ITEM 1.
BUSINESS
Overview
The
Company is a clinical-stage, vertically integrated, leading CellTech bio-developer dedicated to advancing and empowering innovative,
transformative immune effector cell therapy, exosome technology, as well as COVID-19 related diagnostics and therapeutics. The Company
also provides strategic advisory and outsourcing services to facilitate and enhance its clients’ growth and development, as well
as competitiveness in healthcare and CellTech industry markets. Through its subsidiary structure with unique integration of verticals
from innovative R&D to automated bioproduction and accelerated clinical development, the Company is establishing a leading role in
the fields of cellular immunotherapy (including CAR-T/NK), exosome technology (ACTEX™), and COVID-19 related vaccine and therapeutics.
Avalon
achieves and fosters seamless integration of unique verticals to bridge and accelerate innovative research, bio-process development,
clinical programs and product commercialization. Avalon’s upstream innovative research includes:
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Development
of Avalon Clinical-grade Tissue-specific Exosome (“ACTEX™”) |
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Novel
therapeutic and diagnostic targets development utilizing QTY-code protein design technology with Massachusetts Institute of Technology
(MIT) including using the QTY code protein design technology for development of a hemofiltration device to treat Cytokine Storm. |
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Co-development
of next generation, transposon-based, multi-target CAR-T, CAR-NK and other immune effector cell therapeutic modalities with Arbele
Limited. |
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Strategic
partnership with the University of Natural Resources and Life Sciences (BOKU) in Vienna, Austria to develop an S-layer vaccine that
can be administered by an intranasal or oral route against SARS-CoV-2, the novel coronavirus that causes COVID-19 disease. |
Avalon’s
midstream bio-processing and bio-production facility is located in Nanjing, China with state-of-the-art, automated GMP and QC/QA infrastructure
for standardized bio-manufacturing of clinical-grade cellular products involved in our clinical programs in immune effector cell therapy,
regenerative therapeutics, as well as bio-banking.
Avalon’s
downstream medical team and facility consists of top-rated affiliated hospital network and experts specialized in hematology, oncology,
cellular immunotherapy, hematopoietic stem/progenitor cell transplant, as well as regenerative therapeutics. Our major clinical programs
include:
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AVA-001: Avalon has initiated
its first-in-human clinical trial of CD19 CAR-T candidate, AVA-001 in August 2019 at the Hebei Yanda Lu Daopei Hospital and Beijing
Lu Daopei Hospital in China (the world’s single largest CAR-T treatment network with over 600 patients being treated with CAR-T)
for the indication of relapsed/refractory B-cell acute lymphoblastic leukemia and non-Hodgkin Lymphoma. The AVA-001 candidate (co-developed
with China Immunotech Co. Ltd) is characterized by the utilization of 4-1BB (CD137) co-stimulatory signaling pathway, conferring
a strong anti-cancer activity during pre-clinical study. It also features a shorter bio-manufacturing time which leads to the advantage
of prompt treatment to patients where timing is important related hematologic malignancies. Avalon has successfully completed the
first-in-human clinical trial of its AVA-001 anti-CD19 CAR-T cell therapy as a bridge to allogeneic bone marrow transplantation for
patients with relapsed/refractory B-cell acute lymphoblastic leukemia at the Lu Daopei Hospital (registered clinical trial number
NCT03952923) with excellent efficacy (90% complete remission rate) and minimal adverse side effects. Avalon is currently expanding
the patient recruitment for AVA-001 to include relapsed/refractory non-Hodgkin lymphoma patients. |
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AVA-011 and FLASH-CAR™:
The Company advanced its next generation immune cell therapy using RNA-based, non-viral FLASH-CAR™ technology co-developed
with the Company’s strategic partner Arbele Limited. The adaptable FLASH-CAR™ platform can be used to create personalized
cell therapy from a patient’s own cells, as well as off-the-shelf cell therapy from a universal donor. Our leading candidate,
AVA-011, is currently at process development stage to generate clinical-grade cell-therapy products for subsequent clinical studies.
On July 8, 2021, the Company and the University of Pittsburgh of the Commonwealth System of Higher Education (the “University”)
entered into a Corporate Research Agreement (the “University Agreement”). Pursuant to the University Agreement, for a
term of two years the University agreed to use its reasonable efforts to perform academic research funded by the Company in connection
with the development of point-of-care modular autonomous processing system to generate clinical-grade AVA-011, a RNA-based chimeric
antigen receptor (CAR) T-cell therapy candidate (the “Project”) subject to the appointment of Dr. Yen Michael S. Hsu
as Principal Investigator. During the term, the Company agreed to make eight payments of $125,000 to the University. As of December
31, 2021, the Company did not make any payment. The Company and the University shall each own an undivided, one half interest in
any intellectual property rights jointly developed by both parties. The Company has been granted a worldwide, irrevocable, non-exclusive,
royalty free, fully paid-up, perpetual right to use intellectual property developed by the University in connection with the Project
for commercial purposes research activities and other purposes. Further, the Company will have an exclusive right of first offer
to an exclusive royalty-bearing license to intellectual property developed by the University or co-developed by the Company and the
University in connection with the Project. |
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ACTEX™: Stem cell-derived
Avalon Clinical-grade Tissue-specific Exosomes (ACTEX™) is one of the core technology platforms that has been co-developed
by Avalon GloboCare and the University of Pittsburgh Medical Center. The Company formed a strategic partnership with HydroPeptide,
LLC, a leading epigenetics skin care company, to engage in co-development and commercialization of a series of clinical-grade, exosome-based
cosmeceutical and orthopedic products. As part of this agreement, the Company signed a three-way Material Transfer Agreement between
Avalon GloboCare, HydroPeptide and the University of Pittsburgh Medical Center. |
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AVA-Trap™: Avalon’s
AVA-Trap™ therapeutic program plans to enter animal model testing followed by expedited clinical studies with the goal of providing
an effective therapeutic option to combat COVID-19 and other life-threatening conditions involving cytokine storms. The Company initiated
a sponsored research and co-development project with Massachusetts Institute of Technology (MIT) led by Professor Shuguang Zhang
as Principal Investigator in May 2019. 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. |
For
the year ended December 31, 2021 we generated revenue by providing medical related consulting services in advanced areas of immunotherapy
and second opinion/referral services through our wholly-owned subsidiary Avalon (Shanghai) Healthcare Technology Co., Ltd., or Avalon
Shanghai. We also own and operate rental commercial real property in New Jersey, where we are headquartered.
COVID-19
has not significantly impacted Company operations or the work performed as part of our clinical trials in China. The clinical trials
are being conducted at Hebei Yanda Lu Daopei Hospital and Beijing Lu Daopei Hospital. Both hospitals are considered primarily hematology
specialty hospitals and experienced minor disruption as part of the pandemic.
While
Avalon is not a People’s Republic of China (the “PRC”) operating company, certain of its subsidiaries are PRC operating
companies and through them Avalon currently has operations in PRC, which involves unique risks. See “China Operations” below,
and “Risk Factors—Risks Related to Doing Business in China.”
Corporate
Information/Company History
We
were incorporated under the laws of the State of Delaware on July 28, 2014 under the name Global Technologies Corp.
We
own 100% of the capital stock of Avalon Healthcare Systems, Inc., a Delaware corporation, or AHS, which we acquired on October 19, 2016.
AHS was incorporated on May 18, 2015 under the laws of the State of Delaware. In addition, we own through AHS 100% of the capital stock
of Avalon (Shanghai) Healthcare Technology Co., Ltd., or Avalon Shanghai, which is a wholly foreign-owned enterprise, or WOFE, organized
under the laws of the People’s Republic of China, or PRC or China. Avalon Shanghai was incorporated on April 29, 2016 and is engaged
in medical related consulting services for customers. On January 23, 2017, we incorporated Avalon (BVI) Ltd, a British Virgin Islands
company (dormant and in process of being dissolved). On February 7, 2017, we formed Avalon RT 9 Properties, LLC, a New Jersey limited
liability company. In July 2017, we formed Genexosome Technologies Inc., a Nevada corporation, or Genexosome. Effective October 25, 2017,
Genexosome owns 100% of the capital stock of Beijing Jieteng (Genexosome) Biotech Co., Ltd., a corporation incorporated in the People’s
Republic of China on August 7, 2015 (“Beijing Genexosome”), and the Company holds 60% of Genexosome and Dr. Yu Zhou holds
40% of Genexosome. Both Genexosome and Beijing Genexosome are inactive now.
On
May 29, 2018, Avalon Shanghai entered into a Joint Venture Agreement with Jiangsu Unicorn Biological Technology Co., Ltd., or Unicorn,
pursuant to which a company named Epicon Biotech Co., Ltd. (“Epicon”) was formed on August 14, 2018. Epicon is owned 60%
by Unicorn and 40% by Avalon Shanghai. Within five years of execution of the Joint Venture Agreement, Unicorn shall invest cash into
Epicon in an amount not less than RMB 8,000,000 (approximately $1.2 million) and the premises of the laboratories of Nanjing Hospital
of Chinese Medicine for exclusive operation by Epicon, and Avalon Shanghai shall invest cash into Epicon in an amount not less than RMB
10,000,000 (approximately $1.5 million). The board of directors of Epicon shall consist of five members with Unicorn appointing three
members and Avalon Shanghai appointing two members. As of December 31, 2021, Unicorn has invested the premises of the laboratories of
Nanjing BENQ hospital as GMP level research and manufacture facility and Avalon Shanghai has contributed RMB 4,760,000 (approximately
$0.7 million). Epicon is focused on cell preparation, third party testing, biological sample repository for commercial and scientific
research purposes and the clinical transformation of scientific achievements.
On
July 18, 2018, we formed a wholly owned subsidiary, Avactis Biosciences Inc. (“Avactis”), a Nevada corporation, which will
be focused on accelerating commercial activities related to cellular therapies, including regenerative medicine with stem/progenitor
cells as well as cellular immunotherapy including CAR-T, CAR-NK, TCR-T and others. The subsidiary is designed to integrate and optimize
our global scientific and clinical resources to further advance the use of cellular therapies to treat certain cancers. On October
23, 2018, Avactis and Arbele Limited (“Arbele”) agreed to the establishment of AVAR BioTherapeutics (China) Co. Ltd. (“AVAR”),
a Sino-foreign equity joint venture, pursuant to an Equity Joint Venture Agreement (the “AVAR Agreement”), which will be
owned 60% by Avactis and 40% by Arbele. The purpose and business scope of the Joint Venture is to research, develop, produce, sell, distribute
and generally commercialize CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy in China. Avactis is required to contribute $10
million (or equivalent in RMB) in cash and/or services, which shall be contributed in tranches based on milestones to be determined
jointly by AVAR and Avactis in writing subject to Avactis’ cash reserves. Within 30 days, Arbele shall make contribution of $6.66
million in the form of entering into a License Agreement with AVAR granting AVAR with an exclusive right and license in China to its
technology and intellectual property pertaining to CAR-T/CAR-NK/TCR-T/universal cellular immunotherapy technology and any additional
technology developed in the future with terms and conditions to be mutually agreed upon Avactis and AVAR and services. As of the date
hereof, the License Agreement has not been finalized.
The
following diagram illustrates our corporate structure:
On
June 13, 2021, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”), by and among the Company,
Lonlon Biotech Ltd., a company incorporated in the British Virgin Islands (“BVI”) (“Sen Lang BVI”), the holders
of the share capital of Sen Lang BVI (the “Sen Lang BVI Shareholders”), the ultimate beneficial owners of the Sen Lang BVI
Shareholders (the “Sen Lang BVI Beneficial Shareholders” and, together with the Sen Lang BVI Shareholders, the “Sen
Lang BVI Owners”) and a representative of the Sen Lang BVI Owners (the “Sen Lang BVI Representative”). On January 1,
2022, the Company, on the one hand, and Sen Lang BVI, the Sen Lang Shareholders, the Sen Lang Beneficial Shareholders and Ding Wei, in
his capacity as the Sen Lang Representative, on the other hand, terminated the Purchase Agreement.
China
Operations
Certain of Avalon’s
subsidiaries are PRC operating companies, and through them Avalon currently has operations in the People’s Republic of China, which
involves unique risks.
The
method by which cash is transferred in Avalon’s organization, in light of its PRC subsidiaries, is complex. The payment and amount
of any future dividend of the PRC subsidiaries to Avalon will be restricted by PRC laws and regulations regarding dividends and PRC foreign
exchange regulations. PRC laws require that dividends be paid only out of the profit for the year calculated according to PRC accounting
principles. PRC laws also require foreign-invested enterprises to set aside at least 10% of their after-tax profits as the statutory
common reserve fund until the cumulative amount of the statutory common reserve fund reaches 50% or more of such enterprises’ registered
capital, if any, to fund its statutory common reserves, which are not available for distribution as cash dividends. Avalon and, ultimately,
Avalon stockholders will receive the economic benefit of its PRC subsidiaries by way of dividends, which are subject to restrictions
under current United States (“U.S.”) laws and regulations regarding dividends. Furthermore, under applicable PRC laws and
regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within
ten years after the taxable year when the transactions are conducted. Avalon and its subsidiaries may face material and adverse tax consequences
if the PRC tax authorities determine that the contractual arrangements were not entered into on an arm’s length basis.
Pursuant
to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC resident enterprise
to a foreign enterprise investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China
that provides for preferential tax treatment. Avalon currently believes that its PRC subsidiaries’ distribution of dividends to
Avalon, if any, shall be subject to a withholding tax rate of 10%, unless a reduced rate under a tax treaty is applicable. Avalon reported
net losses and had negative net cash flows from operations in 2021. No net income will be generated from Avalon’s PRC subsidiaries’
operations in the foreseeable future and therefore no dividends or distributions will be paid by such subsidiaries to Avalon and its
stockholders in the foreseeable future. However, if such subsidiaries do make distributions of cash or property to Avalon, absent a distribution
by Avalon to the U.S. holders of Avalon common stock, there would be no flow-through of such income to the U.S. holders of Avalon common
stock for U.S. federal income tax purposes. As of the date of this report, no transfers, dividends or distributions from our PRC subsidiaries
to Avalon have been made to date.
As described below under “Holding
Foreign Companies Accountable Act Compliance,” the Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on
December 18, 2020. According to the HFCA Act, if the SEC determines that Avalon has filed audit reports issued by a registered public
accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC will prohibit
Avalon’s securities from being traded on a national securities exchange or in the over-the-counter trading market in the United
States. Avalon’s auditor is Marcum LLP (“Marcum”), based in New York, New York. Marcum is registered with the PCAOB
and is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess their compliance with the
applicable professional standards. Since Marcum is located in the United States, the PCAOB has been able to conduct inspections of Marcum.
In addition, Marcum is not among the PCAOB registered public accounting firms registered in mainland China or Hong Kong that are subject
to PCAOB’s determination on December 16, 2021. Although Avalon is currently not subject to the HFCA Act, any uncertainty of its
applicability to Avalon, for example if Avalon switched to using a PRC-based auditing firm, could cause the market price of Avalon’s
securities to be materially and adversely affected and could cause Avalon’s securities to be delisted or prohibited from being traded
“over-the-counter”. If Avalon’s securities are unable to be listed on another securities exchange, such a delisting
would substantially impair your ability to sell or purchase Avalon’s securities when you wish to do so, and the risk and uncertainty
associated with a potential delisting would have a negative impact on the price of Avalon’s securities.
Moreover,
Avalon’s business operations in the PRC are governed by PRC laws, rules and regulations. The associated legal and operational risks
could result in a material change in the business operations of Avalon’s PRC subsidiaries and could negatively impact the value
of Avalon’s common stock or could even cause the value of such securities to significantly decline or be worthless. The PRC government
has recently announced its plans to enhance its regulatory oversight of Chinese companies listing overseas, and there is some uncertainty
with respect to the interpretation and implementation of such plans. The PRC government has also issued statements and has undertaken
regulatory actions related to the use of variable interest entities, data security and anti-monopoly concerns. The PRC government may
promulgate relevant laws, internal rules and regulations that may impose additional and significant obligations and liabilities on overseas
listed Chinese companies regarding data security, cross-border data flow, compliance with PRC securities laws and anti-monopoly laws.
These laws and regulations can be complex and stringent, and can be subjected to change and uncertain interpretation, which could limit
Avalon’s ability to conduct its business and accept foreign investments, or could significantly impact its operating results and
stock price. However, because Avalon is the issuer of the common stock listed on Nasdaq and is a Delaware operating and holding company,
no approval or permission is required under current applicable PRC laws and regulations for any future issuances of Avalon securities
to non-PRC investors. Nevertheless, PRC laws, regulations and/or their interpretations may change in the future, such that they may have
an extraterritorial effect, whereby Avalon may be required to obtain such approval or permission under PRC laws and regulations. In such
event, Avalon may face the risk that these future regulatory actions by the PRC government could significantly limit or completely hinder
Avalon’s ability to offer future securities to investors. Under this scenario, Avalon’s ability to raise capital and thereby
execute its business plan would be significantly limited or completely hindered, which would likely result in a material change in Avalon’s
operations and the value of Avalon’s common stock, including that it could cause the value of such securities to significantly
decline or become worthless. In addition, Avalon faces the risk that Avalon may not currently ascertain, and therefore may not actually
have, all requisite permissions to offer securities, which would likely result in a material change in Avalon’s operations and/or
value of Avalon’s common stock, including that it could cause the value of such securities to significantly decline or become worthless.
See “Risk Factors—The PRC government exerts substantial influence over the manner in which Avalon must conduct its business
activities and Avalon may face the risk that the future regulatory actions by the PRC government could significantly limit or completely
hinder Avalon’s ability to offer future securities to investors.
Sales
and Marketing
We
seek to develop new business through relationships driven by our senior management, which have extensive contacts throughout the healthcare
system. Our senior management will be seeking opportunities for joint ventures, strategic relationships and acquisitions in consulting,
biomedical innovations, laboratory, and medical device companies.
Services
We
currently generate revenue from related party strategic relationships through Avalon Shanghai that provide consultative services in advanced
areas of immunotherapy and second opinion/referral services. In addition, our services are targeted at serving our clients and using
our insights and deep expertise to produce tangible and significant results. Our services include research studies, executive education,
daily online executive briefings, tailored expert advisory services, and consulting and management services. We typically charge an annual
fee. Through our services, we attempt to have our clients focus on important problems by providing an analysis of the evolving healthcare
industry and the methods prevalent in the industry to solve those problems through counsel, business planning and support. We tailor
these solutions to the client’s specific strategic challenges, operational issues, and management concerns.
Strategic
Partnerships and Acquisitions
We
are actively seeking potential strategic partnerships in our area of focus. In addition, we are actively seeking target acquisitions
that add accretive value to our strategic plan. There is no guarantee that we will be able to successfully sign a definitive agreement,
close or implement such business arrangement.
Markets
We
focus on the following markets in developing our core business:
| ● | Cellular
Immunotherapy in Oncology: Regarded as the future of medicine, we believe cell-based technologies and therapeutics will replace pharmaceuticals
as a more effective and functional modality in certain unmet medical areas. We are actively engaging in this revolutionary trend and
positioning to take a leading role in immune effector cell therapies in the immuno-oncology domain, particularly related to the development
of Chimeric Antigen Receptor (CAR) T cell and CAR-NK cell therapies against hematologic malignancies. CAR-T cell therapy is considered
as a “living drug” which involves isolation of a patient’s peripheral T cells and re-engineering these T cells with
CAR molecules equipped with a weapon attacking a specific target on tumor cells. Our leading candidate is “AVA-001”, an anti-CD19
CAR-T which has successfully completed first-in-human clinical trial for relapsed/refractory (R/R) B-cell lymphoblastic leukemia (B-ALL);
we are in the process of expanding patient recruitment to include R/R non-Hodgkin’s lymphoma. We are also developing a RNA-based
“FASH-CARTM” cell therapy platform, which may potentially reduce manufacturing time and cost. The lead candidate,
“AVA-011”, has completed pre-clinical laboratory studies and currently undergoing IND-enabling process development stage
to generate cGMP-grade AVA-011 CAR-T cells for upcoming clinical trials. |
| ● | Regenerative
Medicine: Avalon Clinical-grade Tissue-specific Exosome (“ACTEX™”) is a technology platform to generate clinical-grade
exosomes from stem/progenitor cells, with potential regenerative applications in skin care and orthopedic joint repair. |
| ● | QTY-Code
Protein Design: Novel therapeutic and diagnostic targets development utilizing QTY-code protein design technology with Massachusetts
Institute of Technology (MIT) including using the QTY code protein design technology for development of a hemofiltration device to treat
Cytokine Storm (aka Cytokine Release Syndrome). QTY-code can be applied to generate water-soluble, antibody-like molecular variants of
native membrane-bound receptors, which may expand the repertoire of therapeutic targets in CAR-T cell therapies. |
| ● | S-Layer
based Vaccine Development: Strategic partnership with the University of Natural Resources and Life Sciences (BOKU) in Vienna, Austria
to develop an S-layer based vaccine that can be administered by an intranasal or oral route against SARS-CoV-2 (the novel coronavirus
that causes COVID-19), Influenza A/B and other respiratory pathogens. |
Revenue
Avalon
RT 9 Properties, LLC
In
May 2017, we acquired commercial property located in Freehold, New Jersey. This property is now our corporate headquarters and contains
several commercial tenants that generate revenue through rental income.
Avalon
Shanghai
We
currently generate revenue by providing medical related consulting services in advanced areas of immunotherapy and second opinion/referral
services through Avalon (Shanghai) Healthcare Technology Co., Ltd., or Avalon Shanghai. Our medical related consulting services include
research studies, executive education, daily online executive briefings, tailored expert advisory services, and consulting and management
services. Through our services we attempt to have our clients focus on important problems by providing an analysis of the evolving healthcare
industry and the methods prevalent in the industry to solve those problems through counsel, business planning and support. The revenue
generated from our related parties in China is managed by our employees residing in China and contactors who are retained as needed.
Consulting services have been provided by Avalon Shanghai under the contract include:
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providing
scientific research consulting services; |
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integrating
experts, medical institutions and other resources in the United States in support of scientific research; |
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providing
technical education and training; and |
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assisting
in publication of academic papers. |
Strategic
Development
We
intend to pursue the acquisition and development of healthcare related technologies for cell related diagnostics and therapeutics through
acquisition, licensing or joint ventures with major universities and biotech companies. We will also consider a third avenue of investing
in certain technologies for cell related diagnostics and therapeutics and are seeking laboratory or medical device acquisitions.
Intellectual
Property
Our
goal is to obtain, maintain and enforce patent rights for our products, formulations, processes, methods of use and other proprietary
technologies, preserve our trade secrets, and operate without infringing on the proprietary rights of other parties, both in the United
States and abroad. Our policy is to actively seek to obtain, where appropriate, the broadest intellectual property protection possible
for our current product candidates and any future product candidates, proprietary information and proprietary technology through a combination
of contractual arrangements and patents, both in the United States and abroad. Even patent protection, however, may not always afford
us with complete protection against competitors who seek to circumvent our patents. If we fail to adequately protect or enforce our intellectual
property rights or secure rights to patents of others, the value of our intellectual property rights would diminish. To this end, we
require all of our employees, consultants, advisors and other contractors to enter into confidentiality agreements that prohibit the
disclosure and use of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments,
discoveries and inventions relevant to our technologies and important to our business.
Competition
Avalon
Shanghai
In
our current consulting business in the People’s Republic of China, or PRC or China, we compete with a number of advisory firms
offering similar service including consulting and strategy firms; market research, data, benchmarking, and forecasting providers; technology
vendors and services firms; healthcare information technology firms; technology advisory firms; outsourcing firms; and specialized providers
of educational and training services. Other organizations, such as state and national trade associations, group purchasing organizations,
non-profit think-tanks, and database companies, also may offer research, consulting, tools, and education services to health care and
education organizations.
We
believe that the principal competitive factors in our market include quality and timeliness of our services, strength and depth of relationships
with our clients, ability to meet the changing needs of current and prospective clients, measurable returns on customer investment, and
service and affordability.
As
our business develops and we expand through joint ventures, acquisitions and strategic partnerships in the U.S. and PRC, we will have
competition with other direct service providers, emerging technologies and medical communication platforms. We will seek to maintain
a competitive advantage through intellectual property, superior quality management and cutting-edge technology.
Avalon
RT 9 Properties LLC
Our
executive commercial building in Freehold, New Jersey is located on a major highway and is one of the largest buildings in the surrounding
areas. It is centrally located and maintains high occupancy. There are other commercial properties in the vicinity that offer similar
amenities. However, premier executive offices are limited and as such we expect to continue to maintain high occupancy in the near term.
Employees
As
of March 30, 2022, we employed six employees, five of which are full time employees. None of our employees are represented by a collective
bargaining arrangement.
Government
Regulation
Overview
The
healthcare industry in the PRC and U.S. is highly regulated and subject to changing political, legislative, regulatory, and other influences.
Further, the healthcare industry is currently undergoing rapid change. We are uncertain how, when or in what context these new changes
will be adopted or implemented. These new regulations could create unexpected liabilities for us, could cause us or our members to incur
additional costs and could restrict our or our clients’ operations. Many of the laws are complex and their application to us, our
clients, or the specific services and relationships we have with our members are not always clear. Our failure to anticipate accurately
the application of these laws and regulations, or our other failure to comply, could create liability for us, result in adverse publicity,
and otherwise negatively affect our business.
PRC
Regulation
Despite
efforts to develop its legal system over the past several decades, including but not limited to legislation dealing with economic matters
such as foreign investment, corporate organization and governance, commerce, taxation and trade, the PRC continues to lack a comprehensive
system of laws. Further, the laws that do exist in the PRC are often vague, ambiguous and difficult to enforce, which could negatively
affect our ability to do business in China and compete with other companies in our segments.
In
September 2006, the Ministry of Commerce, or MOFCOM, promulgated the Regulations on Foreign Investors’ Mergers and Acquisitions
of Domestic Enterprises, or the M&A Regulations, in an effort to better regulate foreign investment in the PRC. The M&A Regulations
were adopted in part as a needed codification of certain joint venture formation and operating practices, and also in response to the
government’s increasing concern about protecting domestic companies in perceived key industries and those associated with national
security, as well as the outflow of well-known trademarks, including traditional Chinese brands.
As
a U.S. based company doing business in the PRC, we seek to comply with all PRC laws, rules and regulations and pronouncements, and endeavor
to obtain all necessary approvals from applicable PRC regulatory agencies such as the MOFCOM, the State Assets Supervision and Administration
Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory
Commission, and the State Administration of Foreign Exchange, or SAFE.
Our
PRC subsidiary, Avalon Shanghai, provides outsourced and customized healthcare services to the rapidly changing health care industry.
Currently, our PRC subsidiary, Beijing Genexosome, is dormant. These subsidiaries have obtained their respective business licenses, which
permit each of them to operate its business in the PRC. No other special permission is required for our PRC subsidiaries to conduct their
respective current business under applicable PRC regulations and laws. Additionally, the operation of Avalon and its PRC subsidiaries
are not covered by permissions requirements of the China Securities Regulatory Commission (CSRC) or the Cyberspace Administration of
China (CAC).
Because
Avalon is the issuer of the common stock listed on Nasdaq and is a Delaware operating and holding company, no approval or permission
is required under current applicable PRC laws and regulations for any future issuances of Avalon securities to non-PRC investors. Nevertheless,
according to the Opinions of the General Office of the CPC Central Committee and the General Office of the State Council on Strictly
Cracking Down on Illegal Securities Activities in accordance with the Law (“Opinions”), the PRC intends to establish and
improve the system of extraterritorial application of the PRC securities laws. Although the details of the extraterritorial application
of the PRC securities laws are still scarce as of the date of this report, PRC laws, regulations and/or their interpretations may change
in the future, such that they have may an extraterritorial effect, whereby Avalon may be required to obtain such approval or permission
under PRC laws and regulations. In such event, Avalon may face the risk that these future regulatory actions by the PRC government could
significantly limit or completely hinder Avalon’s ability to offer future securities to investors. Under this scenario, Avalon’s
ability to raise capital and thereby execute its business plan would be significantly limited or completely hindered, which would likely
result in a material change in Avalon’s operations and the value of Avalon’s common stock, including that it could cause
the value of such securities to significantly decline or become worthless. In addition, Avalon faces the risk that Avalon may not currently
ascertain, and therefore may not actually have, all requisite permissions to offer securities, which would likely result in a material
change in Avalon’s operations and/or value of Avalon’s common stock, including that it could cause the value of such securities
to significantly decline or become worthless.
The
Flow of Economic Benefits from PRC Subsidiaries
The
payment and amount of any future dividend of Avalon’s PRC subsidiaries to Avalon will be restricted by PRC laws and regulations
regarding dividends and PRC foreign exchange regulations. PRC laws require that dividends be paid only out of the profit for the year
calculated according to PRC accounting principles, which differ in certain respects from the generally accepted accounting principles
in other jurisdictions, including accounting principles generally accepted in the United States of America, or US GAAP, and international
financial reporting standards as issued by the International Accounting Standards Board, or IFRS. PRC laws also require foreign-invested
enterprises to set aside at least 10% of their after-tax profits as the statutory common reserve fund until the cumulative amount of
the statutory common reserve fund reaches 50% or more of such enterprises’ registered capital, if any, to fund its statutory common
reserves, which are not available for distribution as cash dividends. Furthermore, under applicable PRC laws and regulations, arrangements
and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable
year when the transactions are conducted.
Pursuant
to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC resident enterprise
to a foreign enterprise investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China
that provides for preferential tax treatment. Furthermore, the Announcement of State Taxation Administration on Promulgation of the Administrative
Measures on Non-Resident Taxpayers Enjoying Treaty Benefits, issued on October 14, 2019 by the PRC State Taxation Administration, which
became effective from January 1, 2020, requires non-resident enterprises to determine whether they are qualified to enjoy the preferential
tax treatment under the tax treaties and make appropriate filings with the competent tax authorities. In addition, based on the Notice
on Issues concerning Beneficial Owner in Tax Treaties, or Circular 9, issued on February 3, 2018 by the PRC State Taxation Administration,
which became effective from April 1, 2018, when determining the applicant’s “beneficial owner” status regarding tax
treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including, without limitation,
whether the applicant is obligated to pay more than 50% of the applicant’s income for twelve months to residents in a third country
or region, whether the business operated by the applicant constitutes the actual business activities, and whether the counterparty country
or region to the tax treaties does not levy any tax or grant tax exemption on relevant incomes or levy tax at an extremely low rate,
will be taken into account, and it will be analyzed according to the actual circumstances of the specific cases. There are also other
conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. Therefore, Avalon currently
believes that dividends from its PRC subsidiaries to Avalon, if any, shall be subject to a withholding tax rate of 10%, unless a reduced
rate under a tax treaty is applicable. Avalon reported net losses and had negative net cash flows from operations in 2021. No net income
will be generated from Avalon’s PRC subsidiaries’ operations in the foreseeable future and therefore no dividends or distributions
will be paid by such subsidiaries to Avalon and its stockholders in the foreseeable future. However, if such subsidiaries do make distributions
of cash or property to Avalon, absent a distribution by Avalon to the U.S. holders of Avalon common stock, there would be no flow-through
of such income to the U.S. holders of Avalon common stock for U.S. federal income tax purposes.
As
of the date of this report, no transfers, dividends or distributions from our PRC subsidiaries to Avalon have been made to date.
Restrictions
on Foreign Exchange and Avalon’s Ability to Transfer Cash Across Borders
The
PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency
out of China. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade
and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration
of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval from or registration with appropriate
governmental authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses.
As a result, SAFE approval may need to be obtained to use cash generated from the operations of Avalon’s PRC subsidiaries. Any
failure to comply with applicable foreign exchange regulations may subject us to administrative fines.
Holding
Foreign Companies Accountable Act Compliance
The
Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. According to the HFCA Act, if the SEC determines
that Avalon has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB
for three consecutive years beginning in 2021, the SEC will prohibit Avalon’s securities from being traded on a national securities
exchange or in the over-the-counter trading market in the United States.
On December 16, 2021, the PCAOB
issued a Determination Report which reported that the PCAOB is unable to inspect or investigate completely registered public accounting
firms headquartered in: (1) mainland China of the People’s Republic of China, because of a position taken by one or more authorities
in mainland China; and (2) Hong Kong, a Special Administrative Region of the PRC, because of a position taken by one or more authorities
in Hong Kong.
Avalon’s auditor is Marcum
LLP (“Marcum”), based in New York, New York. Marcum is registered with the PCAOB and is subject to laws in the United States
pursuant to which the PCAOB conducts regular inspections to assess their compliance with the applicable professional standards. Since
Marcum is located in the United States, the PCAOB has been able to conduct inspections of Marcum. In addition, Marcum is not among the
PCAOB registered public accounting firms registered in mainland China or Hong Kong that are subject to PCAOB’s determination on
December 16, 2021.
Although
the audit reports of Avalon are prepared by U.S. auditors that are subject to inspection by the PCAOB, the PCAOB is currently unable
to conduct inspections over the audit work of Avalon’s independent registered public accounting firms with respect to Avalon’s
operations in mainland China without the approval of certain Chinese authorities. Also, there is no guarantee that future audit reports
will be prepared by auditors that are completely inspected by the PCAOB and, as such, future investors may be deprived of such inspections,
which could result in limitations or restrictions to Avalon’s access of the U.S. capital markets.
Inspections
of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures
and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. However, the
PCAOB is currently unable to inspect an auditor’s audit work related to a company’s operations in China where such documentation
of the audit work is located in China. As a result, Avalon’s investors may be deprived of the benefits of the PCAOB’s oversight
of auditors that are located in China through such inspections.
On
March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements
of the HFCA Act. Avalon will be required to comply with these rules if the SEC identifies us as having a “non-inspection”
year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA
Act, including the listing and trading prohibition requirements described above.
On
June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce
the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two, which
would shorten the timeframe before Avalon’s share may be delisted and before the trading in Avalon’s shares is prohibited.
On
November 5, 2021, the SEC approved Rule 6100 adopted by the PCAOB to determine its inability to inspect or investigate registered firms
completely under the HFCA Act. This rule establishes the framework for the PCAOB to make these required determinations. The trading in
Avalon’s securities may be prohibited under the HFCA Act if the PCAOB subsequently determines Avalon’s audit work is performed
by auditors that the PCAOB is unable to inspect or investigate completely pursuant to Rule 6100, and as a result, U.S. national securities
exchanges, such as Nasdaq, may determine to delist Avalon’s securities. Such a delisting would likely cause the value of such securities
to significantly decline or become worthless.
The
SEC may propose additional regulatory or legislative requirements or guidance that could impact us if our auditor is not subject to PCAOB
inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on
Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report
recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient
access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCA
Act. However, some of the recommendations were more stringent than the HFCA Act. For example, if a company was not subject to PCAOB inspection,
the report recommended that the transition period before a company would be delisted would end on January 1, 2022.
The
SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act
and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will
become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition
to the requirements of the HFCA Act are uncertain. Although Avalon is currently not subject to the HFCA Act, any uncertainty of its applicability
to Avalon, for example if Avalon switched to using a PRC-based auditing firm, could cause the market price of Avalon’s securities
to be materially and adversely affected and could cause Avalon’s securities to be delisted or prohibited from being traded “over-the-counter”.
If Avalon’s securities are unable to be listed on another securities exchange, such a delisting would substantially impair your
ability to sell or purchase Avalon’s securities when you wish to do so, and the risk and uncertainty associated with a potential
delisting would have a negative impact on the price of Avalon’s securities. See “Risk Factors— Trading in Avalon’s
securities may be restricted under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or fully
investigate Avalon’s auditors, and as a result, U.S. national securities exchanges, such as Nasdaq, may determine to delist Avalon’s
securities.
Drug
Approval Process
The
research, development, testing, manufacture, labeling, promotion, advertising, distribution and marketing, among other things, of our
product candidates are extensively regulated by governmental authorities in the United States and other countries. In the United States,
the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or the FDCA, and its implementing regulations. Failure to comply
with the applicable U.S. requirements may subject us to administrative or judicial sanctions, such as the FDA’s refusal to approve
a pending new drug application, or NDA, or a pending biologics license application, or BLA, warning letters, product recalls, product
seizures, total or partial suspension of production or distribution, injunctions and/or criminal prosecution.
Pharmaceutical
products such as ours may not be commercially marketed without prior approval from the FDA and comparable regulatory agencies in other
countries. In the United States, the process to receiving such approval is long, expensive and risky, and includes the following steps:
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pre-clinical
laboratory tests, animal studies, and formulation studies; |
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submission
to the FDA of an IND for human clinical testing, which must become effective before human clinical trials may begin; |
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adequate
and well-controlled human clinical trials to establish the safety and efficacy of the drug for each indication; |
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submission
to the FDA of an NDA or BLA; |
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satisfactory
completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with
current good manufacturing practices, or cGMPs; |
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a
potential FDA audit of the preclinical and clinical trial sites that generated the data in support of the NDA or BLA; |
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the
ability to obtain clearance or approval of companion diagnostic tests, if required, on a timely basis, or at all; and |
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FDA
review and approval of the NDA or BLA. |
Regulation
by U.S. and foreign governmental authorities is a significant factor affecting our ability to commercialize any of our products, as well
as the timing of such commercialization and our ongoing research and development activities. The commercialization of drug products requires
regulatory approval by governmental agencies prior to commercialization. Various laws and regulations govern or influence the research
and development, non-clinical and clinical testing, manufacturing, processing, packing, validation, safety, labeling, storage, record
keeping, registration, listing, distribution, advertising, sale, marketing and post-marketing commitments of our products. The lengthy
process of seeking these approvals, and the subsequent compliance with applicable laws and regulations, require expending substantial
resources.
The
results of pre-clinical testing, which include laboratory evaluation of product chemistry and formulation, animal studies to assess the
potential safety and efficacy of the product and its formulations, details concerning the drug manufacturing process and its controls,
and a proposed clinical trial protocol and other information must be submitted to the FDA as part of an IND that must be reviewed and
become effective before clinical testing can begin. The study protocol and informed consent information for patients in clinical trials
must also be submitted to an independent Institutional Review Board, or IRB, for approval covering each institution at which the clinical
trial will be conducted. Once a sponsor submits an IND, the sponsor must wait 30 calendar days before initiating any clinical trials.
If the FDA has comments or questions within this 30-day period, the issue(s) must be resolved to the satisfaction of the FDA before clinical
trials can begin. In addition, the FDA, an IRB or the company may impose a clinical hold on ongoing clinical trials due to safety concerns.
If the FDA imposes a clinical hold, clinical trials can only proceed under terms authorized by the FDA. Our pre-clinical and clinical
studies must conform to the FDA’s Good Laboratory Practice, or GLP, and Good Clinical Practice, or GCP, requirements, respectively,
which are designed to ensure the quality and integrity of submitted data and protect the rights and well-being of study patients. Information
for certain clinical trials also must be publicly disclosed within certain time limits on the clinical trial registry and results databank
maintained by the NIH.
Typically,
clinical testing involves a three-phase process; however, the phases may overlap or be combined:
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Phase
I clinical trials typically are conducted in a small number of volunteers or patients to assess the early tolerability and safety
profile, and the pattern of drug absorption, distribution and metabolism; |
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Phase
II clinical trials typically are conducted in a limited patient population with a specific disease in order to assess appropriate
dosages and dose regimens, expand evidence of the safety profile and evaluate preliminary efficacy; and |
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Phase
III clinical trials typically are larger scale, multicenter, well-controlled trials conducted on patients with a specific disease
to generate enough data to statistically evaluate the efficacy and safety of the product, to establish the overall benefit-risk relationship
of the drug and to provide adequate information for the registration of the drug. |
A
therapeutic product candidate being studied in clinical trials may be made available for treatment of individual patients, in certain
circumstances. Pursuant to the 21st Century Cures Act (Cures Act), which was signed into law in December 2016. The manufacturer of an
investigational product for a serious disease or condition is required to make available, such as by posting on its website, its policy
on evaluating and responding to requests for individual patient access to such investigational product.
The
results of the pre-clinical and clinical testing, chemistry, manufacturing and control information, proposed labeling and other information
are then submitted to the FDA in the form of either an NDA or BLA for review and potential approval to begin commercial sales. In responding
to an NDA or BLA, the FDA may grant marketing approval, request additional information in a Complete Response Letter, or CRL, or deny
the approval if it determines that the NDA or BLA does not provide an adequate basis for approval. A CRL generally contains a statement
of specific conditions that must be met in order to secure final approval of an NDA or BLA and may require additional testing. If and
when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter, which authorizes
commercial marketing of the product with specific prescribing information for specific indications, and sometimes with specified post-marketing
commitments and/or distribution and use restrictions imposed under a Risk Evaluation and Mitigation Strategy program. Any approval required
from the FDA might not be obtained on a timely basis, if at all.
Among
the conditions for an NDA or BLA approval is the requirement that the manufacturing operations conform on an ongoing basis with cGMPs.
In complying with cGMPs, we must expend time, money and effort in the areas of training, production and quality control within our own
organization and at our contract manufacturing facilities. A successful inspection of the manufacturing facility by the FDA is usually
a prerequisite for final approval of a pharmaceutical product. Following approval of the NDA or BLA, we and our manufacturers will remain
subject to periodic inspections by the FDA to assess compliance with cGMPs requirements and the conditions of approval. We will also
face similar inspections coordinated by foreign regulatory authorities.
Disclosure
of Clinical Trial Information
Sponsors
of certain clinical trials of FDA-regulated products are required to register and disclose certain clinical trial information. Information
related to the product, patient population, phase of investigation, trial sites and investigators, and other aspects of the clinical
trial are then made public as part of the registration. Sponsors are also obligated to disclose the results of their clinical trials
after completion. Disclosure of the results of these trials can be delayed in certain circumstances for up to two years after the date
of completion of the trial. Competitors may use this publicly available information to gain knowledge regarding the progress of development
programs.
Expedited
Development and Review Programs
The
FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new drugs and biological products that
meet certain criteria. Specifically, new drugs and biological products are eligible for Fast Track designation if they are intended to
treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. Fast Track
designation applies to the combination of the product and the specific indication for which it is being studied. The sponsor of a new
drug or biologic may request the FDA to designate the drug or biologic as a Fast Track product at any time during the clinical development
of the product. Unique to a Fast Track product, the FDA may consider for review sections of the marketing application on a rolling basis
before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the application,
the FDA agrees to accept sections of the application and determines that the schedule is acceptable, and the sponsor pays any required
user fees upon submission of the first section of the application.
Any
product submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended
to expedite development and review, such as priority review and accelerated approval. Under the Breakthrough Therapy program, products
intended to treat a serious or life-threatening disease or condition may be eligible for the benefits of the Fast Track program when
preliminary clinical evidence demonstrates that such product may have substantial improvement on one or more clinically significant endpoints
over existing therapies. Additionally, FDA will seek to ensure the sponsor of a breakthrough therapy product receives timely advice and
interactive communications to help the sponsor design and conduct a development program as efficiently as possible. Any product is eligible
for priority review if it has the potential to provide safe and effective therapy where no satisfactory alternative therapy exists or
a significant improvement in the treatment, diagnosis or prevention of a disease compared to marketed products. The FDA will attempt
to direct additional resources to the evaluation of an application for a new drug or biological product designated for priority review
in an effort to facilitate the review. Additionally, a product may be eligible for accelerated approval. Drug or biological products
studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic
benefit over existing treatments may receive accelerated approval, which means that they may be approved on the basis of adequate and
well-controlled clinical studies establishing that the product has an effect on a surrogate endpoint that is reasonably likely to predict
a clinical benefit, or on the basis of an effect on a clinical endpoint other than survival or irreversible morbidity. As a condition
of approval, the FDA may require that a sponsor of a drug or biological product receiving accelerated approval perform adequate and well-controlled
post-marketing clinical studies. In addition, the FDA currently requires as a condition for accelerated approval the pre-approval of
promotional materials, which could adversely impact the timing of the commercial launch of the product. Fast Track designation, Breakthrough
Therapy designation, priority review and accelerated approval do not change the standards for approval but may expedite the development
or approval process.
Regenerative
Medicine Advanced Therapies (RMAT) Designation
The
FDA has established a Regenerative Medicine Advanced Therapy, or RMAT, designation as part of its implementation of the 21st Century
Cures Act, or Cures Act. The RMAT designation program is intended to fulfill the Cures Act requirement that the FDA facilitate an efficient
development program for, and expedite review of, any drug that meets the following criteria: (1) it qualifies as a RMAT, which is defined
as a cell therapy, therapeutic tissue engineering product, human cell and tissue product, or any combination product using such therapies
or products, with limited exceptions; (2) it is intended to treat, modify, reverse, or cure a serious or life-threatening disease or
condition; and (3) preliminary clinical evidence indicates that the drug has the potential to address unmet medical needs for such a
disease or condition. Like breakthrough therapy designation, RMAT designation provides potential benefits that include more frequent
meetings with FDA to discuss the development plan for the product candidate, and eligibility for rolling review and priority review.
Products granted RMAT designation may also be eligible for accelerated approval on the basis of a surrogate or intermediate endpoint
reasonably likely to predict long-term clinical benefit, or reliance upon data obtained from a meaningful number of sites, including
through expansion to additional sites. RMAT-designated products that receive accelerated approval may, as appropriate, fulfill their
post-approval requirements through the submission of clinical evidence, clinical studies, patient registries, or other sources of real
world evidence (such as electronic health records); through the collection of larger confirmatory data sets; or via post-approval monitoring
of all patients treated with such therapy prior to approval of the therapy.
Post-Approval
Requirements
Oftentimes,
even after a drug has been approved by the FDA for sale, the FDA may require that certain post-approval requirements be satisfied, including
the conduct of additional clinical studies. If such post-approval requirements are not satisfied, the FDA may withdraw its approval of
the drug. In addition, holders of an approved NDA or BLA are required to report certain adverse reactions to the FDA, comply with certain
requirements concerning advertising and promotional labeling for their products, and continue to have quality control and manufacturing
procedures conform to cGMPs after approval. The FDA periodically inspects the sponsor’s records related to safety reporting and/or
manufacturing facilities; this latter effort includes assessment of compliance with cGMPs. Accordingly, manufacturers must continue to
expend time, money, and effort in the area of production and quality control to maintain cGMPs compliance.
Other
Healthcare Fraud and Abuse Laws
In
the U.S., our activities are potentially subject to regulation by various federal, state and local authorities in addition to the FDA,
including but not limited to, the Centers for Medicare and Medicaid Services, or CMS, other divisions of the U.S. Department of Health
and Human Services (such as the Office of Inspector General and the Health Resources and Service Administration), the U.S. Department
of Justice, or the DOJ, and individual U.S. Attorney offices within the DOJ, and state and local governments. For example, sales, marketing
and scientific/educational grant programs may have to comply with the anti-fraud and abuse provisions of the Social Security Act, the
false claims laws, the privacy and security provisions of the Health Insurance Portability and Accountability Act, or HIPAA, and similar
state laws, each as amended, as applicable.
The
federal Anti-Kickback Statute prohibits, among other things, any person or entity from knowingly and willfully offering, paying, soliciting
or receiving any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for purchasing,
leasing, ordering or arranging for the purchase, lease or order of any item or service reimbursable, in whole or in part, under Medicare,
Medicaid or other federal healthcare programs. The term remuneration has been interpreted broadly to include anything of value. The Anti-Kickback
Statute has been interpreted to apply to arrangements between therapeutic product manufacturers on one hand and prescribers, purchasers,
and formulary managers on the other. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities
from prosecution. The exceptions and safe harbors are drawn narrowly and practices that involve remuneration that may be alleged to be
intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exception or safe
harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make
the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case
basis based on a cumulative review of all of its facts and circumstances. Additionally, the intent standard under the Anti-Kickback Statute
was amended by the ACA to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or
specific intent to violate it in order to have committed a violation. In addition, the ACA codified case law that a claim including items
or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the
federal False Claims Act, or FCA.
The
federal false claims and civil monetary penalty laws, including the FCA, which imposes significant penalties and can be enforced by private
citizens through civil qui tam actions, prohibit any person or entity from, among other things, knowingly presenting, or causing to be
presented, a false or fraudulent claim for payment to, or approval by, the federal healthcare programs, including Medicare and Medicaid,
or knowingly making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim to the
federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. For
instance, historically, pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free
product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted
for causing false claims to be submitted because of the companies’ marketing of the product for unapproved, off-label, and thus
generally non-reimbursable, uses.
HIPAA
created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing, or attempting to execute,
a scheme to defraud or to obtain, by means of false or fraudulent pretenses, representations or promises, any money or property owned
by, or under the control or custody of, any healthcare benefit program, including private third-party payors, willfully obstructing a
criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up by trick, scheme or
device, a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment
for healthcare benefits, items or services. Like the Anti-Kickback Statute, the ACA amended the intent standard for certain healthcare
fraud statutes under HIPAA such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to
violate it in order to have committed a violation.
Many
states have similar, and typically more prohibitive, fraud and abuse statutes or regulations that apply to items and services reimbursed
under Medicaid and other state programs, or, in several states, apply regardless of the payor. Additionally, to the extent that our product
candidates may in the future be sold in a foreign country, we may be subject to similar foreign laws.
We
may be subject to data privacy and security regulations by both the federal government and the states in which we conduct our business.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations,
imposes requirements relating to the privacy, security and transmission of individually identifiable health information. Among other
things, HITECH makes HIPAA’s privacy and security standards directly applicable to business associates, independent contractors,
or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of
a covered entity. HITECH also created four new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties
directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions
in federal courts to enforce HIPAA and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition,
many state laws govern the privacy and security of health information in specified circumstances, many of which differ from each other
in significant ways, are often not pre-empted by HIPAA, and may have a more prohibitive effect than HIPAA, thus complicating compliance
efforts.
We
expect our product, after approval, may be eligible for coverage under Medicare, the federal health care program that provides health
care benefits to the aged and disabled, and covers outpatient services and supplies, including certain pharmaceutical products, that
are medically necessary to treat a beneficiary’s health condition. In addition, the product may be covered and reimbursed under
other government programs, such as Medicaid and the 340B Drug Pricing Program. The Medicaid Drug Rebate Program requires pharmaceutical
manufacturers to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services
as a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients.
Under the 340B Drug Pricing Program, the manufacturer must extend discounts to entities that participate in the program. As part of the
requirements to participate in certain government programs, many pharmaceutical manufacturers must calculate and report certain price
reporting metrics to the government, such as average manufacturer price, or AMP, and best price. Penalties may apply in some cases when
such metrics are not submitted accurately and timely.
Additionally,
the federal Physician Payments Sunshine Act, or the Sunshine Act, within the ACA, and its implementing regulations, require that certain
manufacturers of drugs, devices, biological and medical supplies for which payment is available under Medicare, Medicaid or the Children’s
Health Insurance Program (with certain exceptions) report annually to CMS information related to certain payments or other transfers
of value made or distributed to physicians and teaching hospitals, or to entities or individuals at the request of, or designated on
behalf of, the physicians and teaching hospitals and to report annually certain ownership and investment interests held by physicians
and their immediate family members. Failure to report accurately could result in penalties. In addition, many states also govern the
reporting of payments or other transfers of value, many of which differ from each other in significant ways, are often not pre-empted,
and may have a more prohibitive effect than the Sunshine Act, thus further complicating compliance efforts.
New
Legislation and Regulations
From
time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing
the testing, approval, manufacturing and marketing of products regulated by the FDA. In addition to new legislation, FDA regulations
and policies are often revised or interpreted by the agency in ways that may significantly affect our business and our products. It is
impossible to predict whether further legislative changes will be enacted or whether FDA regulations, guidance, policies or interpretations
will be changed or what the effect of such changes, if any, may be.
ITEM 1A.
RISK FACTORS
You
should carefully consider the following material risk factors as well as all other information set forth or referred to in this report
before purchasing shares of our common stock. Investing in our common stock involves a high degree of risk. We may not be successful
in preventing the material adverse effects that any of the following risks and uncertainties may cause. These potential risks and uncertainties
may not be a complete list of the risks and uncertainties facing us. There may be additional risks and uncertainties that we are presently
unaware of, or presently consider immaterial, that may become material in the future and have a material adverse effect on us. You could
lose all or a significant portion of your investment due to any of these risks and uncertainties.
Summary
of Risk Factors
Our
business is subject to numerous risks and uncertainties that you should consider before investing in our company, as fully described
below. The principal factors and uncertainties that make investing in our company risky include, among others:
General
Operating and Business Risks
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Our
business is subject to risks arising from epidemic diseases, such as the recent outbreak of the COVID-19 illness. |
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Our
limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those estimates
of our future performance. |
|
● |
Our
results of operations have not resulted in profitability and we may not be able to achieve profitability going forward. |
|
● |
We
depend upon key personnel and need additional personnel. |
|
● |
Currently,
we have several consulting contracts with related parties in China. The loss of such customers could adversely impact our financial
condition and results of operations. |
|
● |
Our
auditors have issued an audit opinion which raises substantial doubt about our ability to continue as a going concern. |
|
● |
We
must effectively manage the growth of our operations, or our company will suffer. |
|
● |
Our
business requires substantial capital, and if we are unable to maintain adequate financing sources our profitability and financial
condition will suffer and jeopardize our ability to continue operations. |
|
● |
Our
revenue and results of operations may suffer if we are unable to attract new clients, continue to engage existing clients, or sell
additional products and services. |
|
● |
Our
prospects will suffer if we are not able to hire, train, motivate, manage, and retain a significant number of highly skilled employees. |
|
● |
Potential
liability claims may adversely affect our business. |
|
● |
In
accordance with our strategic development policy, we may invest in companies for strategic reasons and may not realize a return on
our investments. |
|
● |
Our
growing operations in the PRC could expose us to risks that could have an adverse effect on our costs of operations. |
|
● |
We
face intense competition which could cause us to lose market share. |
|
● |
If
we fail to comply with our obligations in the agreements under which we license intellectual property rights from third parties or
otherwise experience disruptions to our business relationships with our licensors, we could lose intellectual property rights that
are important to our business. |
|
● |
We
may face uncertainty and difficulty in obtaining and enforcing our patents and other proprietary rights. |
|
● |
We
may not be able to protect our intellectual property rights throughout the world. |
|
● |
Patent
terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time. |
|
● |
Obtaining
and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements
imposed by governmental patent agencies, and any patent protection we may obtain in the future could be reduced or eliminated for
non-compliance with these requirements. |
|
● |
It
is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection. If we fail to protect
or enforce our intellectual property rights adequately or secure rights to patents of others, the value of our intellectual property
rights would diminish. |
|
● |
We
may be subject to claims challenging the inventorship of patents and other intellectual property. |
|
● |
If
any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other
proprietary rights would be significantly impaired and our business and competitive position would suffer. |
|
● |
We
may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights
and we may be unable to protect our rights to, or use of, our technology. |
|
● |
Breaches
or compromises of our information security systems or our information technology systems or infrastructure could result in exposure
of private information, disruption of our business and damage to our reputation, which could harm our business, results of operation
and financial condition. |
|
● |
We
may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt
Practices Act or Chinese anti-corruption law could have a material adverse effect on our business. |
Risk
Factors Related to Clinical and Commercialization Activity
|
● |
We
may not be able to file INDs to commence additional clinical trials on the timelines we expect, and even if we are able to do so,
the FDA may not permit us to proceed. |
|
● |
We
have limited experience in conducting clinical trials. |
|
● |
Delays
in the commencement, enrollment, and completion of clinical testing could result in increased costs to us and delay or limit our
ability to obtain regulatory approval for our product candidates. |
|
● |
Our
success depends upon the viability of our product candidates and we cannot be certain any of them will receive regulatory approval
to be commercialized. |
|
● |
As
the results of earlier pre-clinical studies or clinical trials are not necessarily predictive of future results, any product candidate
we advance into clinical trials may not have favorable results in later clinical trials or receive regulatory approval. |
|
● |
Our
business faces significant government regulation, and there is no guarantee that our product candidates will receive regulatory approval. |
|
● |
Even
if our product candidates receive regulatory approval, we may still face future development and regulatory difficulties. |
|
● |
If
we or current or future collaborators, manufacturers, or service providers fail to comply with healthcare laws and regulations, we
or they could be subject to enforcement actions and substantial penalties, which could affect our ability to develop, market and
sell our products and may harm our reputation. |
|
● |
Any
cell based therapies we develop may become subject to unfavorable pricing regulations, third party coverage and reimbursement practices
or healthcare reform initiatives, thereby harming our business. |
|
● |
The
healthcare industry is heavily regulated in the U.S. at the federal, state, and local levels, and our failure to comply with applicable
requirements may subject us to penalties and negatively affect our financial condition. |
|
● |
Our
ability to obtain reimbursement or funding from the federal government may be impacted by possible reductions in federal spending. |
Risks
Related to Doing Business in China
|
● |
Trading in Avalon’s securities may be restricted under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or fully investigate Avalon’s auditors, and as a result, U.S. national securities exchanges, such as Nasdaq, may determine to delist Avalon’s securities. |
|
|
|
|
● |
Our business might be subject to various evolving PRC laws and regulations regarding data privacy and cybersecurity. Failure of cybersecurity and data security compliance could subject us to penalties, damage our reputation and brand and harm our business and results of operations. |
|
|
|
|
● |
If we become directly subject to the recent scrutiny, criticism and negative publicity involving certain U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved quickly. |
|
● |
Adverse
changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce
the demand for our products and damage our business. |
|
● |
Uncertainties
with respect to the PRC legal system could limit the legal protections available to you and us. |
|
● |
The PRC government exerts substantial influence over the manner in which Avalon must conduct its business activities and Avalon may face the risk that the future regulatory actions by the PRC government could significantly limit or completely hinder Avalon’s ability to offer future securities to investors. |
|
|
|
|
● |
Under the current Enterprise Income Tax, or EIT, law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non- PRC stockholders. |
|
|
|
|
● |
We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations implemented on September 8, 2006. |
|
● |
We
may be subject to fines and legal sanctions if we or our Chinese employees fail to comply with PRC regulations relating to employee
stock options granted by overseas listed companies to PRC citizens. |
|
● |
The
new M&A Rules establish more complex procedures for some acquisitions of Chinese companies by foreign investor which could make
it more difficult for us to pursue growth through acquisitions in China. |
|
● |
Government
control of currency conversion and future movements in exchange rates may adversely affect our operations and financial results. |
Risks
Related to Our Securities
|
● |
If we are unable to maintain listing of our securities on the Nasdaq Capital Market or another reputable stock exchange, it may be more difficult for our stockholders to sell their securities. |
|
|
|
|
● |
The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for our stockholders. |
|
● |
Future
sales of our common stock or securities convertible or exchangeable for our common stock may cause our stock price to decline. |
|
● |
You
may experience dilution of your ownership interests because of the future issuance of additional shares of our common or preferred
stock or other securities that are convertible into or exercisable for our common or preferred stock. |
|
● |
The
ability of our Board of Directors to issue additional stock may prevent or make more difficult certain transactions, including a
sale or merger. |
|
● |
We
are a “smaller reporting company,” and we cannot be certain if the reduced disclosure requirements applicable to smaller
reporting companies will make our common stock less attractive to investors. |
|
● |
If
securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading
opinion regarding our stock, our stock price and trading volume could decline. |
|
● |
Our
officers, directors and principal stockholders own a significant percentage of our stock and will be able to exert significant control
over matters subject to stockholder approval. |
|
● |
We
do not anticipate paying dividends on our common stock, and investors may lose the entire amount of their investment. |
|
● |
Applicable
regulatory requirements, including those contained in and issued under the Sarbanes-Oxley Act of 2002, may make it difficult for
us to retain or attract qualified officers and directors, which could adversely affect the management of our business and our ability
to obtain or retain listing of our common stock on a national securities exchange. |
|
● |
If
we cannot satisfy, or continue to satisfy, the initial listing requirements and other rules of the Nasdaq Capital Market, our securities
may be delisted, which could negatively impact the price of our securities and your ability to sell them. |
|
● |
We
could be subject to securities class action litigation. |
General
Operating and Business Risks
Our
business is subject to risks arising from epidemic diseases, such as the recent outbreak of the COVID-19 illness.
The
recent outbreak of the Coronavirus Disease 2019, or COVID-19, which has been declared by the World Health Organization to be
a “public health emergency of international concern,” has spread across the globe and is impacting worldwide economic activity.
Although several vaccines have been developed, a public health epidemic, including COVID-19, poses the risk that we or our employees,
contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including
due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the
impact that COVID-19 could have on our business, the continued spread of COVID-19 and the measures taken by the governments of countries
affected could disrupt the supply chain and adversely impact our business, financial condition or results of operations. The COVID-19
outbreak and mitigation measures may also have an adverse impact on global economic conditions which could have an adverse effect on
our business and financial condition. The extent to which the COVID-19 outbreak impacts our results will depend on future developments
that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and
the actions to contain its impact.
Our
limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those estimates
of our future performance.
We
did not begin operations of our business through AHS until May 2015. We have a limited operating history and limited revenue. As a consequence,
it is difficult, if not impossible, to forecast our future results based upon our historical data. Reliance on the historical results
may not be representative of the results we will achieve, particularly in our combined form. Because of the uncertainties related to
our lack of historical operations, we may be hindered in our ability to anticipate and timely adapt to increases or decreases in revenues
or expenses. If we make poor budgetary decisions as a result of unreliable historical data, we could be less profitable or incur losses,
which may result in a decline in our stock price.
Our
results of operations have not resulted in profitability and we may not be able to achieve profitability going forward.
We
incurred net losses amounting to $9,090,499 and $12,679,438 for the years ended December 31, 2021 and 2020, respectively. If we incur
additional significant losses, our stock price may decline, perhaps significantly. Our management is developing plans to achieve profitability.
Our business plan is speculative and unproven. There is no assurance that we will be successful in executing our business plan or that
even if we successfully implement our business plan, that we will be able to curtail our losses now or in the future. Further, as we
are a new enterprise, we expect that net losses will continue.
We
depend upon key personnel and need additional personnel.
Our
success depends on the continuing services of Wenzhao Lu, our Chairman of the Board, and David Jin, Meng Li and Luisa Ingargiola, our
executive officers. The loss of Mr. Lu, Dr. Jin, Ms. Li or Ms. Ingargiola could have a material and adverse effect on our business operations.
Additionally, the success of our operations will largely depend upon our ability to successfully attract and maintain competent and qualified
key management personnel. As with any company with limited resources, there can be no guaranty that we will be able to attract such individuals
or that the presence of such individuals will necessarily translate into profitability for us. Our inability to attract and retain key
personnel may materially and adversely affect our business operations.
Currently,
we have several consulting contracts with related parties in China. The loss of such customers could adversely impact our financial condition
and results of operations.
During
the years ended December 31, 2021 and 2020, we recognized an aggregate of $1,390,972 and $1,377,762 in revenues, respectively, of which,
$187,412 and $170,908 was generated from medical related consulting services provided to related parties, respectively. Wenzhao Lu, our
Chairman and significant shareholder, is the Chairman of each of the related parties. The loss of any related party customer would have
a material adverse effect on our financial condition or results of operation, the loss of more than one such related party customer,
or our failure to replace such customer with other customers, could have a material adverse effect on our financial condition and our
results of operations.
Our
auditors have issued an audit opinion which raises substantial doubt about our ability to continue as a going concern.
Our
independent auditors have indicated, in their report on our December 31, 2021 consolidated financial statements, that there is substantial
doubt about our ability to continue as a going concern. We had a working capital deficit of $3,078,616 at December 31, 2021. We have
a limited operating history, incurred recurring net losses and negative cash flows from operating activities, and our continued growth
is dependent upon the continuation of providing medical related consulting services to our related parties and generating rental revenue
from our income-producing real estate property in New Jersey, and obtaining additional financing to fund future obligations and pay liabilities
arising from normal business operations. Our ability to continue as a going concern is dependent on our ability to raise additional capital,
implement our business plan, and generate significant revenues. There are no assurances that we will be successful in our efforts to
generate significant revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. We
plan on raising capital through the sale of equity to implement our business plan. However, there is no assurance these plans will be
realized and that any additional financings will be available to our company on satisfactory terms and conditions, if any.
We
must effectively manage the growth of our operations, or our company will suffer.
To
manage our growth, we believe we must continue to implement and improve our services and products. We may not have adequately evaluated
the costs and risks associated with our planned expansion, and our systems, procedures, and controls may not be adequate to support our
operations. In addition, our management may not be able to achieve the rapid execution necessary to successfully offer our products and
services and implement our business plan on a profitable basis. The success of our future operating activities will also depend upon
our ability to expand our support system to meet the demands of our growing business. Any failure by our management to effectively anticipate,
implement, and manage changes required to sustain our growth would have a material adverse effect on our business, financial condition,
and results of operations.
Our
business requires substantial capital, and if we are unable to maintain adequate financing sources our profitability and financial condition
will suffer and jeopardize our ability to continue operations.
In
connection with the strategic development portion of our business, we will need significant capital in order to implement acquisitions
of technologies. In addition, we will need a significant amount of capital in order to fully implement our advisory business and maintain
our rental property. If we are unable to maintain adequate financing or other sources of capital are not available, we could be forced
to suspend, curtail or reduce our operations, which could harm our revenues, profitability, financial condition and business prospects.
Our
revenue and results of operations may suffer if we are unable to attract new clients, continue to engage existing clients, or sell additional
products and services.
We
presently derive our revenue from providing medical related consulting services to related parties and generating rental revenue from
our income-producing real estate property in New Jersey. Our growth therefore depends on our ability to attract new clients, maintain
existing clients and properties and sell additional products and services to existing clients. This depends on our ability to understand
and anticipate market and pricing trends and our clients’ needs and our ability to deliver consistent, reliable, high-quality services.
Our failure to engage new clients, continue to re-engage with our existing clients or cross-sell additional services could materially
and adversely affect our operating results.
Our
prospects will suffer if we are not able to hire, train, motivate, manage, and retain a significant number of highly skilled employees.
We
only recently commenced business and we presently generate medical related consulting services from related parties and generate rental
revenue from our income-producing real estate property in New Jersey. On the consulting side, Wenzhao Lu, our Chairman and significant
shareholder, is the Chairman of each of the clients in which we have provided consulting services. Our future success depends upon our
ability to hire, train, motivate, manage, and retain a significant number of highly skilled employees, particularly research analysts,
technical experts, and sales and marketing staff. We will experience competition for professional personnel in each of our business lines.
Hiring, training, motivating, managing, and retaining employees with the skills we need is time consuming and expensive. Any failure
by us to address our staffing needs in an effective manner could hinder our ability to continue to provide high-quality products and
services and to grow our business.
Potential
liability claims may adversely affect our business.
Our
services, which may include recommendations and advice to organizations regarding complex business and operational processes and regulatory
and compliance issues may give rise to liability claims by our clients or by third parties who bring claims against our clients. Healthcare
organizations often are the subject of regulatory scrutiny and litigation, and we also may become the subject of such litigation based
on our advice and services. Any such litigation, whether or not resulting in a judgment against us, may adversely affect our reputation
and could have a material adverse effect on our financial condition and results of operations. We may not have adequate insurance coverage
for claims against us.
In
accordance with our strategic development policy, we may invest in companies for strategic reasons and may not realize a return on our
investments.
From
time to time, we may make investments in companies. These investments may be for strategic objectives to support our key business initiatives
but may also be standalone investments or acquisitions. Such investments or acquisitions could include equity or debt instruments in
private companies, many of which may not be marketable at the time of our initial investment. These companies may range from early-stage
companies that are often still defining their strategic direction to more mature companies with established revenue streams and business
models. The success of these companies may depend on product development, market acceptance, operational efficiency, and other key business
factors. The companies in which we invest may fail because they may not be able to secure additional funding, obtain favorable investment
terms for future financings, or take advantage of liquidity events such as public offerings, mergers, and private sales. If any of these
private companies fails, we could lose all or part of our investment in that company. If we determine that impairment indicators exist
and that there are other-than-temporary declines in the fair value of the investments, we may be required to write down the investments
to their fair value and recognize the related write-down as an investment loss.
Our
growing operations in the PRC could expose us to risks that could have an adverse effect on our costs of operations.
Avalon
Shanghai’s client base is currently located in the PRC. As a result, we expect to continue to add personnel in the PRC. With a
significant focus of our operations in the PRC, our reliance on a workforce in the PRC exposes us to disruptions in the business, political,
and economic environment in that region. Maintenance of a stable political environment between the PRC and the United States is important
to our operations, and any disruption in this relationship may directly negatively affect our operations. Our operations in the PRC require
us to comply with complex local laws and regulatory requirements and expose us to foreign currency exchange rate risk. Our operations
may also be subject to reduced or inadequate protection of our intellectual property rights, and security breaches. Further, it may be
difficult to transfer funds from our Chinese operations to our company. Negative developments in any of these areas could increase our
costs of operations or otherwise harm our business.
We face
intense competition which could cause us to lose market share.
In
the healthcare markets in the United States and the People’s Republic of China, we will compete with large healthcare providers
who have more significant financial resources, established market positions, long-standing relationships, and who have more significant
name recognition, technical, marketing, sales, distribution, financial and other resources than we do. The resources available to our
competitors to develop new services and products and introduce them into the marketplace exceed the resources currently available to
us. This intense competitive environment may require us to make changes in our services, products, pricing, licensing, distribution,
or marketing to develop a market position.
If
we fail to comply with our obligations in the agreements under which we license intellectual property rights from third parties or otherwise
experience disruptions to our business relationships with our licensors, we could lose intellectual property rights that are important
to our business.
We
are party to a research agreement with the Massachusetts Institute of Technology (“MIT”) for development of chimeric antigen
receptor (CAR) technology. MIT has granted us options to non-exclusively or exclusively license MIT inventions arising under this research
agreement. We may need to negotiate commercially reasonable terms and conditions with MIT to advance our research and development activities
or allow the commercialization of CAR technology or any other product candidates we may identify and pursue.
Avalon
GloboCare and Arbele Limited (“Arbele”) are parties to the joint venture Avactis Biosciences, Inc. (“Avactis”)
for development of AVA-011, a mRNA-based dual anti-CD19-CD22 CAR-T cell therapy candidate. Arbele has granted Avactis an exclusive license
to its rights in this technology. We and Arbele may need to obtain additional licenses from others to advance our research and development
activities or allow the commercialization of mRNA-based CAR technology or any other product candidates we may identify and pursue.
The
Company formed a strategic partnership with HydroPeptide, LLC, a leading epigenetics skin care company, to engage in co-development and
commercialization of a series of clinical-grade, exosome-based cosmeceutical and orthopedic products. As part of this agreement, the
Company signed a three-way Material Transfer Agreement between Avalon GloboCare, HydroPeptide and the University of Pittsburgh Medical
Center.
The
Company and the University of Pittsburgh of the Commonwealth System of Higher Education (the “University”) entered into a
Corporate Research Agreement (the “University Agreement”). Pursuant to the University Agreement, for a term of two
years the University agreed to use its reasonable efforts to perform academic research funded by the Company in connection with the development
of point-of-care modular autonomous processing system to generate clinical-grade AVA-011, a RNA-based chimeric antigen receptor (CAR)
T-cell therapy candidate (the “Project”) subject to the appointment of Dr. Yen Michael S. Hsu as Principal Investigator.
Our
agreements with MIT, Hydropeptide, University of Pittsburg and Arbele impose, and we expect that future agreements will impose, various
development, diligence, commercialization, or other obligations on AVAR and us. In spite of our efforts, these partners may conclude
that we have materially breached its obligations under such agreements and might therefore terminate the agreements, thereby removing
or limiting our ability or our subsidiary AVAR’s ability to develop and commercialize products and technology covered by these
license agreements. If these in-licenses are terminated, or if the underlying patents fail to provide the intended exclusivity, competitors
or other third parties would have the freedom to seek regulatory approval of, and to market, products identical to ours and we may be
required to cease our development and commercialization of CAR or exosome technology or other product candidates that we may identify.
Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations,
and prospects.
Moreover,
disputes may arise regarding intellectual property subject to a licensing agreement, including:
| ● | the
scope of rights granted under the license agreement and other interpretation-related issues; |
| ● | the
extent to which our product candidates, technology and processes infringe on intellectual property of the licensor that is not subject
to the licensing agreement; |
| ● | the
sublicensing of patent and other rights under our collaborative development relationships; |
| ● | our
diligence obligations under the license agreement and what activities satisfy those diligence obligations; |
| ● | the
inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors
and us and our partners; and |
| ● | the
priority of invention of patented technology. |
In
addition, the agreements under which we currently license intellectual property or technology from third parties are complex, and certain
provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement
that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase
what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse
effect on our business, financial condition, results of operations, and prospects. Moreover, if disputes over intellectual property that
we have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, we may
be unable to successfully develop and commercialize the affected product candidates, which could have a material adverse effect on our
business, financial conditions, results of operations, and prospects.
We
may face uncertainty and difficulty in obtaining and enforcing our patents and other proprietary rights.
There
can be no assurance that any patent applications we file or license will be approved, or that challenges will not be instituted against
the validity or enforceability of any patent licensed-in or owned by us. Our pending and future patent applications may not result in
patents being issued that protect our product candidates, in whole or in part, or which effectively prevent others from commercializing
competitive product candidates. Even if our patent applications issue as patents, they may not issue in a form that will provide us with
any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors
may be able to circumvent our patents by developing similar or alternative product candidates in a non-infringing manner. The cost of
litigation to uphold the validity and prevent infringement of a patent is substantial. Furthermore, there can be no assurance that others
will not independently develop substantially equivalent technologies not covered by patents to which we have rights or obtain access
to our know-how. In addition, the laws of certain countries may not adequately protect our intellectual property. Our competitors may
possess or obtain patents on products or processes that are necessary or useful to the development, use, or manufacture of our product
candidates. There can also be no assurance that our proposed technology will not infringe upon patents or proprietary rights owned by
others, with the result that others may bring infringement claims against us and require us to license such proprietary rights, which
may not be available on commercially reasonable terms, if at all. Any such litigation, if instituted, could have a material adverse effect,
potentially including monetary penalties, diversion of management resources, and injunction against continued manufacture, use, or sale
of certain products or processes.
We
rely upon non-patented proprietary know-how. There can be no assurance that we can adequately protect our rights in such non-patented
proprietary know-how, or that others will not independently develop substantially equivalent proprietary information or techniques or
gain access to our proprietary know-how. Any of the foregoing events could have a material adverse effect on us. In addition, if any
of our trade secrets, know-how or other proprietary information were to be disclosed, or misappropriated, the value of our trade secrets,
know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.
In
September 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number
of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may
also affect patent litigation. In particular, under the Leahy-Smith Act, the United States transitioned in March 2013 to a “first
to file” system in which the first inventor to file a patent application will be entitled to the patent. Third parties are allowed
to submit prior art before the issuance of a patent by the U.S. Patent and Trademark Office, or USPTO, and may become involved in opposition,
derivation, post-grant and inter partes review, or interference proceedings challenging our patent rights. An adverse determination
in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, which could adversely affect
our competitive position.
The
USPTO has developed new and untested regulations and procedures to govern the full implementation of the Leahy-Smith Act, and many of
the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the “first-to-file” provisions,
only became effective in March 2013. The Leahy-Smith Act has also introduced procedures that may make it easier for third parties to
challenge issued patents, as well as to intervene in the prosecution of patent applications. Finally, the Leahy-Smith Act contains new
statutory provisions that still require the USPTO to issue new regulations for their implementation, and it may take the courts years
to interpret the provisions of the new statute. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the
operation of our business. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution
of our patent applications and the enforcement or defense of our issued patents.
We
may not be able to protect our intellectual property rights throughout the world.
Filing,
prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive, and
our intellectual property rights in some countries outside the United States may be less extensive than those in the United States. In
addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws
in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside
the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions.
Competitors may use our technologies in jurisdictions where we do not obtain patent protection to develop their own products and may
also export infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United
States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient
to prevent them from competing.
Many
companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The
legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets,
and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for
us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings
to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts
and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our
patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits
that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce
our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual
property that we develop or license.
Patent
terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.
Patents
have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally
20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection
it affords, is limited. Even if patents covering our product candidates are obtained, once the patent life has expired, we may be open
to competition from competitive products, including generics or biosimilars. Given the amount of time required for the development, testing
and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates
are commercialized. As a result, any patents we may obtain may not provide us with sufficient rights to exclude others from commercializing
products similar or identical to ours.
Obtaining
and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements
imposed by governmental patent agencies, and any patent protection we may obtain in the future could be reduced or eliminated for non-compliance
with these requirements.
Periodic
maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid
to the USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents
and/or applications. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary,
fee payment and other similar provisions during the patent application process. There are situations in which non-compliance can result
in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction.
In such an event, our competitors might be able to enter the market and this circumstance would have a material adverse effect on our
business.
It
is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection. If we fail to protect or
enforce our intellectual property rights adequately or secure rights to patents of others, the value of our intellectual property rights
would diminish.
Our
commercial viability will depend in part on obtaining and maintaining patent protection and trade secret protection of our product candidates,
and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges. Our ability
to stop third parties from making, using, selling, offering to sell, or importing our products is dependent upon the extent to which
we obtain rights under valid and enforceable patents or trade secrets that cover these activities.
The
patent positions of pharmaceutical and biopharmaceutical companies can be highly uncertain and involve complex legal and factual questions
for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in biopharmaceutical
patents has emerged to date in the United States. The biopharmaceutical patent situation outside the United States is even more uncertain.
Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value
of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in the patents we
own. Further, if any of our patents are deemed invalid and unenforceable, it could impact our ability to commercialize or license our
technology.
The
degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately
protect our rights or permit us to gain or keep our competitive advantage. For example:
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others
may be able to make products that are similar to our product candidates but that are not covered by the claims of any patents; |
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we
might not have been the first to make the inventions covered by any issued patents or patent applications; |
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we
might not have been the first to file patent applications for these inventions; |
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it
is possible that any patent applications we own or license will not result in issued patents; |
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any
issued patents may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges
by third parties; |
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we
may not develop additional proprietary technologies that are patentable or protectable under trade secrets law; or |
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the
patents of others may have an adverse effect on our business. |
We
also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable.
However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants,
contractors, outside scientific collaborators, and other advisors may unintentionally or willfully disclose our information to competitors.
In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently
develop equivalent knowledge, methods, and know-how.
We
may be subject to claims challenging the inventorship of patents and other intellectual property.
We
or our licensors may be subject to claims that former employees, collaborators or other third parties have an interest as an inventor
or co-inventor in intellectual property we own or license. For example, we or our licensors may have inventorship disputes arise from
conflicting obligations of employees, consultants or others who are involved in developing our product candidates. We may be subject
to claims by third parties asserting that our licensors, employees or we have misappropriated their intellectual property, or claiming
ownership of what we regard as our own intellectual property. Litigation may be necessary to defend against these and other claims challenging
inventorship or our or our licensors’ ownership of our owned or in-licensed patents, trade secrets or other intellectual property.
If we or our licensors fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property
rights, such as exclusive ownership of, or right to use, intellectual property that is important to our product candidates. Even if we
are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and
other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations
and prospects.
If
any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other
proprietary rights would be significantly impaired and our business and competitive position would suffer.
Our
viability also depends upon the skills, knowledge and experience of our scientific and technical personnel, and our consultants and advisors.
To help protect our proprietary know-how and our inventions for which patents may be unobtainable or difficult to obtain, we rely on
trade secret protection and confidentiality agreements. To this end, we require all of our employees, consultants, advisors and contractors
to enter into agreements which prohibit unauthorized disclosure and use of confidential information and, where applicable, require disclosure
and assignment to us of the ideas, developments, discoveries and inventions important to our business. These agreements are often limited
in duration and may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of
any unauthorized use or disclosure or the lawful development by others of such information. There is no assurance that such agreements
will be honored by such parties or enforced in whole or part by the courts. We cannot be certain that others will not gain access to
these trade secrets or that our patents will provide adequate protection. Others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets. In addition, enforcing a claim that a third party illegally
obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. If any of our trade
secrets, know-how or other proprietary information is improperly disclosed, the value of our trade secrets, know-how and other proprietary
rights would be significantly impaired and our business and competitive position would suffer.
We
may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights
and we may be unable to protect our rights to, or use of, our technology.
If
we choose to go to court to stop a third party from using the inventions claimed in our patents, that individual or company has the right
to ask the court to rule that such patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive
and would consume time and other resources, even if we were successful in discontinuing the infringement of our patents. In addition,
there is a risk that the court will decide that these patents are not valid and that we do not have the right to stop the other party
from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop
the other party on the ground that such other party’s activities do not infringe our rights to these patents. In addition, the
U.S. Supreme Court has in the past invalidated tests used by the USPTO in granting patents over the past 20 years. As a consequence,
issued patents may be found to contain invalid claims according to the newly revised standards. Some of our own patents may be subject
to challenge and subsequent invalidation in a variety of post-grant proceedings, particularly inter partes review, before the
USPTO or during litigation under the revised criteria, which make it more difficult to defend the validity of claims in already issued
patents.
Furthermore,
a third party may claim that we or our manufacturing or commercialization partners are using inventions covered by the third party’s
patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product
candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and technical
personnel. There is a risk that a court could decide that we or our commercialization partners are infringing the third party’s
patents and order us or our partners to stop the activities covered by the patents. In addition, there is a risk that a court could order
us or our partners to pay the other party damages for having violated the other party’s patents. The biotechnology industry has
produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types
of products, manufacturing processes or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation
is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products, manufacturing processes
or methods of use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may
not be able to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence
to overcome the presumption of validity enjoyed by issued patents.
As
some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications
in the United States and many foreign jurisdictions are typically not published until eighteen months after filing, and because publications
in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications
for technology covered by our issued patents or our pending applications, or that we were the first to invent the technology. Our competitors
may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent applications may
have priority over our patent applications or patents, which could further require us to obtain rights to issued patents covering such
technologies. If another party has filed a United States patent application on inventions similar to ours, we may have to participate
in an interference proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings
could be substantial, and it is possible that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently
arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to
such inventions.
Some
of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially
greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation or inter partes
review proceedings could have a material adverse effect on our ability to raise the funds necessary to continue our operations.
Some
jurisdictions in which we operate have enacted legislation which allows members of the public to access information under statutes similar
to the U.S. Freedom of Information Act. Even though we believe our information would be excluded from the scope of such statutes, there
are no assurances that we can protect our confidential information from being disclosed under the provisions of such laws. If any confidential
or proprietary information is released to the public, such disclosures may negatively impact our ability to protect our intellectual
property rights.
Breaches
or compromises of our information security systems or our information technology systems or infrastructure could result in exposure of
private information, disruption of our business and damage to our reputation, which could harm our business, results of operation and
financial condition.
We
utilize information security and information technology systems and websites that allow for the secure storage and transmission of proprietary
or private information regarding our clients, patients, employees, vendors and others, including individually identifiable health information.
A security breach of our network, hosted service providers, or vendor systems, may expose us to a risk of loss or misuse of this information,
litigation and potential liability. Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated
attacks, including on companies within the healthcare industry. Although we believe that we take appropriate measures to safeguard sensitive
information within our possession, we may not have the resources or technical sophistication to anticipate or prevent rapidly-evolving
types of cyber-attacks targeted at us, our clients, our patients, or others who have entrusted us with information. Actual or anticipated
attacks may cause us to incur costs, including costs to deploy additional personnel and protection technologies, train employees, and
engage third-party experts and consultants. We invest in industry standard security technology to protect personal information. Advances
in computer capabilities, new technological discoveries, or other developments may result in the technology used by us to protect personal
information or other data being breached or compromised. To our knowledge, we have not experienced any material breach of our cybersecurity
systems. If our or our third-party service provider systems fail to operate effectively or are damaged, destroyed, or shut down, or there
are problems with transitioning to upgraded or replacement systems, or there are security breaches in these systems, any of the aforementioned
could occur as a result of natural disasters, software or equipment failures, telecommunications failures, loss or theft of equipment,
acts of terrorism, circumvention of security systems, or other cyber-attacks, we could experience delays or decreases in revenue, and
reduced efficiency of our operations. Additionally, any of these events could lead to violations of privacy laws, loss of customers,
or loss, misappropriation or corruption of confidential information, trade secrets or data, which could expose us to potential litigation,
regulatory actions, sanctions or other statutory penalties, any or all of which could adversely affect our business, and cause us to
incur significant losses and remediation costs.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices
Act or Chinese anti-corruption law could have a material adverse effect on our business.
We
are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign
governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining
or retaining business. Chinese anti-corruption law also strictly prohibits bribery of government officials. We have operations, agreements
with third parties and make sales in China, where corruption may occur. Our activities in China create the risk of unauthorized payments
or offers of payments by one of the employees, consultants, sales agents or distributors of our company, even though these parties are
not always subject to our control. It is our policy to implement safeguards to prevent these practices by our employees. However, our
existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or
distributors of our company may engage in conduct for which we might be held responsible.
Violations
of the FCPA or other anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities,
which could negatively affect our business, operating results and financial condition. In addition, the United States government may
seek to hold our company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
Risk Factors
Related to Clinical and Commercialization Activity
We
may not be able to file INDs to commence additional clinical trials on the timelines we expect, and even if we are able to do so, the
FDA may not permit us to proceed.
Avalon
has initiated its first-in-human clinical trial of CD19 CAR-T candidate, AVA-001 in August 2019 at the Hebei Yanda Lu Daopei Hospital
and Beijing Lu Daopei Hospital in China (the world’s single largest CAR-T treatment network with over 600 patients being treated
with CAR-T) for the indication of relapsed/refractory B-cell acute lymphoblastic leukemia and non-Hodgkin Lymphoma. We hope to file a
number of investigational new drug applications, or INDs, for cell based therapies and diagnostic systems through INDs over the next
several years. However, the timing of our filing of these INDs is primarily dependent on receiving further data from our pre-clinical
studies, and our timing of filing on all product candidates is subject to further research. Additionally, our submission of INDs is contingent
upon having sufficient financial resources to prepare and complete the application.
We
cannot be sure that submission of an IND will result in the United States Food and Drug Administration, or FDA, allowing further clinical
trials to begin, or that, once begun, issues will not arise that result in the suspension or termination of such clinical trials. Any
IND we submit could be denied by the FDA or the FDA could place any future investigation of ours on clinical hold until we provide additional
information, either before or after clinical trials are initiated. Additionally, even if such regulatory authorities agree with the design
and implementation of the clinical trials set forth in an IND or clinical trial application, we cannot guarantee that such regulatory
authorities will not change their requirements in the future. Unfavorable future trial results or other factors, such as insufficient
capital to continue development of a product candidate or program, could also cause us to voluntarily withdraw an effective IND.
We
have limited experience in conducting clinical trials.
We
have limited human clinical trial experience with respect to our product candidates. Although our CEO, Dr. David Jin, is formerly with
the FDA, this will not provide assurance of success. The clinical testing process is governed by stringent regulation and is highly complex,
costly, time-consuming, and uncertain as to outcome, and pharmaceutical products and products used in the regeneration of tissue may
invite particularly close scrutiny and requirements from the FDA and other regulatory bodies. Our failure or the failure of our collaborators
to conduct human clinical trials successfully or our failure to capitalize on the results of human clinical trials for our product candidates
would have a material adverse effect on us. If our clinical trials of our product candidates or future product candidates do not sufficiently
enroll or produce results necessary to support regulatory approval in the United States or elsewhere, or if they show undesirable side
effects, we will be unable to commercialize these product candidates.
To
receive regulatory approval for the commercial sale of our product candidates, we must conduct adequate and well-controlled clinical
trials to demonstrate efficacy and safety in humans. Clinical failure can occur at any stage of the testing. Our clinical trials may
produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and/or non-clinical
testing. In addition, the results of our clinical trials may show that our product candidates are ineffective or may cause undesirable
side effects, which could interrupt, delay or halt clinical trials, resulting in the denial of regulatory approval by the FDA and other
regulatory authorities. In addition, negative, delayed or inconclusive results may result in:
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the
withdrawal of clinical trial participants; |
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the
termination of clinical trial sites or entire trial programs; |
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costs
of related litigation; |
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substantial
monetary awards to patients or other claimants; |
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impairment
of our business reputation; |
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loss
of revenues; and |
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the
inability to commercialize our product candidates. |
Delays
in the commencement, enrollment, and completion of clinical testing could result in increased costs to us and delay or limit our ability
to obtain regulatory approval for our product candidates.
Delays
in the commencement, enrollment or completion of clinical testing could significantly affect our product development costs. A clinical
trial may be suspended or terminated by us, the FDA, or other regulatory authorities due to a number of factors. The commencement and
completion of clinical trials require us to identify and maintain a sufficient number of trial sites, many of which may already be engaged
in other clinical trial programs for the same indication as our product candidates. We may be required to withdraw from a clinical trial
as a result of changing standards of care, or we may become ineligible to participate in clinical studies. We do not know whether planned
clinical trials will begin on time or be completed on schedule, if at all. The commencement, enrollment and completion of clinical trials
can be delayed for a number of reasons, including, but not limited to, delays related to:
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findings
in pre-clinical studies; |
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reaching
agreements on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can
be subject to extensive negotiation and may vary significantly among different CROs and trial sites; |
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obtaining
regulatory approval to commence a clinical trial; |
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complying
with conditions imposed by a regulatory authority regarding the scope or term of a clinical trial, or being required to conduct additional
trials before moving on to the next phase of trials; |
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obtaining
institutional review board, or IRB, approval to conduct a clinical trial at numerous prospective sites; |
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recruiting
and enrolling patients to participate in clinical trials for a variety of reasons, including the size of the patient population,
nature of trial protocol, meeting the enrollment criteria for our studies, screening failures, the inability of the sites to conduct
trial procedures properly, the availability of approved effective treatments for the relevant disease and competition from other
clinical trial programs for similar indications; |
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retaining
patients who have initiated their participation in a clinical trial but may be prone to withdraw due to the treatment protocol, lack
of efficacy, personal issues, or side effects from the therapy, or who are lost to further follow-up; |
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manufacturing
sufficient quantities of a product candidate for use in clinical trials on a timely basis; |
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complying
with design protocols of any applicable special protocol assessment we receive from the FDA; |
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severe or unexpected cell therapy side effects experienced by patients in a clinical trial; |
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collecting, analyzing and reporting final data from the clinical trials; |
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breaches in quality of manufacturing runs that compromise all or some of the doses made; positive results in FDA-required viral testing; karyotypic abnormalities in our cell product; or contamination in our manufacturing facilities, all of which events would necessitate disposal of all cells made from that source; |
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availability of materials provided by third parties necessary to manufacture our product candidates; |
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availability of adequate amounts of acceptable tissue for preparation of master cell banks for our products; and |
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requirements to conduct additional trials and studies, and increased expenses associated with the services of our CROs and other third parties. |
If we are required to conduct
additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, we or our development
partners, if any, may be delayed in obtaining, or may not be able to obtain or maintain, clinical or marketing approval for these product
candidates. We may not be able to obtain approval for indications that are as broad as intended, or we may be able to obtain approval
only for indications that are entirely different from those indications for which we sought approval.
Changes in regulatory requirements
and guidance may occur, and we may need to amend clinical trial protocols to reflect these changes with appropriate regulatory authorities.
Amendments may require us to resubmit our clinical trial protocols to IRBs for re-examination, which may impact the costs, timing, or
successful completion of a clinical trial. If we experience delays in the completion of, or if we terminate, our clinical trials, the
commercial prospects for our product candidates will be harmed, and our ability to generate product revenues will be delayed. In addition,
many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the
denial of regulatory approval of a product candidate. Even if we are able to ultimately commercialize our product candidates, other therapies
for the same or similar indications may have been introduced to the market and already established a competitive advantage. Any delays
in obtaining regulatory approvals may:
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delay commercialization of, and our ability to derive product revenues from, our product candidates; |
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impose costly procedures on us; or |
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diminish any competitive advantages that we may otherwise enjoy. |
Our success depends upon the viability of our
product candidates and we cannot be certain any of them will receive regulatory approval to be commercialized.
We will need FDA approval
to market and sell any of our product candidates in the United States and approvals from FDA-equivalent regulatory authorities in foreign
jurisdictions to commercialize our product candidates in those jurisdictions. In order to obtain FDA approval of any of our product candidates,
we must submit to the FDA a new drug application, or NDA, or a biologics license application, or BLA, demonstrating that the product candidate
is safe for humans and effective for its intended use. This demonstration requires significant research and animal tests, which are referred
to as pre-clinical studies, as well as human tests, which are referred to as clinical trials. Satisfaction of the FDA’s regulatory
requirements typically takes many years, depends upon the type, complexity, and novelty of the product candidate, and requires substantial
resources for research, development, testing and manufacturing. We cannot predict whether our research and clinical approaches will result
in cell therapies that the FDA considers safe for humans and effective for indicated uses. The FDA has substantial discretion in the drug
approval process and may require us to conduct additional pre-clinical and clinical testing or to perform post-marketing studies. The
approval process may also be delayed by changes in government regulation, future legislation, administrative action or changes in FDA
policy that occur prior to or during our regulatory review.
Even if we comply with all
FDA requests, the FDA may ultimately reject one or more of our NDAs or BLAs, as applicable. We cannot be sure that we will ever obtain
regulatory clearance for our product candidates. Failure to obtain FDA approval of any of our product candidates will reduce our number
of potentially salable products and, therefore, corresponding product revenues, and will have a material and adverse impact on our business.
As the results of earlier pre-clinical studies
or clinical trials are not necessarily predictive of future results, any product candidate we advance into clinical trials may not have
favorable results in later clinical trials or receive regulatory approval.
Even if our pre-clinical
studies and clinical trials are completed as planned, clinical trials, we cannot be certain that their results will support the claims
of our product candidates. Positive results in pre-clinical testing and early clinical trials do not ensure that results from later clinical
trials will also be positive, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical
trials and pre-clinical testing. A number of companies in the pharmaceutical industry, including those with greater resources and experience,
have suffered significant setbacks in Phase II or Phase III clinical trials, even after seeing promising results in earlier clinical trials.
Our clinical trial process
may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure would cause us
to abandon a product candidate and may delay development of other product candidates. Any delay in, or termination of, our clinical trials
will delay or cause us to refrain from the filing of our NDAs and/or BLAs with the FDA and, ultimately, our ability to commercialize our
product candidates and generate product revenues. In addition, our clinical trials to date involve small patient populations. Because
of the small sample size, the results of these clinical trials may not be indicative of future results.
Our business faces significant government regulation,
and there is no guarantee that our product candidates will receive regulatory approval.
Our research and development
activities, pre-clinical studies, anticipated human clinical trials, and anticipated manufacturing and marketing of our potential products
are subject to extensive regulation by the FDA and other regulatory authorities in the United States, as well as by regulatory authorities
in other countries. In the United States, our product candidates are subject to regulation as biological products or as combination biological
products/medical devices under the Federal Food, Drug and Cosmetic Act, the Public Health Service Act and other statutes, as outlined
in the Code of Federal Regulations. Different regulatory requirements may apply to our products depending on how they are categorized
by the FDA under these laws. These regulations can be subject to substantial and significant interpretation, addition, amendment or revision
by the FDA and by the legislative process. The FDA may determine that we will need to undertake clinical trials beyond those currently
planned. Furthermore, the FDA may determine that results of clinical trials do not support approval for the product. Similar determinations
may be encountered in foreign countries. The FDA will continue to monitor products in the market after approval, if any, and may determine
to withdraw its approval or otherwise seriously affect the marketing efforts for any such product. The same possibilities exist for trials
to be conducted outside of the United States that are subject to regulations established by local authorities and local law. Any such
determinations would delay or deny the introduction of our product candidates to the market and have a material adverse effect on our
business, financial condition, and results of operations.
Cell based therapeutics are
subject to ongoing periodic unannounced inspection by the FDA, the Drug Enforcement Agency, other federal agencies and corresponding state
agencies to ensure strict compliance with good manufacturing practices, and other government regulations and corresponding foreign standards.
We do not have control over third-party manufacturers’ compliance with these regulations and standards, nor can we guarantee that
we will maintain compliance with such regulations in regards to our own manufacturing processes. Other risks include:
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regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication, or field alerts to physicians and pharmacies; |
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regulatory authorities may withdraw their approval of the IND or the product or require us to take our approved products off the market; |
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we may be required to change the way the product is manufactured or administered and we may be required to conduct additional clinical trials or change the labeling of our products; |
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we may have limitations on how we promote our products; and |
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we may be subject to litigation or product liability claims. |
Even if our product candidates
receive regulatory approval in the United States, we may never receive approval or commercialize our product candidates outside of the
United States. In order to market and commercialize any product candidate outside of the United States, we must establish and comply with
numerous and varying regulatory requirements of other countries regarding manufacturing, safety and efficacy. Approval procedures vary
among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval
in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include
all of the risks detailed above regarding FDA approval in the United States as well as other risks. Regulatory approval in one country
does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative
effect on the regulatory approval process in others. Failure to obtain regulatory approval in other countries, or any delay or setback
in obtaining such approval, could have the same adverse effects detailed above regarding FDA approval in the United States. Such effects
include the risks that our product candidates may not be approved for all indications requested, which could limit the uses of our product
candidates and have an adverse effect on product sales and potential royalties, and that such approval may be subject to limitations on
the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies.
Even if our product candidates receive regulatory
approval, we may still face future development and regulatory difficulties.
Even if U.S. regulatory approval
is obtained, the FDA may still impose significant restrictions on a product’s indicated uses or marketing, or impose ongoing requirements
for potentially costly post-approval studies. If any of our products were granted accelerated approval, FDA could require post-marketing
confirmatory trials to verify and describe the anticipated effect on irreversible morbidity or mortality or other clinical benefit. FDA
may withdraw approval of a drug or indication approved under the accelerated approval pathway if a trial required to verify the predicted
clinical benefit of the product fails to verify such benefit; other evidence demonstrates that the product is not shown to be safe or
effective under the conditions of use; the applicant fails to conduct any required post-approval trial of the drug with due diligence;
or the applicant disseminates false or misleading promotional materials relating to the product. In addition, the FDA currently requires
as a condition for accelerated approval the pre-approval of promotional materials, which could adversely impact the timing of the commercial
launch of the product.
Given the number of recent
high-profile adverse safety events with certain drug and cell related products, the FDA may require, as a condition of approval, costly
risk management programs, which may include safety surveillance, restricted distribution and use, patient education, enhanced labeling,
special packaging or labeling, expedited reporting of certain adverse events, pre-approval of promotional materials, and restrictions
on direct-to-consumer advertising. Furthermore, heightened Congressional scrutiny on the adequacy of the FDA’s drug approval process
and the FDA’s efforts to assure the safety of marketed cell based therapy has resulted in the proposal of new legislation addressing
drug safety issues. If enacted, any new legislation could result in delays or increased costs during the period of product development,
clinical trials, and regulatory review and approval, as well as increased costs to assure compliance with any new post-approval regulatory
requirements. Any of these restrictions or requirements could force us to conduct costly studies or increase the time for us to become
profitable. For example, any labeling approved for any of our product candidates may include a restriction on the term of its use, or
it may not include one or more of our intended indications.
Our product candidates will
also be subject to ongoing FDA requirements for the labeling, packaging, storage, advertising, promotion, record-keeping, and submission
of safety and other post-market information on the cell based therapy. New issues may arise during a product lifecycle that did not exist,
or were unknown, at the time of product approval, such as adverse events of unanticipated severity or frequency, or problems with the
facility where the product is manufactured. Since approved products, manufacturers, and manufacturers’ facilities are subject to
continuous review and periodic inspections, these new issues post-approval may result in voluntary actions by us or may result in a regulatory
agency imposing restrictions on that product or us, including requiring withdrawal of the product from the market or for use in a clinical
study. If our product candidates fail to comply with applicable regulatory requirements, such as good manufacturing practices, a regulatory
agency may:
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require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions, and penalties for noncompliance; |
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impose other civil or criminal penalties; |
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suspend regulatory approval; |
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suspend any ongoing clinical trials; |
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refuse to approve pending applications or supplements to approved applications filed by us; |
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impose restrictions on operations, including costly new manufacturing requirements; or |
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seize or detain products or require a product recall. |
If we or current or future collaborators, manufacturers,
or service providers fail to comply with healthcare laws and regulations, we or they could be subject to enforcement actions and substantial
penalties, which could affect our ability to develop, market and sell our products and may harm our reputation.
Although we do not currently
have any products on the market, once our therapeutic candidates or clinical trials are covered by federal health care programs, we will
be subject to additional healthcare statutory and regulatory requirements and enforcement by the federal, state and foreign governments
of the jurisdictions in which we conduct our business. Healthcare providers, physicians and third party payors play a primary role in
the recommendation and prescription of any therapeutic candidates for which we obtain marketing approval. Our future arrangements with
third party payors and customers may expose us to broadly applicable fraud and abuse, transparency, and other healthcare laws and regulations
that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our therapeutic
candidates for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include,
but are not limited to, the following:
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the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons from soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual for a healthcare item or service, or the purchasing or ordering of an item or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare or Medicaid; |
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federal civil and criminal false claims laws and civil monetary penalty laws, such as the U.S. federal FCA, which imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, against, individuals or entities for knowingly presenting or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. In addition, the government may assert that a claim including items and services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA; |
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HIPAA includes a fraud and abuse provision referred to as the HIPAA All-Payor Fraud Law, which imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation; |
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HIPAA, as amended by HITECH, and its implementing regulations, which impose obligations on certain covered entity healthcare providers, health plans, and healthcare clearinghouses as well as their business associates that perform certain services involving the use or disclosure of individually identifiable health information, including mandatory contractual terms, with respect to safeguarding, the privacy, security, and transmission of individually identifiable health information, and require notification to affected individuals and regulatory authorities of certain breaches of security of individually identifiable health information; |
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federal and state consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers; |
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the federal Physician Payment Sunshine Act and the implementing regulations, also referred to as “Open Payments,” issued under the ACA, which require that manufacturers of pharmaceutical and biological drugs reimbursable under Medicare, Medicaid, and Children’s Health Insurance Programs report to the Department of Health and Human Services all consulting fees, travel reimbursements, research grants, and other payments, transfers of value or gifts made to physicians and teaching hospitals with limited exceptions; and |
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analogous state laws and regulations, such as, state anti-kickback and false claims laws potentially applicable to sales or marketing arrangements and claims involving healthcare items or services reimbursed by nongovernmental third party payors, including private insurers; and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug and cell based therapy manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. |
The scope and enforcement
of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of
the lack of applicable precedent and regulations. Federal and state enforcement bodies have recently increased their scrutiny of interactions
between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements
in the healthcare industry. Responding to investigations can be time-and resource-consuming and can divert management’s attention
from the business. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.
Ensuring that our business
arrangements with third-parties comply with applicable healthcare laws and regulations could involve substantial costs. If our operations
are found to be in violation of any such requirements, we may be subject to penalties, including civil or criminal penalties, monetary
damages, the curtailment or restructuring of our operations, or exclusion from participation in government contracting, healthcare reimbursement
or other government programs, including Medicare and Medicaid, any of which could adversely affect our financial results. Although effective
compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, these risks cannot be entirely
eliminated. Any action against us for an alleged or suspected violation could cause us to incur significant legal expenses and could divert
our management’s attention from the operation of our business, even if our defense is successful. In addition, achieving and sustaining
compliance with applicable laws and regulations may be costly to us in terms of money, time and resources.
Any cell based therapies we develop may become
subject to unfavorable pricing regulations, third party coverage and reimbursement practices or healthcare reform initiatives, thereby
harming our business.
The regulations that govern
marketing approvals, pricing, coverage and reimbursement for new drugs and cell based therapies vary widely from country to country. Some
countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins
after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject
to continuing governmental control even after initial approval is granted. Although we intend to monitor these regulations, our programs
are currently in earlier stages of development and we will not be able to assess the impact of price regulations for a number of years.
As a result, we might obtain regulatory approval for a product in a particular country, but then be subject to price regulations that
delay our commercial launch of the product and negatively impact the revenues we are able to generate from the sale of the product in
that country.
Our ability to commercialize
any products successfully also will depend in part on the extent to which coverage and reimbursement for these products and related treatments
will be available from government health administration authorities, private health insurers and other organizations. However, there may
be significant delays in obtaining coverage for newly-approved cell based therapies. Moreover, eligibility for coverage does not necessarily
signify that a cell based therapy will be reimbursed in all cases or at a rate that covers our costs, including research, development,
manufacture, sale and distribution costs. Also, interim payments for new cell based therapy if applicable, may be insufficient to cover
our costs and may not be made permanent. Thus, even if we succeed in bringing one or more products to the market, these products may not
be considered medically necessary or cost-effective, and the amount reimbursed for any products may be insufficient to allow us to sell
our products on a competitive basis. Because our programs are in earlier stages of development, we are unable at this time to determine
their cost effectiveness, or the likely level or method of reimbursement. In addition, obtaining coverage and reimbursement approval of
a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide to each
payor supporting scientific, clinical and cost-effectiveness data for the use of our product on a payor-by-payor basis, with no assurance
that coverage and adequate reimbursement will be obtained. A payor’s decision to provide coverage for a product does not imply that
an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a product does not assure
that other payors will also provide coverage for the product. Adequate third-party reimbursement may not be available to enable us to
maintain price levels sufficient to realize an appropriate return on our investment in product development. If reimbursement is not available
or is available only at limited levels, we may not be able to successfully commercialize any product candidate that we successfully develop.
Increasingly, the third party
payors who reimburse patients or healthcare providers, such as government and private insurance plans, are seeking greater upfront discounts,
additional rebates and other concessions to reduce the prices for pharmaceutical products. If the price we are able to charge for any
products we develop, or the reimbursement provided for such products, is inadequate in light of our development and other costs, our return
on investment could be adversely affected.
We currently expect that
certain drugs we develop may need to be administered under the supervision of a physician on an outpatient basis. Under currently applicable
U.S. law, certain drugs that are not usually self-administered (including injectable cell based therapies) may be eligible for coverage
under Medicare through Medicare Part B. Specifically, Medicare Part B coverage may be available for eligible beneficiaries when the following,
among other requirements have been satisfied:
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the product is reasonable and necessary for the diagnosis or treatment of the illness or injury for which the product is administered according to accepted standards of medical practice; |
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the product is typically furnished incident to a physician’s services; |
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the indication for which the product will be used is included or approved for inclusion in certain Medicare-designated pharmaceutical compendia (when used for an off-label use); and |
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the product has been approved by the FDA. |
Average prices for cell therapies
may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation
of laws that presently restrict imports of drugs and cell based therapy from countries where they may be sold at lower prices than in
the U.S. Reimbursement rates under Medicare Part B would depend in part on whether the newly approved product would be eligible for a
unique billing code. Self-administered, outpatient drugs and cell based therapies are typically reimbursed under Medicare Part D, and
cell based therapies that are administered in an inpatient hospital setting are typically reimbursed under Medicare Part A under a bundled
payment. It is difficult for us to predict how Medicare coverage and reimbursement policies will be applied to our products in the future
and coverage and reimbursement under different federal healthcare programs are not always consistent. Medicare reimbursement rates may
also reflect budgetary constraints placed on the Medicare program.
Third party payors often
rely upon Medicare coverage policies and payment limitations in setting their own reimbursement rates. These coverage policies and limitations
may rely, in part, on compendia listings for approved therapeutics. Our inability to promptly obtain relevant compendia listings, coverage,
and adequate reimbursement from both government-funded and private payors for new cell based therapies that we develop and for which we
obtain regulatory approval could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize
products and our financial condition.
We expect that these and
other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and lower reimbursement,
and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare
or other government-funded programs may result in a similar reduction in payments from private payors. The implementation of cost containment
measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our cell
based therapies, once marketing approval is obtained.
We believe that the efforts
of governments and third party payors to contain or reduce the cost of healthcare and legislative and regulatory proposals to broaden
the availability of healthcare will continue to affect the business and financial condition of pharmaceutical and biopharmaceutical companies.
A number of legislative and regulatory changes in the healthcare system in the U.S. and other major healthcare markets have been proposed,
and such efforts have expanded substantially in recent years. These developments could, directly or indirectly, affect our ability to
sell our products, if approved, at a favorable price. For example, in the United States, in 2010, the U.S. Congress passed the ACA, a
sweeping law intended to broaden access to health insurance, reduce or constrain the growth of health spending, enhance remedies against
fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the
health industry and impose additional policy reforms. Among the provisions of the ACA addressing coverage and reimbursement of pharmaceutical
products, of importance to our potential therapeutic candidates are the following:
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increases to pharmaceutical manufacturer rebate liability under the Medicaid Drug Rebate Program due to an increase in the minimum basic Medicaid rebate on most branded prescription drugs and the application of Medicaid rebate liability to drugs used in risk-based Medicaid managed care plans; |
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the expansion of the 340B Drug Pricing Program to require discounts for “covered outpatient drugs” sold to certain children’s hospitals, critical access hospitals, freestanding cancer hospitals, rural referral centers, and sole community hospitals; |
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requirements imposed on pharmaceutical companies are required to offer discounts on brand-name cell based therapy to patients who fall within the Medicare Part D coverage gap, commonly referred to as the “Donut Hole”; |
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requirements imposed on pharmaceutical companies to pay an annual non-tax-deductible fee to the federal government based on each company’s market share of prior year total sales of branded drugs to certain federal healthcare programs, such as Medicare, Medicaid, Department of Veterans Affairs and Department of Defense; and |
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for products classified as biologics, marketing approval for a follow-on biologic product may not become effective until 12 years after the date on which the reference innovator biologic product was first licensed by the FDA, with a possible six-month extension for pediatric products. After this exclusivity ends, it may be possible for biosimilar manufacturers to enter the market, which is likely to reduce the pricing for the innovator product and could affect our profitability if our products are classified as biologics. |
Separately, pursuant to the
health reform legislation and related initiatives, the Centers for Medicare and Medicaid Services, or CMS, is working with various healthcare
providers to develop, refine, and implement Accountable Care Organizations, or ACOs, and other innovative models of care for Medicare
and Medicaid beneficiaries, including the Bundled Payments for Care Improvement Initiative, the Comprehensive Primary Care Initiative,
the Duals Demonstration, and other models. The continued development and expansion of ACOs and other innovative models of care will have
an uncertain impact on any future reimbursement we may receive for approved therapeutics administered by these organizations.
The healthcare industry is heavily regulated
in the U.S. at the federal, state, and local levels, and our failure to comply with applicable requirements may subject us to penalties
and negatively affect our financial condition.
As a healthcare company,
our operations, clinical trial activities and interactions with healthcare providers may be subject to extensive regulation in the U.S.,
particularly if we receive FDA approval for any of its products in the future. For example, if we receive FDA approval for a product for
which reimbursement is available under a federal healthcare program (e.g., Medicare, Medicaid), it would be subject to a variety of federal
laws and regulations, including those that prohibit the filing of false or improper claims for payment by federal healthcare programs
(e.g. the federal False Claims Act), prohibit unlawful inducements for the referral of business reimbursable by federal healthcare programs
(e.g. the federal Anti-Kickback Statute), and require disclosure of certain payments or other transfers of value made to U.S.-licensed
physicians and teaching hospitals or Open Payments. We are not able to predict how third parties will interpret these laws and apply applicable
governmental guidance and may challenge our practices and activities under one or more of these laws. If our past or present operations
are found to be in violation of any of these laws, we could be subject to civil and criminal penalties, which could hurt our business,
our operations and financial condition.
The federal Anti-Kickback
Statute prohibits, among other things, any person or entity, from knowingly and willfully offering, paying, soliciting or receiving any
remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for purchasing, leasing, ordering
or arranging for the purchase, lease or order of any item or service reimbursable under Medicare, Medicaid or other federal healthcare
programs. The term remuneration has been interpreted broadly to include anything of value. The Anti-Kickback Statute has been interpreted
to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on the other.
There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution. The exceptions
and safe harbors are drawn narrowly and practices that involve remuneration that may be alleged to be intended to induce prescribing,
purchasing or recommending may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the
requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the
Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review
of all of its facts and circumstances. Our practices may not in all cases meet all of the criteria for protection under a statutory exception
or regulatory safe harbor.
Additionally, the intent
standard under the Anti-Kickback Statute was amended by the ACA, to a stricter standard such that a person or entity no longer needs to
have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the ACA codified
case law that a claim including items or services resulting from a violation of the federal Anti- Kickback Statute constitutes a false
or fraudulent claim for purposes of the federal FCA.
The civil monetary penalties
statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented
a claim to a federal healthcare program that the person knows or should know is for an item or service that was not provided as claimed
or is false or fraudulent.
Federal false claims and
false statement laws, including the federal FCA, prohibit, among other things, any person or entity from knowingly presenting, or causing
to be presented, a false or fraudulent claim for payment to, or approval by, the federal healthcare programs, including Medicare and Medicaid,
or knowingly making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal
government. A claim includes “any request or demand” for money or property presented to the U.S. government. For instance,
historically, pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product
to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted
for causing false claims to be submitted because of the companies’ marketing of the product for unapproved, off-label, and thus
generally non-reimbursable, uses.
HIPAA prohibits, among other
offenses, knowingly and willfully executing a scheme to defraud any health care benefit program, including private payors, or falsifying,
concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery
of or payment for items or services under a health care benefit program. To the extent that we act as a business associate to a healthcare
provider engaging in electronic transactions, we may also be subject to the privacy and security provisions of HIPAA, as amended by HITECH,
which restricts the use and disclosure of patient-identifiable health information, mandates the adoption of standards relating to the
privacy and security of patient-identifiable health information, and requires the reporting of certain security breaches to healthcare
provider customers with respect to such information. Additionally, many states have enacted similar laws that may impose more stringent
requirements on entities like ours. Failure to comply with applicable laws and regulations could result in substantial penalties and adversely
affect our financial condition and results of operations.
Many states also have similar
fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several
states, apply regardless of the payor. Additionally, to the extent that our product is sold in a foreign country, we may be subject to
similar foreign laws.
Our products, once approved,
may be eligible for coverage under Medicare and Medicaid, among other government healthcare programs. Accordingly, we may be subject to
a number of obligations based on their participation in these programs, such as a requirement to calculate and report certain price reporting
metrics to the government, such as average sales price (ASP) and best price. Penalties may apply in some cases when such metrics are not
submitted accurately and timely. Further, these prices for drugs may be reduced by mandatory discounts or rebates required by government
healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs and biological products
from countries where they may be sold at lower prices than in the United States. It is difficult to predict how Medicare coverage and
reimbursement policies will be applied to our products in the future and coverage and reimbursement under different federal healthcare
programs are not always consistent. Medicare reimbursement rates may also reflect budgetary constraints placed on the Medicare program.
In order to distribute products
commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors of drug and biological
products in a state, including, in certain states, manufacturers and distributors who ship products into the state even if such manufacturers
or distributors have no place of business within the state. Some states also impose requirements on manufacturers and distributors to
establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new
technology capable of tracking and tracing product as it moves through the distribution chain. Several states have enacted legislation
requiring pharmaceutical and biotechnology companies to establish marketing compliance programs, file periodic reports with the state,
make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities, and/or register their sales representatives,
as well as to prohibit pharmacies and other healthcare entities from providing certain physician prescribing data to pharmaceutical and
biotechnology companies for use in sales and marketing, and to prohibit certain other sales and marketing practices. All of our activities
are potentially subject to federal and state consumer protection and unfair competition laws.
If our operations are found
to be in violation of any of the federal and state healthcare laws described above or any other governmental regulations that apply to
us, we may be subject to penalties, including without limitation, civil, criminal and/or administrative penalties, damages, fines, disgorgement,
exclusion from participation in government programs, such as Medicare and Medicaid, injunctions, private “qui tam” actions
brought by individual whistleblowers in the name of the government, or refusal to allow us to enter into government contracts, contractual
damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our
operations, any of which could adversely affect our ability to operate our business and our results of operations.
Our ability to obtain reimbursement or funding
from the federal government may be impacted by possible reductions in federal spending.
U.S. federal government agencies
currently face potentially significant spending reductions. The Budget Control Act of 2011, or the BCA, established a Joint Select Committee
on Deficit Reduction, which was tasked with achieving a reduction in the federal debt level of at least $1.2 trillion. That committee
did not draft a proposal by the BCA’s deadline. As a result, automatic cuts, referred to as sequestration, in various federal programs
were scheduled to take place, beginning in January 2013, although the American Taxpayer Relief Act of 2012 delayed the BCA’s automatic
cuts until March 1, 2013. While the Medicare program’s eligibility and scope of benefits are generally exempt from these cuts, Medicare
payments to providers and Part D health plans are not exempt. The BCA did, however, provide that the Medicare cuts to providers and Part
D health plans would not exceed two percent. President Obama issued the sequestration order on March 1, 2013, and cuts went into effect
on April 1, 2013. Additionally, the Bipartisan Budget Act of 2015 extended sequestration for Medicare through fiscal year 2027.
The U.S. federal budget remains
in flux, which could, among other things, cut Medicare payments to providers. The Medicare program is frequently mentioned as a target
for spending cuts. The full impact on our business of any future cuts in Medicare or other programs is uncertain. In addition, we cannot
predict any impact President Trump’s administration and the U.S. Congress may have on the federal budget. If federal spending is
reduced, anticipated budgetary shortfalls may also impact the ability of relevant agencies, such as the FDA or the National Institutes
of Health, to continue to function at current levels. Amounts allocated to federal grants and contracts may be reduced or eliminated.
These reductions may also impact the ability of relevant agencies to timely review and approve drug research and development, manufacturing,
and marketing activities, which may delay our ability to develop, market and sell any products we may develop.
Risks Related to Doing Business in China
Trading in Avalon’s securities may be
restricted under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or fully investigate Avalon’s
auditors, and as a result, U.S. national securities exchanges, such as Nasdaq, may determine to delist Avalon’s securities.
The Holding Foreign Companies Accountable
Act, or the HFCA Act, was enacted on December 18, 2020. According to the HFCA Act, if the SEC determines that Avalon has filed audit reports
issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning
in 2021, the SEC will prohibit Avalon’s securities from being traded on a national securities exchange or in the over-the-counter
trading market in the United States.
On December
16, 2021, the PCAOB issued a Determination Report which reported that the PCAOB is unable to inspect or investigate completely registered
public accounting firms headquartered in: (1) mainland China of the People’s Republic of China, because of a position taken by one
or more authorities in mainland China; and (2) Hong Kong, a Special Administrative Region of the PRC, because of a position taken by one
or more authorities in Hong Kong.
Avalon’s auditor is Marcum LLP, based
in New York, New York. Marcum LLP registered with the PCAOB and is subject to laws in the United States pursuant to which the PCAOB conducts
annual inspections to assess their compliance with the applicable professional standards. As the firm is located in the United States,
the PCAOB has been able to conduct inspections of Marcum LLP. In addition, Marcum LLP is not among the PCAOB registered public accounting
firms registered in mainland China or Hong Kong that are subject to PCAOB’s determination on December 16, 2021.
Although the audit reports of Avalon
are prepared by U.S. auditors that are subject to inspection by the PCAOB, the PCAOB is currently unable to conduct inspections over the
audit work of Avalon’s independent registered public accounting firms with respect to Avalon’s respective operations in mainland
China without the approval of certain Chinese authorities. Also, there is no guarantee that future audit reports will be prepared by auditors
that are completely inspected by the PCAOB and, as such, future investors may be deprived of such inspections, which could result in limitations
or restrictions to Avalon’s access of the U.S. capital markets.
Inspections of certain other firms that
the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures,
which may be addressed as part of the inspection process to improve future audit quality. However, the PCAOB is currently unable to inspect
an auditor’s audit work related to a company’s operations in China where such documentation of the audit work is located in
China. As a result, Avalon’s investors may be deprived of the benefits of the PCAOB’s oversight of auditors that are located
in China through such inspections.
On March 24, 2021, the SEC adopted
interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. Avalon will be
required to comply with these rules if the SEC identifies us as having a “non-inspection” year under a process to be subsequently
established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition
requirements described above.
On June 22, 2021, the U.S. Senate passed
a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection
years required for triggering the prohibitions under the HFCA Act from three years to two, which would shorten the timeframe before Avalon’s
shares may be delisted and before the trading in Avalon’s shares is prohibited.
On November 5, 2021, the SEC approved
Rule 6100 adopted by the PCAOB to determine its inability to inspect or investigate registered firms completely under the HFCA Act. This
rule establishes the framework for the PCAOB to make these required determinations. The trading in Avalon’s securities may be prohibited
under the HFCA Act if the PCAOB subsequently determines Avalon’s audit work is performed by auditors that the PCAOB is unable to
inspect or investigate completely pursuant to Rule 6100, and as a result, U.S. national securities exchanges, such as Nasdaq, may determine
to delist Avalon’s securities. Such a delisting would likely cause the value of such securities to significantly decline or become
worthless.
The SEC may propose additional regulatory
or legislative requirements or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August
6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors
from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five
recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate.
Some of the concepts of these recommendations were implemented with the enactment of the HFCA Act. However, some of the recommendations
were more stringent than the HFCA Act. For example, if a company was not subject to PCAOB inspection, the report recommended that the
transition period before a company would be delisted would end on January 1, 2022.
The SEC has announced that the SEC
staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations
in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any,
of the PWG recommendations will be adopted. The implications of this possible regulation in addition to the requirements of the HFCA Act
are uncertain. Although Avalon is currently not subject to the HFCA Act, any uncertainty of its applicability to Avalon, for example if
Avalon switched to using a PRC-based auditing firm, could cause the market price of Avalon’s securities to be materially and adversely
affected and could cause Avalon’s securities to be delisted or prohibited from being traded “over-the-counter”. If Avalon’s
securities are unable to be listed on another securities exchange, such a delisting would substantially impair your ability to sell or
purchase Avalon’s securities when you wish to do so, and the risk and uncertainty associated with a potential delisting would have
a negative impact on the price of Avalon’s securities.
The PCAOB’s inability to conduct
inspections in China prevents it from fully evaluating the audits and quality control procedures of our independent registered public
accounting firm. As a result, we and investors in our securities are deprived of the full benefits of such PCAOB inspections. The inability
of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered
public accounting firm’s audit procedures or quality control procedures as compared to audit work located solely outside of China
that are fully subject to the PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in
our audit procedures and reported financial information and the quality of our financial statements.
Our business might be subject to various
evolving PRC laws and regulations regarding data privacy and cybersecurity. Failure of cybersecurity and data security compliance could
subject us to penalties, damage our reputation and brand and harm our business and results of operations.
Our PRC subsidiaries face challenges with respect
to data privacy and regulations since those subsidiaries are currently engaging in providing outsourced and customized healthcare services
to the rapidly changing health care industry, which could consist of personal information that will be analyzed and used to healthcare
services.
Regulatory requirements on cybersecurity
and data privacy in China are constantly evolving and can be subject to varying interpretations or significant changes, resulting in uncertainties
about the scope of our responsibilities in that regard. On June 10, 2021, the Standing Committee of the National People’s Congress
promulgated the PRC Data Security Law, which took effect in September 2021. The Data Security Law provides for a security review procedure
for the data activities that may affect national security. Furthermore, Measures for Cybersecurity Review, which became effective on June
1, 2020, set forth the cybersecurity review mechanism for critical information infrastructure operators, and provided that critical information
infrastructure operators who intend to purchase internet products and services that affect or may affect national security shall be subject
to a cybersecurity review. On July 10, 2021, the Cyberspace Administration of China published the Measures for Cybersecurity Review (Revised
Draft for Comments), which further restates and expands the applicable scope of the cybersecurity review. Pursuant to the draft measures,
critical information infrastructure operators that intend to purchase internet products and services and data processing operators engaging
in data processing activities that affect or may affect national security must be subject to the cybersecurity review. On December 28,
2021, the Cyberspace Administration of China, together with twelve other PRC regulatory authorities jointly revised and issued the Cyber
Security Review Measures (“the Review Measures”), which has been effective since February 15, 2022. The Review Measures provides,
among others, (i) the purchase of cyber products and services by critical information infrastructure operators (the “CIIOs”)
and the network platform operators (the “Network Platform Operators”) which engage in data processing activities that affects
or may affect national security shall be subject to the cybersecurity review by the Cybersecurity Review Office, the department which
is responsible for the implementation of cybersecurity review under the CAC; and (ii) the Network Platform Operators with personal information
data of more than one million users that seek for listing in a foreign country are obliged to apply for a cybersecurity review by the
Cybersecurity Review Office. We believe that we and our PRC subsidiaries will not be subject to cybersecurity review with the CAC since
(i) we currently do not have over one million users’ personal information and do not anticipate that we will be collecting over
one million users’ personal information in the foreseeable future, which we understand might otherwise subject us to the Review
Measures; (ii) our PRC subsidiary’s business operations do not involve any Critical Information Infrastructure such as any important
network facilities or information systems of the important industry or field such as public communication and information service, energy,
communications, water conservation, finance, public services, e-government affairs and national defense science, which may endanger national
security, people’s livelihood and public interest of China in case of damage, function loss or data leakage; and (iii) we listed
our Ordinary Shares on the Nasdaq before the effective date of the Review Measures and the requirement of Article 7 of the Review Measures
that “Network Platform Operators with personal information of more than one million users that seek for listing in a foreign country
are obliged to apply for a cybersecurity review by the Cybersecurity Review Office” should not be applicable to us or our PRC subsidiaries.
However, the Review Measures do not provide any explanation or interpretation of “overseas listing” or “affect or may
affect national security”, and Chinese government may have broad discretion in interpreting and enforcing these laws and regulations.
Even though our current data activities do not fall under the scope of cybersecurity review, it is also uncertain whether the cybersecurity
review will be further expanded. Failure of cybersecurity and data security compliance could subject our PRC subsidiaries to penalties,
damage their reputation and brand, and harm their business and results of operations.
In addition, regulation requirements on personal
information protection in China are also constantly evolving and can be subject to varying interpretations or significant changes, resulting
in uncertainties about the scope of our responsibilities in that regard. On August 20, 2021, the Standing Committee of the National People’s
Congress promulgated the PRC Personal Information Protection Law, which took effect in November 2021. The Personal Information Protection
Law provides that any entity involving processing of personal information (“Personal Information Processer”) shall take various
measures to prevent the disclosure, modification or losing of the personal information processed by such entity, including, but not limited
to, formulating a related internal management system and standard of operation, conducting classified management of personal information,
taking safety technology measures to encrypt and de-identify the processed personal information, providing regular safety training and
education for staff and formulating a personal information safety emergency accident plan. The Personal Information Protection Law further
provides that a Personal Information Processer shall conduct a prior evaluation of the impact of personal information protection before
the occurrence of various situations, including, but not limited to, processing of sensitive personal information (personal information
that, once leaked or illegally used, may lead to discrimination against an individual or serious harm to an individual’s personal
or property safety, including information on an individual’s race, ethnicity, religious beliefs, personal biological characteristics,
medical health, financial accounts, personal whereabouts), using personal information to make automated decisions and providing personal
information to any overseas entity. Our PRC subsidiaries’ businesses involve the processing of personal information of medical related
health, which may be deemed as sensitive personal information. If we do not take measures to review and improve our mechanisms in protecting
personal information after the new Personal Information Protection Law takes effect, failure of personal information protection compliance
could subject us to penalties, damage its reputation and brand and harm its business and results of operations.
If we become directly subject to the recent
scrutiny, criticism and negative publicity involving certain U.S.-listed Chinese companies, we may have to expend significant resources
to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss
of your investment in our stock, especially if such matter cannot be addressed and resolved quickly.
Recently, U.S. public companies
that have a significant portion of their operations in China, particularly companies like us, have been the subject of intense scrutiny,
criticism and negative publicity by investors, short sellers, financial commentators and regulatory agencies, such as the United States
Securities and Exchange Commission. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting
irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of
fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies
has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder
lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what affect
this sector-wide scrutiny, criticism and negative publicity will have on our company, our business and our stock price. If we become the
subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources
to investigate such allegations and/or defend our company. This situation could be costly and time consuming and distract our management
from growing our company. If such allegations are not proven to be groundless, our company and business operations will be severely impacted
and your investment in our stock could be rendered worthless.
Adverse changes in political and economic policies of the PRC government
could impede the overall economic growth of China, which could reduce the demand for our products and damage our business.
Presently, we generate our
revenue in China although we intend to pursue various opportunities in the United States and our headquarters is based in the United States.
Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political
and legal developments in China. The PRC economy differs from the economies of most developed countries in many respects, including:
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As the PRC economy has been
transitioning from a planned economy to a more market-oriented economy, the PRC government has implemented various measures to encourage
economic growth and guide the allocation of resources. While these measures may benefit the overall PRC economy, they may also have a
negative effect on us or the healthcare industry in general.
Although the PRC government
has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues
to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways.
Any adverse change in the
economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level
of new healthcare investments and expenditures in China, which in turn could lead to a reduction in demand for our services and consequently
have a material adverse effect on our business and prospects.
Uncertainties with respect to the PRC legal
system could limit the legal protections available to you and us.
We conduct a significant
portion of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally subject to laws and regulations
applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is
based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series
of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China.
However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to you
and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management
attention. In addition, all of our executive officers and almost all of our directors are residents of China and not of the United States,
and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors
to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations
and subsidiaries.
The PRC government exerts substantial influence
over the manner in which Avalon must conduct its business activities and Avalon may face the risk that the future regulatory actions by
the PRC government could significantly limit or completely hinder Avalon’s ability to offer future securities to investors.
The PRC government has exercised and continues
to exercise substantial control over virtually every sector of the Chinese economy through regulation. Avalon’s ability to operate
in China may be harmed by changes in its laws and regulations. Avalon’s operations in China are currently in material compliance
with all applicable legal and regulatory requirements. However, the central or local governments of PRC in which Avalon operates may impose
new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on Avalon’s
and its existing PRC subsidiaries’ part to ensure their compliance with such regulations or interpretations.
Because Avalon is the issuer of the common stock
listed on Nasdaq and is a Delaware operating and holding company, no approval or permission is required under current applicable PRC laws
and regulations for any future issuances of Avalon securities to non-PRC investors. Nevertheless, according to the Opinions of the General
Office of the CPC Central Committee and the General Office of the State Council on Strictly Cracking Down on Illegal Securities Activities
in accordance with the Law (“Opinions”), the PRC intends to establish and improve the system of extraterritorial application
of the PRC securities laws. Although the details of the extraterritorial application of the PRC securities laws are still scarce as of
the date of this proxy statement, PRC laws, regulations and/or their interpretations may change in the future, such that they may have
an extraterritorial effect, whereby Avalon may be required to obtain such approval or permission under PRC laws and regulations. In such
event, Avalon may face the risk that these future regulatory actions by the PRC government could significantly limit or completely hinder
Avalon’s ability to offer future securities to investors. Under this scenario, Avalon’s ability to raise capital and thereby
execute its business plan would be significantly limited or completely hindered, which would likely result in a material change in Avalon’s
operations and the value of Avalon’s common stock, including that it could cause the value of such securities to significantly decline
or become worthless. In addition, Avalon faces the risk that Avalon may not currently ascertain, and therefore may not actually have,
all requisite permissions to offer securities, which would likely result in a material change in Avalon’s operations and/or value
of Avalon’s common stock, including that it could cause the value of such securities to significantly decline or become worthless.
Under the current Enterprise Income Tax, or
EIT, law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable
tax consequences to us and our non- PRC stockholders.
We are a holding company incorporated
under the laws of Delaware. We conduct substantially all of our business through our wholly-owned and majority-owned subsidiaries, and
we derive all of our income from these entities. Prior to January 1, 2008, dividends derived by foreign enterprises from business operations
in China were not subject to the Chinese enterprise income tax. However, such tax exemption ceased as of January 1, 2008 and thereafter
with the effectiveness of the new EIT law.
Under the EIT law, if we are
not deemed to be a “resident enterprise” for Chinese tax purposes, a withholding tax at the rate of 10% would be applicable
to any dividends paid by our Chinese subsidiaries to us. However, if we are deemed to be a “resident enterprise” established
outside of China whose “place of effective management” is located in China, we would be classified as a resident enterprise
for Chinese tax purposes and thus would be subject to an enterprise income tax rate of 25% on all of our income on a worldwide basis.
The regulations promulgated
pursuant to the EIT law define the term “place of effective management” as “establishments that carry out substantial
and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.”
The State Administration of Taxation issued a SAT Circular 82 on April 22, 2009, which provides that the “place of effective management”
of a Chinese-controlled overseas-incorporated enterprise is located in China if the following requirements are satisfied: (i) the senior
management and core management departments in charge of its daily operations function are mainly located in the PRC; (ii) its financial
and human resources decisions are subject to determination or approval by persons or bodies located in the PRC; (iii) its major assets,
accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and
(iv) no less than half of the enterprise’s directors or senior management with voting rights reside in the PRC. SAT Circular 82
applies only to overseas registered enterprises controlled by PRC enterprises, not to those controlled by PRC individuals. If our non-PRC
incorporated entities are deemed PRC tax residents, such entities would be subject to PRC tax under the EIT law.
We have analyzed the applicability
of the EIT law and related regulations, and for each of the applicable periods presented, we have not accrued for PRC tax on such basis.
In addition, although under the EIT law and the related regulations dividends paid to us by our PRC subsidiaries would qualify as “tax-exempted
income,” we cannot assure you that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to
entities that are treated as resident enterprises for PRC enterprise income tax purposes. As a result of such changes, our historical
operating results will not be indicative of our operating results for future periods and the value of our shares of common stock may be
adversely affected. We are actively monitoring the possibility of “resident enterprise” treatment and are evaluating appropriate
organizational changes to avoid this treatment, to the extent possible.
We may be unable to complete a business combination
transaction efficiently or on favorable terms due to complicated merger and acquisition regulations implemented on September 8, 2006.
The recent PRC Regulation
on Mergers and Acquisitions of Domestic Companies by Foreign Investors also governs the approval process by which a PRC company may participate
in an acquisition of its assets or its equity interests. Depending on the structure of the transaction, the new regulation will require
the Chinese parties to make a series of applications and supplemental applications to the government agencies. In some instances, the
application process may require the presentation of economic data concerning a transaction, including appraisals of the target business
and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have
expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with the new regulations
is likely to be more time consuming and expensive than in the past and the government can now exert more control over the combination
of two businesses. Accordingly, due to the new regulation, our ability to engage in business combination transactions is extremely complicated,
time consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to our stockholders or sufficiently
protect their interests in a transaction.
The new regulation allows
PRC government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction
may have to submit to the Ministry of Commerce, or MOFCOM, and the other government agencies an appraisal report, an evaluation report
and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction.
The regulations also prohibit a transaction at an acquisition price obviously lower than the appraised value of the Chinese business or
assets and in certain transaction structures, require that consideration must be paid within defined periods, generally not in excess
of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration,
contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of
assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, such regulation
may impede our ability to negotiate and complete a business combination transaction on financial terms that satisfy our investors and
protect our stockholders’ economic interests.
We may be subject to fines and legal sanctions
if we or our Chinese employees fail to comply with PRC regulations relating to employee stock options granted by overseas listed companies
to PRC citizens.
On December 25, 2006, the
People’s Bank of China issued the Administration Measures on Individual Foreign Exchange Control, and its Implementation Rules were
issued by the State Administration of Foreign Exchange, or SAFE, on January 5, 2007. Both took effect on February 1, 2007. Under these
regulations, all foreign exchange matters involved in an employee stock holding plan, stock option plan or similar plan in which PRC citizens’
participation requires approval from the SAFE or its authorized branch. On March 28, 2007, the SAFE issued the Application Procedure for
Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plans or Stock Option Plans of Overseas
Listed Companies, or Notice 78. Under Notice 78, PRC individuals who participate in an employee stock option holding plan or a stock option
plan of an overseas listed company are required, through a PRC domestic agent or PRC subsidiary of the overseas listed company, to register
with the SAFE and complete certain other procedures. If we and our Chinese employees are granted shares or stock options pursuant to our
share incentive plan they would be subject to Notice 78. However, in practice, there are significant uncertainties with regard to the
interpretation and implementation of Notice 78. We are committed to complying with the requirements of Notice 78. However, we cannot provide
any assurance that we or our Chinese employees will be able to qualify for or obtain any registration required by Notice 78. In particular,
if we and/or our Chinese employees fail to comply with the provisions of Notice 78, we and/or our Chinese employees may be subject to
fines and legal sanctions imposed by the SAFE or other PRC government authorities, as a result of which our business operations and employee
option plans could be materially and adversely affected.
The new M&A Rules establish more complex
procedures for some acquisitions of Chinese companies by foreign investor which could make it more difficult for us to pursue growth through
acquisitions in China.
The New M&A Rules that
became effective on September 8, 2006 established additional procedures and requirements that could make merger and acquisition activities
by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified
in advance of any change- of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Complying with
the requirements of the M&A Rules to complete such transactions could be time-consuming, and any required approval processes, including
obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could materially
adversely affect our ability to grow our business through acquisitions in China.
Government control of currency conversion and
future movements in exchange rates may adversely affect our operations and financial results.
The value of the Renminbi,
or RMB, the main currency used in China, fluctuates and is affected by, among other things, changes in China’s political and economic
conditions. The conversion of RMB into foreign currencies such as the U.S. dollar have generally been based on rates set by the People’s
Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates
on the world financial markets. Foreign exchange transactions continue to be subject to significant foreign exchange controls and require
the approval of the State Administration of Foreign Exchange in China. These limitations could affect our ability to obtain foreign exchange
through debt or equity financing, or to obtain foreign exchange for capital expenditures.
The Chinese government controls
its foreign currency reserves through restrictions on imports and conversion of RMB into foreign currency. In July 2005, the Chinese government
has adjusted its exchange rate policy from “Fixed Rate” to “Floating Rate”. Between July 2005 to December 2017,
the exchange rate between the RMB and the U.S. dollar appreciated from RMB1.00 to $0.1205 to RMB1.00 to $0.1513. Any significant appreciation
of the RMB may adversely affect our operations and financial results.
Risks Related to Our Securities
If we are unable to maintain listing of our
securities on the Nasdaq Capital Market or another reputable stock exchange, it may be more difficult for our stockholders to sell their
securities.
Nasdaq requires listing issuers
to comply with certain standards in order to remain listed on its exchange. If, for any reason, Nasdaq should delist our securities from
trading on its exchange and we are unable to obtain listing on another reputable national securities exchange, a reduction in some or
all of the following may occur, each of which could materially adversely affect our stockholders.
On February 9, 2022, the
Company received notice from The Nasdaq Stock Market (“Nasdaq”) that the closing bid price for the Company’s common
stock had been below $1.00 per share for the previous 30 consecutive business days, and that the Company is therefore not in compliance
with the minimum bid price requirement for continued inclusion on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the
“Rule”). Nasdaq’s notice has no immediate effect on the listing or trading of the Company’s common stock on The
Nasdaq Capital Market. The notice indicates that the Company will have 180 calendar days, until August 8, 2022, to regain compliance with
this requirement. The Company can regain compliance with the $1.00 minimum bid listing requirement if the closing bid price of its common
stock is at least $1.00 per share for a minimum of ten (10) consecutive business days during the 180-day compliance period. If the Company
does not regain compliance during the initial compliance period, it may be eligible for additional time to regain compliance. To qualify,
the Company will be required to meet the continued listing requirement for market value of its publicly held shares and all other Nasdaq
initial listing standards, except the bid price requirement, and will need to provide written notice to Nasdaq of its intention to cure
the deficiency during the second compliance period by effecting a reverse stock split, if necessary. If the Company is not eligible or
it appears to Nasdaq that the Company will not be able to cure the deficiency during the second compliance period, Nasdaq will provide
written notice to the Company that the Company’s common stock will be subject to delisting. In the event of such notification, the
Company may appeal Nasdaq’s determination to delist its securities, but there can be no assurance that Nasdaq would grant the Company’s
request for continued listing. The Company intends to actively monitor the minimum bid price of its common stock and may, as appropriate,
consider available options to regain compliance with the Rule. There can be no assurance that the Company will be able to regain compliance
with the Rule or will otherwise be in compliance with other Nasdaq listing criteria.
A delisting of our common stock is likely to reduce
the liquidity of our common stock and may inhibit or preclude our ability to raise additional financing.
The price of our common stock may be volatile
and fluctuate substantially, which could result in substantial losses for our stockholders.
Our
common stock has been listed on the Nasdaq Capital Market under the symbol “AVCO” since November 5, 2018. Our common shares
were traded previously on the OTC Market Group Inc.’s Venture Market (the “OTCQB”) since February 22, 2016, under the
symbol “AVCO” since October 18, 2016 and “GTHC” prior to October 18, 2016.
The price of our common stock
has been, and we expect it to continue to be, volatile. The stock market in general and the market for smaller healthcare companies in
particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As
a result of this volatility, you may not be able to sell your shares of common stock at or above the price you paid for your shares of
common stock. The market price for our common stock may be influenced by many factors, including:
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the success of competitive products or technologies; |
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developments related to our existing or any future collaborations; |
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regulatory or legal developments in the United States, China and other countries; |
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developments or disputes concerning patent applications, issued patents or other proprietary rights; |
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the recruitment or departure of key personnel; |
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actual or anticipated changes in estimates as to financial results or recommendations by securities analysts; |
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variations in our financial results or those of companies that are perceived to be similar to us; |
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changes in the structure of healthcare payment systems; |
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market conditions in the healthcare, pharmaceutical and biotechnology sectors; |
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Future sales of our common stock or securities
convertible or exchangeable for our common stock may cause our stock price to decline.
If our existing stockholders
sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the price of our common stock could
decline. The perception in the market that these sales may occur could also cause the price of our common stock to decline.
In addition, as of December
31, 2021, 7,725,000 shares of common stock issuable upon exercise of outstanding stock options, which will become eligible for sale in
the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 under the
Securities Act. If the shares we may issue from time to time upon exercise of outstanding options are sold, or if it is perceived that
they will be sold, by the award recipients in the public market, the price of our common stock could decline.
You may experience dilution of your ownership
interests because of the future issuance of additional shares of our common or preferred stock or other securities that are convertible
into or exercisable for our common or preferred stock.
In the future, we may issue
our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our stockholders. We
are authorized to issue an aggregate of 490,000,000 shares of common stock and 10,000,000 shares of “blank check” preferred
stock. We may issue additional shares of our common stock or other securities that are convertible into or exercisable for our common
stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes,
or for other business purposes. The future issuance of any such additional shares of our common stock may create downward pressure on
the trading price of the common stock. We expect we will need to raise additional capital in the near future to meet our working capital
needs, and there can be no assurance that we will not be required to issue additional shares, warrants or other convertible securities
in the future in conjunction with these capital raising efforts, including at a price (or exercise prices) below the price you paid for
your stock.
The ability of our Board of Directors to issue
additional stock may prevent or make more difficult certain transactions, including a sale or merger.
Our Board of Directors is
authorized to issue up to 10,000,000 shares of preferred stock with powers, rights and preferences designated by it. Shares of voting
or convertible preferred stock could be issued, or rights to purchase such shares could be issued, to create voting impediments or to
frustrate persons seeking to effect a takeover or otherwise gain control of us. The ability of the Board of Directors to issue such additional
shares of preferred stock, with rights and preferences it deems advisable, could discourage an attempt by a party to acquire control of
us by tender offer or other means. Such issuances could therefore deprive stockholders of benefits that could result from such an attempt,
such as the realization of a premium over the market price for their shares in a tender offer or the temporary increase in market price
that such an attempt could cause. Moreover, the issuance of such additional shares of preferred stock to persons friendly to the Board
of Directors could make it more difficult to remove incumbent managers and directors from office even if such change were to be favorable
to stockholders generally.
We are a “smaller reporting company,”
and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our common stock less
attractive to investors.
We are currently a “smaller
reporting company”, meaning that we are not an investment company, an asset- backed issuer, or a majority-owned subsidiary of a
parent company that is not a smaller reporting company and have a non-affiliated public float of less than $250.0 million and annual revenues
of less than $100.0 million during the most recently completed fiscal year and no public float or a public float less than $700 million.
“Smaller reporting companies” are able to provide simplified executive compensation disclosures in their filings; are exempt
from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide
an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations
in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual
reports. Decreased disclosures in our SEC filings due to our status as a “smaller reporting company” may make it harder for
investors to analyze our results of operations and financial prospects.
If securities or industry analysts do not publish
research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading
volume could decline.
The trading market for our
common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We
do not currently have and may never obtain research coverage by securities and industry analysts. If no or few securities or industry
analysts commence coverage of us, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry
analyst coverage, if any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual
property or our stock performance, or if our operating results fail to meet the expectations of analysts, our stock price would likely
decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in
the financial markets, which in turn could cause our stock price or trading volume to decline.
Our officers, directors and principal stockholders
own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
Our officers, directors and
5% stockholders and their affiliates beneficially own a significant percentage of our outstanding common stock. As a result, these stockholders
have significant influence and may be able to determine all matters requiring stockholder approval. For example, these stockholders may
be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other
major corporate transactions. This concentration of ownership could delay or prevent any acquisition of our company on terms that other
stockholders may desire, and may adversely affect the market price of our common stock.
We do not anticipate paying dividends on our
common stock, and investors may lose the entire amount of their investment.
We have never declared or
paid cash dividends on our common stock, and we do not anticipate such a declaration or payment for the foreseeable future.
We expect to use future earnings,
if any, to fund business growth. Therefore, stockholders will not receive any funds absent a sale of their shares of common stock. We
cannot assure stockholders of a positive return on their investment when they sell their shares, nor can we assure that stockholders will
not lose the entire amount of their investment.
Applicable regulatory requirements, including
those contained in and issued under the Sarbanes-Oxley Act of 2002, may make it difficult for us to retain or attract qualified officers
and directors, which could adversely affect the management of our business and our ability to obtain or retain listing of our common stock
on a national securities exchange.
We may be unable to attract
and retain those qualified officers, directors and members of board committees required to provide for effective management because of
the rules and regulations that govern publicly held companies, including, but not limited to, certifications by principal executive officers.
The enactment of the Sarbanes-Oxley Act has resulted in the issuance of a series of related rules and regulations and the strengthening
of existing rules and regulations by the SEC, as well as the adoption of new and more stringent rules by national securities exchanges.
The perceived increased personal risk associated with these changes may deter qualified individuals from accepting roles as directors
and executive officers.
Further, some of these changes
heighten the requirements for board or committee membership, particularly with respect to an individual’s independence from the
corporation and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with
the requisite qualifications. If we are unable to attract and retain qualified officers and directors, the management of our business
and our ability to obtain or retain listing of our shares of common stock on any national securities exchange could be adversely affected.
If we cannot satisfy, or continue to satisfy,
the initial listing requirements and other rules of the Nasdaq Capital Market, our securities may be delisted, which could negatively
impact the price of our securities and your ability to sell them.
Our common stock has been
listed on the Nasdaq Capital Market under the symbol “AVCO” since November 5, 2018. In order to maintain our listing on the
Nasdaq Capital Market, we are required to comply with certain rules of the applicable trading market, including those regarding minimum
stockholders’ equity, minimum share price and certain corporate governance requirements. We may not be able to continue to satisfy
the listing requirements and other applicable rules of the Nasdaq Capital Market. If we are unable to satisfy the criteria for maintaining
our listing, our securities could be subject to delisting.
If our common stock is delisted
from trading by the applicable trading market we could face significant consequences, including.
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a limited availability for market quotations for our securities; |
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reduced liquidity with respect to our securities; |
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a determination that our common stock is a “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common stock; |
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limited amount of news and analyst coverage; and |
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a decreased ability to issue additional securities or obtain additional financing in the future. |
We could be subject to securities class action
litigation.
In the past, securities class
action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially
relevant for us because companies in our industry have experienced significant stock price volatility in recent years. If we face such
litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.