ITEM 1A.
RISK FACTORS
You
should carefully consider the following material risk factors as well as all other information set forth or referred to in this report
before purchasing shares of our common stock. Investing in our common stock involves a high degree of risk. We may not be successful
in preventing the material adverse effects that any of the following risks and uncertainties may cause. These potential risks and uncertainties
may not be a complete list of the risks and uncertainties facing us. There may be additional risks and uncertainties that we are presently
unaware of, or presently consider immaterial, that may become material in the future and have a material adverse effect on us. You could
lose all or a significant portion of your investment due to any of these risks and uncertainties.
Summary
of Risk Factors
Our
business is subject to numerous risks and uncertainties that you should consider before investing in our company, as fully described
below. The principal factors and uncertainties that make investing in our company risky include, among others:
General
Operating and Business Risks
● We depend upon key personnel and need additional personnel.
● Potential liability claims may adversely affect our business.
● We face intense competition which could cause us to lose market share.
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Risk
Factors Related to Clinical and Commercialization Activity
● We have limited experience in conducting clinical trials.
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Risks
Related to Doing Business in China
Risks
Related to Our Securities
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● We could be subject to securities class action litigation.
General
Operating and Business Risks
Our
business is subject to risks arising from epidemic diseases, such as the recent outbreak of the COVID-19 illness.
The
recent outbreak of the Coronavirus Disease 2019, or COVID-19, which has been declared by the World Health Organization to be
a “public health emergency of international concern,” has spread across the globe and is impacting worldwide economic activity.
Although several vaccines have been developed, a public health epidemic, including COVID-19, poses the risk that we or our employees,
contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including
due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the
impact that COVID-19 could have on our business, the continued spread of COVID-19 and the measures taken by the governments of countries
affected could disrupt the supply chain and adversely impact our business, financial condition or results of operations. The COVID-19
outbreak and mitigation measures may also have an adverse impact on global economic conditions which could have an adverse effect on
our business and financial condition. The extent to which the COVID-19 outbreak impacts our results will depend on future developments
that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and
the actions to contain its impact.
Our
limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those estimates
of our future performance.
We
did not begin operations of our business through AHS until May 2015. We have a limited operating history and limited revenue. As a consequence,
it is difficult, if not impossible, to forecast our future results based upon our historical data. Reliance on the historical results
may not be representative of the results we will achieve, particularly in our combined form. Because of the uncertainties related to
our lack of historical operations, we may be hindered in our ability to anticipate and timely adapt to increases or decreases in revenues
or expenses. If we make poor budgetary decisions as a result of unreliable historical data, we could be less profitable or incur losses,
which may result in a decline in our stock price.
Our
results of operations have not resulted in profitability and we may not be able to achieve profitability going forward.
We
incurred net losses amounting to $9,090,499 and $12,679,438 for the years ended December 31, 2021 and 2020, respectively. If we incur
additional significant losses, our stock price may decline, perhaps significantly. Our management is developing plans to achieve profitability.
Our business plan is speculative and unproven. There is no assurance that we will be successful in executing our business plan or that
even if we successfully implement our business plan, that we will be able to curtail our losses now or in the future. Further, as we
are a new enterprise, we expect that net losses will continue.
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We
depend upon key personnel and need additional personnel.
Our
success depends on the continuing services of Wenzhao Lu, our Chairman of the Board, and David Jin, Meng Li and Luisa Ingargiola, our
executive officers. The loss of Mr. Lu, Dr. Jin, Ms. Li or Ms. Ingargiola could have a material and adverse effect on our business operations.
Additionally, the success of our operations will largely depend upon our ability to successfully attract and maintain competent and qualified
key management personnel. As with any company with limited resources, there can be no guaranty that we will be able to attract such individuals
or that the presence of such individuals will necessarily translate into profitability for us. Our inability to attract and retain key
personnel may materially and adversely affect our business operations.
Currently,
we have several consulting contracts with related parties in China. The loss of such customers could adversely impact our financial condition
and results of operations.
During
the years ended December 31, 2021 and 2020, we recognized an aggregate of $1,390,972 and $1,377,762 in revenues, respectively, of which,
$187,412 and $170,908 was generated from medical related consulting services provided to related parties, respectively. Wenzhao Lu, our
Chairman and significant shareholder, is the Chairman of each of the related parties. The loss of any related party customer would have
a material adverse effect on our financial condition or results of operation, the loss of more than one such related party customer,
or our failure to replace such customer with other customers, could have a material adverse effect on our financial condition and our
results of operations.
Our
auditors have issued an audit opinion which raises substantial doubt about our ability to continue as a going concern.
Our
independent auditors have indicated, in their report on our December 31, 2021 consolidated financial statements, that there is substantial
doubt about our ability to continue as a going concern. We had a working capital deficit of $3,078,616 at December 31, 2021. We have
a limited operating history, incurred recurring net losses and negative cash flows from operating activities, and our continued growth
is dependent upon the continuation of providing medical related consulting services to our related parties and generating rental revenue
from our income-producing real estate property in New Jersey, and obtaining additional financing to fund future obligations and pay liabilities
arising from normal business operations. Our ability to continue as a going concern is dependent on our ability to raise additional capital,
implement our business plan, and generate significant revenues. There are no assurances that we will be successful in our efforts to
generate significant revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. We
plan on raising capital through the sale of equity to implement our business plan. However, there is no assurance these plans will be
realized and that any additional financings will be available to our company on satisfactory terms and conditions, if any.
We
must effectively manage the growth of our operations, or our company will suffer.
To
manage our growth, we believe we must continue to implement and improve our services and products. We may not have adequately evaluated
the costs and risks associated with our planned expansion, and our systems, procedures, and controls may not be adequate to support our
operations. In addition, our management may not be able to achieve the rapid execution necessary to successfully offer our products and
services and implement our business plan on a profitable basis. The success of our future operating activities will also depend upon
our ability to expand our support system to meet the demands of our growing business. Any failure by our management to effectively anticipate,
implement, and manage changes required to sustain our growth would have a material adverse effect on our business, financial condition,
and results of operations.
Our
business requires substantial capital, and if we are unable to maintain adequate financing sources our profitability and financial condition
will suffer and jeopardize our ability to continue operations.
In
connection with the strategic development portion of our business, we will need significant capital in order to implement acquisitions
of technologies. In addition, we will need a significant amount of capital in order to fully implement our advisory business and maintain
our rental property. If we are unable to maintain adequate financing or other sources of capital are not available, we could be forced
to suspend, curtail or reduce our operations, which could harm our revenues, profitability, financial condition and business prospects.
Our
revenue and results of operations may suffer if we are unable to attract new clients, continue to engage existing clients, or sell additional
products and services.
We
presently derive our revenue from providing medical related consulting services to related parties and generating rental revenue from
our income-producing real estate property in New Jersey. Our growth therefore depends on our ability to attract new clients, maintain
existing clients and properties and sell additional products and services to existing clients. This depends on our ability to understand
and anticipate market and pricing trends and our clients’ needs and our ability to deliver consistent, reliable, high-quality services.
Our failure to engage new clients, continue to re-engage with our existing clients or cross-sell additional services could materially
and adversely affect our operating results.
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Our
prospects will suffer if we are not able to hire, train, motivate, manage, and retain a significant number of highly skilled employees.
We
only recently commenced business and we presently generate medical related consulting services from related parties and generate rental
revenue from our income-producing real estate property in New Jersey. On the consulting side, Wenzhao Lu, our Chairman and significant
shareholder, is the Chairman of each of the clients in which we have provided consulting services. Our future success depends upon our
ability to hire, train, motivate, manage, and retain a significant number of highly skilled employees, particularly research analysts,
technical experts, and sales and marketing staff. We will experience competition for professional personnel in each of our business lines.
Hiring, training, motivating, managing, and retaining employees with the skills we need is time consuming and expensive. Any failure
by us to address our staffing needs in an effective manner could hinder our ability to continue to provide high-quality products and
services and to grow our business.
Potential
liability claims may adversely affect our business.
Our
services, which may include recommendations and advice to organizations regarding complex business and operational processes and regulatory
and compliance issues may give rise to liability claims by our clients or by third parties who bring claims against our clients. Healthcare
organizations often are the subject of regulatory scrutiny and litigation, and we also may become the subject of such litigation based
on our advice and services. Any such litigation, whether or not resulting in a judgment against us, may adversely affect our reputation
and could have a material adverse effect on our financial condition and results of operations. We may not have adequate insurance coverage
for claims against us.
In
accordance with our strategic development policy, we may invest in companies for strategic reasons and may not realize a return on our
investments.
From
time to time, we may make investments in companies. These investments may be for strategic objectives to support our key business initiatives
but may also be standalone investments or acquisitions. Such investments or acquisitions could include equity or debt instruments in
private companies, many of which may not be marketable at the time of our initial investment. These companies may range from early-stage
companies that are often still defining their strategic direction to more mature companies with established revenue streams and business
models. The success of these companies may depend on product development, market acceptance, operational efficiency, and other key business
factors. The companies in which we invest may fail because they may not be able to secure additional funding, obtain favorable investment
terms for future financings, or take advantage of liquidity events such as public offerings, mergers, and private sales. If any of these
private companies fails, we could lose all or part of our investment in that company. If we determine that impairment indicators exist
and that there are other-than-temporary declines in the fair value of the investments, we may be required to write down the investments
to their fair value and recognize the related write-down as an investment loss.
Our
growing operations in the PRC could expose us to risks that could have an adverse effect on our costs of operations.
Avalon
Shanghai’s client base is currently located in the PRC. As a result, we expect to continue to add personnel in the PRC. With a
significant focus of our operations in the PRC, our reliance on a workforce in the PRC exposes us to disruptions in the business, political,
and economic environment in that region. Maintenance of a stable political environment between the PRC and the United States is important
to our operations, and any disruption in this relationship may directly negatively affect our operations. Our operations in the PRC require
us to comply with complex local laws and regulatory requirements and expose us to foreign currency exchange rate risk. Our operations
may also be subject to reduced or inadequate protection of our intellectual property rights, and security breaches. Further, it may be
difficult to transfer funds from our Chinese operations to our company. Negative developments in any of these areas could increase our
costs of operations or otherwise harm our business.
We face
intense competition which could cause us to lose market share.
In
the healthcare markets in the United States and the People’s Republic of China, we will compete with large healthcare providers
who have more significant financial resources, established market positions, long-standing relationships, and who have more significant
name recognition, technical, marketing, sales, distribution, financial and other resources than we do. The resources available to our
competitors to develop new services and products and introduce them into the marketplace exceed the resources currently available to
us. This intense competitive environment may require us to make changes in our services, products, pricing, licensing, distribution,
or marketing to develop a market position.
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If
we fail to comply with our obligations in the agreements under which we license intellectual property rights from third parties or otherwise
experience disruptions to our business relationships with our licensors, we could lose intellectual property rights that are important
to our business.
We
are party to a research agreement with the Massachusetts Institute of Technology (“MIT”) for development of chimeric antigen
receptor (CAR) technology. MIT has granted us options to non-exclusively or exclusively license MIT inventions arising under this research
agreement. We may need to negotiate commercially reasonable terms and conditions with MIT to advance our research and development activities
or allow the commercialization of CAR technology or any other product candidates we may identify and pursue.
Avalon
GloboCare and Arbele Limited (“Arbele”) are parties to the joint venture Avactis Biosciences, Inc. (“Avactis”)
for development of AVA-011, a mRNA-based dual anti-CD19-CD22 CAR-T cell therapy candidate. Arbele has granted Avactis an exclusive license
to its rights in this technology. We and Arbele may need to obtain additional licenses from others to advance our research and development
activities or allow the commercialization of mRNA-based CAR technology or any other product candidates we may identify and pursue.
The
Company formed a strategic partnership with HydroPeptide, LLC, a leading epigenetics skin care company, to engage in co-development and
commercialization of a series of clinical-grade, exosome-based cosmeceutical and orthopedic products. As part of this agreement, the
Company signed a three-way Material Transfer Agreement between Avalon GloboCare, HydroPeptide and the University of Pittsburgh Medical
Center.
The
Company and the University of Pittsburgh of the Commonwealth System of Higher Education (the “University”) entered into a
Corporate Research Agreement (the “University Agreement”). Pursuant to the University Agreement, for a term of two
years the University agreed to use its reasonable efforts to perform academic research funded by the Company in connection with the development
of point-of-care modular autonomous processing system to generate clinical-grade AVA-011, a RNA-based chimeric antigen receptor (CAR)
T-cell therapy candidate (the “Project”) subject to the appointment of Dr. Yen Michael S. Hsu as Principal Investigator.
Our
agreements with MIT, Hydropeptide, University of Pittsburg and Arbele impose, and we expect that future agreements will impose, various
development, diligence, commercialization, or other obligations on AVAR and us. In spite of our efforts, these partners may conclude
that we have materially breached its obligations under such agreements and might therefore terminate the agreements, thereby removing
or limiting our ability or our subsidiary AVAR’s ability to develop and commercialize products and technology covered by these
license agreements. If these in-licenses are terminated, or if the underlying patents fail to provide the intended exclusivity, competitors
or other third parties would have the freedom to seek regulatory approval of, and to market, products identical to ours and we may be
required to cease our development and commercialization of CAR or exosome technology or other product candidates that we may identify.
Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations,
and prospects.
Moreover,
disputes may arise regarding intellectual property subject to a licensing agreement, including:
● the priority of invention of patented technology.
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In
addition, the agreements under which we currently license intellectual property or technology from third parties are complex, and certain
provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement
that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase
what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse
effect on our business, financial condition, results of operations, and prospects. Moreover, if disputes over intellectual property that
we have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, we may
be unable to successfully develop and commercialize the affected product candidates, which could have a material adverse effect on our
business, financial conditions, results of operations, and prospects.
We
may face uncertainty and difficulty in obtaining and enforcing our patents and other proprietary rights.
There
can be no assurance that any patent applications we file or license will be approved, or that challenges will not be instituted against
the validity or enforceability of any patent licensed-in or owned by us. Our pending and future patent applications may not result in
patents being issued that protect our product candidates, in whole or in part, or which effectively prevent others from commercializing
competitive product candidates. Even if our patent applications issue as patents, they may not issue in a form that will provide us with
any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors
may be able to circumvent our patents by developing similar or alternative product candidates in a non-infringing manner. The cost of
litigation to uphold the validity and prevent infringement of a patent is substantial. Furthermore, there can be no assurance that others
will not independently develop substantially equivalent technologies not covered by patents to which we have rights or obtain access
to our know-how. In addition, the laws of certain countries may not adequately protect our intellectual property. Our competitors may
possess or obtain patents on products or processes that are necessary or useful to the development, use, or manufacture of our product
candidates. There can also be no assurance that our proposed technology will not infringe upon patents or proprietary rights owned by
others, with the result that others may bring infringement claims against us and require us to license such proprietary rights, which
may not be available on commercially reasonable terms, if at all. Any such litigation, if instituted, could have a material adverse effect,
potentially including monetary penalties, diversion of management resources, and injunction against continued manufacture, use, or sale
of certain products or processes.
We
rely upon non-patented proprietary know-how. There can be no assurance that we can adequately protect our rights in such non-patented
proprietary know-how, or that others will not independently develop substantially equivalent proprietary information or techniques or
gain access to our proprietary know-how. Any of the foregoing events could have a material adverse effect on us. In addition, if any
of our trade secrets, know-how or other proprietary information were to be disclosed, or misappropriated, the value of our trade secrets,
know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.
In
September 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number
of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may
also affect patent litigation. In particular, under the Leahy-Smith Act, the United States transitioned in March 2013 to a “first
to file” system in which the first inventor to file a patent application will be entitled to the patent. Third parties are allowed
to submit prior art before the issuance of a patent by the U.S. Patent and Trademark Office, or USPTO, and may become involved in opposition,
derivation, post-grant and inter partes review, or interference proceedings challenging our patent rights. An adverse determination
in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, which could adversely affect
our competitive position.
The
USPTO has developed new and untested regulations and procedures to govern the full implementation of the Leahy-Smith Act, and many of
the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the “first-to-file” provisions,
only became effective in March 2013. The Leahy-Smith Act has also introduced procedures that may make it easier for third parties to
challenge issued patents, as well as to intervene in the prosecution of patent applications. Finally, the Leahy-Smith Act contains new
statutory provisions that still require the USPTO to issue new regulations for their implementation, and it may take the courts years
to interpret the provisions of the new statute. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the
operation of our business. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution
of our patent applications and the enforcement or defense of our issued patents.
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We
may not be able to protect our intellectual property rights throughout the world.
Filing,
prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive, and
our intellectual property rights in some countries outside the United States may be less extensive than those in the United States. In
addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws
in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside
the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions.
Competitors may use our technologies in jurisdictions where we do not obtain patent protection to develop their own products and may
also export infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United
States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient
to prevent them from competing.
Many
companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The
legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets,
and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for
us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings
to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts
and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our
patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits
that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce
our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual
property that we develop or license.
Patent
terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.
Patents
have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally
20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection
it affords, is limited. Even if patents covering our product candidates are obtained, once the patent life has expired, we may be open
to competition from competitive products, including generics or biosimilars. Given the amount of time required for the development, testing
and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates
are commercialized. As a result, any patents we may obtain may not provide us with sufficient rights to exclude others from commercializing
products similar or identical to ours.
Obtaining
and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements
imposed by governmental patent agencies, and any patent protection we may obtain in the future could be reduced or eliminated for non-compliance
with these requirements.
Periodic
maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid
to the USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents
and/or applications. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary,
fee payment and other similar provisions during the patent application process. There are situations in which non-compliance can result
in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction.
In such an event, our competitors might be able to enter the market and this circumstance would have a material adverse effect on our
business.
It
is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection. If we fail to protect or
enforce our intellectual property rights adequately or secure rights to patents of others, the value of our intellectual property rights
would diminish.
Our
commercial viability will depend in part on obtaining and maintaining patent protection and trade secret protection of our product candidates,
and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges. Our ability
to stop third parties from making, using, selling, offering to sell, or importing our products is dependent upon the extent to which
we obtain rights under valid and enforceable patents or trade secrets that cover these activities.
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The
patent positions of pharmaceutical and biopharmaceutical companies can be highly uncertain and involve complex legal and factual questions
for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in biopharmaceutical
patents has emerged to date in the United States. The biopharmaceutical patent situation outside the United States is even more uncertain.
Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value
of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in the patents we
own. Further, if any of our patents are deemed invalid and unenforceable, it could impact our ability to commercialize or license our
technology.
The
degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately
protect our rights or permit us to gain or keep our competitive advantage. For example:
● the patents of others may have an adverse effect on our business.
We
also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable.
However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants,
contractors, outside scientific collaborators, and other advisors may unintentionally or willfully disclose our information to competitors.
In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently
develop equivalent knowledge, methods, and know-how.
We
may be subject to claims challenging the inventorship of patents and other intellectual property.
We
or our licensors may be subject to claims that former employees, collaborators or other third parties have an interest as an inventor
or co-inventor in intellectual property we own or license. For example, we or our licensors may have inventorship disputes arise from
conflicting obligations of employees, consultants or others who are involved in developing our product candidates. We may be subject
to claims by third parties asserting that our licensors, employees or we have misappropriated their intellectual property, or claiming
ownership of what we regard as our own intellectual property. Litigation may be necessary to defend against these and other claims challenging
inventorship or our or our licensors’ ownership of our owned or in-licensed patents, trade secrets or other intellectual property.
If we or our licensors fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property
rights, such as exclusive ownership of, or right to use, intellectual property that is important to our product candidates. Even if we
are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and
other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations
and prospects.
If
any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other
proprietary rights would be significantly impaired and our business and competitive position would suffer.
Our
viability also depends upon the skills, knowledge and experience of our scientific and technical personnel, and our consultants and advisors.
To help protect our proprietary know-how and our inventions for which patents may be unobtainable or difficult to obtain, we rely on
trade secret protection and confidentiality agreements. To this end, we require all of our employees, consultants, advisors and contractors
to enter into agreements which prohibit unauthorized disclosure and use of confidential information and, where applicable, require disclosure
and assignment to us of the ideas, developments, discoveries and inventions important to our business. These agreements are often limited
in duration and may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of
any unauthorized use or disclosure or the lawful development by others of such information. There is no assurance that such agreements
will be honored by such parties or enforced in whole or part by the courts. We cannot be certain that others will not gain access to
these trade secrets or that our patents will provide adequate protection. Others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets. In addition, enforcing a claim that a third party illegally
obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. If any of our trade
secrets, know-how or other proprietary information is improperly disclosed, the value of our trade secrets, know-how and other proprietary
rights would be significantly impaired and our business and competitive position would suffer.
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We
may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights
and we may be unable to protect our rights to, or use of, our technology.
If
we choose to go to court to stop a third party from using the inventions claimed in our patents, that individual or company has the right
to ask the court to rule that such patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive
and would consume time and other resources, even if we were successful in discontinuing the infringement of our patents. In addition,
there is a risk that the court will decide that these patents are not valid and that we do not have the right to stop the other party
from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop
the other party on the ground that such other party’s activities do not infringe our rights to these patents. In addition, the
U.S. Supreme Court has in the past invalidated tests used by the USPTO in granting patents over the past 20 years. As a consequence,
issued patents may be found to contain invalid claims according to the newly revised standards. Some of our own patents may be subject
to challenge and subsequent invalidation in a variety of post-grant proceedings, particularly inter partes review, before the
USPTO or during litigation under the revised criteria, which make it more difficult to defend the validity of claims in already issued
patents.
Furthermore,
a third party may claim that we or our manufacturing or commercialization partners are using inventions covered by the third party’s
patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product
candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and technical
personnel. There is a risk that a court could decide that we or our commercialization partners are infringing the third party’s
patents and order us or our partners to stop the activities covered by the patents. In addition, there is a risk that a court could order
us or our partners to pay the other party damages for having violated the other party’s patents. The biotechnology industry has
produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types
of products, manufacturing processes or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation
is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products, manufacturing processes
or methods of use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may
not be able to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence
to overcome the presumption of validity enjoyed by issued patents.
As
some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications
in the United States and many foreign jurisdictions are typically not published until eighteen months after filing, and because publications
in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications
for technology covered by our issued patents or our pending applications, or that we were the first to invent the technology. Our competitors
may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent applications may
have priority over our patent applications or patents, which could further require us to obtain rights to issued patents covering such
technologies. If another party has filed a United States patent application on inventions similar to ours, we may have to participate
in an interference proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings
could be substantial, and it is possible that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently
arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to
such inventions.
Some
of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially
greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation or inter partes
review proceedings could have a material adverse effect on our ability to raise the funds necessary to continue our operations.
Some
jurisdictions in which we operate have enacted legislation which allows members of the public to access information under statutes similar
to the U.S. Freedom of Information Act. Even though we believe our information would be excluded from the scope of such statutes, there
are no assurances that we can protect our confidential information from being disclosed under the provisions of such laws. If any confidential
or proprietary information is released to the public, such disclosures may negatively impact our ability to protect our intellectual
property rights.
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Breaches
or compromises of our information security systems or our information technology systems or infrastructure could result in exposure of
private information, disruption of our business and damage to our reputation, which could harm our business, results of operation and
financial condition.
We
utilize information security and information technology systems and websites that allow for the secure storage and transmission of proprietary
or private information regarding our clients, patients, employees, vendors and others, including individually identifiable health information.
A security breach of our network, hosted service providers, or vendor systems, may expose us to a risk of loss or misuse of this information,
litigation and potential liability. Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated
attacks, including on companies within the healthcare industry. Although we believe that we take appropriate measures to safeguard sensitive
information within our possession, we may not have the resources or technical sophistication to anticipate or prevent rapidly-evolving
types of cyber-attacks targeted at us, our clients, our patients, or others who have entrusted us with information. Actual or anticipated
attacks may cause us to incur costs, including costs to deploy additional personnel and protection technologies, train employees, and
engage third-party experts and consultants. We invest in industry standard security technology to protect personal information. Advances
in computer capabilities, new technological discoveries, or other developments may result in the technology used by us to protect personal
information or other data being breached or compromised. To our knowledge, we have not experienced any material breach of our cybersecurity
systems. If our or our third-party service provider systems fail to operate effectively or are damaged, destroyed, or shut down, or there
are problems with transitioning to upgraded or replacement systems, or there are security breaches in these systems, any of the aforementioned
could occur as a result of natural disasters, software or equipment failures, telecommunications failures, loss or theft of equipment,
acts of terrorism, circumvention of security systems, or other cyber-attacks, we could experience delays or decreases in revenue, and
reduced efficiency of our operations. Additionally, any of these events could lead to violations of privacy laws, loss of customers,
or loss, misappropriation or corruption of confidential information, trade secrets or data, which could expose us to potential litigation,
regulatory actions, sanctions or other statutory penalties, any or all of which could adversely affect our business, and cause us to
incur significant losses and remediation costs.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices
Act or Chinese anti-corruption law could have a material adverse effect on our business.
We
are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign
governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining
or retaining business. Chinese anti-corruption law also strictly prohibits bribery of government officials. We have operations, agreements
with third parties and make sales in China, where corruption may occur. Our activities in China create the risk of unauthorized payments
or offers of payments by one of the employees, consultants, sales agents or distributors of our company, even though these parties are
not always subject to our control. It is our policy to implement safeguards to prevent these practices by our employees. However, our
existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or
distributors of our company may engage in conduct for which we might be held responsible.
Violations
of the FCPA or other anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities,
which could negatively affect our business, operating results and financial condition. In addition, the United States government may
seek to hold our company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
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Risk Factors
Related to Clinical and Commercialization Activity
We
may not be able to file INDs to commence additional clinical trials on the timelines we expect, and even if we are able to do so, the
FDA may not permit us to proceed.
Avalon
has initiated its first-in-human clinical trial of CD19 CAR-T candidate, AVA-001 in August 2019 at the Hebei Yanda Lu Daopei Hospital
and Beijing Lu Daopei Hospital in China (the world’s single largest CAR-T treatment network with over 600 patients being treated
with CAR-T) for the indication of relapsed/refractory B-cell acute lymphoblastic leukemia and non-Hodgkin Lymphoma. We hope to file a
number of investigational new drug applications, or INDs, for cell based therapies and diagnostic systems through INDs over the next
several years. However, the timing of our filing of these INDs is primarily dependent on receiving further data from our pre-clinical
studies, and our timing of filing on all product candidates is subject to further research. Additionally, our submission of INDs is contingent
upon having sufficient financial resources to prepare and complete the application.
We
cannot be sure that submission of an IND will result in the United States Food and Drug Administration, or FDA, allowing further clinical
trials to begin, or that, once begun, issues will not arise that result in the suspension or termination of such clinical trials. Any
IND we submit could be denied by the FDA or the FDA could place any future investigation of ours on clinical hold until we provide additional
information, either before or after clinical trials are initiated. Additionally, even if such regulatory authorities agree with the design
and implementation of the clinical trials set forth in an IND or clinical trial application, we cannot guarantee that such regulatory
authorities will not change their requirements in the future. Unfavorable future trial results or other factors, such as insufficient
capital to continue development of a product candidate or program, could also cause us to voluntarily withdraw an effective IND.
We
have limited experience in conducting clinical trials.
We
have limited human clinical trial experience with respect to our product candidates. Although our CEO, Dr. David Jin, is formerly with
the FDA, this will not provide assurance of success. The clinical testing process is governed by stringent regulation and is highly complex,
costly, time-consuming, and uncertain as to outcome, and pharmaceutical products and products used in the regeneration of tissue may
invite particularly close scrutiny and requirements from the FDA and other regulatory bodies. Our failure or the failure of our collaborators
to conduct human clinical trials successfully or our failure to capitalize on the results of human clinical trials for our product candidates
would have a material adverse effect on us. If our clinical trials of our product candidates or future product candidates do not sufficiently
enroll or produce results necessary to support regulatory approval in the United States or elsewhere, or if they show undesirable side
effects, we will be unable to commercialize these product candidates.
To
receive regulatory approval for the commercial sale of our product candidates, we must conduct adequate and well-controlled clinical
trials to demonstrate efficacy and safety in humans. Clinical failure can occur at any stage of the testing. Our clinical trials may
produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and/or non-clinical
testing. In addition, the results of our clinical trials may show that our product candidates are ineffective or may cause undesirable
side effects, which could interrupt, delay or halt clinical trials, resulting in the denial of regulatory approval by the FDA and other
regulatory authorities. In addition, negative, delayed or inconclusive results may result in:
● the withdrawal of clinical trial participants;
● the termination of clinical trial sites or entire trial programs;
● costs of related litigation;
● substantial monetary awards to patients or other claimants;
● impairment of our business reputation;
● loss of revenues; and
● the inability to commercialize our product candidates.
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Delays
in the commencement, enrollment, and completion of clinical testing could result in increased costs to us and delay or limit our ability
to obtain regulatory approval for our product candidates.
Delays
in the commencement, enrollment or completion of clinical testing could significantly affect our product development costs. A clinical
trial may be suspended or terminated by us, the FDA, or other regulatory authorities due to a number of factors. The commencement and
completion of clinical trials require us to identify and maintain a sufficient number of trial sites, many of which may already be engaged
in other clinical trial programs for the same indication as our product candidates. We may be required to withdraw from a clinical trial
as a result of changing standards of care, or we may become ineligible to participate in clinical studies. We do not know whether planned
clinical trials will begin on time or be completed on schedule, if at all. The commencement, enrollment and completion of clinical trials
can be delayed for a number of reasons, including, but not limited to, delays related to:
● findings in pre-clinical studies;
● obtaining regulatory approval to commence a clinical trial;
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● collecting, analyzing and reporting final data from the clinical trials;
If we are required to conduct
additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, we or our development
partners, if any, may be delayed in obtaining, or may not be able to obtain or maintain, clinical or marketing approval for these product
candidates. We may not be able to obtain approval for indications that are as broad as intended, or we may be able to obtain approval
only for indications that are entirely different from those indications for which we sought approval.
Changes in regulatory requirements
and guidance may occur, and we may need to amend clinical trial protocols to reflect these changes with appropriate regulatory authorities.
Amendments may require us to resubmit our clinical trial protocols to IRBs for re-examination, which may impact the costs, timing, or
successful completion of a clinical trial. If we experience delays in the completion of, or if we terminate, our clinical trials, the
commercial prospects for our product candidates will be harmed, and our ability to generate product revenues will be delayed. In addition,
many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the
denial of regulatory approval of a product candidate. Even if we are able to ultimately commercialize our product candidates, other therapies
for the same or similar indications may have been introduced to the market and already established a competitive advantage. Any delays
in obtaining regulatory approvals may:
● impose costly procedures on us; or
● diminish any competitive advantages that we may otherwise enjoy.
Our success depends upon the viability of our
product candidates and we cannot be certain any of them will receive regulatory approval to be commercialized.
We will need FDA approval
to market and sell any of our product candidates in the United States and approvals from FDA-equivalent regulatory authorities in foreign
jurisdictions to commercialize our product candidates in those jurisdictions. In order to obtain FDA approval of any of our product candidates,
we must submit to the FDA a new drug application, or NDA, or a biologics license application, or BLA, demonstrating that the product candidate
is safe for humans and effective for its intended use. This demonstration requires significant research and animal tests, which are referred
to as pre-clinical studies, as well as human tests, which are referred to as clinical trials. Satisfaction of the FDA’s regulatory
requirements typically takes many years, depends upon the type, complexity, and novelty of the product candidate, and requires substantial
resources for research, development, testing and manufacturing. We cannot predict whether our research and clinical approaches will result
in cell therapies that the FDA considers safe for humans and effective for indicated uses. The FDA has substantial discretion in the drug
approval process and may require us to conduct additional pre-clinical and clinical testing or to perform post-marketing studies. The
approval process may also be delayed by changes in government regulation, future legislation, administrative action or changes in FDA
policy that occur prior to or during our regulatory review.
Even if we comply with all
FDA requests, the FDA may ultimately reject one or more of our NDAs or BLAs, as applicable. We cannot be sure that we will ever obtain
regulatory clearance for our product candidates. Failure to obtain FDA approval of any of our product candidates will reduce our number
of potentially salable products and, therefore, corresponding product revenues, and will have a material and adverse impact on our business.
As the results of earlier pre-clinical studies
or clinical trials are not necessarily predictive of future results, any product candidate we advance into clinical trials may not have
favorable results in later clinical trials or receive regulatory approval.
Even if our pre-clinical
studies and clinical trials are completed as planned, clinical trials, we cannot be certain that their results will support the claims
of our product candidates. Positive results in pre-clinical testing and early clinical trials do not ensure that results from later clinical
trials will also be positive, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical
trials and pre-clinical testing. A number of companies in the pharmaceutical industry, including those with greater resources and experience,
have suffered significant setbacks in Phase II or Phase III clinical trials, even after seeing promising results in earlier clinical trials.
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Our clinical trial process
may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure would cause us
to abandon a product candidate and may delay development of other product candidates. Any delay in, or termination of, our clinical trials
will delay or cause us to refrain from the filing of our NDAs and/or BLAs with the FDA and, ultimately, our ability to commercialize our
product candidates and generate product revenues. In addition, our clinical trials to date involve small patient populations. Because
of the small sample size, the results of these clinical trials may not be indicative of future results.
Our business faces significant government regulation,
and there is no guarantee that our product candidates will receive regulatory approval.
Our research and development
activities, pre-clinical studies, anticipated human clinical trials, and anticipated manufacturing and marketing of our potential products
are subject to extensive regulation by the FDA and other regulatory authorities in the United States, as well as by regulatory authorities
in other countries. In the United States, our product candidates are subject to regulation as biological products or as combination biological
products/medical devices under the Federal Food, Drug and Cosmetic Act, the Public Health Service Act and other statutes, as outlined
in the Code of Federal Regulations. Different regulatory requirements may apply to our products depending on how they are categorized
by the FDA under these laws. These regulations can be subject to substantial and significant interpretation, addition, amendment or revision
by the FDA and by the legislative process. The FDA may determine that we will need to undertake clinical trials beyond those currently
planned. Furthermore, the FDA may determine that results of clinical trials do not support approval for the product. Similar determinations
may be encountered in foreign countries. The FDA will continue to monitor products in the market after approval, if any, and may determine
to withdraw its approval or otherwise seriously affect the marketing efforts for any such product. The same possibilities exist for trials
to be conducted outside of the United States that are subject to regulations established by local authorities and local law. Any such
determinations would delay or deny the introduction of our product candidates to the market and have a material adverse effect on our
business, financial condition, and results of operations.
Cell based therapeutics are
subject to ongoing periodic unannounced inspection by the FDA, the Drug Enforcement Agency, other federal agencies and corresponding state
agencies to ensure strict compliance with good manufacturing practices, and other government regulations and corresponding foreign standards.