Quarterly Report for Quarter Ending September 30, 2025 (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 nine months ended September 30, 2025 and 2024 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 2024 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 61 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 compared to other non-combusting technologies currently on the market.

Our low-temperature, aerosolizing technology is supported by 31 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.

We define our target market as the "international inhalation market," a market that includes herbal, pharmaceutical, medical, recreational and lifestyle products and ingredients. Industry experts, like Nielsen, Grand View Research, Fior Markets, updated published reports in 2024 and 2025 that we have consolidated; these consolidated estimates support that this is a $1.1 trillion USD annual market. The largest category within this market is the combustible tobacco market, comprising over 90% of the total. 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.

We believe our HnB technologies have applications to the international tobacco industry and the growing hemp/CBD and cannabis industries. HnBs represent the latest in tobacco and inhalable technologies, and it is likely to supplant the electronic vapor system (EVS) technologies that include e-cigarettes and electronic nicotine delivery systems. We believe HnBs, when properly designed, will avoid many of the issues that have proved troublesome for EVS', including thermal decomposition, heating irregularities and the formation and presence of high levels of acrolein and formaldehyde. In late 2019 Philip Morris International sought to introduce its HnB product to U.S. markets. This product, which was sold in more than 40 countries before entering U.S. markets, like other HnB technologies, is a device that heats a tobacco stick, rather than burning it, and testing by an independent accredited lab supports claims that the product can potentially reduce the number of noxious chemicals found in cigarette smoke by 95%. The Philip Morris product received the approval of the U.S. FDA in 2019, via both a Pre-market Tobacco Authorization ("PMTA") and in 2020 with a Modified Risk Tobacco Product ("MRTP") designation to market the product in the U.S.. However, the International Trade Commission ruled on September 29, 2021 that the Philip Morris product violated certain British American Tobacco patents and ruled that the Philip Morris product could not be imported to or sold in the U.S.. In 2023 Phillip Morris and British American Tobacco settled their patent litigation and the product is now being introduced into the U.S. market.

Since late 2019 we have focused our efforts on commercializing our HnB technology, by entering into international joint venture agreements that, when finalized, will pave the way for product introductions in Asia Pacific and for US tobacco consumable manufacturing, The U.S. consumable manufacturing will be supported by proprietary research and development and the completion of high speed manufacturing modules that are being manufactured by Montrade S.p.A., ("Montrade") a company based in Bologna, Italy. To further extend our product development in late 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 HNB device. We acquired 50% membership of CEL and hold the majority of the board seats including the chair. Pursuant to the establishment of CEL, we entered into an exclusive, worldwide License Agreement with CEL for designing, manufacturing a consumer device consistent with our IP. CEL is included in our consolidated financial statements.

Recent events, including changes in the leadership of relevant regulatory bodies, US required that we pause certain of our planned regulatory and product development activities, In the recent quarter ended we were advised that these matters had resolved to a great extent such that our product development and commercialization timelines have been modestly reset. Over the next 12 months we believe we can achieve key milestones that include entering into international joint ventures, preparing and filing certain regulatory submissions with the US FDA, and undertaking market tests in the EU, provided we are able to successfully raise and deploy additional capital. However, prolonged recessionary pressures on the international capital markets and uncertainty surrounding the timing and imposition of tariffs will make it more difficult for small, pre-revenue companies such as ours to raise capital. We continue to assess the impact of these events on our Company, and currently, we are unable to predict all possible impacts on our operations and future prospects.

Going concern

For the first nine months of 2025, we reported a consolidated net loss of $5,596,884 and net cash used in operations of $4,570,415 compared to a net loss of $7,600,197 and net cash used in operations of $2,067,595 for the first nine months of 2024. At September 30, 2025, we had cash on hand of $9,243,579 and an accumulated deficit of $40,344,015. The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2024, 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 nine months of 2025 or 2024.

Our total operating expenses for the three months ended September 30, 2025 decreased 78.7% over those reported for the same period in 2024. This decrease is primarily attributable to the issuance of 206,750 shares in exchange for professional services in the first nine months of 2024 that were valued at $4,135,000 which were not present in this same period in 2025. A decrease in general and administrative expenses of 11.6% further contributed to this decrease. An increase in research and development expenses of 26.7% offset some of this decrease with the increase in engineering services in the first three months of 2025 versus this same period in 2024.

For the first nine months of 2025 total operating expenses decreased 23.3% over those reported in the same period in 2024. The decrease is principally due to professional fees decreasing 35.0%. General and administrative expenses saw a 2.7% increase in the first nine months of 2025 compared to the first nine months of 2024, including increases to amortization expenses, marketing/brand development costs, rent, office expenses, travel and meals. Research and development costs in the first nine months of 2025 increased 18.0% over the first nine months of 2024. This increase was due to increased 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 September 30, 2025, we had $9,243,579 in cash and cash equivalents and a working capital surplus of $7,878,273 compared to $4,596,556 in cash and cash equivalents and a working capital surplus of $1,575,975 at December 31, 2024. Our current liabilities decreased $1,667,188 from December 31, 2024, reflecting a significant decrease in our accounts payable, accrued expenses and investor deposits with a slight increase in related party borrowing. Our source of operating capital in the first nine months of 2025 came from cash on hand at the end of 2024 of $4,596,556, the sale of 519,500 shares of common stock for gross proceeds of $10,390,000 of which $9,540,000 was received in the first nine months 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 $61,943 and earned interest of $259,044. Our source of operating capital in the first nine months of 2024 came from cash on hand at the end of 2023 of $350,565; $112,359 in borrowing from related parties; and $5,308,000 of proceeds from the sale of our common stock.

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. Management believes the currently available funding will be insufficient to finance the Company's operations for a year from the date of these consolidated financial statements and to satisfy our obligations as they become due.

In the first nine months of 2025 we repaid Xten Capital Group, a related party, $50,000 of the outstanding loan while in 2024 and 2023 we borrowed funds from Xten Capital Group, a related party. As a result, at September 30, 2025, we owed Xten $950,000. The loaned funds were used for working capital. In the first nine months of 2025 Liu Mei Chong loaned $61,943 to CQENS Electronics (Hong Kong) Limited. The funds are being used for working capital. As of September 30, 2025 we owe Liu Mei Chong $78,657. The loans are non-interest bearing and due upon demand. At September 30, 2025 and as of the date of this filing, we owe $1,028,657 to related parties while at September 30, 2024, we owed $1,000,000 to Xten Capital Group.

During the first nine months of 2025 we sold an aggregate of 519,500 shares of common stock to accredited investors for gross proceeds of $10,390,000 of which $9,540,000 was received in the first nine months of 2025 and $850,000 that was received as an investor deposit and included in cash on hand at the end of 2024. Proceeds from the sales are being used for working capital.

As of the date of this report, we still will need to raise $10,000,000 to $15,000,000 in additional capital during the next 12 months to achieve our goals. 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 over the next 12 months. In that event, our ability to continue as a going concern is in jeopardy.

Summary of cash flows

		September 30, 2025				September 30, 2024
Net cash (used) in operating activities		$	(4,570,415	)		$	(2,067,595	)
Net cash (used) in investing activities		$	(344,537	)		$	(228,896	)
Net cash provided by financing activities		$	9,561,943			$	5,720,359

Our cash used in operating activities increased 121.0% in the first nine months of 2025 compared to the first nine months of 2024. During these time periods, we primarily used the cash to fund our net losses.

In the first nine months of 2025, there was $344,537 net cash used in investing activities from the capitalization of our intellectual property compared to net cash used in investing activities of $228,896 in the same period in 2024 for capitalization of our intellectual property.

In the first nine months of 2025, we had net cash provided by financing activities of $9,561,943 from the sale of our common stock, investor deposits and borrowing from related parties. We had net cash provided by financing activities in the first nine months of 2024 of $5,720,359 from the sale of our common stock, investor deposits and 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. 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.