UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 FORM 10-K

 

☒  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2019

 

or

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from  to  

 

Commission file number: 000-15078

 

Ethema Health Corporation

 

(Exact name of registrant as specified in its charter)

 

Colorado 84-1227328

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

1590 S. Congress Avenue

West Palm Beach, Florida 33406

(Address of principal executive offices)

 

(561) 290-0239

(Registrant’s telephone number, including area code)

  

Securities registered under Section 12(b) of the Exchange Act: 
 
Title of each class Name of each exchange on which registered
   
None N/A

 

Securities registered under Section 12(g) of the Act:

 

Common Stock, $0.01 par value per share

(Title of class) 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☐  No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ☐  No  ☒ 

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405

 
 

of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No  ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. ☒

 

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

 

Large accelerated filer Accelerated filer
Non-accelerated filer ☐  (Do not check if a smaller reporting company) Smaller reporting company
  Emerging growth company

 

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

 

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

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 28, 2019, based on a closing share price of $0.07 was approximately $4,898,198.

 

As of June 30, 2020, the registrant had 1,841,090,247 shares of its common stock, par value $0.01 per share, outstanding.

 

 

COVID-19 EXPLANATORY NOTE

 

The Company has been unable to meet the extended deadline to file its Annual Report on Form 10-K 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.

 

 
 

 

ETHEMA HEALTH CORPORATION  

YEAR ENDED DECEMBER 31, 2019

TABLE OF CONTENTS

 

    PAGE
PART I.      
Item 1. Business 1  
Item 1A. Risk Factors 4  
Item 1B. Unresolved  Staff Comments 4  
Item 2. Properties 4  
Item 3. Legal Proceedings 5  
Item 4. Mine Safety Disclosures 5  
   
PART II.      
Item 5. Market for Registrant’s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities 6  
Item 6. Selected  Financial Data 7  
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of  Operations 7  
Item 8. Financial Statements and  Supplementary Data 11  
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13  
Item 9A. Controls and Procedures 13  
Item 9B. Other Information 13  
       
PART III      
Item 10. Directors, Executive Officers and Corporate Governance 14  
Item 11. Executive  Compensation 15  
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 16  
Item 13. Certain Relationships and Related Transactions, and Director Independence 17  
Item 14. Principal Accountant Fees and Services 18  
Part IV.      
Item 15. Exhibits and Financial Statements Schedules 20  
SIGNATURES 22  

 

 

 

 
 

 

PART I

Item 1. Business.

 

Company History

Ethema Health Corporation (the “Company” or “Ethema”), a Colorado corporation was incorporated under the laws of the State of Colorado on April 1, 1993, and is the surviving company of a merger, effective February 1, 1995, between the Company and Nova Natural Resources Corporation, a Delaware corporation (“Nova Delaware”). The merger was effectuated solely for the purpose of changing the Company’s domicile from Delaware to Colorado. At all times prior to 2001, the Company was engaged in the oil and gas exploration business. Nova Delaware was the successor entity to Nova Petroleum Corporation, a Delaware corporation, and Power Resources Corporation, a Delaware corporation, which merged in 1986 (“the 1986 Merger”). Prior to the 1986 Merger, Nova Petroleum Corporation and Power Resources Corporation had operated since 1979 and 1972, respectively. In 2001, the Company entered into the electronics business and this business was active in 2001 and 2002, as part of the Torita Group. After 2002, the Company continued with various stages of development in this business until 2010.

 

On April 1, 2010, the Company changed its principal operations from development stage electronics to healthcare services. On March 29, 2010, the Company entered into a one year consulting agreement with GreeneStone Clinic Inc., a Canadian corporation (“Greenestone Clinic”), whereby Greenestone Clinic provided consulting services for the Company’s development and operation of medical clinics in the province of Ontario, Canada. Specifically, Greenestone Clinic provided medical and business expertise in the initial startup of private clinics and technical assistance to ensure that the clinics were in compliance with governmental policy and procedure requirements as well as any operational requirements. At the time of entering into this consulting agreement, Greenestone Clinic operated a clinic at the Muskoka property housing its addiction treatment clinic and provided endoscopy services. The Company started offering medical services in June 2010, offering various medical services, including endoscopy, cardiology and executive medicals, which services were subsequently sold.

 

On May 15, 2010, the Company secured a sublease of space (which was previously the Rothbart Pain Clinic) of approximately 8,000 sq. ft. to be used as the Company’s executive offices and to run an endoscopy clinic. The Endoscopy clinic was subsequently sold. The Company, through its wholly owned subsidiary GreeneStone Clinic Muskoka Inc. (“GreeneStone Muskoka”), also entered into a lease with the owner of the Muskoka premises on April 1, 2011 and provided mental health and addiction treatment services and operated an in-patient addiction treatment center at this location.

 

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 Cranberry Cove Holdings Ltd. (“CCH”), which held the real estate on which the Company’s GreeneStone Muskoka operated, an asset purchase agreement (the “APA”) and lease (the “Lease”) whereby the Company sold certain of the GreeneStone Muskoka business assets and leased the real estate to the buyer, and a real estate purchase agreement and asset purchase agreement whereby the Company purchased the real estate and business assets of Seastone Delray (the “Florida Purchase”).

 

The Share Purchase Agreement

Under the SPA, the Company acquired 100% of the stock of CCH from Leon Developments Ltd. (“Leon Developments”), a company wholly owned by Shawn E. Leon, who is the President, CEO, and CFO of the Company (“Mr. Leon”). CCH owns the real estate on which GreeneStone Muskoka 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.

  1  

 

The Asset Purchase Agreement and Lease

Under the APA, the assets of GreeneStone Muskoka were sold by the Company, through its subsidiary, GreeneStone Muskoka, to Canadian Addiction Residential Treatment LP (the “Purchaser”), for a total consideration of CDN$10,000,000, plus an additional performance payment of up to CDN$3,000,000 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 held in escrow for up to two years to cover indemnities given by the Company. The proceeds of the GreeneStone Muskoka 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 GreeneStone Muskoka were sold, leaving Ethema with only the underlying clinic real estate, which the Company, through its newly acquired subsidiary, CCH concurrently leased to the Purchaser. The Lease is a triple net lease and provides for a five (5) year primary term with three (3) five-year renewal options, annual base rent for the first year at CDN$420,000 with annual increases, an option to tenant to purchase the leased premises and certain first refusal rights.

 

The Florida Purchases and Business

 

Immediately after closing on the sale of the assets of the Canadian Rehab Clinic, the Company closed on the acquisition of the business and real estate assets of Seastone Delray pursuant to certain real estate and asset purchase agreements. This business is operated through its wholly owned subsidiary, Addiction Recovery Institute of America, LLC (“ARIA”) (formerly Seastone Delray Healthcare, LLC). The purchase price for the ARIA 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 April 4, 2017 the Company changed its Corporate name from Greenestone Healthcare Corporation to Ethema Health Corporation.

 

On November 2, 2017, the Company entered into an Agreement to purchase from AREP 5400 East Avenue LLC certain buildings in West Palm Beach, Florida, totaling approximately 80,000 square feet, on which the Company planned to operate a substance abuse treatment center. The purchase price of the Property was $20,530,000. The Company made a series of nonrefundable down payments totaling $2,940,546 in 2017 and 2018. The Company could not get the necessary financing to close on the deal.

 

On May 23, 2018, the Company converted the agreement to purchase AREP 5400 East Avenue LLC. (“the landlord”) into a lease agreement with a purchase option of $17,250,000, increasing August 31, 2018 by $750,000 per month until the purchase option is exercised. The premises is located at 5400, 5402 and 5410 East Avenue, West Palm Beach, Florida (the “Property”). The lease was for an initial 10 years and provided for two additional 10 year extensions.

 

The Company was previously under agreement to purchase the property from the landlord. The property is presently used as a rehabilitation treatment center. The current tenant at the property, Alternatives in Treatment, LLC, a Florida limited liability company, consented to the Lease and concurrent with the execution of the Lease entered into a Sublease Agreement with the Company.

 

In June 2018, the Company moved its operations out of the Delray Beach properties and into the leased property at 5400 East Avenue in West Palm Beach.

 

On August 3, 2018, the Company changed the name of its subsidiary Seastone Delray Healthcare, LLC to Addiction Recovery Institute of America, LLC (“ARIA”).

 

The Company received a license to operate in-patient detoxification and residential treatment services in September 2018.

 

In June of 2019, the Company and the landlord wished to proceed with marketing the property for sale and agreed to convert the long term lease into a month to month lease for a reduced amount of space on the property and Alternatives in Treatment became a direct tenant of the Landlord in the remainder of the space.

 

  2  

 

The Company once again had an opportunity to purchase the property in October of 2019 but could not arrange for sufficient financing to complete the purchase and the Landlord subsequently entered into a conditional agreement with another purchaser.

 

On December 20, 2019, the Company entered into an agreement with the landlord to terminate the lease agreement on January 31, 2020. The Company plans to open a new facility at another location nearby which was subsequently delayed by the Corona Virus pandemic.

 

Corporate Structure

 

The Company consists of the following entities:

 

  · Ethema Health Corporation (“Ethema”) (Parent company);

 

Ethema is the publicly traded investment holding company.

 

  · Greenestone Clinic Muskoka Inc. (“Muskoka”), a Canadian registered company (wholly owned);

 

Muskoka previously owned and operated the addiction treatment center in Canada which was sold to Canadian Addiction Residential Treatment LP (“CART”). Muskoka has certain receivables collectible from CART and certain remaining liabilities.

 

  · Cranberry Cove Holdings, Ltd (“CCH”), a Canadian registered company (wholly owned);

 

This company was acquired from Leon Developments and owns and leases the property on which CART operates an addiction treatment center.

 

  · Addiction Recovery Institute of America, LLC(“ARIA”), a US registered company (formerly Seastone Delray Healthcare, LLC);

 

ARIA operated a treatment center in Delray Beach, Florida out of premises which it had acquired in February 2017. The treatment center was relocated and was operated out of leased premises in West Palm Beach Florida.

 

  · Delray Andrews RE, LLC (“DARE”), a US registered company (dormant)

 

DARE was formed in 2016 to acquire the premises in which ARIA operated its Delray treatment center, the premises were acquired directly into ARIA. DARE has remained dormant since inception.

 

 Employees

 

As of December 31, 2019, Ethema Health Corporation had 2 employees.

 

Marketing

 

The addiction treatment business in the USA operates as an insured healthcare service. Our marketing efforts are long term processes of establishing relationships with relevant professionals and our treatment staff. We use industry specific conferences and functions to network with these professionals.

 

Approximately 70% of our clients are sourced via the Internet. This is the single biggest focus for our marketing team, Search Engine Optimization (SEO) is very important and the Company aggressively seeks the maximum cost/benefit relationships with specialist firms in this field.

  3  

 

 

Competition

 

There are a significant amount of treatment facilities in the United States, we compete with these clinics for patients who are typically covered by insured healthcare services.

 

Environmental Regulations

 

The Company is not currently subject to any pending administrative or judicial enforcement proceedings arising under environmental laws or regulations. Environmental laws and regulations may be adopted in the future which may have an impact upon the Company’s operations.

 

Item 1A. Risk Factors.

 

Not applicable because we are a smaller reporting company.

 

Item 1B. Unresolved Staff Comments

 

None. 

 

Item 2. Properties.

 

Ethema Executive Offices

 

The Company’s executive offices are located at 1590 S. Congress Avenue, West Palm Beach, Florida, 33406..

 

West Palm Beach Treatment Operations

 

The Company treatment operations were based in our leased premises at 5400 East Avenue, West Palm Beach, Florida, USA.

 

This facility was operated until January 30, 2020, we have subsequently ceased operations at this facility and are currently exploring new treatment facility options.

 

Greenestone Muskoka Treatment Facility

 

The Greenestone Muskoka Treatment Facility is located in Bala, Ontario at 3571 Highway 169. The property is 43 acres in size and contains approximately 48,000 square feet of buildings. The property is owned by Ethema’s wholly owned Canadian subsidiary CCH and has been leased to the new owner of the Muskoka Clinic for a term of five years, which ends on February 28, 2022. The Lease gives the tenant an option to extend for three additional five (5) year terms, an option to purchase the property at any time for a purchase price of $7,000,000 in the first thirty six (36) months of the term and thereafter at a purchase price increased by $1,500,000 for each successive year up to a maximum of $10,000,000, and a right of first refusal in the event of a sale to a third party.

 

 Delray Beach Real Estate

 

The Company purchased the properties at 801 and 810 Andrews Avenue in Delray Beach in February 2017. The 801 Andrews Avenue property was a 10 unit residential complex used to house clients of the Company treatment programs and the 810 Andrews Avenue property was where the treatment was performed and also acted as the Company head office.

 

The Company ceased operations in its Delray Beach properties in June 2018 and relocated its treatment facility to the newly leased premises in West Palm Beach.

 

The Company entered into short term month to month leases on both properties while they were being held for resale. On April 2, 2019, the Company disposed of the real property at 801 Andrews Avenue, Delray Beach for gross proceeds of $3,500,000, retaining the property at 810 Andrews Avenue Delray Beach, Florida, which property, was transferred on October 10, 2019, in terms of a deed of transfer, to Leonite Capital, LLC, for net proceeds of $1,398,510, which proceeds were offset against the convertible loan owing to Leonite. Subsequent to year end, in terms of the Deed of transfer an additional $36,470 of expenses were incurred relating to the disposal of the property, these expenses were added to the Leonite convertible loan balance outstanding.

  4  

 

 

West Palm Beach Property

 

On November 2, 2017, the Company entered into an Agreement to purchase from AREP 5400 East Avenue LLC certain buildings in West Palm Beach, Florida, totaling approximately 80,000 square feet, on which the present tenant operates a substance abuse treatment center. The purchase price of the Property was $20,530,000. The Company made a series of nonrefundable down payments totaling $2,940,546 and $1,825,000 as of December 31, 2018 and 2017, respectively. The Company failed to close on the property purchase agreement.

 

On May 23, 2018, the Company converted the agreement to purchase AREP 5400 East Avenue LLC. (“the landlord”) into a lease agreement with a purchase option of $17,250,000, increasing August 31, 2018 by $750,000 per month until the purchase option is exercised. The premises is located at 5400, 5402 and 5410 East Avenue, West Palm Beach, Florida (the “Property”). The lease was for an initial 10 years and provided for two additional 10 year extensions.

 

On December 20, 2019, the Company entered into an agreement with the landlord to terminate the lease agreement on January 31, 2020.

 

On February 1, 2019 ARIA entered into a lease for an industrial storage space at 5401 East Avenue in West Palm Beach for a period of five years. ARIA abandoned this property in March 2020.

 

Item 3. 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 4. Mine Safety Disclosures.

 

None.

  5  

 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .

 

  (a) Market Information

 

The Company’s common stock is quoted on the Over-the-counter Market (the “OTCQB”) under the symbol “GRST”. The Company was sponsored by the market maker Wilson Davis & Co. from Salt Lake City, Utah, which filed a Form 15c2-11 application with the Financial Industry Regulatory Authority (“FINRA”) for the Company in 2011. This application was approved by FINRA in February 2012, and Wilson Davis & Co. first quoted the stock in March 2012.

 

From March 2012 to January 2020, our common stock has been traded on the OTCQB markets under the symbol “GRST”, in January 2020, the stock was downgraded to the OTC Pink Sheets market.

 

The last reported sale price of our common stock on the OTC Pink on June 30, 2020, was $0.0014 per share. As of June 30, 2020, there were approximately 155 holders of record of our common stock. 

 

Dividend Policy

 

We have not paid any cash dividends on our common stock to date, and we have no intention of paying cash dividends in the foreseeable future. Whether we declare and pay dividends is determined by our Board of Directors at their discretion, subject to certain limitations imposed under Nevada corporate law. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors.

 

Equity Compensation Plan Information

 

See Item 11 - Executive Compensation for equity compensation plan information.

 

Recent Sales of Unregistered Securities

 

Other than as set forth below or as previously disclosed in our filings with the Securities and Exchange Commission, we did not sell any equity securities during the year ended December 31, 2019 in transactions that were not registered under the Securities Act.

 

Between September 11, 2019 and December 30, 2019 in terms of conversion notices received from First Fire Global Opportunities Fund, the Company issued 11,887,445 shares of common stock at a par value of $0.01 per share to settle $43,092 of convertible debt.

 

Penny Stock

 

The U.S. Securities and Exchange Commission (the “SEC”) has adopted rules that regulate broker dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.

 

The broker dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer’s account.

 

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.

 

These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.

 

 

  6  

 

 

Item 6. Selected Financial Data.

 

Not applicable as we are a smaller reporting company.

 

Special Note Regarding Forward-Looking Statements 

 

Many of the matters discussed within this Annual Report on Form 10-K (“Annual Report”) contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) on our current expectations and projections about future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. Such risks and uncertainties include the risks noted under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere. We do not undertake any obligation to update any forward looking statements. Unless the context requires otherwise, references to “we,” “us,” “our,” and “Ethema,” refer to Ethema Health Corporation and its subsidiaries.

 

Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake any obligation to update any forward-looking statements.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the 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 consolidated financial statements and accompanying notes to the consolidated financial statements for the year ended December 31, 2019.

 

Results of operations for the year ended December 31, 2019 and the year ended December 31, 2018.

 

Revenue

 

Revenue was $359,947 and $432,515 for the years ended December 31, 2019 and 2018, respectively, a decrease of $72,568 or 16.8%.

 

Revenue from patient treatment was $28,363 and $101,514 for the years ended December 31, 2019 and 2018, respectively, a decrease of $73,151 or 72.0%. The decrease is primarily due to the bad debt provision of $214,837 offset by an increase in revenue of $141,686 due to the reconciliation of outstanding bills from healthcare companies by a third party collections agent, resulting in increased billings collectible during the current year.

 

Revenue from rental income was $331,584 and $331,001 for the years ended December 31, 2019 and 2018, respectively, an increase of $583 or 0.2%.

  7  

 

 

Operating Expenses

 

Operating expenses was $4,559,682 and $3,316,832 for the years ended December 31, 2019 and 2018, respectively, an increase of $1,242,850 or 37.5%. The increase in operating expenses is attributable to:

 

General and administrative expenses of $909,613 and $664,782 for the years ended December 31, 2019 and 2018, respectively, an increase of $244,831 or 36.8%, primarily due to the increase in property taxes on the new West Palm Beach facility of $576,195.

 

  Rent expense was $1,360,117 and $731,818 for the years ended December 31, 2019 and 2018, an increase of $628,299 or 85.9%. This was due to the Company converting the option to purchase the property located at 5400 East Avenue, West Palm Beach, Florida, in which the treatment center is located into an operating lease during May 2018, the current year rental is for a period of twelve months whilst the prior year was for a period of seven months.

 

Management fees was $0 and $182,430 for the years ended December 31, 2019 and 2018, respectively, a decrease of $182,430 or 100%. No management fees were charged during the current period due to sustained losses.

 

Professional fees of $550,624 and $510,722 for the years ended December 31, 2019 and 2018, respectively, increased by $39,902 or 7.8%, primarily due to consultants who had performed various services during 2019 and were compensated by the issue of common stock during June 2019.

 

  Salaries and wages of $1,279,796 and $953,434 for the years ended December 31, 2019 and 2018, respectively, increased by $326,362 or 34.2%, primarily due to additional staff required to operate the significantly larger West Palm Beach facility which was operated for a full year during the current period as opposed to a portion of the year in the prior period.

 

  Depreciation expense was $217,018 and $273,646 for the years ended December 31, 2019 and 2018, respectively, a decrease of $56,628 or 20.7%. The depreciation charge decreased due to the disposal of the two Delray Beach Properties during the current year.

 

  Impairment expense was $242,514 and $0 for the years ended December 31, 2019 and 2018, respectively, an increase of $242,514 or 100.0%. The Company impaired the leasehold improvements of $242,514 relating to the West Palm Beach facility as the rental agreement was terminated in December 2019.

 

Operating loss

 

The operating loss was $4,199,735 and $2,884,317 for the years ended December 31, 2019 and 2018, respectively, an increase of $1,315,418 or 45.6%. The increase is attributable to the decreased revenues and the movements in operating expenses discussed above.

 

Other income

 

Other income was $6,600 and $6,009 for the years ended December 31, 2019 and 2018, respectively, an increase of $591 or 9.8%. This amount is immaterial.

 

Other expense

 

Other expense of $0 and $8,000 for the years ended December 31, 2019 and 2018, a decrease of $8,000 or 100%. This amount is immaterial.

 

Loss on sale of assets

 

The loss on sale of assets was $1,019,812 for the year ended December 31, 2019. The loss represents loss on the disposal of the Delray Beach properties during 2019.

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Penalty on convertible notes

 

The penalty on convertible notes was $569,628 for the year ended December 31, 2019. The penalty arose on notes which were in default in 2019, penalties were either levied or provided for in terms of the agreements entered into with the lenders.

 

Loss on debt conversion

 

Loss on debt conversion was $203,981 for the year ended December 31, 2019. The loss on debt conversion arose during the current year as certain convertible debt was converted into equity at prices below market prices in terms of the agreements entered into with lenders during the current and prior periods.

 

Deposit forfeited

 

On December 20, 2019, the Company entered into an agreement to terminate the lease agreement on January 30, 2020. The deposit forfeited was $1,665,078 for the year ended December 31, 2019. The deposit forfeited represents deposits initially paid for the acquisition of the West Palm Beach treatment facility located at 5400, 5402 and 5410 East Avenue West Palm Beach. We were unable to consummate the purchase transaction and entered into a lease agreement with the landlord, the deposit initially paid was offset against outstanding rental. The excess was recorded as a forfeiture.

 

Interest income 

Interest income of $17,226 and $5,334 for the years ended December 31, 2019 and 2018, respectively, an increase of $11,892 or 222.9%. The interest income in the current year was earned on the escrow balance due from the sale of Greenstone Muskoka in 2017.

 

Interest expense

 

Interest expense of $1,079,038 and $696,944 for the years ended December 31, 2019 and 2018, respectively, an increase of $382,094 or 54.8% was primarily due to the increase in convertible note funding during the current year of a net $1,704,431 primarily for working capital purposes. 

 

Debt discount

 

Debt discount was $3,338,760 and $4,504,007 for the years ended December 31, 2019 and 2018, respectively, a decrease of $1,165,247 or 25.9%. The charge during the current period represents the amortization of the value of the warrants issued over the terms of the convertible loan agreements entered into during 2019 and 2018 and the amortization of the fair value of the beneficial conversion feature of the convertible notes issued to note holders during 2017 through 2019 period. The fair value of the warrants and the beneficial conversion features are amortized over a six to twelve month period, the term of the underlying convertible securities. The decrease is due to the lower value of convertible notes issued during the current year.

 

Derivative liability movement

 

The derivative liability movement during the current year represents the mark to market movements of variably priced convertible notes and warrants issued during the current and prior years. These securities are marked to market on a quarterly basis and the resultant gain or loss is recorded as a derivative liability movement in the consolidated statements of operations and comprehensive loss.

 

Foreign exchange movements

 

Foreign exchange movements of $(311,606) and $428,053 for the years ended December 31, 2019 and 2018, represents the realized exchange gains and (losses) on monetary assets and liabilities settled during the current year as well as mark to market adjustments on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars.

 

Taxation

 

Taxation of $0 and $102,232 for the years ended December 31, 2019 and 2018, respectively, a decrease of 100%. Taxation expense is the estimated foreign tax liability on our Canadian operations during the prior year.

 

Net loss

 

Net loss of $(14,962,841) and $(8,178,643) for the years ended December 31, 2019 and 2018, respectively, an increase of $6,784,198 or 83.0%, is primarily due to the increase in operating expenses in the current year, the loss on the sale of assets, the loss on debt conversions, the penalty on convertible notes and the deposit forfeited, offset by the increased credit on the derivative liability movement during the current year.

  9  

 

  

Contingency related to outstanding payroll tax liabilities

 

The Company has also not filed certain foreign assets forms due to the US Federal Government. A provision of $250,000 was made for any potential penalties due. This issue is being addressed by our tax advisors.

 

Liquidity and Capital Resources

 

Cash used in operating activities of $2,895,538 and $1,463,544 for the years ended December 31, 2019 and 2018, respectively increased by $1,431,994 or 97.8%. The increase is primarily due to the following:

 

· The increase in net loss of $6,784,198 as discussed above.
· The increase in non-cash movement of $5,059,054, primarily due to the loss on disposal of assets of $1,019,812; the deposit forfeited of $1,665,078; and the movement in the derivative liability of $2,176,490 offset by the movement in the amortization of debt discount of $(1,165,247).
· The increase in cash generated from working capital movement of $293,148, primarily due to the movement in payables balances of $484,175, offset by a reduction in the movement in deposits held in escrow of $146,330 and a reduction in the movement of receivables of $130,730.

 

Cash generated by investing activities during the year ended December 31, 2019 was $4,556,698 and cash used in investing activities for the year ended December 31, 2018 was $1,432,110 an increase of $5,988,808 or 418.2%. We realized net proceeds on the disposal of the Delray Beach properties of $4,756,360 during the current year, during the prior year we paid deposits on the West Palm Beach properties of $1,111,993 and improved the West Palm Beach properties by $320,117.

 

Cash used by financing activities for the year ended December 31, 2019 was $1,951,034 and generated by financing activities for the year ended December 31, 2018 was $3,360,764, a decrease of $5,311,798 or 158.1%. We repaid the mortgage outstanding on the Delray properties of $3,067,073 out of the proceeds of the property disposal and repaid $2,504,695 to debt investors during the current year, in the prior year we raised $4,035,000 from debt investors.

 

Over the next twelve months we estimate that the company will require approximately $7.5 million in funding to repay its obligations, if these obligations are not converted to equity and for funding working capital as we continue to seek opportunities for addiction treatment in the US markets. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, the Company’s liquidity risk is assessed as high.

 

  10  

 

 

Item 8. Financial Statements and Supplementary Data.

 

ETHEMA HEALTH CORPORATION

 

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Expressed in US$ unless otherwise indicated)

 

  PAGE
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2019 and 2018 F-2
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2019 and 2018 F-3
Consolidated Statements of Changes in Stockholders Deficit for the years ended December 31, 2019 and 2018. F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018 F-5
Notes to the Consolidated Financial Statements F-6

 

 

 

  11  

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and
Stockholders of Ethema Health Corporation

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Ethema Health Corporation (the “Company”) at December 31, 2019 and December 31, 2018, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ deficit, and cash flows for years ended December 31, 2019 and 2018, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for the years ended December 31, 2019 and 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 3 to the consolidated financial statements, the Company had accumulated deficit of approximately $45.5 million and negative working capital of approximately $18.3 million at December 31, 2019, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Daszkal Bolton LLP
   
We have served as the Company’s auditor since 2018.
   
Fort Lauderdale, Florida
July 10, 2020  

 

F- 1

 

ETHEMA HEALTH CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

    December 31, 2019   December 31, 2018
         
ASSETS    
         
Current assets                
Cash   $ 2,975     $ 24,674  
Accounts receivable, net     105,842       202,654  
Prepaid expenses     26,625       147,870  
Other current assets     120,000       —    
Related party Receivables     —         32,650  
Total current assets     255,442       407,848  
Non-current assets                
Deposit on real Estate           2,940,546  
Due on sale of subsidiary     4,969       372,366  
Property and equipment     2,950,668       8,948,349  
Total non-current assets     2,955,637       12,261,261  
Total assets   $ 3,211,079     $ 12,669,109  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities                
Bank overdraft   $ 11,079     $ —    
Accounts payable and accrued liabilities     1,022,175       1,092,882  
Taxes payable     792,915       775,392  
Convertible loans, net of discounts     5,041,113       4,403,473  
Short term loans     106,934       —    
Mortgage loans     114,290       172,276  
Derivative liability     8,694,272       4,618,080  
Related party payables     2,793,080       2,615,613  
Total current liabilities     18,575,858       13,677,716  
Non-current liabilities                
Third party loans     774,820        
Mortgage loans, net of current portion     3,880,945       6,707,346  
Total non-current liabilities     4,655,765       6,707,346  
Total liabilities     23,231,623       20,385,062  
                 
Stockholders’ deficit                
Preferred stock - Series A; $0.01 par value, 3,000,000 authorized, nil outstanding at December 31, 2019 and 2018.     —         —    
Preferred Stock - Series B; $0.0001 par value, 10,000,000 authorized, nil outstanding at December 31, 2019 and 2018.     —         —    
Common stock; $0.01 par value, 10,000,000,000 shares authorized; 155,483,897 and 124,300,341 shares issued and outstanding  at December 31, 2019 and  2018, respectively.     1,554,838       1,243,003  
Additional paid-in capital     23,188,527       20,939,677  
Accumulated other comprehensive income     727,976       630,411  
Accumulated deficit     (45,491,885 )     (30,529,044 )
Total stockholders’ deficit     (20,020,554 )     (7,715,953 )
Total liabilities and stockholders’ deficit   $ 3,211,079     $ 12,669,109  

 

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

 

F- 2

 

 

ETHEMA HEALTH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS 

AND COMPREHENSIVE LOSS

 

    Year ended
December 31, 2019
  Year ended
December 31, 2018
         
Revenues   $ 359,947     $ 432,515  
                 
Operating expenses                
General and administrative     909,613       664,782  
Rental expense     1,360,117       731,818  
Management fees     —         182,430  
Professional fees     550,624       510,722  
Salaries and wages     1,279,796       953,434  
Depreciation expense     217,018       273,646  
Impairment expense     242,514          
Total operating expenses     4,559,682       3,316,832  
                 
Operating loss     (4,199,735 )     (2,884,317 )
                 
Other Income (expense)                
Other income     6,600       6,009  
Other expense     —         (8,000 )
Loss on sale of property     (1,019,812 )     —    
Penalty on convertible notes     (569,628 )     —    
Loss on conversion of convertible debentures     (203,981 )     —    
Deposit forfeited     (1,665,078 )     —    
Interest income     17,226       5,334  
Interest expense     (1,079,038 )     (696,944 )
Debt discount     (3,338,760 )     (4,504,007 )
Derivative liability movement     (2,599,029 )     (422,539 )
Foreign exchange movements     (311,606 )     428,053  
Net loss before taxation     (14,962,841 )     (8,076,411 )
Taxation     —         (102,232 )
Net loss     (14,962,841 )     (8,178,643 )
Accumulated other comprehensive income (loss)                
Foreign currency translation adjustment     97,565       (166,042 )
                 
Total comprehensive loss   $ (14,865,276 )   $ (8,344,685 )
                 
Basic and diluted loss per common share   $ (0.11 )   $ (0.07 )
Weighted average common shares outstanding – Basic and diluted     136,165,798       123,852,105  

 

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

 

F- 3

 

 

ETHEMA HEALTH CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

 

    Preferred Series B   Common   Additional            
    Shares   Amount   Shares   Amount   Paid in Capital   Comprehensive Income   Accumulated Deficit   Total
                                 
Balance as of January 1, 2018     —       $ —         123,239,230     $ 1,232,392     $ 18,545,914     $ 796,453     $ (22,350,401 )   $ (1,775,642 )
Fair value of warrants issued     —         —         —         —         2,328,785       —         —         2,328,785  
Shares issued for commitment fees     —         —         961,111       9,611       57,978       —         —         67,589  
Shares based compensation     —         —         100,000       1,000       7,000                       8,000  
Foreign currency translation     —         —         —         —         —         (166,042 )     —         (166,042 )
Net loss     —         —         —         —         —         —         (8,178,643 )     (8,178,643 )
Balance as of December 31, 2018     —       $ —         124,300,341     $ 1,243,003     $ 20,939,677     $ 630,411     $ (30,529,044 )   $ (7,715,953 )
                                                                 
Fair value of warrants issued     —         —         —         —         1,320,497       —         —         1,320,497  
Shares issued for commitment fees     —         —         71,111       711       4,267       —         —         4,978  
Conversion of convertible notes                     23,762,445       237,624       815,949       —         —         1,053,573  
Bonus shares issued to investors                     2,050,000       20,500       123,000       —         —         143,500  
Shares based compensation     —         —         5,300,000       53,000       318,000       —         —         371,000  
Cancelation of shares     —         —         —         —         (332,863 )     —         —         (332,863 )
Foreign currency translation     —         —         —         —         —         97,565       —         97,565  
Net loss     —         —         —         —         —         —         (14,962,841 )     (14,962,841 )
Balance as of December 31, 2019     —       $ —         155,483,897     $ 1,554,838     $ 23,188,527     $ 727,976     $ (45,491,885 )   $ (20,020,544 )

 

The accompanying notes are an integral part of the consolidated financial statement

 

F- 4

 

 

 

ETHEMA HEALTH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS 

    Year ended December 31, 2019   Year ended December 31, 2018
Operating activities                
Net loss   $ (14,962,841 )   $ (8,178,643 )
Adjustment to reconcile net loss to net cash used in operating activities:                
Depreciation expense     217,018       273,646  
Impairment expense     242,514       —    
Loss on disposal of property     1,019,812       —    
Loss on convertible debt conversion     60,481       —    
Penalty on convertible debt     410,868       —    
Bonus shares issued to investors     143,500       —    
Deposit forfeited     1,665,078       —    
Stock based compensation for services     375,978       8,000  
Amortization of debt discount     3,338,760       4,504,007  
Derivative liability movements     2,599,029       422,539  
Non-cash interest income     (17,193 )     —    
Movement in bad debt reserve     (308,690 )     (520,092 )
Changes in operating assets and liabilities                
Accounts receivable     405,566       536,296  
Prepaid expenses     121,252       (52,095 )
Escrow receivable     395,159       541,489  
Accounts payable and accrued liabilities     1,398,171       913,995  
Taxes payable     —         87,314  
Net cash used in operating activities     (2,895,538 )     (1,463,544 )
Investing activities                
Proceeds on disposal of property, net of closing costs of $182,344     4,756,360       —    
Investment in promissory note     (120,000 )     —    
Deposits refunded     15,591       —    
Deposit on property           (1,111,993 )
Purchase of fixed assets     (95,254 )     (320,117 )
Net cash generated by (used in) investing activities     4,556,697       (1,432,110 )
                 
Financing activities                
Increase (decrease) in bank overdraft     11,079       (28,824 )
Repayment of mortgage     (3,067,073 )     (123,142 )
Proceeds from convertible notes     2,906,144       4,035,000  
Repayment of convertible notes     (2,441,464 )     (697,111 )
Proceeds from promissory notes     907,170       —    
Repayment of promissory notes     (63,231 )     —    
(Repayment) proceeds from related party notes     (203,660 )     174,841  
Net cash (used in) provided by financing activities     (1,951,035 )     3,360,764  
                 
Effect of exchange rate on cash     268,177       (440,775 )
                 
Net change in cash     (21,699 )     24,335  
Beginning cash balance     24,674       339  
Ending cash balance   $ 2,975     $ 24,674  
                 
Supplemental cash flow information                
Cash paid for interest   $ 542,582     $ 551,605  
Cash paid for income taxes   $ —       $ —    
                 
Non cash investing and financing activities                
Conversion of debt to equity   $ 1,053,573     $ —    
Fair value of warrants issued   $ 1,320,497     $ 2,328,785  

  

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

  

F- 5

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1. Nature of business

 

Ethema Health Corporation (the “Company”) was incorporated under the laws of the state of Colorado, USA, on April 1, 1993. Effective April 4, 2017, the Company changed its name to Ethema Health Corporation and prior to that, on May 2012, the Company had changed its name to GreeneStone Healthcare Corporation from Nova Natural Resources Corporation. As of December 31, 2017, the Company owned 100% of the outstanding shares of GreeneStone Clinic Muskoka Inc., incorporated in 2010 under the laws of the Province of Ontario, Canada; Cranberry Cove Holdings Ltd., incorporated on January 9, 2004 under the laws of the Province of Ontario, Canada; Addiction Recovery Institute of America (“ARIA”) (formerly Seastone Delray Healthcare, LLC), incorporated on May 17, 2016 under the laws of Florida, USA; and Delray Andrews RE, LLC, incorporated on May 17, 2016 under the laws of Florida, USA.

 

During December 2016, the Company obtained a license to operate and provide addiction treatment healthcare services in Florida, USA. The company commenced operations under this license with effect from January 2017.

 

On February 14, 2017, the Company completed a series of transactions (referred to collectively as the “Restructuring Transactions”), including a Share Purchase Agreement (the “SPA”) whereby the Company acquired 100% of the stock of CCH, which holds the real estate on which the Company previously operated a rehabilitation clinic (“the Canadian Rehab Clinic”). The Company entered into an Asset Purchase Agreement (the “APA”) and lease (the “Lease”) whereby the Company sold all of the Canadian Rehab Clinic business assets and leased the real estate to the buyer. Simultaneously with this transaction, the Company entered into a Real Estate Purchase agreement and Asset Purchase Agreement whereby the Company purchased the real estate and business assets of Seastone Delray (the “Florida Purchase”).

 

The Share Purchase Agreement

Under the SPA, the Company acquired 100% of the stock of CCH from Leon Developments Ltd. (“Leon Developments”), a company wholly owned by Shawn E. Leon, who is the President, CEO, and CFO of the Company (“Mr. Leon”). CCH owns the real estate on which the Canadian Rehab Clinic is located. The total consideration paid by the Company was CDN$3,517,062, including the assumption of certain liabilities of CCH, which was funded by the assignment to Leon Developments of certain indebtedness owing to the Company in the amount of CDN$659,918, and the issuance of 60,000,000 shares of the Company’s common stock to Leon Developments, valued at US$0.0364 per share.

 

The Asset Purchase Agreement and Lease

Under the APA, the assets of the Canadian Rehab Clinic were sold by the Company, through its subsidiary, GreeneStone Clinic Muskoka Inc. (“Muskoka”), to Canadian Addiction Residential Treatment LP (the “Purchaser”), for a total consideration of CDN$10,000,000, plus an additional payment of up to CDN$3,000,000 as a performance payment to be received in 2019 if certain clinic performance metrics are met. The Purchaser completed the sale with cash proceeds to the Company of CDN$10,000,000, of which CDN$1,500,000 was to remain in escrow for up to two years to cover indemnities given by the Company. The proceeds of the Muskoka clinic asset sale were used to pay down certain tax debts and operational costs of the Company and to fund the Florida Purchase, mentioned below.

 

Through the APA, substantially all of the assets of the Canadian Rehab Clinic were sold, leaving Ethema with only the underlying clinic real estate, which the Company, through its newly acquired subsidiary, CCH, concurrently leased to the Purchaser. The Lease is a triple net lease and provides for a five (5) year primary term with three (3) five-year renewal options, annual base rent for the first year at CDN$420,000 with annual increases, an option to tenant to purchase the leased premises and certain first refusal rights.

 

The Florida Purchase

Immediately after closing on the sale of the assets of the Canadian Rehab Clinic, the Company closed on the acquisition of the real estate assets of Seastone Delray pursuant to certain real estate and asset purchase agreements The purchase price for the Seastone assets was US$6,070,000 financed with a purchase money mortgage of US$3,000,000, and US$3,070,000 in cash.

 

On May 23, 2018, the Company converted a purchase agreement with AREP 5400 East Avenue LLC to a ten year lease agreement for a substance abuse treatment center in properties located at 5400, 5402 and 5410 East Avenue, west Palm Beach, Florida. The Company was also granted an option to purchase the property at a price of $17,250,000, increasing by $750,000 per month.

 

The Company ceased operations in its Delray Beach properties and relocated its treatment facility to the newly leased premises in West Palm Beach.

 

On April 2, 2019, the Company disposed of the real property located at 801 Andrews Avenue, Delray Beach for gross proceeds of $3,500,000, retaining the property at 810 Andrews Avenue Delray Beach, Florida.

 

On October 10, 2019, the Company transferred the real Property located at 810 Andrews Avenue, Delray Beach, Florida to Leonite Capital, LLC, for net proceeds of $1,398,510, which proceeds were offset against the convertible loan owing to Leonite.

 

 

F- 6

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

   

2. Summary of significant accounting policies

 

Financial Reporting

 

The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).

 

Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that i) recorded transactions are valid; ii) valid transactions are recorded; and iii) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.

 

  a) Use of Estimates

 

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

 

  b) Principals of consolidation and foreign currency translation

 

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

 

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

 

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

 

  Non-monetary, non-current and equity at historical rates.

 

  Revenue and expense items and cash flows at the average rate of exchange prevailing during the period.

 

Adjustments arising from such translations are deferred until realization and are included as a separate component of stockholders’ deficit as a component of accumulated other comprehensive income or loss. Therefore, translation adjustments are not included in determining net income (loss) but reported as other comprehensive income (loss).

 

For foreign currency transactions, the Company translates these amounts to the Company’s functional currency at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time actual payment is made, a foreign exchange transaction gain or loss results which is included in determining net income for the period.

 

The relevant translation rates are as follows: For the year ended December 31, 2019 a closing rate of CDN$1.0000 equals US$0.7699 and an average exchange rate of CDN$1.0000 equals US$0.7536. For the year ended December 31, 2018 a closing rate of CAD$1.0000 equals US$0.7330 and an average exchange rate of CAD$1.0000 equals US$0.7574. 

F- 7

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

    

2. Summary of significant accounting policies (continued)

 

  c) Revenue Recognition

 

ASC 606 requires companies to exercise more judgment and recognize revenue using a five-step process.

 

As a result of certain changes required by ASC 606, the majority of the Company’s provision for doubtful accounts are recorded as a direct reduction to revenue instead of being presented as a separate line item on the consolidated statements of operations and comprehensive loss. The adoption of ASC 606 has no impact on the Company’s accounts receivable as it was historically recorded net of allowance for doubtful accounts and contractual adjustments, and the Company has eliminated the presentation of allowance for doubtful accounts on the consolidated balance sheets. As a result, upon the Company’s adoption of ASC 606 the majority of what was previously classified as the provision for bad debts in the statement of operations is now reflected as implicit price concessions (as defined in ASC 606) and therefore is included as a reduction to net operating revenues in 2019.

 

 

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

 

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

 

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

 

Settlements with third-party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. In the opinion of management, adequate provision has been made for any adjustments and final settlements. However, there can be no assurance that any such adjustments and final settlements will not have a material effect on the Company’s financial condition or results of operations. The Company’s receivables were $105,842 and $202,654 for the years ended December 31, 2019 and 2018, respectively. Management believes that these receivables are properly stated and are not likely to be settled for a significantly different amount. The net adjustments to estimated settlements resulted in a decrease in revenues of $414,603 and $262,353 for the years ended December 31, 2019 and 2018, respectively.

 

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

 

  i. identify the contract with a customer;

 

  ii. identify the performance obligations in the contract;

 

  iii. determine the transaction price;

 

  iv. allocate the transaction price to performance obligations in the contract; and

 

  v. recognize revenue as the performance obligation is satisfied.

 

F- 8

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

    

2. Summary of significant accounting policies (continued)

 

  d) Cash and cash equivalents

 

For purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with several financial institution in the USA and Canada.

 

The Company primarily places cash balances in the USA with high-credit quality financial institutions located in the United States which are insured by the Federal Deposit Insurance Corporation up to a limit of $250,000 per institution, in Canada which are insured by the Canadian Deposit Insurance Corporation up to a limit of CDN$100,000 per institution.

 

  e) Accounts receivable

 

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

 

  f) Allowance for Doubtful Accounts, Contractual and Other Discounts

 

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

 

  g) Financial instruments

 

The Company initially measures its financial assets and liabilities at fair value, except for certain non-arm’s length transactions. The Company subsequently measures all its financial assets and financial liabilities at amortized cost.

 

Financial assets measured at amortized cost include cash and accounts receivable.

 

Financial liabilities measured at amortized cost include bank indebtedness, accounts payable and accrued liabilities, harmonized sales tax payable, withholding taxes payable, convertible notes payable, loans payable and related party notes.

 

Financial assets measured at cost are tested for impairment when there are indicators of impairment. The amount of the write-down is recognized in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income. The Company recognizes its transaction costs in net income in the period incurred. However, financial instruments that will not be subsequently measured at fair value are adjusted by the transaction costs that are directly attributable to their origination, issuance or assumption.

 

F- 9

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

   

2. Summary of significant accounting policies (continued)

 

  g) Financial instruments (continued)

 

FASB ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 establishes a three tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

●       Level 1. Observable inputs such as quoted prices in active markets;
●  Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions.

 

The Company measures its convertible debt and derivative liabilities associated therewith at fair value. These liabilities are revalued periodically and the resultant gain or loss is realized through the Statement of Operations and Comprehensive Loss.

 

  h) Property and equipment

 

Property and equipment is recorded at cost. Depreciation is calculated on the straight line basis over the estimated life of the asset:

 

Leasehold improvements are depreciated using the straight-line method over the term of the lease.

 

  i) Leases

 

The Company accounts for leases in terms of AC 842 whereby leases are classified as either capital or operating leases. Leases that transfer substantially all of the benefits and inherent risks of ownership of property to the Company are accounted for as capital leases. At the time a capital lease is entered into, an asset is recorded together with its related long-term obligation to reflect the acquisition and financing. Equipment recorded under capital leases is amortized on the same basis as described above. Operating leases are recognized on the balance sheet as a lease liability with a corresponding right of use asset for all leases with a term that is more than twelve months. Payments under operating leases are expensed as incurred.

 

  j) Income taxes

 

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

 

ASC Topic 740 contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company recognizes interest and penalties accrued on unrecognized tax benefits within general and administrative expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in general and administrative expenses in the period that such determination is made. The tax returns for fiscal 2001, through 2017 are subject to audit or review by the US tax authorities, whereas fiscal 2010 through 2017 are subject to audit or review by the Canadian tax authority.

 

F- 10

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

    

2. Summary of significant accounting policies (continued)

 

  k) Net income (loss) per Share

 

Basic net income (loss) per share is computed on the basis of the weighted average number of common stock outstanding during the period.

 

Diluted net income (loss) per share is computed on the basis of the weighted average number of common stock and common stock equivalents outstanding. Dilutive securities having an anti-dilutive effect on diluted net income (loss) per share are excluded from the calculation.

 

Dilution is computed by applying the treasury stock method for options and warrants. Under this method, “in-the money” options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Dilution is computed by applying the if-converted method for convertible preferred stocks. Under this method, convertible preferred stock is assumed to be converted at the beginning of the period (or at the time of issuance, if later), and preferred dividends (if any) will be added back to determine income applicable to common stock. The shares issuable upon conversion will be added to weighted average number of common stock outstanding. Conversion will be assumed only if it reduces earnings per share (or increases loss per share). 

 

  l) Stock based compensation

 

Stock based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the employee’s requisite service period or vesting period on a straight-line basis. Share-based compensation expense recognized in the consolidated statements of operations for the year ended December 31, 2019 and 2018 is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. This estimate will be revised in subsequent periods if actual forfeitures differ from those estimates. We have minimal awards with performance conditions and no awards dependent on market conditions.

 

  m) Derivatives

 

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

 

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

 

F- 11

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

   

2. Summary of significant accounting policies (continued)

 

  n) Adoption of accounting standards

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), No. 2016-02, Leases (Topic 842) (ASC 842)

 

The amendments in this update establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard became effective for fiscal years and interim periods beginning after December 15, 2018. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, including a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, an update which provides another transition method, the prospective transition method, which allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the new standard on January 1, 2019 using the prospective transition method.

 

The Company has identified all leases and reviewed the leases to determine the impact of ASC 842 on its consolidated financial statements. The Company has elected to apply the practical expedient to certain classes of leases, whereby the separation of components of leases into lease and non-lease components is not required and all of the practical expedients to all leases, which include not reassessing (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. The adoption of the new standard resulted in the recording of a right-of-use asset and a lease liability on January 1, 2019 of $15,986,074. On December 20, 2019, the Company entered into an agreement with the landlord terminating the lease effective January 31, 2020, thereby eliminating the value of the right-of-use asset and liability.

 

  o) Recent accounting pronouncements

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)

 

The Amendments in this update reduce the complexity in accounting for income taxes by removing certain exceptions to accounting for income taxes and deferred taxes and simplifying the accounting treatment of franchise taxes, a step up in the tax basis of goodwill as part of business combinations, the allocation of current and deferred tax to a legal entity not subject to tax in its own financial statements, reflecting changes in tax laws or rates in the annual effective rate in interim periods that include the enactment date and minor codification improvements.

 

This ASU is effective for fiscal years and interim periods beginning after December 15, 2020.

 

The expected effects of this ASU on the Company’s consolidated financial statements is not considered to be material.

 

The FASB issued several updates during the period, none of these standards are either applicable to the Company or require adoption at a future date and none are expected to have a material impact on the consolidated financial statements upon adoption.

F- 12

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

   

2. Summary of significant accounting policies (continued)

 

  p) Financial instruments Risks

 

The Company is exposed to various risks through its financial instruments. The following analysis provides a measure of the Company’s risk exposure and concentrations at the balance sheet date, December 31, 2019 and 2018.

 

  i. Credit risk

 

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Financial instruments that subject the Company to credit risk consist primarily of accounts receivable.

 

Credit risk associated with accounts receivable of ARIA is mitigated as only a percentage of the revenue billed to health insurance companies is recognized as income until such time as the actual funds are collected. The revenue is concentrated amongst several health insurance companies located in the US.

 

In the opinion of management, credit risk with respect to accounts receivable is assessed as low.

 

  ii. Liquidity risk

 

Liquidity risk is the risk the Company will not be able to meet its financial obligations as they fall due. The Company is exposed to liquidity risk through its working capital deficiency of $18,320,416, which includes derivative liabilities of $8,694,272, and an accumulated deficit of $45,491,885. The Company is dependent upon the raising of additional capital in order to implement its business plan. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, liquidity risk is assessed as high, material and remains unchanged from that of the prior year.

 

  iii. Market risk

 

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

 

  a. Interest rate risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk on its convertible debt and bank overdraft balances as of December 31, 2019. In the opinion of management, interest rate risk is assessed as moderate.

 

  b. Currency risk

 

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is subject to currency risk as it has subsidiaries that operate in Canada and are subject to fluctuations in the Canadian dollar. A substantial portion of the Company’s financial assets and liabilities are denominated in Canadian dollars. Based on the net exposures at December 31, 2019, a 5% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an approximate $11,785 increase or decrease in the Company’s after tax net income from operations. The Company has not entered into any hedging agreements to mediate this risk. In the opinion of management, currency risk is assessed as low, material and remains unchanged from that of the prior year.

 

F- 13

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  

2. Summary of significant accounting policies (continued)

 

  p) Financial instruments Risks (continued)

  

  iii. Market risk (continued)

 

  c. Other price risk

 

Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. In the opinion of management, the Company is not exposed to this risk and remains unchanged from the prior year.

  

3. Going concern

 

The Company’s consolidated financial statements have been prepared in accordance with US GAAP applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations in the normal course of business. As at December 31, 2019 the Company has a working capital deficiency of $(18,320,416), including derivative liabilities of $8,694,272 and accumulated deficit of $(45,491,885). Management believes that current available resources will not be sufficient to fund the Company’s planned expenditures over the next 12 months. Accordingly, the Company will be dependent upon the raising of additional capital through placement of common shares, and/or debt financing in order to implement its business plan, and generating sufficient revenue in excess of costs. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain geographical areas, or techniques that it might otherwise seek to retain. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. These consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue operations.

 

The ability of the Company to continue as a going concern is dependent on the Company generating cash from the sale of its common stock or obtaining debt financing and attaining future profitable operations. Management’s plans include selling its equity securities and obtaining debt financing to fund its capital requirements and ongoing operations; however, there can be no assurance the Company will be successful in these efforts.

 

These factors create substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities or other adjustments that may be necessary should the Company not be able to continue as a going concern.

 

4. Other current assets

 

Other current assets includes the following:

 

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

F- 14

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

5. Sale of property

 

On April 2, 2019, the Company entered into a Commercial Contract with a third party whereby the real property at 801 Andrews Avenue, Delray Beach, Florida, consisting of land and condominiums thereon, was sold for $3,500,000. This transaction closed on April 26, 2019.

The loss realized on the disposal was calculated as follows:

    Amount
     
Proceeds received   $ 4,975,174  
Less: closing costs     (182,344 )
Provision for additional expenses     (36,470 )
Net proceeds received     4,756,360  
         
Assets sold:        
Land     2,753,928  
Buildings thereon, net of depreciation     2,949,452  
Furniture and fixtures, net of depreciation     72,792  
      5,776,172  
         
Loss on disposal of property   $ 1,019,812  

 

On October 10, 2019, in terms of a deed of transfer the Company disposed of the remaining property located at 810 Andrews Avenue, Delray Beach, Florida to a convertible note holder in partial settlement of the convertible note outstanding for net proceeds of $1,475,174. Subsequent to year end an additional $36,470 of expenses related to the property disposal were incurred, these expenses were provided for at year end.

 

6. Deposit on real estate

 

On November 2, 2017, the Company entered into an Agreement to purchase from AREP 5400 East Avenue LLC certain buildings in West Palm Beach, Florida, totaling approximately 80,000 square feet, on which the present tenant operates a substance abuse treatment center. The purchase price of the Property was $20,530,000. The Company made a series of nonrefundable down payments totaling $2,940,546 and $1,825,000 as of December 31, 2018 and 2017.

 

On May 23, 2018, the Company converted the agreement to a lease agreement with a purchase option of $17,250,000, increasing August 31, 2018 by $750,000 per month until the purchase option is exercised. The premises is located at 5400, 5402 and 5410 East Avenue, West Palm Beach, Florida (the “Property”). The lease was for an initial 10 years and provided for two additional 10 year extensions.

 

The Company previously was under agreement to purchase the property from the landlord. The property is presently used as a rehabilitation treatment center. The current tenant at the property, Alternatives in Treatment, LLC, a Florida limited liability company, consented to the Lease and concurrent with the execution of the Lease entered into a Sublease Agreement with the Company.

 

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

 

As of December 31, 2019, the deposits paid of $2,924,955 were offset against the unpaid rental as of December 31, 2019 of $1,509,877. A contingency reserve of $250,000 was allowed for any future claims the landlord may have against the Company, resulting in a forfeiture of the deposit balance of $1,665,078.

 

 

F- 15

 

 

 ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

7. Due on sale of business

 

On February 14, 2017, the Company sold its Canadian Rehab Clinic for gross proceeds of CDN$10,000,000, of which CDN$1,500,000 had been retained in an escrow account for a period of up to two years in order to guarantee the warranties provided by the Company in terms of the APA. As of September 30, 2019, CDN$1,055,042 of the escrow had been refunded to the Company and CDN$461,318 had been used to affect building improvements to the premises owned by CCH, for a total reduction of CDN$1,516,360. The remaining escrow balance was CDN$6,454 consisting of accrued interest earned on the escrow of CDN$22,814, less $16,360 utilized for a portion of the building improvements.

 

8. Property and equipment

 

Property and equipment consists of the following:  

 

    December 31,
2019
  December 31, 2018
    Cost   Accumulated depreciation   Net book value   Net book value
Land   $ 165,537     $ —       $ 165,537     $ 2,911,530  
Property     3,131,464       (346,333 )     2,785,131       5,750,045  
Leasehold improvements     —         —         —         251,774  
Furniture and fixtures     —         —         —         35,000  
    $ 3,297,001     $ (346,333 )   $ 2,950,668     $ 8,948,349  

Depreciation expense for the year ended December 31, 2019 and 2018 was $217,018 and $273,646, respectively. On December 20, 2019, in terms of an agreement with the landlord the lease for the West Palm Beach facility was terminated and the Company impaired the leasehold improvements relating to the leased property, the impairment charge was $242,514.

 

9. Leases

 

Adoption of ASC Topic 842, Leases

On January 1, 2019, the Company adopted Topic 842 using the modified retrospective method applied to leases that were in place as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. The Company's leases consists of operating leases that relate to real estate rental agreements. All of the value of the Company's lease portfolio relates to a real estate lease agreement that was entered into in May 2018.

 

Practical Expedients and Elections

The Company elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that exist prior to adoption of the new standard. We also elected the short-term lease recognition exemption for all leases that qualify.

 

Discount Rate applied to property operating lease

To determine the present value of minimum future lease payments for operating leases at January 1, 2019, the Company was required to estimate a rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment (the "incremental borrowing rate" or "IBR").

 

The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, the Company used the average of (i) the risk free interest rate adjusted for a premium for Company and liquidity risk; (ii) the weighted average mortgage interest rate currently availed to the Company; and (iii) the fifteen year mortgage interest rate. The weighted average rate the Company determined was 4.76% as an appropriate incremental borrowing rate to apply to its real-estate operating lease.

 

F- 16

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

9. Leases (continued)

 

Subsequent to year end, on January 30, 2020, the Company verbally terminated the lease with the current landlord who had leased the premises to a third party and subsequently sold the property. The operating lease liability and right-of-use asset has been eliminated as of December 31, 2019.

 

Total operating lease cost

 

Individual components of the total lease cost incurred by the Company is as follows:

 

   

Year ended

December 31,
2019

 
       
Operating lease expense   $ 1,360,117  

 

 10. Taxes Payable  
           

 

In the prior year, the Company settled the tax liabilities owing to the Canadian Revenue Authorities out of the proceeds of the disposal of the Canadian Rehab Clinic on February 14, 2017. The Company paid CDN$2,929,886 to settle outstanding payroll liabilities, CDN$441,598 to settle outstanding GST/HST liabilities and a further CDN$57,621 to settle other Canadian tax liabilities.

 

The remaining taxes payable consist of:

 

  A payroll tax liability of $140,583 (CDN$182,589) in Greenestone Muskoka which has not been settled as yet.
  A GST/HST tax payable of $26,524 (CDN$34,449).

 

  The Company has assets and operates businesses in Canada and is required to disclose these operations to the US taxation authorities, the requisite disclosure has not been made. Management has reserved the maximum penalty due to the IRS in terms of non-disclosure. This noncompliance with US disclosure requirements is currently being addressed. An amount of $250,000 has been accrued for any potential exposure the Company may have.

 

    December 31,
2019
  December 31,
2018
         
Payroll taxes   $ 140,583     $ 133,843  
HST/GST payable     26,524       33,757  
US penalties due     250,000       250,000  
Income tax payable     375,808       357,792  
    $ 792,915     $ 775,392  

 

F- 17

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

11. Short-term Convertible Notes

 

The short-term convertible notes consist of the following:

 

   

Interest

rate

    Maturity date   Principal     Interest     Debt Discount    

December 31,

2019

   

December 31,

2018

 
                                           
Leonite Investments LLC     8.5 %   On demand   $ 1,126,394     $ 86,754     $ -     $ 1,213,148     $ 2,494,180  
                                                     
Power Up Lending Group Ltd     9.0 %       -       -       -       -       94,595  
      9.0 %       -       -       -       -       44,484  
      9.0 %   May 15,2019     53,000       2,300       (21,593 )     33,707       -  
      9.0 %   September 10, 2019     83,000       3,458       (34,631 )     51,827       -  
                                                     
First Fire Global Opportunities Fund     12.0 %   December 2019     156,908       90,453       -       247,361       -  
                                                     
Actus Fund, LLC     10.0 %   May 7, 2020     225,000       9,125       (105,109 )     129,016       -  
                                                     
Labrys Fund, LP     12.0 %   January 8, 2020     282,000       16,317       (12,260 )     286,057       -  
                                                     
Series N convertible notes     6.0 %   May 17, 2019 to September 16, 2020     3,229,000       231,063       (380,066 )     3,079,997       1,770,214  
                                                     
                                         $ 5,041,113      $ 4,403,473  

 

Leonite Capital, LLC

 

On December 1, 2017, the Company closed on a private offering to raise US $1,500,000 in capital. The Company issued one senior secured convertible promissory note with a principal amount of $1,650,000 to Leonite Capital, LLC (“Leonite”). The note is convertible into shares of common stock at a conversion price of $0.06 per share, subject to anti-dilution and price protection. The Note bears interest at the rate of 8.5% per annum. The Note’s amended maturity date was December 1, 2018. During the term of the Note the Company and the Subsidiaries was obligated to make monthly payment of accrued and unpaid interest. The Note contains Company and Subsidiary representations and warranties, covenants, events of default, and registration rights. The Company paid a commitment fee of $132,000 settled through the issue of 1,650,000 shares of common stock and paid $20,000 towards the lenders legal fees. In conjunction with this note, the Company issued a five year warrant to purchase 27,500,000 shares of common stock at an exercise price or $0.10 per share, subject to anti-dilution and price protection.

 

F- 18

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

11. Short-term Convertible Notes (continued)

 

Leonite Capital, LLC (continued)

 

The Note provided that the parties use reasonable best efforts to close on the remaining $1,200,000 of availability under the Note by January 1, 2018. As a condition to the closing of the Balance Tranche, the parties must finalize and enter into additional agreements related to the Private Offering, including, but not limited to, (i) a Securities Purchase Agreement; (ii) a Warrant Agreement under which the Investor will have the right to purchase up to 27,500,000 shares of the Company’ common stock for $0.10 per share, subject to adjustment, for a period of five years; (iii) a Securities Pledge Agreement under which the Company and the Subsidiaries will grant the lender a blanket lien on their assets, and the Company will pledge its equity ownership in the Subsidiaries. Upon the closing of the Balance Tranche the maturity date of the Note was to become December 1, 2018.

 

On December 29, 2017, effective as of December 1, 2017, the Company and the Subsidiaries entered into an Amended and Restated Senior Secured Convertible Promissory Note, which note amended and restated the Note to (a) extend the maturity date to December 1, 2018; (b) remove CCH, as an obligor; (c) increase the interest rate by 2.00% per annum, to 8.5% per annum; and (d) issue an additional 250,000 shares of the Company’s common stock to the Investor. In connection with the execution of the amendment, the parties entered into (i) a Securities Purchase Agreement; (ii) a Warrant Agreement under which the Investor will have the right to purchase up to 27,500,000 shares of the Company’ common stock for $0.10 per share, subject to adjustment, for a period of five years; (iii) a Security and Pledge Agreement and a General Security Agreement under which the Company and the Subsidiaries will grant the Investor a blanket lien on their assets, and the Company will pledge its equity ownership in the Subsidiaries; effective January 2, 2018.

 

At the execution of the Note, the Investor funded an initial tranche of $300,000. Thereafter the Investor funded a second tranche of $156,136. Upon the execution of the A&R Note the Investor funded a third tranche of $100,000. Upon the execution of the First Amendment the Investor funded a final tranche of $850,000, with the remaining $93,764 of availability under the A&R Note, as amended, serving as a holdback pursuant to the terms of the First Amendment.

 

On March 12, 2018, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $330,000, including an Original Issue Discount of $30,000, for net proceeds of $300,000. The note had a maturity date of March 19, 2018. The outstanding principal amount of the note was convertible at any time and from time to time at the election of the purchaser following the issue date into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to anti-dilution and price protection. The Company paid a commitment fee of $19,800 settled through the issue of 330,000 shares of common stock. This note was repaid on the maturity date for gross proceeds of $330,000.

 

On March 29, 2018, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $165,000, including an Original Issue Discount of $15,000, for net proceeds of $150,000. The note had a maturity date of December 1, 2018 and bears interest at a rate of 8.5% per annum. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser following the issue date into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to anti-dilution and price protection. The Company paid a commitment fee of $11,550 settled through the issue of 165,000 shares of common stock. In conjunction with this note the Company issued a five year warrant to purchase 5,500,000 shares of common stock at an exercise price of $0.10 per share, subject to anti-dilution and price protection.

 

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

 

  

F- 19

 

 

ETHEMA HEALTH CORPORATION

 

 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

11. Short-term Convertible Notes (continued)

 

Leonite Capital, LLC (continued)

 

On November 5, 2018, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $111,111, including an Original Issue Discount of $11,111, for net proceeds of $100,000. The note had a maturity date of November 30, 2018 and bore interest at 1.0% per annum. The outstanding principal amount of the note was convertible at any time and from time to time at the election of the purchaser following the issue date into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to price protection and anti-dilution protection. The Company paid a commitment fee of $8,889 settled through the issue of 111,111 shares of common stock. In conjunction with this note the Company issued a five year warrant to purchase 1,400,000 shares of common stock at an exercise price of $0.10 per share, subject to anti-dilution and price protection. This note was repaid on the maturity date for gross proceeds of $111,184.

 

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

 

Effective March 19, 2019, the Company entered into a note extension agreement with Leonite, whereby the convertible notes outstanding to Leonite, amounting to $2,420,000, for consideration of $75,000 added to the principal outstanding on the note on January 1, 2019, a further $75,000 added to the principal outstanding on the note on February 1, 2019 and a further $100,000 added to the principal of the note on March 15, 2019, the maturity date of all of the convertible notes above were extended to December 31, 2019.

 

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

 

On October 10, 2019, the Company transferred a warranty deed to the real property located at 810 Andrews Avenue, Delray Beach, Florida to Leonite Capital, LLC, in settlement of indebtedness of $1,398,514 and additional expenses related to the disposal of the property of $36,470. These expenses of $36,470 were provided for resulting in net proceeds recognized on the transfer of the property of $1,362,044.

 

F- 20

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

11. Short-term Convertible Notes (continued)

 

Power Up Lending Group LTD

 

On July 31, 2018, the Company, entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued to the Purchaser a Convertible Promissory Note in the aggregate principal amount of $153,000. The Note had a maturity date of May 15, 2019 and bears interest at the rate of nine percent per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement.

 

The outstanding principal amount of the Note is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion. On January 28, 2019, the Company repaid the Power Up convertible note entered into on July 31, 2018 of $153,000 together with interest and early settlement penalty thereon for a payout of $207,679.

 

On September 10, 2018, the Company, entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued to the Purchaser a Convertible Promissory Note in the aggregate principal amount of $133,000. The Note had a maturity date of September 10, 2019 and bears interest at the rate of nine percent per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company had the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of the Purchaser during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion. On March 11, 2019, the Company repaid the Power Up convertible note entered into on September 10, 2018, of $133,000 together with interest and early settlement penalty thereon for gross proceeds of $180,062.

 

On January 9, 2019, the Company, entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $53,000 for net proceeds of $50,000 after expenses. The Note had a maturity date of October 30, 2019 and bears interest at the rate of nine percent per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note was convertible at any time and from time to time at the election of Power Up during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion. On July 8, 2019, the Company repaid the convertible note of $53,000 together with interest thereon and early settlement penalty for gross proceeds of $72,000.

 

On January 28, 2019, the Company, entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $138,000 for net proceeds of $135,000 after expenses. The Note had a maturity date of November 15, 2019 and bears interest at the rate of nine percent per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note was convertible at any time and from time to time at the election of Power Up during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion. On July 16, 2019, the Company repaid the convertible note of $138,000 together with interest thereon and early settlement penalty for gross proceeds of $186,743.

 

 

F- 21

 

 

ETHEMA HEALTH CORPORATION

 

 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

  

11. Short-term Convertible Notes (continued)

 

Power Up Lending Group LTD (continued)

 

On March 6, 2019, the Company, entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $128,000. The Note has a maturity date of January 30, 2020 and bears interest at the rate of nine percent per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of Power Up during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion. On September 18, 2019, the Company repaid $110,000 of the principal outstanding on the note. On October 18, 2019, the Company repaid the remaining principal outstanding of $18,000 together with interest thereon and early settlement penalty for gross proceeds of $68,744.

 

On July 8, 2019, the Company, entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $53,000. The Note has a maturity date of April 30, 2020 and bears interest at the rate of nine percent per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of Power Up during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion.

 

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

 

First Fire Global Opportunities Fund

 

On March 5, 2019, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $200,000, for net proceeds of $192,000 after the payment of legal fees and origination fees amounting to $8,000. The note has a maturity date of December 9, 2019. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser. 180 days after the issued date into shares of the Company’s common stock at the lower of $0.08 per share or 65% of the lowest trade price during the ten consecutive trading days immediately prior to conversion. The note has certain buyback terms if the Company consummates a registered or unregistered primary offering of securities for capital raising purposes, or an option to convert at a 20% discount to the offering price to investors.

 

Between September 11, 2019 and December 30, 2019, in terms of conversion notices received, the Company issued 11,887,445 shares of Common stock in settlement of $36,592 of principal outstanding.

 

 

F- 22

 

 

ETHEMA HEALTH CORPORATION

 

 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

  

11. Short-term Convertible Notes (continued)

 

Actus Fund, LLC

 

On August 7 2019, the Company, entered into a Securities Purchase Agreement with Actus Fund, LLC, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $225,000. The Note has a maturity date of May 7, 2020 and bears interest at the rate of ten percent per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of Actus Fund, LLC during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 60% of the lowest closing bid price of the Company’s common stock for the thirty trading days prior to conversion.

 

Labrys Fund, LP

 

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

 

In connection with the issuance of the convertible promissory note to Labrys Fund LP, the Company issued 2,700,000 returnable shares. These shares are returnable if the note is paid prior to maturity date on January 8, 2020. Should the convertible note be in default the shares will be retained by Labrys Fund, LP. The Company intends repaying the note prior to maturity, therefore the returnable shares are not recorded as issued until the note is in default.

 

Series N convertible notes

 

During the period from May 17, 2018 to December 4, 2018, The Company closed several tranches of a private offering in which it raised $2,505,000 in principal from 12 accredited investors through the issuance to the investors of the Company’s Series N convertible notes, in the total original principal amount of $2,505,000, which Notes are convertible into the Company’s common stock at a conversion price of $0.08 per share together with three year warrants to purchase up to a total of 31,312,500 shares of the Company’s common stock at an exercise price of $0.12 per share. Both the conversion price under the Notes and the exercise price under the warrants are subject to standard price and anti-dilution adjustment mechanisms. The notes mature between May 16, 2019 to December 3, 2019.

 

Between January 28, 2019 and September 17, 2019, the Company closed several tranches of Series N Convertible notes in which it raised $1,643,894 in principal from accredited investors through the issuance to the investors of the Company’s Series N convertible notes, in the total original principal amount of $1,643,894, which Notes are convertible into the Company’s common stock at a conversion price of $0.08 per share together with three year warrants to purchase up to a total of 20,925,000 shares of the Company’s common stock at an exercise price of $0.12 per share. Both the conversion price under the Notes and the exercise price under the warrants are subject to standard adjustment mechanisms. The notes mature one year from the date of issuance.

 

On May 15, 2019, one investor converted the aggregate principal amount of $950,000 of Series N convertible notes into 11,875,000 shares of common stock at a conversion price of $0.08 per share.

 

F- 23

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

12. Mortgage loans

 

Loans payable is disclosed as follows:

 

    Interest 
rate
    Maturity date   Principal 
Outstanding
    Accrued 
interest
    December 31,
2019
    December 31,
2018
 
                                   
Cranberry Cove Holdings, Ltd.                                            
Pace Mortgage     4.2 %   July 19, 2022   3,989,726     $ 5,509     $ 3,995,235      $ 3,924,836  
Addiction Recovery Institute of America, LLC                                            
Mortgage     5.0 %   -     -       -       -       2,954,786  
                $ 3,989,726     $ 5,509     $ 3,995,235     $ 6,879,622  
Disclosed as follows:                                            
Short-term portion                               $ 114,290     $ 172,276  
Long-term portion                                 3,880,945       6,707,346  
                                $ 3,995,235     $ 6,879,622  

 

The aggregate amount outstanding is payable as follows:

 

    Amount
2020    $ 114,290  
2021     113,397  
2022     3,767,548  
Total   $ 3,995,235  

 

Cranberry Cove Holdings, Ltd.

 

On July 19, 2017, CCH, a wholly owned subsidiary, closed on a loan agreement in the principal amount of CDN$5,500,000. The loan is secured by a first mortgage on the premises owned by CCH located at 3571 Muskoka Road 169, Bala, Ontario (the “Property”). The loan bears interest at the fixed rate of 4.2% with a 5-year primary term and a 25-year amortization. The Company has guaranteed the loan and the Company’s chief executive officer and controlling shareholder also has personally guaranteed the Loan. CCH and the Company have granted the Lender a general security interest in its assets to secure repayment of the Loan. The loan is amortized with monthly installments of CDN $29,531.

 

ARIA

 

On February 13, 2017, the Company, through its subsidiary, ARIA, entered into a Mortgage and Security Agreement to purchase the properties located at 801 and 810 Andrews Avenue, Delray Beach, Florida, for an aggregate principal sum of $3,000,000, bearing interest at the rate of 5% per annum, maturing on February 13, 2020, with monthly installments of $15,000.

 

On April 2, 2019, the Company entered into a Commercial Contract whereby the real property at 801 Andrews Avenue, Delray Beach, Florida, consisting of land and condominiums thereon, was sold to a third party for $3,500,000. This transaction closed during April 2019 and the principal mortgage liability of $2,942,526, including interest thereon was settled.

 

F- 24

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 13. Third party loan

 

On April 12, 2019, Eileen Greene, a related party assigned CDN1,000,000 of the amount owed by the Company to her to a third party. The loan bears interest at 12% per annum which the Company agreed to pay.

 

14. Derivative liability

 

The short-term convertible notes, together with certain warrants issued to Leonite and the short term convertible notes disclosed in note 12 above and note 16 below, have variable priced conversion rights with no fixed floor price and will reprice dependent on the share price performance over varying periods of time. This gives rise to a derivative financial liability, which was initially valued at inception of the convertible notes at $1,959,959 using a Black-Scholes valuation model.

 

The derivative liability is marked-to-market on a quarterly basis. As of December 31, 2019, the derivative liability was valued at $8,694,272.

 

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

 

    Year ended
December 31,
2019
     
Calculated stock price     $0.05 to $0.09  
Risk free interest rate     1.43% to 2.56%  
Expected life of convertible notes and warrants     3 to 60 months  
expected volatility of underlying stock     102.3% to 687.3%  
Expected dividend rate     0 %

 

The movement in derivative liability is as follows:

 

    December 31,
2019
  December 31,
2018
         
Opening balance   $ 4,618,080     $ 2,859,832  
Derivative liability on issued convertible notes and variable priced warrants     1,477,163       1,335,709  
Fair value adjustments to derivative liability     2,599,029       422,539  
                 
Closing balance   $ 8,694,272     $ 4,618,080  

F- 25

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

15. Related party transactions

 

Shawn E. Leon

As of December 31, 2019 and 2018 the Company had a payable to Shawn Leon of $293,072 and a receivable of $32,650 from Shawn E. Leon, respectively. Mr. Leon is a director and CEO of the Company. The balances payable and receivable are non-interest bearing and has no fixed repayment terms.

 

Certain Companies controlled by Mr. Leon were paid management fees of $0 and $182,430 for the years ended December 31, 2019 and 2018, respectively. Due the current financial position of the Company, no management fees were accrued or paid.

 

Leon Developments, Ltd.

As of December 31, 2019 and 2018, the Company owed Leon Developments, Ltd. $904,121 and $1,581,499, respectively, for funds advanced to the Company.

 

Eileen Greene

As of December 31, 2019 and 2018, the Company owed Eileen Greene, the spouse of our CEO, Shawn Leon, $1,595,887 and $1,034,114, respectively. During the year ended December 31, 2019, Ms. Greene advanced the company a net $560,824 to fund working capital requirements. The amount owing to Ms. Greene is non-interest bearing and has no fixed repayment terms.

 

 All related party transactions occur in the normal course of operations and in terms of agreements entered into between the parties.

 

16. Stockholder’s deficit

  

  a) Common shares

 

Authorized, issued and outstanding

 

On September 20, 2019, in terms of a shareholders resolution and Article of Amendment filed with the Colorado Secretary of State, the Company increased its authorized common share capital to 900,000,000 shares with a par value of $0.01 per share. 

 

On January 6, 2020, the majority of the shareholders of the Company approved an increase in the authorized number of common shares from 900,000,000 to 10,000,000,000 with a par value of $0.01 per share.

 

The company has issued and outstanding 155,483,897 and 124,300,341 at December 31, 2019 and 2018, respectively.

 

On January 1, 2018, the Company recorded the issuance of a further 80,000 shares of common stock to Leonite in connection with a senior secured convertible promissory note issued in March 2018. The shares were valued at $4,800 on the issue date and recorded as a debt discount.

 

On March 29, 2018, the Company issued 165,000 shares of common stock to Leonite in connection with the closing of a financing of a Senior Secured Convertible Note. The shares were valued at $11,550 on the issue date and recorded as a debt discount.

 

On April 17, 2018, the Company issued 605,000 shares of common stock to Leonite in connection with the closing of a financing of a Senior Secured Convertible Note. The shares were valued at $39,450 on the issue date and recorded as a debt discount.

 

On November 6, 2018, the Company issued 111,111 shares of common stock to Leonite in connection with the closing of a financing of a Senior Secured Convertible Note. The shares were valued at $8,889 on the issue date and recorded as a debt discount.

 

On December 13, 2018, the Company entered into a Separation Agreement and Mutual General Release with a previous employee. In terms of the agreement, the Company issued the employee 100,000 shares of common stock valued at $8,000 on the issue date.

 

F- 26

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

16. Stockholder’s deficit (continued)

  

  a) Common shares (continued)

 

Authorized, issued and outstanding (continued)

  

On January 17, 2019, the Company issued 71,111 shares of common stock to Leonite in connection with the closing of a financing of a Senior Secured Convertible Note. The shares were valued at $4,978 on the issue date and recorded as a debt discount.

 

On May 15, 2019, a Series N convertible note holder converted an aggregate principal amount of $950,000 of principal debt into 11,875,000 at a conversion price of $0.08 per share.

 

During June 2019, the Company issued a total of 5,300,000 shares of common stock to certain consultants, directors and employees for services rendered during the course of the current fiscal year. These shares of common stock were valued at $371,000 at the date of grant.

 

During June 2019, the Company issued a total of 2,050,000 shares of common stock to certain investors as bonus shares. These shares were valued at $0.07 per share on the date of issuance.

 

On July 15, 2019, the Company transferred 2,700,000 unissued shares to Labrys Fund, LP in connection with a convertible note issued on July 8, 2019. These shares are only earned and to be issued upon an event of a repayment default. The Company intends repaying the note prior to maturity, therefore the shares are not recorded as issued for financial statement purposes.

 

Between September 11, 2019 and December 30, 2019 in terms of conversion notices received from First Fire Global Opportunities Fund, the Company issued 11,887,445 shares of common stock to settle $43,092 of convertible debt.

 

  b) Preferred shares

 

Authorized, issued and outstanding

 

The Company has authorized 13,000,000 preferred shares, designated as 3,000,000 series A convertible preferred shares with a par value of $1.00 each and 10,000,000 series B convertible preferred shares with a par value of $0.01 per share. The Company has no preferred shares issued and outstanding.

 

  c) Warrants

 

In terms of the convertible note agreements entered into with Leonite disclosed in note 10 above, the Company granted warrants exercisable over a total of 2,185,183 shares of common stock at an initial exercise price of $0.10 per share, which was recorded as a debt discount.

 

In terms of the Series N Convertible debt issued to various accredited investors, disclosed in note 10 above, the Company granted warrants exercisable over a total of 20,925,000 shares of common stock at an initial exercise price of $0.12 per share, which was recorded as a debt discount.

 

In terms of the price protection provided in the Leonite Capital, LLC warrants which were issued at an initial exercise price of $0.10 per share. These warrants provided for a reduction in the issue price should the Company issue any stock at a price below the exercise price. The Company subsequently issued common stock at a price of $0.00204 per share thereby triggering the price protection clause in the warrant agreement. The warrants issued to Leonite were originally exercisable over 51,258,985 shares and were increased to be exercisable over 2,456,534,397 shares of common, amounting to a total exercisable over 2,507,793,382 shares of common stock, at an exercise price of $0.00204 per share.

 

 

F- 27

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

16. Stockholder’s deficit (continued)

  

  c) Warrants

 

The warrants were valued using a Black Scholes pricing model on the date of grant at $1,477,163 using the following weighted average assumptions: 

 

    Year ended December 31, 2019
Calculated stock price     $0.05 to $0.09  
Risk free interest rate     1.43% to 2.58%  
Expected life of warrants     36 to 60 months  
expected volatility of underlying stock     164.5% to 186.7%  
Expected dividend rate     0 %

 

The volatility of the common stock is estimated using historical data of the Company’s common stock. The risk-free interest rate used in the Black Scholes pricing model is determined by reference to historical U.S. Treasury constant maturity rates with maturities approximate to the life of the warrants granted. An expected dividend yield of zero is used in the valuation model, because the Company does not expect to pay any cash dividends in the foreseeable future. As of December 31, 2019, the Company does not anticipate any awards will be forfeited in the valuation of the warrants.

A summary of all of the Company’s warrant activity during the period January 1, 2018 to December 31, 2019 is as follows: 

      No. of shares     Exercise price per 
share
    Weighted average exercise price  
                     
Outstanding January 1, 2018       49,504,075       $0.0033 to $0.10     $ 0.0690  
Granted       48,295,833       $0.10 to $0.12       0.1130  
Forfeited/cancelled       (300,000     $0.0033       0.0033  
Exercised                    
Outstanding December 31, 2018       97,499,908       $0.003 to $0.12     $ 0.0910  
Granted       27,700,652       $0.10 to $0.12       0.11773  
Adjustment due to price protection       2,456,534,397       $0.00204       0.00204  
Forfeited/cancelled       (15,633,709 )     0.03       0.030  
Exercised                    
Outstanding December 31, 2019       2,566,101,248       $0.00204 to $0.12     $ 0.00451  

  

F- 28

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

16. Stockholder’s deficit (continued)

  

  c) Warrants

 

The following table summarizes information about warrants outstanding at December 31, 2019:

 

      Warrants outstanding     Warrants exercisable  

 

Exercise price

   

 

No. of shares

   

Weighted average

remaining years

   

Weighted average

exercise price

   

 

No. of shares

   

Weighted average

exercise price

 
                                 
$0.00204       2,507,793,382       3.18               2,507,793,382          
$0.03       6,070,366       0.80               6,070,366          
$0.12       52,237,500       1.89               52,237,500          
                                           
        2,566,101,248       3.15     $ 0.00451       2,566,101,248     $ 0.00451  

 

All of the warrants outstanding as of December 31, 2019 are vested. The warrants outstanding as of December 31, 2019 have an intrinsic value of $2,188,320. 

 

  d) Stock options

 

Our board of directors adopted the Greenestone Healthcare Corporation 2013 Stock Option Plan (the “Plan”) to promote our long-term growth and profitability by (i) providing our key directors, officers and employees with incentives to improve stockholder value and contribute to our growth and financial success and (ii) enable us to attract, retain and reward the best available persons for positions of substantial responsibility. A total of 10,000,000 shares of our common stock have been reserved for issuance upon exercise of options granted pursuant to the Plan. The Plan allows us to grant options to our employees, officers and directors and those of our subsidiaries; provided that only our employees and those of our subsidiaries may receive incentive stock options under the Plan. We have no issued options at December 31, 2019 under the Plan.

 

No options were issued, exercised during the year ended December 31, 2019 and 2018, respectively.

 

On October 31, 2019, options exercisable for 480,000 shares expired. There are no other stock options outstanding.

 

As of December 31, 2019 there was no unrecognized compensation costs related to these options and the intrinsic value of the options as of December 31, 2019 is $0.

 

 

F- 29

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

17. Segment information

  

The Company has two reportable operating segments:

 

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

 

  b. Rehabilitation Services provided to customers, these services were provided to customers at our Addiction Recovery Institute of America and Seastone of Delray operations.

 

The segment operating results of the reportable segments for the year ended December 31, 2019 is disclosed as follows:

 

    Year ended December 31, 2019
    Rental Operations   In-Patient services   Total
             
Revenue   $ 331,584     $ 28,363     $ 359,947  
Operating expenditure     17,200       4,542,482       (4,559,682 ) 
                         
Operating income (loss)     314,384       (4,514,119 )     (4,199,735 )
                         
Other (expense) income                        
Other income     -       6,600       6,600  
Loss on sale of assets     -       (1,019,812 )     (1,019,812 )
Penalty on convertible notes     -       (569,628 )     (569,628 )
Loss on debt conversion     -       (203,981 )     (203,981 )
Deposit forfeited     -       (1,665,078 )     (1,665,078 )
Interest income     -       17,226       17,226  
Interest expense     (396,100 )     (682,938 )     (1,079,038 )
Amortization of debt discount     -       (3,338,760 )     (3,338,760 )
Change in fair value of derivative liability     -       (2,599,029 )     (2,599,029 )
Foreign exchange movements     (38,992 )     (272,614 )     (311,606
Net loss before taxation     (120,708 )     (14,842,133 )     (14,962,841 )
Taxation     -       -       -  
Net loss   $ (120,708 )   $ (14,842,133 )   $ (14,962,841 )

 

The operating assets and liabilities of the reportable segments as of December 31, 2019 is as follows:

 

    December 31, 2019
    Rental Operations   In-Patient services   Total
             
Purchase of fixed assets     72,386       22,868       95,254  
Assets                        
Current assets     4,230       251,212       255,442  
Non-current assets     2,955,637             2,955,637  
Liabilities                        
Current liabilities     (1,280,442 )     (17,295,416 )     (18,575,858 )
Non-current liabilities     (4,655,765 )     —         (4,655,765 )
Intercompany balances     596,872       (596,872 )     —    
Net liability position     (2,379,468 )     (17,641,076 )     (20,020,544 )

 

 

F- 30

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

17. Segment information (continued)

  

The segment operating results of the reportable segments for the year ended December 31, 2018 is disclosed as follows:

 

    Year ended December 31, 2018
    Rental Operations   In-Patient services   Total
             
Revenue   $ 331,001     $ 101,514     $ 432,515  
Operating expenditure     157,841       3,158,991       3,316,832  
                         
Operating income (loss)     173,160       (3,057,477 )     (2,884,317 )
                         
Other (expense) income                        
Other income     —         6,009       6,009  
Other expense     —         (8,000 )     (8,000 )
Interest income     —         5,334       5,334  
Interest expense     (178,220 )     (518,724 )     (696,944 )
Amortization of debt discount     —         (4,504,007 )     (4,504,007 )
Loss on change in fair value of derivative liability     —         (422,539 )     (422,539 )
Foreign exchange movements     78,177       349,876       428,053  
Net income (loss) before taxation from continuing operations     73,117       (8,149,528 )     (8,076,411 )
Taxation     —         —         —    
Net income (loss) from continuing operations   $ 73,117     $ (8,149,528 )   $ (8,076,411 )

 

The operating assets and liabilities of the reportable segments as of December 31, 2018 is as follows:

 

    December 31, 2018
    Rental Operations   In-Patient services   Total
             
Purchase of fixed assets     46,667       273,450       320,117  
Assets                        
Current assets     1,460       406,388       407,848  
Non-current assets     2,855,981       9,405,280       12,261,261  
Liabilities                        
Current liabilities     (2,028,940 )     (11,648,776 )     (13,677,716 )
Non-current liabilities     (3,924,836 )     (2,782,510 )     (6,707,346 )
Intercompany balances     788,944       (788,944 )     —    
Net liability position     (2,307,391 )     (5,408,562 )     (7,715,953 )

 

 

F- 31

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

18. Net (loss) income per common share

  

For the year ended December 31, 2019 and 2018, the following options. Warrants and convertible securities were excluded from the computation of diluted net loss per share as the results would have been anti-dilutive.

 

    Year ended
December 31,
2019
  Year ended
December 31,
2018
         
Stock options     —         480,000  
Warrants to purchase shares of common stock     2,566,101,248       97,499,908  
Convertible notes     1,046,179,457       69.816.517  
      3,612,280,705       167,796,425  

 

19. Commitments and contingencies

  

  a. Contingency related to outstanding penalties

 

The Company has provided for potential US penalties of $250,000 due to non-compliance with the filing of certain required returns. The actual liability may be higher due to interest and penalties assessed by these taxing authorities.  

  b. Mortgage loans

 

The company has a mortgage loans as disclosed in note 11 above. The future commitment under this loans is as follows:

 

    Amount
2020     114,290  
2021     113,397  
2022     3,767,548  
Total   $ 3,995,235  

 

  c. Other

 

The Company has principal and interest payment commitments under the Convertible notes disclosed under Note 10 above. Conversion of these notes are at the option of the investor, if not converted these notes may need to be repaid.

 

From time to time, the Company and its subsidiaries enter into legal disputes in the ordinary course of business. The Company believes there are no material legal or administrative matters pending that are likely to have, individually or in the aggregate, a material adverse effect on its business or results of operations.

 

 

F- 32

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

20. Income taxes

  

The Company is current in its US tax filings, except for its 2018 filing, as of December 31, 2019 and is not current in its Canadian tax filings with the 2016 and 2017 returns still outstanding. 

 

The income tax provision/ (benefit) is different from that which would be obtained by applying the statutory Federal income tax rate of 21% and applicable state tax rates of 5% to income before income tax expense. The items causing this difference for the years ended December 31, 2019 and 2018 are as follows: 

 

    Year ended December 31, 2019   Year ended December 31, 2018
         
Tax credit at the federal and state statutory rate     (3,854,992 )     (2,219,152 )
Foreign taxation     (62,163 )     121,579  
Permanent differences     1,569,469       1,280,902  
Foreign net operating losses utilized     —         (19,347 )
Foreign tax rate differential     1,173       —    
Valuation allowance     2,346,513       938,250  
      —         102,232  

 

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities at December 31, 2019 and 2018 are as follows:

 

    December 31, 2019   December 31, 2018
Net operating losses                
Net operating loss carry forward     24,023,480       20,556,758  
Net operating loss utilized     —         (73,007 )
Foreign exchange differential     68,923       (68,925 )
Net taxable loss     8,876,008       3,608,654  
Valuation allowance     (32,968,411 )     (24,023,480 )
      —         —    

 

The company has established a valuation allowance against its gross deferred tax assets sufficient to bring its net deferred tax assets to zero due to the uncertainty surrounding the realization of such assets. Management has determined it is more likely than not that the net deferred tax assets are not realizable due to the Company’s historical loss position. The valuation allowance for the year ended December 31, 2019 increased by $9,228,503 due to the additional operating losses incurred for the year ended December 31, 2019 and adjustments made to prior year opening balances.

 

As of December 31, 2019, the prior three tax years remain open for examination by the federal or state regulatory agencies for purposes of an audit for tax purposes.

 

Pursuant to the Internal Revenue Code of 1986, as amended (“IRC”), §382, the Company’s ability to use its net operating loss carry forwards to offset future taxable income is limited if the Company experiences a cumulative change in ownership of more than 50% within a three-year period.

 

As of December 31, 2019, the Company is in arrears on certain US and Canadian tax filings and the amounts presented above are based on estimates. The actual losses available could differ from these estimates. In addition, the Company could be subject to penalties for these unfiled tax returns.

 

 

F- 33

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

20. Income taxes (continued)

  

As of December 31, 2019 and 2018, the Company has accrued $250,000 in penalties and interest attributable to delinquent tax returns. Management believes the Company has adequately provided for any ultimate amounts that are likely to result from audits of these returns once filed; however, final assessments, if any, could be significantly different than the amounts recorded in the financial statements.

 

The Company operates in foreign jurisdictions and is subject to audit by taxing authorities. These audits may result in the assessment of amounts different than the amounts recorded in the consolidated financial statements. The Company liaises with the relevant authorities in these jurisdictions in regard to its income tax and other returns. Management believes the Company has adequately provided for any taxes, penalties and interest that may fall due.

 

The Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017 and significantly changes tax law in the United States by, among other items, reducing the federal corporate income tax rate from a maximum of 35% to 21% (effective January 1, 2018). The Act embraces a territorial system for the taxation of future foreign earnings and modifies certain business deductions by, among other changes, repealing the domestic production activities deduction, further limiting the deductibility of certain executive compensation and increasing the limitation on the deductibility of certain meals and entertainment expenses. On the other hand, the Act permits 100% bonus depreciation on assets placed in service through 2022 (with a phase-out period through 2026). The full effects of these changes will be reflected for the first time in the determination of income tax expense for the year ending December 31, 2018. The Company determined that it had no liability as of December 31, 2018 for the one-time transition tax on deemed repatriated earnings of foreign subsidiaries imposed by the Act.

 

21. Subsequent events

  

Between January 10, 2020 and January 24, 2020, in terms of conversion notices received from Power up, the Company converted the aggregate principal sum of $53,000 and interest thereon of $1,085 into 75,618,509 shares of common stock, thereby extinguishing the note.

 

Between January 24, 2020 and February 27, 2020, in terms of conversion notices received from Power up, the Company converted the aggregate principal sum of $41,400 into 453,800,493 shares of common stock.

 

Between January 6, 2020 and February 26, 2020, in terms of conversion notices received from First Fire Global Opportunities Fund, the Company converted the aggregate principal sum of $83,902 into 308,100,000 shares of common stock, thereby extinguishing the note.

 

Between January 15, 2020 and February 24, 2020, in terms of conversion notices received from Labrys Fund LP, the Company converted the aggregate principal sum of $8,936 and interest thereon of $138,109 into 479,160,076 shares of common stock, thereby extinguishing the note.

 

Between January 6, 2020 and February 13, 2020, Leonite Capital, LLC converted a total of 125,609,759 warrants through a cashless exercise option into 103,000,000 shares of common stock.

 

Subsequent to year end, in terms of the Deed of transfer an additional $36,470 of expenses were incurred relating to the disposal of the property, these expenses were added to the Leonite convertible loan balance outstanding.

 

The Company intends to continue its operations at a new location in west Palm Beach. A Letter of Intent ("LOI") was signed on February 7, 2020, with a third party that has a property lease and a pending license at its new location. The Company originally anticipated recommencing operations in February 2020, however it has been adversely affected by the COVID-19 pandemic. The LOI requires the Company to provide a working capital loan of up to $500,000. The ability to secure financing has been delayed by the pandemic. The Company is expecting to complete the working capital financing and to close the acquisition of the third party during the next month and to begin operations at the new location shortly thereafter. 

 

F- 34

 

 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

a) Evaluation of Disclosure and Control Procedures

 

The Company’s disclosure controls and procedures are designed to ensure (i) that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (ii) that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Our principal executive officer and principal financial officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2019, and concluded that the disclosure controls and procedures were not effective as a whole, and that the deficiency involving internal controls constituted a material weakness as discussed below.

 

b) Management’s Assessment of Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f). A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.

 

Under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2019, based on the criteria established in a report entitled “Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission” and the interpretive guidance issued by the Commission in Release No. 34-55929. Based on this evaluation, the Company’s management, including the Company’s principal executive officer and principal financial officer, has evaluated and concluded that the Company’s internal control over financial reporting was ineffective as of December 31, 2019, and identified the following material weaknesses:

 

  There are insufficient written policies and procedures to ensure the correct application of accounting and financial reporting with respect to the current requirements of GAAP and SEC disclosure requirements; and Notwithstanding the existence of this material weakness in our internal control over financial reporting, our management believes that the consolidated financial statements included in its reports fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented.

 

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. The Company’s registered public accounting firm was not required to issue an attestation on its internal controls over financial reporting pursuant to temporary rules of the Securities and Exchange Commission. The Company will continue to evaluate the effectiveness of internal controls and procedures on an ongoing basis.

 

c) Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

 

Not applicable.

 

13

 

 

PART III 

 

Item 10. Directors, Executive Officers, and Corporate Governance.

 

The following table sets forth the names and ages of the members of the Company’s Board of Directors (the “Board”) and executive officers, and the positions held by each:

 

Name Position  
Shawn E. Leon 60 Chief Executive Officer, Chief Financial Officer, President and  Director
     
John O’Bireck 61 Director
     
Gerald T Miller 62 Director

 

Set forth below is a brief description of the background and business experience of each of our current executive officers and directors. 

 

Shawn E. Leon, Chief Executive Officer, Chief Financial Officer, President and Director

Shawn E. Leon has been an officer and director of the Company since November 2010 and served as the President of the Company’s subsidiaries at all times. In April 2011, Mr. Leon was appointed as the Company’s Chief Executive Officer. Prior to joining the Company, Mr. Leon held the role of President of Greenestone Clinic Inc., Leon Developments Ltd, Port Carling Inn Developments Ltd., 1871 at the Locks Developments Ltd. and Leon Developments Ltd. Mr. Leon graduated with Honors in Business Administration from Wilfrid Laurier University in 1982. Mr. Leon was elected to the Board because of his prior management experience.

 

John O’Bireck, Director

John O’Bireck of Aurora, Ontario, Canada has been a Control Systems Engineer, since graduating in 1982, and has since been involved with building engineering teams to provide solutions for industrial and transportation industry. He was a cofounder of HayDrive Technologies Ltd. a publicly listed company where he held the positions of Director, Vice-president, Chief Technology Officer and Vice President of Advanced Product Development. Mr. O’Bireck was also the co-founder, Director and President of Supernova Performance Technologies Ltd., a privately held company. In 2014 Mr. O’Bireck was elected as a Director to the Board of Sparta Capital Ltd.

 

Gerald T. Miller, Director

 Gerry Miller of Toronto, Ontario, Canada is the Managing Partner of the Law Firm Gardiner Miller Arnold LLP. Mr. Miller’s practice focuses on a comprehensive range of business, finance and real estate issues. In addition to managing the law firm. Mr. Miller’s runs the business law and real estate practice at Gardiner Miller Arnold LLP Law firm. He advises small to medium sized companies in manufacturing, investing and service related industries. Mr. Miller supervises all merger and acquisition transactions and institutional finance work.

 

Compliance with Section 16(A) of the Exchange Act

 

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish the Company with copies of all reports filed by them in compliance with Section 16(a).

 

Based solely on our review of certain reports filed with the SEC pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, at December 31, 2019, none of the officers, directors or 10% shareholders were in compliance with Section 16(a).

 

Code of Ethics

 

The Board adopted a Code of Business Conduct and Ethics applicable to all of our directors, officers and employees, including our Chief Executive Officer. A copy of our Code of Ethics is incorporated by reference to an exhibit in our exhibit table. Shareholders may also request a copy of the Code of Ethics from the Company’s headquarters.

 

 

 

14

 

 

Board Meetings and Committees

 

The Company holds regular Board meetings each quarter. There are no sub committees of the Board. All Directors act on all matters before the Board.

 

Audit Committee

 

Effective May 6, 2003, the SEC adopted rules that require that before our auditor is engaged by us to render any auditing or permitted non-audit related service, the engagement be:

 

  approved by our audit committee; or

 

  entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee’s responsibilities to management.

 

We do not currently have an audit committee. The Board preapproves all services provided by our independent auditors and otherwise performs the functions of an audit committee. The Company does not believe that not having an audit committee will have any adverse effect on the Company’s financial statements or current operations. The Company’s management will assess whether an audit committee may be necessary in the future.

 

Item 11. Executive Compensation.

 

There has been no annuity, pension or retirement benefits paid to our officers or directors during the past two fiscal years. We currently do not have an employment agreement with the Company’s Chief Executive Officer. There is no compensation committee of the Board. The Board approved the terms of a certain management agreement with Greenestone Clinic, Inc., wholly owned by the Company’s Chief Executive Officer, Shawn Leon, and with Shawn Leon, whereby a management agreement was initially for a term of one year and was for the development of medical clinics in Ontario, Canada. The agreement has been extended from year to year and has been expanded to include overall company management and the development of clinics in the United States. The management agreement allowed for a maximum compensation of $300,000 per year.

 

Summary Compensation Table

 

Name and Principal Position   Year     Salary ($)     Bonus ($)     Option Awards ($)     Non-Equity Plan Compensation ($)    

Non-Qualified Deferred Compensation Earnings

($)

    All Other Compensation ($)     Total ($)  
                                                 
Shawn E. Leon, President CEO, CFO(1)     2019                                     -       -  
      2018                                     182,430       182,430  

 

(1) All other compensation represents a management fee of $0 and $182,430 paid to a company controlled by Mr. Leon and a further management fee for services rendered. No management fees were paid for the year ended December 31, 2019 due the current financial position of the Company. The verbal management agreement was entered into with Greenstone Clinic, Inc., a wholly owned subsidiary of Shawn Leon, and Shawn Leon, was initially for a term of one year and was for the development of medical clinics in Ontario, Canada. The agreement has been extended from year to year and has been expanded to include overall company management and the development of clinics in the United States. The management agreement allowed for a maximum compensation of $300,000 per year.

 

 

 

15

 

Outstanding Equity Awards at Fiscal Year End

 There were no equity awards issued to executive officers during the fiscal year ended December 31, 2019 and there are no outstanding equity awards to named officers as of December 31, 2019.

 

Information regarding equity compensations plans is set forth in the table below:

 

    Number of securities
to be issued upon exercise of
outstanding options
    Weighted average exercise price of outstanding options     Number of securities remaining for future issuance under
equity compensation plans
 
                   
Equity Compensation plans approved by the stockholders                        
2013 Equity compensation plan     -     $ -       10,000,000  
Equity Compensation plans not approved by the stockholders                        
None                  
                         
      -     $ -       10,000,000  

 

Directors Compensation

 

The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named directors by us during the year ended December 31, 2019.

 

Name  

Fees earned or paid in cash

($)

    Stock awards ($)     Option awards ($)     Non-Equity
Plan Compensation ($)
   

Non-Qualified Deferred Compensation Earnings

($)

    All Other Compensation ($)    

Total

($)

 
                                                         
Shawn E. Leon                                          
                                                         
John O’ Bireck(1)           35,000                               35,000  
                                                         
Gerald T Miller(1)           35,000                               35,000  

 

(1) On June 20, 2019, we issued 500,000 shares of common stock to each of the non-executive directors as compensation for their services as directors.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table sets forth the beneficial ownership of our capital stock by each executive officer and director, by each person known by us to beneficially own more than five percent (5%) of any class of stock and by the executive officers and directors as a group. Except as otherwise indicated, all shares of common stock are owned directly and the percentage shown is based on 1,841,090,247 shares of common Stock issued and outstanding as of June 30, 2020.

 

16

 

 

Name of beneficial owner   Amount and
nature of beneficial 
ownership, 
including common 
stock
  Percentage of 
common stock 
beneficially owned(1)
         
Directors and Officers                
Shawn E. Leon     173,622,192   (2)   9.4 %
Gerald T. Miller     500,000   (3)   *  
John O’Bireck     500,000   (4)   *  
                 
All officers and directors as a group (10 persons)     174,622,192       9.5 %

* Less than 1%

 

  (1) Based on 1,841,090,247 shares of common stock outstanding as of June 30, 2020.

  (2) Includes 2,257,850 shares held by Mr. Leon, a further 2,687,300 shares held by Greenestone Clinic, a company controlled by Mr. Leon, a further 60,000,000 shares owned by Leon Developments, a company controlled by Mr. Leon , 8,677,042 shares owend by Eileen Greene, Mr. Leon's spouse and 100,000,000 shares owned by Mr. Leons son.
  (3) Includes 500,000 shares of common stock.
  (4) Includes 500,000 shares of common stock.

 

Item 13. Certain Relationships and Related Party Transactions, and Director Independence

 

Related Party Transactions

 

As of December 31, 2019, amounts payable to executive officers or their affiliates for related party payables, as detailed in the below table:

 

Name   Amount
Owing by the Company        
Shawn E. Leon   $ (293,072 )
Leon Developments, LTD(2)     (904,121 )
Eileen Greene(3)     (1,595,887 )
Total   $ (2,793,080 )

 

 

(1) Shawn Leon is the Chief Executive Officer of the company

  

(2) Leon Developments is wholly owned by Shawn Leon, the Company’s Chief Executive Officer

 

(3) Eileen Greene is the spouse of Shawn Leon.

 

Shawn E. Leon

As of December 31, 2019 and 2018 the Company had a payable of $293,072 and a receivable of $32,650 from Shawn E. Leon, respectively. Mr. Leon is a director and CEO of the Company. The balances payable and receivable are non-interest bearing and has no fixed repayment terms.

 

Companies controlled by Mr. Leon were paid management fees of $0 and $182,430 for the years ended December 31, 2019 and 2018, respectively.

 

Leon Developments, Ltd.

As of December 31, 2019 and 2018, the Company owed Leon Developments, Ltd. $904,121 and $1,581,499, respectively.

 

Eileen Greene

As of December 31, 2019 and 2018, the Company owed Eileen Greene, the spouse of our CEO, Shawn Leon, $1,595,887 and $1,034,114, respectively. During the year ended December 31, 2019, Ms. Greene advanced the company a net $560,824 to fund working capital requirements. The amount owing to Ms. Greene is non-interest bearing and has no fixed repayment terms.

 

 All related party transactions occur in the normal course of operations and in terms of agreements entered into between the parties.

 

17

 

 

Directors Independence

The common stock of the Company is currently quoted on the OTCBB, a quotation system which currently does not have director independence requirements. On an annual basis, each director and executive officer will be obligated to disclose any transactions with the Company in which a director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest in accordance with Item 407(a) of Regulation SK. Following completion of these disclosures, the Board will make an annual determination as to the independence of each director using the current standards for “independence” that satisfy the criteria for the NASDAQ Stock Market, Inc.

 

As of December 31, 2019, the Board determined that John O’Bireck and Gerald T Miller are independent and that Mr. Leon is not independent under these standards.

 

 Item 14. Principal Accountant Fees and Services.

 

Daskal Bolton LLP serves as our independent registered public accounting firm.

 

 The following is a summary of the fees paid by us to Daszkal Bolton LLP for the year ended December 31, 2019 and 2018 for professional services rendered:

 

    Year ended December
31, 2019
  Year ended December
31, 2018
         
Audit fees and expenses   $ 72,000     $ 70,500  
Taxation preparation fees     4,500        11,863  
Audit related fees     -       —    
Other fees     -       —    
    $ 76,500      $ 82,363  

 

Audit Fees

Consists of fees billed for professional services rendered for the audit of our consolidated financial statements and review of interim condensed consolidated financial statements included in quarterly reports and services that are normally provided by Daszkal Bolton LLP in connection with statutory and regulatory filings or engagements in fiscal year ended December 31, 2019 and 2018, respectively.

 

Audit Related Fees

Consists of fees billed for accounting, assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees”.

 

Tax Fees

Tax Fees consist of the aggregate fees billed for professional services rendered by our principal accounts for tax compliance, tax advice, and tax planning. These services include preparation for federal and state income tax returns.

 

All Other Fees

We did not incur any other fees billed by auditors for services rendered to our Company, other than the services listed above for the fiscal years ended December 31, 2019 and 2018, respectively. 

  

 

18

 

 

PART IV

 

Item 15. Exhibits, Financial Statement Item 15. Exhibits and Financial Statement Schedules and Reports on Form 10-K

 

(a)  (1) The following financial statements are included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

 

  1. Independent Auditor’s Report

 

  2. Consolidated Balance Sheets as of December 31, 2019 and 2018

 

  3. Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2019 and 2018

 

  4. Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2019 and 2018

 

  5. Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018

 

  6. Notes to Consolidated Financial Statements

 

  (2) All financial statement schedules have been omitted as the required information is either inapplicable or included in the Consolidated Financial Statements or related notes.

 

19

 

 

 

(b)   Exhibits

 

 Exhibit No. Description Form SEC File No. Date Filed Herewith Filed by Reference
             
3.1 Articles of Incorporation of NNRC, Inc. (as filed with the Secretary of State of Colorado on April 1, 1993) 10-K 000-15078

March 28,

2013

  X
             
3.2 Articles of Amendment to the Articles of Incorporation of Nova Natural Resources, Inc. (as filed with the Secretary of State of Colorado on May 8, 2012) 10-K 000-15078

March 28,

2013

  X
             
3.3 Articles of Amendment to the Articles of Incorporation of Greenestone Healthcare Corporation (as filed with the Secretary of State of Colorado on March 26, 2013) 8-K 000-15078

March 29,

2013

  X
             
3.4 Amended and Restated Bylaws of Greenestone Healthcare Corporation 8-K 000-15078

March 29,

2013

  X
             
3.5 Articles of Amendment to the Articles of Incorporation re: Name Change 8-K 000-15078

April 10,

2017

  X
             

 

3.6

First amendment to Amended and Restated Bylaws 8-K 000-15078

April 10,

2017

  X
             
4.1 Form of Series L Convertible Note and Warrant Agreement 8-K 000-15078 42740   X
             

 

4.2

Form of LABRYS LP Convertible Note Agreement 8-K 000-15078

February 2,

2017

  X
             

 

10.1

Stock Purchase Agreement I 8-K 000-15078 March 29, 2013   X
             

 

10.2

Form of Warrant I 8-K 000-15078 December 30, 2013   X
             

 

10.3

Form of Warrant II 8-K 000-15078 December 30, 2013   X