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 | |||||||||
ETHEMA
HEALTH CORPORATION NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 Restated ETHEMA
HEALTH CORPORATION NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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) 10
3. Restatement
of prior period results (continued)
Six months
ended June 30, 2017 As previously reported
Adjustments
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
3. Restatement
of prior period results (continued)
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 | ||||||
ETHEMA
HEALTH CORPORATION NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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: ETHEMA
HEALTH CORPORATION NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. 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. Property,
plant and equipment consists of the following: 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. The
taxes payable consist of: June 30, 2018 ETHEMA
HEALTH CORPORATION NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The short-term convertible
notes consist of the following: Interest rate June 30, 2018 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. ETHEMA
HEALTH CORPORATION NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. ETHEMA
HEALTH CORPORATION NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The
loans payable is as follows:
12
4. Going
concern
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
6. Deposit
on Real Estate
7. Due
from sale of subsidiary
8. Property,
plant and equipment
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
9. Taxes
Payable
● 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.
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
10. Short-term
Convertible Notes
Maturity date
Principal
Interest
Debt Discount
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 15
10. Short-term
Convertible Notes (continued) 16
11. Loans
payable
| 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 |
| 19 |
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 | ) | |||
| 21 |
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 | ) | |||
| 22 |
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 | |||||||
| 23 |
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 | ||
| 24 |
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.
| 25 |
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
| 31.1 | Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002 * |
| 32.1 | Certification 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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