Quarterly report pursuant to Section 13 or 15(d)

STOCKHOLDERS' EQUITY

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STOCKHOLDERS' EQUITY
9 Months Ended
Sep. 30, 2017
Equity [Abstract]  
STOCKHOLDERS' EQUITY

NOTE 11 – STOCKHOLDERS’ 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.

 

There are no shares of its preferred stock issued and outstanding as of September 30, 2017 and December 31, 2016.

 

There are 64,628,622 and 61,628,622 shares of its common stock issued and outstanding as of September 30, 2017 and December 31, 2016, respectively.

  

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(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”). As of the date hereof, the Company is obligated to DOING in the principal amount of $3,000,000. 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. 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.

 

The Company received cash payment of $3,000,000 as an earnest money from DOING in connection with the 3,000,000 common stock issued to the March 2017 Accredited Investor who is an entrusted party that holds the shares on behalf of DOING and recorded the $3,000,000 as refundable deposit on the accompanying condensed consolidated balance sheets. Upon DOING completing the registration of the acquisition of the March 2017 Shares with the BCC and obtaining an Enterprise Overseas Investment Certificate from BCC, the Company will cancel the stock certificate issued under the March 2017 Accredited Investor’s name as an entrusted holder of the shares and the Company will issue a new stock certificate under DOING’s name. The $3,000,000 refundable deposit, which paid by DOING as an earnest money will be applied as the proceeds for issuance of the 3,000,000 shares of the Company’s common stock under DOING’s name at the closing date.

 

The Company is subject to the contingency of paying interest liability upon the request of DOING if DOING fails to complete the registration and obtain the Enterprise Overseas Investment Certificate within one year. 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 BCC Repayment Obligation since management has evaluated the claim and concluded the likelihood of the claim is remote.

 

Options

 

During the nine months ended September 30, 2017, the Company granted a total of 444,448 options to the Company’s Chief Financial Officer (“CFO”) at a fixed exercise price of $0.50 per share and granted a total of 40,000 options to the Company’s two directors at a fixed exercise price of $1.49 per share. The 444,448 options granted to the Company’s CFO are exercisable for ten years and the 40,000 options granted to the Company’s two directors are exercisable for five years. The fair value of the options was $602,224 which was determined using the Black-Scholes option-pricing model and using the following assumptions:

   

Dividend rate 0
Terms (in years) 5.0-10.0
Volatility 327.82% to 534.84%
Risk-free interest rate 1.88% to 2.40%

 

In connection with the option grant, for the three and nine months ended September 30, 2017, the Company recognized stock-based compensation of $335,757 and $602,224, respectively, on the accompanying condensed consolidated statements of operations because the options were deemed fully earned and non-cancellable on the grant date. Stock Option activities for the nine months ended September 30, 2017 were as follows:

 

      Number of Options     Weighted Average Exercise Price  
Balance at December 31, 2016           $  
Granted       484,448       0.58  
Exercised              
Balance at September 30, 2017       484,448       0.58  
Option exercisable at September 30, 2017       484,448     $ 0.58  

 

The total intrinsic value of the stock options outstanding and exercisable at September 30, 2017 was $1,098,853.

 

The following table summarizes the shares of the Company’s common stock issuable upon exercise of options outstanding at September 30, 2017:

 

  Options Outstanding       Options Exercisable  
  Range of
Exercise
Price
      Number
Outstanding at September 30,
2017
      Range of Weighted Average Remaining Contractual Life
(Years)
      Weighted
Average
Exercise
Price
      Number
Exercisable at September 30,
2017
      Weighted
Average
Exercise Price
 
$ 0.50       444,448       9.71     $ 0.50       444,448     $ 0.50  
  1.49       40,000       4.63       1.49       40,000       1.49  
$ 0.50–1.49       484,448       9.29     $ 0.58       484,448     $ 0.58