See accompanying notes to unaudited consolidated financial statements

VapAria CorporationCQENS Technologies Inc.

Consolidated Statement of Changes in Stockholders’ Deficit

For the nine months ended September 30, 2017

(Unaudited)

See accompanying notes to unaudited consolidated financial statements

VapAria Corporation

Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to unaudited consolidated financial statements

CQENS Technologies, Inc.

(Formerly VapAria CorporationCorporation)

Notes to Unaudited Consolidated Financial Statements

SeptemberJune 30, 20172020

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF BASIS OF PRESENTATION

Nature of Business

CQENS Technologies, Inc., formerly known as VapAria Corporation (“we”CQENS”, “us”, “we,” “our”, or the “Company”), was incorporated under the laws of the State of Delaware on December 21, 2009 under the name OICco Acquisition IV, Inc.

The Company is a specialty pharmaceuticaltechnology company engagedwith a proprietary method of heating plant-based consumable formulations that produce an aerosol that lead to the effective and efficient inhalation of the plant’s constituents. This is accomplished at a high temperature but without the accompanying constituents of combustion. Our system of heating is a high temperature, non-combustion system. Our Heat-not-Burn Tobacco Product (HTP) system is a patent-pending method of heating plant-based consumables for inhalation that is superior to other methods of ingestion, smoking, vaping, swallowing or via topical application.

In the first half of 2020 the effects of the COVID-19 pandemic began to be felt. While the duration and full impact of the pandemic is unknown at this time, we expect that the pandemic will adversely impact the Company in several ways. Our business model is dependent upon our ability to enter into strategic partnerships in the research, designfuture, including alliances with consumer product companies, to enhance and accelerate the development and commercialization of methodsour proposed products. We will also be dependent upon third party manufacturers to produce our proposed products, as well as third party marketing and medicantsdistribution companies. We believe that our business opportunities are international in nature and include potential partnerships in the UK, the EU and Asia, including the People’s Republic of China. The worldwide pandemic caused by COVID-19 could cause these opportunities to address chronic conditions with novel, vapor-centric approachesbe delayed or significantly limited in their scope should the pandemic continue and /or be prolonged into 2021. We also need to pain management, appetite suppression, smoking cessationraise additional working capital to provide sufficient funding to bring our proposed products to market. The adverse impact of COVID-19 on the capital markets will make it more difficult for small, pre-revenue companies such as ours to access capital. We will continue to assess the impact of the COVID-19 pandemic on our company, however, at this time we are unable to predict all possible impacts on our company, our operations and various sleep disorders.our prospects.

The Company has limited operations and, while our executive officers devote a substantial amount of their time to the Company, withoutwith limited cash compensation, as of SeptemberJune 30, 2017, we2020, had no employees.

The Company has a fiscal year end of December 31.

Basis of presentationPresentation

Basis of Presentation - The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows as of SeptemberJune 30, 20172020 have been made.

Certain information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the financial statements and footnotes thereto in the Company’s December 31, 20162019 audited financial statements contained in its Annual Report on Form 10K as filed with the Securities and Exchange Commission on April 17, 2017.statements. The results of operations for the period ended SeptemberJune 30, 20172020 are not necessarily indicative of the operating results for the full year.

Reclassifications– Certain reclassifications may have been made to our prior year’s consolidated financial statements to conform to current year presentation. These reclassifications had no effect on our previously reported results of operations or accumulated deficit.

Recent Accounting Pronouncements – Management has evaluated recently issued accounting pronouncements – No recent accounting standards issued or effective has had, or are expected to and does not believe that any of these pronouncements will have a materialsignificant impact on the Company’s consolidatedour financial statements.statements and related disclosures.

NOTE 2 – GOING CONCERN

The Company’s financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) applicable to a going concern. This contemplates the realization of assets and the liquidation of liabilities in the normal course of business. Currently, the Company has limitedrecurring losses, and although has cash in excess of one million dollars, with renewed research and development efforts and with no source of revenue sufficient to cover its operations costs over the next 12 months, the anticipated expenses and lack of current revenues may not allow it to continue as a going concern. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company will be dependent upon the raising of additional capital. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.

NOTE 3 – STOCKHOLDER’SSTOCKHOLDERS’ EQUITY

On January 29, 2020 we sold 248,448 shares of our common stock for $1,200,000 to a non-U.S. person in a private transaction in reliance on an exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on an exemption provided by Regulation S promulgated thereunder. We did not pay a commission or finder’s fee and are using the proceeds for working capital.

On March 6, 2020, the holder of the $50,000 note that was entered into on May 30, 2013 agreed to convert the principal and accrued unpaid interest totaling $76,917 into shares of CQENS’ common stock at $5.00 per share. A total of 15,384 shares were issued as satisfaction of this note. The issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Section 3(a)(9) of such act.

On April 13, 2020 we entered into a consulting engagement memorandum with an unrelated third party pursuant to which we engaged this party to identify key Asian resources for our company. As compensation for the services we issued this individual 12,423 shares of our common stock valued at $62,115. The recipient was a non-U.S. person and the issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Regulation S promulgated thereunder.

On April 16, 2020 we entered into a consulting engagement memorandum and agreement with an unrelated third party and engaged this individual to provide certain services to us in connection with the further development of certain of our patents. As compensation, upon execution, we issued this individual 10,000 shares of our common stock valued at $50,000 and are obligated to issue him an additional 10,000 shares at such time as additional patents are issued. The recipient was a non-U.S. person and the issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Regulation S promulgated thereunder.

On June 30, 2017, the Company paid an annual dividend1, 2020 we sold a total of 50,00082,818 shares of our common stock for $400,000 to six non-U.S. persons in private transactions. We did not pay a commission or finder’s fee and are using proceeds for working capital. The issuances were exempt from registration under the sole shareholder of our Series A Preferred Stock, Chong Corporation, a related entity.Securities Act in reliance on an exemption provided by Regulation S promulgated thereunder.

As of September 30, 2017, the Company had 75,260,000On June 4, 2020 we sold 165,632 shares of our common stock issuedfor $800,000 to a non-U.S. person in a private transaction. We did not pay a commission or finder’s fee and outstanding.are using the proceeds for working capital and reducing debt. The issuances were exempt from registration under the Securities Act in reliance on an exemption provided by Regulation S promulgated thereunder.

NOTE 4 – RELATED PARTY TRANSACTIONS

DuringEarly in the nine months ended September 30, 2017first half of 2020 the Company borrowed an aggregate of $131,000additional $2,500 from Chong Corporation,Xten Capital Group Inc. (“Xten”), a relatedcommon control entity. On June 24, 2020 the Company paid $250,000 to reduce the debt to Xten. The balance outstanding at SeptemberJune 30, 20172020 due Xten is $518,544.$455,544. The loan is unsecured, noninterest bearing and due on demand.

We maintain our corporate offices at 5550 Nicollet Avenue, Minneapolis, MN 55419. We lease the premises from 5550 Nicollet, LLC, an affiliatea company owned by Mr. Chong. In December 2019 we entered into a month-to-month lease that began January 1, 2020 with a monthly rental rate of Mr. Chong, having renewed$775. We have rented the lease for an additional 12-month term at an annual rentalspace continuously through the first six months of $9,180 with expiration on December 31, 2017. Rent was $6,885 for the nine-month period in 2017 compared to $6,750 in 2016.2020. As of SeptemberJune 30, 2017, $6,8852020, there is no outstanding balance for rent due to 5550 Nicollet LLC.

In the first half of 2020, pursuant to a verbal agreement, Xten provided research and development related expertise and services specific to HNB technologies, devices and intellectual property. Xten billed the Company $270,246 in research and development costs resulting from these activities during the first half of 2020. As of June 30, 2020, we have an accounts payable amount owing to Xten of $59,301 for these services.

NOTE 5 – NOTE PAYABLE

As of September 30, 2017,On May 20, 2013 the Company hasissued a note payable in the amount of $50,000 duenote to an individual. Theunrelated third party. On March 6, 2020, this note was issued on May 30, 2013 and bears eight per cent (8%) annual interest. It was extended to July 1, 2014, then to December 31, 2014, then to June 30, 2015, then to December 31, 2015, then June 30, 2016, to December 31, 2016 and then to August 31, 2017. The note was again amended in August 2017 to extendaccrued unpaid interest, upon agreement by the maturity date for bothnoteholder, were fully satisfied through the conversion of the principal and accrued interest totaling $76,917 into 15,384 common shares of our stock at a rate of $5.00 per share. No gain or loss was recognized from the conversion of this note to December 31, 2017.

The Company analyzed the modification of the term under ASC 470-60 “Trouble Debt Restructurings” and ASC 470-50 “Extinguishment of Debt”. The Company determined the modification is not substantial and the transaction should not be accounted for as an extinguishment of debt.Company’s common stock.

NOTE 6 – CONVERTIBLE NOTE

TheOn July 14, 2014 the Company assumed an unsecuredissued a $40,000 convertible note for $40,000to an unrelated third party that was originally issued on July 14, 2014 as part of the acquisition of VapAria Solutions. TheThis convertible note maturesmatured on December 31, 20172019. In February 10, 2020 we fully satisfied any and bears interest at 10% per annum. The note is convertible into shares of our common stock at $0.08 per share. The Company analyzed the conversion option in the notes for derivative accounting treatment under ASC Topic 815, “Derivatives and Hedging,” and determined that the instrument does not qualify for derivative accounting. The Company therefore performed an analysis to determine if the conversion option was subject to a beneficial conversion feature and determined that the instrument does not have a beneficial conversion feature.

The note was originally due on September 1, 2014. The Company entered into a note amendment on September 1, 2014 and the due date was extended to December 1, 2014. On December 1, 2014, the Company extended the note again to December 31, 2015. On December 31, 2015, the note was extended to July 31, 2016. On December 31, 2016, it was extended to August 31, 2017. On August 16, 2017 the note was extended to December 31, 2017. The Company analyzed the modificationall obligations of the term under ASC 470-60 “Trouble Debt Restructurings”convertible note through repayment of the principal and ASC 470-50 “Extinguishmentaccrued interest of Debt”. The Company determined the modification is not substantial and the transaction should not be accounted for as an extinguishment of debt.$62,323.

NOTE 7 – COMMITMENT AND CONTINGENCIES

Relating to the December 2013 License Agreement with Chong Corporation,Xten, a related party,common control entity, beginning in the calendar year in which the first licensed products or licensed services takes place, but not prior to January 1, 2015, the Company is required to pay to Chong Corporation, a related entity,Xten, a 3% royalty for revenues with a $50,000 annual minimum royalty commitment.

The December 31, 2013 agreementLicense Agreement with Chong CorporationXten also requires us to pay for the costs associated with maintaining the patent applications and patents licensed to us. For the ninesix months ended SeptemberJune 30, 2017, there were no reimbursable costs.2020 the Company paid $2,338 in legal fees versus the first six months of 2019 where Xten did not report that it incurred any costs associated with this December 2013 License Agreement.

Note 8 – SUBSEQUENT EVENTS

On June 17, 2020 the Company entered into a Stock Purchase Agreement with an unrelated stockholder pursuant to which it agreed to repurchase 21,430 shares of its common stock from the stockholder for $2,500. The Stock Purchase Agreement contained customary terms, including cross general releases. On August 10, 2020 the transaction closed. Following the closing of the transaction, the shares have been cancelled and returned to the status of authorized but unissued shares of common stock.

On July 17, 2020 we entered into a consulting engagement memorandum with an unrelated third party for the consultant’s guidance and expertise in identifying business opportunities, partners and other skilled consultants in the People’s Republic of China and/or other territories of Asia. As compensation for the services we issued this individual 12,423 shares of our common stock valued at $60,003. The recipient was a non-U.S. person and the issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Regulation S promulgated thereunder.

On July 17, 2020 we entered into a consulting engagement memorandum with an unrelated third party for the consultant’s guidance and expertise in identifying potential financiers, partners and other skilled consultants in the People’s Republic of China and/or other territories of Asia. As compensation for the services we issued this individual 6,212 shares of our common stock valued at $30,004. The recipient was a non-U.S. person and the issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Regulation S promulgated thereunder.

On July 29, 2020 we entered into an Amended and Restated Operating Agreement (the “Operating Agreement”) of Leap Technology LLC (“Leap Technology”) with Zong Group Holdings LLC (“Zong”) and Leap Management LLC (“LM”). Under the terms of the Operating Agreement and the related Contribution Agreement dated July 24, 2020 (the “Contribution Agreement”), the Company acquired a 55% membership interest in Leap Technology in exchange for the contribution of an exclusive, royalty-free license (the “License Agreement”) for the use in the Asia Pacific countries listed in the Contribution Agreement of certain of our intellectual property, patents pending and patents related to our heated tobacco product technology. It is expected that Leap Technology will form additional business entities to commercialize our propriety technology in those Asia Pacific countries which include China, India, Indonesia, Vietnam, the Philippines, Thailand, Malaysia, Singapore and Hong Kong. The goal of the joint venture is the market development of the Company’s intellectual property in the Asia Pacific region together with other initiatives and the formation business relationships with tobacco companies who operate in the Asia Pacific region.

Effective August 1, 2020 the Board of Directors approved annual salaries for its: (1) CEO, Alexander Chong, of $98,400 per annum; (2) COO, William Bartkowski, of $81,600 per annum; and (3) CFO, Daniel Markes, of $90,000 per annum.  To date the Company has not entered into any written employment agreements with the officers. These officers also received a biweekly cash payment consistent with their respective annual salary on July 15, 2020 and July 31, 2020 for services provided.

Item 2. 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 three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 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-lookingforward 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 Annual Report on Form 10-K for the year ended December 31, 2016,2019, 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.

Impact of COVID-19 on the Company

In the first half of 2020 the effects of the COVID-19 pandemic began to be felt. While the duration and full impact of the pandemic is unknown at this time, we expect that the pandemic will adversely impact CQENS in several ways. Our business model is dependent upon our ability to enter into strategic partnerships in the future, including alliances with consumer product companies, to enhance and accelerate the development and commercialization of our proposed products. We will also be dependent upon third party manufacturers to produce our proposed products, as well as third party marketing and distribution companies. We believe that our business opportunities are international in nature and include potential partnerships in the UK, the EU and Asia, including the People’s Republic of China. The worldwide pandemic caused by COVID-19 could cause these opportunities to be delayed or significantly limited in their scope should the pandemic continue and /or be prolonged into 2021. We also need to raise additional working capital to provide sufficient funding to bring our proposed products to market. The adverse impact of COVID-19 on the capital markets will make it more difficult for small, pre-revenue companies such as ours to access capital. We will continue to assess the impact of the COVID-19 pandemic on our company, however, at this time we are unable to predict all possible impacts on our company, our operations and our prospects.

Overview and plan of operations

We are a pre-clinical specialty pharmaceutical company. Prior to forming VapAria Solutions in 2010, our management had more than 25 years’ collective experience in vaporization and vapor delivery of medicants, having been partners in a joint venture with pioneerstechnology company involved in the industrydevelopment of proprietary and having had undertaken significant work internationally researchingpatentable methods for heating plant-based consumable formulations leading to the production of aerosols for safe, effective and developing products, shepherding them throughefficient inhalation of plant constituents. The technology, often called Heat Not Burn (“HNB”) accomplishes this by heating tobacco to produce an aerosol, but without the patent processaccompanying constituents of combustion. Our technology differs from other such technologies currently on the market because the CQENS System is a high-temperature, non-combustion system, unlike the low-temp, non-combustion systems available today. Current applications of the technology include tobacco, hemp-CBD and introducing them into the U.S. wholesalecannabis where non-combusting methods of preparation for inhalation are believed to be safer and retail supply chain.more effective.

Our initial goal wasAs previously disclosed, on December 31, 2019, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Xten, a related party, pursuant to leverage rightswhich we acquired certain intellectual property and other assets. Following the closing of the Asset Purchase Agreement, our business and operations are now focused on commercializing the CQENS System, a patent-pending method of inductively heating tobacco and other substances and ingredients that support reduced risk as a reduced risk product (RRP), given that the technology prevents combustion and prevents consumers from inhaling the dangerous byproducts of combustion. We believe that HNB technologies will be of great interest to the international tobacco industry and the growing hemp-CBD cannabis industries. HNBs represent the latest in December 2013 from an affiliatetobacco and inhalable technologies, and likely to developsupplant the electronic vapor system (EVS) technologies including e-cigarettes and successfully launch a product in partnership with well-capitalized and experienced industry participants based on our exclusive license and exclusive options to license patented and patent-pending technologies under the December 2013 Agreement and formulations designed to significantly improve on current electronic nicotine delivery systemssystems. We believe HNBs, if 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 the fall of 2019 Philip Morris International introduced its HNB product to U.S. markets. This product, which was sold in more than 40 countries before entering U.S. markets, like other consumer productsHNB technologies, is a device that heats a tobacco stick, rather than burning it, and testing supports claims that the product can potentially reduce the number of noxious chemicals found in cigarette smoke by 95%.

The CQENS System is supported by three patent applications, the most recent of these, a Patent Cooperation Treaty (PCT) patent application, was filed by Xten in January 2019. In May 2019 Xten was informed that the International Searching Authority (ISA) had completed its review of the PCT patent application and issued the International Search Report and Written Opinion relative to that application. The ISA found that 34 of the application’s 55 claims were patentable and the remaining 21 would also be patentable if successfully amended. On September 5, 2019, Xten filed a Chapter II Demand and Article 34 Amendments with the International Bureau of the World International Property Office (WIPO) as a part of what we expect will be a successful effort to obtain a favorable opinion for all of its claims. We have succeeded to these rights with our purchase of the Assets as described earlier in this report.

On July 24, 2020, we entered into the Operating Agreement of Leap Technology with Zong and LM. Under the terms of the Operating Agreement and the related Contribution Agreement, the Company acquired a 55% membership interest in Leap Technology in exchange for the contribution of an exclusive, royalty-free License Agreement for the use in the marketplace. Throughout 2016Asia Pacific countries listed in the Contribution Agreement of certain of our intellectual property, patents pending and into the third quarter of 2017, we have been engaged in substantive discussions with several international companies which have expressed interest inpatents related to our licensedheated tobacco product technology. It is expected that Leap Technology will form additional business entities to commercialize our propriety technology in pursuitthose Asia Pacific countries which include China, India, Indonesia, Vietnam, the Philippines, Thailand, Malaysia, Singapore and Hong Kong. The goal of this strategy. During the secondjoint venture is the market development of the Company’s intellectual property in the Asia Pacific region together with other initiatives and third quartersthe formation business relationships with tobacco companies who operate in the Asia Pacific region.

Under the terms of 2017, these discussionsthe Operating Agreement, there will be five managers of the Leap Technology, three of whom will be designated by the Company and two of whom will be designated by Zong. Zong and LM have involved demonstrationsjointly agreed to raise equity to fund the operations of our fully functional, programmable prototypesthe expected additional business entities to be formed by Leap Technology as well as using their best efforts to assist the Company in raising capital. In the event Zong and discussionsLM jointly fail to undertake their best efforts, as evidenced by failure to fulfill most of terms relatedtheir financial obligations under the Operating Agreement, the Company may exercise a right to licensing and product development agreements that would providerepurchase from Leap Technology the CQENS IP (as defined under the Operating Agreement) contributed under the Contribution Agreement for a combination of upfront payments and ongoing royalties. While no definitive agreements have been reached, our discussions continue with certain of these parties under standard non-disclosure agreements.nominal cash amount.

In mid-2015addition to the Leap Technology agreement, which anticipates an Asian market launch for certain embodiments of our technology, we adjustedalso expect to make progress in launching product embodiments in the EU and in preparing to submit certain product embodiments to the US FDA in order to secure a Premarket Tobacco Product Authorization (“PMTA”). Due to the development of our business focus owing to continuingplan and operations, we have determined that accelerated research, product development and design throughoutglobal launch objectives requires increased time and thus,involvement from our executive officers. These executive officers have agreed to take on their responsibilities with the Company on a full-time basis for cash compensation. Effective August 1, 2020 the Board of Directors approved annual salaries for its: (1) CEO, Alexander Chong, of $98,400 per annum; (2) COO, William Bartkowski, of $81,600 per annum; and (3) CFO, Daniel Markes, of $90,000 per annum.  To date we completedhave not entered into any written employment agreements with the officers. These officers also received a full design of a product embodiment basedbiweekly cash payment consistent with their respective annual salary on our proprietary technology, authorized the production of fully functional prototypesJuly 15, 2020 and are scheduling pre-clinical assessmentsJuly 31, 2020 for the prototypes. Inservices provided.

We raised $2,400,000 in capital in the first nine monthshalf of 2017 and 2016 we spent $51,261 and $95,172, respectively, in research and development costs related to these efforts. In addition to taking delivery2020 through the sale of our prototypes,common stock to non-U.S. Persons in the third quarter of 2016, we engaged an industry expert with 28 years of relevant experience to design IND-enabling studies that should take us from pre-clinical stage to clinical stage and make the FDA 505(b)(2) pathway to regulatory approval and commercialization available to us. Certain of the costs associated with these studies are included in our funding needs for the next 12 months described below. If we are unable to raise sufficient capital to fund these costs or we are unable to secure licensing and product development agreements that would provide for upfront payments, our ability to continue our commercialization efforts will be adversely impacted.

Our management, through the Chong Corporation, an affiliated entity that is the licensor of the intellectual property rights we acquired in December 2013 and January 2016, has built an extensive and robust portfolio of intellectual property that includes patented and patent-pending methods of vaporization and patented and patent-pending medicants and herbal remedies identified for their effectiveness and suitability to address the markets identified above. Historically we have relied upon related party loans that, as of September 30, 2017, totaled $518,544. Our management has worked without cash compensation. In the first nine months of 2017, the loan increased by $131,000, and these proceeds were used to pay expenses associated with research, development and design, patent protection prosecution activities and ordinary business expenses associated with identifying, meeting with and negotiating with potential business partners and our general operating expenses, including the payment of our obligations. If we are unable to secure licensing and product development agreements that would provide for upfront payments, we estimate that we will need to raise between $1 million and $2 million over the next 12 months to continue to implement our business plan.

In addition, if we are successful in securing licensing and product development agreements we expect that the structure of the possible future agreements would provide upfront payments.private transactions. We may also seek to raise the necessaryadditional capital through future public or private debt or equity offerings of our securities, although we do not have any commitments from any third parties to provide any capital to us. While we believe that the exclusive rights to the proprietary technology on which our business is predicated could provide us with a significant competitive advantage if we can bring one or more products to market, our ability to accomplish that in the near term is dependent on a successful prototype and positive pre-clinical assessments of the prototype. Given the current lack of a public market for our common stock, our status as a pre-clinical stage company and the difficulties small companies experience in accessing the capital markets, we expect to encounter difficulties in pursuing public or private capital raises. We may also seek to minimize our capital needs by securing partnerships or joint ventures with well capitalized companies in the pharmaceutical or OTC consumer products industries. Until such time as we are able to raise all or a portion of the necessary capital, our ability to continue to implement our business plan will be in jeopardy.

Going concern

For the first ninesix months of 20172020 we reported a net loss of $126,730$572,271 and net cash used in operations of $132,342$385,995 compared to a net loss of $183,268$49,448 and net cash used in operations of $167,456$35,885 for the first ninesix months of 2016.2019. At SeptemberJune 30, 2017,2020, we had cash on hand of $3,142$1,687,887 and an accumulated deficit of $1,539,279.$2,874,321. The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 20162019 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our minimal cash and no source of revenues which aremay not be sufficient to cover our operating costs. These factors, among others, despite the cash and cash equivalent amount on hand at the end of this quarter, raise substantial doubt about our ability to continue as a going concern.concern and pay our obligations as they become due over the next year. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. There are no assurances we will be successful in our efforts to raise additional capital, develop a source of revenues, report profitable operations or to continue as a going concern, in which event investors would lose their entire investment in our company.

Results of operations

We did not generate any revenues from our operations in either the 2017second quarter or 2016 periods.first half of 2020 or 2019. Our total operating expenses for the thirdsecond quarter of 20172020 and the ninesix months then ended decreased 25.5%increased 1,535.6% and 32.0%,1,162.3% respectively over those reported in the comparable 20162019 periods.

General and administrative expenses which include amortization, rent, and website hosting expenses, decreased 8.9%increased 1.0% in the thirdsecond quarter of 20172020 from the comparable period in 2016, and were essentially flat2019 but showed an overall increase of 731.7% for the first ninesix months of 2017 as comparedfrom the same period in 2019 due mainly to the first nine monthsaggregate of 2016.$100,000 bonus payments made to the Company’s management and some slight increases in amortization and office expenses.

Research and development expenses decreased 33.9% and 46.1% in the thirdsecond quarter 2017of 2020 were $139,790 as we work on variant prototypes. Comparatively, we had no research and development expenses in this same period in 2019. For the ninefirst six months then ended whenof 2020 our research and development expenses were $270,246 against no research and development in the first six months of 2019. Professional fees increased 1,242.1% in the second quarter of 2020 compared to the second quarter of 2019. The first six months of 2020 showed an increase in professional fees of 485.5% over the same periods in the prior year which is directly2019 timeframe. These increases are attributable to higherconsulting service fees and increased legal costs inprimarily due to the earlier periodsfiling of additional US and international patent applications related to prototype development. Professional fees declined by 15.0% in the third quarter of 2017 compared to the third quarter of 2016, and declined 19.8% for the nine months ended September 30, 2017 from the comparable period in 2016, both of which are directly attributable to higher legal fees in the earlier periods.

our HNB technology.

We do expect that our operating expenses will increase as we continue to develop our business and we devote additional resources towards promoting that growth, most notably reflected in anticipated increases in research and development, 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

Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. As of SeptemberJune 30, 2017,2020, we had $3,142$1,687,887 in cash and cash equivalents and a working capital surplus of $1,130,305 compared to $1,298 in cash and cash equivalents and a working capital deficit of $644,237, as compared to $4,484 in cash and cash equivalents and a working capital deficit of $530,620$856,012 at December 31, 2016.2019. Our current liabilities increased $110,928decreased $243,817 from December 31, 2016,2019, reflecting increasesthe retirement of debt and associated interest payable despite a significant increase in interestour accounts payable and in our accrued expenses. Our source of operating capital in the loan amountfirst half of 2020 came from a related party while partially offset bythe sale of 496,898 shares of our decreasecommons stock raising $2,400,000 in accounts payable. Ourcapital compared to the same period in 2019 where our sole source of operating capital during the first nine months of 2017 came from additional borrowingborrowings from a related party which lentloaned us an additional $131,000.$37,000.

We do not have any commitments forThe ability of the Company to continue as a going concern is dependent upon the Company obtaining adequate capital expenditures. Our working capitalto fund operating losses until it becomes profitable. As the company is not sufficientgenerating revenues, continued activities and expenditures to fund ourbring 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 at leasta year from the next 12 monthsdate of these financial statements and to satisfy our obligations as they become due. On August 31, 2017,

In February 2020, the holder$40,000, principal amount, convertible note was fully satisfied through the repayment of aboth the principal and accrued unpaid interest totaling $62,323. In March 2020, the $50,000, principal amount, note agreed to the extension of the due date of the note from August 31, 2017 to December 31, 2017. The remaining note inpayable was fully satisfied when both the principal amount of $40,000 is convertibleand accrued unpaid interest totaling $76,917 were converted into 500,00015,384 shares of our common stock at the option of the holder and has now been extended to December 31, 2017. While there are no assurances the holder will elect to convert the note, in that event$5.00 per share. At June 30, 2020 we granted the holder demand and piggyback registration rights for those shares. If we are unable to repay the notes at year end 2017, we anticipate that the holders will extend under the terms and conditions of earlier extensions, but there are no agreements to do so at the time of this filing. We also owe a related party $518,544$455,544 which is due on demand. We do not have

While we raised $2,400,000 from the funds necessary to repay these obligations or to fundsale of our securities during the costs associated with filing a registration statement if the noteholder converts the note and exercises its registration rights. As described earlier in this report,first half of 2020, we still will need to raise between $1,000,000 and $2,000,000 to $3,000,000 in additional capital during the next 12 months if we are unable to secure licensing and product development agreements.months. As we do not have any firm commitments for all or any portion of this necessary capital, there are no assurances 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.due over the next 12 months. In that event, our ability to continue as a going concern is in jeopardy.

Net Cash Used in Operating ActivitiesSummary of cash flows

WeOur cash used $132,342 of cash in our operating activities duringincreased 975.6% in the first ninesix months of 2017 as2020 compared to $167,456 used by our operating activities for the first ninesix months of 2016. The higher levels reported in 2016 were due2019. During these time periods we used the cash primarily to costs associated with the initial development offund our prototypes.net losses.

Net Cash Provided by (Used in) Investing Activities

There was noDuring the first six months of 2020 net cash provided by (used in)financing activities consisted primarily of $2,400,000 raised from the sale of 496,898 shares of our common stock, repayment and satisfaction in full of the convertible note of $40,000, borrowing of $2,500 and repayment of $250,000 of debt to Xten, a common control entity compared to net cash from $37,000 of additional borrowings in the first six months of 2019 from Xten.

In the first half of 2020 net cash used in investing activities consisted of the capitalized intellectual property legal services in either the first nine monthsamount of 2017 or 2016.$39,916 compared to no cash used in investing activities during this same period in 2019.

Net Cash Provided by Financing Activities

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 revenue recognition, accounts receivable allowances and impairment of long-lived assets. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our audited consolidated financial statements for 20162019 appearing in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 17, 2017.

Recent accounting pronouncements

The Company has implemented all new relevant accounting pronouncements that are in effect through the date of these financial statements. The pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its consolidated financial position or results of operations.2019 10-K.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable for a smaller reporting company.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

We maintain “disclosure controls and procedures” as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective to ensure that the information relating to our company required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure due to the presence of continuing material weakness in our internal control over financial reporting as reported in our Annual Report on Form 10-K for the year ended December 31, 2016.2019 10-K. These material weaknesses in our internal control over financial reporting result from limited segregation of duties and limited multiple level of review in the financial close process.

The existence of the continuing material weaknesses in our internal control over financial reporting increases the risk that a future restatement of our financials is possible. In order to remediate these material weaknesses, we will need to expand our accounting resources. We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal control over financial reporting on an ongoing basis, however, we do not expect that the deficiencies in our disclosure controls will be remediated until such time as we have remediated the material weaknesses in our internal control over financial reporting. Subject to the availability of sufficient capital, we expectWe had expected to expand our accounting resources duringin 2018, which was subsequently delayed into 2019 and has now been delayed into 2020. Given the next 12uncertainties with our ability to 18 monthsraise working capital as discussed earlier in an effortthis report, there are no assurances we will be able to remediate the material weaknesses in our internal control over financial reporting.reporting during 2020.

Changes in Internal Control over Financial Reporting.

There have been no changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II- – OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

In addition to the other information set forth in this report you should carefully consider the risk factors discussed in Part I, Item 1A in our Annual Report on Form2019 10-K for the year ended December 31, 2016 and our subsequent filings with the Securities and Exchange Commission, which could materially affect our business, financial condition or future results. These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the Securities and Exchange Commission.

Leap Technology is a newly formed entity with no operating history.

As disclosed earlier in this report, in July 2020 we became a member of Leap Technology through the contribution of a license for certain of our intellectual property. Leap Technology is a newly formed entity with no operating history and its operations are subject to all the risks inherent in the establishment of a new business enterprise. The likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays that are frequently encountered in a newly-formed company. There can be no assurance that at this time that Leap Technology will be able to implement its business plan, generate revenues, operate profitably or will have adequate working capital to meet its obligations as they become due. Prospective investors must consider the risks and difficulties frequently encountered by early stage companies, particularly in rapidly evolving markets. We cannot be certain that Leap Technology’s business strategy will be successful or that it will successfully address these risks. In the event that Leap Technology does not successfully address these risks, its business, prospects, financial condition, and results of operations could be materially and adversely affected and it may not have the resources to continue or expand our business operations. In that event, any benefits we expect to receive from Leap Technology would not materialize.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None. None, except as otherwise previously disclosed, we have not issued any unregistered securities during the period covered by this report.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable to our company’s operations.

Item 5. Other Information.

On August 16, 2017,June 17, 2020 the holder ofCompany entered into a $40,000 principal amount convertible noteStock Purchase Agreement with an unrelated stockholder pursuant to which it agreed to repurchased 21,430 shares of its common stock from the extensionstockholder for $2,500. The Stock Purchase Agreement contained customary terms, including cross general releases. On August 10, 2020 the transaction closed. Following the closing of the due date oftransaction, the note from August 31, 2017 to December 31, 2017;shares have been cancelled and on August 31, 2017, the holder of a $50,000 principal amount note agreedreturned to the extensionstatus of the due dateauthorized but unissued shares of the note from August 31, 2017 to December 31, 2017.common stock.

Item 6. Exhibits.