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EX-32.2 - ETHEMA HEALTH Corpf2sgrst10k040818ex32_2.htm
EX-32.1 - ETHEMA HEALTH Corpf2sgrst10k040818ex32_1.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14 OR RULE 15D-14 OF THE SECURITIES EXCHANGE - ETHEMA HEALTH Corpf2sgrst10k040818ex31_2.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14 OR RULE 15D-14 OF THE SECURITIES EXCHANGE - ETHEMA HEALTH Corpf2sgrst10k040818ex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 FORM 10-K

 

 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2016

 

or

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from  to  

 

Commission file number: 000-15078

 

Ethema Health Corporation

 

(Exact name of registrant as specified in its charter)

 

Colorado 84-1227328

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

810 Andrews Avenue

Delray Beach, Florida 33483

(Address of principal executive offices)

 

(561) 450-7679

(Registrant’s telephone number, including area code)

  

Securities registered under Section 12(b) of the Exchange Act: 

 

Title of each class

Name of each exchange on which registered
   
None N/A

 

Securities registered under Section 12(g) of the Act:

 

Common Stock, $0.01 par value per share

(Title of class) 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☐  No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ☐  No  ☒ 

 

Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒  Yes  No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No  ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, a non-accelerated file, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer Accelerated filer
Non-accelerated filer ☐  (Do not check if a smaller reporting company) Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2017, based on a closing share price of $0.06 was approximately $2,962,022. As of April 10, 2018, the registrant had 122,989,230 shares of its common stock, par value $0.01 per share, outstanding.

 

 

 

 

ETHEMA HEALTH CORPORATION  

YEAR ENDED DECEMBER 31, 2017

TABLE OF CONTENTS

 

    PAGE
PART I.      
Item 1. Business 1  
Item 1A. Risk Factors 3  
Item 1B. Unresolved  Staff Comments 3  
Item 2. Properties 3  
Item 3. Legal Proceedings 4  
Item 4. Mine Safety Disclosures 4  

 

 
PART II.      
Item 5. Market for Registrant’s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities 4  
Item 6. Selected  Financial Data 6  
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of  Operations 6  
Item 8. Financial Statements and  Supplementary Data 10  
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 11  
Item 9A. Controls and Procedures 11  
Item 9B. Other Information 11  
       
PART III      
Item 10. Directors, Executive Officers and Corporate Governance 12  
Item 11. Executive  Compensation 13  
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 15  
Item 13. Certain Relationships and Related Transactions, and Director Independence 16  
Item 14. Principal Accountant Fees and Services 17  
Part IV.      
Item 15. Exhibits and Financial Statements Schedules 19  
SIGNATURES 22  

 

 

 

 

PART I

Item 1. Business.

 

Company History

Ethema Health Corporation (the “Company” or “Ethema”), a Colorado corporation was incorporated under the laws of the State of Colorado on April 1, 1993, and is the surviving company of a merger, effective February 1, 1995, between the Company and Nova Natural Resources Corporation, a Delaware corporation (“Nova Delaware”). The merger was effectuated solely for the purpose of changing the Company’s domicile from Delaware to Colorado. At all times prior to 2001, the Company was engaged in the oil and gas exploration business. Nova Delaware was the successor entity to Nova Petroleum Corporation, a Delaware corporation, and Power Resources Corporation, a Delaware corporation, which merged in 1986 (“the 1986 Merger”). Prior to the 1986 Merger, Nova Petroleum Corporation and Power Resources Corporation had operated since 1979 and 1972, respectively. In 2001, the Company entered into the electronics business and this business was active in 2001 and 2002, as part of the Torita Group. After 2002, the Company continued with various stages of development in this business until 2010.

 

On April 1, 2010, the Company changed its principal operations from development stage electronics to healthcare services. On March 29, 2010, the Company entered into a one year consulting agreement with Greenestone Clinic Inc., a Canadian corporation (“Greenestone Clinic”), whereby Greenestone Clinic provided consulting services for the Company’s development and operation of medical clinics in the province of Ontario, Canada. Specifically, Greenestone Clinic provided medical and business expertise in the initial startup of private clinics and technical assistance to ensure that the clinics were in compliance with governmental policy and procedure requirements as well as any operational requirements. At the time of entering into this consulting agreement, Greenestone Clinic operated a clinic at the Muskoka property housing its addiction treatment clinic and provided endoscopy services. The Company started offering medical services in June 2010, offering various medical services, including endoscopy, cardiology and executive medicals, which services were subsequently sold.

 

On May 15, 2010, the Company secured a sublease of space (which was previously the Rothbart Pain Clinic) of approximately 8,000 sq. ft. to be used as the Company’s executive offices and to run an endoscopy clinic. The Endoscopy clinic was subsequently sold. The Company, through its wholly owned subsidiary GreeneStone Clinic Muskoka Inc. (“GreeneStone Muskoka”), also entered into a lease with the owner of the Muskoka premises on April 1, 2011 and provided mental health and addiction treatment services and operated an in patient addiction treatment center at this location.

 

During December 2016, the Company obtained a license to operate and provide addiction treatment healthcare services in Florida, USA. The company commenced operations under this license with effect from January 2017.

 

On February 14, 2017, the Company completed a series of transactions (referred to collectively as the “Restructuring Transactions”), including a Share Purchase Agreement (the “SPA”) whereby the Company acquired 100% of the stock of Cranberry Cove Holdings Ltd. (“CCH”), which held the real estate on which the Company’s GreeneStone Muskoka operated, an asset purchase agreement (the “APA”) and lease (the “Lease”) whereby the Company sold certain of the GreeneStone Muskoka business assets and leased the real estate to the buyer, and a real estate purchase agreement and asset purchase agreement whereby the Company purchased the real estate and business assets of Seastone Delray (the “Florida Purchase”).

 

The Share Purchase Agreement

Under the SPA, the Company acquired 100% of the stock of CCH from Leon Developments Ltd. (“Leon Developments”), a company wholly owned by Shawn E. Leon, who is the President, CEO, and CFO of the Company (“Mr. Leon”). CCH owns the real estate on which GreeneStone Muskoka is located. The total consideration paid by the Company was CDN$3,517,062, including the assumption of certain liabilities of CCH, which was funded by the assignment to Leon Developments of certain indebtedness owing to the Company in the amount of CDN$659,918, and the issuance of 60,000,000 shares of the Company’s common stock to Leon Developments, valued at US$0.0364 per share.

 

The Asset Purchase Agreement and Lease

Under the APA, the assets of the GreeneStone Muskoka were sold by the Company, through its subsidiary, GreeneStone Muskoka, to Canadian Addiction Residential Treatment LP (the “Purchaser”), for a total consideration of CDN$10,000,000, plus an additional performance payment of up to CDN$3,000,000 as a performance payment to be received in 2019 if certain clinic performance metrics are met. The Purchaser completed the sale with cash proceeds to the Company of CDN$10,000,000, of which CDN$1,500,000 will remain in escrow for up to two years to cover indemnities given by the Company. The proceeds of the GreeneStone Muskoka asset sale were used to pay down certain tax debts and operational costs of the Company and to fund the Florida Purchase, mentioned below.

 

Through the APA, substantially all of the assets of GreeneStone Muskoka were sold, leaving Ethema with only the underlying clinic real estate, which the Company, through its newly acquired subsidiary, CCH concurrently leased to the Purchaser. The Lease is a triple net lease and provides for a five (5) year primary term with three (3) five-year renewal options, annual base rent for the first year at CDN$420,000 with annual increases, an option to tenant to purchase the leased premises and certain first refusal rights.

 

1

 

 

The Florida Purchase

Immediately after closing on the sale of the assets of the Canadian Rehab Clinic, the Company closed on the acquisition of the business and real estate assets of Seastone Delray pursuant to certain real estate and asset purchase agreements This business is operated through its wholly owned subsidiary Seastone. The purchase price for the Seastone assets was US$6,070,000 financed with a purchase money mortgage of US$3,000,000, and US$3,070,000 in cash.

 

On April 4, 2017 the Company changed its Corporate name from Greenestone Healthcare Corporation to Ethema Health Corporation.

 

Recent Developments

 

On November 2, 2017, Ethema entered into an Agreement of Purchase and Sale (the “Agreement”) to purchase from AREP 5400 East Avenue LLC, a Delaware limited liability company (“Seller”) certain buildings in West Palm Beach, Florida, totaling approximately 80,000 square feet, on which the present tenant operates a substance abuse treatment center (the “Property”). The purchase price of the Property is $20,530,000, and the Company is obligated under the Agreement to make a series of nonrefundable down payments totaling $2,210,000. The closing of the transaction, which is subject to standard due diligence, conditions to closing and deliverables, is scheduled to occur on May 8, 2018 , or such earlier date as is agreed upon by the parties.

 

On December 1, 2017, Ethema and its wholly owned subsidiaries Ethema Clinic Muskoka Inc.(“previously GreeneStone Clinic Muskoka Inc.), an Ontario corporation, CCH, an Ontario corporation and Seastone, a Florida limited liability company (the “Subsidiaries”) closed on a private offering (the “Private Offering”) to raise up to USD$1,500,000 in capital. Pursuant to the Private Offering, the Company and the Subsidiaries jointly and severally issued one senior secured convertible promissory note (the “Note”), bearing a principal amount of up to $1,650,000 in total, to Leonite Capital, LLC, a Delaware limited liability company (the “Investor”). The Note bears interest at the rate of 6.5% per annum. The initial draw under the Note was $300,000 with a $150,000 original issue discount for a total of $450,000. The Company issued the Investor 1,650,000 shares of the Company’s common stock in connection with the closing and paid $20,000 of the Investor’s legal fees. The Note’s initial maturity date is June 1, 2018. During the term of the Note the Company and the Subsidiaries will be obligated to make monthly payment of accrued and unpaid interest. The Note contains Company and Subsidiary representations and warranties, covenants, events of default, and registration rights. The amounts due under the Note are convertible, at the Investors request, into shares of the Company’s common stock at an initial price of $0.06 per share, subject to adjustment.

 

On December 29, 2017, effective as of December 1, 2017, the Company and the Subsidiaries entered into an Amended and Restated Senior Secured Convertible Promissory Note (the “A&R Note”), which note amends and restates the Note to (a) extend the maturity date to December 1, 2018; (b) remove CCH as an obligor; (c) increase the interest rate by 2.00% per annum; and (d) issue an additional 250,000 shares of the Company’s common stock to the Investor. In connection with the execution of the A&R Note, the parties entered into (i) a Securities Purchase Agreement; (ii) a Warrant Agreement under which the Investor will have the right to purchase up to 27,500,000 shares of the Company’ common stock for $0.10 per share, subject to adjustment, for a period of five years (the “Warrant”); (iii) a Security and Pledge Agreement and a General Security Agreement under which the Company and the Subsidiaries will grant the Investor a blanket lien on their assets, and the Company will pledge its equity ownership in the Subsidiaries; and (iv) a First Amendment to the A&R Note, effective January 2, 2018 (the “First Amendment” and together with the foregoing agreements the Ancillary Agreements”). At the execution of the Note, the Investor funded an initial tranche of $300,000. Thereafter the Investor funded a second tranche of $156,136. Upon the execution of the A&R Note the Investor funded a third tranche of $100,000. Upon the execution of the First Amendment the Investor funded a final tranche of $850,000, with the remaining $93,764 of availability under the A&R Note, as amended, serving as a holdback pursuant to the terms of the First Amendment.

 

Corporate Structure

 

During 2017, the Company disposed of its wholly owned, operating subsidiary, GreeneStone Muskoka and formed two new subsidiaries, Seastone Delray Healthcare, LLC (“Seastone Delray”) and Delray Andrews RE, LLC (“Delray Andrews”), both Florida limited liability companies. The Company acquired, from Leon Developments, 100% of the stock of CCH, the owner of the real estate which houses Greenestone Muskoka, and subsequently leased the clinic real estate to the purchaser of the GreeneStone Muskoka assets. The Company also acquired the business of Seastone Delray and certain real property in Delray Beach, and is currently operating it through its subsidiary, Seastone Delray.

 

Employees

 

As of December 31, 2017, Ethema Health Corporation had 14 employees .

 

2

 

 

Marketing

 

The addiction treatment business in the USA operates as an Insured Healthcare service. Our marketing efforts are long term processes of establishing relationships with relevant professionals and our treatment staff. We use industry specific conferences and functions to network with these professionals.

 

Approximately 70% of our clients are sourced via the Internet. This is the single biggest focus for our marketing team, Search Engine Optimization (SEO) is very important and the Company aggressively seeks the maximum cost/benefit relationships with specialist firms in this field. We believe our marketing efforts are successful and effective.

 

Competition

 

There are a significant amount of treatment facilities in the United States, we compete with these clinics for patients who are typically covered by Insured Healthcare services.

 

Environmental Regulations

 

The Company is not currently subject to any pending administrative or judicial enforcement proceedings arising under environmental laws or regulations. Environmental laws and regulations may be adopted in the future which may have an impact upon the Company’s operations.

 

Item 1A. Risk Factors.

 

Not applicable because we are a smaller reporting company.

 

Item 1B. Unresolved Staff Comments none.

 

Item 2. Properties.

 

Ethema Executive Offices

 

The Company’s executive offices are located in our owned premises at 810 Andrews Avenue, Delray Beach, Florida, USA.

 

Greenestone Muskoka Treatment Facility

 

The Greenestone Muskoka Treatment Facility is located in Bala, Ontario at 3571 Highway 169. The property is 43 acres in size and contains approximately 48,000 square feet of buildings. The property is owned by Ethema’s wholly owned Canadian subsidiary CCH and has been leased to the new owner of the Muskoka Clinic for a term of five years, which ends on February 28, 2022. The Lease gives the tenant an option to extend for three additional five (5) year terms, an option to purchase the property at any time for a purchase price of $7,000,000 in the first thirty six (36) months of the term and thereafter at a purchase price increased by $1,500,000 for each successive year up to a maximum of $10,000,000, and a right of first refusal in the event of a sale to a third party.

 

Delray Beach Real Estate

 

The real estate acquired in Delray Beach, Florida consist of two parcels of land. The first parcel is located at 810 Andrews Avenue, Delray Beach, Florida, is 0.34 acres in size and has a two-story, 2,839 square foot CBS office building constructed in 1963. It is in good condition, and is currently used as an office for addiction treatment services. The second parcel, is located at 801 Andrews Avenue, Delray Beach, Florida, is 0.34 acres in size and has a two-story, residential condominium building containing 10 units totaling 8,844 square feet. The improvements were constructed in 1971 with the latest renovation occurring in 2014. The property was being used as a sober home.

 

3

 

 

Item 3. Legal Proceedings.

A former employee has filed suit against the Company asserting wrongful dismissal, claiming damages between CDN$43,500 and CDN$50,000 this matter was settled for CDN14,070, including applicable legal feews, the settlement remains unpaid as the plaintiff has not signed the minutes of settlement..

 

Other than disclosed above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 4. Mine Safety Disclosures. None.

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .

 

(a)Market Information

 

The Company’s common stock is quoted on the Over-the-counter Market (the “OTCQB”) under the symbol “GRST”. The Company was sponsored by the market maker Wilson Davis & Co. from Salt Lake City, Utah, which filed a Form 15c2-11 application with the Financial Industry Regulatory Authority (“FINRA”) for the Company in 2011. This application was approved by FINRA in February 2012, and Wilson Davis & Co. first quoted the stock in March 2012.

 

The following table sets forth the range of high and low bid quotations for our common stock for each of the periods indicated as reported by the OTCQB. These quotations reflect interdealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.

 

   HIGH   LOW 
     
Fiscal Year 2017          
First quarter  $0.08   $0.02 
Second quarter  $0.06   $0.03 
Third quarter  $0.09   $0.05 
Fourth quarter  $0.09   $0.05 
           
Fiscal Year 2016          
First quarter  $0.08   $0.02 
Second quarter  $0.06   $0.02 
Third quarter  $0.06   $0.03 
Fourth quarter  $0.03   $0.02 

 

Quotations on the OTCBB reflect bid and ask quotations, may reflect interdealer prices, without retail markup, markdown or commission and may not represent actual transactions.

 

(b)Holders

 

The number of record holders of the Company’s common stock as of April 11, 2018 is 144.

 

(c)Dividends

 

We have never paid any cash dividends on our common shares, and we do not anticipate that we will pay any dividends with respect to those securities in the foreseeable future. Our current business plan is to retain any future earnings to finance the expansion development of our business.

 

(d)Securities Authorized for Issuance Under Equity Compensation Plans

 

As of December 31, 2017, there were 10,000,000 common securities authorized for issuance under the Company’s 2013 Stock Option Plan (which was previously approved by security holders) of which there were 480,000 options outstanding as of December 31, 2017.

 

Recent Sales of Unregistered Securities

 

In the securities transactions described below, shares were issued pursuant to the exemptions from the registration requirements of the Securities Act of 1933, as amended, afforded the Company under Section 4(a)(2) promulgated thereunder due to the fact that the issuance did not involve a public offering because of the insubstantial number of persons involved in each offering, the size of the offering, manner of the offering and number of shares offered. Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(a) (2) of the Securities Act for these transactions.

 

4

 

 

The following is a summary of the securities transactions during the year ended December 31, 2017:

 

1.On February 2, 2017, the Company entered into a Securities Purchase Agreement with an investor whereby the Company borrowed $100,000 in exchange for a convertible promissory note of $110,000 in terms of an unsecured convertible promissory note with a maturity date of August 2, 2017. The note bore interest at a rate of 8% per annum. The note was convertible upon a repayment default, at the lower of 60% of the lowest traded price over the preceding 30 day trading period prior to the issuance of this note or 60% of the lowest traded price 30 days prior to the conversion date. The note was repaid on May 26, 2017.

 

2.On February 14, 2017, the Company issued 60,000,000 common shares valued at $2,184,000 to Leon Development Ltd, a Company controlled by our CEO, Shawn Leon, in connection with the purchase of the entire shareholding of CCH, the owner of the premises located in Bala, Ontario at 3571 Highway 169. The property is 43 acres in size and contains approximately 48,000 square feet of buildings. The property is owned by Ethema’s wholly owned Canadian subsidiary CCH and has been leased to the new owner of the Muskoka Clinic for an initial term of five years.

 

3.On May 30, 2017, the Company issued 100,000 common shares to a vendor in lieu of services rendered at a market value of $4,000 or US$0.04 per share.

 

4.On June 19, 2017, the Company, entered into a Securities Purchase Agreement with an investor whereby the Company borrowed $110,000 in exchange for a convertible promissory note of $113,500. The Note had a maturity date of March 20, 2018 and bore interest at the at the rate of eight percent per annum. The note was repaid on December 14, 2017.

 

5.During July 2017, five Series L Convertible note holders exercised their conversion rights and converted an aggregate principal amount of $375,011 into 12,500,375 shares of common stock at a conversion price or $0.03 per share.

 

6.On November 6, 2017, the company entered into a Securities Purchase Agreement with an investor whereby the Company borrowed $100,000 in exchange for a convertible promissory note of $103,000. The Note has a maturity date of August 15, 2018 and bears interest at 12% per annum. The note is convertible into shares of common stock 180 days after the issue date at a conversion price of 61% of the market price of the common stock determined by the lowest trading price in the preceding 10 day trading period.

 

7.On December 1, 2017, the Company issued 1,650,000 shares of common stock in connection with the closing of a financing of a Senior Secured Convertible Note. The shares were valued at $132,000, or $0.08 per share on December 1, 2017.

 

8.On December 29, 2017, the Company issued an additional 250,000 shares of common stock upon the amendment of the Senior Secured Convertible note, disclosed in 4 above. The shares were valued at $15,000 or $0.06 per share on December 29, 2017.

 

Penny Stock

 

The U.S. Securities and Exchange Commission (the “SEC”) has adopted rules that regulate broker dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a tollfree telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.

 

The broker dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer’s account.

 

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.

 

These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.

 

5

 

 

Item 6. Selected Financial Data.

 

Not applicable as we are a smaller reporting company.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 

Special Note Regarding Forward-Looking Statements 

 

Many of the matters discussed within this Annual Report on Form 10-K (“Annual Report”) contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) on our current expectations and projections about future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. Such risks and uncertainties include the risks noted under Part 1. “Business,” Part 1A “Risk Factors” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere. We do not undertake any obligation to update any forward-looking statements. Unless the context requires otherwise, references to “we,” “us,” “our,” and “Icagen,” refer to Icagen, Inc. and its subsidiaries.

 

Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake any obligation to update any forward-looking statements.

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates. This discussion and analysis should be read in conjunction with the Company’s financial statements and accompanying notes to the financial statements for the year ended December 31, 2017.

 

Plan of Operation

 

On February 14, 2017, and in terms of the agreements entered into on May 19, 2016, GreeneStone completed a series of transactions (referred to collectively as the “Restructuring Transactions”), including a share purchase agreement (the “SPA”) whereby Ethema acquired the stock of the company holding the Muskoka Healthcare Clinic real estate, an asset purchase agreement (the “APA”) and lease (the “Lease”) whereby the Company sold all of the Muskoka clinic business assets and leased the clinic building to the buyer, and a real estate purchase agreement and asset purchase agreement whereby Ethema purchased the real estate and business assets of Seastone Delray (the “Florida Purchase”).

The Company entered into an Agreement to purchase certain buildings in West Palm Beach, Florida, totaling approximately 80,000 square feet, on which the present tenant operates a substance abuse treatment center. The purchase price of the Property is $20,530,000. The closing of the transaction, which is subject to standard due diligence, conditions to closing and deliverables, is scheduled to occur on May 8, 2018 , or such earlier date as is agreed upon by the parties.

 

Results of operations for the year ended December 31, 2017 and the year ended December 31, 2016.

 

The company sold its Greenestone Muskoka Treatment Center effective February 17, 2017, simultaneously with the purchase of the assets and real estate of an addiction treatment center in Delray Beach, Florida. The disposal of the Greenestone Muskoka Treatment Center has been reflected as a discontinued operation in the financial statements as of December 31, 2017 and 2016 and the results of operations and cash flows for the years ended December 31, 2017 and 2016.

 

Revenue

 

Revenue was $929,416 and $0 for the years ended December 31, 2017 and 2016, respectively. The revenue in 2017 represents revenues earned from our Seastone operations, located in Delray Beach and acquired in February 2017. Revenue in the prior year is reflected under discontinued operation described below. Since this is the first year of operations for Seastone, we have no meaningful comparison.

6

 

 

Operating Expenses

 

Operating expenses was $2,382,573 and $790,880 for the years ended December 31, 2017 and 2016, respectively, an increase of $1,591.693 or 201.3%. The increase in operating expenses is attributable to:

 

General and administrative expenses of $762,325 and $144,536 for the years ended December 31, 2017 and 2016, respectively, an increase of $617,789 or 427.4%, primarily due to the operating expenses of Seastone, acquired during February 2018.
Management fees of $289,125 and $257,283 for the years ended December 31, 2017 and 2016, respectively, increased by $31,842 or 12.4%, primarily due to additional effort required by our CEO to operate the business.
Professional fees of $626,548 and $249,395 for the years ended December 31, 2017 and 2016, respectively, increased by $377,153 or 151.2%, primarily legal fees related to the Corporate restructure, the disposal of GreeneStone Muskoka’s business, the acquisition of Seastone of Delray and the acquisition of CCH during the current year.
Salaries and wages of $770,076 and $139,666 for the years ended December 31, 2017 and 2016, respectively, increased by $630,410 or 451.4%, primarily due to salaries related to the Seastone operation which was acquired in February 2017. Salaries for Greenestone Muskoka are reflected in discontinued operations in 2016.
Depreciation was $223,623 and $0 for the years ended December 31, 2017 and 2016, respectively, the depreciation consist primarily of depreciation on property, plant and equipment related to the acquisition of the assets of Seastone of Delray and the acquisition of CCH, which owns the buildings in which Canadian Addiction Residential Treatment, now operates.

 

Operating loss

 

The operating loss was $1,453,157 and $790,880 for the years ended December 31, 2017 and 2016, respectively, an increase of $662,277 or 83.7%. The increase is attributable to the movement in revenue and operating expenses discussed above.

 

Other income

 

Other income of $475,487 and $72,508 for the years ended December 31, 2017 and 2016, respectively, an increase of $402,979 or 555.8%. Other income in the current period consists of the reversal of a provision raised against a receivable on the disposal of the Endoscopy Clinic in prior years amounting to $472,368, the receivable was assigned to Leon Developments as part of the purchase consideration paid on the acquisition of CCH. Other income in the prior year represented the proceeds related to the sale of certain oil rights which belonged to the Company prior to changing its operations to that of drug rehabilitation and treatment centers.

 

Other expense

 

Other expense of $5,093,954 and $156,387 for the years ended December 31, 2017 and 2016, an increase of $4,937,567 or 3,157.3%, represents; ; i) $5,074,689 of the excess of the purchase price paid over the carrying value of the assets of CCH. This expenditure is classified as once-off compensation expense to our CEO who owns 100% of Leon Developments, the counterparty to the purchase of the CCH Subsidiary; ii) $19,265 represents the loss realized on disposing of a portion of the mortgage owned by the Company in CCH, at a discount to face value. Other expense in the prior period consists primarily of expenses incurred in operating the Seastone of Delray Clinic, in terms of a management agreement, prior to its acquisition on February 14, 2017.

 

Interest income 

Interest income of $32,074 consists primarily of interest earned on the receivable from the sale of our Endoscopy Clinic in prior years. The interest due on this receivable was reversed in prior periods due to uncertainty as to the collectability of this amount. The receivable was assigned to Leon Developments as part of the purchase consideration for CCH.

 

7

 

 

Interest expense

 

Interest expense of $367,547 and $29,504 for the years ended December 31, 2017 and 2016, respectively, an increase of $338,043 or 1,145.8% was primarily due to interest due on the mortgage loans assumed by the Company when it acquired CCH and on the purchase money mortgage loan entered into to acquire the properties associated with Seastone of Delray. In the prior year the interest expense consisted primarily of interest on the short term convertible note advanced to the Company during the prior period and subsequently paid off before the prior period end.

 

Debt discount

 

Debt discount was $668,916 and $93,244 for the year ended December 31, 2017 and 2016, respectively, an increase of $575,672 or 617.4%. The charge during the current period represents the amortization of the value of the warrants issued in terms of the convertible loan agreements entered into during December 2016 and January 2017 and the amortization of the fair value of the beneficial conversion feature of convertible notes issued to note holders during 2017, the fair value of the warrants and the beneficial conversion feature are amortized over a six to twelve month period, the term of the underlying convertible securities. The $93,244, incurred in the prior period represents the amortization of the value of warrant and original issue discount attached to a short-term loan.

 

Derivative liability movement

The derivative liability movement during the current year represents the mark to market movements of variably priced convertible notes and warrants issued during the current year. These securities are marked to market on a quarterly basis and the resultant gain or loss is booked as a derivative liability movement in the statement of operations.

 

Foreign exchange movements

 

Foreign exchange movements of $(81,031) and $811 for the years ended December 31, 2017 and 2016, represents the realized exchange gains and (losses) on monetary assets and liabilities settled during the current year as well as mark to market adjustments on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars.

 

Net income (loss) from discontinued operations

 

The net income from discontinued operations of $6,821,889 and $735,987 for the years ended December 31, 2017 and 2016, respectively, an increase of $6,085,902 or 826.9%:

 

The current year income is primarily made up as follows:

 

Operating loss of $300,439, the operations were disposed of on February 14, 2017, and the loss includes expenditure incurred to dispose of the operation.
Profit on sale of the business of the Canadian Rehab Clinic of $7,494,828 represents the excess of the proceeds received over the assets disposed of as reflected in note 1 and 3 to the consolidated financial statements.
Foreign exchange loss of $135,190 which represents the realized gains on the monetary assets and liabilities settled during each period as well as mark to market adjustments on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars.

 

Net loss

 

Net loss of $1,368,487 and $260,709 for the years ended December 31, 2017 and 2016, respectively, an increase of $1,107,778 or 424.98%, is primarily due to the profit realized on the sale of the Canadian Rehab clinic of $7,494,828, the reversal of the provision raised against the loan on sale of the Endoscopy clinic of $472,368, offset by the compensation charge of $5,074,689 relating to the acquisition of CCH, the amortization of $668,916 of debt discount during the current period and the mark-to-market movements of the derivative financial liabilities.

 

Contingency related to outstanding payroll tax liabilities

 

The Company is delinquent in filing its USA tax returns, these returns are currently being prepared by our tax advisors, although we do not anticipate any taxation liability to arise, we may be faced with penalties for failing to file tax returns timeously.

 

The Company has also not filed certain foreign assets forms due to the US Federal Government. A provision of $250,000 was made for any potential penalties due This issue is being addressed by our tax advisors together with our tax returns mentioned above. remaining liability of approximately $250,000 relates to the not filing of certain foreign assets forms. This issue is currently being addressed.

 

8

 

 

Liquidity and Capital Resources

 

The following table summarizes working capital at December 31, 2017, compared to December 31, 2016.

 

   December 31, 2017   December 31, 2016   Increase (Decrease) 
             
Current assets  $334,619   $275,575   $59,044 
Current liabilities   (6,860,178)   (3,637,111)   (3,223,067)
                
   $(6,525,559)  $(3,361,536)  $(3,164,023)

 

The increase in current assets during the current year is primarily due to the increase in receivable of $218,858 from the Seastone operations an increase in prepaid expenses of $$96,632 offset by a reduction in the discontinued operation asset of $183,219 in the prior year.

 

The increase in current liabilities, includes, a derivative liability of $2,859,832, the fair value of convertible securities which are marked-to-market on a quarterly basis. This derivative has no impact on cash flow. In addition there is a payable of approximately $2,597,000 owing primarily to Leon Developments, a company wholly owned by our CEO Shawn Leon, this payable arose primarily on the acquisition of CCH during the current year.

 

Over the next twelve months we estimate that the company will require $3.0 million in working capital as it continues to develop its Seastone of Delray business and concludes the acquisition of the 174 bed rehabilitation center located on West Palm Beach. The company may have to raise equity or secure debt. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, the Company’s liquidity risk is assessed as medium, a change from the prior years, high risk assessment, due to the settlement of the outstanding tax liabilities mentioned above.

 

9

 

 

Item 8. Financial Statements and Supplementary Data.

 

ETHEMA HEALTH CORPORATION

 

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Expressed in US$ unless otherwise indicated)

 

  PAGE
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2017 and 2016 F-2
Consolidated Statements of Operations and comprehensive loss for the year ended December 31, 2017 and 2016 F-3
Consolidated Statements of Changes in Stockholders Deficit for the years ended December 31, 2017 and 2016. F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016 F-5
Notes to the Consolidated Financial Statements F-6

 

 

10

 

 

(graphic) 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Ethema Health Corporation 

 

We have audited the accompanying consolidated balance sheets of Ethema Health Corporation (“the Company”) as of December 31, 2016 and the related consolidated statements of operations and other comprehensive loss, stockholders’ deficit and cash flows for the years ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ethema Health Corporation as of December 31, 2017 and the results of its operations and its cash flows for the years ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 6 to the consolidated financial statements, the Company has sustained net losses and has a working capital and stockholder’s deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 6. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ RBSM LLP

 

New York, NY 10022

April 17, 2018

 

F-1

 

 

ETHEMA HEALTH CORPORATION

CONSOLIDATED BALANCE SHEETS

         

   December 31, 2017   December 31, 2016 
         
ASSETS    
         
Current assets          
Cash  $339   $4,779 
Accounts receivable   218,858     
Prepaid expenses   99,342    2,710 
Discontinued operations       183,219 
Related party Receivables   16,080    84,867 
Total current assets   334,619    275,575 
Non-current assets          
Investment       110,000 
Deposit on real Estate   1,825,000      
Due on sale of subsidiary   1,191,225     
Property, plant and equipment   7,573,858     
Goodwill   1,580,000     
Cash - Restricted       74,480 
Total non-current assets   11,933,809    184,480 
Total assets  $12,268,428   $460,055 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current liabilities          
Bank overdraft  $28,927   $56,116 
Accounts payable and accrued liabilities   372,244    374,317 
Taxes payable   689,240    2,798,824 
Convertible loans   160,453    250,258 
Loans payable   152,402     
Derivative liability   2,859,832     
Related party payables   2,597,080    157,596 
Total current liabilities   6,860,178    3,637,111 
Non-current liabilities          
Loan payable   7,183,892     
Total liabilities   14,044,070    3,637,111 
           
Stockholders’ deficit          
Preferred stock - Series A; $0.01 par value, 3,000,000 authorized, nil outstanding as of December 31, 2017 and 2016.        
Preferred Stock - Series B; $0.01 par value, 10,000,000 authorized, nil outstanding as of December 31, 2017 and 2016.        
Common stock; $0.01 par value, 500,000,000 shares authorized; 122,989,230 and 48,738,855 shares issued and outstanding  as of December 31, 2017 and  2016, respectively.   1,232,393    487,389 
Additional paid-in capital   18,545,913    16,509,906 
Accumulated other comprehensive income   796,453    807,563 
Accumulated deficit   (22,350,401)   (20,981,914)
Total stockholders’ deficit   (1,775,642)   (3,177,056)
Total liabilities and stockholders’ deficit  $12,268,428   $460,055 

 

The accompanying notes are an integral part of the consolidated financial statements

 

F-2

 

 

ETHEMA HEALTH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS 

AND COMPREHENISIVE LOSS

 

   Year ended December 31, 2017   Year ended December 31, 2016 
         
Revenues  $929,416   $ 
           
Operating expenses          
General and administrative   762,325    144,536 
Management fees   289,125    257,283 
Professional fees   626,548    249,395 
Salaries and wages   770,076    139,666 
Depreciation and amortization   223,623     
Total operating expenses   2,382,573    790,880 
           
Operating loss   (1,453,157)   (790,880)
           
Other Income (expense)          
Other income   475,487    72,508 
Other expense   (5,093,954)   (156,387)
Interest income   32,074     
Interest expense   (367,547)   (29,504)
Debt discount   (668,916)   (93,244)
Derivative liability movement   (1,033,332)    
Foreign exchange movements   (81,031)   811 
Net loss before taxation from continuing operations   (8,190,376)   (996,696)
Taxation        
Net loss from continuing operations   (8,190,376)   (996,696)
Gain on disposal of business        
Operating income from discontinued operations, net of tax   6,821,889    735,987 
Net income from discontinued operations, net of tax   6,821,889    735,987 
Net loss   (1,368,487)   (260,709)
Accumulated other comprehensive loss          
Foreign currency translation adjustment   (11,110)   (126,263)
           
Total comprehensive loss  $(1,379,597)  $(386,972)
           
Basic loss per common share from continuing operations  $(0.08)  $(0.02)
Basic income per share from discontinued operations  $0.06   $0.02 
Basic loss per common share  $(0.02)  $ 
Diluted loss per common share from continuing operations  $(0.06)  $(0.02)
Diluted income per share from discontinued operations  $0.05   $0.02 
Diluted loss per common share  $(0.01)  $ 
Weighted average common shares outstanding - Basic   107,352,184    48,305,978 
Weighted average common shares outstanding - Diluted   148,801,780    48,305,978 

 

The accompanying notes are an integral part of the consolidated financial statements

 

F-3

 

 

ETHEMA HEALTH CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) 

 

   Preferred Series B   Common   Additional             
   Shares   Amount   Shares   Amount   Paid in Capital   Comprehensive Income   Accumulated Deficit   Total 
                                 
Balance at January 1, 2016      $    47,738,855   $477,389   $16,177,534   $933,826   $(20,721,205)  $(3,132,456)
Shares issued for services           1,000,000    10,000    40,000            50,000 
Fair value of warrants issued                   291,955            291,955 
Proceeds received on warrants issued                   417            417 
Foreign currency translation                       (126,263)       (126,263)
Net loss                           (260,709)   (260,709)
Balance as of December 31, 2016      $    48,738,855   $487,389   $16,509,906   $807,563   $(20,981,914)  $(3,177,056)
                                         
Shares issued to acquire subsidiary           60,000,000    600,000    1,584,000            2,184,000 
Conversion of debt to equity           12,500,375    125,004    250,007              375,011 
Fair value of warrants issued                   71,000            71,000 
Shares issued for services           100,000    1,000    3,000            4,000 
Shares issued for commitment fee           1,900,000    19,000    128,000              147,000 
Foreign currency translation                       11,110        11,110 
Net loss                           (1,368,487)   (1,368,487)

Balance as of December 31, 2017

      $    123,239,230   $1,232,393   $18,545,913   $796,453   $(22,350,401)  $(1,775,642)

   

 

The accompanying notes are an integral part of the consolidated financial statements

 

F-4

 

 

ETHEMA HEALTH CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS 

 

   Year ended December 31, 2017   Year ended December 31, 2016 
Operating activities          
Net loss  $(1,368,487)  $(260,709)
Net income from discontinued operations  $(6,821,889)  $(735,987)
Net loss from continuing operations  $(8,190,376)  $(996,695)
Adjustment to reconcile net loss to net cash (used in) provided by operating activities:          
Depreciation   444,959    93,244 
Non cash compensation expense on acquisition of subsidiary   5,074,689     
Non cash interest accrual   (32,074)    
Non cash compensation for services   151,000     
Loss on sale of mortgage   19,853     
Other foreign exchange movements       50,000 
Amortization of debt discount   668,916     
Derivative liability movements   1,033,332     
Provision against receivable on sale of subsidiary   (472,368)    
Amortization of beneficial conversion feature       494 
Changes in operating assets and liabilities          
Accounts receivable   (218,591)    
Prepaid expenses   (85,176)   (2,710)
Accrued purchase consideration   236,982     
Accounts payable and accrued liabilities   (232,628)   (232,105)
Taxes payable   (2,158,233)   308,318 
Net cash used in operating activities - continuing operations   (3,981,052)   (779,455)
Net cash (used in) provided by operating activities - discontinued operations   (426,398)   775,313 
    (4,407,450)   (4,142)
Investing activities          
Investments in Seastone   (2,960,000)   (110,000)
Deposit on property   (1,748,988)    
Purchase of fixed assets   (241,514)    
Net cash used in investing activities - continuing operations   (4,950,502)   (110,000)
Net cash provided by (used in) investing activities - discontinued operations   6,497,400    (3,199)
    1,546,898    (113,199)
           
Financing activities          
(Decrease) Increase in bank overdraft   (28,718)   40,315 
Repayment of loan payable       (15,472)
Proceeds from short-term notes       124,350 
Repayment of short-term note       (148,603)
Proceeds from mortgage sold   110,294     
Proceeds from mortgage   4,391,452     
Repayment of mortgage   (3,408,995)    
Proceeds from convertible notes   1,897,500    668,969 
Repayment of convertible notes   (388,458)   (220,000)
Proceeds from related party notes   366,222    (201,766)
Proceeds from warrants issued       417 
Net cash provided by financing activities   2,939,297    248,210 
           
Effect of exchange rate on cash   (83,185)   (126,263)
           
Net change in cash   (4,440)   4,605 
Beginning cash balance   4,779    174 
Ending cash balance  $339   $4,779 
           
Supplemental cash flow information          
Cash paid for interest  $253,256   $39,136 
Cash paid for income taxes  $   $ 
           
Non cash investing and financing activities          
Common shares issued to acquire subsidiary  $2,184,000   $ 
Conversion of debt to equity  $375,011   $ 
Fair value of warrants issued  $71,000   $ 
Assumption of mortgage liabilities on acquisition of subsidiary  $3,145,549   $ 
Debt discount relating to warrants issued with convertible debt  $   $291,955 

 

The accompanying notes are an integral part of the consolidated financial statements

 

F-5

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1.Nature of Business

 

Ethema Health Corporation (the “Company”) was incorporated under the laws of the state of Colorado, USA, on April 1, 1993. Effective April 4, 2017, the Company changed its name to Ethema Health Corporation and prior to that, on May 2012, the Company had changed its name to GreeneStone Healthcare Corporation from Nova Natural Resources Corporation. As of December 31, 2017, the Company owned 100% of the outstanding shares of GreeneStone Clinic Muskoka Inc., incorporated in 2010 under the laws of the Province of Ontario, Canada; Cranberry Cove Holdings Ltd., incorporated on January 9, 2004 under the laws of the Province of Ontario, Canada. and Seastone Delray Healthcare, LLC, incorporated on May 17, 2016 under the laws of Florida, USA; and Delray Andrews RE, LLC, incorporated on May 17, 2016 under the laws of Florida, USA.

 

During December 2016, the Company obtained a license to operate and provide addiction treatment healthcare services in Florida, USA. The company commenced operations under this license with effect from January 2017.

 

On February 14, 2017, the Company completed a series of transactions (referred to collectively as the “Restructuring Transactions”), including a Share Purchase Agreement (the “SPA”) whereby the Company acquired 100% of the stock of CCH, which holds the real estate on which the Company previously operated a rehabilitation clinic (“the Canadian Rehab Clinic”). The Company entered into an Asset Purchase Agreement (the “APA”) and lease (the “Lease”) whereby the Company sold all of the Canadian Rehab Clinic business assets and leased the real estate to the buyer. Simultaneously with this transaction, the Company entered into a Real Estate \Purchase agreement and Asset Purchase Agreement whereby the Company purchased the real estate and business assets of Seastone Delray (the “Florida Purchase”).

 

The Share Purchase Agreement

Under the SPA, the Company acquired 100% of the stock of CCH from Leon Developments Ltd. (“Leon Developments”), a company wholly owned by Shawn E. Leon, who is the President, CEO, and CFO of the Company (“Mr. Leon”). CCH owns the real estate on which the Canadian Rehab Clinic is located. The total consideration paid by the Company was CDN$3,517,062, including the assumption of certain liabilities of CCH, which was funded by the assignment to Leon Developments of certain indebtedness owing to the Company in the amount of CDN$659,918, and the issuance of 60,000,000 shares of the Company’s common stock to Leon Developments, valued at US$0.0364 per share.

 

The Asset Purchase Agreement and Lease

Under the APA, the assets of the Canadian Rehab Clinic were sold by the Company, through its subsidiary, GreeneStone Clinic Muskoka Inc. (“Muskoka”), to Canadian Addiction Residential Treatment LP (the “Purchaser”), for a total consideration of CDN$10,000,000, plus an additional performance payment of up to CDN$3,000,000 as a performance payment to be received in 2019 if certain clinic performance metrics are met. The Purchaser completed the sale with cash proceeds to the Company of CDN$10,000,000, of which CDN$1,500,000 will remain in escrow for up to two years to cover indemnities given by the Company. The proceeds of the Muskoka clinic asset sale were used to pay down certain tax debts and operational costs of the Company and to fund the Florida Purchase, mentioned below.

 

Through the APA, substantially all of the assets of the Canadian Rehab Clinic were sold, leaving Ethema with only the underlying clinic real estate, which the Company, through its newly acquired subsidiary, CCH concurrently leased to the Purchaser. The Lease is a triple net lease and provides for a five (5) year primary term with three (3) five-year renewal options, annual base rent for the first year at CDN$420,000 with annual increases, an option to tenant to purchase the leased premises and certain first refusal rights.

 

The Florida Purchase

Immediately after closing on the sale of the assets of the Canadian Rehab Clinic, the Company closed on the acquisition of the business and real estate assets of Seastone Delray pursuant to certain real estate and asset purchase agreements This business is operated through its wholly owned subsidiary Seastone. The purchase price for the Seastone assets was US$6,070,000 financed with a purchase money mortgage of US$3,000,000, and US$3,070,000 in cash.

 

On November 2, 2017, the Company entered into an Agreement of Purchase and Sale (the “Agreement”) to purchase from AREP 5400 East Avenue LLC, a Delaware limited liability company (“Seller”) certain buildings in West Palm Beach, Florida, totaling approximately 80,000 square feet, on which the present tenant operates a substance abuse treatment center (the “Property”). The purchase price of the Property is $20,530,000, and the Company is obligated under the Agreement to make a series of nonrefundable down payments totaling $2,210,000. The closing of the transaction, which is subject to standard due diligence, conditions to closing and deliverables, is scheduled to occur on May 8, 2018 , or such earlier date as is agreed upon by the parties.

 

F-6

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

 

2.Summary of Significant Accounting Policies

 

a)Financial Reporting

 

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America. Revenues and expenses are reported on the accrual basis, which means that income is recognized as it is earned and expenses are recognized as they are incurred.

 

Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that i) recorded transactions are valid; ii) valid transactions are recorded; and iii) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.

 

b)Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

c)Principals of consolidation and foreign currency translation

 

The accompanying consolidated financial statements include the accounts of the Company, its subsidiary. All intercompany transactions and balances have been eliminated on consolidation.

 

Certain of the Company’s subsidiary’s functional currency is the Canadian dollar, while the Company’s reporting currency is the U.S. dollar. All transactions initiated in Canadian dollars are translated into US dollars in accordance with ASC 830, “Foreign Currency Translation” as follows:

 

Monetary assets and liabilities at the rate of exchange in effect at the balance sheet date.
Equity at historical rates.
Revenue and expense items and cash flows at the average rate of exchange prevailing during the period.

 

Adjustments arising from such translations are deferred until realization and are included as a separate component of stockholders’ deficit as a component of accumulated other comprehensive income or loss. Therefore, translation adjustments are not included in determining net income (loss) but reported as other comprehensive income (loss).

 

For foreign currency transactions, the Company translates these amounts to the Company’s functional currency at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time actual payment is made, a foreign exchange transaction gain or loss results which is included in determining net income for the period.

 

The relevant translation rates are as follows: For the year ended December 31, 2017 a closing rate of CAD$1.0000 equals US$0.7971 and an average exchange rate of CAD$1.0000 equals US$0.7867.

 

F-7

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.     Summary of Significant Accounting Policies (continued)

 

d)Revenue Recognition

 

The Company has two operating segments from which it derives revenues, i) rental income from leasing of a rehabilitation facility to third parties and ii) in-patient revenues for rehabilitation services provided to customers. Revenue is recognized as follows:

 

i.Rental Income

In terms of the lease agreement, on a monthly basis as long as the facility is utilized by the tenant

 

ii.In-patient revenue

The customers have been treated and provided with services by the Company; there is clear evidence that an arrangement exists; the amount of revenue and related costs can be measured reliably; and it is probable that the economic benefits associated with the transaction will flow to the Company.

 

The Company recognizes revenue from the rendering of services when they are earned; specifically, when all of the following conditions are met:

 

the significant risks and rewards of ownership are transferred to customers and the Company retains neither continuing involvement nor effective control;
there is clear evidence that an arrangement exists;
the amount of revenue and related costs can be measured reliably; and
it is probable that the economic benefits associated with the transaction will flow to the Company.

 

In particular, the Company recognizes:

 

Fees for outpatient counselling, coaching, intervention, psychological assessments and other related services when patients receive the service; and
Fees for inpatient addiction treatments proportionately over the term of the patient’s treatment.

 

e)Nonmonetary transactions

 

The Company’s policy is to measure an asset exchanged or transferred in a nonmonetary transaction at the more reliable measurement of the fair value of the asset given up and the fair value of the asset received, unless:

 

The transaction lacks commercial substance;
The transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange;
Neither the fair value of the asset received nor the fair value of the asset given up is reliably measurable; or
The transaction is a nonmonetary, nonreciprocal transfer to owners that represents a spinoff or other form of restructuring or liquidation.

 

f)Cash and cash equivalents

 

The Company’s policy is to disclose bank balances under cash, including bank overdrafts with balances that fluctuate frequently from being positive to overdrawn and term deposits with a maturity period of three months or less from the date of acquisition.

 

F-8

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.    Summary of Significant Accounting Policies (continued)

 

g)Accounts receivable

 

Accounts receivable primarily consists of amounts due from third-party payors (non-governmental) and private pay patients and is recorded net of allowances for doubtful accounts and contractual discounts. The Company’s ability to collect outstanding receivables is critical to its results of operations and cash flows. Accordingly, accounts receivable reported in the Company’s consolidated financial statements is recorded at the net amount expected to be received. The Company’s primary collection risks are (i) the risk of overestimating net revenues at the time of billing that may result in the Company receiving less than the recorded receivable, (ii) the risk of non-payment as a result of commercial insurance companies denying claims, (iii) the risk that patients will fail to remit insurance payments to the Company when the commercial insurance company pays out-of-network claims directly to the patient, (iv) resource and capacity constraints that may prevent the Company from handling the volume of billing and collection issues in a timely manner, (v) the risk that patients do not pay the Company for their self-pay balances (including co-pays, deductibles and any portion of the claim not covered by insurance) and (vi) the risk of non-payment from uninsured patients.

 

h)Allowance for Doubtful Accounts, Contractual and Other Discounts

 

The Company derives the majority of its revenues from commercial payors at out-of-network rates. Management estimates the allowance for contractual and other discounts based on its historical collection experience. The services authorized and provided and related reimbursement are often subject to interpretation and negotiation that could result in payments that differ from the Company’s estimates. The Company’s allowance for doubtful accounts is based on historical experience, but management also takes into consideration the age of accounts, creditworthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. An account is written off only after the Company has pursued collection efforts or otherwise determines an account to be uncollectible. Uncollectible balances are written-off against the allowance. Recoveries of previously written-off balances are credited to income when the recoveries are made.

 

i)Financial instruments

 

The Company initially measures its financial assets and liabilities at fair value, except for certain non-arm’s length transactions. The Company subsequently measures all its financial assets and financial liabilities at amortized cost.

 

Financial assets measured at amortized cost include cash and accounts receivable.

 

Financial liabilities measured at amortized cost include bank indebtedness, accounts payable and accrued liabilities, harmonized sales tax payable, withholding taxes payable, convertible notes payable, loans payable and related party notes.

 

Financial assets measured at cost are tested for impairment when there are indicators of impairment. The amount of the write-down is recognized in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income. The Company recognizes its transaction costs in net income in the period incurred. However, financial instruments that will not be subsequently measured at fair value are adjusted by the transaction costs that are directly attributable to their origination, issuance or assumption.

 

FASB ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 establishes a three tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions.

 

The Company measures its convertible debt and derivative liabilities associated therewith at fair value. These liabilities are revalued periodically and the resultant gain or loss is realized through the Statement of Operations.

j)Plant and equipment

Fixed assets are recorded at cost. Depreciation is calculated on the straight line basis over the estimated life of the asset:

 

Computer Software 100%

 

Leasehold improvements are depreciated using the straight-line method over the term of the lease. Half rates are used for all fixed assets in the year of acquisition.

k)Goodwill

Goodwill acquired in business combinations is initially computed as the amount paid by the acquiring company in excess of the fair value of the net assets acquired. Goodwill is not amortized. It is the Company’s policy to test for impairment no less than annually, by considering qualitative factors to determine whether it is more likely than not that a that the Company’s goodwill carrying value is greater than its fair value. Such factors may include the following: a significant decline in expected revenues, significant decline in the Company’s stock price, a significant downturn in the general economic business conditions, the loss of key personnel or when conditions occur that may indicate impairment. The Company’s intangible assets, which consist of goodwill of $1,580,000 recorded in connection with the Seastone acquisition, was tested for impairment during the fourth quarter, 2017, and we determined that no adjustment for impairment was necessary. 

l)Leases

 

Leases are classified as either capital or operating leases. Leases that transfer substantially all of the benefits and inherent risks of ownership of property to the Company are accounted for as capital leases. At the time a capital lease is entered into, an asset is recorded together with its related long-term obligation to reflect the acquisition and financing. Equipment recorded under capital leases is amortized on the same basis as described above. Payments under operating leases are expensed as incurred.

 

F-9

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.    Summary of Significant Accounting Policies (continued) 

m)Income taxes

 

The Company accounts for income taxes under the provisions of ASC Topic 740, “Income Taxes”. Under ASC Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income taxes are provided using the liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax basis of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized.

 

ASC Topic 740 contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company recognizes interest and penalties accrued on unrecognized tax benefits within general and administrative expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in general and administrative expenses in the period that such determination is made. The tax returns for fiscal 2001, through 2017 are subject to audit or review by the US tax authorities, whereas fiscal 2010 through 2017 are subject to audit or review by the Canadian tax authority. 

n)Net income (loss) per Share

 

Basic net income (loss) per share is computed on the basis of the weighted average number of common stock outstanding during the period.

 

Diluted net income (loss) per share is computed on the basis of the weighted average number of common stock and common stock equivalents outstanding. Dilutive securities having an anti-dilutive effect on diluted net income (loss) per share are excluded from the calculation.

 

Dilution is computed by applying the treasury stock method for options and warrants. Under this method, “in-the money” options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Dilution is computed by applying the if-converted method for convertible preferred stocks. Under this method, convertible preferred stock is assumed to be converted at the beginning of the period (or at the time of issuance, if later), and preferred dividends (if any) will be added back to determine income applicable to common stock. The shares issuable upon conversion will be added to weighted average number of common stock outstanding. Conversion will be assumed only if it reduces earnings per share (or increases loss per share). 

o)Stock based compensation

 

Stock based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the employee’s requisite service period or vesting period on a straight-line basis. Share-based compensation expense recognized in the consolidated statements of operations for the year ended December 31, 2017 and 2016 is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. This estimate will be revised in subsequent periods if actual forfeitures differ from those estimates. We have minimal awards with performance conditions and no awards dependent on market conditions. 

p)Derivatives

 

The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. The Company uses a Black Scholes Option Pricing model to estimate the fair value of convertible debt conversion features at the end of each applicable reporting period. Changes in the fair value of these derivatives during each reporting period are included in the statements of operations. Inputs into the Black Scholes Option Pricing model require estimates, including such items as estimated volatility of the Company’s stock, risk free interest rate and the estimated life of the financial instruments being fair valued.

 

If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.

 

F-10

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.     Summary of Significant Accounting Policies (continued) 

q)Recent accounting pronouncements

 

In January 2017, the FASB issued Accounting Standards Update No. (“ASU”) 2017-02, an amendment to Topic 805, Business Combinations. The amendments in this Update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this Update affect all reporting entities that must determine whether they have acquired or sold a business. The amendments in this Update provide a more robust framework to use in determining when a set of assets and activities is a business. The amendments in this Update apply to annual periods beginning after December 15, 2017. The amendments in this Update should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect this guidance to have a material impact on its financial statements.

 

In January 2017, the FASB issued ASU 2017-04, an amendment to Topic 350, Intangibles – Goodwill and Other, an entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 3 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. An entity should apply the amendments in this Update on a prospective basis. The amendments in this Update are effective for Goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the effect ASU 2017-04 will have on our consolidated financial statements.

 

In February 2017, the FASB issued ASU 2017-05, an amendment to Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets The amendments in this Update are required for public business entities and other entities that have goodwill reported in their financial statements, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The amendments in this Update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. An entity should apply the amendments in this Update on a prospective basis. The amendments in this Update are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the effect ASU 2017-05 will have on our consolidated financial statements.

 

F-11

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.Summary of Significant Accounting Policies (continued)

 

o)Recent accounting pronouncements (continued)

 

In July 2017, the FASB issued Accounting Standards Update No. (“ASU’’) 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815). The amendments in this Update provide guidance about:

 

1.Accounting for certain financial instruments with down round features

 

2.Replacement of the indefinite deferral for mandatorily redeemable financial instruments of certain non-public entities and certain non-controlling interests

 

The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260).

 

The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.

 

The amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part 1 of this Update should be applied in either of the following ways: 1. Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective 2. Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10.

 

The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect.

The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging, (Topic 815), Targeted Improvements to accounting for Hedging Activities. The amendments in this update provide guidance about:

 

The amendments in this Update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.

 

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the Update. Transition Requirements For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this Update. The amended presentation and disclosure guidance is required only prospectively.

 

The impact this ASU will have on the Company’s consolidated financial statements is expected to be immaterial.

 

F-12

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.Summary of Significant Accounting Policies (continued)

 

o)Recent accounting pronouncements (continued)

 

In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840 and Leases (Topic 842). The amendments in this update provide guidance about:

 

The transition provisions in ASC Topic 606 require that a public business entity and certain other specified entities adopt ASC Topic 606 for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities are required to adopt ASC Topic 606 for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019.

 

The transition provisions in ASC Topic 842 require that a public business entity and certain other specified entities adopt ASC Topic 842 for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. FN3 All other entities are required to adopt ASC Topic 842 for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

 

The impact this ASU will have on the Company’s consolidated financial statements is expected to be immaterial.

 

In November 2017, the FASB issued ASU 2017-14, Income Statement – Reporting Comprehensive Income (Topic220), Revenue Recognition (Topic 605) and Revenue from Contracts with Customers (Topic 606). The amendments in this update provide guidance about:

 

Certain amendments made to SEC materials and staff guidance relating to Operating-Differential subsidiaries, and amendments to the wording and disclosure requirements of Topic 605, Revenue Recognition.

 

F-13

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.Summary of Significant Accounting Policies (continued)

 

o)Recent accounting pronouncements (continued)

 

In February 2018, the FASB issued ASU 2018-3 Technical Corrections and Improvements to Financial Instruments – Overall (Sub topic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update provide guidance about:

 

The amendment clarifies that an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820.

 

The amendment clarifies that the adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place.

 

The amendment clarifies that remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities.

 

The amendment clarifies that when the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives, or 825- 10, Financial Instruments— Overall.

 

The amendments clarify that for financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates.

 

The amendment clarifies that the prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services— Insurance, should apply a prospective transition method 4 Area for Correction or Improvement Summary of Amendments when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected.

 

The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01.

 

The amendments in this update are not expected to have a material impact on the Company’s consolidated financial statements.

 

In March 2018, the FASB issued ASU 2018-4 Investments – Debt Securities (Topic 320) and Regulated Operations (Topic 980), Amendments to SEC Paragraphs pursuant to SEC Staff Accounting Bulletin no. 117 and SEC Release No. 33-9273. The amendments in this update provide guidance about:

 

Certain amendments made to SEC materials and staff guidance relating to Investments – Debt Securities (Topic 320) and Regulated Operations (Topic 980).

 

The amendments in this update are not expected to have a material impact on the Company’s consolidated financial statements.

 

In March 2018, the FASB issued ASU 2018-5, Income Taxes (Topic 740) Amendments to SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 118

 

These amendments affect the wording of SEC paragraphs in the accounting standard codification dealing with Income Taxes (Topic 740).

 

The amendments in this update are not expected to have a material impact on the Company’s consolidated financial statements.

 

Any new accounting standards, not disclosed above, that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

 

F-14

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2.Summary of Significant Accounting Policies (continued)

 

p)Reclassification of Prior Year Presentation

 

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

 

q)Financial instruments Risks

 

The Company is exposed to various risks through its financial instruments. The following analysis provides a measure of the Company’s risk exposure and concentrations at the balance sheet date, December 31, 2017 and 2016.

 

i.Credit risk

 

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Financial instruments that subject the Company to credit risk consist primarily of accounts receivable.

 

Credit risk associated with accounts receivable of Seastone of Delray is mitigated as only a percentage of the revenue billed to health insurance companies is recognized as income until such time as the actual funds are collected. The revenue is concentrated amongst several health insurance companies located in the US.

 

In the opinion of management, credit risk with respect to accounts receivable is assessed as low.

 

ii.Liquidity risk

 

Liquidity risk is the risk the Company will not be able to meet its financial obligations as they fall due. The Company is exposed to liquidity risk through its working capital deficiency of $5,710,511 accumulated deficit $(16,967,612). The Company will be dependent upon the raising of additional capital in order to implement its business plan. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, liquidity risk is assessed as high, material and remains unchanged from the prior year.

 

iii.Market risk

 

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises of three types of risk: interest rate risk, currency risk, and other price risk. The Company is exposed to interest rate risk and currency risk.

 

a.Interest rate risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to minimal interest rate risk on its bank indebtedness as there is a balance owing of $28,927 as of December 31, 2017. This liability is based on floating rates of interest that have been stable during the current reporting period. In the opinion of management, interest rate risk is assessed as low, not material and remains unchanged from the prior year.

 

b.Currency risk

 

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is subject to currency risk as it has subsidiaries that operate in Canada and are subject to fluctuations in the Canadian dollar. A substantial portion of the Company’s financial assets and liabilities are denominated in Canadian dollars. Based on the net exposures at December 31, 2017, a 5% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an approximate $29,500 increase or decrease in the Company’s after tax net income from operations. The Company has not entered into any hedging agreements to mediate this risk. In the opinion of management, currency risk is assessed as low, material and remains unchanged from the prior year.

 

c.Other price risk

 

Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. In the opinion of management, the Company is not exposed to this risk and remains unchanged from the prior year.

 

F-15

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3.Disposal of Business

 

On February 14, 2017, in terms of the details outlined in note 1 above, the Company disposed of the business and certain assets of its Canadian Rehab Clinic for gross proceeds of CDN$10,000,000, a total of CDN$1,500,000 of the gross proceeds is being held in escrow for up to two years, in addition there is an earnout payment of up to CDN$3,000,000 to be received in 2019, if certain clinic performance metrics are met, see note 9 below.

 

The proceeds realized from the sale of the Canadian Rehab Clinic were used to settle outstanding tax liabilities, refer note 12 below, and to acquire the business of Seastone of Delray, refer note 5 below.

 

The proceeds realized on disposal have been allocated as follows:

 

    Amount 
      
Proceeds on disposal  $7,644,000 
      
Assets sold:     
Accounts receivable   113,896 
Plant and equipment   109,075 
    222,971 
Liabilities assumed by purchaser     
Deferred revenue   (73,799)
      
Net assets and liabilities sold   149,172 
      
Net profit realized on disposal  $7,494,828 

 

 

4.Acquisition of Subsidiary

 

On February 14, 2017, the Company acquired 100% of the equity of CCH, from Leon Developments, a company wholly owned by our CEO. The total consideration paid by the Company was CDN$3,517,062, including the assumption of certain liabilities of CCH, which was funded by the assignment to Leon Developments of certain indebtedness owing to the Company in the amount of CDN$659, 918 (US$504,442) on the disposal of a subsidiary, 1816191 Ontario, which principal amount had previously been fully provided for during 2015; and the issuance of 60,000,000 shares of the Company’s common stock at US$0.0364 per share for proceeds of $2,184,000.

 

On June 1, 2017, the Company had the property owned by CCH appraised by an independent valuer, the appraisal obtained was for CDN$10,000,000, which resulted an increase in the value of the assets acquired by $1,146,000 and a corresponding reduction in the excess purchased consideration allocated to the shareholder.

 

F-16

 

 

4.Acquisition of Subsidiary (continued)

 

The allocation of the purchase price is as follows:

 

 

  Amount 
Purchase price paid:     
Common shares issued to Seller  $2,184,000 
Receivable assumed by the Seller   504,442 
    2,688,442 
Allocated as follows:     
      
Assets acquired:
Property   2,942,585 
Receivable from Ethema Health Corporation   299,743 
    3,242,328 
Liabilities assumed:     
Accounts payable and other accruals   158,093 
Related party payable to Leon Developments   2,057,392 
Mortgage liability owing to Ethema Health Corporation   267,540 
Mortgage liability   3,145,550 
    5,628,575 
      
Net liabilities acquired   (2,386,247)
      
Excess purchase consideration allocated to shareholders compensation  $5,074,689 

 

5.Acquisition of the business of Seastone Delray

 

The Company, utilized a portion of the proceeds realized on the sale of the Canadian Rehab Clinic to acquire certain assets of Seastone of Delray.

 

The Company obtained its own license to run a rehabilitation Clinic in Florida in December 2016 and began operations, through its wholly owned subsidiary, Seastone of Delray, LLC, effective January 2017.

 

The assets acquired were as follows:

 

   Amount 
     
Purchase price paid:     
Cash paid to seller  $2,960,000 
Deposits previously paid to seller   110,000 
Mortgage liability funds   3,000,000 
    6,070,000 
Assets acquired:     
Property   4,410,000 
Furniture and fixtures   80,000 
Goodwill   1,580,000 
      
   $6,070,000 

 

F-17

 

 

6.           Going Concern

 

The Company’s consolidated financial statements have been prepared in accordance with US GAAP applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations in the normal course of business. As at December 31, 2017 the Company has a working capital deficiency of $(6,525,559) and accumulated deficit of $(22,350,401). Management believes that current available resources will not be sufficient to fund the Company’s planned expenditures over the next 12 months. Accordingly, the Company will be dependent upon the raising of additional capital through placement of common shares, and/or debt financing in order to implement its business plan, and generating sufficient revenue in excess of costs. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain geographical areas, or techniques that it might otherwise seek to retain. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. These consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue operations.

 

The ability of the Company to continue as a going concern is dependent on the Company generating cash from the sale of its common stock or obtaining debt financing and attaining future profitable operations. Management's plans include selling its equity securities and obtaining debt financing to fund its capital requirement and ongoing operations; however, there can be no assurance the Company will be successful in these efforts.

 

These factors create substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities or other adjustments that may be necessary should the Company not be able to continue as a going concern.

 

7.            Discontinued Operations

 

The assets and liabilities of discontinued operations as of December 31, 2016 is as follows:  

 

   December 31, 2016 
Current assets     
Accounts receivable, net  $123,358 
Prepaid expenses and other current assets   11,253 
Total current assets   134,611 
Non-current assets     
Plant and equipment, net   129,127 
Deposits    
Total assets   263,738 
      
Current liabilities     
Deferred revenues   80,519 
      
Discontinued operation   183,219 

 

 

F-18

 

 

 

7.            Discontinued Operations (continued)

 

The Statement of operations for discontinued operations is as follows:

 

   Year ended December   Year ended December 
   31, 2017   31, 2016 
         
Revenues  $196,866   $3,653,399 
           
Operating expenses          
Depreciation and amortization   4,196    63,391 
General and administrative   116,671    751,553 
Professional fees   32,818    (3,889)
Rent   106,495    385,401 
Salaries and wages   201,723    1,592,444 
Total operating expenses   461,903    2,788,900 
           
Operating (loss) income   (265,037)   864,499 
           
Other Income (expense)          
Other income   7,494,828    720 
Other expense       (617)
Interest expense   (1,021)   (154,605)
Foreign exchange movements   (135,190)   25,990 
Net income (loss) before taxation   7,093,580    735,987 
Taxation   (271,691)    
Net income (loss) from discontinued operations  $6,821,889   $735,987 

 

8.Deposit on Real Estate

 

On November 2, 2017, the Company entered into an Agreement to purchase from AREP 5400 East Avenue LLC certain buildings in West Palm Beach, Florida, totaling approximately 80,000 square feet, on which the present tenant operates a substance abuse treatment center. The purchase price of the Property is $20,530,000, and the Company is obligated under the Agreement to make a series of nonrefundable down payments totaling $2,210,000. To date the Company has made deposits amounting to $1,825,000, primarily through borrowed funds, refer note 13 and 16 below.

 

9.Due on sale of subsidiary

 

A net amount of CDN$617,960 was due to the Company on the sale of the Endoscopy Clinic as of December 31, 2016. This amount was past due and had fully provided for as of December 31, 2016.

 

On February 14, 2017, the Company acquired CCH from Leon Developments and settled a portion of the purchase consideration by assigning the proceeds due to the Company on the sale of the Endoscopy Clinic to Leon Developments. The note together with accrued interest thereon of CDN$41,959 amounted to CDN$659,919 (US$504,442). The provision raised against the note was reversed and the unrecorded interest thereon was recognized during the current period.

 

On February 14, 2017, the Company sold its Canadian Rehab Clinic for gross proceeds of CDN$10,000,000, of which CDN$1,500,000 (US$1,155,900) has been retained in an escrow account for a period of up to two years in order to guarantee the warranties provided by the Company in terms of the APA. In addition, the Company may earn up to an additional CDN$3,000,000 as a performance payment based on the attainment of certain clinic performance metrics.

 

F-19

 

 

10.          Property, plant and equipment

 

Property, plant and equipment consists of the following:  

 

   December 31, 2017   December 31, 2016 
   Cost  

Amortization and

Impairment

   Net book value   Net book value 
                 
Land   1,470,000        1,470,000      
Property  $6,228,340   $(208,482)  $6,019,858   $ 
Furniture and fixtures   105,000    (21,000)   84,000     
                     
   $7,803,340   $(229,482)  $7,573,858   $ 

 

Depreciation expense for the year ended December 31, 2017 and 2016 was $223,423 and $0, respectively.

 

11.Goodwill

 

In terms of the acquisition of Seastone of Delray, the Company acquired the business as a going concern and certain real property. The property was valued using an independent valuer. The excess of the purchase price paid over the fair market value of the assets (note 1 above), has been assigned to goodwill.

 

12.Taxes Payable

 

The Company settled the tax liabilities owing to the Canadian Revenue Authorities out of the proceeds of the disposal of the Canadian Rehab Clinic on February 14, 2017. The Company paid CDN$2,929,886 to settle outstanding payroll liabilities, CDN$441,598 to settle outstanding GST/HST liabilities and a further CDN$ 57,621 to settle other Canadian tax liabilities.

 

The remaining taxes payable consist of:

 

A payroll tax liability of $155,894 (CDN$195,569) in Greenestone Muskoka which has not been settled as yet.
The Company has assets and operates businesses in Canada and is required to disclose these operations to the US taxation authorities, the requisite disclosure has not been made. Management has reserved the maximum penalty due to the IRS in terms of non-disclosure. This noncompliance with US disclosure requirements is currently being addressed. An amount of $250,000 has been accrued for any potential exposure the Company may have.

 

   December 31, 2017   December 31, 2016 
         
Payroll taxes  $155,894   $2,548,824 
US penalties due   250,000    250,000 
Income tax payable   283,346     
           
   $689,240   $2,798,824 

 

F-20

 

 

 

 

13.Short-term Convertible Notes

 

The short-term convertible notes consist of the following:

 

  

Interest

rate

   Maturity date  Principal   Interest   Debt Discount  

December 31,

2017

  

December 31,

2016

 
                        
Leonite Investments LLC   8.5%  December 1, 2018  $1,650,000   $2,885   $(1,514,384)  $138,502   $ 
                                  
Power Up Lending Group Ltd   12.0%  August 15, 2018   103,000    1,862    (82,911)  $21,951      
                                  
Series L Convertible notes   0.0%  June 30, 2017                      250,258 
                                  
                           160,453    250,258 

 

Leonite Capital, LLC

 

On December 1, 2017, the Company closed on a private offering to raise US $1,500,000 in capital. The Company issued one senior secured convertible promissory note with a principal amount of US $1,650,000 to Leonite Capital, LLC. The Note bears interest at the rate of 6.5% per annum. The initial draw under the Note was $300,000 with a $150,000 original issue discount for a total of $450,000. The Company issued 1,650,000 shares of the Company’s common stock as a commitment fee and paid $20,000 towards the lenders legal fees. The Note’s initial maturity date is June 1, 2018. During the term of the Note the Company and the Subsidiaries will be obligated to make monthly payment of accrued and unpaid interest. The Note contains Company and Subsidiary representations and warranties, covenants, events of default, and registration rights.

 

The Note provided that the parties use reasonable best efforts to close on the remaining $1,200,000 of availability under the Note by January 1, 2018. As a condition to the closing of the Balance Tranche, the parties must finalize and enter into additional agreements related to the Private Offering, including, but not limited to, (i) a Securities Purchase Agreement; (ii) a Warrant Agreement under which the Investor will have the right to purchase up to 27,500,000 shares of the Company’ common stock for $0.10 per share, subject to adjustment, for a period of five years; (iii) a Securities Pledge Agreement under which the Company and the Subsidiaries will grant the lender a blanket lien on their assets, and the Company will pledge its equity ownership in the Subsidiaries. Upon the closing of the Balance Tranche the maturity date of the Note will become December 1, 2018.

 

On December 29, 2017, effective as of December 1, 2017, the Company and the Subsidiaries entered into an Amended and Restated Senior Secured Convertible Promissory Note, which note amends and restates the Note to (a) extend the maturity date to December 1, 2018; (b) remove CCH, as an obligor; (c) increase the interest rate by 2.00% per annum, to 8.5% per annum; and (d) issue an additional 250,000 shares of the Company’s common stock to the Investor. In connection with the execution of the amendment, the parties entered into (i) a Securities Purchase Agreement; (ii) a Warrant Agreement under which the Investor will have the right to purchase up to 27,500,000 shares of the Company’ common stock for $0.10 per share, subject to adjustment, for a period of five years; (iii) a Security and Pledge Agreement and a General Security Agreement under which the Company and the Subsidiaries will grant the Investor a blanket lien on their assets, and the Company will pledge its equity ownership in the Subsidiaries; and (iv) a First Amendment to the, effective January 2, 2018.

 

At the execution of the Note, the Investor funded an initial tranche of $300,000. Thereafter the Investor funded a second tranche of $156,136. Upon the execution of the A&R Note the Investor funded a third tranche of $100,000. Upon the execution of the First Amendment the Investor funded a final tranche of $850,000, with the remaining $93,764 of availability under the A&R Note, as amended, serving as a holdback pursuant to the terms of the First Amendment.

 

Amounts under the Note are convertible, at the Investors request, into shares of the Company’s common stock at an initial price of $0.06 per share, subject to adjustment.

 

F-21

 

 

 

13.Short-term Convertible Notes (continued)

 

Power Up Lending Group LTD

On June 19, 2017, the Company, entered into a Securities Purchase Agreement with Power Up Lending Group Ltd., pursuant to which the Company issued to the Purchaser a Convertible Promissory Note in the aggregate principal amount of $113,500. The Note has a maturity date of March 20, 2018 and bears interest at the at the rate of eight percent per annum from the date on which the Note is issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company shall have the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the average lowest closing bid prices of the Company’s common stock for the ten trading days prior to conversion. The note, together with interest thereon of $6,567 and early settlement penalty of $36,020 was repaid on December 14, 2017.

 

On November 6, 2017, the Company, entered into a Securities Purchase Agreement with Power Up Lending Group Ltd., pursuant to which the Company issued to the Purchaser a Convertible Promissory Note in the aggregate principal amount of $103,000. The Note has a maturity date of August 15, 2018 and bears interest at the at the rate of twelve percent per annum from the date on which the Note is issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company shall have the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the average lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion.

 

Labrys Fund, LP

On February 2, 2017, the Company entered into a Securities Purchase Agreement with LABRYS FUND LP, in terms of the agreement the Company borrowed $110,000 in terms of an unsecured convertible promissory note with a maturity date of August 2, 2017. The note bears interest at a rate of 8% per annum. The note is only convertible upon a repayment default, at the lower of 60% of the lowest traded price over the preceding 30 day trading period prior to the issuance of this note or 60% of the lowest traded price 30 days prior to the conversion date. The Company issued 1,200,000 common shares to the note holder as a commitment fee which returnable shares will be returned to the company if fully repaid prior to August 2, 2017.

 

On May 26, 2017, the Company repaid the note for gross proceeds of $112,744, including interest thereon of $2,744. The 1,200,000 commitment fee shares were returned to the Company.

 

Series L convertible notes

The Company entered into Series L Convertible Securities Purchase Agreements with 8 individuals on December 30, 2016. In terms of these agreements, the Company borrowed an aggregate principal amount of $468,969 in terms of a senior ranking convertible promissory note with a maturity date six months from the issue date and bearing interest at 0% per annum. The notes are convertible at the option of the holder into shares of common stock of the Company at a conversion price of $0.03 per share, subject to certain recapitalization adjustments. On December 30, 2016, it was determined that the beneficial conversion feature related to the discounted note and warrant issuances amounting to $218,711 would be amortized over the life of the loans.

 

During January 2017, the Company borrowed a further aggregate principal amount of $71,000 in terms of three senior ranking convertible promissory notes with a maturity date six months from the issue date and bearing interest at 0% per annum. The notes are convertible at the option of the holder into shares of common stock of the Company at a conversion price of $0.03 per share, subject to certain recapitalization adjustments. In January 2017, it was determined that the beneficial conversion feature related to the discounted note and warrant issuances amounting to $104,793 would be amortized over the life of the loans.

 

On May 4, 2017, the Company repaid $20,000 of the principal outstanding to one investor. During July and August 2017, the Company repaid a further $144,958 of the principal outstanding to five investors.

 

During July 2017, five investors converted an aggregate principal amount of $375,011 of convertible notes into shares of common stock at a conversion price of $0.03 per share.

 

In terms of the Series L Convertible notes issued above, during January 2017, the Company granted three-year warrants to the Series L Convertible noteholders, exercisable for 2,366,667 shares of common stock at an exercise price of $0.03, subject to certain recapitalization adjustments, per share, expiring between January 16 and January 17, 2020. (Refer note 17 (c) below).

 

F-22

 

 

 

14.Loans Payable

 

On February 14, 2017, the Company acquired 100% of the equity of CCH, from Leon Developments. The subsidiary has certain mortgage indebtedness amounting to CDN$4,115,057 (US$3,145,549) at the date of acquisition, which was assumed by the Company.

 

On February 14, 2017, the Company acquired certain assets of Seastone of Delray, including fixed property. A portion of the purchase consideration was funded by a purchase money mortgage secured over the properties acquired, amounting to $3,000,000.

 

Loans payable is as follows:

 

   Interest
rate
   Maturity date  Principal
Outstanding
   Accrued
interest
   December 31,
2017
   December 31,
2016
 
                        
Cranberry Cove Holdings                            
First Mortgage   8.0%  August 14, 2017  $   $   $   $ 
Second Mortgage   12.0%  November 4, 2018                
Pace Mortgage   4.2%  July 19,2022   4,343,376    5,998    4,349,374     
Seastone of Delray                            
Mortgage   5.0%  February 13, 2020   2,974,526   $12,394    2,986,920     
           $7,317,902   $18,392   $7,336,294   $ 
Disclosed as follows:                            
Short-term portion                    $152,402   $ 
Long-term portion                     7,183,892     
                     $7,336,294   $ 

 

The aggregate amount outstanding is payable as follows:

 

   Amount 
2018   134,010 
2019   3,048,904 
2020   110,444 
2021   115,662 
2022   3,908,884 
Total  $7,317,902 

 

Cranberry Cove Holdings

 

First Mortgage

The first mortgage with an aggregate principal amount outstanding of CDN$3,500,000, including late charges, interest and penalties of CDN$165,057 for a gross aggregate amount outstanding of CDN$3,663,380, over the CCH properties is secured by the property located at 3571 Muskoka Road, #169, Bala, described as PT LT 15 CON F Medora PT1 35R5958, PT 2 &3 35R11290, Muskoka Lakes. The mortgage bears interest at the rate of 8% per annum on the aggregate principal outstanding of $3,500,000 and matures on August 14, 2017, with monthly interest payments of $23,118 (CDN 30,000). During March 2017, the Company made a principal payment of CDN$100,000 on the first mortgage.

 

This mortgage was repaid in full on July 21, 2017 out of the proceeds derived from a new mortgage agreement entered into on July 19, 2017, see below.

 

Second Mortgage

The second mortgage had an initial principal amount outstanding of CDN$350,000, on May 23, 2017, the Company sold CDN$175,000 of the mortgage it owned to the second mortgage holder for gross proceeds of CDN$150,000, the balance outstanding on the second mortgage is now CDN$525,000, the mortgage is secured by the CCH properties located at 3571 Muskoka Road, #169, Bala, described as PT LT 15 CON F Medora PT1 35R5958, PT 2 &3 35R11290, Muskoka Lakes. The mortgage bears interest at the rate of 12% per annum on the aggregate principal outstanding of CDN$525,000, and matures on November 4, 2018, with monthly interest payments of CDN$3,500.

 

This mortgage was repaid in full on July 21, 2017 out of the proceeds derived from a new mortgage agreement entered into on July 19, 2017, see below.

 

F-23

 

 

14.Loans payable (continued)

 

Pace Mortgage

On July 19, 2017, CCH, a wholly owned subsidiary closed on a loan agreement in the principal amount of CDN$5,500,000. The loan is secured by a first mortgage on the premises owned by CCH located at 3571 Muskoka Road 169, Bala, Ontario (the “Property”). The loan bears interest at the fixed rate of 4.2% with a 5-year primary term and a 25-year amortization. The Company has guaranteed the loan and the Company’s chief executive officer and controlling shareholder also has personally guaranteed the Loan. CCH and the Company have granted the Lender a general security interest in its assets to secure repayment of the Loan. The loan is amortized with monthly installments of CDN

$29,531.

 

Seastone of Delray

The Company entered into a Mortgage and Security Agreement with Seastone Delray Healthcare, LLC on February 13, 2017 for the aggregate principal sum of $3,000,000, bearing interest at the rate of 5% per annum, maturing on February 13, 2020, with monthly repayments of interest and principal of $15,000. The proceeds of the mortgage of $3,000,000 was used to fund the acquisition of the Seastone Delray properties, described as follows:

 

The Company had an automobile loan payable during the prior year, bearing interest at 4.49% with blended monthly payments of $835 that matures in March 2018. This loan was settled during the current financial year. The loan was secured by the vehicle with a net book value as at December 31, 2015 of $14,960.

 

15.Derivative liability

 

The short-term convertible notes issued to Leonite Capital LLC, Labrys Fund LP and Power Up Lending Group, LTD, disclosed in note 13 above, have variable priced conversion rights with no fixed floor price and will reprice dependent on the share price performance over varying periods of time. This gives rise to a derivative financial liability, which was initially valued at inception of the convertible notes at $1,976,500, the maximum amount permissible, using a Black-Scholes valuation model.

In addition, warrants exercisable over 27,500,000 shares of common stock were issued to Leonite Investments, in terms of the Securities Purchase Agreement and the Warrant Agreement entered into. Refer note 13 above.

 

The following assumptions were used in the Black-Scholes valuation model:

 

   Year ended December 31, 2017 
     
Calculated stock price   $0.03 to $0.08 
Risk free interest rate   0.64% to 2.13% 
Expected life of convertible notes   3 to 12 months 
expected volatility of underlying stock   134.9% to 534.8% 
Expected dividend rate   0%

 

The movement in derivative liability is as follows:

 

  

Year ended December 31, 2017

 
     
Opening balance  $ 
Derivative liability arising from convertible notes  $1,826,500 
Fair value adjustment to derivative liability   1,033,332 
   $2,859,832 

 

F-24

 

 

16.Related Party Transactions

 

Greenstone Clinic Inc.

 

As of December 31, 2017 and 2016, the Company had a payable of $0 and $79,592, respectively. Greenstone Clinic Inc., is controlled by one of the Company’s directors. The balance payable is non-interest bearing, not secured and has no specific repayment terms.

 

1816191 Ontario

 

As of December 31, 2017 and 2016, the Company had a payable of $15,921 and $70,763, respectively, to 1816191 Ontario, the Endoscopy Clinic, which was sold at the end of the prior year. The payable is non-interest bearing, and has no specific repayment terms.

 

Shawn E. Leon

As of December 31, 2017 and 2016 the Company had a receivable of $16,080 and a payable of $8,492, respectively to Shawn E. Leon, a director and CEO of the Company. The balances receivable and payable are non-interest bearing and have no fixed repayment terms.

 

Mr. Leon was paid management fees of $289,125and $257,283 during the year ended December 31, 2017 and 2016. In addition to this the Company recorded compensation expense in other expenses, relating to the excess of the fair value of the assets acquired in CCH. Mr. Leon is the owner of Leon Developments, the counterparty in the acquisition of the CCH subsidiary referred to in note 1 and 4 above.

 

Leon Developments, Ltd.

The Company acquired CCH from Leon Developments, Ltd., on February 14, 2017, refer note 1 and 4 above. CCH owns the facility utilized by the Canadian Rehab Clinic which was sold to a third party on February 14, 2017. CCH owed CDN $2,692,512 to Leon Developments. The amount owing to Leon Developments Ltd., as of December 31, 2017 was CDN$2,692,512 or $1,703,976.

 

Cranberry Cove Holdings Ltd.

The Company acquired CCH on February 14, 2017. CCH owns the real estate previously utilized by the Canadian Rehab Clinic and now utilized by the purchaser of the business. As of December 31, 2016, the Company had a receivable of $84,867 from CCH.

 

Prior to the acquisition of CCH, the Company paid rental expense to CCH of $47,493 for the period ended December 31 ,2017 and $385,401 for the year ended December 31, 2016.

 

Eileen Greene

Eileen Greene is the spouse of our CEO, Shawn Leon. During October and November 2017, we borrowed CDN$1,122,000 from Eileen Greene, principally to fund the deposit on the real estate transaction, disclosed in note 8 above. The funds advanced is non-interest bearing and has no fixed repayment terms. As of December 31, 2017, the amount owing to Eileen Greene amounted to $877,182.

 

On December 30, 2016 we entered into a Securities Purchase agreement with Ms. Greene, whereby $163,011 (CDN $220,000) was advanced to the Company in the form of a promissory note, bearing interest at 0% per annum and convertible into shares of common stock at a conversion price of

$0.03 per share. On January 17,2017, Ms. Greene advanced the company a further $40,000 in the form of a promissory note, bearing interest at 0$ per annum and convertible into shares of common stock at a conversion price of $0.03 per share. In connection with the issue pf promissory notes, Ms. Greene was also awarded warrants exercisable over 6,767,042 shares of common stock at an exercise price of $0.03 per share.

 

All related party transactions occur in the normal course of operations and in terms of agreements entered into between the parties.

 

F-25

 

 

17.Stockholders’ deficit

 

a)Common shares

 

Authorized, issued and outstanding

The Company has authorized 500,000,000 shares with a par value of $0.01 per share. The company has issued and outstanding 123,239,230 and 48,738,755 on December 31, 2017 and 2016, respectively.

 

On February 14, 2017, the Company issued 60,000,000 common shares valued at $2,184,000 to Leon Development Ltd, a Company controlled by our CEO, Shawn Leon, in connection with the purchase of the entire shareholding of CCH, the owner of the premises located in Bala, Ontario at 3571 Highway 169.

 

On May 30, 2017, the Company issued 100,000 common shares to a vendor in lieu of services rendered at a market value of $4,000 or US$0.04 per share.

 

During July 2017, five Series L Convertible note holders exercised their conversion rights and converted an aggregate principal amount of

$375,011 into 12,500,375 shares of common stock at a conversion price or $0.03 per share.

 

On December 1, 2017, the Company issued 1,650,000 shares of common stock in connection with the closing of a financing of a Senior Secured Convertible Note. The shares were valued at $132,000, or $0.08 per share on December 1, 2017.

 

On December 29, 2017, the Company issued an additional 250,000 shares of common stock upon the amendment of the Senior Secured Convertible note, disclosed in 4 above. The shares were valued at $15,000 or $0.06 per share on December 29, 2017.

 

b)Preferred shares

 

Authorized, issued and outstanding

The Company has authorized 13,000,000 preferred shares with a par value of $0.01 per share, designated as 3,000,000 series A convertible preferred shares and 10,000,000 series B convertible preferred shares. The Company has no preferred shares issued and outstanding.

 

c)Warrants

 

In terms of the short-term Series L Convertible notes entered into with 3 parties, as disclosed in note 13 above, the Company awarded three year warrants exercisable over 2,366,666 shares of common stock, at an exercise price of $0.03 per share.

 

In terms of the agreements entered into with Leonite Capital, LLC, the Company agreed to issue warrants exercisable over 27,500,000 shares of common stock at an exercise price of $0.10 per share.

 

The fair value of Warrants awarded and revalued during the year ended December 31, 2017 were valued at $1,826,500 using the Black Scholes pricing model utilizing the following weighted average assumptions:

 

   Year ended December 31, 2017 
     
Calculated stock price   $0.02 to $0.08 
Risk free interest rate   1.48% to 2.13% 
Expected life of warrants (years)   3 to 5 years 
expected volatility of underlying stock   398% to 535% 
Expected dividend rate   0%

 

The volatility of the common stock is estimated using historical data of the Company’s common stock. The risk-free interest rate used in the Black Scholes pricing model is determined by reference to historical U.S. Treasury constant maturity rates with maturities approximate to the life of the warrants granted. An expected dividend yield of zero is used in the valuation model, because the Company does not expect to pay any cash dividends in the foreseeable future. As of December 31, 2017, the Company does not anticipate any awards will be forfeited in the valuation of the warrants.

 

F-26

 

 

17.       Stockholders’ deficit (continued)

 

c)Warrants

 

A summary of all of the Company’s warrant activity during the period January 1, 2016 to December 31, 2017 is as follows:

 

    No. of shares   Exercise price per
share
   Weighted average exercise price 
              
Outstanding January 1, 2016    6,300,000    0.0033 to $.0.03   $0.0033 
Granted    19,337,409    0.03    0.0300 
Forfeited/cancelled    (6,000,000)   0.15    0.1500 
Exercised             
Outstanding December 31, 2016    19,637,409    0.0033 to $.0.03    0.0033 
Granted    29,866,666    $0.03 to $0.10    0.0945 
Forfeited/cancelled             
Exercised             
Outstanding December 31, 2017    49,504,075    $0.033 to $0.10   $0.0690 

 

The following table summarizes information about warrants outstanding at December 31, 2017:

 

    Warrants outstanding   Warrants vexercisable 

 

Exercise price

  

 

No. of shares

  

Weighted average

remaining years

  

Weighted average

exercise price

  

 

No. of shares

  

Weighted average

exercise price

 
                      
$0.0033    300,000    *         300,000      
$0.03    21,704,075    2.20         21,704,075      
$0.10    27,500,000    4.90         27,500,000      
                           
     49,504,075    3.71   $0.0690    49,504,075   $0.0690 

 

*In terms of an agreement entered into with an investor relations company, 300,000 warrants were to be issued as part of the Investor Relations Agreement. These warrants have not been issued as yet, therefore the warrant terms are uncertain.

 

All of the warrants outstanding as of December 31, 2017 are vested. The warrants outstanding as of December 31, 2017 have an intrinsic value of

$668,123.

 

d)Stock options

 

Our board of directors adopted the Greenestone Healthcare Corporation 2013 Stock Option Plan (the “Plan”) to promote our long-term growth and profitability by (i) providing our key directors, officers and employees with incentives to improve stockholder value and contribute to our growth and financial success and (ii) enable us to attract, retain and reward the best available persons for positions of substantial responsibility. A total of 10,000,000 shares of our common stock have been reserved for issuance upon exercise of options granted pursuant to the Plan. The Plan allows us to grant options to our employees, officers and directors and those of our subsidiaries; provided that only our employees and those of our subsidiaries may receive incentive stock options under the Plan. We have granted a total of 480,000 options as of December 31, 2017 under the Plan.

 

No options were issued, exercised or cancelled during the year ended December 31, 2017.

 

F-27

 

 

17.Stockholders’ deficit (continued)

 

d)     Stock options (continued

 

A summary of all the Company’s option activity during the period January 1, 2016 to December 31, 2017 is as follows:

 

   No. of shares   Exercise price per
share
   Weighted average
exercise price
 
             
Outstanding January 1, 2016   480,000   $0.12   $0.12 
Granted            
Forfeited/cancelled            
Exercised            
Outstanding December 31, 2016   480,000   $0.12    0.12 
Granted - non plan options            
Forfeited/cancelled            
Exercised            
Outstanding December 31, 2017   480,000   $0.12   $0.12 

 

The following table summarizes information about options outstanding as of December 31, 2017:

 

    Options outstanding   Options exercisable 

 

Exercise price

   No. of shares  

Weighted average

remaining years

  

Weighted average

exercise price

   No. of shares  

Weighted average

exercise price

 
                      
$0.12    480,000    1.83         480,000      
                           
     480,000    1.83   $0.12    480,000   $0.12 

 

The Company issued Stock options to a former officer vesting over a 24-month period commencing on November 1, 2014 expiring on October 31, 2019, a formal option agreement has not been issued as yet, as such the terms of these options are uncertain.

 

As of December 31, 2017 there was no unrecognized compensation costs related to these options and the intrinsic value of the options as of December 31, 2017 is $0.

18.Segmental Information

 

Due to the recent acquisition of the CCH subsidiary on February 14, 2017, the Company has two reportable operating segments;

 

a.Rental income from the property owned by CCH subsidiary located at 3571 Muskoka Road, #169, Bala, on which the operations of the Canadian Rehab Clinic were located prior to disposal on February 14, 2017 and subsequently leased to the purchasers of the business of the Canadian Rehab Clinic, for a period of 5 years renewable for a further three five-year periods and with an option to acquire the property at a fixed price.

 

b.Rehabilitation Services provided to customers, during the nine months ended September 30, 2017, these services were provided to customers at our Seastone of Delray business acquired on February 14, 2017. The Rehabilitation services provided by our Canadian Rehab Center for the years ended December 31, 2017 and 2016 are reported under discontinued operations and have not been reported as part of the Segment Information.

 

F-28

 

 

18.Segmental Information (continued)

 

The segment operating results of the reportable segments are disclosed as follows:

 

  

 

Rental Operations

  

Year ended December 31, 2017

In-Patient services

  

 

Total

 
         
Revenue  $291,583   $637,833   $929,416 
Operating expenditure   195,529    2,187,044    2,382,573 
                
Operating (loss) income   96,054    (1,549,211)   (1,453,157)
                
Other (expense) income               
Other income       475,487    475,487 
Other expense       (5,093,9541)   (5,093,954)
Interest income       32,074    32,074 
Interest expense   (179,037)   (188,510)   (367,547)
Amortization of debt discount       (668,916)   (668,916)
Loss on change in fair value of derivative liability       (1,033,332)   (1,033,332)
Foreign exchange movements   (12,003)   (69,028)   (81,031)
Net loss before taxation from continuing operations   (94,986)   (8,095,390)   (8,190,376)
Taxation            
Net loss from continuing operations  $(94,986)  $(8,095,390)  $(8,190,376)

 

 

The operating assets and liabilities of the reportable segments are as follows:

 

   Rental Operations   In-Patient services   Total 
             
Purchase of fixed assets   219,751    21,763    241,514 
Assets               
Current assets   201    334,418    334,619 
Non-current assets   3,182,638    8,751,171    11,933,809 
Liabilities               
Current liabilities   (2,209,462)   (4,650,716)   (6,860,178)
Non-current liabilities   (4,349,208)   (2,834,684)   (7,183,892)
Intercompany balances   (791,263)   791,263     
Net (liability) asset position   (4,167,095)   2,391,453    (1,775,642)

 

F-29

 

 

19.Net income (loss) per common share

 

For the year ended December 31, 2017 the computation of basic and diluted earnings per share is as follows:

 

   Amount   Number of shares   Per share amount 
         
Basic earnings per share               
Net loss per share from continuing operations  $(8,190,376)   107,352,184   $(0.08)
Net income per share from discontinued operations   6,821,889    107,352,184    0.06 
                
Basic income per share   (1,368,487)   107,352,184    (0.02)
                
Effect of dilutive securities               
                
Warrants       11,135,388      
Convertible debt       30,314,208      
                
Diluted earnings per share               
Net loss per share from continuing operations   (8,190,376)   148,801,780    (0.06)
Net income per share from discontinued operations   6,821,889    148,801,780    0.05 
                
   $(1,368,487)   148,801,780   $(0.01)

 

 

For the year ended December 31, 2016, the following options and warrants were excluded from the computation of diluted net loss per share as the results would have been anti-dilutive.

 

   Year ended December 31, 2016 
     
Stock options  $480,000 
Warrants to purchase shares of common stock   19,637,409 
   $20,117,409 

 

20.Commitments and contingencies

 

a.Contingency related to outstanding penalties

 

The Company has provided for potential US penalties of $250,000 due to non-compliance with the filing of certain required returns. The actual liability may be higher due to interest and penalties assessed by these taxing authorities.

 

b.Operating leases

 

The Company has assumed operating leases for certain vehicles and office equipment. The future commitment of these operating leases are as follows:

 

    Amount 
      
2018   $8,014 
2019    270 
Total   $8,284 
       

 

F-30

 

 

20.Commitments and contingencies (continued)

 

c.Mortgage loans

 

The company has two mortgage loans as disclosed in note 14 above. The future commitments under these loans are as follows:

 

    Amount 
      
2018   $134,010 
2019    3,048,904 
2020    110,444 
2021    115,662 
2022    3,908,884 
Total   $7,317,902 
d.Convertible loans

 

The Company has an interest bearing convertible loan which requires monthly interest payments: the future interest payments under this loan is as follows:

 

    Amount 
      
2018   $128,723 
Total   $128,723 

 

 

e.Other

 

From time to time, the Company and its subsidiaries enter into legal disputes in the ordinary course of business. The Company believes there are no material legal or administrative matters pending that are likely to have, individually or in the aggregate, a material adverse effect on its business or results of operations.

21.Income taxes

 

The Company is not current in its tax filings as of December 31, 2017 and 2016

 

The Company accounts for income taxes under Accounting Standards Codification 740, Income Taxes “ASC 740”. ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Internal Revenue Code Section 382 “IRC 382” places a limitation on the amount of taxable income that can be offset by carry forwards after a change in control (generally greater than a 50% change in ownership).

           
  
Year ended December
31, 2017
   Year ended December
31, 2016
 
           
Tax expense at the federal statutory rate   (1,288,471)   (394,991)
Foreign taxation   (1,325,577)   198,560 
Permanent differences   1,606,144    56,768 
Foreign tax rate differential   (203,943)   98,381 
Valuation allowance   1,211,846    41,282 
         

 

F-31

 

 

21.Income taxes (continued)

 

The components of the Company’s deferred taxes asset as at December 31, 2017 and December 31, 2016 are as follows:

           
   December 31, 2017   December 31, 2016 
Deferred tax assets          

Net operating loss carry forward

   20,303,013    20,198,844 
Net Operating Loss utilized - Discontinued operations   (2,775,870)    
Net taxable loss   3,029,615    104,169 
Valuation allowance   (20,556,758)   (20,303,013)
         

 

As of December 31, 2017, the Company is in arrears on filing its statutory income tax returns and the amounts presented above are based on estimates. The actual losses available could differ from these estimates. In addition, the Company could be subject to penalties for these unfiled tax returns.

 

During the year ended December 31, 2017, the Company has accrued and expensed $250,000 (2016: $250,000) in penalties and interest attributable to delinquent tax returns. Management believes the Company has adequately provided for any ultimate amounts that are likely to result from audits of these returns once filed; however, final assessments, if any, could be significantly different than the amounts recorded in the financial statements.

 

The Company operates in foreign jurisdictions and is subject to audit by taxing authorities. These audits may result in the assessment of amounts different than the amounts recorded in the consolidated financial statements. The Company liaises with the relevant authorities in these jurisdictions in regard to its income tax and other returns. Management believes the Company has adequately provided for any taxes, penalties and interest that may fall due.

 

22.Subsequent events

 

On March 9, 2018, the Company, entered into a Securities Purchase Agreement with Power Up Lending Group Ltd., pursuant to which the Company issued to the Purchaser a Convertible Promissory Note in the aggregate principal amount of $153,000. The Note has a maturity date of December 30, 2018 and bears interest at the at the rate of twelve percent per annum from the date on which the Note is issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company shall have the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the average lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion.

 

Other than the above, the Company has evaluated subsequent events through the date the consolidated financial statements were available to be issued and has concluded that no such events or transactions took place that would require disclosure herein.

 

F-32

 

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

a)Evaluation of Disclosure and Control Procedures

 

The Company’s disclosure controls and procedures are designed to ensure (i) that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (ii) that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Our principal executive officer and principal financial officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2017, and concluded that the disclosure controls and procedures were not effective as a whole, and that the deficiency involving internal controls constituted a material weakness as discussed below.

 

b)Management’s Assessment of Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f). A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2016, based on the criteria established in a report entitled “Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission” and the interpretive guidance issued by the Commission in Release No. 34-55929. Based on this evaluation, the Company’s management, including the Company’s principal executive officer and principal financial officer, has evaluated and concluded that the Company’s internal control over financial reporting was ineffective as of December 31, 2017, and identified the following material weaknesses:

 

There are insufficient written policies and procedures to ensure the correct application of accounting and financial reporting with respect to the current requirements of GAAP and SEC disclosure requirements; and Notwithstanding the existence of this material weakness in our internal control over financial reporting, our management believes that the consolidated financial statements included in its reports fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented.

 

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. The Company’s registered public accounting firm was not required to issue an attestation on its internal controls over financial reporting pursuant to temporary rules of the Securities and Exchange Commission. The Company will continue to evaluate the effectiveness of internal controls and procedures on an ongoing basis.

 

c)Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

 

Not applicable.

 

11

 

 

Item 10. Directors, Executive Officers, and Corporate Governance.

 

The following table sets forth the names and ages of the members of the Company’s Board of Directors (the “Board”) and executive officers, and the positions held by each:

 

Name Position  
Shawn E. Leon 58 Chief Executive Officer, Chief Financial Officer, President and  Director
     
John O’Bireck 59 Director
     
Gerald T Miller 60 Director

 

Set forth below is a brief description of the background and business experience of each of our current executive officers and directors. Shawn E. Leon, Chief Executive Officer, Chief Financial Officer, President and Director

 

Shawn E. Leon has been an officer and director of the Company since November 2010 and served as the President of the Company’s subsidiaries at all times. In April 2011, Mr. Leon was appointed as the Company’s Chief Executive Officer. Prior to joining the Company, Mr. Leon held the role of President of Greenestone Clinic Inc., Leon Developments Ltd, Port Carling Inn Developments Ltd., 1871 at the Locks Developments Ltd. and Leon Developments Ltd. Mr. Leon graduated with Honors in Business Administration from Wilfrid Laurier University in 1982. Mr. Leon was elected to the Board because of his prior management experience.

 

John O’Bireck, Director

 

John O’Bireck of Aurora, Ontario, Canada has been a Control Systems Engineer, since graduating in 1982, and has since been involved with building engineering teams to provide solutions for industrial and transportation industry. He was a cofounder of HayDrive Technologies Ltd. a publicly listed company where he held the positions of Director, Vice-president, Chief Technology Officer and Vice President of Advanced Product Development. Mr. O’Bireck was also the cofounder, Director and President of Supernova Performance Technologies Ltd., a privately held company. In 2014 Mr. O’Bireck was elected as a Director to the Board of Sparta Capital Ltd.

 

Gerald T. Miller, Director

 

Gerry Miller of Toronto, Ontario, Canada is the Managing Partner of the Law Firm Gardiner Miller Arnold LLP. Mr. Miller’s practice focuses on a comprehensive range of business, finance and real estate issues. In addition to managing the law firm. Mr. Miller’s runs the business law and real estate practice at Gardiner Miller Arnold LLP Law firm. He advises small to medium sized companies in manufacturing, investing and service related industries. Mr. Miller supervises all merger and acquisition transactions and institutional finance work.

 

Involvement in Certain Legal Proceedings

 

A former employee has filed suit against the Company asserting wrongful dismissal, claiming damages between CDN$43,500 and CDN$50,000 this matter is under discussion with the plaintiff, we feel that the damages claimed are remote

 

Other than disclosed above, to the best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former director, executive officer, or employee: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

 

12

 

 

Compliance with Section 16(A) of the Exchange Act

 

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish the Company with copies of all reports filed by them in compliance with Section 16(a).

 

Based solely on our review of certain reports filed with the SEC pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, at December 31, 2017, none of the officers, directors or 10% shareholders were in compliance with Section 16(a).

 

Code of Ethics

 

The Board adopted a Code of Business Conduct and Ethics applicable to all of our directors, officers and employees, including our Chief Executive Officer. A copy of our Code of Ethics is incorporated by reference to an exhibit in our exhibit table. Shareholders may also request a copy of the Code of Ethics from the Company’s headquarters.

 

Board Meetings and Committees

 

The Company holds regular Board meetings each quarter. There are no sub committees of the Board. All Directors act on all matters before the Board.

 

Audit Committee

 

Effective May 6, 2003, the SEC adopted rules that require that before our auditor is engaged by us to render any auditing or permitted nonaudit related service, the engagement be:

 

approved by our audit committee; or
entered into pursuant to preapproval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee’s responsibilities to management.

 

We do not currently have an audit committee. The Board preapproves all services provided by our independent auditors and otherwise performs the functions of an audit committee. The Company does not believe that not having an audit committee will have any adverse effect on the Company’s financial statements or current operations. The Company’s management will assess whether an audit committee may be necessary in the future.

 

Item 11. Executive Compensation.

 

There has been no annuity, pension or retirement benefits paid to our officers or directors during the past two fiscal years. We currently do not have an employment agreement with the Company’s Chief Executive Officer. There is no compensation committee of the Board. The Board approved the terms of a certain management agreement with Greenestone Clinic, Inc., wholly owned by the Company’s Chief Executive Officer, Shawn Leon, and with Shawn Leon, whereby a management agreement was initially for a term of one year and was for the development of medical clinics in Ontario, Canada. The agreement has been extended from year to year and has been expanded to include overall company management and the development of clinics in the United States. The management agreement allowed for a maximum compensation of $300,000 per year.

 

Summary Compensation Table

 

Name and Principal Position  Year   Salary ($)   Bonus ($)   Option Awards ($)   Non-Equity Plan Compensation ($)   Non Qualified Deferred Compensation Earnings ($)   All Other Compensation ($)   Total ($) 
                                 
Shawn E. Leon, President CEO, CFO (1)   2017                        289,125    289,125 
    2016                        257,283    257,283 

 

(1)All other compensation represents a management fee of $289,125 (2016:257,283) paid to a company controlled by Mr. Leon and a further management fee for services rendered. The verbal management agreement was entered into with Greenstone Clinic, Inc., a wholly owned subsidiary of Shawn Leon, and Shawn Leon, was initially for a term of one year and was for the development of medical clinics in Ontario, Canada. The agreement has been extended from year to year and has been expanded to include overall company management and the development of clinics in the United States. The management agreement allowed for a maximum compensation of $300,000 per year.

 

13

 

 

Outstanding Equity Awards at Fiscal Year End

 

There were no equity awards issued to executive officers during the fiscal year ended December 31, 2017 and there are no outstanding equity awards to named officers as of December 31, 2017.

 

Information regarding equity compensations plans is set forth in the table below:

 

   Number of securities
to be issued upon exercise of
outstanding options
   Weighted average exercise price of outstanding options   Number of securities remaining for future issuance under
equity compensation plans
 
             
Equity Compensation plans approved by the stockholders               
2013 Equity compensation plan   480,000   $0.12    9,520,000 
Equity Compensation plans not approved by the stockholders               
None      $     
                
    480,000.0   $3.59    9,520,000 

 

Directors Compensation

 

The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named directors by us during the year ended December 31, 2017.

 

Name  Fees earned or paid in cash ($)   Stock awards ($)   Option awards ($)   Non-Equity
Plan Compensation ($)
   Non Qualified Deferred Compensation Earnings ($)   All Other Compensation ($)   Total ($) 
                                    
Shawn E. Leon                            
                                    
John O’ Bireck                            
                                    
Gerald T Miller                            

 

14

 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table sets forth the beneficial ownership of our capital stock by each executive officer and director, by each person known by us to beneficially own more than five percent (5%) of any class of stock and by the executive officers and directors as a group. Except as otherwise indicated, all shares of common stock are owned directly and the percentage shown is based on 109,938,855 shares of common Stock issued and outstanding as of April 11,2018.

 

Name of beneficial owner  Amount and
nature of beneficial
ownership,
including common
stock
 

Percentage of
common stock
beneficially owne

d (1)

         
Directors and Officers          
Shawn E. Leon   80,389,234(2)   62.0%
           
5% Shareholders          
Leonite Capital LLC   29,400,000    19.5%
           
All officers and directors as a group (10 persons)   80,389,234    62.0%

(1)Based on 122,989,230 shares of common stock outstanding as of April 11, 2018.
(2)Includes 2,257,850 shares of common stock; 8,677,042 shares of common stock and warrants for 6,767,042 shares of common stock held by Eileen Greene, the spouse of Shawn Leon; 2,687,300 shares of common stock held by GreeneStone Clinic Inc., which is controlled by Mr. Leon; and a further 60,000,000 shares of common stock issued to Leon Developments Ltd upon the acquisition of CCH on February 14, 2017. Mr. Leon resides at 46 Fairway Heights Drive, Thornhill, Ontario, Canada.

 

15

 

 

Item 13. Certain Relationships and Related Party Transactions, and Director Independence

 

Related Party Transactions

 

As of December 31, 2017, a total of $72,729 is payable to executive officers or their affiliates for net related party payables, as detailed in the below table:

 

Name  Amount 
Owing to the Company     
Shawn E. Leon(1)  $16,080 
Owing by the Company     
1816191 Ontario(2)   (15,922)
Leon Developments, LTD(3)   (1,703,976)
Eileen Greene(4)   (877,182)
Total  $(2,581,000)

(1)Shawn Leon is the Chief Executive Officer of the company
(2)1816191 Ontario is the Endoscopy Clinic sold to Dr. Parekh in December 2014.
(3)Leon Developments is wholly owned by Shawn Leon, the Company’s Chief Executive Officer
(4)Eileen Greene is the spouse of Shawn Leon.

 

Shawn E. Leon

As of December 31, 2017 and 2016 the Company had a receivable of $16,080 and a payable of $8,492, respectively to Shawn E. Leon, a director and CEO of the Company. The balances receivable and payable are non-interest bearing and have no fixed repayment terms.

 

Mr. Leon was paid management fees of $289,125 during the year ended December 31, 2017. In addition to this the Company recorded a once off compensation expense in other expenses, relating to the excess of the fair value of the assets acquired in CCH. Mr. Leon is the owner of Leon Developments, the counterparty in the acquisition of the CCH.

 

1816191 Ontario

As of December 31, 2017 the Company had a payable of $15,921 to 1816191 Ontario, the Endoscopy Clinic, which was sold at the end of the prior year. The payable is non-interest bearing, and has no specific repayment terms.

 

Leon Developments, Ltd.

The Company acquired CCH from Leon Developments, Ltd., on February 14, 2017, CCH owns the facility utilized by the Canadian Rehab Clinic which was sold to a third party on February 14, 2017. CCH owed CDN $2,692,512 to Leon Developments. The amount owing to Leon Developments Ltd., as of December 31, 2017 was CDN$2,692,512 or US$1,703,976.

 

Eileen Greene

Eileen Greene is the spouse of our CEO, Shawn Leon.

 

On December 30, 2016 we entered into a Securities Purchase agreement with Ms. Greene, whereby $163,011 (CDN $220,000) was advanced to the Company in the form of a promissory note, bearing interest at 0% per annum and convertible into shares of common stock at a conversion price of $0.03 per share. On January 17,2017, Ms. Greene advanced the company a further $40,000 in the form of a promissory note, bearing interest at 0$ per annum and convertible into shares of common stock at a conversion price of $0.03 per share. In connection with the issue pf promissory notes, Ms. Greene was also awarded warrants exercisable over 6,767,042 shares of common stock at an exercise price of $0.03 per share.

 

These promissory notes were converted into 6,767,042 common shares during July 2017.

 

During October and November 2017, we borrowed CDN$1,122,000 from Eileen Greene, principally to fund the deposit on a real estate transaction. The funds advanced is non-interest bearing and has no fixed repayment terms. As of December 31, 2017, the amount owing to Eileen Greene amounted to $877,182.

 

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Directors Independence

The common stock of the Company is currently quoted on the OTCBB, a quotation system which currently does not have director independence requirements. On an annual basis, each director and executive officer will be obligated to disclose any transactions with the Company in which a director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest in accordance with Item 407(a) of Regulation SK. Following completion of these disclosures, the Board will make an annual determination as to the independence of each director using the current standards for “independence” that satisfy the criteria for the NASDAQ Stock Market, Inc.

 

As of December 31, 2017, the Board determined that John O’Bireck and Gerald T Miller are independent and that Mr. Leon is not independent under these standards.

 

Item 14. Principal Accountant Fees and Services.

 

On March 9,2018, the Company dismissed RBSM LLP as the Company’s independent registered public accounting firm. The decision to change was approved by the Company’s Board of Directors.

 

The audit report of Company’s independent registered public accounting firm on the financial statements for each of the past two years ended December 31, 2016 and 2015 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles, with the exception that: the reports dated April 17, 2017, and April 14, 2016, contained the following explanatory paragraph: “The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has sustained net losses and has a working capital and stockholder’s deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 6. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.”

 

During the Company’s two most recent fiscal years and the subsequent interim periods preceding its dismissal of RBSM, there were: (i) no disagreements with RBSM on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of RBSM, would have caused it to make reference to the subject matter of the disagreements in its reports on the consolidated financial statements of the Company; and (ii) no reportable events as described in Item 304(a)(1)(v) of Regulation S-K.

 

Appointment of Daszkal Bolton LLP

 

On March 9, 2018, the Company engaged Daszkal Bolton LLP (“Daszkal”), as the Company’s independent registered public accounting firm to audit the Company’s financial statements. Prior to retaining Daszkal, the Company did not consult with Daszkal regarding either: (i) the application of accounting principles to a specified transaction, either contemplated or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements; or (ii) any matter that was the subject of a “disagreement” (as described in Item 304(a)(1)(iv) of Regulation S-K) or a “reportable event” (as described in Item 304(a)(1)(v) of Regulation S-K).

 

The following is a summary of the fees paid by us to RBSM LLP for professional services rendered for the years ended December 31, 2017 and 2016:

 

   Year ended December
31, 2017
  Year ended December
31, 2016
       
Audit fees and expenses  $64,790   $62,500 
Taxation preparation fees          
Audit related fees          
Other fees   —      —   
   $64,790   $62,500 

 

Audit Fees

 

Consists of fees billed for professional services rendered for the audit of our financial statements and review of interim financial statements included in quarterly reports and services that are normally provided by RBSM LLP in connection with statutory and regulatory filings or engagements in fiscal year ended December 31, 2017 and 2016, respectively.

 

Audit Related Fees

 

Consists of fees billed for accounting, assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees”.

 

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Tax Fees

 

Tax Fees consist of the aggregate fees billed for professional services rendered by our principal accounts for tax compliance, tax advice, and tax planning. These services include preparation for federal and state income tax returns.

 

All Other Fees

 

We did not incur any other fees billed by auditors for services rendered to our Company, other than the services listed above for the fiscal years ended December 31, 2017 and 2016, respectively.

 

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PART IV

 

Item 15. Exhibits, Financial Statement Item 15. Exhibits and Financial Statement Schedules and Reports on Form 10-K

 

(a)(1)   The following financial statements are included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

 

  1. Independent Auditor’s Report

 

  2. Consolidated Balance Sheets as of December 31, 2017 and 2016

 

  3. Consolidated Statements of Operations and comprehensive loss for the years ended December 31, 2017 and 2016

 

  4. Consolidated Statements of changes in Stockholders’ Deficit for the years ended December 31, 2017 and 2016

 

  5. Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016

 

  6. Notes to Consolidated Financial Statements

 

  (a)(2) All financial statement schedules have been omitted as the required information is either inapplicable or included in the Consolidated Financial Statements or related notes.

 

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(b) Exibits

 

Exhibit No. Description Form SEC File No. Date Filed Herewith Filed by Reference
             
3.1 Articles of Incorporation of NNRC, Inc. (as filed with the Secretary of State of Colorado on April 1, 1993) 10-K 000-15078 March 28,2013   X
             
3.2 Articles of Amendment to the Articles of Incorporation of Nova Natural Resources, Inc. (as filed with the Secretary of State of Colorado on May 8, 2012) 10-K 000-15078 March 28,2013   X
             
3.3 Articles of Amendment to the Articles of Incorporation of Greenestone Healthcare Corporation (as filed with the Secretary of State of Colorado on March 26, 2013) 8-K 000-15078 March 29, 2013   X
             
3.4 Amended and Restated Bylaws of Greenestone Healthcare Corporation 8-K 000-15078 March 29, 2013   X
             
3.5 Articles of Amendment to the Articles of Incorporation re: Name Change 8-K 000-15078 April 10, 2017   X
             
3.6 First amendment to Amended and Restated Bylaws 8-K 000-15078 April 10, 2017   X
             
4.1 Form of Series L Convertible Note and Warrant Agreement 8-K 000-15078 42740   X
             
4.2 Form of LABRYS LP Convertible Note Agreement 8-K 000-15078 February 2, 2017   X
             
10.1 Stock Purchase Agreement I 8-K 000-15078 41362 X
           
10.2 Form of Warrant I 8-K 000-15078 December 30, 2013   X
             
10.3 Form of Warrant II 8-K 000-15078 December 30, 2013   X
             
10.4 Stock Purchase Agreement  II 8-K 000-15078 December 30, 2013   X
             
10.5 Share Purchase Agreement, dated as of December 16,2014 by and between the Registrant and Jainheel Patekh Medical Professional Corporation 8-K 000-15078 December 23, 2014   X
             
10.6 Collateral Note, Dated December 16, 2014 8-K 000-15078 December 23, 2014   X
             
10.7 Seastone of Delray Asset Purchase Agreement, Management Services Agreement and Commercial Real Estate Contract 8-K 000-15078 May 23, 2016   X
             
10.8 Stock Purchase Agreement re: Cranberry Cove Holdings Ltd. 8-K 000-15078 February 17,2017   X
             
10.9 Asset Purchase Agreement re: Sale of Muskoka Clinic 8-K 000-15078 February 17, 2017   X
             
10.10 Lease of Muskoka Clinic 8-K 000-15078 February 17, 2017   X
             
16.1 Letter from Jarvis Ryan Associates, LLP 8-K 000-15078 July 19, 2014   X

 

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31.1 Certification of the Principal Executive Officer of the registrant pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (Rule 13(a) -14(a) or Rule 15(d( - 14 (a) X
           
31.2 Certification of the Principal Financial Officer of the registrant pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (Rule 13(a) -14(a) or Rule 15(d( - 14 (a)       X  
             
32.1 Certification of the Principal Executive Officer pursuant to Rule 18 U.S.C 1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002       X  
             
32.2 Certification of the Principal Financial Officer pursuant to Rule 18 U.S.C 1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002       X  
             
101.INS  INS XBRL Instance Document         X
101.SCH  SCH XBRL Schema Document         X
101.CAL  CAL XBRL Calculation Linkbase Document         X
101.DEF  DEF XBRL Definition Linkbase Document         X
101.LAB  LAB XBRL Label Linkbase Document         X
101.PRE  PRE XBRL Presentation Linkbase Document         X

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

ETHEMA HEALTH CORPORATION.

 

Date: April 17, 2018

By: /s/ Shawn E. Leon

Name: Shawn E. Leon

Title: Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial 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.

 

Name Position Date

 

/s/Shawn E. Leon

 

Chief Executive Officer (Principal Executive Officer),

 

April 17, 2018

Shawn Leon

Chief Financial Officer (Principal Financial

Officer), President and Director

 
     
/s/ John O’Bireck Director April 17, 2018
John O’Bireck    
     
/s/ Gerald T. Miller Director April 17, 2018
Gerald T. Miller    

 

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