See accompanying notes to unaudited financial statements

VapAria CorporationCQENS Technologies Inc.

Consolidated Statements of OperationsChanges in Stockholders’ Equity (Deficit)

For the three and nine months ended September 30, 2020 and 2019

(Unaudited)

See accompanying notes to unaudited consolidated financial statements

VapAria CorporationCQENS Technologies Inc.

Consolidated Statements of Changes in Stockholders’ DeficitCash Flows

For the three and nine months ended September 30, 2019 and 2018

(Unaudited)

See accompanying notes to unaudited consolidated financial statements

VapAria CorporationCQENS Technologies Inc.

Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to unaudited consolidated financial statements

(Formerly VapAria CorporationCorporation)

Notes to Unaudited Consolidated Financial Statements

September 30, 20192020

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

Nature of Business

VapAria CorporationCQENS Technologies Inc. (“we”, “our”, the “Company”, “CQENS”) was incorporated underis a technology company with a proprietary method of heating plant-based consumable formulations that produce an aerosol that lead to the lawseffective and efficient inhalation of the Stateplant’s constituents. This is accomplished at a high temperature but without the accompanying constituents of Delaware on December 21, 2009 under the name OICco Acquisition IV, Inc. On August 19, 2014 we changed our corporate namecombustion. 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 VapAria Corporation.other methods of ingestion, smoking, vaping, swallowing or via topical application.

AsIn the first nine months of 2020 the effects of the dateCOVID-19 pandemic were felt by the Company. While the duration and full impact of the pandemic is unknown at this reporttime, we expect that the Companypandemic will continue to adversely impact CQENS in several ways. Our business model is a specialty pharmaceutical company engageddependent upon our ability to enter into strategic partnerships in the research, designfuture, including alliances with consumer product companies, to enhance and accelerate the development and commercialization of methodsour proposed products. We will also be dependent upon third party manufacturers to produce our proposed products, as well as third party marketing and medicantsdistribution companies. We believe that our business opportunities are international in nature and include potential partnerships in the UK, the EU and Asia, including the People’s Republic of China. The worldwide pandemic caused by COVID-19 have caused certain of these opportunities to address chronic conditions with novel, vapor-centric approachesbe delayed. Should the pandemic continue and /or be prolonged into 2021 certain of these opportunities might be limited or lost. We also need to pain management, appetite suppression, smoking cessation and various sleep disorders.

raise additional working capital to provide sufficient funding to bring our proposed products to market. The Company has limitedimpact of COVID-19 on the capital markets will make it more difficult for small, pre-revenue companies such as ours to access capital. We will continue to assess the impact of the COVID-19 pandemic on our company, however, at this time we are unable to predict all possible impacts on our company, our operations and while our executive officers devote a substantial amount of their time to the Company without cash compensation, as of September 30, 2019, had no employees.prospects.

The Company has a fiscal year end of December 31.

Basis of Presentation

Basis of Presentation - The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows as of September 30, 20192020 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 audited financial statements for the year ended December 31, 2018 audited financial statements.2019 appearing in its 2019 10-K. The results of operations for the periodperiods ended September 30, 20192020 are not necessarily indicative of the operating results for the full year.

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

Recent Accounting Pronouncements –In February 2016, the Financial Accounting Standard Board (“FASB”) Management has evaluated recently issued Accounting Standards Update (“ASU”) No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”) to increase the transparencyaccounting pronouncements and comparability about leases among entities. Additional ASUs have been issued subsequent to ASU 2016-02 to provide supplementary clarification and implementation guidance for leases related to, among other things, the application of certain practical expedients, the rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payment that depend on an index or rate and certain transition adjustments. ASU 2016-02 and these additional ASUs are now codified as Accounting Standard ASU 842 – “Leases” (“ASC 842”). ASC 842 supersedes the lease accounting guidance in ASU 840 “Leases” (“ASC 840”) and requires lessees to recognize a lease liability and a corresponding right-of-use (ROU) asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements. The Company adopted the new standard January 1, 2019 using the modified-retrospective method.

The new standard provides a number of optional practical expedients in transition. The Company has elected the “package of practical expedients”, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the land easements practical expedients as this is not applicable to the Company. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, that the Company does not recognize ROU assets or lease liabilities for leases with termsbelieve that any of 12 months or less. The Company’s existing lease has a remaining term of 3 months and has no renewal options and as such was exempted from ASC 842. Consequently, as of the date of implementation on January 1, 2019, the adoption of ASC-842 did notthese pronouncements will have any impact to the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07,Improvements to Non-Employee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to non-employees for goods and services. Under the literature, most of the guidance on such payments to non-employees would be aligned with the requirements for share-based payments granted to employees currently under ASC 718, “Compensation – Stock Compensation”. Board members are the only non-employees that the Company grants to, who are treated as “employees” under ASC 718. The guidance is effective for public companies for fiscal years and interim fiscal periods within those fiscal years, beginning after December 15, 2018. The Company’s adoption of ASU 2018-07 did not have ansignificant impact on the Company’s consolidatedour financial statements.statements and related disclosures.

NOTE 2 – GOING CONCERN

The Company’s financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) applicable to a going concern. This contemplates the realization of assets and the liquidation of liabilities in the normal course of business. Currently,At September 30, the Company has recurring losses, and although has limited cash in excess of one million dollars, with renewed research and development efforts and with no source of revenue sufficient to cover its operations costs andover 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 August 27, 2019 the Company paid the final annual dividend of 50,000 shares of common stock with a fair value of $10,000 to the sole shareholder of our Series A Convertible Preferred Stock (“Series A Preferred”), Chong Corporation, a common control entity.

On August 27, 2019 the Company then converted the 500,000 shares of Series A Preferred to 500,000 shares of our common stock. The Series A Preferred designations, rights and preferences provided that each share of the Series A Preferred automatically converted intoJanuary 29, 2020 we sold 248,448 shares of our common stock onfor $1,200,000 to a onenon-U.S. Person in a private transaction. We did not pay a commission or finder’s fee and are using the proceeds for one basis on the fifth anniversary of the date of issuance.working capital.

On March 6, 2020, the holder of the $50,000 note that was entered into on May 30, 2013 agreed to convert the principal and accrued unpaid interest totalling $76,917 into shares of CQENS common stock at $5.00 per share. A total of 15,384 shares were issued as satisfaction of this note.

On April 13, 2020 we entered into a consulting engagement memorandum with an unrelated third party pursuant to which we engaged this party to identify key Asian resources for our company. As compensation for the services we issued this individual 12,423 shares of our common stock valued at $62,115. The recipient was a non-U.S. person.

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

On June 1, 2020 we sold a total of 82,818 shares of our common stock for $400,000 to six non-U.S. Persons in private transactions. We did not pay a commission or finder’s fee and are using proceeds for working capital.

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

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

On July 17, 2020 we entered into a consulting engagement memorandum with an unrelated third party for the consultant’s guidance and expertise in identifying business opportunities, partners and other skilled consultants in the People’s Republic of China and/or other territories of Asia. As compensation for the services we issued this individual 12,423 shares of our common stock valued at $62,115. The recipient was a non-U.S. person.

On July 17, 2020 we entered into a consulting engagement memorandum with an unrelated third party for the consultant’s guidance and expertise in identifying potential financiers, partners and other skilled consultants in the People’s Republic of China and/or other territories of Asia. As compensation for the services we issued this individual 6,212 shares of our common stock valued at $31,060. The recipient was a non-U.S. person.

On September 30, 2019,2020 the Company had 75,860,000entered into an Asset Purchase Agreement with Xten, a common control entity, pursuant to which it acquired a portfolio of 29 U.S. and international patents and patent applications in the areas of devices and technologies for aerosolizing certain remedies and pharmaceutical preparations, as well as the solutions and preparation for inhaled delivery. As consideration for the acquisition, the Company issued Xten common stock purchase warrants exercisable for an aggregate of 21,000,000 shares of its common stock at an exercise price of $5.31 per share (the “Warrants”), consisting of (i) a Series A Common Stock Purchase Warrant exercisable for 7,000,000 shares of common stock issuedcommencing on September 30, 2023 and outstanding and noexpiring on September 30, 2026, (ii) a Series B Common Stock Purchase Warrant exercisable for 7,000,000 shares of preferredcommon stock issuedcommencing on September 30, 2026 and outstanding.expiring on September 30, 2029, and (iii) a Series C Common Stock Purchase Warrant exercisable for 7,000,000 shares of common stock commencing on September 30, 2029 and expiring on September 30, 2032. The Company has the right to accelerate or extend the exercise period of each series of Warrants in its discretion. In addition, the exercise period of each series of Warrants automatically accelerates in the event of a “change of control” (as defined in the Warrants) prior to such series of Warrants becoming exercisable by its respective terms. The Asset Purchase Agreement contained customary indemnification provisions.The Warrants were valued at $191,594 based on the carrying value of the assets acquired.

NOTE 4 – RELATED PARTY TRANSACTIONS

During the first nine months ended September 30, 2019,Early in 2020 the Company borrowed an aggregate of $54,000additional $2,500 from Chong Corporation,Xten, a common control entity. On June 24, 2020 the Company paid $250,000 to reduce the debt to Xten, a common control entity. The balance outstanding at September 30, 20192020 due Chong CorporationXten is $681,044.$455,544. The loan is unsecured, noninterest bearing and due on demand. No additional borrowing or repayment occurred in the third quarter.

We maintain our corporate offices at 5550 Nicollet Avenue, Minneapolis, MN 55419. We lease the premises from 5550 Nicollet, LLC, an affiliate ofa company owned by Mr. Chong, having renewed the Company’s Chief Executive Officer. In December 2019 we entered into a month-to-month lease in December 2018 for an additional 12-month term at an annualthat began January 1, 2020 with a monthly rental rate of $9,300 with expiration on December 31, 2019. Rent was $6,975 for this nine-month period in both 2019 and 2018.$775. We have rented the space continuously through the first nine months of 2020. As of September 30, 2019, $8,5252020, there is no outstanding balance for rent due to 5550 Nicollet, LLCLLC.

In the first nine months of 2020, pursuant to a signed agreement, Xten provided research and that amount is reflected ondevelopment related expertise and services specific to HNB technologies, devices and intellectual property. Costs to the balance sheetCompany were $427,788 for these research and development services during the first nine months of 2020. As of September 30, 2020, $92,541 remains outstanding with $66,900 as an accrued expense and $25,641 as an account payable to this related party.

On September 30, 2020 the Company entered into an Asset Purchase Agreement with Xten, a common control entity, pursuant to which it acquired a portfolio of 29 U.S. and international patents and patent applications in the accompanying financial statements.areas of devices and technologies for aerosolizing certain remedies and pharmaceutical preparations, as well as the solutions and preparation for inhaled delivery. As consideration for the acquisition, the Company issued Xten the Warrants, including (i) a Series A Common Stock Purchase Warrant exercisable for 7,000,000 shares of common stock commencing on September 30, 2023 and expiring on September 30, 2026, (ii) a Series B Common Stock Purchase Warrant exercisable for 7,000,000 shares of common stock commencing on September 30, 2026 and expiring on September 30, 2029, and (iii) a Series C Common Stock Purchase Warrant exercisable for 7,000,000 shares of common stock commencing on September 30, 2029 and expiring on September 30, 2032. The Company has the right to accelerate or extend the exercise period of each series of Warrants in its discretion. In addition, the exercise period of each series of Warrants automatically accelerates in the event of a “change of control” (as defined in the Warrants) prior to such series of Warrants becoming exercisable by its respective terms. The Asset Purchase Agreement contained customary indemnification provisions. The assets have been accounted for at a carrying value of $191,594.

In the third quarter of 2020 the Company procured the services of Plexus Corporation, a common control entity, to create, design and deliver an online interactive presentation in English and Simplified Chinese for use in presentations to potential investors. Cost to the Company for this service was $5,500. At September 30, 2020 this balance accounted for in accrued expenses is outstanding.

On September 30, 2020 the Company entered into an Other Assets Purchase Agreement with Xten, a common control entity, to purchase certain assets including: multiple pieces of laboratory and workshop equipment; custom built plume and inhalation testing machine; computers, monitors and accessories; prepaid rent; and, laboratory/workshop supplies, for a purchase price of $268,358, The Other Asset Purchase Agreement also contained customary indemnification provisions. The purchase price was tendered to Xten in November 2020.

NOTE 5 – NOTE PAYABLE

As of September 30, 2019,On May 20, 2013 the Company hasissued a note payable in the amount of $50,000 duenote to an individual. Theunrelated third party. On March 6, 2020, this note was issued on May 30, 2013 and bears eight per cent (8%) annual interest. The note was amended with an August 31, 2019 due date whereuponaccrued unpaid interest, upon agreement by the maturity datenoteholder, were fully satisfied through the conversion of the principal and accrued interest ontotalling $76,917 into 15,384 common shares of our stock at a conversion rate of $5.00 per share. No gain or loss was recognized from the conversion of this note was further extended to December 31, 2019.

The Company analyzed the modification of the term under ASC 470-60“Trouble Debt Restructurings” and ASC 470-50“Extinguishment of Debt”. The Company determined the modification is not substantial and the transaction should not be accounted for as an extinguishment with the old debt written off and the new debt initially recorded at fair market value with a new effective interest rate.Company’s common stock.

NOTE 6 – CONVERTIBLE NOTE

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

NOTE 7 – SUBSEQUENT EVENTS

On October 1, 2020 in line with the Company’s 2019 Equity Compensation Plan, 250,000 non-qualified stock options were granted to its management as additional compensation for services provided. These options were fully vested upon grant and have an exercise price of $5.31 per annum. The note is convertible intoshare.

On November 18, 2020 we sold 28,572 shares of our common stock at $0.08 per share. The Company analyzed the conversion optionto an accredited investor in the notes for derivative accounting treatment under ASC Topic 815,“Derivativesa private transaction and Hedging,”and determined that the instrument does not qualify for derivative accounting. The Company therefore performed an analysis to determine if the conversion option was subject to a beneficial conversion feature and determined that the instrument does not have a beneficial conversion feature.

The note was originally due on September 1, 2014. The Company entered into a note amendment on September 1, 2014 and the due date was extended on numerous occasions and was recently extended to December 31, 2019. The Company analyzed the modificationwe received proceeds of the term under ASC 470-60“Trouble Debt Restructurings” and ASC 470-50“Extinguishment of Debt”. The Company determined the modification is not substantial and the transaction should not be accounted for as an extinguishment with the old debt written off and the new debt initially recorded at fair value with a new effective interest rate.

NOTE 7 – COMMITMENT AND CONTINGENCIES

The December 2013 License Agreement with Chong Corporation, a common control entity, beginning in the calendar year in which the first licensed products or licensed services takes place, the Company is required to pay to Chong Corporation, a related entity, a 3% royalty for revenues with a $50,000 annual minimum royalty commitment. To date, no revenue has been recorded.

The December 31, 2013 agreement with Chong Corporation also requires us to pay for the costs associated with maintaining the patent applications and patents licensed to us. For the nine months ended September 30, 2019 and 2018 Chong$200,000. We did not report that it incurredpay any costs associated with this December 2013 License Agreement.commissions or finders’ fees and are using the proceeds for working capital.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations for the three and nine months ended September 30, 20192020 and 20182019 should be read in conjunction with the unaudited consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward looking statements becauseas a result of severala 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 20182019 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 and planImpact of operationsCOVID-19 on the Company

We are a pre-clinical specialty pharmaceutical company. Prior to forming VapAria Solutions in 2010, our management had more than 25 years’ collective experience in vaporization and vapor delivery of medicants, having been partners in a joint venture with pioneers in the industry and having undertaken significant work internationally researching and developing products, shepherding them through the patent process and introducing them into the U.S. wholesale and retail supply chain.

Our initial goal was to leverage rights we acquired in December 2013 from an affiliate to develop and successfully launch a product in partnership with well-capitalized and experienced industry participants based on our exclusive license and exclusive options to license patented and patent-pending technologies under the December 2013 Agreement and formulations designed to significantly improve on current electronic nicotine delivery systems and other consumer products in the marketplace. Throughout 2018 and into the first three quarters of 2019, in addition to discussions with third party financing sources, we continued to engage in substantive discussions with several international companies which have expressed interest in our licensed technology in pursuit of this strategy. These discussions have involved demonstrations of our fully functional, programmable prototypes.

In mid-2015 we adjusted our business focus owing to continuing research, development and design throughout and, thus, we completed a full design of a product embodiment based on our proprietary technology, authorized the production of fully functional prototypes and are scheduling pre-clinical assessments for the prototypes. In the first nine months of 20192020 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 had no research and development costs comparedexpect that the pandemic will continue to $14,052adversely impact CQENS in several ways. Our business model is dependent upon our ability to enter into strategic partnerships in the same period in 2018, relatedfuture, including alliances with consumer product companies, to these efforts. In addition to taking deliveryenhance and accelerate the development and commercialization of our prototypes,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 third quarterUK, the EU and Asia, including the People’s Republic of 2016, we engaged an industry expert with 28 yearsChina. The worldwide pandemic caused by COVID-19 have caused certain of   relevant experiencethese opportunities to design IND-enabling studies that should take us from pre-clinical stagebe delayed. Should the pandemic continue and /or be prolonged into 2021 certain of these opportunities might be limited or lost. We also need to clinical stage andraise 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 FDA 505(b)(2) pathway to regulatory approval and commercialization available to us. Certainimpact of the costs associated with these studies are included inCOVID-19 pandemic on our funding needs for the next 12 months described below. Ifcompany, however, at this time we are unable to raise sufficient capital to fund these costs,predict all possible impacts on our ability to continuecompany, our commercialization efforts will be adversely impacted.operations and our prospects.

Our management, through the Chong Corporation, a common control entity that is the licensorOverview and plan of the intellectual property rights we acquired in December 2013 and January 2016, has built an extensive and robust portfolio of intellectual property that includes patented and patent-pending methods of vaporization and patented and patent-pending medicants and herbal remedies identified for their effectiveness and suitability to address the markets identified above. Historically we have relied upon related party loans that, as of September 30, 2019, totaled $681,044. In the first nine months of 2019, the loan increased by $54,000 and these proceeds were used to pay expenses associated with ordinary business expenses associated with identifying, meeting with and negotiating with potential business partners and our general operating expenses, including the payment of our obligations. Our management has worked without cash compensation. We estimate that we will need to raise between $1 million and $2 million over the next 12 months to continue to implement our business plan.operations

We may seekare a technology company involved in the development of proprietary and patentable methods for heating plant-based consumable formulations leading to raise the necessary capital through future public or private debt or equity offeringsproduction of aerosols for safe, effective and efficient inhalation of plant constituents. The technology, often called Heat Not Burn (“HNB”) accomplishes this by heating tobacco to produce an aerosol, but without the accompanying constituents of combustion. Our technology differs from other such technologies currently on the market because the CQENS System is a high-temperature, non-combustion system, unlike the low-temp, non-combustion systems available today. Current applications of the technology include tobacco, hemp-CBD and cannabis where non-combusting methods of preparation for inhalation are believed to be safer and more effective.

On December 31, 2019, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Xten, a related party, pursuant to which we acquired certain intellectual property and other assets. Following the closing of the Asset Purchase Agreement, our business and operations are now focused on commercializing the CQENS System, a patent-pending method of inductively heating tobacco and other substances and ingredients that support reduced risk as a reduced risk product (RRP), given that the technology prevents combustion and prevents consumers from inhaling the dangerous byproducts of combustion.

We believe that HNB technologies will be of great interest to the international tobacco industry and the growing hemp-CBD cannabis industries. HNBs represent the latest in 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 the fall of 2019 Philip Morris International introduced its HNB product to U.S. markets. This product, which was sold in more than 40 countries before entering U.S. markets, like other 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 CQENS System is supported by three patent applications, the most recent of these, a Patent Cooperation Treaty (PCT) patent application, was filed by Xten in January 2019. In May 2019 Xten was informed that the International Searching Authority (ISA) had completed its review of the PCT patent application and issued the International Search Report and Written Opinion relative to that application. The ISA found that 34 of the application’s 55 claims were patentable and the remaining 21 would also be patentable if successfully amended. On September 5, 2019, Xten filed a Chapter II Demand and Article 34 Amendments with the International Bureau of the World International Property Office (WIPO) as a part of what we expect will be a successful effort to obtain a favorable opinion for all of its claims. We have succeeded to these rights with our purchase of the Assets as described earlier in this report.

During 2020 we have continued our efforts begun in 2019 following the closing of the Asset Purchase Agreement, 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 “License Agreement”) for the use in the Asia Pacific countries listed in the Contribution Agreement of certain of our securities, althoughintellectual 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;

• On August 25, 2020, we dowere issued United States Patent 10,750,787 by the U.S. Patent and Trademark Office for a Heat-not-Burn Device and Method. The patent covers the technology behind the proprietary CQENS System;

• On September 4, 2020, we were informed by our intellectual property counsel that it had received a favorable International Preliminary Report on Patentability that was issued as a result of its filing of a Chapter II Demand and Article 34 Amendments with the International Bureau of the World International Property Office (WIPO) on September 5, 2019. The report was issued in connection with the PCT patent application filed by on January 3, 2019 for our Heat-Not-Burn Device and Method. The examiner’s conclusion was that 84 of the 91 claims were considered to be “patentable,” and while the PCT does not have any commitments from any third parties to provide any capital to us. Whileissue patents, based upon management’s experience we believe that a preliminary, favorable examination does provide insight as to how individual country examinations would likely proceed;

• On September 30, 2020 we entered into an Asset Purchase Agreement (the “IP Asset Purchase Agreement”) with Xten pursuant to which we acquired a portfolio of 29 U.S. and international patents and patent applications in the exclusive rightsareas of devices and technologies for aerosolizing certain remedies and pharmaceutical preparations, as well as the solutions and preparation for inhaled delivery; and

• On September 30, 2020 we also entered into a second Asset Purchase Agreement (the “Other Assets 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.

We believe that the proprietary technology on whichactions and transaction we have undertaken in 2019 and 2020 will facilitate and accelerate the commercialization of our business is predicated could provide us with a significant competitive advantage if we can bring one or more products to market, our ability to accomplish thatIP assets in the near term is dependent on a successful prototype and positive pre-clinical assessments ofwell into the prototype. Given the current lack of a public market for our common stock, our status as a pre-clinical stage company and the difficulties small companies experience in accessing the capital markets, we expect to encounter difficulties in pursuing public or private capital raises. We may also seek to minimize our capital needs by securing partnerships or joint ventures with well capitalized companies in the pharmaceutical or OTC consumer products industries. Until we are able to raise all or a portion of the necessary capital, our ability to continue to implement our business plan will be in jeopardy.future.

Going concern

For the first nine months of 20192020 we reported a net loss of $1,046,031 and net cash used in operations of $703,143 compared to a net loss of $74,606 and net cash used in operations of $48,037 compared to a net loss of $81,663 and net cash used in operations of $61,369 for the first nine months of 2018.2019. At September 30, 2019,2020, we had cash on hand of $7,440$1,255,783 and an accumulated deficit of $2,246,777.$3,348,081. The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 20182019 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our minimal cash and no source of revenues which aremay not be sufficient to cover our operating costs. These factors, among others, despite the cash and cash equivalent amount on hand at the end of this quarter, raise substantial doubt about our ability to continue as a going concern.concern and pay our obligations as they become due over the next year. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. There are no assurances we will be successful in our efforts to raise additional capital, develop a source of revenues, report profitable operations or to continue as a going concern, in which event investors would lose their entire investment in our company.

Results of operations

We did not generate any revenues from our operations in anyeither the third quarter or the first nine months of the 20192020 or 2018 periods.2019. Our total operating expenses for the third quarter of 20192020 and the nine months then ended decreased 14.6%increased 1942.4% and 9.4%1427.1%, respectively, over those reported in the comparable 20182019 periods. General and administrative expenses which include amortization, rent, and website hosting expenses, decreased 4.0%increased 2097.5% in the third quarter of 20192020 from the comparable period in 20182019 and showed an overall decreaseincrease of 0.6%1180.2% for the first nine months as comparedfrom the same period in 2019 due mainly to the first nine monthscompensation payments to the Company’s management, purchase of 2018.non-capital equipment and lab supplies and some slight increases in amortization and office expenses.

Research and development expenses were not incurred in the third quarter of 2019 compared to $9,0252020 were $187,958 as we work on variant prototypes comparatively, we had no research and development expenses in this same period in 2019. For the first nine months in 2020 our research and development expenses were $458,204 against no research and development in the first nine months of 2019. Professional fees increased 723% for the third quarter of 2018.2020, compared to the third quarter of 2019. The first nine months of 2019 also2020 showed no research and development expenses versus $14,052 over this same period in 2018. This reduction is directly attributable to the progress made in this area. Professional fees increased 48.8% in the third quarter of 2019 compared to 2018 and rose 17.6% for the nine months ended September 30, 2019 from the comparable period in 2018. The increase in financial audit fees and additional legal fees contributed to this overallan increase in professional fees inof 567.4% over the same 2019 when comparedtimeframe. These increases are attributable to 2018.consulting service fees and increased legal costs.

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 September 30, 2019,2020, we had $7,440$1,255,783 in cash and cash equivalents and a working capital surplus of $439,757 compared to $1,298 in cash and cash equivalents and a working capital deficit of $821,881 as compared to $1,477 in cash and cash equivalents and a working capital deficit of $760,388$856,012 at December 31, 2018.2019. Our current liabilities increased $68,524only $27,103 from December 31, 2018,2019, reflecting increasesthe retirement of debt and associated interest payable despite a significant increase in interest payable,our accounts payable and in the loan amount fromour accrued expenses, including accounts payable and accrued expenses due a related party.party as described in Note 4 to the financial statements appearing earlier in this report. Our source of operating capital in the first nine months of 2020 came from the sale of 496,898 shares of our common stock raising $2,400,000 in capital compared to the same period in 2019 where our sole source of operating capital during the first nine months of 2019 came from additional borrowingborrowings from a related party which loaned us an additional $54,000.

We do not have any commitments forThe ability of the Company to continue as a going concern is dependent upon the Company obtaining adequate capital expenditures. Our working capitalto fund operating losses until it becomes profitable. As the company is not sufficientgenerating revenues, continued activities and expenditures to fund ourbring product(s) to market as soon as we are able is important. Management believes the currently available funding will be insufficient to finance the Company’s operations for at leasta year from the next 12 monthsdate of these financial statements and to satisfy our obligations as they become due. In January 2019,

During the holderfirst nine months of 2020 we have retired approximately $340,000 of debt, including a $50,000, principalnet amount note agreedof $247,500 owed to the extension of the due date of the note from January 31, 2019 to August 31, 2019 and then again to December 31, 2019. In January 2019 the holder of a $40,000 convertible note, principal amount, and convertible into 500,000 shares of our common stock at the option of the holder, agreed to an extension to the due date of the convertible note from January 31, 2019 to August 31, 2019 and then again to December 31, 2019. While there are no assurances the holder will elect to convert the note, in that event we granted the holder demand and piggyback registration rights for those shares. We also owe a related party, $681,044through repayments or conversion into equity. At September 30, 2020 the outstanding amount we owe the related party is $455,544 which is due on demand. We do not have

While we raised $2,400,000 from the funds necessary to repay these obligations or to fundsale of our securities during the costs associated with filing a registration statement if the noteholder converts the note and exercises its registration rights. As described earlierfirst nine months of 2020, plus an additional $200,000 in this report,November 2020, we still will need to raise between $1,000,000 and $2,000,000 to $3,000,000 in additional capital during the next 12 months. As we do not have any firm commitments for all or any portion of this necessary capital, there are no assurances we will have sufficient funds to fund our operating expenses and continued development of our products and to satisfy our obligations as they become due.due over the next 12 months. In that event, our ability to continue as a going concern is in jeopardy.

Summary of cash flows