UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2022
OR
☐ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission file number:
001-38728
(Name of registrant as specified
in its charter)
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
(Address of principal executive offices) (Registrant’s telephone number)
SECURITIES REGISTERED PURSUANT
TO SECTION 12(b) OF THE EXCHANGE ACT:
Title of each Class: Trading Symbol Name of Each Exchange
Common Stock, $0.0001 par value per share ALBT The NASDAQ Capital Market
SECURITIES REGISTERED PURSUANT
TO SECTION 12(g) OF THE EXCHANGE ACT:
None.
Indicate by check mark if the Registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the Registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to
the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. Yes ☐ No ☒
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2022, the last business day of
the Registrant’s most recently completed second fiscal quarter, the market value of our common stock held by non-affiliates was
approximately $15,433,000.
The number of shares of the Registrant’s
common stock, $0.0001 par value per share, outstanding as of March 30, 2023, was 10,164,307.
Documents incorporated by reference: NONE
TABLE OF CONTENTS
PART I
Item 1. Business 1
Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 49
Item 2. Properties 50
Item 3. Legal Proceedings 50
Item 4. Mine Safety Disclosures 50
PART II
Item 6. [Reserved] 51
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 65
Item 8. Financial Statements and Supplementary Data 65
Item 9A. Controls and Procedures 65
Item 9B. Other Information 66
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 66
PART III
Item 10. Directors, Executive Officers and Corporate Governance 67
Item 11. Executive Compensation 74
Item 14. Principal Accounting Fees and Services 81
PART IV
Signatures 89
i
Forward-Looking Statements
CERTAIN STATEMENTS IN THIS ANNUAL REPORT
ON FORM 10-K MAY CONSTITUTE “FORWARD LOOKING STATEMENTS”. WHEN THE WORDS “BELIEVES,” “EXPECTS,” “PLANS,”
“PROJECTS,” “ESTIMATES,” “OBJECTIVES,” “MAY,” “MIGHT,” “PREDICT,”
“TARGET,” “POTENTIAL,” “WILL,” “WOULD,” “COULD,” “SHOULD,” “CONTINUE,”
AND SIMILAR EXPRESSIONS ARE USED, THEY IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT’S
CURRENT BELIEFS AND ASSUMPTIONS AND INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. INFORMATION CONCERNING FACTORS
THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS CAN BE FOUND IN OUR PERIODIC REPORTS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. YOU SHOULD READ THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS THAT WE HAVE FILED AS
EXHIBITS TO THIS ANNUAL REPORT ON FORM 10-K COMPLETELY. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS TO REFLECT FUTURE EVENTS OR CIRCUMSTANCES OR REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS, EXCEPT AS REQUIRED BY APPLICABLE
LAW.
Unless otherwise indicated, references
to “we,” “us,” “our,” “Company,” or “Avalon” mean Avalon GloboCare Corp.
and its subsidiaries, and references to “fiscal” mean the Company’s fiscal year ended December 31. References to the
“parent company” mean Avalon GloboCare Corp.
ii
PART I
ITEM 1. BUSINESS
Overview
We are a clinical-stage, vertically integrated,
leading CellTech bio-developer dedicated to advancing and empowering innovative and transformative immune effector cell therapy and laboratory
services. Through our membership interest in Lab Services MSO (“Lab Services”), we plan to focus on precision diagnostics
along with toxicology and wellness testing. Through our subsidiary structure with unique integration of verticals from innovative R&D
to automated bioproduction and accelerated clinical development, we are establishing a leading role in the fields of cellular immunotherapy
(including CAR-T), and laboratory services.
Laboratory Services is focused on delivering
high quality services related to toxicology and wellness testing and provides a broad portfolio of diagnostic tests including drug testing,
toxicology, and a broad array of test services, from general bloodwork to anatomic pathology, and urine toxicology. Specific capabilities
include STAT blood testing, qualitative drug screening, genetic testing, urinary testing, sexually transmitted disease testing and more.
The panels that we test for are thyroid panel, comprehensive metabolic panel, kidney profile, liver function tests, and other individual
tests. Through Laboratory Services, we use fast, accurate, and efficient equipment to provide practitioners with the tools to quickly
determine if a patient is following their designated treatment plan. In most instances, we are able to provide a practitioner with qualitative
drug class results the same day the sample is received. We provide an extensive chemistry test menu that gives physicians the information
to better treat their patients and maintain their overall wellness and have developed a premier reputation for customer service and fast
turnaround times in the industry.
We are also focused on achieving and fostering
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:
Avalon’s midstream bio-processing and bio-production
facility is affiliated with the University of Pittsburgh Medical Center where our leading candidate AVA-011, as described below, is undergoing
process development to generate clinical grade CAR-T cells for upcoming clinical trial in the US.
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:
1
For the year ended December 31, 2022, we generated
rental revenue from our commercial real property in New Jersey, where we are headquartered. Starting in 2023, in addition to the
rental, we also plan to generate income through our membership interest in Lab Services MSO.
Corporate and Available
Information
We are incorporated
in Delaware. Our website is located at http://www.avalon-globocare.com. On our website, investors can obtain, free of
charge, a copy of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, our Code of Conduct and
Business Ethics, including disclosure related to any amendments or waivers thereto, other reports and any amendments thereto filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, as amended, as soon as reasonably practicable after we file
such material electronically with, or furnish it to, the Securities and Exchange Commission, or the SEC. None of the information posted
on our website is incorporated by reference into this Annual Report. The SEC also maintains a website at http://www.sec.gov that
contains reports, proxy and information statements and other information regarding us and other companies that file materials with the
SEC electronically.
China Operations
Due to the winding down
of the medical related consulting services segment, in November 2022, we decided to cease all operations in the People’s Republic
of China (the “PRC”) with the exception of a small administrative office, in Shanghai. We, through our Nevada Subsidiary Avactis
Biosciences Inc., will continue to own Avactis Nanjing Biosciences Ltd., which only owns a patent and is not considered an operating entity.
In addition, we reconstituted our board in December 2022 at our annual meeting of stockholders and our directors who were citizens of
China did not stand for re-election at our annual meeting. We do not expect nor do we plan that we will further operate in the PRC or
generate revenue from PRC operations for the foreseeable future.
2
The following diagram illustrates our corporate
structure:
Recent Developments
In the fourth quarter of 2022, we conducted a
private placement offering for shares of our newly designated Series A Convertible Preferred Stock, stated value $1,000 per share (the
“Series A Preferred Stock”). We entered into a securities purchase agreement (the “Securities Purchase Agreement”),
with certain accredited investors named therein, including Wenzhao Lu, the chairman of our board of directors, pursuant to which we sold
an aggregate of 9,000 shares of our Series A Preferred Stock for the gross proceeds of $9,000,000, which funds were used to pay the cash
purchase price in connection with our acquisition of Lab Services.
On February 9, 2023, we entered into and closed
an Amended and Restated Membership Interest Purchase Agreement (the “Amended MIPA”), by and among Avalon Laboratory Services,
Inc., a wholly-owned subsidiary of us (“Avalon Laboratory Services”), SCBC Holdings LLC, Laboratory Services, the Zoe Family
Trust, Bryan Cox and Sarah Cox. The Amended MIPA amended and restated, in its entirety, that certain Membership Interest Purchase Agreement,
dated November 7, 2022 (the “Original MIPA”).
Under the Amended MIPA, we acquired from SCBC
Holdings LLC through our subsidiary Avalon Laboratory Services, forty percent (40%) of all the issued and outstanding equity interests
of Laboratory Services, free and clear of all liens (the “Laboratory Services MSO Acquisition”). As part of the consideration
for the Laboratory Services MSO Acquisition, we issued shares of our newly designated Series B Convertible Stock, stated value $1,000
per share (“the Series B Preferred Stock”). Further, Avalon Laboratory Services paid SCBC Holdings LLC $21,000,000 for all
the issued and outstanding equity interests of Laboratory Services, which comprised of (i) $9,000,000 in cash, (ii) $11,000,000 pursuant
to the issuance of the Series B Preferred Stock, and (iii) a $1,000,000 cash payment on February 9, 2024.
In addition, at any time during the period beginning
on the closing date of the Laboratory Services MSO Acquisition and ending on the date nine (9) months after such closing date, Avalon
Laboratory Services, or its designated affiliates under the Amended MIPA, may purchase from SCBC Holdings LLC twenty percent (20%) of
the total issued and outstanding equity interests of Laboratory Services MSO for the purchase price of (i) $6,000,000 in cash and (ii)
the issuance of an additional 4,000 shares of Series B Preferred Stock valued at $4,000,000, in accordance with the terms and conditions
set forth in the Amended MIPA.
Sales and Marketing
We seek to develop new business through relationships
driven by our senior management, which have extensive contacts throughout the healthcare system. Our senior management will be seeking
opportunities for joint ventures, strategic relationships and acquisitions in consulting, biomedical innovations, laboratory, and medical
device companies. In addition, through our membership interest in Lab Services, we plan to generate revenue from toxicology and wellness
laboratory testing. We also intend to seek opportunities to expand the operations of Lab Services, through acquisition of additional
lab companies and through the opening of new lab locations.
3
Consulting Services
Due to the winding down of the medical related
consulting services in 2022, the Company decided to cease all operations of Avalon Shanghai and no longer has any material revenues or
expenses in Avalon Shanghai.
Markets
Laboratory Services
Through our membership interest in Laboratory
Services, we are focused on delivering high quality services related to toxicology and wellness testing. We use fast, accurate, and efficient
equipment to provide practitioners with the tools to quickly determine if a patient is following their designated treatment plan. In
most instances, we are able to provide a practitioner with qualitative drug class results the same day the sample is received. We provide
an extensive chemistry test menu that gives physicians the information to better treat their patients and maintain their overall wellness.
The panels that we test for are thyroid panel, comprehensive metabolic panel, kidney profile, liver function tests, and other individual
tests.
Cellular Therapy
We focus on the following markets in developing
our cellular therapy business:
Revenue
Avalon RT 9 Properties, LLC
In May 2017, we acquired commercial property
located in Freehold, New Jersey. This property is now our corporate headquarters and contains several commercial tenants that generate
revenue through rental income.
Laboratory Services
On February 9, 2023,
we acquired membership interest in Lab Services. We anticipate generating revenue through this membership interest in the areas of toxicology
and wellness testing.
Strategic Development
Through our wholly owned subsidiary Lab Services,
we plan to embark in a rollup acquisition strategy of small to medium size laboratories accretive to our strategy and complimentary to
our membership interest in Lab Services. We also intend to pursue the acquisition and development of healthcare related technologies
for cell related diagnostics and therapeutics through acquisition, licensing or joint ventures with major universities and biotech companies.
seeking laboratory or medical device acquisitions.
Intellectual Property
Our goal is to obtain, maintain and enforce patent
rights for our products, formulations, processes, methods of use and other proprietary technologies, preserve our trade secrets, and
operate without infringing on the proprietary rights of other parties, both in the United States and abroad. Our policy is to actively
seek to obtain, where appropriate, the broadest intellectual property protection possible for our current product candidates and any
future product candidates, proprietary information and proprietary technology through a combination of contractual arrangements and patents,
both in the United States and abroad. Even patent protection, however, may not always afford us with complete protection against competitors
who seek to circumvent our patents. If we fail to adequately protect or enforce our intellectual property rights or secure rights to
patents of others, the value of our intellectual property rights would diminish. To this end, we require all of our employees, consultants,
advisors and other contractors to enter into confidentiality agreements that prohibit the disclosure and use of confidential information
and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions relevant to our
technologies and important to our business.
4
Competition
Laboratory Services
While there has been consolidation in the diagnostic
information services industry in recent years, the laboratory testing industry is fragmented and highly competitive. We primarily compete
with three types of clinical testing providers: commercial clinical laboratories IDN-affiliated laboratories and physician-office laboratories.
Our largest commercial clinical laboratory competitors are Quest Diagnostic Laboratories and Laboratory Corporation of America. In addition,
we compete with many smaller regional and local commercial clinical laboratories, specialized advanced laboratories and providers of
consumer-initiated testing. There also has been a trend among physician practices to establish their own histology laboratory capabilities
and/or bring pathologists into their practices, thereby reducing referrals from these practices and increasing the competitive position
of these practices.
In addition, we believe that consolidation in
the diagnostic information services industry will continue. A significant portion of clinical testing is likely to continue to be performed
by independent delivery networks (including hospitals and hospital health systems) (“IDNs”), which generally have affiliations
with community clinicians and may have more, or more convenient, locations in a market. As a result, we compete against these affiliated
laboratories primarily on the basis of service capability, quality and pricing. In addition, market activity may increase the competitive
environment. For example, IDN ownership of physician practices may enhance the ties of the clinicians to IDN-affiliated laboratories,
enhancing the competitive position of IDN-affiliated laboratories.
The diagnostic information services industry
is faced with changing technology, new product introductions and new service offerings. Competitors may compete using advanced technology,
including technology that enables more convenient or cost-effective testing. Digital pathology, still in an emerging state, is an example
of this. Competitors also may compete on the basis of new service offerings. Competitors also may offer testing to be performed outside
of a commercial clinical laboratory, such as (1) point-of-care testing that can be performed by physicians in their offices; (2) testing
that can be performed by IDNs in their own laboratories; and (3) home testing that can be carried out without requiring the services
of outside providers.
Clinical
The development and commercialization of new
drug products is highly competitive. We expect that we will face significant competition from major pharmaceutical companies, specialty
pharmaceutical companies and biotechnology companies worldwide with respect to our product candidates that we may seek to develop or
commercialize in the future. Specifically, due to the large unmet medical need, global demographics and relatively attractive reimbursement
dynamics, the markets in which we are seeking to develop products are fiercely competitive and there are a number of large pharmaceutical
and biotechnology companies that currently market and sell products or are pursuing the development of product candidates similar to
ours. Our competitors may succeed in developing, acquiring or licensing technologies and drug products that are more effective, have
fewer or more tolerable side effects or are less costly than any product candidates that we are currently developing or that we may develop,
which could render our product candidates obsolete and noncompetitive.
Our commercial opportunity could be reduced or
eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects,
are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other marketing
approval for their products before we are able to obtain approval for ours, which could result in our competitors establishing a strong
market position before we are able to enter the market.
5
General
Many of our existing and potential future competitors
have significantly greater financial resources and expertise in lab services and operations, research and development, manufacturing,
preclinical testing, conducting clinical studies, obtaining marketing approvals and marketing approved products than we do. Mergers and
acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller
number of our competitors. Smaller, or early stage, companies may also prove to be significant competitors, particularly through collaborative
arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific
and management personnel and establishing clinical study sites and patient registration for clinical studies, as well as in acquiring
technologies complementary to, or necessary for, our programs.
We expect that our ability to compete effectively
will depend upon our ability to:
● successfully operate and expand our lab services and locations;
● attract and retain key personnel; and
Failure to do one or more of these activities
could have an adverse effect on our business, financial condition or results of operations.
Avalon RT 9 Properties LLC
Our executive commercial building in Freehold,
New Jersey is located on a major highway and is one of the largest buildings in the surrounding areas. It is centrally located and maintains
high occupancy. There are other commercial properties in the vicinity that offer similar amenities. However, premier executive offices
are limited and as such we expect to continue to maintain high occupancy in the near term.
Employees
As of March 30, 2023, we employed six employees,
five of which are full time employees. None of our employees are represented by a collective bargaining arrangement.
Government Regulation
Overview
The healthcare industry in the U.S. is highly
regulated and subject to changing political, legislative, regulatory, and other influences. Further, the healthcare industry is currently
undergoing rapid change. We are uncertain how, when or in what context these new changes will be adopted or implemented. These new regulations
could create unexpected liabilities for us, could cause us or our members to incur additional costs and could restrict our or our clients’
operations. Many of the laws are complex and their application to us, our clients, or the specific services and relationships we have
with our members are not always clear. Our failure to anticipate accurately the application of these laws and regulations, or our other
failure to comply, could create liability for us, result in adverse publicity, and otherwise negatively affect our business.
6
Holding Foreign Companies Accountable Act
Compliance
The Holding Foreign Companies Accountable Act,
or the HFCA Act, was enacted on December 18, 2020. According to the HFCA Act, if the SEC determines that Avalon has filed audit reports
issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning
in 2021, the SEC will prohibit Avalon’s securities from being traded on a national securities exchange or in the over-the-counter
trading market in the United States.
On December 16, 2021, the PCAOB issued a Determination
Report which reported that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered
in: (1) mainland China of the People’s Republic of China, because of a position taken by one or more authorities in mainland China;
and (2) Hong Kong, a Special Administrative Region of the PRC, because of a position taken by one or more authorities in Hong Kong.
Avalon’s auditor is Marcum LLP (“Marcum”),
based in New York, New York. Marcum is registered with the PCAOB and is subject to laws in the United States pursuant to which the PCAOB
conducts regular inspections to assess their compliance with the applicable professional standards. Since Marcum is located in the United
States, the PCAOB has been able to conduct inspections of Marcum. In addition, Marcum is not among the PCAOB registered public accounting
firms registered in mainland China or Hong Kong that are subject to PCAOB’s determination on December 16, 2021.
Although the audit reports of Avalon are prepared
by U.S. auditors that are subject to inspection by the PCAOB, the PCAOB is currently unable to conduct inspections over the audit work
of Avalon’s independent registered public accounting firms with respect to Avalon’s operations in mainland China without
the approval of certain Chinese authorities. Also, there is no guarantee that future audit reports will be prepared by auditors that
are completely inspected by the PCAOB and, as such, future investors may be deprived of such inspections, which could result in limitations
or restrictions to Avalon’s access of the U.S. capital markets.
Inspections of certain other firms that the PCAOB
has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which
may be addressed as part of the inspection process to improve future audit quality. However, the PCAOB is currently unable to inspect
an auditor’s audit work related to a company’s operations in China where such documentation of the audit work is located
in China. As a result, Avalon’s investors may be deprived of the benefits of the PCAOB’s oversight of auditors that are located
in China through such inspections.
On March 24, 2021, the SEC adopted interim final
rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. Avalon will be required to
comply with these rules if the SEC identifies us as having a “non-inspection” year under a process to be subsequently established
by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements
described above.
On June 22, 2021, the U.S. Senate passed a bill
which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years
required for triggering the prohibitions under the HFCA Act from three years to two, which would shorten the timeframe before Avalon’s
share may be delisted and before the trading in Avalon’s shares is prohibited.
On November 5, 2021, the SEC approved Rule 6100
adopted by the PCAOB to determine its inability to inspect or investigate registered firms completely under the HFCA Act. This rule establishes
the framework for the PCAOB to make these required determinations. The trading in Avalon’s securities may be prohibited under the
HFCA Act if the PCAOB subsequently determines Avalon’s audit work is performed by auditors that the PCAOB is unable to inspect
or investigate completely pursuant to Rule 6100, and as a result, U.S. national securities exchanges, such as Nasdaq, may determine to
delist Avalon’s securities. Such a delisting would likely cause the value of such securities to significantly decline or become
worthless.
7
The SEC may propose additional regulatory or
legislative requirements or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6,
2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from
Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations
to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of
the concepts of these recommendations were implemented with the enactment of the HFCA Act. However, some of the recommendations were
more stringent than the HFCA Act. For example, if a company was not subject to PCAOB inspection, the report recommended that the transition
period before a company would be delisted would end on January 1, 2022.
The SEC has announced that the SEC staff is preparing
a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report.
It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations
will be adopted. The implications of this possible regulation in addition to the requirements of the HFCA Act are uncertain. Although
Avalon is currently not subject to the HFCA Act, any uncertainty of its applicability to Avalon, for example if Avalon switched to using
a PRC-based auditing firm, could cause the market price of Avalon’s securities to be materially and adversely affected and could
cause Avalon’s securities to be delisted or prohibited from being traded “over-the-counter”. If Avalon’s securities
are unable to be listed on another securities exchange, such a delisting would substantially impair your ability to sell or purchase
Avalon’s securities when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative
impact on the price of Avalon’s securities. See “Risk Factors— Trading in Avalon’s securities may be restricted
under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or fully investigate Avalon’s
auditors, and as a result, U.S. national securities exchanges, such as Nasdaq, may determine to delist Avalon’s securities.
Drug Approval Process
The research, development, testing, manufacture,
labeling, promotion, advertising, distribution and marketing, among other things, of our product candidates are extensively regulated
by governmental authorities in the United States and other countries. In the United States, the FDA regulates drugs under the Federal
Food, Drug, and Cosmetic Act, or the FDCA, and its implementing regulations. Failure to comply with the applicable U.S. requirements
may subject us to administrative or judicial sanctions, such as the FDA’s refusal to approve a pending new drug application, or
NDA, or a pending biologics license application, or BLA, warning letters, product recalls, product seizures, total or partial suspension
of production or distribution, injunctions and/or criminal prosecution.
Pharmaceutical products such as ours may not
be commercially marketed without prior approval from the FDA and comparable regulatory agencies in other countries. In the United States,
the process to receiving such approval is long, expensive and risky, and includes the following steps:
● pre-clinical laboratory tests, animal studies, and formulation studies;
● submission to the FDA of an NDA or BLA;
● FDA review and approval of the NDA or BLA.
8
Regulation by U.S. and foreign governmental authorities
is a significant factor affecting our ability to commercialize any of our products, as well as the timing of such commercialization and
our ongoing research and development activities. The commercialization of drug products requires regulatory approval by governmental
agencies prior to commercialization. Various laws and regulations govern or influence the research and development, non-clinical and
clinical testing, manufacturing, processing, packing, validation, safety, labeling, storage, record keeping, registration, listing, distribution,
advertising, sale, marketing and post-marketing commitments of our products. The lengthy process of seeking these approvals, and the
subsequent compliance with applicable laws and regulations, require expending substantial resources.
The results of pre-clinical testing, which include
laboratory evaluation of product chemistry and formulation, animal studies to assess the potential safety and efficacy of the product
and its formulations, details concerning the drug manufacturing process and its controls, and a proposed clinical trial protocol and
other information must be submitted to the FDA as part of an IND that must be reviewed and become effective before clinical testing can
begin. The study protocol and informed consent information for patients in clinical trials must also be submitted to an independent Institutional
Review Board, or IRB, for approval covering each institution at which the clinical trial will be conducted. Once a sponsor submits an
IND, the sponsor must wait 30 calendar days before initiating any clinical trials. If the FDA has comments or questions within this 30-day
period, the issue(s) must be resolved to the satisfaction of the FDA before clinical trials can begin. In addition, the FDA, an IRB or
the company may impose a clinical hold on ongoing clinical trials due to safety concerns. If the FDA imposes a clinical hold, clinical
trials can only proceed under terms authorized by the FDA. Our pre-clinical and clinical studies must conform to the FDA’s Good
Laboratory Practice, or GLP, and Good Clinical Practice, or GCP, requirements, respectively, which are designed to ensure the quality
and integrity of submitted data and protect the rights and well-being of study patients. Information for certain clinical trials also
must be publicly disclosed within certain time limits on the clinical trial registry and results databank maintained by the NIH.
Typically, clinical testing involves a three-phase
process; however, the phases may overlap or be combined:
A therapeutic product candidate being studied
in clinical trials may be made available for treatment of individual patients, in certain circumstances. Pursuant to the 21st Century
Cures Act (Cures Act), which was signed into law in December 2016. The manufacturer of an investigational product for a serious disease
or condition is required to make available, such as by posting on its website, its policy on evaluating and responding to requests for
individual patient access to such investigational product.
The results of the pre-clinical and clinical
testing, chemistry, manufacturing and control information, proposed labeling and other information are then submitted to the FDA in the
form of either an NDA or BLA for review and potential approval to begin commercial sales. In responding to an NDA or BLA, the FDA may
grant marketing approval, request additional information in a Complete Response Letter, or CRL, or deny the approval if it determines
that the NDA or BLA does not provide an adequate basis for approval. A CRL generally contains a statement of specific conditions that
must be met in order to secure final approval of an NDA or BLA and may require additional testing. If and when those conditions have
been met to the FDA’s satisfaction, the FDA will typically issue an approval letter, which authorizes commercial marketing of the
product with specific prescribing information for specific indications, and sometimes with specified post-marketing commitments and/or
distribution and use restrictions imposed under a Risk Evaluation and Mitigation Strategy program. Any approval required from the FDA
might not be obtained on a timely basis, if at all.
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Among the conditions for an NDA or BLA approval
is the requirement that the manufacturing operations conform on an ongoing basis with cGMPs. In complying with cGMPs, we must expend
time, money and effort in the areas of training, production and quality control within our own organization and at our contract manufacturing
facilities. A successful inspection of the manufacturing facility by the FDA is usually a prerequisite for final approval of a pharmaceutical
product. Following approval of the NDA or BLA, we and our manufacturers will remain subject to periodic inspections by the FDA to assess
compliance with cGMPs requirements and the conditions of approval. We will also face similar inspections coordinated by foreign regulatory
authorities.
Disclosure of Clinical Trial Information
Sponsors of certain clinical trials of FDA-regulated
products are required to register and disclose certain clinical trial information. Information related to the product, patient population,
phase of investigation, trial sites and investigators, and other aspects of the clinical trial are then made public as part of the registration.
Sponsors are also obligated to disclose the results of their clinical trials after completion. Disclosure of the results of these trials
can be delayed in certain circumstances for up to two years after the date of completion of the trial. Competitors may use this publicly
available information to gain knowledge regarding the progress of development programs.
Expedited Development and Review Programs
The FDA has a Fast Track program that is intended
to expedite or facilitate the process for reviewing new drugs and biological products that meet certain criteria. Specifically, new drugs
and biological products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition
and demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of
the product and the specific indication for which it is being studied. The sponsor of a new drug or biologic may request the FDA to designate
the drug or biologic as a Fast Track product at any time during the clinical development of the product. Unique to a Fast Track product,
the FDA may consider for review sections of the marketing application on a rolling basis before the complete application is submitted,
if the sponsor provides a schedule for the submission of the sections of the application, the FDA agrees to accept sections of the application
and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the
application.
Any product submitted to the FDA for marketing,
including under a Fast Track program, may be eligible for other types of FDA programs intended to expedite development and review, such
as priority review and accelerated approval. Under the Breakthrough Therapy program, products intended to treat a serious or life-threatening
disease or condition may be eligible for the benefits of the Fast Track program when preliminary clinical evidence demonstrates that
such product may have substantial improvement on one or more clinically significant endpoints over existing therapies. Additionally,
FDA will seek to ensure the sponsor of a breakthrough therapy product receives timely advice and interactive communications to help the
sponsor design and conduct a development program as efficiently as possible. Any product is eligible for priority review if it has the
potential to provide safe and effective therapy where no satisfactory alternative therapy exists or a significant improvement in the
treatment, diagnosis or prevention of a disease compared to marketed products. The FDA will attempt to direct additional resources to
the evaluation of an application for a new drug or biological product designated for priority review in an effort to facilitate the review.
Additionally, a product may be eligible for accelerated approval. Drug or biological products studied for their safety and effectiveness
in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive
accelerated approval, which means that they may be approved on the basis of adequate and well-controlled clinical studies establishing
that the product has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an
effect on a clinical endpoint other than survival or irreversible morbidity. As a condition of approval, the FDA may require that a sponsor
of a drug or biological product receiving accelerated approval perform adequate and well-controlled post-marketing clinical studies.
In addition, the FDA currently requires as a condition for accelerated approval the pre-approval of promotional materials, which could
adversely impact the timing of the commercial launch of the product. Fast Track designation, Breakthrough Therapy designation, priority
review and accelerated approval do not change the standards for approval but may expedite the development or approval process.
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Regenerative Medicine Advanced Therapies
(RMAT) Designation
The FDA has established a Regenerative Medicine
Advanced Therapy, or RMAT, designation as part of its implementation of the 21st Century Cures Act, or Cures Act. The RMAT designation
program is intended to fulfill the Cures Act requirement that the FDA facilitate an efficient development program for, and expedite review
of, any drug that meets the following criteria: (1) it qualifies as a RMAT, which is defined as a cell therapy, therapeutic tissue engineering
product, human cell and tissue product, or any combination product using such therapies or products, with limited exceptions; (2) it
is intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition; and (3) preliminary clinical evidence
indicates that the drug has the potential to address unmet medical needs for such a disease or condition. Like breakthrough therapy designation,
RMAT designation provides potential benefits that include more frequent meetings with FDA to discuss the development plan for the product
candidate, and eligibility for rolling review and priority review. Products granted RMAT designation may also be eligible for accelerated
approval on the basis of a surrogate or intermediate endpoint reasonably likely to predict long-term clinical benefit, or reliance upon
data obtained from a meaningful number of sites, including through expansion to additional sites. RMAT-designated products that receive
accelerated approval may, as appropriate, fulfill their post-approval requirements through the submission of clinical evidence, clinical
studies, patient registries, or other sources of real world evidence (such as electronic health records); through the collection of larger
confirmatory data sets; or via post-approval monitoring of all patients treated with such therapy prior to approval of the therapy.
Post-Approval Requirements
Oftentimes, even after a drug has been approved
by the FDA for sale, the FDA may require that certain post-approval requirements be satisfied, including the conduct of additional clinical
studies. If such post-approval requirements are not satisfied, the FDA may withdraw its approval of the drug. In addition, holders of
an approved NDA or BLA are required to report certain adverse reactions to the FDA, comply with certain requirements concerning advertising
and promotional labeling for their products, and continue to have quality control and manufacturing procedures conform to cGMPs after
approval. The FDA periodically inspects the sponsor’s records related to safety reporting and/or manufacturing facilities; this
latter effort includes assessment of compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money, and effort
in the area of production and quality control to maintain cGMPs compliance.
Other Healthcare Fraud and Abuse Laws
In the U.S., our activities are potentially subject
to regulation by various federal, state and local authorities in addition to the FDA, including but not limited to, the Centers for Medicare
and Medicaid Services, or CMS, other divisions of the U.S. Department of Health and Human Services (such as the Office of Inspector General
and the Health Resources and Service Administration), the U.S. Department of Justice, or the DOJ, and individual U.S. Attorney offices
within the DOJ, and state and local governments. For example, sales, marketing and scientific/educational grant programs may have to
comply with the anti-fraud and abuse provisions of the Social Security Act, the false claims laws, the privacy and security provisions
of the Health Insurance Portability and Accountability Act, or HIPAA, and similar state laws, each as amended, as applicable.
The federal Anti-Kickback Statute prohibits,
among other things, any person or entity from knowingly and willfully offering, paying, soliciting or receiving any remuneration, directly
or indirectly, overtly or covertly, in cash or in kind, to induce or in return for purchasing, leasing, ordering or arranging for the
purchase, lease or order of any item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal healthcare
programs. The term remuneration has been interpreted broadly to include anything of value. The Anti-Kickback Statute has been interpreted
to apply to arrangements between therapeutic product manufacturers on one hand and prescribers, purchasers, and formulary managers on
the other. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution.
The exceptions and safe harbors are drawn narrowly and practices that involve remuneration that may be alleged to be intended to induce
prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to
meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se
illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on
a cumulative review of all of its facts and circumstances. Additionally, the intent standard under the Anti-Kickback Statute was amended
by the ACA to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific intent
to violate it in order to have committed a violation. In addition, the ACA codified case law that a claim including items or services
resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False
Claims Act, or FCA.
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The federal false claims and civil monetary penalty
laws, including the FCA, which imposes significant penalties and can be enforced by private citizens through civil qui tam actions, prohibit
any person or entity from, among other things, knowingly presenting, or causing to be presented, a false or fraudulent claim for payment
to, or approval by, the federal healthcare programs, including Medicare and Medicaid, or knowingly making, using, or causing to be made
or used a false record or statement material to a false or fraudulent claim to the federal government. A claim includes “any request
or demand” for money or property presented to the U.S. government. For instance, historically, pharmaceutical and other healthcare
companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers
would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of
the companies’ marketing of the product for unapproved, off-label, and thus generally non-reimbursable, uses.
HIPAA created additional federal criminal statutes
that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud or to obtain, by
means of false or fraudulent pretenses, representations or promises, any money or property owned by, or under the control or custody
of, any healthcare benefit program, including private third-party payors, willfully obstructing a criminal investigation of a healthcare
offense, and knowingly and willfully falsifying, concealing or covering up by trick, scheme or device, a material fact or making any
materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or
services. Like the Anti-Kickback Statute, the ACA amended the intent standard for certain healthcare fraud statutes under HIPAA such
that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed
a violation.
Many states have similar, and typically more
prohibitive, fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs,
or, in several states, apply regardless of the payor. Additionally, to the extent that our product candidates may in the future be sold
in a foreign country, we may be subject to similar foreign laws.
We may be subject to data privacy and security
regulations by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information
Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, imposes requirements relating to the privacy,
security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and
security standards directly applicable to business associates, independent contractors, or agents of covered entities that receive or
obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also created four new
tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and
gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA and seek
attorneys’ fees and costs associated with pursuing federal civil actions. In addition, many state laws govern the privacy and security
of health information in specified circumstances, many of which differ from each other in significant ways, are often not pre-empted
by HIPAA, and may have a more prohibitive effect than HIPAA, thus complicating compliance efforts.
We expect our product, after approval, may be
eligible for coverage under Medicare, the federal health care program that provides health care benefits to the aged and disabled, and
covers outpatient services and supplies, including certain pharmaceutical products, that are medically necessary to treat a beneficiary’s
health condition. In addition, the product may be covered and reimbursed under other government programs, such as Medicaid and the 340B
Drug Pricing Program. The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national
rebate agreement with the Secretary of the Department of Health and Human Services as a condition for states to receive federal matching
funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. Under the 340B Drug Pricing Program, the manufacturer
must extend discounts to entities that participate in the program. As part of the requirements to participate in certain government programs,
many pharmaceutical manufacturers must calculate and report certain price reporting metrics to the government, such as average manufacturer
price, or AMP, and best price. Penalties may apply in some cases when such metrics are not submitted accurately and timely.
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Additionally, the federal Physician Payments
Sunshine Act, or the Sunshine Act, within the ACA, and its implementing regulations, require that certain manufacturers of drugs, devices,
biological and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program
(with certain exceptions) report annually to CMS information related to certain payments or other transfers of value made or distributed
to physicians and teaching hospitals, or to entities or individuals at the request of, or designated on behalf of, the physicians and
teaching hospitals and to report annually certain ownership and investment interests held by physicians and their immediate family members.
Failure to report accurately could result in penalties. In addition, many states also govern the reporting of payments or other transfers
of value, many of which differ from each other in significant ways, are often not pre-empted, and may have a more prohibitive effect
than the Sunshine Act, thus further complicating compliance efforts.
New Legislation and Regulations
From time to time, legislation is drafted, introduced
and passed in Congress that could significantly change the statutory provisions governing the testing, approval, manufacturing and marketing
of products regulated by the FDA. In addition to new legislation, FDA regulations and policies are often revised or interpreted by the
agency in ways that may significantly affect our business and our products. It is impossible to predict whether further legislative changes
will be enacted or whether FDA regulations, guidance, policies or interpretations will be changed or what the effect of such changes,
if any, may be.
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