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EX-32.2 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, - ETHEMA HEALTH Corpf2sgrst10q081618ex32_2.htm
EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, - ETHEMA HEALTH Corpf2sgrst10q081618ex32_1.htm
EX-31.2 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION - ETHEMA HEALTH Corpf2sgrst10q081618ex31_2.htm
EX-31.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION - ETHEMA HEALTH Corpf2sgrst10q081618ex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2018

 

OR

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from to

 

Commission File Number: 000-15078

 

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 and zip code)

 

(561) 450-7679

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (§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 [X] No [ ]

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

 

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

 

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

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

As of August 20, 2018, there were 124,009,230 shares outstanding of the registrant’s common stock.

 
 

 

ETHEMA HEALTH CORPORATION

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report on Form 10-Q, including but not limited to, statements regarding the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects, or costs and objectives of management for future acquisitions, are forward looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” ’‘targets,” “projects,” “contemplates,” ’‘believes,” “seeks,” “goals,” “estimates,” ’‘predicts,” ’‘potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, and those identified under Part I, Item 1A of our Annual Report on Form 10-K/A for the year ended December 31, 2017 filed with the SEC on April 18, 2018. Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

 

NOTE REGARDING COMPANY REFERENCES

 

Throughout this Quarterly Report on Form 10-Q, “Ethema,” the “Company,” “we,” “us” and “our” refer to Ethema Health Corporation.

 

 
 

 

 

 

 

  ETHEMA HEALTH CORPORATION  

 

SIX MONTHS ENDED JUNE 30, 2018

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I.    
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
     
PART II.    
Item 1 Legal Proceedings 30
Item 1A. Risk factors 30
Item 2 Unregistered sale of equity securities and use of proceeds 30
Item 3 Defaults upon senior securities 30
Item 4 Mine Safety Disclosures 30
Item 5 Other Information 30
Item 6 Exhibits 31
SIGNATURES 32

 

 
 

 

 

 

ETHEMA HEALTH CORPORATION

 

 

PART I

 

Item 1. Financial Statements.

 

INDEX TO THE

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Expressed in US Dollars unless otherwise indicated)

 

 

 

   PAGE
Condensed consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017   1 
Unaudited Condensed Consolidated Statements of Operations and Comprehensive loss for the three and six months ended June 30, 2018 and 2017.   2 
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficit for the six months ended June 30, 2018   3 
Unaudited Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2018 and 2017.   4 
Notes to the unaudited Condensed Consolidated Financial Statements   5 

 

 

 

 
 

ETHEMA HEALTH CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

   June 30, 2018  December 31, 2017
   (unaudited)   
ASSETS
       
Current assets          
Cash  $345,141   $339 
Accounts receivable   60,702    218,858 
Prepaid expenses   43,905    99,342 
Related party Receivables   19,265    16,080 
Total current assets   469,013    334,619 
Non-current assets          
Deposit on real Estate   2,962,210    1,825,000 
Due on sale of subsidiary   410,085    954,951 
Property, plant and equipment   8,909,648    9,153,858 
Total non-current assets   12,281,943    11,933,809 
Total assets  $12,750,956   $12,268,428 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
Current liabilities          
Bank overdraft  $768   $28,927 
Accounts payable and accrued liabilities   331,603    372,244 
Taxes payable   664,578    689,240 
Convertible loans   2,225,369    160,453 
Loans payable, current portion   133,617    152,402 
Derivative liability   4,754,620    2,859,832 
Related party payables   2,467,299    2,597,080 
Total current liabilities   10,577,854    6,860,178 
Non-current liabilities          
Loan payable, net of current portion   6,930,560    7,183,892 
Total liabilities   17,508,414    14,044,070 
           
Stockholders' deficit          
Preferred stock - Series A; $0.01 par value, 3,000,000 authorized, nil outstanding as of June 30\, 2018 and December 31, 2017.   —      —   
Preferred Stock - Series B; $0.01 par value, 10,000,000 authorized, nil outstanding as of June 30, 2018 and December 31, 2017.   —      —   
Common stock; $0.01 par value, 500,000,000 shares authorized;  124,009,230 and 123,239,230 shares issued and outstanding  as of June 30, 2018 and December 31, 2017.   1,240,093    1,232,393 
Additional paid-in capital   19,799,660    18,545,913 
Accumulated other comprehensive income   700,808    796,453 
Accumulated deficit   (26,498,019)   (22,350,401)
Total stockholders' deficit   (4,757,458)   (1,775,642)
Total liabilities and stockholders' deficit  $12,750,956   $12,268,428 

 

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

 1 

 

ETHEMA HEALTH CORPORATION


UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

   Three months ended June 30, 2018  Three months ended June 30, 2017  Six months ended June 30, 2018  Six months ended June 30, 2017
         (Restated)         (Restated) 
Revenues  $66,694   $402,220   $179,996   $724,730 
                     
Operating expenses                    
General and administrative   328,494    57,905    522,227    408,442 
Management fees   45,565    —      92,098    —   
Professional fees   145,088    66,403    183,098    399,204 
Salaries and wages   208,280    173,451    393,436    382,695 
Depreciation and amortization   68,041    73,898    136,456    107,494 
Total operating expenses   795,468    371,657    1,327,315    1,297,835 
                     
Operating (loss) income   (728,774)   30,563    (1,147,319)   (573,105)
                     
Other Income (expense)                    
Other income   —      1,000    —      473,369 
Other expense   —      (19,265)   —      (5,093,954)
Interest income   (49)   —      —      32,074 
Interest expense   (176,587)   (93,603)   (347,038)   (156,620)
Debt discount   (1,339,885)   (241,666)   (2,092,834)   (429,325)
Derivative liability movement   (796,795)   167,580    (808,951)   94,532 
Foreign exchange movements   110,628    (6,438)   248,524    (164,347)
Net loss before taxation from continuing operations   (2,931,462)   (161,829)   (4,147,618)   (5,817,376)
Taxation   —      —      —      —   
Net loss from continuing operations   (2,931,462)   (161,829)   (4,147,618)   (5,817,376)
Gain on disposal of business   —      —      —      7,494,828 
Operating loss from discontinued operations, net of tax   —      (141,177)   —      (82,185)
Net loss from discontinued operations, net of tax   —      (141,177)   —      7,412,643 
Net (loss) income   (2,931,462)   (303,006)   (4,147,618)   1,595,267 
Accumulated other comprehensive (loss) income                    
Foreign currency translation adjustment   (53,186)   154,255    (95,645)   (36,692)
                     
Total comprehensive (loss) income  $(2,984,648)  $(148,751)  $(4,243,263)  $1,558,575 
                     
Basic loss per common share from continuing operations  $(0.02)  $—     $(0.03)  $(0.06)
Basic income per share from discontinued operations  $—     $—     $—     $0.08 
Basic (loss) income per common share  $0.02   $—     $0.03   $0.02 
Diluted loss per common share from continuing operations  $(0.02)  $—     $(0.03)  $(0.06)
Diluted income per share from discontinued operations  $—     $—     $—     $0.07 
Diluted (loss) income per common share  $(0.02)  $—     $(0.03)  $0.01 
Weighted average common shares outstanding - Basic   123,976,208    108,772,921    123,571,357    93,838,855 
Weighted average common shares outstanding - Diluted   123,976,208    108,772,921    123,571,357    104,974,243 

 

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

 2 

 

 

 

ETHEMA HEALTH CORPORATION

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT

 

   Preferred Series B  Common  Additional         
   Shares  Amount  Shares  Amount  Paid in Capital  Comprehensive Income  Accumulated Deficit  Total
                         
Balance at January 1, 2018   —     $—      123,239,230   $1,232,393   $18,545,913   $796,453   $(22,350,401)  $(1,775,642)
Shares issued for commitment fee   —      —      770,000    7,700    51,000    —      —      58,700 
Fair value of Series N warrants issued   —      —      —      —      1,202,747    —      —      1,202,747 
Foreign currency translation   —      —      —      —      —      (95,645)   —      (95,645)
Net income   —      —      —      —      —      —      (4,147,618)   (4,147,618)
Balance as of June 30, 2018   —     $—      124,009,230   $1,240,093   $19,799,660   $700,808   $(26,498,019)  $(4,757,458)

 

 

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

 3 

 

ETHEMA HEALTH CORPORATION

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

   Six months ended June 30, 2018  Six months ended June 30, 2017
Operating activities  (Restated) 
Net (loss) income from continuing operations  $(4,147,618)  $1,595,267 
Net income from discontinued operations  $—     $(7,412,643)
Net loss from continuing operations  $(4,147,618)  $(5,817,376)
Adjustment to reconcile net loss to net cash used in operating activities:          
Depreciation   136,456    107,494 
Non cash compensation expense on acquisition of subsidiary   —      5,074,689 
Non cash compensation for services   58,700    4,000 
Non cash discount on convertible notes issued   103,000    —   
Other foreign exchange movements   —      (27,476)
Amortization of debt discount   2,092,834    429,325 
Derivative liability movements   808,951    (94,532)
Movement in receivables reserve   (38,826)   —   
Provision against receivable on sale of subsidiary   —      (446,476)
Loss on mortgage sold   —      19,265 
Changes in operating assets and liabilities          
Accounts receivable   196,982    (327,351)
Prepaid expenses   51,678   (6,776)
Accrued purchase consideration   517,239    —   
Accounts payable and accrued liabilities   6,525    (55,155)
Taxes payable   (3,896)   (2,401,665)
Net cash used in operating activities - continuing operations   (217,777)   (3,542,034)
Net cash provided by operating activities - discontinued operations   —      101,033 
    (217,777)   (3,441,001)
Investing activities          
Investments in Seastone   —      (2,960,000)
Deposits on property   (1,133,657)   —   
Proceeds from restricted cash   —      51,362 
Purchase of fixed assets   (41,610)   (8,878)
Net cash used in investing activities - continuing operations   (1,175,267)   (2,917,516)
Net cash provided by investing activities - discontinued operations   —      6,241,082 
    (1,175,267)   3,323,566 
           
Financing activities          
Decrease in bank overdraft   (28,056)   (36,605)
Proceeds from mortgage sold   —      111,554 
Repayment of mortgage   (66,080)   (85,613)
Proceeds from convertible notes   2,550,000    294,500 
Repayment of convertible notes   (433,000)   (130,000)
(Repayment) proceeds of related party notes   (31,329)   26,195 
Net cash provided by financing activities   1,991,535    180,031 
           
Effect of exchange rate on cash   (253,690)   (36,692)
           
Net change in cash   344,802    25,904 
Beginning cash balance   339    4,779 
Ending cash balance  $345,141   $30,683 
           
Supplemental cash flow information          
Cash paid for interest  $308,077   $153,817 
Cash paid for income taxes  $—     $—   
           
Non cash investing and financing activities          
Common shares issued to acquire subsidiary  $—     $2,184,000 
Assumption of mortgage liabilities on acquisition of subsidiary  $—     $3,145,549 

 

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

 

 4 

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED 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 real estate assets of Seastone Delray pursuant to certain real estate and asset purchase agreements. 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 made nonrefundable down payments totaling $2,549,955 as of June 30, 2018.

 

On May 23, 2018, the Company converted the agreement to purchase AREP 5400 East Avenue LLC. ("the landlord") into a lease agreement with a purchase option of $17,250,000, increasing August 31, 2018 by $750,000 per month until the purchase option is exercised. The premises is located at 5400, 5402 and 5410 East Avenue, West Palm Beach, Florida (the "Property"). The lease is for an initial 10 years and provides for two additional 10 year extensions.

 

The Company was previously under agreement to purchase the Property from the Landlord. The Property is presently used as a rehabilitation treatment center. The current tenant at the property, Alternatives in Treatment, LLC, a Florida limited liability company, consented to the Lease and concurrent with the execution of the Lease entered into a Sublease Agreement with the Company.

 

 5 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.Nature of Business (continued)

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim consolidated financial information and Rule 8-03 of Regulation SX. Accordingly, these unaudited condensed consolidated financial statements do not include all the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.

 

All adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included in these unaudited condensed consolidated financial statements. Operating results for the three and six month period presented are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The balance sheet at December 31, 2017 has been derived from audited consolidated financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto for the year ended December 31, 2017.

 

2.Summary of Significant Accounting Policies

 

a)Use of Estimates

 

The preparation of unaudited condensed consolidated 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.

 

b)Principals of consolidation and foreign currency translation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated on consolidation.

 

The Company previously owned an operational subsidiary whose functional currency was the Canadian dollar, while the Company’s reporting currency is the U.S. dollar. The Company recently acquired a property-owning subsidiary, CCH, whose functional currency is the Canadian 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.

 

Non monetary assets and equity at historical rates.

 

Revenue and expense items 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’ equity 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 three months ended June 30, 2018; a closing rate of CAD$1.0000 equals US$0.7594 and an average exchange rate of CAD$1.0000 equals US$0.7715.

 6 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.       Summary of Significant Accounting Policies (continued)

 

c)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.

 

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.

 

Deferred revenue represents monies deposited by the patients for future services to be provided by the Company. Such monies will be recognized into revenue as the patient progresses through their treatment term.

 

e)Recent accounting pronouncements

 

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting.

 

The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.

 

The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. 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 adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.

 

The impact of this ASU on the Company’s financial statements is not expected to be material.

 7 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.       Summary of Significant Accounting Policies (continued)

 

e)Recent accounting pronouncements (continued)

 

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements.

 

The amendments in this Update provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with preparers’ requests.

 

The amendments in this Update provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and both of the following are met: 1. The timing and pattern of transfer of the non-lease component(s) and associated lease component are the same. 2. The lease component, if accounted for separately, would be classified as an operating lease.

 

The amendments in this Update related to separating components of a contract affect the amendments in Update 2016-02, which are not yet effective but can be early adopted.

 

The Company is currently considering the impact this ASU will have on its 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)Financial instruments

 

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, June 30, 2018 and December 31, 2017.

 

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 $10,108,841 and accumulated deficit of $26,498,019. As disclosed in note 4, 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.

 

 8 

 

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.       Summary of Significant Accounting Policies (continued)

 

f)Financial instruments (continued)

 

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 $768 as of June 30, 2018. 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 June 30, 2018, a 5% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an approximate $5,362 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.

 

g)Derivative instrument liability

 

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.

 

 9 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3.Restatement of prior period results

 

The Company finalized the Purchase Price allocation for the acquisition of the assets of Seastone and CCH during December 2017. This resulted in the retroactive restatement of the statement of the unaudited condensed consolidated statement of operations and the unaudited condensed consolidated statement of cash flows for the three and six months ended June 30, 2017.

 

The value of the assets acquired were adjusted in line with valuations received and the corresponding depreciation charge was adjusted accordingly.

 

This resulted in an increase in other expense of $1,146,600 and $4,701,415 for the three months and six months ended June 30, 2017, respectively, on the transfer of assets between parties under common control and a net reduction in the associated depreciation charge of $51,442 and $74,912 for the three months and six months ended June 30, 2017, respectively.

 

A further adjustment was made to other income, which was reduced by $62,960 and $94,940, for the three months and six months ended June 30, 2017, respectively, to modify the Company’s estimate of deferred purchase price consideration due on the disposal of Muskoka. 

 

The reconciliation of the unaudited condensed consolidated statement of operations for the three months ended June 30, 2017 is as follows:

ETHEMA HEALTH CORPORATION

(Formerly known as Greenestone Healthcare Corporation)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Three months ended June 20, 2017 As  previously reported  Adjustments 

 

 

Three

months ended

June 30, 2017

As Restated

          
Revenues  $402,220        $402,220 
                
Operating expenses               
General and administrative   57,905         57,905 
Professional fees   66,403         66,403 
Salaries and wages   173,451         173,451 
Depreciation and amortization   125,340    (51,442)   73,898 
Total operating expenses   423,099    (51,442)   371,657 
                
Operating (loss) gain   (20,879)   51,442    30,563 
                
Other Income (expense)               
Other income   63,960    (62,960)   1,000 
Other expense   1,127,335    (1,146,600)   (19,265)
Interest expense   (93,603)        (93,603)
Debt discount   (241,666)        (241,666)
Derivative liability movement   167,580         167,580 
Foreign exchange movements   (6,438)        (6,438)
Net loss before taxation from continuing operations   996,289    (1,158,118)   (161,829)
Taxation   —      —      —   
Net loss from continuing operations   996,289    (1,158,118)   (161,829)
Net loss from discontinued operations, net of tax   (141,177)        (141,177)
Net income (loss)   855,112    (1,158,118)   (303,006)
Accumulated other comprehensive gain               
Foreign currency translation adjustment   154,255         154,255 
                
Total comprehensive income (loss)  $1,009,367   $(1,158,117)  $(148,751)
                
Basic income (loss) per common share from continuing operations  $0.01   $(0.01)  $(0.00)
Basic loss per share from discontinued operations  $(0.00)  $—     $(0.00)
Basic income per common share  $0.01   $0.01  $0.00
Diluted income per share from discontinued operations  $(0.00)  $—     $(0.00)
Diluted income (loss) per common share  $0.01   $(0.01)  $(0.00)
Weighted average common shares outstanding - Basic   108,772,921    108,772,921    108,772,921 

 10 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3.Restatement of prior period results (continued)

 

The reconciliation of the unaudited condensed consolidated statement of operations for the six months ended June 30, 2017 is as follows:

ETHEMA HEALTH CORPORATION

(Formerly known as Greenestone Healthcare Corporation)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

   Six months ended June 30, 2017 As  previously reported  Adjustments 

Six months ended June 30, 2017

As Restated

          
Revenues  $724,730        $724,730 
                
Operating expenses               
General and administrative   408,442         408,442 
Professional fees   399,204         399,204 
Salaries and wages   382,695         382,695 
Depreciation and amortization   182,406    (74,912)   107,494 
Total operating expenses   1,372,747    (74,912)   1,297,835 
                
Operating loss   (648,017)   74,912    (573,105)
                
Other Income (expense)               
Other income   568,309    (94,940)   473,369 
Other expense   (392,539)   (4,701,415)   (5,093,954)
Interest income   32,074         32,074 
Interest expense   (156,620)        (156,620)
Debt discount   (429,325)        (429,325)
Derivative liability movement   94,532         94,532 
Foreign exchange movements   (164,347)        (164,347)
Net loss before taxation from continuing operations   (1,095,933)   (4,721,443)   (5,817,376)
Taxation   —      —      —   
Net loss from continuing operations   (1,095,933)   (4,721,443)   (5,817,376)
Net income from discontinued operations, net of tax   7,412,643         7,412,643 
Net income   6,316,710    (4,721,443)   1,595,267 
Accumulated other comprehensive gain               
Foreign currency translation adjustment   (36,692)        (36,692)
                
Total comprehensive income  $6,280,018   $(4,721,443)  $1,558,575 
                
Basic loss per common share from continuing operations  $(0.01)  $(0.05)  $(0.06)
Basic income per share from discontinued operations  $0.08   $—     $0.08 
Basic income per common share  $0.07   $(0.05 )  $0.02 
Diluted loss per common share from continuing operations  $(0.01)  $(0.04)  $(0.06)
Diluted income per share from discontinued operations  $0.07   $—     $0.07 
Diluted income per common share  $0.06   $(0.04)  $0.01 
Weighted average common shares outstanding - Basic   93,838,855    93,838,855    93,838,855 
Weighted average common shares outstanding - Diluted   104,974,243    104,974,243    104,974,243 

 

 11 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3.Restatement of prior period results (continued)

 

The reconciliation of the unadjusted condensed consolidated statement of cash flows for the six months ended June 30, 2017 is as follows:

ETHEMA HEALTH CORPORATION

(Formerly known as Greenestone Healthcare Corporation)

 

  

June 30, 2017

As previously reported

  Adjustments 

June 30, 2017

 Adjusted Total

Operating activities               
Net income  $6,316,710   $(4,721,443)  $1,595,267 
Net income from discontinued operations   (7,412,643)        (7,412,643)
Net loss from continuing operations   (1,095,933)   (4,721,443)   (5,817,376)
Adjustment to reconcile net loss to net cash (used in) provided by operating activities:               
Depreciation   182,406    (74,912)   107,494 
Non cash compensation expense on acquisition of subsidiary   373,274    4,701,415    5,074,689 
Loss on mortgage sold   19,265         19,265 
Non cash compensation for services   4,000         4,000 
Other foreign exchange movements   (27,476)        (27,476)
Amortization of debt discount   429,325         429,325 
Derivative liability movements   (94,532)        (94,532)
Provision against receivable on sale of subsidiary   (446,476)        (446,476)
Changes in operating assets and liabilities               
Accounts receivable   (327,351)        (327,351)
Prepaid expenses   (6,776)        (6,776)
Accounts payable and accrued liabilities   (150,095)   94,940    (55,155)
Taxes payable   (2,401,665)        (2,401,665)
Net cash used in operating activities - continuing operations   (3,542,034)   —      (3,542,034)
Net cash provided by operating activities - discontinued operations   101,033         101,033 
    (3,441,001)   —      (3,441,001)
Investing activities               
Investments in Seastone   (2,960,000)        (2,960,000)
Proceeds from restricted cash   51,362         51,362 
Purchase of fixed assets   (8,878)        (8,878)
Net cash used in investing activities - continuing operations   (2,917,516)   —      (2,917,516)
Net cash provided by investing activities - discontinued operations   6,241,082         6,241,082 
    3,323,566    —      3,323,566 
                
Financing activities               
(Decrease) Increase in bank overdraft   (36,605)        (36,605)
Proceeds from mortgage sold   111,554         111,554 
Repayment of mortgage   (85,613)        (85,613)
Proceeds from convertible notes   294,500         294,500 
Repayment of convertible notes   (130,000)        (130,000)
(Repayment of) proceeds from related party notes   26,195         26,195 
Net cash provided by financing activities   180,031    —      180,031 
                
Effect of exchange rate on cash   (36,692)        (36,692)
                
Net change in cash   25,904         25,904 
Beginning cash balance   4,779         4,779 
Ending cash balance  $30,683   $—     $30,683 

 

 12 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4.Going concern

 

The Company’s unaudited condensed 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 of June 30, 2018, the Company has a working capital deficiency of $10,108,841 and accumulated deficit of $26,498,019. 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, or 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 unaudited condensed 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.

 

5.       Discontinued Operations

 

On February 14, 2017, the Company completed a series of transactions, including an APA whereby the Company sold certain of the Canadian Rehab Clinic assets. The assets disposed of business represented substantially all of the operating assets of the Canadian Rehab Clinic and has been disclosed as a discontinued operation for comparative purposes as of June 30, 2017. And for the three and six months ended June 30, 2017.

 

The Statement of operations for discontinued operations at June 30, 2017 is as follows:

 

   Three months ended June 30, 2017  Six months ended June 30, 2017
       
Revenues  $(112)  $232,040 
           
Operating expenses          
Depreciation and amortization   —      4,196 
General and administrative   31,330    118,706 
Professional fees   33,466    32,818 
Rent   2,975    47,493 
Salaries and wages   (31,913)   201,723 
Total operating expenses   35,858    404,936 
           
Operating (loss) income   (35,970)   (172,896)
           
Other (Expense) Income          
Other expense   (204)   (993)
Foreign exchange movements   (105,003)   91,704 
Net (loss) income before taxation   (141,177)   (82,185)
Taxation   —      —   
Net (loss) income from discontinued operations  $(141,177)  $(82,185)
           
Gain on disposal of business   —      7,494,828 
           
   $(141,177)  $7,412,643 

 

 13 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6.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 made a series of nonrefundable down payments totaling $2,549,955 as of June 30, 2018.

 

On May 23, 2018, the Company converted the agreement to purchase AREP 5400 East Avenue LLC. ("the landlord") into a lease agreement with a purchase option of $17,250,000, increasing August 31, 2018 by $750,000 per month until the purchase option is exercised. The premises is located at 5400, 5402 and 5410 East Avenue, West Palm Beach, Florida (the "Property"). The lease is for an initial 10 years and provides for two additional 10 year extensions.

 

The Company was previously under agreement to purchase the Property from the Landlord. The Property is presently used as a rehabilitation treatment center. The current tenant at the property, Alternatives in Treatment, LLC, a Florida limited liability company, consented to the Lease and concurrent with the execution of the Lease entered into a Sublease Agreement with the Company.

 

7.Due from sale of subsidiary

 

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) had 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. During the six months ended June 30, 2018, CDN960,000 of the escrow was released to the Company, with an additional CDN$540,000 still outstanding.

 

8.Property, plant and equipment

 

Property, plant and equipment consists of the following:

 

   June 30, 2018  December 31, 2017
   Cost  Amortization and Impairment  Net book value  Net book value
             
Land  $2,917,204   $—     $2,917,204   $2,925,305 
Buildings   5,928,619    (313,033)   5,615,586    5,840,268 
Furniture and fixtures   115,750    (34,320)   81,430    72,047 
Leasehold improvements   307,319    (11,891)   295,428    316,238 
   $9,268,892   $(359,244)  $8,909,648   $9,153,858 

 

Depreciation expense for the three months ended June 30, 2018 and 2017 was $68,041 and $73,898, respectively, and depreciation expense for the six months ended June 30, 2018 and 2017 was $136,456 and $107,494, respectively.

 

9.Taxes Payable

 

The taxes payable consist of:

 

A payroll tax liability of $144,638 (CDN$190,459) in Greenestone Muskoka which is being paid off in instalments.
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. The Company is taking steps to comply with US disclosure requirements, and has established a provision in the amount of $250,000.

 

  

June 30,

2018

  December 31, 2017
       
Payroll taxes  $144,638   $155,894 
US penalties due   250,000    250,000 
Income tax payable   269,940    283,346 
           
   $664,578   $689,240 

 

 14 

 

ETHEMA HEALTH CORPORATION 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

10.Short-term Convertible Notes

 

The short-term convertible notes consist of the following:

 

Interest 

rate

  Maturity date   Principal   Interest   Debt Discount  

June 30, 

2018

  December 31, 2017
                           
Leonite Investments LLC 8.5%   December 1, 2018    $ 1,650,000    $    10,174    $    (696,164)    $         964,010    $      138,502
  6.5%   On Demand          165,000            6,008                       -    $         171,008                      -   
  8.5%   On Demand          605,000          18,772                       -    $         623,772                      -   
                           
Power Up Lending Group Ltd 12.0%   August 15, 2018                   -                       -                       -                         -                 21,951
  12.0%   December 30, 2018          153,000            5,684            (94,591)                 64,093                      -   
                           
Series N Convertible notes 6.0%   November 6 to November 30, 2018       1,400,000            4,775       (1,002,289)               402,486                      -   
                           
           $ 3,973,000    $    45,413    $ (1,793,044)    $      2,225,369    $      160,453

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 $43,764 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.

On March 12, 2018, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $330,000, including an Original Issue Discount of $30,000, for net proceeds of $300,000. The note has a maturity date of March 19, 2018. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser following the issue date into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to price protection and anti-dilution protection. In conjunction with this note the Company issued warrants to purchase 5,500,000 shares of common stock at an exercise price of $0.10 per share.

In Conjunction with this note the Company issued 330,000 shares as a commitment fee at a price of $0.06 per share.

The note was repaid during March 2018.

 15 

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10.Short-term Convertible Notes (continued)

 

Leonite Capital, LLC (continued)

On March 29, 2018, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $165,000, including an Original Issue Discount of $15,000, for net proceeds of $150,000. The note has a maturity date of April 28, 2018. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser following the issue date into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to price protection and anti-dilution protection.

In Conjunction with this note the Company paid a commitment fee of $11,550 settled through the issue of 165,000 shares at a price of $0.07 per share.

On April 17, 2018, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $605,000, including an Original Issue Discount of $55,000, for net proceeds of $550,000. The note had a maturity date of May 8, 2018. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser following the issue date into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to price protection and anti-dilution protection.

The Company also issued a further 605,000 shares of common stock to Leonite as a commitment fee, valued at $42,350 at grant date, and a further 10,083,333 warrants to purchase shares of common stock at an initial exercise price of $0.10 per share, subject to anti-dilution and price protection.

Power Up Lending Group LTD

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.

 

On May 5, 2018, the aggregate principal outstanding of $103,000 together with interest and penalty interest thereon, was settled for gross proceeds of $141,824.

 

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 has 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.

 

Series N Convertible Notes

On May 31, 2018, The Company closed a private offering (the “Private Offering”) in which it raised $1,450,000 in capital from 4 accredited investors through the issuance to the investors of the Company’s Series N Convertible Notes, in the total original principal amount of $1,400,000, which Notes are convertible into the Company’s common stock at a conversion price of $0.08 per share (the “Notes”) together with Warrants to purchase up to a total of 17,500,000 shares of the Company’s common stock at an exercise price of $0.12 per share the. Both the conversion price under the Notes and the exercise price under the Warrants are subject to standard adjustment mechanisms. The Notes mature on November 30, 2018, and the Warrants are exercisable until May 31, 2021.

 

 16 

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11.Loans payable

 

The loans payable is as follows:

  Interest rate   Maturity date   Principal Outstanding   Accrued interest   June 30, 2018   December 31, 2017
                       
Cranberry Cove Holdings                      
Pace Mortgage 4.2%   July 19,2022          4,087,994                   5,130            4,093,124            4,349,374
Seastone of Delray                      
Mortgage 5.0%    February 13, 2020           2,958,725    $           12,328            2,971,053            2,986,920
           $ 7,046,719    $         17,458    $   7,064,177    $   7,336,294
Disclosed as follows:                      
Short-term portion                  $      133,617    $         152,402
Long-term portion                          6,930,560            7,183,892
                   $   7,064,177    $   7,336,294

 

The aggregate amount outstanding is payable as follows:

 

  Amount
Within 1 year  $133,617 
1 to 2 years   3,043,331 
2 to 3 years   109,547 
3 to 4 years   114,196 
Thereafter   3,663,486 
Total  $7,064,177 

 

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.

 

 17 

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12.Derivative liability

 

The short-term convertible notes, together with certain warrants issued to Leonite Capital LLC, and the short term convertible notes issued to Labrys Fund LP and Power Up Lending Group, LTD, disclosed in note 10 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 $1,085,837 using a Black-Scholes valuation model.

In addition, warrants exercisable over 5,500,000 shares of common stock were issued to Leonite Investments, in terms of the Securities Purchase Agreement and the Warrant Agreement entered into. Refer note 10 above.

 

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

 

Six months ended

June 30, 2018

Calculated stock price    $0.024 to $0.10  
Risk free interest rate   1.6% to 2.73% 
Expected life of convertible notes    1 month to 5 years  
expected volatility of underlying stock   15.4% to 495.3% 
Expected dividend rate   0%

 

The movement in derivative liability is as follows:

  Six months ended June 30, 2018   Year ended December 31, 2017
       
Opening balance  $      2,859,832    $                     -   
Derivative liability arising from convertible notes  $      1,085,837    $        1,826,500
Fair value adjustment to derivative liability             808,951              1,033,332
Closing balance  $      4,754,620    $        2,859,832

 

13.

Related Party Transactions 1816191 Ontario

 

During the six months ended June 30, 2018, the Company repaid $15,921 to 1816191 Ontario, the Endoscopy clinic.

 

Shawn E. Leon

As of June 30, 2018, and December 31, 2017 the Company had a receivable of $19,265 and $16,080, respectively to Shawn E. Leon, a director and CEO of the Company. The balances receivable are non-interest bearing and have no fixed repayment terms.

 

Mr. Leon was paid management fees of $92,098 during the six months ended June 30, 2018.

 

 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 June 30, 2018 was $1,542,681.

 

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.

 

Prior to the acquisition of CCH, the Company paid rental expense to CCH of $58,925 for the period ended June 30, 2017.

 18 

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

14.Stockholders’ deficit

 

a)Common shares

 

On March 29, 2018, the Company issued 165,000 shares of common stock to Leonite Capital, LLC in connection with the closing of a financing of a Senior Secured Convertible Note. The shares were valued at $11,550, or $0.07 per share on March 29, 2018.

 

On April 17, 2018, the Company issued 605,000 shares of common stock to Leonite Capital, LLC in connection with the closing of a financing of a Senior Secured Convertible Note. The shares were valued at $39,450 on June 30, 2018.

 

b)Warrants

 

In terms of the convertible note agreements entered into with Leonite Capital, LLC, disclosed in note 10 above, the Company agreed to issue warrants exercisable over a total of 15,583,333 shares of common stock at an exercise price of $0.10 per share.

 

In terms of the Series N Convertible debt issued to various accredited investors, disclosed in note 10 above, the Company agreed to issue warrants exercisable over a total of 17,500,000 shares of common stock at an exercise price of $0.12 per share.

 

The fair value of Warrants awarded and revalued during the year ended June 30, 2018 were valued at $799,004 using the Black Scholes pricing model utilizing the following weighted average assumptions:

 

   Six months ended June 30, 2018
    
Calculated stock price    0.06 TO 0.08  
Risk free interest rate   2.64 TO 2.75% 
Expected life of warrants (years)    3 to 5 years  
expected volatility of underlying stock   198.8 to 495.3% 
Expected dividend rate   0%

 

 The movements in warrants is summarized as follows:

          No. of shares   Exercise price per share   Weighted average exercise price
                   
Outstanding January 1, 2017                19,637,409    $0.0033 to $0.03     $             0.03
Granted                29,866,666    $0.03 to $0.10                    0.0945
Exercised                               -                            -                              -   
Outstanding December 31, 2017                49,504,075   $0.0033 to $0.10                   0.0690
Granted                33,083,333    $0.10 to $0.12                        0.11
Forfeited/cancelled                               -                            -                              -   
Exercised                               -                            -                              -   
Outstanding June 30, 2018                82,587,408   $0.0033 to $0.12   $0.0850

 

 

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ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

14.Stockholders’ deficit (continued)

 

b)Warrants (continued)

 

The following table summarizes information about warrants outstanding at June 30, 2018:

 

  Warrants outstanding   Warrants exercisable
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                     1.70              21,704,075    
$0.10        43,083,333                     4.60              43,083,333    
$0.12        17,500,000                     2.90              17,500,000    
                   
         82,587,408                     3.45    $           0.0850          82,587,408    $             0.0850

 

*       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 June 30, 2018 are vested. The warrants outstanding as of June 30, 2018 have an intrinsic value of $1,108,205.

 

c)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 June 30, 2018 under the Plan.

 

No options were issued, exercised or cancelled for the period under review.

 

The following table summarizes information about options outstanding as of June 30, 2018.

 

  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                     1.34                   480,000    
                   
              480,000                     1.34    $               0.12               480,000    $                0.12

 

As of June 30, 2018, there was no unrecognized compensation costs related to these options and the intrinsic value of the options is $0.

 

 20 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLDATED FINANCIAL STATEMENTS

 

15.Segment information

 

The Company has two reportable operating segments;

 

a.Rental income from the property owned by Cranberry Cove 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 three months ended March 31, 2018, 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 three months ended March 31, 2017 are reported under discontinued operations and have not been reported as part of the Segment Information.

 

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

 

   Three months ended June 30, 2018
   Rental Operations  In-Patient services  Total
          
Revenues  $83,031   $(16,337)  $66,694 
Operating expenses   45,102    750,366    795,468 
                
Operating income (loss)   37,929    (766,703)   (728,774)
                
Other (expense) income               
Interest income   —      (49)   (49)
Interest expense   (42,845)   (133,742)   (176,587)
Amortization of debt discount   —      (1,339,885)   (1,339,885)
Loss on change in fair value of derivative liability   —      (796,795)   (796,795)
Foreign exchange movements   18,345    92,283    110,628 
Net income (loss) before taxation from continuing operations   13,429    (2,944,891)   (2,931,462)
Taxation   —      —      —   
Net income (loss) from continuing operations  $13,429   $(2,944,891)  $(2,931,462)
                
                

 

   Three months ended June 30, 2017
   Rental Operations  In-Patient services  Total
          
Revenues  $78,088   $324,132   $402,220 
Operating expenses   54,875    316,782    371,657 
                
Operating income   23,213    7,350    30,563 
                
Other (expense) income               
Other income   —      1,000    1,000 
Other expense   —      (19,265)   (19,265)
Interest expense   (61,535)   (32,068)   (93,603)
Amortization of debt discount   —      (241,666)   (241,666)
Loss on change in fair value of derivative liability   —      167,580    167,580 
Foreign exchange movements   —      (6,438)   (6,438)
Net loss before taxation from continuing operations   (38,322)   (123,507)   (161,829)
Taxation   —      —      —   
Net loss from continuing operations  $(38,322)  $(123,507)  $(161,829)

 

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ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15.Segment information (continued)

 

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

 

   Six months ended June 30, 2018
   Rental Operations  In-Patient services  Total
          
Revenues  $167,143   $12,853   $179,996 
Operating expenses   76,504    1,250,811    1,327,315 
                
Operating income (loss)   90,639    (1,237,958)   (1,147,319)
                
Other (expense) income               
Interest expense   (92,895)   (254,143)   (347,038)
Amortization of debt discount   —      (2,092,834)   (2,092,834)
Loss on change in fair value of derivative liability   —      (808,951)   (808,951)
Foreign exchange movements   47,555    200,969    248,524 
Net income (loss) before taxation from continuing operations   45,299    (4,192,917)   (4,147,618)
Taxation   —      —      —   
Net income (loss) from continuing operations  $45,299   $(4,192,917)  $(4,147,618)
                

 

   Six months ended June 30, 2017
   Rental Operations  In-Patient services  Total
          
Revenues  $120,125   $604,605   $724,730 
Operating expenses   60,953    1,236,882    1,297,835 
                
Operating income (loss)   59,172    (632,277)   (573,105)
                
Other (expense) income               
Other income   —      473,369    473,369 
Other expense   (5,074,689)   (19,265)   (5,093,954)
Interest income   —      32,074    32,074 
Interest expense   (98,188)   (58,432)   (156,620)
Amortization of debt discount   —      (429,325)   (429,325)
Loss on change in fair value of derivative liability   —      94,532    94,532 
Foreign exchange movements   —      (164,347)   (164,347)
Net loss before taxation from continuing operations   (5,113,705)   (703,671)   (5,817,376)
Taxation   —      —      —   
Net loss from continuing operations  $(5,113,705)  $(703,671)  $(5,817,376)

 

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ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLDATED FINANCIAL STATEMENTS

 

15.Segment information (continued)

 

The operating assets and liabilities of the reportable segments at June 30, 2018, are as follows:

 

   Rental Operations  In-Patient services  Total
          
Purchase of fixed assets  $30,860   $10,750   $41,610 
Assets               
Current assets   (11,055)   480,068    469,013 
Non-current assets   3,002,860    9,279,083    12,281,943 
Liabilities               
Current liabilities   (2,177,320)   (8,400,534)   (10,577,854)
Non-current liabilities   (4,016,836)   (2,913,724)    (6,930,560)
Intercompany balances   (771,823)   771,823    —   
Net (liability) asset  position  $(3,974,174)  $(783,284)  $(4,757,458)

 

16.Net loss (income) per common share

 

For the three and six months ended June 30, 2018, the following options, warrants and convertible notes were excluded from the computation of diluted net loss per share as the results would have been anti-dilutive.

 

   Three and six months ended June 30, 2018  Three months ended June 30, 2017
       
Stock options   480,000    480,000 
Warrants to purchase shares of common stock   82,587,408    22,004,075 
Convertible notes   43,916,472    3,101,093 
    126,983,880    25,585,168 

 

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ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLDATED FINANCIAL STATEMENTS

 

16.Net loss (income) per common share (continued)

 

For the six months ended June 30, 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  $(5,817,376)   93,838,855   $(0.06)
Net income per share from discontinued operations   7,412,643    93,838,855    0.08 
                
Basic income per share   1,595,267    93,838,855    0.02 
                
Effect of dilutive securities               
                
Warrants   —      11,135,388      
Convertible debt   —      —        
                
Diluted earnings per share               
Net loss per share from continuing operations   (5,817,376)   104,974,243    (0.06)
Net income per share from discontinued operations   7,412,643    104,974,243    0.07 
                
   $1,595,267    104,974,243   $0.01 

 

17.Commitments and contingencies

 

a.Contingency related to outstanding penalties

 

The Company has provided for potential US penalties of $250,000 due to noncompliance 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.

 

On May 23, 2018, the Company entered into a Lease Agreement pursuant to which it leased from the AREP 5400 East Avenue LLP (the “Landlord”), the premises located at 5400, 5402, and 5410 East Avenue, West Palm Beach, Florida (the “Property”). The Lease has an initial term of 10 years and provides for 2 additional 10 year extensions. The Company has the option to purchase the property for proceeds of $17,250,000 by August 31, 2018, plus any landlord funded improvements. The option to purchase increase by $750,000 per calendar month commencing on August 31, 2018. The initial base rental is $146,337 per month, plus any taxes imposed on the premises or the base rental.

 

The future commitment of these operating leases and the property lease are as follows:

 

   Amount
    
Within 1 year  $881,012 
1 to 2 years  1,802,872 
2 - 3 years  1,882,422 
3 - 4 years  1,962,242 
5 years and thereafter  12,165,898 
Total  $18,694,445 

 

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ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLDATED FINANCIAL STATEMENTS

 

17.Commitments and contingencies (continued)

 

c.Mortgage bonds

 

The company has two mortgage loans as disclosed in note 11 above. The future commitments under these loans are as follows:

 

   Amount
    
Within 1 year  $3,071,861 
1 to 2 years  105,087 
2 - 3 years  109,547 
3 - 4 years  114,196 
5 years and thereafter  3,663,486 
Total  $7,066,177 

 

 

d.Other

 

The Company has principal and interest payment commitments under the Convertible notes disclosed under Note 10 above. Conversion of these notes are at the option of the investor, if not converted these notes may need to be repaid.

 

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.

 

18.Income taxes

 

The Company is not current in its tax filings for tax years 2011 to 2017 as of June 30, 2018.

 

19.Subsequent events

 

On July 31, 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 May 15, 2019 and bears interest at the at the rate of nine 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 has 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.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein and the consolidated financial statements and the other information set forth in our Annual Report on Form 10- K/A for the year ended December 31, 2017 filed with the Securities and Exchange Commission on April 18, 2018. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.

 

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

 

During the next twelve months, the Company plans to continue and expand its operations as a provider of addiction and aftercare treatment services through marketing efforts undertaken to expand its patient base in Florida. The Company plans to focus on the growth of its addiction and aftercare treatment units by seeking out potential acquisitions.

 

Results of Operations

 

For the three months ended June 30, 2018 and the three months ended June 30, 2017.

 

Revenues was $66,694 and $402,220 for the three months ended June 30, 2018 and 2017, respectively, a decrease of $335,526 or 83.4%. The decrease is primarily due to the Company adjusting its basis of providing against gross revenues on the limited experience is has had with dealing with US Health care providers. Revenue includes rental income of $83,031 and $78,088 for the three months ended June 30, 2018 and 2017, the increase is due to the increase in base rent charged to the tenant, in terms of the lease agreement. Due to the increase of the revenue reserve, based on claims experience, the revenues for the three months ended June 30, 2018 was negative.

 

Operating Expenses

 

Operating expenses was $795,468 and $371,657 for the three months ended June 30, 2018 and 2017, respectively, an increase of $423,811or 114.0%. The increase is primarily due to the following:

 

·An increase in General and administrative expenses of $270,589, which includes rental and operating expense of $172,748 relating to the property lease agreement entered into on May 23, 2018. An increase in stock based compensation of $102,150 relating to commitment fees issued to certain convertible note holders, offset by a reduction in several other immaterial expenses.
·An increase in management fee expense of $45,565, in the prior year, no management fee expense was charged.
·An increase in professional fees of $78,685, primarily due to the increase in legal activity related to the potential acquisition of the premises located at 5400, 5402, and 5410 East Avenue, West Palm Beach, Florida.
·An increase in salaries and wages of $34,829 due the increase in headcount related to the operations located at 5400, 5402, and 5410 East Avenue, West Palm Beach, Florida.

 

Operating loss

 

Operating loss was $728,774 and a profit of $30,563 for the three months ended June 30, 2018 and 2017, respectively, an increase in loss of $759,337, primarily due to the reduction in revenue based on the provisions established against collectability and the increased operating expenses as discussed above.

 

Other income

Other income was $0 and $1,000 for the three months ended June 30, 2018 and 2017, respectively.

 

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Other expense

Other expense was $0 and $19,265 for the three months ended June 30, 2018 and 2017, respectively, a decrease of $19,265 or 100.0%, the charge in the prior period represented a loss on a portion of a mortgage receivable sold to a third party.

 

Interest expense

Interest expense was $176,587 and $93,603 for the three months ended June 30, 2018 and 2017, respectively, an increase of $82,984 or 88.7%, the increase is primarily due to interest due on the new mortgage loans which replaced the mortgage loans assumed by the Company when it acquired Cranberry Cove Holdings, Ltd and on the purchase money mortgage loan entered into to acquire the properties associated with Seastone of Delray, also includes additional interest expense incurred on the convertible notes taken out during the current period.

 

Debt Discount

Debt discount was $1,339,885 and $241,666 for the three months ended June 30, 2018 and 2017, respectively, an increase of $1,098,219 or 454.4% and represents the amortization of the value of the convertible notes and warrants issued in terms of the convertible loan agreements entered into during 2017 and the current period, The Company raised a total of $1,950,000 of net proceeds from convertible notes during the current period.

 

Derivative liability movement

Derivative liability movement was $(796,795) and $167,580 for the three months ended June 30, 2018 and 2017, respectively, a net change of $964,375. This movement represents the mark to market of the derivative liabilities arising on the beneficial conversion feature of the variable priced notes issued to note holders during the current period and the prior year.

 

Foreign exchange movements

Foreign exchange movements were $110,628 and $(6,438) for the three months ended June 30, 2018 and 2017, respectively, and represents predominantly unrealized gains and losses on intercompany liabilities and assets of our various subsidiaries.

 

Net loss from discontinued operations

The net income from discontinued operations of $0 and $141,177, represents professional fees, foreign currency losses and penalty expenses on our discontinued operation which was disposed of on February 14, 2017.

 

Net loss

Net loss was $(2,931,462) and $(303,006) for the three months ended June 30, 2018 and 2017, respectively, an increase of $2,628,456, primarily due to the increase in operating expenses, the net movement in derivative liabilities and the amortization of debt discount during the current period, discussed above.

 

For the six months ended June 30, 2018 and the six months ended June 30, 2017.

Revenue

Revenues was $179,996 and $724,730 for the six months ended June 30, 2018 and 2017, respectively, a decrease of $544,734 or 75.2%. The decrease is primarily due to the Company adjusting its basis of providing against gross revenues on the limited experience is has had with dealing with US Health care providers. Revenue includes rental income of $167,143 and $120,125 for the six months ended June 30, 2018 and 2017, the increase is due to the increase in base rental and the lease agreement being in operation for only four and a half months in the previous period.

 

Operating Expenses

 

Operating expenses were $1,327,315 and $1,297,835 for the six months ended June 30, 2018 and 2017, respectively, an increase of $29,480 or 2.3%. The increase is primarily due to the following:

 

·An increase in General and administrative expenses of $1,123,785, which includes rental and operating expense of $172,748 relating to the property lease agreement entered into on May 23, 2018, an increase in stock based compensation of $131,700 relating to commitment fees issued to certain convertible note holders in the current period, offset by a reduction in legal and professional fees of $254,116 related to the disposal of the Canadian rehab clinic in the prior period.
·An increase in management fee expense of $92,098, in the prior period, no management fee expense was charged.
·A decrease in professional fees of $216,106, related to the disposal of the Canadian rehab clinic in the prior period.
·An increase in salaries and wages of $28,962 due the increase in headcount related to the operations located at 5400, 5402, and 5410 East Avenue, West Palm Beach, Florida.

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Operating loss

 

Operating loss was $1,147,319 and $573,105 for the six months ended June 30, 2018 and 2017, respectively, an increase in loss of $574,214, primarily due to the reduction in revenue based on the provisions established against collectability of receivables as discussed above.

 

Other income

Other income was $0 and $473,369 for the six months ended June 30, 2018 and 2017, respectively. In the prior period, a provision raised against a receivable from the Endoscopy clinic was reversed upon the assignment of the receivable to Leon Developments.

 

Other expense

Other expense was $0 and $5,093,954 for the six months ended June 30, 2018 and 2017, respectively, a decrease of $5,093,954 or 100.0%. Other expense consists of the excess of the purchase price paid over the carry over basis value of the assets of Cranberry Cove Holdings Ltd. 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 Cranberry Cove Subsidiary

 

Interest expense

Interest expense was $347,038 and $156,620 for the six months ended June 30, 2018 and 2017, respectively, an increase of $190,418 or 121.6%, the increase is primarily due to interest due on the new mortgage loans which replaced the mortgage loans assumed by the Company when it acquired Cranberry Cove Holdings, Ltd and on the purchase money mortgage loan entered into to acquire the properties associated with Seastone of Delray, also includes additional interest expense incurred on the convertible notes taken out during the current period.

 

Debt Discount

Debt discount was $2,092,834 and $429,325 for the six months ended June 30, 2018 and 2017, respectively, an increase of $1,663,509 or 387.5% and represents the amortization of the value of the convertible notes and warrants issued in terms of the convertible loan agreements entered into during 2017 and the current period, The Company raised a total of $2,550,000 of net proceeds from convertible notes during the current period.

 

Derivative liability movement

Derivative liability movement was $(808,951) and $94,532 for the six months ended June 30, 2018 and 2017, respectively, a net change of $903,483. This movement represents the mark to market of the derivative liabilities arising on the beneficial conversion feature of the variable priced notes issued to note holders during the current period and the prior year.

 

Foreign exchange movements

Foreign exchange movements were $248,524 and $(164,347) for the six months ended June 30, 2018 and 2017, respectively, and represents predominantly unrealized gains and losses on intercompany liabilities and monetary assets of our various subsidiaries.

 

Net loss from discontinued operations

The net income from discontinued operations of $0 and $7,412,643 for the six months ended June 30, 2018 and 2017, respectively consists primarily of the $7,494,828 gain made on the sale of the Canadian Rehab Center in the prior period, offset by the net operating loss incurred in the prior period of $82,185.

 

Net (loss) income

Net (loss) income was $(4,147,618) and a net income $1,595,267 for the six months ended June 30, 2018 and 2017, respectively, an increase in loss of $5,742,885, primarily due to the gain realized on the disposal of the Canadian Rehab Center in the prior period, offset by the increase in other expenses related to the excess purchase price paid over the assets under common control of our CEO, in the prior period, offset by the increase in the amortization of debt discount and derivative liability movements in the current period.

 

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Liquidity and Capital Resources

The following table summarizes working capital as of June 30, 2018 and December 31, 2017.

 

 

    June 30, 2018    December 31, 2018    Change 
Current Assets  $469,013   $334,619   $134,394
Current Liabilities   (10,577,854)   (6,860,178)   (3,717,676)
Working capital Deficit  $(10,108,841)  $(6,525,559   $(3,583,282)

 

The Company borrowed an additional $2,550,000 and repaid $433,000 of this during the current period, for general working capital purposes and to pay deposits on real estate, the overall increase in convertible loans also includes the amortization of debt discount amounting to $2,093,000 during the current period. We estimate that the Company will require an additional $3,000,000 for working capital purposes. The company may be required to raise additional 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 high and remains unchanged from the prior year.

 

Recently Issued Accounting Pronouncements

 

The recent Accounting Pronouncements are fully disclosed in note 2 to our unaudited condensed consolidated financial statements.

 

Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying unaudited condensed consolidated financial statements.

 

Off balance sheet arrangements

 

We do not maintain off-balance sheet arrangements nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.

 

Inflation

 

The effect of inflation on our revenue and operating results was not significant.

 

Climate Change

We believe that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

The Company has adopted and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that due to a lack of segregation of duties the Company’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Subject to receipt of additional financing or revenue generated from operations, the Company intends to retain additional individuals to remedy the ineffective controls.

 

Changes in Internal Control

 

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

 

Item 1. 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 CDN$14,070, including applicable legal fees, 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 1A. Risk Factors.

 

Not applicable because we are a smaller reporting company.

 

Item 2. Unregistered sales of equity securities and use of proceeds

 

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.

 

On March 29, 2018, the Company issued 165,000 shares of common stock in connection with the closing of a financing of a Senior Secured Convertible Note. The shares were valued at $11,550, or $0.07 per share.

 

On April 17, 2018, the Company issued 605,000 shares of common stock in connection with the closing of a financing of a Senior Secured Convertible Note. The shares were valued at $39,450.

 

Item 3. Defaults upon senior securities

None.

 

Item 4. Mine Safety Disclosures.

None.

 

Item 5. Other Information.

Not applicable.

 

 

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Item 6. Exhibits

 

Exhibit No.

Description

 

31.1Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002 *

 

32.1Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 *

 

101.INS XBRL Instance *

 

101.SCH XBRL Taxonomy Extension Schema * 101.CAL XBRL Taxonomy Extension Calculation * 101.DEF Taxonomy Extension Definition * 101.LAB Taxonomy Extension Labels *

101.PRE Taxonomy Extension Presentation *

 

* filed herewith

 

 

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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: May 20, 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),

 

May 20, 2018

Shawn Leon

Chief Financial Officer (Principal Financial

Officer), President and Director

 
     
/s/ John O’Bireck Director May 20, 2018
John O’Bireck    
     
/s/ Gerald T. Miller Director May 20, 2018
Gerald T. Miller    

 

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