10-Q 1 f2sgrst10q111618.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended: September 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

(GRAPHIC)

 

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 ☒   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 ☒   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  ☒ Smaller reporting company
  Emerging growth company

 

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

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

As of November 19, 2018, there were 124,089,230 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
NINE MONTHS ENDED SEPTEMBER 30, 2018
TABLE OF CONTENTS

Page

   
Financial Statements 1
Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
   
Legal Proceedings 40
Risk factors 41
Unregistered sale of equity securities and use of proceeds 41
Defaults upon senior securities 41
Mine Safety Disclosures 41
Other Information 41
Exhibits 41

 

 

 

 

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

  

 

 

  

ETHEMA HEALTH CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30, 2018   December 31, 2017 
   (unaudited)     
ASSETS    
         
Current assets          
Cash  $80,718   $339 
Accounts receivable   102,458    218,858 
Prepaid expenses   65,075    99,342 
Related party Receivables   30,706    16,080 
Total current assets   278,957    334,619 
Non-current assets          
Deposits on real Estate   2,961,062    1,825,000 
Due on sale of subsidiary   417,149    954,951 
Property, plant and equipment   8,893,157    9,153,858 
Total non-current assets   12,271,368    11,933,809 
Total assets  $12,550,325   $12,268,428 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current liabilities          
Bank overdraft  $44   $28,927 
Accounts payable and accrued liabilities   668,679    372,244 
Taxes payable   665,640    689,240 
Convertible notes   3,343,327    160,453 
Loans payable   162,805    152,402 
Derivative liability   4,980,580    2,859,832 
Related party payables   2,600,527    2,597,080 
Total current liabilities   12,421,602    6,860,178 
Non-current liabilities          
Loan payable   6,961,388    7,183,892 
Total liabilities   19,382,990    14,044,070 
           
Stockholders’ deficit          
Preferred stock - Series A; $0.01 par value, 3,000,000 authorized, nil outstanding as of September 30, 2018 and December 31, 2017.        
Preferred Stock - Series B; $0.01 par value, 10,000,000 authorized, nil outstanding as of September 30, 2018 and December 31, 2017.        
Common stock; $0.01 par value, 500,000,000 shares authorized;  124,089,230 and 122,239,230 shares issued and outstanding  as of September 30, 2018 and December 31, 2017.   1,240,893    1,232,393 
Additional paid-in capital   20,083,842    18,545,913 
Accumulated other comprehensive income   734,762    796,453 
Accumulated deficit   (28,892,162)   (22,350,401)
Total stockholders’ deficit   (6,832,665)   (1,775,642)
Total liabilities and stockholders’ deficit  $12,550,325   $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 September 30, 2018   Three months ended September 30, 2017   Nine months ended September 30, 2018   Nine months ended September 30, 2017 
         (Restated)         (Restated) 
Revenues  $270,370   $648,298   $450,366   $1,373,028 
                     
Operating expenses                    
General and administrative   234,994    127,786    600,639    334,386 
Rent expense   469,741        626,321    2,622 
Management fees   46,350    42,705    138,448    241,923 
Professional fees   114,760    53,830    297,858    453,034 
Salaries and wages   263,901    200,863    657,337    583,559 
Depreciation and amortization   67,929    79,267    204,384    186,760 
Total operating expenses   1,197,675    504,451    2,524,987    1,802,284 
                     
Operating (loss) income   (927,305)   143,847    (2,074,621)   (429,256)
                     
Other Income (expense)                    
Other income   6,009        6,009    473,368 
Other expense               (5,093,953)
Interest income   5,334        5,334    32,074 
Interest expense   (225,205)   (86,371)   (572,243)   (242,992)
Debt discount   (1,195,638)   (13,052)   (3,288,472)   (442,377)
Derivative liability movement   37,951    (19,329)   (771,000)   75,203 
Foreign exchange movements   (95,292)   53,294    153,232    (111,052)
Net (loss) income before taxation from continuing operations   (2,394,146)   78,389    (6,541,761)   (5,738,985)
Taxation                
Net (loss) income from continuing operations   (2,394,146)   78,389    (6,541,761)   (5,738,985)
Gain on disposal of business               7,494,828 
Operating loss from discontinued operations, net of tax       (218,253)       (300,439)
Net (loss) income from discontinued operations, net of tax       (218,253)       7,194,389 
Net (loss) income   (2,394,146)   (139,864)   (6,541,761)   1,455,404 
Accumulated other comprehensive loss                    
Foreign currency translation adjustment   33,954    277,923    (61,691)   241,231 
                     
Total comprehensive (loss) income  $(2,360,192)  $138,059   $(6,603,452)  $1,696,635 
                     
Basic loss per common share from continuing operations  $(0.02)  $   $(0.05)  $(0.06)
Basic income per share from discontinued operations  $   $   $   $0.07 
Basic (loss) income per common share  $(0.02)  $   $(0.05)  $0.01 
Diluted loss per common share from continuing operations  $(0.02)  $   $(0.05)  $(0.05)
Diluted income per share from discontinued operations  $   $   $   $0.06 
Diluted (loss) income per common share  $(0.02)  $   $(0.05)  $0.01 
Weighted average common shares outstanding - Basic   124,089,230    119,407,668    123,852,105    102,455,451 
Weighted average common shares outstanding - Diluted   124,089,230    119,407,668    123,852,105    117,312,150 

 

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     Comprehensive     Accumulated        
Paid in
    Shares     Amount     Shares     Amount     Capital     Income     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                 850,000       8,500       50,200                   58,700  
Fair value of Series N warrants issued                             1,487,729                   1,487,729  
Foreign currency translation                                   (61,691 )           (61,691 )
Net loss                                         (6,541,761 )     (6,541,761 )
Balance as of September 30, 2018         $       124,089,230     $ 1,240,893     $ 20,083,842     $ 734,762     $ (28,892,162 )   $ (6,832,665 )

 

 

 

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

 

   Nine months ended September 30, 2018   Nine months ended September 30, 2017 
Operating activities  (Restated) 
Net (loss) income from continuing operations  $(6,541,761)  $1,455,404 
Net income from discontinued operations       (7,194,389)
Net loss from continuing operations   (6,541,761)   (5,738,985)
Adjustment to reconcile net loss to net cash used in operating activities:          
Depreciation   204,384    186,760 
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       63,962 
Amortization of debt discount   3,288,472    442,377 
Derivative liability movements   771,000    (75,203)
Movement in receivables reserve   (753,159)    
Provision against receivable on sale of subsidiary       (446,476)
Loss on mortgage sold       19,265 
Changes in operating assets and liabilities          
Accounts receivable   869,559    (833,374)
Prepaid expenses   30,707    (12,013)
Due on sale of subsidiary   517,239     
Accounts payable and accrued liabilities   398,633    (162,834)
Taxes payable   (9,917)   (2,393,899)
Net cash used in operating activities - continuing operations   (1,063,143)   (3,871,731)
Net cash used in operating activities - discontinued operations       (117,221)
    (1,063,143)   (3,988,952)
Investing activities          
Investments in Seastone       (2,960,000)
Deposit on property   (1,132,509)    
Proceeds from restricted cash       74,480 
Purchase of fixed assets   (41,610)   (8,878)
Net cash used in investing activities - continuing operations   (1,174,119)   (2,894,398)
Net cash provided by investing activities - discontinued operations       6,285,852 
    (1,174,119)   3,391,454 
           
Financing activities          
Decrease in bank overdraft   (28,781)   (56,105)
Proceeds from mortgage sold       111,554 
Proceeds from mortgages       4,367,000 
Repayment of mortgages   (90,373)   (3,482,144)
Proceeds from convertible notes   3,130,000    294,500 
Repayment of convertible notes   (586,000)   (274,958)
Proceeds (repayment) of related party notes   55,033    (595,736)
Net cash provided by financing activities   2,479,879    364,111 
           
Effect of exchange rate on cash   (162,238)   241,231 
           
Net change in cash   80,379    7,844 
Beginning cash balance   339    4,779 
Ending cash balance  $80,718   $12,623 
           
Supplemental cash flow information          
Cash paid for interest  $308,077   $253,256 
Cash paid for income taxes  $   $ 
           
Non cash investing and financing activities          
Common shares issued to acquire subsidiary  $   $2,184,000 
Conversion of debt to equity  $   $375,011 
Fair value of warrants issued  $1,487,729   $71,000 
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.

 

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 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.

 

5

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.    Nature of Business (continued)

 

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 $2,924,955 as of September 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.

 

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 nine 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.

 

6

 

 

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 and nine months ended September 30, 2018; a closing rate of CAD$1.0000 equals US$0.7725 and an average exchange rate of CAD$1.0000 equals US$0.7651.

 

7

 

 

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.

  

  e) Allowance for Doubtful Accounts, Contractual and Other Discounts

 

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

8

 

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.       Summary of Significant Accounting Policies (continued)

 

  f) Recent accounting pronouncements

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Changes to the Disclosure Requirements for Fair Value Measurement.

 

The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement.

 

Removals

 

The following disclosure requirements were removed from Topic 820:

 

  1. The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy

 

  2. The policy for timing of transfers between levels

 

  3. The valuation processes for Level 3 fair value measurements

 

  4. For nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.

 

Modifications

 

The following disclosure requirements were modified in Topic 820:

 

  1. In lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities.

 

  2. For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.

 

  3. The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

 

Additions

 

The following disclosure requirements were added to Topic 820; however, the disclosures are not required for nonpublic entities:

 

  1. The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period

 

  2. The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

 

9

 

 

In addition, the amendments eliminate at a minimum from the phrase an entity shall disclose at a minimum to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements.

 

The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date.

 

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

 

10

 

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.       Summary of Significant Accounting Policies (continued)

 

  g) 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, September 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 $12,142,645 and accumulated deficit of $28,892,162. 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.

 

  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 $44 as of September 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.

 

11

 

 

  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 September 30, 2018, a 5% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an approximate $4,800 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.

 

12

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.      Summary of Significant Accounting Policies (continued)

 

  h) 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.

 

  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 nine months ended September 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 $0 and $4,701,415 for the three months and nine months ended September 30, 2017, respectively, on the transfer of assets between parties under common control and a net reduction in the associated depreciation charge of $52,517 and $127,430 for the three months and nine months ended September 30, 2017, respectively.

 

A further adjustment was made to other income, which was reduced by $67,596 and $162,536, for the three months and nine months ended September 30, 2017, respectively, to modify the Company’s estimate of deferred purchase price consideration due on the disposal of Muskoka.

 

13

 

 

 ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  3. Restatement of prior period results (continued)

 

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

 

   As  previously reported  Adjustments  As Restated
          
Revenues  $648,298   $   $648,298 
                
Operating expenses               
General and administrative   127,786         127,786 
Management fees   42,705         42,705 
Professional fees   53,830         53,830 
Salaries and wages   200,863         200,863 
Depreciation and amortization   131,784    (52,517)   79,267 
Total operating expenses   556,968    (52,517)   504,451 
                
Operating income   91,330    52,517    143,847 
                
Other Income (expense)               
Other income   67,596    (67,596)    
Interest expense   (86,371)        (86,371)
Debt discount   (13,052)        (13,052)
Derivative liability movement   (19,329)        (19,329)
Foreign exchange movements   53,294         53,294 
Net income before taxation from continuing operations   93,468    (15,079)   78,389 
Taxation            
Net income from continuing operations   93,468    (15,079)   78,389 
Net loss from discontinued operations, net of tax   (218,253)        (218,253)
Net loss   (124,785)   (15,079)   (139,864)
Accumulated other comprehensive gain               
Foreign currency translation adjustment   277,923         277,923 
                
Total comprehensive income   $153,138   $(15,079)  $138,059 
                
Basic income per common share from continuing operations  $   $   $ 
Basic loss per share from discontinued operations  $   $   $ 
Basic income per common share  $   $   $ 
Diluted income per common share from continuing operations  $   $   $ 
Diluted loss per share from discontinued operations  $   $   $ 
Diluted loss per common share  $   $   $ 
Weighted average common shares outstanding - Basic   119,407,668    119,407,668    119,407,668 
Weighted average common shares outstanding - Diluted   119,407,668    119,407,668    119,407,668 

 

14

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  3. Restatement of prior period results (continued)

 

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

 

   As  previously reported   Adjustments   As Restated 
             
Revenues  $1,373,028   $   $1,373,028 
                
Operating expenses               
General and administrative   334,386         334,386 
Rent expense   2,622         2,622 
Management fees   241,923         241,923 
Professional fees   453,034         453,034 
Salaries and wages   583,559         583,559 
Depreciation and amortization   314,190    (127,430)   186,760 
Total operating expenses   1,929,714    (127,430)   1,802,284 
                
Operating loss   (556,686)   127,430    (429,256)
                
Other Income (expense)               
Other income   635,904    (162,536)   473,368 
Other expense   (392,538)   (4,701,415)   (5,093,953)
Interest income   32,074         32,074 
Interest expense   (242,992)        (242,992)
Debt discount   (442,377)        (442,377)
Derivative liability movement   75,203         75,203 
Foreign exchange movements   (111,052)        (111,052)
Net loss before taxation from continuing operations   (1,002,464)   (4,736,521)   (5,738,985)
Taxation            
Net loss from continuing operations   (1,002,464)   (4,736,521)   (5,738,985)
Gain on disposal of business   7,494,828         7,494,828 
Operating loss from discontinued operations, net of tax   (300,439)        (300,439)
Net income from discontinued operations, net of tax   7,194,389        7,194,389 
Net income   6,191,925    (4,736,521)   1,455,404 
Accumulated other comprehensive gain               
Foreign currency translation adjustment   241,231         241,231 
                
Total comprehensive income  $6,433,156   $(4,736,521)  $1,696,635 
                
Basic loss per common share from continuing operations  $(0.01)  $(0.05)  $(0.06)
Basic income per share from discontinued operations  $0.07   $   $0.07 
Basic income per common share  $0.06   $(0.05)  $0.01 
Diluted loss per common share from continuing operations  $(0.01)  $(0.04)  $(0.05)
Diluted income per share from discontinued operations  $0.06   $   $0.06 
Diluted income per common share  $0.05   $(0.04)  $0.01 
Weighted average common shares outstanding - Basic   102,455,451    102,455,451    102,455,451 
Weighted average common shares outstanding - Diluted   117,312,150    117,312,150    117,312,150 

 

15

 

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  3. Restatement of prior period results (continued)

 

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

 

   As previously
reported
   Adjustments   Adjusted Total 
Operating activities               
Net income  $6,191,925   $(4,736,521)  $1,455,404 
Net income from discontinued operations   (7,194,389)        (7,194,389)
Net loss from continuing operations   (1,002,464)   (4,736,521)   (5,738,985)
Adjustment to reconcile net loss to net cash used in operating activities:               
Depreciation   314,190    (127,430)   186,760 
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   63,962         63,962 
Amortization of debt discount   442,377         442,377 
Derivative liability movements   (75,203)        (75,203)
Provision against receivable on sale of subsidiary   (446,476)        (446,476)
Non-cash earnout accrual   (162,536)   162,536     
Changes in operating assets and liabilities               
Accounts receivable   (833,374)        (833,374)
Prepaid expenses   (12,013)        (12,013)
Accounts payable and accrued liabilities   (162,834)        (162,834)
Taxes payable   (2,393,899)        (2,393,899)
Net cash used in operating activities - continuing operations   (3,871,731)       (3,871,731)
Net cash used in operating activities - discontinued operations   (117,221)        (117,221)
    (3,988,952)       (3,988,952)
Investing activities               
Investments in Seastone   (2,960,000)        (2,960,000)
Proceeds from restricted cash   74,480         74,480 
Purchase of fixed assets   (8,878)        (8,878)
Net cash used in investing activities - continuing operations   (2,894,398)       (2,894,398)
Net cash provided by investing activities - discontinued operations   6,285,852         6,285,852 
    3,391,454        3,391,454 
                
Financing activities               
Decrease in bank overdraft   (56,105)        (56,105)
Proceeds from mortgage sold   111,554         111,554 
Proceeds from mortgage   4,367,000         4,367,000 
Repayment of mortgage   (3,482,144)        (3,482,144)
Proceeds from convertible notes   294,500         294,500 
Repayment of convertible notes   (274,958)        (274,958)
Repayment of related party notes   (595,736)        (595,736)
Net cash provided by financing activities   364,111        364,111 
                
Effect of exchange rate on cash   241,231         241,231 
                
Net change in cash   7,844         7,844 
Beginning cash balance   4,779         4,779 
Ending cash balance  $12,623   $   $12,623 

 

16

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  4. Going concern

 

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with US GAAP applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations in the normal course of business. As of September 30, 2018, the Company has a working capital deficiency of $12,142,645 and accumulated deficit of $28,892,162. 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 September 30, 2017, and for the three and nine months ended September 30, 2017.

 

17

 

 

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

 

   Three months ended September 30, 2017   Nine months ended September 30, 2017 
         
Revenues  $   $232,040 
           
Operating expenses          
Depreciation and amortization       4,196 
General and administrative   353    119,058 
Professional fees       32,818 
Rent       47,493 
Salaries and wages       201,723 
Total operating expenses   353    405,288 
           
Operating loss   (353)   (173,248)
           
Other (Expense) Income          
Interest expense   (1,904)   (2,898)
Foreign exchange movements   (215,996)   (124,293)
Net loss before taxation   (218,253)   (300,439)
Taxation        
Net loss from discontinued operations  $(218,253)  $(300,439)
           
Gain on disposal of business       7,494,828 
           
   $(218,253)  $7,194,389 

 

18

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  6. Deposits

 

Deposit on real estate

 

On November 2, 2017, the Company entered into an Agreement to purchase from AREP 5400 East Avenue LLC certain buildings in West Palm Beach, Florida, totaling approximately 80,000 square feet, on which the present tenant operates a substance abuse treatment center. The purchase price of the Property is $20,530,000, and made a series of nonrefundable down payments totaling $2,924,955 as of September 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.

 

Other deposits

The Company has made utility deposits of $36,107 related to the lease agreement discussed above.

 

  7. Due from sale of subsidiary

 

On February 14, 2017, the Company sold its Canadian Rehab Clinic for gross proceeds of CDN$10,000,000, of which CDN$1,500,000 (US$1,155,900) had been retained in an escrow account for a period of up to two years in order to guarantee the warranties provided by the Company in terms of the APA. During the nine months ended September 30, 2018, CDN960,000 of the escrow was released to the Company, with an additional CDN$540,000 still outstanding.

 

  8. Property, plant and equipment

 

Property, plant and equipment consists of the following:

 

 

   September 30, 2018   December 31, 2017 
   Cost   Amortization and Impairment   Net book value   Net book value 
                 
Land  $2,920,015   $   $2,920,015   $2,925,305 
Buildings   5,975,002    (373,848)   5,601,154    5,840,268 
Furniture and fixtures   115,750    (41,154)   74,596    72,047 
Leasehold improvements   312,614    (15,222)   297,392    316,238 
   $9,323,381   $(430,224)  $8,893,157   $9,153,858 

 

Depreciation expense for the three months ended September 30, 2018 and 2017 was $67,929 and $79,267, respectively, and depreciation expense for the nine months ended September 30, 2018 and 2017 was $204,384 and $186,760, respectively.

 

  9. Taxes Payable

 

The taxes payable consist of:

 

  A payroll tax liability of $141,050 (CDN$182,589) in Greenestone Muskoka which is being paid off as and when cash flow permits.

 

19

 

 

  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.
     
  A provision for income taxes in the Company’s Canadian operations.

 

   September 30,
 2018
   December 31,
2017
 
         
Payroll taxes  $141,050   $155,894 
US penalties due   250,000    250,000 
Income tax payable   274,590    283,346 
           
   $665,640   $689,240 

 

20

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

  10. Short-term Convertible Notes

 

The short-term convertible notes consist of the following:

 

   Interest rate   Maturity date  Principal   Interest   Debt
Discount
   September 30,
2018
   December 31,
2017
 
                            
Leonite Investments LLC  8.5%   December 1, 2018  $2,420,000   $65,620   $(280,274)  $2,205,346   $138,502 
                                 
Power Up Lending Group Ltd  12.0%   August 15, 2018                   21,951 
   12.0%   December 30, 2018                    
   9.0%   May 15,2019   153,000    2,301    (107,912)   47,389     
   9.0%   September 10, 2019   133,000    656    (125,712)   7,944     
                                 
Series N Convertible notes  6.0%   November 6 to
September 19, 2019
   1,700,000    21,049    (638,401)   1,082,648     
                                 
          $4,406,000   $89,626   $(1,152,299)   $3,343,327   $160,453 

 

Leonite Capital, LLC

On December 1, 2017, the Company closed on a private offering to raise US $1,500,000 in capital. The Company issued one senior secured convertible promissory note with a principal amount of US $1,650,000 to Leonite Capital, LLC. The Note bears interest at the rate of 8.5% 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.

 

21

 

 

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 had a maturity date of March 19, 2018. The outstanding principal amount of the note was 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.

 

22

 

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10.  Short-term Convertible Notes (continued)

 

Leonite Capital, LLC (continued)

 

On March 29, 2018, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $165,000, including an Original Issue Discount of $15,000, for net proceeds of $150,000. The note has a maturity date of April 28, 2018 and bears interest at a rate of 8.5% per annum. 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 and bears interest at 8.5% per annum. 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 605,000 shares of common stock to Leonite as a commitment fee, in terrns of the agreement 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 had a maturity date of August 15, 2018 and bore interest at the at the rate of twelve percent per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company had the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note was convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that was 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 had a maturity date of December 30, 2018 and bore interest at the rate of twelve percent per annum from the date on which the Note was issued until the same became due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company had the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note was convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that was 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. During September 2018, the Company prepaid the aggregate principal outstanding of $153,000 together with interest thereon and penalty interest, was settled for gross proceeds of $210,800.

 

23

 

 

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 rate of nine percent per annum from the date on which the Note was 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 lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion.

 

On September 10, 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 $133,000. The Note has a maturity date of September 10, 2019 and bears interest at the rate of nine percent per annum from the date on which the Note was 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 lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion.

 

24

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10. Short-term Convertible Notes (continued)

 

Series N Convertible Notes

During the period from May 2018 to September 2018, The Company closed several tranches of a private offering in which it raised $1,700,000 in capital from 7 accredited investors through the issuance to the investors of the Company’s Series N Convertible Notes, in the total original principal amount of $1,700,000, which Notes are convertible into the Company’s common stock at a conversion price of $0.08 per share together with Warrants to purchase up to a total of 21,250,000 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 between November 6, 2018 and September 26, 2019, and the Warrants are exercisable between May 31, 2021 and September 27, 2021.

 

 

25

 

 

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  11. Loans payable

 

The loans payable is as follows: 

                        
   Interest  rate   Maturity date  Principal Outstanding   Accrued interest   September 30, 2018   December 31, 2017 
                        
Cranberry Cove Holdings                            
Pace Mortgage   4.2%  July 19,2022   4,147,549    13,674    4,161,223    4,349,374 
Seastone of Delray                            
Mortgage   5.0%   February 13, 2020   2,950,675   $12,295    2,962,970    2,986,920 
           $7,098,224   $25,969   $7,124,193   $7,336,294 
Disclosed as follows:                            
Short-term portion                    $162,805   $152,402 
Long-term portion                     6,961,388    7,183,892 
                     $7,124,193   $7,336,294 

 

The aggregate amount outstanding is payable as follows: 

     
   Amount 
     
Within 1 year  $162,805 
1 to 2 years   3,025,469 
2 to 3 years   112,598 
3 to 4 years   116,163 
Thereafter   3,707,158 
Total  $7,124,193 

 

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 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. 

 

26

 

 

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 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: 

    
   Nine months ended September 30, 2018
    
Calculated stock price    $0.024 to $0.10
Risk free interest rate   1.6% to 2.91%
Expected life of convertible notes    1 month to 1 year
expected volatility of underlying stock   15.4% to 495.3%
Expected dividend rate   0%

 

The movement in derivative liability is as follows: 

         
   Nine months ended September 30, 2018   Year ended December 31, 2017 
         
Opening balance  $2,859,832   $ 
Derivative liability arising from convertible notes  $1,349,748   $1,826,500 
Fair value adjustment to derivative liability   771,000    1,033,332 
Closing balance  $4,980,580   $2,859,832 

 

  13. Related Party Transactions 1816191 Ontario

 

As of September 30, 2018 and December 31, 2017, the Company owed 1816191 Ontario $29,797 and $15,921, respectively.

 

Shawn E. Leon

As of September 30, 2018, and December 31, 2017 the Company had a receivable of $30,706 and $16,080, respectively from Shawn 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 $138,448 during the nine months ended September 30, 2018.

 

Eileen Green

As of September 30, 2018 and December 31, 2017, the Company had a payable of $898,960 and $877,182, respectively to Eileen Green, the spouse of our CEO. The amount owing is non-interest bearing and has no fixed repayment terms.

 

Leon Developments, Ltd.

The Company acquired CCH from Leon Developments, Ltd., on February 14, 2017. CCH owns the facility utilized by the Canadian Rehab Clinic which was sold to a third party on February 14, 2017. CCH owed CDN $2,692,512 to Leon Developments. The amount owing to Leon Developments Ltd., as of September 30, 2018 was $1,671,769.

 

27

 

 

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 September 30, 2017.

 

28

 

 

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 the issue date.

 

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 the issue date.

 

  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 21,250,000 shares of common stock at an exercise price of $0.12 per share.

 

The fair value of Warrants awarded and revalued during the nine months ended September 30, 2018 were valued at $1,487,729 using the Black Scholes pricing model utilizing the following weighted average assumptions: 

    
   Nine months ended September 30, 2018
    
Calculated stock price   0.06 to 0.08
Risk free interest rate  2.64 to 2.89%
Expected life of warrants (years)   3 to 5 years
expected volatility of underlying stock  198.8 to 203.2%
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    $0.0033 
Granted    29,866,666     $0.03 to $0.10     0.0945 
Exercised             
Outstanding December 31, 2017    49,504,075    $0.0033 to $.0.03    0.0033 
Granted    36,833,333     $0.10 to $0.12     0.11 
Forfeited/cancelled             
Exercised             
Outstanding September 30, 2018    86,337,408    $0.033 to $0.12   $0.0870 

 

29

 

 

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 September 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    1.50         21,704,075      
$0.10    43,083,333    4.30         43,083,333      
$0.12    21,250,000    2.70         21,250,000      
                           
     86,337,408    3.19   $0.87    86,337,408   $0.87 

 

*       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 September 30, 2018 are vested. The warrants outstanding as of September 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 September 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 September 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    1.08         480,000      
                           
     480,000    1.08   $0.12    480,000   $0.12 

 

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

 

30

 

 

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, these services are provided to customers at the Company’s Seastone of Delray business and at the Company’s leased premises at 5400 East Avenue, West Palm Beach. 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 September 30, 2018 
   Rental Operations   In-Patient services   Total 
             
Revenue  $83,031   $187,339   $270,370 
Operating expenditure   45,102    1,152,573    1,197,675 
                
Operating income (loss)   37,929    (965,234)   (927,305)
                
Other (expense) income               
Other income       6,009    6,009 
Interest income       5,334    5,334 
Interest expense   (42,845)   (182,360)   (225,205)
Amortization of debt discount       (1,195,638)   (1,195,638)
Derivative liability movements       37,951    37,951 
Foreign exchange movements   (15,244)   (80,048)   (95,292)
Net loss before taxation from continuing operations   (20,160)   (2,373,986)   (2,394,146)
Taxation            
Net loss from continuing operations  $(20,160)  $(2,373,986)  $(2,394,146)

 

             
   Three months ended September 30, 2017 
   Rental Operations   In-Patient services   Total 
             
Revenue  $83,837   $564,461   $648,298 
Operating expenditure   158,808    345,643    504,451 
                
Operating (loss) income   (74,971)   218,818    143,847 
                
Other (expense) income               
Interest expense   (38,714)   (47,657)   (86,371)
Amortization of debt discount       (13,052)   (13,052)
Derivative liability movements       (19,329)   (19,329)
Foreign exchange movements   (18,320)   71,614    53,294 
Net (loss) income before taxation from continuing operations   (132,005)   210,394    78,389 
Taxation            
Net (loss) income from continuing operations  $(132,005)  $210,394   $78,389 

 

31

 

 

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: 

             
   Nine months ended September 30, 2018 
   Rental Operations   In-Patient services   Total 
             
Revenue  $250,174   $200,192   $450,366 
Operating expenditure   121,606    2,403,381    2,524,987 
                
Operating income (loss)   128,568    (2,203,189)   (2,074,621)
                
Other (expense) income               
Other income       6,009    6,009 
Interest income       5,334    5,334 
Interest expense   (135,740)   (436,503)   (572,243)
Amortization of debt discount       (3,288,472)   (3,288,472)
Derivative liability movement       (771,000)   (771,000)
Foreign exchange movements   32,311    120,921    153,232 
Net income (loss) before taxation from continuing operations   25,139    (6,566,900)   (6,541,761)
Taxation            
Net income (loss) from continuing operations  $25,139   $(6,566,900)  $(6,541,761)

 

   Nine months ended September 30, 2017 
   Rental Operations   In-Patient services   Total 
             
Revenue  $203,962   $1,169,066   $1,373,028 
Operating expenditure   294,673    1,507,611    1,802,284 
                
Operating loss   (90,711)   (338,545)   (429,256)
                
Other (expense) income               
Other income       473,368    473,368 
Other expense   (5,074,689)   (19,264)   (5,093,953)
Interest income       32,074    32,074 
Interest expense   (136,902)   (106,090)   (242,992)
Amortization of debt discount       (442,377)   (442,377)
Derivative liability movement       75,203    75,203 
Foreign exchange movements   (18,320)   (92,732)   (111,052)
Net loss before taxation from continuing operations   (5,320,622)   (418,363)   (5,738,985)
Taxation            
Net loss from continuing operations  $(5,320,622)  $(418,363)  $(5,738,985)

 

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

             
   Rental Operations   In-Patient services   Total 
             
Purchase of fixed assets  $30,860   $10,750   $41,610 
Assets               
Current assets   23,490    255,467    278,957 
Non-current assets   3,024,074    9,247,294    12,271,368 
Liabilities               
Current liabilities   (2,250,122)   (10,171,480)   (12,421,602)
Non-current liabilities   (4,083,621)   (2,877,767)   (6,961,388)
Intercompany balances   (804,722)   804,722     
Net liability  position  $(4,090,901)  $(2,741,764)  $(6,832,665)

 

32

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLDATED FINANCIAL STATEMENTS

 

  16. Net loss (income) per common share

 

For the three and nine months ended September 30, 2018, and the three months ended September 30, 2017 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 nine months ended September 30, 2018   Three months ended September 30, 2017 
         
Stock options   480,000    480,000 
Warrants to purchase shares of common stock   86,337,408    22,004,075 
Convertible notes   68,861,363    3,101,093 
    155,678,771    25,585,168 

 

For the nine months ended September 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  $(5,738,985)   102,455,451   $(0.06)
Net income per share from discontinued operations   7,194,389    102,455,451    0.07 
                
Basic income per share   1,455,404    102,455,451    0.01 
                
Effect of dilutive securities               
                
Warrants       14,856,699      
Convertible debt             
                
Diluted earnings per share               
Net loss per share from continuing operations   (5,738,985)   117,312,150    (0.05)
Net income per share from discontinued operations   7,194,389    117,312,150    0.06 
                
   $1,455,404    117,312,150   $0.01 

 

33

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLDATED FINANCIAL STATEMENTS

 

  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 initially for $17,250,000, which amount has increased to $19,500,000 as of October 31, 2018, plus any landlord funded improvements. The option to purchase increases by $750,000 per calendar month, the next increase of $750,000 will occur on November 30, 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  $1,783,727 
1 to 2 years   1,862,467 
2 - 3 years   1,942,287 
3 - 4 years   2,022,107 
5 years and thereafter   10,642,667 
Total  $18,253,253 

 

  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   162,805 
1 to 2 years   3,025,469 
2 to 3 years   112,598 
3 to 4 years   116,163 
Thereafter   3,707,158 
Total  $7,124,193 

 

  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.

 

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ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLDATED FINANCIAL STATEMENTS

 

18.Income taxes

 

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

 

19.Subsequent events

 

Subsequent to September 30, 2018, the Company raised a further $680,000 by the issuance of Series N Convertible Notes in the principal amount of $680,000 to a further 7 accredited investors, which notes are convertible into the Company’s common stock at a conversion price of $0.08 per share together with Warrants to purchase up to a total of 8,500,000 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 anti-dilution adjustment mechanisms. The Notes mature between September 30, 2019 and November 14, 2019, and the Warrants are exercisable for a period of three years from date of issuance.

 

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

 

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

 

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

 

Plan of Operation

 

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

 

Results of Operations

 

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

 

Revenues were $270,370 and $648,298 for the three months ended September 30, 2018 and 2017, respectively, a decrease of $377,928 or 58.3%. The decrease is primarily due to the Company adjusting its basis of providing against gross revenues on the limited experience it has had with dealing with US Health care providers. Revenue includes rental income of $82,346 and $83,837 for the three months ended September 30, 2018 and 2017. The revenue for the three months ended September 30, 2018, includes sub-letting revenue of $202,480 of our 5400 East avenue facility, this is not regarded as core business and has not been reported as part of the rental operations segment. Due to the increase of the revenue reserve, based on claims experience, the revenues for the three months ended September 30, 2018 was negative. Patient revenue has decreased, however this is primarily due to the relocation of the main treatment facility to 5400 East Avenue, West Palm Beach, patient revenue is expected to increase in the near term.

 

Operating Expenses

 

Operating expenses were $1,197,675 and $504,451 for the three months ended September 30, 2018 and 2017, respectively, an increase of $693,224 or 137.4%. The increase is primarily due to the following:

 

An increase in General and administrative expenses of $107,208, which includes the expenses of operating the 5400 East Avenue facility which is substantially bigger than the Seastone facility.

An increase in rental expense of $469,741 related to the lease agreement entered into for the 5400 East Avenue operation located in West Palm Beach.

An increase in professional fees of $60,930 related to legal and other professional fees incurred on closing the agreements related to the 5400 East Avenue operations and the ongoing operations of this facility.

An increase in salaries and wages of $63,038 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) income 

 

Operating loss was $(927,305) and a profit of $143,847 for the three months ended September 30, 2018 and 2017, respectively, an increase in loss of $1,071,152, 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 $6,009 and $0 for the three months ended September 30, 2018 and 2017, respectively.

 

Interest expense 

Interest expense was $225,205 and $86,371 for the three months ended September 30, 2018 and 2017, respectively, an increase of $138,834 or 160.7%, 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 amortized was $1,195,638 and $13,052 for the three months ended September 30, 2018 and 2017, respectively, an increase of $1,182,586 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 $3,130,000 of net proceeds from convertible notes during the current period.

 

Derivative liability movement 

Derivative liability movement was $37,951 and $(19,329) for the three months ended September 30, 2018 and 2017, respectively, a net change of $57,280. 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 $(95,292) and $53,294 for the three months ended September 30, 2018 and 2017, respectively, and represents predominantly unrealized gains and losses on intercompany liabilities and assets of our various subsidiaries. The Canadian Dollar has been strengthening against the US Dollar during the current period giving rise to the foreign exchange loss.

 

Net loss from discontinued operations 

The net income from discontinued operations of $0 and $218,253 for the three months ended September 30, 2018 and 2017, respectively, 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 $(2,394,145) and $(139,864) for the three months ended September 30, 2018 and 2017, respectively, an increase of $2,254,281, primarily due to the increase in operating expenses, the increase in interest expense, and the amortization of debt discount during the current period, discussed above.

 

For the nine months ended September 30, 2018 and September 30, 2017.

 

Revenue 

Revenues was $450,366 and $1,373,028 for the nine months ended September 30, 2018 and 2017, respectively, a decrease of $922,662 or 67.2%. The decrease is primarily due to the Company adjusting its basis of providing against gross revenues on the limited experience it has had with dealing with US Health care providers. Revenue includes rental income of $250,174 and $203,962 for the nine months ended September 30, 2018 and 2017, the increase is due to the lease agreement being in operation for only seven and a half months in the previous period and the full nine months in the current period. The revenue for the nine months ended September 30, 2018, includes sub-letting revenue of $202,480 of our 5400 East avenue facility, this is not regarded as core business and has not been reported as part of the rental operations segment. Patient revenue has decreased, however this is primarily due to the relocation of the main treatment facility to 5400 East Avenue, West Palm Beach, patient revenue is expected to increase in the near term

 

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Operating Expenses 

 

Operating expenses were $2,524,987 and $1,802,284 for the nine months ended September 30, 2018 and 2017, respectively, an increase of $722,703 or 40.1%. The increase is primarily due to the following:

 

  An increase in General and administrative expenses of $266,253, which includes an increase in stock based compensation of $131,700 relating to commitment fees issued to certain convertible note holders in the current period, and an increase in expenses overall due to the operation of the facility at 5400 East Avenue in West Palm beach, the facility is significantly bigger than our Seastone facility.
  An increase in rental expense of $623,699, related to the lease agreement entered into for the 5400 East Avenue operation located in West Palm Beach, which was occupied from May 2018.
  A decrease in management fee expense of $103,475, a larger than normal management fee was charged in the prior period to compensate management for the activity which took place in terms of the group restructure.
  A decrease in professional fees of $155,176, related to the disposal of the Canadian rehab clinic and the restructure of the group in the prior period.
  An increase in salaries and wages of $17,624 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 $2,074,621 and $429,256 for the nine months ended September 30, 2018 and 2017, respectively, an increase in loss of $1,645,365, primarily due to the reduction in revenue based on the provisions established against collectability of receivables and the rental expense incurred during the current period, as discussed above.

 

Other income 

Other income was $6,009 and $463,368 for the nine months ended September 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 $5,093,953 for the nine months ended September 30, 2018 and 2017, respectively, a decrease of $5,093,953. Other expense in the prior period, 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 income

Interest income was $5,334 and $32,074 for the nine months ended September 30, 2018. Interest income was earned on the proceeds due on the disposal of the endoscopy Clinic in the prior period.

 

Interest expense 

Interest expense was $572,243 and $242,992 for the nine months ended September 30, 2018 and 2017, respectively, an increase of $329,251 or 135.5%, 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 entered into during the current period.

 

Debt Discount 

Debt discount was $3,288,472 and $442,377 for the nine months ended September 30, 2018 and 2017, respectively, an increase of $2,846,095 or 643.4% 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 $3,130,000 of net proceeds from convertible notes during the current period.

 

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Derivative liability movement 

Derivative liability movement was $(771,000) and $75,203 for the nine months ended September 30, 2018 and 2017, respectively, a net change of $846,203. 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 $153,232 and $(111,052) for the nine months ended September 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 $7,194,389 for the nine months ended September 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 $300,439.

 

Net (loss) income 

Net (loss) income was $(6,541,761) and $1,455,404 for the nine months ended September 30, 2018 and 2017, respectively, an increase in loss of $7,997,165, primarily due to the reduction in revenue, 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.

 

Liquidity and Capital Resources 

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

 

   September 30, 2018   December 31, 2017   Change 
Current Assets  $278,957   $334,619   $(55,662)
Current Liabilities   (12,421,602)   (6,860,178)   (5,561,424)
Working capital Deficit  $(12,142,645)  $(6,525,559   $(5,617,086)

 

The Company borrowed an additional $3,130,000 and repaid $586,000 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 $3,288,472 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.

 

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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 September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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.

 

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Item 1A. Risk Factors.

 

Not applicable because we are a smaller reporting company.

 

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

 

No 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.

 

Item 3. Defaults upon senior securities

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.

 

Not applicable.

 

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: November 19, 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),

November 19, 2018

Shawn Leon

Chief Financial Officer (Principal Financial Officer), President and Director

 
     
/s/ John O’Bireck Director November 19, 2018
John O’Bireck    
     
/s/ Gerald T. Miller Director November 19, 2018
Gerald T. Miller    

 

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