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, 2021 and 2020 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
Although the COVID-19
vaccines have generally been introduced to the public, 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, a significant increase in new and variant
strains of COVID-19 cases, availability and effectiveness of COVID-19 vaccines and therapeutics, the level of acceptance of the vaccine
by the general population and any additional preventative and protective actions that governments, or us, may determine are needed.
The occurrence of COVID-19
pandemic had negative impact on our operations. 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 2022.
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.
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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”)
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:
For
the year ended December 31, 2021 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.
47
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 COVID-19 related vaccine and therapeutics.
In addition, the Company
owns commercial real estate that houses its headquarters in Freehold, New Jersey and provides outsourced and customized international
healthcare services to the rapidly changing health care industry primarily focused in the People’s Republic of China. 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 a working capital deficit of $3,078,616 as of December 31, 2021 and has incurred recurring
net losses and generated negative cash flow from operating activities of $9,090,499 and $5,024,479 for the year ended December 31, 2021,
respectively. The Company has a limited operating history and its continued growth is dependent upon the continuation of providing medical
related 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; 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. 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 2022.
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
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● Step 5: Recognize revenue when the company satisfies a performance obligation
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.
The Company’s revenues
are derived from providing medial related consulting services for its’ related parties. Revenues related to its service offerings
are recognized at a point in time when service is rendered. Any payments received in advance of the performance of services are recorded
as deferred revenue until such time as the services are performed.
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.
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 3 of our consolidated financial statements accompanying this report.
49
RESULTS OF OPERATIONS
Comparison of Results of Operations for the
Years Ended December 31, 2021 and 2020
Revenues
For the year ended December
31, 2021, we had real property rental revenue of $1,203,560, as compared to $1,206,854 for the year ended December 31, 2020, a decrease
of $3,294, or 0.3%. We expect that our revenue from real property rent will remain in its current level with minimal increase in the near
future.
For the year ended December
31, 2021, we had medical related consulting services revenue from related party of $187,412, as compared to $170,908 for the year ended
December 31, 2020, an increase of $16,504, or 9.7%. In 2021, we strengthened our efforts in expanding our services to various medical
related fields. Therefore, our medical related consulting services revenue increased. We expect our revenue from medical related consulting
services will remain at or near the current level for the near future.
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, 2021, our real property operating expenses amounted to $829,287, as compared to $851,754 for the year ended December 31, 2020, a decrease
of $22,467, or 2.6%. The decrease was mainly due to a decrease in repairs and maintenance fees of approximately $16,000 and a decrease
in other miscellaneous items of approximately $6,000.
Costs of medical related
consulting services include the cost of labor and related benefits, travel expenses related to medical related consulting services, and
other overhead costs.
For the year ended December
31, 2021, costs of medical related consulting services amounted to $147,167, as compared to $135,805 for the year ended December 31, 2020,
an increase of $11,362, or 8.4%. The increase was primarily attributable to increase in medical related consulting services revenue.
Real Property Operating
Income
Our real property operating
income for the year ended December 31, 2021 was $374,273, representing an increase of $19,173, or 5.4%, as compared to $355,100 for the
year ended December 31, 2020. The increase was mainly attributable to the decrease in real property operating expenses as described above.
We expect our real property operating income will remain in its current level with minimal increase in the near future.
Gross Profit from
Medical Related Consulting Services and Gross Margin
Gross profit from medical related consulting services
for the year ended December 31, 2021 was $40,245, as compared to $35,103 for the year ended December 31, 2020, a change of $5,142, or
14.6%.
Gross margin increased to 21.5% for the year ended
December 31, 2021 from gross margin of 20.5% for the year ended December 31, 2020. The different medical related consulting services agreement
in the year ended December 31, 2021 had an effect of improving gross margin as compared to the year ended December 31 2020. We estimate
that our gross margin from medical related consulting services segment will remain at its current level.
Other Operating Expenses
For
the years ended December 31, 2021 and 2020, other operating expenses consisted of the following:
Years Ended December 31,
Directors and officers liability insurance premium 367,365 276,028
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Loss from Operations
As a result of the foregoing,
for year ended December 31, 2021, loss from operations amounted to $8,833,830, as compared to $12,454,019 for the year ended December
31, 2020, a decrease of $3,620,189, or 29.1%.
Other Income (Expense)
Other income
(expense) mainly includes interest expense and loss from equity method investment.
Other expense,
net, totaled $256,669 for the year ended December 31, 2021, as compared to $225,419 for the year ended December 31, 2020, an increase
of $31,250, or 13.9%, which was primarily attributable to an increase in interest expense of approximately $32,000, and an increase in
loss from equity method investment of approximately $9,000, offset by a decrease in other miscellaneous expense of approximately $9,000.
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Income Taxes
We did not have any income
taxes expense for the years ended December 31, 2021 and 2020 since we incurred losses in these periods.
Net Loss
As a result of the factors
described above, our net loss was $9,090,499 for the year ended December 31, 2021, as compared to $12,679,438 for the year ended December
31, 2020, a decrease of $3,588,939 or 28.3%.
Net Loss Attributable
to Avalon GloboCare Corp. Common Shareholders
The
net loss attributable to Avalon GloboCare Corp. common shareholders was $9,090,499 or $0.11 per share (basic and diluted) for the year
ended December 31, 2021, as compared with $12,679,438, or $0.16 per share (basic and diluted) for the year ended December 31, 2020, a
change of $3,588,939 or 28.3%.
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 $25,244 and $67,237 for the years ended
December 31, 2021 and 2020, respectively. This non-cash gain had the effect of decreasing our reported comprehensive loss.
Comprehensive Loss
As a result
of our foreign currency translation adjustment, we had comprehensive loss of $9,065,255 and $12,612,201 for the years ended December 31,
2021 and 2020, respectively.
Liquidity and Capital
Resources
The Company
has a limited operating history and its continued growth is dependent upon the continuation of providing medical related 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;
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 2022.
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, 2021 and 2020, we had cash balance of approximately $808,000 and $727,000, respectively. These
funds are kept in financial institutions located as follows:
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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.
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, 2020 to December 31, 2021:
December 31, Changes in
Working capital deficit:
Our working capital deficit
increased by $1,772,560 to $3,078,616 at December 31, 2021 from $1,306,056 at December 31, 2020. The increase in working capital
deficit was primarily attributable to a decrease in prepaid expenses and other current assets of approximately $101,000, an increase in
accrued professional fees of approximately $669,000, mainly due to an increase in professional services providers, an increase in accrued
research and development fees of approximately $415,000, an increase in accrued payroll liability and directors’ compensation of
approximately $153,000, an increase in accrued liabilities and other payables – related parties of approximately $200,000, and an
increase in note payable – related party of $390,000, offset by an increase in prepaid professional fees of approximately $108,000.
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, 2021 Compared to the Year Ended December 31, 2020
The
following summarizes the key components of our cash flows for the years ended December 31, 2021 and 2020:
Years Ended December 31,
Net cash used in investing activities (68,135 ) (169,185 )
Net increase (decrease) in cash $ 80,961 $ (38,314 )
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Net cash flow used in
operating activities for the year ended December 31, 2021 was $5,024,479, which primarily reflected our consolidated net loss of approximately
$9,090,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in operating lease obligation of approximately
$121,000, offset by an increase accrued liabilities and other payables of approximately $1,331,000, and an increase in accrued liabilities
and other payables – related parties of approximately $200,000, and the non-cash items adjustment primarily consisting of depreciation
of approximately $312,000, amortization of right-of-use asset of approximately $127,000, and stock-based compensation and service expense
of approximately $2,110,000.
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 $846,000, 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 of approximately $315,000, and stock-based compensation
and service expense of approximately $5,494,000.
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 $68,135 for the year ended December 31, 2021 as compared to $169,185 for the year ended
December 31, 2020. During the year ended December 31, 2021, we made payments for purchase of property and equipment of approximately $18,000
and for improvement of commercial real estate of approximately $10,000, and made additional investment in equity method investment of
approximately $40,000. 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.
Net cash flow provided
by financing activities was $5,170,132 for the year ended December 31, 2021 as compared to $7,664,281 for the year ended December 31,
2020. During the year ended December 31, 2021, we received proceeds from related party borrowings of approximately $2,550,000 and net
proceeds from equity offering of approximately $2,620,000 (net of cash paid for commission and other offering costs of approximately $240,000).
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 other offering costs of approximately $540,000), offset by repayments
made for note payable – related party of $200,000.
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. As of December 31, 2021, the total principal
amount outstanding under the Credit Line was $2.8 million and we have approximately $14.2 million remaining available under the Line
Credit.
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, 2021, we sold a total of 6,258,846 shares of our common stock through Jefferies with an aggregate offering
price of $9,938,140 and we have approximately $5.0 million offering price remaining available under the Sales Agreement.
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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, 2021, 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
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 year ended December 31, 2021 and 2020, we had an unrealized foreign currency translation gain of approximately $25,000 and $67,000,
respectively, because of changes in the exchange rate.
Inflation
The effect
of inflation on our revenue and operating results was not significant.
55
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
None.
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, 2021 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, 2021. 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, 2021 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.
56
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, 2021 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, 2021 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, 2021 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
Nasdaq Notice
On February 9, 2022, the
Company received notice from The Nasdaq Stock Market (“Nasdaq”) that the closing bid price for the Company’s common
stock had been below $1.00 per share for the previous 30 consecutive business days, and that the Company is therefore not in compliance
with the minimum bid price requirement for continued inclusion on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the
“Rule”). Nasdaq’s notice has no immediate effect on the listing or trading of the Company’s common stock on The
Nasdaq Capital Market. The notice indicates that the Company will have 180 calendar days, until August 8, 2022, to regain compliance with
this requirement. The Company can regain compliance with the $1.00 minimum bid listing requirement if the closing bid price of its common
stock is at least $1.00 per share for a minimum of ten (10) consecutive business days during the 180-day compliance period. If the Company
does not regain compliance during the initial compliance period, it may be eligible for additional time to regain compliance. To qualify,
the Company will be required to meet the continued listing requirement for market value of its publicly held shares and all other Nasdaq
initial listing standards, except the bid price requirement, and will need to provide written notice to Nasdaq of its intention to cure
the deficiency during the second compliance period by effecting a reverse stock split, if necessary. If the Company is not eligible or
it appears to Nasdaq that the Company will not be able to cure the deficiency during the second compliance period, Nasdaq will provide
written notice to the Company that the Company’s common stock will be subject to delisting. In the event of such notification, the
Company may appeal Nasdaq’s determination to delist its securities, but there can be no assurance that Nasdaq would grant the Company’s
request for continued listing. The Company intends to actively monitor the minimum bid price of its common stock and may, as appropriate,
consider available options to regain compliance with the Rule. There can be no assurance that the Company will be able to regain compliance
with the Rule or will otherwise be in compliance with other Nasdaq listing criteria.
A delisting of our common stock is likely to reduce
the liquidity of our common stock and may inhibit or preclude our ability to raise additional financing.
2022 Convertible Note
On
March 28, 2022, the Company entered into Securities Purchase Agreement with an accredited investor providing for the sale by the Company
to the investor of a Convertible Note in the amount of $4,000,000 (the “2022 Convertible Note”). In addition to the 2022 Convertible
Note, the investor will also receive a Stock Purchase Warrant (the “2022 Warrant”) to acquire an aggregate of 1,333,333 shares
of common stock. The 2022 Warrants will be exercisable for five years at an exercise price of $1.25. The financing will close on or about
April 15, 2022.
The
2022 Convertible Note will bear interest at 1% per annum payable at maturity and matures ten years from issuance. The investor may elect
to convert all or part of the 2022 Convertible Note, plus accrued interest, at any time into shares of common stock of the Company at
a conversion price equal to 95% of the average of the highest three trading prices for the common stock during the 20-trading day period
ending one trading day prior to the conversion date but in no event will the conversion price be lower than $0.75 per share.
The investor agreed to restrict
its ability to convert the 2022 Convertible Note and exercise the 2022 Warrants and receive shares of common stock such that the number
of shares of common stock held by the investor after such conversion or exercise does not exceed 4.99% of the then issued and outstanding
shares of common stock. Further, Investor agreed to not sell or transfer any or all of the shares of common stock underlying the 2022
Convertible Note or the 2022 Warrant for a period of 90 days beginning on the closing date (the “Lock-Up Period”). Following
the expiration of the Lock-Up Period, the investor has agreed to limit its sale or transfer of such shares of common stock to a maximum
monthly amount equal to 20% of the shares of common stock issuable upon conversion of the 2022 Convertible Note. The Company agreed to
use its reasonable best efforts to file a registration statement on Form S-3 (or other appropriate form) providing for the resale by the
investor of the shares of common stock underlying the 2022 Convertible Note and the 2022 Warrant.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS
THAT PREVENT INSPECTIONS.
Not
applicable.
57
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 64 Chairman of the Board of Directors
David Jin, MD, PhD 54 Chief Executive Officer, President and Director
Meng Li 44 Chief Operating Officer, Secretary and Director
Luisa Ingargiola 54 Chief Financial Officer
Steven A. Sanders 76 Director
Yancen Lu 47 Director
Wilbert J. Tauzin II 78 Director
William B. Stilley, III 54 Director
Tevi Troy 54 Director
Yue “Charles” Li 48 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.
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.
58
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) and Progress Acquisition Corporation (NASDAQ:PGRWU). From 2007 through 2016, Ms. Ingargiola served as the Chief Financial
Officer and then Director at MagneGas Corporation (Nasdaq: MNGA. Prior to 2007, Ms. Ingargiola held various roles as Budget Director and