NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Ethema
Health Corporation (the “Company”) was incorporated under the laws of the state of Colorado, USA, on April 1, 1993.
Effective April 4, 2017, the Company changed its name to Ethema Health Corporation and prior to that, on May 2012, the Company
had changed its name to GreeneStone Healthcare Corporation from Nova Natural Resources Corporation. As of December 31, 2017, the
Company owned 100% of the outstanding shares of GreeneStone Clinic Muskoka Inc., incorporated in 2010 under the laws of the Province
of Ontario, Canada; Cranberry Cove Holdings Ltd., incorporated on January 9, 2004 under the laws of the Province of Ontario, Canada;
Addiction Recovery Institute of America (“ARIA”) (formerly Seastone Delray Healthcare, LLC), incorporated on May 17,
2016 under the laws of Florida, USA; and Delray Andrews RE, LLC, incorporated on May 17, 2016 under the laws of Florida, USA.
During
December 2016, the Company obtained a license to operate and provide addiction treatment healthcare services in
Florida, USA. The company commenced operations under this license with effect from January 2017.
On
February 14, 2017, the Company completed a series of transactions (referred to collectively as the “Restructuring Transactions”),
including a Share Purchase Agreement (the “SPA”) whereby the Company acquired
100% of the stock of CCH, which holds the real estate on which the Company previously operated a rehabilitation clinic (“the
Canadian Rehab Clinic”). The Company entered into an Asset Purchase Agreement
(the “APA”) and lease (the “Lease”) whereby the Company sold
all of the Canadian Rehab Clinic business assets and leased the real estate to the buyer. Simultaneously with this transaction,
the Company entered into a Real Estate Purchase agreement and Asset Purchase Agreement whereby the Company purchased the real
estate and business assets of Seastone Delray (the “Florida Purchase”).
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.
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.
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.
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.
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.
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.
ETHEMA
HEALTH CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
2.
|
Summary
of significant accounting policies (continued)
|
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:
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.
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.
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.
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.
Credit
risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge
an obligation. Financial instruments that subject the Company to credit risk consist primarily of accounts receivable.
Credit
risk associated with accounts receivable of ARIA is mitigated as only a percentage of the revenue billed to health insurance companies
is recognized as income until such time as the actual funds are collected. The revenue is
concentrated amongst several health insurance companies located in the US.
In
the opinion of management, credit risk with respect to accounts receivable is assessed as low.
Liquidity
risk is the risk the Company will not be able to meet its financial obligations as they fall due. The Company is exposed to liquidity
risk through its working capital deficiency of $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.
Market
risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
prices. Market risk comprises of three types of risk: interest rate risk, currency risk, and other price risk. The Company is
exposed to interest rate risk and currency risk.
Interest
rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market interest rates. The Company is exposed to minimal interest rate risk as there is 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.
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.
Other
price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors
specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in
the market. In the opinion of management, the Company is not exposed to this risk and remains unchanged from the prior year.
The
Company’s 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.
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.
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
|
|
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.
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.
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.
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.
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
|
|
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.
On April 12, 2019,
Eileen Greene, a related party assigned CDN1,000,000 of the amount owed by the Company to her to a third party. The loan bears
interest at 12% per annum which the Company agreed to pay.
The
short-term convertible notes, together with certain warrants issued to Leonite and the short term convertible notes disclosed
in note 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.
ETHEMA
HEALTH CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
12.
|
Stockholders'
deficit
|
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.
Authorized,
issued and outstanding
The
Company has authorized 13,000,000 preferred shares with a par value of $0.01 per share, designated as 3,000,000 series A convertible
preferred shares and 10,000,000 series B convertible preferred shares. The Company has no preferred shares issued and outstanding.
In terms of the 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.
ETHEMA
HEALTH CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
12.
|
Stockholders'
deficit (continued)
|
Our
board of directors adopted the Greenestone Healthcare Corporation 2013 Stock Option Plan (the “Plan”) to promote our
long-term growth and profitability by (i) providing our key directors, officers and employees with incentives to improve stockholder
value and contribute to our growth and financial success and (ii) enable us to attract, retain and reward the best available persons
for positions of substantial responsibility. A total of 10,000,000 shares of our common stock have been reserved for issuance
upon exercise of options granted pursuant to the Plan. The Plan allows us to grant options to our employees, officers and directors
and those of our subsidiaries; provided that only our employees and those of our subsidiaries may receive incentive stock options
under the Plan.
No
options were issued, exercised or cancelled during the three months ended March 31, 2020 and the year ended December 31, 2019,
respectively.
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
|
)
|
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.
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
|
|
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.
ETHEMA
HEALTH CORPORATION
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
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|
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.
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|
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.
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|
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.
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.
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:
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·
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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.
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|
·
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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.
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|
·
|
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.
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|
·
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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.
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|
·
|
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.
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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.
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.
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:
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·
|
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;
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|
·
|
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.
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
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