CEN BIOTECH INC - Quarter Report: 2019 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, 2019

 

 

[  ]   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)

 

Ontario, Canada	-
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
7405 Tecumseh Road East Suite 300 Windsor, Ontario Canada	N8T 1G2
(Address of principal executive offices)	(Zip code)

 

(519) 419-4958

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report) 

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes [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.

 

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [X]	Smaller reporting company [X]
Emerging growth company [X]

 

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]

 

Securities registered pursuant to Section 12(b) of the Act: 

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
None		N/A		N/A

 

  

As of August 19, 2019, there were 26,843,363, shares of common stock, no par value per share (“common stock”), of the registrant outstanding.

 

 

 

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PART I
ITEM 1. FINANCIAL STATEMENTS
Contents
	Page
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Unaudited condensed consolidated balance sheets	F-1
Unaudited condensed consolidated statements of operations	F-2
Unaudited condensed consolidated statements of shareholders’ deficit	F-3
Unaudited condensed consolidated statements of cash flows	F-4
Notes to the unaudited condensed consolidated financial statements	F-5

 

 

 

		June 30, 2019				December 31, 2018
ASSETS
Current assets
Cash and cash equivalents		$	15,972			$	3,193
Property, plant and improvements
Property and equipment, net			157,317				166,509
Other assets
Operating lease right-of-use assets			250,484				-
Other receivable			419,958				418,905
Note receivable – related party			44,859				44,859
Advances to CEN Biotech Ukraine LLC – related party			995,328				875,328
Intangible assets, net			5,593,365				5,805,771
Total assets		$	7,477,283			$	7,314,565
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities
Accounts payable		$	206,521			$	206,521
Loans payable			10,119,178				10,107,205
Loans payable – related parties			1,362,318				1,360,806
Convertible notes payable			4,318,916				3,597,760
Convertible notes payable – related parties			926,368				926,368
Accrued interest			8,206,898				6,860,494
Accrued interest – related parties			1,119,126				946,227
Operating lease liabilities			42,306				-
Accrued expenses			492,235				402,377
Total current liabilities			26,793,866				24,407,758
Operating lease liabilities, less current portion			205,327				-
Patent acquisition liability			1,010,000				1,010,000
Convertible notes, less current portion			1,386,122				1,545,887
Convertible notes – related parties, less current portion			1,632,313				1,612,313
Total liabilities			31,027,628				28,575,958
Shareholders’ deficit
Common stock; unlimited authorized shares; 26,813,363 and 25,473,363 issued and outstanding as of June 30, 2019 and December 31, 2018, respectively. No par value.			-				-
Additional paid-in capital			15,198,110				14,393,660
Accumulated deficit			(38,748,455	)			(35,655,053	)
Total shareholders’ deficit			(23,550,345	)			(21,261,393	)
Total liabilities and shareholders’ deficit		$	7,477,283			$	7,314,565

 

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		For the three months ended June 30,								For the six months ended June 30,
		2019				2018				2019				2018
Operating expenses
Consulting fees		$	178			$	48,500			$	19,120			$	60,485
Consulting fees – related parties			37,759				45,839				68,959				77,039
Stock based compensation			546,150				179,800				713,550				347,200
General and administrative			412,527				694,595				600,212				1,136,434
Total operating expenses			996,614				968,734				1,401,841				1,621,158
Loss from operations			(996,614	)			(968,734	)			(1,401,841	)			(1,621,158	)
Other income (expense)
Interest expense			(714,791	)			(608,670	)			(1,416,679	)			(1,203,173	)
Interest expense – related parties			(114,226	)			(105,292	)			(227,439	)			(209,578	)
Interest income			2,052				-				4,097				-
Foreign exchange gain (loss)			(27,046	)			23,155				(51,540	)			53,598
Other expense, net			(854,011	)			(690,807	)			(1,691,561	)			(1,359,153	)
Net loss		$	(1,850,625	)		$	(1,659,541	)		$	(3,093,402	)		$	(2,980,311	)
Net loss per share:
Basic and diluted		$	(0.07	)		$	(0.07	)		$	(0.12	)		$	(0.12	)
Weighted average number of shares outstanding
Basic and diluted			26,173,473				25,222,721				25,836,540				25,188,132

 

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						Common				Additional								Total
		Common				Shares				Paid-in				Accumulated				Shareholders’
		Shares				Amount				Capital				Deficit				Deficit
Balances, January 1, 2018			25,131,843			$	-			$	9,110,041			$	(28,124,692	)		$	(19,014,651	)
Patent acquisition liability modification			-				-				4,380,000				-				4,380,000
Stock-based compensation			20,000				-				347,200				-				347,200
Issuance of common stock – interest shares			96,400				-				59,768				-				59,768
Issuance of common stock – legal consulting			125,000				-				77,500				-				77,500
Net loss			-				-				-				(2,980,311	)			(2,980,311	)
Balances, June 30, 2018			25,373,243			$	-			$	13,974,509			$	(31,105,003	)		$	(17,130,494	)
Balances, January 1, 2019			25,473,363			$	-			$	14,393,660			$	(35,655,053	)		$	(21,261,393	)
Stock-based compensation			1,250,000				-				713,550				-				713,550
Issuance of common stock – interest shares			90,000				-				90,900				-				90,900
Net loss			-				-				-				(3,093,402	)			(3,093,402	)
Balances, June 30, 2019			26,813,363			$	-			$	15,198,110			$	(38,748,455	)		$	(23,550,345	)

 

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		For the six months ended June 30,
		2019				2018
Cash flows from operating activities
Net loss		$	(3,093,402	)		$	(2,980,311	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation			9,192				5,038
Amortization			212,406				212,406
Stock-based compensation – employees			713,550				347,200
Stock-based compensation – others			-				77,500
Non-cash interest expense			1,382,764				1,170,577
Non-cash interest expense – related parties			227,439				209,576
Deferred lease expense			-				27,152
Foreign exchange loss (gain)			51,540				(53,598	)
Changes in operating assets and liabilities which provided (used) cash
Lease right-of-use assets			5,842				-
Other receivable			(1,053	)			(242,558	)
Accounts payable			(3,698	)			62,580
Operating lease liabilities			(8,693	)			-
Accrued expenses			89,858				44,103
Net cash used in operating activities			(414,255	)			(1,120,335	)
Cash flows from investing activities
Advance on business acquisition			(120,000	)			-
Leasehold improvements in progress			-				(5,439	)
Net cash used in investing activities			(120,000	)			(5,439	)
Cash flows from financing activities
Issuance of loans payable			-				380,000
Repayment of loans payable			-				(230,000	)
Issuance of loans payable – related parties			-				225,000
Issuance of convertible notes			533,034				707,800
Repayment of convertible notes			(6,000	)			(20,000	)
Issuance of convertible notes – related parties			20,000				-
Net cash provided by financing activities			547,034				1,062,800
Net increase (decrease) in cash and cash equivalents			12,779				(62,974	)
Cash and cash equivalents, beginning of period			3,193				84,978
Cash and cash equivalents, end of period		$	15,972			$	22,004
Supplemental cash flows disclosures
Cash paid for interest		$	33,913			$	32,598
Non-cash transactions - investing and financing activities
Patent acquisition liability modification		$	-			$	4,380,000

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NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited interim condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) set forth in Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Unaudited interim results are not necessarily indicative of the results for the full fiscal year. These financial statements should be read in conjunction with the condensed consolidated financial statements of the Company for the year ended December 31, 2018 and notes thereto.

 

There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s annual report on Form 10-K for the year ended December 31, 2018.

 

Loss per Share

 

Net loss per common share is computed pursuant to ASC 260-10-45. Basic loss per share is computed based on the weighted average number of common shares outstanding during the period. Diluted net loss per share is calculated by dividing net loss by the diluted weighted average common shares outstanding, which includes the effect of potentially dilutive securities. During periods when there is a net loss, all potentially dilutive shares are anti-dilutive and are excluded from the calculation of net loss per share. Diluted earnings per share is similarly computed except that the denominator includes the effect, using the treasury stock method, of unvested restricted stock and convertible notes, if including such potential shares of common stock is dilutive. For the three-months ended June 30, 2019 and 2018, the common stock equivalents of the convertible note agreements were not included in diluted earnings per share computations because their effect was antidilutive.

 

Share Purchase Agreement

 

On July 31, 2018, the Company entered into a Share Purchase Agreement with AstralENERGY Solar Manufacturing Corporation, LTD. (“AstralENERGY”) to acquire 70% of the outstanding common stock of AstralENERGY. The Company will issue an aggregate 2,500,000 shares of common stock of the Company as consideration for the acquisition. AstralENERGY is a manufacturer of architecturally designed solar panels for residential and commercial solar production and has also developed integrated multi-function LED street lighting systems. Consummation of the acquisition is subject to the completion of certain conditions specified in the agreement. As of August 19, 2019, this transaction has not closed.

 

Merger Agreement

 

On June 21, 2019, Company entered into a Merger Agreement (the “Merger Agreement”) with Caduceus Software Systems Corp. (“CSOC”), Caduceus Merger Sub, Inc., a Wyoming corporation and a wholly owned subsidiary of CSOC (the “Merger Sub”).  Pursuant to the Merger Agreement, the Company, the Merger Sub and CSOC agreed to effect a merger transaction, pursuant to which the Company will merge with and into the Merger Sub, with the Company surviving and being a wholly owned subsidiary of CSOC (the “Merger”).

 

 

Subject to satisfaction or waiver of certain conditions set forth in the Merger Agreement, at the closing, the Merger will be consummated by filing Articles of Merger (the “Articles of Merger”) with the Secretary of State of Wyoming and by making all other filings or recordings required under the Wyoming Business Corporation Act, as in effect and as the same may be amended from time to time (the “WBCA”) in connection with the Merger, in such form as is required by, and executed in accordance with the relevant provisions of, the WBCA. The Merger will become effective when Articles of Merger are filed with the Secretary of State of Wyoming, or at such other time as the parties agree, which shall be specified in the Articles of Merger (the “Effective Time”).

 

Upon the Effective Time, each share of the Company’s issued and outstanding common stock, no par value per share, (the “CEN Common Stock”) shall be converted into and shall become one (1) fully paid and nonassessable share of common stock, par value $0.001 per share, of CSOC (the “CSOC Common Stock”). Any fractional shares of CEN Common Stock issued and outstanding immediately prior to the Effective Time shall, be converted into and shall become the same fraction of a fully paid and nonassessable share of CSOC Common Stock, such that, for such fraction of a share of CEN Common Stock, the holder thereof will be issued an equal fraction of a share of CSOC Common Stock. Each share of CEN Common Stock issued and outstanding immediately prior to the Effective Time that is owned by CSOC or the Merger Sub and each share of CEN Common Stock that is owned by the Company as treasury stock shall be cancelled and retired and cease to exist, and no payment or distribution shall be made with respect thereto. At the Effective Time, any outstanding shares of CSOC Common Stock that are owned by CSOC, the Merger Sub or any other direct or indirect wholly owned subsidiary thereof, shall be cancelled and retired and shall cease to exist and no cash or other consideration shall be delivered or deliverable in exchange therefor.

 

Upon the closing of the Merger Agreement (the “Closing”) the current members of the CSOC Board of Directors (the “CSOC Board”) shall take such actions as required to expand the CSOC Board to be at least four (4) persons total, and thereafter to add three (3) persons designated by the Company as new members of the CSOC Board, after which the current members of the CSOC Board shall resign. Additionally, pursuant to the Merger Agreement, at the Closing, all current officers of CSOC shall resign, and the new members of the CSOC Board as reconstituted pursuant to the foregoing, shall elect new officers of CSOC.

 

The Merger Agreement includes customary representations, warranties and covenants by the respective parties. For example, in the Merger Agreement CSOC represents and warrants to the Company that the financials statements of CSOC to be provided to the Company pursuant to the terms of the Merger Agreement, will be complete and will be based on the books and records of CSOC, and fairly present the financial condition of CSOC as of the respective dates they were prepared and the results of the operations of CSOC for the periods indicated, in all material respects.

 

The Company and CSOC have each agreed, that from the Effective Time, until the first to occur of the Closing or the termination of the Merger Agreement, not to solicit or initiate discussions with third parties regarding other acquisition proposals.

 

Pursuant to the Merger Agreement, CSOC agreed to undertake the following actions following the Effective Time and prior to the Closing:

 

●	file a Form 10 Registration Statement with the Securities and Exchange Commission (the “SEC”) and be current in its reporting requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”);

●	complete a 1 for 5,000 reverse split of the CSOC Common Stock;

●	redeem or terminate any derivatives of CSOC;

●	amend and restate its Articles of Incorporation as to be agreed by the parties, and cause such amendment to be filed with the Wyoming Secretary of State and to become effective under all applicable Laws;

●	convert all of its existing debt, whether existing as of the Effective Time or thereafter, into shares of CSOC Common Stock, pursuant to Debt Conversion Agreements, in the form as to be agreed by the parties such that CSOC has no liabilities as of the Effective Time; and

●	file a Form 14f-1 with the SEC at least 10 days prior to the Closing.

 

 

Pursuant to the Merger Agreement, the Company agreed to undertake the following actions following the Effective Time and prior to the Closing:

 

●	amend the terms of any promissory notes or other debt instruments or agreement which are convertible into shares of CEN Common Stock such that such instruments or agreements are, following the Effective Time, convertible into shares of CSOC Common Stock; and

●

amend the terms of any acquisition agreements in place at the Company, whether currently or at any time prior to the Closing, such that such agreements are freely assignable by the Company to CSOC following the Closing and such that, upon completion of the acquisitions or transactions set forth therein, the counterparties to such agreements shall be entitled to receive shares of CSOC Common Stock instead of shares of CEN Common Stock.

 

Consummation of the Merger is subject to various customary conditions, each as more fully described in the Merger Agreement. In addition to customary closing conditions and other closing conditions further described in the Merger Agreement, the Closing is conditioned upon:

 

●	CSOC having no more than 731,680 shares of CSOC Common Stock issued and outstanding as of immediately prior to the Closing;

●	CSOC having no liabilities as of the Closing;

●	CSOC being current in all of its reporting requirements pursuant to the Exchange Act and the Securities Act of 1933, as amended; and

●

delivery by CSOC to the Company all of the Merger deliverables as set forth in the Merger Agreement, including, but not limited to resignations of the directors and officers of CSOC and written evidence of the termination of any and all stockholder, voting, buy-sell or similar agreements by and among CSOC and any of its shareholders.

 

Pursuant to the terms of the Merger Agreement, if CSOC or the Merger Sub or the Company fails to perform any of their respective material obligations under the Merger Agreement, or are in breach in any material respect of any representation, warranty, covenant or agreement on the part of such party, and such failure or breach is not cured within five (5) business days, then the party who is in such failure or makes such breach shall be in default under the Merger Agreement. In the event of a default, the non-defaulting party will be entitled to either (1) bring an action for specific performance of the Merger Agreement or (2) terminate the Merger Agreement and to proceed against the defaulting party for payment of expenses as further detailed in the Merger Agreement.

 

The Merger Agreement can be terminated any time prior to the Closing pursuant to the following:

 

●	mutual written consent of the Company and CSOC;

●	by CSOC or the Company, upon written notice to the other parties, if there shall be in effect a final non-appealable order, judgment, injunction or decree entered by or with any governmental authority restraining, enjoining or otherwise prohibiting the consummation of the Merger;

●	by CSOC, upon written notice to the Company if there shall have been a default by the Company under the Merger Agreement;

●	by the Company, upon written notice to CSOC, if there shall have been a default by CSOC under the Merger Agreement;

●	by CSOC, upon written notice to the Company, in the event that a material adverse effect with respect to the Company has occurred prior to the Closing;

●	by the Company, upon written notice to CSOC, in the event that a material adverse effect with respect to CSOC or the Merger Sub has occurred prior to the Closing;

●	by the Company, upon written notice to CSOC, at any time prior to the Closing if the results of the Company’s due diligence review of CSOC and/or the Merger Sub are unsatisfactory to the Company in its sole discretion; or

●	by either the Company or CSOC if the Closing has not occurred by August 30, 2019.

 

 

If the Merger Agreement is terminated pursuant to a default on the part of the Company, CSOC may then seek from the Company cash equal to CSOC’s reasonable out of pocket costs incurred in connection with the Merger Agreement, subject to a maximum payment of $150,000. If the Merger Agreement is terminated pursuant to a default on the part of the CSOC, the Company may then seek from CSOC cash equal to the Company’s reasonable out of pocket costs incurred in connection with the Merger Agreement, subject to a maximum payment of $150,000 and an additional sum of $50,000. If the Merger Agreement is terminated because the Closing does not occur for any reason, other than the default thereunder of any of the parties, the parties shall not owe each other any payment amounts.

 

The Merger Agreement also includes indemnification by CSOC of the Company, and by the Company of CSOC, as further described therein, for any losses incurred due to (i) any inaccuracy in or breach of any representations or warranties by the other party as set forth in the Merger Agreement, (ii) any breach or non-fulfillment of any covenant, agreement or obligation of such party as set forth in the Merger Agreement, or (iii) any claim by any person for brokerage or finder’s fees or commissions or similar payments based upon any agreement or understanding made, or alleged to have been made, by any such person with the other party in connection with transactions contemplated by the Merger Agreement.

 

There can be no assurance that Merger Agreement will close, or that the transactions contemplated thereby can be completed as planned, or at all.

 

As of August 19, 2019, the Merger Agreement has not closed. The Company has not determined how to account for this transaction as of August 19, 2019.

 

 

NOTE 2 – NEW ACCOUNTING STANDARD

 

Adoption of New Accounting Standard

 

The Company adopted Accounting Standards Codification (ASC) 842, “Leases” using the modified retrospective approach, effective January 1, 2019, on its condensed consolidated financial statements. The comparative information has not been restated and continues to be reported under the lease accounting standard in effect for those periods.

 

The new lease standard requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations. We elected the practical expedients permitted under the transition guidance of the new standard.

 

 

NOTE 3 – GOING CONCERN UNCERTAINTY / MANAGEMENT PLANS

 

The accompanying condensed 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 $38,748,455 at June 30, 2019 and had no committed source of additional 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 notes that are in default, as described in Notes 7, 8, 9, and 10. 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 condensed 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.

 

 

NOTE 4 – PROPERTY, PLANT AND IMPROVEMENTS, NET

 

Property and equipment, net consists of the following as of:

 

 

Depreciation expense was $4,596 for each of the three-months ended June 30, 2019 and 2018, respectively, and $9,192 and $5,038 for the six months ended June 30, 2019 and 2018, respectively.

 

 

NOTE 5 – ADVANCES TO CEN BIOTECH UKRAINE

 

At June 30, 2019 and December 31, 2018, the Company had advances of $995,328 and $875,328, respectively, to CEN Biotech Ukraine, LLC, a related party, (see Note 13). The advances were for the purpose of funding the operations of CEN Biotech Ukraine, LLC and are unsecured, non-interest bearing, and are due on demand.

 

 

NOTE 6 – INTANGIBLE ASSETS

 

On September 12, 2016, the Company executed an agreement dated August 31, 2016, to acquire assets, including a patent related to LED Lighting, from Tesla Digital, Inc., a Canadian Corporation, and Stevan (Steve) Pokrajac (the “Sellers”).

 

Material consideration given by Company was: (a) Shares of CEN common stock equal to $5 million upon commencement of public trading (b) The transfer of real properties located at 135 North Rear Road, Lakeshore, Ontario, Canada having a fair value of $2,161,467 and 1517-1525 Ridge Road having a purchase cost (including other related disbursements) to the Company of $202,666.

 

The patent remains in the name of Tesla Digital, Inc. until full settlement of the terms of the agreement. In the interim, pursuant to an updated agreement executed on April 15, 2019 between the Company and the Sellers, CEN has reaffirmed the rights to use the patented technology.

 

In addition, the Company agreed to employ Stevan Pokrajac, by an LED subsidiary that the Company plans to form, but which has not yet been formed, in connection with the development of the acquired technology with compensation equal to $200,000 per year, commencing with the start of operations.

 

 

In March 2018, the Tesla agreement was amended to replace the $5 million stock consideration commitment with a commitment to issue one million registered shares of CEN common stock with a closing date of September 30, 2018. On October 4, 2018, this agreement was amended to extend the closing date to December 15, 2018. On April 3, 2019, the Company entered into an amendment which extended the closing date of the agreement to December 31, 2019. The modification of the agreement converted a fixed value of shares to a fixed number of shares. Accordingly, the liability was reduced and additional paid in capital was increased by $4,380,000 to reflect the fair value of the shares committed at the date of the amendment. As of June 30, 2019 and December 31, 2018, the fair value of this liability was $1,010,000. This liability will be remeasured at each reporting date using the current fair value of CEN’s common shares.

 

The Company intends to explore using the patented LED Lighting Technology across manufacturing operations and licensing opportunities across multiple industries such as horticultural, automotive, industrial and commercial lighting. The assets acquired, other than the patent, included certain machinery and raw materials, which were old and non-functioning and accordingly, had no fair value.

 

The intangible assets consists of the following:

 

 

As of June 30, 2019 and December 31, 2018, there is no impairment expense recognized based on the Company’s expectations that it will be able to monetize the patent.

 

The lighting patent is being amortized straight-line over 16 years. Expected amortization expense is $424,812 per year through 2031, with the remaining $283,215 to be amortized in 2032.

 

 

 

NOTE 7 – LOANS PAYABLE

 

Loans payable consist of the following:

 

 

We are in default of $9,675,000 of debt that is secured by certain equipment that we value at approximately $9,000. The remainder of our debt that is in default is not secured.

 

During the three-month periods ended June 30, 2019 and 2018, 18,000 and 26,000 common shares were issued to individuals for loans made to CEN, respectively. Accordingly, during the three-month periods ended June 30, 2019 and 2018, $18,180 and $16,120 in interest expense and additional paid-in capital was recorded, respectively.

 

During the six-month periods ended June 30, 2019 and 2018, 36,000 and 42,400 common shares were issued to individuals for loans made to CEN, respectively. Accordingly, during the six-month periods ended June 30, 2019 and 2018, $36,360 and $26,288 in interest expense and additional paid-in capital was recorded, respectively.

 

 

 

NOTE 8 – LOANS PAYABLE- RELATED PARTY

 

Loans payable - related party consists of the following:

 

 

Attributable related party accrued interest was $411,345 and $357,373 as of June 30, 2019 and December 31, 2018, respectively. Interest expense attributable to related party loans was $54,428 and $43,367 for the three-months ended June 30, 2019 and 2018, respectively, and was $108,512 and $86,409 for the six-months ended June 30, 2019 and 2018, respectively.

 

During both three-month periods ended June 30, 2019 and 2018, 27,000 common shares were issued to related parties in connection with interest terms of the above loans made to CEN. Accordingly, during the three-month periods ended June 30, 2019 and 2018, $27,270 and $16,740 in related party interest expense and additional paid-in capital was recorded, respectively.

 

During both six-month periods ended June 30, 2019 and 2018, 54,000 common shares were issued to related parties in connection with interest terms of the above loans made to CEN. Accordingly, during the six-month periods ended June 30, 2019 and 2018, $54,540 and $33,480 in related party interest expense and additional paid-in capital was recorded, respectively.

 

 

 

NOTE 9 – CONVERTIBLE NOTES

 

Convertible notes payable consists of the following:

 

 

These notes may be converted at the option of the note holder at any time after registration of CEN’s common stock upon written notice by the note holder. These notes are convertible into a total of 3,349,023 common shares.

 

As of August 19, 2019, we are currently in default of $2,054,707 of convertible notes payable, which are convertible into 1,287,652 shares of common stock.

 

 

 

NOTE 10 – CONVERTIBLE NOTES - RELATED PARTY

 

Convertible notes - related party consists of the following at:

 

 

Attributable related party accrued interest was $707,781 and $588,854 as of June 30, 2019 and December 31, 2018, respectively. Interest expense attributable to related party convertible notes was $59,798, and $61,925 for the three months ended June 30, 2019 and 2018, respectively, and was $118,927 and $123,169 for the six-months ended June 30, 2019 and 2018, respectively.

 

These notes may be converted at the option of the note holder at any time after registration of CEN’s common stock upon written notice by the note holder. These notes are convertible into a total of 1,599,176 common shares.

 

As of August 19, 2019, we are currently in default of $926,368 of convertible notes payable, which are convertible into 578,980 shares of common stock.

 

 

 

NOTE 11 – INCOME TAXES

 

A reconciliation of the effective tax rate of the income tax benefit and the statutory income tax rates applied to the loss before income taxes is as follows for the three and six-months ended June 30:

 

 

As of June 30, 2019, the Company has net operating loss carry forwards of approximately $23,100,000 that may be available to reduce future years’ taxable income. Such carry forwards typically expire after 20 years. The Company currently has carry forwards that begin to expire in 2034. Future tax benefits which may arise as a result of these losses have not been recognized in these condensed consolidated financial statements, because the Company believes that it is more likely than not that the carryforwards will expire unused and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards. The deferred tax asset and associated valuation allowance are as follows:

 

 

The change in the valuation allowance amounted to ($3,900,000) and $400,000 for the three-months ended June 30, 2019 and 2018, respectively, and ($3,600,000) and $800,000 for the six-months ended June 30, 2019 and 2018, respectively. All other temporary differences are immaterial both individually and in the aggregate to the condensed consolidated financial statements.

 

Company management analyzes its income tax filing positions in Canadian federal and provincial jurisdictions where it is required to file income tax returns, for all open tax years in these jurisdictions, to identify potential uncertain tax positions. As of June 30, 2019, there are no uncertain income tax positions taken or expected to be taken that would require recognition of a liability or disclosure in the condensed consolidated financial statements. The Company is subject to routing audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. Generally, the Company is no longer subject to income tax examinations for years prior to 2015.

 

 

NOTE 12 – SHAREHOLDERS’ DEFICIT / STOCK ACTIVITY

 

The Company is authorized to issue an unlimited number of common shares and an unlimited number of special voting shares. Common shares have no stated par value.

 

As of June 30, 2019, 4,948,199 shares of common stock are committed to the holders of the convertible notes.

 

 

 

NOTE 13 – RELATED PARTY TRANSACTIONS

 

The Company has received loans from several related parties, as described above in Notes 8 and 10.

 

There are advances of $995,328 and $875,328 to CEN Ukraine as of June 30, 2019 and December 31, 2018, respectively, which such advances were made for the purpose of funding the operations of CEN Ukraine. CEN Ukraine was founded by Bill Chaaban. Prior to December 3, 2017, Bill Chaaban directly owned 51% of CEN Ukraine. Subsequent to December 3, 2017, Mr. Chaaban directly owned 25.5% of CEN Ukraine. CEN Ukraine was founded to seek agricultural and pharmaceutical opportunities in Ukraine. Bill Chaaban personally funded the establishment and initial phases of CEN Ukraine. On December 14, 2017, the Company entered into a controlling interest purchase agreement with Bill Chaaban and another shareholder of CEN Ukraine for 51% of the outstanding equity interests of CEN Ukraine. The consideration will be paid by issuing common shares of the Company. The agreement, which is subject to certain conditions, has not closed as of August 19, 2019, as the Company needs to raise additional funds in order to proceed with the closing.

 

On July 12, 2017, the Company’s Shareholders elected individuals to serve as Directors on the Board. These individuals hold long-term convertible notes payable issued prior to the election. All notes payable bear interest at 5% per annum and are convertible to common shares with various maturity dates. They became related parties when they were elected.

 

During the three-months ended June 30, 2019 and 2018, the Company incurred payroll and consulting expenses of $33,800 and $45,839, respectively, and $65,000 and $77,039 during the six-months ended June 30, 2019 and 2018, respectively, with certain Board Members and Officers. As of June 30, 2019 and December 31, 2018, $189,800 and $124,800, respectively, were payable for such services.

 

During 2017, the Company purchased equipment from R&D Labs Canada, Inc., whose president is Bill Chaaban, in exchange for a $300,000 note payable. This equipment was then sold to CEN Ukraine for a loss of $255,141 in exchange for a $44,859 note receivable, payable in 10 equal installments beginning in 2017 through 2026. No payments have been received as of June 30, 2019, however, management expects this balance to be collectible.

 

The Company leases 20 North Rear Road, a 10.4 acre site of land in Canada, through a sublease from a relative of the Company’s President. There are two buildings on the site – one of 27,000 square feet and one of 53,000 square feet. There is also a 4,000 square foot vault for security purposes. The Company constructed improvements to this property, including structures and equipment for growing marijuana, security fencing required for licensing as a marijuana producer, and other infrastructure. These improvements were fully impaired during the 4^th quarter of 2018.

 

The 20 North Rear Road lease agreement began on September 1, 2013 and required annual rent payments of CAD $339,000, including tax. At December 31, 2016, the balance sheet included accrued rent of $552,934, owed to Jamaal Shaban (“Lessor”), cousin of Bill Chaaban. Concurrently, the Lessor had fallen behind on a mortgage payable on the property. Effective January 2017, the Company entered into agreements to terminate the initial lease, enter into a convertible debt note with the Lessor’s creditor, and begin a new lease agreement for the same property. The new lease agreement calls for monthly rental payments of CAD $4,000 plus taxes for a period of five years. In exchange, the Company issued convertible notes payable of $824,446 in satisfaction of the accrued rent and future rent. The lease has been accounted for as an operating lease, and the amount of the note in excess of the accrued rent was treated as a deferred lease asset amortized over the 5-year lease. However, in conjunction with the impairment in the 4^th quarter of 2018, the remaining deferred lease asset was fully expensed. As of June 30, 2019, the operating right of use asset was $83,408 and the associated liability was $80,351, utilizing an 8% discount rate. During the three-months ended June 30, 2019 and 2018, lease expenses of $9,106 and $22,689, respectively, and $15,092 and $45,572 during the six-months ended June 30, 2019 and 2018, respectively, related to this agreement were recognized within general and administrative expenses.

 

 

The Company also leases office space in Windsor, Ontario from R&D Labs Canada, Inc., whose president is Bill Chaaban. Under the lease agreement effective October 1, 2017, monthly rents of CAD $2,608 are due through September 2022, at which point monthly rents of CAD $3,390 are due. As of June 30, 2019, the operating right of use asset was $167,076 and the associated liability was $167,282, utilizing an 8% discount rate. During the three-months ended June 30, 2019 and 2018, lease expenses of $7,060 and $5,942, respectively, and $12,039 and $12,010 during the six-months ended June 30, 2019 and 2018, respectively, related to this agreement were recognized within general and administrative expenses.

 

As of June 30, 2019, the weighted average remaining lease term was approximately 6.6 years and the weighted average discount rate used to determine operating lease liabilities was 8%.

 

 

NOTE 14 – STOCK BASED COMPENSATION

 

Adoption of Equity Compensation Plan

 

On November 29, 2017, the Board adopted the 2017 Equity Compensation Plan (the “Plan”) providing for the granting of options to purchase shares of common stock, restricted stock awards and other stock-based awards to directors, officers, employees, advisors and consultants. The Company reserved 20,000,000 shares of common stock for issuance under the Plan. The Plan is intended to provide equity incentives to persons retained by our Company.

 

Equity Compensation Grants

 

On November 30, 2017, the Company granted a one-time equity award (“Equity Award”) of 20,000 restricted shares of the Company’s common stock pursuant to a Restricted Stock Agreement, to each of the following executives and directors of the Company: Bahige “Bill” Chaaban, Chairman of the Board and President of the Company; Joseph Byrne, Chief Executive Officer and Director; Richard Boswell, Senior Executive Vice President, Chief Financial Officer and Director; Brian Payne, Vice President and Director; Donald Strilchuck, Director; Harold Aubrey de Lavenu, Director; Alex Tarrabain, Director; and Ameen Ferris, Director. The Equity Awards vested immediately.

 

In addition, as part of this one-time equity award, Donald Strilchuck, Director, received an additional 1,000,000 restricted shares of the Company's common stock for security consulting services, of which 550,000 vested immediately and the remaining vesting ratably each month over the next 36 months. Other individuals received a total of 1,870,000 restricted shares of the Company's common stock for consulting services performed, of which 1,330,000 vested immediately and the remaining vesting ratably each month over the next 36 months. The expense related to the restricted stock awarded to non-employees for services rendered was recognized on the grant date.

 

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 for the payment of its services under which the Company issued 125,000 shares of its common stock. This award vested immediately. The expense related to the restricted stock awarded to non-employees for services rendered was recognized on the grant date.

 

On December 31, 2018, the Company issued 12,120 shares of its common stock to individuals for the payment of their services. These awards vested immediately. The expense related to the stock awarded to non-employees for services rendered was recognized on the grant date.

 

Employment Agreements

 

On November 30, 2017, employment agreements were entered into with four key members of management:

 

●

Under the Employment Agreement with Bahige (Bill) Chaaban, President of the Company, Mr. Chaaban will receive compensation in the form of a base annual salary of $31,200 and a grant of 8,750,000 shares of restricted stock of the Company, of which 7,400,000 vested immediately and the remaining vesting ratably each month over the next 36 months.

 

●

Under the Employment Agreement with Joseph Byrne, Chief Executive Officer of the Company, Mr. Byrne will receive compensation in the form of a base annual salary of $31,200 and a grant of 1,250,000 shares of restricted stock of the Company, of which 325,000 vested immediately and the remaining vesting ratably each month over the next 36 months.

 

●

Under the Employment Agreement with Richard Boswell, former Senior Executive Vice President and Chief Financial Officer of the Company, currently serving as Senior Executive Vice President of the Company, Mr. Boswell will receive compensation in the form of a base annual salary of $31,200 and a grant of 4,500,000 shares of restricted stock of the Company, of which 4,140,000 vested immediately and the remaining vesting ratably each month over the next 36 months.

 

●

Under the Employment Agreement with Brian Payne, Vice President of the Company, Mr. Payne will receive compensation in the form of a base annual salary of $31,200 and a grant of 750,000 shares of restricted stock of the Company, of which 300,000 vested immediately and the remaining vesting ratably each month over the next 36 months.

 

On May 16, 2019, the Board appointed Alex Tarrabain, one of the members of the Company’s Board to serve as the Company’s Chief Financial Officer and as one of the Vice Presidents of the Company effective May 21, 2019 (the “Effective Date”). Richard Boswell, who served as the Company’s Chief Financial Officer since July 2017, resigned from his position as the Company’s Chief Financial Officer as of the Effective Date, and will continue to serve in his position as the Company’s Senior Executive Vice President going forward focusing on the Company’s strategic activities and will also continue to serve as a member of the Company’s Board.

 

In conjunction with the above, on May 16, 2019, an employment agreement was entered into with Mr. Tarrabain:

 

●

Under the Employment Agreement with Alex Tarrabain, Chief Financial Officer and as one of the Vice Presidents of the Company, Mr. Tarrabain will receive compensation in the form of a base annual salary of $31,200 and a grant of 1,250,000 shares of restricted stock of the Company, of which 350,000 vested immediately and the remaining vesting ratably each month over the next 36 months.

 

 

Restricted Stock Awards

 

The total grant-date fair value of the restricted shares noted in the employment agreements and equity compensation grants sections above was $12,698,241 as of June 30, 2019 and $11,435,741 as of December 31, 2018. During the three and six-month periods ended June 30, 2019 and 2018, 1,250,000 restricted shares with a grant date fair value of $1,262,500 and 145,000 restricted shares with a grant date fair value of $89,900, respectively, were awarded. The grant-date fair value is calculated utilizing an enterprise valuation model as of the date the awards are granted. With the exception of immediately vesting portions of awards, shares typically vest pro-rata over the requisite service period, which is generally three years from the grant-date. Non-vested restricted stock awards participate in dividends and recipients are entitled to vote these restricted shares during the vesting period.

 

During the three-month periods ended June 30, 2019 and 2018, 712,500 and 337,500, respectively, and during the six-month periods ended June 30, 2019 and 2018, 1,050,000 and 675,000 of these shares vested. The fair value of the restricted stock which vested amounted to $588,000 and $209,250 for the three-months ended June 30, 2019 and 2018, respectively, and $797,250 and $418,500 for the six-months ended June 30, 2019 and 2018, respectively.

 

Compensation expense recognized in connection with the restricted stock awards was $546,150 and $179,800 for the three-months ended June 30, 2019 and 2018, respectively, and $713,550 and $347,200 for the six-months ended June 30, 2019 and 2018, respectively. Legal expense, included within general and administrative, recognized in connection with the restricted stock awards was $77,500 for the three and six-months ended June 30, 2018.

 

Non-vested restricted stock award activity for the six-months ended June 30, 2019 and 2018 are as follows:

 

 

The fair value of the restricted stock grants was based on the valuation of a third-party specialist. Unrecognized compensation expense related to restricted stock amounted to approximately $1,847,850 as of June 30, 2019. This expense will be recognized over vesting period of the respective awards.

 

 

 

NOTE 15 – NET LOSS PER SHARE

 

During periods when there is a net loss, all potentially dilutive shares are anti-dilutive and are excluded from the calculation of diluted net loss per share. Based on the Company’s application of the as-converted and treasury stock methods, all common stock equivalents were excluded from the computation of diluted earnings per share due to net losses as of June 30, 2019 and 2018. Common stock equivalents that were excluded for the three and six-month periods ended June 30, 2019 and 2018 are as follows:

 

 

 

NOTE 16 – CONTINGENCY

 

In connection with the distribution by Creative of CEN’s common stock on February 29, 2016 and the Form 10 registration statement filed by CEN to register its shares of common stock under the Exchange Act, CEN received comments by the Staff of the Securities and Exchange Commission, including a letter dated May 4, 2016 in which the Staff noted that they “…continue to question the absence of Securities Act registration of the spin-off distribution”. In the event that the distribution of shares of CEN’s common stock was a distribution that required registration under the Securities Act, then the Company could be subject to enforcement action by the SEC that claims a violation of Section 5 of the Securities Act and could be subject to a private right of action for rescission or damages. Based on management’s estimate, any potential liability related to this matter would not be material.

 

 

NOTE 17 – FAIR VALUE DISCLOSURES

 

Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework that prioritizes and ranks the level of observability of inputs used in measuring fair value.

 

 

 

The fair value of the Company’s financial instruments are as follows:

 

 

 

 

The fair values of other receivables (including related accrued interest), note receivable - related party, and advances to CEN Biotech Ukraine, LLC approximates carrying value due to the terms of the instruments.

 

The fair value of the loans payable approximates carrying value due to the terms of such instruments and applicable interest rates.

 

The fair value of convertible notes payable is based on the par value plus accrued interest through the date of reporting due to the terms of such instruments and interest rates.

 

It is not practicable to estimate the fair value of loans payable – related parties and convertible notes payable – related parties due to their related party nature.

 

The fair value of the patent acquisition liability is based upon a valuation report obtained from a 3^rd party valuation specialist. This valuation report utilized a cash-free asset value model to estimate enterprise value based upon similar companies.

 

 

 

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