The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
NOTE 1 –
ORGANIZATION
AND NATURE OF OPERATIONS
Avalon
GloboCare Corp. (f/k/a Global Technologies Corp.) (the “Company”) is a Delaware corporation. The Company was incorporated
under the laws of the State of Delaware on July 28, 2014. On October 18, 2016, the Company changed its name to Avalon GloboCare
Corp. and completed a reverse split its shares of common stock at a ratio of 1:4. On October 19, 2016, the Company entered into
and closed a Share Exchange Agreement with the shareholders of Avalon Healthcare System, Inc., a Delaware corporation (“AHS”),
each of which are accredited investors (“AHS Shareholders”) pursuant to which we acquired 100% of the outstanding securities
of AHS in exchange for 50,000,000 shares of our common stock (the “AHS Acquisition”). AHS was incorporated
on May 18, 2015 under the laws of the State of Delaware. As a result of such acquisition, the Company’s operations now are
focused on
integrating and managing global healthcare services and resources, as well as empowering high-impact biomedical
innovations and technologies to accelerate their clinical applications. Operating through two major platforms, namely “Avalon
Cell”, and “Avalon Rehab”, our “technology + service” ecosystem covers the areas of regenerative
medicine, cell-based immunotherapy, exosome technology, as well as fertility and rehabilitation medicine. We plan to integrate
these services through joint ventures and acquisitions that bring shareholder value both in the short term, through operational
entities as part of Avalon Rehab and in the long term, through biomedical innovations as part of Avalon Cell.
AHS
owns 100% of the capital stock of Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”), which is a
wholly foreign-owned enterprise organized under the laws of the China. Avalon Shanghai was incorporated on April 29, 2016 and is
engaged in medical related consulting services for customers.
For
accounting purposes, AHS was the surviving entity. The transaction was accounted for as a recapitalization of AHS pursuant to which
AHS was treated as the accounting acquirer, surviving and continuing entity although the Company is the legal acquirer. The Company
did not recognize goodwill or any intangible assets in connection with this transaction. Accordingly, the Company’s historical
financial statements are those of AHS and its wholly-owned subsidiary, Avalon Shanghai immediately following the consummation of
this reverse merger transaction.
On
February 7, 2017, the Company formed Avalon RT 9 Properties, LLC, a New Jersey limited liability company, and on January 23, 2017,
the Company incorporated Avalon (BVI) Ltd, a British Virgin Island company. There was no activity for these two newly formed subsidiaries
since their formation and/or incorporation through March 31, 2017.
NOTE
2 –
BASIS OF PRESENTATION AND GOING CONCERN
Basis of presentation
These
interim condensed consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management,
all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim condensed
consolidated financial statements have been included. The results reported in the unaudited condensed consolidated financial statements
for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying
unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements
in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). The Company’s
unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain
information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with
U.S. GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction
with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 28, 2017.
Going concern
The Company currently
has limited operations. The Company’s operations now are focused on providing outsourced, customized international healthcare
services to the rapidly changing health care industry primarily focused in the People’s Republic of China. The Company is
also pursuing the provision of these services in the United States as well as certain strategic partnerships and property ownership
and management. These unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue
as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the
normal course of business.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
NOTE
2 –
BASIS OF PRESENTATION AND GOING CONCERN (continued)
Going concern (continued)
As reflected in the
accompanying unaudited condensed consolidated financial statements, the Company had an accumulated deficit of $602,702 at March
31, 2017 and had a net loss and net cash flow used in operating activities of $549,333 and $412,814 for the three months ended
March 31, 2017, respectively. The Company has a limited operating history and its continued growth is dependent upon the continuation
of providing medical consulting services to its only three clients who are related parties; hence generating revenues, and obtaining
additional financing to fund future obligations and pay liabilities arising from normal business operations. In addition, the current
cash balance cannot be projected to cover the operating expenses for the next twelve months from the release date of this report.
These
matters raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent on the Company’s ability to raise additional capital, implement its business plan,
and generate significant revenues. There are no assurances that the Company will be successful in its efforts to generate significant
revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. The Company plans
on raising capital through the sale of equity or debt instruments to implement its business plan. However, there is no assurance
these plans will be realized and that any additional financings will be available to the Company on satisfactory terms and conditions,
if any.
The accompanying
unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability or classification
of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue
as a going concern.
NOTE 3 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The
preparation of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles
in the United States of America 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. Actual results could differ from these estimates. Significant estimates during
the three months ended March 31, 2017 and 2016 include the allowance for doubtful accounts, the useful life of property and equipment,
assumptions used in assessing impairment of long-term assets, valuation of deferred tax assets, accruals for taxes due, and valuation
of options.
Fair value of financial instruments
and fair value measurements
The Company adopted
the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition
of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used
in measuring fair value as follows:
|
·
|
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities
available at the measurement date.
|
|
·
|
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that
are observable, and inputs derived from or corroborated by observable market data.
|
|
·
|
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions
on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
|
The carrying amounts
reported in the consolidated balance sheets for cash, accounts receivable – related party, prepaid expenses and other, accounts
payable and accrued liabilities, accounts payable and accrued liabilities – related parties, income taxes payable, Value
Added Tax (“VAT”) and other taxes payable, due to related parties, and refundable deposit, approximate their fair market
value based on the short-term maturity of these instruments. The Company did not have any non-financial assets or liabilities that
are measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016.
ASC 825-10 “Financial
Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair
value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election
date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported
in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
NOTE 3 –
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Cash
Cash
consists of cash on hand and cash in banks. The Company maintains cash with various financial institutions in the PRC and United
States. At March 31, 2017 and December 31, 2016, cash balances in the PRC are $310,881 and $2,525,630, respectively, are uninsured.
At March 31, 2017 and December 31, 2016, cash balances in United States are $5,120,347 and $360,559, respectively. The Company
has not experienced any losses in bank accounts and believes it is not exposed to any risks on its cash in bank accounts.
Concentrations
of credit risk
Currently,
a significant portion of the Company’s operations are carried out in the PRC. Accordingly, the Company’s business,
financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and
by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations
and significant risks not typically associated with companies in North America. The Company’s results may be adversely affected
by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things
.
Financial
instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts
receivable. A portion of the Company’s cash is maintained with state-owned banks within the PRC, and none of these deposits
are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks
on its cash in bank accounts. A small portion of the Company’s sales are credit sales which is to the customer whose ability
to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect
to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations
of its customers to help further reduce credit risk
.
At
March 31, 2017 and December 31, 2016, the Company’s cash balances by geographic area were as follows:
Country:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
United States
|
|
$
|
5,120,347
|
|
|
|
94.3
|
%
|
|
$
|
360,559
|
|
|
|
12.5
|
%
|
China
|
|
|
310,881
|
|
|
|
5.7
|
%
|
|
|
2,525,630
|
|
|
|
87.5
|
%
|
Total cash
|
|
$
|
5,431,228
|
|
|
|
100.0
|
%
|
|
$
|
2,886,189
|
|
|
|
100.0
|
%
|
Accounts receivable
– related party and allowance for doubtful accounts
Accounts
receivable – related party are presented net of an allowance for doubtful accounts. The Company maintains allowances for
doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific
allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual
receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment
history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.
Management
believes that the accounts receivable are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required
on its accounts receivable – related party at March 31, 2017 and December 31, 2016. The Company historically has not experienced
uncollectible accounts from customers granted with credit sales.
Property, plant
and equipment
Property,
plant and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets.
The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are
retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses
are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets
when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
NOTE 3 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of long-lived
assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment
loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment
is measured as the difference between the asset’s estimated fair value and its book value. The Company did not
record any impairment charge for the three months ended March 31, 2017 and 2016.
Value added tax
The Company is subject
to a value added tax (“
VAT
”) of 6% for providing consulting service. The amount of
VAT
liability
is determined by applying the applicable tax rate to the invoiced amount of consulting services provided (output
VAT
)
less
VAT
paid on purchases made with the relevant supporting invoices (input
VAT
).
The Company reports revenue net of PRC’s value added tax for all the periods presented in the unaudited condensed consolidated
statements of operations and comprehensive loss.
Revenue recognition
Pursuant to the guidance
of ASC Topic 605, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services
have been provided, the purchase price is fixed or determinable and collectability is reasonably assured.
The Company provides
medical related consulting services to its clients. The Company is paid for its services by its clients pursuant to the terms of
the written consulting agreements. Each contract calls for a fixed payment in a fixed period of time. The Company recognizes revenue
by providing medical related consulting services under written service contracts with its customers. Revenue related to its service
offerings is recognized as the services are performed and amounts are earned, using the straight-line method over the term of the
related services agreement. Prepayments, if any, received from customers prior to the services being performed are recorded as
advance from customers. In these cases, when the services are performed, the amount recorded as advance from customers is recognized
as revenue.
Cost of revenue
Cost of consulting
services includes internal labor and related benefits, travel expenses related to consulting services, subcontractor costs, other
related consulting costs, and other overhead costs.
Stock-based compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718 which requires recognition
in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting
period). The Financial Accounting Standards Board (“FASB”) also requires measurement of the cost of employee and director
services received in exchange for an award based on the grant-date fair value of the award
.
Pursuant
to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the
“measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached,
the total amount of compensation expense remains uncertain. The Company records compensation expense based on the fair value of
the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation
is recalculated, based on the then current fair value, at each subsequent reporting date
.
Research and development
Expenditures for research
and product development costs are expensed as incurred. The Company did not incur any research and development costs during the
three months ended March 31, 2017 and 2016.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
NOTE 3 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising
All costs related
to advertising are expensed as incurred. The Company did not incur any advertising expenses during the three months ended March
31, 2017 and 2016.
Income taxes
The Company accounts
for income taxes using the asset/liability method prescribed by ASC 740, “Income Taxes.” Under this method, deferred
tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities
using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records
a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that
some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is
recognized as income or loss in the period that includes the enactment date.
The
Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”.
Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not
the position will be sustained upon examination by the tax authorities. As of March 31, 2017 and December 31, 2016, the Company
had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Tax year that remains
subject to examination is the years ended December 31, 2016 and 2015. The Company recognizes interest and penalties related to
uncertain income tax positions in other expense. However, no such interest and penalties were recorded as of March 31, 2017 and
December 31, 2016.
Foreign currency translation
The reporting currency
of the Company is the U.S. dollar. The functional currency of the parent company and its wholly-owned U.S. subsidiaries, Avalon
Healthcare System Inc., Avalon RT 9 Properties, LLC, and Avalon (BVI) Ltd., is the U.S. dollar and the functional currency of the
Company’s its wholly-owned PRC subsidiary, Avalon (Shanghai) Healthcare Technology Co., Ltd., is the Chinese Renminbi (“RMB”).
For the subsidiary whose functional currency is the RMB, result of operations and cash flows are translated at average exchange
rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity
is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements
of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments
resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining
comprehensive income/loss. Transactions denominated in foreign currencies are translated into the functional currency at the exchange
rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional
currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange
rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations
as incurred.
All
of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries. The Company
does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected
to have, a material effect on the results of operations of the Company.
Asset
and liability accounts at March 31, 2017 and December 31, 2016 were translated at 6.8926 RMB to $1.00 and at 6.9448 RMB to $1.00,
respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rates.
The average translation rate applied to the statements of
operations
for the
three months ended March 31, 2017 was 6.8877 RMB to $1.00.
Cash flows from the Company’s
operations are calculated based upon the local currencies using the average translation rate.
Comprehensive loss
Comprehensive
loss is comprised of net loss and all changes to the statements of stockholders’ equity, except those due to investments
by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive loss for the three
months ended March 31, 2017 and 2016 consisted of net loss and unrealized loss from foreign currency translation adjustment.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
NOTE 3 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings (loss)
per share
ASC Topic 260 “Earnings
per Share,” requires presentation of both basic and diluted earnings (loss) per share (“EPS”) with a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the
earnings of the entity.
Basic net loss per
share are computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares
of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive
common shares consist of the common shares issuable upon the exercise of common stock options (using the treasury stock method).
Common stock equivalents are not included in the calculation of diluted earnings (loss) per share if their effect would be anti-dilutive. In
a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted
shares outstanding as they would have had an anti-dilutive impact. The following table presents a reconciliation of basic
and diluted net loss per share:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net loss for basic and diluted net loss per share of common stock
|
|
$
|
(549,333
|
)
|
|
$
|
(59,471
|
)
|
Weighted average common stock outstanding - basic and diluted
|
|
|
62,595,289
|
|
|
|
50,000,000
|
|
Net loss per common share - basic and diluted
|
|
$
|
(0.009
|
)
|
|
$
|
(0.001
|
)
|
For
the three months ended March 31, 2017, stock options to purchase 111,111 shares of common stock have been excluded from the computation
of diluted loss per share as their effect would be anti-dilutive.
Segment reporting
The Company uses “the
management approach” in determining reportable operating segments. The management approach considers the internal organization
and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance
as the source for determining the Company’s reportable segments. All of the Company's operations are considered by the chief
operating decision maker to be aggregated in one reportable operating segment. Currently, all of the Company’s customers
are in the People’s Republic of China and all income is derived from consulting services.
Related parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal with if one party controls or can significantly influence the management or operating policies of the
other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company
discloses all significant related party transactions.
Reverse stock split
The Company effected
an one-for-four reverse stock split of its common stock on October 18, 2016. All share and per share information has been retroactively
adjusted to reflect this reverse stock split.
Fiscal year end
The Company has adopted
a fiscal year end of December 31st.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
NOTE 3 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting
pronouncements
In
August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the
classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt
instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance
claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must
adopt all of the amendments in the same period. The Company is currently evaluating the impact it may have on its consolidated
financial statements.
Other
accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements
that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations,
cash flows or disclosures.
NOTE 4 –
PREPAID EXPENSES
AND OTHER
At March 31, 2017 and December 31, 2016,
prepaid expenses and other consisted of the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Prepayment for acquisition of real property (see note 11 Real
property purchase agreement)
|
|
$
|
702,000
|
|
|
$
|
700,000
|
|
Other
|
|
|
47,668
|
|
|
|
49,796
|
|
|
|
$
|
749,668
|
|
|
$
|
749,796
|
|
NOTE 5 –
PROPERTY,
PLANT AND EQUIPMENT
At March 31, 2017
and December 31, 2016, property, plant and equipment consisted of the following:
|
|
Useful life
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Office equipment
|
|
3 Years
|
|
$
|
322
|
|
|
$
|
320
|
|
Less: accumulated depreciation
|
|
|
|
|
(51
|
)
|
|
|
(25
|
)
|
|
|
|
|
$
|
271
|
|
|
$
|
295
|
|
For
the three months ended March 31, 2017 and 2016, depreciation expense amounted to $26 and $0, respectively, which was included in
operating expenses.
NOTE 6 –
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
At March 31, 2017 and December 31, 2016, accounts payable and accrued
liabilities consisted of the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Accrued professional fees
|
|
$
|
43,793
|
|
|
$
|
14,080
|
|
Other
|
|
|
7,746
|
|
|
|
8,254
|
|
|
|
$
|
51,539
|
|
|
$
|
22,334
|
|
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
NOTE 7 –
VAT
AND OTHER TAXES PAYABLE
At March 31, 2017
and December 31, 2016, VAT and other taxes payable consisted of the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
VAT tax payable
|
|
$
|
3,974
|
|
|
$
|
8,768
|
|
Other taxes payable
|
|
|
2,355
|
|
|
|
2,502
|
|
|
|
$
|
6,329
|
|
|
$
|
11,270
|
|
NOTE 8 –
RELATED PARTY
TRANSACTIONS
Revenue from related
parties and accounts receivable – related party
During the three months
ended March 31, 2017 and 2016, revenue from related parties was as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Medical related consulting services provided to:
|
|
|
|
|
|
|
|
|
Shanghai Daopei (1)
|
|
$
|
66,286
|
|
|
$
|
-
|
|
|
|
$
|
66,286
|
|
|
$
|
-
|
|
|
(1)
|
Shanghai Daopei is a subsidiary of an entity whose chairman is Wenzhao Lu, the major shareholder
of the Company.
|
Accounts
receivable – related party, net of allowance for doubtful accounts, at March 31, 2017 and December 31, 2016 amounted to $70,213
and $70,228, respectively, and were related to consulting services provided to Shanghai Daopei, a Chinese entity whose chairman
is Wenzhao Lu, the major shareholder of the Company. Management believes that the accounts receivable are fully collectable.
Therefore, no allowance for doubtful accounts is deemed to be required on its accounts receivable – related party at March
31, 2017 and December 31, 2016.
Accounts payable
and accrued liabilities – related parties
At
March 31, 2017 and December 31, 2016, the Company owed David Jin, its shareholder, chief executive officer, president and board
member, of $19,535 and $6,278, respectively, for travel reimbursements which have been included in accounts payable and accrued
liabilities – related parties on the accompanying consolidated balance sheets.
At
March 31, 2017 and December 31, 2016, the Company owed Meng Li, its shareholder, chief operating officer and board member, of $311
and $309, respectively, for travel and other miscellaneous reimbursements which have been included in accounts payable and accrued
liabilities – related parties on the accompanying consolidated balance sheets.
On
October 17, 2016, the Company entered into a lease for office space in New Jersey with a related party (the “Office Lease”).
Pursuant to the Office Lease, the monthly rent is $1,000. The term of the Office Lease is one year commencing on November 1, 2016
and will expire on October 31, 2017. As of March 31, 2017 and December 31, 2016, the accrued and unpaid rent expense related to
this Office Lease amounted to $5,000 and $2,000, respectively, which was included in accounts payable and accrued liabilities –
related parties on the accompanying consolidated balance sheets.
Due to related
parties
From time to time,
David Jin, shareholder, chief executive officer, president and board member of the Company, provided advances to the Company to
supplement its working capital needs. Those advances are short-term in nature, non-interest bearing, unsecured and payable on demand.
The working capital advance of $500 at March 31, 2017 and December 31, 2016, was reflected as due to related parties on the accompanying
consolidated balance sheets.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
NOTE 8 –
RELATED PARTY
TRANSACTIONS (continued)
Due to related
parties (continued)
From time to time,
Meng Li, shareholder, chief operating officer and board member of the Company, provided advances to the Company to supplement its
working capital needs. Those advances are short-term in nature, non-interest bearing, unsecured and payable on demand. The working
capital advance of $87,650 at March 31, 2017 and December 31, 2016, was reflected as due to related parties on the accompanying
consolidated balance sheets.
From time to time,
Wenzhao Lu, major shareholder, chairman of the Board of Directors and board member of the Company, provided advances to the Company
to supplement its working capital needs. Those advances are short-term in nature, non-interest bearing, unsecured and payable on
demand. The working capital advance of $9,000 at March 31, 2017 and December 31, 2016, was reflected as due to related parties
on the accompanying consolidated balance sheets.
Operating lease
On
October 17, 2016, AHS entered into a lease for office space in New Jersey with a related party (the “AHS Office Lease”).
Pursuant to the AHS Office Lease, the monthly rent is $1,000. The term of the AHS Office Lease is one year commencing on November
1, 2016 and will expire on October 31, 2017. For the three months ended March 31, 2017, rent expense related to the AHS Office
Lease amounted to $3,000.
Future
minimum rental payment required under the AHS Office Lease is as follows:
Twelve-month Period Ending March 31:
|
|
Amount
|
|
2018
|
|
$
|
7,000
|
|
NOTE 9 –
STOCKHOLDERS’
EQUITY
Shares authorized
The Company is authorized to issue 10,000,000
shares of preferred stock and 490,000,000 shares of common shares with a par value of $0.0001.
There are no shares of its preferred stock
issued and outstanding as of March 31, 2017 and December 31, 2016.
There are 64,628,622 and 61,628,622 shares
of its common stock issued and outstanding as of March 31, 2017 and December 31, 2016.
Common shares issued
for Share Subscription Agreement
On
March 3, 2017, the Company entered into and closed a Subscription Agreement with an accredited investor (the "March 2017 Accredited
Investor") pursuant to which the March 2017 Accredited Investor purchased 3,000,000 shares of the Company’s common stock
(“March 2017 Shares”) for a purchase price of $3,000,000 (the “Purchase Price”).
The
offer, sale and issuance of the above securities was made to an accredited investor and the Company relied upon the exemptions
contained in Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated there under with regard to the sale.
No advertising or general solicitation was employed in offering the securities. The offer and sale was made to an accredited investor
and transfer of the common stock issued was restricted by the Company in accordance with the requirements of the Securities Act
of 1933, as amended.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
NOTE 9 –
STOCKHOLDERS’
EQUITY (continued)
Common shares issued
for Share Subscription Agreement (continued)
The
Company,
Avalon (Shanghai) Healthcare Technology Co., Ltd. (“Avalon Shanghai”), Beijing DOING Biomedical
Technology Co., Ltd. (“DOING”) and the March 2017 Accredited Investor entered into a Share Subscription Agreement whereby
the parties acknowledged, among other things, that DOING agreed to transfer the Purchase Price to Avalon Shanghai on behalf of
the March 2017 Accredited Investor and the March 2017 Accredited Investor agreed to transfer the March 2017 Shares to DOING upon
DOING completing the registration of the acquisition of the March 2017 Shares with the Beijing Commerce Commission (“BCC”)
and obtaining an Enterprise Overseas Investment Certificate (the “Investment Certificate”) from BCC. If DOING fails
to complete the registration and acquire the Investment Certificate within one year of the closing then Avalon Shanghai shall transfer
$3,000,000 with an annual interest of 20% to DOING upon the request of DOING (the “BCC Repayment Obligation”).
As
of the date hereof, the Company is obligated to DOING in the principal amount of $3,000,000. The BCC Repayment Obligation
is a debt obligation arising other than in the ordinary course of business, which constitutes a direct financial obligation
of the Company. Further,
Wenzhao Lu, a director and shareholder of the Company, and DOING entered into a Warranty Agreement.
Pursuant to the Warranty Agreement, Mr. Lu agreed to (i) cause the Company to be liable to DOING in the event the March 2017 Accredited
Investor defaults in its obligations to DOING, (ii) cause the March 2017 Accredited Investor to transfer the March 2017 Shares
to DOING upon DOING’s receipt of the Investment Certificate from BCC, (iii) within three years from the date of the Warranty
Agreement, DOING may require Mr. Lu to acquire the March 2017 Shares at $1.20 per share upon three-month notice, and (iv) in the
event Mr. Lu does not acquire the March 2017 Shares within the three-month period, interest of 15% per annum will be added to the
purchase price.
The Company received
cash payment of $3,000,000 as an earnest money from DOING in connection with the 3,000,000 common stock issued to the March 2017
Accredited Investor who is an entrusted party that holds the shares on behalf of DOING and recorded the $3,000,000 as refundable
deposit on the accompanying condensed consolidated balance sheets. Upon DOING completing the registration of the acquisition of
the March 2017 Shares with the BCC and obtaining an Enterprise Overseas Investment Certificate from BCC, the Company will cancel
the stock certificate issued under the March 2017 Accredited Investor’s name as an entrusted holder of the shares and the
Company will issue a new stock certificate under DOING’s name. The $3,000,000 refundable deposit, which paid by DOING as
an earnest money will be applied as the proceeds for issuance of the 3,000,000 shares of the Company’s common stock under
DOING’s name at the closing date.
T
he
Company is subject to the contingency of paying interest liability upon the request of DOING if DOING fails to complete the registration
and obtain the Enterprise Overseas Investment Certificate within one year. The Company records accrual for such contingency based
upon the assessment of the probability of occurrence and, where determinable, an estimate of the liability. Management may consider
many factors in making these assessments including past history and the specifics of this matter. The Company did not accrue any
interest for the
BCC Repayment Obligation since
management has evaluated the claim
and concluded the likelihood of the claim is remote.
Options
In
February and March 2017, the Company granted a total of 111,111 options to the Company’s Chief Financial Officer (“CFO”)
at a fixed exercise price of $0.50 per share. The 111,111 options granted to the Company’s CFO are exercisable for ten years.
The fair value of the options of $138,334 was determined using the Black-Scholes option-pricing model and using the following assumptions:
Dividend rate - 0; Terms (in years) - 10.0; Volatility – 455.73% to 534.84%; Risk-free interest rate – 2.36% to 2.40%.
In connection with the option grant, for the three months ended March 31, 2017, the Company recognized stock-based compensation
of $138,334 on the accompanying condensed consolidated statements of operations because the options were deemed fully earned and
non-cancellable on the grant date. Stock
Option activities for the three months ended March 31, 2017 were as follows:
|
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Number of Options
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Weighted Average Exercise Price
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Balance at December 31, 2016
|
|
|
-
|
|
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$
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-
|
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Granted
|
|
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111,111
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|
|
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0.50
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Balance at March 31, 2017
|
|
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111,111
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|
|
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0.50
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|
Option exercisable at March 31, 2017
|
|
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111,111
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|
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$
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0.50
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The total intrinsic value of the stock options outstanding and exercisable
at March 31, 2017 was $110,000.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
NOTE 9 –
STOCKHOLDERS’
EQUITY (continued)
Options (continued)
The following table summarizes the shares of
the Company’s common stock issuable upon exercise of options outstanding at March 31, 2017:
Options Outstanding
|
|
|
Options Exercisable
|
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Range of
Exercise
Price
|
|
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Number
Outstanding
at March 31,
2017
|
|
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Range of Weighted
Average Remaining
Contractual Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
at March 31,
2017
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
0.50
|
|
|
|
111,111
|
|
|
|
9.96
|
|
|
$
|
0.50
|
|
|
|
111,111
|
|
|
$
|
0.50
|
|
NOTE 10 -
STATUTORY
RESERVE
Avalon
Shanghai operates in the PRC, are required to reserve 10% of its net profit after income tax, as determined in accordance with
the PRC accounting rules and regulations. Appropriation to the statutory reserve by the Company is based on profit arrived at under
PRC accounting standards for business enterprises for each year.
The
profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is
made to the statutory reserve. Appropriation to the statutory reserve must be made before distribution of dividends to shareholders.
The appropriation is required until the statutory reserve reaches 50% of the registered capital. This statutory reserve is not
distributable in the form of cash dividends. The Company did not make any appropriation to statutory reserve for Avalon Shanghai
during the three months ended March 31, 2017 since it incurred a loss in the period.
NOTE 11 –
COMMITMENTS
AND CONTINCENGIES
Severance payments
The Company has employment
agreements with certain employees that provided severance payments upon termination of employment under certain circumstances,
as defined in the applicable agreements. The Company has estimated its possible severance payments of approximately $302,000 as
of March 31, 2017 and December 31, 2016, which have not been reflected in its condensed consolidated financial statements since
the Company concluded that the likelihood is remote at this moment.
Capital market
consulting service contract
On October 19, 2016,
the Company entered into a one-year consulting service agreement with a third party who has agreed to provide certain consulting
service in the areas of capital markets advisory to the Company. The agreement expires on October 15, 2017. In accordance with
this agreement, the Company pays a flat cash fee of $12,000 per month.
Legal
service contract
On
November 22, 2016, the Company entered into a legal service agreement with a law firm who has agreed to provide legal and corporate
advisory services to the Company. The term of this agreement is on a month to month basis. In accordance to this service agreement,
the Company pays a flat cash fee of $15,000 per month.
At March 31, 2017 and December 31, 2016, the accrued legal service
fees related to the service agreement was $15,000 and $10,000, respectively, which was included in accounts payable and accrued
liabilities on the accompanying condensed consolidated balance sheets.
Financial consulting
service contract
On
October 17, 2016, the Company entered into a one-year consulting service agreement with a consultant who has agreed to provide
financial consulting service to the Company. In accordance with this agreement, the Company pays a flat fee of $4,800 per month
commencing on October 20, 2016. At March 31, 2017 and December 31, 2016, the accrued service fees related to the service agreement
was $14,400 and $1,600, respectively, which was included in accounts payable and accrued liabilities on the accompanying condensed
consolidated balance sheets.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
NOTE 11 –
COMMITMENTS
AND CONTINCENGIES (continued)
Real property purchase
agreement
On
December 22, 2016, the Company entered into an Agreement of Sale (the "Purchase Agreement") with Freehold Craig Road
Partnership (“Seller”), a New Jersey partnership, to purchase certain real property located in the Township of Freehold,
County of Monmouth, State of New Jersey, having a street address of 4400 Route 9, Freehold, NJ 07798 (the "Property").
The purchase price for the Property is $7,600,000. The purchase of the Property was closed on May 5, 2017.
Operating leases
AHS office lease
See Note 8 for operating
lease commitment.
Avalon Shanghai office leases
On
January 19, 2017, Avalon Shanghai entered into a lease for office space in Beijing, China with a third party (the “Beijing
Office Lease”). Pursuant to the Beijing Office Lease, the monthly rent is RMB 50,586 (approximately $7,300) with a required
security deposit of RMB 164,764 (approximately $23,900). In addition, Avalon Shanghai needs to pay monthly maintenance fees of
RMB 4,336 (approximately $600). The term of the Beijing Office Lease is 26 months commencing on January 1, 2017 and will expire
on February 28, 2019 with two months of free rent in the months of December 2017 and February 2019. For the three months ended
March 31, 2017, rent expense and maintenance fees related to the Beijing Office Lease amounted to approximately $24,000.
Future
minimum rental payment required under the Beijing Office Lease is as follows:
Twelve-month Periods Ending March 31:
|
|
Amount
|
|
2018
|
|
$
|
88,279
|
|
2019
|
|
|
80,311
|
|
Total
|
|
$
|
168,590
|
|
In
December 2016, Avalon Shanghai entered into a lease for office space in Shanghai, China with a third party (the “Shanghai
Office Lease”). Pursuant to the Shanghai Office Lease, the monthly rent is RMB 20,000 (approximately $2,900). The term of
the Shanghai Office Lease is one year commencing on January 1, 2017 and will expire on December 31, 2017. For the three months
ended March 31, 2017, rent expense related to the Shanghai Office Lease amounted to approximately $8,700.
Future
minimum rental payment required under the Shanghai Office Lease is as follows:
Twelve-month Period Ending March 31:
|
|
Amount
|
|
2018
|
|
$
|
26,134
|
|
NOTE 12 -
CONCENTRATIONS
Customers
The following
table sets forth information as to each customer that accounted for 10% or more of the Company’s revenue for the three months
ended March 31, 2017 and 2016.
|
|
Three Months Ended March 31,
|
|
Customer
|
|
2017
|
|
|
2016
|
|
A (Shanghai Daopei, a related party)
|
|
|
100
|
%
|
|
|
0
|
|
One customer, who
was a related party, accounted for 100% of the Company’s total outstanding accounts receivable at March 31, 2017 and December
31, 2016.
AVALON GLOBOCARE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
NOTE 12 –
CONCENTRATIONS
(continued)
Suppliers
No supplier accounted
for 10% or more of the Company’s purchase during the three months ended March 31, 2017 and 2016.
No
supplier accounted for 10% of the Company’s total outstanding accounts payable at March 31, 2017 and December 31, 2016.
Concentrations
of credit risk
At
March 31, 2017 and December 31, 2016, cash balances in the PRC are $310,881 and $2,525,630, respectively, are uninsured. The Company
has not experienced any losses in PRC bank accounts and believes it is not exposed to any risks on its cash in PRC bank accounts.
The Company maintains
its cash in United States bank and financial institution deposits that at times may exceed federally insured limits. As of March
31, 2017 and December 31, 2016, the Company’s cash balances in United States bank accounts had approximately $4,834,097 and
$80,000 in excess of the federally-insured limits, respectively. The Company has not experienced any losses in its United States
bank accounts through and as of the date of this report.
NOTE 13 –
RESTRICTED
NET ASSETS
A portion of the Company’s
operations are conducted through its PRC subsidiary, which can only pay dividends out of its retained earnings determined in accordance
with the accounting standards and regulations in the PRC and after it has met the PRC requirements for appropriation to statutory
reserve. In addition, the Company’s businesses and assets are primarily denominated in RMB, which is not freely convertible
into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other
banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval
of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment
application form together with suppliers’ invoices, shipping documents and signed contracts. These currency exchange control
procedures imposed by the PRC government authorities may restrict the ability of the Company’s PRC subsidiary to transfer
its net assets to the Parent Company through loans, advances or cash dividends.
The Company’s
PRC subsidiary’s net assets as of March 31, 2017 and December 31, 2016 did not exceed 25% of the Company’s consolidated
net assets. Accordingly, Parent Company’s condensed financial statements have not been required in accordance with Rule 5-04
and Rule 12-04 of SEC Regulation S-X.
NOTE 14 –
SUBSEQUENT EVENTS
On April 28, 2017, Steven P. Sukel and Yancen
Lu were appointed to the Board of Directors of the Company to serve as directors of the Company. Mr. Sukel and Mr. Lu both entered
into agreements pursuant to which they will serve as directors. The director agreements provide that they will receive options
to receive 40,000 shares of common stock per year at an exercise price equal to the closing price on December 31st of the prior
year. The options shall vest in equal amounts quarterly and shall be exercisable for a period of five years. The options for 2017
have been pro-rated. As a result, each director shall receive a stock option to acquire 30,000 shares of common stock during 2017
for a term of five years vesting 10,000 shares at the beginning of each quarter commencing April 1, 2017. The exercise price for
the initial grant in April 2017 was set at $1.49 per share.
On
May 5, 2017, the Company closed the real property purchase located in the Township of Freehold, County of Monmouth, State of New
Jersey (see note 11 – real property purchase agreement).