avalon globocare corp. (otcqb: avco, target price: … · avalon management expects the company to...

INITIATING COVERAGE (April 3, 2018)

Equity | Healthcare / Biotechnology

© 2011-2018 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 1 | P a g e

Avalon GloboCare Corp. (OTCQB: AVCO, Target Price: $4.00)

We initiate coverage of Avalon GloboCare Corp. (OTCQB: AVCO, “Avalon”) with a price target of $4.00. Headquartered in Freehold, NJ, Avalon is a diversified healthcare holding company focused on developing impactful cell-based technologies for the development of innovative diagnostics and therapeutics. Through its US subsidiary, GenExosome Technologies, Avalon is emerging as a leader in developing applications for exosome-based technologies for clinical development and product commercialization. Exosomes are nano-sized, membrane-enclosed vesicles secreted by cells in body fluids, which contain bioactive molecules, including proteins, DNAs, RNAs and microRNAs, and are thought to act as messengers to regulate cellular function. Exosomes are emerging as a significant new category of research with multi-billion-dollar potential for the development of advanced diagnostics (including liquid biopsy) and therapeutics to identify and potentially treat a range of unmet medical indications, including cancer, fibrotic diseases and degenerative diseases, among others.

INVESTMENT HIGHLIGHTS

Avalon’s Exosome Isolation System appears to be a significant advancement in extracting and isolating exosomes

Avalon’s lead platform is the Exosomes Isolation System, which is a proprietary process for extracting and isolating exosomes efficiently from liquid biopsies for the development of exosome-based diagnostics. The company is also developing a solution for isolating exosomes from stem cell cultures, which has potential for application in the development of a wide range of therapeutics and exosome-based products. Avalon appears well positioned to capitalize from growing applications of exosome technology, given its proprietary method for isolation and extraction, which offers significant improvements in speed, purity, and complexity from existing methods.

Strong management, IP and partner network

We note that Avalon’s technology is supported by several impressive industry and research partners, including Weill Cornell Medical College, MD Anderson Cancer Center, and Mayo Clinic in the United States, as well as Lu Daopei Hospital of Daopei Medical Group (DPMG) and Da An Gene Co. Ltd (Shenzhen: 002030.SZ) in China. Avalon has an experienced and well-regarded management team, led by co-founders Chairman Daniel Lu and President & CEO David Jin, MD, PhD. Lu serves as Chairman and CEO of DaoPei Medical Group (DPMG), which comprises multiple hospitals, stem cell banks, and clinical labs in China. Dr. Jin brings Avalon extensive public company leadership experience including holding the role of Chief Medical Officer at BioTime, Inc. (NYSE: BTX) and subsidiary OncoCyte Corporation (NYSE:OCX). Avalon’s technology is supported by an established patent portfolio in China covering exosome extraction from saliva, and the application of exosome-based methods for developing biomarkers for liver and oral cancer, among others. Initiating coverage of Avalon GloboCare with price target of $4.00

We initiate coverage of Avalon with a price target of $4.00. We view Avalon as a speculative growth company in the biotechnology sector offering

exposure to the multi-billion dollar market for advanced cell technologies and exosomes for development of liquid biopsy-based diagnostics and stem cell-based therapeutics for cancer, fibrotic diseases, degenerative diseases, as well as exosome-based products for anti-aging, hair growth, and skincare. If achieved, the target of $4.00 represents potential upside of 66% from the recent price of $2.41 on April 1, 2018.

Key Ratios

FY17A FY18E FY19E

Gross margin (%) 23.0 67.0 75.0

Operating Margin (%) (359.9) (23.5) 11.6

EBITDA margin (%) (343.0) (21.9) 12.2

Net margin (%) (321.5) (22.1) 14.7

P/Revenue (x) 157.2x 61.3x 23.9x

EV / EBITDA (x) NM NM 180.7x

EV/Revenue (x) 156.2x 60.9x 23.7x Source: SeeThruEquity Research

Share Price Performance ($, LTM)

Source: Yahoo! Finance

0.00

1.50

3.00

4.50

6.00

Mar-17 Jun-17 Sep-17 Dec-17 Mar-18

Stock Details (4/1/2018)

OTCQB: AVCO

Sector / Industry Healthcare / Biotechnology

Price target $4.00 Recent share price $2.41

Shares o/s (mn) 70.3

Market cap (in $mn) 158.1

52-week high/low $4.60 / 0.51 Key Financials ($000 unless specified)

FY17A FY18E FY19E

Revenues 1,077.6 2,762.5 7,100.0

EBITDA (3,696.2) (605.1) 869.0

EBIT (3,877.9) (649.1) 825.0

Net income (3,464.3) (611.5) 1,041.0

EPS ($) (0.05) (0.01) 0.01


Avalon GloboCare Corp.

Equity | Healthcare April 3, 2018

SUMMARY TABLE

Share data Balance Sheet data** Key personnel:

Recent price: $2.41 Total assets: 12.7mn Chairman Daniel Lu

Price target: $4.00 Total debt: 2.0mn President & CEO David Jin, MD, PhD

52-week range: 4.60 - 0.51 Equity: 7.9mn CFO Luisa Ingargiola

Average volume:* 11,490 W/C: 4.1mn COO Meng Li

Market cap*: $158.1mn ROE: -47.4% SVP Steven Sukel, JD

Book value/share: $0.11 ROA: -27.3%

Cash/share $0.04 Current ratio: 1.8

Dividend yield: 0.00% Asset turnover: 0.1

Risk profile: High / Speculative Debt/Cap: 21.1%

* three month average volume (number of shares)

* *Balance sheet calculated from FY2017 results

Estimates Valuation

FY Dec Rev ($000) EBITDA ($00) EPS ($) EV/Rev (x) P/Rev (x) P/E (x)

2015A 0.0 (102.4) (0.00) NM NM NM

2016A 616.4 77.0 0.00 273.0x 274.8x 1590.1x

1Q17A 66.3 (492.9) (0.01) 634.7x 638.8x NM

2Q17A 374.8 (354.6) (0.01) 112.3x 113.0x NM

3Q17A 317.5 (633.6) (0.01) 132.5x 133.4x NM

4Q17E 319.1 (2,215.2) (0.03) 131.9x 132.7x NM

2017E 1,077.6 (3,696.2) (0.05) 156.2x 157.2x NM

2018E 2,762.5 (605.1) (0.01) 60.9x 61.3x NM

2019E 7,100.0 869.0 0.01 23.7x 23.9x 201.4x

2020E 21,750.0 7,157.8 0.08 7.7x 7.8x 30.6x

Source: Company Data, SeeThruEquity Research

INVESTMENT THESIS

We initiate coverage of Avalon GloboCare Corp. (OTCQB: AVCO, “Avalon”) with a price target of $4.00. With headquarters in Freehold, NJ, Avalon is a diversified healthcare holding company focused on the large and growing market for utilizing advanced cell-based technologies to develop innovative diagnostics and therapeutics. Avalon’s lead technology platform is the Exosome Isolation System, which is based on a proprietary method for extracting and isolating exosomes from 1) liquid biopsies for the development of exosome-based diagnostics, and 2) from stem-cells for the development of potential therapeutics for cancer, fibrotic diseases, and degenerative diseases. The company is also developing exosome-based products for a variety of indications including anti-aging, skin care, and hair growth, among others. AVCO shares are quoted on the OTCQB, but on March 19, 2018, the company applied for an application to list shares on the Nasdaq CM, which, if granted, would potentially increase the visibility of the company as well as potentially allow institutions restricted from trading in OTC share to consider the company for investment.

Figure 1. Summary Table (Pricing data as of April 1, 2018)




Exosomes are nano-sized, membrane-enclosed vesicles, which are secreted by cells in most body fluids, including saliva, urine, and blood. Exosomes contain bioactive molecules, including proteins, RNAs and microRNAs, and are thought to act as messengers to regulate cellular function. Due to their size, the ease with which they cross cell membranes, and their native ability to communicate in cellular language, exosomes have become an increasing focus in the biotechnology sector as a new category with multi-billion dollar potential for the development of advanced diagnostics and therapeutics for cancer, degenerative diseases, and a variety of other indications. We view Avalon as an intriguing speculative growth company in the biotechnology sector targeting large opportunities possible through the advancement of exosome technology for new therapeutic and diagnostic applications. The price target of $4.00 is primarily driven by the opportunity for Avalon’s exosome technologies. If achieved, the price target of $4.00 suggests potential upside of 66% versus the recent price of $2.41 on April 1, 2018.

Avalon seeking to become technology domain leader in rapidly emerging exosome market

Avalon is seeking to become a domain leader for the application of exosome technology for research and the development of new diagnostic and therapeutics. The company has leveraged its expertise in cell-based technologies with the acquisition of GenExosome Technologies (GenExosome) and its fully-owned Beijing, China-based subsidiary, which positions the company to advance its exosome-based technologies through multiple solutions in both the US and China. Through GenExosome, Avalon is developing and commercializing solutions which leverage its proprietary exosome isolation and extraction technology, for applications in clinical development, biomarker discovery, research, academia and proprietary product development. Avalon’s exosome isolation technology is supported by a patent portfolio in China covering a proprietary process for extracting and isolating exosomes from saliva, and the application of exosome-based methods for developing biomarkers for liver and oral cancer, among others.

Source: Company investor materials

The company is currently seeking to file related patents in the US, and is continuing to develop new intellectual property through research and development and in conjunction with its partners. Indeed, the company has already established relationships with leading partners in the medical, research and scientific community including Weill Cornell Medical College, MD Anderson Cancer Center, and Mayo Clinic in the United States, as well as Lu Daopei Hospital of Daopei Medical Group (DPMG) and Da An Gene Co. Ltd (Shenzhen: 002030.SZ) in China In our view these partnerships lend support to the company’s competitive positioning and the promise of its lead Exosome Isolation System and roadmap.




Initial products to focus on exosome isolation and extraction Avalon’s initial platform is the Exosome Isolation System, which is centered on improving the process of exosome isolation and extraction for the development of 1) exosome-based liquid biopsy diagnostics and 2) exosome-derived therapeutics for regenerative medicine, biomarker discovery and the advancement of targeted therapies. The current industry process for extracting and isolating exosomes from liquid biopsies has been done by ultracentrifugation, which has several drawbacks for the development of practical diagnostics. These drawbacks include significant damage to resulting exosomes, the need for cell purification, and long processing times, among others. By contrast, Avalon’s isolation kits use a proprietary method to extract exosomes from a small body fluid sample (such as two drops of blood, urine or saliva), and require only a few minutes to isolate and purify exosomes. The liquid biopsy kits are being commercialized initially with research and hospital partners in China, and the company recently announced its entry into the US in a new headquarters in Ohio. Avalon is also developing more advanced extraction and isolation kits, which can be used to extract exosomes from cord-derived, placental and adipose mesenchymal stem cells (MSC), as well as from endothelial cells and other primary human cell types in culture. These advanced kits will be used by partners to accelerate exosome-based in vitro diagnostic product development and commercialization. On January 30, 2018, Avalon announced a significant strategic partner for this solution, Da An Gene Co, Ltd. Da an Gene is a Shenzhen Stock Exchange listed company that is part of the Sun Yat-sen University School of Medicine located in Guangzhou, China. In addition to its Exosome Isolation System, Avalon is also developing a range of exosome products which can be marketed as functional cosmeceuticals and/or supplements for anti-aging, skin care, and hair growth, among others. These products have the advantage of a relatively fast time to market and a large potential patient population in worldwide. Avalon has commenced initial commercialization activities for its exosome isolation kits for liquid biopsies, and anticipates initial exosome products launching by the end of 2018. The company’s stem cell-based isolation solutions are in development. Management expects initial revenues from exosome isolation systems for therapeutic development to commence in 2020. Avalon participating in multi-billion dollar market for liquid biopsies and exosomes Avalon estimates that potential market for exosomes represent a multi-billion opportunity for the company, including both diagnostic applications for exosomes isolated from liquid biopsies, as well as therapeutic applications for exosomes extracted from stem cell cultures. The size of the market opportunity is supported by a number of third-party estimates, including a February 2018 forecast from Grand View Research, which estimates that the size of the market for exosome technology will reach $2.28 billion by 2030. Additionally, the broader liquid biopsy market, in which Avalon’s exosome diagnostic line participates, was estimated by Goldman Sachs in July 2016 to have the potential to surpass $14 billion per year. Avalon appears positioned to compete in the growing market for medical applications of exosome technology, given its proprietary method for isolating exosomes from body liquids and stem cells cultures, which promise significant improvements in speed, cost, and complexity from existing methods. Experienced management team supports US, China market strategy

Avalon is led by and experienced management team including co-founders Chairman Daniel Lu and President & CEO David Jin, MD, PhD. Lu serves as Chairman and is well regarded in the healthcare industry in China. His experience includes serving as Chairman and CEO of DaoPei Medical Group (DPMG), which comprises multiple hospitals, stem cell banks, and clinical labs in China. Dr. Jin brings Avalon extensive public company leadership experience including holding the role of Chief Medical Officer at BioTime, Inc. (NYSE: BTX) and subsidiary OncoCyte Corporation (NYSE:OCX). Dr. Jin also serves as Co-CEO of GenExosome. We have included full management bios at the conclusion of this report.




COMPETITIVE LANDSCAPE Avalon operates in the biotechnology sector of the healthcare industry and is focused on developing and commercializing innovative cell-based technologies for diagnostic and therapeutic applications in the healthcare industry. The biotechnology sector is intensely competitive, and characterized by a high degree of regulation, rapid innovation, and significant capital requirements. Avalon faces competition from a range of pharmaceutical companies, startup companies, academic institutions and research organizations, including many large multinational corporations with substantially greater financial resources, research and development, brand recognition, and sales distribution. In this environment, Avalon seeks to compete based on a strategy of differentiation, with focused development based on cell-derived technology, and specifically with an aim to become a domain leader in the rapidly emerging fields of exosome technology, liquid biopsy, cancer diagnostics, and regenerative medicine. Avalon seeks to establish competitive differentiation through its proprietary and patent-supported approach to isolating exosomes faster and more cost-efficiently than existing methods. Initially, the company is looking to become a domain leader in exosomes through the commercialization of exosome isolation systems designed to isolate and extract exosomes from bodily fluids, through its GenExosome Technologies subsidiary. Management highlights the following advantages of GenExosome’s platform versus existing exosome extraction methods.

Product Advantages

Current / Other Exosome Extraction Kits GenExosome Technologies

Ultracentrifugation to separate and collect exosomes

Only two drops of blood required for sample

60% to 70% of exosomes are damaged during the process. Once separated by the centrifuge, the resulting exosomes need to be purified

97% purification

Process takes 1-2 days Patented Process requires only a few minutes to isolate and purify exosomes

Source: Company investor materials

Given the multi-billion dollar market opportunity for exosome technology, Avalon faces significant competition as it seeks to become a domain leader in using exosomes for the development of new diagnostics and therapeutics. Competitors in the exosome and liquid biopsy market include: Capricor Therapeutics (CAPR), Exopharm, Codiak BioSciences, Exosome Diagnostics, Kimera Labs, Aethlon Medical (AEMD), ReNeuron Group (RENE), Thermo Fisher Scientific (TMO, through its acquisition of Life Technologies), Illumina and Eli Lilly (LLY), among others.




FINANCIALS AND FUTURE OUTLOOK

Recent Results

Avalon reported revenues of $1.1mn in FY2017 with an operating loss of ($3.9mn). This represented growth of 75% from $0.6mn in FY2016. The low revenue level is expected for the company given that it has been focused on developing and acquiring its initial exosome products, and therefore 2017 revenues consisted primarily of real estate and consulting business for strategic relationships in China. AVCO reported EPS of ($0.05) in 2017, with average shares outstanding of 65mn. Key Assumptions Avalon expects to begin commercialization of its liquid biopsy exosome isolation kits in 2018, with initial sales derived from strategic customers and partners in China, such as the recently announced partnership with Da An Gene Co., Ltd, a leading biomedical company in Guangzhou, China, which is focusing on molecular diagnostic technology, production and sales of clinical test reagents and instruments, and clinical testing services for national independent medical labs. Management believes sales could surpass $3mn in 2018, driven by exosome isolation kits for liquid biopsies. The liquid biopsy isolation kits allow Avalon to participate in the growing market for exosome-based diagnostics, which can be developed for a variety of indications from a small sample of blood, saliva, or other bodily fluids. Avalon is targeting robust revenue growth beyond 2018, driven by exosome-derived products expected to come to market beginning in 2018 with applications for skincare, anti-aging, wound care, and hair growth, among others. Beyond 2019, further growth is expected from the company’s therapeutic platform for advanced exosome isolation and extraction systems from stem cells.

FYE FYE FYE FYE FYE FYE Exosome Application (mn) 2018E 2019E 2020E 2021E 2022E 2023E

Liquid Biopsy Isolation – Diagnostic Platform $2.5 $6.3 $12.3 $16.1 $18.6 $21.5

Stem Cell Isolation - Therapeutic Platform $0.0 $0.0 $7.3 $18.5 $30.0 $42.0

Exosome-based Products & Consulting $0.3 $0.9 $2.2 $5.0 $8.0 $11.3

Total Revenue $2.8 $7.1 $21.8 $39.5 $56.6 $74.9 Attractive profit margin potential Avalon management expects the company to have strong gross margins for its products, which benefit from an attractive combination of US innovation and manufacturing capabilities in China. Reflecting these advantages, we believe management is targeting gross margins in excess of 75% for its liquid biopsy exosome isolation systems, with a long term gross profit margin target of 80% for the company. Additionally, Avalon management is targeting core operating margins in excess of 50% for the company at scale, with breakeven on this basis possible with annualized revenues of $3mn. Our assumptions are more conservative than this, initially. We assumed that the company is likely to invest cash flows from initial sales into growth and new product development, given the wide range of potential applications for exosomes in developing new therapeutics and diagnostics. We also considered the company’s stated goal of being a leader in the exosome technology domain, which would require reinvestment in research and development.




Balance Sheet & Financial Liquidity

We see cash flow and financial liquidity as a key area to watch for Avalon, as is the case for many emerging companies in the biotechnology sector. Avalon had cash on hand of $3.0mn as of December 31, 2017. At the end of 4Q17, the company had total assets of $12.7mn, which included $7.1mn in US-based real estate investments. The company had total liabilities of $5.4mn, including $2.0mn in debt, and shareholders’ equity of $7.9mn. Avalon used $1.3mn of cash in its operating activities during 2017, and has a going concern qualification from its auditors in its financial statements. Avalon is currently seeking to raise external capital, and we have assumed the company is successful in raising up to $20mn, which we believe the company will require for product development, growth initiatives, and working capital before it reached sustainable cash flow.




VALUATION We valued Avalon using the discounted cash flow (“DCF”) and peer valuation methods. The target price is $4.00 per share. If achieved, the target represents potential upside of 66% from the recent price of $2.41, as of April 1, 2018.

DCF

As outlined in more detail in the Financials and Future Outlook portion of this report, we assumed Avalon is successful in commercializing its advanced cell-based therapeutic and diagnostic products in the US and China. The model assumes commercialization of the company’s exosome liquid biopsy product line in 2018, with additional exosome products beginning in 2019, followed by advanced exosome isolation and extraction solutions for stem-cell and therapeutic development thereafter.

We discounted cash flows at a weighted average cost of capital of 12.7% and incorporated a dilution factor to account for the estimated impact of ongoing fundraising activities on the current share count. We assumed Avalon will require $20mn in external capital to fund product development and growth initiatives. Our model assumed a terminal growth rate of 5% at the end of FY2027E to arrive at an equity value of $264.2mn, after adjusting for cash on hand and debt of FY2017. We then considered 70.3mn shares outstanding to arrive at a fair value of $3.77 per share, as detailed below.

$’ mn FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E FY26E FY27E

Revenue 2,762.5 7,100.0 21,750.0 39,536.7 56,552.7 74,872.5 92,831.8 111,252.9 131,887.5 153,308.8

EBIT (649.1) 825.0 7,113.8 14,905.3 23,469.4 32,195.2 41,310.1 51,176.3 61,987.1 75,121.3

Less: Tax 0.0 0.0 442.2 3,203.0 5,035.5 6,911.6 8,889.4 11,049.8 13,431.3 16,324.2

NOPLAT (649.1) 825.0 6,671.6 11,702.3 18,433.9 25,283.6 32,420.8 40,126.6 48,555.9 58,797.1 Changes in working capital 267.9 1,569.5 (826.4) (279.4) (2,479.9) (2,971.6) (949.5) (422.4) (453.0) (485.9)

Depreciation & Amortization 44.0 44.0 44.0 44.0 47.5 51.3 55.4 59.9 64.7 69.8

Capex (50.0) (50.0) (60.0) (90.0) (91.8) (93.6) (95.5) (97.4) (99.4) (101.4)

FCFF (387.3) 2,388.5 5,829.2 11,376.9 15,909.8 22,269.6 31,431.2 39,666.6 48,068.2 58,279.7

Discount factor 0.9 0.8 0.7 0.6 0.6 0.5 0.4 0.4 0.4 0.3

Dilution Factor 0.81 0.81 0.80 0.80 0.79 0.78 0.78 0.77 0.76 0.75

PV of FCFE (353.5) 1,935.2 3,352.6 5,807.5 7,136.7 8,778.5 10,887.7 12,074.6 12,858.0 13,699.5

Sum of PV of FCFE 76,176.7

Terminal cash flow 797,831.2

PV of terminal cash flow 187,541.7

Enterprise value 263,718.4

Less: Debt 1,950.0

Add: Cash & Investments 3,027.0

Equity value 264,795.4

Shares Outstanding 70,280.0

Fair value per share ($) 3.77




Summary conclusions Key assumptions DCF FV ($ per share) 3.77 Beta 2.0 Recent price ($ per share) 2.41 Cost of equity 12.7% Upside (downside) 56.3% Cost of debt (post tax) 10.4% WACC 12.7% Terminal Growth Rate 5.0%

Source: SeeThruEquity Research

WACC (%)

Term

inal

gro

wth

rate

(%

)

3.77 11.7% 12.2% 12.7% 13.2% 13.7%

4.00% 4.05 3.72 3.44 3.18 2.96

4.50% 4.27 3.91 3.59 3.32 3.07

5.00% 4.52 4.11 3.77 3.47 3.20

5.50% 4.81 4.35 3.97 3.63 3.34

6.00% 5.14 4.63 4.20 3.83 3.51

6.50% 5.55 4.96 4.46 4.05 3.69


Figure 2. Sensitivity of Valuation – WACC vs. Terminal Growth Rate




Peer Group Analysis

We also analyzed Avalon in relation to industry peers. Given that Avalon is operating in the emerging market for liquid biopsy exosome isolation and extraction systems, many of Avalon’s peers are private companies, such as Cambridge, Mass-based Codiak BioSciences, which completed a round of $76.5mn in Series C funding in November 2017, and has raised nearly $170mn in aggregate, to develop its exosome-based platform. Another privately held peer of the company is Exosome Diagnostics, also based in Cambridge, which raised $60mn in Series B funding in 2016 to help support development of a liquid-based diagnostic for lung cancer. We note that many other peer companies in the exosome technology space are privately held, including: Australian-based Exopharm, Exosome Sciences, Illumina and Kimera Labs, among others. The price target of $4.00 suggests a market capitalization of $281mn, which appears appropriate given the significant private monies flowing into the exosome space. We have also included publicly traded peer companies. Our peer group included Avid Bioservices (PPHM), Capricor Therapeutics(CAPR), Aethlon Medical (AEMD), ReNeuron Group (RENE.LI), ITUS Corporation (ITUS), and Thermo Fisher Scientific (TMO), Eli Lilly and Company (LLY) and HTG Molecular Diagnostics (HTGM), as shown below.

Company Company Recent Mkt cap EV / Sales P/E Symbol Price ($ mn) FY2018 FY2018

Capricor Therapeutics CAPR 1.35 35 12.6x NM

Exosome Diagnostics Private NM NM NM NM

Codiak BioSciences Private NM NM NM NM

Eli Lilly & Company LLY 77.30 81,165 3.7x 15.9

ITUS Corporation ITUS 3.68 61 150.9x NM

ReNeuron Group plc REE.LI 0.91 40 NM NM

Aethlon Medical AEMD 1.35 22 255.0x NM

HTG Molecular Diagnostics HTGM 4.83 135 2.9x NM

Avid Bioservices CDMO 2.92 161 2.1x NM

Thermo Fisher Scientific TMO 206.40 82,766 4.3x 19.1

Average 61.6x 17.5x

Avalon GloboCare AVCO 2.41 169 60.9x N/A

Premium (discount) (1.2%)

Source: Bloomberg, SeeThruEquity Research, peer company data as of April 1, 2018

Figure 3. Comparable Valuation *




RISK CONSIDERATIONS Early stage company Avalon is an emerging company in the biotechnology industry, which makes it difficult for the company and industry analysts to forecast future results. The company has articulated a goal of reaching an annualized revenue run rate of more than $30mn by the end of 2020E, driven by the commercialization of its exosome isolation systems for liquid biopsies and stem cell technology, as well as exosome-based products for skin care, anti-aging, hair growth, and other consumer applications. While slightly more conservative than management’s forecast, our analysis generally assumes that Avalon is able to execute a growth plan based on successful commercialization of these products. If the company is unable to realize the pricing, demand, and margins contemplated by management, Avalon may be unable to reach these goals and the forecast in our model, which could have a negative impact on shares.

Financial Solvency and potential for dilution Avalon will require addition financing to fund growth and development. While the company expects to commercialize many solutions sold to research institutions, biotechnology firms, and hospitals without the requirement of large scale clinical trials, we do expect Avalon to will require at least $20mn over the next two years in order to execute its business strategy. Avalon does not generate cash from operating activities at this time, and we do not expect the company to reach breakeven until 2019E, assuming management achieves its plan. The company has a going concern qualification in its audited financial statements, which is expected for an emerging company in the biotechnology industry that is seeking financing and not generating cash flow. There is risk that issuances of new equity would cause dilution to shareholders. If Avalon is not able to raise capital on advantageous terms, such dilution could have a negative impact on investors resulting from the issuance of new equity and/or warrants or other convertible instruments.

Avalon ended 4Q17 with cash on hand of $3.0mn and total assets of $12.7mn. The company’s largest asset is real estate holdings based in the US. Avalon had total liabilities of $5.4mn and net shareholders’ equity of $7.9mn.

Regulatory risks

Avalon operates in the biotechnology sector, which is highly regulated. The company intends to supply advanced cell therapy solutions to research institutions, hospitals and biotechnology firms, and whose products and operations are subject to regulation in the US and China.

Competition

Avalon is a biotechnology firm developing solutions for the development of advanced cell therapies and diagnostics. The biotechnology sector is intensely competitive, and is characterized by a high degree of regulation, rapid innovation, and significant capital requirements. The company’s first line of solutions features exosome technology, which is a new and emerging technology with high expectations. We expect the space to attract significant competition from both new entrants and existing biotechnology firms. Many of these firms have access to substantially greater financial resources, research and development, brand recognition, and sales distribution.




Management Team

Daniel Lu, Chairman of the Board Mr. Lu is Chairman of the Board of the Company and Avalon Health Services, a subsidiary of Avalon established for future rehabilitation and related businesses. He is a seasoned healthcare entrepreneur with extensive operation in China. He has been serving as Chairman of the Board for the DaoPei Medical Group (“DPMG”) since 2010. Under his leadership, DPMG has recently expanded its clinical network involving a state-of-the-art stem cell bank at Wuhan Biolake, three top-ranked private hospitals (located in Beijing, Shanghai, and Hebei), specialty hematology laboratories, as well as a hematology research institute, with more than 100 partnering and collaborating hospitals in China. DPMG was founded by Professor Daopei Lu, a renowned hematologist pioneering in hematopoietic stem cell transplant and member of the Academy of Engineering in China. Daniel Lu is the son of Daopei Lu. Mr. Lu received a Bachelor of Arts from Temple University Tyler School of Arts in 1988 and subsequently worked as senior Art Director at Ogilvy & Mather Advertising Company. Prior to joining DPMG, Mr. Lu served as Chief Operating Officer for BioTime Asia Limited which is a subsidiary of BioTime, Inc. (NYSE/AMEX:BTX) in 2009 Dr. David Jin, MD, PhD, President & CEO, Director Dr. David Jin, MD, PhD, serves as President, Chief Executive Officer, and Director of the Company and Avalon Health Services, a subsidiary of Avalon established for future rehabilitation and related businesses. Dr. Jin is also Co-CEO of GenExosome Technologies. From 2009 to 2016, Dr. Jin has served as the Chief Medical Officer of BioTime, Inc. (NYSE MKT: BTX), a clinical stage regenerative medicine company with a focus on pluripotent stem cell technology. Dr. Jin also acts as a senior translational clinician-scientist at the Howard Hughes Medical Institute and the Ansary Stem Cell Center at Weill Cornell Medical College of Cornell University. Prior to his current endeavors, Dr. Jin was Chief Consultant/Advisor for various biotech/pharmaceutical companies regarding hematology, oncology, immunotherapy and stem cell-based technology development. Dr. Jin has been Principle Investigator in more than 15 pre-clinical and clinical trials, as well as author/co-author of over 80 peer-reviewed scientific abstracts, articles, reviews, and book chapters.

Dr. Jin studied medicine at SUNY Downstate College of Medicine in Brooklyn, NY. He received his clinical training and subsequent faculty tenure at the New York-Presbyterian Hospital (the teaching hospital for both Cornell and Columbia Universities) in the areas of internal medicine, hematology, and clinical oncology. Dr. Jin was honored as Top Chief Medical Officer by ExecRank in 2012, as well as recognized as Leading Physicians of the World in 2015.

Meng Li, Chief Operating Officer, Secretary and Director Ms. Meng Li is Chief Operating Officer, Secretary and a member of the Board of Directors. Ms. Li has over 15 years of executive experience in international marketing, branding, communication, and media investment consultancy. Ms. Li served as Managing Director at Maxus/GroupM (a WPP Group company) where she was responsible for business P&L and corporate management from 2006 to 2015. Prior to joining Maxus/Group M, Ms. Li worked for Zenithmedia (a Publicis Group company) from 2000-2006 as Senior Manager. Ms. Li received a Bachelor of Arts in International Economic Law from University of Dalian Maritime University, China. Luisa Ingargiola, Chief Financial Officer

Luisa Ingargiola graduated in 1989 from Boston University with a Bachelor Degree in Business Administration and a concentration in Finance. In 1996, she received her MBA in Health Administration from




the University of South Florida. From 1990 through 2007, Ms. Ingargiola worked in various finance roles in budgeting and financial reporting. From 2007 through 2016, Ms. Ingargiola served as the Chief Financial Officer at MagneGas Corporation (Nasdaq: MNGA) and continues to serve as a director. Ms. Ingargiola has served as Audit Chair of several public companies and currently serves as Audit Chair of s FTE Networks, Inc. (NYSE: FTNW) and Electra Mecchanica (OTC:ECCTF). She also serves as a Director of The JBF Foundation Worldwide, a 501c3 non-profit.

Steven P. Sukel, Senior Vice President of Healthcare Property Management

Steven P. Sukel is a licensed as an attorney in New Jersey who currently analyzes real estate investment opportunities and operates and manages commercial properties. Mr. Sukel has extensive business experience and was formerly associated with Ernst & Young prior to establishing his own law practice.

Mr. Sukel has focused on New Jersey, multi-state and local taxation and real estate law since 1990 in both public and private practice. Mr. Sukel was with Ernst & Young’s State & Local Tax practice, served as the New Jersey Liaison between the New Jersey Bar Association Taxation Section and the New Jersey CPA Society, was a Past Chair of the New Jersey Bar Association Taxation Section and served two terms on the New Jersey Supreme Court Committee on the Tax Court.

Mr. Sukel received his BA from the University of Scranton and J.D from Quinnipiac University School of Law.




FINANCIAL SUMMARY

Source: SeeThruEquity Research.

Figures in $000 unless specified FY15A FY16A FY17A FY18E FY19E

Current assets 109.6 3,706.2 3,235.0 17,184.2 21,038.4

Other assets 0.0 0.3 9,434.0 9,471.7 9,510.0

Total assets 109.6 3,706.5 12,669.0 26,656.0 30,548.4 Current liabilities 123.0 160.3 5,360.1 5,958.3 7,617.3

Other liabilities 0.0 0.0 0.0 0.0 0.0

Shareholders’ equity (13.4) 3,546.2 7,309.3 20,697.6 22,931.1

Total liab and shareholder equity 109.6 3,706.5 12,669.4 26,656.0 30,548.4


Figures in $000 unless specified FY15A FY16A FY17A FY18E FY19E

Cash from operating activities (67.6) 14.0 (1,339.7) 1,200.6 3,847.0

Cash from investing activities 0.0 (930.3) (8,014.4) (50.0) (50.0)

Cash from financing activities 177.2 3,785.0 9,502.2 12,500.0 0.0

Net inc/(dec) in cash 109.6 2,776.6 140.8 13,650.6 3,797.0 Cash at beginning of the year 0.0 109.6 2,886.2 3,027.0 16,677.6

Cash at the end of the year 109.6 2,886.2 3,027.0 16,677.6 20,474.6


Figure 4. Income Statement Figures in $000 unless specified FY15A FY16A FY17A FY18E FY19E

Revenue 0.0 616.4 1,077.6 2,762.5 7,100.0 YoY growth - NM 74.8% 156.4% 157.0%

Cost of sales 0.0 73.1 829.8 911.6 1,775.0

Gross Profit 0.0 543.4 247.8 1,850.9 5,325.0 Margin NM 88.1% 23.0% 67.0% 75.0%

Operating expenses 102.4 466.4 4,125.6 2,500.0 4,500.0

EBIT (102.4) 76.9 (3,877.9) (649.1) 825.0

Margin NM 12.5% (359.9%) (23.5%) 11.6%

EBITDA (102.4) 77.0 (3,696.2) (605.1) 869.0 Margin NM 12.5% (343.0%) (21.9%) 12.2%

Other income/ (expense) 0.0 0.6 (171.8) 37.8 208.5

Profit before tax (102.4) 77.5 (4,049.6) (611.3) 1,033.5

Tax 0.0 0.0 0.0 0.0 0.0

Net income to Common (102.4) 77.5 (3,464.3) (611.5) 1,041.0 Margin NM 12.6% (321.5%) (22.1%) 14.7%

EPS (per share) (0.00) 0.00 (0.05) (0.01) 0.01

Figure 5. Balance Sheet

Figure 6. Cash Flow Statement




About Avalon GloboCare Corp. Avalon GloboCare Corp. (AVCO) is a global intelligent biotech developer and healthcare service provider dedicated to promoting and empowering high impact, transformative cell-based /technologies and their clinical applications, as well as healthcare facility management through its core platforms, namely "Avalon Cell" and "Avalon Rehab." In addition, Avalon provides strategic advisory and outsourcing services to facilitate and enhance their clients' growth, development, as well as competitiveness in both domestic and global healthcare markets. Avalon also engages in the management of stem cell banks and specialty clinical laboratories. Through its U.S. subsidiary, GenExosome Technologies Inc., Avalon further establishes its leading role in the fields of liquid biopsy, precision medicine and regenerative medicine.




Contact

Ajay Tandon SeeThruEquity www.seethruequity.com (646) 495-0939 [email protected] Disclosure

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