ITEM 1. BUSINESS
Special Note Regarding Forward-Looking Statements
This Annual Report includes “forward-looking statements” that represent our beliefs, projections and predictions about future events. There are statements in this annual 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. Factors that may cause actual results, our performance or achievements, or industry results to differ materially from those contemplated by such forward-looking statements include, without limitation, those discussed in “Item 1A.
ITEM 1A. RISK FACTORS
An investment in our common stock or any other security that may be issued by us involves a high degree of risk. You should carefully consider these risk factors, together with all of the other information included in this Annual Report, before you decide to invest in shares of our common stock. If any of the following risks develop into actual events, then our business, financial condition, results of operations and/or prospects could be materially adversely affected. If that happens, the market price of our common stock, if any, could decline, and investors may lose all or part of their investment. You should read the section entitled “Forward-Looking Statements” above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this annual report.
Risks Related to the Business
We have a limited operating history in which to evaluate our business.
We plan to develop our LED lighting business and our cannabis related businesses. However, we have not yet generated any revenue and we have limited historical financial data upon which to base our projected revenue, planned operating expenses or upon which to evaluate our company and our commercial prospects. Based on our limited experience in developing and marketing our businesses, we may not be able to effectively:
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drive adoption of our future products
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attract and retain customers for our future products;
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provide appropriate levels of customer support for our future products;
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implement an effective marketing strategy to promote awareness of our future products;
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develop, manufacture and commercialize future products or achieve an acceptable return on our research and development efforts and expenses;
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comply with regulatory requirements applicable to our future products;
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anticipate and adapt to changes in our market;
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maintain and develop strategic relationships with vendors and manufacturers to acquire necessary materials for the production of our future products;
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scale our manufacturing activities to meet potential demand at a reasonable cost;
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avoid infringement and misappropriation of third-party intellectual property;
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obtain any necessary licenses to third-party intellectual property on commercially reasonable terms;
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obtain valid and enforceable patents that give us a competitive advantage;
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protect our proprietary technology; and
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attract, retain and motivate qualified personnel.
We cannot provide any assurances that we will generate revenues and, if we do, when and how much the initial revenue will be. If we are unable to generate revenue our business will fail.
We have not generated any revenue and our independent registered auditors’ report includes an explanatory paragraph stating that there is substantial doubt about our ability to continue as a going concern.
We have incurred substantial net losses since our inception and may continue to incur losses for the foreseeable future, as we continue our product development activities. As a result of our limited operating history, we have limited historical financial data that can be used in evaluating our business and our prospects and in projecting our future operating results. Through December 31, 2018, we have accumulated a total deficit of $35,655,053.
As reflected in the consolidated financial statements that are filed with this report, we have been a pre-revenue company with no material amount of earned revenue since our inception. This raises substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional capital and implement our business plan. If we are unable to achieve or sustain profitability or to secure additional financing on acceptable terms, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as a going concern. Any such inability to continue as a going concern may result in our common stock holders losing their entire investment. There is no guarantee that we will become profitable or secure additional financing on acceptable terms. Our consolidated financial statements contemplate that we will continue as a going concern and do not contain any adjustments that might result if we were unable to continue as a going concern. Changes in our operating plans, our existing and anticipated working capital needs, the acceleration or modification of our expansion plans, increased expenses, potential acquisitions or other events will all affect our ability to continue as a going concern.
We may not acquire market share or achieve profits due to competition in the LED lighting, hemp and medical marijuana industry.
Cannabis-based products and the number of companies that produce them have experienced rapid growth in recent years, stemming in part from recent trends toward legalization of cannabis in industrialized countries. Consequently, we will be operating in a highly competitive marketplace with various competitors. Increased competition may result in lower than anticipated gross margins and/or loss of market share, either of which would seriously harm its business and results of operations. Management cannot be certain that we will be able to compete against current or future competitors or that competitive pressure will not seriously harm our business. Some of our potential competitors are much larger and have greater access to capital, sales, marketing and other resources. These competitors may be able to respond more rapidly to new regulations or devote greater resources to the development and promotion of their business model than we can. Furthermore, some of these competitors may make acquisitions or establish co-operative relationships among themselves or with third parties in the industry to increase their ability to rapidly gain market share.
The competitive factors facing us include safety, efficacy, price, quality, breadth of product line, manufacturing quality and capacity, service, marketing and distribution capabilities. Our current and future competitors may have greater resources, more widely accepted and innovative products and stronger name recognition than we do. Our ability to compete is affected by our ability, or that of our strategic partners, to:
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develop or acquire new products and innovative technologies;
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obtain regulatory clearance and compliance, when necessary, for our products;
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manufacture and sell our products cost-effectively;
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meet all relevant quality standards for our products in their particular markets;
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respond to competitive pressures specific to each of our geographic and product markets;
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protect the proprietary technology of our products and avoid infringement of the proprietary rights of others;
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market our products;
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attract and retain skilled employees, including sales representatives;
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maintain and establish distribution relationships; and
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engage in acquisitions, joint ventures or other collaborations.
Competitors could develop products that are more effective, cost less or are ready for commercial introduction before our products. If our competitors are better able to develop and patent products earlier than we can, or develop more effective and/or less expensive products that render our products obsolete or non-competitive, our business will be harmed and our commercial opportunities will be reduced or eliminated.
As some products gain market acceptance, we may experience increased competition for those products as more participants enter the market. Currently, we are not a manufacturer. To the extent that we engage third-party manufacturers or use strategic alliances to produce our products, our manufacturing capabilities may not be adequate or sufficient to compete with large scale, direct or third-party manufacturers. Certain of our potential competitors are larger than us and have longer operating histories, customer bases, greater brand recognition and greater resources for marketing, advertising and product promotion. They may be able to secure inventory from vendors on more favorable terms, operate with a lower cost structure or adopt more aggressive pricing policies. In addition, our potential competitors may be more effective and efficient in introducing new products. We may not be able to compete effectively, and our attempt to do so may require us to increase marketing and/or reduce our prices, which may result in lower margins. Failure to effectively compete could adversely affect our market share, financial condition and growth prospects.
We may rely on third parties to supply and manufacture our proposed products. If these third parties do not perform as expected or if our agreements with them are terminated, our business, prospects, financial condition and results of operations would be materially adversely affected.
We may outsource our manufacturing of our future products to third parties for an indefinite period. Our reliance on contract manufacturers and suppliers exposes us to risks, including the following:
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We rely on our suppliers and manufacturers to provide us with the needed products or components in a timely fashion and of an acceptable quality. An uncorrected defect or supplier’s variation in a component could harm our or our third-party manufacturers’ ability to manufacture, and our ability to sell, products and may subject us to product liability claims.
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The facilities of our third-party manufacturers must satisfy production and quality standards set by applicable regulatory authorities. Regulatory authorities periodically inspect manufacturing facilities to determine compliance with these standards. If we or our third-party manufacturers fail to satisfy these requirements, the facilities could be shut down.
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A third-party manufacturer or supplier could decide to terminate our manufacturing or supply arrangement, including due to a disagreement between us and such third-party manufacturer, if the third-party manufacturer determines not to further manufacture our products, or if we fail to comply with our obligations under such arrangements.
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If any third-party manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have to share, the intellectual property rights to the innovation.
We currently rely on a limited number of suppliers to provide key components for our products. If these or other suppliers become unable to provide components in the volumes needed or at an acceptable price or quality, we would have to identify and qualify acceptable replacements from alternative suppliers. We may experience stoppages in the future. We may not be able to find a sufficient alternative supplier in a reasonable time period, or on commercially reasonable terms, if at all, and our ability to produce and supply our products could be impaired.
To the extent we are able to identify alternative suppliers, qualifying suppliers is a lengthy process. There are a limited number of manufacturers and suppliers that may satisfy applicable requirements. Moreover, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products, which could take a significant period of time.
Each of these risks could delay the development or commercialization of our products or result in higher costs or deprive us of potential product revenues. Furthermore, delays or interruptions in the manufacturing process could limit or curtail our ability to meet demand for our products and/or make commercial sales, unless and until the manufacturing capability at the facilities are restored and re-qualified or alternative manufacturing facilities are developed or brought on-line and “scaled up.” Any such delay or interruption could have a material adverse effect on our business, prospects, financial condition and results of operations.
An unexpected interruption or shortage in the supply or significant increase in the cost of components could limit our ability to manufacture any products, which could reduce our sales and margins.
An unexpected interruption of supply or a significant increase in the cost of components, whether to us or to our contract manufacturers for any reason, such as regulatory requirements, import restrictions, loss of certifications, disruption of distribution channels as a result of weather, terrorism or acts of war, fire, earthquake, or other national disaster, a work stoppage or other labor-related disruption, failure in supply or other logistical channels, electrical outages, or other events, could result in significant cost increases and/or shortages of our products. Our inability to obtain a sufficient amount of products or to pass through higher cost of products we offer could have a material adverse effect on our business, financial condition or results of operations.
We have limited experience in marketing our products and services.
We have undertaken limited marketing efforts for our future products and services. Our future sales and marketing teams, and/or those of our strategic partners, will compete against the experienced and well-funded sales organizations of competitors. Our future revenues and ability to achieve profitability will depend largely on the effectiveness of our sales and marketing team, and we will face significant challenges and risks related to marketing our services, including, but not limited to, the following:
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the ability of sales representatives to obtain access to or persuade adequate numbers of healthcare providers to promote and/or purchase and use our products and services;
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the ability to recruit, properly motivate, retain, and train adequate numbers of qualified sales and marketing personnel;
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the costs associated with hiring, training, maintaining, and expanding an effective sales and marketing team; and
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assuring compliance with government regulatory requirements affecting the healthcare industry in general and our products in particular.
We may rely to our detriment on third-party distributors for sales, marketing and distribution activities.
We may rely on third-party distributors to sell, market, and distribute any future products. Because we may rely on third-party distributors for sales, marketing and distribution activities, we may be subject to a number of risks associated with our dependence on these third-party distributors, including:
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The failure by us to select or use appropriate distributors, or the ineffectiveness of the sales and marketing strategies of such distributors;
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lack of day-to-day control over the activities of third-party distributors;
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third-party distributors may terminate their arrangements with us on limited or no notice or may change the terms of these arrangements in a manner unfavorable to us for reasons outside of our control; and
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disagreements with our distributors could require or result in costly and time-consuming litigation or arbitration.
If we fail to establish and maintain satisfactory relationships with third-party distributors, we may be unable to sell, market and distribute our products, our future revenues and market share may not grow as anticipated, and we could be subject to unexpected costs which would harm our results of operations and financial condition.
If we are unable to obtain and maintain protection of our intellectual property, the value of our products may be adversely affected.
Our business is dependent in part upon our ability to use intellectual property rights to protect our products from competition. To protect our products, we rely on a combination of patent and other intellectual property laws, employment, confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements and protective contractual provisions with our partners, licensors and other third parties. These methods, however, afford us only limited protection against competition from other products.
We attempt to protect our intellectual property position, in part, by filing patent applications related to our proprietary technology, inventions and improvements that are important to our business. However, our patent position is not likely by itself to prevent others from commercializing products that compete directly with our products. In addition, the patent owned by us or issued to us could be challenged, invalidated, or held to be unenforceable. We also note that any patent granted may not provide a competitive advantage to us. Our competitors may independently develop technologies that are substantially similar or superior to our technologies. Further, third parties may design around our patented or proprietary products and technologies.
We rely on certain trade secrets and we may not be able to adequately protect our trade secrets even with contracts with our personnel and third parties. Also, any third party could independently develop and have the right to use, our trade secret, know-how and other proprietary information. If we are unable to protect our intellectual property rights, our business, prospects, financial condition and results of operations could suffer materially.
We may be involved in lawsuits or proceedings to protect or enforce our intellectual property rights or to defend against infringement claims, which could be expensive and time consuming.
Our success depends in part on our products not infringing on the patents and proprietary rights of other parties. For instance, in the United States, patent applications filed in recent years are confidential for 18 months, while older applications are not published until the patent issues. As a result, there may be patents and patent applications of which we are unaware, and avoiding patent infringement may be difficult.
Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. Interference proceedings conducted by a patent and trademark office may be necessary to determine the priority of inventions with respect to our patent applications. Litigation or interference proceedings could result in substantial costs and diversion of resources and management attention. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing. In addition, we may be enjoined from marketing one or more of our products if a court finds that such products infringe the intellectual property rights of a third party.
During litigation, we may not be able to prevent the confidentiality of certain of our proprietary rights because of the substantial amount of discovery required in connection with intellectual property litigation. In addition, during the course of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If investors or customers perceive these results to be negative, it could have a material adverse effect on our business, prospects, financial condition and results of operations.
CEN has debt obligations that could adversely affect its business and its ability to meet its obligations and pay dividends.
At December 31, 2018, CEN has current notes, loans, accounts payable, accrued interest and accrued expenses aggregating $24,407,758. Since CEN has no current revenue, we will have to locate other sources of debt or equity financing in order to meet these obligations. If we are unable to do so, we may default on some commitments which could have a very negative effect on our business or cause us to cease our business altogether.
We are subject to the periodic reporting requirements of the Exchange Act that require us to perform accounting and reporting obligations with limited resources.
Following the filing of our registration statement on Form 10, we became required to file periodic reports with the Securities and Exchange Commission (the “SEC”) pursuant to the Exchange Act and the rules and regulations promulgated thereunder. The reporting obligations require additional staff or consulting expenses. In addition, we have limited resources to allocate to such compliance functions, which increase the possibility of non-compliance.
Our reputation in the industry will be very important as we grow the business, and any negative impact on our reputation could be damaging to our business.
Our participation in the cannabis industry creates the risk that our business may result in negative publicity and public opinion. In addition, the hemp plant and the cannabis/marijuana plant are both part of the same cannabis sativa genus/species of plant, except that hemp, by definition, has less than 0.3% THC content and is legal under federal and state laws, but the same plant with a higher THC content is cannabis/marijuana, which is legal under certain state laws, but which is not legal under federal law. The similarities between these plants can cause confusion, and our activities with legal hemp may be incorrectly perceived as us being involved in federally illegal cannabis/marijuana. Also, despite growing support for the cannabis/marijuana industry and legalization of cannabis/marijuana in certain U.S. states, many individuals and businesses remain opposed to the cannabis/marijuana industry. Any negative press resulting from any incorrect perception that we have entered into the cannabis/marijuana space could result in a loss of current or future business. It could also adversely affect the public’s perception of us and lead to reluctance by new parties to do business with us or to own our common stock. We cannot assure you that additional business partners, including but not limited to financial institutions and customers, will not attempt to end or curtail their relationships with us. Any such negative press or cessation of business could have a material adverse effect on our business, financial condition, and results of operations.
There are risks related to the quality and quality control of our products.
We may be subject to liability of our products and must ensure quality control of the product at every stage. As a planned manufacturer and distributor of products designed to be ingested by humans, we face an inherent risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of our planned products involve the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of our products alone or in combination with other medications or substances could occur. We may be subject to various product liability claims, including, among others, that our products caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against us could result in increased costs, could adversely affect our reputation with its clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition. There can be no assurances that we will be able to obtain or maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of our potential products.
Controlled substance legislation differs between countries and legislation in certain countries may restrict or limit our ability to sell hemp-based consumer products.
Most countries are parties to the Single Convention on Narcotic Drugs 1961, which governs international trade and domestic control of narcotic substances, including cannabis extracts. Countries may interpret and implement their treaty obligations in a way that creates a legal obstacle to our obtaining regulatory approval for our hemp-based consumer products in those countries. These countries may not be willing or able to amend or otherwise modify their laws and regulations to permit our hemp-based consumer products to be marketed, or achieving such amendments to the laws and regulations may take a prolonged period of time. In the case of countries with similar obstacles, we would be unable to market our hemp-based consumer products in countries in the near future or perhaps at all if the laws and regulations in those countries do not change
Fluctuations of foreign exchange rates may adversely affect our reported results.
Exchange rate fluctuations between the U.S. dollar, the Canadian dollar and the Ukrainian Hryvnia result in fluctuations in reported amounts from operations in our consolidated financial statements. Currently, the U.S. Dollar is the functional currency, because the bulk of the Company’s transactions have been in U.S. dollars, and because the Company has received the vast majority of its funding in U.S. dollars. Therefore, any change in the exchange rate will affect our reported sales, expenses and net loss. As our Canadian business or planned Ukrainian businesses expand, we will increase our exposure to non-U.S. dollar currencies.
We have not entered into hedging transactions with respect to our foreign currency exposure, but may do so in the future. We cannot be assured that fluctuations in foreign currency exchange rates will not have a material adverse impact on our business, financial condition or results of operations.
The JOBS Act will allow us to postpone the date by which we must comply with some of the laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC, which could undermine investor confidence in our Company.
For so long as we remain an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act, we may take advantage of certain exemptions from various requirements that are applicable to public companies that are not “emerging growth companies” including:
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the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting;
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the “say on pay” provisions (requiring a non-binding stockholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding stockholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Act and some of the disclosure requirements of the Dodd-Frank Act relating to compensation of its chief executive officer;
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the requirement to provide detailed compensation discussion and analysis in proxy statements and reports filed under the Exchange Act, and instead provide a reduced level of disclosure concerning executive compensation; and
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any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements.
We may take advantage of these exemptions until we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest of: (i) the last day of the first fiscal year following the fifth anniversary of the completion of this offering; (ii) the last day of the first fiscal year in which our annual gross revenues are $1 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or (iv) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.
We may take advantage of some, or all, of the reduced regulatory and reporting requirements that will be available to us so 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 so long as we qualify as an “emerging growth company,” which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an “emerging growth company,” we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions.
Our ability to grow and compete in the future will be adversely affected if adequate capital is not available to us or not available on terms favorable to us.
The ability of our business to grow and compete depends on the availability of adequate capital, which in turn depends in large part on our cash flow from operations and the availability of equity and debt financing. We cannot assure you that our cash flow from operations will be sufficient or that we will be able to obtain equity or debt financing on acceptable terms or at all to implement our growth strategy. As a result, we cannot assure you that adequate capital will be available to finance our current growth plans, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business. Additionally, if adequate additional financing is not available on acceptable terms, we may not be able to continue our business operations. Any additional capital, investment or financing of our business may result in dilution of our stockholders or be on terms and conditions that impair our ability to profitably conduct our business.
Risks Related to Our Common Stock
Shareholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through issuance of additional shares of our common stock.
We have no committed source of financing. Wherever possible, we may attempt to use non-cash consideration to satisfy obligations or obtain financing. Our board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued. In addition, if a trading market develops for our common stock, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market. These actions would result in dilution of the ownership interests of existing shareholders may further dilute common stock book value, and that dilution may be material.
Currently, there is no established public market for our securities, and there can be no assurances that any established public market will ever develop or that our common stock will be quoted for trading and, even if quoted, it is likely to be subject to significant price fluctuations.
As of April 16, 2019, there is currently no established public market whatsoever for our securities.
Because of the possible low price of our securities and certain other factors, many brokerage firms may not be willing to effect transactions in these securities and some market makers have declined to make a market for our common stock. Purchasers and holders of our securities should be aware that any market that develops in our stock may be subject to the penny stock restrictions.
The Company may be subject to a private right of action for recession or damage.
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 SEC, 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. While we have determined for the purpose of our financial reporting this matter is not material, there can be no assurance that liability will not arise in the future in connection with this matter.
Our shares may not become eligible to be traded electronically which would result in brokerage firms being unwilling to trade them.
If we become able to have our shares of common stock quoted on the OTCQB, we will then try, through a broker-dealer and its clearing firm, to become eligible with the Depository Trust Company ("DTC") to permit our shares to trade electronically. If an issuer is not “DTC-eligible,” then its shares cannot be electronically transferred between brokerage accounts, which, based on the realities of the marketplace as it exists today (especially the OTCQB), means that shares of a company will not be traded (technically the shares can be traded manually between accounts, but this takes days and is not a realistic option for companies relying on broker-dealers for stock transactions - like all companies on the OTCQB. While DTC-eligibility is not a requirement to trade on the OTCQB, it is a necessity to process trades on the OTCQB if a company’s stock is going to trade with any volume.
We have been advised that DTC retains the right to deny a company the ability to use their depository without providing a reason for the denial. The eligibility review process should include a clean presentation of facts and documents that meet DTC’s standards. Eligibility requirements include that the securities must be: issued in a transaction registered with the SEC pursuant to the Securities Act; or issued in a transaction exempt from registration pursuant to the 1933 Act exemption, that at the time of the request for DTC eligibility no longer involves transfer or ownership restrictions; or eligible for resale pursuant to Rule 144A or Regulation S under the Securities Act (and must otherwise meet DTC's eligibility criteria).
Although we believe that we meet the requirements of DTC listing, there are no assurances that our shares will ever become DTC-eligible or, if they do, how long it will take.
Our goal is to have our shares listed on an exchange but cannot predict the likelihood or timing of that happening.
Our goal is to have our shares listed on an exchange such as the NYSE American or NASDAQ Capital Market. Each such market has various requirements regarding a company’s financial condition and other matters like independent directors and other corporate governance matters. We cannot predict the likelihood or timing of any application to any such exchange or if any such exchange would approve a listing. We do not currently satisfy the financial requirements for any such listing.
Any market that develops in shares of our common stock may be subject to the penny stock regulations and restrictions pertaining to low priced stocks that will create a lack of liquidity and make trading difficult or impossible.
Our shares may be considered a “penny stock.” Rule 3a51-1 of the Exchange Act establishes the definition of a "penny stock," for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us. This classification will severely and adversely affect any market liquidity for our common stock if our shares have a market price of less than $5.00 per share. We cannot predict the likely price of our shares if a market does develop.
The market for penny stocks has experienced numerous frauds and abuses that could adversely impact investors in our stock.
CEN cannot predict the likelihood of a market developing for our shares or, if developed, what the share price will be. If the price per share is less than $5.00, the shares will be considered to be penny stocks. Company management believes that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
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Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
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Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
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"Boiler room" practices involving high pressure sales tactics and unrealistic price projections by sales persons;
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Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
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Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
CEN is a Canadian company which may make it difficult for U.S. shareholders to enforce legal judgments.
CEN is a Canadian Company. As such it may be difficult and expensive to enforce legal judgments issued by a court in the United States against CEN and possibly its officers or directors. Similarly, it may be difficult and expensive for an American shareholder to bring litigation against CEN or its officers and directors in a Canadian court.
We do not expect to pay cash dividends in the foreseeable future.
We have never paid cash dividends on our common stock. We do not expect to pay cash dividends on our common stock at any time in the foreseeable future. The future payment of dividends directly depends upon our future earnings, capital requirements, financial requirements and other factors that our board of directors will consider. Since we do not anticipate paying cash dividends on our common stock, return on your investment, if any, will depend solely on an increase, if any, in the market value of our common stock.
Because we may not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protection against interested director transactions, conflicts of interest and similar matters.
The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the SEC, the New York Stock Exchange and the Nasdaq Stock Market, as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the Nasdaq Stock Market. Because we are not presently required to comply with many of the corporate governance provisions, we have not yet adopted these measures.
We do not currently have independent audit or compensation committees. As a result, our president has the ability, among other things, to determine his own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest, if any, and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations.
We intend to comply with all corporate governance measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of Sarbanes-Oxley Act of 2002. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly or deter qualified individuals from accepting these roles.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
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 SEC, 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.
ITEM 2.
ITEM 2. PROPERTIES
CEN has one facility in Lakeshore, Ontario. 20 North Rear Road is a 10.4 acre site of land that was subleased from Creative. On January 1, 2017 CEN entered into an agreement whereas the old lease was terminated and a new 5 year lease for the property was started. The new lease gives CEN assess to the 27,000 sq. foot building containing the 4,000 sq. foot vault and options to lease additional buildings and purchase the property. The new lease rate is $4,000 per month Canadian plus HST tax, and proportioned utilities and property tax.
CEN also leases office space in Windsor, Ontario from R&D Labs Canada, Inc., whose president is Bill Chaaban. The lease commenced on October 1, 2017 and calls for monthly rental payments ranging from $2,608 to $3,390 through September 2027.
ITEM 3.
ITEM 3. 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 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Part II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES
CEN was incorporated in Canada on August 4, 2013 as a subsidiary of Creative, a public company incorporated in Nevada. Creative distributed all of the shares of CEN common stock on a pro rata basis to the Creative shareholders on February 29, 2016 at which time CEN became an independent public company. There is no and has never been any trading market for our common stock, and there is currently no established public market whatsoever for our securities.
There can be no assurance that a liquid market will develop in the foreseeable future. Transfer of our common stock may also be restricted under the securities or blue-sky laws of certain states and foreign jurisdictions. Consequently, investors may not be able to liquidate their investments and should be prepared to hold the common stock for an indefinite period of time.
Holders
As of April 16, 2019, there were approximately 276 stockholders of record of our common stock, according to the records of our transfer agent, and an unknown number of additional holders whose stock is held in ‘street name.’
Dividends
We have never paid any cash dividends on shares of our common stock and do not anticipate that we will pay dividends in the foreseeable future. We intend to apply any earnings to fund the development of our business. The purchase of shares of common stock is inappropriate for investors seeking current or near-term income.
Blue Sky Considerations
Because our securities have not been registered for resale under the blue sky laws of any state, the holders of such shares and persons who desire to purchase them in any trading market that might develop in the future, should be aware that there may be significant state blue-sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. Accordingly, investors should consider any secondary market for the Company’s securities to be a limited one.
Securities Authorized for Issuance under Equity Compensation Plans
We adopted, and our stockholders approved, the Cen Biotech, Inc. 2017 Equity Compensation Plan (the “2017 Plan”), effective as of November 29, 2017. Under such plan, we may grant equity-based incentive awards, including options, restricted stock, and other stock-based awards, to any directors, employees, advisers, and consultants that provide services to us or any of our subsidiaries on terms and conditions that are from time to time determined by us. An aggregate of 20,000,000 shares of our common stock are reserved for issuance under the 2017 Plan. A total of 18,437,120 restricted shares have been granted, 15,824,620 restricted shares have vested as of December 31, 2018, and no restricted stock awards have been forfeited under this plan. Restricted stock awards totaling 2,275,000 shares have not vested as of April 16, 2019.
Equity Compensation Plan Information
The following table summarizes information as of December 31, 2018 about our outstanding restricted stock agreements and shares of common stock reserved for future issuance under our existing equity compensation plans.
Recent Sales of Unregistered Securities
Since December 31, 2018 the Company has issued 7 new convertible notes totaling 200,675.20 USD with conversion rights to 125,422 common shares.
Issuances of Common Stock:
During 2018, CEN entered into loans and associated extension agreements with various parties. In consideration for such loans and associated extensions, CEN granted several individuals total aggregate amount of 184,400 unregistered shares of common stock of CEN during the year ended December 31, 2018.
On June 7, 2018, the Company elected Dr. Usamakh Saadikh to serve as a director of the Company. As compensation for his role as a director, the company granted a one-time equity award of 20,000 shares of the Company’s common stock. This award vested immediately.
On June 19, 2018, the Company entered into an agreement with a law firm which included, as compensation, a grant of a one-time equity award of 125,000 shares of the Company’s common stock. This award vested immediately.
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.
The unregistered shares of common stock were issued in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended and the provisions of Regulation D promulgated thereunder or in reliance on the provisions of Regulation S promulgated thereunder.
Issuances of Convertible Notes:
During 2018, net convertible notes totaling $1,545,887, convertible into 966,180 shares of common stock, were issued.
The unregistered shares of the 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.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On November 27, 2018, the Company executed a share repurchase agreement with James Robinson, pursuant to which the Company repurchased from Mr. Robinson 714 shares of special voting stock in the capital of the Company, at a purchase price in the aggregate amount of $0.07. The title of the class of such shares was “Special Voting” shares of the Company. Each such share of capital stock was entitled to 500 votes. This entire class of special voting stock, which was the only outstanding special voting stock of the Company, has been redeemed, retired and cancelled. The common shareholders now hold the only voting stock of the Company.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
We are considered to be a smaller reporting company, as defined by Section 229.10(f)(1) of the Securities Act, and, therefore, are not required to provide the information required by this Item.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial data discussed below is derived from our audited consolidated financial statements for the fiscal years ended December 31, 2018 and 2017, which are found elsewhere in this Annual Report on Form 10-K. Our consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States. The financial data discussed below is only a summary and investors should read the following discussion and analysis of our financial condition and results of our operations in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors,” and elsewhere in this Annual Report on Form 10-K.
Our historical financial statements have been prepared on a stand-alone basis in conformity with U.S. generally accepted accounting principles.
At present we are not able to estimate if or when we will be able to generate revenues. Our consolidated financial statements have been prepared assuming that we will continue as a going concern; however, given our recurring losses from operations, our independent registered public accounting firm has determined there is substantial doubt about our ability to continue as a going concern.
Results of Operations
We have incurred recurring losses to date. Our 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.
We will require additional capital to meet our operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities. There are no assurances that we will be successful in this or any of our endeavors or become financially viable and continue as a going concern
Fiscal Year Ended December 31, 2018 Compared To Fiscal Year Ended December 31, 2017.
The following table reflects our operating results for the years ended December 31, 2018 and 2017:
Revenue
We recognized no revenue during the twelve months ended December 31, 2018 and 2017 as we have not commenced revenue generating operations as yet.
Operating Expenses
During the fiscal year ended December 31, 2018, our operating expenses were $4,370,707 compared to $11,614,227 during the prior fiscal year. During the twelve months ended December 31, 2018, our operating expenses were comprised of salary and consulting fees of $448,463, stock-based compensation expense of $682,000, general and administrative expenses of $1,970,129, and impairment of leasehold improvements of $1,270,115. An impairment assessment as of December 31, 2018 concluded the investment at 20 North Rear Road was substantially impacted by the changes in Canada’s Medical Marihuana Purposes Regulations (MMPR) and the Company reported impairment charges of $1,270,115 in 2018 based upon the assessment related to specialty use elements of the improvements and that at this time, the Company cannot make the final additions that will be necessary for the site to function as a growing space.
By comparison, during the twelve months ended December 31, 2017, our operating expenses were comprised of salary and consulting fees of $1,244,996, stock-based compensation expense of $7,777,900, and general and administrative expenses of $2,591,331. Expenses incurred during the fiscal year ended December 31, 2018 compared to fiscal year ended December 31, 2017 decreased primarily due to stock-based compensation.
Other Income and Expense Items
During fiscal year ended December 31, 2018, our other expense, net was $3,159,654 compared to $2,466,227 during the prior fiscal year. During the twelve months ended December 31, 2018, our other income and expense items were comprised of interest expense of $2,871,012, interest income of $9,395, change in the fair value of our patent acquisition liability of $390,000, and foreign exchange gain of $91,963. By comparison, for the twelve months ended December 31, 2017, our other expense items were comprised of interest expense of $2,377,102 and foreign exchange loss of $89,125. The increase during the year is due to interest expense on additional notes and loans issued during 2018 to fund operations.
Income Taxes
As of December 31, 2018, the Company has net operating loss carry forwards of approximately $36,500,000 that may be available to reduce future years’ taxable income. As December 31, 2018, the Company has a deferred tax asset of approximately $9,700,000 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 for the fiscal year ended December 31, 2018 was $7,530,361 compared to a net loss of $14,080,454 during the fiscal year ended December 31, 2017 due to the factors discussed above.
Liquidity and Capital Resources
As of December 31, 2018, we had assets of $7,314,565, comprised of cash of $3,193, net property and equipment of $166,509, a note receivable from a related party of $44,859, other receivables of $418,905, an advance to fund the operations of CEN Biotech Ukraine, LLC, a related party, of $875,328, and net intangibles of $5,805,771. As of December 31, 2018, we had liabilities of $28,575,958 comprised of a patent acquisition liability of $1,010,000, loans from related parties of $1,360,806, loans of $10,107,205, accrued interest and other expenses of $8,209,098, accounts payable of $206,521, convertible notes- related parties of $2,538,681 and convertible notes of $5,143,647.
Our $28,575,958 of indebtedness includes a patent acquisition liability of $1,010,000, accrued interest of $6,860,494, accrued interest to related parties of $946,227, as well as loans payable, loans payable to related parties, convertible notes and convertible notes to related parties totaling $19,150,339, with maturity dates as outlined below. The convertible notes are due 2 years from issuance with notes maturing in 2018 through 2020. 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 $3,737,666 of unsecured debt. We expect our operating and administrative expenses to be at least $2,400,000 annually.
We intend to fund our expenses through the issuance and sale of additional securities. We do not have any commitments from any persons to purchase any securities and there can be no assurance that we will be able to raise sufficient funds to pay our liabilities as they become due and payable.
Fiscal Year Ended December 31, 2018 Compared To Fiscal Year Ended December 31, 2017.
Cash Flows from Operating Activities
We have not generated positive cash flows from operating activities. During the fiscal year ended December 31, 2018, we used $1,724,001 in operating activities compared to $2,176,862 during the fiscal year ended December 31, 2017. The decrease between the two periods related primarily to a decrease in our overall net loss and increase in current operational liabilities.
Cash Flows from Investing Activities
Our use of cash flow for investing activities during the fiscal year ended December 31, 2018 totaling $105,439 compared to the prior period of $510,724. During the twelve months ended December 31, 2018, our use of cash flows for investing activities were comprised primarily of advances to CEN Ukraine of $100,000. By comparison, for the twelve months ended December 31, 2017, our use of cash flows for investing activities were comprised primarily of advances to CEN Ukraine of $350,000, which were made to fund the operations of CEN Ukraine.
Cash Flows from Financing Activities
Cash flow provided by financing activities during the fiscal year ended December 31, 2018 totaling $1,747,655 compared to the prior period of $2,710,183. During the fiscal year ended December 31, 2018, we received $2,170,887 through issuance of loans and convertible promissory notes payable to investors to fund our working capital requirements. During 2018, we repaid $423,232 of our debts. During the fiscal year ended December 31, 2017, we received $2,710,193 through issuance of loans of convertible notes to investors to fund our working capital requirements. During 2017 we repaid $10,000 of our debts.
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. Our independent registered auditors included an explanatory paragraph in their opinion on our financial statements as of and for the fiscal period ended December 31, 2018 that states that our lack of committed resources causes substantial doubt about our ability to continue as a going concern
Recently Issued Accounting Pronouncements
On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, the new revenue recognition standard that requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. The Company is still in its startup phase and is not generating revenues at this time; therefore, this standard has no impact on its consolidated financial statements until revenues are generated. When revenues are generated, the Company will follow the provisions of the new standard.
In January 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Updated (“ASU”) No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to mainly change the accounting for investments in equity securities and financial liabilities carried at fair value as well as to modify the presentation and disclosure requirements for financial instruments. The ASU is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. Adoption of the ASU is retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. The adoption of this pronouncement did not have an impact on the Company’s financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services for nonemployees. The ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. As a result of the early adoption of this pronouncement, the Company measures these nonemployee awards at fair value on the grant date. The adoption of this pronouncement did not have a significant impact on the Company’s financial statements.
Accounting Standards Issued But Not Yet Adopted
In February 2016, the FASB issued an ASU which requires lessees to recognize lease assets and lease liabilities arising from operating leases on the balance sheet. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018 using a modified retrospective approach, with early adoption permitted. The Company has evaluated the standard to determine the impact of its adoption, using the modified retrospective approach, effective January 1, 2019 on its consolidated financial statements and expects that its operating leases will be recognized as operating lease liabilities and right-of-use assets of approximately $256,000. The cumulative adjustment to retained earnings is not expected to be significant.
Critical Accounting Policies
The preparation of consolidated financial statements and related notes requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.
Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. There are no critical policies or decisions that rely on judgments that are based on assumptions about matters that are highly uncertain at the time the estimate is made. Note 2 to the consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements.
Seasonality
The Company does not currently expect its planned business to be seasonal in nature.
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 public 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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements as of December 31, 2018 and 2017 and for the years then ended start on page 42.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our principal executive officer to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, the Company recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Our internal control over disclosure controls and procedures and financial reporting includes those policies and procedures that:
●
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
●
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP;
●
that our receipts and expenditures are being made only in accordance with authorizations of the Company's management and directors; and
●
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Evaluation of disclosure and controls and procedures
As of December 31, 2018, our management conducted an assessment of the effectiveness of the Company's internal control over disclosure controls and procedures and financial reporting. In making this assessment, management followed an approach based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (known as “COSO”). Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2018.
Revisions to Disclosure Controls and Procedures
Management recognized the need for additional resources in the area of accounting and financial reporting controls and procedures. As a result, we have outsourced the accounting and financial reporting oversight roles to a qualified accounting firm with public company reporting expertise.
Readers are cautioned that internal control over financial reporting, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Therefore, even effective internal control over financial reporting can only provide reasonable assurance with respect to the financial statement preparation and presentation.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during the last quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or the Company’s internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Set forth below is a list of the names, ages and positions of our directors and executive officers.
Biographies of Directors and Executive Officers
Bahige (Bill) Chaaban is our President and Chairman of the Board since July 2017. Previously, Mr. Chaaban served as the Chief Executive Officer of CEN Biotech from the company’s inception in August 2013 until July 2017. Mr. Chaaban also serves as the Chief Executive Officer and Chairman of the Board of CEN Biotech Ukraine LLC, since November 2014. Mr. Chaaban founded and served as President of CGIA, Inc., Supplement Group, Inc., Fulfillment, Inc., and Fitness One, Inc. from October 1998 until April, 2016. Mr. Chaaban has over 30 years of experience in the nutrition industry, including, retail, online and wholesale sales, and design and manufacturing of dietary supplements. Mr. Chaaban served as the Chief Executive Officer of Creative Edge Nutrition, Inc. from April 2012 until December 2014. Mr. Chaaban was the founder of Edge Nutrition, which operated retail nutrition stores in the USA and Canada. Mr. Chaaban is a licensed attorney in the USA and Canada. He holds a Bachelor of Commerce degree from the University of Alberta; a Bachelor of Law degree from the University of Windsor; a Juris Doctor from the University of Detroit Mercy; a Master of Laws degree from Wayne State University; and an Honorary Doctorate from the International Personnel Academy. Mr. Chaaban is qualified to serve as President and to continue serving as Chairman of the Board as he founded the company and has helped to create a global footprint for the Company and its subsidiaries. Mr. Chaaban founded and served as President of CGIA, Inc., Supplement Group, Inc., Fulfillment, Inc., and Fitness One, Inc. Mr. Chaaban determined that he could not devote the time necessary to CEN and these businesses. After careful deliberation, these businesses were closed in April, 2016 and bankruptcies were filed for each in April, 2016.
Joseph Byrne is our Chief Executive Officer and member of our Board since July 2017. Since 2000, Mr. Byrne has been the owner Hickey Byrne Law Firm and he will continue to oversee the practice. Mr. Byrne was elected to municipal council in 1974 and served on council for 11 years. As a municipal councillor and later as Deputy-Reeve and County Councillor, he served on and chaired all major municipal and county committees including, but not limited to Finance, Roads, and Government Restructure. Mr. Byrne is a long standing member and Past Chair of the Board of Directors for the Windsor Essex Economic Development Commission until 2015. Joseph Byrne has also written and published five books, including two hockey stories, The Magic of Hockey (White Snow Blackout) and award winning The Jim Mahon Story, and three books in the Farm Culture series, Senses of Autumn, Of Great Character and Wheatfields. Mr. Byrne is a successful, resourceful, results-driven lawyer, lifelong farmer and author. His diverse career and experience in the political and private business sector is complemented by significant farming and community involvement. Joseph is a highly effective communicator and leader, adept at articulating a compelling vision of strategic focus. Mr. Byrne holds a BA and MA in Geography from the University of Windsor and Bachelors of Laws from the University of Windsor. Mr. Byrne’s extensive experience in the business world combined with his knowledge of the law and farming offer a unique and robust perspective to the Board.
Richard Boswell is our Chief Financial Officer and a member of our Board since July 2017. Mr. Boswell has 25 years of management experience working with companies of various sizes from start-ups through Fortune 10 listed organizations. His vast array of experience includes multiple industries, such as financial services, automotive, information technology, retail, and consulting. He has held key positions overseeing different functions such as information technology, investment analysis, financial planning, process improvement, sales and technology evaluation. Since February 2011 Mr. Boswell has been providing consulting service to clients through his company, BITS Group Inc. BITS Group Inc. provides business consulting and interim or outsourced executive services. Since January 2014, Mr. Boswell has been providing financial and business services to CEN Biotech through his company. Mr. Boswell holds BBA and MBA from Northwood University. Mr. Boswell also did post graduate studies in strategy and innovation management at Lawrence Technological University. Mr. Boswell’s diverse background and experience working with companies of differing sizes will add valuable contributions to the Board as the Company transitions through growth.
Brian Payne is our Vice President and a member of our Board since July 2017. Mr. Payne also worked for the Company since July 2015 as our marketing consultant. Mr. Payne is a business and community leader with over 25 years’ experience in domestic and global supply chains, trade and government relations, change management and manufacturing, primarily in the food and agriculture sectors. Mr. Payne began his career in the international trade arena, catering to automotive and heavy manufacturing companies like General Motors, John Deere, and NaviStar. In 1996, Mr. Payne worked for PepsiCo Global Restaurants, responsible for Project Management across the Pizza Hut brand. In 1999, Mr. Payne served as Director of Distribution. In 2002, Mr. Payne served a supply chain function for a national food company. In 2005, Mr. Payne led the supply chain and regulatory compliance functions for Pizza Pizza Ltd. Since May 2012, Mr. Payne has served as President of his own consulting firm, IMS, which specialized in consulting and outsourced executive functions related to manufacturing, supply chain, trade, regulatory and finance areas. Mr. Payne’s client base includes Caesars Entertainment (Las Vegas, NV), Blueline Food Service Distribution (Detroit, MI), The Windsor Essex Economic Development Corporation (Windsor, ON), the Unified Purchasing Group Canada (Toronto, ON) and Thomas Canning (Maidstone) Limited. Mr. Payne served as Vice President of Thomas Canning (Maidstone) Inc. from January 2015 to April 2017. Mr. Payne is active in his community of Windsor Essex where he serves as Vice Chair of the Board of Directors of Hotel Dieu Grace Healthcare, and a Director of The Lakeview Montessori School and the Hospice of Windsor Essex. Mr. Payne holds a BA in Political Science from the University of Windsor. Mr. Payne’s track record of business success and leadership related to distribution and supply chain fills an important role on the Board. Mr. Payne also served as Vice President of Thomas Canning (Maidstone) Inc., though he voluntarily left the employment prior to the owners filing for insolvency proceedings in June 2017.
Harold Aubrey De Lavenu is a member of our Board since July 2017. Mr. Aubrey De Lavenu is a successful businessman with military background, currently based in the South of Portugal. Mr. De Lavenu has been the director of his company, Hammers ‘n’ Blades, since September 2002. After joining the British Royal Navy in 1983, pursuing a vocation as a Mine Clearance Diver (Navy Seal), Mr. De Lavenu was trained to work as an Explosive Ordinance Disposal Specialist. Mr. Aubrey De Lavenu insights from his vast international experiences will offer excellent cultural perspective to strategic activities of the Board.
Ameen Ferris is a member of our Board since July 2017. Mr. Ferris is a successful entrepreneur who has founded numerous retail/wholesale companies, and brands. In 1991, Mr. Ferris founded the retail chain, Healthy’s Nutrition (“Healthy’s”), a specialty retail company focusing on quality health supplements. Mr. Ferris built a multi-million dollar company with limited resources, and established a thriving Canadian retail chain with warehousing, a full line of private label supplements including, sports nutrition, ailment specific herbal supplements and vitamins. He also co-branded the Healthy’s concept in department stores such as The Hudson Bay Company, Eatons and in select grocery chains. Healthy’s was acquired in 2006 by the publicly traded corporation, Planet Organic. In 2005, Mr. Ferris also established the Low Carb Store, one of Canada’s premier specialty food locations. Mr. Ferris founded Natural Choice Distribution, developing and distributing leading natural supplements, diet products, sports nutrition and therapeutic herbal health supplements. Specializing in brand development, Mr. Ferris entered into an exclusive contract through his own company, Brandrouse, in 2008 through May 2017 by the biotechnology company LivCorp Inc. (a division of Delivra Inc.) with the task of developing their OTC topical product on a start-up budget. From a white label, he established the market orientation and strategy for the brand LivRelief™. His contributions included, strategy, segmentation, targeting and positioning of the brand, involvement and guidance with product development, refinements and extensions, package design of all LivRelief consumer products in Canada, development of LivRelief’s image as a customer-centric brand, marketing and advertising of LivRelief products In May 2017, Mr. Ferris founded the brand consulting firm Brand Rouse. Mr. Ameen complements the board with his strong marketing background.
Donald W. Strilchuck is a member of our Board since July 2017. Mr. Strilchuck has also been a security advisor to CEN Biotech since its inception in August 2013. Prior to being a security advisor to CEN Biotech Mr. Strilchuck was retired from the Windsor Police Department after 32 years, March 2012. Mr. Strilchuck began his career in law enforcement as a cadet in 1979, promoted to patrol officer and was accepted to the Emergency Service Unit, where he became proficient in weapons and tactical response. Mr. Strilchuck served on a joint drug task force, which invests domestic and international occurrences, involving U.S. and other foreign agencies. Mr. Strilchuck was promoted to a supervisory position, and oversaw a team of officers specially trained to deal with street violence and victim assistance. Mr. Strilchuck holds a Law Enforcement Certification from the Ontario Police College. Mr. Strilchuck’s knowledge and experience regarding security and law enforcement combined with his relationships with various agencies makes him an ideal addition to the Board.
Alex Tarrabain is a member of our Board since July 2017. Between 1981 and 1985, Mr. Tarrabain served as a Youth/Childcare Counsellor for the Government of Alberta. Between 1990 and 1991, Mr. Tarrabain articled with Ernst & Young Chartered Accountants. Between 1991 and 1995, Mr. Tarrabain later served as the Senior Accountant for the County of Strathcona in Sherwood Park, Alberta. In August 1995, Mr. Tarrabain opened his own practice, Tarrabain Accounting, and has been operating in the Edmonton and surrounding area for the past 23 years, through the present. Mr. Tarrabain is a frequent speaker at financial functions and has served on many boards including Prostate Canada, NW Zone Hockey Association, Whitemud West Hockey Association and the Canadian Athletic Club in Edmonton. Mr. Tarrabain earned a Bachelor’s of Commerce from the University of Alberta. Mr. Tarrabain’s experience in public accounting will provide the Board with an excellent resource regarding financial matters of the Company.
Dr. Usamakh Saadikh, is a member of our Board of Directors and the Vice President of International Business Development since June 2018. Dr. Saadikh has developed many government and business contacts throughout the Middle East and Europe over the past 25 plus years. His skills and relationships are important for CEN Biotech’s international strategy. Since August 2017, Dr. Saadikh has been employed with Eastern Starr Canada, a wholly owned subsidiary of CEN Biotech, in an advisory role, making important introductions related to the development of future opportunities for CEN Biotech. In June 2014, Dr. Saadikh co-founded CEN Biotech Ukraine LLC where he focused on the formation of the company. Prior to 2014, Dr. Saadikh was the general manager of the International Trade Company based in Kiev, Ukraine. Dr. Saadikh holds a BA and a PhD from Moscow Institute of Applied Biotechnology. Dr. Saadikh’s extensive international experience and long-standing relationships with business and governmental contacts make him an ideal addition to the Board of Directors and executive team.
Family Relationships
Alex Tarrabain and Bill Chaaban are brothers-in-law.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years that resulted in a judgment, decree, or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Certain Relationships and Related Transactions, and Director Independence - Transactions with Related Persons,” none of our directors, director nominees, or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates, or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company’s directors and officers, and persons who beneficially own more than 10% of a registered class of the Company’s equity securities, to file reports of beneficial ownership and changes in beneficial ownership of the Company’s securities with the SEC on Forms 3, 4 and 5. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on the Company’s review of the copies of the forms received by it during the fiscal year ended December 31, 2018 and written representations that no other reports were required, the Company believes that all person who, at any time during such fiscal year, was a director, officer or beneficial owner of more than 10% of the Company’s common stock failed to comply with all Section 16(a) filing requirements during such fiscal years.
Code of Ethics
We adopted a Code of Ethics, which is applicable to our chief executive and principal financial officers and any persons performing similar functions, among others. The Code of Ethics is a written standard designed to deter wrongdoing and to promote:
●
honest and ethical conduct,
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full, fair, accurate, timely and understandable disclosure in regulatory filings and public statements,
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compliance with applicable laws, rules and regulations,
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the prompt reporting violation of the code, and
●
accountability for adherence to the code.
A copy of our Code of Ethics will be provided to any person without charge, upon written request to the Company at 7405 Tecumseh Road East Suite 300, Windsor, Ontario, N8T 1G2, Canada.
Board of Directors
We currently have nine directors, two of whom are independent directors. Directors hold office until the completion of their term of office, which is not longer than one year, or until their successors have been elected. Our current directors’ term of office expires at the annual shareholders meeting in 2019. All officers are appointed annually by the board of directors and serve at the discretion of the board. If at any point we have an even number of directors, the Chairman does not have a casting vote and accordingly tie votes on issues may not be able to be resolved.
All directors will be reimbursed by CEN for any expenses incurred in attending board meetings provided that CEN has the resources to pay these fees. CEN will apply for officers and directors liability insurance at such time when it has the resources to do so.
Board Risk Oversight
The Board has an active role, as a whole, in overseeing risk management. The Board regularly reviews information regarding the Company’s liquidity and operations, as well as the risks associated with each. As our common stock is not yet listed on a national exchange, we are not required under the to maintain any independent committees of our Board of Directors, including an audit committee or a risk management committee. In the event that we list on a national securities exchange we will form the appropriate committees.
Meetings of the Board of Directors
The Board held six formal meetings during 2018. Each director attended at least 75% of all meetings of the Board during 2018.
Director Independence
Harold Aubrey de Lavenu and Ameen Ferris serve as the Company’s independent directors. Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the Company or any other individual having a relationship that, in the opinion of the Company’s Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
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the director is, or at any time during the past three years was, an employee of the Company;
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the director or a family member of the director accepted any compensation from the Company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);
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a family member of the director is, or at any time during the past three years was, an executive officer of the Company;
●
the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the Company made, or from which the Company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
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the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the Company served on the compensation committee of such other entity; or
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the director or a family member of the director is a current partner of the Company’s outside auditor, or at any time during the past three years was a partner or employee of the Company’s outside auditor, and who worked on the Company’s audit.
Involvement in Certain Legal Proceedings
During the past ten years, no present director, executive officer or person nominated to become a director or an executive officer of CEN:
1.
had a petition under the federal bankruptcy laws or any state insolvency law filed by or against, or a receiver, fiscal agent or similar officer appointed by a court for the business or property of such person, or any partnership in which he/she was a general partner at or within two years before the time of such filing, or any corporation or business association of which he/she was an executive officer at or within two years before the time of such filing, other than as described above.
2.
was convicted in a criminal proceeding or subject to a pending criminal proceeding (excluding traffic violations and other similar minor offenses);
3.
was subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him/her from or otherwise limiting his/her involvement in any of the following activities:
i.
acting as a futures commission merchant, introducing broker, commodity trading advisor commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
ii.
engaging in any type of business practice; or
iii.
engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws; or
4.
was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of an federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (3) (i), above, or to be associated with persons engaged in any such activity; or
5.
was found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and for which the judgment has not been reversed, suspended or vacated.
Conflicts of Interest
Certain potential conflicts of interest are inherent in the relationships between our officers and directors and us.
From time to time, one or more of our affiliates may form or hold an ownership interest in and/or manage other businesses both related and unrelated to the type of business that we own and operate. These persons expect to continue to form, hold an ownership interest in and/or manage additional other businesses which may compete with our business with respect to operations, including financing and marketing, management time and services and potential customers. These activities may give rise to conflicts between or among the interests of us and other businesses with which our affiliates are associated. Our affiliates are in no way prohibited from undertaking such activities, and neither us nor our stockholders will have any right to require participation in such other activities.
Further, because we intend to transact business with some of our officers, directors and affiliates, as well as with firms in which some of our officers, directors or affiliates have a material interest, potential conflicts may arise between the respective interests of us and these related persons or entities. We believe that such transactions will be effected on terms at least as favorable to us as those available from unrelated third parties.
With respect to transactions involving real or apparent conflicts of interest, we have adopted policies and procedures which require that: (i) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve the transaction prior to such authorization or approval; and (ii) the transaction be fair and reasonable to us at the time it is authorized or approved by our directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding each element of compensation that we paid or awarded to our named executive officers, and our two highest compensated individuals not serving as executive officers, for the two fiscal years ended December 31, 2018 and 2017, which includes cash compensation, stock options awarded in lieu of cash compensation, and all other compensation:
2018 SUMMARY COMPENSATION TABLE
Outstanding Equity Awards to Executive Officers at Fiscal Year-End 2018
The following table sets forth information regarding outstanding restricted stock awards to our named executive officers as of December 31, 2018:
(1)
On November 30, 2017, executive officers were granted a one-time equity award of restricted shares of the Company’s common stock pursuant to a Restricted Stock Agreement, provided that the officers continue to be employed by the Company, and will fully vest in the event of a Change in Control, as further described on the Current Report on Form 8-K, filed on December 5, 2017.
Compensation of Directors
The following table sets forth information regarding each element of compensation that we paid or awarded to our non-executive directors for the fiscal year ended December 31, 2018:
(1)
On June 7, 2018, the Company granted a one-time equity award of 20,000 restricted shares of the Company’s common stock pursuant to a Restricted Stock Agreement, to Dr. Usamakh Saadikh, a non-executive director of the Company, which vested immediately and remains outstanding as further described on the Current Report on Form 8-K, filed on June 12, 2018.
Employment and Consulting Agreements
On November 30, 2017, the Company entered into an executive employment agreement (“Employment Agreement”) with certain executives (an “Executive”) of the Company, previously appointed by the Board. Under each Employment Agreement, the Executive with receive a base compensation and restricted stock of the Company, to vest at the earlier of (i) over a three-year period, provided that the Executive continues to be employed by the Company, or (ii) in the event of a change of control in the Company. In the event of termination, the Executive will receive any unpaid salary and reimbursement of expenses. In the event of a Change in Control (as defined in the Employment Agreement) or a strategic transaction, the Board may, but is not obligated to, provide the Executive with additional compensation, including additional stock options or restricted stock, for services outside of the Executive’s general scope of duties and responsibilities. Each Employment Agreement has an indefinite term. Under the respective Employment Agreement:
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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 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. No additional grants of restricted stock were made in 2018.
●
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 of restricted stock of the Company, of which 325,000 vested immediately and the remaining vesting ratably each month over the next 36 months. No additional grants of restricted stock were made in 2018.
●
Richard Boswell, Senior Executive Vice President and Chief Financial Officer of the Company, Mr. Boswell will receive compensation in the form of a base annual salary of $31,200 and a grant of 4,500,000 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. No additional grants of restricted stock were made in 2018.
●
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 of restricted stock of the Company, of which 300,000 vested immediately and the remaining vesting ratably each month over the next 36 months. No additional grants of restricted stock were made in 2018.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding the ownership of our common stock as of April 16, 2019 for:
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each director;
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each person known by us to own beneficially 5% or more of our common stock;
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each named executive officer; and
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all directors and executive officers as a group.
The amounts and percentages of our common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership within 60 days. Under these rules more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.
Unless otherwise indicated below, to the best of our knowledge each beneficial owner named in the table has sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable.
Unless otherwise indicated, the address of each named person is c/o Cen Biotech, Inc. 7405 Tecumseh Road East Suite 300, Windsor, Ontario, N8T 1G2, Canada. No shares beneficially owned by any executive officer or director have been pledged as security.
(1) Based on 25,518,363 shares of common stock issued and outstanding as of April 16, 2019.
(2) Please note that Bahige (Bill) Chaaban’s shares represented above include 8,912,361 shares held in his name as noted on the shareholder list and 2,432 shares held in a brokerage account. Please note that Mr. Chaaban explicitly disclaims any ownership of 867,576 shares of the Company’s common stock issuable upon conversion of two promissory notes held by his wife Lamia Chaaban totaling $1,388,122 as Mr. Chaaban does not have voting of dispositive power of such shares, nor does he have the power to cause conversion of the note.
(3) Please note that Joseph Byrne’s shares represented above include 1,307,142 shares held by him in his name as noted on the shareholder list and 60,000 shares held by his wife, Claire Byrne, over which they both have dispositive and voting control, and also includes 140,120 shares of the Company’s common stock issuable upon conversion of a promissory notes that are issued and outstanding but has not been converted at this time.
(4) Please note that Harold Aubrey de Lavenu shares represented above include 20,000 shares held by him in his name as noted on the shareholder list and 13,321 shares held in a brokerage account, as well as 548,980 shares of the Company’s common stock issuable upon conversion of promissory notes that are issued and outstanding but have not been converted at this time.
(5) Please note that Alex Tarrabain’s shares represented above include 93,571 shares held by him in his name as noted on the shareholder list, 21,371 shares held in a brokerage account, as well as 30,000 shares of the Company’s common stock issuable upon conversion of a promissory note that is issued and outstanding but has not been converted at this time.
*
Represents beneficial ownership of less than 1% of our outstanding common stock.
Shareholder Matters
As an issuer of "penny stock," the protection provided by the federal securities laws relating to forward looking statements does not apply to us as long as our shares continue to be penny stocks. Although the federal securities law provides a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, we will not have the benefit of this safe harbor protection in the event of any claim that the material provided by us, including this Annual Report on Form 10-K, contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading.
As a Canada corporation operating in the Province of Ontario, we are subject to the federal laws of Canada and the provincial laws of Ontario (“Canadian law"). Certain provisions of Canadian law create rights that might be deemed material to our shareholders. Other provisions might delay or make more difficult acquisitions of our stock or changes in our control or might make it more difficult to accomplish transactions that some of our shareholders may believe to be in their best interests.
Directors' Duties. Under Canadian law our directors and officers have a fiduciary duty to act honestly and in good faith in the best interests of the company. In determining whether they are acting in the best interests of the company, directors may consider the interests of various stakeholders, including the interests of our shareholders, employees, suppliers, creditors and customers. They can also consider the long-term and short-term interests of the company and our shareholders, including the possibility that these interests may be best served by our continued independence. Our directors may resist a change or potential change in control if they, by a majority vote of a quorum, determine that the change or potential change is opposed to or not in our best interest. Our board of directors may consider these interests or have reasonable grounds to believe that, within a reasonable time, any debt which might be created as a result of the change in control would cause our assets to be less than our liabilities, render us insolvent, or cause us to file for bankruptcy protection
Amendments to Bylaws. Under Canadian law, our board of directors may adopt, alter, amend, or repeal and replace our bylaws, however, any such change requires the approval of the shareholders of the company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
Loan Agreements
Mr. Chaaban has made several loans to the Company. In March 2018, Mr. Chaaban fully assigned and transferred all rights, title, and interests in his loans and related accrued interest due from CEN to his spouse:
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In December 2014, a loan of $113,348 which bears interest at 10% per annum and is unsecured. This note was due December 31, 2015 but it has been extended until December 31, 2018.
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In 2015, several notes aggregating $108,453 which bears interest at 10% per annum. These notes are due December 31, 2018.
●
In 2016, Bill Chaaban made four additional loans with an aggregate principal balance of approximately $12,505 which bears interest of 10% per annum. These notes are due December 31, 2018.
●
Two convertible notes totaling $1,388,122 which bear interest at 12% per annum. These notes are due December 31, 2018 and have conversion options totaling 871,576 common shares.
On July 12, 2017, the Company elected Harold Aubrey de Lavenu, Alex Tarrabain, and Joe Byrne to serve as Directors on the Board. These individuals hold long term convertible notes payable issued prior to their election of $878,368, $48,000, and $224,191, respectively. The notes payable to Harold and Alex bear interest at 5% and the notes payable to Joe bear interest at 12% per annum and are convertible to common shares with various maturity dates.
In January 2018, Joe Byrne and his spouse, along with Alex Tarrabain, made short-term loans totaling $150,000 and $75,000, respectively, to the Company. The short-term notes bear interest in the form of common shares at a rate of 1,000 common shares per $25,000 per month and mature monthly.
During 2014 and 2016, a former director of Creative Edge Nutrition, Inc., the former parent company, made loans with an aggregate principal balance of $601,500 which bear interest at 10% per annum. These notes are due December 31, 2018.
During October 2017, R&D Labs Canada, Inc, whose President is Bill Chaaban and which is owned by Mr. Chaaban’s spouse, made a loan of $300,000 to the Company which bears interest at 8% per annum. This note is due October 2, 2019.
Leases
The Company leases the office space in Windsor, Ontario from R&D Labs Canada, Inc., whose President is Bill Chaaban.
Controlling Interest in Cen Biotech Ukraine.
On December 14, 2017, the Company entered into a Controlling Interest Purchase Agreement (the “Agreement”) with Bahige (Bill) Chaaban and Usamakh Saadikh.
Under the terms of the Agreement, the Company will acquire (the “Acquisition”) 51% of the outstanding equity interests in Cen Biotech Ukraine LLC (“Cen Ukraine”), a corporation that is organized and has its principal offices in 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 April 16, 2019 as the Company needs to raise additional funds in order to proceed with the closing. The Acquisition was unanimously approved by the independent members of the Board of Directors of the Company. Consummation of the Acquisition is subject to the conditions specified in the Agreement, including the receipt by the Company of the audited financial statements of Cen Ukraine, prepared in accordance with U.S. GAAP.
Advances to Cen Biotech Ukraine
There are advances of $875,328 and $775,328 to CEN Ukraine as of December 31, 2018 and 2017, respectively, which were made for the purpose of funding the operations of CEN Ukraine.
Other
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 through 2026.
During the years ended December 31, 2018 and 2017, the Company incurred consulting fees with certain board members and officers totaling $150,778 and $767,249, respectively. As of December 31, 2018 and 2017, $0 and $11,986, respectively, was payable to these related parties for consulting charges.
Director Independence
For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 4200(a)(15). See “Directors, Executive Officers and Corporate Governance”-“Director Independence”.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The following table sets forth the aggregate fees billed to the Company by its independent registered public accounting firms for the fiscal years ended December 31, 2018 and 2017.
The category of “Audit fees” includes fees for our annual audit, quarterly reviews and services rendered in connection with regulatory filings with the SEC, such as the issuance of comfort letters and consents. The Company paid Mazars LLP USA audit fees amounting to $123,855 in 2018. The Company paid Thayer O’Neal audit fees amounting to $74,377 in 2017.
The category of “Audit-related fees” includes employee benefit plan audits, internal control reviews and accounting consultation.
The category of “Tax fees” includes tax compliance, tax advice, tax planning. The Company paid Zeifmans tax fees amounting to $5,000 in 2018. The Company paid Gerald Duthie tax fees amounting to $12,594 in 2017.
The Company did not incur any fees payable to its independent registered public accounting firm for professional services for tax compliance, tax advice, and tax planning during the fiscal years ended December 31, 2018 and 2017.
The category of “All other fees” generally includes advisory services related to accounting rules and regulations.
All of the professional services rendered by principal accountants for the audit of our annual financial statements that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for last two fiscal years were approved by our board of directors.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The financial statement schedules and exhibits filed as part of this Annual Report on Form 10-K are as follows:
a. Exhibits
___________________
*Filed herewith.
b. Financial Statement Schedules
None
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 16, 2019
By:
/s/ Joseph Byrne
Name: Joseph Byrne
Title: Chief Executive Officer (principal executive officer)
Dated: April 16, 2019
/s/ Richard Boswell
Name: Richard Boswell
Title: Chief Financial Officer (principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: April 16, 2019
/s/ Bahige (Bill) Chaaban
Name: Bahige (Bill) Chaaban
Title: Director
Dated: April 16, 2019
/s/ Joseph Byrne
Name: Joseph Byrne
Title: Director
Dated: April 16, 2019
/s/ Richard Boswell
Name: Richard Boswell
Title: Director
Dated: April 16, 2019
/s/ Brian Payne
Name: Brian Payne
Title: Director
Dated: April 16, 2019
/s/ Harold Aubrey de Lavenu
Name Harold Aubrey de Lavenu
Title: Director
Dated: April 16, 2019
/s/ Ameen Ferris
Name: Ameen Ferris
Title: Director
Dated: April 16, 2019
/s/ Donald Strilchuck
Name: Donald Strilchuck
Title: Director
Dated: April 16, 2019
/s/ Alex Tarrabain
Name: Alex Tarrabain
Title: Director
Dated: April 16, 2019
/s/ Dr. Usamakh Saadikh
Name: Dr. Usamakh Saadikh
Title: Director
Consolidated Financial Statements:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of CEN Biotech, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of CEN Biotech, Inc. and subsidiary (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, shareholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph Regarding Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, the Company has incurred significant operating losses and negative cash flows from operations since inception. The Company also had an accumulated deficit of $35,655,053 at December 31, 2018. The Company is dependent on obtaining necessary funding from outside sources, including obtaining additional funding from the sale of securities in order to continue their operations. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 4. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Mazars USA LLP
We have served as the Company’s auditor since 2018.
New York, New York
April 16, 2019
CEN BIOTECH, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2018 and 2017
CEN BIOTECH, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders’ Deficit
CEN BIOTECH, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31
CEN BIOTECH, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
(All amounts are in US dollars unless otherwise stated.)
NOTE 1 - NATURE OF BUSINESS
CEN Biotech, Inc. (“CEN”) was incorporated in Canada on August 4, 2013 as a subsidiary of Creative Edge Nutrition, Inc. (“Creative”), a public company incorporated in Nevada. Creative distributed the shares of CEN common stock on a pro rata basis to the Creative shareholders (“Spin Off Distribution”) on February 29, 2016, at which time CEN became a stand-alone public company. The Spin Off Distribution resulted in the recording of a net shareholders’ deficit of $5,807,665 as a result of the liabilities exceeding the assets. Due to common control and the related party nature of the transaction, the transaction was recorded as if the transaction occurred on January 1, 2016 at the carrying value of CEN.
The consolidated financial statements also include the accounts of CEN Holdings, Inc. (“CEN Holdings”), a Michigan corporation that was incorporated on May 13, 2016 as a wholly-owned subsidiary of the Company and was dissolved on March 20, 2017. The consolidated financial statements also include the accounts of Eastern Starr Biotech, Inc. (“Eastern Starr”), a Georgia corporation that was acquired on August 22, 2017 as a wholly-owned subsidiary of CEN. Intercompany account balances and transactions are eliminated in the consolidated financial statements.
Prior to the Spin Off Distribution on February 29, 2016, 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, CEN’s application for a license to produce marijuana for medical purposes was formally rejected by Canadian regulatory authority. CEN filed an action against the Attorney General of Canada in the Ontario Superior Court of Justice.
CEN is focused on the manufacturing, production and development of products within the cannabis industry, including the LED lighting technology and hemp products. The Company intends to explore the usage of hemp, which it intends to cultivate for usage in industrial, medical and food products. CEN intends to explore the usage of hemp, which it intends to cultivate for usage in industrial, medical and food products.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
CEN’s consolidated financial statements include the accounts of CEN, CEN Holdings, and Eastern Starr (collectively, the “Company”). CEN Holdings’ purpose was to ease and facilitate US banking transactions through March 2017. Eastern Starr’s purpose is to facilitate future growth opportunities in the LED lighting sector. All material intercompany transactions are eliminated in consolidation.
Basis of Accounting
The Company’s consolidated financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America. The functional currency of the Company is the U.S. dollar.
Use of Estimates and Assumptions
The accompanying consolidated financial statements include certain estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements (including intangible assets), and the reported amounts of expenses during the reporting period, including stock-based compensation. Accordingly, actual results may differ from those estimates.
Cash and Cash Equivalents
For purposes of the balance sheet and statement of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents.
Property, Plant and Improvements
Property, plant and improvements are recorded at cost. Depreciation and amortization is provided using the straight-line method over the estimated useful lives or term of the assets, which range from 5 to 7 years.
The cost of asset additions and improvements that extend the useful lives of property, plant and improvements are capitalized. Routine maintenance and repair items are charged to current operations. The original cost and accumulated depreciation of asset dispositions are removed from the accounts and any gain or loss is reflected in the statement of operations in the period of disposition.
The Company reviews long-lived assets to assess recoverability using undiscounted cash flows. When certain events or changes in operating or economic conditions occur, an impairment assessment is performed on the recoverability of the carrying value of these assets. If the asset is determined to be impaired, the loss is measured based on the difference between the asset's fair value and its carrying value. If quoted market prices are not available, Cen estimates fair value using a discounted value of estimated future cash flows.
Intangible Assets
Intangible assets include a patent with a definite useful life and is amortized over 16 years. Management annually reviews this asset for impairment when circumstances indicate the carrying amount of an asset may not be recoverable based on the undiscounted cash flows of the asset. If the carrying amount of an asset may not be recoverable, a write-down to fair value is recorded. Fair values are determined based on the discounted cash flows, or external appraisals, as applicable.
Impairment of Long-Lived Assets
A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. See Note 6 for impairment charges taken in 2018 related to leasehold improvements. There were no impairment charges taken during the year ended December 31, 2017.
Research and Development Expenditures
CEN expenses all research and development expenses when incurred. Research and development expenses were approximately $41,000 and $32,000 in 2018 and 2017, respectively.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences between the financial statement and income tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the year plus or minus the change during the year in deferred tax assets and liabilities.
Foreign Currency Transactions and Balances
Foreign currency transactions in Canadian dollars are converted in the Company’s consolidated financial statements to U.S. dollars at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are subsequently remeasured at the balance sheet date exchange rate into the functional currency. All gains and losses resulting from the settlement of foreign currency transactions and from the re-measurement of monetary assets and liabilities denominated in foreign currencies are included in the consolidated statements of operations.
Stock-Based Compensation
The fair value of restricted stock awards granted to employees and non-employees is determined on the grant date and compensation is recognized ratably over the requisite service period equal to the fair value of the award.
The Company accounts for restricted stock awards issued to employees and non-employees in accordance with the authoritative guidance in ASC Topic 718, Compensation-Stock Compensation (ASC 718). ASC 718 requires all stock-based payments to employees, including grants of employee stock options and modifications to existing stock awards, to be recognized in the statements of operations and comprehensive loss based on their grant date fair values. The Company adopted ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, effective January 1, 2018, which aligns the accounting treatment of nonemployee awards with employee awards.
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 2018 and 2017, the common stock equivalents of the convertible note agreements were not included in diluted earnings per share computations because their effect was antidilutive.
NOTE 3 - NEW ACCOUNTING STANDARDS
Adoption of New Accounting Standards
On January 1, 2018, the Company adopted the new revenue recognition standard which requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. The Company is still in its startup phase and is not generating revenues at this time; therefore, this standard has no impact on its consolidated financial statements until revenues are generated. When revenues are generated, the Company will follow the provisions of the new standard.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to mainly change the accounting for investments in equity securities and financial liabilities carried at fair value as well as to modify the presentation and disclosure requirements for financial instruments. The ASU is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. Adoption of the ASU is retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. The adoption of this pronouncement did not have an impact on the Company’s financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services for nonemployees. The ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. As a result of the early adoption of this pronouncement, the Company measures these nonemployee awards at fair value on the grant date. The adoption of this pronouncement did not have a significant impact on the Company’s financial statements.
Accounting Standards Issued but Not Yet Adopted
In February 2016, the FASB issued an ASU which requires lessees to recognize lease assets and lease liabilities arising from operating leases on the balance sheet. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018 using a modified retrospective approach, with early adoption permitted. The Company has evaluated the standard to determine the impact of its adoption, using the modified retrospective approach, effective January 1, 2019 on its consolidated financial statements and expects that its operating leases will be recognized as operating lease liabilities and right-of-use assets of approximately $256,000. The cumulative adjustment to retained earnings is not expected to be significant.
NOTE 4 - GOING CONCERN UNCERTAINTY / MANAGEMENT PLANS
The accompanying consolidated financial statements have been prepared in contemplating continuation of the Company as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, a substantial doubt has been raised with regard to the ability of the Company to continue as a going concern. The Company has incurred significant operating losses and negative cash flows from operations since inception. The Company had an accumulated deficit of $35,655,053 at December 31, 2018 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 9, 10, 11, and 12. The Company will be dependent upon raising additional capital through placement of our common stock, notes or other securities in order to implement its business plan or additional borrowings, including from related parties. There can be no assurance that the Company will be successful in either situation in order to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
The Company’s cash position may not be sufficient to support the Company’s daily operations or its ability to undertake any business activity that will generate net revenue.
NOTE 5 - PROPERTY, PLANT AND IMPROVEMENTS, NET
Property and equipment, net consists of the following as of December 31:
Depreciation and amortization expense was $14,230 and $1,767 for the years ended December 31, 2018 and 2017, respectively.
NOTE 6 - IMPROVEMENTS IN PROCESS
Property and improvements in development as of December 31, 2017, consisted almost entirely of improvements to leased facilities at 20 North Rear Road. These represent the capitalized costs the Company incurred in constructing the improvements.
An impairment assessment during the fourth quarter of 2018 concluded the investment at 20 North Rear Road was substantially impacted by the changes in Canada’s Medical Marihuana Purposes Regulations (MMPR) and the Company reported impairment charges of $1,270,115 in 2018 based upon the assessment related to specialty use elements of the improvements and that at this time, the Company cannot make the final additions that will be necessary for the site to function as a growing space. There were no such impairments in 2017.
During 2018, $160,724 of improvements in process related to the Company’s main office, which existed as of December 31, 2017, were placed into service and transferred into property and equipment.
NOTE 7 - ADVANCES TO CEN BIOTECH UKRAINE
At December 31, 2018 and 2017, the Company had advances of $875,328 and $775,328 respectively, to CEN Biotech Ukraine, LLC, a related party, (see Note 15). 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 8 - 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.
Material consideration given by Company was: (a) Shares of CEN common stock equal to $5 million upon commencement of public trading (b) The transfer of real properties located at 135 North Rear Road, Lakeshore, Ontario, Canada having a fair value of $2,161,467 and 1517-1525 Ridge Road having a purchase cost (including other related disbursements) to the Company of $202,666.
The patent remains in the name of Tesla Digital, Inc. until full settlement of the terms of the agreement. In the interim, pursuant to an updated agreement executed on April 15, 2019 between the Company and the Sellers, CEN has reaffirmed the rights to use the patented technology.
In addition, the Company agreed to employ Stevan Pokrajac, by an LED subsidiary that the Company plans to form, but which has not yet been formed, in connection with the development of the acquired technology with compensation equal to $200,000 per year, commencing with the start of operations.
In March 2018, the Tesla agreement was amended to replace the $5 million stock consideration commitment with a commitment to issue one million registered shares of CEN common stock with a closing date of September 30, 2018. On October 4, 2018, this agreement was amended to extend the closing date to December 15, 2018. As described in Note 24, the agreement was subsequently amended to extend the closing date 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 December 31, 2018, the fair value of this liability was $1,010,000. This liability will be remeasured at each reporting date using the current fair value of CEN’s common shares.
The Company intends to explore using the patented LED Lighting Technology across manufacturing operations and licensing opportunities across multiple industries such as horticultural, automotive, industrial and commercial lighting. The assets acquired, other than the patent, included certain machinery and raw materials, which were old and non-functioning and accordingly, had no fair value.
The intangible assets consists of the following as of December 31:
As of December 31, 2018 and 2017, there is no impairment expense recognized based on the Company’s expectations that it will be able to monetize the patent.
The lighting patent is being amortized straight-line over 16 years. Expected amortization expense is $424,812 per year through 2031, with the remaining $283,215 to be amortized in 2032.
NOTE 9 - LOANS PAYABLE
Loans payable consist of the following at December 31:
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 2018, interest in the form of 76,400 common shares were issued to individuals in connection with interest terms of the above loans and related loan extensions made to CEN. Accordingly, $54,388 in interest expense and additional paid-in capital was recorded. No such common shares were issued during 2017.
NOTE 10 - LOANS PAYABLE- RELATED PARTY
Loans payable - related party consists of the following at December 31:
In March 2018, Bill Chaaban, President of CEN, fully assigned and transferred all rights, title, and interests in his loans and related accrued interest due from CEN to his spouse.
Attributable related party accrued interest was $357,373 and $248,100 as of December 31, 2018 and 2017, respectively. Interest expense attributable to related party loans was $184,250 and $89,892 in 2018 and 2017, respectively.
During 2018, 108,000 common shares were issued to related parties in connection with interest terms of the above loans made to CEN. Accordingly, $77,490 in related party interest expense, which is included above, and additional paid-in capital was recorded. No such common shares were issued during 2017.
NOTE 11 - CONVERTIBLE NOTES
Convertible notes payable consists of the following at December 31:
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 3,019,851 common shares.
As of April 16, 2019, we are currently in default of $1,318,287 of convertible notes payable, which are convertible into 827,402 shares of common stock.
NOTE 12 - CONVERTIBLE NOTES - RELATED PARTY
Convertible notes - related party consists of the following at December 31:
In March 2018, Bill Chaaban, President of CEN, fully assigned and transferred all rights, title, and interests in his loans and related accrued interest due from CEN to his spouse.
Attributable related party accrued interest was $588,854 and $344,801 as of December 31, 2018 and 2017, respectively. Interest expense attributable to related party convertible notes was $246,568 and $246,247 in 2018 and 2017, respectively.
These notes may be converted at the option of the note holder at any time after registration of CEN’s common stock upon written notice by the note holder. These notes are convertible into a total of 1,586,676 common shares.
As of April 16, 2019, we are currently in default of $926,368 of convertible notes payable, which are convertible into 578,980 shares of common stock.
NOTE 13 - 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 years ended December 31:
As of December 31, 2018, the Company has net operating loss carry forwards of approximately $36,500,000 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 consolidated financial statements, because the Company believes that it is more likely than not that the carryforwards will expire unused and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards. The deferred tax asset and associated valuation allowance are as follows for the years ended December 31:
All other temporary differences are immaterial both individually and in the aggregate to the 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 December 31, 2018, there are no uncertain income tax positions taken or expected to be taken that would require recognition of a liability or disclosure in the 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 14 - 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.
On December 11, 2017, CEN entered into a share repurchase agreement with the Company's President, pursuant to which the Company repurchased from Mr. Chaaban 99,286 shares of special voting stock in the capital of the Company, at a purchase price in the aggregate amount of $9.93. Each share of the special voting stock was entitled to 500 votes. Accordingly, all of the special voting stock owned by Mr. Chaaban has been redeemed and retired.
As of December 31, 2018, 4,606,527 shares of common stock are committed to the holders of the convertible notes.
On November 27, 2018, the Company executed a share repurchase agreement with James Robinson, pursuant to which the Company repurchased from Mr. Robinson 714 shares of special voting stock in the capital of the Company, at a purchase price in the aggregate amount of $0.07. The title of the class of such shares is “Special Voting” shares of the Company. Each such share of capital stock was entitled to 500 votes. Accordingly, all of this class of special voting stock, which was the only special voting stock of the Company, has been redeemed, retired and cancelled.
NOTE 15 - RELATED PARTY TRANSACTIONS
The Company has received loans from several related parties, as described above in Notes 10 and 12.
There are advances of $875,328 and $775,328 to CEN Ukraine as of December 31, 2018 and 2017, 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 April 16, 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 years ended December 31, 2018 and 2017, the Company incurred consulting fees with certain Board Members and Officers totaling $150,778 and $767,249, respectively. As of December 31, 2017, $11,986 was payable to these related parties for consulting charges. No such amounts were payable as of December 31, 2018.
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 December 31, 2018, however, management expects this balance to be collectible. Due to the related party relationship between CEN and R&D Labs Canada, Inc. via Bill Chaaban, the loss on the transaction was considered to be an equity transaction and therefore was included as a distribution of paid-in capital within the consolidated statements of shareholders’ equity during 2017.
NOTE 16 - LEASE (INCLUDING RELATED PARTIES)
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. As further described in Note 6, these improvements were fully impaired during 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, as further described in Note 6, the remaining deferred lease asset was fully expensed in 2018. During 2018 and 2017, lease expenses of $253,695 and $105,332, respectively, related to this agreement were recognized within general and administrative expenses.
Amounts due at December 31, 2018 for the remaining three years of the lease are as follows:
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. During 2018 and 2017, lease expenses of approximately $24,000 and $6,000, respectively related to this agreement were recognized within general and administrative expenses.
Amounts due at December 31, 2018 for the next five years and thereafter of the lease are as follows:
NOTE 17 - STOCK BASED COMPENSATION
Adoption of Equity Compensation Plan
On November 29, 2017, the Board adopted the 2017 Equity Compensation Plan (the “Plan”) providing for the granting of options to purchase shares of common stock, restricted stock awards and other stock-based awards to directors, officers, employees, advisors and consultants. The Company reserved 20,000,000 shares of common stock for issuance under the Plan. The Plan is intended to provide equity incentives to persons retained by our Company.
Equity Compensation Grants
On November 30, 2017, the Company granted a one-time equity award (“Equity Award”) of 20,000 restricted shares of the Company’s common stock pursuant to a Restricted Stock Agreement, to each of the following executives and directors of the Company: Bahige “Bill” Chaaban, Chairman of the Board and President of the Company; Joseph Byrne, Chief Executive Officer and Director; Richard Boswell, Senior Executive Vice President, Chief Financial Officer and Director; Brian Payne, Vice President and Director; Donald Strilchuck, Director; Harold Aubrey de Lavenu, Director; Alex Tarrabain, Director; and Ameen Ferris, Director. The Equity Awards vested immediately.
In addition, as part of this one-time equity award, Donald Strilchuck, Director, received an additional 1,000,000 restricted shares of the Company's common stock for security consulting services, of which 550,000 vested immediately and the remaining vesting ratably each month over the next 36 months. Other individuals received a total of 1,870,000 restricted shares of the Company's common stock for consulting services performed, of which 1,330,000 vested immediately and the remaining vesting ratably each month over the next 36 months. The expense related to the restricted stock awarded to non-employees for services rendered was recognized on the grant date.
On June 7, 2018, the Company elected Dr. Usamakh Saadikh to serve as a director of the Company. As compensation for his role as a Director, the company granted a one-time equity award of 20,000 shares of the Company’s common stock. This award vested immediately.
On June 19, 2018, the Company entered into an agreement with a law firm for the payment of its services under which the Company issued 125,000 shares of its common stock. This award vested immediately. The expense related to the restricted stock awarded to non-employees for services rendered was recognized on the grant date.
On December 31, 2018, the Company issued 12,120 shares of its common stock to individuals for the payment of their services. These awards vested immediately. The expense related to the stock awarded to non-employees for services rendered was recognized on the grant date.
Employment Agreements
On November 30, 2017, employment agreements were entered into with four key members of management:
• Under the Employment Agreement with Bahige (Bill) Chaaban, President of the Company, Mr. Chaaban will receive compensation in the form of a base annual salary of $31,200 and a grant of 8,750,000 shares of restricted stock of the Company, of which 7,400,000 vested immediately and the remaining vesting ratably each month over the next 36 months.
•
Under the Employment Agreement with Joseph Byrne, Chief Executive Officer of the Company, Mr. Byrne will receive compensation in the form of a base annual salary of $31,200 and a grant of 1,250,000 shares of restricted stock of the Company, of which 325,000 vested immediately and the remaining vesting ratably each month over the next 36 months.
•
Under the Employment Agreement with Richard Boswell, Senior Executive Vice President and Chief Financial Officer of the Company, Mr. Boswell will receive compensation in the form of a base annual salary of $31,200 and a grant of 4,500,000 shares of restricted stock of the Company, of which 4,140,000 vested immediately and the remaining vesting ratably each month over the next 36 months.
•
Under the Employment Agreement with Brian Payne, Vice President of the Company, Mr. Payne will receive compensation in the form of a base annual salary of $31,200 and a grant of 750,000 shares of restricted stock of the Company, of which 300,000 vested immediately and the remaining vesting ratably each month over the next 36 months.
Restricted Stock Awards
The grant-date fair value of the restricted shares noted in the employment agreements and equity compensation grants sections above was $102,141 and $11,333,600 for grants in 2018 and 2017, respectively. The grant-date fair value is calculated utilizing an enterprise valuation model as of the date the awards are granted. During 2017, 14,317,500 of these shares vested, with the remaining restricted stock units of 3,962,500 shares vesting pro-rata over the requisite service period, which is generally three years from the grant-date. In addition to the 157,120 shares that were granted and immediately vested during 2018, an additional 1,350,000 shares vested. Non-vested restricted stock awards participate in dividends and recipients are entitled to vote these restricted shares during the vesting period.
Compensation expense, broken out by allocation, recognized in connection with the restricted stock awards was as follows for the years ended December 31:
Non-vested restricted stock award activity for the years ended December 31, 2018 and 2017 are as follows:
The fair value of the restricted stock grants was based on the valuation of a third-party specialist. Unrecognized compensation expense related to restricted stock amounted to approximately $1,298,900 as of December 31, 2018. This expense will be recognized over vesting period of the respective awards.
NOTE 18 - EASTERN STARR
On August 22, 2017, CEN entered into agreement (“Agreement”) with Incumaker, Inc. (“Incumaker”), the sole shareholder of Eastern Starr. Pursuant to the Agreement, CEN purchased all of the outstanding equity interests in Eastern Starr, through consideration in the form of payment made by CEN of approximately $3,000 of Incumaker expenses related to the transaction. The transaction was recorded as an expense in CEN’s books. The transaction was made for the purpose of facilitating growth in the LED lighting sector.
NOTE 19 - OTHER RECEIVABLE
In May 2017, as amended on June 30, 2018, CEN entered into an agreement with Clear Com Media, Inc. ("Clear Com") to provide a line of credit to Clear Com in amounts up to CAD $1,000,000 ($733,000) through June 30, 2020 (maturity date) at a rate of 2% per annum. No allowance was considered necessary as of December 31, 2018. The agreement was entered into to support the development of technologies that may be of future value to the Company.
NOTE 20 - 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 December 31, 2018 and 2017. Common stock equivalents that were excluded for the years ended December 31, 2018 and 2017 are as follows:
NOTE 21 - 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 22 - FAIR VALUE DISCLOSURES
Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework that prioritizes and ranks the level of observability of inputs used in measuring fair value.
The fair value of the Company’s financial instruments are as follows:
The fair values of other receivables (including related accrued interest), note receivable - related party, and advances to CEN Biotech Ukraine, LLC approximates carrying value due to the terms of the instruments.
The fair value of the loans payable approximates carrying value due to the terms of such instruments and applicable interest rates.
The fair value of convertible notes payable is based on the par value plus accrued interest through the date of reporting due to the terms of such instruments and interest rates.
It is not practicable to estimate the fair value of loans payable - related parties and convertible notes payable - related parties due to their related party nature.
The fair value of the patent acquisition liability in 2018 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.
NOTE 23 - 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 April 16, 2019, this transaction has not closed.
NOTE 24 - SUBSEQUENT EVENTS
On April 3, 2019, the Company entered into an amendment to the Share Purchase Agreement dated August 31, 2016, and executed September 12, 2016, as amended, between CEN Biotech, Inc. and Stevan Pokrajac and Tesla Digital Inc. and Tesla Digital Global Group Inc., which extended the closing date of the agreement to December 31, 2019.
Since December 31, 2018 the Company has issued 7 new convertible notes totaling $200,675 convertible to 125,422 common shares.