UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 |
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 |
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 ☒ 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 filer ☒ | Smaller 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 date. May 9,November 14, 2022. shares of common stock are issued and outstanding as of
TABLE OF CONTENTS
Page No. | ||
PART 1 – FINANCIAL INFORMATION | ||
Item 1. | Financial Statements (Unaudited). | |
Item 2. | Management Discussion and Analysis of Financial Condition and Results of Operations. | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | |
Item 4. | Controls and Procedures. | |
PART II – OTHER INFORMATION | ||
Item 1. | Legal Proceedings. | |
Item 1A. | Risk Factors. | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | |
Item 3. | Defaults upon Senior Securities. | |
Item 4. | Mine Safety Disclosures. | |
Item 5. | Other Information. | |
Item 6. | Exhibits. |
i |
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; | |
● | our ability to raise capital; |
● | business risks, including: |
● | our limited operating history and lack of 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 establish and maintain strategic 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, 2021 as filed on April 14, 2022 (the “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 refer to CQENS Technologies Inc., a Delaware corporation. In addition, “first“third quarter of 2022” refers to the threenine months ended March 31,September 30, 2022, “first“third quarter of 2021” refers to the threenine months ended March 31,September 30, 2021, “2021” refers to the year ended December 31, 2021, and “2022” refers to the year ending December 31, 2022. The information which appears on our web site at www.cqens.com is not part of this report.
ii |
PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements.
CQENS Technologies Inc.
Balance Sheets
March 31, 2022 | December 31, 2021 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 2,585,676 | $ | 3,588,377 | ||||
Prepaid expenses | 468,050 | 143,369 | ||||||
Total Current Assets | 3,053,726 | 3,731,746 | ||||||
Equipment, net | 192,833 | 190,005 | ||||||
Intellectual property, net | 769,273 | 707,760 | ||||||
TOTAL ASSETS | $ | 4,015,832 | $ | 4,629,511 | ||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 181,934 | $ | 82,126 | ||||
Accrued expenses | 65,794 | 116,799 | ||||||
Total Current Liabilities | 247,728 | 198,925 | ||||||
TOTAL LIABILITIES | 247,728 | 198,925 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred Stock: $ | par value: shares authorized shares issued and outstanding at March 31, 2022 and December 31, 2021- | - | ||||||
Common Stock: $ | par value; shares authorized: shares issued and outstanding at March 31, 2022 and December 31, 20212,602 | 2,602 | ||||||
Additional paid-in capital | 17,875,924 | 17,737,478 | ||||||
Accumulated deficit | (14,110,422 | ) | (13,309,494 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | 3,768,104 | 4,430,586 | ||||||
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY | $ | 4,015,832 | $ | 4,629,511 |
See accompanying notes to unaudited financial statements
September 30, 2022 | December 2021 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 933,622 | $ | 3,588,377 | ||||
Prepaid expenses | 307,897 | 143,369 | ||||||
Total Current Assets | 1,241,519 | 3,731,746 | ||||||
Equipment, net | 182,759 | 190,005 | ||||||
Intellectual property, net | 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 | $ | 3,072,854 | $ | 4,629,511 | ||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 114,861 | $ | 82,126 | ||||
Accrued expenses | 144,509 | 116,799 | ||||||
Current portion of lease liability | 51,538 | - | ||||||
Total Current Liabilities | 310,908 | 198,925 | ||||||
Lease liability, net of current portion | 87,329 | - | ||||||
TOTAL LIABILITIES | 398,237 | 198,925 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred Stock: $ | par value: shares authorized shares issued and outstanding at September 30, 2022 and December 31, 2021- | - | ||||||
Common Stock: $ | par value; shares authorized: shares issued and outstanding at September 30, 2022 and issued and outstanding at December 31, 20212,606 | 2,602 | ||||||
Additional paid-in capital | 19,314,414 | 17,737,478 | ||||||
Accumulated deficit | (16,642,403 | ) | (13,309,494 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | 2,674,617 | 4,430,586 | ||||||
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY | $ | 3,072,854 | $ | 4,629,511 | ||||
See accompanying notes to unaudited financial statements |
CQENS Technologies Inc.
Statements of Operations
(Unaudited)
2022 | 2021 | |||||||||||||||||||||||
Three months ended March 31, | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||
General and administrative | $ | 413,953 | $ | 1,599,051 | $ | 433,299 | $ | 321,206 | $ | 2,066,156 | $ | 2,221,761 | ||||||||||||
Research and development | 154,928 | 151,535 | 255,643 | 171,263 | 572,593 | 456,902 | ||||||||||||||||||
Professional fees | 232,047 | 59,414 | 266,719 | 114,968 | 694,149 | 530,298 | ||||||||||||||||||
Total Operating Expenses | 800,928 | 1,810,000 | 955,661 | 607,437 | 3,332,898 | 3,208,961 | ||||||||||||||||||
Total Operating Loss | (800,928 | ) | (1,810,000 | ) | ||||||||||||||||||||
Other Income (Expense) | - | 39 | ||||||||||||||||||||||
Other (Expense) | (11 | ) | (16 | ) | (11 | ) | 23 | |||||||||||||||||
Net Loss | $ | (800,928 | ) | $ | (1,809,961 | ) | $ | (955,672 | ) | $ | (607,453 | ) | $ | (3,332,909 | ) | $ | (3,208,938 | ) | ||||||
Basic and diluted loss per common share | $ | (0.03 | ) | $ | (0.07 | ) | (0.04 | ) | (0.02 | ) | (0.13 | ) | (0.13 | ) | ||||||||||
Basic and diluted weighted average shares outstanding | 26,015,595 | 25,415,940 | 26,055,704 | 25,658,186 | 26,029,111 | 25,545,986 |
See accompanying notes to unaudited financial statements
CQENS Technologies Inc.
Statements of Changes in Stockholders’ Equity
For the three and nine months ended March 31,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 | Common Stock | |||||||||||||||||||||||||||||||||||||||
Number of Shares | $0.0001 Par Value | Additional Paid in Capital | Accumulated Deficit | Total | 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 | 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 | 138,446 | - | $ | 138,446 | - | - | 1,126,940 | - | $ | 1,126,940 | ||||||||||||||||||||||||||||||
Net loss | - | - | - | (800,928 | ) | $ | (800,928 | ) | ||||||||||||||||||||||||||||||||
Net Loss | - | - | - | (3,332,909 | ) | $ | (3,332,909 | ) | ||||||||||||||||||||||||||||||||
Balance March 31, 2022 | 26,015,595 | $ | 2,602 | $ | 17,875,924 | $ | (14,110,422 | ) | $ | 3,768,104 | ||||||||||||||||||||||||||||||
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, 2020 | 25,397,685 | $ | 2,540 | $ | 5,990,194 | $ | (4,843,582 | ) | $ | 1,149,152 | ||||||||||
Beginning balance | 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 issued 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 | ||||||||||
Ending balance | 25,469,114 | $ | 2,547 | $ | 7,980,314 | $ | (6,653,543 | ) | $ | 1,329,318 |
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
CQENS Technologies Inc.
Statements of Cash Flows
(Unaudited)
2022 | 2021 | |||||||||||||||
Three Months Ended March 31, | Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net loss | $ | (800,928 | ) | $ | (1,809,961 | ) | $ | (3,332,909 | ) | $ | (3,208,938 | ) | ||||
Adjustments to reconcile net loss to net cash used in operations: | ||||||||||||||||
Amortization expense | 16,245 | 13,727 | 54,327 | 43,933 | ||||||||||||
Lease expense | 21,388 | - | ||||||||||||||
Depreciation expense | 4,972 | 4,484 | 15,046 | 13,452 | ||||||||||||
Stock options expense | 138,446 | 1,490,127 | 1,126,940 | 1,854,459 | ||||||||||||
Common stock issued for consulting services | 100,000 | 252,504 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Prepaid expenses | (324,681 | ) | 6,343 | (164,528 | ) | 5,032 | ||||||||||
Prepaid expenses – noncurrent portion | (601,288 | ) | - | |||||||||||||
Accounts payable | 99,808 | (5,091 | ) | 32,735 | (7,123 | ) | ||||||||||
Lease liability | (21,388 | ) | - | |||||||||||||
Accrued expenses | (51,005 | ) | 6,018 | 27,710 | 23,138 | |||||||||||
Net cash used in operating activities | (917,143 | ) | (294,353 | ) | (2,741,967 | ) | (1,023,543 | ) | ||||||||
Cash flows from investing activities | ||||||||||||||||
Cash flows used in investing activities | ||||||||||||||||
Additions to intellectual property | (77,758 | ) | (45,297 | ) | (236,944 | ) | (93,971 | ) | ||||||||
Additions to furniture and equipment | (7,800 | ) | - | (7,800 | ) | - | ||||||||||
Leasehold improvements | (18,044 | ) | - | |||||||||||||
Net cash flows used in investing activities | (85,558 | ) | (45,297 | ) | (262,788 | ) | (93,971 | ) | ||||||||
Cash flows from financing activities | ||||||||||||||||
Proceeds from issuance of common stock | - | 500,000 | 350,000 | 4,810,000 | ||||||||||||
Net cash provided by financing activities | - | 500,000 | ||||||||||||||
Repayment of related party debt | - | (255,544 | ) | |||||||||||||
Net Cash provided by financing activities | 350,000 | 4,554,456 | ||||||||||||||
Net change in cash and cash equivalents | (1,002,701 | ) | 160,350 | (2,654,755 | ) | 3,436,942 | ||||||||||
Cash and cash equivalents, beginning of period | 3,588,377 | 589,153 | 3,588,377 | 589,153 | ||||||||||||
Cash and cash equivalents, end of period | $ | 2,585,676 | $ | 749,503 | $ | 933,622 | $ | 4,026,095 | ||||||||
Supplementary disclosure for non cash activities: | ||||||||||||||||
Right-of-use asset in exchange for lease liability | $ | 160,255 | $ | - |
See accompanying notes to unaudited financial statements
CQENS Technologies Inc.
Notes to Unaudited Financial Statements
March 31,September 30, 2022
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF BASIS OF PRESENTATION
Nature of Business
CQENS Technologies, Inc. (“we”, “our”, 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 quarter ofnine months ended September 30, 2022 the effects of the COVID-19 pandemic were 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 throughoutcontinues in 2022 and while 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 March 31,September 30, 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, 2021 audited financial statements. The results of operations for the period ended March 31,September 30, 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 and cash equivalents in excess of five 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 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.
7 |
NOTE 3 – STOCKHOLDERS’ EQUITY
ThereOn April 21, 2022, we granted 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 saleshares at an exercise price of $ per share. The fair market value of the options at the grant date using the Black Sholes option pricing model was determined to be $ .
On June 24, 2022 we granted 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 shares of the Company’s stock at an exercise price of $ per share. The fair market value of the options at the grant date using the Black Sholes option pricing model was determined to be $ .
On July 11, 2022 we sold duringfor $350,000 to an investor in a private transaction. We did not pay a commission or finder’s fee. shares of our common stock
On July 11, 2022 we issued first quarter of 2022.consultant’s guidance in identifying business opportunities, partners and other skilled consultants in both Asia and North America. shares of our common stock to a consultant for the
On February 15, 2021, we granted 2,036,625 was expensed 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 $ , based on the price of recent offerings; 2) expected term of years; 3) computed volatility of %; and 4) the risk-free rate of return of %. The exercise period of the immediately exercisable options terminates on . 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 shares at $ per share. of the grants are exercisable immediately, with the balance vesting over the next 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 $ of which $
On March 15, 2021, we sold a total of 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. shares of our common stock for $
On April 21, 2021, we sold a total of 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. shares of our common stock to two non-U.S. Persons each paying $
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 shares of our common stock valued at $ . 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 shares of our common stock valued at $ . 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 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. shares of our common stock for $
On September 28, 2021, we sold a total of 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.
shares of our common stock for $On September 28, 2021, we sold 50,000 to an investor in a private transaction. We did not pay a commission or finder’s fee.
shares of our common stock for $On September 30, 2021, we sold 300,000 to an investor in a private transaction. We did not pay a commission or finder’s fee.
shares of our common stock for $8 |
NOTE 4 – RELATED PARTY TRANSACTIONS
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. Rent for each of the firstthird quarters of 2022 and 2021 was $2,325. As of March 31,September 30, 2022, there is no outstanding balance for rent due to 5550 Nicollet LLC.
Note 5 – LEASES
We account for our leases under ASC 842, Leases, which requires all leases to be reported on the balance 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 as either operating or finance. Finance leases are generally those leases that would allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance leases are recorded in property and equipment, net. All other leases are categorized as operating leases. We did not have any finance leases as of September 30, 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 a single component and account for them as 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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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 lease | 2.58 years | |||
Weighted-average discount rate | ||||
Operating lease | 5.25 | % |
Maturities of lease liabilities as of September 30, 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 initial payment of $589,265 USD and is required to make additional payments of up to $1,086,465 USD for the 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 incurred engineering service costs directly related to the automation equipment from a consultant with an added cost of $12,023 USD resulting in additions to prepaid expenses of $601,288 at September 30, 2022.
Note 57 – SUBSEQUENT EVENTS
On April 15,October 21, 2022, we took possessionour Board of new researchDirectors (“Board”) awarded stock options to 39 individuals, representing up to a maximum of shares of our common stock, exercisable at $ per share. The individuals include executive officers, William Bartkowski and development space from a leaseDaniel Markes, one of our employees, certain professional advisors, and another 29 individuals who are considered related parties in that went into effect in Aprilthey are employed by or otherwise associated with a three-year term ending April 30, 2025 at an initial annual rate of $57,400 paid in monthly installments of $4,800. We have an option to extend for an additional -year period. Annual increases are tied to the U.S. Consumer Price Indexentities owned or controlled by our chairman and chief executive officer, Alexander Chong. Substantially all of the Bureau of Labor Statisticsrelated 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 Department of Laborawards were made for all Urban Consumers for San Francisco-Oakland-San Jose area.
On April 21, 2022 we granted optionswork 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 two consultants. Eachthe terms and conditions of the consultants wasPlan and subject to vesting conditions contained in the Plan and options granted options, fully vested upon grant, to purchase shares at an exercise price of $ per share. The fair market value of the options at the grant date using the Black Sholes option pricing model was determined to be $.thereunder.
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 threenine months ended March 31,September 30, 2022 and 2021 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 2021 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 22 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 2021 that we have consolidated; these consolidated estimates support that this as ana $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.
We 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%.
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. |
Through to the date of this report we have continued our efforts begun 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 second | |
● | 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 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: |
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● | 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 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 July 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 manufacturing contract with Montrade S.p.A., (“Montrade”) a company based in Bologna, Italy, for Montrade to manufacture and install the module. The Company made an initial payment of $589,265 USD and is required to make additional payments of up to $1,086,465 USD for the 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.
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On August 1, 2022 the Company was informed that the Patent Office of Singapore 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 Trademark Office issued the Company US Patent No. 11,272,741 also for our HnB system on March 15.2022.
On August 2, 2022 we were informed that the patent office of Japan issued the Company a Patent, registration number 7093919, for 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 system.
Going concern
For the first quarter ofnine months ended September 30, 2022, we reported a net loss of $800,928$3,332,909 and net cash used in operations of $917,143$2,741,967 compared to a net loss of $1,809,961$3,208,938 and net cash used in operations of $294,353$1,023,543 for the first quarter ofnine months ended September 30, 2021. At March 31,September 30, 2022, we had cash on hand of $2,585,676$933,622 and an accumulated deficit of $14,110,422.$16,642,403. The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2021 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our limited cash and no source of revenues which may not be sufficient to cover our operating costs. These factors, among others, despite the cash and cash equivalent amount on hand at the end of this quarter, raise substantial doubt about our ability to continue as a going concern 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 first quarternine months of 2022 or the first quarter of 2021. Our total operating expenses for the firstthird quarter of 2022 decreased 56%increased 57.3% over those reported in the third quarter of 2021 while the first nine months of 2022 increased 3.9% over those reported in the first quarternine months of 2021. General and administrative expenses decreased 74%7.0% in the first quarternine months of 2022 fromcompared to the comparablesame period in 2021 due mainly to the reduction of non-cash stock optionsoption expense of $1,490,127$1,526,561- relating to the options granted in 2021 to two consulting engineers involved in research and development 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 quarternine months of 2021 for2022 compared to the two contracted engineers involvedsame period in the research and development activities.2021.
Research and development expenses in the firstthird quarter of 2022 remained consistent showing a slight increase of 2%increased 49.3% over this same period in 2021.2021 while the first nine months show an increase of 25.3% over the first nine months of 2021 which reflects the cost of building and testing product prototypes and consumables. Professional fees increased 291%132.0% in the firstthird quarter of 2022 compared to the firstthird quarter of 2021 whichwith an overall increase of 30.9% in the first nine months of 2022 when compared to this same period in 2021. The increase is attributable primarily to an increase in consulting services and their 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 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 March 31,September 30, 2022, we had $2,585,676$933,622 in cash and cash equivalents and a working capital surplus of $2,805,998$930,611 as compared to $3,588,377 in cash and cash equivalents and a working capital surplus of $3,532,821 at December 31, 2021. Our current liabilities increased $48,803$111,983 from December 31, 2021, reflecting a $99,808$32,735 increase in accounts payable, offset by a $51,005 decrease$27,710 increase in accrued expenses.expenses and the addition of $51,538 in the current portion of our lease liability. Our source of operating capital in the first quarter ofnine months ended September 30, 2022, came solely from the cash on hand at the endsale of 2021 compared to the first quarter of 2021 where we sold 71,42935,000 shares of our common stock that raised $500,000.$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 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.
As of March 31, 2022 we have no outstanding debt with a related party where at the end of the first quarter of 2021 we owed a related party $255,544.
We will need to raise $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 flows
March 31, 2022 | March 31, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
Net cash (used) in operating activities | $ | (917,143 | ) | $ | (294,353 | ) | $ | (2,741,967 | ) | $ | (1,023,543 | ) | ||||
Net cash (used) in investing activities | $ | (85,558 | ) | $ | (45,297 | ) | $ | (262,788 | ) | $ | (93,971 | ) | ||||
Net cash provided by financing activities | $ | - | $ | 500,000 | $ | 350,000 | $ | 4,554,456 |
Our cash used in operating activities increased 212%167.9% in the first threenine months ofended September 30, 2022, when compared to the first threenine months ofended September 30, 2021. During these time periods we primarily used the cash to fund our net losses.
In the first quarternine months of 2022 there was $85,558$262,788 net cash used in investing activities from capitalization of IP related legal fees, and for additions to furniture and equipment and leasehold improvements compared to net cash used in investing activities of $45,297$93,971 for the capitalization of IP related legal fees in the first quarter ofsame period in 2021.
WeIn the first nine months of 2022 we had no$350,000 net cash provided by financing activities infrom the first quartersale of 2022.35,000 shares of our common stock. In the first quarter ofsame period in 2021 our net cash provided by financing activities consisted of $500,000$4,810,000 raised from the sale of 71,429545,288 shares of our common stock.stock and repayment of related party debt of $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 unaudited financial statements for 2021 appearing in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 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, 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. Subject to the availability of sufficient capital, we expect to expand our accounting resources during 2022.2022, in an effort to remediate the material weaknesses in our internal control over financial 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 2021 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.
None.During the period covered by this report, the Company issued the unregistered equity securities disclosed below.
On July 11, 2022 we sold 35,000 shares of our common stock for $350,000 to an investor in a private transaction. The investor was a non-U.S. 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 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 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. 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).
[On October 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 the terms and conditions of the Plan and subject to vesting conditions contained in the Plan and options granted thereunder. The awards were granted pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Regulation S promulgated thereunder. The option awards contain a restriction restricting their transferability subject to registration or applicable exemption and are further subject to additional transfer restrictions under the Plan.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable to our company’s operations.
Item 5. Other Information.
NoneNone.
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 | Commercial Lease Agreement Research and Development Facilities effective April 15, 2022 | 10-K | 4/14/22 | 10.20 | ||||||
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) |
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 |
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. | ||
By: | /s/ Alexander Chong | |
Alexander Chong, Chief Executive Officer | ||
By: | /s/ Daniel Markes | |
Daniel Markes, Chief Financial Officer |