Quarterly report pursuant to Section 13 or 15(d)

EQUITY

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EQUITY
6 Months Ended
Jun. 30, 2018
Equity [Abstract]  
EQUITY

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.

 

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)

 

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.

 

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.

 

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