UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

(Mark One)

 

 [X][X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020

For the quarterly period ended March 31, 2021    

 

or

 

[  ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission file number 000-55470

For the transition period from ___________ to _____________

Commission file number 000-55470

 

CQENS Technologies Inc.

(Exact name of registrant as specified in its charter)

 

Delaware 27-1521407

(State or other jurisdiction of


incorporation or organization)

 

(I.R.S. Employer


Identification No.)

5550 Nicollet Avenue, Minneapolis, MN 55419
(Address of principal executive offices) (Zip Code)

 

(612) 812-2037

(Registrant’s telephone number, including area code)

 

not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
None not applicable not applicable

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]Accelerated filer [  ]
Non-accelerated filer [X]Smaller reporting company [X]
Emerging growth company [X][  ] 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 25,369,11325,540,544 shares of common stock are issued and outstanding as of August 14, 2020.May 7, 2021.

 

 

 

 

 

TABLE OF CONTENTS

 

  Page No.
 PART 1 – FINANCIAL INFORMATION 
   
Item 1.Financial Statements (Unaudited).45
Item 2.Management Discussion and Analysis of Financial Condition and Results of Operations.1112
Item 3.Quantitative and Qualitative Disclosures About Market Risk.1416
Item 4.Controls and Procedures.1416
   
 PART II – OTHER INFORMATION 
   
Item 1.Legal Proceedings.1517
Item 1A.Risk Factors.1517
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.1517
Item 3.Defaults upon Senior Securities.1517
Item 4.Mine Safety Disclosures.1517
Item 5.Other Information.1518
Item 6.Exhibits.1618

 

2

  

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

 

This report includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:

 

 financial risks, including:

our history of losses, lack of revenues and insufficient working capital;
 our ability to continue as a going concern;
 
the possible impact of COVID-19 on our company;

 our ability to raise capital to fund our business plan, pay our operating expense and satisfy our obligations;risks, including:

 our limited operating history and lack of developed, proven or launched products;
 
the lack of operating history of Leap Technology LLC (“Leap Technology”) and the risks it will face as a new business venture;
LLC;
 potential conflicts of interest facing certain of our officers and directors;
management;
 future reliance on third parties to formulate and manufacturer our products;
parties;
 our future ability to comply with government regulations;
potential FDA oversight;
 our lack of experience in selling, marketing orand distributing products;
experience;
 our future abilitypossible inability to establish and maintain strategic partnerships;
 
our possible future dependence on licensing or collaboration agreements;

 the inability of Xten Capital Group Inc., formerly Chong Corporation (“Xten”),risks relating to protect the intellectual property which is licensed to us, and risks of possible third-party infringement of intellectual property rights;our common stock, including:

 the lack of a public market for our common stock; and
 
possible impact of Delaware’s anti-takeover provisions of Delaware law.statutes on our shareholders.

You should read thoroughly this report and the documents that we refer to herein with the understanding that our actual future results may be materially different from and/or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements, Part 1. Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 20192020 as filed on April 10, 202015, 2021 (the “2019“2020 10-K”) and our other filings with the Securities and Exchange Commission. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

 

OTHER PERTINENT INFORMATION

 

Unless specifically set forth to the contrary, when used in this report the terms “CQENS,” “we,” “our,” “us,” and similar terms refers to CQENS Technologies Inc., a Delaware corporation formerly known as VapAria Corporation and, where applicable, VapAria Solutions Inc., a Minnesota corporation (“VapAria Solutions”), a wholly owned subsidiary of CQENS. In 2019 we dissolved VapAria Solutions which had no separate operations, assets or liabilities.corporation. In addition, “second“first quarter of 2021” refers to the three months ended March 31, 2021, “first quarter of 2020” refers to the three months ended June 30,March 31, 2020, “second quarter 2019” refers to the three months ended June 30, 2019, “2019”“2020” refers to the year ended December 31, 2019,2020, and “2020”“2021” refers to the year ending December 31, 2020.2021. The information which appears on our web site at www.cqens.com is not part of this report.

All share and per share information appearing in this report gives pro forma effect to the one for seven (1:7) reverse stock split of our outstanding common stock on December 26, 2019.

3

PART 1 – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

CQENS Technologies, Inc.

Balance Sheets

 

 June 30, 2020 December 31, 2019  March 31, 2021 December 31, 2020 
 (Unaudited)    (Unaudited)   
ASSETS                
Current Assets                
Cash and cash equivalents $1,687,887  $1,298  $749,503  $589,153 
Prepaid expenses  57,464   1,553   53,053   59,396 
Total Current Assets  1,745,351   2,851   802,556   648,549 
Equipment, net  189,320   193,804 
Intellectual property, net  320,790   290,346   674,786   643,216 
TOTAL ASSETS $2,066,141  $293,197  $1,666,662  $1,485,569 
LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)        
LIABILITIES & STOCKHOLDERS’ EQUITY        
LIABILITIES                
Current Liabilities                
Accounts payable $60,857  $10,722  $39,111  $44,202 
Credit card payable  508   - 
Accrued expenses  98,137   6,865   42,689   36,671 
Interest payable  -   48,232 
Note payable  -   50,000 
Convertible note  -   40,000 
Loan from related party  455,544   703,044   255,544   255,544 
Total Current Liabilities  615,046   858,863   337,344   336,417 
TOTAL LIABILITIES  615,046   858,863   337,344   336,417 
STOCKHOLDERS’ EQUITY (DEFICIT)        
Common Stock: $0.0001 par value; 200,000,000 shares authorized: 25,371,908 shares issued and outstanding at June 30, 2020 and 24,837,203 issued and outstanding at December 31, 2019  2,537   2,484 
STOCKHOLDERS’ EQUITY        

Preferred Stock: $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding at March 31, 2021 and December 31, 2020

  

-

   

-

 
Common Stock: $0.0001 par value; 200,000,000 shares authorized: 25,469,114 shares issued and outstanding at March 31, 2021 and 25,397,685 issued and outstanding at December 31, 2020  2,547   2,540 
Additional paid-in capital  4,322,879   1,733,900   7,980,314   5,990,194 
Accumulated deficit  (2,874,321)  (2,302,050)  (6,653,543)  (4,843,582)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)  1,451,095   (565,666)
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT) $2,066,141  $293,197 
TOTAL STOCKHOLDERS’ EQUITY  1,329,318   1,149,152 
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY $1,666,662  $1,485,569 

 

See accompanying notes to unaudited financial statements

4

CQENS Technologies, Inc.

Statements of Operations

(Unaudited)

 

  Three months ended June 30,  Six months ended June 30, 
  2020  2019  2020  2019 
Operating Expenses                
General and administrative $7,005  $6,936  $116,551  $14,013 
Research and development - related party  139,790   -   270,246   - 
Professional fees  152,476   11,361   181,616   31,018 
Total Operating Expenses  299,271   18,297   568,413   45,031 
Other (Expense)      (1,994)  (3,858)  (4,417)
Net Loss $(299,271) $(20,291) $(572,271) $(49,448)
                 
Basic and diluted loss per common share  (0.01)  (0.00)  (0.02)  (0.00)
Basic and diluted weighted average shares outstanding  25,196,481   10,758,631   25,105,040   10,758,631 

See accompanying notes to unaudited financial statements

5

CQENS Technologies Inc.

Statements of Changes in Stockholders’ Equity (Deficit)

For the three and six months ended June 30, 2020 and 2019

(Unaudited)

  Series A                
  Preferred Stock  Common Stock  Additional       
  Number of shares  $0.0001 Par Value  Number of Shares  $0.0001 Par Value  Paid in Capital  Accumulated Deficit  Total  
Balance, March 31, 2020  0  $      -   25,101,035  $2,510  $3,010,791  $(2,575,050) $438,251 
                                    
Common stock issued for cash  -   -   248,450   25   1,199,975   -  $1,200,000 
                             
Common stock issued for consulting services  -   -   22,423   2   112,113   -  $112,115 
                             
Net Loss  -   -   -   -   -   (299,271) $(299,271)
                             
Balance, June 30, 2020  0  $-   25,371,908  $2,537  $4,322,879  $(2,874,321) $1,451,095 

  Series A                
  Preferred Stock  Common Stock  Additional       
  Number of shares  $0.0001 Par Value  Number of Shares  $0.0001 Par Value  Paid in Capital  Accumulated Deficit  Total 
Balance, December 31, 2019  0  $-   24,837,203  $2,484  $1,733,900  $(2,302,050)  $(565,666)
                                            
Common stock issued for cash  -   -   496,898   50   2,399,950   -  $2,400,000 
                             
Common stock issued for note payable  -   -   15,384   1   76,916   -  $76,917 
                             
Common stock issued for consulting services  -   -   22,423   2   112,113   -  $112,115 
                             
Net Loss  -   -   -   -   -   (572,271) $(572,271)
                             
Balance, June 30, 2020  0  $-   25,371,908  $2,537  $4,322,879  $(2,874,321) $1,451,095 

  Series A                
  Preferred Stock  Common Stock  Additional       
  Number of shares  $0.0001 Par Value  Number of Shares  $0.0001 Par Value  Paid in Capital  Accumulated Deficit  Total 
Balance, March 31, 2019  500,000  $50   10,758,631  $1,076  $1,622,728  $(2,191,328) $(567,474)
                             
Net Loss  -   -   -   -   -   (20,291) $(20,291)
                             
Balance, June 30, 2019  500,000  $50   10,758,631  $1,076  $1,622,728  $(2,211,619) $(587,765)

  Series A                
  Preferred Stock  Common Stock  Additional       
  Number of shares  $0.0001 Par Value  Number of Shares  $0.0001 Par Value  Paid in Capital  Accumulated Deficit  Total 
Balance, December 31, 2018  500,000  $50   10,758,631  $1,076  $1,622,728  $(2,162,171) $(538,317)
                             
Net Loss  -   -   -   -   -   (49,448) $(49,448)
                             
Balance, June 30, 2019  500,000  $50   10,758,631  $1,076  $1,622,728  $(2,211,619) $(587,765)
  Three months ended March 31, 
  2021  2020 
Operating Expenses        
General and administrative $1,599,051  $109,547 
Research and development  151,535   130,456 
Professional fees  59,414   29,139 
Total Operating Expenses  1,810,000   269,142 
Total Operating Loss  (1,810,000)  (269,142)
Other (Expense)  39   (3,858)
Net Loss $(1,809,961) $(273,000)
         
Basic and diluted loss per common share $(0.07) $(0.01)
Basic and diluted weighted average shares outstanding  25,415,940   25,013,601 

 

See accompanying notes to unaudited financial statements

CQENS Technologies, Inc

6

Statements of Changes in Stockholders’ Equity

For the three months ended March 31, 2021 and 2020

(Unaudited)

 

   Common Stock   Additional         
   Number of Shares   $0.0001 Par Value   Paid in Capital   Accumulated Deficit   Total 
                     
Balance, December 31, 2020  25,397,685  $2,540  $5,990,194  $(4,843,582) $1,149,152 
                     
Stock options expense        1,490,127     $1,490,127 
                     
Common stock for cash  71,429   7   499,993     $500,000 
                     
Net loss            (1,809,961) $(1,809,961)
                     
Balance, March 31, 2021  25,469,114  $2,547  $7,980,314  $(6,653,543) $1,329,318 
                     
   Common Stock   Additional         
   Number of Shares   $0.0001 Par Value   Paid in Capital   Accumulated Deficit   Total 
Balance, December 31, 2019  24,837,203  $2,484  $1,733,900  $(2,302,050) $(565,666)
                     
Common stock for cash  248,448   25   1,199,975     $1,200,000 
                     
Common stock issued for note payable  15,384   1   76,916     $76,917 
                     
Net loss           (273,000) $(273,000)
                     
Balance March 31, 2020  25,101,035  $2,510  $3,010,791  $(2,575,050) $438,251 

 

See accompanying notes to unaudited financial statements

CQENS Technologies Inc.

Statements of Cash Flows

(Unaudited)

 

 Six Months Ended June 30,  Three Months Ended March 31, 
 2020 2019  2021 2020 
          
Cash flows from operating activities                
Net loss $(572,271) $(49,448) $(1,809,961) $(273,000)
Adjustments to reconcile net loss to net cash used in operations:                
Amortization expense  9,472   8,742   13,727   5,454 
Common stock issued for consulting services  112,115   - 
Depreciation expense  4,484   - 
Stock options expense  1,490,127   - 
Changes in operating assets and liabilities:                
Prepaid expenses  (55,911)  (2,400)  6,343   (1,832)
Accounts payable  50,135   3,254   (5,091)  109,170 
Credit card payable  508   - 
Accrued expenses  91,831   -   6,018   1,625 
Compensation payable  -   25,000 
Interest payable  (21,874)  3,967   -   (21,874)
Net cash used in operating activities  (385,995)  (35,885)
Net cash used by operating activities  (294,353)  (155,457)
                
Cash flows from investing activities        
Cash flows used in investing activities        
Additions to intellectual property  (39,916)  -   (45,297)  (1,015)
Net cash flows used in investing activities  (39,916)  -   (45,297)  (1,015)
                
Cash flows from financing activities                
Proceeds from issuance of common stock  2,400,000   - 
Proceeds from issuance of common stock for cash  500,000   1,200,000 
Borrowing on debt with related party  2,500   37,000   -   2,500 
Repayment of related party debt  (250,000)  - 
Repayment of convertible note  (40,000)  -   -   (40,000)
Net cash provided by financing activities  2,112,500   37,000   500,000   1,162,500 
                
Net change in cash and cash equivalents  1,686,589   1,115   160,350   1,006,028 
Cash and cash equivalents, beginning of period  1,298   1,477   589,153   1,298 
Cash and cash equivalents, end of period $1,687,887  $2,592  $749,503  $1,007,326 
                
Supplementary Information                
Interest paid $22,323  $-  $-  $49,240 
Income taxes paid  -   -   -   - 
                
Supplementary disclosure of non-cash activities:                
Common stock issued from conversion of note payable and accrued interest $76,917  $-  $-  $76,917 

 

See accompanying notes to unaudited financial statements

7

CQENS Technologies Inc.

(Formerly VapAria Corporation)

Notes to Unaudited Financial Statements

June 30, 2020March 31, 2021

 

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

 

Nature of Business

 

CQENS Technologies, Inc. (“we”, formerly known as VapAria Corporation (“CQENS”“our”, “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“CQENS”) is a technology company with 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 halfquarter of 2020 the effects of2021 the COVID-19 pandemic begancontinued to be felt.impact the Company. While the duration and full impact of the pandemic is unknown at this time, we expect that the pandemic will adversely impact the CompanyCQENS 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 causehave caused these opportunities to be delayed or significantly limited in their scope shoulddelayed. Should the pandemic continue and /orand/or be prolonged into 2021.throughout 2021 certain of these opportunities might be limited or lost. 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.

  

The Company has limited operations and, while our executive officers devote a substantial amount of their time to the Company, with limited cash compensation, as of June 30, 2020, had no employees.

The Company has a fiscal year end of December 31.

Basis of Presentation

 

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 June 30, 2020March 31, 2021 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, 20192020 audited financial statements. The results of operations for the period ended June 30, 2020March 31, 2021 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.

 

8

Recent Accounting Pronouncements– Management has evaluated recently issued accounting pronouncements and

The Company does not believe that any of theserecently issued effective pronouncements, willor pronouncements issued but not yet effective, if adopted, would have significant impacta material effect on ourthe accompanying financial statements and related disclosures.statements.

 

NOTE 2 – GOING CONCERN

 

The Company’s financial statements are prepared in accordance with U.S.United States 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 recurring losses, and although has cash in excess of one millionfive hundred thousand 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 revenuesthese 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 – STOCKHOLDERS’ EQUITY

 

On February 15, 2021 the Board of Directors determined that it was in the best interest of the Company to grant stock options under the Company’s 2019 Equity Compensation Plan to two consulting engineers involved in our research and development. Each of the consultants was granted options to purchase 200,000 shares at $7.00 per share. 100,000 of the grants are exercisable immediately, with the balance vesting over the next four years in equal installments and subject to certain terms and conditions, including continuing in their consulting roles through the vesting periods. The fair market value of the options at the grant date was determined to be $2,798,086 of which $1,490,127 was expensed during the three months ended March 31, 2021. The options were valued using the Black Scholes option pricing model with the following assumptions: 1) a current stock price per share of $7.00, based on the price of recent offerings; 2) expected term of 5 years; 3) computed volatility of 303.59%; and, 4) the risk free rate of return of 0.27%. The exercise period of the immediately exercisable options terminates on February 15, 2026.

On March 15, 2021 we sold a total of 71,429 shares of our common stock for $500,000 to a non-U.S. Person in a private transaction. We did not pay a commission or finder’s fee and are using proceeds for working capital.

Comparatively, on January 29, 2020 we sold 248,448 shares of our common stock for $1,200,000 to a non-U.S. personPerson 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.transaction. 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’our 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 1, 2020 we sold a total of 82,818 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 Securities Act in reliance on an exemption provided by Regulation S promulgated thereunder.

On June 4, 2020 we sold 165,632 shares of our common stock for $800,000 to a non-U.S. person in a private transaction. We did not pay a commission or finder’s fee and 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

 

Early inIn the first halfquarter of 20202021 the Company borrowed an additional $2,500did not borrow from or make any debt repayments to Xten Capital Group Inc. (“Xten”), a common control entity. On June 24, 2020 the Company paid $250,000 to reduce the debt to Xten. The balance outstanding at June 30, 2020March 31, 2021 due Xten is $455,544.$255,544. 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, a company owned by Mr. Chong. In December 20192020 we entered into a month-to-month lease that began January 1, 20202021 with a monthly rental rate of $775. We have rented the space continuously through the first six months of 2020. As of June 30, 2020,March 31, 2021 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.

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NOTE 5 – NOTE PAYABLE

On May 20, 2013 the Company issued a $50,000 note to an unrelated third party. On March 6, 2020, this note and accrued unpaid interest, upon agreement by the noteholder, 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 the Company’s common stock.

NOTE 6 – CONVERTIBLE NOTE

On July 14, 2014 the Company issued a $40,000 convertible note to an unrelated third party that was originally issued July 14, 2014 as part of the acquisition of VapAria Solutions. This convertible note matured on December 31, 2019. In February 10, 2020 we fully satisfied any and all obligations of the convertible note through repayment of the principal and accrued interest of $62,323.

NOTE 7 – COMMITMENT AND CONTINGENCIES

Relating to the December 2013 License Agreement with Xten, a 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 Xten, a 3% royalty for revenues with a $50,000 annual minimum royalty commitment.

The December 31, 2013 License Agreement with Xten also requires us to pay for the costs associated with maintaining the patent applications and patents licensed to us. For the six months ended June 30, 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 8NOTE 5 – SUBSEQUENT EVENTS

 

On June 17, 2020 the Company entered intoApril 21, 2021 we sold a Stock Purchase Agreement with an unrelated stockholder pursuant to which it agreed to repurchase 21,430 sharestotal 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 12,42371,430 shares of our common stock valued at $60,003. The recipient was afor $500,000 in two separate and equal transactions to two non-U.S. person and the issuance was exempt from registration under the Securities ActPersons 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.private transactions.

 

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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 six months ended June 30,March 31, 2021 and 2020 and 2019 should be read in conjunction with the unaudited 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 Annual Report on Form2020 10-K, for the year ended December 31, 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 technology company involved incompany; we design and develop innovative methods to heat plant-based and/or medicant-infused formulations to produce aerosols for the developmentefficient and efficacious inhalation of proprietarythe plant and patentablemedicant 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 an inhalable, medicant-infused aerosol while maintaining the integrity of the active ingredient(s).

Our high-temperature non-combusting technology is supported by 21 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. In one instance for example, our method of heating a tobacco formulation for inhalation is superior, less toxic and far more convenient than other methods for heating plant-based consumable formulations leadingof tobacco consumption, especially when compared to the production of aerosols for safe, effective and efficient inhalation of plant constituents. The technology, often called Heat Not Burn (“HNB”) accomplishes thisthe smoke produced by combustible products, i.e., cigarettes, cigars and pipes. Independent tests of our system’s prototypes supported the benefits of rapid heating, tobaccoconfirmed non-combustion, even at high temperatures, and produced better toxicology results, 98% better, when compared to produce an aerosol, but without the accompanying constituents of combustion. Our technology differs fromproducts requiring combustion and compared to other suchnon-combusting technologies currently on the market.

Our low-temperature, aerosolizing technology is supported by 30 U.S. and international patents and pending patents. This portfolio includes intellectual property (“IP”) around device designs and around formulations containing a wide variety of herbal and pharmaceutical preparations. This system features 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 becauseas the CQENS System“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, have published reports in the last half of 2020 that we have consolidated; these consolidated estimates support that this as an $880 billion USD annual market currently and it’s expected to grow to $1.1 trillion USD by 2025. The largest category within this market is a high-temperature, non-combustion system, unlike the low-temp, non-combustion systems available today. Current applicationscombustible tobacco market, comprising 92% of the technology include tobacco, hemp-CBDtotal. Our near term focus is on this segment, which represents the greatest opportunity for growth and cannabis where non-combusting methods of preparation for inhalation are believedthe greatest opportunity to be saferpositively impact public health and more effective.wellness.

 

As previously disclosed, on December 31, 2019, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Xten, a related party, pursuant to which we acquired certain intellectual property and other assets. Following the closing of the Asset Purchase Agreement, our business and operationsOur HnB technologies 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-CBDhemp/CBD and cannabis industries. HNBsHnBs represent the latest in tobacco and inhalable technologies, and likely to supplant the electronic vapor system (EVS) technologies including e-cigarettes and electronic nicotine delivery systems. We believe HNBs,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 oflate 2019 Philip Morris International introduced its HNBHnB product to U.S. markets. This product, which was sold in more than 40 countries before entering U.S. markets, like other HNBHnB 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 MaySince late 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 Amendmentswe have focused our efforts on commercializing our HnB technology. This entry began with the International Bureau ofDecember 31, 2019 transaction pursuant to which we acquired the World International Property Office (WIPO)following assets from Xten Capital Group, Inc., formerly known as Chong Corporation (“Xten”), 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.related party:

 

11assignment of all patent applications and patent related documents and materials currently assigned to or owned or held by Xten in the field of HnB methods and embodiments developed by Xten which are the backbone of the CQENS System, consisting of the following:

 

the provisional patent application filed by Xten on January 3, 2018, the non-provisional patent application filed by Xten on June 28, 2018 and the Patent Cooperation Treaty (“PCT”) application filed by Xten on January 3, 2019;
all documents and files related to device and tobacco consumable development;

all versions of prototyped embodiments, consisting of both device and tobacco consumable embodiments; and
all files, correspondence, communication, data and test results related to the toxicology testing undertaken by Xten related to the CQENS System.

exclusive licenses from Xten in the fields and applications of tobacco, nicotine, reduced tobacco risk and smoking cessation, for device patents assigned to Xten, U.S. Patent No. 9,770,564 and U.S. Patent No. 9,913,950; and
exclusive licenses from Xten in the fields and applications of tobacco, nicotine, reduced tobacco risk and smoking cessation, for international device patents and patent applications assigned to Xten, including those issued in the People’s Republic of China, the European Union, Japan and Hong Kong, and those pending in Germany, France, Brazil, Canada and Korea, and divisional patents pending in the European Union and Japan.

 

On July 24,During 2020 and into 2021 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 interesthave continued our efforts begun in Leap Technology in exchange for the contribution of an exclusive, royalty-free 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.2019, including:

 

On July 24, 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, 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 jointly agreed to raise equity to fund the operations of the Operating Agreement and the related Contribution Agreement dated July 24, 2020 (the “Contribution Agreement”), we acquired a 55% membership interest in Leap Technology in exchange for the contribution of an exclusive, royalty-free license (the “Leap 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. As of the date of this report, the joint venture is still in a pre-formative stage expected to be formalized consistent with the Restated Operating Agreement in the second quarter of 2021;
On August 25, 2020, we were issued U.S. Patent 10,750,787 by the U.S. Patent and Trademark Office for a Heat-not-Burn Device and Method. The patent covers the technology behind the proprietary CQENS System;
On September 4, 2020, we were informed by our intellectual property counsel that it had received a favorable International Preliminary Report on Patentability that was issued as a result of its filing of a Chapter II Demand and Article 34 Amendments with the International Bureau of the WIPO on September 5, 2019. The report was issued in connection with the PCT patent application filed by on January 3, 2019 for our Heat-Not-Burn Device and Method. The examiner’s conclusion was that 84 of the 91 claims were considered to be “patentable,” and while the PCT does not issue patents, based upon management’s experience we believe that a preliminary, favorable examination does provide insight as to how individual country examinations would likely proceed;
On September 30, 2020 we entered into an Asset Purchase Agreement with Xten pursuant to which we acquired a portfolio of 29 U.S. and international patents and patent applications in the areas of devices and technologies for aerosolizing certain remedies and pharmaceutical preparations, as well as the solutions and preparation for inhaled delivery. This transaction effectively terminated all prior licensing agreements and resulting with the portfolio being assigned to the Company;
On September 30, 2020 we also entered into a second Asset Purchase Agreement with Xten pursuant to which we acquired certain assets including, but not limited to, a custom built plume and inhalation testing machine, oscilloscope with probe, multiple pieces of laboratory and workshop equipment, computers, monitors and accessories; and
On February 15, 2021 we entered into a non-binding Memorandum of Understanding (the “MOU”) with The Barker Group of Companies and affiliates. The Barker Group is involved in the processing, manufacturing and distribution of tobacco from “seed through shelf,” principally in the US. From planting the seeds, through growing, processing, manufacturing, and finally placing the finished product on the shelf, The Barker Group has the necessary permits and facilities to support fully legal and regulatory compliant tobacco activity in the U.S. The Barker Group’s businesses have recently expanded to include hemp and CBD products. The Barker Group includes Cherokee Tobacco Company (CTC), the exclusive national distributor of Cherokee and Palmetto cigarettes, Cherokee and Arrowhead pipe tobacco, Cherokee and Virginia Heritage filtered cigars, the full line of Pure HempSmokes, Piedmont Blue CBD products, and AHP hemp pre-rolls. The Barker Group distributes its products to over 130,000 US retail locations. The parties have agreed to negotiate in good faith collaborating on certain strategic initiatives, including the following:

to commercialize CQENS’ patented and patent-pending HnB technology by designing devices and consumables for The Barker Group to manufacture and distribute exclusively in the U.S. for tobacco, hemp/CBD and cannabis products where U.S. laws and regulations permit;
to prepare and submit a Premarket Tobacco Authorization (“PMTA”) for submission to the FDA to enable the launch of the CQENS System throughout the U.S.; and
to expand the scope of the HnB marketing opportunities by also submitting a Modified Risk Tobacco Product (“MRTP”) application to the FDA in addition to the PMTA.

Additionally, the MOU provides for CQENS to license its technology to The Barker Group under certain terms and conditions yet to be formed by Leap Technologyfinalized and for The Barker Group to invest in CQENS with terms and conditions yet to be finalized. The foregoing initiatives, as well as using their best effortsother items contained in the non-binding MOU, are subject to assist the Company in raising capital. In the event Zongcompletion and LM jointly failexecution of definitive agreements, all of which will be subject to undertake their best efforts, as evidenced by failure to fulfill most of their financial obligations under the Operating Agreement, the Company may exercise a right to repurchase from Leap Technology the CQENS IP (as defined under the Operating Agreement) contributed under the Contribution Agreement for a nominal cash amount.customary closing conditions.

 

In additionSince signing the MOU, we have we have been engaged in discussions and negotiations designed to the Leap Technology agreement, which anticipatesidentify an Asianinitial target market launch for certain embodiments of our technology, we also 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 plan and operations, we have determined that accelerated research, product development and global launch objectives requires increased time and 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 have 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.

We raised $2,400,000 in capital in the first half of 2020 through the sale of our common stock to non-U.S. Persons in private transactions. We may seek to raise additional 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 companyU.S. and the difficulties small companies experience in accessingEU, to develop a product for that market and agree to a definitive agreement to launch 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.product.

 

Going concern

 

For the first six monthsquarter of 20202021 we reported a net loss of $572,271$1,809,961 and net cash used in operations of $385,995$294,353 compared to a net loss of $49,448$273,000 and net cash used in operations of $35,885$155,457 for the first six monthsquarter of 2019.2020. At June 30, 2020,March 31, 2021, we had cash on hand of $1,687,887$749,503 and an accumulated deficit of $2,874,321.$6,653,543. The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 20192020 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our minimal cash and no source of revenues which may not be sufficient to cover our operating costs. These factors, among others, and 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 and pay our obligations as they become due over the next year. Our 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 secondfirst quarter of 2021 or the first halfquarter of 2020 or 2019.2020. Our total operating expenses for the secondfirst quarter of 2020 and the six months then ended2021 increased 1,535.6% and 1,162.3% respectively573% over those reported in the comparable 2019 periods.

first quarter of 2020. General and administrative expenses increased 1.0% in the second quarter of 20201,360% from the comparable period in 2019 but showed an overall increase of 731.7% for the first six months from the same period in 20192020 due mainly to the aggregatenon-cash stock option expense of $100,000 bonus payments made$1,315,246 relating to the Company’s managementoptions granted to the two contracted engineers involved in the research and some slight increases in amortization and office expenses.development activities.

12

 

Research and development expenses in the secondfirst quarter of 2020 were $139,790 as we work on variant prototypes. Comparatively, we had no research and development expenses in2021 increased 16% over this same period in 2019. For2020 which reflects the first six monthscost of 2020 our researchbuilding and development expenses were $270,246 against no research and developmenttesting product prototypes. Professional fees increased 104% in the first six monthsquarter of 2019. Professional fees increased 1,242.1% in2021 compared to the secondfirst quarter of 2020 comparedwhich is attributable to the second quarter of 2019. The first six months of 2020 showed an increase in professional fees of 485.5% over the same 2019 timeframe. These increases are attributableprimarily to increased consulting service fees to independent, nonaffiliated professionals for international business development and increased legal costs primarily due to the filing of additional USmanufacturing guidance and international patent applications related to our HNB technology.logistics

 

We 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 June 30, 2020,March 31, 2021, we had $1,687,887$749,503 in cash and cash equivalents and a working capital surplus of $1,130,305$465,212 as compared to $1,298$589,153 in cash and cash equivalents and a working capital deficitsurplus of $856,012$312,132 at December 31, 2019.2020. Our current liabilities decreased $243,817increased $927 from December 31, 2019,2020, reflecting the retirement of debt and associated interest payable despite a significant increase$5,091 decrease in our accounts payable andoffset by a $6,018 increase in our accrued expenses. Our source of operating capital in the first halfquarter of 20202021 came from the sale of 496,89871,429 shares of our common stock raising $500,000 compared to the same period in 2020 where our source of operating capital came from the sale of 248,448 shares of our commons stock raising $2,400,000$1,200,000 in capital compared to the same period in 2019 where our sole source of operating capital came fromalong with additional borrowingsborrowing from a related party which loaned usof $2,500. Subsequent to the date covered by this report we raised $500,000 from the sale of an additional $37,000.aggregate of 71,430 shares of our common stock to two non-U.S. Persons in private transactions.

 

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 financial statements and to satisfy our obligations as they become due.

 

In February 2020,As of March 31, 2021 the $40,000, principaloutstanding amount convertible note was fully satisfied through the repayment of both the principal and accrued unpaid interest totaling $62,323. In March 2020, the $50,000, principal amount, note payable was fully satisfied when both the principal and accrued unpaid interest totaling $76,917 were converted into 15,384 shares of our common stock at $5.00 per share. At June 30, 2020 we owe a related party $455,544$255,544 which is due on demand.

 

While we raised $2,400,000 from the sale of our securities during the first half of 2020, we still We will need to raise $2,000,000an additional $3,000,000 to $3,000,000$5,000,000 in additional capital during the next 12 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 over the next 12 months. In that event, our ability to continue as a going concern is in jeopardy.

Net Cash Used in Operating Activities

We used $294,353 of cash by our operating activities in the first quarter of 2021 compared to $155,457 used by our operating activities in the first quarter of 2020, an increase of 89.3%.

 

Summary of cash flowsNet Cash Used In Investing Activities

 

  June 30, 2020  June 30, 2019 
Net cash (used) in operating activities $(385,995) $(35,885)
Net cash provided by financing activities $2,112,500  $37,000 
Net cash used in investing activities $(39,916) $- 

OurIn the first quarter of 2021 there was $45,297 net cash used in operatinginvesting activities increased 975.6%for capitalization of IP related legal fees compared to $1,015 for additional trademark costs in the first six monthssame period of 2020 compared the first six months of 2019. During these time periods we used the cash primarily to fund our net losses.2020.

 

During the first six months of 2020 netNet Cash Provided by Financing Activities

Net cash provided by financing activities for the first quarter of 2021 consisted primarily of $2,400,000$500,000 raised from the sale of 496,89871,429 shares of our common stock compared to $1,200,000 raised from the sale of 248,448 share of our common stock, repayment and satisfaction in full of the convertible note of $40,000 and additional borrowing of $2,500 and repayment of $250,000 of debt tofrom Xten, a common control entity compared to net cash from $37,000 of additional borrowings in the first six monthsquarter of 2019 from Xten.2020.

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

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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 20192020 appearing in our 2019 10-K.Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 15, 2021.

 

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 2019 10-K.Annual Report on Form 10-K for the year ended December 31, 2020. 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. In order to do so, we will need additional capital to permit us to hire employees and put the requisite controls in place. We had expected to expand our accounting resources in 2018,2019, which was subsequently delayed into 20192020 and has now been delayed into 2020.2021. Given the uncertainties with our ability to raise working capital as discussed earlier in this report, there are no assurances we will be able to remediate the material weaknesses in our internal control over financial reporting during 2020.2021.

 

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.

 

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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 in Part I, Item 1A in our 20192020 10-K 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, 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, exceptOn March 15, 2021 we sold a total of 71,429 shares of our common stock for $500,000 to one non-U.S. Persons in a private transaction. The recipients were non-U.S. persons and the issuance was exempt from registration under the Securities Act of 1933, as otherwise previously disclosed, we haveamended in reliance on an exemption provided by Regulation S promulgated thereunder. We did not issued any unregistered securities during the period covered by this report.pay a commission or finder’s fee and are using proceeds for working capital.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable to our company’s operations.

Item 5. Other Information.

 

On June 17, 2020 the Company entered into a Stock Purchase Agreement with an unrelated stockholder pursuant to which it agreed to repurchased 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.[                                   ]

15

 

Item 6. Exhibits.

 

No. Exhibit Description Form 

Date

Filed

 Number Herewith
2.1 Share Exchange Agreement and Plan of Reorganization dated April 11, 2014 by and between OICco Acquisition IV, Inc., VapAria Corporation and the listed shareholders 8-K 4/11/14 2a  
3.1 Amended and Restated Certificate of Incorporation S-1 6/30/10 3.C  
3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation 8-K 8/21/14 3.4  
3.3 Certificate of Amendment to the Amended and Restated Certificate of Incorporation 10-Q 11/19/16 3.5  
3.4 Bylaws S-1 3/29/10 3(b)  
10.1 Form of Stock Purchase Agreement 8-K 6/5/20 10.1  
10.2 Form of Amended and Restated Operating Agreement dated July 24, 2020 of Leap Technology LLC (“Leap Technology”) by and between CQENS Technologies Inc., Zong Group Holdings LLC and Leap Management LLC. 8-K 7/29/20 10.1  
10.3 Form of Contribution Agreement Via Exclusive Licensing Agreement dated July 24, 2020 by and between CQENS Technologies Inc. and Leap Technology LLP 8-K 7/29/20 10.2  
10.4 Form of Intellectual Property License Agreement dated July 24, 2020 by and between CQENS Technologies Inc. and Leap Technology LLP 8-K 7/29/20 10.3  
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer       Filed
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer and Chief Financial Officer       Filed

32.1

 

Section 1350 Certification

       Filed
101.INS XBRL Instance Document       Filed
101.SCH XBRL Taxonomy Extension Schema Document       Filed
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document       Filed
101.DEF XBRL Taxonomy Extension Definition Linkbase Document       Filed
101.LAB XBRL Taxonomy Extension Label Linkbase Document       Filed
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document       Filed
No. Exhibit Description Form 

Date

Filed

 Number Herewith
2.1 Share Exchange Agreement and Plan of Reorganization dated April 11, 2014 by and between OICco Acquisition IV, Inc., VapAria Corporation and the listed shareholders 8-K 4/11/14 2a  
3.1 Amended and Restated Certificate of Incorporation S-1 6/30/10 3.C  
3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation 8-K 8/21/14 3.4  
3.3 Certificate of Amendment to the Amended and Restated Certificate of Incorporation 10-Q 11/19/16 3.5  
3.4 Bylaws S-1 3/29/10 3(b)  
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer       Filed
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer and Chief Financial Officer       Filed
32.1 Section 1350 Certification       Filed
101.INS XBRL Instance Document       Filed
101.SCH XBRL Taxonomy Extension Schema Document       Filed
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document       Filed
101.DEF XBRL Taxonomy Extension Definition Linkbase Document       Filed
101.LAB XBRL Taxonomy Extension Label Linkbase Document       Filed
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document       Filed

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 CQENS Technologies Inc.
  
August 14, 2020May 11, 2021By:/s/ Alexander Chong
  Alexander Chong, Chief Executive Officer
   
August 14, 2020May 11, 2021By:/s/ Daniel Markes
  Daniel Markes, Chief Financial Officer


 

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