CEN BIOTECH INC - Quarter Report: 2019 March (Form 10-Q)

 

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		March 31, 2019				December 31, 2018
ASSETS
Current assets
Cash and cash equivalents		$	39,752			$	3,193
Property, plant and improvements
Property and equipment, net			161,913				166,509
Other assets
Operating lease right-of-use assets			251,110				-
Other receivable			417,904				418,905
Note receivable – related party			44,859				44,859
Advances to CEN Biotech Ukraine LLC – related party			905,328				875,328
Intangible assets, net			5,699,568				5,805,771
Total assets		$	7,520,434			$	7,314,565
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities
Accounts payable		$	206,521			$	206,521
Loans payable			10,113,095				10,107,205
Loans payable – related parties			1,361,550				1,360,806
Convertible notes payable			4,190,461				3,597,760
Convertible notes payable – related parties			926,368				926,368
Accrued interest			7,544,199				6,860,494
Accrued interest – related parties			1,032,171				946,227
Operating lease liabilities			40,683				-
Accrued expenses			446,432				402,377
Total current liabilities			25,861,480				24,407,758
Operating lease liabilities, less current portion			210,838				-
Patent acquisition liability			1,010,000				1,010,000
Convertible notes, less current portion			1,117,123				1,545,887
Convertible notes – related parties, less current portion			1,612,313				1,612,313
Total liabilities			29,811,754				28,575,958
Commitments and contingencies
Shareholders’ deficit
Common stock; unlimited authorized shares; 25,518,363 and 25,473,363 issued and outstanding as of March 31, 2019 and December 31, 2018, respectively. No par value.			-				-
Additional paid-in capital			14,606,510				14,393,660
Accumulated deficit			(36,897,830	)			(35,655,053	)
Total shareholders’ deficit			(22,291,320	)			(21,261,393	)
Total liabilities and shareholders’ deficit		$	7,520,434			$	7,314,565

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		For the three months ended March 31,
		2019				2018
Operating expenses
Consulting fees		$	18,942			$	11,985
Consulting fees – related parties			31,200				31,200
Stock based compensation			167,400				167,400
General and administrative			187,685				441,839
Total operating expenses			405,227				652,424
Loss from operations			(405,227	)			(652,424	)
Other (expense) income
Interest expense			(701,888	)			(594,503	)
Interest expense – related parties			(113,213	)			(104,286	)
Interest income			2,045				-
Foreign exchange (loss) gain			(24,494	)			30,443
Other expense, net			(837,550	)			(668,346	)
Net loss		$	(1,242,777	)		$	(1,320,770	)
Net Loss Per Share:
Basic and diluted		$	(0.05	)		$	(0.05	)
Weighted Average Number of Shares Outstanding
Basic and diluted			25,495,863				25,153,061

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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			-				-				167,400				-				167,400
Issuance of common stock – interest shares			43,400				-				26,908				-				26,908
Net loss			-				-				-				(1,320,770	)			(1,320,770	)
Balances, March 31, 2018			25,175,243			$	-			$	13,684,349			$	(29,445,462	)		$	(15,761,113	)
Balances, January 1, 2019			25,473,363			$	-			$	14,393,660			$	(35,655,053	)		$	(21,261,393	)
Stock-based compensation			-				-				167,400				-				167,400
Issuance of common stock – interest shares			45,000				-				45,450				-				45,450
Net loss			-				-				-				(1,242,777	)			(1,242,777	)
Balances, March 31, 2019			25,518,363			$	-			$	14,606,510			$	(36,897,830	)		$	(22,291,320	)

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		For the three months ended March 31,
		2019				2018
Cash flows from operating activities
Net loss		$	(1,242,777	)		$	(1,320,770	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation			4,596				442
Amortization			106,203				106,203
Stock-based compensation – employees			167,400				167,400
Non-cash interest expense			701,885				561,910
Non-cash interest expense – related parties			113,214				104,286
Deferred lease expense			-				13,576
Foreign exchange loss (gain)			24,494				(30,443	)
Changes in operating assets and liabilities which provided (used) cash
Operating lease right-of-use assets			5,216				-
Other receivable			1,001				(146,018	)
Accounts payable			(957	)			14,770
Accounts payable – related parties			-				(7,585	)
Operating lease liabilities			(4,805	)			-
Accrued expenses			44,055				12,903
Net cash used in operating activities			(80,475	)			(523,326	)
Cash flows from investing activities
Advance on business acquisition			(30,000	)			-
Leasehold improvements in progress			-				(5,439	)
Net cash used in investing activities			(30,000	)			(5,439	)
Cash flows from financing activities
Issuance of loans payable			-				180,000
Repayment of loans payable			-				(130,000	)
Issuance of loans payable – related parties			-				225,000
Issuance of convertible notes			147,034				595,800
Net cash provided by financing activities			147,034				870,800
Net increase in cash and cash equivalents			36,559				342,035
Cash and cash equivalents, beginning of period			3,193				84,978
Cash and cash equivalents, end of period		$	39,752			$	427,013
Supplemental cash flows disclosures
Cash paid for interest		$	-			$	32,593
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 March 31, 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 May 20, 2019, this transaction has not closed.

 

 

 

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 $36,897,830 at March 31, 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 and amortization expense was $4,596 and $442 for the three-months ended March 31, 2019 and 2018, respectively.

 

 

 

NOTE 5 – ADVANCES TO CEN BIOTECH UKRAINE

 

At March 31, 2019 and December 31, 2018, the Company had advances of $905,328 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 of the planned subsidiary after the acquisition is completed.

 

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 March 31, 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:

 

 

As of March 31, 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 at:

 

 

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 March 31, 2019 and 2018, 18,000 and 16,400 common shares were issued to individuals for loans made to CEN, respectively. Accordingly, during the three-month periods ended March 31, 2019 and 2018, $18,180 and $10,168 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 at:

 

 

Attributable related party accrued interest was $384,187 and $357,373 as of March 31, 2019 and December 31, 2018, respectively. Interest expense attributable to related party loans was $26,814 and $43,042 for the three-months ended March 31, 2019 and 2018, respectively.

 

During both three-month periods ended March 31, 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 March 31, 2019 and 2018, $27,270 and $16,740 in related party interest expense, which is included above, and additional paid-in capital was recorded, respectively.

 

 

 

NOTE 9 – CONVERTIBLE NOTES

 

Convertible notes payable consists of the following at:

 

 

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 3,111,523 common shares.

 

As of May 20, 2019, we are currently in default of $1,329,287 of convertible notes payable, which are convertible into 834,277 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 $647,984 and $588,854 as of March 31, 2019 and December 31, 2018, respectively. Interest expense attributable to related party convertible notes was $59,129 and $61,244 for the three-months ended March 31, 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 1,586,676 common shares.

 

As of May 20, 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-months ended March 31:

 

 

 

As of March 31, 2019, the Company has net operating loss carry forwards of approximately $37,800,000 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 for the period ended March 31, 2019 and the year ended December 31, 2018:

 

 

The change in the valuation allowance amounted to $300,000 and $400,000 for the three-months ended March 31, 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 March 31, 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 March 31, 2019, 4,698,199 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 $905,328 and $875,328 to CEN Ukraine as of March 31, 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 May 20, 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 each of the three-months ended March 31, 2019 and 2018, the Company incurred payroll expenses with certain Board Members and Officers totaling $31,200. As of March 31, 2019 and December 31, 2018, $156,000 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 March 31, 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 March 31, 2019, the operating right of use asset was $88,992 and the associated liability was $85,998, utilizing an 8% discount rate. During the three-months ended March 31, 2019 and 2018, lease expenses of $19,562 and $22,883 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 March 31, 2019, the operating right of use asset was $162,118 and the associated liability was $165,523, utilizing an 8% discount rate. During the three-months ended March 31, 2019 and 2018, lease expenses of $9,259 and $6,068 related to this agreement were recognized within general and administrative expenses.

 

As of March 31, 2019, the weighted average remaining lease term was approximately 6.8 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, Senior Executive Vice President and Chief Financial Officer 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.

 

Restricted Stock Awards

 

The grant-date fair value of the restricted shares noted in the employment agreements and equity compensation grants sections above was $11,435,741 in 2018 and prior. No such grants were made during the three-month periods ended March 31, 2019 and 2018. The grant-date fair value is calculated utilizing an enterprise valuation model as of the date the awards are granted. During 2017, 14,317,500 of these shares vested, with the remaining restricted stock units of 3,962,500 shares vesting pro-rata over the requisite service period, which is generally three years from the grant-date. During each of the three-months ended March 31, 2019 and 2018, an additional 337,500 of these shares vested. Non-vested restricted stock awards participate in dividends and recipients are entitled to vote these restricted shares during the vesting period.

 

Compensation expense recognized in connection with the restricted stock awards was $167,400 for each of the three-months ended March 31, 2019 and 2018. The fair value of the restricted stock which vested amounted to $340,875 and $209,250 for the three-months ended March 31, 2019 and 2018, respectively.

 

 

Non-vested restricted stock award activity for the three-months ended March 31, 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 $1,131,500 as of March 31, 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 March 31, 2019 and 2018. Common stock equivalents that were excluded for the three-month periods ended March 31, 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.

 

 

 

NOTE 18 – SUBSEQUENT EVENT.

 

On April 3, 2019, the Company entered into an amendment to the Share Purchase Agreement dated August 31, 2016, and executed September 12, 2016, as amended, between CEN Biotech, Inc. and Stevan Pokrajac and Tesla Digital Inc. and Tesla Digital Global Group Inc., which extended the closing date of the agreement to December 31, 2019.

 

On May 15, 2019, the Company entered into a Non-Binding (other than as set forth therein) Term Sheet (the “Term Sheet”) with Caduceus Software Systems Corp., a Wyoming corporation (“CSOC”), which was reviewed and approved by the Board of Directors of the Company (the “Board”) on May 15, 2019.  Pursuant to the Term Sheet, the Company and CSOC agreed to undertake a merger transaction to combine the two companies’ operations and negotiate and enter into a definite agreement to effect the transaction.

 

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 connection with the foregoing, on May 16, 2019, the Company entered into an Executive Employment Agreement (the “Employment Agreement”) with Mr. Tarrabain pursuant to which Mr. Tarrabain agreed to serve as the Company’s Vice President and Chief Financial Officer and the Company agreed to issue to Mr. Tarrabain 1,250,000 shares (the “Shares’) of the Company’s common stock in accordance with a Restricted Stock Agreement (the “RSA”).  The Employment Agreement has an indefinite term. Additionally, pursuant to the Employment Agreement, the Company agreed to pay Mr. Tarrabain an annual base salary of $31,200.  Further, pursuant to the Employment Agreement in the event of an occurrence of a “Change in Control” (as defined in the Employment Agreement) or a strategic transaction, the Board may, but is not obligated to, provide Mr. Tarrabain with additional compensation, including additional stock options or restricted stock, for services outside of his general scope of duties and responsibilities.

 

Pursuant to the RSA, entered into by Mr. Tarrabain and the Company on May 16, 2019, 350,000 of the Shares will vest immediately (the “Grant Date”) and the balance 900,000 of the Shares will vest over a three (3) year period with 25,000 of the Shares versing on the one (1) month anniversary of the Grant Date and an additional 25,000 of the Shares vesting at the end of each one (1) month anniversary of the Grant Date thereafter, provided that Mr. Tarrabain continues to be an employee of the Company.

 

 

 

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