ETHEMA HEALTH Corp 10-Q for FY2021 Q3
ETHEMA HEALTH Corp (GRST)
About this 10-Q
ETHEMA HEALTH Corp filed this 10-Q on November 22, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $866.43K
- up 864.5% from $89.83K a year earlier
- Net income
- $1.55M
- compared with a net loss of $10.23M a year earlier
- Diluted EPS
- $0.00
- compared with -$0.01 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from to
Commission
File Number
(Exact Name of Registrant as Specified in its Charter)
| (State or other jurisdiction
of incorporation or organization) |
(I.R.S. employer Identification No.) | |
| Address of Principal Executive Offices | Zip Code |
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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.
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).
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 ☐ |
| 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 ☐
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| 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 November 22, 2021 was .
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report on Form 10-Q, including but not limited to, statements regarding the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects, or costs and objectives of management for future acquisitions, are forward looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,” “estimates,” “predicts,” “potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, and those identified under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on April 15, 2021. Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
NOTE REGARDING COMPANY REFERENCES
Throughout this Quarterly Report on Form 10-Q, “Ethema,” the “Company,” “we,” “us” and “our” refer to Ethema Health Corporation.
FORM 10-Q
ETHEMA HEALTH CORPORATION
TABLE OF CONTENTS
| Page | ||
| PART I - FINANCIAL INFORMATION | ||
| Item l. | Financial Statements | 1 |
| Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020 | 1 | |
| Unaudited Condensed Consolidated Statements of Operations and Comprehensive (loss) Income for the three and nine months ended September 30, 2021 and 2020 | 2 | |
| Unaudited Condensed Consolidated Statements of Stockholder's Deficit for the three and nine months ended September 30, 2021 and 2020 | 3 | |
| Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 | 4 | |
| Notes to the Unaudited Condensed Consolidated Financial Statements | 5 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 33 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 37 |
| Item 4. | Controls and Procedures | 37 |
| PART II - OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 38 |
| Item 1A. | Risk Factors | 38 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 38 |
| Item 3. | Defaults Upon Senior Securities | 38 |
| Item 4. | Mine Safety Disclosures | 38 |
| Item 5. | Other Information | 38 |
| Item 6. | Exhibits | 38 |
| SIGNATURES | 39 | |
ETHEMA HEALTH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Other investments | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Due on sale of subsidiary | ||||||||
| Property and equipment | ||||||||
| Intangibles | ||||||||
| Right of use asset | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Taxes payable | ||||||||
| Convertible loans, net of discounts | ||||||||
| Short term loans | ||||||||
| Mortgage loans – current portion | ||||||||
| Government assistance loans | ||||||||
| Derivative liability | ||||||||
| Operating lease liabilities | ||||||||
| Accrued dividends | ||||||||
| Related party payables | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities | ||||||||
| Government assistance loans, net of current portion | ||||||||
| Third party loans | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Mortgage loans, net of current portion | ||||||||
| Deferred taxes | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Preferred stock - Series B; $ par value, authorized, outstanding as of September 30, 2021 and December 31, 2020, respectively. | ||||||||
| Stockholders’ deficit | ||||||||
| Preferred stock - Series A; $ par value, authorized, outstanding at September 30, 2021 and December 31, 2020, respectively | ||||||||
| Common stock - $ par value, shares authorized; and shares issued and outstanding as of September 30, 2021 and December 31, 2020. | ||||||||
| Additional paid-in capital | ||||||||
| Discount for shares issued below par value | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Non-controlling interest | ||||||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities, mezzanine debt and stockholders’ deficit | $ | $ | ||||||
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 September 30, 2021 | Three
months ended September 30, 2020 | Nine
months ended September 30, 2021 | Nine
months ended September 30, 2020 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Rental expense | ||||||||||||||||
| Management fee reversal | ( | ) | ( | ) | ||||||||||||
| Professional fees | ||||||||||||||||
| Salaries and wages | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating Income (Loss) | ( | ) | ( | ) | ||||||||||||
| Other Income (expense) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Gain on debt extinguishment | ||||||||||||||||
| Penalty on convertible debt | ( | ) | ||||||||||||||
| Loss on advance | ( | ) | ||||||||||||||
| Warrant exercise | ( | ) | ( | ) | ( | ) | ||||||||||
| Fair value of warrants granted to convertible debt holders | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Amortization of debt discount | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Derivative liability movement | ( | ) | ( | ) | ||||||||||||
| Foreign exchange movements | ( | ) | ||||||||||||||
| Net income (loss) before taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Taxes | ||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss attributable to non-controlling interest | ||||||||||||||||
| Net income (loss) attributable to parent | ( | ) | ( | ) | ( | ) | ||||||||||
| Preferred stock dividend | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) available to common stockholders | ( | ) | ( | ) | ( | ) | ||||||||||
| Accumulated other comprehensive (loss) income | ||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | ||||||||||
| Total comprehensive income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Earnings (loss) per share | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
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, 2020 | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||||||||||
| Fair value of warrants issued to convertible debt holders | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Warrants exercised | — | ( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible notes | — | ( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Dividends accrued | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||||||||||
| Fair value of warrants issued to convertible debt holders | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Warrants exercised | — | ( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible notes | — | ( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Dividends accrued | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||||||||||
| Warrants exercised | — | ( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible notes | — | ( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued in consideration of acquisition | — | ( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Fair value of non-controlling interest on acquisition of subsidiary | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | ( |
) | |||||||||||||||||||||||||||||||||||||||||
| Dividends accrued | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||||||||||
3
| Preferred Series A | Preferred Series B | Common | Discount | Additional | Comprehensive | Accumulated | Controlling shareholders | Non-controlling | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Par Value | Capital | Income | Deficit | interest | interest | Total | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| Exercise of warrants | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for commitment fees | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible notes | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2020 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible notes | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Extinguishment of debt | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement of liabilities | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends accrued | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends accrued | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||||||||
4
ETHEMA HEALTH CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
| Nine
months ended September 30, 2021 | Nine
months ended September 30, 2020 | |||||||
| Operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustment to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Gain on debt extinguishment | ( | ) | ||||||
| Non-cash interest accrual on escrow deposit | ( | ) | ||||||
| Warrant exercise | ||||||||
| Non-cash interest converted to equity | ||||||||
| Shares issued for services | ||||||||
| Fair value of warrants granted | ||||||||
| Amortization of debt discount | ||||||||
| Unrealized foreign exchange gain | ( | ) | ||||||
| Derivative liability movements | ( | ) | ||||||
| Movement in receivables reserve | ( | ) | ||||||
| Non-cash deferred tax movements | ( | ) | ||||||
| Amortization of right of use asset | ||||||||
| Changes in operating assets and liabilities (net of assets acquired and liabilities assumed) | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Operating lease liability | ( | ) | ||||||
| Taxes payable | ||||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Investing activities | ||||||||
| Acquisition of subsidiary, net of cash of $60,324 | ||||||||
| Other investments | ( | ) | ||||||
| Acquisition of property, plant and equipment | ( | ) | ||||||
| Deposit refunded | ||||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
| Financing activities | ||||||||
| Repayment of bank overdraft | ( | ) | ||||||
| Repayment of mortgage loans | ( | ) | ( | ) | ||||
| Proceeds from convertible loans | ||||||||
| Repayment of convertible loans | ( | ) | ( | ) | ||||
| Proceeds from federal assistance loans | ||||||||
| Proceeds from short term loans | ||||||||
| Repayment of short term loans | ( | ) | ||||||
| Dividends paid | ( | ) | ||||||
| Proceeds from related party notes | ||||||||
| Repayment of related party notes | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate on cash | ( | ) | ( | ) | ||||
| Net change in cash | ( | ) | ||||||
| Beginning cash balance | ||||||||
| Ending cash balance | $ | $ | ||||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing activities | ||||||||
| Fair value of warrants issued | $ | $ | ||||||
| Shares issued in consideration of acquisition | $ | |||||||
| Conversion of convertible notes | $ | |||||||
| Settlement of liabilities | $ | |||||||
| Fair value of non-controlling interest | ||||||||
5
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Nature of business |
Ethema Health Corporation (the “Company”) was incorporated under the laws of the state of Colorado, USA, on April 1, 1993. Effective April 4, 2017, the Company changed its name to Ethema Health Corporation and prior to that, on May 2012, the Company had changed its name to Greenstone Healthcare Corporation from Nova Natural Resources Corporation. As of December 31, 2017, the Company owned 100% of the outstanding shares of Greenstone Clinic Muskoka Inc., incorporated in 2010 under the laws of the Province of Ontario, Canada; Cranberry Cove Holdings Ltd., incorporated on January 9, 2004 under the laws of the Province of Ontario, Canada; Addiction Recovery Institute of America (“ARIA”) (formerly Seastone Delray Healthcare, LLC), incorporated on May 17, 2016 under the laws of Florida, USA; and Delray Andrews RE, LLC, incorporated on May 17, 2016 under the laws of Florida, USA.
During December 2016, the Company obtained a license to operate and provide addiction treatment healthcare services in Florida, USA. The company commenced operations under this license with effect from January 2017.
On February 14, 2017, the Company completed a series of transactions (referred to collectively as the “Restructuring Transactions”), including a Share Purchase Agreement (the “SPA”) whereby the Company acquired 100% of the stock of CCH, which holds the real estate on which the Company previously operated a rehabilitation clinic (“the Canadian Rehab Clinic”). The Company entered into an Asset Purchase Agreement (the “APA”) and lease (the “Lease”) whereby the Company sold all of the Canadian Rehab Clinic business assets and leased the real estate to the buyer. Simultaneously with this transaction, the Company entered into a Real Estate Purchase agreement and Asset Purchase Agreement whereby the Company purchased the real estate and business assets of Seastone Delray (the “Florida Purchase”).
The Share Purchase Agreement
Under the SPA, the Company acquired 100% of the stock of CCH from Leon Developments Ltd. (“Leon Developments”), a company wholly owned by Shawn E. Leon, who is the President, CEO, and CFO of the Company (“Mr. Leon”). CCH owns the real estate on which the Canadian Rehab Clinic is located. The total consideration paid by the Company was CDN$3,517,062, including the assumption of certain liabilities of CCH, which was funded by the assignment to Leon Developments of certain indebtedness owing to the Company in the amount of CDN$659,918, and the issuance of 60,000,000 shares of the Company’s common stock to Leon Developments, valued at US$0.0364 per share.
The Asset Purchase Agreement and Lease
Under the APA, the assets of the Canadian Rehab Clinic were sold by the Company, through its subsidiary, Greenstone Clinic Muskoka Inc. (“Muskoka”), to Canadian Addiction Residential Treatment LP (the “Purchaser”), for a total consideration of CDN$10,000,000. The proceeds of the Muskoka clinic asset sale were used to pay down certain tax debts and operational costs of the Company and to fund the Florida Purchase, mentioned below.
Through the APA, substantially all of the assets of the Canadian Rehab Clinic were sold, leaving Ethema with only the underlying clinic real estate, which the Company, through its newly acquired subsidiary, CCH, concurrently leased to the Purchaser. The Lease is a triple net lease and provides for a five (5) year primary term with three (3) five-year renewal options, annual base rent for the first year at CDN$420,000 with annual increases, an option to tenant to purchase the leased premises and certain first refusal rights.
The Florida Purchase
Immediately after closing on the sale of the assets of the Canadian Rehab Clinic, the Company closed on the acquisition of the real estate assets of Seastone Delray pursuant to certain real estate and asset purchase agreements The purchase price for the Seastone assets was US$6,070,000, financed with a purchase money mortgage of US$3,000,000, and US$3,070,000 in cash.
On April 2, 2019, the Company disposed of the real property located at 801 Andrews Avenue, Delray Beach for gross proceeds of $3,500,000.
Since June 30, 2020, the Company has been actively involved in the operation of a treatment center operated by Evernia Health Center LLC (“Evernia”) at 950 Evernia Street, West Palm Beach Florida. On July 1, 2021, the Company closed on an acquisition, purchasing 75% of the equity of American Treatment Holdings, Inc. (“ATHI”). ATHI owns 100% of the equity of Evernia. The company has been financing the operations of Evernia since June 2020. Evernia is the only treatment center of the Company.
6
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Summary of significant accounting policies |
Financial Reporting
The (a) unaudited condensed consolidated balance sheets as of September 30, 2021, which have been derived from the unaudited condensed consolidated financial statements, and as of December 31, 2020, which have been derived from audited consolidated financial statements, and (b) the unaudited condensed consolidated statements of operations and cash flows of the Company, have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of results that may be expected for the year ending December 31, 2021. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on April 15, 2021.
All amounts referred to in the notes to the unaudited condensed consolidated financial statements are in United States Dollars ($) unless stated otherwise.
| a) | Use of Estimates |
The preparation of condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
| b) | Principals of consolidation and foreign currency translation |
The accompanying condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. 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 nine months ended September 30, 2021, a closing rate of CDN$1.0000 equals US$0.7849 and an average exchange rate of CDN$1.0000 equals US$0.78937. For the nine months ended September 30, 2020, a closing rate of CAD$1.0000 equals US$0.7497 and an average exchange rate of CAD$1.0000 equals US$0.7507.
7
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Summary of significant accounting policies (continued) |
| 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) | 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.
| e) | 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.
| f) | Accounts receivable |
Accounts receivable primarily consists of amounts due from third-party payors (non-governmental) and private pay patients and is recorded net of allowances for doubtful accounts and contractual discounts. The Company’s ability to collect outstanding receivables is critical to its results of operations and cash flows. Accordingly, accounts receivable reported in the Company’s 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.
8
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Summary of significant accounting policies (continued) |
| g) | 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.
| h) | Property and equipment |
Property and equipment is recorded at cost. Depreciation is calculated on the straight line basis over the estimated life of the asset.
| i) | 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.
9
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Summary of significant accounting policies (continued) |
| j) | 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.
| k) | 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.
| l) | 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.
10
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Summary of significant accounting policies (continued) |
| m) | 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.
| n) | 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 $
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. |
11
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Summary of significant accounting policies (continued) |
| o) | 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.
| p) | 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).
| q) | Stock based compensation |
Stock based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the employee’s requisite service period or vesting period on a straight-line basis. Share-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. This estimate will be revised in subsequent periods if actual forfeitures differ from those estimates. We have minimal awards with performance conditions and no awards dependent on market conditions.
12
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Summary of significant accounting policies (continued) |
| r) | 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 September 30, 2021 and December 31, 2020.
| i. | Credit risk |
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Financial instruments that subject the Company to credit risk consist primarily of accounts receivable.
Credit risk associated with accounts receivable is mitigated as only a percentage of the revenue billed to health insurance companies is recognized as income until such time as the actual funds are collected. The revenue is concentrated amongst several health insurance companies located in the US.
In the opinion of management, credit risk with respect to accounts receivable is assessed as low.
| ii. | Liquidity risk |
Liquidity
risk is the risk the Company will not be able to meet its financial obligations as they fall due. The Company is exposed to
liquidity risk through its working capital deficiency of $
| 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 September 30, 2021. In the opinion of management, interest rate risk is assessed as moderate.
| b. | Currency risk |
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is subject to currency risk as it has subsidiaries that operate in Canada and are subject to fluctuations in the Canadian dollar. A substantial portion of the Company’s financial assets and liabilities are denominated in Canadian dollars. Based on the net exposures at September 30, 2021, a 5% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an approximate $4,512 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.
13
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Summary of significant accounting policies (continued) |
| s) | Recent accounting pronouncements |
The FASB issued several additional updates during the period, none of these standards are either applicable to the Company or require adoption at a future date and none are expected to have a material impact on the consolidated financial statements upon adoption.
| 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 year and 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 September 30, 2021 the Company has a working capital deficiency of $15,440,821, including derivative liabilities of $1,782,072 and accumulated deficit of $45,978,688 45,978,688. Management believes that current available resources will not be sufficient to fund the Company’s planned expenditures over the next 12 months. Accordingly, the Company will be dependent upon the raising of additional capital through placement of common shares, and/or debt financing in order to implement its business plan and generating sufficient revenue in excess of costs. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain geographical areas, or techniques that it might otherwise seek to retain. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. These consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue operations.
The ability of the Company to continue as a going concern is dependent on the Company generating cash from the sale of its common stock or obtaining debt financing and attaining future profitable operations. Management’s plans include selling its equity securities and obtaining debt financing to fund its capital requirements and ongoing operations; however, there can be no assurance the Company will be successful in these efforts.
These factors create substantial doubt about the Company’s ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities or other adjustments that may be necessary should the Company not be able to continue as a going concern.
14
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 4. | Acquisition of subsidiaries |
On June 30, 2020, the Company entered into an agreement whereby the Company will acquire 51% of American Treatment Holdings, Inc. (“ATHI”) from The Q Global Trust (“Seller”) and Lawrence B Hawkins (“Hawkins”), which in turn owns 100% of Evernia Health Services LLC. (“Evernia”), which operates drug rehabilitation facilities. The consideration for the acquisition is a loan to be provided by the purchaser to Evernia in the amount of $500,000. As of 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 $25,000 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.
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:
| Schedule of Recognized Identified Assets Acquired and Liabilities Assumed | ||||
| Amount | ||||
| Consideration | ||||
| Cash | ||||
| 100,000,000 shares of common stock at fair market value | ||||
| Total purchase consideration | $ | |||
| Recognized amounts of identifiable assets acquired and liabilities assumed | ||||
| Cash | ||||
| Other Current assets | ||||
| Property, plant and equipment | ||||
| Right of use asset | ||||
| Intangibles | ||||
| Total assets | ||||
| Less: liabilities assumed | ||||
| Current liabilities assumed | ( | ) | ||
| Intercompany advance | ( | ) | ||
| Operating lease liabilities assumed | ( | ) | ||
| Imputed Deferred taxation on identifiable intangible acquired | ( | ) | ||
| Total liabilities | ( | ) | ||
| Net identifiable assets acquired and liabilities assumed | ||||
| Fair value of non-controlling interest | ( | ) | ||
| $ | ||||
15
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 4. | Acquisition of subsidiaries (continued) |
The amount of revenue and earnings include in the Company’s consolidated statement of operations and comprehensive income (loss) for the nine months ended September 30, 2021 and the revenue and earnings of the combined entity had the acquisition date been January 1, 2020. Evernia only began operations in June 2020.
| Schedule of Accumulated Other Comprehensive Income | ||||||||
| Revenue | Earnings | |||||||
| Actual from July 1, 2021 to September 30, 2021 | $ | $ | ( | ) | ||||
| 2021 Supplemental pro forma from January 1, 2021 to September 30, 2021 | $ | $ | ( | ) | ||||
| 2020 Supplemental pro forma from inception to September 30, 2020 | $ | $ | ( | ) | ||||
The 2021 and 2020 Supplemental pro forma earnings information was adjusted to account for amortization of intangibles on acquisition of $178,990 and $268,485, respectively.
| 5. | Other current assets |
Other current assets includes the following:
On February 25, 2019, the Company entered into a Letter of Intent whereby it would purchase a 33.33% interest in Local Link Wellness, LLC (“LLW”) for gross proceeds of $400,000. LLW proposes to provide a comprehensive addiction treatment program to large employee groups. The Company has advanced LLW a total of $120,000 at September 30, 2021. These funds were advanced as short-term promissory notes that are immediately due and payable.
The Company has no intention to close on the purchase of LLW, and management recorded a full reserve against this advance as they believe it is not recoverable.
| 6. | Other investments |
On June 30, 2020, the Company entered into an agreement whereby the Company will acquire 51% of Behavioral Health Holdings, Inc. (“BHHI”) from The Q Global Trust (“Seller”) and Lawrence B Hawkins, which in turn owns 100% of Peace of Mind Counseling Services, Inc. (“PMCS”), which operates drug rehabilitation facilities. The Company has decided not to pursue the acquisition of BHHI.
| 7. | Due on sale of business |
On February 14, 2017, the Company sold its Canadian Rehab Clinic for gross proceeds of CDN$10,000,000, of which CDN$1,500,000 had been retained in an escrow account for a period of up to two years in order to guarantee the warranties provided by the Company in terms of the APA. As of September 30, 2021, CDN$1,055,042 of the escrow had been refunded to the Company and CDN$461,318 had been used to affect building improvements to the premises owned by CCH, for a total reduction of CDN$1,516,360. The remaining escrow balance was CDN$6,485 (approximately US$ 5,090).
16
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 8. | Property and equipment |
Property and equipment consists of the following:
| Schedule of property and equipment | ||||||||||||||||
| September
30, 2021 | December 31, 2020 | |||||||||||||||
| Cost | Accumulated depreciation | Net book value | Net book value | |||||||||||||
| Land | $ | $ | $ | $ | ||||||||||||
| Property | ( | ) | ||||||||||||||
| Leasehold improvements | ( | ) | ||||||||||||||
| Furniture and fittings | ( | ) | ||||||||||||||
| Vehicles | ( | ) | ||||||||||||||
| $ | $ | ( | ) | $ | $ | |||||||||||
Depreciation
expense for the nine months ended September 30, 2021 and 2020 was $
| 9. | 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:
| Schedule of Impaired Intangible Assets | ||||||||||||||||
| September
30, 2021 |
December 31, 2020 | |||||||||||||||
| Cost | Accumulated amortization | Net book value | Net book value | |||||||||||||
| Health care Provider license | $ | $ | $ | $ | ||||||||||||
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 $
| 10. | Leases |
The Company acquired ATHI on July 1, 2021, ATHI’s wholly owned subsidiary had entered into am operating lease agreement for certain real property located at 1590 S. Congress Avenue, West Palm Beach, Florida, with effect from February 1, 2019 for a period of three years, expiring on 1 February 2022. Under the terms of the lease agreement, the lease was extended during October 2021 for a further 5 year period until 1 February 2027.
To determine the present value of minimum future lease payments for operating leases at February 1, 2019, the Company was required to estimate a rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment (the "incremental borrowing rate" or "IBR").
The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, the Company used the average of (i) the five year ARM interest rate as quoted by Freddie Mac adjusted for a risk premium of 20% The Company determined was 4.64% as an appropriate incremental borrowing rate to apply to its real-estate operating lease.
17
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 10. | Leases (continued) |
Right of use assets are included in the consolidated balance sheet are as follows:
| Condensed Balance Sheet | ||||||||
| September
30, 2021 | December
31, 2020 | |||||||
| Non-current assets | ||||||||
| Right of use assets - operating leases, net of amortization | $ | $ | ||||||
Lease costs consists of the following:
| Lease, Cost | ||||||||
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating lease cost | $ | $ | ||||||
Other lease information:
| Operating Lease, Lease Income | ||||||||
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flows from operating leases | ( | ) | ( | ) | ||||
| Weighted average remaining lease term – operating leases | — | |||||||
| Discount rate – operating leases | % | — | % | |||||
Maturity of Leases
Operating lease liability
The amount of future minimum lease payments under operating leases are as follows:
| Schedule of Future Minimum Lease Payments | ||||
| Amount | ||||
| Remainder of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 and thereafter | ||||
| Total undiscounted minimum future lease payments | ||||
| Imputed interest | ( | ) | ||
| Total operating lease liability | $ | |||
| Disclosed as: | ||||
| Current portion | $ | |||
| Non-Current portion | ||||
| Lease liability | $ | |||
18
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 11. | Taxes Payable |
The taxes payable consist of:
| ● | A payroll tax liability of $143,309 (CDN$182,589) in Greenstone Muskoka which has not been settled as yet. | |
| ● | A GST/HST tax payable of $110,467 (CDN$140,747). | |
| ● | The Company has assets and operates businesses in Canada and is required to disclose these operations to the US taxation authorities, the requisite disclosure has not been made. Management has reserved the maximum penalty due to the IRS in terms of non-disclosure. This noncompliance with US disclosure requirements is currently being addressed. An amount of $250,000 has been accrued for any potential exposure the Company may have. |
| Taxes Payable | ||||||||
| September
30, 2021 | December
31, 2020 | |||||||
| Payroll taxes | $ | $ | ||||||
| HST/GST payable | ||||||||
| US penalties due | ||||||||
| Income tax payable | ||||||||
| Taxes Payable | $ | $ | ||||||
| 12. | Short-term Convertible Notes |
The short-term convertible notes consist of the following:
| Short term convertible notes | ||||||||||||||||||||||||||
| Interest rate | Maturity Date | Principal | Interest | Debt Discount | September 30, 2021 | December 31, 2020 | ||||||||||||||||||||
| Leonite Capital, LLC | % | — | $ | $ | $ | $ | $ | |||||||||||||||||||
| % | On Demand | |||||||||||||||||||||||||
| First Fire Global Opportunities Fund | % | |||||||||||||||||||||||||
| Auctus Fund, LLC | % | On Demand | ||||||||||||||||||||||||
| % | ||||||||||||||||||||||||||
| Labrys Fund, LP | % | ( | ) | |||||||||||||||||||||||
| % | ( | ) | ||||||||||||||||||||||||
| % | ( | ) | ||||||||||||||||||||||||
| Ed Blasiak | % | |||||||||||||||||||||||||
| Joshua Bauman | % | |||||||||||||||||||||||||
| Geneva Roth Remark Holdings, Inc. | % | |||||||||||||||||||||||||
| % | ||||||||||||||||||||||||||
| % | ||||||||||||||||||||||||||
| Series N convertible notes | % | On Demand | ||||||||||||||||||||||||
| $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
19
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 12. | Short-term Convertible Notes (continued) |
Leonite Capital, LLC
Convertible Promissory Notes
On December 1, 2017, the Company closed on a private offering to raise US $1,500,000 in capital. The Company issued one senior secured convertible promissory note with a principal amount of $1,650,000 to Leonite Capital, LLC (“Leonite”). The note is convertible into shares of common stock at a conversion price of $0.06 per share, subject to anti-dilution and price protection. The Note bears interest at the rate of 8.5% per annum. The Note’s amended maturity date was December 1, 2018. During the term of the Note the Company and the Subsidiaries was obligated to make monthly payment of accrued and unpaid interest. The Note contains Company and Subsidiary representations and warranties, covenants, events of default, and registration rights. The Company paid a commitment fee of $132,000 settled through the issue of 1,650,000 shares of common stock and paid $20,000 towards the lenders legal fees. In conjunction with this note, the Company issued a five year warrant to purchase 27,500,000 shares of common stock at an exercise price or $0.10 per share, subject to anti-dilution and price protection.
The Note provided that the parties use reasonable best efforts to close on the remaining $1,200,000 of availability under the Note by January 1, 2018. As a condition to the closing of the Balance Tranche, the parties must finalize and enter into additional agreements related to the Private Offering, including, but not limited to, (i) a Securities Purchase Agreement; (ii) a Warrant Agreement under which the Investor will have the right to purchase up to 27,500,000 shares of the Company’ common stock for $0.10 per share, subject to adjustment, for a period of five years; (iii) a Securities Pledge Agreement under which the Company and the Subsidiaries will grant the lender a blanket lien on their assets, and the Company will pledge its equity ownership in the Subsidiaries. Upon the closing of the Balance Tranche the maturity date of the Note was to become December 1, 2018.
On December 29, 2017, effective as of December 1, 2017, the Company and the Subsidiaries entered into an Amended and Restated Senior Secured Convertible Promissory Note, which note amended and restated the Note to (a) extend the maturity date to December 1, 2018; (b) remove CCH, as an obligor; (c) increase the interest rate by 2.00% per annum, to 8.5% per annum; and (d) issue an additional 250,000 shares of the Company’s common stock to the Investor. In connection with the execution of the amendment, the parties entered into (i) a Securities Purchase Agreement; (ii) a Warrant Agreement under which the Investor will have the right to purchase up to 27,500,000 shares of the Company’ common stock for $0.10 per share, subject to adjustment, for a period of five years; (iii) a Security and Pledge Agreement and a General Security Agreement under which the Company and the Subsidiaries will grant the Investor a blanket lien on their assets, and the Company will pledge its equity ownership in the Subsidiaries; effective January 2, 2018.
At the execution of the Note, the Investor funded an initial tranche of $300,000. Thereafter the Investor funded a second tranche of $156,136. Upon the execution of the A&R Note the Investor funded a third tranche of $100,000. Upon the execution of the First Amendment the Investor funded a final tranche of $850,000, with the remaining $93,764 of availability under the A&R Note, as amended, serving as a holdback pursuant to the terms of the First Amendment.
On March 29, 2018, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $165,000, including an Original Issue Discount of $15,000, for net proceeds of $150,000. The note had a maturity date of December 1, 2018 and bears interest at a rate of 8.5% per annum. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser following the issue date into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to anti-dilution and price protection. The Company paid a commitment fee of $11,550 settled through the issue of 165,000 shares of common stock. In conjunction with this note the Company issued a five year warrant to purchase 5,500,000 shares of common stock at an exercise price of $0.10 per share, subject to anti-dilution and price protection.
20
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 12. | Short-term Convertible Notes (continued) |
Leonite Capital, LLC (continued)
Convertible Promissory notes (continued)
On April 17, 2018, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $605,000, including an Original Issue Discount of $55,000, for net proceeds of $550,000. The note had a maturity date of December 1, 2018 and bears interest at 8.5% per annum. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser following the issue date into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to price protection and anti-dilution protection. The Company paid a commitment fee of $42,350 settled through the issue of 10,083,333 shares of common stock. In conjunction with this note the Company issued a five year warrant to purchase 10,083,333 shares of common stock at an exercise price of $0.10 per share, subject to anti-dilution and price protection.
On January 17, 2019, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $71,111, including an Original Issue Discount of $7,111, for net proceeds of $64,000. The note had a maturity date of July 25, 2019 and bears interest at 11.0% per annum. The outstanding principal amount of the note was convertible at any time and from time to time at the election of the purchaser following the issue date into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to price protection and anti-dilution protection. The Company paid a commitment fee of $4,978 settled through the issue of 71,111 shares of common stock. In conjunction with this note the Company issued a five year warrant to purchase 1,185,183 shares of common stock at an exercise price of $0.10 per share, subject to anti-dilution and price protection.
Effective March 19, 2019, the Company entered into a note extension agreement with Leonite, whereby the convertible notes outstanding to Leonite, amounting to $2,420,000, for consideration of $75,000 added to the principal outstanding on the note on January 1, 2019, a further $75,000 added to the principal outstanding on the note on February 1, 2019 and a further $100,000 added to the principal of the note on March 15, 2019, the maturity date of all of the convertible notes above were extended to December 31, 2019 and has subsequently been partially settled by the transfer of the property located at 810 Andrews Avenue, Delray Beach, Florida, valued at $1,500,000.
On August 26, 2019, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $60,000, including an Original Issue Discount of $10,000, for net proceeds of $47,000. The note had a maturity date of September 10, 2019 and bears interest at 1.0% per annum. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser following the issue date into shares of the Company’s common stock at a conversion price equal to $0.06 per share subject to price protection and anti-dilution protection. In conjunction with this note the Company issued a five year warrant to purchase 1,000,000 shares of common stock at an exercise price of $0.10 per share, subject to anti-dilution and price protection.
On October 10, 2019, the Company transferred a warranty deed to the real property located at 810 Andrews Avenue, Delray Beach, Florida to Leonite Capital LLC, in settlement of indebtedness of $1,398,514 and additional expenses related to the disposal of the property of $36,470. These expenses of $36,470 were provided for resulting in net proceeds recognized on the transfer of the property of $1,362,044.
On July 12, 2020, the company entered into a debt extinguishment agreement with Leonite whereby the following occurred:
| 1. | The total amount outstanding under the note, including principal and interest was reduced to $150,000 | |
| 2. | $700,000 of the note was converted into Series A Redeemable Preferred shares in the Company’s subsidiary, Cranberry Cove Holdings, accruing dividends at 10% per annum. | |
| 3. | $400,000 of the note was converted into series B Preferred stock in the Company for a 12 month period, mandatorily redeemable by the Company accruing dividends at 6% per annum payable in cash or stock, subject to certain conditions. | |
| 4. | The remaining balance of $150,000 will accrue interest at 8.5% per annum and is convertible into common stock and repayable in 6 monthly installments of $25,000 commencing after December 12, 2020. | |
| 5. | The existing warrants were cancelled and a new five year warrant, with a cashless exercise option, exercisable for a minimum of 326,286,847 shares of common stock and a maximum of 20% of the outstanding equity of the Company at an initial exercise price of $0.10 per share subject to adjustment based on new stock issuances or the lowest volume weighted exercise price of the stock for 30 days immediately preceding the exercise was issued to Leonite. |
21
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 12. | Short-term Convertible Notes (continued) |
Leonite Capital, LLC (continued)
Convertible Promissory Notes (continued)
On December 28, 2020, Leonite converted $80,000 plus accrued interest of $5,949 of the Leonite loan amended on July 12, 2020, into 96,331,811 shares of common stock at a conversion price of $0.0009, thereby realizing a loss on conversion of $240,616. On January 8, 2021, Leonite converted the remaining principal amount of $70,000, plus accrued interest thereon of $137, into 78,763,466 shares of common stock at a conversion price of $0.0009 per share.
On July 12, 2020, the Company entered into a Senior Secured Convertible Note agreement with Leonite for $440,000 with an original issue discount of $40,000 for gross proceeds of $400,000, the initial tranche advanced will be for cash of $200,000 plus the OID of $20,000, the remaining advances will be at the discretion of the Leonite. The loan bears interest at 6.5% per annum and matures on June 12, 2021. The Company is required to make monthly payments of the accrued interest on the advances made. The note is convertible into common shares at the option of the holder at $0.10 per share, or 80% multiplied by the price per share paid in subsequent financings or after a six month period from the effective date at 60% of the lowest trading price during the preceding 21 consecutive trading days. The note has both conversion price protection and anti-dilution protection provisions.
On July 12, 2020, the Company entered into a five year option agreement with Leonite Capital LLC (“Leonite”) and other investors (collectively the “Transferees”), the Company agreed to sell to Leonite a portion of the total outstanding shares of ATHI from the shares of ATHI held by the company. The Company has provided Leonite an option to purchase 33% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that Leonite made to the Company totaling $655,000. Leonite shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Leonite to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
In terms of clause 3.12 of the Senior secured convertible Promissory Note Agreement (“Leonite Note”) entered into with Leonite and the amendments thereto, the terms of the convertible promissory note issued to Labrys Fund LP on November 30, 2020, as described below, contained terms more favorable than those contained in the Leonite Note, resulting in an adjustment made to the Original issue discount of $4,000 and the issuance of five year warrants exercisable for 145,454,547 shares of common at an exercise price of $0.00205 per share, for all advances made to the Company by Leonite in terms of the Leonite Note, up to and including December 31, 2020.
On January 8, January 22, February 4, and February 19, 2021, Leonite advanced the company an aggregate cash amount of $290,000, including a revised original issue discount of $74,556 for an aggregate principal sum added to the Leonite Note of $364,556.
On March 3, 2021, in terms of a conversion notice, Leonite converted the principal sum of $82,681 and interest thereon of $12,319 of the Leonite Note into 97,000,000 shares of common stock at a conversion price of $0.0009 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.
22
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 12. | Short-term Convertible Notes (continued) |
Power Up Lending Group LTD
On July 8, 2019, the Company entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $53,000. The Note had a maturity date of April 30, 2020 and bore interest at the rate of nine percent per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company had the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note was convertible at any time and from time to time at the election of Power Up during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion.
Between January 10, 2020 and January 24, 2020, in terms of conversion notices received, Power Up converted the aggregate principal amount of $53,000 and interest thereon of $1,085 into 75,618,509 shares of common stock at an average conversion price of $0.000715 per share.
On July 15 2019, the Company, entered into a Securities Purchase Agreement with Power Up, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $83,000. The Note has a maturity date of April 30, 2020 and bore interest at the rate of nine percent per annum from the date on which the Note was issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company had the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note was convertible at any time and from time to time at the election of Power Up during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 61% of the lowest closing bid price of the Company’s common stock for the ten trading days prior to conversion.
Between January 24, 2020 and February 27, 2020, in terms of conversion notices received, Power Up converted the aggregate principal amount of $41,400 into 453,800,493 shares of common stock at an average conversion price of 0.0000912 per share.
On June 1, 2020, The Company repaid the Power Up Lending Group $41,600 in full settlement of the convertible note entered into on July 15, 2019.
First Fire Global Opportunities Fund
On March 5, 2019, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $200,000, for net proceeds of $192,000 after the payment of legal fees and origination fees amounting to $8,000. The note had a maturity date of December 9, 2019. The outstanding principal amount of the note was convertible at any time and from time to time at the election of the purchaser. 180 days after the issued date into shares of the Company’s common stock at the lower of $0.08 per share or 65% of the lowest trade price during the ten consecutive trading days immediately prior to conversion. The note had certain buyback terms if the Company consummated a registered or unregistered primary offering of securities for capital raising purposes, or an option to convert at a 20% discount to the offering price to investors.
Between September 11, 2019 and December 30, 2019, in terms of a conversion notices received, the Company issued 11,887,445 shares of Common stock in settlement of $36,592 of principal outstanding.
Between January 6, 2020 and February 26, 2020, in terms of conversion notices received, First Fire converted an aggregate principal amount of $83,902 into 308,100,000 shares of common stock at an average conversion price of $0.000272 per share.
On June 3, 2020, the Company entered into an agreement with First Fire whereby the remaining balance of the convertible note of $73,006 would be settled by two payments of $25,000 each.
Between July 2, 2020 and August 17, 2020, the Company repaid the remaining principal outstanding of $50,000 plus additional interest charges of $1,500.
23
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 12. | Short-term Convertible Notes (continued) |
First Fire Global Opportunities Fund (continued)
On October 29, 2020, the Company entered into a Securities Purchase Agreement, pursuant to which the Company issued a senior secured convertible promissory note in the aggregate principal amount of $137,500, including an OID of $12,500. The note bears interest at 6.5% per annum and matures on October 29, 2021. The note is senior to any future borrowings and commencing on November 29, 2020 the Company will make monthly payments of the accrued interest under the note. The note may be prepaid at certain prepayment penalties and is convertible into shares of common stock at a conversion price at the option of the holder at $0.001 per share, adjusted for anti-dilution provisions; or 80% of the price per share of subsequent equity financings or; after six months 60% of the lowest trading price during the preceding six month period.
On October 29, 2020, the Company entered into a five year option agreement with First Fire whereby the Company agreed to sell to First Fire a portion of the total outstanding shares of ATHI. The Company provided First Fire an option to purchase 6.25% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that First Fire made to the Company totaling $125,000. First Fire shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by First Fire to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
In terms of clause 3.12 of the Senior secured convertible Promissory Note Agreement (“First Fire Note”) entered into with First Fire, the terms of the convertible promissory note issued to Labrys Fund LP on November 30, 2020, as described below, contained terms more favorable than those contained in the First Fire Note, resulting in an adjustment made to the Original issue discount of $1,389 and the issuance of five year warrants exercisable for 50,505,051 shares of common at an exercise price of $0.00205 per share, for the advance made to the Company by First Fire in terms of the First Fire Note.
On May 10, 2021, the Company repaid the principal outstanding of $138,889, including interest and early settlement penalty thereon for the payment of $164,913.
Auctus Fund, LLC
On August 7 2019, the Company, entered into a Securities Purchase Agreement with Auctus Fund, LLC, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $225,000. The Note had a maturity date of May 7, 2020 and bore interest at the rate of ten percent per annum from the date on which the Note was issued until the same became due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company had the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of Auctus Fund, LLC during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 60% of the lowest closing bid price of the Company’s common stock for the thirty trading days prior to conversion.
On June 15, 2020, The Company entered into an amended agreement with Auctus whereby Auctus agreed to discharge the principal amount of the note by nine equal monthly installments of $25,000 commencing in October 2020. During the nine months ended September 30, 2021, the Company repaid Auctus the principal sum of $50,000.
On August 13, 2020, the Company entered into a Securities Purchase Agreement with Auctus Fund LLC, pursuant to which the Company issued a convertible promissory note in the aggregate principal amount of $100,000 for net proceeds of $85,000 after certain fees and expenses of $15,000. The note has a maturity date of August 13, 2021 and bears interest at 10% per annum. The interest due on the note for the full twelve month period is due immediately upon issuance of the note, regardless of acceleration or prepayment. The principal amount of the note is payable in six monthly instalments of $16,666.66 commencing 180 days after the issuance date, the balance outstanding under the note due at maturity date. In the event a default occurs under the Note, the Note is convertible into shares of common stock at a conversion price equal to the lowest trading price over the prior 5 days prior to the date of the note or the five day volume weighted market price prior to the date of conversion. The Company is required to adhere to certain covenants including covenants concerning distributions of capital stock; restrictions on stock repurchases, additional borrowings sales of assets and loans and advances made by the Company. In conjunction with the issuance of the promissory note, the Company issued a five year warrant exercisable for 66,666,666 shares of common stock at an exercisable price of $0.0015 per share subject to anti-dilution and price protection adjustments. The Company also issued a second five year warrant exercisable for 66,666,666 shares of common stock at an exercisable price of $0.0015 per share subject to anti-dilution and price protection adjustments, which warrants will only be exercisable upon an event of default on the convertible note.
24
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 12. | Short-term Convertible Notes (continued) |
Auctus Fund, LLC (continued)
On March 9, 2021, Auctus exercised its warrant for 66,666,666 shares of common stock on a cashless exercise basis, resulting in the issue of 59,999,999 shares of common stock.
On May 10, 2021, the company settled the remaining balance of the August 13, 2020 convertible promissory with an aggregate principal amount of $95,000, together with interest and settlement penalty thereon for the payment of $110,000.
In addition, on May 10, 2021, the Company paid a further $15,000 of principal on the convertible promissory note entered into on August 7, 2019, thereby reducing the principal outstanding to $100,000.
Labrys Fund, LP
On July 8, 2019, the Company, entered into a Securities Purchase Agreement with Labrys Fund, LP (“Labrys”), pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $282,000 for net proceeds of $253,800 after an original issue discount of $28,200. The Note had a maturity date of January 8, 2020 and bore interest at the rate of twelve percent per annum from the date on which the Note was issued until the same became due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company had the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note was convertible at any time and from time to time at the election of Labrys during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 60% of the lowest closing bid price of the Company’s common stock for the thirty trading days prior to conversion.
In connection with the issuance of the convertible promissory note to Labrys, the Company issued 2,700,000 returnable shares. These shares were returnable if the note was paid prior to maturity date on January 8, 2020. The company had not repaid the note on the maturity date, January 8, 2020, therefore the 2,700,000 shares were recorded as a charge to expense as an additional fee amounting to $165,780, the value of the shares on the date of issuance.
Between January 15, 2020 and February 25, 2020, in terms of conversion notices received, Labrys converted the aggregate principal sum of $8,936 and interest of $19,867 into 479,160,076 shares of common stock at an average conversion price of 0.00006 per share.
On May 15, 2020 the Company entered into an amended agreement with Labrys Fund LP whereby default interest and penalties were waived, no further conversions will be effectuated and the Company committed to make eight equal payments of $25,000 commencing on October 15, 2020, in full settlement of the balance outstanding. No event of default will occur as long as the Company makes all scheduled payments.
Between October 21, 2020 and November 30, 2020, the Company repaid principal of $37,500. The Company was unable to adhere to the amended repayment schedule and default penalty and penalty interest was reinstated.
On November 30, 2020, Labrys converted principal of $235,564 and interest thereon of $20,416 into 91,421,457 shares of common stock, realizing a gain on conversion of $4,571, thereby extinguishing the note.
On November 30, 2020, the Company, entered into a Securities Purchase Agreement with Labrys, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $275,000 for net proceeds of $239,050 after an original issue discount of $27,500 and certain legal expenses. The Note has a maturity date of November 30, 2021 and bears interest at the rate of twelve percent per annum from the date on which the Note was issued until the same became due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note was convertible at any time and from time to time at the election of Labrys during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 60% of the lowest closing bid price of the Company’s common stock for the thirty trading days prior to conversion.
In connection with the issuance of the convertible promissory note to Labrys, the Company granted Labrys a five-year warrant to purchase 100,000,000 shares of common stock at an exercise price of $0.00205 per share. The value of the warrant was accounted for as a debt discount.
25
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 12. | Short-term Convertible Notes (continued) |
Labrys Fund, LP (continued)
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 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.
In connection with the issuance of the convertible promissory note to Labrys, the Company granted Labrys a five-year warrant to purchase 91,666,666 shares of common stock at an exercise price of $0.006 per share. The value of the warrant was accounted for as a debt discount.
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.
In connection with the issuance of the convertible promissory note to Labrys, the Company granted Labrys a five-year warrant to purchase 52,272,727 shares of common stock at an exercise price of $0.0044 per share. The value of the warrant was accounted for as a debt discount.
Ed Blasiak
On September 14, 2020, the Company entered into a Securities Purchase Agreement with Ed Blasiak (“Blasiak”), pursuant to which the Company issued a senior secured convertible promissory note in the aggregate principal amount of $55,000, including an original issue discount of $5,000. The note bears interest at 6.5% per annum and matures on September 14, 2021. The note is senior to any future borrowings and commencing on October 1, 2020 the Company will make monthly payments of the accrued interest under the note. The note may be prepaid at certain prepayment penalties and is convertible into shares of common stock at a conversion price at the option of the holder at $0.001 per share, adjusted for anti-dilution provisions; or 80% of the price per share of subsequent equity financings or; after six months 60% of the lowest trading price during the preceding six month period.
On September 14, 2020, the Company entered into a five year option agreement with Ed Blasiak (“Blasiak”) whereby the Company agreed to sell to Blasiak a portion of the total outstanding shares of ATHI. The Company provided Blasiak an option to purchase 2.5% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that Blasiak made to the Company totaling $50,000. Blasiak shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Blasiak to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
26
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 12. | Short-term Convertible Notes (continued) |
Joshua Bauman
On September 14, 2020, the Company entered into a Securities Purchase Agreement with Joshua Bauman (“Bauman”), pursuant to which the Company issued a senior secured convertible promissory note in the aggregate principal amount of $110,000, including an original issue discount of $10,000. The note bears interest at 6.5% per annum and matures on September 14, 2021. The note is senior to any future borrowings and commencing on October 1, 2020 the Company will make monthly payments of the accrued interest under the note. The note may be prepaid at certain prepayment penalties and is convertible into shares of common stock at a conversion price at the option of the holder at $0.001 per share, adjusted for anti-dilution provisions; or 80% of the price per share of subsequent equity financings or; after six months 60% of the lowest trading price during the preceding six month period.
On October 29, 2020, the Company entered into a five year option agreement entered into with Bauman, so that the Company agreed to sell to Bauman a portion of the total outstanding shares of ATHI. The Company provided Bauman an option to purchase 6.25% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that Bauman made to the Company totaling $125,000. Bauman shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Bauman to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
In terms of clause 3.12 of the Senior secured convertible Promissory Note Agreement (“Bauman Note”) entered into with Joshua Bauman, the terms of the convertible promissory note issued to Labrys Fund LP on November 30, 2020, as described above, contained terms more favorable than those contained in the Bauman Note, resulting in an adjustment made to the Original issue discount of $1,389 and the issuance of five year warrants exercisable for 50,505,051 shares of common at an exercise price of $0.00205 per share, for the advance made to the Company by Bauman in terms of the Bauman Note.
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.
Geneva Roth Remark Holdings, Inc
On October 29, 2020, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $88,000, for net proceeds of $85,000 after the payment of legal fees and origination fees amounting to $3,000. The note has a maturity date of August 29, 2021 and bears interest at the rate of 9.0% per annum. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser. 180 days after the issued date into shares of the Company’s common stock at 61% of the lowest trade price during the ten consecutive trading days immediately prior to conversion. The principal plus the accrued interest of the Note may be prepaid by the Company prior to the expiry of 180 days from issuance date at a prepayment penalty ranging from 112% to 130%.
On November 24, 2020, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $53,000, for net proceeds of $50,000 after the payment of legal fees and origination fees amounting to $3,000. The note has a maturity date of October 15, 2021 and bears interest at the rate of 9.0% per annum. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser. 180 days after the issued date into shares of the Company’s common stock at 61% of the lowest trade price during the ten consecutive trading days immediately prior to conversion. The principal plus the accrued interest of the Note may be prepaid by the Company prior to the expiry of 180 days from issuance date at a prepayment penalty ranging from 112% to 130%.
27
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 12. | Short-term Convertible Notes (continued) |
Geneva Roth Remark Holdings, Inc (continued)
On March 3, 2021, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $53,500, for net proceeds of $50,000 after the payment of legal fees and origination fees amounting to $3,500. The note has a maturity date of January 3, 2022 and bears interest at the rate of 9.0% per annum. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser. 180 days after the issued date into shares of the Company’s common stock at 61% of the lowest trade price during the ten consecutive trading days immediately prior to conversion. The principal plus the accrued interest of the Note may be prepaid by the Company prior to the expiry of 180 days from issuance date at a prepayment penalty ranging from 112% to 130%.
On April 30, 2021 the Company prepaid the note issued on October 29, 2020, to Geneva Roth Remark Holdings, Inc., in the aggregate principal amount of $88,000 including interest and early settlement penalty thereon for a total payment of $119,449.
On May 21, 2021, the Company prepaid the note issued on November 24, 2020 to Geneva Roth Remark Holdings, Inc., in the aggregate principal amount of $53,000 including interest and early settlement penalty thereon for a total payment of $71,907.
On September 8, 2021, the Company prepaid the note issued on March 3, 2021 to Geneva Roth Remark Holdings, Inc., in the aggregate principal amount of $53,500 including interest and early settlement penalty thereon for a total payment of $72,620.
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.
| 13. | 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 April 16, 2021, the Company, entered into a secured Promissory Note in the aggregate principal amount of $30,000 for net proceeds of $25,000 after an original issue discount of $3,000 and fees of $2,000. The Note had a maturity date of April 19, 2021 and bore 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.
The Company repaid the note on April 19, 2021 for $28,889, after a reduction on the fees paid of $1,111.
28
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 13. | Short term loans (continued) |
Leonite Capital, LLC (continued)
Secured Promissory Notes
On April 29, 2021, the Company, entered into a secured Promissory Note in the aggregate principal amount of $46,000 for net proceeds of $40,000 after an original issue discount of $6,000. The Note had a maturity date of May 3, 2021 and bore 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.
The Company repaid the note on May 3, 2021 for $46,000.
On April 30, 2021, the Company, entered into a secured Promissory Note in the aggregate principal amount of $140,000 for net proceeds of $126,000 after an original issue discount of $14,000. The Note had a maturity date of May 7, 2021 and bore 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.
The Company repaid the note on May 10, 2021 for $140,000.
On May 27, 2021, the Company, entered into a secured Promissory Note in the aggregate principal amount of $70,000 for net proceeds of $60,000 after an original issue discount of $10,000. The Note had a maturity date of June 4, 2021 and bore 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.
The Company repaid the note on June 4, 2021 for $70,000.
On September 15, 2021, the Company, entered into a secured Promissory Note in the aggregate principal amount of $60,000 for net proceeds of $50,000 after an original issue discount of $10,000. The Note had a maturity date of September 23, 2021 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.
The note was still outstanding at September 30, 2021.
| 14. | Mortgage loans |
Mortgage loans is disclosed as follows:
| Mortgage loans | ||||||||||||||||||||||
| Interest rate |
Maturity date |
Principal Outstanding |
Accrued interest |
September
30, 2021 |
December
31, 2020 |
|||||||||||||||||
| Cranberry Cove Holdings, Ltd. | ||||||||||||||||||||||
| Pace Mortgage | % | $ | $ | $ | $ | |||||||||||||||||
| Disclosed as follows: | ||||||||||||||||||||||
| Short-term portion | $ | $ | ||||||||||||||||||||
| Long-term portion | ||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||
The aggregate amount outstanding is payable as follows:
| Schedule of maturity of long term debt | ||||
| Amount | ||||
| Within the next twelve months | $ | |||
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.
29
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 15. | Government assistance loans |
On May 10, 2020, the Company was granted a government assistance loan in the aggregate principal amount of $156,782. The loan is forgivable if the Company demonstrates that the proceeds were used for expenses such as employee costs during the pandemic. Should the loan not be forgiven, interest is payable on the loan at the rate of 1% per annum and the principal is repayable and interest is payable over an 18 month period. No payments have been made to date and the Company expects the loan to be forgiven, therefore no interest has been accrued.
On December 1, 2020, CCH was granted a Covid-19 related government assistance loan in the aggregate principal amount of CDN$ 40,000 (Approximately $31,000). the grant is interest free and CDN$ 10,000 is forgivable if the loan is repaid in full by December 31, 2022.
On January 12, 2021, CCH received a further CDN$ 20,000 Covid-19 related government assistance loan. The loan is interest free and if repaid by December 31, 2022, CDN$ 10,000 is forgivable.
On May 3, 2021, a Company subsidiary, Addiction Recovery Institute of America LLC, closed on a second PPP loan through Lendistry for net proceeds of $157,367.
| 16. | 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$160,000 (approximately $131,557).
| 17. | Derivative liability |
The short-term convertible notes issued to convertible note holders disclosed in note 12 above, have variable priced conversion rights with no fixed floor price and will reprice dependent on the share price performance over varying periods of time. This gives rise to a derivative financial liability, which was initially valued at inception of the convertible notes at $109,574 using a Black-Scholes valuation model, after taking into account the value of warrants issued to the convertible note holders.
The
derivative liability is marked-to-market on a quarterly basis. As of September 30, 2021, the derivative liability was valued at $
The following assumptions were used in the Black-Scholes valuation model:
| Schedule of assumption used in Black Scholes | ||||
| Nine
months ended September 30, 2021 |
||||
| Calculated stock price | $ |
|||
| Risk free interest rate | % to | % | ||
| Expected life of convertible notes and warrants | ||||
| expected volatility of underlying stock | % to | % | ||
| Expected dividend rate | % | |||
The movement in derivative liability is as follows:
| Schedule of derivative liability | ||||||||
| September
30, 2021 | December
31, 2020 | |||||||
| Opening balance | $ | $ | ||||||
| Derivative liability mark-to-market on convertible debt extinguishment | ||||||||
| Derivative liability on revised convertible notes and warrants arising from convertible debt extinguishment | ||||||||
| Derivative liability cancelled on debt extinguishment | ( | ) | ( | ) | ||||
| Derivative liability on issued convertible notes | ||||||||
| Fair value adjustments to derivative liability | ( | ) | ||||||
| Closing balance | $ | $ | ||||||
30
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 18. | Related party transactions |
Shawn E. Leon
As of September 30, 2021 and December 31, 2020 the Company had a payable to Shawn Leon of $121,797 and $322,744, respectively. Mr. Leon is a director and CEO of the Company. The balances payable are non-interest bearing and has no fixed repayment terms.
Management fees from prior periods due to Mr. Leon amounting to $259,175, related to Mr. Leon and reflected as a payable to Mr. Leon were reversed during the current period
Due to the current financial position of the Group, Mr. Leon forfeited the management fees due to him for the three and nine months ended September 30, 2021 and for the year ended December 31, 2020.
Leon Developments, Ltd.
As of September 30, 2021 and December 31, 2020, the Company owed Leon Developments, Ltd. $929,369 and $930,307, respectively, for funds advanced to the Company.
Eileen Greene
As of September 30, 2021 and December 31, 2020, the Company owed Eileen Greene, the spouse of our CEO, Shawn Leon, $1,490,507 and $1,558,798, respectively. The amount owing to Ms. Greene is non-interest bearing and has no fixed repayment terms.
All related party transactions occur in the normal course of operations and in terms of agreements entered into between the parties.
| 19. | 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 3,111,047,811 and 2,027,085,665 shares of common stock at September 30, 2021 and December 31, 2020, respectively.
On January 8, 2021, the Company issued 78,763,466 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $70,137.
On March 3, 2021, the Company issued 97,000,000 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $95,000.
On March 9, 2021, the Company received notification of exercise of warrants for 66,666,666 shares on a cashless basis, resulting in the issuance of 59,999,999 shares of common stock valued on the date of issuance at $90,000.
On May 3, 2021, the Company issued 100,000,000 shares of common stock to Labrys in connection with a conversion notice received, converting principal and interest of $90,000.
On May 13 2021, the Company received notification of exercise of warrants for 50,505,051 shares on a cashless basis, resulting in the issuance of 42,353,038 shares of common stock valued on the date of issuance at $86,824.
On June 1, 2021, the Company issued 30,000,000 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $59,250.
31
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 19. | Stockholder’s deficit |
| a) | Common shares (continued) |
On June 8, 2021, the Company issued 106,313,288 shares of common stock to Joshua Bauman in connection with a conversion notice received, converting principal and interest of $105,563.
On June 10, 2021, the Company issued 60,000,000 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $59,250.
On July 1, 2021, in terms of the amendment to the stock Purchase Agreement entered into on June 30, 2020 between the Company and the Q Global Trust, LLC, and American Treatment Holdings, the company issued 100,000,000 shares of common stock thereby closing the transaction and acquiring a controlling interest in American Treatment Holdings.
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 August 6, 2021, the company received a cashless warrant exercise from Labrys, exercising warrants for 100,000,000 shares for net shares of 86,333,333 shares of common stock.
On September 10, 2021, the Company issued 59,259,630 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $60,977.
On September 24, 2021, the company received a cashless warrant exercise from Labrys, exercising warrants for 91,666,666 shares for net shares of 54,999,999 shares of common stock.
On September 24, 2021, the company received a cashless warrant exercise from Labrys, exercising warrants for 60,000,000 shares for net shares of 36,939,393 shares of common stock.
| 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 September 30, 2021 and December 31, 2020, respectively.
| c) | Series B Preferred shares |
Authorized and outstanding
The Company has authorized 400,000 Series B preferred shares with a par value of $1.00 per share. The company has issued and outstanding 400,000 Series B Preferred shares at September 30, 2021 and December 31, 2020, respectively.
| d) | Warrants |
The Secured Promissory Note Agreements entered into with Leonite, First Fire and Bauman contain certain conversion price protection and anti-dilution protection provisions, which were triggered as a result of the terms contained in the promissory note issued to Labrys Fund LP on November 30, 2020. As a result, the Company issued 5five year warrants exercisable for 246,464,649 shares of common stock at an exercise price of $0.00205 per share, for all advances made to the Company by the lenders in terms of the secured Promissory Note Agreements.
Between January 8, 2021 and February 19, 2021, Leonite advanced the Company an additional $290,000 and in terms of clause 3.12 of the Secured Promissory Note Agreement entered into with Leonite, the Company granted Leonite 5five year warrants exercisable for 131,111,112 shares of common stock at an exercise price of $0.00205 per share.
32
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 19. | Stockholder’s deficit (continued) |
| d) | Warrants (continued) |
On March 9, 2021, the Company received a cashless warrant exercise notice, exercising warrants for 66,666,666 shares for net shares of 59,999,999 shares of common stock.
On May 13, 2021, the company received a cashless warrant exercise notice, exercising warrants for 50,505,051 shares for net shares of 42,353,038 shares of common stock.
On May In connection with the issuance of the convertible promissory note to Labrys, the Company granted Labrys a 5five-year warrant to purchase 91,666,666 shares of common stock at an exercise price of $0.006 per share
On June 2, 2021, in connection with the issuance of the convertible promissory note to Labrys, the Company granted Labrys a 5five-year warrant to purchase 52,272,727 shares of common stock at an exercise price of $0.0044 per share.
On August 6, 2021, the company received a cashless warrant exercise from Labrys, exercising warrants for 100,000,000 shares for net shares of 86,333,333 shares of common stock.
On September 10, 2021, the Company issued 59,259,630 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $60,977.
On September 24, 2021, the company received a cashless warrant exercise from Labrys, exercising warrants for 91,666,666 shares for net shares of 54,999,999 shares of common stock.
On September 24, 2021, the company received a cashless warrant exercise from Labrys, exercising warrants for 60,000,000 shares for net shares of 36,939,393 shares of common stock.
A summary of all of the Company’s warrant activity during the period from January 1, 2020 to September 30, 2021 is as follows:
| Options outstanding | |||||||||||
| No. of shares | Exercise
price per share | Weighted average exercise price | |||||||||
| Outstanding as of January 1, 2020 | $ | ||||||||||
| Granted | |||||||||||
| Adjustment due to price protection | |||||||||||
| Forfeited/cancelled | ( | ) | |||||||||
| Granted in terms of debt extinguishment | |||||||||||
| Cancelled as part of debt extinguishment | ( | ) | |||||||||
| Exercised | ( | ) | |||||||||
| Outstanding as of December 31, 2020 | |||||||||||
| Granted | $ | ||||||||||
| Forfeited/cancelled | ( | ) | |||||||||
| Exercised | ( | ) | |||||||||
| Outstanding as of September 30, 2021 | $ | ||||||||||
The warrants granted during the year were valued using a Black Scholes pricing model on the date of grant at $1,732,622 using the following weighted average assumptions:
| Black Scholes pricing model | ||||
Nine months ended September 30, 2021 |
||||
| Calculated stock price | $to | |||
| Risk free interest rate | to | % | ||
| Expected life of warrants | ||||
| expected volatility of underlying stock | to | % | ||
| Expected dividend rate | % | |||
33
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 19. | Stockholder’s deficit (continued) |
| d) | Warrants (continued) |
The volatility of the common stock is estimated using historical data of the Company’s common stock. The risk-free interest rate used in the Black Scholes pricing model is determined by reference to historical U.S. Treasury constant maturity rates with maturities approximate to the life of the warrants granted. An expected dividend yield of zero is used in the valuation model, because the Company does not expect to pay any cash dividends in the foreseeable future.
The following table summarizes information about warrants outstanding at September 30, 2021:
| Warrants outstanding | |||||||||||||||||||||
| 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 | |||||||||||||||||||||
| $0.002050 | |||||||||||||||||||||
| $0.120000 | |||||||||||||||||||||
| $ | $ | ||||||||||||||||||||
All
of the warrants outstanding at September 30, 2021 are vested. The warrants outstanding at September 30, 2021 have an intrinsic value
of $
| e) | Stock options |
Our board of directors adopted the Greenstone Healthcare Corporation 2013 Stock Option Plan (the “Plan”) to promote our long-term growth and profitability by (i) providing our key directors, officers and employees with incentives to improve stockholder value and contribute to our growth and financial success and (ii) enable us to attract, retain and reward the best available persons for positions of substantial responsibility. A total of 10,000,000 shares of our common stock have been reserved for issuance upon exercise of options granted pursuant to the Plan. The Plan allows us to grant options to our employees, officers and directors and those of our subsidiaries; provided that only our employees and those of our subsidiaries may receive incentive stock options under the Plan. We have no issued options at September 30, 2021 under the Plan.
| 20. | Segment information |
The Company has two reportable operating segments:
| a. | Rental income from the property owned by CCH subsidiary located at 3571 Muskoka Road, #169, Bala, on which the operations of the Canadian Rehab Clinic were located prior to disposal on February 14, 2017 and subsequently leased to the purchasers of the business of the Canadian Rehab Clinic, for a period of 5 years renewable for a further three five-year periods and with an option to acquire the property at a fixed price. |
| b. | Rehabilitation Services provided to customers, these services were provided to customers at our Addiction Recovery Institute of America and Seastone of Delray operations. |
34
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 20. | Segment information (continued) |
The segment operating results of the reportable segments for the nine months ended September 30, 2021 is disclosed as follows:
| Segment information | ||||||||||||
| Nine months ended September 30, 2021 | ||||||||||||
| Rental Operations | In-Patient services | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Operating expenses | ||||||||||||
| Operating income | ||||||||||||
| Other (expense) income | ||||||||||||
| Penalty on convertible debt | ( | ) | ( | ) | ||||||||
| Loss on advance | ( | ) | ( | ) | ||||||||
| Warrant exercise | ( | ) | ( | ) | ||||||||
| Fair value of warrants granted to convertible debt holders | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||
| Amortization of debt discount | ( | ) | ( | ) | ||||||||
| Derivative liability movement | ||||||||||||
| Foreign exchange movements | ( | ) | ||||||||||
| Net loss before taxes | ( | ) | ( | ) | ( | ) | ||||||
| Taxes | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
The operating assets and liabilities of the reportable segments as of September 30, 2021 is as follows:
| September 30, 2021 | ||||||||||||
| Rental Operations | In-Patient services | Total | ||||||||||
| Purchase of fixed assets | $ | $ | $ | |||||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Non-current assets | ||||||||||||
| Liabilities | ||||||||||||
| Current liabilities | ( | ) | ( | ) | ( | ) | ||||||
| Non-current liabilities | ( | ) | ( | ) | ( | ) | ||||||
| Mandatory redeemable preferred shares | ( | ) | ( | ) | ||||||||
| Intercompany balances | ( | ) | ||||||||||
| Net liability position | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
35
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 20. | Segment information (continued) |
The segment operating results of the reportable segments for the nine months ended September 30, 2020 is disclosed as follows:
| Nine months ended September 30, 2020 | ||||||||||||
| Rental Operations | In-Patient services | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Operating expenses | ||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ||||||||
| Other (expense) income | ||||||||||||
| Interest income | ||||||||||||
| Gain on debt extinguishment | ||||||||||||
| Exercise of warrants | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||
| Amortization of debt discount | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ||||||||
| Foreign exchange movements | ( | ) | ||||||||||
| Net loss before taxes | ( | ) | ( | ) | ( | ) | ||||||
| Taxes | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
The operating assets and liabilities of the reportable segments is as follows:
| September 30, 2020 | ||||||||||||
| Rental Operations | In-Patient services | Total | ||||||||||
| Assets | ||||||||||||
| Current assets | $ | $ |
| $ | ||||||||
| Non-current assets | ||||||||||||
| Liabilities | ||||||||||||
| Current liabilities | ( | ) | ( | ) | ( | ) | ||||||
| Non-current liabilities | ( | ) | ( | ) | ||||||||
| Intercompany balances | ( | ) | ||||||||||
| Net liability position | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
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ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 21. | Net (loss) income per common share |
For the three months ended September 30, 2021, the computation of basic and diluted earnings per share is calculated as follows:
| Schedule of Earnings Per Share, Basic and Diluted | ||||||||||||
| Number of | Per share | |||||||||||
| Amount | shares | amount | ||||||||||
| Basic earnings per share | ||||||||||||
| Net income per share available for common stockholders | $ | $ | ||||||||||
| Effect of dilutive securities | ||||||||||||
| Warrants | ||||||||||||
| Convertible debt | ||||||||||||
| Diluted earnings per share | ||||||||||||
| Net income per share available for common stockholders | $ | $ | ||||||||||
For the nine months ended September 30, 2021 and the three and nine months ended September 30, 2020, the following warrants and convertible securities were excluded from the computation of diluted net loss per share as the results would have been anti-dilutive.
| Schedule of Anti dilutive Securities Excluded from Computation of Earnings Per Share | ||||||||
| Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||
| Warrants to purchase shares of common stock | ||||||||
| Convertible notes (in shares) | ||||||||
| 22. | Commitments and contingencies |
| a. | Contingency related to outstanding penalties |
The Company has provided for potential US penalties of $250,000 due to non-compliance with the filing of certain required returns. The actual liability may be higher due to interest and penalties assessed by these taxing authorities.
| b. | Mortgage loans |
The company has a mortgage loan as disclosed in note 14 above. The future commitment under this loan is as follows:
| Schedule of commitment and contingencies | ||||
| Amount | ||||
| Within the next twelve months | $ | |||
The Company has principal and interest payment commitments under the Convertible notes disclosed under Note 12 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.
37
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 22. | Commitments and contingencies |
| c. | ATHI Option agreements |
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 33% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that Leonite made to the Company totaling $655,000. Leonite shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Leonite to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
On September 14, 2020, the Company entered into a 5five year option agreement with Ed Blasiak (“Blasiak”) whereby the Company agreed to sell to Blasiak a portion of the total outstanding shares of ATHI. The Company provided Blasiak an option to purchase 2.5% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that Blasiak made to the Company totaling $50,000. Blasiak shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Blasiak to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
On October 29, 2020, the Company entered into a 5five year option agreement with First Fire whereby the Company agreed to sell to First Fire a portion of the total outstanding shares of ATHI. The Company provided First Fire an option to purchase 6.25% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that First Fire made to the Company totaling $125,000. First Fire shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by First Fire to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
On October 29, 2020, the Company entered into a 5five year option agreement entered into with Bauman, so that the Company agreed to sell to Bauman a portion of the total outstanding shares of ATHI. The Company provided Bauman an option to purchase 6.25% of ATHI from the Company for a purchase consideration of $0.0001 per share, based on the advances that Bauman made to the Company totaling $125,000. Bauman shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Bauman to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
| 23. | Subsequent events |
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% due immediately on the issuance ate of the note. per annum. 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.
On October 10, 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.
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.
On October 25, 2021, in terms of a conversion notice received, Joshua Bauman converted the aggregate principal sum of $37,500 and interest thereon of $1,155 into 39,405,310 shares of common stock.
On October 29, 2021, in terms of a conversion notice, Leonite converted the principal sum of $66,667 and interest thereon of $7,978 of the Leonite Note into 83,771,947 shares of common stock.
Other than disclosed above, the Company has evaluated subsequent events through the date the financial statements were issued, other than disclosed above, we did not identify any other subsequent events that would have required adjustment or disclosure in the financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein and the consolidated financial statements and the other information set forth in our Annual Report on Form 10- K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on April 15, 2021. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.
Plan of Operation
During the next twelve months, the Company plans to 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 September 30, 2021 and September 30, 2020.
Revenues
Revenues were $866,432 and $89,829 for the three months ended September 30, 2021 and 2020, respectively, an increase of $776,603 or 864.5%. The revenue from in-patient services related to Evernia was $774,577 and $0 for the three months ended September 30, 2021 and 2020, Evernia was acquired on July 1, 2021. The revenue from rental properties was $91,855 and $89,829 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 $747,468 and $117,276 for the three months ended September 30, 2021 and 2020, respectively, an increase of $630,192 or 537.4%. The increase is primarily due to the following:
| ● | Operating expenses related to ATHI and Evernia was $881,507 for the three months ended September 31, 2021, Evernia was acquired on July 1, 2021. Included in Evernia operating expenses is payroll costs of $391,277, outside contractors fees of $62,972, advertising and promotion costs of $56,607 management fees of $30,000, rental expenses of $87,874, and depreciation and amortization expenses of $94,354, which relate primarily to the amortization of intangibles. |
| ● | General and administrative expenses, excluding ATHI and Evernia was $8,466 and $11,991 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $3,525 or 29.4%. the amount is immaterial. |
| ● | Rent expense, excluding ATHI and Evernia was $0 and $1,500 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $1,500 or 100.0%. This amount is immaterial. |
| ● | Management fees, excluding ATHI and Evernia was $(259,175) and $0 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $259,175 or 100.0%. Management fees accrued to payables to our CEO were reversed during the current period as these fees have not been paid for several years. |
| ● | Professional fees, excluding ATHI and Evernia was $55,425 and $40,478 for the three months ended September 30, 2021 and 2020, respectively, an increase of $14,947 or 36.9%. The increase is primarily due to an increase in accounting fees in the current period versus the prior period. |
| ● | Salaries and wages, excluding ATHI and Evernia was $23,946 and $31,297 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $7,351 or 23.5%, the decrease is due to a reduction in administrative personnel at corporate office. |
| ● | Depreciation expense, excluding ATHI and Evernia was $31,604 and $32,010 for the three months ended September 30, 2021 and 2020, a decrease of $406 or 1.3%, the decrease is primarily due to fluctuations in the exchange rate as all depreciable assets are denominated in Canadian Dollars. |
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Operating Income (loss)
The operating income was $118,964 and the operating loss was $(27,447) for the three months ended September 30, 2021 and 2020, respectively, an increase of $146,411 or 533.4%. The improvement in operating income is due to the operating loss realized in ATHI and Evernia of $(106,930), offset primarily by the reversal of management fees of $259,175, as discussed above.
Warrant exercise
Warrant exercise was $581,516 and $0 for the three months ended September 30, 2021 and 2020, respectively, an increase of $581,516 or 100.0%. During the current period warrant holders exercised warrants for 243,939,393shares of common stock resulting in the expense of $581,516 for the issue of 178,272,725 shares of common stock, on a cashless basis.
Interest expense
Interest expense was a credit of $29,052 and a charge of $124,972 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $95,920 or 76.8, primarily due to an over accrual of interest on convertible notes in the current year prior quarters.
Amortization of debt discount
Amortization of debt discount was $333,237 and $99,202 for the three months ended September 30, 2021 and 2020, respectively, an increase of $234,035 or 235.9%. The increase is primarily due to the value of warrants and beneficial conversion features arising on new convertible debt issued during the current period. These amounts are recorded as a debt discount and amortized over the life of the convertible debt which is generally one year or less.
Derivative liability movement
The derivative liability movement was $2,091,562 and $(9,841,979) for the three months ended September 30, 2021 and 2020, 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 $11,933,541 was primarily due to the conversion and repayment of several convertible notes during the current period, and a reduction on the stock price, impacting favorable on the mark-to-market adjustment.
Foreign exchange movements
Foreign exchange movements was $184,956 and $(140,811) for the three months ended September 30, 2021 and 2020, 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.
Taxation
Taxation credit was $18,794 and $0 for the three months ended September 30, 2021 and 2020, respectively, an increase in credit of $18,794 or 100.0%. The taxation charge related to the deferred tax portion of intangible assets on the acquisition of Evernia.
Net Income (loss)
Net income was $1,528,575 and a net loss of $(10,234,410) for the three months ended September 30, 2021 and 2020, respectively, a decrease of $11,933,541 or 114.9%, is primarily due to the movement in the derivative liability of $11,933,541, offset by the increase in the amortization of debt discount of $234,035, as discussed above.
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For the nine months ended September 30, 2021 and September 30, 2020.
Revenues
Revenues were $1,053,383 and $255,672 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $797,711 or 312.0%. The revenue from in-patient services related to Evernia was $774,577 and $0 for the nine months ended September 30, 2021 and 2020, Evernia was acquired on July 1, 2021. The revenue from rental properties was $278,806 and $255,672 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 $830,098 and $390,218 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $439,880 or 112.7%. The increase is primarily due to the following:
| ● | Operating expenses related to ATHI and Evernia was $881,507 for the nine months ended September 31, 2021, Evernia was acquired on July 1, 2021. Included in Evernia operating expenses is payroll costs of $391,277, outside contractors fees of $62,972, advertising and promotion costs of $56,607 management fees of $30,000, rental expenses of $87,874, and depreciation and amortization expenses of $94,354, which relate primarily to the amortization of intangibles. |
| ● | General and administrative expenses, excluding ATHI and Evernia was $22,628 and $43,805 for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $21,177 or 48.3%. The decrease is due to a concerted effort to reduce costs. |
| ● | Rent expense, excluding ATHI and Evernia was $2,512 and $4,000 for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $1,488 or 37.2%, this amount is immaterial. |
| ● | Professional fees, excluding ATHI and Evernia was $2,717 and $177,528 for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $174,811 or 98.5%. The decrease is primarily due to the reversal of accruals for audit fees in excess of our requirements as of September 30, 2021, and certain professional fees incurred in the prior year related to the restructure of the capital and debt structure of the business. |
| ● | Salaries and wages, excluding ATHI and Evernia, was $83,073 and $73,287 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $9,786 or 13.4%, the increase is due to an additional employee on the corporate payroll assisting with group operations. |
| ● | Depreciation expense, excluding ATHI and Evernia was $96,837 and $91,598 for the nine months ended September 30, 2021 and 2020, an increase of $5,239 or 5.7%, the increase is primarily due to fluctuations in the exchange rate as all depreciable assets are denominated in Canadian Dollars. |
Operating income (loss)
The operating income was $223,285 and the operating loss was $(134,546) for the nine months ended September 30, 2021 and 2020, respectively, an increase of $357,831 or 266.0%. The improvement in operating income is due to the operating loss realized in Evernia of $(106,930), offset primarily by the reversal of management fees of $259,175 and a reduction in professional fees of $174,811, as discussed above.
Gain on debt extinguishment
Gain on debt extinguishment was $0 and $12,683,678 for the nine months ended September 30, 2021 and 2020, respectively. In the prior period, the company entered into several debt extinguishment agreements with convertible debt holders whereby the amounts payable and the payment terms under these convertible notes were renegotiated, this also resulted in the extinguishment of derivative liabilities related to these convertible notes.
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Penalty on convertible notes
Penalty on convertible notes was $9,240 and $0 for the nine months ended September 30, 2021 and 2020, an increase of $9,240. The penalty on convertible notes relates to a fee paid for the extension of repayment dates on the Labrys note.
Loss on advance
Loss on advance was $120,000 and $0 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $120,000 or 100.0%. The company provided against funds that were advanced to Local link wellness in the prior year, which management determined to be uncollectible.
Warrant exercise
Warrant exercise was $758,340 and $95,868 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $662,472 or 691.0%. During the current period and the prior period, warrant holders exercised warrants on a cashless basis, resulting in a charge to the statement of operations. In the current period warrant holders exercised warrants for 280,625,762 shares and in the prior year 224,388,247 shares of common stock, the differential in the charge of $662,472 is due to the improvement of the share price of the company’s stock over the prior year.
Fair value of warrants granted to convertible debt holders
Fair value of warrants granted to convertible debt holders was $976,788 and $0 for the nine months ended September 30, 2021 and 2020, an increase of $976,788 or 100%. The Company granted warrants to certain convertible debt holders in terms of agreements entered into with them, whereby any debt issued subsequent to their debt on more favorable terms would result in the debt holders being entitled to the same terms as issued to the subsequent debt holders. The company issued warrants for a total of 246,464,649 shares of common stock valued using a Black Scholes valuation model.
Interest expense
Interest expense was $708,936 and $589,738 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $119,198 or 20.2%, was primarily due to: (i) the increase in the principal convertible debt outstanding of $1,192,014 over the prior period, which increase took place primarily in the second quarter of the current period and additional interest expense on the conversion of convertible debt to equity.
Amortization of debt discount
Amortization of debt discount was $1,683,779 and $628,892 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $1,054,887 or 167.7%. The increase is primarily due to the value of warrants and beneficial conversion features arising on new convertible debt issued during the current period. These amounts are recorded as a debt discount and amortized over the life of the convertible debt which is generally one year or less.
Derivative liability movement
The derivative liability movement was $544,767 and $(22,850,631) for the nine months ended September 30, 2021 and 2020, 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 $23,395,398 was primarily due to the improvement in the stock price in the prior period and the conversion of several convertible notes during the current period.
Foreign exchange movements
Foreign exchange movements was $4,218 and $82,551 for the nine months ended September 30, 2021 and 2020, 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.
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Taxation
Taxation credit was $18,794 and $0 for the nine months ended September 30, 2021 and 2020, respectively, an increase in credit of $18,794 or 100.0%. The taxation charge related to the deferred tax portion of intangible assets on the acquisition of Evernia.
Net loss
Net loss was $3,466,019 and $11,532,817 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $8,066,798 or 69.9%, is primarily due to the gain on debt extinguishment in the prior year offset by the derivative liability movements; and the amortization of debt discount, in the current period, as discussed above.
Contingency related to outstanding tax liabilities
The Company also has not filed certain foreign assets forms due to the US Federal Government. A provision of $250,000 was made for any potential penalties due.
Liquidity and Capital Resources
Cash generated by operating activities was $75,913 and cash used by operating activities was $(435,442) for the nine months ended September 30, 2021 and 2020, respectively, an increase of $511,355. The increase is primarily due to the following:
| ● | A decrease in net loss of $8,086,798 |
| ● | Offset by a decrease in the movement of non-cash items of $(7,844,962), primarily due to the gain on debt extinguishment in the prior period of $12,683,678, the movement in the amortization of debt discount of $1,054,886, the movement in the fair value of warrants granted of $976,788, the movement in warrants exercised of $662,473, offset by the movement in derivative liabilities of $(23,395,398). |
| ● | Working capital movements increased by $289,519, primarily due to decrease in movements of prepaid expenses of $333,531, offset by the increase in movements of accounts receivable of $117,382. |
Cash used in investing activities was $471,427 and cash released from investing activities was $5,995 for the nine months ended September 30, 2021 and 2020, respectively, the increase is attributable to the advances made to Evernia of $450,537, in the form of repayable balances, prior to the acquisition of ATHI by the Company, the net cash received on the acquisition of Evernia of $10,324, with cash balances of $60,324, offsetting the cash paid on acquisition of $50,000 and the purchase of property, plant and equipment of $31,214.
Cash provided by financing was $372,199 and $433,319 for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $61,120. The decrease is due to the net increase in convertible note movements of $161,723, the increase in movements of funding of short term loans of $16,111, offset by the movement in related party notes of $272,412.
Over the next twelve months we estimate that the company will require approximately $1.5 million in working capital as it continues to develop the Evernia facility and it is also exploring several other treatment center options and sources of patients throughout the country. The company may have to raise equity or secure debt. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, the Company’s liquidity risk is assessed as medium.
Recently Issued Accounting Pronouncements
The recent Accounting Pronouncements are fully disclosed in note 2 to our unaudited condensed consolidated financial statements.
Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying unaudited condensed consolidated financial statements.
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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 September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors.
Not applicable because we are a smaller reporting company.
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Item 2. Unregistered sales of equity securities and use of proceeds
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, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $53,500, for net proceeds of $50,000 after the payment of legal fees and origination fees amounting to $3,500. The note has a maturity date of January 3, 2022 and bears interest at the rate of 9.0% per annum. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser. 180 days after the issued date into shares of the Company’s common stock at 61% of the lowest trade price during the ten consecutive trading days immediately prior to conversion. The principal plus the accrued interest of the Note may be prepaid by the Company prior to the expiry of 180 days from issuance date at a prepayment penalty ranging from 112% to 130%.
On March 9, 2021, the Company received a cashless warrant exercise notice, exercising warrants for 66,666,666 shares for net shares of 59,999,999 shares of common stock.
On April 16, 2021, the Company, entered into a secured Promissory Note in the aggregate principal amount of $30,000 for net proceeds of $25,000 after an original issue discount of $3,000 and fees of $2,000. The Note had a maturity date of April 19, 2021 and bore 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 April 29, 2021, the Company, entered into a secured Promissory Note in the aggregate principal amount of $46,000 for net proceeds of $40,000 after an original issue discount of $6,000. The Note had a maturity date of May 3, 2021 and bore 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 April 30, 2021, the Company, entered into a secured Promissory Note in the aggregate principal amount of $140,000 for net proceeds of $119,449 after an original issue discount of $14,000 and fees of $6,551. The Note had a maturity date of May 7, 2021 and bore 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 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.
In connection with the issuance of the convertible promissory note to Labrys, the Company granted Labrys a five-year warrant to purchase 91,666,666 shares of common stock at an exercise price of $0.006 per share. The value of the warrant was accounted for as a debt discount.
On May 13, 2021, the company received a cashless warrant exercise notice, exercising warrants for 50,505,051 shares for net shares of 42,353,038 shares of common stock.
On May 27, 2021, the Company, entered into a secured Promissory Note in the aggregate principal amount of $70,000 for net proceeds of $60,000 after an original issue discount of $10,000. The Note had a maturity date of June 4, 2021 and bore 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.
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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.
In connection with the issuance of the convertible promissory note to Labrys, the Company granted Labrys a five-year warrant to purchase 52,272,727 shares of common stock at an exercise price of $0.0044 per share. The value of the warrant was accounted for as a debt discount.
On August 6, 2021, the company received a cashless warrant exercise from Labrys, exercising warrants for 100,000,000 shares for net shares of 86,333,333 shares of common stock.
On September 10, 2021, the Company issued 59,259,630 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $60,977.
On September 15, 2021, the Company, entered into a secured Promissory Note in the aggregate principal amount of $60,000 for net proceeds of $50,000 after an original issue discount of $10,000. The Note had a maturity date of September 23, 2021 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 September 24, 2021, the company received a cashless warrant exercise from Labrys, exercising warrants for 91,666,666 shares for net shares of 54,999,999 shares of common stock.
On September 24, 2021, the company received a cashless warrant exercise from Labrys, exercising warrants for 60,000,000 shares for net shares of 36,939,393 shares of common stock.
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% due immediately on the issuance ate of the note. per annum. 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.
On October 10, 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.
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.
On October 25, 2021, in terms of a conversion notice received, Joshua Bauman converted the aggregate principal sum of $37,500 and interest thereon of $1,155 into 39,405,310 shares of common stock.
On October 29, 2021, in terms of a conversion notice, Leonite converted the principal sum of $66,667 and interest thereon of $7,978 of the Leonite Note into 83,771,947 shares of common stock.
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.
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Item 3. Defaults upon senior securities
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits
101.INS XBRL Instance *
101.SCH XBRL Taxonomy Extension Schema *
101.CAL XBRL Taxonomy Extension Calculation *
101.DEF Taxonomy Extension Definition *
101.LAB Taxonomy Extension Labels *
101. PRE Taxonomy Extension Presentation *
* filed herewith
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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: November 22, 2021
By:/s/ Shawn E. Leon
Name: Shawn E. Leon
Title: Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | Position | Date | ||
| /s/Shawn E. Leon | Chief Executive Officer (Principal Executive Officer), | November 22, 2021 | ||
| Shawn Leon | Chief Financial Officer (Principal Financial Officer), President and Director | |||
| /s/ John O’Bireck | Director | November 22, 2021 | ||
| John O’Bireck | ||||
| /s/ Gerald T. Miller | Director | November 22, 2021 | ||
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