Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations for the six months ended June 30, 2026 and 2025 should be read in conjunction with the unaudited consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under "Cautionary Statements Regarding Forward-Looking Information" appearing earlier in this report, Part I. Item 1A. Risk Factors appearing in our 2025 10-K, and our other filings with the Securities and Exchange Commission. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report.

Overview

We are a technology company. We design and develop innovative methods to heat plant-based and/or medicant-infused formulations to produce aerosols for the efficient and efficacious inhalation of the plant and medicant constituents contained therein. We have two ways of accomplishing this: 1) at high temperatures via induction without combustion or the constituents of combustion; and 2) at low temperatures, where we heat an inert carrier, producing inhalable, medicant-infused aerosols while maintaining the integrity of the active ingredient(s).

Our high-temperature non-combusting technology is supported by 88 U.S. and international patents and pending patents. Among the applications of our patented and patent-pending technology are those for Heat-not-Burn ("HnB") devices. Independent tests performed by an accredited lab on our system's prototypes supported the benefits of rapid heating, confirmed non-combustion, even at high temperatures, and produced better toxicology results, greater than 99% better, when compared to products requiring combustion. And when compared to other non-combusting technologies currently on the market, our results were superior.

Our low-temperature, aerosolizing technology is supported by 23 U.S. and international patents and pending patents. This portfolio includes intellectual property around device designs and formulations containing a wide variety of herbal and pharmaceutical preparations. The development stage devices feature the ability to verify the user, validate the medicant or pharmaceutical preparation and measure, meter and monitor the proper, prescribed dosage.

Today, we define one of our target markets as the world-wide combustible tobacco market. Grand View Research, a global leader in market reports and industry statistics, estimates that the global tobacco market size was USD 926.0 billion in 2025, and is projected to reach USD 1,144.2 billion in 2033, growing at a CAGR of 2.7% from 2026 to 2033. Our near-term focus is on the heated, non-combusting modified risk tobacco segment which we believe represents our greatest opportunity for growth and the greatest opportunity to positively impact public health and wellness.

On August 17, 2021, we entered into a Joint Venture Agreement (the "JV Agreement") with Firebird Manufacturing, LLC ("Firebird"), a Barker Group company. Under the terms of the JV Agreement the parties have agreed to organize, negotiate, and establish a limited liability company joint venture entity (the "Joint Venture Entity") for the purposes of developing, manufacturing, and distributing HnB products in the United States. The Joint Venture Entity will be owned equally by Firebird and the Company. Firebird will be responsible for manufacturing the consumable and distributing both the device and consumables to the retail locations where the product can be lawfully sold in the United States.

Formation of the Joint Venture Entity is subject to formalizing and executing the Joint Venture Operating Agreement and additional agreements, including a license agreement for the use of intellectual property, certain product development agreements, supply agreements and such other agreements as may be necessary to further the purpose of the JV Agreement. The parties anticipate completing the relevant agreements in 2026 although there are no assurances that the parties will complete and formalize these agreements.

On July 13, 2022, the Company entered into a manufacturing contract with Montrade S.p.A., ("Montrade"), an industry leading designer and manufacturer of machines for a wide range of products, including heated tobacco products (HTP), based in Bologna, Italy, for the manufacture and installation of our proprietary HTP consumables manufacturing equipment. The Company made an initial payment of $589,265. The equipment is completed and is in final assembly testing. On June 30, 2026, the balance owing for construction, installation, travel and training is $291,470.

On June 3, 2025, CQENS entered into an additional agreement with Montrade for the development, manufacture, delivery and installation of a higher volume machine to manufacture consumables for the Company's proprietary, patented and patent pending HnB system. We made an initial down payment of $1,016,531 on June 4th, 2025. The design phase was completed in November 2025 and we paid the balance for this phase in December 2025 expensing a total of $302,299 for the design phase. On June 30, 2026, the balance remaining under this Agreement is $1,839,348.

On December 20, 2023, we entered into a Shareholder Agreement with Asahi Corporation to establish CQENS Electronics (Hong Kong) Limited ("CEL"), a Hong Kong company, for design, development and manufacture of our heat-not-burn device. CQENS acquired 50% membership of CEL and holds majority of the board seats including the chair. Pursuant to the establishment of CEL, CQENS entered into an exclusive, worldwide license agreement with CEL for designing, manufacturing a consumer device consistent with our IP.

In October 2025, we set-up a research and development operation in Shenzhen, China to support our US-based research and development efforts and to take our prototype device through the design for manufacturability for mass manufacturing. In November 2025, we secured a facility and entered into a two-year lease agreement with fixed rent for the term of the lease. The monthly rent is approximately $4,878 USD per month. In January 2026, we formed Shenzhen CQENS, a wholly owned foreign entity in China, for these research and development activities in Shenzhen China.

As the largest category within the global inhalation market is the combustible tobacco market, comprising over 90% of the total inhalation market, our near-term focus is on this segment, which represents the greatest opportunity for growth and the greatest opportunity to positively impact public health and wellness. To this end we have added three critical senior executives to our management team with decades of experience in the tobacco and next-generation sectors filling our Chief Operating Officer, Chief Commercial Officer and Chief Technical Officer roles. Their experience is extensive and includes executing global commercial strategy; development and scaling of reduced-risk product portfolios across multiple international markets; machinery and manufacturing solutions in the tobacco and next generations product sectors.

Further, we have assembled a team of engineers in Shenzhen, China to work closely with our US-based research and development engineering team and our Hong Kong based joint venture entity, CQENS Electronics (Hong Kong) Limited, to complete the design for manufacturability of our launch products. And with our Hong Kong JV are working to secure national and international certification markings.

Our joint venture partner in Hong Kong has sourced and secured suppliers for the device components, completed the tooling and is focused on the production process for mass manufacturing of our devices.

US-based Firebird is in the midst of construction of a new and much larger facility where the consumable manufacturing production line equipment will be installed for the mass production of our consumables.

We have retained the services of a related party, Plexus Corporation, to consult with us in the design and development of our quality management systems within our corporate office and throughout our joint ventures and reaching to our suppliers and will work to ensure the manufacturing facilities are GMP compliant.

We have retained Jefferies, a leading investment banker and capital markets firm, to explore the opportunities to secure a long-term strategic partnership or to secure the capital resources necessary to successfully commercialize our products. We have also retained Munger, Tolles and Olsen LLP who will assist in the negotiation process. We have not identified any opportunities as of the date of this report.

We have retained McKinney Regulatory Science Advisors LLC to consult, conduct trials and testing, and assist us as we navigate through the PMTA process.

We have met with the FDA and we believe we have received clear guidance on a path forward for conducting clinical trials.

Going concern

For the first six months of 2026, we reported a consolidated net loss of $2,794,479 and net cash used in operations of $2,168,962 compared to a net loss of $4,447,724 and net cash used in operations of $2,106,829 for the first half of 2025. At June 30, 2026, we had cash on hand of $6,712,279 and an accumulated deficit of $50,541,857. The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2025, contains an explanatory paragraph regarding our ability to continue as a going concern based upon our recurring losses and no source of revenues which are sufficient to cover our operating costs. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Results of operations

We did not generate any revenues from our operations in the first six months of 2026 or 2025.

Our total operating expenses for the three months ended June 30, 2026 decreased 29.4% over those reported for the same period in 2025. This is attributable to an increase of 77.6% in general and administrative expenses, a decrease of 7.0% in research and development and a 63.3% decrease in professional fees. General and administrative expenses increased as a result of increases in compensation expense, travel, office expenses and amortization. Research and development costs decreased as fewer engineering hours were utilized in the second quarter of 2026. The decrease in professional fees in the second quarter of 2026 versus the same period in 2025 is primarily due to the cost associated with the stock options issuance in 2025 that was not incurred in the second quarter of 2026.

For the first six months of 2026 total operating expenses decreased 37.9% over those reported in the first half of 2025. The decrease is principally due to professional fees decreasing 68.9% where the first half of 2025 saw consulting fees for PMTA and QMS related work, along with higher auditing and attorney fees and the cost of issuing stock options. General and administrative expenses saw a 53.2% increase in the first half of 2026 compared to the first half of 2025, including increases to amortization expenses, marketing/brand development costs, rent and office expenses, travel and meals. Research and development costs in the first half of 2026 increased 11.7% over the first half of 2025. This increase was due to a slight increase in engineering and consulting services relating to product design and development work.

We expect that our operating expenses will increase as we continue to develop and grow our business and we devote additional resources toward our new technologies and business opportunities, promoting that growth, most notably reflected in anticipated increases in general overhead, salaries for personnel and technical resources, as well as increased costs associated with our SEC reporting obligations. However, as set forth elsewhere in this report, our ability to continue to develop our business and achieve our operational goals is dependent upon our ability to raise significant additional working capital. As the availability of this capital is unknown, we are unable to quantify at this time the expected increases in operating expenses in future periods.

Liquidity and capital resources

As of June 30, 2026, we had $6,712,279 in cash and cash equivalents and a working capital surplus of $5,007,011 compared to $8,914,107 in cash and cash equivalents and a working capital surplus of $7,427,664 at December 31, 2025. Our current liabilities increased $127,289 from December 31, 2025, reflecting an increase in our accrued expenses and related party borrowing tempered by decreases in accounts payable and the current portion of our lease liability. Our source of operating capital in the first six months of 2026 came from cash on hand at the end of 2025 of $8,914,107, the sale of 9,000 shares of common stock for gross proceeds of $180,000, borrowing from a related party of $229,074, and earned interest of $93,759. Our source of operating capital in the first six months of 2025 came from cash on hand at the end of 2024 of $4,596,556; the sale of 518,500 shares of common stock for gross proceeds of $10,370,000 of which $9,520,000 was received in the first half of 2025 and $850,000 that was received as an investor deposit and included in cash on hand at the end of 2024, borrowing from a related party of $59,924, and earned interest of $183,553.

The ability of the Company to continue as a going concern is dependent upon the Company obtaining adequate capital to fund operating losses until it becomes profitable. As the company is not generating revenues, continued activities and expenditures to bring product(s) to market as soon as we are able is important.

In the first six months of both 2026 and 2025, we repaid Xten Capital Group, a related party, $50,000 of the outstanding loan. As of June 30, 2026, we owed Xten $850,000. In the first half of 2026, CQENS Electronics (Hong Kong) Limited ("CEL") borrowed $503 from Ann Liu while in the first half of 2025 CEL borrowed $59,924. As of June 30, 2026 CEL owes Ann Liu $79,220. In the first half of 2026 CEL borrowed $140,257 from Asahi, our joint venture partner in Hong Kong while CEL did not borrow any funds from Asahi in the same period in 2025. As of June 30, 2026, CEL owes Asahi $197,124. In the first six months of 2026, we borrowed $88,314 from Tianyang Zhang, a related party in our Shenzhen operations while we did not borrow any funds from Mr. Zhang in the same period of 2025. As of June 30, 2026, we owe Mr. Zhang $306,765. As of June 30, 2026, we owe Xinjie Liu $7,828 from borrowing that occurred in the latter part of 2025. There was no borrowing from Mr. Liu in the first half of 2026 or 2025. Each of the loans are non-interest bearing and due upon demand and we are using the funds for working capital. At June 30, 2026 and as of the date of this filing, we owe an aggregate of $1,440,937 to related parties.

As of the date of the filing of this report there is no assurance we will have sufficient funds for commercialization of any products. There is no assurance we will have sufficient funds due to circumstances beyond our control including regulatory changes, delays or additional regulatory requirements.

We will need to raise $10,000,000 to $15,000,000 in additional capital to fund operations beyond the next 12 months. There is no assurance we will have sufficient funds to fund our operating expenses and continued development of our products and to satisfy our obligations as they become due beyond the next 12 months. In that event, our ability to continue as a going concern is in jeopardy.

Summary of cash flows

		June 30, 2026				June 30, 2025
Net cash (used) in operating activities		$	(2,168,962	)		$	(2,106,829	)
Net cash (used) in investing activities		$	(397,296	)		$	(1,973,321	)
Net cash provided by financing activities		$	359,074			$	9,529,924

Our cash used in operating activities increased 2.9% in the first six months of 2026 compared to the first six months of 2025. During these time periods, we primarily used the cash to fund our net losses.

In the first half of 2026, there was $397,296 net cash used in investing activities from the capitalization of our intellectual property, along with additions to other intangible assets, construction-in-progress asset and property plant and equipment compared to net cash used in investing activities of $1,973,321 in the same period in 2025 for capitalization of our intellectual property and increases to equipment under construction.

In the first half of 2026, we had net cash provided by financing activities of $359,074 from the sale of our common stock and net borrowing from related parties. We had net cash provided by financing activities in the first half of 2025 of $9,529,924 from the sale of our common stock and net borrowing from related parties.

Critical accounting policies

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to impairment of long-lived assets. We also have other key accounting policies, none of these policies are deemed to be critical accounting policies or critical estimates.

Off balance sheet arrangements

As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.