UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 2019

 

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 000-54748

 

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   Zip Code

 

(561) 450-7679

Registrant’s Telephone Number, Including Area Code

 

 

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

 

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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes       No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 Act).  Yes     No   

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common shares    GRST   Nasdaq

  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Number of shares of common stock outstanding as of August 19, 2019 was 146,296,452.

 

 

 

 
 

 

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, 2018 filed with the SEC on April 22, 2019. 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

 

FORM 10-Q

 

TABLE OF CONTENTS

 

    Page
  PART I - FINANCIAL INFORMATION  
Item l. Financial Statements 1
  Condensed Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and December 31, 2018 1
  Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2019 and 2018 2
  Unaudited Condensed Consolidated Statements of Stockholder's Deficit for the three and six months ended June 30, 2019 and 2018 3
  Unaudited Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2019 and 2018 4
  Notes to the Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 35
     
  PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 36
Item 1A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Mine Safety Disclosures 36
Item 5. Other Information 36
Item 6. Exhibits 36
SIGNATURES 37

 

 
 

PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ETHEMA HEALTH CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

         

    June 30,
2019
  December 31, 2018
    (unaudited)    
ASSETS    
         
Current assets                
Cash   $ 24,961     $ 24,674  
Accounts receivable     240,656       202,654  
Prepaid expenses and other current assets     242,930       147,870  
Related party receivables     59,763       32,650  
Total current assets     568,310       407,848  
Non-current assets                
Deposit on real estate     2,924,955       2,940,546  
Due on sale of business     76,412       372,366  
Property, plant and equipment     4,948,275       8,948,349  
Right of use assets     15,476,645       —    
Total non-current assets     23,426,287       12,261,261  
Total assets   $ 23,994,597     $ 12,669,109  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities                
Accounts payable and accrued liabilities   $ 1,784,915     $ 1,092,882  
Taxes payable     767,155       775,392  
Convertible notes     4,572,920       4,403,473  
Promissory notes     161,751       —    
Mortgage loans, current portion     110,815       172,276  
Operating lease liability, current portion     835,898       —    
Derivative liability     3,924,231       4,618,080  
Related party payables     2,823,504       2,615,613  
Total current liabilities     14,981,189       13,677,716  
Non-current liabilities                
Mortgage loans, net of current portion     3,906,127       6,707,346  
Operating lease liability, net of current portion     14,824,699       —    
Total non-current liabilities     18,730,826       6,707,346  
Total liabilities     33,712,015       20,385,062  
                 
Stockholders’ deficit                
Preferred stock - Series A; $0.01 par value, 3,000,000 authorized, nil outstanding as of June 30, 2019 and December 31, 2018.     —         —    
Preferred Stock - Series B; $0.01 par value, 10,000,000 authorized, nil outstanding as of June 30, 2019 and December 31, 2018.     —         —    
Common stock; $0.01 par value, 500,000,000 shares authorized; 143,596,452 and 124,300,341 shares issued and outstanding  as of June 30, 2019 and December 31, 2018, respectively.     1,435,965       1,243,004  
Additional paid-in capital     23,422,968       20,939,676  
Accumulated other comprehensive income     712,525       630,411  
Accumulated deficit     (35,288,876 )     (30,529,044 )
Total stockholders’ deficit     (9,717,418 )     (7,715,953 )
Total liabilities and stockholders’ deficit   $ 23,994,597     $ 12,669,109  

 

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

 

1

 

ETHEMA HEALTH CORPORATION

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

AND COMPREHENSIVE LOSS

 

    Three months ended
June 30, 2019
  Three months ended
June 30, 2018
  Six months ended
June 30, 2019
  Six months ended
June 30, 2018
                 
Revenues   $ 98,186     $ 66,694     $ 180,201     $ 179,996  
                                 
Operating expenses                                
General and administrative     499,423       171,915       881,576       365,647  
Rental expense     209,359       156,580       779,425       156,580  
Management fees     —         45,565       —         92,098  
Professional fees     399,673       145,088       443,827       183,098  
Salaries and wages     328,449       208,280       732,713       393,436  
Depreciation     56,419       68,041       132,295       136,456  
Total operating expenses     1,493,323       795,469       2,969,836       1,327,315  
                                 
Operating loss     (1,395,137 )     (728,775 )     (2,789,635 )     (1,147,319 )
                                 
Other Income (expense)                                
Interest income     —         (49 )     15,262       —    
Loss on disposal of property     (692,488 )     —         (692,488 )     —    
Bonus shares issued to investors     (143,500 )     —         (143,500 )     —    
Interest expense     (197,054 )     (176,587 )     (542,137 )     (347,038 )
Debt discount     (828,313 )     (1,339,885 )     (1,590,255 )     (2,092,834 )
Derivative liability movement     1,728,172       (796,795 )     1,254,871       (808,951 )
Foreign exchange movements     (142,832 )     110,628       (271,950 )     248,524  
Net loss before taxation     (1,671,152 )     (2,931,463 )     (4,759,832 )     (4,147,618 )
Taxation     —         —         —         —    
Net loss     (1,671,152 )     (2,931,463 )     (4,759,832 )     (4,147,618 )
Accumulated other comprehensive loss                                
Foreign currency translation adjustment     39,017       (53,186 )     82,114       (95,645 )
                                 
Total comprehensive loss   $ (1,632,135 )   $ (2,984,649 )   $ (4,677,718 )   $ (4,243,263 )
                                 
Basic and diluted loss per common share   $ (0.01 )   $ (0.02 )   $ (0.04 )   $ (0.03 )
Weighted average common shares outstanding – Basic and diluted     131,159,364       123,976,208       127,713,048       123,571,357  

 

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

 

 

2

 

 

ETHEMA HEALTH CORPORATION

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

 

    Preferred Series B   Common   Additional            
    Shares   Amount   Shares   Amount   Paid in Capital   Comprehensive Income   Accumulated Deficit   Total
                                 
Balance as of December 31, 2018     —       $ —         124,300,341     $ 1,243,004     $ 20,939,676     $ 630,411     $ (30,529,044 )   $ (7,715,953 )
                                                                 
Fair value of warrants issued     —         —         —         —         874,566       —         —         874,566  
Shares issued for commitment fees     —         —         71,111       711       4,267       —         —         4,978  
Foreign currency translation     —         —         —         —         —         43,097       —         43,097  
Net loss     —         —         —         —         —         —         (3,088,680 )     (3,088,680 )
Balance as of March 31, 2019     —       $ —         124,371,452     $ 1,243,715     $ 21,818,509     $ 673,508     $ (33,617,724 )   $ (9,881,992 )
                                                                 
Fair value of warrants issued     —         —         —         —         332,209       —         —         332,209  
Share based compensation     —         —         5,300,000       53,000       318,000       —         —         371,000  
Conversion of convertible notes     —         —         11,875,000       118,750       831,250       —         —         950,000  
Bonus shares issued to investors     —         —         2,050,000       20,500       123,000                       143,500  
Foreign currency translation     —         —         —         —         —         39,017       —         39,017  
Net loss     —         —         —         —         —         —         (1,671,152 )     (1,671,152 )
Balance as of June 30, 2019     —       $ —         143,596,452     $ 1,435,965     $ 23,422,968     $ 712,525     $ (35,288,876 )   $ (9,717,418 )

 

 

 

    Preferred Series B   Common   Additional            
    Shares   Amount   Shares   Amount   Paid in Capital   Comprehensive Income   Accumulated Deficit   Total
                                 
Balance as of December 31, 2017     —       $ —         123,239,230     $ 1,232,393     $ 18,545,913     $ 796,453     $ (22,350,401 )   $ (1,775,642 )
                                                                 
Shares issued for commitment fees     —         —         165,000       1,650       9,900       —         —         11,550  
Foreign currency translation     —         —         —         —         —         (53,186 )     —         (53,186 )
Net loss     —         —         —         —         —         —         (1,216,155 )     (1,216,155 )
Balance as of March 31, 2018     —       $ —         123,404,230     $ 1,234,043     $ 18,555,813     $ 743,267     $ (23,566,556 )   $ (3,033,433 )
                                                                 
Shares issued for commitment fees     —         —         605,000       6,050       41,100       —         —         47,150  
Fair value of series N warrants issued     —         —         —         —         1,202,747       —         —         1,202,747  
Foreign currency translation     —         —         —         —         —         (42,459 )     —         (42,459 )
Net loss     —         —         —         —         —         —         (2,931,463 )     (2,931,463 )
Balance as of June 30, 2018     —       $ —         124,009,230     $ 1,240,093     $ 19,799,660     $ 700,808     $ (26,498,019 )   $ (4,757,458 )

 

 

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

 

 

3

 

ETHEMA HEALTH CORPORATION

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS 

 

    Six months ended
June 30,
2019
  Six months ended
June 30,
2018
Operating activities                
Net loss   $ (4,759,832 )   $ (4,147,618 )
Adjustment to reconcile net loss to net cash used in operating activities:                
Depreciation     132,295       136,456  
Non-cash interest accrual on escrow deposit     (15,229 )     —    
Loss on disposal of property     692,488          
Bonus shares issued to investors     143,500          
Non-cash compensation for services     371,000       58,700  
Amortization of debt discount     1,590,255       2,092,834  
Non-cash discount on convertible notes issued     —         103,000  
Derivative liability movements     (1,254,871 )     808,951  
Movement on receivables reserve     —         (38,826 )
Non-cash deferral of operating lease liability expense     183,952       —    
Changes in operating assets and liabilities                
Accounts receivable     (38,002 )     196,982  
Prepaid expenses and other current assets     (95,055 )     51,678  
Accrued purchase consideration     321,147       517,239  
Accounts payable and accrued liabilities     700,015       6,525  
Taxes payable     —         (3,896 )
Net cash used in operating activities     (2,028,337 )     (217,777 )
                 
Investing activities                
Proceeds on disposal of property, net of closing costs of $183,344     3,318,141       —    
Deposits paid     —         (1,133,657 )
Deposit refunded     15,592       —    
Purchase of fixed assets     (22,868 )     (41,610 )
Net cash provided by (used in) investing activities     3,310,865       (1,175,267 )
                 
Financing activities                
Decrease in bank overdraft     —         (28,056 )
Repayment of mortgage loans     (3,001,101 )     (66,080 )
Proceeds from convertible notes     2,010,000       2,550,000  
Repayment of convertible notes     (775,377 )     (433,000 )
Proceeds from promissory notes     153,541       —    
Proceeds  from related party notes     97,633       (31,329 )
Net cash (used by) provided by financing activities     (1,515,304 )     1,991,535  
                 
Effect of exchange rate on cash     233,063       (253,690 )
                 
Net change in cash     287       344,802  
Beginning cash balance     24,674       339  
Ending cash balance   $ 24,961     $ 345,141  
                 
Supplemental cash flow information                
Cash paid for interest   $ 498,757     $ 308,077  
Cash paid for income taxes   $ —       $ —    
                 
Non cash investing and financing activities                
Fair value of warrants issued   $ 1,206,775     $ —    

 

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; Addiction Recovery Institute of America (“ARIA”) (formerly Seastone Delray Healthcare, LLC), incorporated on May 17, 2016 under the laws of Florida, USA; and Delray Andrews RE, LLC, incorporated on May 17, 2016 under the laws of Florida, USA.

 

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

 

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

 

The Share Purchase Agreement

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

 

The Asset Purchase Agreement and Lease

Under the APA, the assets of the Canadian Rehab Clinic were sold by the Company, through its subsidiary, GreeneStone Clinic Muskoka Inc. (“Muskoka”), to Canadian Addiction Residential Treatment LP (the “Purchaser”), for a total consideration of CDN$10,000,000, plus an additional 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 was to 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

 

2. Summary of significant accounting policies

 

Basis of presentation

 

The (a) unaudited condensed consolidated balance sheets as of June 30, 2019, which have been derived from the unaudited condensed consolidated financial statements, and as of December 31, 2018, which have been derived from audited consolidated financial statements, and (b) the unaudited condensed consolidated statements of operations and cash flows of the Company, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2019 are not necessarily indicative of results that may be expected for the year ending December 31, 2019. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K/A for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on April 22, 2019.

 

All amounts referred to in the notes to the unaudited condensed consolidated financial statements are in United States Dollars ($) unless stated otherwise.

 

a) Use of Estimates

 

The preparation of financial statements in conformity with US GAAP 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) Principles of consolidation and foreign currency translation

 

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

 

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

 

Monetary assets and liabilities at the rate of exchange in effect at the balance sheet date.

 

Equity at historical rates.

 

Revenue and expense items and cash flows at the average rate of exchange prevailing during the period.

 

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

 

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

 

The relevant translation rates are as follows: For the six months ended June 30, 2019, a closing rate of CDN$1.00 equals US$0.7641 and an average exchange rate of CDN$1.00 equals US$0.7498. For the six months ended June 30, 2018, a closing rate of CAD$1.00 equals US$0.7594 and an average exchange rate of CAD$1.0000 equals US$0.7715.

6

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

c) Revenue Recognition

 

ASU 2014-09 requires companies to exercise more judgment and recognize revenue using a five-step process. The Company adopted ASU 2014-09 using the modified retrospective method for all contracts effective January 1, 2018. Modified retrospective adoption requires entities to apply the standard retrospectively to the most current period presented in the financial statements, requiring the cumulative effect of the retrospective application as an adjustment to the opening balance of retained earnings at the date of initial application. Prior periods have not been adjusted. No cumulative effect adjustment in retained earnings was recorded as the adoption of ASU 2014-09 did not significantly impact the Company’s reported historical revenue.

 

As a result of certain changes required by ASU 2014-09, the majority of the Company’s provision for doubtful accounts are recorded as a direct reduction to revenue instead of being presented as a separate line item on the consolidated statements of operations. The adoption of ASU 2014-09 has no impact on the Company’s accounts receivable as it was historically recorded net of allowance for doubtful accounts and contractual adjustments, and the Company has eliminated the presentation of allowance for doubtful accounts on the consolidated balance sheets.

 

As our performance obligations relate to contracts with a duration of one year or less, the Company elected the optional exemption in ASC 606-10-50-14(a). Therefore, the Company is not required to disclose the transaction price for the remaining performance obligations at the end of the reporting period or when the Company expects to recognize the revenue. The Company has minimal unsatisfied performance obligations at the end of the reporting period as our patients typically are under no obligation to remain admitted in our facilities.

 

The Company receives payments from the following sources for services rendered in our U.S. Facility: (i) commercial insurers; and (ii) individual patients and clients. As the period between the time of service and time of payment is typically one year or less, the Company elected the practical expedient under ASC 606-10-32-18 and did not adjust for the effects of a significant financing component.

 

The Company derives a significant portion of its revenue from other payors that receive discounts from established billing rates. The various managed care contracts under which these discounts must be calculated are complex, subject to interpretation and adjustment, and may include multiple reimbursement mechanisms for different types of services provided in the Company’s in-patient facilities and cost settlement provisions. Management estimates the transaction price on a pay or specific basis given its interpretation of the applicable regulations or contract terms. The services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from the Company’s estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.

 

Settlements under cost reimbursement agreements with third-party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. In the opinion of management, adequate provision has been made for any adjustments and final settlements. However, there can be no assurance that any such adjustments and final settlements will not have a material effect on the Company’s financial condition or results of operations. The Company’s accounts receivables were $240,656 and $202,654 for the six months ended June 30, 2019 and year ended December 31, 2018, respectively, and were included in other current assets in the consolidated balance sheets. Management believes that these receivables are properly stated and are not likely to be settled for a significantly different amount. The net adjustments to estimated accounts receivable settlements resulted in a decrease in revenues of $0 and $262,353 for the six months ended June 30, 2019 and the year ended December 31, 2018, respectively.

 

7

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

c) Revenue Recognition (continued)

 

The Company’s revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those services. The Company derives its revenues from the sale of its services, as defined below. The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its revenue transactions:

 

  i. identify the contract with a customer;
  ii. identify the performance obligations in the contract;
  iii. determine the transaction price;
  iv. allocate the transaction price to performance obligations in the contract; and
  v. recognize revenue as the performance obligation is satisfied.

 

The Company has two operating segments from which it derives revenues which is recognized on the basis described below.

 

  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 patients 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.

 

d) Non-monetary transactions

 

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

 

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

 

e) 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. The Company had no cash equivalents at June 30, 2019 and December 31, 2018.

8

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

 


2. Summary of significant accounting policies (continued)

 

f) Accounts receivable

 

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

 

g) Allowance for Doubtful Accounts, Contractual and Other Discounts

 

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

 

h) Financial instruments

 

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

 

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

 

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

 

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

9

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  2. Summary of significant accounting policies (continued)

 

h) Financial instruments (continued)

 

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

 

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

 

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

 

i) Plant and equipment

 

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

 

Leasehold improvements are depreciated using the straight-line method over the term of the lease.

 

j) Leases

 

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

 

k) Income taxes

 

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

 

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

 

10

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of significant accounting policies (continued)

 

l) Net income (loss) per Share

 

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

 

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

 

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

 

m) Stock based compensation

 

Stock based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the employee’s requisite service period or vesting period on a straight-line basis. Share-based compensation expense recognized in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018 is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. This estimate will be revised in subsequent periods if actual forfeitures differ from those estimates. We have minimal awards with performance conditions and no awards dependent on market conditions.

 

n) Derivatives

 

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

 

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

 

 

 

11

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of significant accounting policies (continued)

 

o) Recent accounting pronouncements

 

Adoption of Accounting Standards

 

In February 2016, the Financial Accounting Standards Board (“FSAB”) issued Accounting Standards Update (“ASU”), No. 2016-02, Leases (Topic 842) (ASC 842)

 

The amendments in this update establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard is effective for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, including a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, an update which provides another transition method, the prospective transition method, which allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the new standard on January 1, 2019 using the prospective transition method.

 

The Company has identified all leases and reviewed the leases to determine the impact of ASC 842 on its unaudited condensed consolidated financial statements. The Company has elected to apply the practical expedient to certain classes of leases, whereby the separation of components of leases into lease and non-lease components is not required and all of the practical expedients to all leases, which include not reassessing (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. The adoption of the new standard resulted in the recording of a right-of-use asset and a lease liability on the unaudited condensed consolidated balance sheet on January 1, 2019 of $15,986,074. The adoption of ASU 2016-02, as amended, has had no impact on the unaudited condensed consolidated statements of operations or unaudited condensed consolidated statements of cash flows.

 

Recent accounting pronouncements

   

The FASB issued several updated during the period, none of these standards are either applicable to the Company or require adoption at a future date and are not expected to have a material impact on the unaudited condensed consolidated financial statements upon adoption.

   

p) Financial instruments Risks

 

The Company is exposed to various risks through its financial instruments. The following analysis provides a measure of the Company’s risk exposure and concentrations at the balance sheet date, June 30, 2019 and December 31, 2018.

 

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 ARIA 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.

 

12

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of significant accounting policies (continued)

 

p) Financial instruments Risks (continued)

 

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 $14,412,879 accumulated deficit of $35,288,876. 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 as there is no overdraft indebtedness as of June 30, 2019. In the opinion of management, interest rate risk is assessed as low, not material and remains unchanged from the prior year.

 

b. Currency risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is subject to currency risk as it has subsidiaries that operate in Canada and are subject to fluctuations in the Canadian dollar. A substantial portion of the Company’s financial assets and liabilities are denominated in Canadian dollars. Based on the net exposures at June 30, 2019, a 5% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an approximate $83,570 increase or decrease in the Company’s after tax net income from operations. The Company has not entered into any hedging agreements to mitigate 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.

 

q) Reclassification of Prior Year Presentation

 

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

 

13

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3. 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 at June 30, 2019 the Company has a working capital deficiency of $14,412,879 and accumulated deficit of $35,288,876. Management believes that current available resources will not be sufficient to fund the Company’s planned expenditures over the next 12 months. Accordingly, the Company will be dependent upon the raising of additional capital through placement of common shares, and/or debt financing in order to implement its business plan, and generating sufficient revenue in excess of costs. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain geographical areas, or techniques that it might otherwise seek to retain. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. These factors create substantial doubt about the Company’s ability to continue as a going concern. These unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities or other adjustments that may be necessary should the Company not be able to continue as a going concern.

 

4. Prepaid expenses and other current assets

 

Prepaid expenses and other current assets includes the following:

 

On February 25, 2019, the Company entered into a Letter of Intent whereby it would purchase a 33.33% interest in Local Link Wellness, LLC (“LLW”) for gross proceeds of $400,000. LLW proposes to provide a comprehensive addiction treatment program to large employee groups. The company has advanced LLW a total of $120,000 as at June 30, 2019. These funds were advanced as short-term promissory notes that are immediately due and payable.

 

5. Assets held for resale

 

On April 2, 2019, the Company entered into a Commercial Contract whereby the real property at 801 Andrews Avenue, Delray Beach, Florida, consisting of land and condominiums thereon, was sold to JAGGM, LLC for $3,500,000. This transaction closed on April 26, 2019.

The loss realized on the disposal was calculated as follows:

    Amount
     
Proceeds received   $ 3,500,485  
Less: closing costs     (182,344 )
Net proceeds received     3,318,141  
         
Assets sold:        
Land     1,877,618  
Buildings thereon     2,060,219  
Furniture and fixtures     72,792  
      4,010,629  
         
Loss on disposal   $ 692,488  

14

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6. Deposit on real estate

 

On November 2, 2017, the Company entered into an Agreement to purchase from AREP 5400 East Avenue LLC certain buildings in West Palm Beach, Florida, totaling approximately 80,000 square feet, on which the present tenant operates a substance abuse treatment center. The purchase price of the Property is $20,530,000. The Company made a series of nonrefundable down payments totaling $2,924,955 and $1,825,000 as of June 30, 2019 and $2,940,546 as of December 31, 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 by $750,000 per month, commencing on August 31, 2018, until the purchase option is exercised. The premises is located at 5400, 5402 and 5410 East Avenue, West Palm Beach, Florida (the “Property”). The lease is for an initial 10 years and provides for two additional 10 year extensions.

 

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

 

7. Due on sale of business

 

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 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. As of June 30, 2019, CDN$1,055,042 of the escrow had been refunded to the Company and CDN$365,268 had been used to affect building improvements to the premises owned by CCH, for a total reduction of CDN$1,420,310. The remaining escrow balance was CDN$100,000 consisting of principal of CDN$76,690 and accrued interest thereon of CDN$20,310.

 

8. Property, plant and equipment

 

Property, plant and equipment consists of the following:

 

    June 30,
2019
  December 31, 2018
    Cost   Accumulated Depreciation   Net book value   Net book value
                 
Land   $ 1,040,596     $ —       $ 1,040,596     $ 2,911,530  
Property     4,059,658       (408,047 )     3,651,611       5,750,045  
Leasehold improvements     271,074       (15,006 )     256,068       251,774  
Furniture and fixtures     —         —         —         35,000  
    $ 5,371,328     $ (423,053 )   $ 4,948,275     $ 8,948,349  

Depreciation expense for the three months ended June 30, 2019 and 2018 was $56,419 and $68,041, respectively, and for the six months ended June 30, 2019 and 2018 was $132,295 and $136,456, respectively.

 

9. Leases

 

Adoption of ASC Topic 842, Leases

On January 1, 2019, the Company adopted Topic 842 using the modified retrospective method applied to leases that were in place as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. The Company's leases consists of operating leases that relate to real estate rental agreements. All of the value of the Company's lease portfolio relates to a real estate lease agreement that was entered into in May 2018.

 

15

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. Leases (continued)

 

Practical Expedients and Elections

The Company elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that exist prior to adoption of the new standard. We also elected the short-term lease recognition exemption for all leases that qualify.

 

Discount Rate applied to property operating lease

To determine the present value of minimum future lease payments for operating leases at January 1, 2019, the Company was required to estimate a rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment (the "incremental borrowing rate" or "IBR").

 

The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, the Company used the average of (i) the risk free interest rate adjusted for a premium for Company and liquidity risk; (ii) the weighted average mortgage interest rate currently availed to the Company; and (iii) the fifteen year mortgage interest rate. The weighted average rate the Company determined was 4.76% as an appropriate incremental borrowing rate to apply to its real-estate operating lease.

 

Right of use assets

Right of use assets are included in the unaudited condensed consolidated Balance Sheet are as follows:

 

    June 30,
2019
     
Non-current assets        
Right of use assets, operating leases, net of amortization   $ 15,467,645  

 

Total operating lease cost

 

Individual components of the total lease cost incurred by the Company is as follows:

 

    Six months
ended
June 30,
2019
 
       
Operating lease expense   $ 1,068,624  
         

 

Minimum rental payments under operating leases are recognized on a straight-line basis over the term of the lease.

 

Maturity of operating leases

 

 The amount of future minimum lease payments under operating leases are as follows:

 

    Amount
     
Remainder of 2019   $ 917.930  
2020     1,882,422  
2021     1,962,242  
2022     2,042,062  
2023 and thereafter     12,436,420  
Total undiscounted minimum future lease payments     19,241,076  
Deferred rental liability on straight line amortization     183,952  
Imputed interest     (3,764,431 )
Total operating lease liability   $ 15,660,597  
         
Disclosed as:        
Current portion   $ 835,898  
Non-current portion     14,824,699  
    $ 15,660,597  

16

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10. Taxes payable

 

The taxes payable consist of:

 

  A payroll tax liability of $139,520 (CDN$182,589) in Greenestone Muskoka which has not been settled as yet.
  The Company has assets and operates businesses in Canada and is required to disclose these operations to the US taxation authorities, the requisite disclosure has not been made. Management has reserved the maximum penalty due to the IRS in terms of non-disclosure. This non-compliance with US disclosure requirements is currently being addressed. An amount of $250,000 has been accrued for any potential exposure the Company may have.
  Estimated income taxes payable in certain of the Canadian operations.

 

    June 30,
2019
  December 31,
2018
         
Payroll taxes   $ 139,520     $ 133,843  
HST/GST payable     4,670       33,757  
US penalties due     250,000       250,000  
Income tax payable     372,965       357,792  
                 
    $ 767,155     $ 775,392  

 

11. Convertible notes

 

The convertible notes consist of the following:

 

   

Interest

rate

    Maturity date   Principal     Interest     Debt Discount    

June 30,

2019

   

December 31,

2018

 
                                           
Leonite Capital LLC     11.0 %  

July 25,

2019

  $ 2,243,179     $ 63,793     $ (32,391 )   $ 2,274,581     $ 2,494,180  
                                                     
Power Up Lending Group Ltd     9.0 %   May 15,2019     -       -       -       -       94,595  
      9.0 %   September 10, 2019     -       -       -       -       44,484  
      9.0 %   October 30, 2019     53,000       2,247       (21,993 )     33,254       -  
      9.0 %   November 15, 2019     138,000       5,206       (65,443 )     77,763       -  
      9.0 %   January 30, 2020     128,000       3,661       (69,543 )     62,118       -  
                                                     
First Fire Global Opportunities Fund     12.0 %   December 9, 2019     200,000       3,205       (114,909 )     88,296       -  
                                                     
Series N convertible notes     6.0 %   May 17, 2019 to June 11,2020     2,999,000       135,741       (1,097,833 )     2,036,908       1,770,214  
                                                     
                                         $ 4,572,920      $ 4,403,4 73  

 

17

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11. Convertible notes (continued)

 

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 $1,650,000 to Leonite Capital, LLC (“Leonite”). The note is convertible into shares of common stock at a conversion price of $0.06 per share, subject to anti-dilution and price protection. The Note bears interest at the rate of 8.5% per annum. The Note’s amended maturity date was December 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 Company paid a commitment fee of $132,000 settled through the issue of 1,650,000 shares of common stock and paid $20,000 towards the lenders legal fees. In conjunction with this note, the Company issued a five year warrant to purchase 27,500,000 shares of common stock at an exercise price or $0.10 per share, subject to antidilution and price protection.

 

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 was to 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 amended and restated 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; effective January 2, 2018.

 

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

 

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 anti-dilution and price protection. The Company paid a commitment fee of $19,800 settled through the issue of 330,000 shares of common stock. This note was repaid on the maturity date for gross proceeds of $330,000.

 

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 had a maturity date of December 1, 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 anti-dilution and price protection. The Company paid a commitment fee of $11,550 settled through the issue of 165,000 shares of common stock. In conjunction with this note the Company issued a five year warrant to purchase 5,500,000 shares of common stock at an exercise price of $0.10 per share, subject to anti-dilution and price protection.

18

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11. Convertible notes (continued)

 

Leonite Capital, LLC (continued)

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 December 1, 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 paid a commitment fee of $42,350 settled through the issue of 10,083,333 shares of common stock. In conjunction with this note the Company issued a five year warrant to purchase 10,083,333 shares of common stock at an exercise price of $0.10 per share, subject to anti-dilution and price protection.

 

On November 5, 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 $111,111, including an Original Issue Discount of $11,111, for net proceeds of $100,000. The note had a maturity date of November 30, 2018 and bore interest at 1.0% per annum. 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. The Company paid a commitment fee of $8,889 settled through the issue of 111,111 shares of common stock. In conjunction with this note the Company issued a five year warrant to purchase 1,400,000 shares of common stock at an exercise price of $0.10 per share, subject to anti-dilution and price protection. This note was repaid on the maturity date for gross proceeds of $111,184.

 

On January 17, 2019, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $71,111, including an Original Issue Discount of $7,111, for net proceeds of $64,000. The note had a maturity date of July 25, 2019 and bears interest at 11.0% 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 paid a commitment fee of $4,978 settled through the issue of 71,111 shares of common stock. In conjunction with this note the Company issued a five year warrant to purchase 1,185,183 shares of common stock at an exercise price of $0.10 per share, subject to anti-dilution and price protection.

 

Effective March 19, 2019, the Company entered into a note extension agreement with Leonite, whereby the convertible notes outstanding to Leonite, amounting to $2,420,000, for consideration of $75,000 added to the principal outstanding on the note on January 1, 2019, a further $75,000 added to the principal outstanding on the note on February 1, 2019 and a further $100,000 added to the principal of the note on March 15, 2019, the maturity date of all of the convertible notes above were extended to July 25, 2019.

 

Power Up Lending Group LTD

 

On July 31, 2018, the Company, entered into a Securities Purchase Agreement with Power Up, 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 January 28, 2019, the Company repaid the Power Up convertible note entered into on July 31, 2018 of $153,000 together with interest and early settlement penalty thereon for a payout of $207,679.

 

 

19

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

 

11. Convertible notes (continued)

 

Power Up Lending Group LTD (continued)

 

On September 10, 2018, the Company, entered into a Securities Purchase Agreement with Power Up, 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. On March 11, 2019, the Company repaid the Power Up convertible note entered into on September 10, 2018, of $133,000 together with interest and early settlement penalty thereon for gross proceeds of $180,062.

 

On January 9, 2019, the Company, entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $53,000 for net proceeds of $50,000 after expenses. The Note has a maturity date of October 30, 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 Power Up 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 January 28, 2019, the Company, entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $138,000 for net proceeds of $135,000 after expenses. The Note has a maturity date of November 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 Power Up 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 March 6, 2019, the Company, entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $128,000. The Note has a maturity date of January 30, 2020 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 Power Up 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.

 

First Fire Global Opportunities Fund

 

On March 5, 2019, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $200,000, for net proceeds of $192,000 after the payment of legal fees and origination fees amounting to $8,000. The note has a maturity date of December 9, 2019. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser 180 days after the issued date into shares of the Company’s common stock at the lower of $0.08 per share or 65% of the lowest trade price during the ten consecutive trading days immediately prior to conversion. The note has certain buyback terms if the Company consummates a registered or unregistered primary offering of securities for capital raising purposes, or an option to convert at a 20% discount to the offering price to investors.

 

20

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11. Convertible notes (continued)

 

Series N convertible notes

 

During the period from May 17, 2018 to December 4, 2018, The Company closed several tranches of a private offering in which it raised $2,505,000 in principal from 12 accredited investors through the issuance to the investors of the Company’s Series N convertible notes, in the total original principal amount of $2,505,000, which Notes are convertible into the Company’s common stock at a conversion price of $0.08 per share together with three year warrants to purchase up to a total of 31,312,500 shares of the Company’s common stock at an exercise price of $0.12 per share. Both the conversion price under the Notes and the exercise price under the warrants are subject to standard price and anti-dilution adjustment mechanisms. The notes mature between May 16, 2019 to December 3, 2019.

 

Between January 28, 2019 and June 12, 2019, the Company closed several tranches of Series N Convertible notes in which it raised $1,444,000 in principal from accredited investors through the issuance to the investors of the Company’s Series N convertible notes, in the total original principal amount of $1,444,000, which Notes are convertible into the Company’s common stock at a conversion price of $0.08 per share together with three year warrants to purchase up to a total of 18,050,000 shares of the Company’s common stock at an exercise price of $0.12 per share. Both the conversion price under the Notes and the exercise price under the warrants are subject to standard adjustment mechanisms. The notes mature one year from the date of issuance.

 

On May 15, 2019, one investor converted the aggregate principal amount of $950,000 of Series N convertible notes into 11,875,000 shares of common stock at a conversion price of $0.08 per share.

 

12. Mortgage loans

 

Mortgage loans payable is disclosed as follows:

 

    Interest 
rate
    Maturity date   Principal 
Outstanding
    Accrued 
interest
    June 30,
2019
    December 31,
2018
 
                                   
Cranberry Cove Holdings, Ltd.                                            
Pace Mortgage     4.2 %   July 19, 2022   4,011,864     $ 5,078     $ 4,016,942      $ 3,924,836  
ARIA                                            
Mortgage     5.0 %   February 13, 2020     -       -       -       2,954,786  
                $ 4,011,864     $ 5,078     $ 4,016,942     $ 6,879,622  
Disclosed as follows:                                            
Short-term portion                               $ 110,815     $ 172,276  
Long-term portion                                 3,906,127       6,707,346  
                                $ 4,016,942     $ 6,879,622  

 

The aggregate amount outstanding is payable as follows:

 

    Amount
Within one year     110,815  
One to two years     110,225  
Two to three years     114,903  
Three to four years     3,680,999  
Total   $ 4,016,942  

 

Cranberry Cove Holdings, Ltd – Pace mortgage

 

On July 19, 2017, CCH, a wholly owned subsidiary, closed on a loan agreement in the principal amount of CDN$5,500,000. The loan is secured by a first mortgage on the premises owned by CCH located at 3571 Muskoka Road 169, Bala, Ontario (the “Property”). The loan bears interest at the fixed rate of 4.2% with a 5-year primary term and a 25-year amortization. The Company has guaranteed the loan and the Company’s chief executive officer and controlling shareholder also has personally guaranteed the Loan. CCH and the Company have granted the Lender a general security interest in its assets to secure repayment of the Loan. The loan is amortized with monthly installments of CDN $29,531.

21

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

  12. Mortgage loans payable (continued)

 

ARIA

 

On February 13, 2017, the Company, through its subsidiary, ARIA, entered into a Mortgage and Security Agreement to purchase the properties located at 801 and 810 Andrews Avenue, Delray Beach, Florida, for an aggregate principal sum of $3,000,000, bearing interest at the rate of 5% per annum, maturing on February 13, 2020, with monthly installments of $15,000.

 

On April 2, 2019, the Company entered into a Commercial Contract whereby the real property at 801 Andrews Avenue, Delray Beach, Florida, consisting of land and condominiums thereon, was sold to JAGGM, LLC for $3,500,000. This transaction closed during April 2019 and the principal mortgage liability of $2,942,526, including interest thereon was settled.

 

13. Derivative liabilities

 

The short-term convertible notes, together with certain warrants issued to Leonite and the short term convertible notes disclosed in note 11 above and note 15 below, 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 $1,335,709 using a Black-Scholes valuation model.

 

The derivative liability is marked-to-market on a quarterly basis. As of June 30, 2019, the derivative liability was valued at $3,924,231.

 

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

 

    Six months ended
June 30,
2019
     
Calculated stock price     $0.07 to $0.09  
Risk free interest rate     1.71% to 2.56%  
Expected life of convertible notes and warrants     3 to 60 months  
expected volatility of underlying stock     124.7% to 206.8%  
Expected dividend rate     0 %

 

The movement in derivative liability is as follows:

 

   

June 30,

2019

   

December 31,

2018

 
             
Opening balance (January 1)   $ 4,618,080     $ 2,859,832  
Derivative liability on issued convertible notes and variable priced warrants     561,022       1,335,709  
Fair value adjustments to derivative liability     (1,254,871     422,539  
                 
Closing balance   $ 3,924,231     $ 4,618,080  

22

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

14. Related party transactions

 

Shawn E. Leon

As of June 30, 2019 and December 31, 2018 the Company had a receivable of $59,763 and $32,650, respectively from Shawn E. Leon.. Mr. Leon is a director and CEO of the Company. The balances receivable is non-interest bearing and has no fixed repayment terms.

 

Mr. Leon was paid management fees of $0 and $92,098 for the six months ended June 30, 2019 and 2018 respectively.

 

Leon Developments, Ltd.

As of June 30, 2019 and December 31, 2018, the Company owed Leon Developments, Ltd., $1,658,386 and $1,581,499, respectively. The balance owing to Leon Developments, Ltd. Is non-interest bearing and has no fixed terms of repayment.

 

Eileen Greene

As of June 30, 2019 and December 31, 2018, the Company owed Eileen Greene, the spouse of Mr. Leon, $1,165,119 and $1,034,114, respectively. The amount owing to Ms. Greene is non-interest bearing and has no fixed repayment terms.

 

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

15. Stockholders' deficit

 

a) Common shares

 

Authorized, issued and outstanding

The Company has authorized 500,000,000 shares with a par value of $0.01 per share. The company has issued and outstanding 143,596,452 and 124,300,341as of June 30, 2019 and December 31, 2018, respectively.

 

On January 17, 2019, the Company issued 71,111 shares of common stock to Leonite in connection with the closing of a financing of a Senior Secured Convertible Note. The shares were valued at $4,978 on the issue date and recorded as a debt discount.

 

On May 15, 2019, a Series N convertible note holder converted an aggregate principal amount of $950,000 of principal debt into 11,875,000 at a conversion price of $0.08 per share.

 

During June 2019, the Company issued a total of 5,300,000 shares of common stock to certain consultants, directors and employees for services rendered during the course of the current fiscal year. These shares of common stock were valued at $371,000 at the date of grant.

 

During June 2019, the Company issued a total of 2,050,000 shares of common stock to certain investors as bonus shares. These shares were valued at $0.07 per share on the date of issuance.

 

b) Preferred shares

 

Authorized, issued and outstanding

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

 

c) Warrants

 

In terms of the convertible note agreements entered into with Leonite disclosed in note 11 above, the Company granted warrants exercisable over a total of 1,185,183 shares of common stock at an initial exercise price of $0.10 per share, which was recorded as a debt discount.

 

In terms of the Series N Convertible debt issued to various accredited investors, disclosed in note 11 above, the Company granted warrants exercisable over a total of 18,050,000 shares of common stock at an initial exercise price of $0.12 per share, which was recorded as a debt discount.

 

23

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15. Stockholders' deficit (continued)

 

c) Warrants (continued)

 

The warrants were valued using a Black Scholes pricing model and the relative fair value method, on the date of grant at $1,231,258 using the following weighted average assumptions:

 

    Six months ended
June 30,
2019
     
Calculated stock price     $0.07 to $0.09  
Risk free interest rate     1.81% to 2.58%  
Expected life of warrants     36 to 60 months  
expected volatility of underlying stock     169.8% to 186.7%  
Expected dividend rate     0 %

 

The volatility of the common stock is estimated using historical data of the Company’s common stock. The risk-free interest rate used in the Black Scholes pricing model is determined by reference to historical U.S. Treasury constant maturity rates with maturities approximate to the life of the warrants granted. An expected dividend yield of zero is used in the valuation model, because the Company does not expect to pay any cash dividends in the foreseeable future. As of June 30, 2019, the Company does not anticipate any awards will be forfeited in the valuation of the warrants.

A summary of all of the Company’s warrant activity during the period January 1, 2018 to June 30, 2019 is as follows:

 

      No. of shares     Exercise price per 
share
    Weighted average exercise price  
                     
Outstanding January 1, 2018       49,504,075       0.0033 to $.0.10     $ 0.0690  
Granted       48,295,833       0.10 to $0.12       0.1130  
Forfeited/cancelled                    
Exercised                    
Outstanding December 31, 2018       97,799,908       $0.03 to $0.12     $ 0.0910  
Granted       19,235,183       $0.10 to $0.12       0.1188  
Forfeited/cancelled       (300,000     $0.0033       (0.0033
Exercised                    
Outstanding June 30, 2019       116,735,091       $0.03 to $0.12     $ 0.0954  

 

The following table summarizes information about warrants outstanding at June 30, 2019:

      Warrants outstanding     Warrants exercisable  

 

Exercise price

   

 

No. of shares

   

Weighted average

remaining years

   

Weighted average

exercise price

   

 

No. of shares

   

Weighted average

exercise price

 
                                 
$0.03       21,704,075       0.73               21,704,075          
$0.10       45,668,516       3.60               45,668,516          
$0.12       49,362,500       2.35               49,362,500          
                                           
        116,735,091       2.54     $ 0.0954       116,735,091     $ 0.0954  

 

All of the warrants outstanding as of June 30, 2019 and December 31, 2018 are vested. The warrants outstanding as of June 30, 2019 have an intrinsic value of $868,163.

 

24

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15. Stockholders' deficit (continued)

 

d) Stock options

 

Our board of directors adopted the Greenestone Healthcare Corporation 2013 Stock Option Plan (the “Plan”) to promote our long-term growth and profitability by (i) providing our key directors, officers and employees with incentives to improve stockholder value and contribute to our growth and financial success and (ii) enable us to attract, retain and reward the best available persons for positions of substantial responsibility. A total of 10,000,000 shares of our common stock have been reserved for issuance upon exercise of options granted pursuant to the Plan. The Plan allows us to grant options to our employees, officers and directors and those of our subsidiaries; provided that only our employees and those of our subsidiaries may receive incentive stock options under the Plan. We have granted a total of 480,000 options as of June 30, 2019 under the Plan.

No options were issued, exercised or cancelled during the six months ended June 30, 2019 and the year ended December 31, 2018, respectively.

 

The following table summarizes information about options outstanding as of June 30, 2019:

      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       0.34               480,000          
                                           
        480,000       0.34     $ 0.12       480,000     $ 0.12  

 

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

 

As of June 30, 2019 there was no unrecognized compensation costs related to these options and the fair value of the options as of June 30, 2019 was $0.

 

16. Segment information

 

The Company has two reportable operating segments:

 

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

 

b. Rehabilitation Services provided to customers, these services were provided to customers at the Company’s Addiction Recovery Institute of America and Seastone of Delray operations.

 

 

25

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16. Segment information (continued)

 

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

 

    Three months ended June 30, 2019
    Rental Operations   In-Patient services   Total
             
Revenue   $ 82,461     $ 15,725     $ 98,186  
Operating expenses     36,989       1,456,334       1,493,323  
                         
Operating income (loss)     45,472       (1,440,609 )     (1,395,137 )
                         
Other (expense) income                        
Loss on disposal of property     —         (692,488 )     (692,488 )
Bonus shares issued to investors     —         (143,500 )     (143,500 )
Interest expense     (40,666 )     (156,388 )     (197,054 )
Amortization of debt discount     —         (828,313 )     (828,313 )
Loss on change in fair value of derivative liability     —         1,728,172     1,728,172  
Foreign exchange movements     (26,066 )     (116,766 )     (142,832 )
Net loss before taxation     (21,260 )     (1,649,892 )     (1,671,152 )
Taxation     —         —         —    
Net loss from operations   $ (21,260 )   $ (1,649,892 )   $ (1,671,152 )

 

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

 

 

26

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16. Segment information (continued)

 

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

 

    Six months ended June 30, 2019
    Rental Operations   In-Patient services   Total
             
Revenue   $ 164,476     $ 15,725     $ 180,201  
Operating expenses     74,229       2,895,607       2,969,836  
                         
Operating income (loss)     90,247       (2,879,882 )     (2,789,635 )
                         
Other (expense) income                        
Interest income     —         15,262       15,262  
Loss on disposal of property     —         (692,488 )     (692,488 )
Bonus shares issued to investors     —         (143,500 )     (143,500 )
Interest expense     (82,046 )     (460,091 )     (542,137 )
Amortization of debt discount     —         (1,590,255 )     (1,590,255 )
Loss on change in fair value of derivative liability     —         1,254,871     1,254,871  
Foreign exchange movements     (45,296 )     (226,654 )     (271,950 )
Net loss before taxation     (37,095 )     (4,722,737 )     (4,759,832 )
Taxation     —         —         —    
Net loss from operations   $ (37,095 )   $ (4,722,737 )   $ (4,759,832 )

 

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

 

27

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16. Segment information (continued)

 

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

 

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

 

    June 30, 2019
    Rental Operations   In-Patient services   Total
             
Purchase of fixed assets     —         22,868       22,868  
Assets                        
Current assets     9,630       558,680       568,310  
Non-current assets     2,916,346       20,509,941       23,426,287  
Liabilities                        
Current liabilities     (2,075,136 )     (12,906,053 )     (14,981,189 )
Non-current liabilities     (4,016,852 )     (14,713,974 )     (18,730,826 )
Intercompany balances     719,954       (719,954 )     —    
Net liability position     (2,446,058 )     (7,271,360 )     (9,717,418 )

 

17. Net loss per common share

 

For the three and six months ended June 30, 2019 and 2018, the following options and warrants were excluded from the computation of diluted net loss per share as the results would have been anti-dilutive.

 

 

    June 30,
2019
  June 30,
2018
         
Stock options     480,000       480,000  
Warrants     116,735,091       82,587,408  
Convertible notes     78,944,078       43,916,472  
                 
      196,159,169       126,983,880  

 

18. Commitment and contingencies

 

a) Contingency related to outstanding penalties

 

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

 

b) Option to purchase lease property

 

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 $25,500,000 as of July 31, 2019, plus any landlord funded improvements. The option to purchase increases by $750,000 per calendar month. The initial base rental is $146,337 per month, plus any taxes imposed on the premises or the base rental.

 

28

 

ETHEMA HEALTH CORPORATION

 

  NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

18. Commitment and contingencies

 

c) Future minimum operating lease payments

 

In terms of the lease agreement mentioned above the Company is obligated to make the following minimum undiscounted lease payments:

 

    Amount
     
  Remainder of 2019     $ 917,930  
  2020       1,882,422  
  2021       1,962,242  
  2022       2,042,062  
  2023 and thereafter       12,436,420  
  Total undiscounted minimum future lease payments     $ 19,241,076  

 

d) Mortgage payments

 

The Company is obligated to make the following mortgage loans payments:

 

    Amount
Within one year   $ 110,815  
One to two years     110,225  
Two to three years     114,903  
Three to four years     3,680,999  
Total   $ 4,016,942  

 

e) Other

 

The Company has principal and interest payment commitments under the Convertible notes disclosed under Note 11 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.

 

 

19. Subsequent events

 

 On July 8, 2019, 2019, the Company, entered into a Securities Purchase Agreement with Labrys Fund, LP, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $282,000 for net proceeds of $253,800 after an original issue discount of $28,200. The Note has a maturity date of January 8, 2020 and bears interest 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 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 Power Up 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 60% of the lowest closing bid price of the Company's common stock for the thirty trading days prior to conversion. The Company was also required to issue 2,764,706 shares of common stock, which shares will be returned to the Company if the note is repaid prior to the expiry of 180 days from the date of issuance.

 

On August 7, 2019, the Company, entered into a Securities Purchase Agreement with Auctus Fund, LLC, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $225,000 for net proceeds of $197,250 after expenses and original issue discount of $25,000. The Note has a maturity date of May 7, 2020 and bears interest at the rate of ten 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 Auctus Fund, LLC 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 60% of the lowest closing bid price of the Company’s common stock for the thirty trading days prior to conversion.

 

The Company has reached an agreement with Leonite Capital, LLC whereby it has agreed to transfer ownership of the land and buildings at 810 Andrews Avenue, Delray Beach, valued at $1,500,000, in partial settlement of the principal and interest outstanding of $2,306,972 as at June 30, 2019. Leonite has agreed to further negotiate extend the maturity date of the remaining balance outstanding to December 31, 2019. 

 

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

 

 

 

29

 

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, 2018 filed with the Securities and Exchange Commission on April 22, 2019. 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, 2018.

 

Plan of Operation

 

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

 

Results of Operations

 

For the three months ended June 30, 2019 and June 30, 2019.

 

Revenues were $98,186 and $66,694 for the three months ended June 30, 2019 and 2018, respectively, an increase of $31,492 or 17.5%.

 

Revenue from patient treatment was $15,725 and $(16,337) for the three months ended June 30, 2019 and 2018, respectively, an increase of $32,062 or 196.3%. The increase is due to an adjustment made to revenue in the prior period and limited patient care income in the current period. We are attempting to develop specialized programs for niche groups which will assist in utilizing the West Palm Beach facility. We are actively building up our customer contact base to increase patient revenues.

Revenue from rental income was $82,462 and $83,031 for the three months ended June 30, 2019 and 2018, respectively, a decrease of $569 or 0.7%. The decrease is due to foreign currency movements between the two periods.

 

Operating Expenses

 

Operating expenses were $1,494,323 and $795,469 for the three months ended June 30, 2019 and 2018, respectively, an increase of $697,854 or 87.7%. The increase is primarily due to the following:

 

General and administrative expenses of $499,423 and $171,915 for the three months ended June 30, 2019 and 2018, respectively, an increase of $327,508 or 89.6%, primarily due to an increase in directors fees of $70,000 paid by the issuance of stock during the current period, the balance is made up of general increases in individually immaterial expenses associated with running a much larger facility in West Palm Beach.

 

Rent expense was $209,359 and $156,580 for the three months ended June 30, 2019 and 2018, an increase of $52,779 or 89.6%. This was due to the Company converting the option to purchase the property located at 5400 East Avenue, West Palm Beach, Florida, in which the treatment center is located into an operating lease during May 2018. The Company has an option to acquire the property.

 

30

 


 

Management fees of $0 and $45,565 for the three months ended June 30, 2019 and 2018, respectively, decreased by $45,565 or 100%, our CEO did not charge any fees during the current period to facilitate cash flow.

 

Professional fees of $399,673 and $145,088 for the three months ended June 30, 2019 and 2018, respectively, increased by $254,585 or 139.0%, the increase is due to consulting fees paid to two individuals who assisted with business development during the relocation of operations to the USA from Canada.

 

Salaries and wages of $328,449 and $208,280 for the three months ended June 30, 2019 and 2018, respectively, increased by $120,169 or 30.5%, primarily due to additional staff required to operate the significantly larger West Palm Beach facility, which was not in full operation during the prior period.

 

Depreciation was $56,419 and $68,041 for the three months ended June 30, 2019 and 2018, respectively, a decrease of $11,622 or 8.5%, the decrease is attributable to the disposal of the condominiums in Delray Beach during the current quarter. Operating loss

 

Operating loss

The operating loss was $1,395,137 and $728,775 for the three months ended June 30, 2019 and 2018, respectively, an increase of $666,362 or 58.1%. The increase is attributable to the general increase in general and administrative expenses, the increased salaries expense and professional fees paid during the current period.

 

Loss on disposal of property

The loss on disposal of property of $692,488 and $0 for the three months ended June 30, 2019 and 2018, respectively, an increase of 100% was due to the sale of the condominiums in Delray Beach, the proceeds were used to settle the mortgage owing on the properties.

Bonus shares issued to investors

The bonus shares to investors of $143,500 and $0 for the three months ended June 30, 2019 and 2018, respectively, increased by 100%. Bonus shares were issued to certain investors during the current period to facilitate additional investment in the Company.

 

Interest expense

 

Interest expense of $197,054 and $176,587 for the three months ended June 30, 2019 and 2018, respectively, an increase of $20,467 or 11.6% was primarily due to the increase in convertible note funding during the current period of $443,000 during the current period. The funding was used for general working capital purposes.

 

Debt discount

 

Debt discount was $828,313 and $1,339,885 for the three months ended June 30, 2019 and 2018, respectively, a decrease of $511,572 or 24.4%. The charge during the current period represents the amortization of the value of the warrants issued over the terms of the convertible loan agreements entered into during the current period and during 2018 and the amortization of the fair value of the beneficial conversion feature of the convertible notes issued to note holders during the current period and 2018. The fair value of the warrants and the beneficial conversion features are amortized over a six to twelve month period, the term of the underlying convertible securities.

 

Derivative liability movement

 

The derivative liability movement of 1,728,172 (gain) and (796,795) (loss) represents the mark to market movements of variably priced convertible notes and warrants issued during the current and prior comparative period. These securities are marked to market on a quarterly basis and the resultant gain or loss is recorded as a derivative liability movement in the unaudited condensed consolidated statement of operations.

 

31

 

Foreign exchange movements

 

Foreign exchange movements of $(142,832) and $110,628 for the three months ended June 30, 2019 and 2018, respectively, represents the realized exchange gains and (losses) on monetary assets and liabilities settled during the current year as well as mark to market adjustments on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars. The average exchange rate utilized during the current year of $0.7498 weakened by 2.8% from $0.7715 in the prior period.

 

Net loss

 

Net loss of $(1,671,152) and $(2,931,463) for the three months ended June 30, 2019 and 2018, respectively, a decrease of $1,260,309 or 30.4%, is primarily due to the increase in operating expenses in the current period, the loss realized on the sale of the property, offset by the swing in derivative liability movements of $2,524,967 during the comparative periods.

 

For the six months ended June 30, 2019 and June 30, 2019.

 

Revenues were $180,201 and $179,996 for the six months ended June 30, 2019 and 2018, respectively, an increase of $205 or 0.1%.

 

Revenue from patient treatment was $15,725 and $12,853 for the six months ended June 30, 2019 and 2018, respectively, an increase of $2,872 or 22.3%. We are attempting to develop specialized programs for niche groups which will assist in utilizing the West Palm Beach facility. We are actively building up our customer contact base to increase patient revenues.

Revenue from rental income was $164,476 and $167,143 for the six months ended June 30, 2019 and 2018, respectively, a decrease of $2,267or 1.6%. The decrease is due to foreign currency movements between the two periods.

 

Operating Expenses

 

Operating expenses were $2,969,836 and $1,327,315 for the six months ended June 30, 2019 and 2018, respectively, an increase of $1,642,521 or 123.7%. The increase is primarily due to the following:

 

General and administrative expenses of $881,576 and $365,647 for the six months ended June 30, 2019 and 2018, respectively, an increase of $515,929 or 141.1%, primarily due to an increase in property taxes of $441,711 and directors fees of $70,000 paid by the issuance of stock during the current period, the balance is made up of general movements in individually immaterial expenses associated with running a much larger facility in West Palm Beach.

 

Rent expense was $779,425 and $156.580 for the six months ended June 30, 2019 and 2018, an increase of $622,845 or 397.8%. This was due to the Company converting the option to purchase the property located at 5400 East Avenue, West Palm Beach, Florida, in which the treatment center is located into an operating lease during May 2018. The Company has an option to acquire the property.

 

Management fees of $0 and $92,098 for the six months ended June 30, 2019 and 2018, respectively, decreased by $92,098 or 100%, our CEO did not charge any fees during the current period to facilitate cash flow.

 

Professional fees of $443,827 and $183,098 for the six months ended June 30, 2019 and 2018, respectively, increased by $260,729 or 142.4%, the increase is due to consulting fees paid to two individuals who assisted with business development during the relocation of operations to the USA from Canada.

 

Salaries and wages of $732,713 and $393,436 for the six months ended June 30, 2019 and 2018, respectively, increased by $339,277 or 86.2%, primarily due to additional staff required to operate the significantly larger West Palm Beach facility, which was not in full operation during the prior period.

 

Depreciation was $132,295 and $136,456 for the six months ended June 30, 2019 and 2018, respectively, a decrease of $4,161 or 3.0%, the decrease is attributable to the disposal of the condominiums in Delray Beach during the current quarter.

 

Operating loss

The operating loss was $2,789,635 and $1,147,319 for the six months ended June 30, 2019 and 2018, respectively, an increase of $1,642,316 or 143.1%. The increase is attributable to the general increase in general and administrative expenses, the increased salaries expense and professional fees paid during the current period.

32

 

 

Interest income

Interest income of $15,262 and $0 for the six months ended June 30, 2019 and 2018, respectively. The interest earned in the current period relates to the escrow deposit on the sale of the Muskoka business in the 2017 year.

 

 

Loss on disposal of property

The loss on disposal of property of $692,488 and $0 for the six months ended June 30, 2019 and 2018, respectively, an increase of 100% was due to the sale of the condominiums in Delray Beach, the proceeds were used to settle the mortgage owing on the properties.

Bonus shares issued to investors

The bonus shares to investors of $143,500 and $0 for the six months ended June 30, 2019 and 2018, respectively, increased by 100%. Bonus shares were issued to certain investors during the current period to facilitate additional investment in the Company.

 

Interest expense

 

Interest expense of $542,137 and $347,038 for the six months ended June 30, 2019 and 2018, respectively, an increase of $195,099 or 56.2% was primarily due to the increase in convertible note funding during the current period of a net $2,010,000. The funding was used for general working capital purposes.

 

Debt discount

 

Debt discount was $1,590,255 and $2,092,834 for the six months ended June 30, 2019 and 2018, respectively, a decrease of $502,579 or 24.0%. The charge during the current period represents the amortization of the value of the warrants issued over the terms of the convertible loan agreements entered into during the current period and during 2018 and the amortization of the fair value of the beneficial conversion feature of the convertible notes issued to note holders during the current period and 2018. The fair value of the warrants and the beneficial conversion features are amortized over a six to twelve month period, the term of the underlying convertible securities.

 

Derivative liability movement

 

The derivative liability movement of 1,254,871 (Gain) and (808,951) (Loss) represents the mark to market movements of variably priced convertible notes and warrants issued during the current and prior comparative period. These securities are marked to market on a quarterly basis and the resultant gain or loss is recorded as a derivative liability movement in the unaudited condensed consolidated statement of operations.

 

Foreign exchange movements

 

Foreign exchange movements of $(271,950) and $248,524 for the six months ended June 30, 2019 and 2018, respectively, represents the realized exchange gains and (losses) on monetary assets and liabilities settled during the current year as well as mark to market adjustments on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars. The average exchange rate utilized during the current year of $0.7498 weakened by 2.8% from $0.7715 in the prior period.

 

Net loss

 

Net loss of $(4,759,832) and $(4,147,618) for the six months ended June 30, 2019 and 2018, respectively, an increase of $612,214 or 14.8%, is primarily due to the increase in operating expenses in the current period, the loss realized on the sale of the property, offset by the swing in derivative liability movements of $2,063,822 during the comparative periods.

 

Contingency related to outstanding payroll tax liabilities

 

The Company also has not filed certain foreign assets forms due to the US Federal Government. A provision of $250,000 was made for any potential penalties due This issue is being addressed by our tax advisors.

 

Liquidity and Capital Resources

 

Cash used in operating activities of $2,028,337 and $217,777 for the six months ended June 30, 2019 and 2018, respectively increased by $1,810,560 or 831.4%. The increase is primarily due to the following:

 

· the increase in net loss of $612,214, discussed under operations above.
· the movement in non-cash items increased by $1,317,725, primarily made up of;

o     the derivative liability movement of $2,063,822 due to the mark-to market of current derivative instruments;

o     offset by the loss realized on the sale of the property; and

o     offset by the bonus shares issued to investors.

· The net movement in working capital items of $119,378.

33

 

Cash provided by investing activities of $3,310,864 and utilized by investing activities of $1,175,267 for the six months ended June 30, 2019 and 2018, respectively, an increase of $4,486,131. We sold the Delray condominiums in the current period realizing proceeds of $3,318,141 and in the prior period we paid deposits on real estate of $1,133,657, whilst attempting to close the purchase of 5400 East Avenue, West Palm Beach, Florida.

 

Cash used by financing activities was $1,515,304 and generated by financing activities was $1,991,535, a decrease of $3,506,839. We repaid the mortgage bond associated with the condominiums we sold and raised a net $1,485,797 from convertible notes, promissory notes and related parties during the current period. We raised a net $2,085,671 in the prior period from convertible notes and related parties to fund working capital purposes

 

Over the next twelve months we estimate that the company will require approximately $2.5 million in working capital as it continues to develop its West Palm Beach facility and it is also exploring several other treatment center options and sources of patients throughout the country. The company may have to raise equity or secure debt. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, the Company’s liquidity risk is assessed as medium.

 

We raised an additional $451,050 in convertible debt subsequent to period end.

 

Recently Issued Accounting Pronouncements

 

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

 

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

 

Off balance sheet arrangements

 

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

 

  Inflation

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

 

Climate Change  

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

 

34

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

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

 

Changes in Internal Control

 

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

35

 

PART II

 

Item 1. Legal Proceedings.

 

A former employee has filed suit against the Company asserting wrongful dismissal, claiming damages between CDN$43,500 and CDN$50,000 this matter was settled for CDN$14,070, including applicable legal fees, the settlement remains unpaid as the plaintiff has not signed the minutes of settlement.

 

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

 

Item 1A. Risk Factors.

 

Not applicable because we are a smaller reporting company.

 

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

 

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

 

36

 

 

 

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: August 19, 2019 

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), August19, 2019
Shawn Leon Chief Financial Officer (Principal Financial Officer), President and Director  
     
/s/ John O’Bireck Director August 19, 2019
John O’Bireck    
     
/s/ Gerald T. Miller Director August 19, 2019
Gerald T. Miller    

 

 

37

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