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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, 2022

 

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 BeachFlorida

  33406
Address of Principal Executive Offices   Zip Code

 

(561290-0239

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 13, 2022 was 3,729,053,805.

 

 

  

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, 2021 filed with the SEC on April 14, 2022. 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, 2022 (Unaudited) and December 31, 2021 1
  Unaudited Condensed Consolidated Statements of Operations and Comprehensive (loss) Income for the three months ended March 31, 2022 and 2021 2
  Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the three months ended March 31, 2022 and 2021 3
  Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March  31, 2022 and 2021 4
  Notes to the Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31
     
  PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Mine Safety Disclosures 32
Item 5. Other Information 32
Item 6. Exhibits 33
SIGNATURES 34

  

 
 

 

ETHEMA HEALTH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

                 
   

March 31,

2022

  December 31, 2021
      (Unaudited)          
ASSETS                
                 
Current assets                
Cash   $ 27,024     $ 48,822  
Accounts receivable, net     291,011       176,011  
Prepaid expenses     19,277       29,731  
Other current assets     18,406       17,235  
Total current assets     355,718       271,799  
Non-current assets                
Due on sale of subsidiary     5,190       5,115  
Property and equipment     3,082,878       3,012,663  
Intangible assets, net     1,521,418       1,610,913  
Right of use assets     1,590,752       1,653,816  
Total non-current assets     6,200,238       6,282,507  
Total assets   $ 6,555,956     $ 6,554,306  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities                
Accounts payable and accrued liabilities   $ 360,310     $ 438,482  
Taxes payable     717,665       658,836  
Convertible loans, net of discounts     4,831,880       4,891,938  
Short term loans     249,522       122,167  
Mortgage loans     3,890,306       3,864,312  
Government assistance loans     157,367       157,367  
Operating lease liability     252,340       241,083  
Finance lease liability     7,507       7,386  
Derivative liability     278,699       515,901  
Accrued dividends     131,072       105,049  
Related party payables     2,792,941       2,514,281  
Total current liabilities     13,669,609       13,516,802  
Non-current liabilities                
Government assistance loans     48,015       47,326  
Deferred taxation     254,263       273,057  
Third party loans     588,562       646,176  
Operating lease liability     1,425,018       1,493,431  
Finance lease liability     30,951       32,895  
Total non-current liabilities     2,346,809       2,492,885  
Total liabilities     16,016,418       16,009,687  
                 
Preferred stock - Series B; $1.00 par value, 10,000,000 authorized, 400,000 shares outstanding at March 31, 2022 and December 31, 2021.     400,000       400,000  
                 
Stockholders’ deficit                
Preferred stock - Series A; $0.01 par value, 10,000,000 authorized, 4,000,000 shares outstanding at March 31, 2022 and December 31, 2021.     40,000       40,000  
Common stock - $0.01 par value, 10,000,000,000 shares authorized; 3,729,053,805 and 3,579,053,805 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively.     37,290,539       35,790,539  
Additional paid-in capital     22,791,350       22,791,350  
Discount for shares issued below par value     (27,363,367 )     (26,013,367 )
Accumulated other comprehensive income     851,049       816,532  
Accumulated deficit     (44,302,371 )     (44,103,311 )
Stockholders’ deficit attributable to Ethema Health Corporation stockholders     (10,692,800 )     (10,678,257 )
Non-controlling interest     832,338       822,876  
Total stockholders’ deficit     (9,860,462 )     (9,855,381 )
Total liabilities and stockholders’ deficit   $ 6,555,956     $ 6,554,306  

 

 

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 INCOME (LOSS)

 

 

                 
    Three months ended
March 31, 2022
  Three months ended
March 31, 2021
         
Revenues   $ 1,023,315     $ 90,793  
                 
Operating expenses                
General and administrative     209,932       5,503  
Rent expense     90,031       1,500  
Management fees     30,000           
Professional fees     49,587       36  
Salaries and wages     436,825       12,852  
Depreciation expense     132,000       32,125  
Total operating expenses     948,375       52,016  
                 
Operating Income     74,940       38,777  
                 
Other (expense) income                
Other income     10,018           
Warrants exercised              (90,000 )
Fair value of warrants granted to convertible note holders              (976,788 )
Penalty on convertible notes              (9,240 )
Interest expense     (80,768 )     (137,677 )
Amortization of debt discount     (252,832 )     (502,677 )
Derivative liability movement     197,476       (611,059 )
Foreign exchange movements     (95,556 )     (79,492 )
Net loss before taxation     (146,722 )     (2,368,156 )
Taxation     (18,263 )         
Net loss     (164,985 )     (2,368,156 )
Net income attributable to non-controlling interest     (9,462 )         
Net loss attributable to Ethema Health Corporation Stockholders’     (174,447 )     (2,368,156 )
Preferred stock dividend     (24,613 )     (30,847 )
Net loss available to common shareholders of Ethema Health Corporation     (199,060 )     (2,399,003 )
Accumulated other comprehensive income                
Foreign currency translation adjustment     34,517       29,606  
                 
Total comprehensive loss   $ (164,543 )   $ (2,369,397 )
                 
Basic and diluted loss per common share   $ (0.00 )   $ (0.00 )
Weighted average common shares outstanding – Basic and diluted     3,630,720,472       2,143,692,378  

 

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   Non-controlling   Total  
                                                shareholders interest        
Balance as of December 31, 2021   4,000,000   $ 40,000   3,579,053,805   $ 35,790,539   $ 22,791,350   $ (26,013,367 ) $ 816,532   $ (44,103,311 ) $ 822,876   $ (9,855,381 )
Conversion of convertible notes   —            150,000,000     1,500,000            (1,350,000 )                        150,000  
Foreign currency translation   —            —                            34,517                   34,517  
Net loss   —            —                                  (174,447 )   9,462     (164,985 )
Dividends accrued   —            —                                   (24,613 )          (24,613 )
Balance as of March 31, 2022   4,000,000   $ 40,000   3,729,053,805   $ 37,290,539   $ 22,791,350   $ (27,363,367 ) $ 851,049   $ (44,302,371 ) $ 832,338   $ (9,860,462 )
                                                           
                                                           
                                                           
  Series A Preferred Common                                      
  Shares   Amount Shares   Amount   Additional Paid in Capital   Discount to par value   Comprehensive Income   Accumulated Deficit   Non-controlling   Total  
                                                shareholders interest        
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 ) $ 7,00,000   $ (15,026,099 )
Fair value of warrants issued to convertible debt holders   —            —              1,207,214                                 1,207,214  
Warrants exercised   —            59,999,999     6,00,000            (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 )

 

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

 

 

 3

 

ETHEMA HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

                 
   

Three months ended

March 31,

2022

 

Three months ended

March 31,

2021

Operating activities                
Net loss   $ (164,985 )   $ (2,368,156 )
Adjustment to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization expense     132,000       32,125  
Fair value of warrants granted              976,788  
Amortization of debt discount     252,832       502,677  
Derivative liability movements     (197,476 )     611,059  
Exercise of warrants              90,000  
Amortization of right of use asset     63,064           
Deferred taxation movement     (18,794 )         
Changes in operating assets and liabilities                
Accounts receivable     (115,000 )         
Prepaid expenses     10,456       14,638  
Other current assets     (1,171 )         
Accounts payable and accrued liabilities     (22,013 )     50,330  
Operating lease liabilities     (57,156 )         
Taxes payable     49,169       12,983  
Net cash used in operating activities     (69,074 )     (77,556 )
                 
Investing activities                
Other investments              (336,220 )
Purchase of property and equipment     (72,858 )         
Net cash used in investing activities     (72,858 )     (336,220 )
                 
Financing activities                
Repayment of mortgage     (29,850 )     (28,631 )
Proceeds from convertible notes              340,000  
Repayment of convertible notes     (201,733 )     (35,000 )
Proceeds from promissory notes     100,000           
Proceeds from government assistance loans              15,797  
Repayment of third party loans     (78,977 )         
Repayment of finance leases     (1,822 )         
Proceeds from related party notes     259,228           
Repayment of related party notes              (12,985 )
Net cash provided by financing activities     46,846       279,181  
                 
Effect of exchange rate on cash     73,288       79,325  
                 
Net change in cash     (21,798 )     (55,270 )
Beginning cash balance     48,822       90,500  
Ending cash balance   $ 27,024     $ 35,230  
                 
Supplemental cash flow information                
Cash paid for interest   $ 43,304     $ 41,344  
Cash paid for income taxes   $        $     
                 
Non-cash investing and financing activities                
Fair value of warrant issued   $        $ 230,426  
Conversion of convertible notes   $ 150,000     $ 165,137  

 

  

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

 

 

 4

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Nature of business

 

Since 2010, the Company has operated addiction treatment centers. Initially the Company operated an addiction treatment center in Ontario Canada under its Greenestone Muskoka clinic, which was sold on February 14, 2017. Simultaneously with this sale the Company purchased buildings and operated an addiction treatment center in Delray Beach Florida under its Addiction recovery Institute of America subsidiary with a license obtained in December 2016, initially though owned properties in Delray Beach and subsequently though leased properties in West Palm Beach, Florida. Since June 30, 2020, the Company has been actively involved in the management of a treatment center operated by Evernia in West Palm Beach Florida. On July 1, 2021, the Company closed on the acquisition of 75% of ATHI, which owns 100% of Evernia, once the probationary approval of a license was obtained from the Department of Children and Family Services of Florida. Evernia is the only active treatment center operated by the Company.

 

The Company also owns the real estate on which its Greenstone Muskoka clinic operated. The current tenant operates an addiction treatment center on these premises. The Company collects rent on this property, which is treated as a separate business segment. 

  

2. Summary of significant accounting policies

 

Financial Reporting

 

The (a) unaudited condensed consolidated balance sheets as of March 31, 2022, which have been derived from the unaudited condensed consolidated financial statements, and as of December 31, 2021, which have been derived from audited consolidated financial statements, and (b) the unaudited condensed consolidated statements of operations, stockholders’ deficit 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, 2022 are not necessarily indicative of results that may be expected for the year ending December 31, 2022. 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, 2021, filed with the Securities and Exchange Commission (“SEC”) on April 14, 2022.

 

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 unaudited condensed consolidated financial statements in conformity with 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 dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities issued in share-based payment arrangements, determining the fair value of assets acquired, allocation of purchase price, impairment of long-lived assets, the collectability of receivables, leasing arrangements, convertible debentures, contingencies and the value of deferred taxes and related valuation allowances. Certain estimates, including evaluating the collectability of receivables and advances, could be affected by external conditions, including those unique to the Company’s industry and general economic conditions. It is possible that these external factors could have an effect on the Company’s estimates that could cause actual results to differ from the Company’s estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.

 5

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of significant accounting policies (continued)

 

  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. ATHI and its wholly owned subsidiary Evernia, have been consolidated since July 1, 2021. 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, 2022, a closing rate of CDN$1.0000 equals US$0.8003 and an average exchange rate of CDN$1.0000 equals US$0.78980. For the three months ended March 31, 2021, a closing rate of CAD$1.0000 equals US$0.7952 and an average exchange rate of CAD$1.0000 equals US$0.7899.  

 

  c) Business Combinations

 

The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.

 

Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from a market participant perspective, useful lives and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

  

  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.

 6

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of significant accounting policies (continued)

 

  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 in-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) 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.

 

  h) Intangible assets

 

Intangible assets are stated at acquisition cost less accumulated amortization, if applicable, less any adjustments for impairment losses.

 

Amortization is charged on a straight-line basis over the estimated remaining useful lives of the individual intangibles. Where intangibles are deemed to be impaired the Company recognizes an impairment loss measured as the difference between the estimated fair value of the intangible and its book value.

 

Licenses to provide substance abuse rehabilitation services are amortized over the expected life of the contract, including any anticipated renewals. The Company expects its licenses to remain in operation for a period of five years.

   

  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.

 

 7

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of significant accounting policies (continued)

  

  j) 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.

 

  k) Financial instruments

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 8

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of significant accounting policies (continued)

  

  l) Related parties

 

Parties are considered to be related to the Company if the parties directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions are recorded at fair value of the goods or services exchanged.

 

  m) 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 $291,011and $176,011 at March 31, 2022 and December 31, 2021, 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.

 

 9

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of significant accounting policies (continued)

 

  n) 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.

 

  o) 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). 

 

  p) 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.

 

 10

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

2. Summary of significant accounting policies (continued)

 

  q) 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 March 31, 2022 and December 31, 2021.

 

  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 $13,313,891, which includes derivative liabilities of $278,699, and an accumulated deficit of $44,302,371. 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, 2022. 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, 2022, a 5% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an approximate $4,164 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

 

2. Summary of significant accounting policies (continued)

 

  r) Recent accounting pronouncements

 

In August 2020, the Financial Accounting Standard board (“FASB”) issued ASU 2020-06 "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06"). The update simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and limiting the number of embedded conversion features separately recognized from the primary contract. The guidance also includes targeted improvements to the disclosures for convertible instruments and earnings per share. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is assessing the impact, if any, on the adoption of this update on the Company's consolidated financial statements.

 

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.

  

  t) Comparative and prior period disclosures

 

The comparative and prior period disclosed amounts presented in these unaudited condensed consolidated financial statements have been reclassified where necessary to conform to the presentation used in the current period.

 

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. At March 31, 2022 the Company has a working capital deficiency of $13.3 million, including derivative liabilities of $0.3 million and total liabilities in excess of assets in the amount of $9.5 million. 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 condensed 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 as a going concern.

 

4. Acquisition of subsidiaries

 

On June 30, 2020, the Company entered into an agreement whereby the Company agreed to 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 was a loan to be provided by the purchaser to Evernia in the amount of $500,000. As of the date of acquisition, July 1, 2021, the Company had advanced Evernia approximately $1,140,985.

 

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.

 

On April 28, 2021, the Stock Purchase Agreement date June 30, 2020 between the Company and the Q Global Trust, and ATHI was amended whereby the option to purchase an additional 9% of ATHI for $50,000 was amended to purchase an additional 24%, an increase of 15% over the prior option, for 100,000,000 shares of common stock. The remaining condition to closing, the receipt of approval for the change of ownership of the license from the Department of Children and Family Services of Florida, was satisfied by the probationary approval, which was received on June 30, 2021. The Company exercised the option and issued the 100,000,000 shares of common stock and paid $42,500 of the $50,000 due to the Seller, in terms of the amended agreement as of the date of this report. In addition to the consideration paid for the additional equity the Company agreed to execute a promissory note for the payment of any unpaid management fees at the time of Closing such that the unpaid fees shall be paid pari-passu with the repayment of the Loan Agreement and Seller agrees that any funds advanced to the Company by Behavioural Health Holdings, LLC shall be forgiven and considered contributed capital to ATHI. The Company agrees to advance up to $1,100,000 under the Loan Agreement for the funding of the operations of ATHI as required without any contribution required by the Seller. 

 

Pursuant to the terms of the Purchase Agreement, the consideration paid for 75% of the equity of ATHI was $50,000 in cash plus the issuance of 100,000,000 shares of the Company’s common stock with a market value of $410,000 on the date of acquisition.

 

 

 12

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4. Acquisition of subsidiaries (continued)

 

In terms of the agreement, the preliminary purchase price was allocated to the fair market value of tangible and intangible assets acquired and liabilities assumed as follows:

 

       
    Amount
Consideration        
Cash     50,000  
100,000,000 shares of common stock at fair market value     410,000  
Total purchase consideration   $ 460,000  
Recognized amounts of identifiable assets acquired and liabilities assumed        
Cash     60,324  
Other Current assets     198,133  
Property, plant and equipment     130,234  
Right of use asset     1,772,560  
Intangibles     1,789,903  
 Total assets     3,951,154  
Less: liabilities assumed        
Current liabilities assumed     (50,040 )
Intercompany advance     (1,140,985 )
Operating lease liabilities assumed     (1,836,151 )
Imputed Deferred taxation on identifiable intangible acquired     (310,645 )
 Total liabilities     (3,337,821 )
Net identifiable assets acquired and liabilities assumed     613,333  
Fair value of non-controlling interest     (153,333 )
 Total   $ 460,000  

 

The amount of revenue and earnings include in the Company’s condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2022 and the revenue and earnings of the combined entity had the acquisition date been January 1, 2021.

 

                 
    Revenue   Earnings
         
Actual from January 1, 2022 to March 31, 2022   $ 991,941     $ 84,070  
                 
2021 Supplemental pro forma from January 1, 2021 to March 31, 2021   $ 495,081     $ (2,651,152 )

 

The 2021 Supplemental pro forma earnings information was adjusted to account for amortization of intangibles on acquisition of $89,495.

  

5. 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, 2022, 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$6,485 (approximately US$ 5,190).

 

 13

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6. Property and equipment

 

Property and equipment consists of the following:  

 

                 
                 
    March 31,
2022
  December 31, 2021
    Cost   Accumulated depreciation   Net book value   Net book value
Land   $ 172,055     $        $ 172,055     $ 168,585  
Property     3,254,757       (652,897 )     2,601,860       2,596,590  
Leasehold improvements     237,015       (17,718 )     219,297       153,730  
Furniture and fittings     53,556       (11,589 )     41,967       42,140  
Vehicles     55,949       (9,478 )     46,471       49,268  
Computer equipment     1,450       (222 )     1,228       1,350  
    $ 3,774,782     $ (691,904 )   $ 3,082,878     $ 3,012,663  

 

Depreciation expense for the three months ended March 31, 2022 and 2021 was $132,000 and $32,125, respectively.

 

7. Intangibles

 

Intangible assets consist of the Company’s preliminary estimate of the fair value of intangibles acquired with the acquisition of ATHI disclosed in Note 4 above. The Company preliminarily allocated the excess over the tangible assets acquired, less the liabilities assumed to the contract provided to the Company by a health care service provider.

 

Intangible assets consist of the following:  

 

               
   

March 31,

2022

  December 31, 2021
    Cost   Accumulated amortization   Net book value   Net book value
Health care Provider license   $ 1,789,903     $ (268,485 )   $ 1,521,418     $ 1,610,913  
                                 

 

The Company evaluates intangible assets for impairment on an annual basis during the last month of each year and at an interim date if indications of impairment exist. Intangible asset impairment is determined by comparing the fair value of the asset to its carrying amount with an impairment being recognized only when the fair value is less than carrying value and the impairment is deemed to be permanent in nature.

 

The Company recorded $89,495 in amortization expense for finite-lived assets for the three months ended March 31, 2022.

 

8. Leases

 

 Right of use assets are included in the condensed consolidated balance sheet are as follows:

 

               
   

March 31,

2022

  December 31,
2021
Non-current assets                
Right-of-use assets – finance leases, net of depreciation, included in Property and equipment   $ 46,471     $ 49,268  
Right-of-use assets - operating leases, net of amortization   $ 1,590,752     $ 1,653,816  

  

 14

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8. Leases (continued)

 

Lease costs consists of the following: 

 

               
    Three months ended  March 31,
    2022   2021
 Finance lease cost:                
Amortization of right-of-use assets   $ 2,797     $     
Interest expense on finance lease liabilities     648           
 Finance lease cost     3,445           
                 
Operating lease cost   $ 63,064     $     
Lease cost   $ 63,064     $     

 

Other lease information: 

 

       
    Three months ended March 31,
    2022   2021
Cash paid for amounts included in the measurement of lease liabilities        
Operating cash flows from finance leases   $ (1,809 )   $     
Operating cash flows from operating leases     (63,064 )         
    $ (64,873 )   $     
                 
Weighted average lease term – finance leases     4 years and seven months       —    
Weighted average remaining lease term – operating leases     4 years and 10 months       —    
                 
Discount rate – finance leases     6.61 %     —    
Discount rate – operating leases     4.64 %     —    

 

Maturity of Leases

 

Finance lease liability

 

The amount of future minimum lease payments under finance leases as of March 31, 2022 is as follows:

 

       
    Amount
Remainder of 2022   $ 7,372  
2023     9,829  
2024     9,829  
2025     9,829  
2026     7,902  
 Total undiscounted minimum future lease payments     44,761  
Imputed interest     (6,303 )
Total finance lease liability   $ 38,458  
Disclosed as:        
Current portion   $ 7,507  
Non-Current portion     30,951  
Lease liability   $ 38,458  

 

 15

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8. Leases (continued)

 

Operating lease liability

 

The amount of future minimum lease payments under operating leases are as follows:

 

       
    Amount
     
Remainder of 2022   $ 250,047  
2023     348,677  
2024     366,110  
2025     384,416  
2026     437,407  
Total undiscounted minimum future lease payments     1,786,657  
Imputed interest     (109,299 )
Total operating lease liability   $ 1,677,358  
         
Disclosed as:        
Current portion   $ 254,340  
Non-Current portion     1,425,018  
 Lease liability   $ 1,677,358  

    

 

 9. Taxes Payable

 

The taxes payable consist of:

 

  A payroll tax liability of $146,119 (CDN$182,589) in Greenstone Muskoka which has not been settled as yet.
  A GST/HST tax payable of $137,200 (CDN$171,445).

 

               
    March 31,
2022
  December 31,
2021
         
Payroll taxes   $ 146,119     $ 144,020  
HST/GST payable     137,200       123,134  
Income tax payable     434,346       391,682  
 Taxes Payable   $ 717,665     $ 658,836  

 

 16

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10. Short-term Convertible Notes

 

The short-term convertible notes consist of the following:

 

 

                                                   
    Interest rate   Maturity Date   Principal   Interest   Debt Discount   March 31, 2022   December 31, 2021
Leonite Capital, LLC     12.0 %    On Demand    $ 129,379      $ 43,673      $         $ 173,052      $ 315,579  
                                                     
Auctus Fund, LLC     0.0 %   On Demand     80,000                         80,000       100,000  
                                                     
Labrys Fund, LP     12.0 %   November 30, 2021              8,826                8,826       8,826  
      11.0 %   May 7, 2022     389,045                (75,420 )     313,625       354,504  
      11.0 %   June 2, 2022     230,000       20,074       (47,942 )     202,132       148,488  
                                                     
Ed Blasiak     6.5 %   September 14, 2021     55,000       5,591                60,591       59,697  
                                                     
Joshua Bauman     11.0 %   October 21, 2022     150,000       7,278       (83,836 )     73,442       32,387  
                                                     
Geneva Roth Remark Holdings, Inc.     8.0 %   October 1, 2022     42,311       3,385       (21,329 )     24,367       24,384  
                                                     
Series N convertible notes     6.0 %   On Demand     3,229,000       666,845                3,895,845       3,848,073  
                                                     
                 $ 4,304,735      $ 755,672      $ (228,527 )   $ 4,831,880     $ 4,891,938  

 

Leonite Capital, LLC

 

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.

 

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.

 

 17

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10. Short-term Convertible Notes (continued)

 

Leonite Capital, LLC (continued)

 

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 $0.0009 per share.

 

On June 1, 2021, in terms of a conversion notice, Leonite converted the principal sum of $25,084 and interest thereon of $4,166 of the Leonite Note into 30,000,000 shares of common stock at a conversion price of $0.0009 per share.

 

On June 10, 2021, in terms of a conversion notice, Leonite converted the principal sum of $58,908 and interest thereon of $342 of the Leonite Note into 60,000,000 shares of common stock at a conversion price of $0.0009 per share.

 

On September 10, 2021, in terms of a conversion notice, Leonite converted the principal sum of $59,260 and interest thereon of $1,718 of the Leonite Note into 59,259,630 shares of common stock at a conversion price of $0.0010 per share.

 

On October 19, 2021, in terms of a conversion notice, Leonite converted the principal sum of $44,444 and interest thereon of $5,302 of the Leonite Note into 50,496,728 shares of common stock at a conversion price of $0.0010 per share.

 

On October 29, 2021, the Company issued 83,771,947 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $83,022 at a conversion price of $0.0009 per share.

 

On November 22, 2021, in terms of a conversion notice, Leonite converted the principal sum of $50,532 and interest thereon of $7,145 of the Leonite Note into 58,427,091 shares of common stock at a conversion price of $0.0010 per share.

 

On December 13, 2021, in terms of a conversion notice, Leonite converted the principal sum of $89,684 and interest thereon of $249 of the Leonite Note into 90,682,696 shares of common stock at a conversion price of $0.0010 per share.

 

On February 28, 2022, in terms of a conversion notice, Leonite converted the principal sum of $149,250 of the Leonite Note into 150,000,000 shares of common stock at a conversion price of $0.0010 per share.

  

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 the Company agreed to discharge the principal amount of the note by nine equal monthly installments of $25,000 commencing in October 2020. During the year ended December 31, 2021, the Company repaid Auctus the principal sum of $50,000.

 

During March 2022, the Company paid $20,000 of principal on the convertible note, thereby reducing the principal outstanding to $80,000. The note matured May 7, 2020, Auctus Fund LLC has not declared a default and we are in constant discussion with the lender on settling the note.

 

 18

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10. Short-term Convertible Notes (continued)

 

Labrys Fund, LP

 

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.

 

On May 3, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $57,000 including interest thereon of $33,000 into 100,000,000 shares of common stock.

 

On July 7, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $100,800 into 112,000,000 shares of common stock.

 

On September 28, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $54,000 into 60,000,000 shares of common stock.

 

On October 8, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $55,800 into 62,000,000 shares of common stock.

 

On October 15, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $7,400 into 8,222,222 shares of common stock. The Company has $8,826 of interest outstanding under the convertible promissory note.

 

On May 7, 2021, 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 $550,000 for net proceeds of $477,700 after an original issue discount of $55,000 and certain legal expenses of $17,300. The Note has a maturity date of May 7, 2022 and bears interest at the rate of eleven 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 $0.005, subject to anti-dilution adjustments.

 

On November 23, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $6,329 and interest of $60,500 into 75,000,000 shares of common stock.

 

Effective December 29, 2021, the Company entered into a modification of the convertible note agreement with Labrys whereby the May 7, 2021 note were amended as follows:

 

· The Maturity date of the note was extended to May 31, 2022.
· The triggering of the dilutive event on October 25, 2021 which reduced the conversion price of the convertible note to $0.001 per share, will not be utilized as long as any events of default under the note are not triggered.
· The Company agreed to make monthly payments under the note totaling $536,000 between January 10, and May 31, 2022.

 

During the three months ended March 31, 2022, the Company repaid $150,000 of the outstanding principal of the convertible note. There have been no further events of default in terms of this convertible note and we are in discussion with the note holder on settling the note.

 

 19

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10. Short-term Convertible Notes (continued)

 

Labrys Fund, LP (continued)

 

On June 2, 2021, 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 $230,000 for net proceeds of $200,000 after an original issue discount of $23,000 and certain legal expenses of $7,000. The Note has a maturity date of June 2, 2022 and bears interest at the rate of eleven 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 $0.004, subject to anti-dilution adjustments.

 

Effective December 29, 2021, the Company entered into a modification of the convertible note agreement with Labrys whereby the May 7, 2021 note were amended as follows:

 

  · The Maturity date of the note was extended to June 30, 2022.

 

  · The triggering of the dilutive event on October 25, 2021 which reduced the conversion price of the convertible note to $0.001 per share, will not be utilized as long as any events of default under the note are not triggered.

 

  · The Company agreed to make two equal payments of $127,650 on the note on May 31, and June 30, 2022.

 

The note is not in default and we are in discussions with the lender on settling the outstanding balance on this note.

 

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.

 

The note has matured, Ed Blasiak has not declared a default under the note and we are in communication with Mr. Blasiak on our ability to repay the note. 

 

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 June 8, 2021, in terms of a conversion notice received by the company, Bauman converted the aggregate principal sum of $100,000 including interest thereon of $5,563 into 106,313,288 shares of common stock.

 

On October 25, 2021, in terms of a conversion notice received by the company, Bauman converted the aggregate principal sum of $37,500 including interest thereon of $1,155 into 39,405,310 shares of common stock, thereby extinguishing the note.

 

On October 21, 2021, 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 $150,000, including an original issue discount of $16,250. The note bears interest at 11.0% per annum, which is guaranteed and earned in full on issue date and matures on October 21, 2022. 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.

 

Geneva Roth Remark Holdings, Inc

 

On October 1, 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 $95,200, for net proceeds of $85,000 before the payment of legal fees and origination fees amounting to $3,750. The note has a maturity date of October 1, 2022 and bears interest at the rate of 8.0% per annum, due immediately on the issuance date of the note. The outstanding principal amount of the note is payable in nine monthly payments of $11,424 commencing on November 15, 2021. The note is convertible into shares of common stock upon an event of default at the election of the purchaser. The conversion price is 75% of the lowest trading price for the preceding five days prior to the date of conversion.

 

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 matured one year from the date of issuance.

 

The series N convertible notes have past their maturity date, there are no default terms and we are considering our options to settle these notes.

 

 

 20

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11. Short term loans

 

LXR Biotech

 

On April 12, 2019, the Company, entered into a secured Promissory Note in the aggregate principal amount of CDN$133,130. The Note had a maturity date of April 11, 2020 and bears interest at the rate of six percent per annum from the date on which the Note was issued.

 

This note has not been repaid as yet and remains outstanding.

 

Leonite Capital, LLC

 

Secured Promissory Notes  

 

On March 1, 2022, the Company entered into a secured Promissory Note in the aggregate principal amount of $124,000 for net proceeds of $100,000 after an original issue discount of $24,000. The Note had a maturity date of April 1, 2022. This note has not been repaid at the date of this report and no default has been declared. We are in discussions with Leonite on the repayment of this note and the advancement of additional funds for business purposes. 

 

12. Mortgage loans

 

Mortgage loans is disclosed as follows:

 

                                 
    Interest 
rate
    Maturity
date
  Principal 
Outstanding
    Accrued 
interest
    March 31,
2022
    December 31,
2021
 
                                   
Cranberry Cove Holdings, Ltd.                                            
Pace Mortgage     4.2 %   July 19, 2022   $ 3,884,941     $ 5,365     $ 3,890,306     $ 3,864,312  
Disclosed as follows:                                            
Short-term portion                               $ 3,890,306     $ 3,864,312  

 

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.

 

 13. Government assistance loans

 

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.

 

On May 3, 2021, the Company was granted a government assistance loan in the aggregate principal amount of $157,367. 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.

 

The company has applied for forgiveness of this government assistance loan, we expect that the loan will be forgiven and are awaiting written confirmation of forgiveness.

 

 

 21

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

 14. Third party loans

 

On April 12, 2019, Eileen Greene, a related party assigned CDN$1,000,000 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.

 

During the current period the Company repaid CDN$100,000 (approximately $78,977).

 

15. Derivative liability

 

The short-term convertible notes issued to convertible note holders disclosed in note 10 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 $1,959,959 using a Black-Scholes valuation model.

 

The derivative liability is marked-to-market on a quarterly basis. As of March 31, 2022, the derivative liability was valued at $278,699.

 

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

 

       
    Three months ended
March 31
2022
 
     
Calculated stock price     $0.0006 to $0.0010  
Risk free interest rate     0.06% to 2.45 %
Expected life of convertible notes and warrants     3 to 39 months  
expected volatility of underlying stock     167.1% to 238.1 %
Expected dividend rate     0 %

 

The movement in derivative liability is as follows:

 

               
    March  31,
2022
  December 31,
2021
         
Opening balance   $ 515,901     $ 4,765,387  
Derivative liability extinguished on convertible notes converted to equity   (39,726 )       (2,914,119 )
Derivative liability on issued convertible notes              190,824  
Fair value adjustments to derivative liability     (197,476 )     (1,526,191 )
                 
Closing balance   $ 278,699     $ 515,901  
                       

 22

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16. Related party transactions

 

Shawn E. Leon

As of March 31, 2022 and December 31, 2021 the Company had a payable to Shawn Leon of $341,379 and $106,100, respectively. 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, 2022 and the year ended December 31, 2021.

 

Leon Developments, Ltd.

As of March 31, 2022 and December 31, 2021, the Company owed Leon Developments, Ltd., $955,398 and $935,966, respectively, for funds advanced to the Company.

 

Eileen Greene

As of March 31, 2022 and December 31, 2021, the Company owed Eileen Greene, the spouse of our CEO, Shawn Leon, $1,496,164 and $1,472,215, 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.

  

17. 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 3,729,053,805 and 3,579,053,805 shares of common stock at March 31, 2022 and December 31, 2021, respectively.

 

On February 28, 2022, the Company issued 150,000,000 shares of common stock to Leonite in connection with a conversion notice received, converting principal of $149,250.

 

  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, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, respectively.

 

  d) 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, 2022 under the Plan.

 

 23

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

17. Stockholder’s deficit (continued)

 

  e) Warrants

 

All of the warrants with the exception of the 8,287,500 warrants exercisable at $0.12 per share have cashless exercise terms whereby in-the-money warrants may be exercised by reducing the number of shares issued in terms of the warrant exercise to offset the proceeds due on the exercise. The 8,287,500 warrants are only exercisable for cash.

 

All of the warrants with the exception of the 8,287,500 warrants exercisable at $0.12 per share have price protection features whereby any securities issued subsequent to the date of the warrant issuance date, were issued at a lower price, or have conversion features that are lower than the current exercise price, or were converted at a lower price, or are exercisable at a lower price, to the current warrant exercise price, will result in the exercise price of the warrant being set to the lower issue, conversion or exercise price.

 

A summary of the Company’s warrant activity during the period from January 1, 2021 to March 31, 2022 is as follows:

 

                       
    No. of shares   Exercise price
per share
  Weighted
average exercise
price
             
Outstanding as of January 1, 2021     615,561,379       $0.000675 to $0.12     0.011380  
Granted     471,010,103       $0.0020500       0.003080  
Forfeited/cancelled     (101,682,866 )     $0.0015 to $0.12       0.039029  
Exercised     (361,111,110 )     $0.00150 to $0.00205       0.003291  
Outstanding as of December 31, 2021     623,777,506       $0.000675 to $0.12     $ 0.0052875  
Granted              —             
Forfeited/cancelled     (12,637,500 )     $0.12       0.12  
Exercised              —         —    
Outstanding as of March 31, 2022     611,140,006       $0.000675 to $0.12     $ 0.0029154  

  

 

The following table summarizes information about warrants outstanding at March 31, 2022:

 

                                         
      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       3.28               326,286,847          
$0.002050       276,565,659       3.77               276,565,659          
$0.120000       8,287,500       0.27               8,287,500          
                                           
        611,140,006       3.46     $ 0.0029154       611,140,006     $ 0.0029154  

 

All of the warrants outstanding at March 31, 2022 are vested. The warrants outstanding at March 31, 2022 have an intrinsic value of $8,157. 

 

18. 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 Evernia, Addiction Recovery Institute of America and Seastone of Delray operations.

 

 24

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

18. Segment information (continued)

  

The segment operating results of the reportable segments for the three months ended March 31, 2022 is disclosed as follows:

 

                       
    Three months ended March 31, 2022
    Rental
Operations
  In-Patient
services
  Total
             
Revenue   $ 93,874     $ 929,441     $ 1,023,315  
Operating expenses     (33,316 )     (915,059 )     (948,375 )
                         
Operating income     60,558       14,382       74,940  
                         
Other (expense) income                        
Other income              10,018       10,018  
Interest expense     (53,607 )     (27,161 )     (80,768 )
Amortization of debt discount              (252,832 )     (252,832 )
Derivative liability movement              197,476       197,476  
Foreign exchange movements     (21,829 )     (73,727 )     (95,556 )
Net loss before taxes     (14,878 )     (131,844 )     (146,722 )
Taxes              (18,263 )     (18,263 )
Net loss   $ (14,878 )   $ (150,107 )   $ (164,985 )

 

The operating assets and liabilities of the reportable segments as of March 31, 2022 is as follows:

 

                         
                         
    March 31, 2022
    Rental
Operations
  In-Patient
services
  Total
             
Purchase of fixed assets   $        $ 72,858     $ 72,858  
Assets                        
Current assets     551       355,167       355,718  
Non-current assets     2,773,914       3,426,324       6,200,238  
Liabilities                        
Current liabilities     (1,590,715 )     (12,078,894 )     (13,669,609 )
Non-current liabilities     (636,577 )     (1,710,232 )     (2,346,809 )
Mandatory redeemable preferred shares              (400,000 )     (400,000 )
Intercompany balances     1,238,399       (1,238,399 )         
Net liability position   $ 1,785,572     $ (11,646,034 )   $ (9,860,462

 

 

                         
    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                        
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 )
Derivative liability movement              (611,059     (611,059
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 )

 

 

 25

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

18. Segment information (continued)

   

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 )

 

 

19. Net (loss) income per common share

  

For the three months ended March 31, 2022 and 2021, 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,
2022
  Three months ended
March 31,
2021
         
Warrants to purchase shares of common stock     611,140,006       926,470,474  
Convertible notes     458,435,448       662,500,729  
      1,069,575,454       1,588,971,203  

  

20. Commitments and contingencies

  

  a. Options granted to purchase shares in ATHI

 

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 4,000,000 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $400), based on the advances that Leonite made to the Company totaling $396,000. 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 571,428 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $57), based on the advances that Blasiak 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 1,428,571 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $143), based on the advances that First Fire made to the Company totaling $120,000. 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 1,428,571 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $143), based on the advances that Bauman made to the Company totaling $120,000. 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.

 

 26

 

 

ETHEMA HEALTH CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

20. Commitments and contingencies (continued)

  

  b. Mortgage loans

 

The company has a mortgage loan as disclosed in note 12 above. The mortgage loan matures on July 19, 2022 and the Company currently owes $3,890,306.

 

  c. Other

 

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

 

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

    

21. Subsequent events

   

 On May 3, 2022, the Company, entered into a secured Promissory Note in the aggregate principal amount of $76,250 for net proceeds of $61,000 after an original issue discount of $15,250. The Note had a maturity date of June 17, 2022 and bears interest at the rate of zero percent per annum from the date on which the Note was issued until the same became due and payable. 

 

 Other than disclosed above, the Company has evaluated subsequent events through the date of the condensed consolidated financial statements were issued, we did not identify any other subsequent events that would have required adjustment or disclosure in the financial statements.

 

 27

 

 

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, 2021 filed with the Securities and Exchange Commission on April 14, 2022. 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 continue to grow the Evernia business.

 

With effect from July 1, 2021, the operations of ATHI, which include Evernia are included in the results of operations.

 

For the three months ended March 31, 2022 and March 31, 2021.

 

Revenues

 

Revenues were $1,023,315 and $90,793 for the three months ended March 31, 2022 and 2021, respectively, an increase of $932,522 or 1,027.1%. The revenue from in-patient services related to Evernia was $929,441 and $0 for the three months ended March 31, 2022 and 2021, respectively. Evernia was acquired on July 1, 2021. The revenue from rental properties was $93,874 and $90,793 and included the rental escalation as per the agreement and an improvement in the currency exchange rate against the Canadian Dollar over the prior period.

 

Operating Expenses

 

Operating expenses were $948,375 and $52,016 for the three months ended March 31, 2022 and 2021, respectively, an increase of $896,359 or 1,723.2%. The increase is primarily due to the following:

 

  Operating expenses related to ATHI and Evernia was $882,698 for the three months ended March 31, 2022, Evernia was acquired on July 1, 2021. Included in Evernia operating expenses is payroll costs of $412,673, outside contractors and professional fees of $86,261, advertising and promotion costs of $27,162 management fees of $30,000, rental expenses of $90,031, and depreciation and amortization expenses of $99,879, which relate primarily to the amortization of intangibles.

     

  Operating expenses, excluding ATHI and Evernia was $65,677 and $52,016 for the three months ended March 31, 2022 and 2021, respectively, an increase of $13,661 or 26.3%, the amount is immaterial.

     

  Rent expense, excluding ATHI and Evernia was $0 and $1,500 for the three months ended March 31, 2022 and 2021,  respectively, a decrease of $1,500 or 100.0%. This amount is immaterial.

     

  Management fees, excluding ATHI and Evernia was $0and $0 for the three months ended March 31, 2022 and 2021,  respectively. Management fees were waived during the current and prior period, due to the financial position the Company is in.

     

  Salaries and wages, excluding ATHI and Evernia was $24,152 and $12,852 for the three months ended March 31, 2022 and 2021, respectively, an increase of $11,300 or 87.9%, the increase is due the additional person to monitor the corporate office.

    

  Depreciation expense, excluding ATHI and Evernia was $32,121 and $32,125 for the three months ended March 31, 2022 and 2021, respectively, a decrease of $4, the difference is immaterial.

 

 28

 

Operating Income

 

The operating income was $74,940 and $38,777 for the three months ended March 31, 2022 and 2021, respectively, an increase of $36,163 or 93.3%. The improvement in operating income is due to the operating income realized in ATHI and Evernia of $46,473, offset by the increased loss realized on the legacy operations of $10,580, which is immaterial..

 

Other income

Other income was $10,018 and $0 for the three months ended March 31, 2022 and 2021, an increase of $10,018 or 100%. Other income represents a once off contribution by our landlord to our operations.

 

Warrant exercise

 

Warrant exercise was $0 and $90,000 for the three months ended March 31, 2022 and 2021, respectively, a decrease of $90,000. During the prior period warrant holders exercised warrants on a cashless basis.

 

Fair value of warrants granted to convertible debt holders

 

Fair value of warrants granted to convertible debt holders was $0 and $976,788 for the three months ended March 31, 2022 and 2021, a decrease 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.

 

Interest expense

 

Interest expense was $80,768 and $137,677 for the three months ended March 31, 2022 and 2021, respectively, a decrease of $56,909 or 41.3%, primarily due to a reduction in overall debt due to conversion of convertible notes over the prior 12 months and the repayment of convertible notes during the current period.

 

Amortization of debt discount

 

Amortization of debt discount was $252,832 and $502,677 for the three months ended March 31, 2022 and 2021, respectively, a decrease of $249,845 or 49.7%. The decrease is primarily due to the conversion of convertible debt over the past twelve months and the repayment of debt during the current period, resulting in acceleration of amortization expense in periods prior to the current period.

 

Derivative liability movement

 

The derivative liability movement was $197,476 and ($611,059) for the three months ended March 31, 2022 and 2021, respectively. 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 decrease in the mark to market movement of $808,535 was primarily due to the conversion and repayment of several convertible notes during the past twelve months and an overall reduction in our stock price, impacting favorably on the mark-to-market adjustment.

 

Foreign exchange movements

 

Foreign exchange movements was $(95,556) and $(79,492) for the three months ended March 31, 2022 and 2021, respectively, representing the realized exchange gains and (losses) on monetary assets and liabilities settled during the current year as well as mark to market adjustments on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars. The Dollar strengthened against the Canadian Dollar during the current period, resulting in an unrealized loss on Canadian denominated assets.

 

Taxation

 

Taxation was $18,263 and $0 for the three months ended March 31, 2022 and 2021, respectively, an increase of $18,263 or 100.0%. A provision for taxation was created on the profit realized on the Evernia operations.

 

 29

 

Net loss

 

Net loss was $164,985 and $2,368,156 for the three months ended March 31, 2022 and 2021, respectively, a decrease of $2,203,171 or 93.0%, is primarily due to the prior period movements on the fair value of warrants issued, the amortization of debt discount and the derivative liability movement, as discussed above.

 

Commitments and contingencies

 

The company has commitments under operating and finance leases as follows:

 

The amount of future minimum lease payments under finance leases as of March 31, 2022 is as follows:

 

    Amount
Remainder of 2022   $ 7,372  
2023     9,829  
2024     9,829  
2025     9,829  
2026     7,902  
    $  44,761  

 

The amount of future minimum lease payments under operating leases are as follows:

 

    Amount
Remainder of 2022   $ 250,047  
2023     348,677  
2024     366,110  
2025     384,416  
2026     437,407  
    $ 1,786,657  

    

The company also has commitments under convertible loans, short term loans, mortgage loans. If the convertible loans, as disclosed in note 10, above are not converted will need to be repaid, the short term loans disclosed in note 11 are repayable on demand and mortgage loans, disclosed on note 12 above, matures during July 2022.

 

If government assistance loans, are not forgiven, the Company will need to repay the balance outstanding, including interest thereon. 

 

Liquidity and Capital Resources

 

Cash used in operating activities was $69,074 and $77,556 for the three months ended March 31, 2022 and 2021, respectively, a decrease of $8,482. The decrease is primarily due to the following:

 

  A decrease in net loss of $2,203,171, as discussed under results of operations above.

     

  Offset by a decrease in the movement of non-cash items of $(1,981,024), primarily due to the movement in the amortization of debt discount of $(249,845), the movement in the fair value of warrants granted of $(976,788), and the movement in derivative liabilities of $(808,535), offset by an increase in depreciation and amortization of $99,875, primarily related to the acquisition of Evernia.

     

  Working capital movements increased by $213,666, primarily due to an increase in accounts receivable movement of $115,000 and a decrease in movements of accounts payable of $72,343 due to the payment of liabilities.

 

Cash used in investing activities was $72,858 and $336,220 for the three months ended March 31, 2022 and 2021, respectively. In the current period we invested in leasehold improvements and furniture and fittings to increase capacity at our Evernia facility. In the prior period we provided working capital of $336,220 to Evernia, prior to us acquiring it.

 

Cash provided by financing was $46,847 and $279,181 for the three months ended March 31, 2022 and 2021, respectively, a decrease of $232,334.

 30

 

In the prior year we received net proceeds after the repayment of convertible notes of $305,000, during the current period we repaid $201,733 of convertible notes as we reduce our debt to third parties.

 

We repaid $78,977 of third party debt during the current period and received short term proceeds of $100,000 from promissory notes payable. We funded the above repayments from proceeds advanced by our CEO of $259,228 during the current period.

 

Over the next twelve months we estimate that the company will require approximately $0.5 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.

 

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, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 


 31

 

PART II

 

Item 1. Legal Proceedings.

 

A suit, claiming past due rent was filed against the Company in March 2020 for rent of a storage warehouse, the warehouse was abandoned during March 2020. The rental expense was accrued in our records for $12,293 as of December 31, 2021.

 

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

 

Item 1A. Risk Factors.

 

Not applicable because we are a smaller reporting company.

 

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

  

On March 1, 2022, the Company, entered into a secured Promissory Note in the aggregate principal amount of $124,000 for net proceeds of $100,000 after an original issue discount of $24,000. The Note had a maturity date of April 1, 2022 and bears interest at the rate of zero percent per annum from the date on which the Note was issued until the same became due and payable.

 

On February 28, 2022, the Company issued 150,000,000 shares of common stock to Leonite in connection with a conversion notice received, converting principal of $149,250.

 

On May 3, 2022, the Company, entered into a secured Promissory Note in the aggregate principal amount of $76,250 for net proceeds of $61,000 after an original issue discount of $15,250. The Note had a maturity date of June 17, 2022 and bears interest at the rate of zero percent per annum from the date on which the Note was issued until the same became due and payable.

 

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.

 

 32

 

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 Inline XBRL Instance Document
101.SCH  Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline Taxonomy Extension CAL XBRL Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB  Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
101 Cover Page Interactive Data File (embedded within the Inline XBRL Document)

 

* filed herewith

 33

 

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 16, 2022

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 16, 2022
Shawn Leon   Chief Financial Officer (Principal Financial Officer), President and Director    
         
/s/ John O’Bireck   Director   May 16, 2022
John O’Bireck        
         
/s/ Gerald T. Miller   Director   May 16, 2022
         

 

 

 34

 

 

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