Change Agents Corporation. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future. Accordingly, factors that may affect our results include, but are not limited to: ● our ability to commercialize our product candidates and the growth of the markets for those product candidates; ● our ability to develop and commercialize products before competitors that are superior to the alternatives developed by such competitors; and ● a decline in economic conditions, including the impact of an inflationary environment and tariffs. All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the filing date of this Quarterly Report on Form 10-Q or the date of the document incorporated by reference into this Quarterly Report on Form 10-Q. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith, and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished. The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2026 and 2025 should be read in conjunction with our condensed consolidated financial statements and related notes to those condensed consolidated financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. Overview We are a technology-focused company with a strategic focus on developing innovative Agentic AI software and consumer health products that target consumers and small businesses. We recently announced our intent to expand into drone interception and surveillance AI enhanced technology solutions through the establishment of Autonomous Air Defense Systems LLC. Throughout our operating history, we have maintained our corporate identity, management team and original mission while strategically evolving our business in response to market conditions and commercial opportunities, with each such evolution being the product of deliberate decisions. We are actively seeking complementary bolt-on AI acquisitions that could generate near-term revenue to supplement our current operations as both segments continue to develop. We believe our diverse and evolving portfolio of commercial activities reflects our ongoing commitment to identifying and building value-oriented technology businesses for the benefit of its stockholders. We had the following areas of focus in the three and six months ended June 30, 2026 and 2025: We currently operate through two business segments: (i) an artificial intelligence software segment, through which we develop and commercialize an AI-driven, short-form agentic video generation platform and an agentic Generative Engine Optimization (GEO) search product operated by Avalon Quantum AI, LLC, our wholly owned subsidiary formed in connection with our acquisition of RPM Interactive, Inc. in December 2025; and (ii) a consumer health technology segment, through which we distributes the Keto Air breathalyzer device - a non-invasive consumer breathalyzer that measures ketosis levels and is sold in North America, bearing an FDA registration number. Each segment is described more fully below. Artificial Intelligence Software Segment - Avalon Quantum AI, LLC / RPM Interactive Our artificial intelligence software segment is operated through Avalon Quantum AI, LLC, a wholly owned subsidiary of our company organized in the State of Nevada and formed in connection with our acquisition of RPM Interactive, Inc. (“RPM”) in December 2025. RPM merged with and into Avalon Quantum AI, LLC pursuant to the merger, and Avalon Quantum AI, LLC continues to operate as our wholly owned subsidiary. Avalon Quantum AI LLC is advancing next-generation Agentic AI software products that we believe are designed to deliver material revenue increases for small businesses and content creators. The Catch-Up AI-powered Video Platform - Phase 1 The Catch-Up platform is an AI-driven, short-form video generation software product. In its current Phase 1 form, the platform enables content creators - with an initial focus on the podcasting market - to input a topic of their choosing, after which the platform automatically scrapes YouTube for relevant videos, identifies the most-viewed or most-discussed content on that topic, and generates a structured, short-form video featuring an AI-generated avatar of the creator that replicates their voice and likeness. Each short-generated video consists of three segments: an introduction delivered by the creator’s AI avatar, the featured video clip sourced by the platform, and a concluding statement also delivered by the AI avatar. Catch-Up Phase 2 Development Phase 2 of the Catch-Up platform is currently in development and is expected to launch in Q3 of 2026. As announced on March 31, 2026, the Company hired Caylent, Inc. a cloud-native services company and an Amazon Web Services (AWS) Premier Tier Consulting Partner, to support the development of this Phase 2 AWS-based initiative. This Phase 2 development is expected to transition the platform from a manually configured AI video production system into a fully autonomous, agentic AI-driven video platform. Phase 2 is expected to expand the platform’s user base beyond podcasters to a substantially broader range of content creators and marketers, including social media influencers and individuals or businesses engaged in product marketing and e-commerce. The Beacon Agentic Generative Engine Optimization (GEO) Search Product The Beacon Agentic GEO search product is designed to help small, local service businesses get recommended by AI systems like ChatGPT, Gemini, Claude, Perplexity and Grok. The agentic software product is designed to autonomously; a) diagnose a small businesses AI visibility and SEO effectiveness in about 60 seconds, b) provide a visibility score, and c) generate implementation-ready fixes upon approval. The Beacon app will be offered in the form of a monthly subscription fee. Consumer Health Technology Segment - Keto-Air Breathalyzer Our consumer health technology segment is centered on the Keto Air breathalyzer device, a non-invasive consumer health product that allows users to determine whether they are in a state of nutritional ketosis, and at what level, by exhaling into a compact, pen-like breathalyzer. Ketosis is a metabolic state in which the body burns fat for fuel rather than carbohydrates, and is widely associated with low-carbohydrate and ketogenic dietary regimens. The Keto Air device represents a meaningful improvement over prior methods of measuring ketosis, such as urine test strips or earlier-generation breathalyzers that required cartridge replacements, offering users a convenient, reusable, and non-invasive testing experience. We entered into an exclusive North American distribution agreement for the Keto-Air technology and device in 2024. Pursuant to this agreement, we have exclusive distribution rights in the United States, Canada and Mexico through July of 2025 and since that time, we continue to be the only distributor in North America. We believe this provides us with a meaningful competitive advantage in the North American ketosis monitoring market for the duration of the agreement. 34 Cessation of Laboratory Services During the first quarter of 2025, to preserve cash, the Company entered into discussions with Lab Services MSO for the potential redemption of our investment and on February 26, 2025, we and Lab Services MSO entered into a Redemption and Abandonment Agreement, whereby Lab Services MSO redeemed the 40% equity interest in Lab Services MSO held by us. Accordingly, beginning in February 2025, we no longer offer laboratory services. Other Areas In order to preserve cash and focus on product commercialization, we have suspended all research and development efforts related to cellular therapy. We are redirecting our funding efforts to our core business strategies outlined above. Going Concern Our condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, we had working capital deficit of approximately $4,093,000 at June 30, 2026 and had incurred recurring net losses from continuing operations and generated negative cash flow from operating activities of continuing operations of approximately $6,555,000 and $3,556,000 for the six months ended June 30, 2026, respectively. We have a limited operating history and our continued growth is dependent upon generating revenue from advanced Agentic AI systems, including automated video generation and small business marketing automation, the continuation of generating revenue for selling of Keto Air, and obtaining additional financing to fund future obligations and pay liabilities arising from ordinary course business operations. In addition, the current cash balance cannot be projected to cover our operating expenses for the next twelve months from the release date of this Quarterly Report on Form 10-Q. These matters raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital, implement our business plan, and generate sufficient revenues. There are no assurances that we will be successful in our efforts to generate sufficient revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. We plan on raising capital through the sale of equity to implement our business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to us on satisfactory terms and conditions, or at all. The accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should we be unable to continue as a going concern. Recent Developments Name Change On July 17, 2026, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation, as amended with the Secretary of State of the State of Delaware to change the name of the Company from “Avalon GloboCare Corp.” to “Change Agents Corporation” effective as of July 20, 2026 (the “Name Change”). In connection with the Name Change, the Company’s trading symbol for its common stock began trading on The Nasdaq Capital Market on July 22, 2026 under the symbol “CHGA” 35 Equity Purchase Agreement On July 22, 2026, the Company entered into an Equity Purchase Agreement (the “Purchase Agreement”) with Hudson Global Ventures, LLC, a Nevada limited liability company (the “Investor”). Pursuant to the Purchase Agreement, upon the terms and subject to the conditions set forth therein, the Company may, from time to time during the Commitment Period, in its sole discretion, require the Investor to purchase shares of the Company’s common stock, par value $0.0001 per shares (“Common Stock”) having an aggregate purchase price of up to $10,000,000 at a fixed purchase price per share of $0.30. The Commitment Period ends on the earliest of (i) the date on which the Investor has purchased shares equal to the $10,000,000 maximum commitment amount, (ii) 36 months after the date of the Purchase Agreement, (iii) written notice of termination by the Company to the Investor, subject to certain limitations, and (iv) certain bankruptcy-related events. In connection with the Purchase Agreement, the Company issued to the Investor a common stock purchase warrant (the “Warrant”) to purchase up to 925,925 shares of Common Stock at an exercise price of $0.01 per share, subject to adjustment as provided in the Warrant. The Warrant is exercisable at any time following stockholder approval of the shares issuable upon exercise of the Warrant (the “Stockholder Approval Date”) until 5:00 p.m. Eastern time on the date that is five years after the Stockholder Approval Date, subject to the terms and limitations set forth therein, including a 4.99% beneficial ownership limitation. Business Loan and Security Agreement On July 24, 2026, the Company entered into a Business Loan and Security Agreement (the “Business Loan Agreement”) with a commercial funding source (the “Lender”), pursuant to which the Company obtained a loan from the Lender in the principal amount of $825,000 (the “Business Loan”), with net proceeds to the Company of $254,350, following the payment of an administration fee of $41,500 and repayment in full of the current loan from Agile Lending in the amount of $529,400, with a total repayment amount of $1,188,000, including interest charges of $363,000 (assuming all payments are made on time and the July 2026 Loan is not prepaid) repayable in 30 weekly installments of $37,125 with a maturity date of July 29, 2026.. Pursuant to the Business Loan Agreement, the Company granted the Lender a continuing security interest in certain collateral (as defined in the Business Loan Agreement). In connection with the Business Loan, the Company issued Lender a Confessed Judgement Secured Promissory Note (the “Secured Note”) dated July 24, 2026 in the amount 825,000 with a maturity date of February 19, 2027. Forbearance Letter Agreement On July 24, 2026, the Company entered into a Forbearance Letter Agreement with Agile Lending LLC under which it agreed to issue 360,000 shares of its common stock (the “Forbearance Shares”) in consideration of Agile Lending’s agreement to forbear the July 2026 payment and to not under the March 2026 Business Loan and Security Agreement between the Company and Agile Lending. The Company granted Agile Lending piggyback registration rights with respect to the Forbearance Shares. Critical Accounting Policies Use of Estimates The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Changes in these estimates and assumptions may have a material impact on the condensed consolidated financial statements and accompanying notes. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates. Significant estimates during the three and six months ended June 30, 2026 and 2025 include the useful life of intangible assets, the assumptions used in assessing impairment of long-term assets, the allowance for credit loss, the valuation of deferred tax assets and the associated valuation allowances, the valuation of stock-based compensation, the valuation of Series D convertible preferred stock (“Series D Preferred Stock”), and the determination of the fair value of the warrants. Income Taxes We are governed by the income tax laws of China and the United States. Income taxes are accounted for pursuant to ASC 740 “Accounting for Income Taxes,” which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge for taxes is based on the results for the period as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. 36 Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is changed to equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis. Recent Accounting Standards For details of applicable new accounting standards, please, refer to Recent Accounting Standards in Note 3 of our condensed consolidated financial statements accompanying this Quarterly Report on Form 10-Q. RESULTS OF OPERATIONS Comparison of Results of Operations for the Three and Six Months Ended June 30, 2026 and 2025 Income from Equity Method Investment – Lab Services MSO As a result of the sale of our ownership of 40% of Lab Services MSO on February 26, 2025, we had no income from our investment in Lab Services MSO after February 2025. For the six months ended June 30, 2025, we had income from our investment in Lab Services MSO of $392,677, which consists of our share of Lab Services MSO’s net income of $503,833 and amortization of identifiable intangible assets acquired from Lab Services MSO acquisition of $111,156. Other Operating Expenses For the three and six months ended June 30, 2026 and 2025, other operating expenses consisted of the following : Three Months Ended June 30, Six Months Ended June 30, 2026 2025 2026 2025 Advertising and marketing expenses $ 105,271 $ 322,552 $ 315,117 $ 393,702 Professional fees 795,577 1,428,611 2,377,528 3,060,826 Compensation and related benefits 434,725 292,629 658,141 601,651 Credit loss expense - 1,650,000 - 1,650,000 Miscellaneous taxes 48,184 44,868 89,094 85,113 Directors’ and officers’ liability insurance premium 34,104 35,968 68,208 71,485 Travel and entertainment 28,601 38,321 61,696 82,982 Amortization 563,000 - 1,126,000 - Other general and administrative 42,417 95,567 77,221 140,857 $ 2,051,879 $ 3,908,516 $ 4,773,005 $ 6,086,616 ● For the three months ended June 30, 2026, advertising and marketing expenses decreased by $217,281, or 67.4%, as compared to the three months ended June 30, 2025. For the six months ended June 30, 2026, advertising and marketing expenses decreased by $78,585, or 20.0%, as compared to the six months ended June 30, 2025. The decrease was primarily due to decreased advertising activities in the three and six months ended June 30, 2026 as compared to the corresponding periods of 2025. We expect that our advertising and marketing expenses will likely remain at its current quarterly level with minimal increase in the near future. 37 ● Professional fees primarily consisted of accounting fees, audit fees, legal service fees, consulting fees, investor relations service charges, advisory service fees, fairness opinion charge, valuation service fees and other fees. For the three months ended June 30, 2026, professional fees decreased by $633,034, or 44.3%, as compared to the three months ended June 30, 2025, which was primarily attributable to a decrease in consulting fee of approximately $242,000, mainly due to the decrease in use of consulting service providers related to capital markets advisory and services related to our potential merger with YOOV, a decrease in accounting fee of approximately $372,000, mainly due to the decreased accounting services related to our potential merger with YOOV, and a decrease in legal service fees of approximately $120,000, mainly due to the decreased legal services related to our potential merger with YOOV, offset by an increase in other miscellaneous items of approximately $101,000. For the six months ended June 30, 2026, professional fees decreased by $683,298, or 22.3%, as compared to the six months ended June 30, 2025, which was primarily attributable to a decrease in consulting fee of approximately $260,000, mainly due to the decrease in use of consulting service providers related to capital markets advisory and services related to our potential merger with YOOV, a decrease in accounting fee of approximately $305,000, mainly due to the decreased accounting services related to our potential merger with YOOV, and a decrease in legal service fees of approximately $228,000, mainly due to the decreased legal services related to our potential merger with YOOV, offset by an increase in other miscellaneous items of approximately $110,000. We expect that our professional fees will decrease in the near future. ● For the three months ended June 30, 2026, compensation and related benefits increased by $142,096, or 48.6%, as compared to the three months ended June 30, 2025. The increase was primarily attributable to an increase in stock-based compensation of approximately $217,000 which reflected the value of options granted and vested to our management, offset by a decrease in cash compensation for our directors and officers of approximately $75,000. For the six months ended June 30, 2026, compensation and related benefits increased by $56,490, or 9.4%, as compared to the six months ended June 30, 2025. The increase was primarily attributable to an increase in stock-based compensation of approximately $215,000 which reflected the value of options granted and vested to our management in the second quarter of 2026, offset by a decrease in cash compensation for our directors and officers of approximately $159,000. We expect that our compensation and related benefits will likely decrease in the near future . ● For the three and six months ended June 30, 2025, we recorded credit loss expense of $1,650,000. Based on our periodic review of receivable from sale of equity method investment balance, we adjusted the allowance for credit loss after considering management’s evaluation of the collectability of the receivable balance, including the analysis of subsequent collection, age of the balance, Lab Services MSO’s collection history, and recent economic events. For the three and six months ended June 30, 2026, we did not record any credit loss expense. ● For the three months ended June 30, 2026, miscellaneous taxes increased by $3,316, or 7.4%, as compared to the three months ended June 30, 2025. For the six months ended June 30, 2026, miscellaneous taxes increased by $3,981, or 4.7%, as compared to the six months ended June 30, 2025. We expect that our miscellaneous taxes will remain relatively steady, with minimal increase, in the near future. ● For the three months ended June 30, 2026, directors’ and officers’ liability insurance premium decreased by $1,864, or 5.2%, as compared to the three months ended June 30, 2025. For the six months ended June 30, 2026, directors’ and officers’ liability insurance premium decreased by $3,277, or 4.6%, as compared to the six months ended June 30, 2025. The decrease was mainly due to our switching to a different insurance provider, resulting in a lower premium . ● For the three months ended June 30, 2026, travel and entertainment expense decreased by $9,720, or 25.4%, as compared to the three months ended June 30, 2025. For the six months ended June 30, 2026, travel and entertainment expense decreased by $21,286, or 25.7%, as compared to the six months ended June 30, 2025. The decrease was primarily attributable to decreased business travel activities in the six months ended June 30, 2026 as compared to the comparable periods of 2025 . ● For the three months ended June 30, 2026, amortization expense increased by $563,000, or 100.0%, as compared to the three months ended June 30, 2025. For the six months ended June 30, 2026, amortization expense increased by $1,126,000, or 100.0%, as compared to the six months ended June 30, 2025. The increase was attributable to increased amortization of identifiable intangible assets acquired, representing developed technology and trade name. There was no comparable amortization prior to the date of acquisition, December 12, 2025. ● Other general and administrative expenses mainly consisted of NASDAQ listing fee, office supplies, and other miscellaneous items. For the three months ended June 30, 2026, other general and administrative expenses decreased by $53,150, or 55.6%, as compared to the three months ended June 30, 2025. For the six months ended June 30, 2026, other general and administrative expenses decreased by $63,636, or 45.2%, as compared to the six months ended June 30, 2025. The decrease was due to our efforts at stricter controls on corporate expenditure. Loss from Operations As a result of the foregoing, for the three months ended June 30, 2026, loss from operations amounted to $2,051,879, as compared to $3,908,516 for the three months ended June 30, 2025, representing a decrease of $1,856,637, or 47.5%. As a result of the foregoing, for the six months ended June 30, 2026, loss from operations amounted to $4,773,005, as compared to $5,693,939 for the six months ended June 30, 2025, representing a decrease of $920,934, or 16.2%. 38 Other Expense Other expense mainly includes interest expense, change in fair value of derivative liability, loss on extinguishment of debt, and other miscellaneous income. Other expense totaled $126,933 for the three months ended June 30, 2026, as compared to $9,376,095 for the three months ended June 30, 2025, representing a decrease of $9,249,162, or 98.6%, which was primarily attributable to a decrease in interest expense of approximately $620,000, mainly driven by the decrease in amortization of debt discount and debt issuance costs of approximately $715,000, offset by the increase in interest expense of approximately $95,000 from debts, a decrease in loss on extinguishment of debt of approximately $9,077,000, and an increase in other income of approximately $112,000 mainly due to the gain from payable settlement, offset by a decrease in gain from change in fair value of derivative liability of approximately $560,000. Other expense totaled $1,782,487 for the six months ended June 30, 2026, as compared to $9,857,352 for the six months ended June 30, 2025, representing a decrease of $8,074,865, or 81.9%, which was primarily attributable to a decrease in interest expense of approximately $715,000, mainly driven by the decrease in amortization of debt discount and debt issuance costs of approximately $810,000, offset by the increase in interest expense of approximately $95,000 from debts, a decrease in loss on extinguishment of debt of approximately $9,077,000, and an increase in other income of approximately $5,000, offset by a decrease in gain from change in fair value of derivative liability of approximately $1,722,000. Income Taxes We did not have any income taxes expense for the three and six months ended June 30, 2026 and 2025 since we incurred losses in these periods. Net Loss from Continuing Operations As a result of the factors described above, our net loss from continuing operations was $2,178,812 for the three months ended June 30, 2026, as compared to $13,284,611 for the three months ended June 30, 2025, representing a decrease of $11,105,799, or 83.6%. As a result of the factors described above, our net loss from continuing operations was $6,555,492 for the six months ended June 30, 2026, as compared to $15,551,291 for the six months ended June 30, 2025, representing a decrease of $8,995,799, or 57.8%. Net Loss from Discontinued Operations Our net loss from discontinued operations was $0 for the three months ended June 30, 2026, as compared to $173,987 for the three months ended June 30, 2025, representing a decrease of $173,987, or 100.0%. Our net loss from discontinued operations was $103,015 for the six months ended June 30, 2026, as compared to $389,418 for the six months ended June 30, 2025, representing a decrease of $286,403, or 73.5%. Net Loss As a result of the factors described above, our net loss was $2,178,812 for the three months ended June 30, 2026, as compared to $13,458,598 for the three months ended June 30, 2025, representing a decrease of $11,279,786, or 83.8%. As a result of the factors described above, our net loss was $6,658,507 for the six months ended June 30, 2026, as compared to $15,940,709 for the six months ended June 30, 2025, representing a decrease of $9,282,202, or 58.2%. Net Loss Attributable to Change Agents Corporation Common Shareholders The net loss attributable to our common shareholders was $2,178,812, or $0.14 per share (basic and diluted), for the three months ended June 30, 2026, as compared to $13,458,598, or $6.22 per share (basic and diluted), for the three months ended June 30, 2025, representing a decrease of $11,279,786, or 83.8%. The net loss attributable to our common shareholders was $6,658,507, or $0.54 per share (basic and diluted), for the six months ended June 30, 2026, as compared to $15,778,236 (after taking into effect $162,473 in deemed contribution), or $8.33 per share (basic and diluted), for the six months ended June 30, 2025, representing a decrease of $9,119,729, or 57.8%. 39 Foreign Currency Translation Adjustment Our reporting currency is the U.S. dollar. The functional currency of our U.S. entities is the U.S. dollar and the functional currency of Avalon Shanghai is the Chinese Renminbi (“RMB”). The financial statements of our subsidiary whose functional currency is the RMB are translated to U.S. dollars using period end rate of exchange for assets and liabilities, average rate of exchange for revenues, costs, and expenses and cash flows, and at historical exchange rate for equity. Net gains and losses resulting from foreign exchange transactions are included in the results of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $(316) and a foreign currency translation gain of $104 for the three months ended June 30, 2026 and 2025, respectively. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $(627) and a foreign currency translation gain of $383 for the six months ended June 30, 2026 and 2025, respectively. This non-cash loss/gain had the effect of increasing/decreasing our reported comprehensive loss in each respective period. Comprehensive Loss As a result of our foreign currency translation adjustment, we had comprehensive loss of $2,179,128 and $13,458,494 for the three months ended June 30, 2026 and 2025, respectively. As a result of our foreign currency translation adjustment, we had comprehensive loss of $6,659,134 and $15,940,326 for the six months ended June 30, 2026 and 2025, respectively. Liquidity and Capital Resources We have a limited operating history and our continued growth is dependent upon the continuation of generating revenue for selling of Keto Air, generating revenue from advanced Agentic AI systems, including automated video generation and small business marketing automation, as well as obtaining additional financing to fund future obligations and pay liabilities arising from ordinary course business operations. In addition, the current cash balance cannot be projected to cover our operating expenses for the next twelve months from the release date of this report. These matters raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital, implement our business plan, and generate sufficient revenues. There are no assurances that we will be successful in our efforts to generate sufficient revenues, maintain sufficient cash balance or report profitable operations or to continue as a going concern. We plan to raise capital in the future through the sale of equity or debt to implement our business plan. However, there is no assurance these plans will be realized and that any additional financings will be available to us on satisfactory terms and conditions, if at all. Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations as they come due and otherwise operate on an ongoing basis. At June 30, 2026 and December 31, 2025, we had a cash balance of approximately $39,000 and $109,000, respectively. These funds are kept in financial institutions located as follows: Country: June 30, 2026 December 31, 2025 United States $ 39,145 99.8 % $ 108,599 99.5 % China 76 0.2 % 492 0.5 % Total cash $ 39,221 100.0 % $ 109,091 100.0 % The following table sets forth a summary of changes in our working capital deficit from December 31, 2025 to June 30, 2026: June 30, December 31, Changes in 2026 2025 Amount Percentage Working capital deficit: Total current assets $ 499,714 $ 1,495,877 $ (996,163 ) (66.6 )% Total current liabilities 4,593,051 14,147,114 (9,554,063 ) (67.5 )% Working capital deficit $ (4,093,337 ) $ (12,651,237 ) $ 8,557,900 (67.6 )% 40 Our working capital deficit decreased by $8,557,900 to $4,093,337 at June 30, 2026 from $12,651,237 at December 31, 2025. The decrease in working capital deficit was primarily attributable to a decrease in accrued professional fees of approximately $361,000 driven by the payments made to our professional service providers in the six months ended June 30, 2026, a decrease in accrued payroll liability and compensation of approximately $197,000 resulting from the payments made to our employees and directors in the six months ended June 30, 2026, a decrease in accrued liabilities and other payables of approximately $109,000 driven by the payments made to our vendors in the six months ended June 30, 2026, a decrease in advance from pending sale of subsidiary – related party of approximately $3,158,000 resulting from the sale of our subsidiary of Avalon RT 9 to Mr. Lu in February 2026 as described in elsewhere in this report, a decrease in bridge loan payable, net, of approximately $197,000 due to the repayments made to lender in the six months ended June 30, 2026, a decrease in convertible note payable, net, of approximately $737,000 mainly due to the conversion of our June 2024 Convertible Note in the principal amount of approximately $546,000 into our common stock in the six months ended June 30, 2026 and the repayments of principal of $200,000 made to two individual investors in the six months ended June 30, 2026, and a decrease in current liabilities of discontinued operations of approximately $6,061,000 driven by the sale of our subsidiary of Avalon RT 9 to Mr. Lu in February 2026 as described in elsewhere in this report, offset by a decrease in receivable from sale of equity method investment of $561,000 due to the payments received in the six months ended June 30, 2026, a decrease in current assets of discontinued operations of approximately $357,000 driven by the sale of our subsidiary of Avalon RT 9 to Mr. Lu in February 2026 as described in elsewhere in this report, and an increase in note payable, net, of approximately $1,189,000 resulting from our loan financing in the six months ended June 30, 2026. Because the exchange rate conversion is different for the condensed consolidated balance sheets and the condensed consolidated statements of cash flows, the changes in assets and liabilities reflected on the condensed consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the condensed consolidated balance sheets. Cash Flows for the Six Months Ended June 30, 2026 Compared to the Six Months Ended June 30, 2025 The following table summarizes the key components of our cash flows for the six months ended June 30, 2026 and 2025: Six Months Ended June 30, 2026 2025 Net cash used in operating activities from continuing operations $ (3,556,055 ) $ (2,788,804 ) Net cash provided by investing activities from continuing operations 315,393 95,000 Net cash provided by financing activities from continuing operations 3,360,816 277,636 Net cash flows used in discontinued operations (231,956 ) (173,555 ) Effect of exchange rate on cash – continuing operations 41,932 409 Net decrease in cash $ (69,870 ) $ (2,589,314 ) Net cash flow used in operating activities from continuing operations for the six months ended June 30, 2026 was $3,556,055, which primarily reflected our consolidated net loss from continuing operations of approximately $6,555,000, and the changes in operating assets and liabilities, primarily consisting of a decrease in accrued liabilities and other payables of approximately $407,000 which was mainly driven by payments made to our vendors in the six months ended June 30, 2026, offset by the non-cash item adjustments, primarily consisting of depreciation and amortization of intangible assets of approximately $1,127,000 mainly due to the amortization of identifiable intangible assets acquired, representing developed technology and trade name, in the six months ended June 30, 2026 as described in elsewhere in this report, stock-based compensation and service expense of approximately $703,000, amortization of debt issuance costs and debt discount of approximately $255,000, and change in fair market value of derivative liability of approximately $1,275,000. Net cash flow used in operating activities from continuing operations for the six months ended June 30, 2025 was $2,788,804, which primarily reflected our consolidated net loss from continuing operations of approximately $15,551,000, and the non-cash item adjustments, primarily consisting of income from equity method investment of approximately $393,000, and change in fair market value of derivative liability of approximately $447,000, and the changes in operating assets and liabilities, primarily consisting of an increase in prepaid expense and other assets of approximately $264,000 which was mainly due to the increase in prepaid professional fees of approximately $237,000, offset by an increase in accrued liabilities and other payables of approximately $1,296,000 which was mainly driven by the increase in professional services related to our potential merger with YOOV in the six months ended June 30, 2025, and the non-cash item adjustments, primarily consisting of credit loss provision of $1,650,000 due to the increase in allowance for credit loss related to our receivable from sale of equity method investment in the second quarter of 2025, stock-based compensation and service expense of approximately $762,000, amortization of debt issuance costs and debt discount of approximately $1,064,000, and loss on extinguishment of debt of approximately $9,077,000 resulted from the reduction in the conversion price. We expect our cash used in operating activities to increase in the next 12 months due to the following: ● the development and commercialization of new products; and ● an increase in public relations and/or sales promotions for existing and/or new brands as we expand within existing markets or enter new markets. 41 Net cash flow provided by investing activities from continuing operations was $315,393 for the six months ended June 30, 2026, as compared to $95,000 for the six months ended June 30, 2025. During the six months ended June 30, 2026, we received proceeds from sale of equity method investment of $561,000, offset by payments made for purchase of property and equipment of approximately $12,000 and for acquisition of software and platform of approximately $233,000. During the six months ended June 30, 2025, we received proceeds from sale of equity method investment of $95,000. Net cash flow provided by financing activities from continuing operations was $3,360,816 for the six months ended June 30, 2026, as compared to $277,636 for the six months ended June 30, 2025. During the six months ended June 30, 2026, we received net proceeds from issuance of debt of $1,520,000 (net of original issue discount of approximately $191,000 and cash paid for debt issuance costs of $44,000), net proceeds from the February 2026 private offering of approximately $2,757,000 (net of cash paid for the February 2026 private offering costs of approximately $493,000), offset by repayments made for bridge loan of $375,000, repayments made for convertible debt of $200,000, and repayments made for debt of approximately $341,000. During the six months ended June 30, 2025, we received proceeds from stock subscription of $150,000 and received advance from sale of noncontrolling interest in subsidiary of approximately $150,000, offset by payments made for offering costs of approximately $22,000. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term: ● an increase in working capital requirements to finance our current business; ● the use of capital for acquisitions and the development of business opportunities; and ● the cost of being a public company. In addition, the impact that the imposition of tariffs and changes to global trade policies could have on our results of operations is uncertain. We estimate that, based on current plans and assumptions, our available cash will be insufficient to satisfy our cash requirements under our present operating expectations through cash flow provided by operations and sales of equity. Other than funds received as described above and cash resources generated from our operations, we presently have no other significant alternative source of working capital. We have used these funds to fund our operating expenses, pay our obligations and grow our company. We will need to raise significant additional capital to fund our operations and to provide working capital for our ongoing operations and obligations. Therefore, our future operation is dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, there can be no assurance that financing will be available in amounts or on terms acceptable to the Company. Additionally, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will be required to cease our operations. To date, we have not considered this alternative, nor do we view it as a likely occurrence. Foreign Currency Exchange Rate Risk We ceased all operations in China in 2022, with the exception of a small administrative office. We did not during the six months ended June 30, 2026, and do not expect in the foreseeable future, to generate any additional revenue from PRC operations. Thus, exchange rate fluctuations between the RMB and the U.S. dollar do not, and are not expected to, have a material effect on us. For the three months ended June 30, 2026 and 2025, we had an unrealized foreign currency translation loss of approximately $(300) and an unrealized foreign currency translation gain of approximately $100, respectively, because of changes in the exchange rate. For the six months ended June 30, 2026 and 2025, we had an unrealized foreign currency translation loss of approximately $(600) and an unrealized foreign currency translation gain of approximately $400, respectively, because of changes in the exchange rate. Inflation The effect of inflation on our revenues and operating results was not significant for the three and six months ended June 30, 2026 and 2025. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As a “smaller reporting company”, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item. 42