NOTES TO
THE 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.
On
May 23, 2018, the Company converted a purchase agreement with AREP 5400 East Avenue LLC to a ten year lease agreement for a substance
abuse treatment center in properties located at 5400, 5402 and 5410 East Avenue, west Palm Beach, Florida. The Company was also
granted an option to purchase the property at a price of $17,250,000, increasing by $750,000 per month.
The
Company ceased operations in its Delray Beach properties and relocated its treatment facility to the newly leased premises in
West Palm Beach.
On
April 2, 2019, the Company disposed of the real property located at 801 Andrews Avenue, Delray Beach for gross proceeds of $3,500,000,
retaining the property at 810 Andrews Avenue Delray Beach, Florida.
On
October 10, 2019, the Company transferred the real Property located at 810 Andrews Avenue, Delray Beach, Florida to Leonite Capital,
LLC, for net proceeds of $1,398,510, which proceeds were offset against the convertible loan owing to Leonite.
ETHEMA HEALTH
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies
|
Financial Reporting
The
Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America (“US GAAP”).
Management
further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system
of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is
designed to assure, among other items, that i) recorded transactions are valid; ii) valid transactions are recorded; and iii)
transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial
condition, results of operations and cash flows of the Company for the respective periods being presented.
The
preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
|
b)
|
Principals of consolidation
and foreign currency translation
|
The
accompanying 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.
|
|
●
|
Non-monetary,
non-current and 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 year ended December 31, 2019 a closing rate of CDN$1.0000 equals US$0.7699
and an average exchange rate of CDN$1.0000 equals US$0.7536. For the year ended December 31, 2018 a closing rate of CAD$1.0000
equals US$0.7330 and an average exchange rate of CAD$1.0000 equals US$0.7574.
ETHEMA HEALTH
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies (continued)
|
ASC
606 requires companies to exercise more judgment and recognize revenue using a five-step process.
As
a result of certain changes required by ASC 606, the majority of the Company’s provision for doubtful accounts are recorded
as a direct reduction to revenue instead of being presented as a separate line item on the consolidated statements of operations
and comprehensive loss. The adoption of ASC 606 has no impact on the Company’s accounts receivable as it was historically
recorded net of allowance for doubtful accounts and contractual adjustments, and the Company has eliminated the presentation of
allowance for doubtful accounts on the consolidated balance sheets. As a result, upon the Company’s adoption of ASC 606
the majority of what was previously classified as the provision for bad debts in the statement of operations is now reflected
as implicit price concessions (as defined in ASC 606) and therefore is included as a reduction to net operating revenues in 2019.
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 inpatient facilities
and cost settlement provisions. Management estimates the transaction price on a payor-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
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 receivables were $105,842 and
$202,654 for the years ended December 31, 2019 and 2018, respectively. 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 settlements resulted
in a decrease in revenues of $414,603 and $262,353 for the years ended December 31, 2019 and 2018, respectively.
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. 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.
|
ETHEMA HEALTH
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies (continued)
|
|
d)
|
Cash and cash equivalents
|
For
purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three
months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with several
financial institution in the USA and Canada.
The
Company primarily places cash balances in the USA with high-credit quality financial institutions located in the United States
which are insured by the Federal Deposit Insurance Corporation up to a limit of $250,000 per institution, in Canada which are
insured by the Canadian Deposit Insurance Corporation up to a limit of CDN$100,000 per institution.
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 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.
|
f)
|
Allowance for Doubtful
Accounts, Contractual and Other Discounts
|
The
Company derives the majority of its revenues from commercial payors at out-of-network rates. Management estimates the allowance
for contractual and other discounts based on its historical collection experience. The services authorized and provided and related
reimbursement are often subject to interpretation and negotiation that could result in payments that differ from the Company’s
estimates. The Company’s allowance for doubtful accounts is based on historical experience, but management also takes into
consideration the age of accounts, creditworthiness and current economic trends when evaluating the adequacy of the allowance
for doubtful accounts. An account is written off only after the Company has pursued collection efforts or otherwise determines
an account to be uncollectible. Uncollectible balances are written-off against the allowance. Recoveries of previously written-off
balances are credited to income when the recoveries are made.
The
Company initially measures its financial assets and liabilities at fair value, except for certain non-arm’s length transactions.
The Company subsequently measures all its financial assets and financial liabilities at amortized cost.
Financial
assets measured at amortized cost include cash and accounts receivable.
Financial
liabilities measured at amortized cost include bank indebtedness, accounts payable and accrued liabilities, harmonized sales tax
payable, withholding taxes payable, convertible notes payable, loans payable and related party notes.
Financial
assets measured at cost are tested for impairment when there are indicators of impairment. The amount of the write-down is recognized
in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting
the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had
the impairment not been recognized previously. The amount of the reversal is recognized in net income. The Company recognizes
its transaction costs in net income in the period incurred. However, financial instruments that will not be subsequently measured
at fair value are adjusted by the transaction costs that are directly attributable to their origination, issuance or assumption.
ETHEMA HEALTH
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies (continued)
|
|
g)
|
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 and Comprehensive Loss.
|
h)
|
Property and equipment
|
Property
and equipment is recorded at cost. Depreciation is calculated on the straight line basis over the estimated life of the asset:
Leasehold
improvements are depreciated using the straight-line method over the term of the lease.
The
Company accounts for leases in terms of AC 842 whereby 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. Operating
leases are recognized on the balance sheet as a lease liability with a corresponding right of use asset for all leases with a
term that is more than twelve months. Payments under operating leases are expensed as incurred.
The
Company accounts for income taxes under the provisions of ASC Topic 740, “Income Taxes”. Under ASC
Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the consolidated 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 CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies (continued)
|
|
k)
|
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).
|
l)
|
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 consolidated statements of operations for the year ended December 31, 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 CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies (continued)
|
|
n)
|
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 became effective for fiscal years and interim periods beginning after December 15,
2018. 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 consolidated 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 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 January 1, 2019 of $15,986,074. On December 20, 2019, the Company entered into an
agreement with the landlord terminating the lease effective January 31, 2020, thereby eliminating the value of the right-of-use
asset and liability.
|
o)
|
Recent accounting pronouncements
|
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)
The
Amendments in this update reduce the complexity in accounting for income taxes by removing certain exceptions to accounting for
income taxes and deferred taxes and simplifying the accounting treatment of franchise taxes, a step up in the tax basis of goodwill
as part of business combinations, the allocation of current and deferred tax to a legal entity not subject to tax in its own financial
statements, reflecting changes in tax laws or rates in the annual effective rate in interim periods that include the enactment
date and minor codification improvements.
This
ASU is effective for fiscal years and interim periods beginning after December 15, 2020.
The
expected effects of this ASU on the Company’s consolidated financial statements is not considered to be material.
The
FASB issued several updates during the period, none of these standards are either applicable to the Company or require adoption
at a future date and none are expected to have a material impact on the consolidated financial statements upon adoption.
ETHEMA HEALTH
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies (continued)
|
|
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, December 31, 2019 and 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.
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 $18,320,416, which includes derivative liabilities of $8,694,272, and an accumulated
deficit of $45,491,885. The Company is 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 that of 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 interest rate risk on its convertible debt and bank overdraft balances as of
December 31, 2019. In the opinion of management, interest rate risk is assessed as moderate.
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 December 31, 2019, a 5% depreciation or appreciation of the
Canadian dollar against the U.S. dollar would result in an approximate $11,785 increase or decrease in the Company’s
after tax net income from operations. The Company has not entered into any hedging agreements to mediate this risk. In the
opinion of management, currency risk is assessed as low, material and remains unchanged from that of the prior
year.
ETHEMA HEALTH
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
2.
|
Summary of significant
accounting policies (continued)
|
|
p)
|
Financial instruments
Risks (continued)
|
|
iii.
|
Market risk (continued)
|
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.
The
Company’s 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 December 31, 2019 the Company has a working capital deficiency of $(18,320,416), including derivative liabilities of $8,694,272
and accumulated deficit of $(45,491,885). 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 consolidated financial statements do not include any adjustments to the
amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue operations.
The
ability of the Company to continue as a going concern is dependent on the Company generating cash from the sale of its common
stock or obtaining debt financing and attaining future profitable operations. Management’s plans include selling its equity
securities and obtaining debt financing to fund its capital requirements and ongoing operations; however, there can be no assurance
the Company will be successful in these efforts.
These
factors create substantial doubt about the Company’s ability to continue as a going concern. These 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.
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 at December 31, 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 consolidated balance sheet.
ETHEMA HEALTH
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
On
April 2, 2019, the Company entered into a Commercial Contract with a third party whereby the real property at 801 Andrews Avenue,
Delray Beach, Florida, consisting of land and condominiums thereon, was sold for $3,500,000. This transaction closed on April
26, 2019.
The
loss realized on the disposal was calculated as follows:
|
|
Amount
|
|
|
|
Proceeds received
|
|
$
|
4,975,174
|
|
Less: closing costs
|
|
|
(182,344
|
)
|
Provision for additional expenses
|
|
|
(36,470
|
)
|
Net proceeds received
|
|
|
4,756,360
|
|
|
|
|
|
|
Assets sold:
|
|
|
|
|
Land
|
|
|
2,753,928
|
|
Buildings thereon, net of depreciation
|
|
|
2,949,452
|
|
Furniture and fixtures, net of depreciation
|
|
|
72,792
|
|
|
|
|
5,776,172
|
|
|
|
|
|
|
Loss on disposal of property
|
|
$
|
1,019,812
|
|
On
October 10, 2019, in terms of a deed of transfer the Company disposed of the remaining property located at 810 Andrews Avenue,
Delray Beach, Florida to a convertible note holder in partial settlement of the convertible note outstanding for net proceeds
of $1,475,174. Subsequent to year end an additional $36,470 of expenses related to the property disposal were incurred, these
expenses were provided for at year end.
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 was $20,530,000. The Company made a series of nonrefundable down
payments totaling $2,940,546 and $1,825,000 as of December 31, 2018 and 2017.
On
May 23, 2018, the Company converted the agreement to a lease agreement with a purchase option of $17,250,000, increasing
August 31, 2018 by $750,000 per month until the purchase option is exercised. The premises is located at 5400, 5402 and 5410
East Avenue, West Palm Beach, Florida (the “Property”). The lease was for an initial 10 years and provided for
two additional 10 year extensions.
The
Company previously was 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.
On
December 20, 2019 the Company entered into an agreement to terminate the lease agreement on January 30, 2020.
As
of December 31, 2019, the deposits paid of $2,924,955 were offset against the unpaid rental as of December 31, 2019 of $1,509,877.
A contingency reserve of $250,000 was allowed for any future claims the landlord may have against the Company, resulting in a
forfeiture of the deposit balance of $1,665,078.
ETHEMA
HEALTH CORPORATION
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
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$461,318 had
been used to affect building improvements to the premises owned by CCH, for a total reduction of CDN$1,516,360. The remaining
escrow balance was CDN$6,454 consisting of accrued interest earned on the escrow of CDN$22,814, less $16,360 utilized for a portion
of the building improvements.
8.
|
Property and equipment
|
Property and equipment
consists of the following:
|
|
December 31,
2019
|
|
December 31, 2018
|
|
|
Cost
|
|
Accumulated depreciation
|
|
Net book value
|
|
Net book value
|
Land
|
|
$
|
165,537
|
|
|
$
|
—
|
|
|
$
|
165,537
|
|
|
$
|
2,911,530
|
|
Property
|
|
|
3,131,464
|
|
|
|
(346,333
|
)
|
|
|
2,785,131
|
|
|
|
5,750,045
|
|
Leasehold improvements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
251,774
|
|
Furniture and fixtures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,000
|
|
|
|
$
|
3,297,001
|
|
|
$
|
(346,333
|
)
|
|
$
|
2,950,668
|
|
|
$
|
8,948,349
|
|
Depreciation expense
for the year ended December 31, 2019 and 2018 was $217,018 and $273,646, respectively. On December 20, 2019, in terms of an agreement
with the landlord the lease for the West Palm Beach facility was terminated and the Company impaired the leasehold improvements
relating to the leased property, the impairment charge was $242,514.
Adoption of ASC Topic
842, Leases
On January 1,
2019, the Company adopted Topic 842 using the modified retrospective method applied to leases that were in place as of January 1,
2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior
period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. The Company's
leases consists of operating leases that relate to real estate rental agreements. All of the value of the Company's lease portfolio
relates to a real estate lease agreement that was entered into in May 2018.
Practical
Expedients and Elections
The
Company elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward
our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs
for any leases that exist prior to adoption of the new standard. We also elected the short-term lease recognition exemption for
all leases that qualify.
Discount
Rate applied to property operating lease
To
determine the present value of minimum future lease payments for operating leases at January 1, 2019, the Company was required
to estimate a rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal
to the lease payments in a similar economic environment (the "incremental borrowing rate" or "IBR").
The
Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing
options and certain lease-specific circumstances. For the reference rate, the Company used the average of (i) the risk free interest
rate adjusted for a premium for Company and liquidity risk; (ii) the weighted average mortgage interest rate currently availed
to the Company; and (iii) the fifteen year mortgage interest rate. The weighted average rate the Company determined was 4.76%
as an appropriate incremental borrowing rate to apply to its real-estate operating lease.
ETHEMA
HEALTH CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
Subsequent
to year end, on January 30, 2020, the Company verbally terminated the lease with the current landlord who had leased the premises
to a third party and subsequently sold the property. The operating lease liability and right-of-use asset has been eliminated
as of December 31, 2019.
Total
operating lease cost
Individual
components of the total lease cost incurred by the Company is as follows:
|
|
Year
ended
December 31,
2019
|
|
|
|
|
|
Operating lease expense
|
|
$
|
1,360,117
|
|
In the prior year, the
Company settled the tax liabilities owing to the Canadian Revenue Authorities out of the proceeds of the disposal of the Canadian
Rehab Clinic on February 14, 2017. The Company paid CDN$2,929,886 to settle outstanding payroll liabilities, CDN$441,598 to settle
outstanding GST/HST liabilities and a further CDN$57,621 to settle other Canadian tax liabilities.
The remaining taxes
payable consist of:
|
●
|
A
payroll tax liability of $140,583 (CDN$182,589) in Greenestone Muskoka which has not been settled as yet.
|
|
●
|
A
GST/HST tax payable of $26,524 (CDN$34,449).
|
|
●
|
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 noncompliance with US disclosure requirements is currently being addressed. An amount of $250,000 has been accrued for
any potential exposure the Company may have.
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
|
|
|
Payroll taxes
|
|
$
|
140,583
|
|
|
$
|
133,843
|
|
HST/GST payable
|
|
|
26,524
|
|
|
|
33,757
|
|
US penalties due
|
|
|
250,000
|
|
|
|
250,000
|
|
Income tax payable
|
|
|
375,808
|
|
|
|
357,792
|
|
|
|
$
|
792,915
|
|
|
$
|
775,392
|
|
ETHEMA HEALTH
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
11.
|
Short-term Convertible
Notes
|
The
short-term convertible notes consist of the following:
|
|
Interest
rate
|
|
|
Maturity
date
|
|
Principal
|
|
|
Interest
|
|
|
Debt
Discount
|
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leonite Investments LLC
|
|
|
8.5
|
%
|
|
On demand
|
|
$
|
1,126,394
|
|
|
$
|
86,754
|
|
|
$
|
-
|
|
|
$
|
1,213,148
|
|
|
$
|
2,494,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power Up Lending Group Ltd
|
|
|
9.0
|
%
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
94,595
|
|
|
|
|
9.0
|
%
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,484
|
|
|
|
|
9.0
|
%
|
|
May 15,2019
|
|
|
53,000
|
|
|
|
2,300
|
|
|
|
(21,593
|
)
|
|
|
33,707
|
|
|
|
-
|
|
|
|
|
9.0
|
%
|
|
September 10, 2019
|
|
|
83,000
|
|
|
|
3,458
|
|
|
|
(34,631
|
)
|
|
|
51,827
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Fire Global Opportunities Fund
|
|
|
12.0
|
%
|
|
December 2019
|
|
|
156,908
|
|
|
|
90,453
|
|
|
|
-
|
|
|
|
247,361
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actus Fund, LLC
|
|
|
10.0
|
%
|
|
May 7, 2020
|
|
|
225,000
|
|
|
|
9,125
|
|
|
|
(105,109
|
)
|
|
|
129,016
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labrys Fund, LP
|
|
|
12.0
|
%
|
|
January 8, 2020
|
|
|
282,000
|
|
|
|
16,317
|
|
|
|
(12,260
|
)
|
|
|
286,057
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series N convertible notes
|
|
|
6.0
|
%
|
|
May 17, 2019 to September 16, 2020
|
|
|
3,229,000
|
|
|
|
231,063
|
|
|
|
(380,066
|
)
|
|
|
3,079,997
|
|
|
|
1,770,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,041,113
|
|
|
$
|
4,403,473
|
|
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 anti-dilution and price
protection.
ETHEMA
HEALTH CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
11.
|
Short-term Convertible
Notes (continued)
|
Leonite
Capital, LLC (continued)
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.
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.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
11.
|
Short-term Convertible
Notes (continued)
|
Leonite
Capital, LLC (continued)
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.
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.
On
October 10, 2019, the Company transferred a warranty deed to the real property located at 810 Andrews Avenue, Delray Beach, Florida
to Leonite Capital, LLC, in settlement of indebtedness of $1,398,514 and additional expenses related to the disposal of the property
of $36,470. These expenses of $36,470 were provided for resulting in net proceeds recognized on the transfer of the property of
$1,362,044.
ETHEMA
HEALTH CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
11.
|
Short-term Convertible
Notes (continued)
|
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.
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.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
11.
|
Short-term Convertible
Notes (continued)
|
Power Up Lending
Group LTD (continued)
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 October 18, 2019, the Company repaid the remaining principal outstanding of $18,000 together with interest thereon and early
settlement penalty for gross proceeds of $68,744.
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.
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.
Between
September 11, 2019 and December 30, 2019, in terms of conversion notices received, the Company issued 11,887,445 shares of Common
stock in settlement of $36,592 of principal outstanding.
ETHEMA HEALTH
CORPORATION
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
11.
|
Short-term Convertible
Notes (continued)
|
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.
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.
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.
ETHEMA
HEALTH CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
Loans payable is disclosed
as follows:
|
|
Interest
rate
|
|
|
Maturity
date
|
|
Principal
Outstanding
|
|
|
Accrued
interest
|
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cranberry Cove Holdings,
Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pace Mortgage
|
|
|
4.2
|
%
|
|
July 19, 2022
|
|
$
|
3,989,726
|
|
|
$
|
5,509
|
|
|
$
|
3,995,235
|
|
|
$
|
3,924,836
|
|
Addiction Recovery Institute of America,
LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
5.0
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,954,786
|
|
|
|
|
|
|
|
|
|
$
|
3,989,726
|
|
|
$
|
5,509
|
|
|
$
|
3,995,235
|
|
|
$
|
6,879,622
|
|
Disclosed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
114,290
|
|
|
$
|
172,276
|
|
Long-term portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,880,945
|
|
|
|
6,707,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,995,235
|
|
|
$
|
6,879,622
|
|
The
aggregate amount outstanding is payable as follows:
|
|
Amount
|
2020
|
|
$
|
114,290
|
|
2021
|
|
|
113,397
|
|
2022
|
|
|
3,767,548
|
|
Total
|
|
$
|
3,995,235
|
|
Cranberry
Cove Holdings, Ltd.
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.
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 a third party for $3,500,000. This transaction closed
during April 2019 and the principal mortgage liability of $2,942,526, including interest thereon was settled.
ETHEMA
HEALTH CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
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.
The
short-term convertible notes, together with certain warrants issued to Leonite and the short term convertible notes disclosed
in note 12 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 December 31, 2019, the derivative liability was valued at
$8,694,272.
The following assumptions
were used in the Black-Scholes valuation model:
|
|
Year ended
December 31,
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 687.3%
|
|
Expected dividend rate
|
|
|
0
|
%
|
The
movement in derivative liability is as follows:
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
|
|
|
Opening balance
|
|
$
|
4,618,080
|
|
|
$
|
2,859,832
|
|
Derivative liability on issued convertible notes and variable priced warrants
|
|
|
1,477,163
|
|
|
|
1,335,709
|
|
Fair value adjustments to derivative liability
|
|
|
2,599,029
|
|
|
|
422,539
|
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
$
|
8,694,272
|
|
|
$
|
4,618,080
|
|
ETHEMA
HEALTH CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
15.
|
Related party transactions
|
Shawn E. Leon
As
of December 31, 2019 and 2018 the Company had a payable to Shawn Leon of $293,072 and a receivable of $32,650 from Shawn E. Leon,
respectively. Mr. Leon is a director and CEO of the Company. The balances payable and receivable are non-interest bearing and
has no fixed repayment terms.
Certain
Companies controlled by Mr. Leon were paid management fees of $0 and $182,430 for the years ended December 31, 2019 and 2018,
respectively. Due the current financial position of the Company, no management fees were accrued or paid.
Leon
Developments, Ltd.
As
of December 31, 2019 and 2018, the Company owed Leon Developments, Ltd. $904,121 and $1,581,499, respectively, for funds advanced
to the Company.
Eileen
Greene
As
of December 31, 2019 and 2018, the Company owed Eileen Greene, the spouse of our CEO, Shawn Leon, $1,595,887 and $1,034,114, respectively.
During the year ended December 31, 2019, Ms. Greene advanced the company a net $560,824 to fund working capital requirements.
The amount owing to Ms. Greene is non-interest bearing and has no fixed repayment terms.
All
related party transactions occur in the normal course of operations and in terms of agreements entered into between the parties.
16.
|
Stockholder’s deficit
|
Authorized, issued
and outstanding
On
September 20, 2019, in terms of a shareholders resolution and Article of Amendment filed with the Colorado 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.
On
January 6, 2020, the majority of the shareholders of the Company approved an increase in the authorized number of common shares
from 900,000,000 to 10,000,000,000 with a par value of $0.01 per share.
The company has issued and outstanding 155,483,897
and 124,300,341 at December 31, 2019 and 2018, respectively.
On
January 1, 2018, the Company recorded the issuance of a further 80,000 shares of common stock to Leonite in connection with a
senior secured convertible promissory note issued in March 2018. The shares were valued at $4,800 on the issue date and recorded
as a debt discount.
On
March 29, 2018, the Company issued 165,000 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 $11,550 on the issue date and recorded as a debt discount.
On
April 17, 2018, the Company issued 605,000 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 $39,450 on the issue date and recorded as a debt discount.
On
November 6, 2018, the Company issued 111,111 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 $8,889 on the issue date and recorded as a debt discount.
On
December 13, 2018, the Company entered into a Separation Agreement and Mutual General Release with a previous employee. In terms
of the agreement, the Company issued the employee 100,000 shares of common stock valued at $8,000 on the issue date.
ETHEMA
HEALTH CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
16.
|
Stockholder’s deficit
(continued)
|
|
a)
|
Common
shares (continued)
|
Authorized, issued
and outstanding (continued)
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 transferred 2,700,000 unissued shares to Labrys Fund, LP in connection with a convertible note issued
on July 8, 2019. These shares are only earned and to be issued 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.
Between
September 11, 2019 and December 30, 2019 in terms of conversion notices received from First Fire Global Opportunities Fund, the
Company issued 11,887,445 shares of common stock to settle $43,092 of convertible debt.
Authorized, issued
and outstanding
The Company has authorized
13,000,000 preferred shares, designated as 3,000,000 series A convertible preferred shares with a par value of $1.00 each and
10,000,000 series B convertible preferred shares with a par value of $0.01 per share. The Company has no preferred shares issued
and outstanding.
In
terms of the convertible note agreements entered into with Leonite disclosed in note 10 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 10 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.
In
terms of the price protection provided in the Leonite Capital, LLC warrants which were issued at an initial exercise price of
$0.10 per share. These warrants provided for a reduction in the issue price should the Company issue any stock at a price
below the exercise price. The Company subsequently issued common stock at a price of $0.00204 per share thereby triggering
the price protection clause in the warrant agreement. The warrants issued to Leonite were originally exercisable over
51,258,985 shares and were increased to be exercisable over 2,456,534,397 shares of
common, amounting to a total exercisable over 2,507,793,382 shares of common stock, at an exercise price of $0.00204 per
share.
ETHEMA
HEALTH CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
16.
|
Stockholder’s deficit
(continued)
|
The
warrants were valued using a Black Scholes pricing model on the date of grant at $1,477,163 using the following weighted average
assumptions:
|
|
Year ended December 31, 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 December 31, 2019, the Company
does not anticipate any awards will be forfeited in the valuation of the warrants.
A summary of all
of the Company’s warrant activity during the period January 1, 2018 to December 31, 2019 is as follows:
|
|
|
No.
of shares
|
|
|
Exercise
price per
share
|
|
|
Weighted
average exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1,
2018
|
|
|
|
49,504,075
|
|
|
|
$0.0033
to $0.10
|
|
|
$
|
0.0690
|
|
Granted
|
|
|
|
48,295,833
|
|
|
|
$0.10 to $0.12
|
|
|
|
0.1130
|
|
Forfeited/cancelled
|
|
|
|
(300,000
|
)
|
|
|
$0.0033
|
|
|
|
0.0033
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding December 31, 2018
|
|
|
|
97,499,908
|
|
|
|
$0.003 to $0.12
|
|
|
$
|
0.0910
|
|
Granted
|
|
|
|
27,700,652
|
|
|
|
$0.10 to $0.12
|
|
|
|
0.11773
|
|
Adjustment due to price protection
|
|
|
|
2,456,534,397
|
|
|
|
$0.00204
|
|
|
|
0.00204
|
|
Forfeited/cancelled
|
|
|
|
(15,633,709
|
)
|
|
|
0.03
|
|
|
|
0.030
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding December 31, 2019
|
|
|
|
2,566,101,248
|
|
|
|
$0.00204
to $0.12
|
|
|
$
|
0.00451
|
|
ETHEMA
HEALTH CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
16.
|
Stockholder’s deficit
(continued)
|
The
following table summarizes information about warrants outstanding at December 31, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.00204
|
|
|
|
2,507,793,382
|
|
|
|
3.18
|
|
|
|
|
|
|
|
2,507,793,382
|
|
|
|
|
|
$0.03
|
|
|
|
6,070,366
|
|
|
|
0.80
|
|
|
|
|
|
|
|
6,070,366
|
|
|
|
|
|
$0.12
|
|
|
|
52,237,500
|
|
|
|
1.89
|
|
|
|
|
|
|
|
52,237,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,566,101,248
|
|
|
|
3.15
|
|
|
$
|
0.00451
|
|
|
|
2,566,101,248
|
|
|
$
|
0.00451
|
|
All
of the warrants outstanding as of December 31, 2019 are vested. The warrants outstanding as of December 31, 2019 have an intrinsic
value of $2,188,320.
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 no issued options at December 31, 2019 under the
Plan.
No options were issued,
exercised during the year ended December 31, 2019 and 2018, respectively.
On October 31, 2019, options
exercisable for 480,000 shares expired. There are no other stock options outstanding.
As
of December 31, 2019 there was no unrecognized compensation costs related to these options and the intrinsic value of the options
as of December 31, 2019 is $0.
ETHEMA
HEALTH CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
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 our Addiction Recovery Institute of America and
Seastone of Delray operations.
|
The segment operating
results of the reportable segments for the year ended December 31, 2019 is disclosed as follows:
|
|
Year
ended December 31, 2019
|
|
|
Rental
Operations
|
|
In-Patient
services
|
|
Total
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
331,584
|
|
|
$
|
28,363
|
|
|
$
|
359,947
|
|
Operating expenditure
|
|
|
17,200
|
|
|
|
4,542,482
|
|
|
|
(4,559,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
314,384
|
|
|
|
(4,514,119
|
)
|
|
|
(4,199,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
-
|
|
|
|
6,600
|
|
|
|
6,600
|
|
Loss on sale of
assets
|
|
|
-
|
|
|
|
(1,019,812
|
)
|
|
|
(1,019,812
|
)
|
Penalty on convertible
notes
|
|
|
-
|
|
|
|
(569,628
|
)
|
|
|
(569,628
|
)
|
Loss on debt conversion
|
|
|
-
|
|
|
|
(203,981
|
)
|
|
|
(203,981
|
)
|
Deposit forfeited
|
|
|
-
|
|
|
|
(1,665,078
|
)
|
|
|
(1,665,078
|
)
|
Interest income
|
|
|
-
|
|
|
|
17,226
|
|
|
|
17,226
|
|
Interest expense
|
|
|
(396,100
|
)
|
|
|
(682,938
|
)
|
|
|
(1,079,038
|
)
|
Amortization of
debt discount
|
|
|
-
|
|
|
|
(3,338,760
|
)
|
|
|
(3,338,760
|
)
|
Change in fair value
of derivative liability
|
|
|
-
|
|
|
|
(2,599,029
|
)
|
|
|
(2,599,029
|
)
|
Foreign
exchange movements
|
|
|
(38,992
|
)
|
|
|
(272,614
|
)
|
|
|
(311,606
|
)
|
Net loss before taxation
|
|
|
(120,708
|
)
|
|
|
(14,842,133
|
)
|
|
|
(14,962,841
|
)
|
Taxation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
$
|
(120,708
|
)
|
|
$
|
(14,842,133
|
)
|
|
$
|
(14,962,841
|
)
|
The
operating assets and liabilities of the reportable segments as of December 31, 2019 is as follows:
|
|
December 31, 2019
|
|
|
Rental Operations
|
|
In-Patient services
|
|
Total
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
72,386
|
|
|
|
22,868
|
|
|
|
95,254
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
4,230
|
|
|
|
251,212
|
|
|
|
255,442
|
|
Non-current assets
|
|
|
2,955,637
|
|
|
|
—
|
|
|
|
2,955,637
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
(1,280,442
|
)
|
|
|
(17,295,416
|
)
|
|
|
(18,575,858
|
)
|
Non-current liabilities
|
|
|
(4,655,765
|
)
|
|
|
—
|
|
|
|
(4,655,765
|
)
|
Intercompany balances
|
|
|
596,872
|
|
|
|
(596,872
|
)
|
|
|
—
|
|
Net liability position
|
|
|
(2,379,468
|
)
|
|
|
(17,641,076
|
)
|
|
|
(20,020,544
|
)
|
ETHEMA
HEALTH CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
17.
|
Segment information (continued)
|
The segment operating
results of the reportable segments for the year ended December 31, 2018 is disclosed as follows:
|
|
Year ended December 31, 2018
|
|
|
Rental Operations
|
|
In-Patient services
|
|
Total
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
331,001
|
|
|
$
|
101,514
|
|
|
$
|
432,515
|
|
Operating expenditure
|
|
|
157,841
|
|
|
|
3,158,991
|
|
|
|
3,316,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
173,160
|
|
|
|
(3,057,477
|
)
|
|
|
(2,884,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
—
|
|
|
|
6,009
|
|
|
|
6,009
|
|
Other expense
|
|
|
—
|
|
|
|
(8,000
|
)
|
|
|
(8,000
|
)
|
Interest income
|
|
|
—
|
|
|
|
5,334
|
|
|
|
5,334
|
|
Interest expense
|
|
|
(178,220
|
)
|
|
|
(518,724
|
)
|
|
|
(696,944
|
)
|
Amortization of debt discount
|
|
|
—
|
|
|
|
(4,504,007
|
)
|
|
|
(4,504,007
|
)
|
Loss on change in fair value of derivative liability
|
|
|
—
|
|
|
|
(422,539
|
)
|
|
|
(422,539
|
)
|
Foreign exchange movements
|
|
|
78,177
|
|
|
|
349,876
|
|
|
|
428,053
|
|
Net income (loss) before taxation from continuing operations
|
|
|
73,117
|
|
|
|
(8,149,528
|
)
|
|
|
(8,076,411
|
)
|
Taxation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss) from continuing operations
|
|
$
|
73,117
|
|
|
$
|
(8,149,528
|
)
|
|
$
|
(8,076,411
|
)
|
The
operating assets and liabilities of the reportable segments as of December 31, 2018 is as follows:
|
|
December 31, 2018
|
|
|
Rental Operations
|
|
In-Patient services
|
|
Total
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
46,667
|
|
|
|
273,450
|
|
|
|
320,117
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
1,460
|
|
|
|
406,388
|
|
|
|
407,848
|
|
Non-current assets
|
|
|
2,855,981
|
|
|
|
9,405,280
|
|
|
|
12,261,261
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
(2,028,940
|
)
|
|
|
(11,648,776
|
)
|
|
|
(13,677,716
|
)
|
Non-current liabilities
|
|
|
(3,924,836
|
)
|
|
|
(2,782,510
|
)
|
|
|
(6,707,346
|
)
|
Intercompany balances
|
|
|
788,944
|
|
|
|
(788,944
|
)
|
|
|
—
|
|
Net liability position
|
|
|
(2,307,391
|
)
|
|
|
(5,408,562
|
)
|
|
|
(7,715,953
|
)
|
ETHEMA
HEALTH CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
18.
|
Net (loss) income per
common share
|
For
the year ended December 31, 2019 and 2018, the following options. Warrants and convertible securities were excluded from the computation
of diluted net loss per share as the results would have been anti-dilutive.
|
|
Year ended
December 31,
2019
|
|
Year ended
December 31,
2018
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
480,000
|
|
Warrants to purchase shares of common stock
|
|
|
2,566,101,248
|
|
|
|
97,499,908
|
|
Convertible notes
|
|
|
1,046,179,457
|
|
|
|
69.816.517
|
|
|
|
|
3,612,280,705
|
|
|
|
167,796,425
|
|
19.
|
Commitments 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.
The company has a mortgage
loans as disclosed in note 11 above. The future commitment under this loans is as follows:
|
|
Amount
|
2020
|
|
|
114,290
|
|
2021
|
|
|
113,397
|
|
2022
|
|
|
3,767,548
|
|
Total
|
|
$
|
3,995,235
|
|
The
Company has principal and interest payment commitments under the Convertible notes disclosed under Note 10 above. Conversion of
these notes are at the option of the investor, if not converted these notes may need to be repaid.
From
time to time, the Company and its subsidiaries enter into legal disputes in the ordinary course of business. The Company believes
there are no material legal or administrative matters pending that are likely to have, individually or in the aggregate, a material
adverse effect on its business or results of operations.
ETHEMA
HEALTH CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
The
Company is current in its US tax filings, except for its 2018 filing, as of December 31, 2019 and is not current in its Canadian
tax filings with the 2016 and 2017 returns still outstanding.
The
income tax provision/ (benefit) is different from that which would be obtained by applying the statutory Federal income tax rate
of 21% and applicable state tax rates of 5% to income before income tax expense. The items causing this difference for the years
ended December 31, 2019 and 2018 are as follows:
|
|
Year ended December 31, 2019
|
|
Year ended December 31, 2018
|
|
|
|
|
|
Tax credit at the federal and state statutory rate
|
|
|
(3,854,992
|
)
|
|
|
(2,219,152
|
)
|
Foreign taxation
|
|
|
(62,163
|
)
|
|
|
121,579
|
|
Permanent differences
|
|
|
1,569,469
|
|
|
|
1,280,902
|
|
Foreign net operating losses utilized
|
|
|
—
|
|
|
|
(19,347
|
)
|
Foreign tax rate differential
|
|
|
1,173
|
|
|
|
—
|
|
Valuation allowance
|
|
|
2,346,513
|
|
|
|
938,250
|
|
|
|
|
—
|
|
|
|
102,232
|
|
Deferred
income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities
at December 31, 2019 and 2018 are as follows:
|
|
December 31, 2019
|
|
December 31, 2018
|
Net operating losses
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
|
24,023,480
|
|
|
|
20,556,758
|
|
Net operating loss utilized
|
|
|
—
|
|
|
|
(73,007
|
)
|
Foreign exchange differential
|
|
|
68,923
|
|
|
|
(68,925
|
)
|
Net taxable loss
|
|
|
8,876,008
|
|
|
|
3,608,654
|
|
Valuation allowance
|
|
|
(32,968,411
|
)
|
|
|
(24,023,480
|
)
|
|
|
|
—
|
|
|
|
—
|
|
The
company has established a valuation allowance against its gross deferred tax assets sufficient to bring its net deferred tax assets
to zero due to the uncertainty surrounding the realization of such assets. Management has determined it is more likely than not
that the net deferred tax assets are not realizable due to the Company’s historical loss position. The valuation allowance
for the year ended December 31, 2019 increased by $9,228,503 due to the additional operating losses incurred for the year ended
December 31, 2019 and adjustments made to prior year opening balances.
As
of December 31, 2019, the prior three tax years remain open for examination by the federal or state regulatory agencies for purposes
of an audit for tax purposes.
Pursuant
to the Internal Revenue Code of 1986, as amended (“IRC”), §382, the Company’s ability to use its net operating
loss carry forwards to offset future taxable income is limited if the Company experiences a cumulative change in ownership of
more than 50% within a three-year period.
As
of December 31, 2019, the Company is in arrears on certain US and Canadian tax filings and the amounts presented above are based
on estimates. The actual losses available could differ from these estimates. In addition, the Company could be subject to penalties
for these unfiled tax returns.
ETHEMA
HEALTH CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
20.
|
Income taxes (continued)
|
As
of December 31, 2019 and 2018, the Company has accrued $250,000 in penalties and interest attributable to delinquent tax returns.
Management believes the Company has adequately provided for any ultimate amounts that are likely to result from audits of these
returns once filed; however, final assessments, if any, could be significantly different than the amounts recorded in the financial
statements.
The
Company operates in foreign jurisdictions and is subject to audit by taxing authorities. These audits may result in the assessment
of amounts different than the amounts recorded in the consolidated financial statements. The Company liaises with the relevant
authorities in these jurisdictions in regard to its income tax and other returns. Management believes the Company has adequately
provided for any taxes, penalties and interest that may fall due.
The
Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017 and significantly changes tax law
in the United States by, among other items, reducing the federal corporate income tax rate from a maximum of 35% to 21% (effective
January 1, 2018). The Act embraces a territorial system for the taxation of future foreign earnings and modifies certain
business deductions by, among other changes, repealing the domestic production activities deduction, further limiting the deductibility
of certain executive compensation and increasing the limitation on the deductibility of certain meals and entertainment expenses.
On the other hand, the Act permits 100% bonus depreciation on assets placed in service through 2022 (with a phase-out period through
2026). The full effects of these changes will be reflected for the first time in the determination of income tax expense for the
year ending December 31, 2018. The Company determined that it had no liability as of December 31, 2018 for the one-time
transition tax on deemed repatriated earnings of foreign subsidiaries imposed by the Act.
Between
January 10, 2020 and January 24, 2020, in terms of conversion notices received from Power up, the Company converted the aggregate
principal sum of $53,000 and interest thereon of $1,085 into 75,618,509 shares of common stock, thereby extinguishing the note.
Between
January 24, 2020 and February 27, 2020, in terms of conversion notices received from Power up, the Company converted the aggregate
principal sum of $41,400 into 453,800,493 shares of common stock.
Between
January 6, 2020 and February 26, 2020, in terms of conversion notices received from First Fire Global Opportunities Fund, the
Company converted the aggregate principal sum of $83,902 into 308,100,000 shares of common stock, thereby extinguishing the note.
Between
January 15, 2020 and February 24, 2020, in terms of conversion notices received from Labrys Fund LP, the Company converted the
aggregate principal sum of $8,936 and interest thereon of $138,109 into 479,160,076 shares of common stock, thereby extinguishing
the note.
Between
January 6, 2020 and February 13, 2020, Leonite Capital, LLC converted a total of 125,609,759 warrants through a cashless exercise
option into 103,000,000 shares of common stock.
Subsequent
to year end, in terms of the Deed of transfer an additional $36,470 of expenses were incurred relating to the disposal of the
property, these expenses were added to the Leonite convertible loan balance outstanding.
The Company intends to continue its operations at a new location in west Palm Beach. A Letter of Intent ("LOI") was signed
on February 7, 2020, with a third party that has a property lease and a pending license at its new location. The Company originally
anticipated recommencing operations in February 2020, however it has been adversely affected by the COVID-19 pandemic. The
LOI requires the Company to provide a working capital loan of up to $500,000. The ability to secure financing has been delayed
by the pandemic. The Company is expecting to complete the working capital financing and to close the acquisition of the third
party during the next month and to begin operations at the new location shortly thereafter.