NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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$3,070,000 in cash.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2.
|
Summary of significant accounting policies
|
Basis of presentation
The (a) unaudited condensed consolidated balance
sheets as of June 30, 2019, which have been derived from the unaudited condensed consolidated financial statements, and as of
December 31, 2018, which have been derived from audited consolidated financial statements, and (b) the unaudited condensed consolidated
statements of operations and cash flows of the Company, have been prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule
8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six months ended June 30, 2019 are not necessarily indicative
of results that may be expected for the year ending December 31, 2019. These unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s
Form 10-K/A for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on April
22, 2019.
All amounts referred to in the notes to the
unaudited condensed consolidated financial statements are in United States Dollars ($) unless stated otherwise.
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.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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.
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.
In terms of the lease agreement, on a monthly
basis as long as the facility is utilized by the tenant
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.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2.
|
Summary of significant accounting policies (continued)
|
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2.
|
Summary of significant accounting policies (continued)
|
|
p)
|
Financial
instruments Risks (continued)
|
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.
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.
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.
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.
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.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The Company’s unaudited condensed
consolidated financial statements have been prepared in accordance with US GAAP applicable to a going concern, which assumes that
the Company will be able to meet its obligations and continue its operations in the normal course of business. As 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
|
|
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.
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.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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
|
|
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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
|
|
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
|
|
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.
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.
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.
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.
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.
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
|
|
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
|
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.
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.
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.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
15.
|
Stockholders' deficit (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.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
15.
|
Stockholders' deficit (continued)
|
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.
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.
|
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
|
)
|
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
|
)
|
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.
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
|
|
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
|
|
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.
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.
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.
|
|
●
|
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.
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.
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.
|
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.
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.
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
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
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
|
|
|