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 March 31, 2023 |
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 ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. shares of common stock are issued and outstanding as of May 8, 2023.
TABLE OF CONTENTS
Page No. | ||
PART 1 – FINANCIAL INFORMATION | ||
Item 1. | Financial Statements (Unaudited). | 3 |
Item 2. | Management Discussion and Analysis of Financial Condition and Results of Operations. | 11 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 15 |
Item 4. | Controls and Procedures. | 16 |
PART II – OTHER INFORMATION | ||
Item 1. | Legal Proceedings. | 16 |
Item 1A. | Risk Factors. | 16 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 16 |
Item 3. | Defaults upon Senior Securities. | 17 |
Item 4. | Mine Safety Disclosures. | 17 |
Item 5. | Other Information. | 17 |
Item 6. | Exhibits. | 17 |
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, 2022 as filed on April 14, 2023 (the “2022 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 quarter of 2023” refers to the three months ended March 31, 2023, “first quarter of 2022” refers to the three months ended March 31, 2022, “2022” refers to the year ended December 31, 2022, and “2021” refers to the year ended December 31, 2021. The information which appears on our web site at www.cqens.com is not part of this report.
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PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements.
CQENS Technologies, Inc.
Balance Sheets
March 31, 2023 | December 31, 2022 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 98,321 | $ | 219,781 | ||||
Prepaid expenses | 102,101 | 182,713 | ||||||
Total Current Assets | 200,422 | 402,494 | ||||||
Equipment, net | 172,685 | 177,722 | ||||||
Intellectual property, net | 1,009,147 | 973,823 | ||||||
Right-of-use asset, net | 113,436 | 126,235 | ||||||
Leasehold improvement, net | 13,075 | 14,644 | ||||||
Prepaid expenses - noncurrent portion | 458,317 | 458,317 | ||||||
TOTAL ASSETS | $ | 1,967,082 | $ | 2,153,235 | ||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 130,365 | $ | 222,539 | ||||
Accrued expenses | 184,736 | 94,050 | ||||||
Related party loan | 450,000 | - | ||||||
Current portion of lease liability | 57,217 | 52,217 | ||||||
Total Current Liabilities | 822,318 | 368,806 | ||||||
Lease liability, net of current portion | 56,219 | 74,018 | ||||||
TOTAL LIABILITIES | 878,537 | 442,824 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred Stock: $ | par value: shares authorized shares issued and outstanding at March 31, 2023 and December 31, 2022- | - | ||||||
Common Stock: $ | par value; shares authorized: shares issued and outstanding at March 31, 2023 and issued and outstanding at December 31, 20222,608 | 2,607 | ||||||
Additional paid-in capital | 21,825,940 | 21,261,500 | ||||||
Accumulated deficit | (20,740,003 | ) | (19,553,696 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | 1,088,545 | 1,710,411 | ||||||
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY | $ | 1,967,082 | $ | 2,153,235 |
See accompanying notes to unaudited financial statements
3 |
CQENS Technologies, Inc.
Statements of Operations
(Unaudited)
Three months ended March 31, | ||||||||
2023 | 2022 | |||||||
Operating Expenses | ||||||||
General and administrative | $ | 684,523 | $ | 413,953 | ||||
Research and development | 337,072 | 154,928 | ||||||
Professional fees | 161,351 | 232,047 | ||||||
Total Operating Expenses | 1,182,946 | 800,928 | ||||||
Total Operating Loss | (1,182,946 | ) | (800,928 | ) | ||||
Other (Expense) | (3,361 | ) | - | |||||
Net Loss | $ | (1,186,307 | ) | $ | (800,928 | ) | ||
Basic and diluted loss per common share | $ | (0.05 | ) | $ | (0.03 | ) | ||
Basic and diluted weighted average shares outstanding | 26,069,645 | 26,015,595 |
See accompanying notes to unaudited financial statements
4 |
CQENS Technologies, Inc
Statements of Changes in Stockholders’ Equity
For the three months ended March 31, 2023 and 2022
(Unaudited)
Common Stock | Additional | |||||||||||||||||||
Number of Shares | $0.0001 Par Value | Paid in Capital | Accumulated Deficit | Total | ||||||||||||||||
Balance, December 31, 2022 | 26,065,595 | $ | 2,607 | $ | 21,261,500 | $ | (19,553,696 | ) | $ | 1,710,411 | ||||||||||
Stock options expense | - | - | 384,441 | - | $ | 384,441 | ||||||||||||||
Common stock issued for cash | 9,000 | 1 | 179,999 | - | $ | 180,000 | ||||||||||||||
Net loss | - | - | - | (1,186,307 | ) | $ | (1,186,307 | ) | ||||||||||||
Balance March 31, 2023 | 26,074,595 | $ | 2,608 | $ | 21,825,940 | $ | (20,740,003 | ) | $ | 1,088,545 |
Common Stock | Additional | |||||||||||||||||||
Number of Shares | $0.0001 Par Value | Paid in Capital | Accumulated Deficit | Total | ||||||||||||||||
Balance, December 31, 2021 | 26,015,595 | $ | 2,602 | $ | 17,737,478 | $ | (13,309,494 | ) | $ | 4,430,586 | ||||||||||
Stock options expense | - | - | 138,446 | - | $ | 138,446 | ||||||||||||||
Net loss | - | - | - | (800,928 | ) | $ | (800,928 | ) | ||||||||||||
Balance, March 31, 2022 | 26,015,595 | $ | 2,602 | $ | 17,875,924 | $ | (14,110,422 | ) | $ | 3,768,104 |
See accompanying notes to unaudited financial statements
5 |
CQENS Technologies Inc.
Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (1,186,307 | ) | $ | (800,928 | ) | ||
Adjustments to reconcile net loss to net cash used in operations: | ||||||||
Amortization expense | 23,729 | 16,245 | ||||||
Lease expense | 12,799 | - | ||||||
Depreciation expense | 5,037 | 4,972 | ||||||
Stock options expense | 384,441 | 138,446 | ||||||
Changes in operating assets and liabilities: | ||||||||
Prepaid expenses | 80,612 | (324,681 | ) | |||||
Accounts payable | (92,174 | ) | 99,808 | |||||
Lease liability | (12,799 | ) | - | |||||
Accrued expenses | 90,686 | (51,005 | ) | |||||
Net cash used in operating activities | (693,976 | ) | (917,143 | ) | ||||
Cash flows used in investing activities | ||||||||
Additions to intellectual property | (57,484 | ) | (77,758 | ) | ||||
Additions to furniture and equipment | - | (7,800 | ) | |||||
Net cash flows used in investing activities | (57,484 | ) | (85,558 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from issuance of common stock | 180,000 | - | ||||||
Borrowing on debt from related party | 450,000 | - | ||||||
Net cash provided by financing activities | 630,000 | - | ||||||
Net change in cash and cash equivalents | (121,460 | ) | (1,002,701 | ) | ||||
Cash and cash equivalents, beginning of period | 219,781 | 3,588,377 | ||||||
Cash and cash equivalents, end of period | $ | 98,321 | $ | 2,585,676 |
See accompanying notes to unaudited financial statements
6 |
CQENS Technologies, Inc.
Notes to Financial Statements
March 31, 2023
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 of 2023 the effects of the COVID-19 pandemic were still felt by the Company. In addition, in the U.S. the Federal Reserve has begun raising interest rates sharply, the continuation of which could lead to a recession. We expect that any continued recessionary conditions will adversely impact CQENS in several ways. Our business model is dependent upon our ability to enter into strategic partnerships in the future, including alliances with consumer product companies, to enhance and accelerate the development and commercialization of our proposed products. We will also be dependent upon third party manufacturers to produce our proposed products, as well as third party marketing and distribution companies. We believe that our business opportunities are international in nature and include potential partnerships in the UK, the EU and Asia, including the People’s Republic of China. The worldwide pandemic caused by COVID-19 and current recessionary conditions has caused certain of these opportunities to be delayed. Should the pandemic continue and/or be prolonged throughout 2023 certain of these opportunities might be limited or lost. We also need to raise additional working capital to provide sufficient funding to bring our proposed products to market. The impact of a recession 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 any lingering effect the COVID-19 pandemic and recessionary conditions have on our 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 following unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such interim financial statements do not include all the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete annual financial statements. The information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the financial statements not misleading. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. The balance sheet as of March 31, 2023 has been derived from the Company’s annual financial statements that were audited by our independent registered public accounting firm but does not include all of the information and footnotes required for complete annual financial statements. These financial statements should be read in conjunction with the audited financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2022 and filed with the SEC on April 14, 2023 for a broader discussion of our business and the risks inherent in such business.
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.
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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, with limited cash resources, 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.
NOTE 3 – STOCKHOLDERS’ EQUITY
On February 16, 2023, we sold 150,000 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 March 9, 2023, we sold 30,000 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 $
For the three month period ended March 31, 2023 stock option expense totaled $ compared to $ for the same period in 2022.
There was sale of our common stock during the first quarter of 2022.
As of March 31, 2023, the Company had shares of common stock issued and outstanding.
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 first quarters of 2023 and 2022 was $2,325. As of March 31, 2023, there was an outstanding balance for rent due to 5550 Nicollet LLC of $ .
During the first quarter of 2023 the Company borrowed $450,000 from Xten Capital Group, a common control entity. The loan is due upon demand and is non-interest bearing.
During the first quarter of 2023 the Company paid $381 to Plexus International, a common control entity for accounting services.
Note 5 – LEASES
In March 2022 we entered into a three-year lease agreement commencing April 15, 2022 through 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 five-year period. Annual increases are tied to the U.S. Consumer Price Index of the Bureau of Labor Statistics of the Department of Labor for all Urban Consumers for San Francisco-Oakland-San Jose area. Based on the aforementioned consumer price index, the annual increase to rent beginning May 1, 2023 will be $375 bringing monthly installments to $5,175 and the annual rate to $62,100.
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 March 31, 2023. 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.
8 |
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 ASSETS AND LIABILITIES
March 31, 2023 | ||||
Assets | ||||
Leasehold improvement, net | $ | 13,075 | ||
Operating lease asset | $ | 113,436 | ||
Liabilities | ||||
Current | ||||
Operating lease liabilities | $ | 57,217 | ||
Noncurrent | ||||
Operating lease liabilities | $ | 56,219 |
Supplemental cash flow information related to leases were as follows:
SCHEDULE OF CASH FLOW INFORMATION RELATED LEASE
Three Months Ended March 31, 2023 | ||||
Cash paid for amounts included in the measurement of lease liabilities | ||||
Operating cash flows from operating leases | $ | 12,799 |
The table below present the remaining lease terms and discount rates for operating lease.
SCHEDULE OF REMAINING LEASE TERMS AND DISCOUNT RATES
March 31, 2023 | ||||
Weighted-average remaining lease term | ||||
Operating lease | 2.08 years | |||
Weighted-average discount rate | ||||
Operating lease | 5.25 | % |
Maturities of lease liabilities as of March 31, 2023, were as follows:
SCHEDULE OF MATURITIES OF LEASE LIABILITIES
Operating Lease | ||||
2023 (nine months remaining) | 42,676 | |||
2024 | 59,324 | |||
2025 | 20,476 | |||
Thereafter | - | |||
Total lease payments | 122,476 | |||
Less: amount of lease payments representing interest | (12,504 | ) | ||
Present value future minimum lease payments | $ | 113,436 | ||
Less: current obligations under lease | (57,217 | ) | ||
Non-current obligations | $ | 56,219 |
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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 on July 11, 2022 and is required to make additional payments of up to $1,086,465 USD for the module as certain stages are completed. As of March 31, 2023 no additional payments have been made. As of December 31, 2022, $130,948 of initial payment was expensed for design services completed by Montrade. The remaining payment of $458,317 is related to the manufacturing of the module for the automated manufacture of consumables for the Company’s proprietary, patented and patent pending Heat-not-Burn system. The $458,317 payment has been recorded as Prepaid expenses – noncurrent portion and remains categorized as such at March 31, 2023. Montrade is an industry leading designer and manufacturer of machines for a wide range of products, including heated tobacco products.
Note 7 – SUBSEQUENT EVENTS
On May 1, 2023 the three year lease we entered into in March 2022 saw an increase in rent of $375 per month bringing monthly installments to $5,175 and the annual rate to $62,100.
Effective as of the date of the filing of this report, we have borrowed an additional $250,000 from Xten Capital Group, a common control entity. The loan is due upon demand and is non-interest bearing.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations for the three months ended March 31, 2023 and 2022 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 2022 10-K, and our other filings with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report.
Overview
We are a technology company. We design and develop innovative methods to heat plant-based and/or medicant-infused formulations to produce aerosols for the efficient and efficacious inhalation of the plant and medicant constituents contained therein. We have two ways of accomplishing this: 1) at high temperatures via induction without combustion or the constituents of combustion; and 2) at low temperatures, where we heat an inert carrier, producing inhalable, medicant-infused aerosols while maintaining the integrity of the active ingredient(s).
Our high-temperature non-combusting technology is supported by 34 U.S. and international patents and pending patents. Among the applications of our patented and patent-pending technology are those for Heat-not-Burn (“HnB”) devices. Independent tests of our system’s prototypes supported the benefits of rapid heating, confirmed non-combustion, even at high temperatures, and produced better toxicology results, greater than 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 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.
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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, published reports in 2021 and 2022 that we have consolidated; these consolidated estimates support that this is an $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 have applications to the international tobacco industry and the growing hemp/CBD and cannabis industries. HnBs represent the latest in tobacco and inhalable technologies, and 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%. The Philip Morris product received the approval of the US FDA in 2019, via both a Pre-market Tobacco Authorization (“PMTA”) and Modified Risk Tobacco Product (“MARTP”) designation to market the product in the US. However, the International Trade Commission ruled on September 29, 2021 that the Philip Morris product violated certain British American Tobacco patents and ruled that the Philip Morris product could not be imported to or sold in the U.S. As of the date of this report there are no FDA approved or legal HnB products on the market in the US.
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: 1) all patent applications and patent related documents and materials that had been assigned, owned, or held by Xten in the field of HnB methods and designs, the backbone of the CQENS HnB system, 2) all documents and files related to device and tobacco consumable development, 3) all versions of prototyped embodiments, consisting of both device and tobacco consumable embodiments, and 4) all files, correspondence, communications and testing related to toxicology test results and consumer focus groups.
During 2020 and through March 31, 2023 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 completion of a Restated Operating Agreement sometime in 2023.
● 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;
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● 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 August 17, 2021, as a result of a previously executed Memorandum of Understanding with the Barker Group of Companies, we entered into a Joint Venture Agreement (the “JV Agreement”) with Firebird Manufacturing, LLC, a Barker Group company (“Firebird”). Under the terms of the JV Agreement the parties have agreed to organize, negotiate, and establish a limited liability company joint venture entity (the “Joint Venture Entity”) for the purposes of developing, manufacturing, and distributing Heat-hemp/CBD 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.
Pursuant to the JV Agreement, 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 provides that the parties will be prohibited from marketing a competing product for two years following the termination 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 by the Company and two of whom will be designated by Firebird. In 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.
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 agreement 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. The parties anticipate completing all of the relevant agreements no later than July 31, 2023 although there are no assurances that the parties will complete and formalize these agreements.
On July 13, 2022, we announced that we completed research and development (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.
On August 1, 2022 the Company was informed that the Patent Office of Singapore issued the Company Singapore Patent No. 11202006324T for our innovative 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.
On February 14, 2023, the Company was issued U.S. Patent 11,606,969 by the U.S. Patent and Trademark Office for a Heat-not-Burn Device and Method, representing the sixth Heat-not-Burn related patent that the Company has now been issued, three in the U.S., one in Japan, one in Singapore and one in Korea that was issued early in 2023.
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Going concern
For the first quarter of 2023 we reported a net loss of $1,186,307 and net cash used in operations of $693,976 compared to a net loss of $800,928 and net cash used in operations of $917,143 for the first quarter of 2022. At March 31, 2023, we had cash on hand of $98,321 and an accumulated deficit of $20,740,003. The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2022 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, 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.
Results of operations
We did not generate any revenues from our operations in either the first quarter of 2023 or the first quarter of 2022. Our total operating expenses for the first quarter of 2023 increased 48% over those reported in the first quarter of 2022 principally due to increased research and development expenses, and due to an increase in compensation expense resulting from previous stock option grants for consulting services. General and administrative expenses increased 65% in the first quarter of 2023 from the comparable period in 2022 due mainly to the increase in compensation expense from previous stock option grants.
Research and development expenses in the first quarter of 2023 increased 118% over this same period in 2022. This increase was impacted by manufacturing equipment design along with increased engineering services in the first quarter of 2023 over the first quarter of 2022. Professional fees decreased 30% in the first quarter of 2023 compared to the first quarter of 2022. This reduction is attributable primarily to the consulting services provided by Vilosophy UK, Ltd in the first quarter of 2022 that were not again incurred in this same period in 2023.
We expect that our operating expenses will increase as we continue to develop our business and we devote additional resources towards promoting that growth, most notably reflected in anticipated increases in research and development, general overhead, salaries for personnel and technical resources, as well as increased costs associated with our SEC reporting obligations. However, as set forth elsewhere in this report, our ability to continue to develop our business and achieve our operational goals is dependent upon our ability to raise significant additional working capital. As the availability of this capital is unknown, we are unable to quantify at this time the expected increases in operating expenses in future periods.
Liquidity and capital resources
Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. As of March 31, 2023, we had $98,321 in cash and cash equivalents and a working capital deficit of $621,896 compared to $219,781 in cash and cash equivalents and a working capital surplus of $33,688 at December 31, 2022. Our current liabilities increased $453,512 from December 31, 2022, reflecting a $92,174 decrease in accounts payable offset by a $90,686 increase in accrued expenses, a $450,000 increase in our borrowing from a related party, and a $5,000 increase in the current portion of our lease liability. Our source of operating capital in the first quarter of 2023 came from the cash on hand at the end of 2022, $450,000 in advances from Xten, a common control entity and $180,000 of proceeds from the sale of our common stock. Our source of operating capital in the first quarter of 2022 came solely from cash on hand.
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.
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On January 13, 2023, we entered into an agreement to borrow up to $1,000,000 from our largest shareholder, Xten Capital Group, on an as needed basis. Such borrowings will be for operations, interest free and due upon demand. At March 31, 2023 and as of the date of this filing, we have borrowed $450,000 and $200,000, respectively. On February 16, 2023, we sold 7,500 shares of our common stock for $150,000 in a private transaction. We did not pay a commission or finder’s fee and are using the proceeds for working capital. On March 9, 2023, we sold 1,500 shares of our common stock for $30,000 in a private transaction. We did not pay a commission or finder’s fee and are using the proceeds for working capital. We raised $350,000 from the sale of our securities during 2022.
As of March 31, 2023 we owe $450,000 to a related party. At the end of the first quarter of 2022, we had no related party debt.
As of the date of this report we still will need to raise $2,500,000 to $4,000,000 in additional capital during the next 12 months. 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. 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.
Summary of cash flows
March 31, 2023 | March 31, 2022 | |||||||
Net cash (used) in operating activities | $ | (693,976 | ) | $ | (917,143 | ) | ||
Net cash (used) in investing activities | $ | (57,484 | ) | $ | (85,558 | ) | ||
Net cash provided by financing activities | $ | 630,000 | $ | - |
Our cash used in operating activities decreased 24% in the first three months of 2023 compared to the first three months of 2022. During these time periods we primarily used the cash to fund our net losses.
In the first quarter of 2023 there was $57,484 net cash used in investing activities from for capitalization of our intellectual property compared to net cash used in investing activities of $85,558 in the same period in 2022 for capitalization of IP related legal fees and for additions to furniture and equipment.
We had net cash provided by financing activities in the first quarter of 2023 of $630,000 from the sale of our common stock and from borrowing from a related party. In the first quarter of 2022 we had no net cash provided by financing.
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 appearing later in this report and Note 2 to our audited consolidated financial statements appearing in our 2022 10-K.
Off balance sheet arrangements
As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable for a smaller reporting company.
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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 2022 10-K. These material weaknesses in our internal control over financial reporting result from limited segregation of duties and limited multiple level of review in the financial close process.
The existence of the continuing material weaknesses in our internal control over financial reporting increases the risk that a future restatement of our financials is possible. In order to remediate these material weaknesses, we will need to expand our accounting resources. We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal control over financial reporting on an ongoing basis, however, we do not expect that the deficiencies in our disclosure controls will be remediated until such time as we have remediated the material weaknesses in our internal control over financial reporting. Subject to the availability of sufficient capital, we expect to expand our accounting resources during 2023. 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.
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 2022 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.
On February 16, 2023, we sold 7,500 shares of our common stock for $150,000 in a private transaction to an accredited investor. We did not pay a commission or finder’s fee and are using the proceeds for working capital. The shares were issued under the exemption from registration provided by Section 4(a)(2) of the Act. The accredited investor and had access to information concerning the Company. The shares are restricted and contain a legend restricting their transfer subject to registration or applicable exemption.
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On March 9, 2023, we sold 1,500 shares of our common stock for $30,000 in a private transaction to an accredited investor. We did not pay a commission or finder’s fee and are using the proceeds for working capital. The shares were issued under the exemption from registration provided by Section 4(a)(2) of the Act. The accredited investor had access to information concerning the Company. The shares are restricted and contain a legend restricting their transfer subject to registration or applicable exemption.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable to our company’s operations.
Item 5. Other Information.
None.
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 | Certificate of Amendment to the Amended and Restated Certificate of Incorporation | 8-K | 12/18/19 | 3.5 | ||||||
3.5 | Bylaws | S-1 | 3/29/10 | 3(b) | ||||||
10.1 | Form of Stock Purchase Agreement | 8-K | 6/5/20 | 10.1 | ||||||
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 | Furnished* | ||||||||
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) | Filed |
* This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CQENS Technologies Inc. | ||
May 12, 2023 | By: | /s/ Alexander Chong |
Alexander Chong, Chief Executive Officer | ||
May 12, 2023 | By: | /s/ Daniel Markes |
Daniel Markes, Chief Financial Officer |
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