The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with professional standards for “Accounting for Derivative Instruments and Hedging Activities.” Professional standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.” The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying Common Stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying Common Stock at the commitment date of the note transaction and the effective conversion price embedded in the note.

On February 14, 2017, in terms of the details outlined in note 1 above, the Company disposed of the business and certain assets of its Canadian Rehab Clinic for gross proceeds of CDN$10,000,000, a total of CDN$1,500,000 of the gross proceeds is being held in escrow for up to two years, in addition there is an earnout payment of up to CDN$3,000,000 to be received in 2019, if certain clinic performance metrics are met, see note 8 below.

The proceeds realized from the sale of the Canadian Rehab Clinic were used to settle outstanding tax liabilities, refer note 11 below, and to acquire the business of Seastone of Delray, refer note 5 below.

The proceeds realized on disposal have been allocated as follows:

GREENESTONE HEALTHCAREETHEMA HEALTH CORPORATION

(formerly Greenstone Healthcare Corporation)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDCONSOLDATED FINANCIAL STATEMENTS

On February 14, 2017, the Company acquired 100% of the equity of CCH, from Leon Developments, a company wholly owned by our CEO. 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 (US$504,442) on the disposal of a subsidiary, 1816191 Ontario, which principal amount had previously been fully provided for during 2015; and the issuance of 60,000,000 shares of the Company’s common stock at US$0.0364 per share for proceeds of $2,184,000.

During the current quarter, on June 1, 2017, the Company had the property owned by CCH appraised by an independent valuer, the appraisal obtained was for CDN$10,000,000, which resulted an increase in the value of the assets acquired by $1,146,600 and a corresponding reduction in the excess purchased consideration allocated to the shareholder. 

The allocation of the purchase price is as follows:

The Company, utilized a portion of the proceeds realized on the sale of the Canadian Rehab Clinic to acquire certain assets of Seastone of Delray.

The Company obtained its own license to run a rehabilitation Clinic in Florida in December 2016 and began operations, through its wholly owned subsidiary, Seastone of Delray, LLC, effective January 2017.

ETHEMA HEALTH CORPORATION

(formerly Greenstone Healthcare Corporation)

NOTES TO THE UNAUDITED CONDENSED CONSOLDATED FINANCIAL STATEMENTS 

The assets acquired were as follows:

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 atof June 30, 20162017, the Company has a working capital deficiency of $(3,246,708)$6,348,925 and accumulated deficit of $(20,508,791).$14,665,204. Management believes that current available resources will not be sufficient to fund the Company’s planned expenditures including past due payroll and sales tax payments, as well as estimated penalties and interest, over the next 12 months. Accordingly, the Company will be dependent upon the raising of additional capital through placement of common shares, and, and/or debt financing in order to implement its business plan, and, or generating sufficient revenue in excess of costs. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain geographical areas, or techniques that it might otherwise seek to retain. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. These unaudited condensed consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue operations.

The ability of the Company to continue as a going concern is dependent on the Company generating cash from the sale of its common stock or obtaining debt financing and attaining future profitable operations. Management's plans include selling its equity securities and obtaining debt financing to fund its capital requirement and ongoing operations; however, there can be no assurance the Company will be successful in these efforts.

On February 14, 2017, the Company completed a series of transactions, including an APA whereby the Company sold certain of the Canadian Rehab Clinic assets. The assets disposed of business represented substantially all of the operating assets of the Canadian Rehab Clinic and has been disclosed as a discontinued operation for comparative purposes as of December 31, 2016 and for the three and six month period ended June 30, 2017 and 2016. Refer note 3 above.

ETHEMA HEALTH CORPORATION

(formerly Greenstone Healthcare Corporation)

NOTES TO THE UNAUDITED CONDENSED CONSOLDATED FINANCIAL STATEMENTS

The assets and liabilities of discontinued operations as of December 31, 2016 is as follows:

 The statement of operations for discontinued operations is as follows:

A net amount of CAD$CDN$617,960 iswas due to the Company on the sale of the Endoscopy Clinic inas of December 2014.31, 2016. This debt is inamount was past due and had fully provided for as of December 31, 2016.

On February 14, 2017, the formCompany acquired CCH from Leon Developments and settled a portion of an interest bearing note with a couponthe purchase consideration by assigning the proceeds due to the Company on the sale of 5% per annum.the Endoscopy Clinic to Leon Developments. The note together with accrued interest thereon of CDN$41,959 amounted to CDN$659,919 (US$504,442). The provision raised against the note was originally duereversed and the unrecorded interest thereon was recognized during the current quarter. 

ETHEMA HEALTH CORPORATION
(formerly Greenstone Healthcare Corporation)
NOTES TO THE UNAUDITED CONDENSED CONSOLDATED FINANCIAL STATEMENTS

On February 14, 2017, the Company sold its Canadian Rehab Clinic for gross proceeds of CDN$10,000,000, of which CDN$1,500,000 (US$1,155,900) has 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. In addition, the Company may earn up to an additional CDN$3,000,000 as a performance payment based on June 30, 2015 which was recently extended to December 31, 2015.the attainment of certain clinic performance metrics. The Company estimates that the earnout will approximate $663,000 and is accruing this additional amount outstandingover a period of CAD$617,960 was revalued at US$475,026twenty three and a half months. The accrual is recorded as other income, as of June 30, 2016 and US$446,4762017, the company had accrued $97,847 (at closing exchange rates) as of December 31, 2015. Management evaluated this receivable as of December 31, 2015 and a provision for the full value of the note was raised as of June 30, 2016 and December 31, 2015.additional income.

PlantProperty, plant and equipment consists of the following:

Depreciation expense for the three months ended June 30, 2017 and 2016 was $125,340 and 2015 was $15,412 and $26,446$0, respectively, and for the six months ended June 30, 2017 and 2016 was $182,406 and 2015 was $30,746 and $47,440,$0, respectively.

GREENESTONE HEALTHCARE CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

In terms of the acquisition of Seastone of Delray, the Company paid an amount of $1,438,525 (Note 1 above) in excess of the fair market value of the assets acquired. This amount will be allocated to different classes of intangible assets when an independent valuation of the intangibles is performed.

The Company has an automobile loan payable bearing interest at 4.49% with blended monthly paymentssettled the tax liabilities owing to the Canadian Revenue Authorities out of $835 that matures in March 2018.the proceeds of the disposal of the Canadian Rehab Clinic on February 14, 2017. The loan is secured by the vehicle withCompany paid CDN$2,929,886 to settle outstanding payroll liabilities, CDN$441,598 to settle outstanding GST/HST liabilities and a net book value as at June 30, 2016 of $13,715.further CDN$ 57,621 to settle other Canadian tax liabilities.

The remaining taxes payable consist of:

Estimated principal payments are as follows:

ETHEMA HEALTH CORPORATION
(formerly Greenstone Healthcare Corporation)
NOTES TO THE UNAUDITED CONDENSED CONSOLDATED FINANCIAL STATEMENTS

The short-term convertible notes consist of the following:

Labrys Fund, LP 

On February 2, 2017, the Company entered into a Securities Purchase Agreement with JMJ Financial on April 13, 2016,LABRYS FUND LP, in terms of the agreement the Company borrowed $200,000$110,000 in terms of an unsecured convertible promissory note with a maturity date of seven months from the closing date.August 2, 2017. The principal amount due under the promissory note is $220,000, inclusivebears interest at a rate of an Original Issue discount and a further 10% once-off interest charge of $20,000 is due in terms of this note.8% per annum. The note is only convertible upon a repayment default, at the lower of $0.03 per share of 60% of the lowest traded price over the preceding 2530 day trading period.period prior to the issuance of this note or 60% of the lowest traded price 30 days prior to the conversion date. The Company also issued 3,703,700 warrants exercisable over1,200,000 common shares to the note holder as a commitment fee which returnable shares will be returned to the company if fully repaid prior to August 2, 2017.

On May 26, 2017, the Company repaid the note for gross proceeds of $112,744, including interest thereon of $2,744. The 1,200,000 commitment fee shares were returned to the Company.

Power Up Lending Group LTD

On June 19, 2017, the Company, entered into a Securities Purchase Agreement with Power Up Lending Group Ltd., pursuant to which the Company issued to the Purchaser a Convertible Promissory Note in the aggregate principal amount of $113,500. The Note has a maturity date of March 20, 2018 and bears interest at the at the rate of eight percent per annum from the date on which the Note is issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company shall have the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the average lowest closing bid prices of the Company’s common stock for the ten trading days prior to conversion. The balance of the Note plus accrued interest at June 30, 2017 was $4,967, net of unamortized discount of $108,943.

Series L convertible notes 

The Company entered into Series L Convertible Securities Purchase Agreements with 8 individuals on December 30, 2016. In terms of these agreements, the Company borrowed an aggregate principal amount of $468,969 in terms of a senior ranking convertible promissory note with a maturity date six months from the issue date and bearing interest at 0% per annum. The notes are convertible at the option of the holder into shares of common stock of the Company at a conversion price of $0.03 per share, which warrants containsubject to certain recapitalization adjustments. On December 30, 2016, it was determined that the beneficial conversion feature related to the discounted note and warrant issuances amounting to $218,711 would be amortized over the life of the loans.

During January 2017, the Company borrowed a cashless exercise option,further aggregate principal amount of $71,000 in terms of three senior ranking convertible promissory notes with a maturity date six months from the financing arrangement.issue date and bearing interest at 0% per annum. The notes are convertible at the option of the holder into shares of common stock of the Company at a conversion price of $0.03 per share, subject to certain recapitalization adjustments. In January 2017, it was determined that the beneficial conversion feature related to the discounted note and warrant issuances amounting to $104,793 would be amortized over the life of the loans.

Short term notes consist of the following at June 30, 2016:

GREENESTONE HEALTHCAREETHEMA HEALTH CORPORATION

(formerly Greenstone Healthcare Corporation)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDCONSOLDATED FINANCIAL STATEMENTS

On May 4, 2017, the Company repaid $20,000 of the principal outstanding to one investor.

The amortization charge of the debt discount for the three months and six months ended June 30, 2017 was $161,750 and $314,769, respectively.

In terms of the Series L Convertible notes issued above, during January 2017, the Company granted three year warrants to the Series L Convertible noteholders, exercisable for 2,366,667 shares of common stock at an exercise price of $0.03, subject to certain recapitalization adjustments, per share, expiring between January 16 and January 17, 2020. (Refer note 16 (b) below).

The short-term convertible notes issued to Labrys Fund LP and Power Up Lending Group, LTD, disclosed in note 12 above, have variable priced conversion rights with no fixed floor price and will reprice dependent on the share price performance over varying periods of time. This gives rise to a derivative financial liability, which was initially valued at inception of the convertible notes at $223,500, the maximum amount permissible, using a Black-Scholes valuation model.

The Labrys Fund note was repaid in May 2017; therefore, the derivative liability was no longer required, the total derivative liability relating to this note of $183,048 was released to the statement of operations. The value of the Power Up convertible note was re-assessed as of June 30, 2017 and a further charge of $15,468 was made to the statement of operations. The value of the derivative liability will be re assessed at each financial reporting period, with any movement thereon recorded in the statement of operations in the period in which it is incurred.

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

Greenstone Clinic Inc.

As of June 30, 2017, the Company had a receivable of $63,471 and as of December 31, 2015,2016, the Company had a payable of $5,284.$79,592, respectively. Greenstone Clinic Inc., is controlled by one of the Company’s directors. The balance payable is noninterest bearing, not secured and has no specific repayment terms.

The balance owing fromETHEMA HEALTH CORPORATION
(formerly Greenstone Clinic, Inc., on June 30, 2016 was offset against the amount owing to Shawn E. Leon.Healthcare Corporation)
NOTES TO THE UNAUDITED CONDENSED CONSOLDATED FINANCIAL STATEMENTS

The Company incurred management fees from Greenstone Clinic, Inc., totaling $46,577 and $48,337 and $46,577 and $96,705 for the three months and six months ended June 30, 2016 and 2015, respectively.

1816191 Ontario

As of June 30, 20162017, and December 31, 2015,2016, the Company had a receivable of $15,863 and a payable of $(22,305),$16,055 and $70,763, respectively, to 1816191 Ontario, the Endoscopy Clinic, which was sold at the end of the prior year. The receivable and payable is noninterest bearing, and has no specific repayment terms.

Shawn E. Leon

As of June 30, 20162017, and December 31, 20152016 the Company had a receivable of $25,531 and a payable of $135,006 and $159,551,$8,492, respectively to Shawn E. Leon, a director and CEO of the Company. The balancebalances receivable and payable isare noninterest bearing and have no fixed repayment terms.

The balance owing from Greenstone Clinic, Inc., onMr. Leon was paid management fees of $100,000 during the six months ended June 30, 2016 was offset against2017. In addition to this the amount owingCompany recorded a once off compensation expense in other expenses, relating to Shawn E. Leon.the excess of the fair value of the assets acquired in Cranberry Cove Holdings, Ltd. Mr. Leon is the owner of Leon Developments, the counterparty in the acquisition of the Cranberry Cove subsidiary referred to in note 1 and 4 above.

Leon Developments, Ltd.

The Company acquired CCH from Leon Developments, Ltd., on February 14, 2017, refer note 1 and 4 above. CCH owns the facility utilized by the Canadian Rehab Clinic which was sold to a third party on February 14, 2017. CCH owed CDN$2,692,512 to Leon Developments, this amount has remained unchanged since acquisition. The amount owing is valued at $2,213,731 as of June 30, 2017.

Cranberry Cove Holdings Ltd.

The Company acquired CCH on February 14, 2017. CCH owns the real estate previously utilized by the Canadian Rehab Clinic and now utilized by the purchaser of the business. As of December 31, 2016, the Company had a receivable of $84,867 from CCH.

Prior to the acquisition of CCH, the Company paid rental expense to CCH of CDN$58,925 and CDN$226,250 for the six months ended June 30, 2017 and 2016, respectively.

On February 14, 2017, the Company acquired 100% of the equity of CCH, from Leon Developments. The subsidiary has certain mortgage indebtedness amounting to CDN$4,115,057 (US$3,145,549) at the date of acquisition, which was assumed by the Company.

On February 14, 2017, the Company acquired certain assets of Seastone of Delray, including fixed property. A portion of the purchase consideration was funded by a purchase money mortgage secured over the properties acquired, amounting to $3,000,000.

The loans payable is as follows:

ETHEMA HEALTH CORPORATION
(formerly Greenstone Healthcare Corporation)
NOTES TO THE UNAUDITED CONDENSED CONSOLDATED FINANCIAL STATEMENTS

The aggregate amount outstanding is payable as follows:

Cranberry Cove Holdings

The first mortgage with an aggregate principal amount outstanding of CDN$3,500,000, including late charges, interest and penalties of CDN$165,057 for a gross aggregate amount outstanding of CDN$3,663,380, over the Cranberry Cove Holdings properties is secured by the property located at 3571 Muskoka Road, #169, Bala, described as PT LT 15 CON F Medora PT1 35R5958, PT 2 &3 35R11290, Muskoka Lakes. The mortgage bears interest at the rate of 8% per annum on the aggregate principal outstanding of $3,500,000 and matures on August 14, 2017, with monthly interest payments of $23,118 (CDN 30,000).

During March 2017, the Company made a principal payment of CDN$100,000 on the first mortgage.

The second mortgage had an initial principal amount outstanding of CDN$350,000, on May 23, 2017, the Company sold CDN$175,000 of the mortgage it owned to the second mortgage holder for gross proceeds of CDN$150,000, the balance outstanding on the second mortgage is now CDN$525,000, the mortgage is secured by the Cranberry Cove Holdings properties located at 3571 Muskoka Road, #169, Bala, described as PT LT 15 CON F Medora PT1 35R5958, PT 2 &3 35R11290, Muskoka Lakes. The mortgage bears interest at the rate of 12% per annum on the aggregate principal outstanding of CDN$525,000, and matures on November 4, 2018, with monthly interest payments of CDN$3,500.

Seastone of Delray 

The Company entered into an agreementa Mortgage and Security Agreement with Seastone Delray Healthcare, LLC on February 13, 2017 for the aggregate principal sum of $3,000,000, bearing interest at the rate of 5% per annum, maturing on February 13, 2020, with monthly repayments of interest and principal of $15,000. The proceeds of the mortgage of $3,000,000 was used to lease premises fromfund the acquisition of the Seastone Delray properties, described as follows:

Parcel 1, Moore’s Landing according to the Plat thereof, as recorded in Plat Book 42, page 72, Public Records of Palm Beach County, Florida

Unit numbers 1 to 10, inclusive of Seastone Condominium Apartments, a Condominium, according to The Declaration of Condominium recorded on O.RT. Book 3313, Page 122 and all exhibits thereof, Public Records of Palm Beach County, Florida.

On February 2, 2017, the Company issued 1,200,000 common shares to a convertible note holder in terms of a returnable commitment fee. The shares are returnable to the Company if the convertible note is repaid prior to maturity, failing which the commitment fee will be earned. These shares were not accounted for as issued as the probability of the commitment fee being assessed was not probable or certain. The convertible loan was repaid and the 1,200,000 common shares were returned to the Company, refer note 12 above.

On February 14, 2017, in terms of the acquisition of 100% of the capital stock of Cranberry Cove Holdings Ltd. at market related terms. The Company had rental expense amounting to $105,721 and $168,469 and $180,112 and $179,392 for the three months and six months ended June 30, 2016 and 2015, respectively. Cranberry Cove Holdings Ltd. is related to(“CCH”) from Leon Developments, the Company funded a portion of the acquisition by virtuethe issuance of its shareholder owning 1816191 Ontario.60,000,000 shares of the Company’s common stock at a market value of US$0.0364 per share, totaling $2,184,000, refer note 1 and 4 above. 

As of JuneOn May 30, 2016 and December 31, 2015,2017, the Company owed Cranberry Cove Holdings $308,625 (CAD $401,490) and $87,356 (CAD$120,908) in accrued rent and utility charges.

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

The Company issued 1,000,000100,000 common shares valued at $50,000 to a third partyvendor in termslieu of an investor relations consulting agreement entered into on June 17, 2016.services rendered at a market value of US$0.04 per share.