The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Ethema
Health Corporation (the “Company”) was incorporated under the laws of the state of Colorado, USA, on April 1, 1993.
Effective April 4, 2017, the Company changed its name to Ethema Health Corporation and prior to that, on May 2012, the Company
had changed its name to GreeneStone Healthcare Corporation from Nova Natural Resources Corporation. As of December 31, 2017, the
Company owned 100% of the outstanding shares of GreeneStone Clinic Muskoka Inc., incorporated in 2010 under the laws of the Province
of Ontario, Canada; Cranberry Cove Holdings Ltd., incorporated on January 9, 2004 under the laws of the Province of Ontario, Canada;
Addiction Recovery Institute of America (“ARIA”) (formerly Seastone Delray Healthcare, LLC), incorporated on May 17,
2016 under the laws of Florida, USA; and Delray Andrews RE, LLC, incorporated on May 17, 2016 under the laws of Florida, USA.
During
December 2016, the Company obtained a license to operate and provide addiction treatment healthcare services in Florida, USA.
The company commenced operations under this license with effect from January 2017.
On
February 14, 2017, the Company completed a series of transactions (referred to collectively as the “Restructuring Transactions”),
including a Share Purchase Agreement (the “SPA”) whereby the Company acquired 100% of the stock of CCH, which holds
the real estate on which the Company previously operated a rehabilitation clinic (“the Canadian Rehab Clinic”). The
Company entered into an Asset Purchase Agreement (the “APA”) and lease (the “Lease”) whereby the Company
sold all of the Canadian Rehab Clinic business assets and leased the real estate to the buyer. Simultaneously with this transaction,
the Company entered into a Real Estate Purchase agreement and Asset Purchase Agreement whereby the Company purchased the real
estate and business assets of Seastone Delray (the “Florida Purchase”).
The
Share Purchase Agreement
Under
the SPA, the Company acquired 100% of the stock of CCH from Leon Developments
Ltd. (“Leon Developments”), a company wholly owned by Shawn E. Leon, who is the President, CEO, and CFO of the Company
(“Mr. Leon”). CCH owns the real estate on which the Canadian Rehab Clinic is located. The total consideration paid
by the Company was CDN$3,517,062, including the assumption of certain liabilities of CCH, which was funded by the assignment to
Leon Developments of certain indebtedness owing to the Company in the amount of CDN$659,918, and the issuance of 60,000,000 shares
of the Company’s common stock to Leon Developments, valued at US$0.0364 per share.
The
Asset Purchase Agreement and Lease
Under
the APA, the assets of the Canadian Rehab Clinic were sold by the Company, through its subsidiary, GreeneStone Clinic Muskoka
Inc. (“Muskoka”), to Canadian Addiction Residential Treatment LP (the “Purchaser”), for a total consideration
of CDN$10,000,000, plus an additional payment of up to CDN$3,000,000 as a performance payment to be received in 2019 if certain
clinic performance metrics are met. The Purchaser completed the sale with cash proceeds to the Company of CDN$10,000,000, of which
CDN$1,500,000 was to remain in escrow for up to two years to cover indemnities given by the Company. The proceeds of the Muskoka
clinic asset sale were used to pay down certain tax debts and operational costs of the Company and to fund the Florida Purchase,
mentioned below.
Through
the APA, substantially all of the assets of the Canadian Rehab Clinic were sold, leaving Ethema with only the underlying clinic
real estate, which the Company, through its newly acquired subsidiary, CCH, concurrently leased to the Purchaser. The Lease is
a triple net lease and provides for a five (5) year primary term with three (3) five-year renewal options, annual base rent for
the first year at CDN$420,000 with annual increases, an option to tenant to purchase the leased premises and certain first refusal
rights.
The
Florida Purchase
Immediately
after closing on the sale of the assets of the Canadian Rehab Clinic, the Company closed on the acquisition of the real estate
assets of Seastone Delray pursuant to certain real estate and asset purchase agreements The purchase price for the Seastone assets
was US$6,070,000 financed with a purchase money mortgage of US$3,000,000, and US$3,070,000 in cash.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies
|
Basis of presentation
The
(a) unaudited condensed consolidated balance sheets as of September 30, 2019, which have been derived from the unaudited condensed
consolidated financial statements, and as of December 31, 2018, which have been derived from audited consolidated financial statements,
and (b) the unaudited condensed consolidated statements of operations and cash flows of the Company, have been prepared in accordance
with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and
the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September
30, 2019 are not necessarily indicative of results that may be expected for the year ending December 31, 2019. These unaudited
condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company’s Form 10-K/A for the year ended December 31, 2018, filed with the Securities and
Exchange Commission (“SEC”) on April 22, 2019.
All
amounts referred to in the notes to the unaudited condensed consolidated financial statements are in United States Dollars ($)
unless stated otherwise.
The
preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those
estimates.
|
b)
|
Principles
of consolidation and foreign currency translation
|
The
accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries.
All intercompany transactions and balances have been eliminated on consolidation.
Certain
of the Company’s subsidiaries functional currency is the Canadian dollar, while the Company’s reporting currency is
the U.S. dollar. All transactions initiated in Canadian dollars are translated into US dollars in accordance with ASC 830, “Foreign
Currency Translation” as follows:
|
●
|
Monetary
assets and liabilities at the rate of exchange in effect at the balance sheet date.
|
|
●
|
Equity
at historical rates.
|
|
●
|
Revenue
and expense items and cash flows at the average rate of exchange prevailing during the period.
|
Adjustments
arising from such translations are deferred until realization and are included as a separate component of stockholders’
deficit as a component of accumulated other comprehensive income or loss. Therefore, translation adjustments are not included
in determining net income (loss) but reported as other comprehensive income (loss).
For
foreign currency transactions, the Company translates these amounts to the Company’s functional currency at the exchange
rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time actual payment is made,
a foreign exchange transaction gain or loss results which is included in determining net income for the period.
The
relevant translation rates are as follows: For the nine months ended September 30, 2019, a closing rate of CDN$1.00 equals US$0.7551
and an average exchange rate of CDN$1.00 equals US$0.7523. For the nine months ended September 30, 2018, a closing rate of CAD$1.00
equals US$0.7725 and an average exchange rate of CAD$1.0000 equals US$0.7651.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies (continued)
|
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 condensed 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 condensed consolidated balance sheets.
As
our performance obligations relate to contracts with a duration of one year or less, the Company elected the optional exemption
in ASC 606-10-50-14(a). Therefore, the Company is not required to disclose the transaction price for the remaining performance
obligations at the end of the reporting period or when the Company expects to recognize the revenue. The Company has minimal unsatisfied
performance obligations at the end of the reporting period as our patients typically are under no obligation to remain admitted
in our facilities.
The
Company receives payments from the following sources for services rendered in our U.S. Facility: (i) commercial insurers; and
(ii) individual patients and clients. As the period between the time of service and time of payment is typically one year or less,
the Company elected the practical expedient under ASC 606-10-32-18 and did not adjust for the effects of a significant financing
component.
The
Company derives a significant portion of its revenue from other payors that receive discounts from established billing rates.
The various managed care contracts under which these discounts must be calculated are complex, subject to interpretation and adjustment,
and may include multiple reimbursement mechanisms for different types of services provided in the Company’s in-patient facilities
and cost settlement provisions. Management estimates the transaction price on a pay or specific basis given its interpretation
of the applicable regulations or contract terms. The services authorized and provided and related reimbursement are often subject
to interpretation that could result in payments that differ from the Company’s estimates. Additionally, updated regulations
and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.
Settlements
under cost reimbursement agreements with third-party payors are estimated and recorded in the period in which the related services
are rendered and are adjusted in future periods as final settlements are determined. In the opinion of management, adequate provision
has been made for any adjustments and final settlements. However, there can be no assurance that any such adjustments and final
settlements will not have a material effect on the Company’s financial condition or results of operations. The Company’s
accounts receivables were $164,148 and $202,654 for the nine months ended September 30, 2019 and year ended December 31, 2018,
respectively, and were included in other current assets in the consolidated balance sheets. Management believes that these receivables
are properly stated and are not likely to be settled for a significantly different amount. The net adjustments to estimated accounts
receivable settlements resulted in a decrease in revenues of $0 and $262,353 for the nine months ended September 30, 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’s revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount
that reflects the consideration that the Company expects to receive in exchange for those services. The Company derives its revenues
from the sale of its services, as defined below. The Company applies the following five steps in order to determine the appropriate
amount of revenue to be recognized as it fulfills its obligations under each of its revenue transactions:
|
i.
|
identify
the contract with a customer;
|
|
ii.
|
identify
the performance obligations in the contract;
|
|
iii.
|
determine
the transaction price;
|
|
iv.
|
allocate
the transaction price to performance obligations in the contract; and
|
|
v.
|
recognize
revenue as the performance obligation is satisfied.
|
The
Company has two operating segments from which it derives revenues which is recognized on the basis described below.
In
terms of the lease agreement, on a monthly basis as long as the facility is utilized by the tenant
The
patients have been treated and provided with services by the Company; there is clear evidence that an arrangement exists; the
amount of revenue and related costs can be measured reliably; and it is probable that the economic benefits associated with the
transaction will flow to the Company.
|
d)
|
Non-monetary
transactions
|
The
Company’s policy is to measure an asset exchanged or transferred in a non-monetary transaction at the more reliable measurement
of the fair value of the asset given up and the fair value of the asset received, unless:
|
●
|
The
transaction lacks commercial substance;
|
|
●
|
The
transaction is a transfer between entities under common control;
|
|
●
|
The
transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property
to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange;
|
|
●
|
Neither
the fair value of the asset received nor the fair value of the asset given up is reliably measurable; or
|
|
●
|
The
transaction is a non-monetary, non-reciprocal transfer to owners that represents a spinoff or other form of restructuring
or liquidation.
|
|
e)
|
Cash
and cash equivalents
|
The
Company’s policy is to disclose bank balances under cash, including bank overdrafts with balances that fluctuate frequently
from being positive to overdrawn and term deposits with a maturity period of three months or less from the date of acquisition.
The Company had no cash equivalents at September 30, 2019 and December 31, 2018.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies (continued)
|
Accounts
receivable primarily consists of amounts due from third-party payors (non-governmental) and private pay patients and is recorded
net of allowances for doubtful accounts and contractual discounts. The Company’s ability to collect outstanding receivables
is critical to its results of operations and cash flows. Accordingly, accounts receivable reported in the Company’s unaudited
condensed consolidated financial statements is recorded at the net amount expected to be received. The Company’s primary
collection risks are (i) the risk of overestimating net revenues at the time of billing that may result in the Company receiving
less than the recorded receivable, (ii) the risk of non-payment as a result of commercial insurance companies denying claims,
(iii) the risk that patients will fail to remit insurance payments to the Company when the commercial insurance company pays out-of-network
claims directly to the patient, (iv) resource and capacity constraints that may prevent the Company from handling the volume of
billing and collection issues in a timely manner, (v) the risk that patients do not pay the Company for their self-pay balances
(including co-pays, deductibles and any portion of the claim not covered by insurance) and (vi) the risk of non-payment from uninsured
patients.
|
g)
|
Allowance
for Doubtful Accounts, Contractual and Other Discounts
|
The
Company derives the majority of its revenues from commercial payors at out-of-network rates. Management estimates the
allowance for contractual and other discounts based on its historical collection experience. The services authorized and
provided and related reimbursement are often subject to interpretation and negotiation that could result in payments that
differ from the Company’s estimates. The Company’s allowance for doubtful accounts is based on historical
experience, but management also takes into consideration the age of accounts, creditworthiness and current economic trends
when evaluating the adequacy of the allowance for doubtful accounts. An account is written off only after the Company has
pursued collection efforts or otherwise determines an account to be uncollectible. Uncollectible balances are written-off
against the allowance. Recoveries of previously written-off balances are credited to income when the recoveries are made. The
allowance for doubtful accounts was $363,068 as at September 30, 2019 and December 31, 2018.
The
Company initially measures its financial assets and liabilities at fair value, except for certain non-arm’s length transactions.
The Company subsequently measures all its financial assets and financial liabilities at amortized cost.
Financial
assets measured at amortized cost include cash and accounts receivable.
Financial
liabilities measured at amortized cost include bank indebtedness, accounts payable and accrued liabilities, harmonized sales tax
payable, withholding taxes payable, convertible notes payable, loans payable and related party notes.
Financial
assets measured at cost are tested for impairment when there are indicators of impairment. The amount of the write-down is recognized
in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting
the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had
the impairment not been recognized previously. The amount of the reversal is recognized in net income. The Company recognizes
its transaction costs in net income in the period incurred. However, financial instruments that will not be subsequently measured
at fair value are adjusted by the transaction costs that are directly attributable to their origination, issuance or assumption.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies (continued)
|
|
h)
|
Financial
instruments (continued)
|
FASB
ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. ASC 820 establishes a three tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as follows:
|
·
|
Level
1. Observable inputs such as quoted prices in active markets;
|
|
·
|
Level
2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
·
|
Level
3. Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own
assumptions.
|
The
Company measures its convertible debt and derivative liabilities associated therewith at fair value. These liabilities are revalued
periodically and the resultant gain or loss is realized through the Statement of Operations.
|
i)
|
Property,
plant and equipment
|
Fixed
assets are recorded at cost. Depreciation is calculated on the straight line basis over the estimated life of the asset:
- Buildings
|
25 years
|
|
|
- Leasehold improvements
|
over the term of the lease
|
Leases
are classified as either capital or operating leases. Leases that transfer substantially all of the benefits and
inherent risks of ownership of property to the Company are accounted for as capital leases. At the time a capital lease is
entered into, an asset is recorded together with its related long-term obligation to reflect the acquisition and financing.
Equipment recorded under capital leases is amortized on the same basis as described above. Payments under operating leases
with lease durations less than twelve months are expensed as incurred.
The
Company accounts for income taxes under the provisions of ASC Topic 740, “Income Taxes”. Under ASC
Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income taxes
are provided using the liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities. The tax basis of an asset or liability is the amount attributed
to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in
the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely
than not that some portion of, or all of, the deferred tax assets will not be realized.
ASC
Topic 740 contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a
tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that
the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second
step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.
The Company recognizes interest and penalties accrued on unrecognized tax benefits within general and administrative expense.
To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected
as a reduction in general and administrative expenses in the period that such determination is made.
The
tax returns for fiscal 2001, through 2017 are subject to audit or review by the US tax authorities, whereas fiscal 2010 through
2017 are subject to audit or review by the Canadian tax authority.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies (continued)
|
|
l)
|
Net
income (loss) per Share
|
Basic
net income (loss) per share is computed on the basis of the weighted average number of common stock outstanding during the period.
Diluted
net income (loss) per share is computed on the basis of the weighted average number of common stock and common stock equivalents
outstanding. Dilutive securities having an anti-dilutive effect on diluted net income (loss) per share are excluded from the calculation.
Dilution
is computed by applying the treasury stock method for options and warrants. Under this method, “in-the money” options
and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds
obtained thereby were used to purchase common stock at the average market price during the period. Dilution is computed by applying
the if-converted method for convertible preferred stocks. Under this method, convertible preferred stock is assumed to be converted
at the beginning of the period (or at the time of issuance, if later), and preferred dividends (if any) will be added back to
determine income applicable to common stock. The shares issuable upon conversion will be added to weighted average number of common
stock outstanding. Conversion will be assumed only if it reduces earnings per share (or increases loss per share).
|
m)
|
Stock
based compensation
|
Stock
based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense
over the employee’s requisite service period or vesting period on a straight-line basis. Share-based compensation expense
recognized in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30,
2019 and 2018 is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. This estimate will
be revised in subsequent periods if actual forfeitures differ from those estimates. We have minimal awards with performance conditions
and no awards dependent on market conditions.
The
Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to
determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative
at fair value with changes in fair value recorded in earnings. The Company uses a Black Scholes Option Pricing model to estimate
the fair value of convertible debt conversion features at the end of each applicable reporting period. Changes in the fair value
of these derivatives during each reporting period are included in the statements of operations. Inputs into the Black Scholes
Option Pricing model require estimates, including such items as estimated volatility of the Company’s stock, risk free interest
rate and the estimated life of the financial instruments being fair valued.
If
the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt
with Conversion and Other Options” for consideration of any beneficial conversion feature.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies (continued)
|
|
o)
|
Recent
accounting pronouncements
|
Adoption
of Accounting Standards
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”),
No. 2016-02, Leases (Topic 842) (ASC 842)
The
amendments in this update establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition
of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and (c) causes lessees
to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term
of more than twelve months. The new standard is effective for fiscal years and interim periods beginning after December 15, 2018,
with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the financial statements, including a number of optional
practical expedients that entities may elect to apply. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted
Improvements, an update which provides another transition method, the prospective transition method, which allows entities to
initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance
of retained earnings in the period of adoption. The Company adopted the new standard on January 1, 2019 using the prospective
transition method.
The
Company has identified all leases and reviewed the leases to determine the impact of ASC 842 on its unaudited condensed consolidated
financial statements. The Company has elected to apply the practical expedient to certain classes of leases, whereby the separation
of components of leases into lease and non-lease components is not required and all of the practical expedients to all leases,
which include not reassessing (1) whether any expired or existing contracts are or contain leases, (2) lease classification for
any expired or existing leases, and (3) initial direct costs for any existing leases. The adoption of the new standard resulted
in the recording of a right-of-use asset and a lease liability on the unaudited condensed consolidated balance sheet on January
1, 2019 of $15,986,074. The adoption of ASU 2016-02, as amended, has had no impact on the unaudited condensed consolidated statements
of operations or unaudited condensed consolidated statements of cash flows.
Recent
accounting pronouncements
The
FASB issued several updated during the period, none of these standards are either applicable to the Company or require adoption
at a future date and are not expected to have a material impact on the unaudited condensed consolidated financial statements upon
adoption.
|
p)
|
Financial
instruments Risks
|
The
Company is exposed to various risks through its financial instruments. The following analysis provides a measure of the Company’s
risk exposure and concentrations at the balance sheet date, September 30, 2019 and December 31, 2018.
Credit
risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge
an obligation. Financial instruments that subject the Company to credit risk consist primarily of accounts receivable.
Credit
risk associated with accounts receivable of ARIA is mitigated as only a percentage of the revenue billed to health insurance companies
is recognized as income until such time as the actual funds are collected. The revenue is concentrated amongst several health
insurance companies located in the US.
In
the opinion of management, credit risk with respect to accounts receivable is assessed as low.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies (continued)
|
|
p)
|
Financial
instruments Risks (continued)
|
Liquidity
risk is the risk the Company will not be able to meet its financial obligations as they fall due. The Company is exposed to liquidity
risk through its working capital deficiency of $13,826,678 accumulated deficit of $35,642,106. The Company will be dependent upon
the raising of additional capital in order to implement its business plan. There is no assurance that the Company will be successful
with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s
financial condition. In the opinion of management, liquidity risk is assessed as high, material and remains unchanged from the
prior year.
Market
risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
prices. Market risk comprises of three types of risk: interest rate risk, currency risk, and other price risk. The Company is
exposed to interest rate risk and currency risk.
Interest
rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes
in market interest rates. The Company is exposed to minimal interest rate risk as there is minimal overdraft indebtedness as
of September 30, 2019. In the opinion of management, interest rate risk is assessed as low, not material and remains
unchanged from the prior year.
Currency
risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign
exchange rates. The Company is subject to currency risk as it has subsidiaries that operate in Canada and are subject to fluctuations
in the Canadian dollar. A substantial portion of the Company’s financial assets and liabilities are denominated in Canadian
dollars. Based on the net exposures at September 30, 2019, a 5% depreciation or appreciation of the Canadian dollar against the
U.S. dollar would result in an approximate $9,400 increase or decrease in the Company’s after tax net income from operations.
The Company has not entered into any hedging agreements to mitigate this risk. In the opinion of management, currency risk is
assessed as low, material and remains unchanged from the prior year.
Other
price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors
specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in
the market. In the opinion of management, the Company is not exposed to this risk and remains unchanged from the prior year.
|
q)
|
Reclassification
of Prior Year Presentation
|
Certain
prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect
on the reported results of operations.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Company’s unaudited condensed consolidated financial statements have been prepared in accordance with US GAAP applicable
to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations in the normal
course of business. As at September 30, 2019 the Company has a working capital deficiency of $13,826,678 and accumulated deficit
of $35,642,106. Management believes that current available resources will not be sufficient to fund the Company’s planned
expenditures over the next 12 months. Accordingly, the Company will be dependent upon the raising of additional capital through
placement of common shares, and/or debt financing in order to implement its business plan, and generating sufficient revenue in
excess of costs. If the Company raises additional capital through the issuance of equity securities or securities convertible
into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those
of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company
may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional
funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain
geographical areas, or techniques that it might otherwise seek to retain. There is no assurance that the Company will be successful
with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s
financial condition. These factors create substantial doubt about the Company’s ability to continue as a going concern.
These unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification
of recorded assets and liabilities or other adjustments that may be necessary should the Company not be able to continue as a
going concern.
4.
|
Prepaid expenses and other
current assets
|
Prepaid
expenses and other current assets includes the following:
On
February 25, 2019, the Company entered into a Letter of Intent whereby it would purchase a 33.33% interest in Local Link
Wellness, LLC (“LLW”) for gross proceeds of $400,000. LLW proposes to provide a comprehensive addiction treatment
program to large employee groups. The company has advanced LLW a total of $120,000 as at September 30, 2019. These funds were
advanced as short-term promissory notes that are immediately due and payable and are classified as other current assets on
our condensed consolidated balance sheet.
5.
|
Assets held for resale
|
On
April 2, 2019, the Company entered into a Commercial Contract whereby the real property at 801 Andrews Avenue, Delray Beach, Florida,
consisting of land and condominiums thereon, was sold to JAGGM, LLC for $3,500,000. This transaction closed on April 26, 2019.
The
loss realized on the disposal was calculated as follows:
|
|
Amount
|
|
|
|
Proceeds received
|
|
$
|
3,500,485
|
|
Less: closing costs
|
|
|
(182,344
|
)
|
Net proceeds received
|
|
|
3,318,141
|
|
|
|
|
|
|
Assets sold:
|
|
|
|
|
Land
|
|
|
1,877,618
|
|
Buildings thereon
|
|
|
2,060,219
|
|
Furniture and fixtures
|
|
|
72,792
|
|
|
|
|
4,010,629
|
|
|
|
|
|
|
Loss on disposal
|
|
$
|
692,488
|
|
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6.
|
Deposit on real estate
|
On
November 2, 2017, the Company entered into an Agreement to purchase from AREP 5400 East Avenue LLC certain buildings in West Palm
Beach, Florida, totaling approximately 80,000 square feet, on which the present tenant operates a substance abuse treatment center.
The purchase price of the Property is $20,530,000. The Company made a series of nonrefundable down payments totaling $2,924,955
as of September 30, 2019 and $2,940,546 as of December 31, 2018. On May 23, 2018, the Company converted the agreement
to purchase AREP 5400 East Avenue LLC. (“the landlord”) into a lease agreement with a purchase option of $17,250,000,
increasing by $750,000 per month, commencing on August 31, 2018, until the purchase option is exercised. The premises is located
at 5400, 5402 and 5410 East Avenue, West Palm Beach, Florida (the “Property”). The lease is for an initial 10 years
and provides for two additional 10 year extensions.
The
Company was previously under agreement to purchase the property from the landlord. The property is presently used as
a rehabilitation treatment center. The current tenant at the property, Alternatives in Treatment, LLC, a Florida
limited liability company, consented to the Lease and concurrent with the execution of the Lease entered into a Sublease
Agreement with the Company. The Company intends to make investments and enter into joint venture arrangements with
established addiction recovery businesses based in the US and leverage of these investments and arrangements to bring patient
into its leased facility.
7.
|
Due on sale of business
|
On
February 14, 2017, the Company sold its Canadian Rehab Clinic for gross proceeds of CDN$10,000,000, of which CDN$1,500,000 had
been retained in an escrow account for a period of up to two years in order to guarantee the warranties provided by the Company
in terms of the APA. As of September 30, 2019, CDN$1,055,042 of the escrow had been refunded to the Company and CDN$365,268 had
been used to affect building improvements to the premises owned by CCH, for a total reduction of CDN$1,420,310. The remaining
escrow balance was CDN$100,000 consisting of principal of CDN$76,690 and accrued interest thereon of CDN$20,310.
8.
|
Property, plant and equipment
|
Property, plant
and equipment consists of the following:
|
|
September 30,
2019
|
|
December 31, 2018
|
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net book value
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,038,661
|
|
|
$
|
—
|
|
|
$
|
1,038,661
|
|
|
$
|
2,911,530
|
|
Property
|
|
|
4,023,914
|
|
|
|
(444,961
|
)
|
|
|
3,578,953
|
|
|
|
5,750,045
|
|
Leasehold improvements
|
|
|
271,074
|
|
|
|
(21,783
|
)
|
|
|
249,291
|
|
|
|
251,774
|
|
Furniture and fixtures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,000
|
|
|
|
$
|
5,333,649
|
|
|
$
|
(466,744
|
)
|
|
$
|
4,866,905
|
|
|
$
|
8,948,349
|
|
Depreciation expense
for the three months ended September 30, 2019 and 2018 was $47,104 and $67,929, respectively, and for the nine months ended September
30, 2019 and 2018 was $179,399 and $204,384, respectively.
Adoption of ASC Topic
842, Leases
On January 1,
2019, the Company adopted Topic 842 using the modified retrospective method applied to leases that were in place as of January 1,
2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior
period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. The Company's
leases consists of operating leases that relate to real estate rental agreements. All of the value of the Company's lease portfolio
relates to a real estate lease agreement that was entered into in May 2018.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Practical
Expedients and Elections
The
Company elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward
our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs
for any leases that exist prior to adoption of the new standard. We also elected the short-term lease recognition exemption for
all leases that qualify.
Discount
Rate applied to property operating lease
To
determine the present value of minimum future lease payments for operating leases at January 1, 2019, the Company was required
to estimate a rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal
to the lease payments in a similar economic environment (the "incremental borrowing rate" or "IBR").
The
Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing
options and certain lease-specific circumstances. For the reference rate, the Company used the average of (i) the risk free interest
rate adjusted for a premium for Company and liquidity risk; (ii) the weighted average mortgage interest rate currently availed
to the Company; and (iii) the fifteen year mortgage interest rate. The weighted average rate the Company determined was 4.76%
as an appropriate incremental borrowing rate to apply to its real-estate operating lease.
Right of use assets
Right of use assets
are included in the unaudited condensed consolidated Balance Sheet are as follows:
|
|
September 30,
2019
|
|
|
|
Non-current assets
|
|
|
|
|
Right of use assets, operating leases, net of amortization
|
|
$
|
15,200,632
|
|
Total
operating lease cost
Individual
components of the total lease cost incurred by the Company is as follows:
|
|
Nine
months
ended
September 30,
2019
|
|
|
|
|
|
Operating lease expense
|
|
$
|
1,602,936
|
|
|
|
|
|
|
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
|
|
$
|
458,965
|
|
2020
|
|
|
1,882,422
|
|
2021
|
|
|
1,962,242
|
|
2022
|
|
|
2,042,062
|
|
2023 and thereafter
|
|
|
12,436,420
|
|
Total undiscounted minimum future lease payments
|
|
|
18,782,111
|
|
Deferred rental liability on straight line amortization
|
|
|
259,299
|
|
Imputed interest
|
|
|
(3,581,480
|
)
|
Total operating lease liability
|
|
$
|
15,459,930
|
|
|
|
|
|
|
Disclosed as:
|
|
|
|
|
Current portion
|
|
$
|
889,385
|
|
Non-current portion
|
|
|
14,570,545
|
|
|
|
$
|
15,459,930
|
|
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The taxes payable consist
of:
|
●
|
A
payroll tax liability of $137,876 (CDN$182,589) in Greenestone Muskoka which has not been settled as yet.
|
|
●
|
The
Company has assets and operates businesses in Canada and is required to disclose these operations to the US taxation authorities,
the requisite disclosure has not been made. Management has reserved the maximum penalty due to the IRS in terms of non-disclosure.
This non-compliance with US disclosure requirements is currently being addressed. An amount of $250,000 has been accrued for
any potential exposure the Company may have.
|
|
●
|
Estimated
income taxes payable in certain of the Canadian operations.
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
|
|
|
Payroll taxes
|
|
$
|
137,876
|
|
|
$
|
133,843
|
|
HST/GST payable
|
|
|
15,184
|
|
|
|
33,757
|
|
US penalties due
|
|
|
250,000
|
|
|
|
250,000
|
|
Income tax payable
|
|
|
368,572
|
|
|
|
357,792
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
771,632
|
|
|
$
|
775,392
|
|
The
convertible notes consist of the following:
|
|
Interest
rate
|
|
Maturity date
|
|
Principal
|
|
Interest
|
|
Debt Discount
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leonite Capital LLC
|
|
|
11.0
|
%
|
|
December 31,
2019
|
|
$
|
2,212,731
|
|
|
$
|
66,265
|
|
|
$
|
—
|
|
|
$
|
2,278,996
|
|
|
$
|
2,494,180
|
|
|
|
|
1.0
|
%
|
|
September 10, 2019
|
|
|
60,000
|
|
|
|
58
|
|
|
|
—
|
|
|
|
60,058
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power Up Lending Group Ltd
|
|
|
9.0
|
%
|
|
May 15,2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
94,595
|
|
|
|
|
9.0
|
%
|
|
September 10, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,484
|
|
|
|
|
9.0
|
%
|
|
November 15, 2019
|
|
|
18,000
|
|
|
|
6,239
|
|
|
|
(3,260
|
)
|
|
|
20,979
|
|
|
|
—
|
|
|
|
|
9.0
|
%
|
|
April 30, 2020
|
|
|
53,000
|
|
|
|
1,098
|
|
|
|
(38,010
|
)
|
|
|
16,088
|
|
|
|
—
|
|
|
|
|
9.0
|
%
|
|
April 30, 2020
|
|
|
83,000
|
|
|
|
1,576
|
|
|
|
(60,962
|
)
|
|
|
23,614
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Fire Global Opportunities Fund
|
|
|
12.0
|
%
|
|
December 9, 2019
|
|
|
193,500
|
|
|
|
5,709
|
|
|
|
(45,991
|
)
|
|
|
153,218
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actus Fund, LLC
|
|
|
10.0
|
%
|
|
May 7, 2020
|
|
|
225,000
|
|
|
|
3,375
|
|
|
|
(180,657
|
)
|
|
|
47,718
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labrys Fund, LP
|
|
|
12.0
|
%
|
|
January 8, 2020
|
|
|
282,000
|
|
|
|
7,788
|
|
|
|
(153,261
|
)
|
|
|
136,527
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series N convertible notes
|
|
|
6.0
|
%
|
|
May 17, 2019 to September 16, 2020
|
|
|
3,229,000
|
|
|
|
182,230
|
|
|
|
(717,718
|
)
|
|
|
2,693,512
|
|
|
|
1,770,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,430,710
|
|
|
$
|
4,403,473
|
|
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11.
|
Convertible notes (continued)
|
Leonite Capital,
LLC
On
December 1, 2017, the Company closed on a private offering to raise US $1,500,000 in capital. The Company issued one senior secured
convertible promissory note with a principal amount of $1,650,000 to Leonite Capital, LLC (“Leonite”). The note is
convertible into shares of common stock at a conversion price of $0.06 per share, subject to anti-dilution and price protection.
The Note bears interest at the rate of 8.5% per annum. The Note’s amended maturity date was December 1, 2018. During the
term of the Note the Company and the Subsidiaries was obligated to make monthly payment of accrued and unpaid interest. The
Note contains Company and Subsidiary representations and warranties, covenants, events of default, and registration rights. The
Company paid a commitment fee of $132,000 settled through the issue of 1,650,000 shares of common stock and paid $20,000 towards
the lenders legal fees. In conjunction with this note, the Company issued a five year warrant to purchase 27,500,000 shares of
common stock at an exercise price or $0.10 per share, subject to antidilution and price protection.
The
Note provided that the parties use reasonable best efforts to close on the remaining $1,200,000 of availability under the Note
by January 1, 2018. As a condition to the closing of the Balance Tranche, the parties must finalize and enter into additional
agreements related to the Private Offering, including, but not limited to, (i) a Securities Purchase Agreement; (ii) a Warrant
Agreement under which the Investor will have the right to purchase up to 27,500,000 shares of the Company’ common stock
for $0.10 per share, subject to adjustment, for a period of five years; (iii) a Securities Pledge Agreement under which the Company
and the Subsidiaries will grant the lender a blanket lien on their assets, and the Company will pledge its equity ownership in
the Subsidiaries. Upon the closing of the Balance Tranche the maturity date of the Note was to become December 1, 2018.
On
December 29, 2017, effective as of December 1, 2017, the Company and the Subsidiaries entered into an Amended and Restated Senior
Secured Convertible Promissory Note, which note amended and restated the Note to (a) extend the maturity date to December 1, 2018;
(b) remove CCH, as an obligor; (c) increase the interest rate by 2.00% per annum, to 8.5% per annum; and (d) issue an additional
250,000 shares of the Company’s common stock to the Investor. In connection with the execution of the amendment, the parties
entered into (i) a Securities Purchase Agreement; (ii) a Warrant Agreement under which the Investor will have the right to purchase
up to 27,500,000 shares of the Company’ common stock for $0.10 per share, subject to adjustment, for a period of five years;
(iii) a Security and Pledge Agreement and a General Security Agreement under which the Company and the Subsidiaries will grant
the Investor a blanket lien on their assets, and the Company will pledge its equity ownership in the Subsidiaries; effective January
2, 2018.
At
the execution of the Note, the Investor funded an initial tranche of $300,000. Thereafter the Investor funded a second tranche
of $156,136. Upon the execution of the A&R Note the Investor funded a third tranche of $100,000. Upon the execution of the
First Amendment the Investor funded a final tranche of $850,000, with the remaining $93,764 of availability under the A&R
Note, as amended, serving as a holdback pursuant to the terms of the First Amendment.
On
March 12, 2018, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory
Note in the aggregate principal amount of $330,000, including an Original Issue Discount of $30,000, for net proceeds of $300,000.
The note had a maturity date of March 19, 2018. The outstanding principal amount of the note was convertible at any time and from
time to time at the election of the purchaser following the issue date into shares of the Company’s common stock at a conversion
price equal to $0.06 per share subject to anti-dilution and price protection. The Company paid a commitment fee of $19,800 settled
through the issue of 330,000 shares of common stock. This note was repaid on the maturity date for gross proceeds of $330,000.
On
March 29, 2018, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory
Note in the aggregate principal amount of $165,000, including an Original Issue Discount of $15,000, for net proceeds of $150,000.
The note had a maturity date of December 1, 2018 and bears interest at a rate of 8.5% per annum. The outstanding principal amount
of the note is convertible at any time and from time to time at the election of the purchaser following the issue date into shares
of the Company’s common stock at a conversion price equal to $0.06 per share subject
to anti-dilution and price protection. The Company paid a commitment fee of $11,550 settled through the issue of 165,000 shares
of common stock. In conjunction with this note the Company issued a five year warrant to purchase 5,500,000 shares of common stock
at an exercise price of $0.10 per share, subject to anti-dilution and price protection.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11.
|
Convertible notes (continued)
|
Leonite Capital,
LLC (continued)
On
April 17, 2018, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory
Note in the aggregate principal amount of $605,000, including an Original Issue Discount of $55,000, for net proceeds of $550,000.
The note had a maturity date of December 1, 2018 and bears interest at 8.5% per annum. The outstanding principal amount of the
note is convertible at any time and from time to time at the election of the purchaser following the issue date into shares of
the Company’s common stock at a conversion price equal to $0.06 per share subject to price protection and anti-dilution
protection. The Company paid a commitment fee of $42,350 settled through the issue of 10,083,333 shares of common stock. In conjunction
with this note the Company issued a five year warrant to purchase 10,083,333 shares of common stock at an exercise price of $0.10
per share, subject to anti-dilution and price protection.
On
November 5, 2018, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible
Promissory Note in the aggregate principal amount of $111,111, including an Original Issue Discount of $11,111, for net proceeds
of $100,000. The note had a maturity date of November 30, 2018 and bore interest at 1.0% per annum. The outstanding principal
amount of the note was convertible at any time and from time to time at the election of the purchaser following the issue date
into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to price protection and
anti-dilution protection. The Company paid a commitment fee of $8,889 settled through the issue of 111,111 shares of common stock.
In conjunction with this note the Company issued a five year warrant to purchase 1,400,000 shares of common stock at an exercise
price of $0.10 per share, subject to anti-dilution and price protection. This note was repaid on the maturity date for gross proceeds
of $111,184.
On
January 17, 2019, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued
a Convertible Promissory Note in the aggregate principal amount of $71,111, including an Original Issue Discount of $7,111,
for net proceeds of $64,000. The note had a maturity date of July 25, 2019 and bears interest at 11.0% per annum. The
outstanding principal amount of the note was convertible at any time and from time to time at the election of the purchaser
following the issue date into shares of the Company’s common stock at a conversion price equal to $0.06 per share
subject to price protection and anti-dilution protection. The Company paid a commitment fee of $4,978 settled through the
issue of 71,111 shares of common stock. In conjunction with this note the Company issued a five year warrant to purchase
1,185,183 shares of common stock at an exercise price of $0.10 per share, subject to anti-dilution and price
protection.
Effective
March 19, 2019, the Company entered into a note extension agreement with Leonite, whereby the convertible notes
outstanding to Leonite, amounting to $2,420,000, for consideration of $75,000 added to the principal outstanding on the note
on January 1, 2019, a further $75,000 added to the principal outstanding on the note on February 1, 2019 and a further
$100,000 added to the principal of the note on March 15, 2019, the maturity date of all of the convertible notes above were
extended to December 31, 2019 and has subsequently been partially settled by the transfer of the property located at 810
Andrews Avenue, Delray Beach, Florida, valued at $1,500,000.
On
August 26, 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 $60,000, including an Original Issue Discount of $10,000, for net proceeds
of $47,000. The note had a maturity date of September 10, 2019 and bears interest at 1.0% per annum. The outstanding principal
amount of the note is convertible at any time and from time to time at the election of the purchaser following the issue date
into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to price protection and
anti-dilution protection. In conjunction with this note the Company issued a five year warrant to purchase 1,000,000 shares of
common stock at an exercise price of $0.10 per share, subject to anti-dilution and price protection.
Power Up Lending
Group LTD
On
July 31, 2018, the Company, entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued to
the Purchaser a Convertible Promissory Note in the aggregate principal amount of $153,000. The Note had a maturity date of May
15, 2019 and bears interest at the rate of nine percent per annum from the date on which the Note was issued until the same becomes
due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the
Note in terms of agreement.
The
outstanding principal amount of the Note is convertible at any time and from time to time at the election of the Purchaser during
the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at
a conversion price equal to 61% of the lowest closing bid price of the Company’s common stock for the ten trading days prior
to conversion. On January 28, 2019, the Company repaid the Power Up convertible note entered into on July 31, 2018 of $153,000
together with interest and early settlement penalty thereon for a payout of $207,679.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11.
|
Convertible notes (continued)
|
Power Up Lending
Group LTD (continued)
On
September 10, 2018, the Company, entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued
to the Purchaser a Convertible Promissory Note in the aggregate principal amount of $133,000. The Note had 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 had 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 had 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 was 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 July 8,
2019, the Company repaid the convertible note of $53,000 together with interest thereon and early settlement penalty for
gross proceeds of $72,000.
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 had 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 was 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 July
16, 2019, the Company repaid the convertible note of $138,000 together with interest thereon and early settlement penalty for
gross proceeds of $186,743.
On
March 6, 2019, the Company, entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued a
Convertible Promissory Note in the aggregate principal amount of $128,000. The Note has a maturity date of January 30, 2020 and
bears interest at the rate of nine percent per annum from the date on which the Note was issued until the same becomes due and
payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note
in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election
of Power Up during the period beginning on the date that is 180 days following the issue date into shares of the Company’s
common stock at a conversion price equal to 61% of the lowest closing bid price of the Company’s common stock for the ten
trading days prior to conversion. On September 18, 2019, the Company repaid $110,000 of the principal outstanding on the note.
On
July 8, 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. The Note has a maturity date of April 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.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11.
|
Convertible notes (continued)
|
Power Up Lending
Group LTD (continued)
On
July 15 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 $83,000. The Note has a maturity date of April 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.
On
September 11, 2019, in terms of a conversion notice received, the Company issued 260,416 shares of Common stock in settlement
of $6,500 of principal outstanding.
Actus Fund, LLC
On
August 7 2019, the Company, entered into a Securities Purchase Agreement with Actus Fund, LLC, pursuant to which the Company issued
a Convertible Promissory Note in the aggregate principal amount of $225,000. The Note has a maturity date of May 7, 2020 and bears
interest at the rate of ten percent per annum from the date on which the Note was issued until the same becomes due and payable,
whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms
of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of
Actus Fund, LLC during the period beginning on the date that is 180 days following the issue date into shares of the Company’s
common stock at a conversion price equal to 60% of the lowest closing bid price of the Company’s common stock for the thirty
trading days prior to conversion.
Labrys Fund, LP
On
July 8, 2019, 2019, the Company, entered into a Securities Purchase Agreement with Labrys Fund, LP, pursuant to which the Company
issued a Convertible Promissory Note in the aggregate principal amount of $282,000 for net proceeds of $253,800 after an original
issue discount of $28,200. The Note has a maturity date of January 8, 2020 and bears interest at the rate of twelve percent per
annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration
or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement. The outstanding principal amount
of the Note is convertible at any time and from time to time at the election of Labrys during the period beginning on the date
that is 180 days following the issue date into shares of the Company's common stock at a conversion price equal to 60% of the
lowest closing bid price of the Company's common stock for the thirty trading days prior to conversion. The Company was also required
to issue 2,764,706 shares of common stock, which shares will be returned to the Company if the note is repaid prior to the expiry
of 180 days from the date of issuance.
In
connection with the issuance of the convertible promissory note to Labrys Fund LP, the Company issued 2,700,000 returnable shares.
These shares are returnable if the note is paid prior to maturity date on January 8, 2020. Should the convertible note be in default
the shares will be retained by Labrys Fund, LP. The Company intends repaying the note prior to maturity, therefore the returnable
shares are not recorded as issued until the note is in default.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11.
|
Convertible notes (continued)
|
Series N convertible
notes
During
the period from May 17, 2018 to December 4, 2018, The Company closed several tranches of a private offering in which it raised
$2,505,000 in principal from 12 accredited investors through the issuance to the investors of the Company’s Series N convertible
notes, in the total original principal amount of $2,505,000, which Notes are convertible into the Company’s common stock
at a conversion price of $0.08 per share together with three year warrants to purchase up to a total of 31,312,500 shares of the
Company’s common stock at an exercise price of $0.12 per share. Both the conversion price under the Notes and the exercise
price under the warrants are subject to standard price and anti-dilution adjustment mechanisms. The notes mature between May 16,
2019 to December 3, 2019.
Between
January 28, 2019 and September 17, 2019, the Company closed several tranches of Series N Convertible notes in which it raised
$1,643,894 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 $1,643,894, 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 20,925,000 shares of the
Company’s common stock at an exercise price of $0.12 per share. Both the conversion price under the Notes and the exercise
price under the warrants are subject to standard adjustment mechanisms. The notes mature one year from the date of issuance.
On
May 15, 2019, one investor converted the aggregate principal amount of $950,000 of Series N convertible notes into 11,875,000
shares of common stock at a conversion price of $0.08 per share.
Mortgage loans payable
is disclosed as follows:
|
|
Interest
rate
|
|
|
Maturity
date
|
|
Principal
Outstanding
|
|
|
Accrued
interest
|
|
|
September
30,
2019
|
|
|
December
31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cranberry Cove Holdings,
Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pace Mortgage
|
|
|
4.2
|
%
|
|
July 19, 2022
|
|
$
|
3,938,887
|
|
|
$
|
4,986
|
|
|
$
|
3,943,873
|
|
|
$
|
3,924,836
|
|
ARIA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
5.0
|
%
|
|
February 13, 2020
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,954,786
|
|
|
|
|
|
|
|
|
|
$
|
3,938,887
|
|
|
$
|
4,986
|
|
|
$
|
3,943,873
|
|
|
$
|
6,879,622
|
|
Disclosed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110,569
|
|
|
$
|
172,276
|
|
Long-term portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,833,304
|
|
|
|
6,707,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,943,873
|
|
|
$
|
6,879,622
|
|
The
aggregate amount outstanding at September 30, 2019 is payable as follows:
|
|
Amount
|
Within one year
|
|
$
|
110,569
|
|
One to two years
|
|
|
110,064
|
|
Two to three years
|
|
|
3,723,240
|
|
Total
|
|
$
|
3,943,873
|
|
Cranberry Cove Holdings,
Ltd – Pace mortgage
On
July 19, 2017, CCH, a wholly owned subsidiary, closed on a loan agreement in the principal amount of CDN$5,500,000. The loan is
secured by a first mortgage on the premises owned by CCH located at 3571 Muskoka Road 169, Bala, Ontario (the “Property”).
The loan bears interest at the fixed rate of 4.2% with a 5-year primary term and a 25-year amortization. The Company has guaranteed
the loan and the Company’s chief executive officer and controlling shareholder also has personally guaranteed the Loan.
CCH and the Company have granted the Lender a general security interest in its assets to secure repayment of the Loan. The loan
is amortized with monthly installments of CDN $29,531.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12.
|
Mortgage loans payable
(continued)
|
ARIA
On
February 13, 2017, the Company, through its subsidiary, ARIA, entered into a Mortgage and Security Agreement to purchase the properties
located at 801 and 810 Andrews Avenue, Delray Beach, Florida, for an aggregate principal sum of $3,000,000, bearing interest at
the rate of 5% per annum, maturing on February 13, 2020, with monthly installments of $15,000.
On
April 2, 2019, the Company entered into a Commercial Contract whereby the real property at 801 Andrews Avenue, Delray Beach, Florida,
consisting of land and condominiums thereon, was sold to JAGGM, LLC for $3,500,000. This transaction closed during April 2019
and the principal mortgage liability of $2,942,526, including interest thereon was settled.
On April 12, 2019,
Eileen Greene, a related party assigned CDN1,000,000 of the amount owed by the Company to her to a third party. The loan
bears interest at 12% per annum which the Company agreed to pay.
14.
|
Derivative liabilities
|
The
short-term convertible notes, together with certain warrants issued to Leonite and the short term convertible notes disclosed
in note 11 above and note 16 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 $1,959,959 using a Black-Scholes valuation model.
The
derivative liability is marked-to-market on a quarterly basis. As of September 30, 2019, the derivative liability was valued at
$2,673,079.
The following assumptions
were used in the Black-Scholes valuation model:
|
|
Nine
months ended
September 30,
2019
|
|
|
|
Calculated stock price
|
|
|
$0.05
to $0.09
|
|
Risk free interest rate
|
|
|
1.43% to 2.56%
|
|
Expected life of convertible notes and warrants
|
|
|
3 to 60 months
|
|
expected volatility of underlying stock
|
|
|
102.3% to 206.8%
|
|
Expected dividend rate
|
|
|
0
|
%
|
The
movement in derivative liability is as follows:
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
|
|
|
Opening balance (January 1)
|
|
$
|
4,618,080
|
|
|
$
|
2,859,832
|
|
Derivative liability on issued convertible notes and variable priced warrants
|
|
|
1,185,272
|
|
|
|
1,335,709
|
|
Fair value adjustments to derivative liability
|
|
|
(3,130,273
|
)
|
|
|
422,539
|
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
$
|
2,673,079
|
|
|
$
|
4,618,080
|
|
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
15.
|
Related party transactions
|
Shawn
E. Leon
As
of September 30, 2019 and December 31, 2018 the Company had a receivable of $34,761 and $32,650, respectively from Shawn E. Leon.
Mr. Leon is a director and CEO of the Company. The balances receivable is non-interest bearing and has no fixed repayment terms.
Mr.
Leon was paid management fees of $0 and $138,448 for the nine months ended September 30, 2019 and 2018 respectively.
Leon
Developments, Ltd.
As
of September 30, 2019 and December 31, 2018, the Company owed Leon Developments, Ltd., $1,634,159 and $1,581,499, respectively.
The balance owing to Leon Developments, Ltd. Is non-interest bearing and has no fixed terms of repayment.
Eileen
Greene
As
of September 30, 2019 and December 31, 2018, the Company owed Eileen Greene, the spouse of Mr. Leon, $373,249 and $1,034,114,
respectively. The amount owing to Ms. Greene is non-interest bearing and has no fixed repayment terms.
During the current period, Eileen Greene assigned CDN$1,000,000 of the amount owing to her to a shareholder. The amount owing
to the shareholder bears interest at 12% per annum, which the Company has agreed to pay.
All
related party transactions occur in the normal course of operations and in terms of agreements entered into between the parties.
16.
|
Stockholders' deficit
|
Authorized, issued
and outstanding
On September 20, 2019, in terms of a shareholders resolution and Article of Amendment filed with the Nevada Secretary of State,
the Company increased its authorized common share capital to 900,000,000 shares with a par value of $0.01 per share.
The
Company has authorized 900,000,000 shares with a par value of $0.01 per share. The company has issued and outstanding 143,856,868
and 124,300,341 as of September 30, 2019 and December 31, 2018, respectively.
On
January 17, 2019, the Company issued 71,111 shares of common stock to Leonite in connection with the closing of a financing of
a Senior Secured Convertible Note. The shares were valued at $4,978 on the issue date and recorded as a debt discount.
On
May 15, 2019, a Series N convertible note holder converted an aggregate principal amount of $950,000 of principal debt into 11,875,000
at a conversion price of $0.08 per share.
During
June 2019, the Company issued a total of 5,300,000 shares of common stock to certain consultants, directors and employees for
services rendered during the course of the current fiscal year. These shares of common stock were valued at $371,000 at the date
of grant.
During
June 2019, the Company issued a total of 2,050,000 shares of common stock to certain investors as bonus shares. These shares were
valued at $0.07 per share on the date of issuance.
On
July 15, 2019, the Company issued 2,700,000 returnable shares to Labrys Fund, LP in connection with a convertible note issued
on July 8, 2019. These shares are only earned upon an event of a repayment default. The Company intends repaying the note prior
to maturity, therefore the shares are not recorded as issued for financial statement purposes.
On
September 11, 2019, in terms of a conversion notice received from First Fire Global Opportunities Fund, the company issued 260,416
shares of common stock to settle $6,500 of convertible debt.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
16.
|
Stockholders' deficit
(continued)
|
Authorized,
issued and outstanding
The
Company has authorized 13,000,000 preferred shares with a par value of $0.01 per share, designated as 3,000,000 series A convertible
preferred shares and 10,000,000 series B convertible preferred shares. The Company has no preferred shares issued and outstanding.
In
terms of the convertible note agreements entered into with Leonite disclosed in note 11 above, the Company granted warrants exercisable
over a total of 2,185,183 shares of common stock at an initial exercise price of $0.10 per share, which was recorded as a debt
discount.
In
terms of the Series N Convertible debt issued to various accredited investors, disclosed in note 11 above, the Company granted
warrants exercisable over a total of 20,925,000 shares of common stock at an initial exercise price of $0.12 per share, which
was recorded as a debt discount.
The
warrants were valued using a Black Scholes pricing model and the relative fair value method, on the date of grant at $1,363,869
using the following weighted average assumptions:
|
|
Nine
months ended
September 30,
2019
|
|
|
|
Calculated stock price
|
|
|
$0.05
to $0.09
|
|
Risk free interest rate
|
|
|
1.43% to 2.58%
|
|
Expected life of warrants
|
|
|
36 to 60 months
|
|
expected volatility of underlying stock
|
|
|
164.5% to 186.7%
|
|
Expected dividend rate
|
|
|
0
|
%
|
The
volatility of the common stock is estimated using historical data of the Company’s common stock. The risk-free interest
rate used in the Black Scholes pricing model is determined by reference to historical U.S. Treasury constant maturity rates with
maturities approximate to the life of the warrants granted. An expected dividend yield of zero is used in the valuation model,
because the Company does not expect to pay any cash dividends in the foreseeable future. As of September 30, 2019, the Company
does not anticipate any awards will be forfeited in the valuation of the warrants.
A
summary of all of the Company’s warrant activity during the period January 1, 2018 to September 30, 2019 is as follows:
|
|
|
No.
of shares
|
|
|
Exercise
price per
share
|
|
|
Weighted
average exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1,
2018
|
|
|
|
49,504,075
|
|
|
|
$ 0.0033
to $.0.10
|
|
|
$
|
0.0690
|
|
Granted
|
|
|
|
48,295,833
|
|
|
|
$ 0.10
to $0.12
|
|
|
|
0.1130
|
|
Forfeited/cancelled
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding December 31, 2018
|
|
|
|
97,799,908
|
|
|
|
$0.03 to $0.12
|
|
|
$
|
0.0910
|
|
Granted
|
|
|
|
23,110,183
|
|
|
|
$0.10 to $0.12
|
|
|
|
0.1177
|
|
Forfeited/cancelled
|
|
|
|
(300,000
|
)
|
|
|
$0.0033
|
|
|
|
(0.0033
|
)
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding September 30, 2019
|
|
|
|
120,610,091
|
|
|
|
$0.03
to $0.12
|
|
|
$
|
0.0960
|
|
The
following table summarizes information about warrants outstanding at September 30, 2019:
|
|
|
Warrants
outstanding
|
|
|
Warrants
exercisable
|
|
Exercise price
|
|
|
No. of shares
|
|
|
Weighted
average
remaining
years
|
|
|
Weighted
average
exercise
price
|
|
|
No. of shares
|
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.03
|
|
|
|
21,704,075
|
|
|
|
0.47
|
|
|
|
|
|
|
|
21,704,075
|
|
|
|
|
|
$0.09
|
|
|
|
1,000,000
|
|
|
|
4.91
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
$0.10
|
|
|
|
45,668,516
|
|
|
|
3.35
|
|
|
|
|
|
|
|
45,668,516
|
|
|
|
|
|
$0.12
|
|
|
|
52,237,500
|
|
|
|
2.09
|
|
|
|
|
|
|
|
52,237,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,610,091
|
|
|
|
2.32
|
|
|
$
|
0.0960
|
|
|
|
120,610,091
|
|
|
$
|
0.0960
|
|
All
of the warrants outstanding as of September 30, 2019 and December 31, 2018 are vested. The warrants outstanding as of September
30, 2019 have an intrinsic value of $434,082.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
16.
|
Stockholders' deficit
(continued)
|
Our
board of directors adopted the Greenestone Healthcare Corporation 2013 Stock Option Plan (the “Plan”) to promote our
long-term growth and profitability by (i) providing our key directors, officers and employees with incentives to improve stockholder
value and contribute to our growth and financial success and (ii) enable us to attract, retain and reward the best available persons
for positions of substantial responsibility. A total of 10,000,000 shares of our common stock have been reserved for issuance
upon exercise of options granted pursuant to the Plan. The Plan allows us to grant options to our employees, officers and directors
and those of our subsidiaries; provided that only our employees and those of our subsidiaries may receive incentive stock options
under the Plan. We have granted a total of 480,000 options as of September 30, 2019 under the Plan.
No
options were issued, exercised or cancelled during the nine months ended September 30, 2019 and the year ended December 31, 2018,
respectively.
The
following table summarizes information about options outstanding as of September 30, 2019:
|
|
|
Options
outstanding
|
|
|
Options
exercisable
|
|
Exercise price
|
|
|
No.
of shares
|
|
|
Weighted
average
remaining
years
|
|
|
Weighted
average
exercise
price
|
|
|
No.
of shares
|
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.12
|
|
|
|
480,000
|
|
|
|
0.08
|
|
|
|
|
|
|
|
480,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
480,000
|
|
|
|
0.08
|
|
|
$
|
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, 2019 there was no unrecognized compensation costs related to these options and the fair value of the options
as of September 30, 2019 was $0.
The
Company has two reportable operating segments:
|
a.
|
Rental
income from the property owned by CCH subsidiary located at 3571 Muskoka Road, #169, Bala, on which the operations of the
Canadian Rehab Clinic were located prior to disposal on February 14, 2017 and subsequently leased to the purchasers of the
business of the Canadian Rehab Clinic, for a period of 5 years renewable for a further three five-year periods and with an
option to acquire the property at a fixed price.
|
|
b.
|
Rehabilitation
Services provided to customers, these services were provided to customers at the Company’s ARIA and Seastone of Delray operations.
|
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
17.
|
Segment information (continued)
|
The
segment operating results of the reportable segments are disclosed as follows:
|
|
Three months ended September 30, 2019
|
|
|
Rental Operations
|
|
In-Patient services
|
|
Total
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
83,542
|
|
|
$
|
64,500
|
|
|
$
|
148,042
|
|
Operating expenses
|
|
|
32,125
|
|
|
|
1,126,348
|
|
|
|
1,158,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
51,417
|
|
|
|
(1,061,848
|
)
|
|
|
(1,010,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
—
|
|
|
|
6,600
|
|
|
|
6,600
|
|
Other expense
|
|
|
—
|
|
|
|
(11,729
|
)
|
|
|
(11,729
|
)
|
Interest income
|
|
|
—
|
|
|
|
51
|
|
|
|
51
|
|
Interest expense
|
|
|
(83,840
|
)
|
|
|
(215,182
|
)
|
|
|
(299,022
|
)
|
Amortization of debt discount
|
|
|
—
|
|
|
|
(974,084
|
)
|
|
|
(974,084
|
)
|
Loss on change in fair value of derivative liability
|
|
|
—
|
|
|
|
1,875,402
|
|
|
|
1,875,402
|
|
Foreign exchange movements
|
|
|
19,828
|
|
|
|
40,155
|
|
|
|
59,983
|
|
Net loss before taxation
|
|
|
(12,595
|
)
|
|
|
(340,635
|
)
|
|
|
(353,230
|
)
|
Taxation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss from operations
|
|
$
|
(12,595
|
)
|
|
$
|
(340,635
|
)
|
|
$
|
(353,230
|
)
|
|
|
Three months ended September 30, 2018
|
|
|
Rental Operations
|
|
In-Patient services
|
|
Total
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
83,031
|
|
|
$
|
187,339
|
|
|
$
|
270,370
|
|
Operating expenditure
|
|
|
45,102
|
|
|
|
1,152,570
|
|
|
|
1,197,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
37,929
|
|
|
|
(965,231
|
)
|
|
|
(927,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(20,160
|
)
|
|
|
(2,373,983
|
)
|
|
|
(2,394,143
|
)
|
Taxation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss from operations
|
|
$
|
(20,160
|
)
|
|
$
|
(2,373,983
|
)
|
|
$
|
(2,394,143
|
)
|
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
17.
|
Segment information (continued)
|
The
segment operating results of the reportable segments are disclosed as follows:
|
|
Nine months ended September 30, 2019
|
|
|
Rental Operations
|
|
In-Patient services
|
|
Total
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
248,019
|
|
|
$
|
80,225
|
|
|
$
|
328,244
|
|
Operating expenses
|
|
|
106,393
|
|
|
|
4,021,917
|
|
|
|
4,128,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
141,626
|
|
|
|
(3,941,692
|
)
|
|
|
(3,800,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
—
|
|
|
|
6,600
|
|
|
|
6,600
|
|
Other expense
|
|
|
—
|
|
|
|
(11,729
|
)
|
|
|
(11,729
|
)
|
Interest income
|
|
|
—
|
|
|
|
15,313
|
|
|
|
15,313
|
|
Loss on disposal of property
|
|
|
—
|
|
|
|
(692,488
|
)
|
|
|
(692,488
|
)
|
Bonus shares issued to investors
|
|
|
—
|
|
|
|
(143,500
|
)
|
|
|
(143,500
|
)
|
Interest expense
|
|
|
(165,614
|
)
|
|
|
(675,546
|
)
|
|
|
(841,160
|
)
|
Amortization of debt discount
|
|
|
—
|
|
|
|
(2,564,338
|
)
|
|
|
(2,564,338
|
)
|
Loss on change in fair value of derivative liability
|
|
|
—
|
|
|
|
3,130,273
|
|
|
|
3,130,273
|
|
Foreign exchange movements
|
|
|
(25,752
|
)
|
|
|
(186,215
|
)
|
|
|
(211,967
|
)
|
Net loss before taxation
|
|
|
(49,740
|
)
|
|
|
(5,063,322
|
)
|
|
|
(5,113,062
|
)
|
Taxation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss from operations
|
|
$
|
(49,740
|
)
|
|
$
|
(5,063,322
|
)
|
|
$
|
(5,113,062
|
)
|
|
|
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
|
|
|
25,139
|
|
|
|
(6,566,900
|
)
|
|
|
(6,541,761
|
)
|
Taxation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss) from operations
|
|
$
|
25,139
|
|
|
$
|
(6,566,900
|
)
|
|
$
|
(6,541,761
|
)
|
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
17.
|
Segment information (continued)
|
The
segment operating results of the reportable segments are disclosed as follows:
The
operating assets and liabilities of the reportable segments are as follows:
|
|
September 30, 2019
|
|
|
Rental Operations
|
|
In-Patient services
|
|
Total
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
—
|
|
|
|
22,868
|
|
|
|
22,868
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
3,480
|
|
|
|
397,068
|
|
|
|
400,548
|
|
Non-current assets
|
|
|
2,852,070
|
|
|
|
20,215,934
|
|
|
|
23,068,004
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
(1,306,190
|
)
|
|
|
(12,921,036
|
)
|
|
|
(14,227,226
|
)
|
Non-current liabilities
|
|
|
(4,741,441
|
)
|
|
|
(14,459,976
|
)
|
|
|
(19,201,417
|
)
|
Intercompany balances
|
|
|
765,246
|
|
|
|
(765,246
|
)
|
|
|
—
|
|
Net liability position
|
|
|
(2,426,835
|
)
|
|
|
(7,533,256
|
)
|
|
|
(9,960,091
|
)
|
18.
|
Net loss per common share
|
For
the three and nine months ended September 30, 2019 and 2018, the following options, warrants and convertible notes were excluded
from the computation of diluted net loss per share as the results would have been anti-dilutive.
|
|
September 30,
2019
|
|
September 30,
2018
|
|
|
|
|
|
Stock options
|
|
|
480,000
|
|
|
|
480,000
|
|
Warrants
|
|
|
120,610,091
|
|
|
|
86,337,408
|
|
Convertible notes
|
|
|
94,933,731
|
|
|
|
68,861,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,023,822
|
|
|
|
155,678,771
|
|
19.
|
Commitment and contingencies
|
|
a)
|
Contingency related
to outstanding penalties
|
The Company has
provided for potential US penalties of $250,000 due to non-compliance with the filing of certain required returns. The actual
liability may be higher due to interest and penalties assessed by these taxing authorities.
|
b)
|
Option to purchase
lease property
|
On
May 23, 2018, the Company entered into a Lease Agreement pursuant to which it leased from the AREP 5400 East Avenue LLP (the “Landlord”),
the premises located at 5400, 5402, and 5410 East Avenue, West Palm Beach, Florida (the “Property”). The Lease has
an initial term of 10 years and provides for 2 additional 10 year extensions. The Company has the option to purchase the property
initially for $17,250,000, which amount has increased to $27,750,000 as of October 31, 2019, plus any landlord funded improvements.
The option to purchase increases by $750,000 per calendar month. The initial base rental is $146,337 per month, plus any taxes
imposed on the premises or the base rental. The Company intends to make investments and enter into joint venture arrangements with established addiction recovery businesses
based in the US and leverage of these investments and arrangements to bring patient into its leased facility.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
19.
|
Commitment and contingencies
|
|
c)
|
Future
minimum operating lease payments
|
In
terms of the lease agreement mentioned above the Company is obligated to make the following minimum undiscounted lease payments:
|
|
Amount
|
|
|
|
Remainder
of 2019
|
|
$
|
458,965
|
|
2020
|
|
|
1,882,422
|
|
2021
|
|
|
1,962,242
|
|
2022
|
|
|
2,042,062
|
|
2023
and thereafter
|
|
|
12,436,420
|
|
|
|
$
|
18,782,111
|
|
The
Company is obligated to make the following mortgage loans payments:
|
|
Amount
|
Within one year
|
|
$
|
110,569
|
|
One to two years
|
|
|
110,064
|
|
Two to three years
|
|
|
3,723,240
|
|
Total
|
|
$
|
3,943,873
|
|
The
Company has principal and interest payment commitments under the Convertible notes disclosed under Note 11 above. Conversion of
these notes are at the option of the investor, if not converted these notes may need to be repaid.
From
time to time, the Company and its subsidiaries enter into legal disputes in the ordinary course of business. The Company believes
there are no material legal or administrative matters pending that are likely to have, individually or in the aggregate, a material
adverse effect on its business or results of operations.
Convertible
notes
On
October 10, 2019, in terms of a conversion notice received from First Fire Global Opportunities Fund, the Company issued 366,666
shares of Common stock in settlement of $6,500 of principal outstanding on the $200,000 convertible note issued on March 5, 2019.
On
November 4, 2019, in terms of a conversion notice received from First Fire Global Opportunities Fund, the Company issued 460,363
shares of Common stock in settlement of $7,000 of principal outstanding on the $200,000 convertible note issued on March 5, 2019.
The
Company has reached an agreement with Leonite Capital, LLC whereby it has agreed to transfer ownership of the land and buildings
at 810 Andrews Avenue, Delray Beach, valued at $1,500,000, in partial settlement of the amount owed. This agreement has not closed
as yet. Leonite has agreed to further negotiate to extend the maturity date of the remaining balance outstanding to December 31,
2019.
On November 15, 2019, the Company entered into a non-binding letter of intent with an addiction treatment center based in
Fort Lauderdale Florida, whereby the Company would invest up to $18,000,000 in the addiction treatment center for a 50% equity
stake in the business. The initial investment of $12,000,000 for 40% of the equity is expected to take place in 3 equal tranches
of $4,000,000 each and an additional optional investment of $6,000,000 for an additional 10% to be exercised within a year.
The parties will determine the future use of the West Palm Beach facility under potential joint venture arrangements with
the addiction treatment center.
Other
than disclosed above, the Company has evaluated subsequent events through the date the unaudited condensed consolidated financial
statements were available to be issued and has concluded that no such events or transactions took place that would require disclosure
herein.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following
discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations
for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes
presented herein and the consolidated financial statements and the other information set forth in our Annual Report on Form 10-
K/A for the year ended December 31, 2018 filed with the Securities and Exchange Commission on April 22, 2019. In addition to historical
information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those
anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports
filed and to be filed with the Securities and Exchange Commission.
Our financial
statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates,
judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates,
judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and
liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods
presented. Our financial statements would be affected to the extent there are material differences between these estimates. This
discussion and analysis should be read in conjunction with the Company’s financial statements and accompanying notes to
the financial statements for the year ended December 31, 2018.
Plan of
Operation
During the next twelve months, the Company plans to continue
and expand its operations as a provider of addiction and aftercare treatment services. The Company has recently entered into a
Letter of Intent to invest in a larger treatment provider and as this plan materializes, the Company will work closely with this
provider to determine how best to leverage its marketing spend and to which segments of the market to target. Our plan would be
to complement each other in the marketplace by having a wider variety of services available by specializing in different locations.
It is not yet determined if any changes will be made to the management structure of our facility in West Palm Beach.
Results
of Operations
For the three months ended September
30, 2019 and September 30, 2018.
Revenues
Revenues were
$148,042 and $270,370 for the three months ended September 30, 2019 and 2018, respectively, a decrease of $122,328 or 45.2%.
Revenue
from patient treatment was $64,500 and $187,339 for the three months ended September 30, 2019 and 2018, respectively, a decrease
of $122,839 or 65.6%. We have not been able to attract sufficient patient numbers into our US facilities to generate sufficient revenues to cover
operating costs, temporarily reducing our patient intake while we explore joint venture arrangements and investments in established
addiction recovery operations within the US. We expect, that if we are successful in our efforts we will increase our patient
numbers and revenues.
Revenue from
rental income was $83,542 and $83,031 for the three months ended September 30, 2019 and 2018, respectively, an increase of $511
or 0.6%. The increase is due to foreign currency movements between the two periods.
Operating
Expenses
Operating
expenses were $1,158,473 and $1,197,672 for the three months ended September 30, 2019 and 2018, respectively, a decrease of $39,201
or 3.3%. The decrease is primarily due to the following:
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Management
fees was $0 and $46,350 for the three months ended September 30, 2019 and 2018, respectively, a decrease of $46,350 or 100%.
Management has not charged fees during the current year to preserve operating cash flow.
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Salaries
of $370,341 and $263,901 for the three months ended September 30, 2019 and 2018, an increase of $106,440 or 40.3% 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.
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All
other expense categories were reduced in an effort to preserve cash and curtail operating expenses whilst the Company seeks
new business lines.
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Depreciation
was $47,104 and $67,929 for the three months ended September 30, 2019 and 2018, respectively, a decrease of $20,825 or 30.7%,
the decrease is attributable to the disposal of the condominiums in Delray Beach during the prior quarter.
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Operating
loss
The
operating loss was $1,010,431 and $927,302 for the three months ended September 30, 2019 and 2018, respectively, an increase of
$83,129 or 9.0%. The increase is attributable to the lower revenues offset by a reduction in operating expenses, as discussed
above.
Interest
expense
Interest
expense was $299,022 and $225,205 for the three months ended September 30, 2019 and 2018, respectively, an increase of $73,817
or 32.8% was primarily due to the increase in convertible note funding during the current period. The funding was used for general
working capital purposes.
Debt
discount
Debt
discount was $974,084 and $1,195,638 for the three months ended September 30, 2019 and 2018, respectively, a decrease of $221,554
or 18.5%. The charge during the current period represents the amortization of the value of the warrants issued over the terms
of the convertible loan agreements entered into during the current period and during 2018 and the amortization of the fair value
of the beneficial conversion feature of the convertible notes issued to note holders during the current period and 2018. The fair
value of the warrants and the beneficial conversion features are amortized over a six to twelve month period, the term of the
underlying convertible securities.
Derivative
liability movement
The
derivative liability movement of $1,875,402 (gain) and $37,951(gain) represents the mark to market movements of variably priced
convertible notes and warrants issued during the current and prior comparative period. These securities are marked to market on
a quarterly basis and the resultant gain or loss is recorded as a derivative liability movement in the unaudited condensed consolidated
statement of operations.
Foreign
exchange movements
Foreign
exchange movements was $59,983 and $(95,292) for the three months ended September 30, 2019 and 2018, respectively, representing
the realized exchange gains and (losses) on monetary assets and liabilities settled during the current year as well as mark to
market adjustments on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars. The
average exchange rate utilized during the current year of $0.7523 weakened by 2.6% from $0.7725 in the prior period.
Net
loss
Net
loss of $(353,230) and $(2,394,143) for the three months ended September 30, 2019 and 2018, respectively, a decrease of $2,040,913
or 85.2%, is primarily due to the movement in the derivative liability during the current period as discussed above.
For the nine months ended September
30, 2019 and September 30, 2018.
Revenues were
$328,244 and $450,366 for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $122,122 or 27.1%.
Revenue
from patient treatment was $80,225 and $200,192 for the nine months ended September 30, 2019 and 2018, respectively, a decrease
of $119,967 or 59.9%. We have not been able to attract sufficient patient numbers into our US facilities to generate sufficient revenues to cover
operating costs, temporarily reducing our patient intake while we explore joint venture arrangements and investments in established
addiction recovery operations within the US. We expect, that if we are successful in our efforts we will increase our patient
numbers and revenues.
Revenue from
rental income was $248,019 and $250,174 for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $2,155
or 0.9%. The decrease is due to foreign currency movements between the two periods.
Operating
Expenses
Operating
expenses were $4,128,310 and $2,524,987 for the nine months ended September 30, 2019 and 2018, respectively, an increase of $1,603,323
or 63.5%. The increase is primarily due to the following:
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General
and administrative expenses of $1,123,207 and $600,639 for the nine months ended September 30, 2019 and 2018, respectively,
an increase of $522,568 or 87.0%, primarily due to an increase in property taxes of $441,711 and directors fees of $70,000
paid by the issuance of stock during the current period, the balance is made up of general movements in individually immaterial
expenses associated with running a much larger facility in West Palm Beach.
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Rent
expense was $1,212,042 and $626,321 for the nine months ended September 30, 2019 and 2018, an increase of $585,721 or 93.5%.
This was due to the Company converting the option to purchase the property located at 5400 East Avenue, West Palm Beach, Florida,
in which the treatment center is located into an operating lease during May 2018. The Company has an option to acquire the
property.
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Management
fees of $0 and $138,448 for the nine months ended September 30, 2019 and 2018, respectively, decreased by $138,448 or 100%,
our CEO did not charge any fees during the current period to facilitate cash flow.
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Professional
fees of $510,608 and $297,858 for the nine months ended September 30, 2019 and 2018, respectively, increased by $212,750 or
71.4%, the increase is due to consulting fees paid to two individuals who assisted with business development during the relocation
of operations to the USA from Canada.
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Salaries
and wages of $1,103,054 and $657,337 for the nine months ended September 30, 2019 and 2018, respectively, increased by $445,717
or 67.8%, 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.
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Depreciation
was $179,399 and $204,384 for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $24,985 or 12.2%,
the decrease is attributable to the disposal of the condominiums in Delray Beach during the current quarter.
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Operating
loss
The
operating loss was $3,800,066 and $2,074,621 for the nine months ended September 30, 2019 and 2018, respectively, an increase
of $1,725,445 or 83.2%. The increase is attributable to the operating expenses discussed above and the reduction in patient revenues.
Loss
on disposal of property
The loss on disposal of property
of $692,488 and $0 for the nine months ended September 30, 2019 and 2018, respectively, an increase of 100% was due to the sale
of the condominiums in Delray Beach, the proceeds were used to settle the mortgage owing on the properties.
Bonus shares issued to investors
The bonus shares to investors of
$143,500 and $0 for the nine months ended September 30, 2019 and 2018, respectively, increased by 100%. Bonus shares were issued
to certain investors during the current period to facilitate additional investment in the Company.
Interest
expense
Interest
expense of $841,160 and $572,243 for the nine months ended September 30, 2019 and 2018, respectively, an increase of $268,917
or 47.0% was primarily due to the increase in convertible note funding during the current period of a net $1,788,689. The funding
was used for general working capital purposes.
Debt
discount
Debt
discount was $2,564,338 and $3,288,472 for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $724,134
or 22.0%. The charge during the current period represents the amortization of the value of the warrants issued over the terms
of the convertible loan agreements entered into during the current period and during 2018 and the amortization of the fair value
of the beneficial conversion feature of the convertible notes issued to note holders during the current period and 2018. The fair
value of the warrants and the beneficial conversion features are amortized over a six to twelve month period, the term of the
underlying convertible securities.
Derivative
liability movement
The
derivative liability movement of $3,130,273 (Gain) and (771,000) (Loss) represents the mark to market movements of variably priced
convertible notes and warrants issued during the current and prior comparative period. These securities are marked to market on
a quarterly basis and the resultant gain or loss is recorded as a derivative liability movement in the unaudited condensed consolidated
statement of operations.
Foreign
exchange movements
Foreign
exchange movements of $(211,967) and $153,232 for the nine months ended September 30, 2019 and 2018, respectively, represents
the realized exchange gains and (losses) on monetary assets and liabilities settled during the current year as well as mark to
market adjustments on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars. The
average exchange rate utilized during the current year of $0.7523 weakened by 2.6% from $0.7725 in the prior period.
Net
loss
Net
loss of $(5,113,062) and $(6,541,761) for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $1,428,699
or 21.8%, is primarily due to the increase in operating expenses in the current period, the loss realized on the sale of the property,
offset by the swing in derivative liability movements of $3,901,273 during the comparative period.
Contingency
related to outstanding payroll tax liabilities
The
Company also has not filed certain foreign assets forms due to the US Federal Government. A provision of $250,000 was made for
any potential penalties due.
Liquidity
and Capital Resources
Cash
used in operating activities of $2,521,914 and $1,166,143 for the nine months ended September 30, 2019 and 2018, respectively
increased by $1,355,771 or 116.3%. The increase is primarily due to the following:
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the
decrease in net loss of $1,428,699, discussed under operations above.
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the
movement in non-cash items decreased by $(3,241,378), primarily made up of;
·
The increase in derivative liability movement of $(3,901,273) and;
·
The increase in the movement of debt discount amortization of $724,134, offset by;
·
The deferred rental liability movement of $259,299 and;
·
The movement in on cash compensation for services rendered of $317,278.
· The net movement
in working capital items of $(296,250).
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Cash
provided by investing activities of $3,310,865 and utilized by investing activities of $1,174,119 for the nine months ended September
30, 2019 and 2018, respectively, an increase of $4,484,984. We sold the Delray condominiums in the current period realizing proceeds
of $3,318,141 and in the prior period we paid deposits on real estate of $1,132,509, whilst attempting to close the purchase of
5400 East Avenue, West Palm Beach, Florida.
Cash
used by financing activities was $978,429 and generated by financing activities was $2,479,879 for the nine months ended September
30, 2019, a decrease of $3,458,308. We repaid the mortgage bond associated with the condominiums we sold and raised a net $1,788,689
from convertible notes, promissory notes and related parties during the current period. We raised a net $2,544,000 in the prior
period from convertible notes and related parties to fund working capital purposes
Over
the next twelve months we estimate that the company will require approximately $2.5 million in working capital as it continues
to develop its West Palm Beach facility and it is also exploring several other treatment center options and sources of patients
throughout the country. The company may have to raise equity or secure debt. There is no assurance that the Company will be successful
with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s
financial condition. In the opinion of management, the Company’s liquidity risk is assessed as medium.
We have assigned the ownership of our property at 810 Andrews Avenue, Delray Beach, Florida, valued at $1,500,000 to a convertible
note holder as partial settlement of the amount owing and intend raising funds from certain investors to settle the remaining
balance and other convertible notes as they fall due, we may not be successful in our fund raising attempts.
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, 2019 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II
Item 1.
Legal Proceedings.
A former employee
has filed suit against the Company asserting wrongful dismissal, claiming damages between CDN$43,500 and CDN$50,000 this matter
was settled for CDN$14,070, including applicable legal fees, the settlement remains unpaid as the plaintiff has not signed the
minutes of settlement.
Other than
disclosed above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial
condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public
board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers
of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries
or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision
could have a material adverse effect.
Item 1A.
Risk Factors.
Not applicable
because we are a smaller reporting company.
Item 2.
Unregistered sales of equity securities and use of proceeds
No shares
were issued pursuant to the exemptions from the registration requirements of the Securities Act of 1933, as amended, afforded
the Company under Section 4(a)(2) promulgated thereunder due to the fact that the issuance did not involve a public offering because
of the insubstantial number of persons involved in each offering, the size of the offering, manner of the offering and number
of shares offered. Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section
4(a) (2) of the Securities Act for these transactions.
Item 3.
Defaults upon senior securities
None.
Item 4.
Mine Safety Disclosures.
None.
Item 5.
Other Information.
Not applicable.
Item 6.
Exhibits
101.INS XBRL
Instance *
101.SCH XBRL
Taxonomy Extension Schema * 101.CAL XBRL Taxonomy Extension Calculation * 101.DEF Taxonomy Extension Definition * 101.LAB Taxonomy
Extension Labels *
101. PRE Taxonomy
Extension Presentation *
* filed herewith
SIGNATURES
Pursuant to
the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ETHEMA
HEALTH CORPORATION
Date: November
19, 2019
By:/s/ Shawn
E. Leon
Name: Shawn
E. Leon
Title: Chief
Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)
Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Name
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Position
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Date
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/s/Shawn E. Leon
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Chief Executive
Officer (Principal Executive Officer),
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November 19,
2019
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Shawn Leon
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Chief Financial
Officer (Principal Financial Officer), President and Director
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/s/ John O’Bireck
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Director
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November 19,
2019
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John O’Bireck
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/s/ Gerald T.
Miller
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Director
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November 19, 2019
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Gerald T. Miller
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