Note 3 - Advances to CEN Biotech Ukraine and Acquisition of Clear Com Media

6 Months Ended

Jun. 30, 2022

Notes to Financial Statements

Business Combination Disclosure [Text Block]

NOTE 3 – ADVANCES TO CEN BIOTECH UKRAINE AND ACQUISITION OF CLEAR COM MEDIA

At June 30, 2022 and December 31, 2021, the Company had advances of $1,229,328 and $1,229,328, respectively, to CEN Biotech Ukraine, LLC, a related party (see Note 11). The advances were for the purpose of funding the operations of CEN Biotech Ukraine, LLC.

Bahige (Bill) Chaaban, our former Chief Executive Officer and member of our Board of Directors, and Usamakh Saadikh, a former member of our Board of Directors, each directly own 25.5% of CEN Ukraine respectively. The remaining 49% of CEN Ukraine is owned by XN Pharma, which is an entity jointly owned by Bahige (Bill) Chaaban and Usamakh Saadikh. Bahige (Bill) Chaaban and Usamakh Saadikh do not currently hold any positions with CEN Ukraine. CEN Ukraine is operated and controlled by its sole director. Pursuant to Ukrainian law, shareholders of a company do not have the ability to control the company or the actions of its director. CEN Ukraine is operated under the direction of its management pursuant to the guidelines of Ukrainian law. These loans are unsecured, non-interest bearing, and are due on demand.

CEN acquired CCM on July 9, 2021. The results of operations for CCM have been included in the accompanying consolidated financial statements from that date forward. The acquisition was made for the purpose of providing revenue to support CEN operations through the development, marketing and sales of certain digital products.  Additionally, CCM will provide in-house IT support functions for CEN activities.

The merger was accounted for as a business combination using the acquisition method of accounting under the provisions of Accounting Standards Codification (ASC) 805, “Business Combinations” (ASC 805), with CEN representing the accounting acquirer under this guidance. ASC 805 requires, among other things, an assignment of the acquisition consideration transferred to the sellers for the tangible and intangible assets acquired and liabilities assumed, using the bottom-up approach, to estimate their value at acquisition date. Any excess of the fair value of the purchase consideration over these identified net assets is to be recorded as goodwill.

The aggregate consideration for the acquisition of CCM was 4,000,000 shares of CEN common stock, which were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Act”), in reliance upon exemptions from the registration requirements of the Act in transactions not involving a public offering, and which were valued at $2,120,000 based upon the closing stock price on July 9, 2021. The purchase price accounting was still in process as of September 30, 2021, our most recently reported quarterly interim reporting. However, as of December 31, 2021, subsequent adjustments to the initial purchase price accounting due to receipt of final appraisal reports and other adjustments resulted in an increase in accounts receivable of approximately $8,000, a decrease of identifiable intangibles by approximately $168,000, and an increase in current financial liabilities by approximately $23,000, with a corresponding increase to goodwill of approximately $184,000. The decreased value of identifiable intangibles, had it been reflected in the September 30, 2021 reporting, would have resulted in a decrease to accumulated amortization and associated amortization expense of approximately $15,000. The following represents the adjusted fair values of the assets acquired and the liabilities assumed by CEN in the transaction:

Cash	$	259,470
Accounts receivable		210,536
Property and equipment		97,911
Other assets		244,540
Identifiable intangibles		456,855
Current financial liabilities		(344,591	)
Other long-term liabilities		(140,078	)
Total identifiable net assets		784,643
Goodwill		1,335,357
Net assets acquired	$	2,120,000

Identified intangible assets acquired include trade names, customer relationships, and product technology whose fair value of $456,855 is based on an appraisal report utilizing a combination of market, income, and multi-period excess earnings methods. These trade names and customer relationships are being amortized over useful lives ranging of 3 and 7 years, respectively, and the product technology is not yet being amortized as not yet in service. These identifiable intangible assets will be reviewed for impairment at least annually or more frequently if indicators of impairment exist.

Amounts recognized as goodwill are expected to be fully deductible for Canadian income tax purposes. All goodwill has been included within the Digital segment.

Costs related to the acquisition, which include legal, accounting, and valuation fees, in the amount of approximately $80,000 have been charged directly to operations and are included in general and administrative expenses in the 2021 consolidated statement of operations.

Supplemental proforma financial information

The unaudited financial information in the table below summarizes the combined results of operations of CEN and CCM on a pro forma basis, as though the companies had been combined as of the January 1, 2020. These pro forma results were based on estimates and assumptions, which we believe are reasonable. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2020. The pro forma financial information assumes the 4,000,000 shares of CEN common stock were issued on January 1, 2020 and includes adjustments to amortization for acquired intangible assets and income tax expense.

The pro forma financial information for the year ended December 31, 2021 combines the results of CEN and CCM for 2021, which include the results of CCM subsequent to July 9, 2021, and the historical results for CCM for the period of January 1, 2021 to July 8, 2021. The pro forma financial information for the year ended December 31, 2020 combines CEN’s historical results for 2020 with the historical results of CCM for 2020.

The following table summarizes the pro forma financial information (unaudited):

	Years Ended
	December 31, 2021			December 31, 2020
Revenue	$	1,305,985		$	1,242,676
Operating expenses		20,437,863			3,720,279
Loss from operations		(19,131,878	)		(2,477,603	)
Other income, net		57,949			16,950,653
(Loss) income before income taxes		(19,073,929			14,473,050
Income tax expense		(61,032	)		32,892
Net (loss) income	$	(19,012,897		$	14,440,158
Net (Loss) Income Per Share
Basic	$	(0.43	)	$	0.46
Diluted	$	(0.43	)	$	0.39
Weighted Average Number of Shares Outstanding
Basic		44,488,649			31,264,072
Diluted		44,488,649			36,732,510