ITEM 7. 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 years ended December 31, 2020 and 2019 should be read in conjunction with our consolidated financial statements
and related notes to those consolidated financial statements that are included elsewhere in this report. Certain information
contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Special Note Regarding Forward-looking Statements
All statements other than statements of historical fact included in this Form 10-K
including, without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” regarding our financial position, business strategy and the plans and objectives of management for future
operations, are forward-looking statements. When used in this Form 10-K, words such as “anticipate,” “believe,”
“estimate,” “expect,” “intend” and similar expressions, as they relate to us or our management,
identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions
made by, and information currently available to, our management. Actual results could differ materially from those contemplated
by the forward-looking statements as a result of a number of factors, including those set forth under the risk factors and business
sections in this Form 10-K.
Impact of COVID-19 on our Operations, Financial Condition,
Liquidity and Results of Operations
The ultimate impact of the COVID-19 pandemic on our operations is unknown and will
depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the
COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative
and protective actions that governments, or us, may determine are needed.
The occurrence of COVID-19 pandemic
had negativeimpact on our operations. Some tenants have delayed on rent payment and some of the universities and laboratories with which
we collaborate were temporarily closed. Our general development operations have continued during the COVID-19 pandemic and we have not
had significant disruption. However, we are uncertain if the COVID-19 pandemic will impact future operations at our laboratory, or our
ability to collaborate with other laboratories and universities. In addition, we are unsure if the COVID-19 pandemic will impact future
clinical trials. Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related
financial effect cannot be reasonably estimated at this time but is expected to adversely impact the Company’s business for the
year of 2021.
We have limited cash available to fund planned operations and although we have other
sources of capital described below under “Liquidity and Capital Resources,” management continues to pursue various
financing alternatives to fund our operations so we can continue as a going concern. However, the COVID-19 pandemic has created
significant economic uncertainty and volatility in the credit and capital markets. Management plans to secure the necessary financing
through the issue of new equity and/or the entering into of strategic partnership arrangements but the ultimate impact of the
COVID-19 pandemic on our ability to raise additional capital is unknown and will depend on future developments, which are highly
uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak and new information which may
emerge concerning the severity of the COVID-19 pandemic. We may not be able to raise sufficient additional capital and may tailor
our operations based on the amount of funding we are able to raise in the future. Nevertheless, there is no assurance that these
initiatives will be successful. Further, there is no assurance that capital available to us in any future financing will be on
acceptable terms.
Overview
The Company is a clinical-stage, vertically
integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative, transformative immune effector cell
therapy, exosome technology, as well as COVID-19 related diagnostics and therapeutics. The Company also provides strategic advisory
and outsourcing services to facilitate and enhance its clients’ growth and development, as well as competitiveness in healthcare
and CellTech industry markets. Through its subsidiary structure with unique integration of verticals
from innovative R&D to automated bioproduction and accelerated clinical development, the Company is establishing a leading
role in the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEXTM), and COVID-19 related vaccine
and therapeutics.
Avalon achieves and fosters seamless integration of unique verticals to bridge and
accelerate innovative research, bio-process development, clinical programs and product commercialization. Avalon’s upstream
innovative research includes:
● Development of Avalon Clinical-grade Tissue-specific Exosome (“ACTEXTM”)
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Avalon’s midstream bio-processing and bio-production facility is located in
Nanjing, China with state-of-the-art, automated GMP and QC/QA infrastructure for standardized bio-manufacturing of clinical-grade
cellular products involved in our clinical programs in immune effector cell therapy, regenerative therapeutics, as well as bio-banking.
Avalon’s downstream medical team and facility consists of top-rated affiliated
hospital network and experts specialized in hematology, oncology, cellular immunotherapy, hematopoietic stem/progenitor cell transplant,
as well as regenerative therapeutics. Our major clinical programs include:
We generated revenue by providing medical related consulting services in advanced
areas of immunotherapy and second opinion/referral services through our wholly-owned subsidiary Avalon (Shanghai) Healthcare Technology
Co., Ltd., or Avalon Shanghai. We also own and operate rental commercial real property in New Jersey, where we are headquartered.
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.
Going Concern
The Company is a clinical-stage,
vertically integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative, transformative immune
effector cell therapy, exosome technology, as well as COVID-19 related diagnostics and therapeutics. The Company also provides
strategic advisory and outsourcing services to facilitate and enhance its clients’ growth and development, as well as competitiveness
in healthcare and CellTech industry markets. Through its subsidiary structure with unique integration of verticals from innovative
R&D to automated bioproduction and accelerated clinical development, the Company is establishing a leading role in the fields
of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEXTM), and regenerative therapeutics.
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In addition, the Company owns commercial real estate that houses its headquarters
in Freehold, New Jersey and provides outsourced, customized international healthcare services
to the rapidly changing health care industry primarily focused in the People’s Republic of China. The Company did
not generate any revenue from development services and sales of developed products segment during the year ended December 31,
2020. These consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business.
As reflected in the accompanying consolidated financial statements, the Company
had an accumulated deficit of $42,041,375 at December 31, 2020, and has incurred recurring net loss and generated negative cash
flow from operating activities of $12,679,438 and $7,546,100 for the year ended December 31, 2020, respectively. The Company has
a limited operating history and its continued growth is dependent upon the continuation of providing medical consulting services
to its only few clients who are related parties and generating rental revenue from its income-producing real estate property in
New Jersey and performing development services for hospitals and other customers and sales of developed products to hospitals
and other customers; hence generating revenues, and obtaining additional financing to fund future obligations and pay liabilities
arising from normal business operations. In addition, the current cash balance cannot be projected to cover the operating expenses
for the next twelve months from the release date of this report. These matters raise substantial doubt about the Company’s
ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s
ability to raise additional capital, implement its business plan, and generate significant revenues. There are no assurances that
the Company will be successful in its efforts to generate significant revenues, maintain sufficient cash balance or report profitable
operations or to continue as a going concern. The Company plans on raising capital through the sale of equity to implement its
business plan. However, there is no assurance these plans will be realized and that any additional financings will be available
to the Company on satisfactory terms and conditions, if any.
The occurrence of an uncontrollable event such as the COVID-19 pandemic had negatively
impact on the Company’s operations. Some tenants have delayed on rent payment and our occupancy of our rental property has
decreased. Our general development operations have continued during the COVID-19 pandemic and we have not had significant disruption.
However, we are uncertain if the COVID-19 pandemic will impact future operations at our laboratory, or our ability to collaborate
with other laboratories and universities. In addition, we are unsure if the COVID-19 pandemic will impact future clinical trials.
Given the dynamic nature of these circumstances, the duration of business disruption and reduced traffic, the related financial
effect cannot be reasonably estimated at this time but is expected to adversely impact the Company’s business for the year
of 2021.
The accompanying consolidated financial statements do not include any adjustments
related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that
may result should the Company be unable to continue as a going concern.
Critical Accounting
Policies
Use of Estimates
Our discussion
and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these
consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our
estimates, including those related to the useful life of property and equipment and investment in real estate, assumptions
used in assessing impairment of long-term assets, valuation of deferred tax assets and the associated valuation allowances,
and valuation of stock-based compensation.
We base our estimates on historical experience and on various other assumptions
that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates
and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results
may differ from these estimates under different assumptions or conditions.
Revenue Recognition
We recognize revenue under
Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”).
The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for
those goods or services. The following five steps are applied to achieve that core principle:
● Step 1: Identify the contract with the customer
● Step 2: Identify the performance obligations in the contract
● Step 3: Determine the transaction price
● Step 5: Recognize revenue when the company satisfies a performance obligation
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In order to identify the performance obligations in a contract
with a customer, a company must assess the promised goods or services in the contract and identify each promised goods or service
that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” goods or service (or bundle
of goods or services) if both of the following criteria are met:
If a goods or service is not distinct, the goods or service is combined with other
promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects
to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of
third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts,
variable amounts, or both. Variable consideration is included in the transaction price only to the extent that it is probable
that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with
the variable consideration is subsequently resolved.
The transaction price is allocated to each performance obligation on a relative
standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance
obligation is satisfied, at a point in time or over time as appropriate.
Types of revenue:
● Sales of developed products to hospitals and other customers.
Revenue recognition criteria:
We have determined that the ASC 606 does not apply to rental contracts, which are
within the scope of other revenue recognition accounting standards.
Rental income from operating leases is recognized on a straight-line basis under
the guidance of ASC 842. Lease payments under tenant leases are recognized on a straight-line basis over the term of the related
leases. The cumulative difference between lease revenue recognized under the straight-line method and contractual lease payments
are included in rent receivable on the consolidated balance sheets.
We do not offer promotional payments, customer coupons, rebates or other cash redemption
offers to our customers.
Income Taxes
We are governed by the income tax
laws 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.
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Deferred tax is accounted for using the balance sheet liability method in respect
of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements
and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized
for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit
will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated using tax rates that are expected to apply to the period
when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when
it is related to items credited or charged directly to equity, in which case the deferred tax is changed to equity. Deferred tax
assets and liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle
its current tax assets and liabilities on a net basis.
Recent Accounting Standards
For details of applicable new accounting standards, please, refer to Recent
Accounting Standards in Note 3of our consolidatedfinancial statements accompanying this report.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Years Ended December 31, 2020 and
2019
Revenues
For the year ended December 31, 2020, we had real property rental
revenue of $1,206,854, as compared to $1,155,677 for the year ended December 31, 2019, an increase of $51,177, or 4.4%. The increase
was primarily attributable to the increase of tenants in 2020. We expect that our revenue from real property rent will increase
in the near future since our occupancy of our rental property increased in subsequent period.
For the year ended December 31, 2020, we had medical related consulting services
revenue from related parties of $170,908, as compared to $355,544 for the year ended December 31, 2019, a decrease of $184,636,
or 51.9%. The decrease was mainly attributable to the decreased demand for our consulting service from our related parties. We
expect that our revenue from medical related consulting services will increase in the near future.
For the year ended December 31,
2020, we did not have any revenue from contract services through performing development services for hospitals and other customers and
sales of developed products to hospitals and other customers. For the year ended December 31, 2019, 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 $35,084. We have discontinued sales of our exosome isolation system product. However, we are actively developing other unrelated proprietary
exosome related products for sale or licensure.
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 year ended December 31, 2020, our real property operating
expenses amounted to $851,754, as compared to $818,662 for the year ended December 31, 2019, an increase of $33,092, or 4.0%. The
increase was mainly due to an increase in property management fees of approximately $11,000, and an increase in other miscellaneous
items of approximately $22,000.
Costs of medical related consulting services include the cost of labor and related
benefits, travel expenses related to medical related consulting services, other related consulting costs, and other overhead costs.
For the year ended December 31, 2020, costs of medical related consulting services
amounted to $135,805, as compared to $284,472 for the year ended December 31, 2019, a decrease of $148,667, or 52.3%. The decrease
was mainly due 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, labor and related benefits, depreciation, other overhead costs and shipping and handling
costs incurred.
For the year ended December 31, 2019, costs of development services for hospitals
and other customers and sales of developed products to hospitals and other customers amounted to $103,258. We had neither revenue
nor cost of revenue from this segment in the year ended December 31, 2020.
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Real Property Operating Income
Our real property
operating income for the year ended December 31, 2020 was $355,100, representing an increase of $18,085, or 5.4%, as compared
to $337,015 for the year ended December 31, 2019. The increase was mainly attributable to the increase in rental revenue
resulting from the increase of tenants as described above, offset by the increase in real property operating expenses. We
expect our real property operating income will increase in the near future since our occupancy rate increased in subsequent
period.
Gross Profit from Medical Related Consulting Services
and Gross Margin
Gross profit from medical related consulting services for the year ended December
31, 2020 was $35,103, as compared to $71,072 for the year ended December 31, 2019, a change of $35,969, or 50.6%.
Gross margin increased to 20.5% for the year ended December 31, 2020 from gross
margin of 20.0% for the year ended December 31, 2019. We estimate that our gross margin from medical related consulting services
segment will remain at its current yearly level.
Gross Loss from Development Services and Sales of
Developed Products and Gross Margin
We did not generate any gross profit from development services and sales of developed
products in the year ended December 31, 2020. Our gross loss from development services and sales of developed products for the
year ended December 31, 2019 was $68,174, with a gross margin of (194.3)%.
Other Operating Expenses
For the years ended
December 31, 2020 and 2019, other operating expenses consisted of the following:
Years Ended December 31,
Directors and officers liability insurance premium 276,028 184,423
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Loss from Operations
As a result of the foregoing, for the year
ended December 31, 2020, loss from operations amounted to $12,454,019, as compared to $19,377,230 for the year ended December
31, 2019, a decrease of $6,923,211, or 35.7%.
Other Income (Expense)
Other income (expense) mainly includes interest expense, change
in fair value of warrants liabilities, allocated financing costs, loss from equity method investment, and loss from noncontrolling
interest deficit adjustment.
Other expense, net, totaled $225,419 for the year ended December 31, 2020, as compared
to other income, net, of $1,307,069 for the year ended December 31, 2019, a decrease of $1,532,488, or 117.2%, which was primarily
attributable to a decrease in change in fair value of warrants liabilities of approximately $2,817,000, an increase in interest
expense of approximately $86,000, a decrease in other income of approximately $21,000, offset by a decrease in allocated financing
expense of approximately $525,000, a decrease in loss from noncontrolling interest deficit adjustment of approximately $862,000,
and a decrease in loss from equity method investment of approximately $4,000.
Income Taxes
We did not have any income taxes expense for the years ended December 31, 2020 and
2019 since we incurred losses in these periods.
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Net Loss
As a result of the factors described above, our net loss was $12,679,438 for the
year ended December 31, 2020, as compared to $18,070,161 for the year ended December 31, 2019, a decrease of $5,390,723 or 29.8%.
Net Loss Attributable to Avalon GloboCare Corp. Common
Shareholders
The net loss attributable to Avalon GloboCare Corp. common shareholders was $12,679,438
or $(0.16) per share (basic and diluted) for the year ended December 31, 2020, as compared with $18,070,161, or $(0.24) per share
(basic and diluted) for the year ended December 31, 2019, a change of $5,390,723 or 29.8%.
Foreign Currency Translation Adjustment
Our reporting currency is the U.S. dollar. The functional currency of our parent
company, AHS, Avalon RT 9, Genexosome, Avactis, and Exosome, is the U.S. dollar and the functional currency of Avalon Shanghai
and Beijing Genexosome, is the Chinese Renminbi (“RMB”). The financial statements of our subsidiaries whose functional
currency is the RMB are translated to U.S. dollars using period end rates of exchange for assets and liabilities, average rate
of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rates for equity. Net gains and losses
resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations,
which are a non-cash adjustment, we reported a foreign currency translation gain of $67,237 and a foreign currency translation
loss of $20,887 for the years ended December 31, 2020 and 2019, respectively. This non-cash gain/loss had the effect of decreasing/increasing
our reported comprehensive loss.
Comprehensive Loss
As a result of our foreign currency translation adjustment, we had comprehensive
loss of $12,612,201 and $18,091,048 for the years ended December 31, 2020 and 2019, respectively.
Liquidity and Capital Resources
The Company has a limited operating history and its continued growth is dependent
upon the providing medical consulting services to its only few clients who are related parties and generating rental revenue from
its income-producing real estate property in New Jersey and performing development services for hospitals and other customers
and sales of developed products to hospitals and other customers; hence generating revenues, and obtaining additional financing
to fund future obligations and pay liabilities arising from normal business operations. In addition, the current cash balance
cannot be projected to cover the operating expenses for the next twelve months from the release date of this report. These matters
raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue
as a going concern is dependent on the Company’s ability to raise additional capital, implement its business plan, and generate
significant revenues. There are no assurances that the Company will be successful in its efforts to generate significant revenues,
maintain sufficient cash balance or report profitable operations or to continue as a going concern. The Company plans on raising
capital through the sale of equity to implement its business plan. However, there is no assurance these plans will be realized
and that any additional financings will be available to the Company on satisfactory terms and conditions, if any.
The occurrence of an uncontrollable event such as the COVID-19 pandemic is likely
to negatively affect the Company’s operations. Efforts to contain the spread of the coronavirus have intensified,
including social distancing, travel bans and quarantine, and these are likely to negatively impact our tenants, employees and
consultants. These, in turn, will not only impact our operations, financial condition and demand for our medical related consulting
services but our overall ability to react timely to mitigate the impact of this event. Given the dynamic nature of these circumstances,
the duration of business disruption and reduced traffic, the related financial effect cannot be reasonably estimated at this time
but is expected to adversely impact our business for the year of 2021.
Liquidity is the ability of a company to generate funds to support its current and
future operations, satisfy its obligations and otherwise operate on an ongoing basis. At December 31, 2020 and 2019, we had
cash balance of approximately $727,000 and $765,000, respectively. These funds are kept in financial institutions located as follows:
Under applicable PRC regulations, foreign invested enterprises, or FIEs, in China
may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations.
In addition, a foreign invested enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC
accounting standards each year to its general reserves until the cumulative amount of such reserves reach 50% of its registered
capital. These reserves are not distributable as cash dividends.
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In addition, a portion of our businesses and assets are denominated in RMB, which
is not freely convertible into foreign currencies. All foreign exchange transactions take place either through 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 our PRC subsidiary
to transfer its net assets to the Parent Company through loans, advances or cash dividends.
The current PRC Enterprise Income Tax (“EIT”) Law and its implementing
rules generally provide that a 10% withholding tax applies to China-sourced income derived by non-resident enterprises for PRC
enterprise income tax purposes unless the jurisdiction of incorporation of such enterprises’ shareholder has a tax treaty
with China that provides for a different withholding arrangement.
The following table sets forth a summary of changes in our working capital from
December 31, 2019 to December 31, 2020:
December 31, Changes in
Working capital deficit:
Our working
capital deficit increased by $41,688 to $1,306,056 at December 31, 2020 from $1,264,368 at December 31, 2019. The
increase in working capital deficit was primarily attributable to a decrease in accounts receivable – related party of
approximately $215,000, a decrease in deferred financing costs of approximately $89,000, an increase in accrued liabilities
and other payables of approximately $89,000, an increase in accrued liabilities and other payables of approximately $71,000,
an increase in accrued liabilities and other payables – related parties of approximately $119,000, and an increase in
operating lease obligation of approximately $76,000, offset by an increase in prepaid expenses and other current assets of
approximately $51,000, a decrease in accrued research and development fees of approximately $136,000, and a decrease in
accrued payroll liability and directors’ compensation of approximately $334,000.
Because the exchange rate conversion is different for the consolidated balance sheets
and the consolidated statements of cash flows, the changes in assets and liabilities reflected on the consolidated statements
of cash flows are not necessarily identical with the comparable changes reflected on the consolidated balance sheets.
Cash Flows for
the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
The following summarizes
the key components of our cash flows for the years ended December 31, 2020 and 2019:
Years Ended December 31,
Effect of exchange rate on cash 12,690 (9,468 )
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Net cash flow used in operating activities for the year
ended December 31, 2020 was $7,546,100, which primarily reflected our consolidated net loss of approximately $12,679,000, and
the changes in operating assets and liabilities, primarily consisting of an increase in prepaid expenses and other current assets
of approximately $207,000, a decrease in accrued liabilities and other payables of approximately $837,000, offset by a decrease
in accounts receivable – related party of approximately $217,000, an increase in accrued liabilities and other payables
– related parties of approximately $119,000, and the non-cash items adjustment primarily consisting of depreciation and
amortization of approximately $315,000, and stock-based compensation and service expense of approximately $5,494,000.
Net cash flow used in operating
activities for the year ended December 31, 2019 was $7,079,871, which primarily reflected our consolidated net loss of
approximately $18,070,000, the non-cash item adjustment consisting of change in warrants derivative liabilities of
approximately $2,817,000, and the changes in operating assets and liabilities, primarily consisting of an increase in
accounts receivable – related party of approximately $217,000, offset by a decrease in prepaid expenses and other
current assets of approximately $480,000, and an increase in accrued liabilities and other payables of approximately
$1,230,000, and the add-back of non-cash items mainly consisting of depreciation and amortization of approximately $507,000,
stock-based compensation and service expense of approximately $9,209,000, allocated financing costs of approximately
$525,000, impairment loss of approximately $1,010,000, and loss from noncontrolling interest deficit adjustment of
approximately $862,000.
We expect our cash
used in operating activities to increase due to the following:
● the development and commercialization of new products;
● an increase in professional staff and services; and
Net cash flow used in investing activities was $169,185
for the year ended December 31, 2020 as compared to $552,967 for the year ended December 31, 2019. During the year ended December
31, 2020, we made payment for improvement of commercial real estate of approximately $111,000 and made additional investment in
equity method investment of approximately $58,000.
During the year ended December 31, 2019, we made payment
for purchase of property and equipment of approximately $377,000, made payment for improvement of commercial real estate of approximately
$16,000, and made payment for equity method investment of approximately $159,000.
Net cash flow provided by financing activities was $7,664,281 for the year ended
December 31, 2020 as compared to $6,154,910 for the year ended December 31, 2019. During the year ended December 31, 2020, we
received proceeds from related party borrowings of $600,000 and net proceeds from equity offering of approximately $7,264,000
(net of cash paid for commission and offering costs of approximately $540,000), offset by repayments made for note payable –
related party of $200,000.
During the year ended December 31, 2019, we received proceeds from borrowings from
a related party of $3,600,000, and net proceeds from equity offering of approximately $5,365,000 (net of offering costs of approximately
$909,000), offset by repayments made to a related party for borrowings of $410,000, repayments for loan payable of $1,000,000,
and payment made for repurchase of warrants of 1,400,000.
Our capital requirements for the next twelve months primarily
relate to working capital requirements, including salaries, fees related to third parties’ professional services, reduction
of accrued liabilities, mergers, acquisitions and the development of business opportunities. These uses of cash will depend on
numerous factors including our sales and other revenues, and our ability to control costs. All funds received have been expended
in the furtherance of growing the business. The following trends are reasonably likely to result in a material decrease in our
liquidity over the near to long term:
● addition of administrative personnel as the business grows; and
● the cost of being a public company.
In the third quarter of 2019, we had secured a $20 million credit facility (Line
of Credit) provided by our Chairman, Wenzhao Lu. The unsecured credit facility bears interest at a rate of 5% and provides
for maturity on drawn loans 36 months after funding. The note is not convertible to equity. As of December 31, 2020, the total
principal amount outstanding under the Credit Line was $3.2 million and we have approximately $16.8 million remaining available
under the Line Credit.
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On December 13, 2019, we
entered into an Open Market Sale AgreementSM (the “Sales Agreement”) with Jefferies LLC, as sales
agent (“Jefferies”), pursuant to which we may offer and sell, from time to time, through Jefferies, shares of our
common stock, par value $0.0001 per share, having an aggregate offering price of up to $20.0 million. On April 6, 2020, the
date on which we filed our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, our
registration statement became subject to the offering limits set forth in General Instruction I.B.6 of Form S-3. As
of April 6, 2020, the aggregate market value of our outstanding common stock held by non-affiliates, or public
float, was $39,564,237, based on 23,691,160 shares of our outstanding common stock that were held
by non-affiliates on such date and a price of $1.67 per share, which was the price at which our common stock was
last sold on The Nasdaq Capital Market on February 19, 2020 (a date within 60 days of the date hereof), calculated in
accordance with General Instruction I.B.6 of Form S-3. We have not offered any securities pursuant to
General Instruction I.B.6 of Form S-3 in the 12 calendar months preceding the date of this prospectus supplement.
We filed a prospectus supplement to amend and supplement the information in our prospectus and original prospectus supplement
based on the amount of securities that we are eligible to sell under General Instruction I.B.6
of Form S-3. After giving effect to the $13,000,000 offering limit imposed by General Instruction I.B.6
of Form S-3, we may offer and sell additional shares of our common stock having an aggregate offering price of
up to $13,000,000 from time to time through Jefferies acting as our sales agent in accordance with the terms of
the sales agreement. As of December 31, 2020, we sold a total of 4,052,008 shares of our common stock through Jefferies
with an aggregate offering price of $7,077,835 and we have approximately $7.9 million offering price remaining available
under the Sales Agreement.
We estimate that based on current plans and assumptions,
that our available cash will be insufficient to satisfy our cash requirements under our present operating expectations through
cash available under our Credit Line and sales of equity through our Sales Agreement. Other than funds received from the sale
of our equity and advances from our related party, and cash resource generating from our operations, we presently have no other
significant alternative source of working capital. We have used these funds to fund our operating expenses, pay our obligations
and grow our company. We will need to raise significant additional capital to fund our operations and to provide working capital
for our ongoing operations and obligations. Therefore, our future operation is dependent on our ability to secure additional financing.
Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing
mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more
difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required,
it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us
to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional
dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common
stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct
business operations. If we are unable to obtain additional financing, we will be required to cease our operations. To date, we
have not considered this alternative, nor do we view it as a likely occurrence.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions, and other factors may result in actual payments differing
from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary
of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review
of this information within the context of our consolidated financial position, results of operations, and cash flows. The following
tables summarize our contractual obligations as of December 31, 2020, and the effect these obligations are expected to have on
our liquidity and cash flows in future periods.
Payments Due by Period
Contractual obligations: Total Less than 1 year 1-3 years 3-5 years 5+ years
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Off-balance Sheet Arrangements
We presently do not have off-balance sheet
arrangements.
Foreign Currency Exchange Rate Risk
A portion of our operations are in China. Thus, a portion of our revenues and operating
results may be impacted by exchange rate fluctuations between RMB and US dollars. For the years ended December 31, 2020 and 2019,
we had an unrealized foreign currency translation gain of approximately $67,000 and an unrealized foreign currency translation
loss of approximately $21,000, respectively, because of changes in the exchange rate.
Inflation
The effect of inflation on our revenue and
operating results was not significant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, as defined in Rule 12b-2 of
the Exchange Act, we are not required to provide the information required by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Previous independent registered public accounting firm
On September 20, 2019 (the “Dismissal Date”), the
Company advised RBSM LLP (the “Former Auditor”) that it was dismissed as the Company’s independent
registered public accounting firm. The decision to dismiss the Former Auditor as the Company’s independent registered public
accounting firm was approved by the Company’s Board of Directors.
During the years ended December 31, 2018 and 2017 and through
the Dismissal Date, the Company has not had any disagreements with the Former Auditor on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the Former Auditor’s
satisfaction, would have caused them to make reference thereto in their reports on the Company’s financial statements for
such years.
Except as set forth below, during the years ended December 31,
2018 and 2017 and through the Dismissal Date, the reports of the Former Auditor on the Company’s financial statements did
not contain any adverse opinion or disclaimer of opinion, and such reports were not qualified or modified as to uncertainty, audit
scope, or accounting principle, except that the report contained a paragraph stating there was substantial doubt about the Company’s
ability to continue as a going concern.
New independent registered public accounting firm
On September 23, 2019 (the “Engagement Date”), the
Company engaged Marcum LLP (“New Auditor”) as its independent registered public accounting firm for the Company’s
fiscal year ended December 31, 2019. The decision to engage the New Auditor as the Company’s independent registered public
accounting firm was approved by the Company’s Board of Directors.
During the two most recent fiscal years and through the Engagement
Date, the Company has not consulted with the New Auditor regarding either:
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ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain
disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our
periodic reports filed under the Securities Exchange Act of 1934, as amended, or 1934 Act, is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such
information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosure. We
carried out an evaluation, under the supervision and with the participation of our management, including the principal
executive officer and the principal financial officer (principal financial officer), of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the 1934 Act, as of the end of the
period covered by this report. During evaluation of disclosure controls and procedures as of December 31, 2020 conducted as
part of our annual audit and preparation of our annual financial statements, the CEO and CFO conducted an evaluation of the
effectiveness of the design and operations of our disclosure controls and procedures and concluded that our disclosure
controls and procedures were not effective due to the lack of segregation of duties resulting from our small size.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for the preparation and fair presentation
of the financial statements included in this annual report. The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America and reflect management’s judgment and estimates concerning
effects of events and transactions that are accounted for or disclosed.
Management is also responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal control over financial reporting includes those policies and
procedures that pertain to our ability to record, process, summarize and report reliable data. Management recognizes that there
are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human
error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting
can provide only reasonable assurance with respect to financial statement presentation. Further, because of changes in conditions,
the effectiveness of internal control over financial reporting may vary over time.
Management regularly assesses controls and did so most recently
for our financial reporting as of December 31, 2020. This assessment was based on criteria for effective internal control over
financial reporting described in the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations
(COSO) of the Treadway Commission. Based on this assessment, management has concluded that our internal control over financial
reporting was not effective as of December 31, 2020 due to the lack of segregation of duties resulting from our small size. In
addition, due to the lack of segregation of duties and limited resources, the Company has a small accounting staff to prepare
and review its financial statements. This issue has risen to a material weakness for the year ended December 31, 2020.
In light of the material weakness, we performed additional analyses
and procedures in order to conclude that our consolidated financial statements for the year ended December 31, 2020 included in
this Annual Report on Form 10-K were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our
material weakness, our consolidated financial statements for the year ended December 31, 2020 are fairly stated, in all material
respects, in accordance with US GAAP.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting, as such term is defined in Rules 13a-15(f) under the Exchange Act, during the quarter ended December 31, 2020 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation
report by our independent registered public accounting firm, regarding internal control over financial reporting. As a smaller
reporting company, our internal control over financial reporting was not subject to audit by our independent registered public
accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s
report.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Below are the names of and certain information regarding our
executive officers and directors as of the date hereof:
Name Age Position
Wenzhao Lu 63 Chairman of the Board of Directors
David Jin, MD, PhD 53 Chief Executive Officer, President and Director
Meng Li 43 Chief Operating Officer, Secretary and Director
Luisa Ingargiola 53 Chief Financial Officer
Steven A. Sanders 75 Director
Yancen Lu 46 Director
Wilbert J. Tauzin II 76 Director
William B. Stilley, III 53 Director
Tevi Troy 53 Director
Yue “Charles” Li 47 Director
Officers are elected annually by the Board of Directors (subject
to the terms of any employment agreement), at our annual meeting, to hold such officer until an officer’s successor has
been duly appointed and qualified, unless an officer sooner dies, resigns or is removed by the Board.
The principal occupation and business experience during at least
the past five years for our executive officers and directors is as follows:
Wenzhao Lu, Chairman of the Board of Directors
Mr. Wenzhao Lu is our Chairman of the Board. He is a seasoned
healthcare entrepreneur with extensive operational knowledge and experience in China. He has been serving as Chairman of the Board
for the Daopei Medical Group, or DPMG, since 2010. Under his leadership, DPMG has recently expanded its clinical network involving
a state-of-the-art stem cell bank at Wuhan Biolake, three top-ranked private hospitals (located in Beijing, Shanghai, and Hebei),
specialty hematology laboratories, as well as a hematology research institute, with more than 100 partnering and collaborating
hospitals in China. DPMG was founded by Professor Daopei Lu, a renowned hematologist pioneering in hematopoietic stem cell transplant
and member of the Academy of Engineering in China. Mr. Wenzhao Lu received a Bachelor of Arts from Temple University Tyler School
of Arts in 1988 and subsequently worked as senior Art Director at Ogilvy & Mather Advertising Company. Prior to joining DPMG,
Mr. Lu served as Chief Operating Officer for BioTime Asia Limited, which is a subsidiary of BioTime, Inc. (NYSE American: BTX)
in 2009. Mr. Lu is qualified to serve as a director because of his extensive operational knowledge of, and executive level management
experience in, the healthcare industry.
50
David Jin, Chief Executive Officer, President and Director
Dr. David Jin, MD, PhD, is our Chief Executive Officer, President
and a member of the Board of Directors. From 2009 to 2017, Dr. Jin has served as the Chief Medical Officer of BioTime, Inc. (NYSE
American: BTX), a clinical stage regenerative medicine company with a focus on pluripotent stem cell technology. Dr. Jin also
acts as a senior translational clinician-scientist at the Howard Hughes Medical Institute and the Ansary Stem Cell Center at Weill
Cornell Medical College of Cornell University. Prior to his current endeavors, Dr. Jin was Chief Consultant/Advisor for various
biotech/pharmaceutical companies regarding hematology, oncology, immunotherapy and stem cell-based technology development. Dr.
Jin has been Principle Investigator in more than 15 pre-clinical and clinical trials, as well as author/co-author of over 80 peer-reviewed
scientific abstracts, articles, reviews, and book chapters. Dr. Jin studied medicine at SUNY Downstate College of Medicine in
Brooklyn, New York. He received his clinical training and subsequent faculty tenure at the New York-Presbyterian Hospital (the
teaching hospital for both Cornell and Columbia Universities) in the areas of internal medicine, hematology, and clinical oncology.
Dr. Jin was honored as Top Chief Medical Officer by ExecRank in 2012, as well as recognized by Leading Physicians of the World
in 2015. Dr. Jin is qualified to serve as a director because of his role with us, and his extensive operational knowledge of,
and executive level management experience in, the healthcare industry.
Meng Li, Chief Operating Officer and Secretary
Ms. Meng Li is our Chief Operating Officer and Secretary and
a former member of the Board of Directors. Ms. Li has over 15 years of executive experience in international marketing, branding,
communications, and media investment consultancy. Ms. Li served as Managing Director at Maxus/GroupM (a WPP Group company) where
she was responsible for business P&L and corporate management from 2006 to 2015. Prior to joining Maxus/Group M, Ms. Li worked
for Zenith Media (a Publicis Group company) from 2000 to 2006 as Senior Manager. Ms. Li received a Bachelor of Arts in International
Economic Law from Dalian Maritime University in China.
Luisa Ingargiola, Chief Financial Officer
Luisa Ingargiola is
our Chief Financial Officer. Ms Ingargiola has significant experience serving as Chief Financial Officer or Audit Chair for multiple
NASDAQ and NYSE companies. She currently serves as Director and Audit Chair for several public companies including ElectraMeccanica
(NASDAQ:SOLO), AgEagle (NYSE:UAVS), Siyata Mobile (NASDAQ:SYTA) and Progress Acquisition Corporation (NASDAQ:PGRWU). From 2007