ETHEMA HEALTH Corp 10-K for FY2021
ETHEMA HEALTH Corp (GRST)
About this 10-K
ETHEMA HEALTH Corp filed this 10-K on April 14, 2022, covering the fiscal year ended December 31, 2021 (FY2021).
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.94M
- up 473.0% from $339K a year earlier
- Net loss
- $1.54M
- compared with net income of $3.08M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the fiscal year 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)
(Registrant’s telephone number, including area code)
| Securities registered under Section 12(b) of the Exchange Act: | |
| Title of each class | Name of each exchange on which registered |
| None | N/A |
Securities registered under Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
Indicate
by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. ☒
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data
file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, a non-accelerated file, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ||
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The
aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2021, based on
a closing share price of $0.0044 was approximately $
As of April 13, 2022, the registrant had shares of its common stock, par value $0.01 per share, outstanding.
ETHEMA HEALTH CORPORATION
YEAR ENDED DECEMBER 31, 2021
TABLE OF CONTENTS
| PAGE | |||
| PART I. | |||
| Item 1. | Business | 1 | |
| Item 1A. | Risk Factors | 4 | |
| Item 1B. | Unresolved Staff Comments | 4 | |
| Item 2. | Properties | 4 | |
| Item 3. | Legal Proceedings | 4 | |
| Item 4. | Mine Safety Disclosures | 4 | |
| PART II. | |||
| Item 5. | Market for Registrant’s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities | 5 | |
| Item 6. | Reserved | 7 | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 7 | |
| Item 8. | Financial Statements and Supplementary Data | 10 | |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 11 | |
| Item 9A. | Controls and Procedures | 11 | |
| Item 9B. | Other Information | 11 | |
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 11 | |
| PART III | |||
| Item 10. | Directors, Executive Officers and Corporate Governance | 12 | |
| Item 11. | Executive Compensation | 13 | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 14 | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 15 | |
| Item 14. | Principal Accountant Fees and Services | 15 | |
| Part IV. | |||
| Item 15. | Exhibits and Financial Statements Schedules | 17 | |
| SIGNATURES | 20 | ||
PART I
Item 1. Business.
Company History
Ethema Health Corporation (the “Company” or “Ethema”), a Colorado corporation was incorporated under the laws of the State of Colorado on April 1, 1993, and is the surviving company of a merger, effective February 1, 1995, between the Company and Nova Natural Resources Corporation, a Delaware corporation (“Nova Delaware”). The merger was effectuated solely for the purpose of changing the Company’s domicile from Delaware to Colorado. At all times prior to 2001, the Company was engaged in the oil and gas exploration business. Nova Delaware was the successor entity to Nova Petroleum Corporation, a Delaware corporation, and Power Resources Corporation, a Delaware corporation, which merged in 1986 (“the 1986 Merger”). Prior to the 1986 Merger, Nova Petroleum Corporation and Power Resources Corporation had operated since 1979 and 1972, respectively. In 2001, the Company entered into the electronics business and this business was active in 2001 and 2002, as part of the Torita Group. After 2002, the Company continued with various stages of development in this business until 2010.
On April 1, 2010, the Company changed its principal operations from development stage electronics to healthcare services. On March 29, 2010, the Company entered into a one year consulting agreement with GreeneStone Clinic Inc., a Canadian corporation (“Greenestone Clinic”), whereby Greenestone Clinic provided consulting services for the Company’s development and operation of medical clinics in the province of Ontario, Canada. Specifically, Greenestone Clinic provided medical and business expertise in the initial startup of private clinics and technical assistance to ensure that the clinics were in compliance with governmental policy and procedure requirements as well as any operational requirements. At the time of entering into this consulting agreement, Greenestone Clinic operated a clinic at the Muskoka property housing its addiction treatment clinic and provided endoscopy services. The Company started offering medical services in June 2010, offering various medical services, including endoscopy, cardiology and executive medicals, which services were subsequently sold.
On May 15, 2010, the Company secured a sublease of space (which was previously the Rothbart Pain Clinic) of approximately 8,000 sq. ft. to be used as the Company’s executive offices and to run an endoscopy clinic. The Endoscopy clinic was subsequently sold. The Company, through its wholly owned subsidiary GreeneStone Clinic Muskoka Inc. (“GreeneStone Muskoka”), also entered into a lease with the owner of the Muskoka premises on April 1, 2011 and provided mental health and addiction treatment services and operated an in-patient addiction treatment center at this location.
During December 2016, the Company obtained a license to operate and provide addiction treatment healthcare services in Florida, USA. The company commenced operations under this license with effect from January 2017.
On February 14, 2017, the Company completed a series of transactions (referred to collectively as the “Restructuring Transactions”), including a Share Purchase Agreement (the “SPA”) whereby the Company acquired 100% of the stock of Cranberry Cove Holdings Ltd. (“CCH”), which held the real estate on which the Company’s GreeneStone Muskoka operated, an asset purchase agreement (the “APA”) and lease (the “Lease”) whereby the Company sold certain of the GreeneStone Muskoka business assets and leased the real estate to the buyer, and a real estate purchase agreement and asset purchase agreement whereby the Company purchased the real estate and business assets of Seastone Delray (the “Florida Purchase”).
The Share Purchase Agreement
Under the SPA, the Company acquired 100% of the stock of CCH from Leon Developments Ltd. (“Leon Developments”), a company wholly owned by Shawn E. Leon, who is the President, CEO, and CFO of the Company (“Mr. Leon”). CCH owns the real estate on which GreeneStone Muskoka is located. The total consideration paid by the Company was CDN$3,517,062, including the assumption of certain liabilities of CCH, which was funded by the assignment to Leon Developments of certain indebtedness owing to the Company in the amount of CDN$659,918, and the issuance of 60,000,000 shares of the Company’s common stock to Leon Developments, valued at US$0.0364 per share.
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The Asset Purchase Agreement and Lease
Under the APA, the assets of GreeneStone Muskoka were sold by the Company, through its subsidiary, GreeneStone Muskoka, to Canadian Addiction Residential Treatment LP (the “Purchaser” or “CART”), for a total consideration of CDN$10,000,000. The proceeds of the GreeneStone Muskoka asset sale were used to pay down certain tax debts and operational costs of the Company and to fund the Florida Purchase, mentioned below.
Through the APA, substantially all of the assets of GreeneStone Muskoka were sold, leaving Ethema with only the underlying clinic real estate, which the Company, through its newly acquired subsidiary, CCH concurrently leased to the Purchaser. The Lease is a triple net lease and provides for a five (5) year primary term with three (3) five-year renewal options, annual base rent for the first year at CDN$420,000 with annual increases, an option to tenant to purchase the leased premises and certain first refusal rights.
The Florida Purchases and Business
Immediately after closing on the sale of the assets of GreeneStone Muskoka, the Company closed on the acquisition of the business and real estate assets of Seastone Delray pursuant to certain real estate and asset purchase agreements. This business is operated through its wholly owned subsidiary, Addiction Recovery Institute of America, LLC (“ARIA”). The purchase price for the ARIA assets was US$6,070,000 financed with a purchase money mortgage of US$3,000,000, and US$3,070,000 in cash.
On April 4, 2017 the Company changed its Corporate name from Greenestone Healthcare Corporation to Ethema Health Corporation.
On November 2, 2017, the Company entered into an Agreement to purchase from AREP 5400 East Avenue LLC (“the Landlord”) certain buildings in West Palm Beach, Florida, totaling approximately 80,000 square feet, on which the Company planned to operate a substance abuse treatment center. The purchase price of the Property was $20,530,000. The Company made a series of nonrefundable down payments totaling $2,940,546 in 2017 and 2018. The Company could not get the necessary financing to close on the deal.
On May 23, 2018, the Company converted the agreement to purchase the buildings from the Landlord into a real property lease agreement with a purchase option. The lease was for an initial 10 years and provided for two additional 10 year extensions.
In June 2018, the Company moved its ARIA operations into the West Palm Beach properties and in September 2018 received a license to operate in-patient detoxification and residential treatment services.
In June of 2019, the Company and the Landlord wished to proceed with marketing the property for sale and agreed to convert the long term lease into a month to month lease for a reduced amount of space.
The Company once again had an opportunity to purchase the property in October of 2019 but could not arrange for sufficient financing to complete the purchase and the Landlord subsequently entered into a conditional agreement with another purchaser and on December 20, 2019, the Company entered into an agreement with the landlord to terminate the lease agreement on January 31, 2020.
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On June 30, 2020, the Company entered into an agreement (“the Stock Purchase Agreement”), whereby the Company agreed to acquire 51% of American Treatment Holdings, Inc. (“ATHI”) from The Q Global Trust (“Seller”) and Lawrence B Hawkins (“Hawkins”), which owned 100% of Evernia Health Services LLC. (“Evernia”), which operates drug rehabilitation facilities. The consideration for the acquisition was a loan to be provided by the Company to Evernia in the amount of $500,000.
The Company originally had a 180 day option, to purchase an additional 9% of ETHI for a purchase consideration of $50,000. On April 28, 2021, the Stock Purchase Agreement 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 and $50,000. 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 probationary approval, which was received on June 30, 2021. The Company exercised the option and issued the 100,000,000 shares of common stock, resulting in the Company owning 75% of ATHI..
Corporate Structure
The Company consists of the following entities:
| · | Ethema Health Corporation (Parent company); |
Ethema is the publicly traded investment holding company, registered in Colorado, U.S.
| · | Cranberry Cove Holdings, Ltd, a Canadian registered company (wholly owned); |
CCH owns and leases the property on which CART operates an addiction treatment center.
| · | Addiction Recovery Institute of America, LLC, a US registered company (wholly owned); |
ARIA operated a treatment center in Delray Beach, Florida out of premises which it had acquired in February 2017. The treatment center was relocated and was operated out of leased premises in West Palm Beach Florida.
| · | Delray Andrews RE, LLC (“DARE”), a US registered company (wholly owned and dormant); |
DARE has remained dormant since inception.
| · | GreeneStone Clinic Muskoka Inc., a Canadian registered company (wholly owned); |
Muskoka previously owned and operated the addiction treatment center in Canada which was sold to CART.
| · | American Treatment Holdings, Inc, a US registered company (75% owned); |
ATHI owns 100% of the members interest of Evernia. Ethema has been financing the operations of Evernia since June 2020.
| · | Evernia Health Center, a US registered company. |
Evernia operates a treatment center in West Palm Beach Florida and is a wholly owned subsidiary of ATHI which was acquired by Ethema effective July 1, 2021. The Company has been actively involved in the operation of this treatment center since June 30, 2020.
Employees
As of December 31, 2021, Ethema had 46 employees.
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Marketing
The addiction treatment business in the USA operates as an insured healthcare service. Our marketing efforts are long-term processes of establishing relationships with relevant professionals and our treatment staff. We use industry specific conferences and functions to network with these professionals.
Through Evernia, the Company has an in-network relationship with a single large health care provider and the majority of the Company’s clients are sourced from this health care provider.
Competition
There are a significant amount of treatment facilities in the United States, we compete with these clinics for patients who are typically covered by insured healthcare services.
Environmental Regulations
The Company is not currently subject to any pending administrative or judicial enforcement proceedings arising under environmental laws or regulations. Environmental laws and regulations may be adopted in the future which may have an impact upon the Company’s operations.
Item 1A. Risk Factors.
Not applicable because we are a smaller reporting company.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties.
Ethema Executive Offices
The Company’s executive offices are located at 1590 S. Congress Avenue, West Palm Beach, Florida, 33406.
West Palm Beach Treatment Operations
The Company, through its acquisition of ATHI, effectively acquired a 75% of the Evernia treatment facility located at 950 Evernia Street, West Palm Beach Florida. The Company has been actively involved in the operation of the Evernia treatment facility since June 2020.
Muskoka Treatment Facility
The Muskoka Treatment Facility is located in Bala, Ontario, 3571 Highway 169. The property is 43 acres and contains approximately 48,000 square feet of buildings. The property is wholly owned by CCH and has been leased to CART for an initial term of five years, which ended on February 28, 2022. The tenant exercised its option to extend the lease term for an additional five years. The lease gives the tenant an option to extend for two additional five (5) year terms, an option to purchase the property at any time for a purchase price of CDN$7,000,000 in the first thirty six (36) months of the term and thereafter at a purchase price increased by CDN$1,500,000 for each successive year up to a maximum of CDN$10,000,000, and a right of first refusal in the event of a sale to a third party.
Item 3. Legal Proceedings.
A suit, claiming past due rent was filed against the Company in March 2020 for rent of a storage warehouse, the warehouse was abandoned during March 2020. The rental expense was accrued in our records for $12,293 as of December 31, 2021.
Other than disclosed above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 4. Mine Safety Disclosures.
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .
| (a) | Market Information |
The Company’s common stock is quoted on the Over-the-counter Market (the “OTC PINK”) under the symbol “GRST”. The Company was sponsored by the market maker Wilson Davis & Co. from Salt Lake City, Utah, which filed a Form 15c2-11 application with the Financial Industry Regulatory Authority (“FINRA”) for the Company in 2011. This application was approved by FINRA in February 2012, and Wilson Davis & Co. first quoted the stock in March 2012.
From March 2012 to January 2020, our common stock had been traded on the OTCQB markets under the symbol “GRST”, in January 2020, the stock was downgraded to the OTC Pink Sheets market.
The last reported sale price of our common stock on the OTC Pink on April 13, 2022, was $0.0007 per share. As of April 13, 2022, there were approximately 155 holders of record of our common stock.
Dividend Policy
We have not paid any cash dividends on our common stock to date, and we have no intention of paying cash dividends in the foreseeable future. Whether we declare and pay dividends is determined by our Board of Directors at their discretion, subject to certain limitations imposed under Colorado corporate law. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors.
Equity Compensation Plan Information
See Item 11 - Executive Compensation for equity compensation plan information.
Recent Sales of Unregistered Securities
Other than as set forth below or as previously disclosed in our filings with the Securities and Exchange Commission, we did not sell any equity securities during the year ended December 31, 2021 in transactions that were not registered under the Securities Act.
On January 8, 2021, the Company issued 78,763,466 shares of common stock to Leonite Capital, LP (“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 from Auctus Fund, LLC (“Auctus”), 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 Fund LP (“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 from First Fire Global Opportunities Fund, 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 $29,250.
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, 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 75% interest in ATHI.
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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, resulting in the issuance of 86,333,333 shares of common stock valued on the date of issuance at $176,983.
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, resulting in the issuance of 54,999,999 shares of common stock valued on the date of issuance at $242,000.
On September 24, 2021, the company received a cashless warrant exercise from Labrys, exercising warrants for 60,000,000 shares, resulting in the issuance of 36,939,393 shares of common stock valued on the date of issuance at $162,533.
On September 28, 2021, the Company issued 60,000,000 shares of common stock to Labrys in connection with a conversion notice received, converting principal of $54,000.
On October 8, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $55,800 into 62,000,000 shares of common stock.
On October 15, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $7,400 into 8,222,222 shares of common stock.
On October 19, 2021, the Company issued 50,496,728 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $49,747.
On October 25, 2021, the Company issued 39,405,310 shares of common stock to Joshua Bauman in connection with a conversion notice received, converting principal and interest of $38,655.
On October 29, 2021, the Company issued 83,771,947 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $83,022.
On November 22, 2021, the Company issued 58,427,091 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $57,677.
On November 23, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $6,329 and interest of $60,500 into 75,000,000 shares of common stock.
On December 13, 2021, in terms of a conversion notice received by the company, Leonite converted the aggregate principal and interest amount of $89,933 into 90,682,696 shares of common stock.
Penny Stock
The U.S. Securities and Exchange Commission (the “SEC”) has adopted rules that regulate broker dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws. (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.
The broker dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer’s account.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.
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Item 6. Reserved
Special Note Regarding Forward-Looking Statements
Many of the matters discussed within this Annual Report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) on our current expectations and projections about future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. Such risks and uncertainties include the risks noted under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere. We do not undertake any obligation to update any forward looking statements. Unless the context requires otherwise, references to “we,” “us,” “our,” and “Ethema,” refer to Ethema Health Corporation and its subsidiaries.
Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake any obligation to update any forward-looking statements.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our consolidated financial statements would be affected to the extent there are material differences between these estimates. This discussion and analysis should be read in conjunction with the company’s consolidated financial statements and accompanying notes to the consolidated financial statements for the year ended December 31, 2021.
Results of operations for the year ended December 31, 2021 and the year ended December 31, 2020.
Revenue
Revenue was $1,942,588 and $338,996 for the years ended December 31, 2021 and 2020, respectively, an increase of $1,603,592 or 473.0%.
Revenue from patient treatment was $1,568,071 and $0 for the years ended December 31, 2021 and 2020, respectively, an increase of $1,568,071 or 100.0%. The increase is due to the acquisition of Evernia, a West Palm Beach based treatment facility, on July 1, 2021.
Revenue from rental income was $374,517 and $338,996 for the years ended December 31, 2021 and 2020, respectively, an increase of $35,521 or 10.5%, the increase is primarily due to the contractual increase in rental income..
Operating Expenses
Operating expenses was $1,940,483 and $502,340 for the years ended December 31, 2021 and 2020, respectively, an increase of $1,438,143 or 286.3%. The increase in operating expenses is attributable to:
| ● | General and administrative expenses of $531,391 and $55,756 for the years ended December 31, 2021 and 2020, respectively, an increase of $475,635 or 853.1%. The increase is due to the acquisition of the Evernia treatment facility effective July 1, 2021, including contractor costs of $198,526, advertising costs of $89,500 and $96,346 in meals for patients. |
| ● | Rent expense was $178,679 and $5,512 for the years ended December 31, 2021 and 2020, an increase of $173,167 or 3,141.6%, due to the acquisition of Evernia, effective July 1, 2021, which leases a property in West Palm Beach, Florida. |
| ● | Management fees was $60,000 and $0 for the years ended December 31, 2021 and 2020, respectively, an increase of $60,000 or 100.0%. Management fees for the current period represent management fees paid to the minority holder in ATHI. |
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| ● | Professional fees were $132,275 and $231,264 for the years ended December 31, 2021 and 2020, respectively, a decrease of $98,989 or 42.8%. The decrease is primarily due to consulting fees that were paid to two individuals in the prior year who had assisted with business development efforts. |
| ● | Salaries and wages was $712,787 and $88,532 for the years ended December 31, 2021 and 2020, respectively, an increase of $624,255 or 705.1%. The increase is due to the acquisition of the Evernia treatment facility effective July 1, 2021. |
| ● | Depreciation expense was $325,351 and $121,276 for the years ended December 31, 2021 and 2020, respectively, an increase of $204,075 or 168.3%. The increase in the depreciation charge was due to the acquisition of Evernia, including the amortization of the health care provider license amounting to $178,990. |
Operating profit (loss)
The operating profit was $2,105 and the operating loss was $(163,344) for the years ended December 31, 2021 and 2020, respectively, an increase of $165,449 or 101.3%. The increase is attributable to the acquisition of Evernia on July 1, 2021, which resulted in increased revenue primarily due to patients obtained from the health care provider license which Evernia has secured.
Other income
Other income was $273,373 and $1,183 for the years ended December 31, 2021 and 2020, respectively. Other income includes; (i) the reversal of a $250,000 provision raised for rental expenses on a previous property leased by the Company which has, subsequently been disposed of by the Landlord, and (ii) a financial inducement granted to the Company by the Evernia landlord.
Forgiveness of government relief loan
Forgiveness of government relief loan was $156,782 and $0 for the years ended December 31, 2021 and 2020, respectively, an increase of $156,782 or 100.0%. The company had met all requirements for forgiveness of one of its Covid-19 government relief loans and the loan forgiveness was recorded during the fourth quarter.
Gain on debt extinguishment
Gain on debt extinguishment was $0 and $12,601,823 for the years ended December 31, 2021 and 2020, respectively. In the prior year, 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.
Gain on sale of assets
The Gain on sale of assets was $0 and $36,470 for the years ended December 31, 2021 and 2020, respectively. The gain in the prior year represented an over-accrual for expenses relating to the disposal of the Delray Beach properties.
Loss on advance
Loss on advance was $120,000 and $0 for the years ended December 31, 2021 and 2020, respectively, an increase of $120,000 or 100.0%. The company advanced funds to Local link wellness in the prior year, which were deemed to be uncollectible in 2021.
Warrants exercised
Warrant exercise was $0 and $95,868 for the years ended December 31, 2021 and 2020, respectively, a decrease of $95,868 or 100.0%. In the prior year warrants were exercised for 184,000,000 shares of common stock
Fair value of warrants granted to convertible debt holders
Fair value of warrants granted to convertible debt holders was $854,140 and $0 for the years ended December 31, 2021 and 2020, an increase of $854,140 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 195,963,598 shares of common stock which was valued using a Black Scholes valuation model.
Penalty on convertible notes
Penalty on convertible notes was $9,240 and $0 for the years ended December 31, 2021 and 2020, an increase of $9,240. The penalty on convertible notes relates to a fee paid for the extension of repayment dates on the Labrys note.
Interest income
Interest income was $0 and $629 for the years ended December 31, 2021 and 2020 respectively, a decrease of $629 or 100.0%. The interest income is immaterial.
| 8 |
Interest expense
Interest expense was $829,525 and $676,634 for the years ended December 31, 2021 and 2020, respectively, an increase of $152,891 or 22.6%, primarily due to the increase in convertible note funding during the current year.
Debt discount
Debt discount was $1,965,551 and $861,657 for the years ended December 31, 2021 and 2020, respectively, an increase of $1,103,894 or 128.1%. The increase is primarily due to new convertible notes issued during the current year and the amortization of loans entered into during the second half of the prior year.
Derivative liability movement
The derivative liability movement during the current year represents the mark to market movements of variably priced convertible notes and warrants issued during the current and prior years. These securities are marked to market on a quarterly basis and the resultant gain or loss is recorded as a derivative liability movement in the consolidated statements of operations and comprehensive loss.
Foreign exchange movements
Foreign exchange movements was $(34,301) and $(175,500) for the years ended December 31, 2021 and 2020, respectively and represents the realized exchange gains and (losses) on monetary assets and liabilities settled during the current year as well as mark to market adjustments on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars.
Net (loss) income before taxation
Net loss was $(1,854,306) and net income was $3,084,992 for the years ended December 31, 2021 and 2020, respectively, a decrease of $4,939,298 or 160.1%. The decrease is primarily due to the fair value of the warrants granted, the debt discount amortization, and the prior year gain on debt extinguishment, offset by the derivative liability movements, as discussed above.
Taxation
Taxation credit was $280,903 and $0 for the years ended December 31, 2021 and 2020, respectively an increase of $280,903 or 100.0%. the tax credit arose due to the reversal of prior years’ accrual for $250,000 in penalty tax for non-disclosure of foreign entities in the US tax return, a deferred tax movement of $37,588 on the amortization of licenses which arose on the acquisition of ATHI and Evernia, and a small tax provision on profits realized on the ATHI and Evernia results.
Net (loss) income
Net loss was $(1,573,403) and net income was $3,084,992 for the years ended December 31, 2021 and 2020, respectively, a decrease of $4,658,395 or 151.0%. The decrease is primarily due to the reasons discussed above.
Liquidity and Capital Resources
Cash used in operating activities was $85,567 and $101,970 for the years ended December 31, 2021 and 2020, respectively a decrease of $16,403 or 16.1%. The decrease is primarily due to the following:
| ● | The increase in net loss of $4.7 million, as discussed above. |
| ● | The increase in non-cash movements of $5.31 million, primarily due to the movement on the gain on debt extinguishment of $12.6 million, the increase in the movement on the amortization of debt discount of $1,1 million, and the increase in the movement of fair value of warrants granted of $0.9 million, offset by the net movement in derivative liabilities of $9.1 million. |
| ● | The absorption of cash into working capital of $0.6 million during the current year, primarily due to the acquisition of Evernia and ATHI on July 1, 2021. |
Cash used in investing activities was $0.6 million and $0.7 million for the years ended December 31, 2021 and 2020, respectively. We invested $0.5 million (2020 - $0.7 million) in the Evernia treatment facility based in West Palm Beach, prior to acquisition. We also purchased property and equipment of $0.1million, primarily to support the Evernia operation during the current year.
Cash generated by financing activities was $0.6 million and $0.9 million for the years ended December 31, 2021 and 200, respectively. During the current year we raised $1.2 million and repaid $0.5 million in convertible notes, primarily to fund the Evernia operations.
Over the next twelve months we estimate that the company will require approximately $6.5 million in funding to repay its obligations, if these obligations are not converted to equity and for funding working capital as we continue to seek opportunities for addiction treatment in the US markets. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, the Company’s liquidity risk is assessed as high.
| 9 |
Item 8. Financial Statements and Supplementary Data.
ETHEMA HEALTH CORPORATION
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US$ unless otherwise indicated)
| PAGE | |
| Report of Independent Registered Public Accounting Firm (PCAOB ID 229) | F-1 |
| Consolidated Balance Sheets as of December 31, 2021 and 2020 | F-2 |
| Consolidated Statements of Operations and Comprehensive (Loss) income for the years ended December 31, 2021 and 2020 | F-3 |
| Consolidated Statements of Changes in Stockholders Deficit for the years ended December 31, 2021 and 2020 | F-4 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 | F-5 |
| Notes to the Consolidated Financial Statements | F-6 |
| 10 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Ethema Health Corporation
West Palm Beach, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying balance sheets of Ethema Health Corporation (the “Company”) at December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ deficit, and cash flows for each of the years ended December 31, 2021 and 2020, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years ended December 31, 2021 and 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The accompanying consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 3 to the consolidated financial statements, the Company had accumulated deficit of approximately $44.7 million and negative working capital of approximately $13.2 million at December 31, 2021, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Critical Audit Matter
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Accounting for Embedded Conversion Features on Convertible Notes – Refer to Notes 12 and 16 to the Financial Statements
The principal considerations for our determination that performing procedures relating to the valuation of derivatives is a critical audit matter are the significant judgment by management when developing the fair value of the derivative liabilities. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the valuation models used and related variable inputs used within those models.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing management’s process for developing the fair value estimate; evaluating the appropriateness of the valuation techniques; testing the completeness and accuracy of underlying data used in the model; and evaluating the significant assumptions used by management, including the values of expected volatility and discount rate. Evaluating management’s assumptions related to the volatility amounts and discount rates involved evaluating whether the assumptions used by management were reasonable considering the current and historical performance, the consistency with external market and industry data, and whether these assumptions were consistent with evidence obtained in other areas of the audit.
| /s/
| |
| We have served as the Company’s auditor since 2018. | |
| April 14, 2022 | |
| |
|
F-1
ETHEMA HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
| December 31, 2021 | December 31, 2020 | |||||||
| 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 | ||||||||
| Intangible assets, net | ||||||||
| Right of use assets | ||||||||
| 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 | ||||||||
| Government assistance loans | ||||||||
| Operating lease liability | ||||||||
| Finance lease liability | ||||||||
| Derivative liability | ||||||||
| Accrued dividends | ||||||||
| Related party payables | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities | ||||||||
| Government assistance loans | ||||||||
| Deferred taxation | ||||||||
| Third party loans | ||||||||
| Operating lease liability | ||||||||
| Finance lease liability | ||||||||
| Mortgage loans, net of current portion | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Preferred stock - Series B; $par value, authorized, shares outstanding as of December 31, 2021 and 2020. | ||||||||
| Stockholders’ deficit | ||||||||
| Preferred stock - Series A; $par value, authorized, shares outstanding at December 31, 2021 and 2020. | ||||||||
| Common stock - $ par value, shares authorized; and shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Discount for shares issued below par value | ( | ) | ( | |||||
| Accumulated other comprehensive income | ||||||||
| Accumulated deficit | ( | ) | ( | |||||
| Stockholders’ deficit attributable to Ethema Health Corporation stockholders’ | ( | ) | ( | |||||
| Non-controlling interest | ||||||||
| Total stockholders’ deficit | ( | ) | ( | |||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements
F-2
ETHEMA HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
| Year
ended December 31, 2021 | Year
ended December 31, 2020 | |||||||
| Revenues | $ | $ | ||||||
| Operating expenses | ||||||||
| General and administrative | ||||||||
| Rent expense | ||||||||
| Management fees | ||||||||
| Professional fees | ||||||||
| Salaries and wages | ||||||||
| Depreciation expense | ||||||||
| Total operating expenses | ||||||||
| Operating profit (loss) | ( | ) | ||||||
| Other (expense) income | ||||||||
| Other income | ||||||||
| Forgiveness of government relief loan | ||||||||
| Gain on debt extinguishment | ||||||||
| Gain on sale of assets | ||||||||
| Loss on advance | ( | ) | ||||||
| Warrants exercised | ( | ) | ||||||
| Fair value of warrants granted to convertible note holders | ( | ) | ||||||
| Penalty on convertible notes | ( | ) | ||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Debt discount | ( | ) | ( | ) | ||||
| Derivative liability movement | ( | ) | ||||||
| Foreign exchange movements | ( | ) | ( | ) | ||||
| Net (loss) income before taxation | ( | ) | ||||||
| Taxation | ||||||||
| Net (loss) income | ( | ) | ||||||
| Net loss attributable to non-controlling interest | ||||||||
| Net (loss) income attributable to Ethema Health Corporation Stockholders’ | ( | ) | ||||||
| Preferred stock dividend | ( | ) | ( | ) | ||||
| Net (loss) income available to common shareholders of Ethema Health Corporation | ( | ) | ||||||
| Accumulated other comprehensive income | ||||||||
| Foreign currency translation adjustment | ||||||||
| Total comprehensive (loss) income | $ | ( | ) | $ | ||||
| Basic (loss) income per common share | $ | $ | ||||||
| Diluted (loss) income per common share | $ | $ | ||||||
| Weighted average common shares outstanding – Basic | ||||||||
| Weighted average common shares outstanding – Diluted | ||||||||
The accompanying notes are an integral part of the consolidated financial statements
F-3
ETHEMA HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Series A Preferred | Common | Additional Paid | Discount | Comprehe | Accumul | Non-controlling | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | in Capital | to par value | nsive Income | ated Deficit | ders interest | Total | |||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | $ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||
| Shares issued for commitment fees | — | |||||||||||||||||||||||||||||||||||||||
| Warrants exercised | — | ( |
) | |||||||||||||||||||||||||||||||||||||
| Conversion of convertible notes | — | ( |
) | |||||||||||||||||||||||||||||||||||||
| Settlement of liabilities | — | ( |
) | |||||||||||||||||||||||||||||||||||||
| Settlement of liabilities, related party | — | |||||||||||||||||||||||||||||||||||||||
| Cancelation of shares | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||||||||||
| Dividends accrued | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||
| Warrants exercised | — | ( |
) | |||||||||||||||||||||||||||||||||||||
| Shares issued in consideration of acquisition of subsidiary | — | ( |
) | |||||||||||||||||||||||||||||||||||||
| Fair value of non-controlling interest on acquisition of subsidiary | — | — | ||||||||||||||||||||||||||||||||||||||
| Conversion of convertible notes | — | ( |
) | |||||||||||||||||||||||||||||||||||||
| Fair value of warrants issued to convertible debt holders | — | — | ||||||||||||||||||||||||||||||||||||||
| Fair value of beneficial conversion feature of convertible debt issued | — | — | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | ||||||||||||||||||||||||||||||||||||||
| Transactions with related parties | — | — | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Dividends accrued | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statement
F-4
ETHEMA HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2021 | Year ended December 31, 2020 | |||||||
| Operating activities | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustment to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Fair value of warrants granted | ||||||||
| Gain on debt extinguishment | ( | ) | ||||||
| Gain on disposal of property | ( | ) | ||||||
| Forgiveness of federal relief loan | ( | ) | ||||||
| Stock based compensation for services | ||||||||
| Amortization of debt discount | ||||||||
| Derivative liability movements | ( | ) | ||||||
| Non-cash interest converted to equity | ||||||||
| Non-cash interest income | ( | ) | ||||||
| Exercise of warrants | ||||||||
| Amortization of right of use asset | ||||||||
| Deferred taxation movement | ( | ) | ||||||
| Unrealized foreign exchange loss | ||||||||
| Movement in bad debt reserve | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Operating lease liabilities | ( | ) | ||||||
| Taxes payable | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities | ||||||||
| Acquisition of subsidiary, net of cash | ||||||||
| Deposits refunded | ||||||||
| Other investments | ( | ) | ( | ) | ||||
| Purchase of property and equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Decrease in bank overdraft | ( | ) | ||||||
| Repayment of mortgage | ( | ) | ( | ) | ||||
| Proceeds from convertible notes | ||||||||
| Repayment of convertible notes | ( | ) | ( | ) | ||||
| Proceeds from promissory notes | ||||||||
| Repayment of promissory notes | ( | ) | ( | ) | ||||
| Proceeds from government assistance loans | ||||||||
| Preferred stock dividends paid | ( | ) | ( | ) | ||||
| Repayment of third party loans | ( | ) | ||||||
| Proceeds from finance leases | ||||||||
| Repayment of finance leases | ( | ) | ||||||
| (Repayment) Proceeds from 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 warrant issued | $ | $ | ||||||
| Shares issued in consideration of acquisition of subsidiary | $ | $ | ||||||
| Conversion of convertible notes | $ | $ | ||||||
| Conversion of related party payable to common stock | $ | $ | ||||||
| Conversion of related party payable to Series A Preferred stock | $ | $ | ||||||
| Settlement of liabilities | $ | $ | ||||||
| Fair value of non-controlling interest | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements
F-5
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Nature of business |
Since 2010, the Company has operated addiction treatment centers. Initially the Company operated an addiction treatment center in Ontario Canada under its Greenestone Muskoka clinic, which was sold on February 14, 2017. Simultaneously with this sale the Company purchased buildings and operated an addiction treatment center in Delray Beach Florida under its Addiction recovery Institute of America subsidiary with a license obtained in December 2016, initially though owned properties in Delray Beach and subsequently though leased properties in West Palm Beach, Florida. Since June 30, 2020, the Company has been actively involved in the management of a treatment center operated by Evernia in West Palm Beach Florida. On July 1, 2021, the Company closed on the acquisition of 75% of ATHI, which owns 100% of Evernia, once the probationary approval of a license was obtained from the Department of Children and Family Services of Florida. Evernia is the only active treatment center operated by the Company.
The Company also owns the real estate on which its Greenstone Muskoka clinic operated. The current tenant operates an addiction treatment center on these premises. The Company collects rent on this property, which is treated as a separate business segment.
F-6
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Summary of significant accounting policies |
Financial Reporting
The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).
Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that i) recorded transactions are valid; ii) valid transactions are recorded; and iii) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.
| a) | Use of Estimates |
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
| b) | Principals of consolidation and foreign currency translation |
The accompanying consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany transactions and balances have been eliminated on consolidation.
Certain of the Company’s subsidiaries functional currency is the Canadian dollar, while the Company’s reporting currency is the U.S. dollar. All transactions initiated in Canadian dollars are translated into US dollars in accordance with ASC 830, “Foreign Currency Translation” as follows:
| ● | Monetary assets and liabilities at the rate of exchange in effect at the balance sheet date. |
| ● | Certain non-monetary assets and liabilities and equity at historical rates. |
| ● | Revenue and expense items and cash flows at the average rate of exchange prevailing during the year. |
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 year.
The relevant translation rates are as follows: For the year ended December 31, 2021, a closing rate of CDN$1 equals US$0.7888 and an average exchange rate of CDN$1 equals US$0.7977, for the year ended December 31, 2020, a closing rate of CDN$1.0000 equals US$0.7854 and an average exchange rate of CDN$1.0000 equals US$0.7455.
| c) | Business Combinations |
The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed for business combinations with third parties 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.
F-7
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Summary of significant accounting policies (continued) |
| d) | Cash and cash equivalents |
For
purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months
or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with several financial institution
in the USA and Canada. There were
The Company primarily places cash balances in the USA with high-credit quality financial institutions located in the United States which are insured by the Federal Deposit Insurance Corporation up to a limit of $250,000 per institution, in Canada which are insured by the Canadian Deposit Insurance Corporation up to a limit of CDN$100,000 per institution.
| e) | Accounts receivable |
Accounts receivable primarily consists of amounts due from third-party payors (non-governmental) and private pay patients and is recorded net of allowances for doubtful accounts and contractual discounts. The Company’s ability to collect outstanding receivables is critical to its results of operations and cash flows. Accordingly, accounts receivable reported in the Company’s consolidated financial statements is recorded at the net amount expected to be received. The Company’s primary collection risks are (i) the risk of overestimating net revenues at the time of billing that may result in the Company receiving less than the recorded receivable, (ii) the risk of non-payment as a result of commercial insurance companies denying claims, (iii) the risk that patients will fail to remit insurance payments to the Company when the commercial insurance company pays out-of-network claims directly to the patient, (iv) resource and capacity constraints that may prevent the Company from handling the volume of billing and collection issues in a timely manner, (v) the risk that patients do not pay the Company for their self-pay balances (including co-pays, deductibles and any portion of the claim not covered by insurance) and (vi) the risk of non-payment from uninsured patients.
| f) | Allowance for Doubtful Accounts, Contractual and Other Discounts |
The Company derives the majority of its revenues from commercial payors at in-network rates. Management estimates the allowance for contractual and other discounts based on its historical collection experience and contractual rates. The services authorized and provided and related reimbursement are often subject to interpretation and negotiation that could result in payments that differ from the Company’s estimates. The Company’s allowance for doubtful accounts is based on historical experience, but management also takes into consideration the age of accounts, creditworthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. An account is written off only after the Company has pursued collection efforts or otherwise determines an account to be uncollectible. Uncollectible balances are written-off against the allowance. Recoveries of previously written-off balances are credited to income when the recoveries are made.
| g) | Property and equipment |
Property and equipment is recorded at cost. Depreciation is calculated on the straight line basis over the estimated life of the asset.
| h) | Intangible assets |
Intangible assets are stated at acquisition cost less accumulated amortization, if applicable, less any adjustments for impairment losses.
Amortization is charged on a straight-line basis over the estimated remaining useful lives of the individual intangibles. Where intangibles are deemed to be impaired the Company recognizes an impairment loss measured as the difference between the estimated fair value of the intangible and its book value.
Licenses to provide substance abuse rehabilitation services are amortized over the expected life of the contract, including any anticipated renewals. The Company expects its licenses to remain in operation for a period of five years.
F-8
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Summary of significant accounting policies (continued) |
| i) | Leases |
The Company accounts for leases in terms of AC 842 whereby leases are classified as either finance 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 finance leases. At the time a finance lease is entered into, an asset is recorded together with its related long-term obligation to reflect the acquisition and financing. Property and equipment recorded under finance leases is amortized on the same basis as described above. Operating leases are recognized on the balance sheet as a lease liability with a corresponding right of use asset for all leases with a term that is more than twelve months. Payments under operating leases are expensed as incurred.
| j) | Derivatives |
The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. The Company uses a Black Scholes Option Pricing model to estimate the fair value of convertible debt conversion features at the end of each applicable reporting period. Changes in the fair value of these derivatives during each reporting period are included in the statements of operations. Inputs into the Black Scholes Option Pricing model require estimates, including such items as estimated volatility of the Company’s stock, risk free interest rate and the estimated life of the financial instruments being fair valued.
If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.
| k) | Financial instruments |
The Company initially measures its financial assets and liabilities at fair value, except for certain non-arm’s length transactions. The Company subsequently measures all its financial assets and financial liabilities at amortized cost.
Financial assets measured at amortized cost include cash and accounts receivable.
Financial liabilities measured at amortized cost include bank indebtedness, accounts payable and accrued liabilities, harmonized sales tax payable, withholding taxes payable, convertible notes payable, loans payable and related party notes.
Financial assets measured at cost are tested for impairment when there are indicators of impairment. The amount of the write-down is recognized in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income. The Company recognizes its transaction costs in net income in the period incurred. However, financial instruments that will not be subsequently measured at fair value are adjusted by the transaction costs that are directly attributable to their origination, issuance or assumption.
FASB ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 establishes a three tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
| ● | Level 1. Observable inputs such as quoted prices in active markets; |
| ● | Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
| ● | Level 3. Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions. |
The Company measures its convertible debt and derivative liabilities associated therewith at fair value. These liabilities are revalued periodically and the resultant gain or loss is realized through the Statement of Operations and Comprehensive Loss.
| l) | Related parties |
Parties are considered to be related to the Company if the parties directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions are recorded at fair value of the goods or services exchanged.
F-9
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Summary of significant accounting policies (continued) |
| m) | Revenue Recognition |
ASC 606 requires companies to exercise more judgment and recognize revenue using a five-step process.
The Company’s provision for doubtful accounts are recorded as a direct reduction to revenue instead of being presented as a separate line item on the consolidated statements of operations and comprehensive loss.
As our performance obligations relate to contracts with a duration of one year or less, the Company elected the optional exemption in ASC 606-10-50-14(a). Therefore, the Company is not required to disclose the transaction price for the remaining performance obligations at the end of the reporting period or when the Company expects to recognize the revenue. The Company has minimal unsatisfied performance obligations at the end of the reporting period as our patients typically are under no obligation to remain admitted in our facilities.
The Company receives payments from the following sources for services rendered in our U.S. Facility: (i) commercial insurers; and (ii) individual patients and clients. As the period between the time of service and time of payment is typically one year or less, the Company elected the practical expedient under ASC 606-10-32-18 and does not adjust for the effects of a significant financing component.
The Company derives a significant portion of its revenue from other payors that receive discounts from established billing rates. The various managed care contracts under which these discounts must be calculated are complex, subject to interpretation and adjustment, and may include multiple reimbursement mechanisms for different types of services provided in the Company’s inpatient facilities and cost settlement provisions. Management estimates the transaction price on a payor-specific basis given its interpretation of the applicable regulations or contract terms. The services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from the Company’s estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.
Settlements
with third-party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future
periods as final settlements are determined. In the opinion of management, adequate provision has been made for any adjustments and final
settlements. However, there can be no assurance that any such adjustments and final settlements will not have a material effect on the
Company’s financial condition or results of operations. The Company’s receivables were $
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. |
| n) | Income taxes |
The Company accounts for income taxes under the provisions of ASC Topic 740, “Income Taxes”. Under ASC Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income taxes are provided using the liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax basis of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized.
ASC Topic 740 contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company recognizes interest and penalties accrued on unrecognized tax benefits within general and administrative expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in general and administrative expenses in the period that such determination is made. The tax returns for fiscal 2018, through 2020 are subject to audit or review by the US tax authorities, whereas fiscal 2010 through 2020 are subject to audit or review by the Canadian tax authority.
F-10
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Summary of significant accounting policies (continued) |
| o) | Net income (loss) per Share |
Basic net income (loss) per share is computed on the basis of the weighted average number of common stock outstanding during the year.
Diluted net income (loss) per share is computed on the basis of the weighted average number of common stock and common stock equivalents outstanding. Dilutive securities having an anti-dilutive effect on diluted net income (loss) per share are excluded from the calculation.
Dilution is computed by applying the treasury stock method for options and warrants. Under this method, “in-the money” options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Dilution is computed by applying the if-converted method for convertible preferred stocks. Under this method, convertible preferred stock is assumed to be converted at the beginning of the period (or at the time of issuance, if later), and preferred dividends (if any) will be added back to determine income applicable to common stock. The shares issuable upon conversion will be added to weighted average number of common stock outstanding. Conversion will be assumed only if it reduces earnings per share (or increases loss per share).
| p) | Stock based compensation |
Stock based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the employee’s requisite service period or vesting period on a straight-line basis. Share-based compensation expense recognized in the consolidated statements of operations for the year ended December 31, 2021 and 2020 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 no awards with performance conditions and no awards dependent on market conditions.
| q) | Financial instruments Risks |
The Company is exposed to various risks through its financial instruments. The following analysis provides a measure of the Company’s risk exposure and concentrations at the balance sheet date, December 31, 2021 and 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 $
F-11
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 2. | Summary of significant accounting policies (continued) |
| q) | Financial instruments Risks (continued) |
| 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 December 31, 2021. In the opinion of management, interest rate risk is assessed as moderate.
| b. | Currency risk |
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is subject to currency risk as it has subsidiaries that operate in Canada and are subject to fluctuations in the Canadian dollar. A substantial portion of the Company’s financial assets and liabilities are denominated in Canadian dollars. Based on the net exposures at December 31, 2021, a 5% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an approximate $6,187 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.
| r) | Recent accounting pronouncements |
In November 2021, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2021-10, Disclosures by Entities about Government Assistance (Topic 832), the update increases the transparency of government assistance, including the following disclosures: (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements.
This ASU is effective for fiscal years beginning after December 15, 2021.
The effects of this ASU on the Company’s consolidated financial statements is currently being assessed and is not expected to have an impact on current disclosure.
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.
| s) | Comparative and prior period disclosures |
The comparative and prior period disclosed amounts presented in these consolidated financial statements have been reclassified where necessary to conform to the presentation used in the current year and period.
F-12
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 3. | Going concern |
The Company’s consolidated financial statements have been prepared in accordance with US GAAP applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations in the normal course of business. At December 31, 2021 the Company has a working capital deficiency of $13.2 million, 13.2 million including derivative liabilities of $0.5 million 515,901 and total liabilities in excess of assets in the amount of $9.5 million . Management believes that current available resources will not be sufficient to fund the Company’s planned expenditures over the next 12 months. Accordingly, the Company will be dependent upon the raising of additional capital through placement of common shares, and/or debt financing in order to implement its business plan and generating sufficient revenue in excess of costs. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain geographical areas, or techniques that it might otherwise seek to retain. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. These consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
| 4. | Acquisition of subsidiaries |
On June 30, 2020, the Company entered into a stock purchase agreement to acquire 51% of American Treatment Holdings, Inc. (“ATHI”) from The Q Global Trust (“Seller”) and Lawrence B Hawkins (“Hawkins”), which in turn owns 100% of Evernia Health Services LLC. (“Evernia”), which operates drug rehabilitation facilities. The consideration for the acquisition 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 $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 ATHI for a purchase consideration of $50,000.
On April 28, 2021, the Stock Purchase Agreement 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 $50,000. As of December 31, 2021, the Company had issued the 100,000,000 shares of common stock and had paid $42,750 due to the Seller, in terms of the amended agreement. 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 Behavioral 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 Amended 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 intangible 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 | ( |
) | ||
| Advances | ( |
) | ||
| 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 | ( |
) | ||
| Total | $ | |||
F-13
ETHEMA HEALTH CORPORATION
NOTES TO THE 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 (loss) income for the year ended December 31, 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, therefore earning were included from June 2020.
| Schedule of revenue and earnings | ||||||||
| Revenue | Earnings | |||||||
| Actual from July 1, 2021 to December 31, 2021 | $ | $ | ( |
) | ||||
| 2021 Supplemental pro forma from January 1, 2021 to December 31, 2021 | $ | $ | ( |
) | ||||
| 2020 Supplemental pro forma from inception to December 31, 2020 | $ | $ | ||||||
The 2021 and 2020 Supplemental pro forma earnings information was adjusted to account for amortization of intangibles on acquisition of $178,990 and $357,981, 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 proposed to provide a comprehensive addiction treatment program to large employee groups. The Company had advanced LLW a total of $120,000 at September 30, 2021. These funds were advanced as short-term promissory notes that were 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 to acquire 51% of American Treatment Holdings, Inc. (“ATHI”) from The Q Global Trust (“Seller”) and Lawrence B Hawkins (“Hawkins”), which in turn owns 100% of Evernia Health Services LLC. (“Evernia”), which operates drug rehabilitation facilities. The consideration for the acquisition is a loan to be provided by the purchaser to Evernia in the amount of $500,000. As of December 31, 2020, the Company had advanced Evernia $690,449.
The Company originally had a 180 day option, from the advancement of the first tranche to Evernia, to purchase an additional 9% of ETHI for a purchase consideration of $50,000.
On April 28, 2021, the Stock Purchase Agreement date June 30, 2020 between the Company and the Q Global Trust, and ATHI was amended whereby the option to purchase an additional 9% of ATHI for $50,000 was amended to purchase an additional 24%, an increase of 15% over the prior option, for 100,000,000 shares of common stock. The remaining condition to closing, the receipt of approval for the change of ownership of the license from the Department of Children and Family Services of Florida, was satisfied by the probationary approval, which was received on June 30, 2021. The Company exercised the option and issued the 100,000,000 shares of common stock and paid $42,750 of the $50,000 due to the Seller as of December 31, 2021. 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 Behavioral 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.
F-14
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 6. | Other investments (continued) |
On June 30, 2020, the Company entered into an agreement to 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. During 2021, the Company decided not to pursue the acquisition of BHHI.
| 7. | Due on sale of subsidiary |
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 December 31, 2021, CDN$1,055,042 of the escrow had been refunded to the Company and CDN$461,318 had been used to affect building improvements to the premises owned by CCH, for a total reduction of CDN$1,516,360. The remaining escrow balance was CDN$6,485 (approximately US$ 5,115).
| 8. | Property and equipment |
Property and equipment consists of the following:
| Schedule of sale of property | December
31, 2021 |
December 31, 2020 | ||||||||||||||
| Cost | Accumulated depreciation | Net book value | Net book value | |||||||||||||
| Land | $ | $ | $ | $ | ||||||||||||
| Property | ( |
) | ||||||||||||||
| Leasehold improvements | ( |
) | ||||||||||||||
| Furniture and fittings | ( |
) | ||||||||||||||
| Vehicles | ( |
) | ||||||||||||||
| Computer equipment | ( |
) | ||||||||||||||
| $ | $ | ( |
) | $ | $ | |||||||||||
Depreciation
expense for the year ended December 31, 2021 and 2020 was $
F-15
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 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 Intangible assets | December
31, 2021 | |||||||||||
| Cost | Accumulated amortization | 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 an 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 that 4.64% per annum was an appropriate incremental borrowing rate to apply to its real-estate operating lease.
Right of use assets are included in the consolidated balance sheet are as follows:
| Schedule of Right of use assets | ||||||||
| December
31, 2021 |
December
31, 2020 | |||||||
| Non-current assets | ||||||||
| Right-of-use assets – finance leases, net of depreciation, included in Property and equipment | $ | $ | ||||||
| Right-of-use assets - operating leases, net of amortization | $ | $ | ||||||
Lease costs consists of the following:
| Schedule of Lease costs | ||||||||
| Year ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | $ | $ | ||||||
| Interest expense on finance lease liabilities | ||||||||
| Finance lease cost | ||||||||
| Operating lease cost | $ | $ | ||||||
| Lease cost | $ | $ | ||||||
F-16
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 10. | Leases (continued) |
Other lease information:
| Schedule of Other lease | ||||||||
| Year ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flows from finance leases | $ | ( |
) | $ | ||||
| Operating cash flows from operating leases | ( |
) | ( |
) | ||||
| Financing cash flows from finance leases | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | ( |
) | $ | ( |
) | ||
| Weighted average lease term – finance leases | — | |||||||
| Weighted average remaining lease term – operating leases | — | |||||||
| Discount rate – finance leases | % | — | ||||||
| Discount rate – operating leases | % | — | % | |||||
Maturity of Leases
Finance lease liability
The amount of future minimum lease payments under finance leases as of December 31, 2021 is as follows:
| Schedule of Finance lease liability | ||||
| Amount | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total undiscounted minimum future lease payments | ||||
| Imputed interest | ( |
) | ||
| Total finance lease liability | $ | |||
| Disclosed as: | ||||
| Current portion | $ | |||
| Non-Current portion | ||||
| Lease liability | $ | |||
Operating lease liability
The amount of future minimum lease payments under operating leases are as follows:
| Schedule of Operating lease liability | ||||
| Amount | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total undiscounted minimum future lease payments | ||||
| Imputed interest | ( |
) | ||
| Total operating lease liability | $ | |||
| Disclosed as: | ||||
| Current portion | $ | |||
| Non-Current portion | ||||
| Lease liability | $ | |||
F-17
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 11. | Taxes Payable |
Taxes payable consist of:
| ● | A payroll tax liability of $144,021 (CDN$182,589) in Greenestone Muskoka which has not been settled as yet.
|
| ● | A GST/HST tax payable of $123,134 (CDN$156,109).
|
| ● | 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. Previously an amount of $250,000 was accrued for any potential exposure, this accrual has been reversed in the current year. |
| Schedule of taxation payable | ||||||||
| December
31, 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:
| Schedule of short-term convertible notes | ||||||||||||||||||||||||||
| Interest rate | Maturity Date | Principal | Interest | Debt Discount | December 31, 2021 | December 31, 2020 | ||||||||||||||||||||
| Leonite Capital, LLC | % | — | $ | $ | $ | $ | $ | |||||||||||||||||||
| % | |
|||||||||||||||||||||||||
| First Fire Global Opportunities Fund | % | October 29,2021 | ||||||||||||||||||||||||
| Auctus Fund, LLC | % | On Demand | ||||||||||||||||||||||||
| % | August 13, 2021 | |||||||||||||||||||||||||
| Labrys Fund, LP | % | |||||||||||||||||||||||||
| % | ( |
) | ||||||||||||||||||||||||
| % | ( |
) | ||||||||||||||||||||||||
| Ed Blasiak | % | |||||||||||||||||||||||||
| Joshua Bauman | % | |||||||||||||||||||||||||
| % | ( |
) | ||||||||||||||||||||||||
| Geneva Roth Remark Holdings, Inc. | % | |||||||||||||||||||||||||
| % | ||||||||||||||||||||||||||
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| % | ( |
) | ||||||||||||||||||||||||
| Series N convertible notes | % | |||||||||||||||||||||||||
| $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||
F-18
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 12. | Short-term Convertible Notes (continued) |
Leonite Capital, LLC
Convertible Promissory Notes
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 Leonite 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. |
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.
F-19
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 12. | Short-term Convertible Notes (continued) |
Leonite Capital, LLC (continued)
Convertible Promissory notes (continued)
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.
On October 19, 2021, in terms of a conversion notice, Leonite converted the principal sum of $44,444 and interest thereon of $5,302 of the Leonite Note into 50,496,728 shares of common stock at a conversion price of $0.0010 per share.
On October 29, 2021, the Company issued 83,771,947 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $83,022 at a conversion price of $0.0009 per share.
On November 22, 2021, in terms of a conversion notice, Leonite converted the principal sum of $50,532 and interest thereon of $7,145 of the Leonite Note into 58,427,091 shares of common stock at a conversion price of $0.0010 per share.
On December 13, 2021, in terms of a conversion notice, Leonite converted the principal sum of $89,684 and interest thereon of $249 of the Leonite Note into 90,682,696 shares of common stock at a conversion price of $0.0010 per share.
F-20
ETHEMA HEALTH CORPORATION
NOTES TO THE 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.
F-21
ETHEMA HEALTH CORPORATION
NOTES TO THE 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 year ended December 31, 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.
F-22
ETHEMA HEALTH CORPORATION
NOTES TO THE 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. The note matured May 7, 2020 and remains in default.
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.
F-23
ETHEMA HEALTH CORPORATION
NOTES TO THE 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 October 8, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $55,800 into 62,000,000 shares of common stock.
On October 15, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $7,400 into 8,222,222 shares of common stock.
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 November 23, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $6,329 and interest of $60,500 into 75,000,000 shares of common stock.
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.
F-24
ETHEMA HEALTH CORPORATION
NOTES TO THE 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.
On June 8, 2021, in terms of a conversion notice received by the company, Bauman converted the aggregate principal sum of $100,000 including interest thereon of $5,563 into 106,313,288 shares of common stock.
On October 25, 2021, in terms of a conversion notice received by the company, Bauman converted the aggregate principal sum of $37,500 including interest thereon of $1,155 into 39,405,310 shares of common stock, thereby extinguishing the note.
On October 21, 2021, the Company entered into a Securities Purchase Agreement with Joshua Bauman (“Bauman”), pursuant to which the Company issued a senior secured convertible promissory note in the aggregate principal amount of $150,000, including an original issue discount of $16,250. The note bears interest at 11.0% per annum, which is guaranteed and earned in full on issue date and matures on October 21, 2022. The note may be prepaid at certain prepayment penalties and is convertible into shares of common stock at a conversion price at the option of the holder at $0.001 per share, adjusted for anti-dilution provisions.
Geneva Roth Remark Holdings, Inc
On October 29, 2020, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $88,000, for net proceeds of $85,000 after the payment of legal fees and origination fees amounting to $3,000. The note has a maturity date of August 29, 2021 and bears interest at the rate of 9.0% per annum. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser. 180 days after the issued date into shares of the Company’s common stock at 61% of the lowest trade price during the ten consecutive trading days immediately prior to conversion. The principal plus the accrued interest of the Note may be prepaid by the Company prior to the expiry of 180 days from issuance date at a prepayment penalty ranging from 112% to 130%.
On November 24, 2020, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $53,000, for net proceeds of $50,000 after the payment of legal fees and origination fees amounting to $3,000. The note has a maturity date of October 15, 2021 and bears interest at the rate of 9.0% per annum. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser. 180 days after the issued date into shares of the Company’s common stock at 61% of the lowest trade price during the ten consecutive trading days immediately prior to conversion. The principal plus the accrued interest of the Note may be prepaid by the Company prior to the expiry of 180 days from issuance date at a prepayment penalty ranging from 112% to 130%.
On March 3, 2021, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $53,500, for net proceeds of $50,000 after the payment of legal fees and origination fees amounting to $3,500. The note has a maturity date of January 3, 2022 and bears interest at the rate of 9.0% per annum. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser. 180 days after the issued date into shares of the Company’s common stock at 61% of the lowest trade price during the ten consecutive trading days immediately prior to conversion. The principal plus the accrued interest of the Note may be prepaid by the Company prior to the expiry of 180 days from issuance date at a prepayment penalty ranging from 112% to 130%.
F-25
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 12. | Short-term Convertible Notes (continued) |
Geneva Roth Remark Holdings, Inc (continued)
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.
On October 1, 2021, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $95,200, for net proceeds of $85,000 before the payment of legal fees and origination fees amounting to $3,750. The note has a maturity date of October 1, 2022 and bears interest at the rate of 8.0% per annum, due immediately on the issuance date of the note. The outstanding principal amount of the note is payable in nine monthly payments of $11,424 commencing on November 15, 2021. The note is convertible into shares of common stock upon an event of default at the election of the purchaser. The conversion price is 75% of the lowest trading price for the preceding five days prior to the date of conversion.
Series N convertible notes
Between January 28, 2019 and June 11, 2020, the Company closed several tranches of Series N Convertible notes in which it raised $3,229,000 in principal from accredited investors through the issuance to the investors of the Company’s Series N convertible notes, in the total original principal amount of $3,229,000, which Notes are convertible into the Company’s common stock at a conversion price of $0.08 per share together with three year warrants to purchase up to a total of 52,237,500 shares of the Company’s common stock at an exercise price of $0.12 per share. Both the conversion price under the Notes and the exercise price under the warrants are subject to standard adjustment mechanisms. The notes matured one year from the date of issuance.
| 13. | Short term loans |
On April 12, 2019, Eileen Greene, a related party assigned CDN1,000,000 of the amount owed by the Company to her, to a third party. The loan bears interest at 12% per annum which the Company agreed to pay.
| 14. | Mortgage loans |
Mortgage loans is disclosed as follows:
| Schedule of mortgage loans | Interest rate |
Maturity date | Principal Outstanding |
Accrued interest |
December
31, 2021 |
December
31, 2020 |
||||||||||||||||
| Cranberry Cove Holdings, Ltd. | ||||||||||||||||||||||
| Pace Mortgage | % | $ | $ | $ | $ | |||||||||||||||||
| Disclosed as follows: | ||||||||||||||||||||||
| Short-term portion | $ | $ | ||||||||||||||||||||
| Long-term portion | ||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||
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.
F-26
ETHEMA HEALTH CORPORATION
NOTES TO THE 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 was forgivable if the Company demonstrated that the proceeds were used for expenses such as employee costs during the pandemic. This loan was forgiven in September 2021.
On May 3, 2021, the Company was granted a second government assistance loan in the aggregate principal amount of $157,367. The loan is forgivable if the Company demonstrates that the proceeds were used for expenses such as employee costs during the pandemic. Should the loan not be forgiven, interest is payable on the loan at the rate of 1% per annum and the principal is repayable and interest is payable over an 18 month period. No payments have been made to date and the Company expects the loan to be forgiven, therefore no interest has been accrued.
On December 1, 2020, CCH was granted a Covid-19 related government assistance loan in the aggregate principal amount of CDN$ 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.
| 16. | Derivative liability |
The short-term convertible notes, together with certain warrants issued to convertible note holders disclosed in note 12 above and note 18 below, have variable priced conversion rights with no fixed floor price and will reprice dependent on the share price performance over varying periods of time. This gives rise to a derivative financial liability, which was initially valued at inception of the convertible notes at $1,959,959 using a Black-Scholes valuation model.
The
derivative liability is marked-to-market on a quarterly basis. As of December 31, 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 | Year
ended December 31, 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 | December
31, 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 | ( |
) | |||||||||
| Mark-to-market adjustments on converted notes | ( |
) | |||||||||
| Derivative liability on issued convertible notes | |||||||||||
| Fair value adjustments to derivative liability | ( |
) | |||||||||
| Closing balance | $ | $ | |||||||||
F-27
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 17. | Related party transactions |
Shawn E. Leon
As
of December 31, 2021 and 2020 the Company had a payable to Shawn Leon of $
Management
fees from prior periods due to Mr. Leon amounting to $
Due to the current financial position of the Group, Mr. Leon forfeited the management fees due to him for the years ended December 31, 2021 and 2020.
Leon Developments, Ltd.
As of December 31, 2021 and 2020, the Company owed Leon Developments, Ltd. $935,966 and $930,307, respectively, for funds advanced to the Company.
Eileen Greene
As
of December 31, 2021 and 2020, the Company owed Eileen Greene, the spouse of our CEO, Shawn Leon, $
All related party transactions occur in the normal course of operations and in terms of agreements entered into between the parties.
| 18. | 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 3,579,053,805 and 2,027,085,665 2,207,085,665 shares of common stock at December 31, 2021 and December 31, 2020, respectively.
On January 8, 2021, the Company issued 78,763,466 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $70,137.
On March 3, 2021, the Company issued 97,000,000 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $95,000.
On March 9, 2021, the Company received notification of exercise of warrants for 66,666,666 shares on a cashless basis, resulting in the issuance of 59,999,999 shares of common stock valued on the date of issuance at $90,000.
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.
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.
F-28
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 18. | Stockholder’s deficit (continued) |
| a) | Common shares (continued) |
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.
On September 28, 2021, the Company issued 60,000,000 shares of common stock to Labrys in connection with a conversion notice received, converting principal of $54,000.
On October 8, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $55,800 into 62,000,000 shares of common stock.
On October 15, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $7,400 into 8,222,222 shares of common stock.
On October 19, 2021, the Company issued 50,496,728 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $49,747.
On October 25, 2021, the Company issued 39,405,310 shares of common stock to Joshua Bauman in connection with a conversion notice received, converting principal and interest of $38,655.
On October 29, 2021, the Company issued 83,771,947 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $83,022.
On November 22, 2021, the Company issued 58,427,091 shares of common stock to Leonite in connection with a conversion notice received, converting principal and interest of $57,677.
On November 23,2021, the Company issued 75,000,000 shares of common stock to Labrys in connection with a conversion notice received, converting principal and interest of $66,829.
On December 13, 2021, in terms of a conversion notice received by the company, Leonite converted the aggregate principal and interest amount of $89,933 into 90,682,696 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 December 31, 2021 and December 31, 2020, respectively.
| c) | Series B Preferred shares |
Authorized and outstanding
The Company has authorized 400,000 10,000,000 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 December 31, 2021 and December 31, 2020, respectively.
| d) | Warrants |
The Secured Promissory Note Agreements entered into with Leonite and First Fire contain certain conversion price protection and anti-dilution protection provisions, which were triggered as a result of the terms contained in the promissory note issued to Labrys Fund LP on November 30, 2020. As a result, the Company issued five year warrants exercisable for 195,959,598 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 five year warrants exercisable for 131,111,112 shares of common stock at an exercise price of $0.00205 per share.
F-29
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 18. | 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 7, 2021, 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
On June 2, 2021, 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.
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 December 31, 2021 is as follows:
| Schedule of warrants 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 December 31, 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:
| Schedule of assumption | ||||
Year ended December 31, 2021 |
||||
| Calculated stock price | $ to | |||
| Risk free interest rate | to | % | ||
| Expected life of warrants | ||||
| expected volatility of underlying stock | to | % | ||
| Expected dividend rate | % | |||
F-30
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 18. | 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 December 31, 2021:
| Summarizes information about 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 December 31, 2021 are vested. The warrants outstanding at December 31, 2021 have an intrinsic value of $106,043.
| 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 December 31, 2021 under the Plan.
| 19. | Segment information |
The Company has two reportable operating segments:
| a. | Rental income from the property owned by CCH subsidiary located at 3571 Muskoka Road, #169, Bala, on which the operations of the Canadian Rehab Clinic were located prior to disposal on February 14, 2017 and subsequently leased to the purchasers of the business of the Canadian Rehab Clinic, for a period of 5 years renewable for a further three five-year periods and with an option to acquire the property at a fixed price. |
| b. | Rehabilitation Services provided to customers, these services were provided to customers at our Evernia, Addiction Recovery Institute of America and Seastone of Delray operations. |
F-31
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 19. | Segment information (continued) |
The segment operating results of the reportable segments for the year ended December 31, 2021 is disclosed as follows:
| Schedule of segment information | ||||||||||||
| Year ended December 31, 2021 | ||||||||||||
| Rental Operations |
In-Patient services |
Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Operating expenses | ||||||||||||
| Operating income (loss) | ( |
) | ||||||||||
| Other (expense) income | ||||||||||||
| Other income | ||||||||||||
| Forgiveness of government relief loan | ||||||||||||
| Loss on advance | ( |
) | ( |
) | ||||||||
| Fair value of warrants granted to convertible debt holders | ( |
) | ( |
) | ||||||||
| Penalty on convertible debt | ( |
) | ( |
) | ||||||||
| 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 December 31, 2021 is as follows:
| December 31, 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 | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
F-32
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 19. | Segment information (continued) |
The segment operating results of the reportable segments for the year ended December 31, 2020 is disclosed as follows:
| Year ended December 31, 2020 | ||||||||||||
| Rental Operations | In-Patient services | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Operating expenditure | ( | ) | ( | ) | ( | ) | ||||||
| Operating income (loss) | ( | ) | ( | ) | ||||||||
| Other (expense) income | ||||||||||||
| Other income | ||||||||||||
| Gain on extinguishment of debt | ||||||||||||
| Gain on sale of assets | ||||||||||||
| Loss on debt conversion | ( | ) | ( | ) | ||||||||
| Warrants exercised | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||
| Amortization of debt discount | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ||||||||
| Foreign exchange movements | ( | ) | ( | ) | ( | ) | ||||||
| Net income (loss) before taxation | ( | ) | ||||||||||
| Taxation | ||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | |||||||
The operating assets and liabilities of the reportable segments as of December 31, 2020 is as follows:
| December 31, 2020 | ||||||||||||
| Rental Operations | In-Patient services | Total | ||||||||||
| Purchase of fixed assets | $ | $ | $ | |||||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Non-current assets | ||||||||||||
| Liabilities | ||||||||||||
| Current liabilities | ( | ) | ( | ) | ( | ) | ||||||
| Non-current liabilities | ( | ) | ( | ) | ||||||||
| Intercompany balances | ( | ) | ||||||||||
| Net liability position | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| 20. | Net (loss) income per common share |
For the year ended December 31, 2021, 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 Antidilutive Securities | Year
ended December 31, 2021 | |||
| Warrants to purchase shares of common stock | ||||
| Convertible notes | ||||
F-33
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 20. | Net (loss) income per common share (continued) |
For the year ended December 31, 2020, the computation of basic and diluted earnings per share is calculated as follows:
| Schedule of Net (loss) income per common share | ||||||||||||
| 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 | $ | $ | ||||||||||
| 21. | Commitments and contingencies |
| a. | Options granted to purchase shares in ATHI |
On July 12, 2020, the Company entered into a five year option agreement with Leonite Capital LLC (“Leonite”) and other investors (collectively the “Transferees”), the Company agreed to sell to Leonite a portion of the total outstanding shares of ATHI from the shares of ATHI held by the company. The Company provided Leonite an option to purchase 4,000,000 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $400), based on the advances that Leonite made to the Company totaling $396,000. Leonite shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Leonite to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
On September 14, 2020, the Company entered into a five year option agreement with Ed Blasiak (“Blasiak”) whereby the Company agreed to sell to Blasiak a portion of the total outstanding shares of ATHI. The Company provided Blasiak an option to purchase 571,428 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $57), based on the advances that Blasiak made to the Company totaling $50,000. Blasiak shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Blasiak to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
On October 29, 2020, the Company entered into a five year option agreement with First Fire whereby the Company agreed to sell to First Fire a portion of the total outstanding shares of ATHI. The Company provided First Fire an option to purchase 1,428,571 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $143), based on the advances that First Fire made to the Company totaling $120,000. First Fire shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by First Fire to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
On October 29, 2020, the Company entered into a five year option agreement entered into with Bauman, so that the Company agreed to sell to Bauman a portion of the total outstanding shares of ATHI. The Company provided Bauman an option to purchase 1,428,571 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $143), based on the advances that Bauman made to the Company totaling $120,000. Bauman shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Bauman to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
| b. | Mortgage loans |
The company has a mortgage loan as disclosed in note 14 above. The mortgage loan matures on July 19, 2022 and the Company currently owes $3,864,312.
| c. | Other |
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.
| 22. | Income taxes |
The Company is current in its US tax filings, except for its 2020 filing, as of December 31, 2021 and is not current in its Canadian tax filings with the 2019 and 2020 returns still outstanding.
The income tax provision/ (benefit) is different from that which would be obtained by applying the statutory Federal income tax rate of 21% and applicable state tax rates of 5% to income before income tax expense. The items causing this difference for the years ended December 31, 2021 and 2020 are as follows:
| Schedule of reconciliation of income taxes | ||||||||
| Year ended December 31, 2021 | Year ended December 31, 2020 | |||||||
| Tax credit at the federal and state statutory rate | ||||||||
| Prior year over provision | ||||||||
| Foreign taxation | ( | ) | ( | ) | ||||
| Permanent differences | ( | ) | ( | ) | ||||
| Foreign tax rate differential | ( | ) | ||||||
| Net operating loss utilized | ||||||||
| Valuation allowance | ( | ) | ||||||
| Net future tax asset | ||||||||
F-34
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 22. | Income taxes Continued) |
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities at December 31, 2021 and 2020 are as follows:
| Schedule of deferred tax assets and liabilities | ||||||||
| December
31, 2021 | December
31, 2020 | |||||||
| Net operating losses | ||||||||
| Net operating loss carry forward | ||||||||
| Prior year adjustment to opening balances | ||||||||
| Foreign exchange differential | ||||||||
| Net operating loss utilized | ( | ) | ||||||
| Net taxable loss | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net future tax asset | ||||||||
The company has established a valuation allowance against its gross deferred tax assets sufficient to bring its net deferred tax assets to zero due to the uncertainty surrounding the realization of such assets. Management has determined it is more likely than not that the net deferred tax assets are not realizable due to the Company’s historical loss position. The valuation allowance for the year ended December 31, 2021 increased by $678,797 due to the additional taxation losses incurred for the year ended December 31, 2021.
As of December 31, 2021, the prior three tax years remain open for examination by the federal or state regulatory agencies for purposes of an audit for tax purposes.
Pursuant to the Internal Revenue Code of 1986, as amended (“IRC”), §382, the Company’s ability to use its net operating loss carry forwards to offset future taxable income is limited if the Company experiences a cumulative change in ownership of more than 50% within a three-year period.
As of December 31, 2021, the Company is in arrears on certain US and Canadian tax filings and the amounts presented above are based on estimates. The actual losses available could differ from these estimates. In addition, the Company could be subject to penalties for these unfiled tax returns.
The Company operates in foreign jurisdictions and is subject to audit by taxing authorities. These audits may result in the assessment of amounts different than the amounts recorded in the consolidated financial statements. The Company liaises with the relevant authorities in these jurisdictions in regard to its income tax and other returns. Management believes the Company has adequately provided for any taxes, penalties and interest that may fall due.
| 23. | Subsequent events |
Subsequent to December 31, 2021, but effective December 29, 2021, the Company entered into amended agreements with Labrys whereby the following notes were amended as follows:
Note dated May 7, 2021
· The Maturity date of the note was extended to May 31, 2022.
| · | The triggering of the dilutive event on October 25, 2021 which reduced the conversion price of the convertible note to $0.001 per share, will not be utilized as long as any events of default under the note are not triggered. |
| · | The Company agreed to make monthly payments under the note totaling $536,000 between January 10, and May 31, 2022. |
Note dated June 2, 2021
· The Maturity date of the note was extended to June 30, 2022.
| · | The triggering of the dilutive event on October 25, 2021 which reduced the conversion price of the convertible note to $0.001 per share, will not be utilized as long as any events of default under the note are not triggered. |
| · | The Company agreed to make two equal payments of $127,650 on the note on May 31, and June 30, 2022. |
Other than disclosed above, the Company has evaluated subsequent events through the date the financial statements were issued, we did not identify any other subsequent events that would have required adjustment or disclosure in the financial statements.
F-35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
Annual Evaluation of Disclosure Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Exchange Act), that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), to allow for timely decisions regarding required disclosure.
As required by Exchange Act Rule 13a-15, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer concluded that due to our limited resources our disclosure controls and procedures are not effective in providing material information required to be included in our periodic SEC filings on a timely basis and to ensure that information required to be disclosed in our periodic SEC filings is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure about our internal control over financial reporting discussed below.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Our internal control system was designed to, in general, provide reasonable assurance to our management and board regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on that assessment, our management has determined that as of December 31, 2021, our internal control over financial reporting was not effective due to material weaknesses related to a limited segregation of duties due to our limited resources and the small number of employees. Management has determined that this control deficiency constitutes a material weakness which could result in material misstatements of significant accounts and disclosures that could result in a material misstatement to our interim or annual financial statements that would not be prevented or detected. In addition, due to limited staffing, we are not always able to detect minor errors or omissions in reporting.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding management’s assessment of our internal control over financial reporting pursuant to temporary rules of the SEC.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
| 11 |
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Our current directors and executive officers, their ages and their positions, as of the date of this Annual Report, as follows:
| Name Position | ||
| Shawn E. Leon | 62 | Chief Executive Officer, Chief Financial Officer, President and Director |
| John O’Bireck | 63 | Director |
| Gerald T Miller | 64 | Director |
Set forth below is a brief description of the background and business experience of each of our current executive officers and directors.
Shawn E. Leon, Chief Executive Officer, Chief Financial Officer, President and Director
Shawn E. Leon has been an officer and director of the Company since November 2010 and served as the President of the Company’s subsidiaries at all times. In April 2011, Mr. Leon was appointed as the Company’s Chief Executive Officer. Prior to joining the Company, Mr. Leon held the role of President of Greenestone Clinic Inc., Leon Developments Ltd, Port Carling Inn Developments Ltd., 1871 at the Locks Developments Ltd. and Leon Developments Ltd. Mr. Leon graduated with Honors in Business Administration from Wilfrid Laurier University in 1982. Mr. Leon was elected to the Board because of his prior management experience.
John O’Bireck, Director
John O’Bireck of Aurora, Ontario, Canada has been a Control Systems Engineer, since graduating in 1982, and has since been involved with building engineering teams to provide solutions for industrial and transportation industry. He was a cofounder of HayDrive Technologies Ltd. a publicly listed company where he held the positions of Director, Vice-president, Chief Technology Officer and Vice President of Advanced Product Development. Mr. O’Bireck was also the co-founder, Director and President of Supernova Performance Technologies Ltd., a privately held company. In 2014 Mr. O’Bireck was elected as a Director to the Board of Sparta Capital Ltd.
Gerald T. Miller, Director
Gerry Miller of Toronto, Ontario, Canada is the Managing Partner of the Law Firm Gardiner Miller Arnold LLP. Mr. Miller’s practice focuses on a comprehensive range of business, finance and real estate issues. In addition to managing the law firm. Mr. Miller’s runs the business law and real estate practice at Gardiner Miller Arnold LLP Law firm. He advises small to medium sized companies in manufacturing, investing and service related industries. Mr. Miller supervises all merger and acquisition transactions and institutional finance work.
CORPORATE GOVERNANCE
Code of Business Conduct and Ethics
We have adopted a code of conduct that applies to all officers, directors and employees, including those officers responsible for financial reporting. If we make any substantive amendments to the code of conduct or grant any waiver from a provision of the code of conduct to any executive officer or director, we will promptly disclose the nature of the amendment or in a Current Report on Form 8-K to be filed with the SEC.
Our Board of Directors
Our Board currently consists of three members. Our Board judges the independence of its directors by the heightened standards established by the Nasdaq Stock Market. Accordingly, the Board of Directors has determined that our two non-employee directors, Messrs. O’Bireck and Mr. Miller, each meet the independence standards established by the Nasdaq Stock Market and the applicable independence rules and regulations of the SEC. Our Board considers a director to be independent when the director is not one of our or our subsidiaries’ officers or employees or director of our subsidiaries, does not have any relationship which would, or could reasonably appear to, materially interfere with the independent judgment of such director, and the director otherwise meets the independence requirements under the listing standards of the Nasdaq Stock Market and the rules and regulations of the SEC.
| 12 |
Board Committees
Our Board of Directors act as our Audit Committee, our Compensation Committee and our Nominating and Governance Committees.
Audit Committee
The primary purpose of the audit committee is to oversee the quality and integrity of our accounting and financial reporting processes and the audit of our financial statements. The audit committee is responsible for selecting, compensating, overseeing and terminating our independent registered public accounting firm. Specifically, the audit committee’s duties are to recommend to our Board of Directors the engagement of an independent registered public accounting firm to audit our financial statements and to review our accounting and auditing principles. The audit committee will review the scope, timing and fees for the annual audit and the results of audit examinations performed by the external auditors and independent registered public accounting firm, including their recommendations to improve the system of accounting and internal controls.
Compensation Committee
The compensation committee is responsible for, among other things, reviewing and recommending to our Board the annual salary, bonus, stock compensation and other benefits of our executive officers, including our Chief Executive Officer and Chief Financial Officer; reviewing and providing recommendations regarding compensation and bonus levels of other members of senior management; reviewing and making recommendations to our Board on all new executive compensation programs; reviewing the compensation of our Board; and administering our equity incentive plans. The compensation committee may delegate any or all of its duties or responsibilities to a subcommittee of the compensation committee, to the extent consistent with the Company’s organizational documents and all applicable laws, regulations and rules of markets in which our securities trade, as applicable.
Nominating and Governance Committee
The nominating and governance committee is responsible for, among other things, annually assessing the composition, skills, size and tenure of the Board of Directors in advance of annual meetings and whenever individual directors indicate that their status may change; annually considering new members for nomination to the Board of Directors; causing the Board of Directors to annually review the independence of directors; and developing and monitoring our general approach to corporate governance issues as they may arise.
Compliance with Section 16(A) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish the Company with copies of all reports filed by them in compliance with Section 16(a).
Based solely on our review of certain reports filed with the SEC pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, at December 31, 2021, none of the officers, directors or 10% shareholders were in compliance with Section 16(a).
Item 11. Executive Compensation.
There has been no annuity, pension or retirement benefits paid to our officers or directors during the past two fiscal years. We currently do not have an employment agreement with the Company’s Chief Executive Officer. There is no compensation committee of the Board. The Board approved the terms of a certain management agreement with Greenestone Clinic, Inc., wholly owned by the Company’s Chief Executive Officer, Shawn Leon, and with Shawn Leon, whereby a management agreement was initially for a term of one year and was for the development of medical clinics in Ontario, Canada. The agreement has been extended from year to year and has been expanded to include overall company management and the development of clinics in the United States. The management agreement allowed for a maximum compensation of $300,000 per year.
Summary Compensation Table
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Awards ($) | Non-Equity Plan Compensation ($) | Non-Qualified Deferred Compensation Earnings ($) |
All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||
| Shawn E. Leon, President CEO, CFO | 2021 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| 2020 | — | — | — | — | — | — | — | |||||||||||||||||||||||||
| 13 |
Outstanding Equity Awards at Fiscal Year End
There were no equity awards issued to executive officers during the fiscal year ended December 31, 2021 and there are no outstanding equity awards to named officers as of December 31, 2021.
Information regarding equity compensations plans is set forth in the table below:
| Number
of securities to be issued upon exercise of outstanding options | Weighted average exercise price of outstanding options | Number
of securities remaining for future issuance under equity compensation plans | ||||||||||
| Equity Compensation plans approved by the stockholders | ||||||||||||
| 2013 Equity compensation plan | — | $ | — | 10,000,000 | ||||||||
| Equity Compensation plans not approved by the stockholders | ||||||||||||
| None | — | — | — | |||||||||
| — | $ | — | 10,000,000 | |||||||||
Directors Compensation
The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named directors by us during the year ended December 31, 2021.
| Name | Fees earned or paid in cash ($) |
Stock awards ($) | Option awards ($) | Non-Equity Plan Compensation ($) |
Non-Qualified Deferred Compensation Earnings ($) |
All Other Compensation ($) | Total ($) |
|||||||||||||||||||||
| Shawn E. Leon | — | — | — | — | — | — | — | |||||||||||||||||||||
| John O’ Bireck | — | — | — | — | — | — | — | |||||||||||||||||||||
| Gerald T Miller | — | — | — | — | — | — | — | |||||||||||||||||||||
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
| Name of beneficial owner | Amount
and nature of beneficial ownership, including common stock |
Percentage
of common stock beneficially owned(1) | ||||||
| Directors and Officers | ||||||||
| Shawn E. Leon | 171,864,342 | (2) | 4.6 | % | ||||
| Gerald T. Miller | 500,000 | (3) | * | |||||
| John O’Bireck | 500,000 | (4) | * | |||||
| All officers and directors as a group (3 persons) | 172,864,342 | 4.6 | % | |||||
* Less than 1%
| (1) | Based on 3,729,053,805 shares of common stock outstanding as of March 28, 2022. | |
| (2) | Includes 500,000 shares held by Mr. Leon, a further 2,687,300 shares held by Greenestone Clinic, a company controlled by Mr. Leon, a further 60,000,000 shares owned by Leon Developments, a company controlled by Mr. Leon , 8,677,042 shares owned by Eileen Greene, Mr. Leon's spouse and 100,000,000 shares owned by Mr. Leon’s’ son. | |
| (3) | Includes 500,000 shares of common stock. | |
| (4) | Includes 500,000 shares of common stock. |
| 14 |
Item 13. Certain Relationships and Related Party Transactions, and Director Independence
Related Party Transactions
As of December 31, 2021, amounts payable to executive officers or their affiliates for related party payables, as detailed in the below table:
| Name | Amount | |||
| Owing by the Company | ||||
| Shawn E. Leon(1) | $ | (106,100 | ) | |
| Leon Developments, LTD(2) | (935,966 | ) | ||
| Eileen Greene(3) | (1,472,215 | ) | ||
| Total | $ | (2,514,281 | ) | |
| (1) | Shawn Leon is the Chief Executive Officer of the company |
| (2) | Leon Developments is wholly owned by Shawn Leon, the Company’s Chief Executive Officer |
| (3) | Eileen Greene is the spouse of Shawn Leon. |
Shawn E. Leon
As of December 31, 2021 and 2020 the Company had a payable to Shawn Leon of $106,100 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 $259,707, 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 years ended December 31, 2021 and 2020.
Leon Developments, Ltd.
As of December 31, 2021 and 2020, the Company owed Leon Developments, Ltd. $935,966 and $930,307, respectively, for funds advanced to the Company.
Eileen Greene
As of December 31, 2021 and 2020, the Company owed Eileen Greene, the spouse of our CEO, Shawn Leon, $1,472,215 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.
Directors Independence
The common stock of the Company is currently quoted on the OTC Pink, a quotation system which currently does not have director independence requirements. On an annual basis, each director and executive officer will be obligated to disclose any transactions with the Company in which a director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest in accordance with Item 407(a) of Regulation SK. Following completion of these disclosures, the Board will make an annual determination as to the independence of each director using the current standards for “independence” that satisfy the criteria for the NASDAQ Stock Market, Inc.
As of December 31, 2021, the Board determined that John O’Bireck and Gerald T Miller are independent and that Mr. Leon is not independent under these standards.
Item 14. Principal Accountant Fees and Services.
Daszkal Bolton LLP serves as our independent registered public accounting firm.
The following is a summary of the fees paid by us to Daszkal Bolton LLP for the year ended December 31, 2021 and 2020 for professional services rendered:
| Year
ended December 31, 2021 | Year
ended December 31, 2020 | |||||||
| Audit fees and expenses | $ | 79,500 | $ | 77,000 | ||||
| Taxation preparation fees | 4,500 | |||||||
| Audit related fees | — | — | ||||||
| Other fees | — | — | ||||||
| $ | 79,500 | $ | 81,500 | |||||
| 15 |
Audit Fees
Consists of fees billed for professional services rendered for the audit of our consolidated financial statements and review of interim condensed consolidated financial statements included in quarterly reports and services that are normally provided by Daszkal Bolton LLP in connection with statutory and regulatory filings or engagements in fiscal year ended December 31, 2021 and 2020, respectively.
Audit Related Fees
Consists of fees billed for accounting, assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees”.
Tax Fees
Tax Fees consist of the aggregate fees billed for professional services rendered by our principal accounts for tax compliance, tax advice, and tax planning. These services include preparation for federal and state income tax returns.
All Other Fees
We did not incur any other fees billed by auditors for services rendered to our Company, other than the services listed above for the fiscal years ended December 31, 2020 and 2019, respectively.
| 16 |
PART IV
Item 15. Exhibits, Financial Statement Item 15. Exhibits and Financial Statement Schedules and Reports on Form 10-K
| (a) | (1) | The following financial statements are included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2021. |
| 1. | Independent Auditor’s Report | |
| 2. | Consolidated Balance Sheets as of December 31, 2021 and 2020 | |
| 3. | Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2021 and 2020 | |
| 4. | Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2021 and 2020 | |
| 5. | Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 | |
| 6. | Notes to Consolidated Financial Statements |
| (2) | All financial statement schedules have been omitted as the required information is either inapplicable or included in the Consolidated Financial Statements or related notes. |
| 17 |
| (b) | Exhibits |
18
| Exhibit No. | Description | Form | SEC File No. | Date | Filed Herewith | Filed by Reference |
10.9 |
Asset Purchase Agreement re: Sale of Muskoka Clinic | 8-K | 000-15078 | February 17, 2017 |
X | |
10.10 |
Lease of Muskoka Clinic | 8-K | 000-15078 | February 17 2017 |
X | |
16.1 |
Letter from Jarvis Ryan Associates, LLP | 8-K | 000-15078 | July 19, 2014 |
X |
| 31.1 | Certification of the Principal Executive Officer and Principal Financial Officer of the registrant pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (Rule 13(a) -14(a) or Rule 15(d( - 14 (a) | X | ||||
| 32.1 | Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Rule 18 U.S.C 1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 | X | ||||
| 101.INS | Inline XBRL Instance Document | X | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||
| 101.CAL | Inline Taxonomy Extension CAL XBRL Calculation Linkbase Document | X | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||
| 101 | Cover Page Interactive Data File (embedded within the Inline XBRL Document) |
| 19 |
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: April 14, 2022
By: /s/ Shawn E. Leon
Name: Shawn E. Leon
Title: Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | Position | Date |
| /s/Shawn E. Leon | Chief Executive Officer (Principal Executive Officer), | April 14, 2022 |
| Shawn Leon | Chief Financial Officer (Principal Financial Officer), President and Director |
|
| /s/ John O’Bireck | Director | April 14, 2022 |
| John O’Bireck | ||
| /s/ Gerald T. Miller | Director | April 14, 2022 |
| Gerald T. Miller |
| 20 |