CEN BIOTECH INC - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

[  ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ___________ to ___________

Commission File Number 000-55557 

CEN BIOTECH, INC.

(Exact name of registrant as specified in its charter)

(519) 419-4958

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act): Yes [  ] No [X]

As of August 14, 2018, there were 25,388,243 shares of common stock, no par value per share (“common stock”), of the registrant outstanding.

TABLE OF CONTENTS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). There are statements in this quarterly report that are not historical facts. These “forward-looking statements” can be identified by use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “hope,” “intend,” “may,” “plan,” “positioned,” “project,” “propose,” “should,” “strategy,” “will,” or any similar expressions. You should be aware that these forward-looking statements are subject to risks and uncertainties that are beyond our control. Although we believe that our assumptions underlying such forward-looking statements are reasonable, we do not guarantee our future performance, and our actual results may differ materially from those contemplated by these forward-looking statements. Our assumptions used for the purposes of the forward-looking statements made in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances, including the development of our lines of business and any products that we may manufacture or sell and our ability to raise additional funding sufficient to implement our strategy, as well as assumptions regarding Canadian and U.S. laws regarding the consumer or retail sale of marijuana products and accessories and the manufacture and distribution of such products and accessories, including zoning and banking regulations. We also assume that we will be able to raise additional capital to fund our operations while we develop a line of business to generate net revenues. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. In light of these numerous risks and uncertainties, we cannot provide any assurance that the results and events contemplated by our forward-looking statements contained in this quarterly report will in fact transpire. These forward-looking statements are not guarantees of future performance. You are cautioned to not place undue reliance on these forward-looking statements, which speak only as of their dates. We do not undertake any obligation to update or revise any forward-looking statements.

 PART I

CEN BIOTECH, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(Unaudited)

See accompanying notes to financial statements.

CEN BIOTECH, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to financial statements.

See accompanying notes to financial statements.

CEN BIOTECH, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to financial statements.

CEN BIOTECH, INC. AND SUBSIDIARY

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(All amounts are in US dollars unless otherwise stated.)

ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Background and Overview

CEN Biotech, Inc. (“CEN” or the “Company”) is a Canadian holding company, incorporated in Canada on August 4, 2013 as a subsidiary of Creative Edge Nutrition, Inc. (“Creative”), a Nevada corporation. Creative separated its planned specialty pharmaceutical business located in Canada by transferring substantially all of the assets and liabilities of the planned specialty pharmaceutical business to CEN and effecting a distribution (“Spin Off Distribution”) of CEN common stock to Creative shareholders on February 29, 2016. The Spin-Off Distribution was expected to be tax free for U.S. Federal income tax purposes.

Prior to the Spin Off Distribution, CEN initially pursued the cannabis business in Canada and obtained funding to build the initial phase of its comprehensive seed-to-sale facility and applied to obtain a license in Canada to begin operating its state-of-the-art medical marijuana cultivation, processing, and distribution facility in Lakeshore, Ontario.  On March 11, 2015, the Company’s application for a license to produce marijuana for medical purposes was formally rejected by Canadian regulatory authority. On February 1, 2016 the Company commenced legal action against the Attorney General of Canada in the Ontario Superior Court of Justice for damages for detrimental reliance, economic loss, and prejudgment and post judgment interest, costs of the proceeding and other relief that the court may seem just.  As of August 14, 2018, the action in the Ontario Superior Court of Justice is still ongoing.  After evaluating this action, the Company decided to not pursue the development of its medical marijuana business and to seek to develop and pursue other businesses that are related to the cannabis and other industries, including Light Emitting Diode (“LED”) lighting and hemp products for industrial, medical and food products that have a tetrahydrocannabinol (THC) that is below 0.3%.

We are focused on the manufacturing, production and development of products within the cannabis industry, including the LED lighting technology and hemp products. The Company intends to explore the usage of hemp, which it intends to cultivate for usage in industrial, medical and food products.

At present we are not able to estimate if or when we will be able to generate revenues. Our consolidated financial statements have been prepared assuming that we will continue as a going concern; however, given our recurring losses from operations, our independent registered public accounting firm has determined there is substantial doubt about our ability to continue as a going concern.

Subsequent Event

On July 31, 2018, the Company entered into a Share Purchase Agreement with AstralENERGY Solar Manufacturing Corporation, LTD. (“AstralENERGY”) as described in NOTE 19 – SUBSEQUENT EVENTS.

Results of Operations

We have incurred recurring losses and have not commenced revenue generating operations to date. Our expenses to date are primarily our general and administrative expenses and fees, costs and expenses related to acquisitions and operations. Our condensed consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation.

The accompanying consolidated financial statements have been prepared in contemplating continuation of the Company as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, a substantial doubt has been raised with regard to the ability of the Company to continue as a going concern. The Company has incurred significant operating losses and negative cash flows from operations since inception. The Company had an accumulated deficit of $31,105,003 at June 30, 2018 and had no committed source of debt or equity financing. The Company has not had any operating revenue and does not foresee any operating revenue in the near term. The Company has relied on the issuance of loans payable and convertible debt instruments to finance its expenses, including a note that is in default and is secured by the Company’s equipment and certain unsecured convertible notes payable. The Company will be dependent upon raising additional capital through placement of our common stock, notes or other securities in order to implement its business plan or additional borrowings, including from related parties. There can be no assurance that the Company will be successful in either situation in order to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The Company’s cash position may not be sufficient to support the Company’s daily operations or its ability to undertake any business activity that will generate net revenue.

Results of Operations for the Three and Six-Months Ended June 30, 2018 and 2017:

The following tables reflect our operating results for the three and six-months ended June 30, 2018 and 2017, respectively:

Revenue

We have not recognized revenue during the three and six-months ended June 30, 2018 and 2017, as we have not commenced revenue generating operations to date.

Operating Expenses

During the three months ended June 30, 2018, our operating expenses were $968,734 compared to $605,487 during the six months ended June 30, 2017. During the three months ended June 30, 2018, our operating expenses were comprised of salary and consulting fees of $94,339, stock-based compensation expense of $179,800, and general and administrative expenses of $694,595. By comparison, during the three months ended June 30, 2017, our operating expenses were comprised of salary and consulting fees of $191,327, and general and administrative expenses of $414,160. Expenses incurred during the three months ended June 30, 2018 compared to three months ended June 30, 2017 increased primarily due to stock-based compensation and professional fees. Professional fees generally include financial, legal and administrative contracted services.

During the six months ended June 30, 2018, our operating expenses were $1,621,158 compared to $1,070,218 during the six months ended June 30, 2017. During the six months ended June 30, 2018, our operating expenses were comprised of salary and consulting fees of $137,524, stock-based compensation expense of $347,200, and general and administrative expenses of $1,136,434. By comparison, during the six months ended June 30, 2017, our operating expenses were comprised of salary and consulting fees of $281,327, and general and administrative expenses of $788,891. Expenses incurred during the six months ended June 30, 2018 compared to six months ended June 30, 2017 increased primarily due to stock-based compensation and professional fees. Professional fees generally include financial, legal and administrative contracted services.

Other Income and Expense Items

During the three months ended June 30, 2018, our other expense items totaled $690,807 compared to $618,808 during the three months ended June 30, 2017. During the three months ended June 30, 2018, our other expense items were comprised of interest expense of $713,962 and foreign exchange gain of $23,155. By comparison, during the three months ended June 30, 2017, our other expense items were comprised of interest expense of $587,855, and foreign exchange loss of $30,953.

During the six months ended June 30, 2018, our other expense items totaled $1,359,153 compared to $1,202,354 during the six months ended June 30, 2017. During the six months ended June 30, 2018, our other expense items were comprised of interest expense of $1,412,751 and foreign exchange gain of $53,598. By comparison, during the six months ended June 30, 2017, our other expense items were comprised of interest expense of $1,158,211 and foreign exchange loss of $44,143.

Net Loss

Our net loss during the three months ended June 30, 2018 was $1,659,541 compared to a net loss of $1,224,295 during the three months ended June 30, 2017 due to the factors discussed above.

Our net loss during the six months ended June 30, 2018 was $2,980,311 compared to a net loss of $2,272,572 during the six months ended June 30, 2017 due to the factors discussed above.

 Liquidity and Capital Resources

As of June 30, 2018, we had assets of $8,961,362, comprised of cash of $22,004, net property and equipment of $13,692, leasehold improvements of $1,432,124, a note receivable from a related party of $44,859, other receivables of $465,120, deferred lease expense of $190,058, an advance to CEN Biotech Ukraine, LLC, a related party, of $775,328, and net intangibles of $6,018,177. As of June 30, 2018, we had liabilities of $26,091,856 comprised of patent acquisition liability of $620,000, loans from related parties of $1,362,090, loans payable of $10,117,369, accrued interest and other expenses of $6,793,955, accounts payable of $171,805, convertible notes- related parties of $2,710,313 and convertible notes of $4,316,324.

Our indebtedness includes a patent acquisition liability of $620,000, accrued interest of $5,684,981, accrued interest to related parties of $768,997, as well as loans payable, loans payable to related parties, loans payable share interest, loans payable share interest to related parties, convertible notes and convertible notes to related parties totaling $18,506,096, with maturity dates as outlined below. We are in default of $9,675,000 of debt that is secured by certain equipment that we value at approximately $11,000. We are also in default of $17,200 of unsecured debt. We expect our operating and administrative expenses to be at least $2,400,000 annually. The convertible notes are due 2 years from issuance with notes maturing in 2018 through 2020.

We intend to fund our expenses through the issuance and sale of additional securities. We do not have any commitments from any persons to purchase any securities and there can be no assurance that we will be able to raise sufficient funds to pay our liabilities as they become due and payable.

Six Months Ended June 30, 2018 and 2017

Cash Flows from Operating Activities

We have not generated positive cash flows from operating activities. During the six months ended June 30, 2018, we used $1,120,335 in operating activities compared to $738,064 used in operating activities during the six months ended June 30, 2017. The increase between the two periods related primarily to increases in professional fees compared to the six months ended June 30, 2017.

Cash Flows from Investing Activities

Our use of cash flow for investing activities during the six months ended June 30, 2018 was $5,439 compared to the six months ended June 30, 2017 of $352,645. During the six months ended June 30, 2018, our use of cash flows for investing activities were comprised of leasehold improvements of $5,439. By comparison, during the six months ended June 30, 2017, our use of cash flows for investing activities was comprised of advances to CEN Ukraine of $250,000 and leasehold improvements of $102,645.

Cash Flows from Financing Activities

During the six months ended June 30, 2018, we received $1,312,800 by way of loans of nonconvertible promissory notes, convertible notes and share interest loans payable from investors to fund our working capital requirements. During the six months ended June 30, 2018, $230,000 of the share interest loans payable were repaid, and $20,000 of the convertible notes were repaid. During the six months ended June 30, 2017, we received $1,199,963 by way of loans of convertible notes from investors to fund our working capital requirements. 

CEN has no committed source of debt or equity financing. Our Executive team and Board are seeking additional financing from their business contacts, but no assurances can be given that such financing will be obtained or, if obtained, on what terms.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, obligations under any guarantee contracts or contingent obligations. We also have no other commitments, other than the costs of being a reporting company that will increase our operating costs or cash requirements in the future.

Jumpstart Our Business Startups Act of 2012

The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) provides that an emerging growth company can take advantage of certain exemptions from various reporting and other requirements that are applicable to public companies that are not emerging growth companies. We currently take advantage of some, but not all, of the reduced regulatory and reporting requirements that are available to us for as long as we qualify as an emerging growth company. Our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting for as long as we qualify as an emerging growth company.

Recent Accounting Pronouncements

Adoption of New Accounting Standards

On January 1, 2018, the Company adopted the new revenue recognition standard which requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. The Company is still in its startup phase and is not generating revenues at this time; therefore, this standard has no impact on its consolidated financial statements until such time as revenues are generated. When revenues are generated, the Company will follow the provisions of the new standard.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to mainly change the accounting for investments in equity securities and financial liabilities carried at fair value as well as to modify the presentation and disclosure requirements for financial instruments. The ASU is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. Adoption of the ASU is retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. The adoption of this pronouncement did not have an impact on the Company’s financial statements.

Accounting Standards Issued but Not Yet Adopted

In February 2016, the FASB issued an ASU which requires lessees to recognize lease assets and lease liabilities arising from operating leases on the balance sheet. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018 using a modified retrospective approach, with early adoption permitted. The Company is currently evaluating the standard to determine the impact of its adoption on its consolidated financial statements. The Company will record a right-of-use asset and a lease liability upon adoption.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services for nonemployees. The ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the standard to determine the impact of its adoption on its consolidated financial statements. The Company will measure these nonemployee awards at fair value upon adoption.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, we are not required to provide the information called for by this Item.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures 

We maintain "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our principal executive officer to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, the Company recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. 

 Changes in Internal Control over Financial Reporting

There have been no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the last quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or the Company’s internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Evaluation of disclosure and controls and procedures 

As of June 30, 2018, our management conducted an assessment of the effectiveness of the Company's internal control over disclosure controls and procedures and financial reporting. In making this assessment, management followed an approach based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (known as “COSO”). In connection with management’s evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2018, management determined that the Company did not maintain effective controls over the completeness, existence, accuracy and presentation and disclosure of the accounting for the acquisition of a patent and deferral on the recognition of rental expense related to a lease agreement for financial reporting, which resulted in a restatement of the previously issued June 30, 2017 condensed consolidated financial statements. Management determined that the ineffective controls over financial reporting constitute a material weakness. 

Remediation of the Material Weakness in Internal Control Over Financial Reporting

We are currently working to remediate the material weakness referred to above with respect to our financial reporting. We have reviewed the design of our current review control over financial reporting, in particular, with regards to non-routine transactions such as acquisitions of intangibles, to determine appropriate improvements and implement enhanced procedures. As part of these enhanced procedures, we are outsourcing some of our accounting and oversight roles to a qualified accounting firm, and then management will execute the review process.

We believe these measures will remediate the control deficiency identified above and will strengthen our internal control over financial reporting. We currently are working with this accounting firm and are targeting to complete the implementation of the control enhancements during 2018. We will test the ongoing operating effectiveness of the new controls subsequent to implementation, and consider the material weakness remediated after the applicable remedial controls operate effectively for a sufficient period of time.

Revisions to disclosure Controls and Procedures

Management recognized the need for additional resources in the area of accounting and financial reporting controls and procedures. As a result, we have outsourced the accounting and financial reporting oversight roles to a qualified accounting firm with public company reporting expertise.

Readers are cautioned that internal control over financial reporting, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Therefore, even effective internal control over financial reporting can only provide reasonable assurance with respect to the financial statement preparation and presentation.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. We are not currently a party, as plaintiff or defendant, to any legal proceedings that we believe to be material or which, individually or in the aggregate, would be expected to have a material effect on our business, financial condition or results of operation if determined adversely to us.

Item 1A. Risk Factors.

As a smaller reporting company, we are not required to provide the information called for by this Item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. 

Between April 10, 2018 and June 30, 2018, CEN entered into loans and associated extension agreements with various parties. In consideration for such loans and associated extensions, CEN granted various individuals total aggregate amount of 53,000 and 96,400 unregistered shares of common stock of CEN during the three and six months ended June 30, 2018, respectively.

On June 7, 2018, the Company elected Dr. Usamakh Saadikh to serve as a director of the Company. As compensation for his role as a Director, the company granted a one-time equity award of 20,000 shares of the Company’s common stock. This award vested immediately.

On June 19, 2018, the Company entered into an agreement with a law firm which included, as compensation, a grant of a one-time equity award of 125,000 shares of the Company’s common stock. This award vested immediately.

The unregistered shares of common stock were issued in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended and the provisions of Regulation D promulgated thereunder or in reliance on the provisions of Regulation S promulgated thereunder.

Item 3. Defaults Upon Senior Securities.

CEN has a payment default with respect to the term loan payable to Global Holdings International, LLC, in the principal amount of $9,675,000 and which bears compound interest at 15% per annum which was due on June 30, 2016. The aggregate amount due under this loan as of August 14, 2018 is $15,332,361. Interest and default interest and related fees currently accrue at approximately $524,000 per quarter. This note is secured by some of the Company's equipment which we value at approximately $11,000.

CEN has a payment default with respect to four unsecured convertible loans payable to four private investors, in the principal amount of $17,200 and which bear interest at 5% per annum which were due in May and June 2018. The aggregate amounts due under these loans as of August 14, 2018, including accrued interest, is approximately $19,000. Interest and default interest and related fees currently accrue at approximately $210 per quarter.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The financial statement schedules and exhibits filed as part of this Quarterly Report on Form 10-Q are as follows: 

 ___________________

* Filed herein.

** Furnished herewith. 

None

SIGNATURES

Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: August 14, 2018

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