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, 2024 and 2023 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 Annual Report 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 Annual Report on 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 Annual Report on Form 10-K.
Overview
We are a commercial-stage
company dedicated to developing and delivering precision diagnostic consumer products. We are currently marketing the Keto Air breathalyzer
device and plan to develop additional diagnostic uses of the breathalyzer technology. In addition, we own commercial real estate that
houses our headquarters in Freehold, New Jersey.
We have the following areas of focus in 2024 and 2023:
Laboratory Acquisitions
We had embarked on
a laboratory rollup strategy focused on forming joint ventures and acquiring laboratories that were accretive to our commercial
strategy. As a first step, in February 2023, we acquired a 40% membership interest in Lab Services MSO. Among other things, Lab
Services MSO provides toxicology and wellness testing services, a broad portfolio of diagnostic tests, and a broad array of test
services. During 2025, to preserve cash, the Company entered into discussions with Lab Services MSO for the potential redemption of
our investment and on February 26, 2025, we and Lab Services MSO entered into a Redemption and Abandonment Agreement, whereby Lab
Services MSO redeemed the 40% equity interest in Lab Services MSO held by us. Accordingly, beginning in February 2025, we no longer
offer laboratory services.
Research and Development
We are focused on bringing
forward intellectual property through joint patent filings with the Massachusetts Institute of Technology (“MIT”). We completed
a sponsored research and co-development project with MIT led by Professor Shuguang Zhang as Principal Investigator. Using the unique QTY
code protein design platform, six water-soluble variant cytokine receptors have been successfully designed and tested to show binding
affinity to the respective cytokines. We currently are focused on bringing forward the intellectual property associated with this program
through joint patent submissions.
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Product Commercialization
We have begun the commercialization
and development of a versatile breathalyzer system.
We were granted
exclusive distributorship rights for the KetoAir from Qi Diagnostics for the following territories: North America, South America,
the EU and the UK. For our commercialization strategy, we intend to target the diabetes and obesity markets. We sell the
product through the KetoAir website and social media. We believe the KetoAir device has some competitive advantages to other methods
for measuring ketosis.
The KetoAir is a handheld
device that allows the user to detect acetone levels in exhaled breath. The acetone level is in concentration units (ppm, part-per-million)
such that the user will know his/her real-time ketosis status: inadequate ketosis (0-3.99 ppm), mild ketosis (4-9.99 ppm), optimal ketosis
(10-40 ppm), or alarming level (> 40 ppm). The KetoAir is registered with the United States Food and Drug Administration as a Class
I medical device. The device is also paired with an “AI Nutritionist” software program (via Bluetooth connection) which is
downloadable from Google Play (for Android mobile phones, approved) and iPhone (the app is currently being reviewed by Apple iOS AppStore).
It helps users monitor and manage their ketogenic diet and related programs. We believe the KetoAir can be an essential tool to help diabetic
patients adhere to their therapeutic programs and optimize their ketogenic dietary management.
Other Areas
In order to preserve
cash and focus on our core laboratory rollup strategy and product commercialization, we have currently suspended all research and development
efforts related to cellular therapy in order to redirect our funding efforts to our core business strategies outlined above.
Going Concern
We are a commercial-stage company dedicated to developing and delivering
precision diagnostic consumer products. We are currently marketing the Keto Air breathalyzer device and plan to develop additional diagnostic
uses of the breathalyzer technology.
In
addition, we own commercial real estate that houses our headquarters in Freehold, New Jersey. These consolidated financial statements
have been prepared assuming that we 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, we had working capital deficit of approximately $10,646,000 at December 31, 2024 and had incurred recurring
net losses and generated negative cash flow from operating activities of approximately $7,903,000 and $4,969,000 for the year ended December
31, 2024, respectively.
We have a limited operating
history and our continued growth is dependent upon the continuation of generating rental revenue from our income-producing real estate
property in New Jersey and obtaining additional financing to fund future obligations and pay liabilities arising from ordinary course
business operations. In addition, the current cash balance cannot be projected to cover our operating expenses for the next twelve months
from the release date of this report. These matters raise substantial doubt about our ability to continue as a going concern. Our ability
to continue as a going concern is dependent on our ability to raise additional capital, implement our business plan, and generate sufficient
revenues. There are no assurances that we will be successful in our efforts to generate sufficient revenues, maintain sufficient cash
balance or report profitable operations or to continue as a going concern. We plan on raising capital through the sale of equity to implement
our business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to
us on satisfactory terms and conditions, or at all.
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 we be unable to continue as a going concern.
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Critical
Accounting Policies
Use
of Estimates
The preparation of
the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Changes in these estimates and assumptions may have a material impact on the
consolidated financial statements and accompanying notes. Making estimates requires management to exercise significant judgment. It
is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at
the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to
one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates.
Significant estimates
during the years ended December 31, 2024 and 2023 include the useful life of investment in real estate and intangible assets, the assumptions
used in assessing impairment of long-term assets, the valuation of deferred tax assets and the associated valuation allowances, the valuation
of stock-based compensation, the assumptions used to determine fair value of warrants and embedded conversion features of convertible
note payable, and the fair value of the consideration given and assets acquired in the purchase of our equity interest in Lab Services
MSO.
Investment in Unconsolidated
Companies
We use the equity method
of accounting for our investment in, and earning or loss of, company that we do not control but over which we do exert significant influence.
We apply the equity method by initially recording these investments at cost, as equity method investments, subsequently adjusted for equity
in earnings and cash distributions.
We consider whether the
fair value of our equity method investment has declined below its carrying value whenever adverse event or change in circumstance indicates
that recorded value may not be recoverable. If we consider any decline to be other than temporary (based on various factors, including
historical financial results and the overall health of the investee), then a write-down would be recorded to estimated fair value. Impairment
of equity method investment amounted to $259,579 and $9,651,361 for the years ended December 31, 2024 and 2023, respectively.
We classify distributions
received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment
and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions
received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered
a return of investment and is classified as cash inflows from investing activities.
Real Property Rental
We have determined that
the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“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.
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 probable that taxable profit will be available against which deductible
temporary differences can be utilized.
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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.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the
Years Ended December 31, 2024 and 2023
Real
Property Rental Revenue
For
the year ended December 31, 2024, we had real property rental revenue of $1,333,403, as compared to $1,255,681 for the year ended December
31, 2023, an increase of $77,722, or 6.2%. The increase was primarily attributable to the increase in the number of tenants occupying
the building in the year ended December 31, 2024 as compared to the year ended December 31, 2023. We expect that our revenue from real
property rent will remain at its current level with minimal increase in the near future.
Real Property Operating
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, 2024, our real property operating expenses amounted to $1,065,574, as compared to $1,017,493 for the year ended December 31, 2023,
an increase of $48,081, or 4.7%. The increase was primarily attributable to an increase in electric fee of approximately $40,000 and an
increase in other miscellaneous items of approximately $8,000.
Real Property Operating
Income
Our real property operating
income for the year ended December 31, 2024 was $267,829, representing an increase of $29,641, or 12.4%, as compared to $238,188 for the
year ended December 31, 2023. The increase was primarily attributable to the increase in real property rental revenue as described above.
We expect our real property operating income will remain at its current level with minimal increase in the near future.
Loss from Equity
Method Investment – Lab Services MSO
For the year ended December
31, 2024, we had loss from our investment in Lab Services MSO of $846,588, which consists of our share of Lab Services MSO’s net
income of $79,923, and amortization of identifiable intangible assets acquired from Lab Services MSO acquisition of $666,932, and impairment
of goodwill acquired from Lab Services MSO acquisition of $259,579, which was primarily attributable to Lab Services MSO’s lower
revenues and net incomes than anticipated and the decline in our stock price and market capitalization.
For the year ended December
31, 2023, we had loss from our investment in Lab Services MSO of $8,571,647, which consists of our share of Lab Services MSO’s net
income of $1,236,391, and amortization of identifiable intangible assets acquired from Lab Services MSO acquisition of $611,356, and impairment
of goodwill acquired from Lab Services MSO acquisition of $9,196,682, which was primarily attributable to Lab Services MSO’s lower
revenues and net incomes than anticipated and the decline in our stock price and market capitalization.
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Other Operating Expenses
For
the years ended December 31, 2024 and 2023, other operating expenses consisted of the following:
Years Ended December 31,
Research and development - 109,618
Directors and officers’ liability insurance premium 212,898 349,745
Impairment of laboratory equipment 111,033 -
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Loss from Operations
As a result of the foregoing,
for the year ended December 31, 2024, loss from operations amounted to $4,927,732, as compared to $15,753,683 for the year ended December
31, 2023, representing a decrease of $10,825,951, or 68.7%.
Other (Expense)
Income
Other (expense) income
mainly includes third party and related party interest expense, debt modification charge, change in fair value of derivative liability,
impairment of equity method investment on Epicon, gain on debts extinguishment, and other miscellaneous expense.
Other expense, net, totaled
$2,975,662 for the year ended December 31, 2024, as compared to $953,327 for the year ended December 31, 2023, an increase of $2,022,335,
or 212.1%, which was primarily attributable to an increase in third party interest expense of approximately $1,077,000, mainly driven
by the increase in amortization of debt discount and debt issuance costs of approximately $867,000 and the increased interest expense
of approximately $210,000 from third party debts, an increase in interest expense – related party of approximately $9,000, an increase
in debt modification charge of approximately $839,000, a decrease in gain on debts extinguishment of approximately $683,000, and an increase
in other expense of approximately $56,000, offset by an increase in gain from change in fair value of derivative liability of approximately
$186,000, a decrease in impairment of equity method investment on Epicon of approximately $455,000.
Income Taxes
We did not
have any income taxes expense for the years ended December 31, 2024 and 2023 since we incurred losses in these periods.
Net Loss
As
a result of the factors described above, our net loss was $7,903,394 for the year ended December 31, 2024, as compared to $16,707,010
for the year ended December 31, 2023, a decrease of $8,803,616, or 52.7%.
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Net Loss Attributable
to Avalon GloboCare Corp. Common Shareholders
The
net loss attributable to our common shareholders was $7,903,394, or $8.44 per share (basic and diluted), for the year ended December 31,
2024, as compared to $16,707,010, or $23.80 per share (basic and diluted), for the year ended December 31, 2023, a decrease of $8,803,616,
or 52.7%.
Foreign Currency
Translation Adjustment
Our reporting currency is the
U.S. dollar. The functional currency of our parent company, AHS, Avalon RT 9, Avalon Lab, and Q&A Distribution is the U.S. dollar
and the functional currency of Avalon Shanghai is the Chinese Renminbi (“RMB”). The financial statements of our subsidiary
whose functional currency is the RMB are translated to U.S. dollars using period end rate of exchange for assets and liabilities, average
rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rate 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 loss of $273 and $18,590 for the years ended December 31, 2024 and 2023,
respectively. This non-cash loss had the effect of increasing our reported comprehensive loss in each respective period.
Comprehensive Loss
As a result
of our foreign currency translation adjustment, we had comprehensive loss of $7,903,667 and $16,725,600 for the years ended December 31,
2024 and 2023, respectively.
Liquidity and Capital
Resources
We have
a limited operating history and our continued growth is dependent upon the continuation of generating rental revenue from our income-producing
real estate property in New Jersey, as well as obtaining additional financing to fund future obligations and pay liabilities arising from
ordinary course business operations. In addition, the current cash balance cannot be projected to cover our operating expenses for the
next twelve months from the release date of this report. These matters raise substantial doubt about our ability to continue as a going
concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital, implement our business plan,
and generate sufficient revenues. There are no assurances that we will be successful in our efforts to generate sufficient revenues, maintain
sufficient cash balance or report profitable operations or to continue as a going concern. As described below, we have raised additional
capital through the sale of equity and debt and we plan to raise additional capital in the future through the sale of equity or debt to
implement our business plan. However, there is no assurance these plans will be realized and that any additional financings will be available
to us on satisfactory terms and conditions, if at all.
Liquidity is the ability
of a company to generate funds to support its current and future operations, satisfy its obligations as they come due and otherwise operate
on an ongoing basis. At December 31, 2024 and 2023, we had a cash balance of approximately $2,856,000 and $285,000, respectively. These
funds are kept in financial institutions located as follows:
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The following
table sets forth a summary of changes in our working capital deficit from December 31, 2023 to December 31, 2024:
December 31, Changes in
Working capital deficit:
Our working capital deficit increased
by $4,734,238 to $10,646,057 at December 31, 2024 from $5,911,819 at December 31, 2023. The increase in working capital deficit was primarily
attributable to a decrease in rent receivable of approximately $117,000 driven by collection efforts in the year ended December 31, 2024,
an increase in accrued liabilities and other payables of $161,000 mainly due to the increase in accrued Delaware state franchise tax in
the year ended December 31, 2024, an increase in accrued liabilities and other payables – related parties of approximately $526,000
mainly due to our equity method investment payable paid by a related party on our behalf, a significant increase in advance from pending
sale of noncontrolling interest – related party of approximately $2,622,000 resulting from advance received in connection with the
membership interest purchase agreement entered into in November 2023 in the year ended December 31, 2024, an increase in derivative liability
of approximately $103,000, an increase in note payable, net, of approximately $5,715,000, which was attributable to the reclassification
of note payable from non-current to current, and an increase in convertible note payable, net, of approximately $189,000, offset by n
increase in cash of approximately $2,571,000, a decrease in accrued professional fees of approximately $1,193,000 resulting from payments
made to our professional service providers in the year ended December 31, 2024, a decrease in operating lease obligation of approximately
$119,000, and a decrease in equity method investment payable of approximately $667,000 resulting from payment of $100,000 made to investee
and payment of approximately $567,000 made by a related party on our behalf in the year ended December 31, 2024.
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, 2024 Compared to the Year Ended December 31, 2023
The
following table summarizes the key components of our cash flows for the years ended December 31, 2024 and 2023:
Years Ended December 31,
Net cash used in investing activities (100,000 ) (22,159 )
Effect of exchange rate on cash 1,447 (3,970 )
Net
cash flow used in operating activities for the year ended December 31, 2024 was $4,969,205, which primarily reflected our
consolidated net loss of approximately $7,903,000, and the non-cash item adjustment, consisting of change in fair market value of
derivative liability of approximately $374,000, and the changes in operating assets and liabilities, primarily consisting of a
decrease in accrued liabilities and other payables of approximately $1,165,000 resulting from payments made to our vendors in the
year ended December 31, 2024, and a decrease in operating lease obligation of approximately $123,000, offset by a decrease in rent
receivable of approximately $131,000 driven by our collection efforts, and the non-cash items adjustment, primarily consisting of
depreciation of approximately $178,000, amortization of operating lease right-of-use asset of approximately $123,000, stock-based
compensation and service expense of approximately $522,000, loss from equity method investments of approximately $847,000 which was
mainly attributable to the amortization of identifiable intangible assets acquired from Lab Services MSO acquisition of
approximately $667,000 and the impairment of goodwill acquired from Lab Services MSO acquisition of approximately $260,000,
resulting from Lab Services MSO’s lower revenues and net incomes than anticipated and the decline in our stock price and
market capitalization, distribution of earnings from equity method investment of approximately $612,000, amortization of debt
issuance costs and debt discount of approximately $1,411,000, impairment of laboratory equipment of approximately $111,000, and debt
modification charge of approximately $689,000.
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Net cash
flow used in operating activities for the year ended December 31, 2023 was $6,504,718, which primarily reflected our consolidated net
loss of approximately $16,707,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in operating
lease obligation of approximately $113,000, and the non-cash items adjustment, consisting of change in fair market value of derivative
liability of approximately $188,000, and gain on debts extinguishment of approximately $683,000, offset by depreciation of approximately
$212,000, amortization of operating lease right-of-use asset of approximately $118,000, stock-based compensation and service expense of
approximately $1,180,000, loss from equity method investments of approximately $8,590,000 mainly due to the impairment of goodwill acquired
from Lab Services MSO acquisition resulting from Lab Services MSO’s lower revenues and net incomes than anticipated and the decline
in our stock price and market capitalization, impairment of equity method investment - Epicon of approximately $455,000 due to Epicon’s
series of operating losses and the joint venture partner unable to obtain funds to commence operations, and amortization of debt issuance
costs and debt discount of approximately $544,000 resulting from our outstanding convertible debt and note payable, and the changes in
operating assets and liabilities, primarily consisting of an increase in accrued liabilities and other payables – related parties
of approximately $106,000 driven by the increased accrued interest for related party.
We expect our cash used
in operating activities to increase in the next 12 months due to the following:
● the development and commercialization of new products; and
Net
cash flow used in investing activities was $100,000 for the year ended December 31, 2024, as compared to $22,159 for the year ended December
31, 2023. During the year ended December 31, 2024, we paid $100,000 for the acquisition of a 40% interest in Lab Services MSO. During
the year ended December 31, 2023, we made payment for purchase of property and equipment of approximately $22,000.
Net
cash flow provided by financing activities was $7,638,667 for the year ended December 31, 2024, as compared to $4,825,337 for the year
ended December 31, 2023. During the year ended December 31, 2024, we received net proceeds from the issuance of convertible debts and
warrants of approximately $3,085,000 (net of original issue discount of approximately $177,000 and cash paid for convertible note issuance
costs of approximately $283,000), an advance from the pending sale of a noncontrolling interest in a subsidiary of approximately $2,122,000,
net proceeds from equity offering of approximately $2,719,000 (net of cash paid for commission and other offering costs of approximately
$138,000), and proceeds from issuance of convertible preferred stock of $3,500,000, offset by repayments made for loan payable –
related party of $400,000, and made for convertible debts of approximately $3,388,000. During the year ended December 31, 2023, we received
proceeds from related party borrowings of $850,000, and net proceeds from issuance of convertible debt and warrants of approximately $2,238,000
(net of original issue discount of $135,000 and cash paid for convertible note issuance costs of approximately $327,000), and net proceeds
from issuance of balloon promissory note of approximately $936,000 (net of cash paid for promissory note issuance costs of approximately
$64,000), and net proceeds from equity offering of approximately $616,000 (net of cash paid for commission and other offering costs of
approximately $19,000), and advance from pending sale of noncontrolling interest in subsidiary of approximately $486,000, offset by repayments
made for convertible debt of $300,000.
The following trends
are reasonably likely to result in a material decrease in our liquidity over the near to long term:
● an increase in working capital requirements to finance our current business;
● the cost of being a public company.
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August 2019 Credit
Facility
In the third quarter
of 2019, we entered into a $20 million credit facility (the “Line of Credit”) provided by our Chairman of the Board and a
significant (and our largest) stockholder, Wenzhao Lu. The Line of Credit allowed us to request loans thereunder and to use the proceeds
of such loans for working capital and operating expense purposes until the facility matured on December 31, 2024.
At-the-Market Offering
In June 2023, we entered
into a sales agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (“Roth”) under which we may offer
and sell from time to time shares of our common stock having an aggregate offering price of up to $3.5 million. From July 1, 2023 to August
16, 2024, we sold an aggregate of 312,285 shares of our common stock at an average price of $11.19 per share to investors pursuant to
the Sales Agreement, and received net cash proceeds of $3,388,251, net of cash paid for Roth’s commissions and other fees of $104,992.
March 2024 Convertible
Note Financing
In March 2024, we entered
into a security purchase agreement with a lender (the “March 2024 Lender”) and closed on the issuance of a 13.0% senior secured
convertible promissory note in the principal amount of $700,000 (the “March 2024 Convertible Note”), as well as the issuance
of 7,000 shares of common stock as a commitment fee and warrants for the purchase of up to 16,827 shares of our common stock.
June 2024 Convertible
Note Financing
In June 2024, we entered
into a security purchase agreement with a lender (the “June 2024 Lender”) and closed on the issuance of a 13.0% senior secured
convertible promissory note in the principal amount of $2,845,000 (the “June 2024 Convertible Note”), as well as the issuance
of 26,800 shares of common stock as a commitment fee and warrants for the purchase of up to 146,667 shares of our common stock. We and
our subsidiaries also entered into security agreements in connection with issuance of the June 2024 Convertible Note, creating a security
interest in certain property of the Company and its subsidiaries to secure the prompt payment, performance and discharge in full of all
of our obligations under the June 2024 Convertible Note.
Series C Convertible
Preferred Stock Sold Pursuant to Securities Purchase Agreement
On December 19, 2024,
the Company entered into that certain securities purchase agreement (the “Securities Purchase Agreement”), with an accredited
investor, York Sun Investment Holding Limited, a British Virgin Islands company (the “Investor”), pursuant to which the Company
agreed to issue and sell to the Investor, upon the terms and conditions set forth in the Securities Purchase Agreement, up to 7,000 shares
of Series C Convertible Preferred Stock for up to an aggregate of $7,000,000 (the “Purchase Price”), which is equal to $1,000
per share. The first closing occurred on December 24, 2024, with respect to the Investor’s purchase of 3,500 shares of Series C
Convertible Preferred Stock in exchange for $3,500,000.
Each share of Series
C Convertible Preferred Stock is convertible into common stock of the Company (the “Conversion Shares”) at a conversion per
share equal to $2.41, at the option of the holder, at any time after the later of (i) the date of the shareholder approval of the issuance
of the Conversion Shares pursuant to the rules of the Nasdaq Stock Market (the “Shareholder Approval”) and (ii) the one year
anniversary of the date of the first issuance of any shares of the Series C Convertible Preferred Stock. The Company shall not be required
to issue any Conversion Shares until the Shareholder Approval is obtained by the Company. The Investor shall also have a right of first
refusal during the period beginning on the date of the Securities Purchase Agreement and continuing until such shareholder approval is
obtained, on all issuances of convertible preferred stock of the Company, excluding agreements that are in place prior to the date of
the Securities Purchase Agreement and issuances of new classes of convertible preferred stock in exchange for existing classes of convertible
preferred stock. Additionally, the Investor has the right, pursuant to the Securities Purchase Agreement to appoint one member to, or
to replace one member of, the Company’s board of directors, subject to all applicable Nasdaq rules.
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The Investor’s
purchase of the remaining 3,500 shares of Series C Convertible Preferred Stock under the Securities Purchase Agreement in exchange for
an additional $3,500,000 is required to occur within 120 calendar days of the date of the Securities Purchase Agreement, subject to the
satisfaction of customary closing conditions.
We estimate that, based
on current plans and assumptions, our available cash will be insufficient to satisfy our cash requirements under our present operating
expectations through cash flow provided by operations and sales of equity. Other than funds received as described above and cash resources
generated 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.
Foreign Currency Exchange Rate Risk
We ceased all operations
in China in 2022, with the exception of a small administrative office. We did not during the year ended December 31, 2024, and do not
expect in the foreseeable future, to generate any additional revenue from PRC operations. Thus, exchange rate fluctuations between the
RMB and the U.S. dollar do not, and are not expected to, have a material effect on us. For the years ended December 31, 2024 and 2023,
we had an unrealized foreign currency translation loss of approximately $300 and $18,600, respectively, because of changes in the exchange
rate.
Inflation
The effect of inflation
on our revenues and operating results was not significant for the years ended December 31, 2024 and 2023.
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
Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC 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 CEO and
the CFO, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e)
under the Exchange Act, as of the end of the period covered by this report. Our management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and
management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. During
evaluation of disclosure controls and procedures as of December 31, 2024, conducted as part of our annual audit and preparation of
our annual financial statements, our management, including our 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 as of December 31, 2024 due to the reasons set forth below.
51
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 report. The financial statements have been prepared in conformity with
U.S. GAAP 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 our internal control over financial reporting
and did so most recently for our financial reporting as of December 31, 2024. 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 (2013). Based on this assessment, management has concluded that our internal control over financial
reporting was not effective as of December 31, 2024, due to the lack of segregation of duties resulting from our small size and inability
to perform an effective test of the operating effectiveness of the controls, including the oversight of our financial statement close
process. As a result of our Lab Services MSO transaction in February 2023, we retained additional accounting staff and hired a Controller
that worked part-time for Lab Services MSO and part-time for the Company. In addition, the Company has transitioned all email servers
to the United States to enhance this aspect of internal controls.
In light of the material weaknesses described
above, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the year ended
December 31, 2024 included in this Annual Report on Form 10-K were fairly stated in accordance with U.S. GAAP. Accordingly, management
believes that despite the material weakness identified in our internal control over financial reporting, our consolidated financial statements
for the year ended December 31, 2024 are fairly stated, in all material respects, in accordance with U.S. GAAP.
Changes in Internal Control over Financial
Reporting
Other than those described above, 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, 2024 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 SEC that permit us to provide only management’s report.
ITEM 9B. OTHER INFORMATION
(a) None.
(b) During the quarter ended December 31, 2024,
none of our directors or executive officers adopted or terminated a Rule 10b5-1 trading plan or a non-Rule 10b5-1 trading arrangement
(as defined in Item 408(c) of Regulation S-K).
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS
THAT PREVENT INSPECTIONS.
Not applicable.
52
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.
Name Age Position
Wenzhao Lu 67 Chairman of the Board of Directors
David Jin, MD, PhD 57 Chief Executive Officer, President and Director
Meng Li 47 Chief Operating Officer and Secretary
Luisa Ingargiola 57 Chief Financial Officer
Steven A. Sanders 79 Director
Lourdes Felix 57 Director
Wilbert J. Tauzin II 81 Director
William B. Stilley, III 57 Director
Tevi Troy 57 Director
Directors are elected annually, to hold such office
until a successor has been duly appointed and qualified, unless an director sooner dies, resigns or is removed. Officers serve at the
discretion of the Board, subject to the terms of any employment agreement.
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 has served as our Chairman of the
Board since October 10, 2016. He is a seasoned healthcare entrepreneur with extensive operational knowledge and experience in the U.S.
and Asia. He served as Chairman of the board of directors of the Daopei Medical Group (“DPMG”), from 2010 to December 2021.
Under his leadership, DPMG operated three top-ranked private hospitals (located in Beijing and Hebei), specialty hematology laboratories,
and 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 a member of the Academy of Engineering in China.
Mr. 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, in 2009, Mr. Lu served as Chief Operating Officer of BioTime Asia Limited,
a subsidiary of BioTime, Inc. (NYSE American: BTX). 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.
53
David Jin, Chief Executive Officer, President
and Director
Dr. David Jin, MD, PhD, has served as our
Chief Executive Officer, President and as a member of our Board since September 14, 2016. From 2009 to 2017, Dr. Jin 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 an author/co-author of over 80 peer-reviewed scientific abstracts, articles, reviews, and book chapters. Dr. Jin studied
medicine at SUNY Downstate College of Medicine in Brooklyn, New York. He received his clinical training and subsequent faculty
tenure at the New York-Presbyterian Hospital (the teaching hospital for both Cornell and Columbia Universities) in the areas of
internal medicine, hematology, and clinical oncology. Dr. Jin was honored as Top Chief Medical Officer by ExecRank in 2012, as well
as recognized by Leading Physicians of the World in 2015. Dr. Jin is qualified to serve as a director because of his role with us,
and his extensive operational knowledge of, and executive level management experience in, the healthcare industry.
Meng Li, Chief Operating Officer and Secretary
Ms. Meng Li has served as our Chief Operating
Officer and Secretary since October 10, 2016 and served as a member of the Board from October 10, 2016 to July 9, 2018 and from April
5, 2019 through December 30, 2022. 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 has served as our Chief Financial
Officer since February 21, 2017. Ms. Ingargiola has significant experience serving as Chief Financial Officer or Audit Chair for multiple
Nasdaq and New York Stock Exchange companies. She currently serves as Director and Audit Chair for several public companies, including
ElectraMeccanica (NASDAQ:SOLO), Dragonfly Energy (DFLI) and Vision Marine (VMAR). From 2007 through 2016, Ms. Ingargiola served as the
Chief Financial Officer and then a member of the board of directors at MagneGas Corporation (Nasdaq: MNGA). Prior to 2007, Ms. Ingargiola
held various roles as Budget Director and Investment Analyst in several private companies. Ms. Ingargiola graduated in 1989 from Boston
University with a Bachelor’s degree in Business Administration and a concentration in Finance. In 1996, she received her MBA in
Health Administration from the University of South Florida. Ms. Ingargiola is qualified to serve as a Chief Financial Officer because
of her extensive knowledge corporate governance, regulatory requirements, executive leadership and knowledge of, and experience in, financing
and M&A transactions.
Steven A. Sanders, Director
Steven A. Sanders has served as a member of the Board since July 30,
2018. Since January 2017, Mr. Sanders has been Of Counsel to the law firm of Ortoli Rosenstadt LLP. From July 2007 until January 2017,
Mr. Sanders was a Senior Partner at Ortoli Rosenstadt LLP. From January 1, 2004 until June 30, 2007, he was Of Counsel to the law firm
of Rubin, Bailin, Ortoli, LLP. From January 1, 2001 to December 31, 2003, he was Counsel at the law firm of Spitzer & Feldman PC.
Mr. Sanders also serves as a member of the board of directors of Helijet International, Inc. and served as a member of the board of directors
of Electrameccanica Vehicles Corp. (NASDAQ:SOLO). Additionally, since October 2013, he has been a member of the board of directors at
the American Academy of Dramatic Arts, and, since February 2015, has been a member of the board of directors of the Bay Street Theater.
Mr. Sanders received his JD from Cornell University and his BBA from The City College of New York. Mr. Sanders is qualified to serve as
a director because of his corporate, securities and international law experience, including working with companies in the life sciences
industry.
54
Lourdes Felix, Director
Lourdes Felix has served as a member of the
Board since January 9, 2023. Ms. Felix is an entrepreneur and corporate finance executive with 30 years of combined experience in
capital markets, public accounting and in the private sector. She presently serves as Chief Executive Officer, Chief Financial
Officer, and a member of the board of directors of BioCorRx Inc., a company focused on addiction treatment solutions and related
disorders. She has been with BioCorRx Inc. since October 2012. Ms. Felix is one of the founders and President of BioCorRx
Pharmaceuticals Inc., a majority owned subsidiary of BioCorRx Inc. Prior to joining BioCorRx Inc., her experience was in the private
sector and public accounting. Ms. Felix has expertise in finance, accounting, company-wide operations, budgeting, and internal
control principles, including U.S. GAAP, SEC, and SOX compliance. She has thorough knowledge of federal and state regulations and
has successfully managed and produced SEC regulatory filings. She also has extensive experience in developing and managing financial
operations. Ms. Felix holds a Bachelor of Science degree in Accounting from the University of Phoenix. She continued her education
and is an MBA candidate at D’Amore-McKim School of Business, Northeastern University. Ms. Felix is qualified to serve as a
director because of her extensive investment and executive level management experience.
Wilbert J. Tauzin II, Director
Wilbert J. Tauzin II has served as a member of
the Board since November 1, 2017. From December 2010 until March 1, 2014, Congressman Tauzin served as a Special Legislative Counsel at
Alston & Bird LLP. From December 2004 to June 2010, Congressman Tauzin was President and Chief Executive Officer of Pharmaceutical
Research and Manufacturers of America, a trade group that serves as one of the pharmaceutical industry’s top lobbying groups. He
served 12.5 terms in the U.S. House of Representatives, representing Louisiana’s 3rd Congressional District. From January 2001 through
February 2004, Congressman Tauzin served as Chairman of the House Committee on Energy and Commerce. He also served as a senior member
of the House Resources Committee and Deputy Majority Whip. Prior to serving as a member of Congress, Congressman Tauzin was a member of
the Louisiana State Legislature, where he served as Chairman of the House Natural Resources Committee and Chief Administration Floor Leader.
He served as Lead Independent Director of LHC Group, a publicly traded provider of quality home health care, from 2005 to 2021 and retains
the role of Lead Independent Emeritus today. The Congressman also served on the board of directors of Entergy, a Fortune 500 company.
In addition, the Congressman chartered a Louisiana State Savings and Loan Association and Chaired its first board of directors. He received
a Bachelor of Arts Degree from Nicholls State University and a Juris Doctor degree from Louisiana State University. Congressman Tauzin