UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2021

 

or

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

 

For the transition period from to

 

Commission File Number 000-54748

 

ETHEMA HEALTH CORPORATION.

(Exact Name of Registrant as Specified in its Charter)

 

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

1590 S. Congress Avenue

West Palm Beach, Florida

 

33406

Address of Principal Executive Offices   Zip Code

 

(561) 290-0239

Registrant’s Telephone Number, Including Area Code

 

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

 

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

  

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Number of shares of common stock outstanding as of May 24, 2021 was ****.

 

 

 
 

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report on Form 10-Q, including but not limited to, statements regarding the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects, or costs and objectives of management for future acquisitions, are forward looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,” “estimates,” “predicts,” “potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, and those identified under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on April 15, 2021. Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

 

 

NOTE REGARDING COMPANY REFERENCES

 

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

 

 

 
 

 

 

FORM 10-Q

ETHEMA HEALTH CORPORATION

TABLE OF CONTENTS

 
  Page
PART I - FINANCIAL INFORMATION  
Item l. Financial Statements 1
  Condensed Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 2020 1
  Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020

 

2

  Unaudited Condensed Consolidated Statements of Stockholder's Deficit for the three months ended March 31, 2021 and 2020

 

3

  Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020

 

4

  Notes to the Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 35
     
  PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 37
Item 1A. Risk Factors 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Mine Safety Disclosures 37
Item 5. Other Information 37
Item 6. Exhibits 37
SIGNATURES 38

 

 

 
 

 

ETHEMA HEALTH CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

   

March 31,

2021

  December 31, 2020
    (Unaudited)    
ASSETS    
         
Current assets                
Cash   $ 35,230     $ 90,500  
Accounts receivable, net     3,113       3,075  
Prepaid expenses     1,040       19,190  
Other current assets     135,467       131,938  
Other investments     1,026,669       690,449  
Total current assets     1,201,519       935,152  
Non-current assets                
Due on sale of subsidiary     5,157       5,094  
Property and equipment     2,885,861       2,882,220  
Total non-current assets     2,891,018       2,887,314  
Total assets   $ 4,092,537     $ 3,822,466  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities                
Accounts payable and accrued liabilities   $ 798,948     $ 833,615  
Taxes payable     870,843       850,277  
Convertible loans, net of discounts     4,579,133       4,200,217  
Short term loans     118,382       115,375  
Mortgage loans     118,538       115,704  
Government assistance loans     156,782       156,782  
Derivative liability     4,379,372       4,765,387  
Accrued dividends     36,377       15,594  
Related party payables     2,815,450       2,811,849  
Total current liabilities     13,873,825       13,864,800  
Non-current liabilities                
Government assistance loans     47,714       31,417  
Third party loans     731,629       704,271  
Mortgage loans, net of current portion     3,865,866       3,848,077  
Total non-current liabilities     4,645,209       4,583,765  
Total liabilities     18,519,034       18,448,565  
                 
Preferred stock - Series B; $0.0001 par value, 10,000,000 authorized, 400,000 outstanding as of March 31, 2021 and December 31, 2020, respectively.     400,000       400,000  
                 
Stockholders’ deficit                
Preferred stock - Series A; $0.01 par value, 10,000,000 authorized, 4,000,000 outstanding at March 31, 2021 and December 31, 2020, respectively     40,000       40,000  
Common stock - $0.01 par value, 10,000,000,000 shares authorized; 2,262,849,130 and 2,207,085,665 shares issued and outstanding as of March 31, 2021 and December 31, 2020.     22,628,492       20,270,857  
Additional paid-in capital     24,649,099       23,344,885  
Discount for shares issued below par value     (18,821,629 )     (17,728,779 )
Accumulated other comprehensive income     836,325       806,719  
Accumulated deficit     (44,858,784 )     (42,459,781 )
Total stockholders’ deficit     (15,526,497 )     (15,726,099 )
     Minority shareholders interest     700,000       700,000  
Total stockholders’ deficit     (14,826,497 )     (15,026,099 )
Total liabilities and stockholders’ deficit   $ 4,092,537     $ 3,822,466  

 

 

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

1

 

 

 

ETHEMA HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

AND COMPREHENSIVE LOSS

 

    Three months ended March 31, 2021   Three months ended
March 31, 2020
         
Revenues   $ 90,793     $ 83,542  
                 
Operating expenses                
General and administrative     5,503       22,536  
Rental expense     1,500       1,000  
Professional fees     36       108,021  
Salaries and wages     12,852       12,351  
Depreciation     32,125       30,241  
Total operating expenses     52,016       174,149  
                 
Operating income (loss)     38,777       (90,607 )
                 
Other Income (expense)                
Loss on conversion of convertible debentures     (1,106,648 )     (286,343 )
Penalty on convertible notes     (9,240 )     —    
Fair value of warrants granted to convertible debt holders     (976,788 )     —    
Exercise of warrants     (90,000 )     (92,952 )
Interest income     —         60  
Interest expense     (137,677 )     (193,922 )
Debt discount     (502,677 )     (403,677 )
Derivative liability movement     495,589       (9,754,896 )
Foreign exchange movements     (79,492 )     484,051  
Net loss before taxation     (2,368,156 )     (10,338,286 )
Taxation     —         —    
Net loss     (2,368,156 )     (10,338,286 )
Preferred stock dividend     (30,847 )     —    
Net loss available to ordinary shareholders     (2,399,003 )     (10,338,286 )
Accumulated other comprehensive income (loss)                
Foreign currency translation adjustment     29,606       (185,813 )
Total comprehensive loss   $ (2,369,397 )   $ (14,865,276 )
                 
Basic and diluted loss per common share   $ (0.00 )   $ (0.01 )
Weighted average common shares outstanding – Basic and diluted     2,143,692,378       956,540,071  

 

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

 

2

 

 

ETHEMA HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

 

    Series A Preferred   Common                        
    Shares   Amount   Shares   Amount   Additional Paid in Capital   Discount to par value   Comprehensive Income   Accumulated Deficit  

Minority

shareholders interest

  Total
Balance as of December 31, 2020     4,000,000     $ 40,000       2,027,085,665     $ 20,270,857     $ 23,344,885     $ (17,728,779 )   $ 806,719     $ (42,459,781 )   $ 700,000     $ (15,026,099 )
Fair value of warrants issued to convertible debt holders     —         —         —         —         1,207,214       —         —         —         —         1,207,214  
Warrants exercised     —         —         59,999,999       600,000       —         (510,000 )     —         —         —         90,000  
Conversion of convertible notes     —         —         175,763,466       1,757,635       97,000       (582,850 )     —         —         —         1,271,785  
Foreign currency translation     —         —         —         —         —         —         29,606       —         —         29,606  
Net loss     —         —         —         —         —                 —         (2,368,156 )     —         (2,368,156 )
Dividends accrued     —         —         —         —         —         —         —         (30,847 )     —         (30,847 )
Balance as of March 31, 2021     4,000,000     $ 40,000       2,262,849,130     $ 22,628,492     $ 24,649,099     $ (18,821,629 )   $ 836,325     $ (44,858,784 )     700,000     $ (14,826,497 )

 

    Series A Preferred   Common                        
    Shares   Amount   Shares   Amount   Additional Paid in Capital   Discount to par value   Comprehensive Income   Accumulated Deficit  

Minority

shareholders interest

  Total
Balance as of December 31, 2019     —       $ —         155,483,897     $ 1,554,838     $ 23,188,527     $ —       $ 727,976     $ (45,491,885 )     —       $ (20,020,544 )
Warrants exercised     —         —         103,000,000       1,030,000       —         (937,048 )     —         —         —         92,952  
Shares issued for commitment fees     —         —         2,700,000       27,000       138,780       —         —         —         —         165,780  
Conversion of convertible notes     —         —         1,316,679,078       13,166,792       —         (12,635,787 )     —         —         —         531,005  
Foreign currency translation     —         —         —         —         —         —         (185,813 )     —         —         (185,813 )
Net loss     —         —         —         —         —         —         —         (10,338,286 )     —         (10,338,286 )
Balance as of March 31, 2020     —       $ —         1,577,862,975     $ 15,778,630     $ 23,327,307     $ 13,572,835     $ 542,163     $ 55,830,171       —       $ (29,754,906 )

 

 

 

 

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

3

 

 

ETHEMA HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

    Three months ended March 31, 2021   Three months ended March 31, 2020
Operating activities                
Net loss   $ (2,368,156 )   $ (10,338,286 )
Adjustment to reconcile net loss to net cash (used in) operating activities:                
Depreciation     32,125       30,241  
Exercise of warrants     90,000       92,952  
Fair value of warrants granted to convertible debt holders     976,788       —    
Loss on conversion of convertible debentures     1,106,648       286,343  
Stock based compensation for services     —         165,780  
Amortization of debt discount     502,677       403,677  
Derivative liability movements     (495,589 )     9,754,896  
Non-cash interest accrual on escrow deposit     —         (23 )
Changes in operating assets and liabilities                
Accounts receivable     —         49,007  
Prepaid expenses and other current assets     14,638       3,000  
Accounts payable and accrued liabilities     50,330       75,296  
Taxes payable     12,983       10,861  
Net cash (used in) provided by operating activities     (77,556 )     533,744  
Investing activities                
Investment in promissory note     —         (15,537 )
Deposits refunded     —         5,995  
Other investments     (336,220 )     —    
Net cash used in investing activities     (336,220 )     (9,542 )
                 
Financing activities                
Decrease in bank overdraft     —         (11,079 )
Repayment of mortgage     (28,631 )     (25,855 )
Proceeds from convertible notes     340,000       —    
Repayment of convertible notes     (35,000 )     —    
Proceeds from government assistance loans     15,797       —    
Repayment of related party notes     (12,985 )     —    
Proceeds from related party notes     —         19,362  
Net cash provided by (used in) financing activities     279,181       (17,572 )
                 
Effect of exchange rate on cash     79,325       (507,665 )
                 
Net change in cash     (55,270 )     (1,035 )
Beginning cash balance     90,500       2,975  
Ending cash balance   $ 35,230     $ 1,940  
                 
Supplemental cash flow information                
Cash paid for interest   $ 41,344     $ 41,504  
Cash paid for income taxes   $ —       $ —    
                 
Non-cash investing and financing activities                
Conversion of debt to equity   $ 165,137     $ 531,005  
Fair value of warrants issued   $ 230,426     $ —    

    

 

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

4

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Nature of business

 

Ethema Health Corporation (the “Company”) was incorporated under the laws of the state of Colorado, USA, on April 1, 1993. Effective April 4, 2017, the Company changed its name to Ethema Health Corporation and prior to that, on May 2012, the Company had changed its name to Greenstone Healthcare Corporation from Nova Natural Resources Corporation. As of December 31, 2017, the Company owned 100% of the outstanding shares of Greenstone 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, Greenstone Clinic Muskoka Inc. (“Muskoka”), to Canadian Addiction Residential Treatment LP (the “Purchaser”), for a total consideration of CDN$10,000,000. 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 April 2, 2019, the Company disposed of the real property located at 801 Andrews Avenue, Delray Beach for gross proceeds of $3,500,000.

 

Since June 30, 2020, the Company has been actively involved in the operation of the treatment center operated by Evernia Health Center LLC (“Evernia”) at 950 Evernia Street, West Palm Beach Florida. The Company is under contract to purchase a majority interest in this company and has been financing the startup operations of this facility. This operation will be the Company’s only treatment center operating and expects the purchase of the majority interest to close in the second quarter of 2021.  

 

5

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   

2. Summary of significant accounting policies

 

Financial Reporting

 

The (a) unaudited condensed consolidated balance sheets as of March 31, 2021, which have been derived from the unaudited condensed consolidated financial statements, and as of December 31, 2020, which have been derived from audited consolidated financial statements, and (b) the unaudited condensed consolidated statements of operations and cash flows of the Company, have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of results that may be expected for the year ending December 31, 2021. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on April 15, 2021.

 

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

 

  a) Use of Estimates

 

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

 

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

 

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

 

  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 three months ended March 31, 2021, a closing rate of CDN$1.0000 equals US$0.7952 and an average exchange rate of CDN$1.0000 equals US$0.7899. For the three months ended March 31, 2020, a closing rate of CAD$1.0000 equals US$0.7049 and an average exchange rate of CAD$1.0000 equals US$0.7435. 

6

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED 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.

 

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.

  

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 does 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 $3,113 and $3,075 for the three months ended March 31, 2021 and for the year ended December 31, 2020, respectively. Management believes that these receivables are properly stated and are not likely to be settled for a significantly different amount.

 

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.

 

7

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED 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 institutions 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. 

 

8

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED 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:

 

  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.

 

 

9

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED 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 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.

 

10

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   

2. Summary of significant accounting policies (continued)

 

  n) Recent accounting pronouncements

 

The FASB issued several additional 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.

 

  o) 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, March 31, 2021 and December 31, 2020.

 

  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 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 $12,672,306, which includes derivative liabilities of $4,379,372, and an accumulated deficit of $44,858,784. 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, mortgage loans, short term loans, third party loans and government assistance loans as of March 31, 2021. 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 March 31, 2021, a 5% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an approximate $4,526 increase or decrease in the Company’s after tax net income from operations. The Company has not entered into any hedging agreements to mitigate this risk. In the opinion of management, currency risk is assessed as low, material and remains unchanged from that of the prior year.

 

  c. Other price risk

 

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

 

 

11

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

3. Going concern

 

The Company’s condensed consolidated financial statements have been prepared in accordance with US GAAP applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations in the normal course of business. As at March 31, 2021 the Company has a working capital deficiency of $12,672,306, including derivative liabilities of $4,379,372 and accumulated deficit of $44,858,784. 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 condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities or other adjustments that may be necessary should the Company not be able to continue as a going concern.

 

4. 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 March 31, 2021. 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.

 

The Company has no intention to close on the purchase of LLW and is currently negotiating with the vendors to provide advertising services in lieu of the return of the $120,000 invested by the Company. 

 

 

12

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

5. Other investments

  

On June 30, 2020, the Company entered into an agreement whereby the Company will acquire 51% of American Treatment Holdings, Inc. (“ATHI”) from The Q Global Trust (“Seller”) and Lawrence B Hawkins (“Hawkins”), which in turn owns 100% of Evernia Health Services LLC. (“Evernia”), which operates drug rehabilitation facilities. The consideration for the acquisition is a loan to be provided by the purchaser to Evernia in the amount of $500,000. As of March 31, 2021, the Company had advanced Evernia approximately $1,026,669 including accrued interest thereon.

 

The Company originally had a 180 day option, from the advancement of the first tranche to Evernia, to purchase an additional 9% of ETHI for a purchase consideration of $50,000. The option has been extended and the Company had made a down payment of $10,000 towards exercising this option.

 

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

 

On July 12, 2020, the Company entered into a five year option agreement with Leonite Capital LLC (“Leonite”) and other investors (collectively the “Transferees”), the Company agreed to sell to Leonite a portion of the total outstanding shares of ATHI from the shares of ATHI held by the company. The Company provided Leonite an option to purchase a 33% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that Leonite made to the Company totaling $655,000. Leonite shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Leonite to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.

 

On September 14, 2020, the Company entered into a five year option agreement with Ed Blasiak (“Blasiak”) whereby the Company agreed to sell to Blasiak a portion of the total outstanding shares of ATHI. The Company provided Blasiak an option to purchase 2.5% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that Blasiak made to the Company totaling $50,000. Blasiak shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Blasiak to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.

 

On October 29, 2020, the Company entered into a five year option agreement with First Fire whereby the Company agreed to sell to First Fire a portion of the total outstanding shares of ATHI. The Company provided First Fire an option to purchase 6.25% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that First Fire made to the Company totaling $125,000. First Fire shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by First Fire to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.

 

On October 29, 2020, the Company entered into a five year option agreement entered into with Bauman, so that the Company agreed to sell to Bauman a portion of the total outstanding shares of ATHI. The Company provided Bauman an option to purchase 6.25% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that Bauman made to the Company totaling $125,000. Bauman shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Bauman to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.

 

6. 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 March 31, 2021, 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$6,485 (approximately US$ 5,157).

13

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7. Property and equipment

 

Property and equipment consists of the following:  

 

    March 31,
2021
  December 31, 2020
    Cost   Accumulated depreciation   Net book value   Net book value
Land   $ 170,974     $ —       $ 170,974     $ 168,866  
Property     3,234,310       (519,423     2,714,887       2,713,354  
    $ 3,405,284     $ (519,423 )   $ 2,885,861     $ 2,882,220  

 

Depreciation expense for the three months ended March 31, 2021 and 2020 was $32,125 and $30,241, respectively.

 

 8. Taxes Payable

 

The taxes payable consist of:

 

  A payroll tax liability of $145,200 (CDN$182,589) in Greenstone Muskoka which has not been settled as yet.
  A GST/HST tax payable of $87,492 (CDN$110,022).
  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.

 

    March 31,
2021
  December 31,
2020
         
Payroll taxes   $ 145,200     $ 143,410  
HST/GST payable     87,493       73,503  
US penalties due     250,000       250,000  
Income tax payable     388,150       383,364  
    $ 870,843     $ 850,277  

 

 

14

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. Short-term Convertible Notes

 

The short-term convertible notes consist of the following:

  

      Interest rate     Maturity Date     Principal       Interest       Debt Discount      

March 31,

2021

      December 31, 2020  
Leonite Capital, LLC     8.5 %   —    $ —       $ —       $ —       $ —       $ 70,583  
      6.5    June 12, 2021     677,874        6,763       (340,016     344,621        147,058   
                                                     
First Fire Global Opportunities Fund     6.5 %   October 29,2021     138,889       3,821       (80,841 )     61,869       25,297  
                                                     
Auctus Fund, LLC     10.0 %   May 7, 2020     115,000       —         —         115,000       150,000  
      10.0 %   August 13, 2021     95,000       6,139       (35,137 )     66,002       40,202  
                                                     
Labrys Fund, LP     12.0 %   November 30, 2021     275,000       11,053       (183,836 )     102,217       26,159  
                                                     
Ed Blasiak     6.5 %   September 14, 2021     55,000       1,966       (25,164 )     31,802       17,347  
                                                     
Joshua Bauman     6.5 %   September 14, 2021     138,889       4,819       (63,817 )     79,891       43,247  
                                                     
Geneva Roth Remark Holdings, Inc.     9.0 %   August 29, 2021     88,000       2,431       (43,711 )     46,720       19,238  
      9.0 %   October 15, 2021     53,000       1,670       (31,033 )     23,637       6,753  
      9.0 %   January 3, 2022     53,500       374       (48,605 )     5,269       —    
                                                     
Series N convertible notes     6.0 %   On Demand     3,229,000       473,105             3,702,105       3,654,333  
                                                     
                                         $ 4,579,133      $ 4,200,217  

 

 

15

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. Short-term Convertible Notes (continued)

 

Leonite Capital, LLC

 

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

 

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

 

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

 

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

 

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

 

16

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. Short-term Convertible Notes (continued)

 

Leonite Capital, LLC (continued)

  

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

 

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

 

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

 

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

 

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

 

On July 12, 2020, the company entered into a debt extinguishment agreement with Leonite whereby the following occurred:

 

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

 

 

17

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. Short-term Convertible Notes (continued)

 

Leonite Capital, LLC (continued)

 

On December 28, 2020, Leonite converted $80,000 plus accrued interest of $5,949 of the Leonite loan amended on July 12, 2020, into 96,331,811 shares of common stock at a conversion price of $0.0009, thereby realizing a loss on conversion of $240,616. On January 8, 2021, Leonite converted the remaining principal amount of $70,000, plus accrued interest thereon of $137, into 78,763,466 shares of common stock at a conversion price of $0.0009 per share.

 

On July 12, 2020, the Company entered into a Senior Secured Convertible Note agreement with Leonite for $440,000 with an original issue discount of $40,000 for gross proceeds of $400,000, the initial tranche advanced will be for cash of $200,000 plus the OID of $20,000, the remaining advances will be at the discretion of the Leonite. The loan bears interest at 6.5% per annum and matures on June 12, 2021. The Company is required to make monthly payments of the accrued interest on the advances made. The note is convertible into common shares at the option of the holder at $0.10 per share, or 80% multiplied by the price per share paid in subsequent financings or after a six month period from the effective date at 60% of the lowest trading price during the preceding 21 consecutive trading days. The note has both conversion price protection and anti-dilution protection provisions.

 

On July 12, 2020, the Company entered into a five year option agreement with Leonite Capital LLC (“Leonite”) and other investors (collectively the “Transferees”), the Company agreed to sell to Leonite a portion of the total outstanding shares of ATHI from the shares of ATHI held by the company. The Company has provided Leonite an option to purchase 33% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that Leonite made to the Company totaling $655,000. Leonite shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Leonite to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.

 

On January 8, 2021, in terms of a conversion notice, Leonite converted the principal sum of $70,000 and interest thereon of $137 of the Leonite loan into 78,763,466 shares of common stock at a conversion price of $0.009 per share. 

 

In terms of clause 3.12 of the Senior secured convertible Promissory Note Agreement (“Leonite Note”) entered into with Leonite and the amendments thereto, the terms of the convertible promissory note issued to Labrys Fund LP on November 30, 2020, as described below, contained terms more favorable than those contained in the Leonite Note, resulting in an adjustment made to the Original issue discount of $4,000 and the issuance of five year warrants exercisable for 145,454,547 shares of common at an exercise price of $0.00205 per share, for all advances made to the Company by Leonite in terms of the Leonite Note, up to and including December 31, 2020.

 

On January 8, January 22, February 4, and February 19, 2021, Leonite advanced the company an aggregate cash amount of $290,000, including a revised original issue discount of $74,556 for an aggregate principal sum added to the Leonite Note of $364,556.

 

On March 3, 2021, in terms of a conversion notice, Leonite converted the principal sum of $82,681 and interest thereon of $12,319 of the Leonite Note into 97,000,000 shares of common stock at a conversion price of $0.009 per share.

 

18

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. Short-term Convertible Notes (continued)

 

Power Up Lending Group LTD

 

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

 

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

 

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

 

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

 

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

 

19

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. Short-term Convertible Notes (continued)

 

First Fire Global Opportunities Fund

 

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

 

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

 

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

 

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

 

Between July 2, 2020 and August 17, 2020, the Company repaid the remaining principal outstanding of $50,000 plus additional interest charges of $1,500.

 

On October 29, 2020, the Company entered into a Securities Purchase Agreement, pursuant to which the Company issued a senior secured convertible promissory note in the aggregate principal amount of $137,500, including an OID of $12,500. The note bears interest at 6.5% per annum and matures on October 29, 2021. The note is senior to any future borrowings and commencing on November 29, 2020 the Company will make monthly payments of the accrued interest under the note. The note may be prepaid at certain prepayment penalties and is convertible into shares of common stock at a conversion price at the option of the holder at $0.001 per share, adjusted for anti-dilution provisions; or 80% of the price per share of subsequent equity financings or; after six months 60% of the lowest trading price during the preceding six month period.

 

On October 29, 2020, the Company entered into a five year option agreement with First Fire whereby the Company agreed to sell to First Fire a portion of the total outstanding shares of ATHI. The Company provided First Fire an option to purchase 6.25% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that First Fire made to the Company totaling $125,000. First Fire shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by First Fire to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.

 

In terms of clause 3.12 of the Senior secured convertible Promissory Note Agreement (“First Fire Note”) entered into with First Fire, the terms of the convertible promissory note issued to Labrys Fund LP on November 30, 2020, as described below, contained terms more favorable than those contained in the First Fire Note, resulting in an adjustment made to the Original issue discount of $1,389 and the issuance of five year warrants exercisable for 50,505,051shares of common at an exercise price of $0.00205 per share, for the advance made to the Company by First Fire in terms of the First Fire Note.

  

20

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. Short-term Convertible Notes (continued)

 

Auctus Fund, LLC

 

On August 7 2019, the Company, entered into a Securities Purchase Agreement with Auctus Fund, LLC, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $225,000. The Note had a maturity date of May 7, 2020 and bore interest at the rate of ten percent per annum from the date on which the Note was issued until the same became 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 Auctus 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.

 

On June 15, 2020, The Company entered into an amended agreement with Auctus whereby Auctus agreed to discharge the principal amount of the note by nine equal monthly installments of $25,000 commencing in October 2020. During the three months ended March 31, 2021, the Company repaid Auctus the principal sum of $35,000.

 

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

 

On March 9, 2021, Auctus exercised its warrant for 66,666,666 shares of common stock on a cashless exercise basis, resulting in the issue of 59,999,999 shares of common stock.

 

Labrys Fund, LP

 

On July 8, 2019, the Company, entered into a Securities Purchase Agreement with Labrys Fund, LP (“Labrys”), 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 had a maturity date of January 8, 2020 and bore interest at the rate of twelve percent per annum from the date on which the Note was issued until the same became 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 was 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, the Company issued 2,700,000 returnable shares. These shares were returnable if the note was paid prior to maturity date on January 8, 2020. The company had not repaid the note on the maturity date, January 8, 2020, therefore the 2,700,000 shares were expensed as an additional fee amounting to $165,780, the value of the shares on the date of grant.

 

21

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. Short-term Convertible Notes (continued)

 

Labrys Fund, LP (continued)

 

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

 

On May 15, 2020 the Company entered into an amended agreement with Labrys Fund LP whereby default interest and penalties were waived, no further conversions will be effectuated and the Company committed to make eight equal payments of $25,000 commencing on October 15, 2020, in full settlement of the balance outstanding. No event of default will occur as long as the Company makes all scheduled payments.

 

Between October 21, 2020 and November 30, 2020, the Company repaid principal of $37,500. The Company was unable to adhere to the amended repayment schedule and default penalty and penalty interest was reinstated.

 

On November 30, 2020, Labrys converted principal of $235,564 and interest thereon of $20,416 into 91,421,457 shares of common stock, realizing a gain on conversion of $4,571, thereby extinguishing the note.

 

On November 30, 2020, the Company, entered into a Securities Purchase Agreement with Labrys, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $275,000 for net proceeds of $239,050 after an original issue discount of $27,500 and certain legal expenses. The Note has a maturity date of November 30, 2021 and bears interest at the rate of twelve percent per annum from the date on which the Note was issued until the same became 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 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, the Company granted Labrys a five-year warrant to purchase 100,000,000 shares of common stock at an exercise price of $0.00205 per share. The value of the warrant was accounted for as a debt discount.

 

Ed Blasiak

 

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

 

On September 14, 2020, the Company entered into a five year option agreement with Ed Blasiak (“Blasiak”) whereby the Company agreed to sell to Blasiak a portion of the total outstanding shares of ATHI. The Company provided Blasiak an option to purchase 2.5% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that Blasiak made to the Company totaling $50,000. Blasiak shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Blasiak to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.

 

22

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. Short-term Convertible Notes (continued)

 

 Joshua Bauman

 

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

 

On October 29, 2020, the Company entered into a five year option agreement entered into with Bauman, so that the Company agreed to sell to Bauman a portion of the total outstanding shares of ATHI. The Company provided Bauman an option to purchase 6.25% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that Bauman made to the Company totaling $125,000. Bauman shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Bauman to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.

 

In terms of clause 3.12 of the Senior secured convertible Promissory Note Agreement (“Bauman Note”) entered into with Joshua Bauman, the terms of the convertible promissory note issued to Labrys Fund LP on November 30, 2020, as described above, contained terms more favorable than those contained in the Bauman Note, resulting in an adjustment made to the Original issue discount of $1,389 and the issuance of five year warrants exercisable for 50,505,051 shares of common at an exercise price of $0.00205 per share, for the advance made to the Company by Bauman in terms of the Bauman Note.

 

Geneva Roth Remark Holdings, Inc

 

On October 29, 2020, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $88,000, for net proceeds of $85,000 after the payment of legal fees and origination fees amounting to $3,000. The note has a maturity date of August 29, 2021 and bears interest at the rate of 9.0% 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. 180 days after the issued date into shares of the Company’s common stock at 61% of the lowest trade price during the ten consecutive trading days immediately prior to conversion. The principal plus the accrued interest of the Note may be prepaid by the Company prior to the expiry of 180 days from issuance date at a prepayment penalty ranging from 112% to 130%.

 

On November 24, 2020, the Company entered into a Securities Purchase Agreement 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 the payment of legal fees and origination fees amounting to $3,000. The note has a maturity date of October 15, 2021 and bears interest at the rate of 9.0% 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. 180 days after the issued date into shares of the Company’s common stock at 61% of the lowest trade price during the ten consecutive trading days immediately prior to conversion. The principal plus the accrued interest of the Note may be prepaid by the Company prior to the expiry of 180 days from issuance date at a prepayment penalty ranging from 112% to 130%.

 

On March 3, 2021, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $53,500, for net proceeds of $50,000 after the payment of legal fees and origination fees amounting to $3,500. The note has a maturity date of January 3, 2022 and bears interest at the rate of 9.0% 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. 180 days after the issued date into shares of the Company’s common stock at 61% of the lowest trade price during the ten consecutive trading days immediately prior to conversion. The principal plus the accrued interest of the Note may be prepaid by the Company prior to the expiry of 180 days from issuance date at a prepayment penalty ranging from 112% to 130%.

 

23

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. Short-term Convertible Notes (continued)

 

Series N convertible notes

 

Between January 28, 2019 and June 11, 2020, the Company closed several tranches of Series N Convertible notes in which it raised $3,229,000 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 $3,229,000, 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 52,237,500 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 adjustment mechanisms. The notes mature one year from the date of issuance.

   

10. Mortgage loans

 

Mortgage loans is disclosed as follows:

 

    Interest 
rate
    Maturity date   Principal 
Outstanding
    Accrued 
interest
    March 31,
2021
    December 31,
2020
 
                                   
Cranberry Cove Holdings, Ltd.                                 
Pace Mortgage     4.2 %   July 19, 2022   3,978,909     $ 5,495     $ 3,984,404      $ 3,963,781  
Disclosed as follows:                                
Short-term portion                      $ 118,538     $ 115,704  
Long-term portion                       3,865,866       3,848,077  
                                $ 3,984,404     $ 3,963,781  

 

The aggregate amount outstanding is payable as follows:

 

    Amount
Within the next twelve months     118,538  
Thereafter     3,865,866  
Total   $ 3,984,404  

 

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 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.

  

 11. Short term loans

 

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.

 

24

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 12. Government assistance loans

 

On May 10, 2020, the Company was granted a government assistance loan in the aggregate principal amount of $156,782. The loan is forgivable if the Company demonstrates that the proceeds were used for expenses such as employee costs during the pandemic. Should the loan not be forgiven, interest is payable on the loan at the rate of 1% per annum and the principal is repayable and interest is payable over an 18 month period. No payments have been made to date and the Company expects the loan to be forgiven, therefore no interest has been accrued.

 

On December 1, 2020, CCH was granted a Covid-19 related government assistance loan in the aggregate principal amount of CDN$ 40,000 (Approximately $31,000). the grant is interest free and CDN$ 10,000 is forgivable if the loan is repaid in full by December 31, 2022. 

 

On January 12, 2021, CCH received a further CDN$ 20,000 Covid-19 related government assistance loan. The loan is interest free and if repaid by December 31, 2022, CDN$ 10,000 is forgivable.

 

13. Derivative liability

 

The short-term convertible notes issued to convertible note holders disclosed in note 9 above, 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 $109,574 using a Black-Scholes valuation model, after taking into account the value of warrants issued to the convertible note holders.

 

The derivative liability is marked-to-market on a quarterly basis. As of March 31, 2021, the derivative liability was valued at $4,379,372.

 

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

 

    Three months ended
March 31,
2021
     
Calculated stock price     $0.001 to $0.0055  
Risk free interest rate     0.03% to 0.64
Expected life of convertible notes and warrants     3 to 60 months  
expected volatility of underlying stock     157.4% to 299.1
Expected dividend rate     0 %

 

The movement in derivative liability is as follows:

    March 31,
2021
  December 31,
2020
         
Opening balance   $ 4,765,387     $ 8,694,272  
Derivative liability mark-to-market on convertible debt extinguishment     —         126,444,276  
Derivative liability on revised convertible notes and warrants arising from convertible debt extinguishment     —         6,349,265  
Derivative liability cancelled on debt extinguishment     —         (144,893,444  
Derivative liability on issued convertible notes     109,574       1,129,050  
Fair value adjustments to derivative liability     (495,589 )     7,041,968  
                 
Closing balance   $ 4,379,372     $ 4,765,387  

 

25

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

14. Related party transactions

 

Shawn E. Leon

As of March 31, 2021 and December 31, 2020 the Company had a payable to Shawn Leon of $322,744. Mr. Leon is a director and CEO of the Company. The balances payable are non-interest bearing and has no fixed repayment terms.

 

Due to the current financial position of the Group, Mr. Leon forfeited the management fees due to him for the three months ended March 31, 2021 and for the year ended December 31, 2020.

 

Leon Developments, Ltd.

As of March 31, 2021 and December 31, 2020, the Company owed Leon Developments, Ltd. $946,894 and $930,307, respectively, for funds advanced to the Company.

 

Eileen Greene

As of March 31, 2021 and December 31, 2020, the Company owed Eileen Greene, the spouse of our CEO, Shawn Leon, $1,545,812 and $1,558,798, respectively. 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.

 

15. Stockholder’s deficit

 

  a) Common shares

 

Authorized and outstanding

The Company has authorized 10,000,000,000 shares with a par value of $0.01 per share. The company has issued and outstanding 2,262,849,130 and 2,027,085,665 shares of common stock at March 31, 2021 and December 31, 2020, respectively.

 

On January 8, 2021, the Company issued 78,763,466 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $70,137.

 

On March 3, 2021, the Company issued 97,000,000 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $95,000.

 

On March 9, 2021, the Company received notification of exercise of warrants for 66,666,666 shares on a cashless basis, resulting in the issuance of 59,999,999 shares of common stock valued on the date of issuance at $90,000.

  

  b) Series A Preferred shares

 

Authorized, issued and outstanding

The Company has authorized 10,000,000 Series A preferred shares with a par value of $0.01 per share. The company has issued and outstanding 4,000,000 Series A Preferred shares at March 31, 2021 and December 31, 2020, respectively.

 

  c) Series B Preferred shares

 

Authorized and outstanding

The Company has authorized 400,000 Series B preferred shares with a par value of $1.00 per share. The company has issued and outstanding 400,000 Series B Preferred shares at March 31, 2021 and December 31, 2020, respectively.

 

26

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15. Stockholder’s deficit (continued)

   

  d) Warrants

 

The Secured Promissory Note Agreements entered into with Leonite, First Fire and Bauman contain certain conversion price protection and anti-dilution protection provisions, which were triggered as a result of the terms contained in the promissory note issued to Labrys Fund LP on November 30, 2020. As a result, the Company issued five year warrants exercisable for 246,464,649 shares of common at an exercise price of $0.00205 per share, for all advances made to the Company by the lenders in terms of the secured Promissory Note Agreements.

 

Between January 8, 2021 and February 19, 2021, Leonite advanced the Company an additional $290,000 and in terms of clause 3.12 of the Secured Promissory Note Agreement entered into with Leonite, the Company granted Leonite five year warrants exercisable for 131,111,112 shares of common stock at an exercise price of $0.00205 per share.

 

On March 9, 2021, the Company received a cashless warrant exercise, exercising warrants for 66,666,666 shares for net shares of 59,999,999 shares of common stock.

 

A summary of all of the Company’s warrant activity during the period January 1, 2020 to March 31, 2021 is as follows:

 

    No. of shares   Exercise price per 
share
  Weighted average exercise price
             
Outstanding as of January 1, 2020     2,566,101,248       $0.00204 to $0.12     $ 0.0044700  
Granted     233,333,332       0.0017357       0.0017357  
Adjustment due to price protection     152,017,272,726       0.0000324       0.0000324  
Forfeited/cancelled     (2,366,666 )     0.0300000       0.0300000  
Granted in terms of debt extinguishment     326,286,847        0.000675        0.0006750  
Cancelled as part of debt extinguishment     (154,300,675,861 )     0.0000324       0.0000324  
Exercised     (224,390,247 )     0.0004       0.0004000  
Outstanding as of December 31, 2020     615,561,379       $0.000675 to $0.12       0.0113796  
Granted     377,575,761       $0.0020500       0.0020500  
Forfeited/cancelled     —         —         —    
Exercised     (66,666,666     $0.0015000       $0.001500   
Outstanding as of March 31, 2021     926,470,474       $0.000675 to $0.12     $ $0.0082883  

  

 

The warrants were valued using a Black Scholes pricing model on the date of grant at $1,565,487 using the following weighted average assumptions: 

 

   

Three months ended

March 31,

2021

Calculated stock price     $0.00205  
Risk free interest rate     0.36 to 0.59  %
Expected life of warrants     60 months  
expected volatility of underlying stock     226.2 to 231.3
Expected dividend rate     0 %

 

27

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15. Stockholder’s deficit (continued)

  

  d) Warrants (continued)

 

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.

The following table summarizes information about warrants outstanding at March 31, 2021:

 

      Warrants outstanding     Warrants exercisable  

 

Exercise price

   

 

No. of shares

   

Weighted average

remaining years

   

Weighted average

exercise price

   

 

No. of shares

   

Weighted average

exercise price

 
                                 
$0.000675       326,286,847       4.28               326,286,847          
$0.03000       3,703,700       0.04               3,703,700          
$0.00150       66,666,666       437               66,666,666          
$0.00205       477,575,761       4.73               477,575,761          
$0.12       52,237,500       0.64               52,237,500          
                                           
        926,470,474       4.30     $ 0.0082883       926,470,474     $ 0.0082883  

 

All of the warrants outstanding as of March 31, 2021 are vested. The warrants outstanding as of March 31, 2021 have an intrinsic value of $3,227,478. 

 

  e) Stock options

 

Our board of directors adopted the Greenstone 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 March 31, 2021 under the Plan.

 

28

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16. 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 three months ended March 31, 2021 is disclosed as follows:

 

    Three months ended March 31, 2021
    Rental Operations   In-Patient services   Total
             
Revenue   $ 90,793     $ —       $ 90,793  
Operating expenditure     (32,849 )     (19,167 )     (52,016 )
                         
Operating income (loss)     57,944       (19,167 )     38,777  
                         
Other (expense) income                        
Loss on debt conversion     —         (1,106,648 )     (1,106,648 )
Penalty on convertible notes     —         (9,240 )     (9,240 )
Fair value of warrants granted             (976,788 )     (976,788 )
Fair value of warrants exercised             (90,000 )     (90,000 )
Interest expense     (59,745 )     (77,932 )     (137,677 )
Amortization of debt discount     —         (502,677 )     (502,677 )
Change in fair value of derivative liability     —         495,589       495,589  
Foreign exchange movements     (18,695 )     (60,797 )     (79,492 )
Net loss before taxation     (20,496 )     (2,347,660 )     (2,368,156 )
Taxation     —         —         —    
Net loss   $ (20,496 )   $ (2,347,660 )   $ (2,368,156 )

 

The operating assets and liabilities of the reportable segments as of March 31, 2021 is as follows:

 

    March 31, 2021
    Rental Operations   In-Patient services   Total
             
Purchase of fixed assets   $ —       $ —       $ —    
Assets                        
Current assets     4,580       1,196,939       1,201,519  
Non-current assets     2,885,861       5,157       2,891,018  
Liabilities                        
Current liabilities     (1,484,968 )     (12,388,857 )     (13,873,825 )
Non-current liabilities     (4,645,209 )     —         (4,645,209 )
Mandatory redeemable preferred shares     —         (400,000 )     (400,000 )
Intercompany balances     1,330,423       (1,330,423 )     —    
Net liability position   $ (1,909,313 )   $ (12,917,184 )   $ (14,826,497 )

 

 

29

 

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16. Segment information (continued)

  

The segment operating results of the reportable segments for the three months ended March 31, 2020 is disclosed as follows:

 

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

 

The operating assets and liabilities of the reportable segments as of March 31, 2020 is as follows:

  

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

  

30

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

17. Net (loss) income per common share

  

For the three months ended March 31, 2021 and 2020, 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.

 

     
    Three months ended
March 31,
2021
  Three months ended
March 31,
2020
         
Warrants to purchase shares of common stock     926,470,474       154,455,397,549  
Convertible notes     662,500,729       48,756,889,839  
      1,588,971,203       203,212,287,388  

 

18. 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 10 above. The future commitment under this loan is as follows:

 

    Amount
Within the next twelve months     118,538  
Thereafter     3,865,866  
Total   $ 3,984,404  

 

The Company has principal and interest payment commitments under the Convertible notes disclosed under Note 9 above. Conversion of these notes are at the option of the investor, if not converted these notes may need to be repaid.

 

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

  

19. Subsequent events

  

On April 30, 2021 the Company was given a conversion notice of three payments of $30,800 due on April 30, 2021 under the Labrys note entered into on November 30, 2020 in the aggregate principal amount of $275,000 and 100,000,000 restricted shares were issued. The Company still has seven more payments of 30,800 due under the note.

 

On May 10, 2021, the Company closed on a new financing with Labrys for a $550,000 convertible note including a 10% OID for net proceeds of $500,000. The note bears interest at 10% per annum and has a fixed conversion price of $0.005 per share subject to adjustments should other new financings be done at more favorable terms. The note is due 12 months from the issuance date. The funding included a five year warrant for 91,666,666 shares at a conversion price of $0.006 per share.

 

31

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

19. Subsequent events (continued)

  

On May 10, 2021, the Company prepaid the note entered into on October 29, 2020 with First Fire Global Opportunities Fund, LLC in the aggregate principal amount of $137,500. The note was repaid in its entirety.

 

On May 12, warrants issued under the note in the amount 50,505,051 shares were exercised on a cashless basis, resulting in the issuance of 42,353,038 common shares.

 

On April 30, 2021 the Company prepaid the note issued on October 29, 2020, to Geneva Roth Remark Holdings, Inc., in the aggregate principal amount of $88,000. The note has been repaid in its entirety.

 

On May 10, 2021 the Company prepaid the note issued August 13, 2020, to Auctus Fund LLC, in the aggregate principal amount of $100,000. The note has been repaid and retired.

 

On May 3, 2021, a Company subsidiary Addiction Recovery Institute of America LLC closed on a second PPP loan through Lendistry for net proceeds of $157,367.

 

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 Company has loaned $1,026,669 as of March 31, 2021. The Company is expected to close on the acquisition during the second quarter.

 

32

 


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

 

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein and the consolidated financial statements and the other information set forth in our Annual Report on Form 10- K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on April 15, 2021. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.

 

Plan of Operation

 

During the next twelve months, the Company plans to conclude the purchase of Evernia and continue to grow the Evernia business.

 

Results of Operations

 

For the three months ended March 31, 2021 and March 31, 2020.

 

Revenues

 

Revenues were $90,793 and $83,542 for the three months ended March 31, 2021 and 2020, respectively, an increase of $7,251 or 8.7%, this included the rental escalation as per the agreement and a deterioration in the currency exchange rate against the Canadian Dollar over the prior period.

 

Operating Expenses

 

Operating expenses were $52,016 and $174,149 for the three months ended March 31, 2021 and 2020, respectively, decrease of $122,133 or 70.1%. The decrease is primarily due to the following:

 

  · General and administrative expenses was $5,503 and $22,536 for the three months ended March 31, 2021 and 2020, respectively, a decrease of $17,033 or 75.6%. The decrease is due to the continued winding down of operations as the business focuses on the Evernia operation mentioned above.
     
  · Professional fees was $36 and $108,021 for the three months ended March 31, 2021 and 2020, respectively, a decrease of $107,985 or 99.9%. The decrease is due to the winding down of all other operations with a focus on building up the Evernia business mentioned above.
     
  · Salaries and wages was $12,852 and $12,351 for the three months ended March 31, 2021 and 2020, respectively, an increase of $501 or 4.1%. Slight increases in salaries were granted during the current period.
     
  · Depreciation expense was $32,125 and $30,241 for the three months ended March 31, 2021 and 2020, an increase of $1,884 or 6.2%, the increase is related to the deterioration of the US Dollar exchange rate  against the Canadian Dollar over the prior period.

 

Operating Income (loss)

 

The operating income was $38,777 and operating loss was $90,607 for the three months ended March 31, 2021 and 2020, respectively, an improvement of $129,384 or 142.8%. The increase is due to the slight improvement in revenues and the decrease in operating expenses as discussed above.

 

33

 

 

Loss on conversion of convertible debt

 

The loss on conversion of convertible debt was$1,106,648 and $286,343 for the three months ended March 31, 2021 and 2020, respectively, an increase of $820,305 or 286.5%. The increase in loss is attributable to the fixed conversion price on the notes converted in a market where our share price had increased substantially from the date that the fixed conversion prices were set.

 

Penalty on convertible notes

 

Penalty on convertible notes was $9,240 and $0 for the three months ended March 31, 2021 and 2020, an increase of $9,240. The penalty on convertible notes relates to a fee paid for the extension of repayment dates on the Labrys note.

 

Fair value of warrants granted to convertible debt holders

 

Fair value of warrants granted to convertible debt holders was $976,788 and $0 for the three months ended March 31, 2021 and 2020, an increase of $976,788 or 100%. The Company granted warrants to certain convertible debt holders in terms of agreements entered into with them, whereby any debt issued subsequent to their debt on more favorable terms would result in the debt holders being entitled to the same terms as issued to the subsequent debt holders. The company issued warrants for a total of 246,464,649 shares of common stock valued using a Black Scholes valuation model.

 

Exercise of warrants

 

Exercise of warrants was $90,000 and $92,952 for the three months ended March 31, 2021 and 2020, respectively, a decrease of $2,952 or 3.2%. During the current period a warrant holder exercised warrants for 66,666,666 shares of common stock resulting in the expense of $90,000 for the issue of 59,999,999 shares of common stock, on a cashless basis.

 

Interest expense

 

Interest expense was $137,677 and $193,922 for the three months ended March 31, 2021 and 2020, respectively, a decrease of $56,245 or 29.0% was primarily due to the conversion of convertible debt to equity during the current period and lower interest rates in the convertible debt outstanding during the current period.

 

Debt discount

 

Debt discount was $502,677 and $403,677 for the three months ended March 31, 2021 and 2020, respectively, an increase of $99,000 or 24.5%. The increase is primarily related to the age of the convertible debt on our balance sheet which has debt discounts being amortized during the current period, in the prior period several notes had debt discount which had been fully amortized.

 

Derivative liability movement

 

The derivative liability movement was $495,589 and $(9,754,896) for the three months ended March 31, 2021 and 2020. The derivative liability movement represents the mark to market movements of variably priced convertible notes and warrants issued during the current and prior comparative period. The mark to market movement of $495,589 during the current period is due to the conversion of convertible debt into equity during the period.

 

Foreign exchange movements

 

Foreign exchange movements was $(79,492) and $484,051 for the three months ended March 31, 2021 and 2020, respectively, representing the realized exchange gains and (losses) on monetary assets and liabilities settled during the current period as well as mark to market adjustments on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars. The US Dollar exchange rate deteriorated against the Canadian Dollar compared to the prior period, resulting in the loss on foreign exchange.

 

Net loss

 

Net loss of $2,368,156 and $10,338,286 for the three months ended March 31, 2021 and 2020, respectively, a decrease of $8,020,130 or 77.6%, primarily due to the decrease in operating expenses, the decrease in the derivative liability movement, offset by the increase in the loss on convertible debentures and the increase in the fair value of warrants issued to convertible note holders during the current period.

 

 

34

 

Contingency related to outstanding payroll tax liabilities

 

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

 

Liquidity and Capital Resources

 

Cash (used in) provided by operating activities was $(77,556) and $533,744 for the three months ended March 31, 2021 and 2020, respectively, a decrease of $611,300. The decrease is primarily due to the following:

 

  · the decrease in net loss of $7,970,130, discussed under operations above, offset by non-cash movements of $8,521,217, primarily movements on the derivative liability and the fair value of warrants issued on convertible debt;

 

  · the translation difference on foreign currency balances movement was $586,990 and includes the unrealized movements on intercompany balances which offsets the net cash generated by operating activities.

 

Cash used in investing activities was $336,220 and $9,542 for the three months ended March 31, 2021 and 2020, respectively, the increase is attributable to the advances made to Evernia, which acquisition we expect to close within the second quarter.

 

Cash provided by financing was $279,181 and cash used in financing activities was $17,572. In the current period the Company raised convertible debt funding of $340,000 and repaid $35,000 of convertible notes and $28,631 on the mortgage loan.

 

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

 

Recently Issued Accounting Pronouncements

 

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

 

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

 

Off balance sheet arrangements

 

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

 

Inflation

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

 

Climate Change

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

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

35

 

 

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

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

 

Changes in Internal Control

 

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

36

 

 

PART II

 

Item 1. Legal Proceedings.

 

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

 

Item 1A. Risk Factors.

 

Not applicable because we are a smaller reporting company.

 

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

 

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

 

Item 3. Defaults upon senior securities

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.

 

Not applicable.

 

Item 6. Exhibits

 

 

 

Exhibit No.

Description

 

 

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

 

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

 

101.INS XBRL Instance *

 

101.SCH XBRL Taxonomy Extension Schema *

101.CAL XBRL Taxonomy Extension Calculation *

101.DEF Taxonomy Extension Definition *

101.LAB Taxonomy Extension Labels * 

101. PRE Taxonomy Extension Presentation *

 

* filed herewith

 

 

37

 

SIGNATURES

 

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

 

ETHEMA HEALTH CORPORATION

 

Date: May 24, 2021

By:/s/ Shawn E. Leon 

Name: Shawn E. Leon 

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

 

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

 

 

Name Position Date
     
/s/Shawn E. Leon Chief Executive Officer (Principal Executive Officer), May 24, 2021
Shawn Leon Chief Financial Officer (Principal Financial Officer), President and Director  
     
/s/ John O’Bireck Director May 24, 2021
John O’Bireck    
     
/s/ Gerald T. Miller Director May 24, 2021
     

 

 

38

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