Company Quick10K Filing
Quick10K
CEN Biotech
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
8-K 2019-08-27 Enter Agreement, Regulation FD, Exhibits
8-K 2019-06-21 Enter Agreement, Regulation FD, Exhibits
8-K 2019-05-22 Regulation FD, Exhibits
8-K 2019-05-16 Sale of Shares, Exhibits
8-K 2019-05-15 Enter Agreement, Regulation FD, Exhibits
8-K 2019-04-03 Enter Agreement, Exhibits
8-K 2018-11-27 Enter Agreement, Shareholder Rights, Exhibits
8-K 2018-10-04 Enter Agreement, Exhibits
8-K 2018-07-31 Enter Agreement, Exhibits
8-K 2018-06-07 Officers
8-K 2018-01-16 Accountant, Exhibits
RCAR RenovaCare 137
CRWE Crown Equity 35
PRSS CafePress 20
RGBP Regen Biopharma 5
NCLC NCL 0
SQFT Presidio Property Trust 0
RIGHT Right of Reply 0
AXPW Axion Power 0
NHEL Natural Health Farm Holdings 0
INCT InCapta 0
CENB 2019-06-30
Note 1 - Basis of Presentation and Summary of Significant Accounting Policies
Note 2 - New Accounting Standard
Note 3 - Going Concern Uncertainty / Management Plans
Note 4 - Property, Plant and Improvements, Net
Note 5 - Advances To Cen Biotech Ukraine
Note 6 - Intangible Assets
Note 7 - Loans Payable
Note 8 - Loans Payable- Related Party
Note 9 - Convertible Notes
Note 10 - Convertible Notes - Related Party
Note 11 - Income Taxes
Note 12 - Shareholders' Deficit / Stock Activity
Note 13 - Related Party Transactions
Note 14 - Stock Based Compensation
Note 15 - Net Loss per Share
Note 16 - Contingency
Note 17 - Fair Value Disclosures
Item 2
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 ex_155835.htm
EX-31.2 ex_155836.htm
EX-32.1 ex_155837.htm
EX-32.2 ex_155838.htm

CEN Biotech Earnings 2019-06-30

CENB 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 cenb20190630_10q.htm FORM 10-Q cenb20190630_10q.htm
 

 

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.

 

 

 
 

 

 

TABLE OF CONTENTS

 

 

PART I

  

  

  

ITEM 1

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3

  

  

 

ITEM 2

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

4

  

  

 

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

11

  

  

 

ITEM 4

CONTROLS AND PROCEDURES

11

  

  

 

PART II

  

  

 

ITEM 1

LEGAL PROCEEDINGS

12

 

 

 

ITEM 1A

RISK FACTORS

12

  

  

 

ITEM 2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

12

  

  

 

ITEM 3

DEFAULTS UPON SENIOR SECURITIES

13

     

ITEM 4

MINE SAFETY DISCLOSURE

13

     

ITEM 5

OTHER INFORMATION

13

     

ITEM 6

EXHIBITS

14

 

2

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report includes “forward-looking statements” that represent our beliefs, projections and predictions about future events. There are statements in this quarterly report that are not historical facts. All statements other than statements of historical fact are “forward-looking statements,” including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. 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, as well as statements in the future tense. These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements.

 

Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. 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. We do not undertake any obligation to update or revise any forward-looking statements.

 

 

 

 

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

 

3

 

 

 

CEN BIOTECH, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(Unaudited)

 

   

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  

 

 

See accompanying notes to financial statements.

 

F-1

 

 

CEN BIOTECH, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations

(Unaudited)

 

   

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  

 

 

See accompanying notes to financial statements.

 

F-2

 

 

CEN BIOTECH, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Shareholders’ Deficit

(Unaudited)

 

           

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 )

 

 

See accompanying notes to financial statements.

 

F-3

 

 

CEN BIOTECH, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   

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  

 

See accompanying notes to financial statements.

 

F-4

 

 

CEN BIOTECH, INC. AND SUBSIDIARY

Notes to the Condensed Consolidated Financial Statements (Unaudited)

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

 

 

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”).

 

F-5

 

 

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.

 

F-6

 

 

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.

 

F-7

 

 

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.

 

F-8

 

 

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:

 

   

June 30, 2019

   

December 31, 2018

 

Leasehold improvements

  $ 166,163     $ 166,163  

Furniture and equipment

    17,668       17,668  

Accumulated depreciation

    (26,514 )     (17,322 )
                 

Net property, plant and improvements

  $ 157,317     $ 166,509  

 

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.

 

F-9

 

 

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:

 

   

June 30, 2019

   

December 31, 2018

 
                 

Lighting patent

  $ 6,797,000     $ 6,797,000  

Accumulated amortization

    (1,203,635 )     (991,229 )
                 

Net

  $ 5,593,365     $ 5,805,771  

 

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.

 

F-10

 

 

 

NOTE 7 – LOANS PAYABLE

 

Loans payable consist of the following:

 

    June 30, 2019     December 31, 2018  

Loan payable to Global Holdings International, LLC, which bears interest at 15% per annum after defaulting on the maturity date of June 30, 2016. This note is secured by the Company's equipment.

  $ 9,675,000     $ 9,675,000  
                 

Mortgage payable in default to ARG & Pals, Inc., for the original amount of CAD $385,000. The mortgage bears interest at 22% per annum, and matured on November 21, 2018.

    294,178       282,205  
                 

Loan payable in default to an individual, issued January 17, 2018 with a 30-day maturity, bearing share interest of 2,000 common shares per 30-day period. This is an unsecured loan which matured on July 16, 2019.

    50,000       50,000  
                 

Loan payable in default to an individual, issued April 13, 2018, with a 30-day maturity, bearing share interest of 4,000 common shares per 30-day period. This is an unsecured loan which matured on July 16, 2019.

    100,000       100,000  
                 

Total loans payable (all current)

  $ 10,119,178     $ 10,107,205  

 

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.

 

F-11

 

 

 

NOTE 8 – LOANS PAYABLE- RELATED PARTY

 

Loans payable - related party consists of the following:

 

   

June 30,

2019

   

December 31,

2018

 

Loan payable in default to the spouse of Bill Chaaban, President of CEN, bears an interest at 10% per annum. This is an unsecured loan that matured on December 31, 2018.

  $ 235,818     $ 234,306  
                 

Loan payable in default to a former director of Creative, former parent company, bears interest at 10% per annum. This is an unsecured loan that matured on December 31, 2018.

    601,500       601,500  
                 

Loan payable to R&D Labs Canada, Inc., whose president is Bill Chaaban, also the President of CEN, bearing interest at 8% per annum. This is an unsecured loan with a maturity date of October 2, 2019. R&D Labs Canada is a company owned by Bill Chaaban’s spouse.

    300,000       300,000  
                 

Loan payable in default to the spouse of Joseph Byrne, CEO of CEN, issued January 12, 2018 with a 30-day maturity, bearing share interest of 4,000 common shares per 30-day period. This is an unsecured loan that matured on July 16, 2019.

    100,000       100,000  
                 

Loan payable in default to Alex Tarrabain, a Director of CEN, issued January 17, 2018 with a 30-day maturity, bearing share interest of 3,000 common shares per 30-day period. This is an unsecured loan that matured on July 16, 2019.

    75,000       75,000  
                 

Loan payable in default to Joseph Byrne, CEO of CEN, issued January 24, 2018 with a 30-day maturity, bearing share interest of 2,000 common shares per 30-day period. This is an unsecured loan that matured on July 16, 2019.

    50,000       50,000  
                 

Total loans payable - related party

    1,362,318       1,360,806  

Less: current portion

    1,362,318       1,360,806  
                 

Long-term portion loans payable - related party

  $ -     $ -  

 

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.

 

F-12

 

 

 

NOTE 9 – CONVERTIBLE NOTES

 

Convertible notes payable consists of the following:

 

   

June 30,

2019

   

December 31,

2018

 

Convertible note payable, due on demand, bearing interest at 7% per annum with conversion rights for 335,833 common shares.

  $ 844,111     $ 809,755  
                 

Convertible notes payable to multiple private investors, including certain notes in default, bearing interest at 5% per annum with conversion rights for 3,013,190 common shares, maturing at various dates between May 2018 and May 2021.

    4,860,927       4,333,892  
                 

Total convertible notes payable

    5,705,038       5,143,647  

Less current portion

    4,318,916       3,597,760  

Convertible notes payable, less current portion

  $ 1,386,122     $ 1,545,887  

 

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.

 

F-13

 

 

 

NOTE 10 – CONVERTIBLE NOTES - RELATED PARTY

 

Convertible notes - related party consists of the following at:

 

   

June 30,

2019

   

December 31,

2018

 

Convertible note due to the spouse of Bill Chaaban, President of CEN, which bears an interest at 12% per annum. This note is convertible to 867,576 common shares with a maturity date of August 17, 2020.

  $ 1,388,122     $ 1,388,122  
                 

Convertible notes in default due to Harold Aubrey de Lavenu, a Director of CEN, bearing interest at 5% per annum. These notes are convertible to 548,980 common shares which matured on March 31, 2019.

    878,368       878,368  
                 

Convertible note in default due to Alex Tarrabain, a Director of CEN, bearing interest at 5% per annum. This note is convertible to 30,000 common shares and matured on March 31, 2019.

    48,000       48,000  

Convertible notes due to Joseph Byrne, CEO of CEN, bearing interest at 12% per annum. This note is convertible to 140,120 common shares with a maturity date of August 17, 2020.

    224,191       224,191  
                 

Convertible note due to Darren Ferris, brother of Ameen Ferris, a Director of CEN, bearing interest at 5% per annum. This note is convertible to 12,500 common shares with a maturity date of June 19, 2021.

    20,000       -  
                 

Total convertible notes payable - related party

    2,558,681       2,538,681  

Less current portion

    926,368       926,368  
                 

Convertible notes payable - related party, less current portion

  $ 1,632,313     $ 1,612,313  

 

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.

 

F-14

 

 

 

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:

 

   

2019

   

2018

 
                 

Income tax benefit at Canadian statutory rate

    26.5 %     26.5 %

Valuation allowance

    (26.5 %)     (26.5 %)
                 

Effective income tax rate

    0 %     0 %

 

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:

 

   

June 30,

2019

   

December 31,

2018

 
                 

Deferred tax asset - net operating losses

  $ 6,100,000     $ 9,700,000  

Deferred tax asset valuation allowance

    (6,100,000 )     (9,700,000 )
                 

Net deferred tax asset

  $ -     $ -  

 

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.

 

F-15

 
 

 

 

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 4th 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 4th 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.

 

F-16

 

 

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.

 

F-17

 

 

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.

 

F-18

 

 

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:

 

   

Number of

Shares

   

Weighted-

Average Grant

Date Fair Value

per Share

   

Weighted-

Average

Remaining

Contractual

Term

(Years)

 

Non-vested at January 1, 2018

    3,962,500     $ 0.62       2.92  

Granted

    145,000       0.62       -  

Vested

    (820,000 )     0.62       -  

Forfeited

    -       -       -  

Non-vested at June 30, 2018

    3,287,500     $ 0.62       2.50  
                         

Non-vested at December 31, 2018

    2,612,500     $ 0.62       2.00  

Granted

    1,250,000       1.01       -  

Vested

    (1,050,000 )     0.83       -  

Forfeited

    -       -       -  

Non-vested at June 30, 2019

    2,812,500     $ 0.74       1.97  

 

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.

 

F-19

 

 

 

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:

 

   

Three-months Ended

June 30,

   

Six-months Ended

June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Convertible debt

    4,882,922       4,291,436       4,746,243       3,969,963  

 

 

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:

 

           

Fair Value Measured at Reporting Date Using

         
   

Carrying Amount

   

Level 1

   

Level 2

   

Level 3

   

Fair Value

 

At June 30, 2019:

                                       

Cash and cash equivalents

  $ 15,972     $ -     $ 15,972     $ -     $ 15,972  

Other receivables

  $ 419,958     $ -     $ -     $ 419,958     $ 419,958  

Note receivable - related party

  $ 44,859     $ -     $ -     $ 44,859     $ 44,859  

Advances to CEN Biotech

                                       

Ukraine, LLC - related party

  $ 995,328     $ -     $ -     $ 995,328     $ 995,328  

Loans payable

  $ 10,119,178     $ -     $ -     $ 10,119,178     $ 10,119,178  

Loans payable - related parties

  $ 1,362,318     $ -     $ -     $ -     $ -  

Patent acquisition liability

  $ 1,010,000     $ -     $ -     $ 1,010,000     $ 1,010,000  

Convertible notes payable

  $ 5,705,038     $ -     $ -     $ 6,240,408     $ 6,240,408  

Convertible notes payable - related parties

  $ 2,558,681     $ -     $ -     $ -     $ -  

 

F-20

 

 

   

Carrying Amount

   

Level 1

   

Level 2

   

Level 3

   

Fair Value

 

At December 31, 2018:

                                       

Cash and cash equivalents

  $ 3,193     $ -     $ 3,193     $ -     $ 3,193  

Other receivables

  $ 418,905     $ -     $ -     $ 418,905     $ 418,905  

Note receivable - related party

  $ 44,859     $ -     $ -     $ 44,859     $ 44,859  

Advances to CEN Biotech

                                       

Ukraine, LLC - related party

  $ 875,328     $ -     $ -     $ 875,328     $ 875,328  

Loans payable

  $ 10,107,205     $ -     $ -     $ 10,107,205     $ 10,107,205  

Loans payable - related parties

  $ 1,360,806     $ -     $ -     $ -     $ -  

Patent acquisition liability

  $ 1,010,000     $ -     $ -     $ 1,010,000     $ 1,010,000  

Convertible notes payable

  $ 5,143,647     $ -     $ -     $ 5,534,810     $ 5,534,810  

Convertible notes payable - related parties

  $ 2,538,681     $ -     $ -     $ -     $ -  

 

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 3rd party valuation specialist. This valuation report utilized a cash-free asset value model to estimate enterprise value based upon similar companies.

 

F-21

 

 

 

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 (the “Spin-Off Distribution”) of CEN common stock to Creative shareholders on February 29, 2016. The Spin-Off Distribution was intended 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 19, 2019 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 instead 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-based industrial, medical and food products that have a tetrahydrocannabinol (“THC”) that is below 0.3%.

 

 We are currently focused on the manufacturing, production and development of products within the cannabis industry, including LED lighting technology and hemp-based products. The Company intends to continue to explore the usage of hemp, which it now 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 any revenues. Our condensed consolidated financial statements have been prepared assuming that we will continue as a going concern; however, given our recurring losses from operations, management has determined there is substantial doubt about our ability to continue as a going concern.

 

Near Term Operating Plan

 

Our near-term operating plans are based on us obtaining financing through debt or equity raises of approximately $50,000,000 USD. Generally, the funds are planned to be invested as follows: $25 million in hemp activities, $20 million in LED lighting manufacturing and $5 million in general operating costs. There can be no assurance that the Company will be able to raise the foregoing funds or proceed as planned.

 

4

 

 

 Recent Developments

 

On June 21, 2019, Company entered into a Merger Agreement (the “Merger Agreement”) with 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.

 

5

 

 

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.

 

6

 

 

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.

 

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 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 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 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.

 

7

 

 

Results of Operations for the Three and Six-Months Ended June 30, 2019 and 2018:

 

The following tables reflect our operating results for the three and six-months ended June 30, 2019 and 2018, respectively:

 

   

Three-months ended

         

Operating Summary

 

June 30, 2019

   

June 30, 2018

   

Change

 

Revenues, net

  $ -     $ -       -  

Cost of Goods Sold

    -       -       -  

Gross Profit

    -       -       -  

Operating Expenses

    996,614       968,734       2.9

%

Loss from Operations

    996,614       968,734       2.9

%

Other Expense

    854,011       690,807       23.6

%

Net Loss

  $ 1,850,625     $ 1,659,541       11.5

%

 

   

Six-months ended

         

Operating Summary

 

June 30, 2019

   

June 30, 2018

   

Change

 

Revenues, net

  $ -     $ -       -  

Cost of Goods Sold

    -       -       -  

Gross Profit

    -       -       -  

Operating Expenses

    1,401,841       1,621,158       (13.5

)%

Loss from Operations

    1,401,841       1,621,158       (13.5

)%

Other Expense

    1,691,561       1,359,153       24.5

%

Net Loss

  $ 3,093,402     $ 2,980,311       3.8

%

 

 

Revenue

 

We have not recognized revenue during the three or six-months ended June 30, 2019 and 2018, as we have not commenced revenue generating operations to date.

 

Operating Expenses

 

During the three months ended June 30, 2019, our operating expenses were $996,614 compared to $968,734 during the three months ended June 30, 2018. During the three months ended June 30, 2019, our operating expenses were comprised of salary and consulting fees of $37,937, stock-based compensation expense of $546,150, and general and administrative expenses of $412,527. By comparison, 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. Expenses incurred during the three months ended June 30, 2019 compared to three months ended June 30, 2018 increased primarily due to increases in stock-based compensation related to additional awards.

 

During the six months ended June 30, 2019, our operating expenses were $1,401,841 compared to $1,621,158 during the six months ended June 30, 2018. During the six months ended June 30, 2019, our operating expenses were comprised of salary and consulting fees of $88,079, stock-based compensation expense of $713,550, and general and administrative expenses of $600,212. By comparison, 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. Expenses incurred during the six months ended June 30, 2019 compared to six months ended June 30, 2018 decreased primarily due to decreases in general and administrative expenses related to travel, legal, and other professional fees.

 

8

 

 

Other Income and Expense Items

 

During the three months ended June 30, 2019, our other income and expense, net was $854,011 compared to $690,807 during the three months ended June 30, 2018. During the three months ended June 30, 2019, our other income and expense items were comprised of interest expense of $829,017, interest income of $2,052, and foreign exchange loss of $27,046. By comparison, during the three months ended June 30, 2018, our other income and expense items were comprised of interest expense of $713,962, and foreign exchange gain of $23,155. The increase during the period is due to interest expense on additional notes and loans issued to fund operations.

 

During the six months ended June 30, 2019, our other income and expense, net was $1,691,561 compared to $1,359,153 during the six months ended June 30, 2018. During the six months ended June 30, 2019, our other income and expense items were comprised of interest expense of $1,644,118, interest income of $4,097, and foreign exchange loss of $51,540. By comparison, during the six months ended June 30, 2018, our other income and expense items were comprised of interest expense of $1,412,751, and foreign exchange gain of $53,598. The increase during the period is due to interest expense on additional notes and loans issued to fund operations.

 

Income Taxes

 

As of June 30, 2019, the Company has net operating loss carryforwards of approximately $23,100,000 that may be available to reduce future years’ taxable income. As of June 30, 2019, the Company has a deferred tax asset of approximately $6,100,000 which has been completely offset by a valuation allowance. The Company believes that it is more likely than not that the carryforwards will expire unused as the Company has not been able to commence revenue generating activities to date.

 

Net Loss

 

Our net loss during the three months ended June 30, 2019 was $1,850,625 compared to a net loss of $1,659,541 during the three months ended June 30, 2018 due to the factors discussed above.

 

Our net loss during the six months ended June 30, 2019 was $3,093,402 compared to a net loss of $2,980,311 during the six months ended June 30, 2018 due to the factors discussed above.

 

 Liquidity and Capital Resources

 

As of June 30, 2019 and December 31, 2018, our liquid assets consisted of cash of $15,972 and $3,193, respectively.

 

9

 

 

As of June 30, 2019, our indebtedness includes a patent acquisition liability of $1,010,000, accrued interest of $8,206,898, accrued interest to related parties of $1,119,126, 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 $19,745,215, with maturity dates as outlined below. The convertible notes are due 2 years from issuance with notes maturing in 2018 through 2021. We are in default of $9,675,000 of debt that is secured by certain equipment that we value at approximately $9,000. We are also currently in default of $3,606,075 of unsecured debt. We expect our operating and administrative expenses to be at least $2,400,000 annually.

 

Description

 

Maturity Date

   

Amount

 

Loan Payable

 

6/30/2016

    $ 9,675,000  

Loan Payable

 

11/21/2018

      294,178  

Loan Payable – Related Party

 

12/31/2018

      837,318  

Loan Payable – Related Party

 

10/2/2019

      300,000  

Loan Payable – Share Interest

 

7/16/2019

      150,000  

Loan Payable – Share Interest – Related Party

 

7/16/2019

      225,000  

Convertible Notes

 

On Demand

      844,111  

Convertible Notes

 

Q2 2018

      14,000  

Convertible Notes

 

Q4 2018

      68,000  

Convertible Notes

 

Q1 2019

      1,046,287  

Convertible Notes

 

Q2 2019

      405,000  

Convertible Notes

 

Q3 2019

      791,017  

Convertible Notes

 

Q4 2019

      457,701  

Convertible Notes

 

Q1 2020

      575,800  

Convertible Notes

 

Q2 2020

      117,000  

Convertible Notes

 

Q3 2020

      514,264  

Convertible Notes

 

Q4 2020

      338,824  

Convertible Notes

 

Q1 2021

      201,034  

Convertible Notes

 

Q2 2021

      332,000  

Convertible Notes Related Party

 

Q1 2019

      926,368  

Convertible Notes Related Party

 

Q3 2020

      1,612,313  

Convertible Notes Related Party

 

Q2 2021

      20,000  
               

Total

    $ 19,745,215  

 

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, or any funds, to pay our liabilities as they become due and payable.

 

Six months ended June 30, 2019 and 2018

 

Cash Flows from Operating Activities

 

We have not generated positive cash flows from operating activities. During the six months ended June 30, 2019, we used $414,255 in operating activities compared to $1,120,335 used in operating activities during the three months ended June 30, 2018. The decrease in the use of operating cash between the two periods related primarily to a decrease in the extensions of credit under the other receivables category and a larger portion of the current loss relating to non-cash interest and stock-based compensation expense.

 

 Cash Flows from Investing Activities

 

Our use of cash flow for investing activities during the six months ended June 30, 2019 was $120,000 compared to use of $5,439 during the six months ended June 30, 2018. During the six months ended June 30, 2019, our use of cash flows for investing activities were comprised solely of advances to CEN Ukraine of $120,000. By comparison, during the six months ended June 30, 2018, our use of cash flows for investing activities was comprised solely of leasehold improvements of $5,439. 

 

10

 

 

Cash Flows from Financing Activities

 

During the six months ended June 30, 2019, we received $553,034 through issuance of convertible notes to investors and related parties to fund our working capital requirements. During the six months ended June 30, 2018, we received $1,312,800 through issuance of convertible notes and share interest loans to investors to fund our working capital requirements. During the six months ended June 30, 2019 and 2018, $6,000 and $250,000 of the convertible notes and share interest loans payable were repaid.

  

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 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.

 

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.

 

(a) Evaluation of disclosure and controls and procedures.

 

As of June 30, 2019, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an assessment and evaluated the effectiveness of the Company's disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

11

 

 

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2019. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of June 30, 2019.

 

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.

 

(b) Changes in internal control over financial reporting.

 

On May 16, 2019, Alex Tarrabain, one of the members of the Company’s Board was appointed 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”), and 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 continues 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.

 

Other than the foregoing, there were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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. 

  

During the three and six-months ended June 30, 2019, 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 45,000 and 90,000 unregistered shares of common stock of CEN during the three and six-months ended June 30, 2019, respectively.

 

The above issuances of 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.

 

12

 

 

During the three and six-months ended June 30, 2019, we issued $406,000 and $553,034, respectively, of convertible notes to investors and related parties to fund our working capital requirements. These notes bear interest at 5% per year and are convertible at the option of the holder into 253,750 and 345,422, respectively, common shares.

 

The above issuances of convertible notes 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 September 30, 2016. The aggregate amount due under this loan as of August 19, 2019 is approximately $17,600,000. Interest and default interest and related fees currently accrue at approximately $600,000 per quarter. This note is secured by some of the Company's equipment which we value at approximately $9,000.

 

CEN has a payment default with respect to certain unsecured convertible loans payable to private investors and related parties, in the principal amount of $2,981,075 and which bear interest at 5% per annum which were due prior to August 19, 2019. The aggregate amounts due under these loans as of August 19, 2019, including accrued interest, is approximately $4,200,000. Interest and default interest and related fees currently accrue at approximately $55,000 per quarter.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

13

 

 

Item 6. Exhibits.

 

 

Exhibit No.

 

Description

 

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

 

a.     Exhibits

 

Exhibit No.

Description

 

 

2.1

Form of Merger Agreement dated June 21, 2019, between CEN Biotech, Inc. and Caduceus Software Systems Corp. and Caduceus Merger Sub, Inc. (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC June 21, 2019).

   

3.1

Articles of Incorporation of Cen Biotech, Inc. (Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement (Commission file number 000-55557) on Form 10 filed with the SEC January 4, 2016.)

   

3.2

By-Laws of Cen Biotech, Inc. (Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement (Commission file number 000-55557) on Form 10 filed with the SEC January 4, 2016.)

   
10.1 Amendment dated April 3, 2019, to 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. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC April 8, 2019).
   
10.2 Term Sheet dated May 15, 2019, between CEN Biotech, Inc. and Caduceus Software Systems Corp. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC May 16, 2019).
   
10.3 Executive Employment Agreement dated May 16, 2019, between CEN Biotech, Inc. and Alex Tarrabain. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC May 16, 2019).
   
10.4 Restricted Stock Agreement dated May 16, 2019, between CEN Biotech, Inc. and Alex Tarrabain. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC May 16, 2019).
   

31.1

Certification of Chief Executive Officer pursuant to Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

31.2

Certification of the Chief Financial Officer pursuant to Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

32.1

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

 

32.2

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

 

101.INS

XBRL Instance*

101.SCH

XBRL Taxonomy Extension Schema*

101.CAL

XBRL Taxonomy Extension Calculation*

101.DEF

XBRL Taxonomy Extension Definition*

101.LAB

XBRL Taxonomy Extension Labels*

101.PRE

XBRL Taxonomy Extension Presentation*

 

 

                                       

* Filed herein.

** Furnished herewith. 

 

b.     Financial Statement Schedules

 

None

  

14

 

 

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 19, 2019

 

CEN BIOTECH, INC.

 

 

 

 

By:

/s/ Joseph Byrne

 

Name:

Joseph Byrne

 

Title:

Chief Executive Officer (Principal Executive Officer) 

 

 

Dated: August 19, 2019

/s/ Alex Tarrabain 

 

Name: Alex Tarrabain

 

Title: Chief Financial Officer (Principal Financial and Accounting Officer)

 

15