Mr. Ted Konyi reports

SMARTCOOL SHAREHOLDER UPDATE FEBRUARY 2023

Smartcool Systems Inc. has released a message from its chief executive officer.

Since Smartcool was first founded in 2004 -- which at the time was a small shell company called Citotech -- we have been very excited about the prospects for our technology to generate significant energy efficiency benefits for commercial enterprises. The path has been both long and challenging but we remain optimistic about our potential for financial success and to impact, in a small way, a reduction in the world's consumption of energy and carbon emissions. During this journey, we have managed to find financing to sustain the company, thanks to many loyal shareholders who have yet to be rewarded for their belief and patience. Thankfully, we believe that our patience and persistence might soon be rewarded.

Historical

Business activity

A quick review is probably worthwhile for most readers. The economics of energy efficiency in our early days were constantly challenged by low energy prices and it was difficult to gain traction in places that enjoyed low electricity rates. Adding insult to injury, we lost the original inventor, Tony Murphy, when he passed away unexpectedly just before we acquired Abbotly Technologies in 2006. But with the acquisition of Abbotly Technologies, we inherited its largest U.K. distributor and quickly realized that our U.K. operations would be more successful due to their higher utility rates. In June, 2006, we acquired that distributor and commenced doing business as Smartcool U.K., in addition to the North American market. The impact at that time was quite immediate, as Smartcool U.K. landed a major order with Sainsbury's, one of the biggest grocery store chains in England. Despite installing 175 stores for Sainsbury's, we were unable to add additional large customers and sales in the U.K. dropped off after we completed that job in 2012.

The original Abbotly technology was designed for multicompressor, grocery store or large refrigeration applications. We saw the opportunity to adapt the technology to become saleable for smaller applications, such as commercial air conditioning. We envisioned this opportunity was significantly larger than the commercial refrigeration applications. In 2009, we successfully engineered a simpler version of our software that could effectively control one or two compressors rather than the multistage compression found in large refrigeration. Thus, the ECO3 was born. To date, the ECO3 has sold over 15,000 copies. We are currently working with version No. 25 of the software.

Despite best sales efforts, we continued to struggle to reach profitability. Having founded the company and raised most of the working capital through private placement offerings, we decided that I should take the lead as CEO in January, 2015. We looked at numerous opportunities to improve sales and in August, 2018, we acquired Total Energy Concepts (TEC). Initial sales in late 2018 and through 2019 proved quite healthy. Then in early 2020, with the onslaught of the pandemic, sales virtually evaporated.

Many of our customers are in the hospitality or retail industry, which virtually shut down. Pending orders were delayed and we only managed to survive thanks to funding provided to small businesses from the governments of Canada, the United States and the United Kingdom. A glimmer of hope appeared in 2021, with a few very notable pilots of our technology being installed with major customers; these included RioCan in Canada, one of the largest hotel chains, Co-op stores, Grosvenor and some large universities in the U.K. The new activity led to an upswing in sales revenue, with some very positive results from the pilots. Also, by this time, we came to realize that our ECO3 was extremely successful in reducing the energy consumed by heat pumps, now becoming a major part of HVAC (heating, ventilation, air conditioning).

By 2020, ESG (environmental, social governance) and carbon footprint reductions were making their way to the forefront of decisions being made by building owners and operators. Finally, carbon emissions reductions were becoming as -- or more -- important than reducing operating expenses from using less energy. This was starting to impact client decisions, with much more attention being paid to Smartcool.

Accounting

Accounting for Smartcool had always been challenging, as public company reporting requirements are quite stringent. Human resources in a small company are limited and can prove to be problematic, particularly with an enterprise that has multiple international subsidiaries. While TEC's legacy management team was strong on sales performance, its accounting history and bench strength were accustomed to private company audit and reporting standards, and we struggled to incorporate it into our accounting regime. We were late filing our financial statements and related disclosure for the period ended June 30, 2018, and the British Columbia Securities Commission entered a failure-to-file cease trade order against us on Sept. 5, 2018. Although this cease trade order was quickly revoked when we filed those records on Sept. 27, 2018, we changed auditors in early 2019 and our new auditors were unable to audit our annual financial statements for the year ended Dec. 31, 2018, within the stipulated time frame. On May 1, 2019, the B.C. Securities Commission entered another failure-to-file cease trade order. Although our new auditors eventually completed their audit of our annual financials for 2018, we were only able to file them on Feb. 25, 2020. On March 9, 2020, we finally filed our unaudited financial statements for the three-month period ended March 31, 2019, followed by the statements for the six-month period ended June 30, 2019, filed on March 12, 2020, and the nine-month period ended Sept. 30, 2019, on March 17, 2020, but we have yet to complete the audit for the year ended Dec. 31, 2019, which was due at the end of April, 2020. Our inability to finish and file our financial statements on time for the first three quarters of 2019, and our failure to complete and audit our annual financial statements for that year, were due almost entirely to our inability to successfully integrate TEC's accounting history with our other operating results. We were making significant progress on this initiative until, in March, 2020, we experienced two catastrophes -- on the one hand, COVID was ramping up, and, on the other hand, the then-president of TEC hijacked our U.S. business. One of the most damaging results of that hijacking was the end of our access to vital accounting information about the U.S. operations for the fourth quarter of 2019, without which we could not -- and still cannot -- complete our annual financial statements for 2019.

Despite our issues with TEC and our U.S. operations, we have been experiencing positive sales growth in the U.K. Thus, despite our inability to consolidate our U.S. financial data for fiscal 2019, our U.K. subsidiary has continued to produce annual audited statements, and these are current and up to date.

Present

Business activity

Our internal estimates suggest that approximately 90 per cent of our sales in 2022 were in the U.K. Sales in North America were principally to some large customers in Canada and a distributor in the U.S.

Sales in the U.K. consisted primarily of follow-up orders from pilots that were completed in 2021. The four major clients in the U.K. are Co-op stores, one of the largest hotel chains and two international property owners. With Co-op, 68 stores were installed with Smartcool technology in 2022 out of a total of 2,600 locations. Of the 850 locations for the hotel chain, five of its hotels were installed. Smartcool installed several products at a shared offices complex in London, and we look forward to additional sales referrals from this customer. Lastly, one of the largest property owners in London with over 1,000 buildings, Smartcool has provided technology for five locations to date. Sales in the U.K. continued to grow in 2022.

Accounting

Under the direction of our chief financial officer, Kulwant Sandher, our accountants and auditors have recently agreed that we will write off any of the TEC business that occurred after the third quarter of 2019 and our accountants have prepared our annual financial statements for 2019, 2020 and 2021, subject to adjustments after each year is audited. Unfortunately, our auditors will not be able to begin their audit of the 2019 financial statements until April of this year, and we are depending on the completion of that audit to provide any adjustments for 2020. Audits are also required for 2020 and 2021. The timing of this currently is unknown but estimated to be September, 2023. By that time there will be a requirement for audited statements for 2022 as well.

Future

Business activity

We believe that our future is looking bright, particularly in the U.K. and, by extension, Europe. The unfortunate events that have and are occurring in Ukraine have created what appears to be a permanent shift in the energy supply for all of Europe, including the U.K. This has led to unprecedented increases in energy costs -- one of the driving factors in seeking energy reduction through efficiency measures. The path to net zero is also driving decisions for reducing emissions by way of improving efficiencies. The confluence of these two factors is leading to an exceptional opportunity for Smartcool. Our large clients in the U.K. have indicated that they are now prepared to roll out the retrofit of their locations with Smartcool technology. In the U.K., Smartcool does most of its own installation work at client sites. Growth is therefore limited by our installation capacity. We currently employ six technical staff and are hiring two more and will then likely need to hire two to four additional technical staff by the end of the year. This should provide the U.K. operation with capacity to meet our expectation of sales growth.

Similar expansion drivers exist in continental Europe. Many of the U.K. clients that are currently enjoying savings due to Smartcool technology have locations in continental Europe and we anticipate that high utility rates and a desire to effect significant reductions in the carbon footprint should provide further opportunities for expansion. We have already formed a wholly owned subsidiary in Germany under the name Smartcool GmbH, and we expect our initial sales activity in Germany to yield pilot projects this year.

While our primary focus is on expansion in the U.K. and Europe, we continue to believe that North America represents a substantial growing market. RioCan has publicly commented on the energy savings it has achieved with our installations, and we hope to install our technology across its entire portfolio over the next few years.

It is very important to note that the world is moving to the electrification of everything, including heating. This means that the use of heat pumps is increasing rapidly in both new construction and retrofit systems needing replacement or improvement. Heat pumps use reverse cycle air conditioning for heating spaces, and we have demonstrated attractive savings when we install our products on heat pumps. European companies started adopting heat pumps for heating and air conditioning 15 years ago and the adoption rate continues to accelerate. The installed base of commercial heat pumps in Europe already exceeds one million. North America is also getting on the heat pump bandwagon, with jurisdictions like California, New York and other states banning natural gas appliances. This means that Smartcool's control algorithm can now be impactful on both air conditioning and heating, offering year-round savings rather than just during the cooling season. The aggregate reduction of electricity consumed can yield very rapid paybacks and high ROIs (returns on investment). Lastly, distributors have been established on a non-exclusive basis in Italy, Korea, Singapore, India, Saudi Arabia and the United Arab Emirates. These jurisdictions should also see growth based on the initial successes of pilot projects.

In closing, while we have always been optimistic about the prospects for Smartcool, there has never been a time in the company's history when it is more prepared to grow and the market, more accepting -- perhaps even demanding -- of our technology. We look forward to being able to update you with positive news during the course of this year.

Sincerely,

Ted Konyi

CEO

We seek Safe Harbor.