UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission File Number 000-54748

 

ETHEMA HEALTH CORPORATION.

(Exact Name of Registrant as Specified in its Charter)

 

Colorado   84-1227328
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. employer
Identification No.)
     

1590 S. Congress Avenue

West Palm Beach, Florida

 

33406

Address of Principal Executive Offices   Zip Code

 

(561) 290-0239

Registrant’s Telephone Number, Including Area Code

 

 

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒  Smaller reporting company ☒
  Emerging growth company ☒  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

 

 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common shares    GRST   OTC Pink

  

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Number of shares of common stock outstanding as of September 21, 2020 was 1,841,090, 247.

 

 
 

 

COVID-19 EXPLANATORY NOTE

 

The Company has been unable to meet the extended deadline to file its Quarterly Report on Form 10-Q as allowed by the Order of the Securities and Exchange Commission (the “SEC”), dated March 25, 2020, pursuant to Section 36 of the Securities Exchange Act of 1934 modifying exemptions from the reporting and proxy delivery requirements for public companies (Release No. 34-22465). Due to the lockdowns imposed by local US State Government, the Company has not had access to consulting and other administrative staff and accordingly was unable to compile and review information necessary to complete our filing within the extended time period allowed by the SEC, without unreasonable effort or expense due to circumstances related to the COVID-19 pandemic.

 

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report on Form 10-Q, including but not limited to, statements regarding the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects, or costs and objectives of management for future acquisitions, are forward looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,” “estimates,” “predicts,” “potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, and those identified under Part I, Item 1A of our Annual Report on Form 10-K/A for the year ended December 31, 2019 filed with the SEC on July 10, 2020. Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

 

NOTE REGARDING COMPANY REFERENCES

 

Throughout this Quarterly Report on Form 10-Q, “Ethema,” the “Company,” “we,” “us” and “our” refer to Ethema Health Corporation.

 

 
 

 

 

FORM 10-Q

ETHEMA HEALTH CORPORATION

TABLE OF CONTENTS

 
  Page
PART I - FINANCIAL INFORMATION  
Item l. Financial Statements 1
  Condensed Consolidated Balance Sheets as of March 31, 2020 (Unaudited) and December 31, 2019 1
  Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020 and 2019

 

2

  Unaudited Condensed Consolidated Statements of Stockholder's Deficit for the three months ended March 31, 2020 and 2019

 

3

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

 

4

  Notes to the Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
     
  PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Mine Safety Disclosures 25
Item 5. Other Information 25
Item 6. Exhibits 25
SIGNAT URES 26

 

 

 
 

PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

ETHEMA HEALTH CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

March 31,

2020

  December 31, 2019
    (UNAUDITED)     
ASSETS    
         
Current assets                
Cash   $ 1,940     $ 2,975  
Accounts receivable, net     56,580       105,842  
Prepaid expenses     17,619       26,625  
Other current assets     135,537       120,000  
Total current assets     211,676       255,442  
Non-current assets                
Due on sale of subsidiary     4,571       4,969  
Property and equipment     2,672,627       2,950,668  
Total non-current assets     2,677,198       2,955,637  
Total assets   $ 2,888,874     $ 3,211,079  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities                
Bank overdraft   $ —       $ 11,079  
Accounts payable and accrued liabilities     901,902       1,022,175  
Taxes payable     757,327       792,915  
Convertible loans, net of discounts     5,367,603       5,041,113  
Short term loans     99,300       106,934  
Mortgage loans     105,662       114,290  
Derivative liability     18,449,168       8,694,272  
Related party payables     2,705,804       2,793,080  
Total current liabilities     28,386,766       18,575,858  
Non-current liabilities                
Third party loans     730,235       774,820  
Mortgage loans, net of current portion     3,526,779       3,880,945  
Total non-current liabilities     4,257,014       4,655,765  
Total liabilities     32,643,780       23,231,623  
                 
Stockholders’ deficit                
Preferred stock - Series A; $0.01 par value, 3,000,000 authorized, nil outstanding at March 31, 2020 and December 31, 2019.     —         —    
Preferred Stock - Series B; $0.0001 par value, 10,000,000 authorized, nil outstanding at March 31, 2020 and December 31, 2019.     —         —    
Common stock; $0.01 par value, 10,000,000,000 shares authorized; 1,577,862,975 and 155,483,897 shares issued and outstanding  at March 31, 2020 and December 31, 2019, respectively.     15,778,630       1,554,838  
Common stock discount     (13,572,835 )     —    
Additional paid-in capital     23,327,307       23,188,527  
Accumulated other comprehensive income     542,163       727,976  
Accumulated deficit     (55,830,171 )     (45,491,885 )
Total stockholders’ deficit     (29,754,906 )     (20,020,554 )
Total liabilities and stockholders’ deficit   $ 2,888,874     $ 3,211,079  

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements 

 

1

 

 

ETHEMA HEALTH CORPORATION 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS

OF OPERATIONS AND COMPREHENSIVE LOSS

 

    Three months ended March 31, 2020   Three months ended
March 31, 2019
         
Revenues   $ 83,542     $ 82,015  
                 
Operating expenses                
General and administrative     22,536       382,153  
Rental expense     1,000       570,066  
Professional fees     108,021       44,154  
Salaries and wages     12,351       404,264  
Depreciation     30,241       75,876  
Total operating expenses     174,149       1,476,513  
                 
Operating loss     (90,607 )     (1,394,498 )
                 
Other Income (expense)                
Loss on conversion of convertible debentures     (286,343 )     —    
Exercise of warrants     (92,952 )     —    
Interest income     60       15,277  
Interest expense     (193,922 )     (345,098 )
Debt discount     (403,677 )     (761,942 )
Derivative liability movement     (9,754,896 )     (473,301 )
Foreign exchange movements     484,051       (129,118 )
Net loss before taxation     (10,338,286 )     (3,088,680 )
Taxation     —         —    
Net loss     (10,338,286 )     (3,088,680  
Accumulated other comprehensive loss                
Foreign currency translation adjustment     (185,813 )     43,097  
                 
Total comprehensive loss   $ (10,524,099 )   $ (3,045,583 )
                 
Basic and diluted loss per common share   $ (0.01 )   $ (0.02 )
Weighted average common shares outstanding – Basic and diluted     956,540,071       124,358,020  

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements

 

2

 

 

ETHEMA HEALTH CORPORATION  

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

 

        Preferred Series A   Preferred Series B   Common       Additional            
    Shares   Amount   Shares   Amount   Shares   Amount*   Discount  to par value   Paid in Capital*   Comprehensive Income   Accumulated Deficit   Total
                                             
Balance as of December 31, 2019     —         —         —       $ —         155,483,897     $ 1,554,838     $ —       $ 23,188,527     $ 727,976     $ (45,491,885 )   $ (20,020,544 )
Exercise of warrants     —         —         —         —         103,000,000       1,030,000       (937,048 )     —         —         —         92,952  
Shares issued for commitment fees     —         —         —         —         2,700,000       27,000       —         138,780       —         —         165,780  
Conversion of convertible notes                                     1,316,679,078       13,166,792       (12,635,787 )     —         —         —         531,005  
Foreign currency translation     —         —         —         —         —         —                 —         (185,813 )     —         (185,813 )
Net loss     —         —         —         —         —         —                 —         —         (10,338,286 )     (10,338,286 )
Balance as of March 31, 2020     —         —         —       $ —         1,577,862,975     $ 15,778,630     $ (13,572,835 )   $ 23,327,307     $ 542,163     $ (55,830,171 )   $ (29,754,906 )
                                                                                         

 

 

        Preferred Series A   Preferred Series B   Common       Additional            
    Shares   Amount   Shares   Amount   Shares   Amount*   Discount  to par value   Paid in Capital*   Comprehensive Income   Accumulated Deficit   Total
                                             
Balance as of December 31, 2018     —         —         —       $ —         124,300,341     $ 1,243,004     $ —       $ 20,939,676     $ 630,411     $ (30,529,044 )   $ (7,715,953 )
Fair value of warrants issued     —         —         —         —         —         —         —         874,566       —         —         874,566  
Shares issued for commitment fees     —         —         —         —         71,111       711       —         4,267       —         —         4,978  
Foreign currency translation                                     —         —         —         —         43,097       —         43,097  
Net loss     —         —         —         —         —         —         —         —         —         (3,088,680 )     (3,088,680 )
Balance as of March 31, 2019     —         —         —         —         124,371,452     $ 1,243,715       —       $ 21,818,509     $ 673,508     $ (33,617,724 )   $ (9,881,992 )

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements

 

3

 

 

ETHEMA HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

    Three months ended March 31, 2020   Three months ended March 31, 2019
Operating activities                
Net loss   $ (10,338,286 )   $ (3,088,680 )
Adjustment to reconcile net loss to net cash provided by (used in) operating activities:                
Depreciation     30,241       75,876  
Exercise of warrants     92,952       —    
Loss on conversion of convertible debentures     286,343       —    
Stock based compensation for services     165,780       —    
Amortization of debt discount     403,677       761,942  
Derivative liability movements     9,754,896       473,301  
Non-cash interest accrual on escrow deposit     (23 )     (15,277 )
Non cash deferral of operating lease expense     —         95,302  
Changes in operating assets and liabilities                
Accounts receivable     49,007       (77,275 )
Prepaid expenses and other current assets     3,000       (80,409 )
Deposit released from escrow     —         322,156  
Accounts payable and accrued liabilities     75,296       424,777  
Taxes payable     10,861       —    
Net cash provided by (used in) operating activities     533,744       (1,108,287 )
Investing activities                
Investment in promissory note     (15,537 )     —    
Deposits refunded     5,995       —    
Deposit on property     —         (2,658 )
Purchase of fixed assets     —         (8,176 )
Net cash used in investing activities     (9,542 )     (10,834 )
                 
Financing activities                
Decrease in bank overdraft     (11,079 )     —    
Repayment of mortgage     (25,855 )     (33,396 )
Proceeds from convertible notes     —         1,567,000  
Repayment of convertible notes     —         (523,803 )
Repayment of related party notes             (1,081 )
Proceeds from related party notes     19,362       —    
Net cash (used in) provided by financing activities     (17,572 )     1,008,720  
                 
Effect of exchange rate on cash     (507,665 )     111,306  
                 
Net change in cash     (1,035 )     905  
Beginning cash balance     2,975       24,674  
Ending cash balance   $ 1,940     $ 25,579  
                 
Supplemental cash flow information                
Cash paid for interest   $ 41,504     $ 411,610  
Cash paid for income taxes   $ —       $ —    
                 
Non cash investing and financing activities                
Conversion of debt to equity   $ 531,005     $ —    
Fair value of warrants issued   $ —       $ 874,566  

    

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements

 

4

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Nature of business

 

Ethema Health Corporation (the “Company”) was incorporated under the laws of the state of Colorado, USA, on April 1, 1993. Effective April 4, 2017, the Company changed its name to Ethema Health Corporation and prior to that, on May 2012, the Company had changed its name to GreeneStone Healthcare Corporation from Nova Natural Resources Corporation. As of December 31, 2017, the Company owned 100% of the outstanding shares of GreeneStone Clinic Muskoka Inc., incorporated in 2010 under the laws of the Province of Ontario, Canada; Cranberry Cove Holdings Ltd., 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”).

 

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.

 

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.

 

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.

 

On December 20, 2019 the Company entered into an agreement to terminate the lease agreement on January 30, 2020.

 

 

2. Summary of significant accounting policies


Basis of presentation

 

The (a) unaudited condensed consolidated balance sheets as of March 31, 2020, which have been derived from the unaudited condensed consolidated financial statements, and as of December 31, 2019, which have been derived from audited consolidated financial statements, and (b) the unaudited condensed consolidated statements of operations and cash flows of the Company, have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2020 are not necessarily indicative of results that may be expected for the year ending December 31, 2020. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on July 10, 2020.

 

All amounts referred to in the notes to the unaudited condensed consolidated financial statements are in United States Dollars ($) unless stated otherwise.

 

a) Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

 

5

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of significant accounting policies (continued)

 

b) Principles of consolidation and foreign currency translation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany transactions and balances have been eliminated on consolidation.

 

Certain of the Company’s subsidiaries functional currency is the Canadian dollar, while the Company’s reporting currency is the U.S. dollar. All transactions initiated in Canadian dollars are translated into US dollars in accordance with ASC 830, “Foreign Currency Translation” as follows:

 

i. Monetary assets and liabilities at the rate of exchange in effect at the balance sheet date.

 

ii. Equity at historical rates.

 

iii. 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 three months ended March 31, 2020, a closing rate of CDN$1.00 equals US$0.7049 and an average exchange rate of CDN$1.00 equals US$0.7435. For the three months ended March 31, 2019, an average exchange rate of CAD$1.0000 equals US$0.7483 and for the year ended December 31, 2019 a closing rate of $0.7699.

 

c) Revenue Recognition

 

ASU 2014-09 requires companies to exercise more judgment and recognize revenue using a five-step process.

 

As a result of certain changes required by ASU 2014-09, the majority of the Company’s provision for doubtful accounts are recorded as a direct reduction to revenue instead of being presented as a separate line item on the condensed consolidated statements of operations. The adoption of ASU 2014-09 has no impact on the Company’s accounts receivable as it was historically recorded net of allowance for doubtful accounts and contractual adjustments, and the Company has eliminated the presentation of allowance for doubtful accounts on the condensed consolidated balance sheets.

 

As our performance obligations relate to contracts with a duration of one year or less, the Company elected the optional exemption in ASC 606-10-50-14(a). Therefore, the Company is not required to disclose the transaction price for the remaining performance obligations at the end of the reporting period or when the Company expects to recognize the revenue. The Company has minimal unsatisfied performance obligations at the end of the reporting period as our patients typically are under no obligation to remain admitted in our facilities.

 

The Company receives payments from the following sources for services rendered in our U.S. Facility: (i) commercial insurers; and (ii) individual patients and clients. As the period between the time of service and time of payment is typically one year or less, the Company elected the practical expedient under ASC 606-10-32-18 and did not adjust for the effects of a significant financing component.

 

The Company derives a significant portion of its revenue from other payors that receive discounts from established billing rates. The various managed care contracts under which these discounts must be calculated are complex, subject to interpretation and adjustment, and may include multiple reimbursement mechanisms for different types of services provided in the Company’s in-patient facilities and cost settlement provisions. Management estimates the transaction price on a pay or specific basis given its interpretation of the applicable regulations or contract terms. The services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from the Company’s estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.

 

Settlements under cost reimbursement agreements with third-party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. In the opinion of management, adequate provision has been made for any adjustments and final settlements. However, there can be no assurance that any such adjustments and final settlements will not have a material effect on the Company’s financial condition or results of operations. The Company’s accounts receivables were $56,580 and $105,842 for the three months ended March 31, 2020 and year ended December 31, 2019, respectively, and were included in other current assets in the condensed consolidated balance sheets. Management believes that these receivables are properly stated and are not likely to be settled for a significantly different amount. The net adjustments to estimated accounts receivable settlements resulted in a decrease in revenues of $0 and $414,603 for the three months ended March 31, 2020 and the year ended December 31, 2019, respectively.

 

6

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of significant accounting policies (continued)

 

c) Revenue Recognition (continued)

 

The Company’s revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those services. The Company derives its revenues from the sale of its services, as defined below. The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its revenue transactions: 

 

  i. identify the contract with a customer;
  ii. identify the performance obligations in the contract;
  iii. determine the transaction price;
  iv. allocate the transaction price to performance obligations in the contract; and
  v. recognize revenue as the performance obligation is satisfied.

 

The Company has two operating segments from which it derives revenues which is recognized on the basis described below.

 

i.         Rental Income

 

In terms of the lease agreement, on a monthly basis as long as the facility is utilized by the tenant

 

ii.       In-patient revenue

 

The patients have been treated and provided with services by the Company; there is clear evidence that an arrangement exists; the amount of revenue and related costs can be measured reliably; and it is probable that the economic benefits associated with the transaction will flow to the Company.

 

During 2020, the Company’s revenues were solely comprised of rental income.

 

d) Non-monetary transactions

 

The Company’s policy is to measure an asset exchanged or transferred in a non-monetary transaction at the more reliable measurement of the fair value of the asset given up and the fair value of the asset received, unless:

 

The transaction lacks commercial substance;

 

The transaction is a transfer between entities under common control;

 

The transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange;

 

Neither the fair value of the asset received nor the fair value of the asset given up is reliably measurable; or

 

The transaction is a non-monetary, non-reciprocal transfer to owners that represents a spinoff or other form of restructuring or liquidation.

 

e) Cash and cash equivalents

 

The Company’s policy is to disclose bank balances under cash, including bank overdrafts with balances that fluctuate frequently from being positive to overdrawn and term deposits with a maturity period of three months or less from the date of acquisition. The Company had no cash equivalents at March 31, 2020 and December 31, 2019.

 

f) Accounts receivable

 

Accounts receivable primarily consists of amounts due from third-party payors (non-governmental) and private pay patients and is recorded net of allowances for doubtful accounts and contractual discounts. The Company’s ability to collect outstanding receivables is critical to its results of operations and cash flows. Accordingly, accounts receivable reported in the Company’s unaudited condensed consolidated financial statements is recorded at the net amount expected to be received. The Company’s primary collection risks are (i) the risk of overestimating net revenues at the time of billing that may result in the Company receiving less than the recorded receivable, (ii) the risk of non-payment as a result of commercial insurance companies denying claims, (iii) the risk that patients will fail to remit insurance payments to the Company when the commercial insurance company pays out-of-network claims directly to the patient, (iv) resource and capacity constraints that may prevent the Company from handling the volume of billing and collection issues in a timely manner, (v) the risk that patients do not pay the Company for their self-pay balances (including co-pays, deductibles and any portion of the claim not covered by insurance) and (vi) the risk of non-payment from uninsured patients.

 

g) Allowance for Doubtful Accounts, Contractual and Other Discounts

 

The Company derives the majority of its revenues from commercial payors at out-of-network rates. Management estimates the allowance for contractual and other discounts based on its historical collection experience. The services authorized and provided and related reimbursement are often subject to interpretation and negotiation that could result in payments that differ from the Company’s estimates. The Company’s allowance for doubtful accounts is based on historical experience, but management also takes into consideration the age of accounts, creditworthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. An account is written off only after the Company has pursued collection efforts or otherwise determines an account to be uncollectible. Uncollectible balances are written-off against the allowance. Recoveries of previously written-off balances are credited to income when the recoveries are made.

 

7

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of significant accounting policies (continued)

 

h) Financial instruments

 

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.

 

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.

 

i) 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:

 

· Buildings 25 years

 

j) Income taxes

 

The Company accounts for income taxes under the provisions of ASC Topic 740, “Income Taxes”. Under ASC Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income taxes are provided using the liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax basis of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized.

 

ASC Topic 740 contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company recognizes interest and penalties accrued on unrecognized tax benefits within general and administrative expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in general and administrative expenses in the period that such determination is made.

 

The tax returns for fiscal 2001, through 2017 are subject to audit or review by the US tax authorities, whereas fiscal 2010 through 2019 are subject to audit or review by the Canadian tax authority.

 

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.

 

8

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of significant accounting policies (continued)

 

k) Net income (loss) per Share (continued)

 

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 unaudited condensed consolidated statements of operations and comprehensive loss 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.

 

m) Derivatives

 

The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. The Company uses a Black Scholes Option Pricing model to estimate the fair value of convertible debt conversion features at the end of each applicable reporting period. Changes in the fair value of these derivatives during each reporting period are included in the statements of operations. Inputs into the Black Scholes Option Pricing model require estimates, including such items as estimated volatility of the Company’s stock, risk free interest rate and the estimated life of the financial instruments being fair valued.

 

If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.

 

n) Recent accounting pronouncements

 

Recent accounting pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments”, which replaces the incurred loss methodology with an expected credit loss methodology that is referred to as the current expected credit loss (CECL) methodology. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The amendments in this update are required to be applied using the modified retrospective method with an adjustment to accumulated deficit and are effective for the Company beginning with fiscal year 2020, including interim periods. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. An entity with trade receivables will be required to use historical loss information, current conditions, and reasonable and supportable forecasts to determine expected lifetime credit losses. Pooling of assets with similar risk characteristics is also required.

 

Since adopted on January 1, 2020, there has not been any material impact on the Company’s financial position, results of operations, and related disclosures.

 

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 consolidated 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 effects of this ASU on the Company’s condensed 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 condensed consolidated financial statements upon adoption.

 

 

9

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of significant accounting policies (continued)

 

o) Financial instruments Risks

 

The Company is exposed to various risks through its condensed consolidated financial instruments. The following analysis provides a measure of the Company’s risk exposure and concentrations at the balance sheet date, March 31, 2020 and December 31, 2019.

 

i. Credit risk

 

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.

 

ii. Liquidity risk

 

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 $28,170,081 and an accumulated deficit of $55,830,171. The Company will be dependent upon the raising of additional capital in order to implement its business plan. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, liquidity risk is assessed as high, material and remains unchanged from the prior year.

 

iii. Market risk

 

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises of three types of risk: interest rate risk, currency risk, and other price risk. The Company is exposed to interest rate risk and currency risk.

 

a. Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to minimal interest rate risk as there is no overdraft indebtedness as of March 31, 2020. In the opinion of management, interest rate risk is assessed as low, not material and remains unchanged from the prior year.

 

b. Currency risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is subject to currency risk as it has subsidiaries that operate in Canada and are subject to fluctuations in the Canadian dollar. A substantial portion of the Company’s financial assets and liabilities are denominated in Canadian dollars. Based on the net exposures at March 31, 2020, a 5% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an approximate $24,150 increase or decrease in the Company’s after tax net income from operations. The Company has not entered into any hedging agreements to mitigate this risk. In the opinion of management, currency risk is assessed as low, material and remains unchanged from the prior year.

 

c. Other price risk

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.

 

3. Going concern

 

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with US GAAP applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations in the normal course of business. As of March 31, 2020 the Company has a working capital deficiency of approximately $28,200,000 and accumulated deficit of approximately $55,800,000. Management believes that current available resources will not be sufficient to fund the Company’s planned expenditures over the next 12 months. Accordingly, the Company will be dependent upon the raising of additional capital through placement of common shares, and/or debt financing in order to implement its business plan, and generating sufficient revenue in excess of costs. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain geographical areas, or techniques that it might otherwise seek to retain. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. These factors create substantial doubt about the Company’s ability to continue as a going concern. These unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities or other adjustments that may be necessary should the Company not be able to continue as a going concern.

 

10

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4. Prepaid expenses and other current assets

 

Prepaid expenses and other current assets includes the following:

 

On February 25, 2019, the Company entered into a Letter of Intent whereby it would purchase a 33.33% interest in Local Link Wellness, LLC (“LLW”) for gross proceeds of $400,000. LLW plans to provide a comprehensive addiction treatment program to large employee groups. The company has advanced LLW a total of $120,000 as at March 31, 2020. These funds were advanced as short-term promissory notes that are immediately due and payable and are classified as other current assets on our unaudited condensed consolidated balance sheet.

 

The company invested $15,500 in Evernia Health Services, LLC (“Evernia”), a newly formed entity which is 100% owned by American Treatment Holdings, Inc. (“ATHI”), a newly formed entity to hold the investment in Evernia. Subsequent to March 31, 2020, the Company acquired 51% of ATHI by providing a loan of a maximum of $500,000 to Ervernia. As of June 30, 2020, the Company had advanced Evernia approximately $98,000 including accrued interest thereon and the Company has agreed to advance an additional amount of approximately $202,000 (“the First Tranche”) within a reasonable time of concluding the loan agreements. The timing of the balance of the advance of approximately $200,000 will be mutually agreed upon between the parties.

 

5. Property and equipment

 

Property and equipment consists of the following:  

 

    March 31,
2020
  December 31, 2019
    Cost   Accumulated depreciation   Net book value   Net book value
Land   $ 151,547     $     $ 151,547     $ 165,537  
Property     2,866,811       (345,731 )     2,521,080       2,785,131  
    $ 3,018,358     $ (345,731 )   $ 2,672,627     $ 2,950,668  

Depreciation expense for the three months ended March 31, 2020 and 2019 was $30,241 and $75,876, respectively.

 

6. Taxes Payable

 

The taxes payable consist of:

 

· A payroll tax liability of $128,702 (CDN$182,589) in Greenestone Muskoka which has not been settled as yet.
· The Company has assets and operates businesses in Canada and is required to disclose these operations to the US taxation authorities, the requisite disclosure has not been made. Management has reserved the maximum penalty due to the IRS in terms of non-disclosure. This non-compliance with US disclosure requirements is currently being addressed. An amount of $250,000 has been accrued for any potential exposure the Company may have.
· Estimated income taxes payable in certain of the Canadian operations.

 

    March 31,
2020
  December 31,
2019
         
Payroll taxes   $ 128,702     $ 140,583  
HST/GST payable     34,578       26,524  
US penalties due     250,000       250,000  
Income tax payable     344,047       375,808  
    $ 757,327     $ 792,915  

 

11

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7. Short term convertible notes

 

The short-term convertible notes consist of the following:

 

   

Interest

rate

    Maturity date   Principal     Interest     Debt Discount    

March 31,

2020

   

December 31,

2019

 
                                           
Leonite Investments LLC     8.5 %   On demand   $ 1,126,394     $ 154,152     $ -     $ 1,280,546     $ 1,213,148  
                                                     
Power Up Lending Group      9.0 %         -       -       -       -       33,707  
      9.0 %   September 10, 2019     41,600       4,835       (4,303 )     42,132       51,827  
                                                     
First Fire Global Opportunities Fund     12.0 %   December 2019     73,006       91,606       -       164,612       247,361  
                                                     
Actus Fund, LLC     10.0 %   May 7, 2020     225,000       14,813       (30,384 )     209,429       129,016  
                                                     
Labrys Fund, LP     12.0 %   January 8, 2020     273,064       4,751       -       277,815       286,057  
                                                     
Series N convertible notes     6.0 %   May 17, 2019 to September 16, 2020     3,229,000       279,365       (115,296 )     3,393,069       3,079,997  
                                                     
                                        $ 5,367,063     $ 5,041,113  

 

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.

 

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 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.

 

12

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7. Short term convertible notes (continued)

 

Leonite Capital, LLC (continued)

 

On April 17, 2018, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $605,000, including an Original Issue Discount of $55,000, for net proceeds of $550,000. The note had a maturity date of December 1, 2018 and bears interest at 8.5% per annum. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser following the issue date into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to price protection and anti-dilution protection. The Company paid a commitment fee of $42,350 settled through the issue of 10,083,333 shares of common stock. In conjunction with this note the Company issued a five year warrant to purchase 10,083,333 shares of common stock at an exercise price of $0.10 per share, subject to anti-dilution and price protection.

 

On January 17, 2019, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $71,111, including an Original Issue Discount of $7,111, for net proceeds of $64,000. The note had a maturity date of July 25, 2019 and bears interest at 11.0% per annum. The outstanding principal amount of the note was convertible at any time and from time to time at the election of the purchaser following the issue date into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to price protection and anti-dilution protection. The Company paid a commitment fee of $4,978 settled through the issue of 71,111 shares of common stock. In conjunction with this note the Company issued a five year warrant to purchase 1,185,183 shares of common stock at an exercise price of $0.10 per share, subject to anti-dilution and price protection.

 

Effective March 19, 2019, the Company entered into a note extension agreement with Leonite, whereby the convertible notes outstanding to Leonite, amounting to $2,420,000, for consideration of $75,000 added to the principal outstanding on the note on January 1, 2019, a further $75,000 added to the principal outstanding on the note on February 1, 2019 and a further $100,000 added to the principal of the note on March 15, 2019, the maturity date of all of the convertible notes above were extended to December 31, 2019 and has subsequently been partially settled by the transfer of the property located at 810 Andrews Avenue, Delray Beach, Florida, valued at $1,500,000.

 

On August 26, 2019, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $60,000, including an Original Issue Discount of $10,000, for net proceeds of $47,000. The note had a maturity date of September 10, 2019 and bears interest at 1.0% per annum. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser following the issue date into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to price protection and anti-dilution protection. In conjunction with this note the Company issued a five year warrant to purchase 1,000,000 shares of common stock at an exercise price of $0.10 per share, subject to anti-dilution and price protection.

 

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.

 

Refer to Note 16 for subsequent events concerning Leonite Capital, LLC. 

 

Power Up Lending Group LTD

 

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.

 

Between January 10, 2020 and January 24, 2020, in terms of conversion notices received, Power Up converted the aggregate principal amount of $53,000 and interest thereon of $1,085 into 75,618,509 shares of common stock at an average conversion price of $0.000715 per share.

 

13

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7. Short term convertible notes (continued)

 

Power Up Lending Group LTD (continued)

 

On July 15 2019, the Company, entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $83,000. The Note has a maturity date of April 30, 2020 and bears interest at the rate of nine percent per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of Power Up during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion.

 

Between January 24, 2020 and February 27, 2020, in terms of conversion notices received, Power Up converted the aggregate principal amount of $41,400 into 453,800,493 shares of common stock at an average conversion price of 0.0000912 per share.

 

Refer to Note 16 for subsequent events concerning Power up Lending Group LTD. 

 

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 a conversion notices received, the Company issued 11,887,445 shares of Common stock in settlement of $36,592 of principal outstanding.

 

Between January 6, 2020 and February 26, 2020, in terms of conversion notices received, First Fire converted an aggregate principal amount of $83,902 into 308,100,000 shares of common stock at an average conversion price of $0.000272 per share.

 

Refer to Note 16 for subsequent events concerning First Fire Global Opportunities Fund. 

 

Auctus Fund, LLC

 

On August 7 2019, the Company, entered into a Securities Purchase Agreement with Auctus Fund, LLC, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $225,000. 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.

 

Refer to Note 16 for subsequent events concerning Auctus Fund LLC.

14

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7. Short term convertible notes (continued)

  

Labrys Fund, LP

 

On July 8, 2019, 2019, the Company, entered into a Securities Purchase Agreement with Labrys Fund, LP, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $282,000 for net proceeds of $253,800 after an original issue discount of $28,200. The Note has a maturity date of January 8, 2020 and bears interest at the rate of twelve percent per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of Labrys during the period beginning on the date that is 180 days following the issue date into shares of the Company's common stock at a conversion price equal to 60% of the lowest closing bid price of the Company's common stock for the thirty trading days prior to conversion. The Company was also required to transfer 2,764,706 unissued shares of common stock, which shares will be returned to the Company if the note is repaid prior to the expiry of 180 days from the date of issuance.

 

In connection with the issuance of the convertible promissory note to Labrys Fund LP, the Company issued 2,700,000 returnable shares. These shares were returnable if the note was 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 had not repaid the note on the maturity date, January 8, 2020, therefore the 2,700,000 shares were expensed as an additional fee amounting to $165,780, the value of the shares on the date of grant.

 

Between January 15, 2020 and February 25, 2020, in terms of conversion notices received, Labrys Fund LP converted the aggregate principal sum of $8,936 and interest of $19,867 into 479,160,076 shares of common stock at an average conversion price of 0.00006 per share.

 

Refer to Note 16 for subsequent events concerning Labrys Fund LP.

 

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 were 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 matured 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.

 

8. Mortgage loans

 

Loans payable is disclosed as follows:

 

    Interest 
rate
    Maturity date   Principal 
Outstanding
    Accrued 
interest
    March  31,
2020
    December 31, 2019  
                                   
Cranberry Cove Holdings, Ltd.                                            
Pace Mortgage     4.2 %   July 19, 2022   3,627,433     $ 5,009     $ 3,632,441      $ 3,995,235  
Disclosed as follows:                                            
Short-term portion                               $ 105,662     $ 114,290  
Long-term portion                                 3,526,779       3,880,945  
                                $ 3,632,441     $ 3,995,235  

 

The aggregate amount outstanding is payable as follows:

 

    Amount
  Within 12 months       105,662  
  Within 12 to 24 months       104,925  
  Within 24 to 36 months       3,421,854  
  Total     $ 3,632,441  

 

 

15

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8. Mortgage loans (continued)

 

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.

 

9. Third party loan

 

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.

 

10. Derivative liability

 

The short-term convertible notes, together with certain warrants issued to Leonite and the short term convertible notes disclosed in note 7 above and note 12 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 March 31, 2020, the derivative liability was valued at $18,449,168, primarily due to the increase in the number of warrants due to Leonite in terms of the warrant conversion price protection afforded the warrant holder.

 

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

 

    Three months ended
March 31,
2020
     
Calculated stock price   $ 0.0001  
Risk free interest rate     0.05% to 0.33%  
Expected life of convertible notes and warrants     1 to 53 months  
expected volatility of underlying stock     193.9% to 363.7%  
Expected dividend rate     0 %

 

The movement in derivative liability is as follows:

 

    March 31,
2020
  December 31,
2019
         
Opening balance   $ 8,694,272     $ 4,618,080  
Derivative liability on issued convertible notes and variable priced warrants     —         1,477,163  
Fair value adjustments to derivative liability     9,754,896       2,599,029  
                 
Closing balance   $ 18,449,168     $ 8,694,272  

 

11. Related party transactions

 

Shawn E. Leon

As of March 31, 2020 and December 31, 2019 the Company had a payable of $326,504 and $293,072, respectively to Shawn E. Leon. Mr. Leon is a director and CEO of the Company. The balances payable is non-interest bearing and has no fixed repayment terms.

 

Mr. Leon was paid management fees of $0 for the three months ended March 31, 2020 and 2019. Mr. Leon is entitled to management fees of $240,000 per annum.

 

Leon Developments, Ltd.

As of March 31, 2020 and December 31, 2019, the Company owed Leon Developments, Ltd., $794,052 and $904,121, respectively. The balance owing to Leon Developments, Ltd. Is non-interest bearing and has no fixed terms of repayment.

 

Eileen Greene

As of March 31, 2020 and December 31, 2019, the Company owed Eileen Greene, the spouse of Mr. Leon, $1,585,247 and

$1,595,887, respectively. The amount owing to Ms. Greene is non-interest bearing and has no fixed repayment terms.

 

16

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12. Stockholders' deficit

 

a) Common shares

 

Authorized, issued and outstanding

 

The Company has authorized 10,000,000,000 shares with a par value of $0.01 per share. The company has issued and outstanding common shares of 1,577,862,975 and 155,483,897 as of March 31, 2020 and December 31, 2019, respectively.

 

Between January 6, 2020 and February 27, 2020, the Company issued 1,316,679,078 shares of common stock in terms of conversion notices received from convertible note holders. The shares issued were issued below par based on the market price of the stock on the date of conversion and were valued at $531,005.

 

On January 8, 2020, the Company recorded the issuance of 2,700,000 shares to Labrys Fund. These shares were originally issued to Labrys fund as shares returnable to the Company dependent on settlement of the convertible note at maturity. The Company did not settle the convertible note or interest thereon at maturity.

 

Between January 6, 2020 and February 13, 2020, the Company issued 103,000,000 shares of common stock to Leonite Investment in terms of the exercise of 125,609,759 warrants valued at $92,952 at an average exercise price of 0.00009 per share, based on the price protection afforded to the warrant holder.

 

b) Preferred shares

 

Authorized, issued and outstanding

The Company has authorized 13,000,000 preferred shares with a par value of $0.01 per share, designated as 3,000,000 series A convertible preferred shares and 10,000,000 series B convertible preferred shares. The Company has no preferred shares issued and outstanding.

 

c) Warrants

 

In terms of the 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 $0.0000324 per share thereby triggering the price protection clause in the warrant agreement, resulting in an additional 152,017,272,726 warrants exercisable over shares of common stock. Leonite exercised warrants over 125,609,759 shares of common stock resulting in the issue of 103,000,000 shares of common stock. The remaining Leonite warrants exercisable for 154,399,456,399 shares are exercisable at $0.0000324 per share.

 

A summary of all of the Company’s warrant activity during the period January 1, 2019 to March 31, 2020 is as follows:

 

    No. of shares   Exercise price per 
share
  Weighted average exercise price
             
Outstanding as of January 1, 2019     97,499,908       $0.003 to $0.12     $ 0.0910000  
Granted     27,700,652       $0.10 to $0.12       0.1177300  
Adjustment due to price protection     2,456,534,397     $ 0.00204       0.0020400  
Forfeited/cancelled     (15,633,709 )     0.03       0.0300000  
Exercised     —         —         —    
Outstanding as of December 31, 2019     2,566,101,248       $0.00204 to $0.12     $ 0.0044700  
Granted     —         —         —    
Adjustment due to price protection     152,017,272,726     $ 0.0000324       0.0000324  
Forfeited/cancelled     (2,366,666 )     0.03       0.0300000  
Exercised     (125,609,759 )     0.0009       0.0009000  
Outstanding as of March 31, 2020     154,455,397,549       $0.0000324 to $0.12     $ 0.0000737  

  

The following table summarizes information about warrants outstanding at March 31, 2020:

 

      Warrants outstanding     Warrants exercisable  

 

Exercise price

   

 

No. of shares

   

Weighted average

remaining years

   

Weighted average

exercise price

   

 

No. of shares

   

Weighted average

exercise price

 
                                 
$0.0000324       154,399,456,349       2.94               154,399,456,349          
$0.03       3,703,700       1.04               3,703,700          
$0.12       52,237,500       1.64               52,237,500          
                                           
        154,455,397,549       2.94     $ 0.0000737       154,455,397,549     $ 0.0000737  

 

All of the warrants outstanding as of March 31, 2020 and December 31, 2019 are vested. The warrants outstanding as of March 31, 2020 have an intrinsic value of $10,437,403.

 

17

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12. Stockholders' deficit (continued)

 

d) Stock options

 

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.

 

No options were issued, exercised or cancelled during the three months ended March 31, 2020 and the year ended December 31, 2019, respectively.

 

13. Segment information

 

The Company has two reportable operating segments:

 

a. Rental income from the property owned by CCH subsidiary located at 3571 Muskoka Road, #169, Bala, on which the operations of the Canadian Rehab Clinic were located prior to disposal on February 14, 2017 and subsequently leased to the purchasers of the business of the Canadian Rehab Clinic, for a period of 5 years renewable for a further three five-year periods and with an option to acquire the property at a fixed price.

 

b. Rehabilitation Services provided to customers, these services were provided to customers at the Company’s ARIA and Seastone of Delray operations.

 

The segment operating results of the reportable segments is disclosed as follows:

 

    Three months ended March 31, 2020
    Rental Operations   In-Patient services   Total
             
Revenue   $ 83,542     $ -     $ 83,542  
Operating expenditure     30,300       143,849       174,149  
                         
Operating income (loss)     53,242       (143,849 )     (90,607 )
                         
Other (expense) income                        
Other income                        
Loss on conversion of convertible notes     -       (286,343 )     (286,343 )
Exercise of warrants     -       (92,952 )     (92,952 )
Interest income     -       60       60  
Interest expense     (61,398 )     (132,524 )     (193,922 )
Amortization of debt discount     -       (403,677 )     (403,677 )
Change in fair value of derivative liability     -       (9,754,896 )     (9,754,896 )
Foreign exchange movements     71,619       412,432       484,051  
Net income (loss) before taxation     63,463       (10,401,749 )     (10,338,286 )
Taxation     -       -       -  
Net income (loss)   $ 63,463     $ (10,401,749 )   $ (10,338,286 )

 

    Three months ended March 31, 2019
    Rental Operations   In-Patient services   Total
             
Revenue   $ 82,015     $ —       $ 82,015  
Operating expenses     37,358       1,439,155       1,476,513  
                         
Operating income (loss)     44,657       (1,439,155 )     (1,394,498 )
                         
Other (expense) income                        
Interest income     —         15,277       15,277  
Interest expense     (41,512 )     (303,586 )     (345,098 )
Amortization of debt discount     —         (761,942 )     (761,942 )
Loss on change in fair value of derivative liability     —         (473,301 )     (473,301 )
Foreign exchange movements     (19,291 )     (109,827 )     (129,118 )
Net loss before taxation     (16,146 )     (3,072,534 )     (3,088,680 )
Taxation     —         —         —    
Net loss   $ (16,146 )   $ (3,072,534 )   $ (3,088,680 )

 

18

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

13. Segment information (continued)

 

The operating assets and liabilities of the reportable segments is as follows:

 

    March 31, 2020
    Rental Operations   In-Patient services   Total
             
Purchase of fixed assets     —         —         —    
Assets                        
Current assets     2,883       208,793       211,676  
Non-current assets     2,677,198       —         2,677,198  
Liabilities                        
Current liabilities     (1,149,279 )     (27,237,487 )     (28,386,766 )
Non-current liabilities     (3,526,779 )     (730,235 )     (4,257,014 )
Intercompany balances     (704,122 )     704,122       —    
Net liability position     (2,700,099 )     (27,054,807 )     (29,754,906 )

 

    March 31, 2019
    Rental Operations   In-Patient services   Total
             
Purchase of fixed assets     —         8,176       8,176  
Assets                        
Current assets     471       2,388,629       2,389,100  
Non-current assets     2,885,893       23,004,453       25,890,346  
Liabilities                        
Current liabilities     (2,117,691 )     (17,117,309 )     (19,235,000 )
Non-current liabilities     (3,877,763 )     (15,048,675 )     (18,926,438 )
Intercompany balances     737,461       (737,461 )     —    
Net liability position     (2,371,629 )     (7,510,363 )     (9,881,992 )

 

14. Net loss per common share

 

For the three months ended March 31, 2020 and 2019, the following common stock equivalents were excluded from the computation of diluted net loss per share as the results would have been anti-dilutive.

 

    Three months ended
March 31,
2020
  Three months ended March 31,
2019
         
Stock options     —         480,000  
Warrants to purchase shares of common stock     154,455,397,549       111,197,591  
Convertible notes     48,756,889,839       83,671,069  
      203,212,287,388       195,348,660  

 

15. 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 tax returns. The actual liability may be higher due to interest and penalties assessed by these taxing authorities.  

 

b. Mortgage loans

 

The company has a mortgage loans as disclosed in note 8 above. The future commitment under this loans is as follows:

 

 

    Amount
  Within 12 months       105,662  
  Within 12 to 24 months       104,925  
  Within 24 to 36 months       3,421,854  
  Total     $ 3,632,441  

  

c. Other

 

The Company has principal and interest payment commitments under the Convertible notes disclosed under Note 7 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.

 

19

 

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16. Subsequent events

 

On June 1, 2020, The Company repaid the Power Up Lending Group $41,600 in full settlement of the convertible note entered into on July 15, 2019.

 

On June 3, 2020, the Company entered into an agreement with First Fire whereby the remaining balance of the convertible note of $73,006 would be settled by two payments of $25,000 each.

 

On June 15, 2020, The Company entered into an amended agreement with Auctus whereby the Company agreed to discharge the principal amount of the note by nine equal monthly instalments of $25,000 commencing in October 2020.

 

On July 12, 2020, the company entered into a debt extinguishment agreement for convertible debt disclosed in Note 7 with Leonite whereby the following occurred:

 

1. The total amount outstanding under the note, including principal and interest would be reduced to $150,000
2. $700,000 of the note would be converted into Series A Redeemable Preferred shares in the Company’s subsidiary, Cranberry Cove Holdings, accruing dividends at 10% per annum.
3. $400,000 of the note would be converted into series B Preferred stock in the Company for a12 month period, mandatorily redeemable by the Company accruing dividends at 6% per annum payable in cash or stock, subject to certain conditions.
4. The remaining balance of $150,000 will accrue interest at 8.5% per annum and is convertible into common stock and repayable in 6 monthly instalments of $25,000 commencing after December 12, 2020.
5. The existing warrants are cancelled and a new five year warrant, with a cashless exercise options, exercisable for a minimum of 326,286,847 shares of common stock and a maximum of 20% of the outstanding equity of the Company at an initial exercise price of $0.10 per share subject to adjustment based on new stock issuances or the lowest volume weighted exercise price of the stock for 30 days immediately preceding the exercise.

 

On July 12, 2020, the Company entered into a Senior Secured Convertible Note agreement with Leonite for $440,000 with an original issue discount of $40,000 for gross proceeds of $400,000, the initial tranche advanced will be for cash of $200,000 plus the OID of $240,000, the remaining advances will be at the discretion of the Leonite. The loan bears interest at 6.5% per annum and matures on June 12, 2021. The Company is required to make monthly payments of the accrued interest on the advances made. The note is convertible into common shares at the option of the holder at $0.0001 per share, or 80% multiplied by the price per share paid in subsequent financings or after a six month period from the effective date at 60% of the lowest trading price during the preceding 21 consecutive trading days. The note has both conversion price protection and anti-dilution protection provisions.

 

On June 30, 2020, the Company entered into an agreement whereby the Company will acquire 51% of American Treatment Holdings, Inc. (“ATHI”) from The Q Global Trust (“Seller”) and Lawrence B Hawkins (“Hawkins”), which in turn owns 100% of Peace of Evernia Health Services LLC. (“Evernia”), which operates drug rehabilitation facilities. The consideration for the acquisition is a loan to be provided by the purchaser to Evernia in the amount of $500,000. As of June 30, 2020, the Company had advanced Evernia approximately $98,000 including accrued interest thereon and the Company has agreed to advance an additional amount of approximately $202,000 (“the First Tranche”) within a reasonable time of concluding the loan agreements. The timing of the balance of the advance of approximately $200,000 will be mutually agreed upon between the parties.

 

The Company has a 180 day option from the advancement of the First Tranche to purchase an additional 9% of ATHI for a purchase consideration of $50,000, payable to the Seller.

 

On June 30, 2020, the Company entered into an agreement whereby the Company will acquire 51% of Behavioral Health Holdings, Inc. (“BHHI”) from The Q Global Trust (“Seller”) and Lawrence B Hawkins, which in turn owns 100% of Peace of Mind Counseling Services, Inc. (“PMCS”), which operates drug rehabilitation facilities. The consideration for the acquisition is still to be determined.

 

The Company has a 180 day option, from the advancement of the first tranche to Evernia, to purchase an additional 9% of BHHI for a purchase consideration still to be determined, payable to the Seller.

 

On July 12, 2020, the Company entered into a five year option agreement with Leonite Capital LLC (“Leonite”) and other investors (collectively the “Transferees”), the Company agreed to sell to the Transferees 20% of the total outstanding shares of ATHI. The Company provided Leonite an option to purchase 2,666,667 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $267), based on the advances that Leonite and others made to the Company totaling $300,000. Leonite shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Leonite to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.

20

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

On June 30, 2020, the Company entered into a loan agreement with Evernia whereby it had previously advanced Evernia $96,000 and had agreed to advance a further $294,000 in future tranches, the loan bears interest at 0% per annum and is repayable in instalments which are equal to the cash receipts collected during the previous month less ordinary business expenses and management fees paid to Ethema and Hawkins, which management fee is a maximum of $20,000 per month. The instalments commence on the earlier of; (i) December 31, 2020 and; (ii) the date that Evernia accumulates cash reserves of $200,000. The loan will remain in place until repaid in full. The repayment proceeds will be repaid directly to Leonite Capital in reduction of the loan funds advanced by Leonite to the Company.

 

On August 13, 2020, the Company entered into a Securities Purchase Agreement with Auctus Fund LLC, pursuant to which the Company issued a convertible promissory note in the aggregate principal amount of $100,000 for net proceeds of $85,000 after certain fees and expenses of $15,000. The note has a maturity date of August 13, 2021 and bears interest at 10% per annum. The interest due on the note for the full twelve month period is due immediately upon issuance of the note, regardless of acceleration or prepayment. The principal amount of the note is payable in six monthly instalments of $16,666.66 commencing 180 days after the issuance date, the balance outstanding under the note due at maturity date. In the event a default occurs under the Note, the Note is convertible into shares of common stock at a conversion price equal to the lowest trading price over the prior 5 days prior to the date of the note or the five day volume weighted market price prior to the date of conversion. The Company is required to adhere to certain covenants including covenants concerning distributions of capital stock; restrictions on stock repurchases, additional borrowings sales of assets and loans and advances made by the Company. In conjunction with the issuance of the promissory note, the Company issued a five year warrant exercisable for 66,666,666 shares of common stock at an exercisable price of $0.0015 per share subject to anti-dilution and price protection adjustments. The Company also issued a second five year warrant exercisable for 66,666,666 shares of common stock at an exercisable price of $0.0015 per share subject to anti-dilution and price protection adjustments, which warrants will only be exercisable upon an event of default on the convertible note.

 

On September 14, 2020, the Company entered into a Securities Purchase Agreement with Ed Blasiak (“Blasiak”), pursuant to which the Company issued a senior secured convertible promissory note in the aggregate principal amount of $55,000, including an original issue discount of $5,000. The note bears interest at 6.5% per annum and matures on September 14, 2021. The note is senior to any future borrowings and commencing on October 1, 2020 the Company will make monthly payments of the accrued interest under the note. The note may be prepaid at certain prepayment penalties and is convertible into shares of common stock at a conversion price at the option of the holder at $0.001 per share, adjusted for anti-dilution provisions; or 80% of the price per share of subsequent equity financings or; after six months 60% of the lowest trading price during the preceding six month period.

 

On September 14, 2020, the Company entered into a five year option agreement with Blasiak and other investors (collectively the “Transferees”), the Company agreed to sell to the Transferees 20% of the total outstanding shares of ATHI. The Company provided Blasiak an option to purchase 571,428 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $57), based on the advances that Blasiak and others made to the Company totaling $400,000. Blasiak shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Blasiak to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.

 

On September 14, 2020, the Company entered into a Securities Purchase Agreement with Joshua Bauman (“Bauman”), pursuant to which the Company issued a senior secured convertible promissory note in the aggregate principal amount of $110,000, including an original issue discount of $10,000. The note bears interest at 6.5% per annum and matures on September 14, 2021. The note is senior to any future borrowings and commencing on October 1, 2020 the Company will make monthly payments of the accrued interest under the note. The note may be prepaid at certain prepayment penalties and is convertible into shares of common stock at a conversion price at the option of the holder at $0.001 per share, adjusted for anti-dilution provisions; or 80% of the price per share of subsequent equity financings or; after six months 60% of the lowest trading price during the preceding six month period.

 

On September 14, 2020, the Company entered into a five year option agreement with Bauman and other investors (collectively the “Transferees”), the Company agreed to sell to the Transferees 20% of the total outstanding shares of ATHI. The Company provided Blasiak an option to purchase 1,142,856 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $114), based on the advances that Bauman and others made to the Company totaling $400,000. Bauman shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Bauman to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.

 

Other than disclosed above, the Company has evaluated subsequent events through the date the unaudited condensed consolidated financial statements were available to be issued and has concluded that no such events or transactions took place that would require disclosure herein.

  

21

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein and the consolidated financial statements and the other information set forth in our Annual Report on Form 10- K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on July 6, 2020. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.

 

Covid-19 Explanation

The Company has been unable to meet the extended deadline to file its Annual Report on Form 10-Q as allowed by the Order of the Securities and Exchange Commission (the “SEC”), dated March 25, 2020, pursuant to Section 36 of the Securities Exchange Act of 1934 modifying exemptions from the reporting and proxy delivery requirements for public companies (Release No. 34-22465). Due to the lockdowns imposed by local US State Government, the Company has not had access to consulting and other administrative staff and accordingly was unable to compile and review information necessary to complete our filing within the extended time period allowed by the SEC, without unreasonable effort or expense due to circumstances related to the COVID-19 pandemic.

 

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our consolidated financial statements would be affected to the extent there are material differences between these estimates. This discussion and analysis should be read in conjunction with the Company’s condensed consolidated financial statements and accompanying notes to the condensed consolidated financial statements for the year ended December 31, 2019.

 

Plan of Operation

 

During the next twelve months, the Company plans to facilitate Evernia efforts to obtain the requisite licensing, close on the Evernia acquisition and provide the requisite funding to Evernia to commence operations as a provider of addiction and aftercare treatment services.

 

Results of Operations

 

For the three months ended March 31, 2020 and March 31, 2019.

 

Revenues

 

Revenues were $83,542 and $82,015 for the three months ended March 31, 2020 and 2019, respectively, an increase of $1,527 or 1.9%.

 

In the prior period, the treatment facility was relocated to the East Avenue, West Palm Beach facility and no revenues were generated, in the current period, we had ceased operations at the East Avenue facility after agreeing with the landlord to cancel the lease agreement.

 

Revenue consists of rental income. The increase is due to the differing foreign currency exchange rates between the two periods.

 

Operating Expenses

 

Operating expenses were $174,149 and $1,476,513 for the three months ended March 31, 2020 and 2019, respectively, a decrease of $1,302,364 or 88.2%. The decrease is primarily due to the following:

 

· General and administrative expenses was $22,536 and $382,153 for the three months ended March 31, 2020 and 2019, respectively, a decrease of $359,617 or 94.1%. The decrease is due to the cessation of operations at the East Avenue, West Palm Beach facility during December 2019.

 

· Rent expense was $1,000 and $570,066 for the three months ended March 31, 2020 and 2019, respectively, a decrease of $569,066 due to the cancellation of the property lease as agreed to with the landlord in December 2019.

 

· Professional fees was $108,021 and $44,154 for the three months ended March 31, 2020 and 2019, respectively, an increase of $63,867 or 144.6%. The increase is primarily due to expensing the returnable shares issued to Labrys Fund in July 2019, the expense amounted to $165,780, offset by the reversal of accruals made for certain professional fees expensed in the prior period.

 

· Salaries and wages was $12,351 and $404,264 for the three months ended March 31, 2020 and 2019, respectively, a decrease of $391,913 or 96.9%, the decrease is due to the cessation of operations at the East Avenue, West Palm Beach facility in December 2020.

 

· Depreciation expense was $30,241 and $75,876 for the three months ended March 31, 2020 and 2019, a decrease of $45,635 or 60.1%, the decrease is primarily due to the disposal of the Delray Beach facility during the prior year.

 

Operating loss

 

The operating loss was $90,607 and $1,394,498 for the three months ended March 31, 2020 and 2019, respectively, a decrease of $1,303,892 or 93.5%. The decrease is due to the decrease in operating expenses as discussed above.

 

22

 

Loss on conversion of convertible debt

 

The loss on conversion of convertible debt was$286,343 and $0 for the three months ended March 31, 2020 and 2019, respectively, an increase of $286,343 or 100%. The loss on conversion of convertible debt was due to the conversion of convertible debentures at a discount to market price by several convertible note holders during the current period.

 

Exercise of warrants

Exercise of warrants was $92,952 and $0 for the three months ended March 31, 2020 and 2019, respectively, an increase of $92,952 or 100%. During the current period a warrant holder exercised warrants for a total of 125,609,759 shares of common stock resulting in the expense of $92,952 for the issue of 103,000,000 shares of common stock.

 

Interest expense

 

Interest expense was $193,922 and $345,098 for the three months ended March 31, 2020 and 2019, respectively, a decrease of

$151,176 or 43.8% was primarily due to the decrease in mortgage liabilities on the disposal of the Delray Beach properties in the prior period and the conversion of convertible debt to equity during the current period.

 

Debt discount

 

Debt discount was $403,677 and $761,942 for the three months ended March 31, 2020 and 2019, respectively, a decrease of

$358,265 or 47.0%. The decrease is primarily due to the maturity date of several convertible notes prior to the current quarter, with the resultant full amortization of debt discount related to those convertible notes. No new convertible notes were issued during the current period.

 

Derivative liability movement

 

The derivative liability movement was $9,754,896 and $473,301for the three months ended March 31, 2020. The derivative liability movement represents the mark to market movements of variably priced convertible notes and warrants issued during the current and prior comparative period. The increase in the mark to market movement of $9,281,595 was primarily due to the price protection afforded to certain warrant and note holders which increased the number of shares into which the notes and warrants are convertible into substantially during the period.

 

Foreign exchange movements

 

Foreign exchange movements was $484,051 and $(129,118) for the three months ended March 31, 2020 and 2019, respectively, representing the realized exchange gains and (losses) on monetary assets and liabilities settled during the current year as well as mark to market adjustments on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars.

 

23

 

Net loss

 

Net loss of $(10,338,286) and $(3,088,680) for the three months ended March 31, 2020 and 2019, respectively, a decrease of

$7,249,606 or 234.7%, is primarily due to the decrease in operating expenses and the increase in movement in the derivative liability during the current period as discussed above.

 

Contingency related to outstanding payroll tax liabilities

 

The Company also has not filed certain foreign assets forms due to the US Federal Government. A provision of $250,000 was made for any potential penalties due.

 

Liquidity and Capital Resources

 

Cash provided by (used in) operating activities was $533,745 and $(1,108,287) for the three months ended March 31, 2020 and 2019, respectively, an increase of $1,642,032. The increase is primarily due to the following:

 

· the increase in net loss of $(7,249,606), discussed under operations above, offset by non-cash movements of $9,342,722, primarily movements on the derivative liability, offset a decrease in working capital movements of $451,085;
· the translation difference on loan accounts of $507,665 includes the unrealized movements on intercompany balances which offsets the net cash generated by operating activities.

 

Cash used in investing activities was $9,542 and $10,834 for the three months ended March 31, 2020 and 2019, respectively.

 

Cash used by financing activities was $17,572 and generated by financing activities was $1,008,720. In the prior period net cash raised from convertible notes amounted to $1,043,197, offset by mortgage repayments of $33,396.

 

Over the next twelve months we estimate that the company will require approximately $1.5 million in working capital as it continues to develop its West Palm Beach facility and it is also exploring several other treatment center options and sources of patients throughout the country. The company may have to raise equity or secure debt. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, the Company’s liquidity risk is assessed as medium.

 

Recently Issued Accounting Pronouncements

 

The recent Accounting Pronouncements are fully disclosed in note 2 to our unaudited condensed consolidated financial statements.

 

Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying unaudited condensed consolidated financial statements.

 

Off balance sheet arrangements

 

We do not maintain off-balance sheet arrangements nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.

 

Inflation

The effect of inflation on our revenue and operating results was not significant.

 

Climate Change

We believe that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

The Company has adopted and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that due to a lack of segregation of duties the Company’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Subject to receipt of additional financing or revenue generated from operations, the Company intends to retain additional individuals to remedy the ineffective controls.

 

Changes in Internal Control

 

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

24

 

PART II

 

Item 1. Legal Proceedings.

 

In March 2020 a former employee filed a suit against the Company for unpaid wages amounting to $5,700. The suit was settled out of court for gross wages of $7,500 and legal fees of an additional $3,500.

 

A suit, claiming past due rent was filed against the Company in March 2020 for rent of a storage warehouse, the warehouse was abandoned during March 2020. The rental expense was accrued in our records as of December 31, 2019.

 

Other than disclosed above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A. Risk Factors.

 

Not applicable because we are a smaller reporting company.

 

Item 2. Unregistered sales of equity securities and use of proceeds

 

No shares were issued pursuant to the exemptions from the registration requirements of the Securities Act of 1933, as amended, afforded the Company under Section 4(a)(2) promulgated thereunder due to the fact that the issuance did not involve a public offering because of the insubstantial number of persons involved in each offering, the size of the offering, manner of the offering and number of shares offered. Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(a) (2) of the Securities Act for these transactions.

 

Item 3. Defaults upon senior securities

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.

 

Not applicable.

 

Item 6. Exhibits

 

 

 

Exhibit No.

Description

 

 

  31.1 Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002 *

 

  32.1 Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002*

 

101.INS XBRL Instance *

 

101.SCH XBRL Taxonomy Extension Schema * 101.CAL XBRL Taxonomy Extension Calculation * 101.DEF Taxonomy Extension Definition * 101.LAB Taxonomy Extension Labels * 

101. PRE Taxonomy Extension Presentation *

 

* filed herewith

 

25

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

ETHEMA HEALTH CORPORATION

 

Date: September 28, 2020

By:/s/ Shawn E. Leon 

Name: Shawn E. Leon 

Title: Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

Name Position Date
     
/s/Shawn E. Leon Chief Executive Officer (Principal Executive Officer), September 28, 2020
Shawn Leon Chief Financial Officer (Principal Financial Officer), President and Director  
     
/s/ John O’Bireck Director September 28, 2020
John O’Bireck    
     
/s/ Gerald T. Miller Director September 28, 2020

 

26

 

 

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