See accompanying notes to unaudited financial statements

CQENS Technologies, Inc.

Statements of Operations

(Unaudited)

See accompanying notes to unaudited financial statements

CQENS Technologies, Inc.Inc

Statements of Changes in Stockholders’ Equity

For the three and nine months ended September 30,March 31, 2023 and 2022 and 2021

(Unaudited)

See accompanying notes to unaudited financial statements

CQENS Technologies Inc.

Statements of Cash Flows

(Unaudited)

See accompanying notes to unaudited financial statements

CQENS Technologies, Inc.

Notes to Unaudited Financial Statements

September 30, 2022March 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 nine months ended September 30, 2022first quarter of 2023 the effects of the COVID-19 pandemic were still felt by the Company. WhileIn addition, in the duration and full impactU.S. the Federal Reserve has begun raising interest rates sharply, the continuation of the pandemic is unknown at this time, wewhich could lead to a recession. We expect that the pandemic any continued recessionary conditions will continue to adversely impact CQENS in several ways. Our business model is dependent upon our ability to enter into strategic partnerships in the future, including alliances with consumer product companies, to enhance and accelerate the development and commercialization of our proposed products. We will also be dependent upon third party manufacturers to produce our proposed products, as well as third party marketing and distribution companies. We believe that our business opportunities are international in nature and include potential partnerships in the UK, the EU and Asia, including the People’s Republic of China. The worldwide pandemic caused by COVID-19 haveand current recessionary conditions has caused certain of these opportunities to be delayed. AlthoughShould the pandemic continues in 2022 and whilecontinue and/or be prolonged throughout 2023 certain of these opportunities might be limited or lost, we are optimistic that in the final quarter of this year we can raise a limited amount of working capital.lost. We willalso need to raise additional working capital to provide sufficient funding to bring our proposed products to market. The impact of COVID-19a 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,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 accompanyingfollowing unaudited interim financial statements have been prepared bypursuant to the Company without audit. In the opinionrules and regulations of the management,Securities and Exchange Commission (“SEC”). Accordingly, such interim financial statements do not include 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, 2022 have been made.

Certain information and footnote disclosures included in financial statements prepared in accordance withfootnotes required by accounting principles generally accepted in the United States have(“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 condensed or omitted. It is suggestedderived from the Company’s annual financial statements that thesewere 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 footnotesnotes thereto which are included in our Annual Report on Form 10-K for the Company’syear ended December 31, 2021 audited financial statements. The results2022 and filed with the SEC on April 14, 2023 for a broader discussion of operations forour business and the period ended September 30, 2022 are not necessarily indicative of the operating results for the full year.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.

NOTE 2 – GOING CONCERN

The Company’s financial statements are prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) applicable to a going concern. This contemplates the realization of assets and the liquidation of liabilities in the normal course of business. Currently, the Company has recurring losses, and although haswith limited cash and cash equivalents in excess of five hundred thousand dollars,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 April 21, 2022, we granted 60,000 options under the Company’s 2014 Equity Compensation Plan to two consultants. Each of the consultants was granted options, fully vested upon grant, to purchase 30,000 shares at an exercise price of $10.00 per share. The fair market value of the options at the grant date using the Black Sholes option pricing model was determined to be $599,293.

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

On July 11, 2022February 16, 2023, we sold 35,0007,500 shares of our common stock for $350,000150,000 to an investor in a private transaction. We did not pay a commission or finder’s fee.

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

On February 15, 2021, we granted 400,000 options under the Company’s 2019 Equity Compensation Plan to two consulting engineers involved in our research and development. Each of the consultants was granted options to purchase 200,000 shares at $7.00 per share. 100,000 of the grants are exercisable immediately, with the balance vesting over the next four years in equal installments and subject to certain terms and conditions, including continuing in their consulting roles through the vesting periods. The fair market value of the options at the grant date was determined to be $2,798,086 of which $2,036,625 was expensed in 2021. The options were valued using the Black Scholes option pricing model with the following assumptions: 1) a current stock price per share of $7.00, based on the price of recent offerings; 2) expected term of 5 years; 3) computed volatility of 303.59%; and 4) the risk-free rate of return of 0.27%. The exercise period of the immediately exercisable options terminates on February 15, 2026.

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

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

On May 1, 2021, we entered into a consulting engagement memorandum with an unrelated third party for the consultant’s guidance and expertise in identifying business opportunities, partners and other skilled consultants in the People’s Republic of China and/or other territories of Asia. As compensation for the services, we issued this individual 20,000 shares of our common stock valued at $140,000. The recipient was a non-U.S. person and the issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Regulation S promulgated thereunder.

On May 16, 2021, we entered into a consulting engagement memorandum with an unrelated third party pursuant to which we engaged this party to identify key Asian resources for our company. As compensation for the services, we issued this individual 16,072 shares of our common stock valued at $112,504. The recipient was a non-U.S. person and the issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Regulation S promulgated thereunder.

On May 17, 2021, we sold a total of 71,429 shares of our common stock for $500,000 to a non-U.S. Person in a private transaction. We did not pay a commission or finder’s fee and are using the proceeds for working capital.

On September 28, 2021,March 9, 2023, we sold a total of 296,0001,500 shares of our common stock for $2,960,00030,000 to eleven non-U.S. persons in private transactions. We did not pay a commission or finder’s fees and are using the proceeds for working capital.

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

On September 30, 2021, we sold 30,000For the three month period ended March 31, 2023 stock option expense totaled $384,441 sharescompared to $138,446 for the same period in 2022.

There was no sale of our common stock for $300,000 to an investor in a private transaction. We did not pay a commission or finder’s fee.

during the first quarter of 2022.

As of March 31, 2023, the Company had 26,074,595 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 thirdfirst quarters of 20222023 and 20212022 was $2,325. As of September 30, 2022,March 31, 2023, there is nowas an outstanding balance for rent due to 5550 Nicollet LLC.LLC of $1,550.

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 September 30, 2022.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.

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 ASSETASSETS AND LIABILITYLIABILITIES

Supplemental cash flow information related to leases were as follows:

SCHEDULE OF CASH FLOW INFORMATION RELATED LEASESLEASE

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

SCHEDULE OF REMAINING LEASE TERMS AND DISCOUNT RATES

Maturities of lease liabilities as of September 30, 2022,March 31, 2023, were as follows:

SCHEDULE OF MATURITIES OF LEASE LIABILITIES

NoteNOTE 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. Additionally in August the Company incurred engineering service costs directly related to the automation equipment from a consultant with an added cost of $12,023 USD resulting in additions to prepaid expenses of $601,288 at September 30, 2022.

Note 7 – SUBSEQUENT EVENTS

On October 21,May 1, 2023 the three year lease we entered into in March 2022 our Boardsaw an increase in rent of Directors (“Board”) awarded stock options to 39 individuals, representing up to a maximum of 595,000 shares of our common stock, exercisable at $10.00375 per share. The individuals include executive officers, William Bartkowskimonth bringing monthly installments to $5,175 and Daniel Markes, one of our employees, certain professional advisors, and another 29 individuals who are considered related parties in that they are employed by or otherwise associated with entities owned or controlled by our chairman and chief executive officer, Alexander Chong. Substantially allthe annual rate to $62,100.

Effective as of the related party individuals are also non U.S. persons. The grants were made in amounts and with exercise prices and vesting conditions consistent with our corporate development objectives, including but not limited to our plans to begin commercializing our technology internationally in mid-2023. Alldate of the awards were made for work or services provided or to be provided to CQENS.filing of this report, we have borrowed an additional $250,000 from Xten Capital Group, a common control entity. The Board made the grants under the Company’s shareholder approved 2014 Equity Compensation Plan (the “Plan”)loan is due upon demand and pursuant to the terms and conditions of the Plan and subject to vesting conditions contained in the Plan and options granted thereunder.is non-interest bearing.

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 ninethree months ended September 30,March 31, 2023 and 2022 and 2021 should be read in conjunction with the unaudited financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward lookingforward-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 20212022 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 lookingforward-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; wecompany. We design and develop innovative methods to heat plant-based and/or medicant-infused formulations to produce aerosols for the efficient and efficacious inhalation of the plant and medicant constituents contained therein. We have two ways of accomplishing this: 1) at high temperatures via induction without combustion or the constituents of combustion; and 2) at low temperatures, where we heat an inert carrier, producing an inhalable, medicant-infused aerosolaerosols while maintaining the integrity of the active ingredient(s).

Our high-temperature non-combusting technology is supported by 2234 U.S. and international patents and pending patents. Among the applications of our patented and patent-pending technology are those for Heat-not-Burn (“HnB”) devices. In one instance for example, our method of heating a tobacco formulation for inhalation is superior, less toxic and far more convenient than other methods of tobacco consumption, especially when compared to the inhalation of the smoke produced by combustible products, i.e., cigarettes, cigars and pipes. Independent tests of our system’s prototypes supported the benefits of rapid heating, confirmed non-combustion, even at high temperatures, and produced better toxicology results, 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 (“IP”) around device designs and around formulations containing a wide variety of herbal and pharmaceutical preparations. This system features the ability to verify the user, validate the medicant or pharmaceutical preparation and measure, meter and monitor the proper, prescribed dosage.

We define our target market as the “international inhalation market,” a market that includes herbal, pharmaceutical, medical, recreational and lifestyle products and ingredients. Industry experts, like Nielsen, Grand View Research, Fior Markets, have published reports in the last half of 2021 and 2022 that we have consolidated; these consolidated estimates support that this as ais 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-termnear term focus is on this segment, which represents the greatest opportunity for growth and the greatest opportunity to positively impact public health and wellness.

We believe our HnB technologies are of great interesthave 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.

Through to the date of this reportDuring 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;

Additionally, the MOU provides for CQENS● On September 30, 2020, we also entered into a second Asset Purchase Agreement with Xten pursuant to license its technologywhich we acquired certain assets including, but not limited to, The Barker Group under certain termsa custom built plume and conditions yet to be finalizedinhalation testing machine, oscilloscope with probe, multiple pieces of laboratory and for The Barker Group to invest in CQENS with termsworkshop equipment, computers, monitors and conditions yet to be finalized. The foregoing initiatives, as well as other items contained in the non-binding MOU, are subject to the completionaccessories; and execution of definitive agreements, all of which will be subject to customary closing conditions.

Since signing● On August 17, 2021, as a result of a previously executed Memorandum of Understanding with the MOU,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 been engagedagreed 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 discussions and negotiations designed to identifythe United States for an initial target marketterm 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 U.S.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 EU,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 develop a product forfurther 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 marketthe parties will complete and agree to a definitive agreement to launch the product.formalize these agreements.

On July 13, 2022, we announced that we completed R&Dresearch 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 Heat-not-Burn (“HnB”)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.

15, 2022. On August 2, 2022 we were informed that the patent office of Japan issued the Company a Patent, registration number 7093919, for our HnB system on June 23, 2022. As of

On February 14, 2023, the date of this filing, weCompany 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 have a total of four HnB related Patentsbeen issued, three in the U.S., one in Japan, one in Singapore and another 21 pending US and international patents for the system.one in Korea that was issued early in 2023.

Going concern

For the nine months ended September 30, 2022,first quarter of 2023 we reported a net loss of $3,332,909$1,186,307 and net cash used in operations of $2,741,967$693,976 compared to a net loss of $3,208,938$800,928 and net cash used in operations of $1,023,543$917,143 for the nine months ended September 30, 2021.first quarter of 2022. At September 30, 2022,March 31, 2023, we had cash on hand of $933,622$98,321 and an accumulated deficit of $16,642,403.$20,740,003. The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 20212022 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our limited cash and no source of revenues which may not be sufficient to cover our operating costs. These factors, among others, despite the cash and cash equivalent amount on hand at the end of this quarter, raise substantial doubt about our ability to continue as a going concern and pay our obligations as they become due over the next year. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. There are no assurances we will be successful in our efforts to raise additional capital, develop a source of revenues, report profitable operations or to continue as a going concern, in which event investors would lose their entire investment in our company.

Results of operations

We did not generate any revenues from our operations in either the first nine monthsquarter of 20222023 or 2021.the first quarter of 2022. Our total operating expenses for the thirdfirst quarter of 20222023 increased 57.3% over those reported in the third quarter of 2021 while the first nine months of 2022 increased 3.9%48% over those reported in the first nine monthsquarter of 2021.2022 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 decreased 7.0%increased 65% in the first nine monthsquarter of 2023 from the comparable period in 2022 compareddue mainly to the same periodincrease in 2021 due to the reduction of non-cashcompensation expense from previous stock option expense of $1,526,561- relating to the options granted in 2021 to two consulting engineers involved in research and development activities during the first nine months of 2022 compared to the same period in 2021. This reduction in cost was offset with additional non-cash options granted to three consultants of $799,042, increased compensation paid to employees of $413,470 and the recruitment costs of $37,623 for our employee engineer involved in research and development in the first nine months of 2022 compared to the same period in 2021.grants.

Research and development expenses in the thirdfirst quarter of 20222023 increased 49.3%118% over this same period in 2021 while2022. This increase was impacted by manufacturing equipment design along with increased engineering services in the first nine months show an increasequarter of 25.3%2023 over the first nine monthsquarter of 2021 which reflects the cost of building and testing product prototypes and consumables.2022. Professional fees increased 132.0%decreased 30% in the thirdfirst 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 compared to the third quarter of 2021 with an overall increase of 30.9%that were not again incurred in the first nine months of 2022 when compared to this same period in 2021. The increase is attributable primarily to an increase in consulting services and their associated fees. Professional fees in 2022 includes an agreement entered into in January 2022 with an unrelated third party whereby the consultant will provide introductions to manufacturers and advice and counsel regarding potential manufacturers for the products of the Company in the Peoples Republic of China and/or other territories of Asia and general business plan and strategy in the region as required by the Company. Further the consultant will identify and introduce high net worth capital sources (qualified non-U.S. investors) to the Company. In exchange the Company paid a consulting fee of $333,000.2023.

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 September 30, 2022,March 31, 2023, we had $933,622$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 $930,611 as compared to $3,588,377 in cash and cash equivalents and a working capital surplus of $3,532,821$33,688 at December 31, 2021.2022. Our current liabilities increased $111,983$453,512 from December 31, 2021,2022, reflecting a $32,735 increase$92,174 decrease in accounts payable offset by a $27,710$90,686 increase in accrued expenses, a $450,000 increase in our borrowing from a related party, and the addition of $51,538a $5,000 increase in the current portion of our lease liability. Our source of operating capital in the nine months ended September 30,first quarter of 2023 came from the cash on hand at the end of 2022, came$450,000 in advances from Xten, a common control entity and $180,000 of proceeds from the sale of 35,000 shares of our common stock that raised $350,000 andstock. Our source of operating capital in the first quarter of 2022 came solely from the cash we had on hand compared to the nine months ended September 30, 2021, where we sold 545,288 shares of our common stock that raised $4,810,000.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.

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.

WeAs 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 $3,000,000$2,500,000 to $5,000,000$4,000,000 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, thereThere 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

Our cash used in operating activities increased 167.9%decreased 24% in the ninefirst three months ended September 30, 2022, whenof 2023 compared to the ninefirst three months ended September 30, 2021.of 2022. During these time periods we primarily used the cash to fund our net losses.

In the first nine monthsquarter of 20222023 there was $262,788$57,484 net cash used in investing activities from for capitalization of IP related legal fees, for additions to furniture and equipment and leasehold improvementsour intellectual property compared to net cash used in investing activities of $93,971$85,558 in the same period in 2022 for the capitalization of IP related legal fees in the same period in 2021.and for additions to furniture and equipment.

In the first nine months of 2022 weWe had $350,000 net cash provided by financing activities in the first quarter of 2023 of $630,000 from the sale of 35,000 shares of our common stock. In the same period in 2021 our net cash provided by financing activities consisted of $4,810,000 raised from the sale of 545,288 shares of our common stock and repaymentfrom borrowing from a related party. In the first quarter of related party debt of $255,544.2022 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 for 2021appearing later in this report and Note 2 to our audited consolidated financial statements appearing in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 14, 2022.2022 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.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

We maintain “disclosure controls and procedures” as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective to ensure that the information relating to our company required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure due to the presence of continuing material weakness in our internal control over financial reporting as reported in our Annual Report on Form 10-K for the year ended December 31, 2021.2022 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 2022,2023. 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 20212022 10-K and our subsequent filings with the Securities and Exchange Commission, which could materially affect our business, financial condition or future results. These cautionary statements are to be used as a reference in connection with any forward-looking statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the Securities and Exchange Commission.

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

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

On July 11, 2022February 16, 2023, we sold 35,0007,500 shares of our common stock for $350,000 to an investor$150,000 in a private transaction. The investor was a non-U.S. Person, and the issuance was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance ontransaction to an exemption provided by Regulation S promulgated thereunder and the shares issued contain a legend restricting their transferability absent registration of applicable exemption.accredited investor. We did not pay a commission or finder’s fee and are using the proceeds for working capital.

On July 11, 2022 we The shares were issued 10,000 shares of our common stock to a consultant for the consultant’s guidance in identifying business opportunities, partners and other skilled consultants in both Asia and North America. The recipient was an accredited investor and the shares issued contain a legend restricting their transferability absent registration of applicable exemption. The issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(a)(2).

[On October 21, 2022 the Company issued stock option awards to 39 individuals, such option awards exercisable for up to an aggregate of 595,000 shares of our common stock, exercisable at $10.00 per share. The individuals include executive officers, William Bartkowski and Daniel Markes, one of our employees, certain professional advisors, and another 29 individuals who are considered related parties in that they are employed by or otherwise associated with entities owned or controlled by our chairman and chief executive officer, Alexander Chong. Substantially all of the related party individuals are also non U.S. persons. The awards were granted under the Company’s shareholder approved 2014 Equity Compensation Plan (the “Plan”) and pursuant to the terms and conditions of the Plan and subject to vesting conditions contained in the Plan and options granted thereunder. The awards were granted pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Regulation S promulgated thereunder.Act. The option awardsaccredited investor and had access to information concerning the Company. The shares are restricted and contain a restrictionlegend restricting their transferabilitytransfer subject to registration or applicable exemptionexemption.

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 furtherusing 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 additional transfer restrictions under the Plan.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.