UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Logo, company name

Description automatically generated

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022

For the quarterly period ended September 30, 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

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 ☒ 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 ☒ 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 filerSmaller reporting company
Emerging growth company  

 

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 ☐Yes☐ No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable datedate. 25,984,04526,060,595 shares of common stock are issued and outstanding as of November 15, 2021.14, 2022.

 

 

 

TABLE OF CONTENTS

 

  Page No.
 PART 1 – FINANCIAL INFORMATION 
   
Item 1.Financial Statements (Unaudited).43
Item 2.Management Discussion and Analysis of Financial Condition and Results of Operations.1211
Item 3.Quantitative and Qualitative Disclosures About Market Risk.1716
Item 4.Controls and Procedures.1716
   
 PART II – OTHER INFORMATION 
   
Item 1.Legal Proceedings.1817
Item 1A.Risk Factors.1817
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.1817
Item 3.Defaults upon Senior Securities.1817
Item 4.Mine Safety Disclosures.1817
Item 5.Other Information.1817
Item 6.Exhibits.1817

2i

 

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;ability to raise capital;

 

 business risks, including:

 

 our limited operating history and lack of developed, proven or launched products;
 the lack of operating history of Leap Technology LLC;
the joint venture with the Barker Group/Firebird Manufactures remains to be finalized;
 potential conflicts of interest of our management;
 reliance on third parties;
 potential FDA oversight;
 lack of marketing and distributing experience;
 possible inability to finalizeestablish and maintain strategic partnerships with The Barker Group and Firebird Manufacturing;partnerships;
 possible dependence on licensing or collaboration agreements;

 

 risks relating to our common stock, including:

 

 the lack of a public market for our common stock; and
 possible impact of Delaware’s anti-takeover 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, 20202021 as filed on April 15, 202114, 2022 (the “2020“2021 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 refersrefer to CQENS Technologies Inc., a Delaware corporation. In addition, “third quarter of 2022” refers to the nine months ended September 30, 2022, “third quarter of 2021” refers to the nine months ended September 30, 2021, “third quarter of 2020” refers to the nine months ended September 30, 2020, “2020”“2021” refers to the year ended December 31, 2020,2021, and “2021”“2022” refers to the year ending December 31, 2021.2022. The information which appears on our web site at www.cqens.com is not part of this report.

 

3ii

 

PART 1 – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

CQENS Technologies Inc.

Balance Sheets

 

 September 30, 2021 December 31, 2020  September 30, 2022 December 2021 
  (Unaudited)       (Unaudited)     
ASSETS                
Current Assets                
Cash and cash equivalents $4,026,095  $589,153  $933,622  $3,588,377 
Prepaid expenses  54,364   59,396   307,897   143,369 
Total Current Assets  4,080,459   648,549   1,241,519   3,731,746 
Equipment, net  180,352   193,804   182,759   190,005 
Intellectual property, net  693,254   643,216   892,208   707,760 
Right-of-use asset - lease, net  138,867   - 
Leasehold improvement, net  16,213   - 
Prepaid expenses – noncurrent portion  601,288   - 
TOTAL ASSETS $4,954,065  $1,485,569  $3,072,854  $4,629,511 
LIABILITIES & STOCKHOLDERS’ EQUITY                
LIABILITIES                
Current Liabilities                
Accounts payable $37,079  $44,202  $114,861  $82,126 
Accrued expenses  59,809   36,671   144,509   116,799 
Loan from related party  -   255,544 
Current portion of lease liability  51,538   - 
Total Current Liabilities  96,888   336,417   310,908   198,925 
Lease liability, net of current portion  87,329   - 
TOTAL LIABILITIES  96,888   336,417   398,237   198,925 
STOCKHOLDERS’ EQUITY                
Preferred Stock: $0.0001 par value: 10,000,000 shares authorized 0 shares issued and outstanding at September 30, 2021 and December 31, 2020  -   - 
Common Stock: $0.0001 par value; 200,000,000 shares authorized: 25,979,045 shares issued and outstanding at September 30, 2021 and 25,397,685 issued and outstanding at December 31, 2020  2,598   2,540 
Preferred Stock: $0.0001 par value: 10,000,000 shares authorized no shares issued and outstanding at September 30, 2022 and December 31, 2021  -   - 
Common Stock: $0.0001 par value; 200,000,000 shares authorized: 26,060,595 shares issued and outstanding at September 30, 2022 and 26,015,595 issued and outstanding at December 31, 2021  2,606   2,602 
Additional paid-in capital  12,907,099   5,990,194   19,314,414   17,737,478 
Accumulated deficit  (8,052,520)  (4,843,582)  (16,642,403)  (13,309,494)
TOTAL STOCKHOLDERS’ EQUITY  4,857,177   1,149,152   2,674,617   4,430,586 
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY $4,954,065  $1,485,569  $3,072,854  $4,629,511 
See accompanying notes to unaudited financial statementsSee accompanying notes to unaudited financial statements

 

See accompanying notes to unaudited financial statements

43

 

CQENS Technologies Inc.

Statements of Operations

(Unaudited)

 

                  
 Three months ended September 30, Nine months ended September 30,  Three months ended
September 30,
 Nine months ended
September 30,
 
 2021 2020 2021 2020  2022 2021 2022 2021 
Operating Expenses                                
General and administrative $321,206  $150,551  $2,221,761  $267,102  $433,299  $321,206  $2,066,156  $2,221,761 
Research and development  171,263   187,958   456,902   458,204   255,643   171,263   572,593   456,902 
Professional fees  114,968   134,117   530,298   315,733   266,719   114,968   694,149   530,298 
Total Operating Expenses  607,437   472,626   3,208,961   1,041,039   955,661   607,437   3,332,898   3,208,961 
Other (Expense)  (16)  (1,134)  23   (4,992)  (11)  (16)  (11)  23 
Net Loss $(607,453) $(473,760) $(3,208,938) $(1,046,031) $(955,672) $(607,453) $(3,332,909) $(3,208,938)
                                
Basic and diluted loss per common share  (0.02)  (0.02)  (0.13)  (0.04)  (0.04)  (0.02)  (0.13)  (0.13)
Basic and diluted weighted average shares outstanding  25,658,186   25,375,190   25,545,986   25,195,747   26,055,704   25,658,186   26,029,111   25,545,986 

See accompanying notes to unaudited financial statements

4

CQENS Technologies Inc.

Statements of Changes in Stockholders’ Equity

For the three and nine months ended September 30, 2022 and 2021

(Unaudited)

                
  Common Stock         
  Number of Shares  $0.0001 Par Value  Additional Paid in Capital  Accumulated Deficit  Total 
Balance, June 30, 2022  26,015,595  $2,602          18,769,692   (15,686,731) $3,085,563 
                     
Common stock issued for cash  35,000   3   349,997   -  $350,000 
                     
Common stock issued for consulting services  10,000   1   99,999   -  $100,000 
                     
Stock options expense  -   -   94,726   -  $94,726 
                     
Net Loss  -   -   -   (955,672) $(955,672)
                     
Balance, September 30, 2022  26,060,595  $2,606  $19,314,414  $(16,642,403) $2,674,617 

  Common Stock         
  Number of Shares  $0.0001 Par Value  Additional Paid in Capital  Accumulated Deficit  Total 
Balance, December 31, 2021  26,015,595  $2,602         17,737,478   (13,309,494) $4,430,586 
                     
Common stock issued for cash  35,000   3   349,997   -  $350,000.00 
                     
Common stock issued for consulting services  10,000   1   99,999   -  $100,000.00 
                     
Stock options expense  -   -   1,126,940   -  $1,126,940 
                     
Net Loss  -   -   -   (3,332,909) $(3,332,909)
                     
Balance, September 30, 2022  26,060,595  $2,606  $19,314,414  $(16,642,403) $2,674,617 

  Common Stock         
  Number of Shares  $0.0001 Par Value  Additional Paid in Capital  Accumulated Deficit  Total 
Balance, June 30, 2021  25,648,045  $2,565           9,414,966   (7,445,067) $1,972,464 
                     
Common stock issued for cash  331,000   33   3,309,967   -  $3,310,000 
                     
Stock options expense  -   -   182,166   -  $182,166 
                     
Net Loss  -   -   -   (607,453) $(607,453)
                     
Balance, September 30, 2021  25,979,045  $2,598  $12,907,099  $(8,052,520) $4,857,177 

  Common Stock         
  Number of Shares  $0.0001 Par Value  Additional Paid in Capital  Accumulated Deficit  Total 
Balance, December 31, 2020  25,397,685  $2,540           5,990,194   (4,843,582) $1,149,152 
                     
Common stock issued for cash  545,288   54   4,809,946   -  $4,810,000 
                     
Common stock issued for consulting services  36,072   4   252,500   -  $252,504 
                     
Stock options expense  -   -   1,854,459   -  $1,854,459 
                     
Net Loss  -   -   -   (3,208,938) $(3,208,938)
                     
Balance, September 30, 2021  25,979,045  $2,598  $12,907,099  $(8,052,520) $4,857,177 

 

See accompanying notes to unaudited financial statements

 

5

CQENS Technologies Inc.

Statements of Changes in Stockholders’ Equity

For the three and nine months ended September 30, 2021 and 2020

(Unaudited)

                     
  Common Stock          
  Number of Shares  $0.0001 Par Value  Additional Paid in Capital  Accumulated Deficit  Total 
Balance, June 30, 2021  25,648,045  $2,565   9,414,966   (7,445,067) $1,972,464 
                     
Common stock issued for note payable                    
Common stock issued for note payable, shares                    
Common stock issued for consulting services                    
Common stock issued for consulting services, shares                    
Common stock returned to treasury                    
Common stock returned to treasury, shares                    
Common stock issued for cash  331,000   33   3,309,967   -  $3,310,000 
                     
Stock options expense  -   -   182,166   -  $182,166 
                     
Warrants issued for intellectual property                    
Net Loss  -   -   -   (607,453) $(607,453)
                     
Balance, September 30, 2021  25,979,045  $2,598  $12,907,099  $(8,052,520) $4,857,177 

  Common Stock          
  Number of Shares  $0.0001 Par Value  Additional Paid in Capital  Accumulated Deficit  Total 
Balance, December 31, 2020  25,397,685  $2,540   5,990,194   (4,843,582) $1,149,152 
                     
Common stock for cash  545,288   54   4,809,946   -  $4,810,000 
                     
Common stock issued for consulting services  36,072   4   252,500   -  $252,504 
                     
Stock options expense  -   -   1,854,459   -  $1,854,459 
                     
Net Loss  -   -   -   (3,208,938) $(3,208,938)
                     
Balance, September 30, 2021  25,979,045  $2,598  $12,907,099  $(8,052,520) $4,857,177 

  Common Stock          
  Number of Shares  $0.0001 Par Value  Additional Paid in Capital  Accumulated Deficit  Total 
Balance, June 30, 2020  25,371,908  $2,537   4,322,879   (2,874,321) $1,451,095 
                     
Common stock issued for consulting services  18,635   2   93,173   -  $93,175 
                     
Common stock returned to treasury  -21,430   (2)  (2,498)  -  $(2,500)
                     
Warrants issued for intellectual property  -   -   191,594  ��-  $191,594 
                     
Net Loss  -   -   -   (473,760) $(473,760)
                     
Balance, September 30, 2020  25,369,113  $2,537  $4,605,148  $(3,348,081) $1,259,604 

  Common Stock          
  Number of Shares  $0.0001 Par Value  Additional 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 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  41,058   4   205,286   -  $205,290 
                     
Warrants for intellectual property  

-

   -   191,594   -  $191,594 
                     
Common stock returned to treasury  (21,430)  (2)  (2,498)  -  $(2,500)
                     
Net Loss  -   -   -   (1,046,031) $(1,046,031)
                     
Balance, September 30, 2020  25,369,113  $2,537  $4,605,148  $(3,348,081) $1,259,604 

See accompanying notes to unaudited financial statements

6

 

CQENS Technologies Inc.

Statements of Cash Flows

(Unaudited)

 

          
 Nine Months Ended September 30,  Nine Months Ended September 30, 
 2021 2020  2022 2021 
          
Cash flows from operating activities                
Net loss $(3,208,938) $(1,046,031) $(3,332,909) $(3,208,938)
Adjustments to reconcile net loss to net cash used in operations:                
Amortization expense  43,933   17,061   54,327   43,933 
Lease expense  21,388   - 
Depreciation expense  13,452   -   15,046   13,452 
Stock options expense  1,854,459   -   1,126,940   1,854,459 
Common stock issued for consulting services  252,504   205,290   100,000   252,504 
Changes in operating assets and liabilities:                
Prepaid expenses  5,032   (68,387)  (164,528)  5,032 
Prepaid expenses – noncurrent portion  (601,288)  - 
Accounts payable  (7,123)  24,295   32,735   (7,123)
Accounts payable - related party  -   91,403 
Lease liability  (21,388)  - 
Accrued expenses  23,138   22,141   27,710   23,138 
Accrued expenses - related party  -   72,400 
Interest payable  -   (21,315)
Net cash used in operating activities  (1,023,543)  (703,143)  (2,741,967)  (1,023,543)
                
Cash flows from investing activities        
Cash flows used in investing activities        
Additions to intellectual property  (93,971)  (152,372)  (236,944)  (93,971)
Additions to furniture and equipment  (7,800)  - 
Leasehold improvements  (18,044)  - 
Net cash flows used in investing activities  (93,971)  (152,372)  (262,788)  (93,971)
                
Cash flows from financing activities                
Proceeds from issuance of common stock  4,810,000   2,400,000   350,000   4,810,000 
Repurchase of common stock  -   (2,500)
Borrowing on debt with related party  -   2,500 
Repayment of related party debt  (255,544)  (250,000)  -   (255,544)
Repayment of convertible note  -   (40,000)
Net Cash provided by financing activities  4,554,456   2,110,000   350,000   4,554,456 
                
Net change in cash and cash equivalents  3,436,942   1,254,485   (2,654,755)  3,436,942 
Cash and cash equivalents, beginning of period  589,153   1,298   3,588,377   589,153 
Cash and cash equivalents, end of period $4,026,095  $1,255,783  $933,622  $4,026,095 
                
Supplementary Information        
Interest paid $-  $23,323 
Income taxes paid  -   - 
Supplementary disclosure for non cash activities:        
                
Supplementary disclosure of non-cash activities:        
Warrants issued for intellectual property $-  $191,594 
Common stock issued from conversion of note payable and accrued interest $-  $76,917 
Purchase of fixed asset through accounts payable related party $-  $202,596 
Right-of-use asset in exchange for lease liability $160,255  $- 

 

See accompanying notes to unaudited financial statements

76

 

CQENS Technologies Inc.

Notes to Unaudited Financial Statements

September 30, 20212022

 

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

 

Nature of Business

 

CQENS Technologies, Inc. (“we”, “our”, the “Company”, or “CQENS”) is a technology company with a proprietary method of heating plant-based consumable formulations that produce an aerosol that ledlead 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 nine months ended September 30, 2022 the effects of 2021 the COVID-19 pandemic continued to impactwere felt by the Company. While the duration and full impact of the pandemic is unknown at this time, we expect that the pandemic will continue to 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 have caused certain of these opportunities to be delayed. ShouldAlthough the pandemic continue and/or be prolonged throughout 2021continues in 2022 and 2022while certain of these opportunities might be limited or lost.lost, we are optimistic that in the final quarter of this year we can raise a limited amount of working capital. We alsowill need to raise additional working capital to provide sufficient funding to bring our proposed products to market. The 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,Company, however, at this time we are unable to predict all possible impacts on our company, our operations and our prospects.

 

Basis of Presentation

Basis of Presentation - The accompanying financial statements have been prepared by the Company without audit. In the opinion of the management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows as of September 30, 2021,2022 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, 2020,2021 audited financial statements. The results of operations for the period ended September 30, 2021,2022 are not necessarily indicative of the operating results for the full year.

 

Recent Accounting Pronouncements

 

The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.

 

NOTE 2 – GOING CONCERN

 

The Company’s financial statements are prepared in accordance with 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 just over four millionand cash equivalents in excess of five hundred thousand dollars, with increasingrenewed research and development activities, increased costs anticipated in commercializing products as contemplated in the next 12 monthsefforts and with no source of revenue sufficient to cover its operations costs over the next 12 months these 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.

 

87

 

NOTE 3 – STOCKHOLDERS’ EQUITY

 

On April 21, 2022, we granted 60,000 options under the Company’s 2014 Equity Compensation Plan to two consultants. Each of the consultants was granted options, fully vested upon grant, to purchase 30,000 shares at an exercise price of $10.00 per share. The fair market value of the options at the grant date using the Black Sholes option pricing model was determined to be $599,293.

On June 24, 2022 we granted 20,000 options under the Company’s 2014 Equity Compensation Plan to a consultant. The options granted are fully vested upon grant and allow consultant to purchase 20,000 shares of the Company’s stock at an exercise price of $10.00 per share. The fair market value of the options at the grant date using the Black Sholes option pricing model was determined to be $199,749.

On July 11, 2022 we sold 35,000 shares of our common stock for $350,000 to an investor in a private transaction. We did not pay a commission or finder’s fee.

On July 11, 2022 we issued 10,000 shares of our common stock to a consultant for the consultant’s guidance in identifying business opportunities, partners and other skilled consultants in both Asia and North America.

On February 15, 2021, the Board of Directors determined that it was in the best interest of the Company to grant stockwe granted 400,000 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 200,000shares at $7.00per share. 100,000of the grants are exercisable immediately, with the balance vesting over the next four yearsin equal instalmentsinstallments 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 $2,798,086of which $1,854,459 2,036,625was expensed during the nine months ended September 30,in 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 5years; 3) computed volatility of 303.59303.59%%; and 4) the risk-free rate of return of 0.270.27%%. 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.

 

On April 21, 2021, we sold a total of 71,430 shares of our common stock to two non-U.S. Persons each paying $250,000 for a total of $500,000 in private transactions. We did not pay a commissions or finder’s fees and are using proceeds for working capital.

 

On May 1, 2021, 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 20,000 shares of our common stock valued at $140,000. 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 May 16, 2021, 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 16,072 shares of our common stock valued at $112,504. 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 May 17, 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 the proceeds for working capital.

 

On September 28, 2021, we sold a total of 296,000 shares of our common stock for $2,960,000 to eleven non-U.S. persons in private transactions. We did not pay a commission or finder’s fees and are using the proceeds for working capital.

On September 28, 2021, we sold 5,000 shares of our common stock for $50,000 to an investor in a private transaction. We did not pay a commission or finder’s fee.

On September 30, 2021, we sold 30,000 shares of our common stock for $300,000 to an investor in a private transaction. We did not pay a commission or finder’s fee.

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. 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 our common stock at $5.00 per share. A total of 15,384 shares were issued as satisfaction of this note.

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.

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. As of the date of this report no additional patents have been issued.

 

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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.

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.

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 $62,115. The recipient was a non-U.S. person.

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 $31,060. The recipient was a non-U.S. person.

On September 30, 2020, the Company entered into an Asset Purchase Agreement with Xten, a common control entity, pursuant to which it 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. As consideration for the acquisition, the Company issued Xten common stock purchase warrants exercisable for an aggregate of 21,000,000 shares of its common stock at an exercise price of $5.31 per share (the “Warrants”), consisting of (i) a Series A Common Stock Purchase Warrant exercisable for 7,000,000 shares of common stock commencing on September 30, 2023 and expiring on September 30, 2026, (ii) a Series B Common Stock Purchase Warrant exercisable for 7,000,000 shares of common stock commencing on September 30, 2026 and expiring on September 30, 2029, and (iii) a Series C Common Stock Purchase Warrant exercisable for 7,000,000 shares of common stock commencing on September 30, 2029 and expiring on September 30, 2032. The Company has the right to accelerate or extend the exercise period of each series of Warrants in its discretion. In addition, the exercise period of each series of Warrants automatically accelerates in the event of a “change of control” (as defined in the Warrants) prior to such series of Warrants becoming exercisable by its respective terms. The Asset Purchase Agreement contained customary indemnification provisions. The Warrants were valued at $191,594 based on the carrying value of the assets acquired.

NOTE 4 – RELATED PARTY TRANSACTIONS

In the first nine months of 2020 the Company borrowed $2,500 from Xten Capital Group, Inc. a common control entity (“Xten”) and repaid $250,000 to Xten leaving a balance due to Xten at September 30, 2020, of $455,544. In the first nine months of 2021 the Company repaid Xten the balance of its loan in the amount of $255,544. There is no outstanding amount due to Xten at September 30, 2021.

 

We maintain our corporate offices at 5550 Nicollet Avenue, Minneapolis, MN 55419. We lease the premises on a month-to-month basis from 5550 Nicollet, LLC, a company owned by Mr. Chong. In December 2020 we entered into a month-to-month lease that began January 1,Rent for each of the third quarters of 2022 and 2021 with a monthly rental rate ofwas $7752,325. As of September 30, 2021,2022, there is no outstanding balance for rent due to 5550 Nicollet LLC.

 

In Note 5 – LEASES

We account for our leases under ASC 842, Leases, which requires all leases to be reported on the first ninebalance sheet as right-of-use assets and lease obligations. We elected the expedients permitted under the transition guidance that retained lease classification and initial direct costs for any leases that existed prior to adoption of the standard.

We categorized leases with terms longer than twelve months of 2020, pursuantas either operating or finance. Finance leases are generally those leases that would allow us to a signed agreement, Xten provided researchsubstantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance leases are recorded in property and development related expertise and services specific to HNB technologies, devices, and intellectual property. Costs to the Company were $427,788 for these research and development services during the first nine months of 2020. Asequipment, net. All other leases are categorized as operating leases. We did not have any finance leases as of September 30, 2020, $92,541 remains outstanding with $66,900 2022. Our lease for property is for three years. We elected the accounting policy to include both the lease and non-lease components of our agreements as an accrued expensea single component and $25,641 account for them as an account payable to this related party. In the first nine months of 2021 the Company did not engage any services from Xten.a lease.

Lease liabilities are recognized at the present value of the fixed lease payments using a discount rate based on similarly secured borrowings available to us. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the lease. Lease assets are tested for impairment in the same manner as long-lived assets used in operations. Leasehold improvements are capitalized at cost over the lesser of their expected useful life or the lease term.

When we have options to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is reasonably certain that we will exercise the option, we consider these options in determining the classification and measurement of the lease. Costs associated with the operating lease are recognized on a straight-line basis within operating expenses over the term of the lease.

The following table presents the lease-related asset and liability recorded on the balance sheets:

SCHEDULE OF LEASE RELATED ASSET AND LIABILITY

   1 
  September 30, 2022 
Assets    
Leasehold improvement, net $16,213 
Operating lease asset $138,867 
     
Liabilities    
Current    
Operating lease liabilities $51,538 
Noncurrent    
Operating lease liabilities $87,329 

Supplemental cash flow information related to leases were as follows:

SCHEDULE OF CASH FLOW INFORMATION RELATED LEASES

  Nine Months
Ended
 
  September 30, 2022 
Cash paid for amounts included in the measurement of lease liabilities    
Operating cash flows from operating leases $24,000 
ROU assets recognized in exchange for lease obligations    
Operating leases $160,255 

 

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On The table below present the remaining lease terms and discount rates for operating lease.

SCHEDULE OF REMAINING LEASE TERMS AND DISCOUNT RATES

September 30, 2022
Weighted-average remaining lease term
Operating lease2.58 years
Weighted-average discount rate
Operating lease5.25%

Maturities of lease liabilities as of September 30, 2020,2022, were as follows:

SCHEDULE OF MATURITIES OF LEASE LIABILITIES

  Operating Lease 
2022 (three months remaining)  14,400 
2023  57,600 
2024  57,600 
2025  19,200 
Thereafter  - 
Total lease payments  148,800 
Less: amount of lease payments representing interest  (9,933)
Present value of future minimum lease payments $138,867 
Less: current obligations under lease $(51,538)
Non-current obligations $87,329 

Note 6 - PREPAID EXPENSE – NONCURRENT PORTION

Effective July 13, 2022 the Company entered into a manufacturing contract with Montrade S.p.A., (“Montrade”) a company based in Bologna, Italy, for Montrade to manufacture and install the consumable manufacturing equipment. The Company made an Asset Purchase Agreement with Xten, pursuantinitial payment of $589,265 USD and is required to which it acquired a portfoliomake additional payments 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. As considerationup to $1,086,465 USD for the acquisition,module as certain stages are completed. Montrade is an industry leading designer and manufacturer of machines for a wide range of products, including heated tobacco products. Additionally in August the Company issued Xtenincurred engineering service costs directly related to the Warrants, including (i)automation equipment from a Series A Common Stock Purchase Warrant exercisable for 7,000,000 sharesconsultant with an added cost of common stock commencing on$12,023 USD resulting in additions to prepaid expenses of $601,288 at September 30, 2023 and expiring on September 30, 2026, (ii) a Series B Common Stock Purchase Warrant exercisable for 7,000,000 shares of common stock commencing on September 30, 2026 and expiring on September 30, 2029, and (iii) a Series C Common Stock Purchase Warrant exercisable for 7,000,000 shares of common stock commencing on September 30, 2029 and expiring on September 30, 2032. The Company has the right to accelerate or extend the exercise period of each series of Warrants in its discretion. In addition, the exercise period of each series of Warrants automatically accelerates in the event of a “change of control” (as defined in the Warrants) prior to such series of Warrants becoming exercisable by its respective terms. The Asset Purchase Agreement contained customary indemnification provisions. The assets have been accounted for at a carrying value of $191,594. On September 30, 2020, the Company entered into another Assets Purchase Agreement with Xten, a common control entity, to purchase certain assets including multiple pieces of laboratory and workshop equipment; custom built plume and inhalation testing machine; computers, monitors and accessories; prepaid rent; and, laboratory/workshop supplies, for a purchase price of $268,358, The Other Asset Purchase Agreement also contained customary indemnification provisions. The purchase price was tendered to Xten in November 2020.2022.

 

NOTE 5Note 7SUBSEQUENT EVENTS

On October 18, 2021, we sold a total of 5,000 shares of our common stock for $50,000 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.

 

On October 21, 2021, we granted 428,5742022, our Board of Directors (“Board”) awarded stock options to the management team valued39 individuals, representing up to a maximum of 595,000 shares of our common stock, exercisable at $4,282,71710.00. per share. The individuals include executive officers, William Bartkowski and Daniel Markes, one of our employees, certain professional advisors, and another 29 individuals who are considered related parties in that they are employed by or otherwise associated with entities owned or controlled by our chairman and chief executive officer, Alexander Chong. Substantially all of the related party individuals are also non U.S. persons. The grants were made in amounts and with exercise prices and vesting conditions consistent with our corporate development objectives, including but not limited to our plans to begin commercializing our technology internationally in mid-2023. All of the awards were made for work or services provided or to be provided to CQENS. The Board made the grants under the Company’s shareholder approved 2014 Equity Compensation Plan (the “Plan”) and pursuant to the terms and conditions of the Plan and subject to vesting conditions contained in the Plan and options granted thereunder.

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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 nine months ended September 30, 2021,2022 and 20202021 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 20202021 10-K, and our other filings with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report.

 

Overview

 

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

 

Our high-temperature non-combusting technology is supported by 2122 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 of tobacco consumption, especially when compared to the inhalation of the smoke produced by combustible products, i.e., cigarettes, cigars and pipes. Independent tests of our system’s prototypes supported the benefits of rapid heating, confirmed non-combustion, even at high temperatures and produced better toxicology results, 98% better, when compared to products requiring combustion and compared to other non-combusting technologies currently on the market.

 

Our low-temperature, aerosolizing technology is supported by 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 as the “international inhalation market,” a market that includes herbal, pharmaceutical, medical, recreational and lifestyle products and ingredients. Industry experts, like Nielsen, Grand View Research, Fior Markets, have published reports in the last half of 20202021 that we have consolidated; these consolidated estimates support that this as an $880a $950 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 the combustible tobacco market, comprising 92% of the total. Our near-term focus is on this segment, which represents the greatest opportunity for growth and the greatest opportunity to positively impact public health and wellness.

 

OurWe believe our HnB technologies are of great interest to the international tobacco industry and the growing hemp/CBD and cannabis industries. HnBs 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, 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 late 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 HnB 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%.

 

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Since late 2019 we have focused our efforts on commercializing our HnB technology. This entry began with the December 31, 2019 transaction pursuant to which we acquired the following assets from Xten Capital Group, Inc., formerly known as Chong Corporation (“Xten”), a related party:

 

assignment 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

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 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.

 

During 2020 and into 2021Through to the date of this report we have continued our efforts that we beganbegun in 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 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 third quartersecond half of 2021;2022;
   
 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 BurnHeat-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;

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 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-builtcustom 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:

 

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 to commercialize CQENS’ patented and patent pendingpatent-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 finalized and for The Barker Group to invest in CQENS with terms and conditions yet to be finalized. The foregoing initiatives, as well as other items contained in the non-binding MOU, are subject to the completion and execution of definitive agreements, all of which will be subject to customary closing conditions.

 

Since signing the MOU, we have been engaged in discussions and negotiations designed to identify an initial target market in the U.S. and the EU, to develop a product for that market and agree to a definitive agreement to launch the product.

On August 17, 2021, CQENSJuly 13, 2022, we announced that we completed R&D stages for the module for the automated manufacture of consumables for its proprietary, patented and patent pending Heat-not-Burn system. The system heats plant-based and/or medicant-infused formulations to produce aerosols for the inhalation of the plant and medicant constituents without combustion or the constituents of combustion, although there are no assurances its products can be commercialized. Contemporaneous with the completion of these R&D stages, effective July 13, 2022 the Company entered into a Joint Venture Agreement (the “JV Agreement”manufacturing contract with Montrade S.p.A., (“Montrade”) with Firebird Manufacturing, LLC (“Firebird”). Undera company based in Bologna, Italy, for Montrade to manufacture and install the termsmodule. The Company made an initial payment of the JV Agreement the parties have agreed$589,265 USD and is required to organize, negotiate, and establish a limited liability company joint venture entity (the “Joint Venture Entity”)make additional payments of up to $1,086,465 USD for the purposesmodule as certain stages are completed. Montrade is an industry leading designer and manufacturer of developing, manufacturing, and distributing Heat- not-Burn (“HnB”) hemp/CBDmachines for a wide range of products, in the United States for an initial term of four years, subject to an automatic renewal for successive one-year terms provided certain conditions are met. The Joint Venture Entity will be owned equally by the Company and Firebird. The Company will license its intellectual property to the Joint Venture Entity, receiving a 10% royalty on direct consumable sales and will be responsible for designing and coordinating the manufacture of an HnB device exclusively conformed to heat but not combust hemp/CBD. Firebird will be responsible for manufacturing the hemp/CBD consumable and distributing both the device and consumables to the retail locations where the product can be lawfully sold.including heated tobacco products.

 

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Pursuant to the JV Agreement,On August 1, 2022 the Company and Firebird will each receive on a monthly basis a distribution out of the Joint Venture profits, if any, equal to 30% after payment of expenses. The remaining profits, if any, will be distributed annually. The JV Agreement also provideswas informed that the parties will be prohibited from marketing a competing product for two years following the terminationPatent Office of the Joint Venture Entity, subject to penalty in the amount of $5 million. The JV Agreement also sets forth in general terms the respective contributions of the parties, including equipment, manufacturing facilities, intellectual property, and expertise. Under the terms of the JV Agreement, there will be five managers of the Joint Venture Entity, three of whom will be designated bySingapore issued the Company Singapore Patent No. 11202006324T for our innovative Heat-not-Burn (“HnB”) system on January 21, 2022. We were further informed that the US Patent and two of whom will be designated by Firebird. InTrademark Office issued the event the parties formalize and enter into a Joint Venture Entity Operating Agreement, Jay Barker, an affiliate of Firebird, may be appointed to the Company’s board of directors. The JV Agreement contains customary representations and warranties.Company US Patent No. 11,272,741 also for our HnB system on March 15.2022.

 

The parties have also agreed to indemnify each other andOn August 2, 2022 we were informed that the JV against any losses arising frompatent office of Japan issued the Company a breach by the other of certain representations and warranties. The execution of the Joint Venture Entity Operating Agreement is subject to formalizing the definitive Joint Venture Operating Agreement and the execution of additional agreements, including a license agreementPatent, registration number 7093919, for the use of intellectual property, certain product development agreements, supply agreements and such other agreements as may be necessary to further the purpose of the JV Agreement.our HnB system on June 23, 2022. As of the date of this filing, we now have a total of four HnB related Patents and another 21 pending US and international patents for the filing of this report no other agreements have been entered into by the parties and there are no assurances that the parties will complete and formalize such agreements.system.

 

Going concern

 

For the first nine months of 2021ended September 30, 2022, we reported a net loss of $3,332,909 and net cash used in operations of $2,741,967 compared to a net loss of $3,208,938 and net cash used in operations of $1,023,543 compared to a net loss of $1,046,031 and net cash used in operations of $703,143 for the first nine months of 2020.ended September 30, 2021. At September 30, 2021,2022, we had cash on hand of $4,026,095$933,622 and an accumulated deficit of $8,052,520.$16,642,403. The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2020,2021 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our minimallimited 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 the first nine months of 20212022 or 2020.2021. Our total operating expenses for the third quarter of 20212022 increased 28.5%57.3% over those reported in the third quarter of 20202021 while the first nine-monthsnine months of 20212022 increased 208%3.9% over those reported in the first nine months of 2020.2021. General and administrative expenses increased 732%decreased 7.0% in the first nine months of 20212022 compared to the same period in 20202021 due mainly to the reduction of non-cash stock option expense of $1,854,459$1,526,561- relating to the options granted in 2021 to two contractedconsulting engineers involved in research and development activities.activities during the first nine months of 2022 compared to the same period in 2021. This reduction in cost was offset with additional non-cash options granted to three consultants of $799,042, increased compensation paid to employees of $413,470 and the recruitment costs of $37,623 for our employee engineer involved in research and development in the first nine months of 2022 compared to the same period in 2021.

 

Research and development expenses in the third quarter of 2021 decreased 8.9%2022 increased 49.3% over this same period in 20202021 while the first nine months show a slight decreasean increase of 0.3%25.3% over the first nine months of 2020.2021 which reflects the cost of building and testing product prototypes and consumables. Professional fees decreased 14.3%increased 132.0% in the third quarter of 20212022 compared to the third quarter of 2020 and increased 68%2021 with an overall increase of 30.9% in the first nine months of 20212022 when compared to this same period in 2020 which2021. The increase is attributable primarily to an increase in consulting services and legaltheir associated fees. Professional fees in 2022 includes an agreement entered into in January 2022 with an unrelated third party whereby the consultant will provide introductions to manufacturers and advice and counsel regarding potential manufacturers for the products of the Company in the Peoples Republic of China and/or other territories of Asia and general business plan and strategy in the region as required by the Company. Further the consultant will identify and introduce high net worth capital sources (qualified non-U.S. investors) to the Company. In exchange the Company paid a consulting fee of $333,000.

 

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 currently quantify at this time the expected increases in operating expenses in future periods.

 

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Liquidity and capital resources

 

Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. As of September 30, 2021,2022, we had $4,026,095$933,622 in cash and cash equivalents and a working capital surplus of $3,983,571$930,611 as compared to $589,153$3,588,377 in cash and cash equivalents and a working capital surplus of $312,132$3,532,821 at December 31, 2020.2021. Our current liabilities decreased $239,529 or 71.2%increased $111,983 from December 31, 2020, primarily due to2021, reflecting a $32,735 increase in accounts payable, a $27,710 increase in accrued expenses and the repaymentaddition of $51,538 in the related party loan.current portion of our lease liability. Our source of operating capital in the first nine months of 2021ended September 30, 2022, came from the sale of 35,000 shares of our common stock that raised $350,000 and from the cash we had on hand compared to the nine months ended September 30, 2021, where we sold 545,288 shares of our common stock raising $4,810,000 compared to the same period in 2020 where our source of operating capital came from the sale of 496,898 shares of our common stock raising $2,400,000.that raised $4,810,000.

 

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.

 

We will need to raise an additional $3,000,000 to $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.

 

Summary of Cash Flowscash flows

 

 September 30, 2021 September 30, 2020  September 30, 2022 September 30, 2021 
Net cash (used) in operating activities $(1,023,543) $(703,143) $(2,741,967) $(1,023,543)
Net cash (used) in investing activities $(93,971) $(152,372) $(262,788) $(93,971)
Net cash provided by financing activities $4,554,456  $2,110,000  $350,000  $4,554,456 

 

Our cash used in operating activities increased 45.6%167.9% in the first nine months of 2021ended September 30, 2022, when compared to the first nine months of 2020.ended September 30, 2021. During these time periods we primarily used the cash to primarily fund our net losses.

 

In the first nine months of 20212022 there was $93,971$262,788 net cash used in investing activities from capitalization of IP related legal fees, for additions to furniture and equipment and leasehold improvements compared to $152,372net cash used in investing activities of $93,971 for the capitalization of IP related legal fees in the same period of 2020.in 2021.

 

NetIn the first nine months of 2022 we had $350,000 net cash provided by financing activities forfrom the first nine monthssale of 35,000 shares of our common stock. In the same period in 2021 our net cash provided by financing activities consisted of $4,810,000 raised from the sale of 545,288 shares of our common stock and $255,544 in debt repayment to Xten compared to $2,400,000 raised from the sale of 496,898 share of our common stock, repayment, and satisfaction in full of the convertible note of $40,000, additional borrowing of $2,500 from Xten and $250,000 repayment of related party debt to Xten, a common control entity, in the first nine months of 2020.$255,544.

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 consolidatedunaudited financial statements for 20202021 appearing in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 15, 2021.14, 2022.

 

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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, 2020.2021. 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 orderSubject to do so,the availability of sufficient capital, we will need additional capital to permit us to hire employees and put the requisite controls in place. We had expectedexpect to expand our accounting resources during 2022, in 2019, which was subsequently delayed into 2020 and has now been delayed into 2021. Given the uncertainties with our ability to raise working capital as discussed earlier in this report, there are no assurances we will be ablean effort to remediate the material weaknesses in our internal control over financial reporting during 2021.reporting.

 

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 20202021 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.

 

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

 

During the period covered by this report, the Company issued the unregistered equity securities disclosed below.

On September 28, 2021,July 11, 2022 we sold a total of 296,00035,000 shares of our common stock for $350,000 to elevenan investor in a private transaction. The investor was a non-U.S. Persons for a total of $2,960,000. The shares issued contain a legend restricting their transferability absent registration of applicable exemption. The recipients were non-U.S. Persons,Person, and the issuance was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on an exemption provided by Regulation S promulgated thereunder.thereunder and the shares issued contain a legend restricting their transferability absent registration of applicable exemption. We did not pay a commission or finder’s fee and are using proceeds for working capital.

On September 28, 2021,July 11, 2022 we sold 5,000issued 10,000 shares of our common stock to an investora consultant for $50,000the consultant’s guidance in a private transaction.identifying business opportunities, partners and other skilled consultants in both Asia and North America. The recipient was an accredited investor and the shares issued contain a legend restricting their transferability absent registration of applicable exemption. The issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(a)(2). We did not pay a commission or finder’s fee and are using the proceeds for working capital.

 

[On September 30, 2021, we sold 30,000October 21, 2022 the Company issued stock option awards to 39 individuals, such option awards exercisable for up to an aggregate of 595,000 shares of our common stock, exercisable at $10.00 per share. The individuals include executive officers, William Bartkowski and Daniel Markes, one of our employees, certain professional advisors, and another 29 individuals who are considered related parties in that they are employed by or otherwise associated with entities owned or controlled by our chairman and chief executive officer, Alexander Chong. Substantially all of the related party individuals are also non U.S. persons. The awards were granted under the Company’s shareholder approved 2014 Equity Compensation Plan (the “Plan”) and pursuant to an investor for $300,000the terms and conditions of the Plan and subject to vesting conditions contained in a private transaction.the Plan and options granted thereunder. The recipient was an accredited investor andawards were granted pursuant to the shares issued contain a legend restricting their transferability absent registration of applicable exemption. The issuance was exemptexemption from registration under the Securities Act in reliance on an exemption provided by Section 4(a)(2). We did not pay of the Securities Act of 1933, as amended, and/or Regulation S promulgated thereunder. The option awards contain a commissionrestriction restricting their transferability subject to registration or finder’s feeapplicable exemption and are usingfurther subject to additional transfer restrictions under the proceeds for working capital.Plan.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable to our company’s operations.

 

Item 5. Other Events.Information.

 

None.

 

Item 6. Exhibits.

    Incorporated by Reference Filed or
No. Exhibit Description Form 

Date

Filed

 Number 

Furnished

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 Joint Venture Agreement made as of the 17th day of August 2021 by and among Firebrand Manufacturing, LLC and CQENS Technologies, Inc. 8-K 8/23/21 10.1  
10.2 Form of Regulation S Stock Purchase Agreement       

Filed

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)  
10.1 Commercial Lease Agreement Research and Development Facilities effective April 15, 2022 10-K 4/14/22 10.20  

17

10.2 Purchase Agreement between CQENS Technologies, Inc. and Montrade S.P.A. effective July 13, 2022+ 10-Q 8/15/22 10.2  
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 Inline XBRL Instance Document       Filed
101.SCH Inline XBRL Taxonomy Extension Schema Document       Filed
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document       Filed
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document       Filed
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document       Filed
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document       Filed
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)        

+ Exhibits and/or Schedules have been omitted. The Company hereby agrees to furnish to the Staff of the Securities and Exchange Commission upon request any omitted information.

18

 

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.
  
November 15, 202114, 2022By:/s/ Alexander Chong
  Alexander Chong, Chief Executive Officer
   
November 15, 202114, 2022By:/s/ Daniel Markes
  Daniel Markes, Chief Financial Officer

19