UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For thequarterly period ended: September 30, 2018ended March 31, 2019
ORor
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Periodtransition period from ___________ to
Commission File Number:000-15078___________
Commission File Number: 000-15078
Number000-54748
ETHEMA HEALTH CORPORATIONCORPORATION.
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)Charter)
Colorado | 84-1227328 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer Identification No.) | |
810 Andrews Avenue Delray Beach, Florida | 33483 | |
Address of Principal Executive Offices | Zip Code |
(561) 450-7679
Registrant’s Telephone Number, Including Area Code
Colorado 84-1227328
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
810AndrewsAvenue,DelrayBeach, Florida 33483(Address of principalexecutive offices and zipcode)
(561) 450-7679
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by sectionSection 13 or 15(d) of the Securities Exchange Act of 1934 during the pastpreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes ☒No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporateWebsite, ifany,every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation STS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.files). Yes Yes☒ ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer | ☐ |
Non-accelerated filer ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As
Securities registered pursuant to Section 12(b) of November 19, 2018, there were 124,089,230the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common shares | GRST | Nasdaq |
Indicate the number of shares outstanding of each of the registrant’sissuer’s classes of common stock. stock, as of the latest practicable date:
Number of shares of common stock outstanding as of May 14, 2019 was 124,371,452.
ETHEMA HEALTH CORPORATION
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report on Form 10-Q, including but not limited to, statements regarding the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects, or costs and objectives of management for future acquisitions, are forward looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as“may, “may,”“will, “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” ’‘targets,“targets,” “projects,” “contemplates,” ’‘believes,“believes,” “seeks,” “goals,” “estimates,” ’‘predicts,“predicts,” ’‘potential”“potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identifiedbelow,under Part II, Item 1A. “Risk Factors” andincluded elsewhere in this Quarterly Report on Form 10-Q, and those identified under Part I, Item 1A ofin our Annual Report on Form 10-K/A for the year ended December 31, 20172018 filed with the SEC on April 18, 2018.22, 2019. Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements.Weundertake no obligation to revise or update any forward-looking statements for any reason.
NOTE REGARDING COMPANY REFERENCES
Throughout this Quarterly Report on Form 10-Q, “Ethema,” the “Company,” “we,” “us” and “our” refer to Ethema Health Corporation.
ETHEMA HEALTH CORPORATION
FORM 10-Q
TABLE OF CONTENTS
I
ETHEMA HEALTH CORPORATION
PART II: FINANCIAL INFORMATION
Item 1. Financial Statements.Statements
INDEX TO THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US Dollars unless otherwise indicated)
ETHEMA HEALTH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||
Current assets | ||||||||||||||||
Cash | $ | 80,718 | $ | 339 | $ | 25,579 | $ | 24,674 | ||||||||
Accounts receivable | 102,458 | 218,858 | 279,929 | 202,654 | ||||||||||||
Prepaid expenses | 65,075 | 99,342 | ||||||||||||||
Related party Receivables | 30,706 | 16,080 | ||||||||||||||
Prepaid expenses and other current assets | 246,532 | 147,870 | ||||||||||||||
Related party receivables | 51,011 | 32,650 | ||||||||||||||
Assets held for resale | 1,786,049 | — | ||||||||||||||
Total current assets | 278,957 | 334,619 | 2,389,100 | 407,848 | ||||||||||||
Non-current assets | ||||||||||||||||
Deposits on real Estate | 2,961,062 | 1,825,000 | ||||||||||||||
Due on sale of subsidiary | 417,149 | 954,951 | ||||||||||||||
Deposit on real estate | 2,924,955 | 2,940,546 | ||||||||||||||
Due on sale of business | 74,833 | 372,366 | ||||||||||||||
Property, plant and equipment | 8,893,157 | 9,153,858 | 7,154,381 | 8,948,349 | ||||||||||||
Right of use assets | 15,736,177 | — | ||||||||||||||
Total non-current assets | 12,271,368 | 11,933,809 | 25,890,346 | 12,261,261 | ||||||||||||
Total assets | $ | 12,550,325 | $ | 12,268,428 | $ | 28,279,446 | $ | 12,669,109 | ||||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||||||||||
Current liabilities | ||||||||||||||||
Bank overdraft | $ | 44 | $ | 28,927 | ||||||||||||
Accounts payable and accrued liabilities | 668,679 | 372,244 | $ | 1,621,531 | $ | 1,092,882 | ||||||||||
Taxes payable | 665,640 | 689,240 | 751,900 | 775,392 | ||||||||||||
Convertible notes | 3,343,327 | 160,453 | 4,717,256 | 4,403,473 | ||||||||||||
Loans payable | 162,805 | 152,402 | ||||||||||||||
Mortgage loans | 3,034,927 | 172,276 | ||||||||||||||
Operating lease liability | 782,805 | — | ||||||||||||||
Derivative liability | 4,980,580 | 2,859,832 | 5,652,403 | 4,618,080 | ||||||||||||
Related party payables | 2,600,527 | 2,597,080 | 2,674,178 | 2,615,613 | ||||||||||||
Total current liabilities | 12,421,602 | 6,860,178 | 19,235,000 | 13,677,716 | ||||||||||||
Non-current liabilities | ||||||||||||||||
Loan payable | 6,961,388 | 7,183,892 | ||||||||||||||
Mortgage loans | 3,877,764 | 6,707,346 | ||||||||||||||
Operating lease liability | 15,048,674 | — | ||||||||||||||
Total non-current liabilities | 18,926,438 | 6,707,346 | ||||||||||||||
Total liabilities | 19,382,990 | 14,044,070 | 38,161,438 | 20,385,062 | ||||||||||||
Stockholders’ deficit | ||||||||||||||||
Preferred stock - Series A; $0.01 par value, 3,000,000 authorized, nil outstanding as of September 30, 2018 and December 31, 2017. | — | — | ||||||||||||||
Preferred Stock - Series B; $0.01 par value, 10,000,000 authorized, nil outstanding as of September 30, 2018 and December 31, 2017. | — | — | ||||||||||||||
Common stock; $0.01 par value, 500,000,000 shares authorized; 124,089,230 and 122,239,230 shares issued and outstanding as of September 30, 2018 and December 31, 2017. | 1,240,893 | 1,232,393 | ||||||||||||||
Preferred stock - Series A; $0.01 par value, 3,000,000 authorized, nil outstanding as of March 31, 2019 and December 31, 2018. | — | |||||||||||||||
Preferred Stock - Series B; $0.01 par value, 10,000,000 authorized, nil outstanding as of March 31, 2019 and December 31, 2018. | — | |||||||||||||||
Common stock; $0.01 par value, 500,000,000 shares authorized; 124,371,452 and 124,300,341 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively. | 1,243,715 | 1,243,004 | ||||||||||||||
Additional paid-in capital | 20,083,842 | 18,545,913 | 21,818,509 | 20,939,676 | ||||||||||||
Accumulated other comprehensive income | 734,762 | 796,453 | 673,508 | 630,411 | ||||||||||||
Accumulated deficit | (28,892,162 | ) | (22,350,401 | ) | (33,617,724 | ) | (30,529,044 | ) | ||||||||
Total stockholders’ deficit | (6,832,665 | ) | (1,775,642 | ) | (9,881,992 | ) | (7,715,953 | ) | ||||||||
Total liabilities and stockholders’ deficit | $ | 12,550,325 | $ | 12,268,428 | $ | 28,279,446 | $ | 12,669,109 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
ETHEMA HEALTH CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
Three months ended September 30, 2018 | Three months ended September 30, 2017 | Nine months ended September 30, 2018 | Nine months ended September 30, 2017 | |||||||||||||
(Restated) | (Restated) | |||||||||||||||
Revenues | $ | 270,370 | $ | 648,298 | $ | 450,366 | $ | 1,373,028 | ||||||||
Operating expenses | ||||||||||||||||
General and administrative | 234,994 | 127,786 | 600,639 | 334,386 | ||||||||||||
Rent expense | 469,741 | — | 626,321 | 2,622 | ||||||||||||
Management fees | 46,350 | 42,705 | 138,448 | 241,923 | ||||||||||||
Professional fees | 114,760 | 53,830 | 297,858 | 453,034 | ||||||||||||
Salaries and wages | 263,901 | 200,863 | 657,337 | 583,559 | ||||||||||||
Depreciation and amortization | 67,929 | 79,267 | 204,384 | 186,760 | ||||||||||||
Total operating expenses | 1,197,675 | 504,451 | 2,524,987 | 1,802,284 | ||||||||||||
Operating (loss) income | (927,305 | ) | 143,847 | (2,074,621 | ) | (429,256 | ) | |||||||||
Other Income (expense) | ||||||||||||||||
Other income | 6,009 | — | 6,009 | 473,368 | ||||||||||||
Other expense | — | — | — | (5,093,953 | ) | |||||||||||
Interest income | 5,334 | — | 5,334 | 32,074 | ||||||||||||
Interest expense | (225,205 | ) | (86,371 | ) | (572,243 | ) | (242,992 | ) | ||||||||
Debt discount | (1,195,638 | ) | (13,052 | ) | (3,288,472 | ) | (442,377 | ) | ||||||||
Derivative liability movement | 37,951 | (19,329 | ) | (771,000 | ) | 75,203 | ||||||||||
Foreign exchange movements | (95,292 | ) | 53,294 | 153,232 | (111,052 | ) | ||||||||||
Net (loss) income before taxation from continuing operations | (2,394,146 | ) | 78,389 | (6,541,761 | ) | (5,738,985 | ) | |||||||||
Taxation | — | — | — | — | ||||||||||||
Net (loss) income from continuing operations | (2,394,146 | ) | 78,389 | (6,541,761 | ) | (5,738,985 | ) | |||||||||
Gain on disposal of business | — | — | — | 7,494,828 | ||||||||||||
Operating loss from discontinued operations, net of tax | — | (218,253 | ) | — | (300,439 | ) | ||||||||||
Net (loss) income from discontinued operations, net of tax | — | (218,253 | ) | — | 7,194,389 | |||||||||||
Net (loss) income | (2,394,146 | ) | (139,864 | ) | (6,541,761 | ) | 1,455,404 | |||||||||
Accumulated other comprehensive loss | ||||||||||||||||
Foreign currency translation adjustment | 33,954 | 277,923 | (61,691 | ) | 241,231 | |||||||||||
Total comprehensive (loss) income | $ | (2,360,192 | ) | $ | 138,059 | $ | (6,603,452 | ) | $ | 1,696,635 | ||||||
Basic loss per common share from continuing operations | $ | (0.02 | ) | $ | — | $ | (0.05 | ) | $ | (0.06 | ) | |||||
Basic income per share from discontinued operations | $ | — | $ | — | $ | — | $ | 0.07 | ||||||||
Basic (loss) income per common share | $ | (0.02 | ) | $ | — | $ | (0.05 | ) | $ | 0.01 | ||||||
Diluted loss per common share from continuing operations | $ | (0.02 | ) | $ | — | $ | (0.05 | ) | $ | (0.05 | ) | |||||
Diluted income per share from discontinued operations | $ | — | $ | — | $ | — | $ | 0.06 | ||||||||
Diluted (loss) income per common share | $ | (0.02 | ) | $ | — | $ | (0.05 | ) | $ | 0.01 | ||||||
Weighted average common shares outstanding - Basic | 124,089,230 | 119,407,668 | 123,852,105 | 102,455,451 | ||||||||||||
Weighted average common shares outstanding - Diluted | 124,089,230 | 119,407,668 | 123,852,105 | 117,312,150 |
Three months ended March 31, 2019 | Three months ended March 31, 2018 | |||||||
Revenues | $ | 82,015 | $ | 113,302 | ||||
Operating expenses | ||||||||
General and administrative | 382,153 | 193,732 | ||||||
Rental expense | 570,066 | — | ||||||
Management fees | — | 46,533 | ||||||
Professional fees | 44,154 | 38,010 | ||||||
Salaries and wages | 404,264 | 185,156 | ||||||
Depreciation and amortization | 75,876 | 68,415 | ||||||
Total operating expenses | 1,476,513 | 531,846 | ||||||
Operating loss | (1,394,498 | ) | (418,544 | ) | ||||
Other Income (expense) | ||||||||
Interest income | 15,277 | 49 | ||||||
Interest expense | (345,098 | ) | (170,451 | ) | ||||
Debt discount | (761,942 | ) | (752,949 | ) | ||||
Derivative liability movement | (473,301 | ) | (12,156 | ) | ||||
Foreign exchange movements | (129,118 | ) | 137,896 | |||||
Net loss before taxation | (3,088,680 | ) | (1,216,155 | ) | ||||
Taxation | — | — | ||||||
Net loss | (3,088,680 | ) | (1,216,155 | ) | ||||
Accumulated other comprehensive loss | ||||||||
Foreign currency translation adjustment | 43,097 | (53,186 | ) | |||||
Total comprehensive loss | $ | (3,045,583 | ) | $ | (1,269,341 | ) | ||
Basic and diluted loss per common share | $ | (0.02 | ) | $ | (0.01 | ) | ||
Weighted average common shares outstanding – Basic and diluted | 124,358,020 | 123,242,897 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
ETHEMA HEALTH CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF STOCKHOLDERSSTOCKHOLDERS’ DEFICIT
Preferred Series B | Common | Additional | Comprehensive | Accumulated | ||||||||||||||||||||||||||||
Paid in | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Income | Deficit | Total | |||||||||||||||||||||||||
Balance at January 1, 2018 | — | $ | — | 123,239,230 | $ | 1,232,393 | $ | 18,545,913 | $ | 796,453 | $ | (22,350,401 | ) | $ | (1,775,642 | ) | ||||||||||||||||
Shares issued for commitment fee | — | — | 850,000 | 8,500 | 50,200 | — | — | 58,700 | ||||||||||||||||||||||||
Fair value of Series N warrants issued | — | — | — | — | 1,487,729 | — | — | 1,487,729 | ||||||||||||||||||||||||
Foreign currency translation | — | — | — | — | — | (61,691 | ) | — | (61,691 | ) | ||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (6,541,761 | ) | (6,541,761 | ) | ||||||||||||||||||||||
Balance as of September 30, 2018 | — | $ | — | 124,089,230 | $ | 1,240,893 | $ | 20,083,842 | $ | 734,762 | $ | (28,892,162 | ) | $ | (6,832,665 | ) |
Preferred Series B | Common | Additional | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Paid in Capital | Comprehensive Income | Accumulated Deficit | Total | |||||||||||||||||||||||||
Balance as of December 31, 2018 | — | $ | — | 124,300,341 | $ | 1,243,004 | $ | 20,939,676 | $ | 630,411 | $ | (30,529,044 | ) | $ | (7,715,953 | ) | ||||||||||||||||
Fair value of warrants issued | — | — | — | — | 874,566 | — | — | 874,566 | ||||||||||||||||||||||||
Shares issued for commitment fees | — | — | 71,111 | 711 | 4,267 | — | — | 4,978 | ||||||||||||||||||||||||
Foreign currency translation | — | — | — | — | — | 43,097 | — | 43,097 | ||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (3,088,680 | ) | (3,088,680 | ) | ||||||||||||||||||||||
Balance as of March 31, 2019 | — | $ | — | 124,371,452 | $ | 1,243,715 | $ | 21,818,509 | $ | 673,508 | $ | (33,617,724 | ) | $ | (9,881,992 | ) |
Preferred Series B | Common | Additional | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Paid in Capital | Comprehensive Income | Accumulated Deficit | Total | |||||||||||||||||||||||||
Balance as of December 31, 2017 | — | $ | — | 123,239,230 | $ | 1,232,393 | $ | 18,545,913 | $ | 796,453 | $ | (22,350,401 | ) | $ | (1,775,642 | ) | ||||||||||||||||
Shares issued for commitment fees | — | — | 165,000 | 1,650 | 9,900 | — | — | 11,550 | ||||||||||||||||||||||||
Foreign currency translation | — | — | — | — | — | (53,186 | ) | — | (53,186 | ) | ||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (1,216,155 | ) | (1,216,155 | ) | ||||||||||||||||||||||
Balance as of March 31, 2018 | — | $ | — | 123,404,230 | $ | 1,234,043 | $ | 18,555,813 | $ | 743,267 | $ | (23,566,556 | ) | $ | (3,033,433 | ) |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
ETHEMA HEALTH CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWS
Nine months ended September 30, 2018 | Nine months ended September 30, 2017 | |||||||
Operating activities | (Restated) | |||||||
Net (loss) income from continuing operations | $ | (6,541,761 | ) | $ | 1,455,404 | |||
Net income from discontinued operations | — | (7,194,389 | ) | |||||
Net loss from continuing operations | (6,541,761 | ) | (5,738,985 | ) | ||||
Adjustment to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 204,384 | 186,760 | ||||||
Non cash compensation expense on acquisition of subsidiary | — | 5,074,689 | ||||||
Non cash compensation for services | 58,700 | 4,000 | ||||||
Non cash discount on convertible notes issued | 103,000 | — | ||||||
Other foreign exchange movements | — | 63,962 | ||||||
Amortization of debt discount | 3,288,472 | 442,377 | ||||||
Derivative liability movements | 771,000 | (75,203 | ) | |||||
Movement in receivables reserve | (753,159 | ) | — | |||||
Provision against receivable on sale of subsidiary | — | (446,476 | ) | |||||
Loss on mortgage sold | — | 19,265 | ||||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | 869,559 | (833,374 | ) | |||||
Prepaid expenses | 30,707 | (12,013 | ) | |||||
Due on sale of subsidiary | 517,239 | — | ||||||
Accounts payable and accrued liabilities | 398,633 | (162,834 | ) | |||||
Taxes payable | (9,917 | ) | (2,393,899 | ) | ||||
Net cash used in operating activities - continuing operations | (1,063,143 | ) | (3,871,731 | ) | ||||
Net cash used in operating activities - discontinued operations | — | (117,221 | ) | |||||
(1,063,143 | ) | (3,988,952 | ) | |||||
Investing activities | ||||||||
Investments in Seastone | — | (2,960,000 | ) | |||||
Deposit on property | (1,132,509 | ) | — | |||||
Proceeds from restricted cash | — | 74,480 | ||||||
Purchase of fixed assets | (41,610 | ) | (8,878 | ) | ||||
Net cash used in investing activities - continuing operations | (1,174,119 | ) | (2,894,398 | ) | ||||
Net cash provided by investing activities - discontinued operations | — | 6,285,852 | ||||||
(1,174,119 | ) | 3,391,454 | ||||||
Financing activities | ||||||||
Decrease in bank overdraft | (28,781 | ) | (56,105 | ) | ||||
Proceeds from mortgage sold | — | 111,554 | ||||||
Proceeds from mortgages | — | 4,367,000 | ||||||
Repayment of mortgages | (90,373 | ) | (3,482,144 | ) | ||||
Proceeds from convertible notes | 3,130,000 | 294,500 | ||||||
Repayment of convertible notes | (586,000 | ) | (274,958 | ) | ||||
Proceeds (repayment) of related party notes | 55,033 | (595,736 | ) | |||||
Net cash provided by financing activities | 2,479,879 | 364,111 | ||||||
Effect of exchange rate on cash | (162,238 | ) | 241,231 | |||||
Net change in cash | 80,379 | 7,844 | ||||||
Beginning cash balance | 339 | 4,779 | ||||||
Ending cash balance | $ | 80,718 | $ | 12,623 | ||||
Supplemental cash flow information | ||||||||
Cash paid for interest | $ | 308,077 | $ | 253,256 | ||||
Cash paid for income taxes | $ | — | $ | — | ||||
Non cash investing and financing activities | ||||||||
Common shares issued to acquire subsidiary | $ | — | $ | 2,184,000 | ||||
Conversion of debt to equity | $ | — | $ | 375,011 | ||||
Fair value of warrants issued | $ | 1,487,729 | $ | 71,000 | ||||
Assumption of mortgage liabilities on acquisition of subsidiary | $ | — | $ | 3,145,549 |
Three months ended March 31, 2019 | Three months ended March 31, 2018 | |||||||
Operating activities | ||||||||
Net loss | $ | (3,088,680 | ) | $ | (1,216,155 | ) | ||
Adjustment to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
Depreciation | 75,876 | 68,415 | ||||||
Non-cash interest accrual on escrow deposit | (15,277 | ) | — | |||||
Non-cash compensation for services | — | 11,550 | ||||||
Non-cash discount on convertible debt | — | 48,000 | ||||||
Amortization of debt discount | 761,942 | 752,949 | ||||||
Derivative liability movements | 473,301 | 12,156 | ||||||
Non-cash deferral of operating lease liability expense | 95,302 | — | ||||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | (77,275 | ) | 42,490 | |||||
Prepaid expenses and other current assets | (80,409 | ) | 74,630 | |||||
Deposit released from escrow | 322,156 | 395,354 | ||||||
Accounts payable and accrued liabilities | 424,777 | 31,745 | ||||||
Taxes payable | — | 1,933 | ||||||
Net cash (used in) provided by operating activities | (1,108,287 | ) | 223,067 | |||||
Investing activities | ||||||||
Deposits paid | (2,658 | ) | (286,912 | ) | ||||
Purchase of fixed assets | (8,176 | ) | — | |||||
Net cash used in investing activities | (10,834 | ) | (286,912 | ) | ||||
Financing activities | ||||||||
Decrease in bank overdraft | — | (25,878 | ) | |||||
Repayment of mortgage loans | (33,396 | ) | (33,186 | ) | ||||
Proceeds from convertible notes | 1,567,000 | 600,000 | ||||||
Repayment of convertible notes | (523,803 | ) | (330,000 | ) | ||||
Proceeds from related party notes | (1,081 | ) | 21,398 | |||||
Net cash provided by financing activities | 1,008,720 | 232,334 | ||||||
Effect of exchange rate on cash | 111,306 | (141,489 | ) | |||||
Net change in cash | 905 | 27,000 | ||||||
Beginning cash balance | 24,674 | 339 | ||||||
Ending cash balance | $ | 25,579 | $ | 27,339 | ||||
Supplemental cash flow information | ||||||||
Cash paid for interest | $ | 411,610 | $ | 141,244 | ||||
Cash paid for income taxes | $ | — | $ | — | ||||
Non cash investing and financing activities | ||||||||
Fair value of warrants issued | $ | 874,566 | $ | — |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | Nature of business |
1. Nature of Business
Ethema Health Corporation (the “Company”) was incorporated under the laws of the state of Colorado, USA, on April 1, 1993. Effective April 4, 2017, the Company changed its name to Ethema Health Corporation and prior to that, on May 2012, the Company had changed its name to GreeneStone Healthcare Corporation from Nova Natural Resources Corporation. As of December 31, 2017, the Company owned 100% of the outstanding shares of GreeneStone Clinic Muskoka Inc., incorporated in 2010 under the laws of the Province of Ontario, Canada; Cranberry Cove Holdings Ltd.(“CCH”), incorporated on January 9, 2004 under the laws of the Province of Ontario, Canada. andCanada; Addiction Recovery Institute of America (“ARIA”) (formerly Seastone Delray Healthcare, LLC,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.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\Purchase agreement and Asset Purchase Agreement whereby the Company purchased the real estate and business assets of Seastone Delray (the “Florida Purchase”).
The Share Purchase Agreement
Under the SPA, the Company acquired 100% of the stock of CCH from Leon Developments Ltd. (“Leon Developments”), a company wholly owned by Shawn E. Leon, who is the President, CEO, and CFO of the Company (“Mr. Leon”). CCH owns the real estate on which the Canadian Rehab Clinic is located. The total consideration paid by the Company was CDN$3,517,062, including the assumption of certain liabilities of CCH, which was funded by the assignment to Leon Developments of certain indebtedness owing to the Company in the amount of CDN$659,918, and the issuance of 60,000,000 shares of the Company’s common stock to Leon Developments, valued at US$0.0364 per share.
The Asset Purchase Agreement and Lease
Under the APA, the assets of the Canadian Rehab Clinic were sold by the Company, through its subsidiary, GreeneStone Clinic Muskoka Inc. (“Muskoka”), to Canadian Addiction Residential Treatment LP (the “Purchaser”), for a total consideration of CDN$10,000,000, plus an additional performance payment of up to CDN$3,000,000 as a performance payment to be received in 2019 if certain clinic performance metrics are met. The Purchaser completed the sale with cash proceeds to the Company of CDN$10,000,000, of which CDN$1,500,000 willwas 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.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
1. Nature of Business (continued)
On November 2, 2017, the Company entered into an Agreement of Purchase and Sale (the “Agreement”) to purchase from AREP 5400 East Avenue LLC, a Delaware limited liability company (“Seller”) certain buildings in West Palm Beach, Florida, totaling approximately 80,000 square feet, on which the present tenant operates a substance abuse treatment center (the “Property”). The purchase price of the Property is $20,530,000, and the Company made nonrefundable down payments totaling $2,924,955(a) unaudited condensed consolidated balance sheets as of September 30, 2018.
On May 23, 2018, the Company converted the agreement to purchase AREP 5400 East Avenue LLC. (“the landlord”) into a lease agreement with a purchase option of $17,250,000, increasing AugustMarch 31, 2018 by $750,000 per month until the purchase option is exercised. The premises is located at 5400, 5402 and 5410 East Avenue, West Palm Beach, Florida (the “Property”). The lease is for an initial 10 years and provides for two additional 10 year extensions.
The Company was previously under agreement to purchase the Property2019, which have been derived from the Landlord. The Property is presently used as a rehabilitation treatment center. The current tenant at the property, Alternatives in Treatment, LLC, a Florida limited liability company, consented to the Lease and concurrent with the execution of the Lease entered into a Sublease Agreement with the Company.
The accompanying unaudited condensed consolidated financial statements, and as of December 31, 2018, which have been derived from audited consolidated financial statements, and (b) the unaudited condensed consolidated statements of operations, stockholders’ deficit and cash flows of the Company, have been prepared in accordance with accounting principles generally accepted in the United States of America(“GAAP”) for interim consolidated financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation SX.S-X. Accordingly, these unaudited condensed consolidated financial statementsthey do not include all of the information and disclosuresfootnotes required by accounting principles generally accepted in the United States of AmericaGAAP for complete financial statements.
All In the opinion of management, all adjustments (consisting of normal recurring adjustments)accruals) considered necessary for a fair presentation have been included in these unaudited condensed consolidated financial statements.included. Operating results for the three and nine month period presentedmonths ended March 31, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The balance sheet atyear ending December 31, 2017 has been derived from audited consolidated financial statements. The2019. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotesnotes thereto included in the Company’s Form 10-K/A for the year ended December 31, 2017.2018, filed with the Securities and Exchange Commission (“SEC”) on April 22, 2019.
All amounts referred to in the notes to the unaudited condensed consolidated financial statements are in United States Dollars ($) unless stated otherwise.
a) | Use of Estimates |
The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of AmericaUS 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) | Principals of consolidation and foreign currency translation |
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated on consolidation.
The Company previously owned an operational subsidiary whoseCertain of the Company’s subsidiaries functional currency wasis the Canadian dollar, while the Company’s reporting currency is the U.S. dollar. The Company recently acquired a property-owning subsidiary, CCH, whose functional currency is the Canadian dollar. All transactions initiated in Canadian dollars are translated into US dollars in accordance with ASC 830, “Foreign Currency Translation” as follows:
● | Monetary assets and liabilities at the rate of exchange in effect at the balance sheet date. |
● |
● | 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’ equitydeficit as a component of accumulated other comprehensive income or loss. Therefore, translation adjustments are not included in determining net income (loss) but reported as other comprehensive income (loss).
For foreign currency transactions, the Company translates these amounts to the Company’s functional currency at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time actual payment is made, a foreign exchange transaction gain or loss results which is included in determining net income for the period.
The relevant translation rates are as follows: For the three and nine months ended September 30, 2018;March 31, 2019, a closing rate of CAD$1.0000CDN$1.00 equals US$0.77250.7483 and an average exchange rate of CDN$1.00 equals US$0.7522. For the three months ended March 31, 2018, a closing rate of CAD$1.00 equals US$0.7756 and an average exchange rate of CAD$1.0000 equals US$0.7651.0.7907.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
c) | Revenue Recognition |
ASU 2014-09 requires companies to exercise more judgment and recognize revenue using a five-step process. The Company adopted ASU 2014-09 using the modified retrospective method for all contracts effective January 1, 2018. Modified retrospective adoption requires entities to apply the standard retrospectively to the most current period presented in the financial statements, requiring the cumulative effect of the retrospective application as an adjustment to the opening balance of retained earnings at the date of initial application. Prior periods have not been adjusted. No cumulative effect adjustment in retained earnings was recorded as the adoption of ASU 2014-09 did not significantly impact the Company’s reported historical revenue.
As a result of certain changes required by ASU 2014-09, the majority of the Company’s provision for doubtful accounts are recorded as a direct reduction to revenue instead of being presented as a separate line item on the consolidated statements of operations. The adoption of ASU 2014-09 has no impact on the Company’s accounts receivable as it was historically recorded net of allowance for doubtful accounts and contractual adjustments, and the Company has eliminated the presentation of allowance for doubtful accounts on the consolidated balance sheets.
As our performance obligations relate to contracts with a duration of one year or less, the Company elected the optional exemption in ASC 606-10-50-14(a). Therefore, the Company is not required to disclose the transaction price for the remaining performance obligations at the end of the reporting period or when the Company expects to recognize the revenue. The Company has minimal unsatisfied performance obligations at the end of the reporting period as our patients typically are under no obligation to remain admitted in our facilities.
The Company receives payments from the following sources for services rendered in our U.S. Facility: (i) commercial insurers; and (ii) individual patients and clients. As the period between the time of service and time of payment is typically one year or less, the Company elected the practical expedient under ASC 606-10-32-18 and did not adjust for the effects of a significant financing component.
The Company derives a significant portion of its revenue from other payors that receive discounts from established billing rates. The various managed care contracts under which these discounts must be calculated are complex, subject to interpretation and adjustment, and may include multiple reimbursement mechanisms for different types of services provided in the Company’s in-patient facilities and cost settlement provisions. Management estimates the transaction price on a pay or specific basis given its interpretation of the applicable regulations or contract terms. The services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from the Company’s estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.
Settlements under cost reimbursement agreements with third-party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. In the opinion of management, adequate provision has been made for any adjustments and final settlements. However, there can be no assurance that any such adjustments and final settlements will not have a material effect on the Company’s financial condition or results of operations. The Company’s cost report receivables were $279,929 and $202,654 for the three months ended March 31, 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 cost report settlements resulted in a decrease in revenues of $0 and $262,353 for the three months ended March 31, 2019 and the year ended December 31, 2018, respectively.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. | Summary of significant accounting policies (continued) |
c) | Revenue Recognition (continued) |
The Company has analyzed its revenue transaction pursuant to ASC 606, Revenue, and it has no material impact as a result of the transition from ASC 605 to 606. The Company’s revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those services. The Company derives its revenues from the sale of its services, as defined below. The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its revenue transactions:
i. | identify the contract with a customer; |
ii. | identify the performance obligations in the contract; |
iii. | determine the transaction price; |
iv. | allocate the transaction price to performance obligations in the contract; and |
v. | recognize revenue as the performance obligation is satisfied. |
The Company has two operating segments from which it derives revenues which is recognized on the basis described below.
i. | Rental Income |
In terms of the lease agreement, on a monthly basis as long as the facility is utilized by the tenant
ii. | In-patient revenue |
The customers have been treated and provided with services by the Company; there is clear evidence that an arrangement exists; the amount of revenue and related costs can be measured reliably; and it is probable that the economic benefits associated with the transaction will flow to the Company.
d) | Nonmonetary transactions |
The Company’s policy is to measure an asset exchanged or transferred in a nonmonetary 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 nonmonetary, non-reciprocal transfer to owners that represents a spinoff or other form of restructuring or liquidation. |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. | Summary of significant accounting policies (continued) |
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.
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 has two operating segmentsreceiving 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 which it derives revenues, i) rental incomehandling 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 leasing of a rehabilitation facility to third parties and ii) in-patient revenues for rehabilitation services provided to customers. Revenue is recognized as follows:uninsured patients.
In terms of the lease agreement, on a monthly basis as long as the facility is utilized by the tenant
The customers have been treated and provided with services by the Company; there is clear evidence that an arrangement exists; the amount of revenue and related costs can be measured reliably; and it is probable that the economic benefits associated with the transaction will flow to the Company.
The Company recognizes revenue from the rendering of services when they are earned; specifically, when all of the following conditions are met:
In particular, the Company recognizes:
Allowance for Doubtful Accounts, Contractual and |
The Company derives the majority of its revenues from commercial payorpayors at out-of-network rates. Management estimates the allowance for contractual and other discounts basebased on its historical collection experience. The serviceservices 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 evaluationevaluating 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 accountsaccount to be uncollectible. Uncollectible balances are written-off against the allowance. Recoveries of previously written-off balances are credited to income when the recoveries are made.
8
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Changes to the Disclosure Requirements for Fair Value Measurement.
The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement.
Removals
The following disclosure requirements were removed from Topic 820:
Modifications
The following disclosure requirements were modified in Topic 820:
Additions
The following disclosure requirements were added to Topic 820; however, the disclosures are not required for nonpublic entities:
In addition, the amendments eliminateat a minimumfrom the phrasean entity shall disclose at a minimumto promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements.
The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date.
The impact of this ASU on the Company’s consolidated financial statements is not expected to be material.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Financial instruments |
The Company is exposed to various risks throughinitially measures its financial instruments.assets and liabilities at fair value, except for certain non-arm’s length transactions. The following analysis provides a measure of the Company’s risk exposureCompany subsequently measures all its financial assets and concentrationsfinancial liabilities at the balance sheet date, September 30, 2018 and December 31, 2017.amortized cost.
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 ofassets measured at amortized cost include cash and accounts receivable.
Credit risk associated withFinancial liabilities measured at amortized cost include bank indebtedness, accounts receivablepayable 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 Seastone of Delray is mitigated as only a percentageimpairment. The amount of the revenue billed to health insurance companieswrite-down is recognized asin 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 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.
Liquidity risk is the risk the Companyperiod incurred. However, financial instruments that will not be able to meet its financial obligations as they fall due. The Company is exposed to liquidity risk through its working capital deficiency of $12,142,645 and accumulated deficit of $28,892,162. As disclosed in note 4, the Company will be dependent upon the raising of additional capital in order to implement its business plan. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, liquidity risk is assessed as high, material and remains unchanged from the prior year.
Market risk is the risk that thesubsequently measured at fair value are adjusted by the transaction costs that are directly attributable to their origination, issuance 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 on its bank indebtedness as there is a balance owing of $44 as of September 30, 2018. This liability is based on floating rates of interest that have been stable during the current reporting period. In the opinion of management, interest rate risk is assessed as low, not material and remains unchanged from the prior year.
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is subject to currency risk as it has subsidiaries that operate in Canada and are subject to fluctuations in the Canadian dollar. A substantial portion of the Company’s financial assets and liabilities are denominated in Canadian dollars. Based on the net exposures at September 30, 2018, a 5% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an approximate $4,800 increase or decrease in the Company’s after tax net income from operations. The Company has not entered into any hedging agreements to mediate this risk. In the opinion of management, currency risk is assessed as low, material and remains unchanged from the prior year.
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.assumption.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
2. | Summary of significant accounting policies (continued) |
h) |
FASB ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 establishes a three tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
● | Level 1. Observable inputs such as quoted prices in active markets; |
● | Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
● | Level 3. Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions. |
The Company measures its convertible debt and derivative liabilities associated therewith at fair value. These liabilities are revalued periodically and the resultant gain or loss is realized through the Statement of Operations.
i) | Plant and equipment |
Fixed assets are recorded at cost. Depreciation is calculated on the straight line basis over the estimated life of the asset:
Leasehold improvements are depreciated using the straight-line method over the term of the lease.
j) | Leases |
Leases are classified as either capital or operating leases. Leases that transfer substantially all of the benefits and inherent risks of ownership of property to the Company are accounted for as capital leases. At the time a capital lease is entered into, an asset is recorded together with its related long-term obligation to reflect the acquisition and financing. Equipment recorded under capital leases is amortized on the same basis as described above. Leases that are classified as operating leases are recorded as a right-of-use asset with a corresponding operating lease liability. The right of use asset is amortized over the life of the lease using the effective interest rate method whilst the operating lease obligation is amortized over the term of the lease using the effective interest method after adjusting for the impact of straight line lease payments. The operating lease expense is recorded as an expense in the statement of operations on a straight line basis over the term of the operating lease.
k) | Income taxes |
The Company accounts for income taxes under the provisions of ASC Topic 740,“Income Taxes”.Under ASC Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income taxes are provided using the liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax basis of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized.
ASC Topic 740 contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company recognizes interest and penalties accrued on unrecognized tax benefits within general and administrative expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in general and administrative expenses in the period that such determination is made. The tax returns for fiscal 2001, through 2017 are subject to audit or review by the US tax authorities, whereas fiscal 2010 through 2017 are subject to audit or review by the Canadian tax authority.
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 months ended March 31, 2019 and the year ended December 31, 2018 is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. This estimate will be revised in subsequent periods if actual forfeitures differ from those estimates. We have minimal awards with performance conditions and no awards dependent on market conditions.
n) | Derivatives |
The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. The Company uses a Black Scholes Option Pricing model to estimate the fair value of convertible debt conversion features at the end of each applicable reporting period. Changes in the fair value of these derivatives during each reporting period are included in the statements of operations. Inputs into the Black Scholes Option Pricing model require estimates, including such items as estimated volatility of the Company’s stock, risk free interest rate and the estimated life of the financial instruments being fair valued.
If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.
The Company finalized the Purchase Price allocation for the acquisition of the assets of Seastone and CCH during December 2017. This resulted in the retroactive restatement of the statement of the unaudited condensed consolidated statement of operations and the unaudited condensed consolidated statement of cash flows for the three and nine months ended September 30, 2017.ETHEMA HEALTH CORPORATION
The value of the assets acquired were adjusted in line with valuations received and the corresponding depreciation charge was adjusted accordingly.
This resulted in an increase in other expense of $0 and $4,701,415 for the three months and nine months ended September 30, 2017, respectively, on the transfer of assets between parties under common control and a net reduction in the associated depreciation charge of $52,517 and $127,430 for the three months and nine months ended September 30, 2017, respectively.
A further adjustment was made to other income, which was reduced by $67,596 and $162,536, for the three months and nine months ended September 30, 2017, respectively, to modify the Company’s estimate of deferred purchase price consideration due on the disposal of Muskoka.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. |
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 reconciliationCompany is exposed to various risks through its financial instruments. The following analysis provides a measure of the unaudited condensed consolidated statement of operationsCompany’s risk exposure and concentrations at the balance sheet date, March 31, 2019 and December 31, 2018.
i. | Credit risk |
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the three months ended September 30, 2017 is as follows: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.
As previously reported | Adjustments | As Restated | ||||||||||
Revenues | $ | 648,298 | $ | — | $ | 648,298 | ||||||
Operating expenses | ||||||||||||
General and administrative | 127,786 | 127,786 | ||||||||||
Management fees | 42,705 | 42,705 | ||||||||||
Professional fees | 53,830 | 53,830 | ||||||||||
Salaries and wages | 200,863 | 200,863 | ||||||||||
Depreciation and amortization | 131,784 | (52,517 | ) | 79,267 | ||||||||
Total operating expenses | 556,968 | (52,517 | ) | 504,451 | ||||||||
Operating income | 91,330 | 52,517 | 143,847 | |||||||||
Other Income (expense) | ||||||||||||
Other income | 67,596 | (67,596 | ) | — | ||||||||
Interest expense | (86,371 | ) | (86,371 | ) | ||||||||
Debt discount | (13,052 | ) | (13,052 | ) | ||||||||
Derivative liability movement | (19,329 | ) | (19,329 | ) | ||||||||
Foreign exchange movements | 53,294 | 53,294 | ||||||||||
Net income before taxation from continuing operations | 93,468 | (15,079 | ) | 78,389 | ||||||||
Taxation | — | — | — | |||||||||
Net income from continuing operations | 93,468 | (15,079 | ) | 78,389 | ||||||||
Net loss from discontinued operations, net of tax | (218,253 | ) | (218,253 | ) | ||||||||
Net loss | (124,785 | ) | (15,079 | ) | (139,864 | ) | ||||||
Accumulated other comprehensive gain | ||||||||||||
Foreign currency translation adjustment | 277,923 | 277,923 | ||||||||||
Total comprehensive income | $ | 153,138 | $ | (15,079 | ) | $ | 138,059 | |||||
Basic income per common share from continuing operations | $ | — | $ | — | $ | — | ||||||
Basic loss per share from discontinued operations | $ | — | $ | — | $ | — | ||||||
Basic income per common share | $ | — | $ | — | $ | — | ||||||
Diluted income per common share from continuing operations | $ | — | $ | — | $ | — | ||||||
Diluted loss per share from discontinued operations | $ | — | $ | — | $ | — | ||||||
Diluted loss per common share | $ | — | $ | — | $ | — | ||||||
Weighted average common shares outstanding - Basic | 119,407,668 | 119,407,668 | 119,407,668 | |||||||||
Weighted average common shares outstanding - Diluted | 119,407,668 | 119,407,668 | 119,407,668 |
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. |
p) | Financial instruments Risks (continued) |
ii. | Liquidity risk |
Liquidity risk is the risk the Company will not be able to meet its financial obligations as they fall due. The reconciliationCompany is exposed to liquidity risk through its working capital deficiency of $16,845,900 accumulated deficit of $33,617,724. The Company will be dependent upon the raising of additional capital in order to implement its business plan. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, liquidity risk is assessed as high, material and remains unchanged from the prior year.
iii. | Market risk |
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises of three types of risk: interest rate risk, currency risk, and other price risk. The Company is exposed to interest rate risk and currency risk.
a. | Interest rate risk |
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to minimal interest rate risk as there is no overdraft indebtedness as of March 31, 2019. In the opinion of management, interest rate risk is assessed as low, not material and remains unchanged from the prior year.
b. | Currency risk |
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is subject to currency risk as it has subsidiaries that operate in Canada and are subject to fluctuations in the Canadian dollar. A substantial portion of the unaudited condensed consolidated statementCompany’s financial assets and liabilities are denominated in Canadian dollars. Based on the net exposures at March 31, 2019, a 5% depreciation or appreciation of operations for the nine months ended September 30, 2017Canadian dollar against the U.S. dollar would result in an approximate $5,250 increase or decrease in the Company’s after tax net income from operations. The Company has not entered into any hedging agreements to mediate this risk. In the opinion of management, currency risk is assessed as follows:low, material and remains unchanged from the prior year.
c. | Other price risk |
As previously reported | Adjustments | As Restated | ||||||||||
Revenues | $ | 1,373,028 | $ | — | $ | 1,373,028 | ||||||
Operating expenses | ||||||||||||
General and administrative | 334,386 | 334,386 | ||||||||||
Rent expense | 2,622 | 2,622 | ||||||||||
Management fees | 241,923 | 241,923 | ||||||||||
Professional fees | 453,034 | 453,034 | ||||||||||
Salaries and wages | 583,559 | 583,559 | ||||||||||
Depreciation and amortization | 314,190 | (127,430 | ) | 186,760 | ||||||||
Total operating expenses | 1,929,714 | (127,430 | ) | 1,802,284 | ||||||||
Operating loss | (556,686 | ) | 127,430 | (429,256 | ) | |||||||
Other Income (expense) | ||||||||||||
Other income | 635,904 | (162,536 | ) | 473,368 | ||||||||
Other expense | (392,538 | ) | (4,701,415 | ) | (5,093,953 | ) | ||||||
Interest income | 32,074 | 32,074 | ||||||||||
Interest expense | (242,992 | ) | (242,992 | ) | ||||||||
Debt discount | (442,377 | ) | (442,377 | ) | ||||||||
Derivative liability movement | 75,203 | 75,203 | ||||||||||
Foreign exchange movements | (111,052 | ) | (111,052 | ) | ||||||||
Net loss before taxation from continuing operations | (1,002,464 | ) | (4,736,521 | ) | (5,738,985 | ) | ||||||
Taxation | — | — | — | |||||||||
Net loss from continuing operations | (1,002,464 | ) | (4,736,521 | ) | (5,738,985 | ) | ||||||
Gain on disposal of business | 7,494,828 | 7,494,828 | ||||||||||
Operating loss from discontinued operations, net of tax | (300,439 | ) | (300,439 | ) | ||||||||
Net income from discontinued operations, net of tax | 7,194,389 | — | 7,194,389 | |||||||||
Net income | 6,191,925 | (4,736,521 | ) | 1,455,404 | ||||||||
Accumulated other comprehensive gain | ||||||||||||
Foreign currency translation adjustment | 241,231 | 241,231 | ||||||||||
Total comprehensive income | $ | 6,433,156 | $ | (4,736,521 | ) | $ | 1,696,635 | |||||
Basic loss per common share from continuing operations | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.06 | ) | |||
Basic income per share from discontinued operations | $ | 0.07 | $ | — | $ | 0.07 | ||||||
Basic income per common share | $ | 0.06 | $ | (0.05 | ) | $ | 0.01 | |||||
Diluted loss per common share from continuing operations | $ | (0.01 | ) | $ | (0.04 | ) | $ | (0.05 | ) | |||
Diluted income per share from discontinued operations | $ | 0.06 | $ | — | $ | 0.06 | ||||||
Diluted income per common share | $ | 0.05 | $ | (0.04 | ) | $ | 0.01 | |||||
Weighted average common shares outstanding - Basic | 102,455,451 | 102,455,451 | 102,455,451 | |||||||||
Weighted average common shares outstanding - Diluted | 117,312,150 | 117,312,150 | 117,312,150 |
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
3. |
The reconciliation of the unadjusted condensed consolidated statement of cash flows for the nine months ended September 30, 2017 is as follows:
As previously reported | Adjustments | Adjusted Total | ||||||||||
Operating activities | ||||||||||||
Net income | $ | 6,191,925 | $ | (4,736,521 | ) | $ | 1,455,404 | |||||
Net income from discontinued operations | (7,194,389 | ) | (7,194,389 | ) | ||||||||
Net loss from continuing operations | (1,002,464 | ) | (4,736,521 | ) | (5,738,985 | ) | ||||||
Adjustment to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation | 314,190 | (127,430 | ) | 186,760 | ||||||||
Non cash compensation expense on acquisition of subsidiary | 373,274 | 4,701,415 | 5,074,689 | |||||||||
Loss on mortgage sold | 19,265 | 19,265 | ||||||||||
Non cash compensation for services | 4,000 | 4,000 | ||||||||||
Other foreign exchange movements | 63,962 | 63,962 | ||||||||||
Amortization of debt discount | 442,377 | 442,377 | ||||||||||
Derivative liability movements | (75,203 | ) | (75,203 | ) | ||||||||
Provision against receivable on sale of subsidiary | (446,476 | ) | (446,476 | ) | ||||||||
Non-cash earnout accrual | (162,536 | ) | 162,536 | — | ||||||||
Changes in operating assets and liabilities | ||||||||||||
Accounts receivable | (833,374 | ) | (833,374 | ) | ||||||||
Prepaid expenses | (12,013 | ) | (12,013 | ) | ||||||||
Accounts payable and accrued liabilities | (162,834 | ) | (162,834 | ) | ||||||||
Taxes payable | (2,393,899 | ) | (2,393,899 | ) | ||||||||
Net cash used in operating activities - continuing operations | (3,871,731 | ) | — | (3,871,731 | ) | |||||||
Net cash used in operating activities - discontinued operations | (117,221 | ) | (117,221 | ) | ||||||||
(3,988,952 | ) | — | (3,988,952 | ) | ||||||||
Investing activities | ||||||||||||
Investments in Seastone | (2,960,000 | ) | (2,960,000 | ) | ||||||||
Proceeds from restricted cash | 74,480 | 74,480 | ||||||||||
Purchase of fixed assets | (8,878 | ) | (8,878 | ) | ||||||||
Net cash used in investing activities - continuing operations | (2,894,398 | ) | — | (2,894,398 | ) | |||||||
Net cash provided by investing activities - discontinued operations | 6,285,852 | 6,285,852 | ||||||||||
3,391,454 | — | 3,391,454 | ||||||||||
Financing activities | ||||||||||||
Decrease in bank overdraft | (56,105 | ) | (56,105 | ) | ||||||||
Proceeds from mortgage sold | 111,554 | 111,554 | ||||||||||
Proceeds from mortgage | 4,367,000 | 4,367,000 | ||||||||||
Repayment of mortgage | (3,482,144 | ) | (3,482,144 | ) | ||||||||
Proceeds from convertible notes | 294,500 | 294,500 | ||||||||||
Repayment of convertible notes | (274,958 | ) | (274,958 | ) | ||||||||
Repayment of related party notes | (595,736 | ) | (595,736 | ) | ||||||||
Net cash provided by financing activities | 364,111 | — | 364,111 | |||||||||
Effect of exchange rate on cash | 241,231 | 241,231 | ||||||||||
Net change in cash | 7,844 | 7,844 | ||||||||||
Beginning cash balance | 4,779 | 4,779 | ||||||||||
Ending cash balance | $ | 12,623 | $ | — | $ | 12,623 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Going concern |
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with US GAAP applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations in the normal course of business. As of September 30, 2018,at March 31, 2019 the Company has a working capital deficiency of $12,142,645$16,844,900 and accumulated deficit of $28,892,162.$33,617,724. Management believes that current available resources will not be sufficient to fund the Company’s planned expenditures over the next 12 months. Accordingly, the Company will be dependent upon the raising of additional capital through placement of common shares, and/or debt financing in order to implement its business plan, and or generating sufficient revenue in excess of costs. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain geographical areas, or techniques that it might otherwise seek to retain. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. These 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 amounts and classificationsrecoverability or classification of recorded assets and liabilities or other adjustments that mightmay be necessary should the Company not be unable to continue operations.
The ability of the Companyable 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.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 $80,000 as at March 31, 2019 and a further $30,000 as of May 15, 2019. These funds were advanced as short-term promissory notes.
5. |
On February 14, 2017,April 2, 2019, the Company completedentered into a series of transactions, including an APACommercial Contract whereby the Companyreal property at 801 Andrews Avenue, Delray Beach, Florida, consisting of land and condominiums thereon, was 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 operationto JAGGM, LLC for comparative purposes as of September$3,500,000. This transaction closed on April 30, 2017, and for the three and nine months ended September 30, 2017.
The Statement of operations for discontinued operations at September 30, 2017 is as follows:2019.
Three months ended September 30, 2017 | Nine months ended September 30, 2017 | |||||||
Revenues | $ | — | $ | 232,040 | ||||
Operating expenses | ||||||||
Depreciation and amortization | — | 4,196 | ||||||
General and administrative | 353 | 119,058 | ||||||
Professional fees | — | 32,818 | ||||||
Rent | — | 47,493 | ||||||
Salaries and wages | — | 201,723 | ||||||
Total operating expenses | 353 | 405,288 | ||||||
Operating loss | (353 | ) | (173,248 | ) | ||||
Other (Expense) Income | ||||||||
Interest expense | (1,904 | ) | (2,898 | ) | ||||
Foreign exchange movements | (215,996 | ) | (124,293 | ) | ||||
Net loss before taxation | (218,253 | ) | (300,439 | ) | ||||
Taxation | — | — | ||||||
Net loss from discontinued operations | $ | (218,253 | ) | $ | (300,439 | ) | ||
Gain on disposal of business | — | 7,494,828 | ||||||
$ | (218,253 | ) | $ | 7,194,389 |
18
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSThe land and buildings thereon, net of accumulated depreciation as at March 31, 2019 of $1,786,049 was reclassified as an asset held for resale.
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, and$20,530,000. The Company made a series of nonrefundable down payments totaling $2,924,955 as of September 30,March 31, 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"landlord”) into a lease agreement with a purchase option of $17,250,000, increasing August 31, 2018 by $750,000 per month until the purchase option is exercised. The premises is located at 5400, 5402 and 5410 East Avenue, West Palm Beach, Florida (the "Property"“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 Propertyproperty from the Landlord.landlord. The Propertyproperty is presently used as a rehabilitation treatment center. The current tenant at the property, Alternatives in Treatment, LLC, a Florida limited liability company, consented to the Lease and concurrent with the execution of the Lease entered into a Sublease Agreement with the Company.
Other depositsETHEMA HEALTH CORPORATION
The Company has made utility deposits of $36,107 related to the lease agreement discussed above.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. | Due |
On February 14, 2017, the Company sold its Canadian Rehab Clinic for gross proceeds of CDN$10,000,000, of which CDN$1,500,000 (US$1,155,900) had been retained in an escrow account for a period of up to two years in order to guarantee the warranties provided by the Company in terms of the APA. During the nine months ended September 30, 2018, CDN960,000As of March 31, 2019, CDN$1,055,042 of the escrow was releasedhad been refunded to the Company with an additionaland CDN$540,000 still outstanding.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:
September 30, 2018 | December 31, 2017 | |||||||||||||||
Cost | Amortization and Impairment | Net book value | Net book value | |||||||||||||
Land | $ | 2,920,015 | $ | — | $ | 2,920,015 | $ | 2,925,305 | ||||||||
Buildings | 5,975,002 | (373,848 | ) | 5,601,154 | 5,840,268 | |||||||||||
Furniture and fixtures | 115,750 | (41,154 | ) | 74,596 | 72,047 | |||||||||||
Leasehold improvements | 312,614 | (15,222 | ) | 297,392 | 316,238 | |||||||||||
$ | 9,323,381 | $ | (430,224 | ) | $ | 8,893,157 | $ | 9,153,858 |
March 31, | December 31, 2018 | ||||||||||||||||
Cost | Accumulated depreciation | Net book value | Net book value | ||||||||||||||
Land | $ | 2,038,510 | $ | — | $ | 2,038,510 | $ | 2,911,530 | |||||||||
Property | 5,215,854 | (393,771 | ) | 4,822,083 | 5,750,045 | ||||||||||||
Leasehold improvements | 265,100 | (8,304 | ) | 256,796 | 251,774 | ||||||||||||
Furniture and fixtures | 88,176 | (51,184 | ) | 36,992 | 35,000 | ||||||||||||
$ | 7,607,640 | $ | (453,259 | ) | $ | 7,154,381 | $ | 8,948,349 |
Depreciation expense for the three months ended September 30,March 31, 2019 and 2018 was $75,876 and 2017 was $67,929 and $79,267, respectively, and depreciation expense for the nine months ended September 30, 2018 and 2017 was $204,384 and $186,760,$68,415, respectively.
9. | Leases |
Adoption of ASC Topic 842, Leases
On January 1, 2019, the Company adopted Topic 842 using the modified retrospective method applied to leases that were in place as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. The Company’s leases consists of operating leases that relate to real estate rental agreements. All of the value of the Company’s lease portfolio relates to a real estate lease agreement that was entered into in May 2018.
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.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. | Leases (continued) |
Right of use assets
Right of use assets are included in the unaudited condensed consolidated Balance Sheet are as follows:
March 31, 2019 | |||||
Non-current assets | |||||
Right of use assets, net of amortization | $ | 15,736,177 |
Total operating lease cost
Individual components of the total lease cost incurred by the Company is as follows:
Three months ended March 31, 2019 | |||||
Operating lease expense | $ | 534,312 |
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 | $ | 1,363,592 | |||
2020 | 1,882,422 | ||||
2021 | 1,962,242 | ||||
2022 | 2,042,062 | ||||
2023 and thereafter | 12,436,419 | ||||
Total undiscounted minimum future lease payments | 19,686,737 | ||||
Deferred rental liability on straight line amortization | 95,302 | ||||
Imputed interest | (3,950,560 | ) | |||
Total operating lease liability | $ | 15,831,479 | |||
Disclosed as: | |||||
Current portion | $ | 782,805 | |||
Non-current portion | 15,048,674 | ||||
$ | 15,831,479 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. | Taxes |
The taxes payable consist of:
● | A payroll tax liability of |
● | 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. | |
$250,000 has been accrued for any potential exposure the Company may have. | ||
● |
March 31, 2019 | December 31, 2018 | ||||||||
Payroll taxes | $ | 136,638 | $ | 133,843 | |||||
HST/GST payable | — | 33,757 | |||||||
US penalties due | 250,000 | 250,000 | |||||||
Income tax payable | 365,262 | 357,792 | |||||||
$ | 751,900 | $ | 775,392 |
September 30, 2018 | December 31, 2017 | |||||||
Payroll taxes | $ | 141,050 | $ | 155,894 | ||||
US penalties due | 250,000 | 250,000 | ||||||
Income tax payable | 274,590 | 283,346 | ||||||
$ | 665,640 | $ | 689,240 |
11. | Convertible notes |
The convertible notes consist of the following:
Interest rate | Maturity date | Principal | Interest | Debt Discount | March 31, 2019 | December 31, 2018 | |||||||||||||||||||||
Leonite Investments LLC | 11.0 | % | July 25, 2019 | $ | 2,494,754 | $ | — | $ | (169,186 | ) | $ | 2,325,568 | $ | 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 | 1,059 | (38,398 | ) | 15,661 | — | |||||||||||||||||||
9.0 | % | November 11, 2019 | 138,000 | 2,110 | (108,598 | ) | 31,512 | — | |||||||||||||||||||
9.0 | % | November 15, 2019 | 128,000 | 789 | (115,402 | ) | 13,387 | — | |||||||||||||||||||
First Fire Global Opportunities Fund | 12.0 | % | December 5, 2019 | 200,000 | 712 | (181,091 | ) | 19,621 | — | ||||||||||||||||||
Series N convertible notes | 6.0 | % | May 17, 2019 to March 13, 2020 | 3,506,000 | 91,050 | (1,285,543 | ) | 2,311,507 | 1,770,214 | ||||||||||||||||||
4,717,256 | 4,403,473 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. |
The short-term convertible notes consist of the following:Leonite Investments, LLC
Interest rate | Maturity date | Principal | Interest | Debt Discount | September 30, 2018 | December 31, 2017 | |||||||||||||||||||
Leonite Investments LLC | 8.5% | December 1, 2018 | $ | 2,420,000 | $ | 65,620 | $ | (280,274 | ) | $ | 2,205,346 | $ | 138,502 | ||||||||||||
Power Up Lending Group Ltd | 12.0% | August 15, 2018 | — | — | — | — | 21,951 | ||||||||||||||||||
12.0% | December 30, 2018 | — | — | — | — | — | |||||||||||||||||||
9.0% | May 15,2019 | 153,000 | 2,301 | (107,912 | ) | 47,389 | — | ||||||||||||||||||
9.0% | September 10, 2019 | 133,000 | 656 | (125,712 | ) | 7,944 | — | ||||||||||||||||||
Series N Convertible notes | 6.0% | November 6 to September 19, 2019 | 1,700,000 | 21,049 | (638,401 | ) | 1,082,648 | — | |||||||||||||||||
$ | 4,406,000 | $ | 89,626 | $ | (1,152,299) | $ | 3,343,327 | $ | 160,453 |
Leonite Capital, LLC
On December 1, 2017, the Company closed on a private offering to raise US $1,500,000 in capital. The Company issued one senior secured convertible promissory note with a principal amount of US $1,650,000 to Leonite Capital, LLC.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 initial draw under the Note was $300,000 with a $150,000 original issue discount for a total of $450,000. The Company issued 1,650,000 shares of the Company’s common stock as a commitment fee and paid $20,000 towards the lenders legal fees. The Note’s initialamended maturity date is Junewas 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 will become December 1, 2018.
On December 29, 2017, effective as of December 1, 2017, the Company and the Subsidiaries entered into an Amended and Restated Senior Secured Convertible Promissory Note, which note amends and restates the Note to (a) extend the maturity date to December 1, 2018; (b) remove CCH, as an obligor; (c) increase the interest rate by 2.00% per annum, to 8.5% per annum; and (d) issue an additional 250,000 shares of the Company’s common stock to the Investor. In connection with the execution of the amendment, the parties entered into (i) a Securities Purchase Agreement; (ii) a Warrant Agreement under which the Investor will have the right to purchase up to 27,500,000 shares of the Company’ common stock for $0.10 per share, subject to adjustment, for a period of five years; (iii) a Security and Pledge Agreement and a General Security Agreement under which the Company and the Subsidiaries will grant the Investor a blanket lien on their assets, and the Company will pledge its equity ownership in the Subsidiaries; and (iv) a First Amendment to the, effective January 2, 2018.
At the execution of the Note, the Investor funded an initial tranche of $300,000. Thereafter the Investor funded a second tranche of $156,136. Upon the execution of the A&R Note the Investor funded a third tranche of $100,000. Upon the execution of the First Amendment the Investor funded a final tranche of $850,000, with the remaining $43,764$93,764 of availability under the A&R Note, as amended, serving as a holdback pursuant to the terms of the First Amendment.
Amounts under the Note are convertible, at the Investors request, into shares of the Company’s common stock at an initial price of $0.06 per share, subject to adjustment.
On March 12, 2018, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $330,000, including an Original Issue Discount of $30,000, for net proceeds of $300,000. The note 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 and anti-dilution protection. In conjunction with this noteThe Company paid a commitment fee of $19,800 settled through the Company issued warrants to purchase 5,500,000issue of 330,000 shares of common stock at an exercise price of $0.10 per share.
In Conjunction with this note the Company issued 330,000 shares as a commitment fee at a price of $0.06 per share.
Thestock. This note was repaid during March 2018.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Short-term Convertible Notes (continued)
Leonite Capital, LLC (continued)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 hashad a maturity date of April 28,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 and anti-dilution protection.
In Conjunction with this note the 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 aan exercise price of $0.07$0.10 per share.share, subject to anti-dilution and price protection.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. | Convertible notes (continued) |
Leonite Investments, 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 May 8,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 also issued 605,000paid a commitment fee of $42,350 settled through the issue of 10,083,333 shares of common stockstock. In conjunction with this note the Company issued a five year warrant to Leonite as a commitment fee, in terrns of the agreement valued at $42,350 at grant date, and a furtherpurchase 10,083,333 warrants to purchase shares of common stock at an initial exercise price of $0.10 per share, subject to anti-dilution and price protection.
Power Up Lending Group LTD
On November 6, 2017,5, 2018, the Company, entered into a Securities Purchase Agreement with Power Up Lending Group Ltd., pursuant to which the Company issued to the Purchaser a Convertible Promissory Note in the aggregate principal amount of $103,000.$111,111, including an Original Issue Discount of $11,111, for net proceeds of $100,000. The Notenote had a maturity date of August 15,November 30, 2018 and bore interest at the at the rate of twelve percent1.0% per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company had the right to prepay the Note in terms of agreement.annum. The outstanding principal amount of the Notenote was convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that was 180 dayspurchaser following the issue date into shares of the Company’s common stock at a conversion price equal to 61%$0.06 per share subject to price protection and anti-dilution protection. The Company paid a commitment fee of $8,889 settled through the average lowest closing bidissue 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 Company’s common stock for the ten trading days prior to conversion. On May 5, 2018, the aggregate principal outstanding of $103,000 together with interest and penalty interest thereon, was settledmaturity date for gross proceeds of $141,824.$111,184.
On March 9, 2018,January 17, the Company, entered into a Securities Purchase Agreement with Power Up Lending Group Ltd., pursuant to which the Company issued to the Purchaser a Convertible Promissory Note in the aggregate principal amount of $153,000.$71,111, including an Original Issue Discount of $7,111, for net proceeds of $64,000. The Notenote had a maturity date of December 30, 2018July 25, 2019 and borebears interest at the rate of twelve percent11.0% per annum from the date on which the Note was issued until the same became due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company had the right to prepay the Note in terms of agreement.annum. The outstanding principal amount of the Note wasnote is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that was 180 dayspurchaser following the issue date into shares of the Company’s common stock at a conversion price equal to 61%$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 average lowest closing bid pricenote on March 15, 2019, the maturity date of the Company’s common stock forconvertible notes above were extended to July 25, 2019. In Addition, the ten trading days priorcoupon rate of the note was adjusted to conversion. During11% per annum with effect from September 2018, the Company prepaid the aggregate principal outstanding of $153,000 together with interest thereon and penalty interest, was settled for gross proceeds of $210,800.2018.
Power Up Lending Group LTD
On July 31, 2018, the Company, entered into a Securities Purchase Agreement with Power Up, Lending Group Ltd., pursuant to which the Company issued to the Purchaser a Convertible Promissory Note in the aggregate principal amount of $153,000. The Note has a maturity date of May 15, 2019 and bears interest at the rate of nine percent per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion. On 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 gross proceeds 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, Lending Group Ltd., pursuant to which the Company issued to the Purchaser a Convertible Promissory Note in the aggregate principal amount of $133,000. The Note has a maturity date of September 10, 2019 and bears interest at the rate of nine percent per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion. 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.
24On 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, for net proceeds of $125,000 after expenses. 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
10. Short-term Convertible Notes (continued)
11. | Convertible notes (continued) |
Series N Convertible Notesconvertible notes
During the period from May 17, 2018 to SeptemberDecember 4, 2018, The Company closed several tranches of a private offering in which it raised $1,700,000$2,505,000 in capitalprincipal from 712 accredited investors through the issuance to the investors of the Company’s Series N Convertible Notes,convertible notes, in the total original principal amount of $1,700,000,$2,505,000, which Notes are convertible into the Company’s common stock at a conversion price of $0.08 per share together with Warrantsthree year warrants to purchase up to a total of 21,250,00031,312,500 shares of the Company’s common stock at an exercise price of $0.12 per share the.share. Both the conversion price under the Notes and the exercise price under the Warrantswarrants 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 March 13, 2019, the Company closed several tranches of Series N Convertible notes in which it raised $1,001,000 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 $1,001,000, 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 12,512,500 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 adjustment mechanisms. The Notesnotes mature between November 6, 2018 and September 26, 2019, andone year from the Warrants are exercisable between May 31, 2021 and September 27, 2021.
25
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSdate of issuance.
12. |
TheMortgage loans payable is disclosed as follows:
Interest rate | Maturity date | Principal Outstanding | Accrued interest | September 30, 2018 | December 31, 2017 | |||||||||||||||||
Cranberry Cove Holdings | ||||||||||||||||||||||
Pace Mortgage | 4.2 | % | July 19,2022 | 4,147,549 | 13,674 | 4,161,223 | 4,349,374 | |||||||||||||||
Seastone of Delray | ||||||||||||||||||||||
Mortgage | 5.0 | % | February 13, 2020 | 2,950,675 | $ | 12,295 | 2,962,970 | 2,986,920 | ||||||||||||||
$ | 7,098,224 | $ | 25,969 | $ | 7,124,193 | $ | 7,336,294 | |||||||||||||||
Disclosed as follows: | ||||||||||||||||||||||
Short-term portion | $ | 162,805 | $ | 152,402 | ||||||||||||||||||
Long-term portion | 6,961,388 | 7,183,892 | ||||||||||||||||||||
$ | 7,124,193 | $ | 7,336,294 |
Interest rate | Maturity date | Principal Outstanding | Accrued interest | March 31, 2019 | December 31, 2018 | ||||||||||||||||||
Cranberry Cove Holdings, Ltd. | |||||||||||||||||||||||
Pace Mortgage | 4.2 | % | July 19, 2022 | $ | 3,954,225 | $ | 5,460 | $ | 3,959,685 | 3,924,836 | |||||||||||||
ARIA | |||||||||||||||||||||||
Mortgage | 5.0 | % | February 13, 2020 | 2,942,526 | 10,480 | 2,953,006 | 2,954,786 | ||||||||||||||||
$ | 6,896,751 | $ | 15,940 | $ | 6,912,691 | $ | 6,879,722 | ||||||||||||||||
Disclosed as follows: | |||||||||||||||||||||||
Short-term portion | $ | 3,034,927 | $ | 172,276 | |||||||||||||||||||
Long-term portion | 3,877,764 | 6,707,346 | |||||||||||||||||||||
$ | 6,912,691 | $ | 6,879,722 |
The aggregate amount outstanding is payable as follows:
Amount | ||||
Within 1 year | $ | 162,805 | ||
1 to 2 years | 3,025,469 | |||
2 to 3 years | 112,598 | |||
3 to 4 years | 116,163 | |||
Thereafter | 3,707,158 | |||
Total | $ | 7,124,193 |
Amount | |||||
Within one year | 3,034,927 | ||||
One to two years | 105,728 | ||||
Two to three years | 110,215 | ||||
Three to four years | 3,661,821 | ||||
Total | $ | 6,912,691 |
Cranberry Cove Holdings, Ltd – Pace Mortgagemortgage
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.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
Seastone of DelrayNOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. | Mortgage loans payable (continued) |
TheARIA
On February 13, 2017, the Company, through its subsidiary, ARIA, entered into a Mortgage and Security Agreement with Seastoneto purchase the properties located at 801 and 810 Andrews Avenue, Delray Healthcare, LLC on February 13, 2017Beach, Florida, for thean aggregate principal sum of $3,000,000, bearing interest at the rate of 5% per annum, maturing on February 13, 2020, with monthly repaymentsinstallments of interest and principal of $15,000. The proceeds of the mortgage of $3,000,000 was used to fund the acquisition of the Seastone Delray properties.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSOn 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.
Derivative liability |
The short-term convertible notes, together with certain warrants issued to Leonite Capital LLC, and the short term convertible notes issued to Power Up Lending Group, LTD, disclosed in note 1011 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 $1,085,837$1,335,709 using a Black-Scholes valuation model.
In addition, warrants exercisable over 5,500,000 shares of common stock were issued to Leonite Investments, in terms of the Securities Purchase Agreement and the Warrant Agreement entered into. Refer note 10 above.
The following assumptions were used in the Black-Scholes valuation model:
Three months ended March 31, 2019 | |||||
Calculated stock price | |||||
Risk free interest rate | |||||
Expected life of convertible notes and warrants | |||||
expected volatility of underlying stock | |||||
Expected dividend rate | % |
The movement in derivative liability is as follows:
Nine months ended September 30, 2018 | Year ended December 31, 2017 | |||||||
Opening balance | $ | 2,859,832 | $ | — | ||||
Derivative liability arising from convertible notes | $ | 1,349,748 | $ | 1,826,500 | ||||
Fair value adjustment to derivative liability | 771,000 | 1,033,332 | ||||||
Closing balance | $ | 4,980,580 | $ | 2,859,832 |
March 31, 2019 | December 31, 2018 | ||||||||
Opening balance | $ | 4,618,080 | $ | 2,859,832 | |||||
Derivative liability on convertible notes and variable priced warrants | 561,022 | 1,335,709 | |||||||
Fair value adjustments to derivative liability | 473,301 | 422,539 | |||||||
Closing balance | $ | 5,652,403 | $ | 4,618,080 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14. | Related |
Shawn E. Leon
As of September 30, 2018March 31, 2019 and December 31, 2017, the Company owed 1816191 Ontario $29,797 and $15,921, respectively.
Shawn E. Leon
As of September 30, 2018 and December 31, 2017 the Company had a receivable of $30,706$51,011 and $16,080, respectively$32,650 from Shawn E. Leon, respectively. Mr. Leon is a director and CEO of the Company. The balances receivable areis non-interest bearing and havehas no fixed repayment terms.
Mr. Leon was paid management fees of $138,448 during$0 and $46,533 for the ninethree months ended September 30, 2018.March 31, 2019 and 2018 respectively.
Eileen GreenLeon Developments, Ltd.
As of September 30, 2018March 31, 2019 and December 31, 2017,2018, the Company had a payableowed Leon Developments, Ltd., $1,625,908 and $1,581,499, respectively. The balance owing to Leon Developments, Ltd. Is non-interest bearing and has no fixed terms of $898,960repayment.
Eileen Greene
As of March 31, 2019 and $877,182, respectively toDecember 31, 2018, the Company owed Eileen Green,Greene, the spouse of our CEO.its CEO, Shawn Leon, $1,048,270 and $1,034,114, respectively. The amount owing to Ms. Greene is non-interest bearing and has no fixed repayment terms.
Leon Developments, Ltd.
The Company acquired CCH from Leon Developments, Ltd., on February 14, 2017. CCH ownsAll related party transactions occur in the facility utilized bynormal course of operations and in terms of agreements entered into between the Canadian Rehab Clinic which was sold to a third party on February 14, 2017. CCH owed CDN $2,692,512 to Leon Developments. The amount owing to Leon Developments Ltd., as of September 30, 2018 was $1,671,769.
Cranberry Cove Holdings Ltd.
The Company acquired CCH on February 14, 2017. CCH owns the real estate previously utilized by the Canadian Rehab Clinic and now utilized by the purchaser of the business.
Prior to the acquisition of CCH, the Company paid rental expense to CCH of $58,925 for the period ended September 30, 2017.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSparties.
Stockholders’ deficit |
a) | Common shares |
Authorized, issued and outstanding
The Company has authorized 500,000,000 shares with a par value of $0.01 per share. The company has issued and outstanding 124,371,452 and 124,300,341 as of March 31, 2019 and December 31, 2018, respectively.
On March 29, 2018,January 17, 2019, the Company issued 165,00071,111 shares of common stock to Leonite Capital, LLC in connection with the closing of a financing of a Senior Secured Convertible Note. The shares were valued at $11,550, or $0.07 per share$4,978 on the issue date.
On April 17, 2018, the Company issued 605,000 shares of common stock to Leonite Capital, LLC in connection with the closing ofdate and recorded as a financing of a Senior Secured Convertible Note. The shares were valued at $39,450 on the issue date.debt discount.
b) | Preferred shares |
Authorized, issued and outstanding
The Company has authorized 13,000,000 preferred shares with a par value of $0.01 per share, designated as 3,000,000 series A convertible preferred shares and 10,000,000 series B convertible preferred shares. The Company has no preferred shares issued and outstanding.
c) | Warrants |
In terms of the convertible note agreements entered into with Leonite Capital, LLC, disclosed in note 1011 above, the Company agreed to issuegranted warrants exercisable over a total of 15,583,3331,185,183 shares of common stock at an exercise price of $0.10 per share.share, which was recorded as a debt discount.
In terms of the Series N Convertible debt issued to various accredited investors, disclosed in note 1011 above, the Company agreed to issuegranted warrants exercisable over a total of 21,250,00012,512,500 shares of common stock at an exercise price of $0.12 per share.share, which was recorded as a debt discount.
ETHEMA HEALTH CORPORATION
The fair value of Warrants awarded and revalued during the nine months ended September 30, 2018 were valued at $1,487,729 using the Black Scholes pricing model utilizing the following weighted average assumptions:
The movements in warrants is summarized as follows:
No. of shares | Exercise price per share | Weighted average exercise price | |||||||||||
Outstanding January 1, 2017 | 19,637,409 | $0.0033 to $.0.03 | $ | 0.0033 | |||||||||
Granted | 29,866,666 | $0.03 to $0.10 | 0.0945 | ||||||||||
Exercised | — | — | — | ||||||||||
Outstanding December 31, 2017 | 49,504,075 | $0.0033 to $.0.03 | 0.0033 | ||||||||||
Granted | 36,833,333 | $0.10 to $0.12 | 0.11 | ||||||||||
Forfeited/cancelled | — | — | — | ||||||||||
Exercised | — | — | — | ||||||||||
Outstanding September 30, 2018 | 86,337,408 | $0.033 to $0.12 | $ | 0.0870 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Stockholders’ deficit (continued) |
Warrants (continued) |
The warrants were valued using a Black Scholes pricing model on the date of grant at $899,049 using the following weighted average assumptions:
Three months ended March 31, 2019 | |||||
Calculated stock price | $0.07 to $0.09 | ||||
Risk free interest rate | 2.19% to 2.58% | ||||
Expected life of convertible notes and warrants | 36 to 60 months | ||||
expected volatility of underlying stock | 398% to 535% | ||||
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 March 31, 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 March 31, 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 | 13,697,683 | 0.10 to 0.12 | 0.1183 | ||||||||||
Forfeited/cancelled | — | — | — | ||||||||||
Exercised | — | — | — | ||||||||||
Outstanding March 31, 2019 | 111,197,591 | $0.03 to $0.12 | $ | 0.0942 |
The following table summarizes information about warrants outstanding at September 30, 2018:
Warrants outstanding | Warrants exercisable | ||||||||||||||||||||
Exercise price | No. of shares | Weighted average remaining years | Weighted average exercise price | No. of shares | Weighted average exercise price | ||||||||||||||||
$0.0033 | 300,000 | * | 300,000 | ||||||||||||||||||
$0.03 | 21,704,075 | 1.50 | 21,704,075 | ||||||||||||||||||
$0.10 | 43,083,333 | 4.30 | 43,083,333 | ||||||||||||||||||
$0.12 | 21,250,000 | 2.70 | 21,250,000 | ||||||||||||||||||
86,337,408 | 3.19 | $ | 0.87 | 86,337,408 | $ | 0.87 |
March 31, 2019:
* In terms of an agreement entered into with an investor relations company, 300,000 warrants were to be issued as part of the Investor Relations Agreement. These warrants have not been issued as yet, therefore the warrant terms are uncertain.
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 | 1.00 | 21,704,075 | ||||||||||||||||||
$0.10 | 45,668,516 | 3.90 | 45,668,516 | ||||||||||||||||||
$0.12 | 43,825,000 | 2.50 | 43,825,000 | ||||||||||||||||||
111,197,591 | 2.77 | $ | 0.0942 | 111,197,591 | $ | 0.0942 |
All of the warrants outstanding as of September 30,March 31, 2019 and December 31, 2018 are vested. The warrants outstanding as of September 30, 2018March 31, 2019 have an intrinsic value of $1,108,205.$1,085,204.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
15. |
d) | Stock options |
Our board of directors adopted the GreeneStoneGreenestone Healthcare Corporation 2013 Stock Option Plan (the “Plan”) to promote our long- termlong-term growth and profitability by (i) providing our key directors, officers and employees with incentives to improve stockholder value and contribute to our growth and financial success and (ii) enable us to attract, retain and reward the best available persons for positions of substantial responsibility. A total of 10,000,000 shares of our common stock have been reserved for issuance upon exercise of options granted pursuant to the Plan. The Plan allows us to grant options to our employees, officers and directors and those of our subsidiaries; provided that only our employees and those of our subsidiaries may receive incentive stock options under the Plan. We have granted a total of 480,000 options as of September 30, 2018March 31, 2019 under the Plan.
No options were issued, exercised or cancelled forduring the period under review.three months ended March 31, 2019 and the year ended December 31, 2018, respectively.
The following table summarizes information about options outstanding as of September 30, 2018. March 31, 2019:
Options outstanding | Options exercisable | Options outstanding | Options exercisable | |||||||||||||||||||||||||||||||||||||||
Exercise price | No. of shares | Weighted average remaining years | Weighted average exercise price | No. of shares | Weighted average exercise price | No. of shares | Weighted average remaining years | Weighted average exercise price | No. of shares | Weighted average exercise price | ||||||||||||||||||||||||||||||||
$0.12 | 480,000 | 1.08 | 480,000 | 480,000 | 0.59 | 480,000 | ||||||||||||||||||||||||||||||||||||
480,000 | 1.08 | $ | 0.12 | 480,000 | $ | 0.12 | 480,000 | 0.59 | $ | 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 September 30, 2018,March 31, 2019 there was no unrecognized compensation costs related to these options and the intrinsic value of the options isas of March 31, 2019 was $0.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLDATED FINANCIAL STATEMENTS
Segment information |
The Company has two reportable operating segments;segments:
a. | Rental income from the property owned by | |
b. | Rehabilitation Services provided to customers, these services |
The segment operating results of the reportable segments are disclosed as follows:
Three months ended September 30, 2018 | ||||||||||||
Rental Operations | In-Patient services | Total | ||||||||||
Revenue | $ | 83,031 | $ | 187,339 | $ | 270,370 | ||||||
Operating expenditure | 45,102 | 1,152,573 | 1,197,675 | |||||||||
Operating income (loss) | 37,929 | (965,234 | ) | (927,305 | ) | |||||||
Other (expense) income | ||||||||||||
Other income | — | 6,009 | 6,009 | |||||||||
Interest income | — | 5,334 | 5,334 | |||||||||
Interest expense | (42,845 | ) | (182,360 | ) | (225,205 | ) | ||||||
Amortization of debt discount | — | (1,195,638 | ) | (1,195,638 | ) | |||||||
Derivative liability movements | — | 37,951 | 37,951 | |||||||||
Foreign exchange movements | (15,244 | ) | (80,048 | ) | (95,292 | ) | ||||||
Net loss before taxation from continuing operations | (20,160 | ) | (2,373,986 | ) | (2,394,146 | ) | ||||||
Taxation | — | — | — | |||||||||
Net loss from continuing operations | $ | (20,160 | ) | $ | (2,373,986 | ) | $ | (2,394,146 | ) |
ETHEMA HEALTH CORPORATION
Three months ended September 30, 2017 | ||||||||||||
Rental Operations | In-Patient services | Total | ||||||||||
Revenue | $ | 83,837 | $ | 564,461 | $ | 648,298 | ||||||
Operating expenditure | 158,808 | 345,643 | 504,451 | |||||||||
Operating (loss) income | (74,971 | ) | 218,818 | 143,847 | ||||||||
Other (expense) income | ||||||||||||
Interest expense | (38,714 | ) | (47,657 | ) | (86,371 | ) | ||||||
Amortization of debt discount | — | (13,052 | ) | (13,052 | ) | |||||||
Derivative liability movements | — | (19,329 | ) | (19,329 | ) | |||||||
Foreign exchange movements | (18,320 | ) | 71,614 | 53,294 | ||||||||
Net (loss) income before taxation from continuing operations | (132,005 | ) | 210,394 | 78,389 | ||||||||
Taxation | — | — | — | |||||||||
Net (loss) income from continuing operations | $ | (132,005 | ) | $ | 210,394 | $ | 78,389 |
31
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Segment information (continued) |
The segment operating results of the reportable segments are disclosed as follows:
Nine months ended September 30, 2018 | ||||||||||||
Rental Operations | In-Patient services | Total | ||||||||||
Revenue | $ | 250,174 | $ | 200,192 | $ | 450,366 | ||||||
Operating expenditure | 121,606 | 2,403,381 | 2,524,987 | |||||||||
Operating income (loss) | 128,568 | (2,203,189 | ) | (2,074,621 | ) | |||||||
Other (expense) income | ||||||||||||
Other income | — | 6,009 | 6,009 | |||||||||
Interest income | — | 5,334 | 5,334 | |||||||||
Interest expense | (135,740 | ) | (436,503 | ) | (572,243 | ) | ||||||
Amortization of debt discount | — | (3,288,472 | ) | (3,288,472 | ) | |||||||
Derivative liability movement | — | (771,000 | ) | (771,000 | ) | |||||||
Foreign exchange movements | 32,311 | 120,921 | 153,232 | |||||||||
Net income (loss) before taxation from continuing operations | 25,139 | (6,566,900 | ) | (6,541,761 | ) | |||||||
Taxation | — | — | — | |||||||||
Net income (loss) from continuing operations | $ | 25,139 | $ | (6,566,900 | ) | $ | (6,541,761 | ) |
Nine months ended September 30, 2017 | ||||||||||||
Rental Operations | In-Patient services | Total | ||||||||||
Revenue | $ | 203,962 | $ | 1,169,066 | $ | 1,373,028 | ||||||
Operating expenditure | 294,673 | 1,507,611 | 1,802,284 | |||||||||
Operating loss | (90,711 | ) | (338,545 | ) | (429,256 | ) | ||||||
Other (expense) income | ||||||||||||
Other income | — | 473,368 | 473,368 | |||||||||
Other expense | (5,074,689 | ) | (19,264 | ) | (5,093,953 | ) | ||||||
Interest income | — | 32,074 | 32,074 | |||||||||
Interest expense | (136,902 | ) | (106,090 | ) | (242,992 | ) | ||||||
Amortization of debt discount | — | (442,377 | ) | (442,377 | ) | |||||||
Derivative liability movement | — | 75,203 | 75,203 | |||||||||
Foreign exchange movements | (18,320 | ) | (92,732 | ) | (111,052 | ) | ||||||
Net loss before taxation from continuing operations | (5,320,622 | ) | (418,363 | ) | (5,738,985 | ) | ||||||
Taxation | — | — | — | |||||||||
Net loss from continuing operations | $ | (5,320,622 | ) | $ | (418,363 | ) | $ | (5,738,985 | ) |
Three months ended March 31, 2019 | ||||||||||||
Rental Operations | In-Patient services | Total | ||||||||||
Revenue | $ | 82,015 | $ | — | $ | 82,015 | ||||||
Operating expenses | 37,358 | 1,439,155 | 1,476,513 | |||||||||
Operating income (loss) | 44,657 | (1,439,155 | ) | (1,394,498 | ) | |||||||
Other (expense) income | ||||||||||||
Interest income | — | 15,277 | 15,277 | |||||||||
Interest expense | (41,512 | ) | (303,586 | ) | (345,098 | ) | ||||||
Amortization of debt discount | — | (761,942 | ) | (761,942 | ) | |||||||
Loss on change in fair value of derivative liability | — | (473,301 | ) | (473,301 | ) | |||||||
Foreign exchange movements | (19,291 | ) | (109,827 | ) | (129,118 | ) | ||||||
Net loss before taxation | (16,146 | ) | (3,072,534 | ) | (3,088,680 | ) | ||||||
Taxation | — | — | — | |||||||||
Net loss | $ | (16,146 | ) | $ | (3,072,534 | ) | $ | (3,088,680 | ) |
The operating assets and liabilities of the reportable segments at September 30, 2018, are as follows:
Rental Operations | In-Patient services | Total | ||||||||||
Purchase of fixed assets | $ | 30,860 | $ | 10,750 | $ | 41,610 | ||||||
Assets | ||||||||||||
Current assets | 23,490 | 255,467 | 278,957 | |||||||||
Non-current assets | 3,024,074 | 9,247,294 | 12,271,368 | |||||||||
Liabilities | ||||||||||||
Current liabilities | (2,250,122 | ) | (10,171,480 | ) | (12,421,602 | ) | ||||||
Non-current liabilities | (4,083,621 | ) | (2,877,767 | ) | (6,961,388 | ) | ||||||
Intercompany balances | (804,722 | ) | 804,722 | — | ||||||||
Net liability position | $ | (4,090,901 | ) | $ | (2,741,764 | ) | $ | (6,832,665 | ) |
March 31, 2019 | |||||||||||||
Rental Operations | In-Patient services | Total | |||||||||||
Purchase of fixed assets | — | 8,176 | 8,176 | ||||||||||
Assets | |||||||||||||
Current assets | 471 | 2,388,629 | 2,389,100 | ||||||||||
Non-current assets | 2,885,893 | 23,004,453 | 25,890,346 | ||||||||||
Liabilities | |||||||||||||
Current liabilities | (2,117,691 | ) | (17,117,309 | ) | (19,235,000 | ) | |||||||
Non-current liabilities | (3,877,763 | ) | (15,048,675 | ) | (18,926,438 | ) | |||||||
Intercompany balances | 737,461 | (737,461 | ) | — | |||||||||
Net liability position | (2,371,629 | ) | (7,510,363 | ) | (9,881,992 | ) |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLDATEDCONSOLIDATED FINANCIAL STATEMENTS
16. |
The segment operating results of the reportable segments are disclosed as follows:
Three months ended March 31, 2018 | |||||||||||||
Rental Operations | In-Patient services | Total | |||||||||||
Revenue | $ | 84,112 | $ | 29,190 | $ | 113,302 | |||||||
Operating expenditure | 31,401 | 500,445 | 531,846 | ||||||||||
Operating income (loss) | 52,711 | (471,255 | ) | (418,544 | ) | ||||||||
Other (expense) income | |||||||||||||
Interest income | — | 49 | 49 | ||||||||||
Interest expense | (50,049 | ) | (120,402 | ) | (170,451 | ) | |||||||
Amortization of debt discount | — | (752,949 | ) | (752,949 | ) | ||||||||
Loss on change in fair value of derivative liability | — | (12,156 | ) | (12,156 | ) | ||||||||
Foreign exchange movements | 29,209 | 108,687 | 137,896 | ||||||||||
Net income (loss) before taxation | 31,871 | (1,248,026 | ) | (1,216,155 | ) | ||||||||
Taxation | — | — | — | ||||||||||
Net income (loss) | $ | 31,871 | $ | (1,248,026 | ) | $ | (1,216,155 | ) |
The operating assets and liabilities of the reportable segments are as follows:
March 31, 2018 | |||||||||||||
Rental Operations | In-Patient services | Total | |||||||||||
Purchase of fixed assets | — | — | — | ||||||||||
Assets | |||||||||||||
Current assets | — | 308,280 | 308,280 | ||||||||||
Non-current assets | 3,066,465 | 8,524,705 | 11,591,170 | ||||||||||
Liabilities | |||||||||||||
Current liabilities | (2,222,619 | ) | (5,677,890 | ) | (7,900,509 | ) | |||||||
Non-current liabilities | (4,128,074 | ) | (2,904,300 | ) | (7,032,374 | ) | |||||||
Intercompany balances | 789,576 | (789,576 | ) | — | |||||||||
Net liability position | (2,494,652 | ) | (538,781 | ) | (3,033,433 | ) |
17. | Net loss |
For the three and nine months ended September 30,March 31, 2019 and 2018, and the three months ended September 30, 2017 the following options warrants and convertible noteswarrants were excluded from the computation of diluted net loss per share as the results would have been anti-dilutive.
March 31, 2019 | March 31, 2018 | ||||||||
Stock options | 480,000 | 480,000 | |||||||
Warrants | 111,197,591 | 55,004,075 | |||||||
Convertible notes | 83,671,069 | 37,244,536 | |||||||
195,348,660 | 92,728,611 |
Three and nine months ended September 30, 2018 | Three months ended September 30, 2017 | |||||||
Stock options | 480,000 | 480,000 | ||||||
Warrants to purchase shares of common stock | 86,337,408 | 22,004,075 | ||||||
Convertible notes | 68,861,363 | 3,101,093 | ||||||
155,678,771 | 25,585,168 |
ETHEMA HEALTH CORPORATION
For the nine months ended September 30, 2017, the computation of basic and diluted earnings per share is as follows:
Amount | Number of shares | Per share amount | ||||||||||
Basic earnings per share | ||||||||||||
Net loss per share from continuing operations | $ | (5,738,985 | ) | 102,455,451 | $ | (0.06 | ) | |||||
Net income per share from discontinued operations | 7,194,389 | 102,455,451 | 0.07 | |||||||||
Basic income per share | 1,455,404 | 102,455,451 | 0.01 | |||||||||
Effect of dilutive securities | ||||||||||||
Warrants | — | 14,856,699 | ||||||||||
Convertible debt | — | — | ||||||||||
Diluted earnings per share | ||||||||||||
Net loss per share from continuing operations | (5,738,985 | ) | 117,312,150 | (0.05 | ) | |||||||
Net income per share from discontinued operations | 7,194,389 | 117,312,150 | 0.06 | |||||||||
$ | 1,455,404 | 117,312,150 | $ | 0.01 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLDATEDCONSOLIDATED FINANCIAL STATEMENTS
18. |
Contingency related to outstanding penalties |
The Company has provided for potential US penalties of $250,000 due to noncompliancenon-compliance with the filing of certain required returns. The actual liability may be higher due to interest and penalties assessed by these taxing authorities.
The Company has assumed operating leases for certain vehicles and office equipment.
On May 23, 2018, the Company entered into a Lease Agreement pursuant to which it leased from the AREP 5400 East Avenue LLP (the “Landlord”), the premises located at 5400, 5402, and 5410 East Avenue, West Palm Beach, Florida (the “Property”). The Lease has an initial term of 10 years and provides for 2 additional 10 year extensions. The Company has the option to purchase the property initially for $17,250,000, which amount has increased to $19,500,000$24,000,000 as of October 31, 2018,April 30, 2019, plus any landlord funded improvements. The option to purchase increases by $750,000 per calendar month, the next increase of $750,000 will occur on November 30, 2018.month. The initial base rental is $146,337 per month, plus any taxes imposed on the premises or the base rental.
c) | Future minimum operating lease payments |
The future commitment
In terms of these operating leases and the property lease are as follows: agreement mentioned above the Company is obligated to make the following minimum undiscounted lease payments:
Amount | ||||
Within 1 year | $ | 1,783,727 | ||
1 to 2 years | 1,862,467 | |||
2 - 3 years | 1,942,287 | |||
3 - 4 years | 2,022,107 | |||
5 years and thereafter | 10,642,667 | |||
Total | $ | 18,253,253 |
Amount | |||||
Remainder of 2019 | $ | 1,363,592 | |||
2020 | 1,882,422 | ||||
2021 | 1,962,242 | ||||
2022 | 2,042,062 | ||||
2023 and thereafter | 12,436,419 | ||||
Total undiscounted minimum future lease payments | 19,686,737 |
Mortgage |
The company has twoCompany is obligated to make the following mortgage loans as disclosed in note 11 above. The future commitments under these loans are as follows:payments:
Amount | ||||
Within one year | 3,034,927 | |||
One to two years | 105,728 | |||
Two to three years | 110,215 | |||
Three to four years | 3,661,821 | |||
Total | $ | 6,912,691 |
Amount | ||||
Within 1 year | 162,805 | |||
1 to 2 years | 3,025,469 | |||
2 to 3 years | 112,598 | |||
3 to 4 years | 116,163 | |||
Thereafter | 3,707,158 | |||
Total | $ | 7,124,193 |
Included in the amount due within one year is an amount t of $2,953,006 related to the Assets held for resale, disclosed under note 5 above, this amount was settled out of the proceeds realized on the sale of the property.
Other |
The Company has principal and interest payment commitments under the Convertible notes disclosed under Note 1011 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.
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLDATEDCONSOLIDATED FINANCIAL STATEMENTS
18. |
On April 30, 2019, the Company concluded the sale of the real property located at 801 Andrews Avenue, Delray Beach consisting of land and condominiums thereon, for gross proceeds of $3,500,000. The Company is not current in its tax filings for tax years 2011proceeds were used to 2017 assettle the outstanding mortgage loan of September 30, 2018.$2,987,568, including interest thereon, commissions and expenses related to the sale of the property of approximately $183,819, and certain outstanding property taxes of $77,523. The net proceeds received by the company of $251,000 was used to repay a portion of the convertible debt.
Subsequent to March 31, 2019 we raised an additional CDN$255,000 and a further US$175,000 which together with proceeds of US$70,000 and CDN$75,000 received prior to March 31, 2019 were converted into Series N convertible notes.
Subsequent to September 30, 2018,Other than disclosed above, the Company raised a further $680,000 byhas evaluated subsequent events through the issuance of Series N Convertible Notes indate the principal amount of $680,000unaudited condensed consolidated financial statements were available to a further 7 accredited investors, which notes are convertible intothe Company’s common stock at a conversion price of $0.08 per share together with Warrants to purchase up to a total of 8,500,000 shares of the Company’s common stock at an exercise price of $0.12 per share the. Both the conversion price under the Notesbe issued and the exercise price under the Warrants are subject to standard anti-dilution adjustment mechanisms. The Notes mature between September 30, 2019 and November 14, 2019, and the Warrants are exercisable for a period of three years from date of issuance.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, 20172018 filed with the Securities and Exchange Commission on April 18, 2018.22, 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, 2017.2018.
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 September 30, 2018March 31, 2019 and September 30, 2017.March 31, 2018.
Revenues were $270,370$82,015 and $648,298$113,302 for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, a decrease of $377,928$31,287 or 58.3%27.6%.
Revenue from patient treatment was $0 and $29,190 for the three months ended March 31, 2019 and 2018, respectively, a decrease of $29,190 or 100%. The decrease is primarily due to the relocation of the Company’s treatment operations to a significantly larger West Palm Beach facility from the Delray Beach facility and delays in attracting new patients to our new facility. The Company adjustingis actively building up its basis of providing against gross revenues on the limited experience it has had with dealing with US Health care providers. customer contact base to increase patient revenues.
Revenue includesfrom rental income of $82,346was $82,015 and $83,837$84,112 for the three months ended September 30,March 31, 2019 and 2018, respectively, a decrease of $2,097 or 2.5%. The decrease is due to foreign currency movements between the two periods.
Operating Expenses
Operating expenses were $1,476,513 and 2017. The revenue$531,846 for the three months ended September 30,March 31, 2019 and 2018, includes sub-letting revenue of $202,480 of our 5400 East avenue facility, this is not regarded as core business and has not been reported as part of the rental operations segment. Due to the increase of the revenue reserve, based on claims experience, the revenues for the three months ended September 30, 2018 was negative. Patient revenue has decreased, however this is primarily due to the relocation of the main treatment facility to 5400 East Avenue, West Palm Beach, patient revenue is expected to increase in the near term.
Operating Expenses
Operating expenses were $1,197,675 and $504,451 for the three months ended September 30, 2018 and 2017, respectively, an increase of $693,224$944,667 or 137.4%177.6%. The increase is primarily due to the following:
● |
● |
Operating (loss) income
● | Management fees of $0 and $46,533 for the three months ended March 31, 2019 and 2018, respectively, decreased by $46,533 or 100%, our CEO did not charge any fees during the current period to facilitate cash flow. |
● | Professional fees of $44,154 and $38,010 for the three months ended March 31,, 2019 and 2018, respectively, increased by $6,144 or 16.2%, the slight increase is due to activity around the disposal of the property located at 801 Andrews Avenue, Delray Beach, Florida. |
● | Salaries and wages of $404,264 and $185,156 for the three months ended March 31, 2019 and 2018, respectively, increased by $219,108 or 118.3%, 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 $75,876 and $68,415 for the three months ended March 31, 2019 and 2018, respectively, an increase of $7,461 or 10.9%, the increase is attributable to additional depreciation on the leasehold improvements affected on the East Avenue properties at the end of the prior year. Depreciation consists primarily of depreciation on property, plant and equipment related to the acquisition of the assets of Seastone of Delray and the acquisition of CCH, which owns the buildings in which Canadian Addiction Residential Treatment, now operates. |
Operating loss
The operating loss was $(927,305)$1,394,498 and a profit of $143,847$418,544 for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, an increase in loss of $1,071,152, primarily due$975,954 or 233.2%. The increase is attributable to the reductiondecrease in revenue based on the provisions established against collectability and the increasedincrease in rent, property taxes and other operating expenses as discussed above.
Other
Interest income
Other
Interest income was $6,009of $15,277 and $0$49 for the three months ended September 30,March 31, 2019 and 2018, andrespectively, an increase of $15,228. The interest earned in the current period relates to the escrow deposit on the sale of the Muskoka business in the 2017 respectively.year.
Interest expense
Interest expense was $225,205of $345,098 and $86,371$170,451 for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, an increase of $138,834$174,647 or 160.7%, the increase is102.5% was primarily due to interest due on the new mortgage loans which replacedincrease in convertible note funding during the mortgage loans assumed by the Company when it acquired Cranberry Cove Holdings, Ltdprior year of a net $3,337,889 and on the purchase money mortgage loan entered into to acquire the properties associated with Seastonea further increase in net convertible note funding of Delray, also includes additional interest expense incurred on the convertible notes taken out$1,043,197 during the current period. The funding was used for general working capital purposes.
Debt Discount discount
Debt discount amortized was $1,195,638$761,942 and $13,052$752,949 for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, an increase of $1,182,586 and$8,993 or 1.2%. The charge during the current period represents the amortization of the value of the convertible notes and warrants issued inover the terms of the convertible loan agreements entered into during 2017 and the current period The Company raised a total of $3,130,000 of net proceeds from convertible notesand during the current period.
Derivative liability movement
Derivative liability movement was $37,951 and $(19,329) for the three months ended September 30, 2018 and 2017, respectively, a net change of $57,280. This movement represents the mark to marketamortization of the derivative liabilities arising onfair value of the beneficial conversion feature of the variable pricedconvertible notes issued to note holders during the current period and 2018. The fair value of the prior year.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 during the current year represents the mark to market movements of variably priced convertible notes and warrants issued during the current and prior years. 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 were $(95,292)of $(129,118) and $53,294$137,896 for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, and represents predominantly unrealizedthe realized exchange gains and losses(losses) on intercompanymonetary assets and liabilities and assets of our various subsidiaries. The Canadian Dollar has been strengthening against the US Dollarsettled during the current period giving riseyear as well as mark to market adjustments on monetary assets and liabilities reflected on the foreignbalance sheet and denominated in Canadian Dollars. The average exchange loss.rate utilized during the current year of $0.7522 weakened by 3.0% from $0.7756 in the prior period.
Net loss
Net loss from discontinued operations
The net income from discontinued operations of $0$(3,088,680) and $218,253$(1,216,155) for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, represents professional fees, foreign currency losses and penalty expenses on our discontinued operation which was disposed of on February 14, 2017.
Net loss
Net loss was $(2,394,145) and $(139,864) for the three months ended September 30, 2018 and 2017, respectively, an increase of $2,254,281,$1,872,525 or 154.0%, is primarily due to the increase in operating expenses in the current period, the increase in interest expense over the prior period and the amortization of debt discount duringincrease in the derivative liability movement and the foreign exchange gain in the prior period compared to a loss in the current period discussed above.
For the nine months ended September 30, 2018 and September 30, 2017.Contingency related to outstanding payroll tax liabilities
Revenue
Revenues was $450,366 and $1,373,028 for the nine months ended September 30, 2018 and 2017, respectively, a decrease of $922,662 or 67.2%. The decrease is primarilyCompany has also not filed certain foreign assets forms due to the Company adjusting its basisUS Federal Government. A provision of providing against gross revenues on the limited experience it has had with dealing with US Health care providers. Revenue includes rental income$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 $250,174$1,108,287 and $203,962provided by operations of $223,067 for the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, the increase is due to the lease agreement being in operation for only seven and a half months in the previous period and the full nine months in the current period. The revenue for the nine months ended September 30, 2018, includes sub-letting revenue of $202,480 of our 5400 East avenue facility, this is not regarded as core business and has not been reported as part of the rental operations segment. Patient revenue hasrespectively decreased however this is primarily due to the relocation of the main treatment facility to 5400 East Avenue, West Palm Beach, patient revenue is expected to increase in the near term
Operating Expenses
Operating expenses were $2,524,987 and $1,802,284 for the nine months ended September 30, 2018 and 2017, respectively, an increase of $722,703by $1,331,354 or 40.1%596.8%. The increasedecrease is primarily due to the following:
● |
● | the movement in |
○ | the derivative liability movement of |
● | ||
Operating loss
Operating loss was $2,074,621Cash used in investing activities of $10,834 and $429,256$286,912 for the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, respectively, an increase in lossa decrease of $1,645,365, primarily due to the reduction in revenue based on the provisions established against collectability of receivables and the rental expense incurred during the current period, as discussed above.
Other income
Other income was $6,009 and $463,368 for the nine months ended September 30, 2018 and 2017, respectively.$276,078 or 96.2%. In the prior period a provision raised against a receivable from the Endoscopy clinic was reversed upon the assignment of the receivable to Leon Developments.
Other expense
Other expense was $0 and $5,093,953 for the nine months ended September 30, 2018 and 2017, respectively, a decrease of $5,093,953. Other expense in the prior period, consists of the excess of the purchase price paid over the carry over basis value of the assets of Cranberry Cove Holdings Ltd. This expenditure is classified as once-off compensation expense to our CEO who owns 100% of Leon Developments, the counterparty to the purchase of the Cranberry Cove Subsidiary
Interest income
Interest income was $5,334 and $32,074 for the nine months ended September 30, 2018. Interest income was earned on the proceeds due on the disposal of the endoscopy Clinic in the prior period.
Interest expense
Interest expense was $572,243 and $242,992 for the nine months ended September 30, 2018 and 2017, respectively, an increase of $329,251 or 135.5%, the increase is primarily due to interest due on the new mortgage loans which replaced the mortgage loans assumed by the Company when it acquired Cranberry Cove Holdings, Ltd and on the purchase money mortgage loan entered into to acquire the properties associated with Seastone of Delray, also includes additional interest expense incurred on the convertible notes entered into during the current period.
Debt Discount
Debt discount was $3,288,472 and $442,377 for the nine months ended September 30, 2018 and 2017, respectively, an increase of $2,846,095 or 643.4% and represents the amortization of the value of the convertible notes and warrants issued in terms of the convertible loan agreements entered into during 2017 and the current period, The Company raised a total of $3,130,000 of net proceeds from convertible notes during the current period.
Derivative liability movement
Derivative liability movement was $(771,000) and $75,203 for the nine months ended September 30, 2018 and 2017, respectively, a net change of $846,203. This movement represents the mark to market of the derivative liabilities arising on the beneficial conversion feature of the variable priced notes issued to note holders during the current period and the prior year.
Foreign exchange movements
Foreign exchange movements were $153,232 and $(111,052) for the nine months ended September 30, 2018 and 2017, respectively, and represents predominantly unrealized gains and losses on intercompany liabilities and monetary assets of our various subsidiaries.
Net loss from discontinued operations
The net income from discontinued operations of $0 and $7,194,389 for the nine months ended September 30, 2018 and 2017, respectively consists primarily of the $7,494,828 gain made on the sale of the Canadian Rehab Center in the prior period, offset by the net operating loss incurred in the prior period of $300,439.
Net (loss) income
Net (loss) income was $(6,541,761) and $1,455,404 for the nine months ended September 30, 2018 and 2017, respectively, an increase in loss of $7,997,165, primarily due to the reduction in revenue, the gain realized on the disposal of the Canadian Rehab Center in the prior period, offset by the increase in other expenses related to the excess purchase price paid over the assets under common control of our CEO, in the prior period, offset by the increase in the amortization of debt discount and derivative liability movements in the current period.
Liquidity and Capital Resources
The following table summarizes working capital as of September 30, 2018 and December 31, 2017.
September 30, 2018 | December 31, 2017 | Change | ||||||||||
Current Assets | $ | 278,957 | $ | 334,619 | $ | (55,662 | ) | |||||
Current Liabilities | (12,421,602 | ) | (6,860,178 | ) | (5,561,424 | ) | ||||||
Working capital Deficit | $ | (12,142,645 | ) | $ | (6,525,559 | $ | (5,617,086 | ) |
The Company borrowed an additional $3,130,000 and repaid $586,000 during the current period, for general working capital purposes and to pay deposits on real estate of $286,912, while attempting to close the overallpurchase of 5400 East Avenue, West Palm Beach, Florida.
Cash generated by financing activities was $1,008,720 and $232,334, an increase inof $776,386 or 334.2%. The Company raised an additional net $773,197 from convertible loans also includesnotes over the amortization of debt discount amountingprior period to $3,288,472 duringfund working capital purposes
Over the current period. Wenext twelve months we estimate that the Companycompany will require an additional $3,000,000 forapproximately $2.5 million in working capital purposes.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 be requiredhave to raise additional equity or secure debt. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, the Company’s liquidity risk is assessed as high and remains unchanged from the prior year.medium.
On April 30, 2019, the Company concluded the sale of the real property located at 801 Andrews Avenue, Delray beach consisting of land and condominiums thereon, for gross proceeds of $3,500,000. The proceeds were used to settle the outstanding mortgage loan of $2,987,568, including interest thereon, commissions and expenses related to the sale of the property of approximately $183,819, and certain outstanding property taxes of $77,523. The net proceeds received by the company of $251,000 was used to repay a portion of the convertible debt.
In addition, we raised an additional CDN$255,000 and a further US$175,000 which together with proceeds of US$70,000 and CDN$75,000 received prior to March 31, 2019 were converted into Series N convertible notes.
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 September 30, 2018March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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.
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.
Not applicable.
Exhibit No. Description |
31.1 | Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002 * |
32.1 | Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 * |
101.INS XBRL Instance *
101.SCH XBRL Taxonomy Extension Schema * 101.CAL XBRL Taxonomy Extension Calculation * 101.DEF Taxonomy Extension Definition * 101.LAB Taxonomy Extension Labels *
101. PRE Taxonomy Extension Presentation *
* filed herewith
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ETHEMA HEALTH CORPORATION
Date: November 19, 2018May 15, 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), |
|
Shawn Leon | Chief Financial Officer (Principal Financial Officer), President and Director | |
/s/ John O’Bireck | Director | |
John O’Bireck | ||
/s/ Gerald T. Miller | Director | |
Gerald T. Miller |
36