to acquire 20,000 shares of common stock at an exercise price of $2.80 for a term of five years with 10,000 options vesting immediately and the balance vesting October 1, 2018. In addition, Mr. Sanders will receive $5,000 per quarter for serving as a member of our audit committee and nominating and corporate governance committee, respectively, commencing upon formation.

 

On July 30, 2018, Steven P. Sukel resigned as a director of the Company.

 

DOING Biomedical Technology Co., Ltd. Investment

 

On March 3, 2017, the Company entered into and closed a Subscription Agreement with an accredited investor (the “March 2017 Accredited Investor”) pursuant to which the March 2017 Accredited Investor purchased 3,000,000 shares of the Company’s common stock (“March 2017 Shares”) for a purchase price of $3,000,000 (the “DOING Investment”). The Company, Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”), Beijing DOING Biomedical Technology Co., Ltd. (“DOING”), and the March 2017 Accredited Investor entered into a Share Subscription Agreement whereby the parties acknowledged, among other things, that DOING agreed to transfer the purchase price to Avalon Shanghai on behalf of the March 2017 Accredited Investor and the March 2017 Accredited Investor agreed to transfer the March 2017 Shares to DOING upon DOING completing the registration of the acquisition of the March 2017 Shares with the Beijing Commerce Commission (“BCC”), and obtaining an Enterprise Overseas Investment Certificate (the “Investment Certificate”) from BCC. If DOING fails to complete the registration and acquire the Investment Certificate within one year of the closing then Avalon Shanghai was required to transfer $3,000,000 with interest of 20% to DOING upon the request of DOING (the “BCC Repayment Obligation”). Further, Wenzhao Lu, the Company’s director and major shareholder, and DOING entered into a Warranty Agreement. Pursuant to the Warranty Agreement, Mr. Wenzhao agreed to (i) cause us to be liable to DOING in the event the March 2017 Accredited Investor defaults in its obligations to DOING, (ii) cause the March 2017 Accredited Investor to transfer the March 2017 Shares to DOING upon DOING’s receipt of the Investment Certificate from BCC, (iii) within three years from the date of the Warranty Agreement, DOING may require Mr. Wenzhao to acquire the March 2017 Shares at $1.20 per share upon three-month notice, and (iv) in the event Mr. Wenzhao does not acquire the March 2017 Shares within the three month period, interest of 15% per annum will be added to the purchase price. 

 

On April 23, 2018, the Company, Avalon Shanghai, DOING and March 2017 Accredited Investor entered into a Supplementary Agreement Related to Share Subscription pursuant to which Avalon Shanghai agreed to pay RMB 8,256,000 (approximately $1.3 million based on the exchange rate on April 23, 2018) to DOING representing one-third of the DOING Investment plus 20% interest for the one-third DOING Investment resulting in a reduction in the March 2017 Shares by one-third to 2,000,000 shares. Further, the parties agreed that the BCC Repayment Obligation shall be extended to July 31, 2018 at which time DOING may require that the Company pay $2,000,000 plus 20% interest to DOING resulting in the cancellation of the remaining March 2017 Shares. However, DOING may, in its discretion, require that the remaining March 2017 Shares be transferred to a new nominal holder who shall pay the required subscription price, which funds will, in turn, be used to satisfy the BCC Repayment Obligation (See Note 15 - Common Shares Issued for Share Subscription Agreement).

 

On August 8, 2018, DOING and the March 2017 Accredited Investor sold the remaining 2,000,000 shares of common stock to a third party in consideration of $2,000,000. Therefore, the BCC Repayment Obligation was satisfied in full and the Company has no further obligation for DOING and the March 2017 Accredited Investor.

 

Loan Payable

 

On August 3, 2018, the Company signed an extension agreement for its loan with the maturity date of March 31, 2020 (See Note 12).

 

Common Shares Sold for Cash

 

On August 13, 2018, the Company sold 939,450 shares of common stock at $2.25 per share to investors pursuant to subscription agreements. The Company receive gross proceeds of $2,113,763.

 

 30

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2018 and 2017 should be read in conjunction with our unaudited condensed consolidated financial statements and related notes to those unaudited condensed consolidated financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Special Note Regarding Forward-Looking Statements and Business sections in our Form 10-K as filed with the Securities and Exchange Commission on March 13, 2018. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

The results of operations related to the development services and sales of developed products segment are included in our results of operations commencing from October 25, 2017 (the effective date of the acquisition), which is the result of a business combination, that closed on October 25, 2017 (and reported in an 8-K filed on October 26, 2017).

 

Unless otherwise indicated, references to the “Company”, “us” or “we” refer to Avalon GloboCare Corp. and its consolidated subsidiaries.

 

Overview

 

We are dedicated to integrating and managing global healthcare services and resources, as well as empowering high-impact biomedical innovations and technologies to accelerate their clinical applications. Operating through two major platforms, namely “Avalon Cell”, and “Avalon Rehab”, our “Technology + Service” ecosystem covers the areas of regenerative medicine, cell-based immunotherapy, exosome technology, telemedicine with medical second opinion/referral services, as well as rehabilitation medicine.

 

In addition, we are engaged in the development of exosome technology to improve diagnosis and management of diseases. Exosomes are tiny, subcellular, membrane-bound vesicles in diameter of 30-150 nm that are released by almost all cell types and that can carry membrane and cellular proteins, as well as genetic materials that are representative of the cell of origin. Profiling various bio-molecules in exosomes may serve as useful biomarkers for a wide variety of diseases. Our research kits are designed to be used by researchers for biomarker discovery and clinical diagnostic development, and the advancement of targeted therapies. Currently, research kits and service are available to isolate exosomes or extract exosomal RNA/protein from serum/plasma, urine and saliva samples. We are seeking to decode proteomic and genomic alterations underlying a wide-range of pathologies, thus allowing for the introduction of novel non-invasive “liquid biopsies”. Our mission is focused toward diagnostic advancements in the fields of oncology, infectious diseases and fibrotic diseases, and discovery of disease-specific exosomes to provide disease origin insight necessary to enable personalized clinical management. There is no guarantee that we will be able to successfully achieve our stated mission.

 

We currently produce revenue by providing medical related consulting services in advanced areas of immunotherapy and second opinion/referral services through Avalon Healthcare System, Inc. (“AHS”) and Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”). Our medical related consulting services include research studies; executive education; daily online executive briefings; tailored expert advisory services; and consulting and management services. Through our services we attempt to focus our clients on important problems by providing an analysis of the evolving healthcare industry and the methods prevalent in the industry to solve those problems through counsel, business planning and support.

 

Further, we produce revenue by performing development services for hospitals and other customers and sales of developed products to hospitals and other customers through GenExosome Technologies Inc. (“GenExosome”) and Beijing Jieteng (GenExosome) Biotech Co., Ltd. (“Beijing GenExosome”).

 

We also own and operate rental real property in New Jersey.

 

On May 29, 2018, Avalon Shanghai entered into a Joint Venture Agreement with Jiangsu Unicorn Biological Technology Co., Ltd., or Unicorn, pursuant to which the parties agreed to establish a company named Airuikang Biological Technology Co., Ltd., or ABT, which will be owned 60% by Unicorn and 40% by Avalon Shanghai. Within two years of execution of the Joint Venture Agreement, Unicorn shall invest cash into ABT in an amount not less than RMB 8,000,000 Yuan (approximately $1.2 million) and the premises of the laboratories of Nanjing Hospital of Chinese Medicine for exclusive use by the ABT, and Avalon Shanghai shall invest cash into ABT in an amount not less than 10,000,000 Yuan (approximately $1.5 million). The board of directors of ABT shall consist of five members with Unicorn appointing three members and Avalon Shanghai appointing two members. ABT will be focused on cell preparation, third party testing, biological sample repository for commercial and scientific research purposes and the clinical transformation of scientific achievements. 

 

On July 18, 2018, the Company formed a wholly owned subsidiary, Avactis Biosciences, Inc., a Nevada corporation, which will be focused on accelerating commercial activities related to Chimeric Antigen Receptor (CAR)-T technologies. The new subsidiary is designed to integrate and optimize our global scientific and clinical resources to further advance the use of CAR-T to treat certain cancers.

 

On July 30, 2018, the Company signed a Letter of Intent with Arbele Limited, a Hong Kong Company for a proposed strategic partnership agreement. The purpose of the proposed Transaction is to form a joint venture company, AVAR (China) Biotherapeutics (“JV”), to develop, manufacture, and commercializing CAR-T immunotherapy for treating cancer patients in China, utilizing intellectual property from Arbele and the clinical platform of the LuDaopei Medical Group in China. The intention of the parties is to enter into definitive agreements by December 31, 2018. The Company paid a $100,000 fee to Arbele for a five-month exclusive right to complete the definitive agreements for the transaction.

 

On August 6, 2018, the Company entered into a strategic partnership agreement with Weill Cornell’s cGMP Cellular Therapy Facility and Laboratory for Advanced Cellular Engineering headed by Dr. Yen-Michael Hsu. This strategic partnership aims to co-develop bio-production and standardization procedures in procurement, storage, processing, clinical study protocols, and bio-banking for Chimeric Antigen Receptor (CAR)-T therapy, in accordance with the Foundation of Accreditation for Cellular Therapy (FACT) and American Association of Blood Banks (AABB) standards. This partnership also includes a CAR-T education program to support and foster collaborative research and training programs for scientists and clinicians between Weill Cornell and Hebei Yanda LuDaopei Hospital, which is our main affiliated clinical facility as well as the world’s single largest medical institution in CAR-T therapy.

 

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The value of the Renminbi (“RMB”), the main currency used in China, fluctuates and is affected by, among other things, changes in China’s political and economic conditions. The conversion of RMB into foreign currencies such as the U.S. dollar have generally been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to the allowance for doubtful accounts, reserve for obsolete inventory, the useful life of property and equipment and investment in real estate and intangible assets, assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances, and valuation of stock-based compensation.

 

We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the unaudited condensed consolidated financial statements.

 

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an update Accounting Standards Update (“ASU”) (“ASU 2014-09”) establishing Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard, which is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. We adopted this standard in 2018 using the modified retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Based on an evaluation of the impact ASU 2014-09 will have on our sources of revenue, we have concluded that ASU 2014-09 did not have a material impact on the process for, timing of, and presentation and disclosure of revenue recognition from customers.

 

Types of revenue:

 

  Rental revenue from leasing commercial property under operating leases with terms of generally three years or more.

 

  Service fees under consulting agreements with related parties to provide medical related consulting services to our clients. We are paid for our services by our clients pursuant to the terms of the written consulting agreements. Each contract calls for a fixed payment.

 

  Service fees under agreements to perform development services for hospitals and other customers. We do not perform contracts that are contingent upon successful results.

 

  Sales of developed products to hospitals and other customers.

 

Revenue recognition criteria:

 

  We recognize rental revenue from our commercial leases on a straight-line basis over the life of the lease including rent holidays, if any. Straight-line rent receivable consists of the difference between the tenants’ rents calculated on a straight-line basis from the date of lease commencement over the remaining terms of the related leases and the tenants’ actual rents due under the lease agreements and is included in tenants receivable in the accompanying consolidated balance sheets. Revenues associated with operating expense recoveries are recognized in the period in which the expenses are incurred.

 

  We recognize revenue by providing medical related consulting services under written service contracts with our customers. Revenue related to our service offerings is recognized as the services are performed and amounts are earned and all other elements of revenue recognition have been satisfied. Prepayments, if any, received from customers prior to the services being performed are recorded as advance from customers. In these cases, when the services are performed, the amount recorded as advance from customers is recognized as revenue.

 

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  Revenue from development services performed under written contracts is recognized when it is earned pursuant to the terms of the contract. Each contract calls for a fixed dollar amount with a specified time period. These contracts generally involve up-front payment. Revenue is recognized for these projects as services are provided.

 

  Revenue from sales of developed items to hospitals and other customers is recognized when items are shipped to customers and titles are transferred.

 

We do not offer promotional payments, customer coupons, rebates or other cash redemption offers to our customers.

 

Sales tax collected is not recognized as revenue and amounts outstanding are included in accrued liabilities and other payables in the consolidated balance sheets.

 

Income Taxes

 

We are governed by the income tax laws of China and the United States. Income taxes are accounted for pursuant to ASC 740 “Accounting for Income Taxes,” which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge for taxes is based on the results for the period as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

 

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.

 

Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is changed to equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis.

 

Stock-based Compensation

 

Stock based compensation is accounted for based on the requirements of the Share-Based Payment topic of Accounting Standards Codification (“ASC”) 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award. The Accounting Standards Codification also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

 

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is recognized over the period of services or the vesting period, whichever is applicable. Until the measurement date is reached, the total amount of compensation expense remains uncertain. Our compensation expense for unvested options to non-employees is re-measured at each balance sheet date and is being amortized over the vesting period of the options.

 

Non-controlling Interest

 

As of June 30, 2018, Dr. Yu Zhou, director and co- chief executive officer of GenExosome, who owned 40% of the equity interests of GenExosome, which is not under our control.

 

Acquisition

 

We account for acquisition using the acquisition method of accounting, whereby the results of operations are included in the financial statements from the date of acquisition. The purchase price is allocated to the acquired assets and assumed liabilities based on their estimated fair values at the date of acquisition, and any excess is allocated to goodwill.

 

Effective October 25, 2017, pursuant to the Stock Purchase Agreement as discussed elsewhere in this report, our majority owned subsidiary, GenExosome, acquired 100% of Beijing GenExosome.

 

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In according to the acquisition, Beijing GenExosome’s assets and liabilities were recorded at their fair values as of the effective date, October 25, 2017, and the results of operations of Beijing GenExosome are consolidated with results of operations of us, starting on October 25, 2017.

 

Recent Accounting Pronouncements

 

For details of applicable new accounting standards, please, refer to Recent Accounting Pronouncements in Note 3 of our unaudited condensed consolidated financial statements accompanying this report. 

 

RESULTS OF OPERATIONS

 

Comparison of Results of Operations for the Three and Six Months Ended June 30, 2018 and 2017

 

Revenues

 

We generated real property rental revenue commencing in May 2017. We generated revenue from medical related consulting services commencing in July 2016 and we had revenue from performing development services for hospitals and other customers and sales of developed products to hospitals and other customers commencing on October 25, 2017.

 

For the three months ended June 30, 2018, we had real property rental revenue of $278,872, as compared to $222,254 for the three months ended June 30, 2017, an increase of $56,618, or 25.5%, since we started to generate real property rental revenue in May 2017. For the six months ended June 30, 2018, we had real property rental revenue of $575,495, as compared to $222,254 for the six months ended June 30, 2017, an increase of $353,241, or 158.9%, since we started to generate real property rental revenue in May 2017.

 

For the three months ended June 30, 2018, we had medical related consulting services revenue from related parties of $141,996, as compared to $152,497 for the three months ended June 30, 2017, a decrease of $10,501, or 6.9%. For the six months ended June 30, 2018, we had medical related consulting services revenue from related parties of $141,996, as compared to $218,783 for the six months ended June 30, 2017, a decrease of $76,787, or 35.1%. The decrease was primarily due to the decreased demand for our consulting service from our related parties.

 

For the three and six months ended June 30, 2018, we had revenue from contract services through performing development services for hospitals and other customers and sales of developed products to hospitals and other customers of $75,225 and $86,515, respectively.

 

Costs and Expenses

 

Real property operating expenses consist of property management fees, property insurance, real estate taxes, depreciation, repairs and maintenance fees, utilities and other expenses related to our rental properties.

 

For the three months ended June 30, 2018, our real property operating expenses amounted to $195,941, as compared to $161,854 for the three months ended June 30, 2017, an increase of $34,087, or 21.1%, since we started our real property rental operations in May 2017. For the six months ended June 30, 2018, our real property operating expenses amounted to $406,215, as compared to $161,854 for the six months ended June 30, 2017, an increase of $244,361, or 151.0%, since we started our real property rental operations in May 2017.

 

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Costs of medical related consulting services include the cost of internal labor and related benefits, travel expenses related to medical related consulting services, subcontractor costs, other related consulting costs, and other overhead costs. Subcontractor costs were costs related to medical related consulting services incurred by our subcontractor, such as medical professional’s compensation and travel costs.

 

For the three months ended June 30, 2018, costs of medical related consulting services amounted to $124,715, as compared to $125,231 for the three months ended June 30, 2017, a decrease of $516, or 0.4%. For the six months ended June 30, 2018, costs of medical related consulting services amounted to $124,715, as compared to $224,812 for the six months ended June 30, 2017, a decrease of $100,097, or 44.5%. The decrease was primarily attributable to the decrease in medical related consulting services revenue.

 

Costs of development services and sales of developed products include inventory costs, materials and supplies costs, internal labor and related benefits, depreciation, other overhead costs and shipping and handling costs incurred.

 

Costs of development services for hospitals and other customers and sales of developed products to hospitals and other customers was $42,093 and $58,613, respectively, for the three and six months ended June 30, 2018. There were no comparable revenue nor costs of revenue from our development services and sales of developed products operations prior to the date of acquisition, October 25, 2017.

 

Real Property Operating Income

 

Our real property operating income for the three months ended June 30, 2018 was $82,931, representing an increase of $22,531 or 37.3% as compared to $60,400 for the three months ended June 30, 2017, which was mainly attributable to we started our real property rental operations in May 2017.

 

Our real property operating income for the six months ended June 30, 2018 was $169,280, representing an increase of $108,880 or 180.3% as compared to $60,400 for the six months ended June 30, 2017, which was mainly attributable to we started our real property rental operations in May 2017.

 

Gross Profit (Loss) from Medical Related Consulting Services and Gross Margin

 

Gross profit from medical related consulting services for the three months ended June 30, 2018 was $17,281, as compared to $27,266 for the three months ended June 30, 2017, a decrease of $9,985, or 36.6%. The decrease was primarily attributable to the decrease in our medical related consulting revenue.

 

Gross profit from medical related consulting services for the six months ended June 30, 2018 was $17,281, as compared to gross loss from medical related consulting services of $6,029 for the six months ended June 30, 2017, a change of $23,310 or 386.6%. The change was mainly attributable to the decrease in our medical related consulting costs for the six months ended June 30, 2018.

 

Gross margin decreased to 12.2% for the three months ended June 30, 2018 from 17.9% for the three months ended June 30, 2017. The decrease in gross margin was primarily resulted from low consulting services revenue and the allocation of fixed costs, mainly consisting of internal labor and related benefits, to costs of the low level of consulting revenue.

 

Gross margin increased to 12.2% for the six months ended June 30, 2018 from (2.8)% for the six months ended June 30, 2017. The different medical related consulting services agreement in the six months ended June 30, 2018 had an effect of improving gross margin as compared to the six months ended June 30, 2017.

 

Gross Profits from Development Services and Sales of Developed Products and Gross Margin

 

Our gross profit from development services and sales of developed products was $33,132 and $27,902, respectively, for the three and six months ended June 30, 2018, representing gross margin of 44.0% and 32.3%, respectively.

 

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Other Operating Expenses

 

For the three and six months ended June 30, 2018 and 2017, other operating expenses consisted of the following:

 

   Three Months   Three Months   Six Months   Six Months 
   Ended   Ended   Ended   Ended 
   June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017 
Selling expenses  $   $6,279   $   $14,990 
Compensation and related benefits   487,452    205,473    1,026,266    388,400 
Professional fees   593,025    172,705    1,164,797    379,923 
Amortization   81,893        163,786     
Travel and entertainment   82,085    31,192    140,033    39,800 
Rent and related utilities   26,173    31,899    55,561    68,327 
Other general and administrative   75,970    28,836    191,993    44,532 
   $1,346,598   $476,384   $2,742,436   $935,972 

 

Our selling expense consisted of salaries of sales personnel and travel and entertainment costs incurred by our sales department. We did not incur any selling expense in the three and six months ended June 30, 2018.

 

For the three months ended June 30, 2018, compensation and related benefits increased by $281,979, or 137.2%, as compared to the three months ended June 30, 2017. The significant increase was primarily attributable to an increase in stock-based compensation of approximately $194,000 which reflected the value of options granted and vested to our management in the second quarter of fiscal 2018, and an increase in employee salaries and related benefits of approximately $88,000 due to the increase in general and administrative personnel resulting from our business expansion. For the six months ended June 30, 2018, compensation and related benefits increased by $637,866, or 164.2%, as compared to the six months ended June 30, 2017. The significant increase was primarily attributable to an increase in stock-based compensation of approximately $372,000 which reflected the value of options granted and vested to our management in the first half of fiscal 2018, and an increase in employee salaries and related benefits of approximately $266,000 due to the increase in general and administrative personnel resulting from our business expansion.

 

Professional fees primarily consisted of accounting fees, audit fees, legal service fees, consulting fees, investor relations service charges and other fees incurred for service related to being a public company. For the three months ended June 30, 2018, professional fees increased by $420,320, or 243.4%, as compared to the three months ended June 30, 2017. The significant increase was mainly attributable to an increase in consulting fees of approximately $329,000 due to the increase in use of consulting services providers, an increase in investor relations charge of approximately $50,000 due to the increase in investor relations activities incurred, and an increase in other miscellaneous items of approximately $41,000 reflecting our business expansion. For the six months ended June 30, 2018, professional fees increased by $784,874, or 206.6%, as compared to the six months ended June 30, 2017. The significant increase was mainly attributable to an increase in consulting fees of approximately $600,000 due to the increase in use of consulting services providers, an increase in investor relations charge of approximately $93,000 due to the increase in investor relations activities incurred, an increase in legal service fee of approximately $34,000 due to the increase in use of legal services providers, and an increase in other miscellaneous items of approximately $58,000 reflecting our business expansion.

 

For the three months ended June 30, 2018, amortization expense increased by $81,893, or 100.0%, as compared to the three months ended June 30, 2017. For the six months ended June 30, 2018, amortization expense increased by $163,786, or 100.0%, as compared to the six months ended June 30, 2017. We purchased intangible assets and commenced to amortize it in the fourth quarter of fiscal 2017.

 

For the three months ended June 30, 2018, travel and entertainment expense increased by $50,893, or 163.2%, as compared to the three months ended June 30, 2017. For the six months ended June 30, 2018, travel and entertainment expense increased by $100,233, or 251.8%, as compared to the six months ended June 30, 2017. The increase was mainly due to our business expansion.

 

For the three months ended June 30, 2018, rent and related utilities expenses decreased by $5,726, or 18.0%, as compared to the three months ended June 30, 2017. For the six months ended June 30, 2018, rent and related utilities expenses decreased by $12,766, or 18.7%, as compared to the six months ended June 30, 2017.

 

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Other general and administrative expenses mainly consisted of office supplies, miscellaneous taxes, bank service charge, academic sponsorship and other miscellaneous items. For the three months ended June 30, 2018, other general and administrative expenses increased by $47,134, or 163.5%, as compared to the three months ended June 30, 2017. The increase was primarily due to an increase in academic sponsorship incurred of approximately $50,000, offset by a decrease in other miscellaneous items of approximately $3,000. For the six months ended June 30, 2018, other general and administrative expenses increased by $147,461, or 331.1%, as compared to the six months ended June 30, 2017. The increase was primarily due to an increase in academic sponsorship incurred of approximately $75,000, and an increase in other miscellaneous items of approximately $72,000 resulting from our business expansion.

 

Loss from Operations

 

As a result of the foregoing, for the three months ended June 30, 2018, loss from operations amounted to $1,213,254, as compared to $388,718 for the three months ended June 30, 2017, a change of $824,536, or 212.1%.

 

As a result of the foregoing, for the six months ended June 30, 2018, loss from operations amounted to $2,527,973, as compared to $881,601 for the six months ended June 30, 2017, a change of $1,646,372, or 186.7%.

 

Other Income (Expense)

 

Other income (expense) includes interest income from bank deposits, interest expense incurred from our outstanding loan and $1 million refundable deposit which we repaid in April 2018 as described elsewhere in this report, foreign currency transaction loss, and other nominal income.

 

Other expense, net, totaled $130,561 for the three months ended June 30, 2018, as compared to $41,790 for the three months ended June 30, 2017, a change of $88,771, which was mainly attributable to an increase in foreign currency transaction loss of approximately $107,000, offset by a decrease in interest expense of approximately $17,000.

 

Other expense, net, totaled $366,811 for the six months ended June 30, 2018, as compared to $98,240 for the six months ended June 30, 2017, a change of $268,571, which was mainly attributable to an increase in interest expense of approximately $220,000, and an increase in foreign currency transaction loss of approximately $50,000.

 

Income Taxes