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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2023

 

or

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

 

For the transition period from to

 

Commission File Number 000-54748

 

ETHEMA HEALTH CORPORATION.

(Exact Name of Registrant as Specified in its Charter)

 

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

950 Evernia Street

West Palm Beach, Florida

   33401
Address of Principal Executive Offices   Zip Code

 

(416) 500-0020

Registrant’s Telephone Number, Including Area Code

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered

 

Common shares    GRST   OTC Pink

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Number of shares of common stock outstanding as of May 19, 2023 was 3,729,053,805.

 

 

  

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

NOTE REGARDING COMPANY REFERENCES

 

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

 

 

 

 

FORM 10-Q

ETHEMA HEALTH CORPORATION

TABLE OF CONTENTS

 

    Page
  PART I - FINANCIAL INFORMATION  
Item l. Financial Statements 1
  Condensed Consolidated Balance Sheets as of March 31, 2023 (Unaudited) and December 31, 2022 1
  Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022 2
  Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the three months ended March 31, 2023 and 2022 3
  Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March  31, 2023 and 2022 4
  Notes to the Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 27
     
  PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Mine Safety Disclosures 28
Item 5. Other Information 28
Item 6. Exhibits 29
SIGNATURES 30

 

 

 

ETHEMA HEALTH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

       
  

March 31,

2023

  December 31, 2022
ASSETS   (Unaudited)      
           
Current assets          
Cash  $27,580   $140,757 
Accounts receivable, net   543,119    337,074 
Prepaid expenses   34,142    44,718 
Other current assets   84,823    20,347 
Total current assets   689,664    542,896 
Non-current assets          
Property and equipment   2,979,853    2,974,395 
Intangible assets, net   1,163,437    1,252,932 
Right of use assets   1,322,851    1,393,071 
Deposits paid   450,000    400,000 
Total non-current assets   5,916,141    6,020,398 
Total assets  $6,605,805   $6,563,294 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current liabilities          
Accounts payable and accrued liabilities  $372,830   $170,934 
Taxes payable   282,878    248,644 
Convertible notes, net of discounts   5,351,270    5,269,250 
Short-term notes   496,923    460,534 
Mortgage loans   3,478,130    3,504,605 
Receivables funding   443,459    416,731 
Government assistance loans   61,473    14,818 
Operating lease liability   299,027    287,017 
Finance lease liability   8,017    7,891 
Redeemable Preferred stock - Series B; $1.00 par value, 10,000,000 shares authorized; 400,000 shares outstanding as of March 31, 2023   400,000    — 
Accrued dividends   218,357    194,829 
Related party payables   2,655,976    2,713,878 
Total current liabilities   14,068,340    13,289,131 
Non-current liabilities          
Government assistance loans   29,484    79,555 
Deferred taxation   201,919    217,451 
Third party loans   590,372    578,335 
Operating lease liability   1,125,990    1,206,413 
Finance lease liability   22,883    24,952 
Total non-current liabilities   1,970,648    2,106,706 
Total liabilities   16,038,988    15,395,837 
           
Redeemable Preferred stock - Series B; $1.00 par value, 10,000,000 shares authorized; 400,000 shares outstanding as of December 31, 2022.   —    400,000 
           
Stockholders’ deficit          
Preferred stock - Series A; $0.01 par value, 10,000,000 shares authorized;
4,000,000 shares outstanding as of March 31, 2023 and December 31, 2022.		   40,000    40,000 
Common stock - $0.01 par value, 10,000,000,000 shares authorized; 
3,729,053,805 shares issued and outstanding as of March 31, 2023 and December 31, 2022.		   37,290,539    37,290,539 
Additional paid-in capital   23,419,917    23,419,917 
Discount for shares issued below par value   (27,363,367)   (27,363,367)
Accumulated other comprehensive loss   (6,569)   (5,065)
Accumulated deficit   (43,686,855)   (43,484,751)
Stockholders’ deficit attributable to Ethema Health Corporation stockholders’   (10,306,335)   (10,102,727)
Non-controlling interest   873,152    870,184 
Total stockholders’ deficit   (9,433,183)   (9,232,543)
Total liabilities and stockholders’ deficit  $6,605,805   $6,563,294 

 

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

 1

 

  

ETHEMA HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

AND COMPREHENSIVE INCOME (LOSS)

 

       
   Three months ended
March 31, 2023		  Three months ended
March 31, 2022
       
Revenues  $1,300,046   $1,023,315 
           
Operating expenses          
General and administrative   241,237    209,932 
Rent expense   114,564    90,031 
Management fees   27,500    30,000 
Professional fees   111,204    49,587 
Salaries and wages   592,036    436,825 
Depreciation expense   138,479    132,000 
Total operating expenses   1,225,020    948,375 
           
Operating Income   75,026    74,940 
           
Other (expense) income          
Other income   —      10,018 
Interest expense   (157,096)   (80,768)
Amortization of debt discount   (76,921)   (252,832)
Derivative liability movement   —      197,476 
Foreign exchange movements   (2,955)   (95,556)
Loss before taxation   (161,946)   (146,722)
Taxation   (13,771)   (18,263)
Consolidated Net loss   (175,717)   (164,985)
Net income attributable to non-controlling interest   (2,968)   (9,462)
Net loss attributable to Ethema Health Corporation Stockholders’   (178,685)   (174,447)
Preferred stock dividend   (23,419)   (24,613)
Net loss available to common shareholders of Ethema Health Corporation   (202,104)   (199,060)
Accumulated other comprehensive (loss) income          
Foreign currency translation adjustment   (1,504)   34,517 
           
Total comprehensive loss  $(203,608)  $(164,543)
           
Basic and diluted loss per common share  $(0.00)  $(0.00)
Weighted average common shares outstanding – Basic and diluted   3,729,053,805    3,630,720,472 

 

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

 

 2

 

ETHEMA HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

 

  

                                                                
   Series A Preferred  Common   
   Shares  Amount  Shares  Amount  Additional Paid-in Capital  Discount to par value  Accumulated Other Comprehensive Income (Loss)  Accumulated Deficit  Non-controlling shareholders interest  Total
Balance as of December 31, 2022   4,000,000   $40,000    3,729,053,805   $37,290,539   $23,419,917   $(27,363,367)  $(5,065)  $(43,484,751)  $870,184   $(9,232,543)
Foreign currency translation   —      —      —      —      —      —      (1,504)   —      —      (1,504)
Net loss   —      —      —      —      —           —      (178,685)   2,968    (175,717)
Dividends accrued   —      —      —      —      —      —      —      (23,419)   —      (23,419)
Balance as of March 31, 2023   4,000,000   $40,000    3,729,053,805   $37,290,539   $234,199,117   $(27,363,367)  $(6,569)  $(43,686,855)  $873,152   $(9,433,183)

  

 

   Series A Preferred  Common   
   Shares  Amount  Shares  Amount  Additional Paid-in Capital  Discount to par value  Accumulated Other Comprehensive Income (Loss)  Accumulated Deficit  Non-controlling shareholders interest  Total
Balance as of December 31, 2021   4,000,000   $40,000    3,579,053,805   $35,70,539   $22,791,350   $(26,013,367)  $816,532   $(44,103,311)  $822,876   $(9,855,381)
Conversion of convertible notes   —      —      150,000,000    1,500,000    —      (1,350,000)   —      —      —      150,000 
Foreign currency translation   —      —      —      —      —      —      34,517    —      —      34,517 
Net loss   —      —      —      —      —           —      (174,447)   9,462    (164,985)
Dividends accrued   —      —      —      —      —      —      —      (24,613)   —      (24,613)
Balance as of March 31, 2022   4,000,000   $40,000    3,729,053,805   $37,290,539   $22,791,350   $(27,363,367)  $851,049   $(44,302,371)  $832,338   $(9,860,462)

   

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

 

 

 3

 

ETHEMA HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

       
   Three months ended
March 31,
2023		  Three months ended
March 31,
2022
Operating activities          
Consolidated net loss  $(175,717)  $(164,985)
Adjustment to reconcile consolidated net loss to net cash provided by (used in) operating activities:          
Depreciation and amortization expense   138,479    132,000 
Amortization of debt discount   76,921    252,832 
Derivative liability movements   —      (197,476)
Amortization of right of use asset   70,219    63,064 
Deferred taxation movement   (15,532)   (18,794)
Changes in operating assets and liabilities          
Accounts receivable   (151,744)   (115,000)
Prepaid expenses   10,576    10,456 
Other current assets   (64,476)   (1,171)
Accounts payable and accrued liabilities   251,384    (22,013)
Operating lease liabilities   (68,413)   (57,156)
Taxes payable   34,177    49,169 
Net cash provided by (used in) operating activities   105,874    (69,074)
           
Investing activities          
Deposits paid   (50,000)   —   
Purchase of property and equipment   (52,418)   (72,858)
Net cash used in investing activities   (102,418)   (72,858)
           
Financing activities          
Repayment of mortgage   (29,300)   (29,850)
Proceeds from receivables funding   190,000    —   
Repayment of receivables funding   (204,133)   —   
Repayment of convertible notes   (10,000)   (201,733)
Proceeds from promissory notes   —      100,000 
Repayment of government assistance loans   (3,449)   —   
Repayment of third party loans   —      (78,977)
Repayment of finance leases   (1,944)   (1,822)
Proceeds from related party notes   —      259,228 
Repayment of related party notes   (58,917)   —   
Net cash (used in) provided by financing activities   (117,743)   46,846 
           
Effect of exchange rate on cash   1,110    73,288 
           
Net change in cash   (113,177)   (21,798)
Beginning cash balance   140,757    48,822 
Ending cash balance  $27,580   $27,024 
           
Supplemental cash flow information          
Cash paid for interest  $53,310   $43,304 
Cash paid for income taxes  $—     $—   
           
Non-cash investing and financing activities          
Conversion of convertible notes  $—     $150,000 

 

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

 

 4

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Nature of business

 

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 through owned properties in Delray Beach and subsequently though leased properties in West Palm Beach, Florida. Since June 30, 2020, the Company has been actively involved in the management of a treatment center operated by Evernia in West Palm Beach, Florida. On July 1, 2021, the Company closed on the acquisition of 75% of ATHI, which owns 100% of Evernia, once the probationary approval of a license was obtained from the Department of Children and Family Services of Florida. Evernia is the only active treatment center operated by the Company.

 

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

     

2. Summary of significant accounting policies

 

 Financial Reporting

 

The (a) unaudited condensed consolidated balance sheets as of March 31, 2023, which have been derived from the unaudited condensed consolidated financial statements, and as of December 31, 2022, which have been derived from audited consolidated financial statements, and (b) the unaudited condensed consolidated statements of operations, stockholders’ deficit and cash flows of the Company, have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2023 are not necessarily indicative of results that may be expected for the year ending December 31, 2023. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023.

 

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

 

a) Use of Estimates

 

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

 

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

 

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

 

  ● 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).

 

 5

 

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. Summary of significant accounting policies (continued)

 

b) Principals of consolidation and foreign currency translation (continued)

 

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 three months ended March 31, 2023, a closing rate of CDN$1 equals US$0.7389 and an average exchange rate of CDN$1 equals US$0.7394, for the year ended December 31, 2022, a closing rate of CDN$1.0000 equals US$0.7383 and an average exchange rate of CDN$1.0000 equals US$0.7686.

 

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.

 

 

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 no cash equivalents at

March 31, 2023 and December 31, 2022.

 

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 unaudited condensed 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.

 

 

 6

 

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

2. Summary of significant accounting policies (continued)

 

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.

   

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 previously used 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 were 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.

 

 

 7

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

2. Summary of significant accounting policies (continued)

 

k) Financial instruments

 

The Company initially measures its financial assets and liabilities at fair value. 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 consolidated 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.

 

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.

 

 8

 

 ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

2. Summary of significant accounting policies (continued)

 

  m) Revenue recognition (continued)

 

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 $543,119 and $337,074 at March 31, 2023 and December 31, 2022, respectively. Management believes that these receivables are properly stated and are not likely to be settled for a significantly different amount.

 

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

 

  i. identify the contract with a customer;
  ii. identify the performance obligations in the contract;
  iii. determine the transaction price;
  iv. allocate the transaction price to performance obligations in the contract; and
  v. recognize revenue as the performance obligation is satisfied.

 

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.

  

 9

 

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

2. Summary of significant accounting policies (continued)

 

n) Income taxes (continued)

 

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 2019, through 2022 are subject to audit or review by the US tax authorities, whereas fiscal 2011 through 2022 are subject to audit or review by the Canadian tax authority.

 

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 three months ended March 31, 2023 and 2022 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 dates, March 31, 2023 and December 31, 2022.

 

  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.

 

 10

 

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

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

2. Summary of significant accounting policies (continued)

 

  q) Financial instruments Risks (continued)

 

  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 approximately $13.4 million, and an accumulated deficit of approximately $43.7 million. The Company is dependent upon the raising of additional capital in order to implement its business plan. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, liquidity risk is assessed as high, material and remains unchanged from that of the prior year.

 

  iii. Market risk

 

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

 

  a. Interest rate risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk on its convertible debt, mortgage loans, short term loans, third party loans and government assistance loans as of March 31, 2023. 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, however net earnings in foreign currency is minimal and a 5% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an immaterial 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.

 

 

q) Allowance for credit losses

 

 The Company recognizes revenue based on historical collections received from healthcare providers, recognizing only a percentage of revenues actually billed. Effectively recognizing revenue net of any expected billing differentials. Based on the Company’s collection experience, the percentage of revenue recognized is adjusted on a periodic basis, thereby taking into account expected credit losses in the revenue recognition process. The revenue we recognize is already net of expected credit losses.

 

We constantly evaluate our collections experience and consider the market conditions and current economic developments facing the Company’s operations . We have not experienced significantly different collections to revenues we have recognized and we have not seen any deterioration in the payment patterns from the healthcare providers that the Company works with, we cannot predict with any certainty that the payment patterns the Company experiences may change and we may be required to adjust the percentage of revenue recognized.

 

r) Recent accounting pronouncements

 

The Financial Accounting Standards Board (“FASB”) issued additional updates during the three months ended March 31, 2023. 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 Company’s consolidated financial statements upon adoption.

 

 11

 

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

3. Going concern

 

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with US GAAP applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations in the normal course of business. At March 31, 2023 the Company has a working capital deficiency of $13.4 million, and total liabilities in excess of assets in the amount of $9.4 million . Management believes that current available resources will not be sufficient to fund the Company’s planned expenditures over the next 12 months. These factors, individually and collectively indicate that a material uncertainty exists that raises substantial doubt about the Company's ability to continue as a going concern for one year from the date of issuance of these condensed interim consolidated financial statements. 

 

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 unaudited condensed consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

  

4. Property and equipment

  

Property and equipment consists of the following:  

  

      March 31,
2023		   December 31, 2022
 

Useful

lives

   Cost   Accumulated depreciation   Net book value   Net book value
Land Indefinite   $ 158,871     $ —       $ 158,871     $ 158,742  
Property 25 years     3,005,354       (723,081 )     2,282,273       2,310,448  
Leasehold improvements Life of lease     446,065       (54,164 )     391,901       373,320  
Furniture and fittings 6 years     139,889       (29,106 )     110,783       92,941  
Vehicles 5 years     55,949       (20,668 )     35,281       38,079  
Computer equipment 3 years     1,450       (706 )     744       865  
      $ 3,807,578     $ (827,725 )   $ 2,979,853     $ 2,974,395  

 

Depreciation expense for the three months ended March 31, 2023 and 2022 was $48,494 and $42,505, respectively.

   

5. Intangibles

 

Intangible assets consist of the following:

 

   Useful
lives		  March 31,
2023		  December 31, 2022
      Cost  Accumulated amortization  Net book value  Net book value
Health care Provider license  5 years  $1,789,903   $(626,466)  $1,163,437   $1,252,932 
                        

 

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

 

The Company recorded $89,495 in amortization expense for finite-lived assets for each of the three months ended March 31, 2023 and 2022.

 12

 

 

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

6. Leases

 

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

   March 31,
2023		  December 31,
2022
Non-current assets          
Right-of-use assets – finance leases, net of depreciation, included in Property and equipment  $35,281   $38,079 
Right-of-use assets - operating leases, net of amortization  $1,322,851   $1,393,071 

  

Lease costs consists of the following: 

 

              
   Three  months ended March 31,
   2023  2022
 Finance lease cost:          
Amortization of right-of-use assets  $2,797   $2,797 
Interest expense on finance lease liabilities   526    648 
    3,323    3,445 
           
Operating lease cost  $86,127   $63,064 
Lease cost  $89,450   $186,727 

 

Other lease information: 

   Three months ended March 31,
   2023  2022
Cash paid for amounts included in the measurement of lease liabilities      
Operating cash flows from finance leases  $(526)  $(648)
Operating cash flows from operating leases   (86,127)   (63,064)
Financing cash flows from finance leases   (1,944)   (1,809)
Cash paid for amounts included in the measurement of lease liabilities  $(88,597)  $(65,521)
           
Weighted average lease term – finance leases   3 years and seven months    4 years and seven months 
Weighted average remaining lease term – operating leases   3 years and 10 months    4 years and 10 months 
           
Discount rate – finance leases   6.60%   6.61%
Discount rate – operating leases   4.64%   4.64%

 

Maturity of Leases

 

Finance lease liability

 

The amount of future minimum lease payments under finance leases as of March 31, 2023 is as follows:

 

 

   Amount
Remainder of 2023  $7,372 
2024   9,829 
2025   9,829 
2026   6,195 
2027   1,707 
    34,932 
Imputed interest   (4,032)
Total finance lease liability  $30,900 
Disclosed as:     
Current portion  $8,017 
Non-Current portion   22,883 
Lease liability  $30,900 

 

 13

 

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

6. Leases (continued)

 

Operating lease liability

 

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

 Schedule of Operating lease liability

   Amount
    
Remainder of 2023  $262,549 
2024   366,110 
2025   384,416 
2026   403,637 
2027   33,771 
Total undiscounted minimum future lease payments   1,450,483 
Imputed interest   (25,465)
Total operating lease liability  $1,425,017 
      
Disclosed as:     
Current portion  $299,027 
Non-Current portion   1,125,990 
 Lease liability  $1,425,017 

    

Lessor Property

 

The Company’s wholly owned subsidiary CCH owns a property 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, The property is leased to the purchasers of the business of the Canadian Rehab Clinic, initially for a period of 5 years, which was renewed for an additional 5 years, with a further two 5 year renewal periods available to the lessee. The lessee has an option to acquire the property for CDN$10 million. The Company considers the likelihood of the option being exercised as remote at this time.

 

The Lease was considered in terms of ASC 842, Leases and determined to be an operating lease as the criteria for the lease to be a sales-type lease or a direct financing lease were not met, including the possibility of the lessee exercising the option to purchase the property being considered as remote.

 

The Company derived rental income of CDN$126 942 ($89,419) for the three months ended March 31, 2023.

 

7. Short-term Convertible Notes

 

The short-term convertible notes consist of the following:

  

    Interest rate   Maturity Date   Principal   Interest   March 31, 2023   December 31, 2022
Leonite Capital, LLC     12.0 %   On Demand    $ 129,379      $ 59,198      $ 188,577      $ 184,749  
Leonite Fund I, LP     Variable     March 1, 2023     745,375       19,738       765,113       720,830  
                                             
Auctus Fund, LLC     0.0 %   On Demand     70,000       —         70,000       80,000  
                                             
Labrys Fund, LP     12.0 %   On Demand     —         —         —         8,826  
                                             
Ed Blasiak     6.5 %   On Demand     55,000       9,216       64,216       63,322  
                                             
Joshua Bauman     11.0 %   October 21, 2022     150,000       23,778       173,778       169,710  
                                             
Series N convertible notes     6.0 %   On Demand     3,229,000       860,586       4,089,586       4,041,813  
                                             
                 $ 4,378,754      $ 972,516     $ 5,351,270     $ 5,269,250  

    

 14

 

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7. Short-term Convertible Notes (continued)

 

Leonite Capital, LLC

 

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

 

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

 

On March 1, 2023, the Company entered into a forbearance agreement with Leonite whereby the parties agreed to extend the maturity date of the note to June 8, 2023, the Company will continue to pay interest on the note, until repaid. The note has not been repaid as yet and the Company in continuing to negotiate the resolution of the note. 

 

Leonite Fund I, LP

 

Effective June 1, 2022, The Company entered into a Note Exchange Agreement whereby the convertible promissory notes entered into with Labrys Fund LP on May 7, 2021, with. A principal outstanding of $341,000, and on June 2, 2021 with a principal outstanding of $230,000 and accrued interest thereon of $25,300, were exchanged for a new Senior Secured Convertible Promissory note in the principal amount of $745,375, including an OID of $149,075. The Note matured on March 1, 2023, and bore interest at the minimum of 10% per annum or the Wall Street Journal quoted prime rate plus 5.75%. The note is currently in default, although no default has been declared and management is negotiating with Leonite on a resolution.

 

Interest is payable monthly and the note may be prepaid with a prepayment penalty of 10%. The note is convertible into common stock at a fixed conversion price of $0.01 per share, subject to anti-dilution adjustments and a fundamental transaction clause allowing the note holder to receive the same consideration as common stockholders would receive.

 

The convertible note is secured by all of the assets of Ethema Health Corporation and Addiction Recovery Institute of America, LLC.

 

On March 1, 2023, the Company entered into a forbearance agreement with Leonite whereby the parties agreed to extend the maturity date of the note to June 8, 2023, the Company will continue to pay interest on the note, until repaid. The note has not been repaid as yet and the Company in continuing to negotiate the resolution of the note. 

 

Auctus Fund, LLC

 

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

 

On June 15, 2020, The Company entered into an amended agreement with Auctus whereby the Company agreed to discharge the principal amount of the note by nine equal monthly installments of $25,000 commencing in October 2020. During the year ended December 31, 2021, the Company repaid Auctus the principal sum of $50,000.

 

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

 

During February 2023, the Company paid $10,000 of principal on the convertible note, thereby reducing the principal outstanding to $70,000. The note matured May 7, 2020, Auctus Fund LLC has not declared a default and we are in constant discussion with the lender on settling the note. 

 

 15

 


ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7. Short-term Convertible Notes (continued)

  

Ed Blasiak

 

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

 

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

 

Joshua Bauman

 

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

 

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

 

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

  

On October 21, 2021, the Company entered into a Securities Purchase Agreement with 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 matured on October 21, 2022. The note 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.

 

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

 

Series N convertible notes

 

Between January 28, 2019 and June 11, 2020, the Company closed several tranches of Series N Convertible notes in which it raised $3,229,000 in principal from accredited investors through the issuance to the investors of the Company’s Series N convertible notes, in the total original principal amount of $3,229,000, which Notes are convertible into the Company’s common stock at a conversion price of $0.08 per share together with three year warrants to purchase up to a total of 52,237,500 shares of the Company’s common stock at an exercise price of $0.12 per share. Both the conversion price under the Notes and the exercise price under the warrants are subject to standard adjustment mechanisms. The notes matured one year from the date of issuance.

 

The series N convertible notes matured and are in default. The Company is considering its options to settle these notes.

 

 16

 

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8. Short-term Notes

 

Leonite Capital, LLC

 

Secured Promissory Notes  

 

On March 1, 2022, the Company entered into a secured Promissory Note in the aggregate principal amount of $124,000 for net proceeds of $100,000 after an original issue discount of $24,000. Due to the failure to repay the note by due date, a penalty of $37,200 was added to the principal outstanding and the Company incurs a monthly monitoring fee of $2,000 per month. In addition the note earns interest at a default rate of 24% per annum on the total balance outstanding, including the monthly monitoring fee and accrued interest.

 

The Note had a maturity date of April 1, 2022. This note has not been repaid at the date of this report. We are in negotiations with Leonite to settle the balance outstanding and no default has been declared.

 

The balance outstanding on the note, including default penalty, interest accrued and monthly monitoring fees is $231,481 as of March 31, 2023.

 

On May 3, 2022, the Company, entered into a secured Promissory Note in the aggregate principal amount of $76,250 for net proceeds of $61,000 after an original issue discount of $15,250. Due to the failure to repay the note by due date, a penalty of $22,875 was added to the principal outstanding and the Company incurs a monthly monitoring fee of $2,000 per month. In addition the note earns interest at a default rate of 24% per annum on the total balance outstanding, including the monthly monitoring fee and accrued interest.

 

The Note had a maturity date of June 17, 2022. This note has not been repaid at the date of this report. We are in negotiations with Leonite to settle the balance outstanding and no default has been declared.

 

The balance outstanding on the note, including default penalty, interest accrued and monthly monitoring fees is $143,634 as of March 31, 2023.

 

LXR Biotech

 

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

 

This note has not been repaid, is in default and remains outstanding. The balance outstanding at March 31, 2023 was $121,806.

 

9. Mortgage loans

 

Mortgage loans is disclosed as follows:

 

    Interest 
rate		     Maturity date   Principal 
Outstanding		     Accrued 
interest		     March 31,
2023		     December 31,
2022
                                 
Cranberry Cove Holdings, Ltd.                               
Pace Mortgage     4.2 %   July 19, 2022   $  3,473,334     $ 4,796     $ 3,478,130      $ 3,504,605
Disclosed as follows:                                     
Short-term portion                          $ 3,478,130     $ 3,504,605
                                           

 

Cranberry Cove Holdings, Ltd. (“CCH”)


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.

 

The loan matured on July 19, 2022, and negotiations with the lender continue, no new terms have been presented to the Company as yet. The Company has continued to make installments in terms of the original mortgage agreement. 

 

 17

 

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10. Government assistance loans

 

On December 1, 2020, CCH was granted a Covid-19 related government assistance loan in the aggregate principal amount of CDN$ 40,000 (Approximately $31,000). the grant is interest free and CDN$ 10,000 is forgivable if the loan is repaid in full by December 31, 2022. The maturity date of this loan was extended by an additional year to December 31, 2023.

 

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

 

On May 3, 2021, ARIA was granted a government assistance loan in the aggregate principal amount of $157,367. The loan is forgivable if the Company demonstrates that the proceeds were used for expenses such as employee costs during the pandemic. Should the loan not be forgiven, interest is payable on the loan at the rate of 1% per annum and the principal is repayable and interest is payable over an 18 month period.

 

On September 21, 2022, ARIA received partial forgiveness of the government assistance loan of $104,368, the balance of the loan plus accrued interest is due and payable. On December 30, 2022, the Company sold ARIA to its Chairman and CEO and agreed to assume the repayment of the government assistance loan. As of March 31, 2023, the balance outstanding, including interest thereon was $44,336.

 

11. Receivables funding

 

September 26, 2022 Funding

 On September 26, 2022, the Company, through its 75% held subsidiary, Evernia Health Center, LLC, entered into a Receivables Sale Agreement with Itria Ventures LLC (“Itria”), whereby $310,000 of the Receivables of Evernia were sold to Itria, for gross proceeds of $250,000. The Company also incurred fees of $5,500, resulting in net proceeds of $244,500. The Company is obliged to pay 7.41% of the receivables until the amount of $310,000 is paid in full, with periodic repayments of $6,458 per week. The guarantor of the funding is a minority shareholder in ATHI.

 

The Company made weekly cash payments of $6,458 totaling $167,917 on the September 26, 2022 funding. The balance outstanding at March 31, 2023 was $147,083, less unamortized discount of $30,949.

 

December 13, 2022 Funding 

On December 13, 2022, the Company, through its 75% held subsidiary, Evernia Health Center, LLC entered into a Receivables Sale Agreement with Itria Ventures LLC (“Itria”), whereby $305,000 of the Receivables of Evernia were sold to Itria, for gross proceeds of $250,000. The Company also incurred fees of $2,500, resulting in net proceeds of $247,500. The Company is obliged to pay 6.08% of the receivables until the amount of $305,000 is paid in full, with periodic repayments of $6,354 per week. The guarantor of the funding is a minority shareholder in ATHI.

 

The Company made weekly cash payments of $6,354 totaling $88,958 on the December 13, 2022 funding. The balance outstanding at March 31, 2023 was $211,042, less unamortized discount of $40,228.

 

January 19, 2023 Funding

On January 19, 2023, the Company received funding from an agreement entered into on December 14, 2022 through its 75% held subsidiary, Evernia Health Center, LLC entered into a Receivables Sale Agreement with Bizfund.com (“Bizfund)”), whereby $132,000 of the Receivables of Evernia were sold to Bizfund, for gross proceeds of $100,000. The Company is obliged to pay 15.0% of the receivables until the amount of $132,000 is paid in full, with periodic repayments of $2,750 per week. The guarantor of the funding is a minority shareholder in ATHI.

 

The Company made weekly cash payments of $2,750 totaling $24,750 on the January 19, 2023 funding. The balance outstanding at March 31, 2023 was $107,250, less unamortized discount of $26,536.

 

February 14, 2023 Funding 

On February 14, 2023, the Company, through its 75% held subsidiary, Evernia Health Center, LLC entered into a Receivables Sale Agreement with Fox Business Funding (“Fox”), whereby $118,800 of the Receivables of Evernia were sold to Fox, for gross proceeds of $90,000. The Company is obliged to pay 8.0% of the receivables until the amount of $118,800 is paid in full, with periodic repayments of $2,970 per week. The guarantor of the funding is a minority shareholder in ATHI.

 

The Company made weekly cash payments of $2,970 totaling $17,820 on the February 14, 2023 funding. The balance outstanding at March 31, 2023 was $100,980, less unamortized discount of $25,183.

 

 18

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12. Third Party loans

 

On April 12, 2019, Eileen Greene, a related party assigned CDN$1,000,000 of the amount owed by the Company to her, to a third party. The loan bears interest at 12% per annum which the Company agreed to pay. As of March 31, 2023 the balance of principal and interest outstanding on third party loans was CDN$798,950 ($590,372).

 

13. Related party transactions

 

Shawn E. Leon

As of March 31, 2023 and December 31, 2022, the Company had a payable to Shawn Leon of $389,476 and $411,611, respectively. Mr. Leon is a director and CEO of the Company. The balances payable are non-interest bearing and has no fixed repayment terms.

 

On December 30, 2022, the Company sold its wholly owned subsidiaries, Greenestone Muskoka and ARIA, to Mr. Leon for gross proceeds of $0. The Company realized a gain on disposal of $628,567 which was recorded as an increase in Additional Paid in Capital due to the related party nature of the transaction.

 

Due to the current financial position of the Group, Mr. Leon forfeited the management fees due to him for the three months ended March 31, 2023 and the year ended December 31, 2022.

 

Leon Developments, Ltd.

As of March 31, 2023 and December 31, 2022, the Company owed Leon Developments, Ltd., $851,672 and $850,607, respectively, for funds advanced to the Company.

 

Eileen Greene

As of March 31, 2023 and December 31, 2022, the Company owed Eileen Greene, the spouse of our CEO, Shawn Leon, $1,414,828 and $1,451,610, respectively. The amount owed 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.

   

14. 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 3,729,053,805 shares of common stock at March 31, 2023 and December 31, 2022.

 

  b) Series A Preferred shares

 

Authorized, issued and outstanding 

The Company has authorized 10,000,000 Series A preferred shares with a par value of $0.01 per share. The company has issued and outstanding 4,000,000 Series A Preferred shares at March 31, 2023 and December 31, 2022.

 

  c) Series B Preferred shares

 

Authorized and outstanding 

The Company has authorized 400,000 Series B preferred shares with a par value of $1.00 per share. The company has issued and outstanding 400,000 Series B Preferred shares at March 31, 2023 and December 31, 2022.

 

The Series B preferred shares are senior secured and were mandatorily redeemable by the Company on July 1, 2021, and were originally classified as mezzanine debt. These Series B preferred shares have been reclassified as current liabilities for the three months ended March 31, 2023 as they meet the definition of liabilities in terms of ASC 480- debt and are no longer contingently convertible, due to the fact that the redemption date has passed and the Company is currently negotiating with the preferred note holders to settle the total liabilities owing to them, including certain convertible notes. The Company continues to accrue dividends at the rate of 6% per annum.

  

 19

 

 

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

14. Stockholder’s deficit (continued)

 

  d) Stock options

 

Our board of directors adopted the Greenstone Healthcare Corporation 2013 Stock Option Plan (the “Plan”) to promote our long-term growth and profitability by (i) providing our key directors, officers and employees with incentives to improve stockholder value and contribute to our growth and financial success and (ii) enable us to attract, retain and reward the best available persons for positions of substantial responsibility. A total of 10,000,000 shares of our common stock have been reserved for issuance upon exercise of options granted pursuant to the Plan. The Plan allows us to grant options to our employees, officers and directors and those of our subsidiaries; provided that only our employees and those of our subsidiaries may receive incentive stock options under the Plan. We have no issued options at March 31, 2023 under the Plan.

 

  e) Warrants

 

All of the warrants have cashless exercise terms whereby in-the-money warrants may be exercised by reducing the number of shares issued in terms of the warrant exercise to offset the proceeds due on the exercise.

 

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

  

A summary of the Company’s warrant activity during the period from January 1, 2022 to March 31, 2023 is as follows:

 

    No. of shares   Exercise price
per share		   Weighted
average exercise
price
             
Outstanding as of January 1, 2022     623,777,506       $0.000675 to $0.12     $ 0.0052875  
Granted     —         —         —    
Forfeited/cancelled     (20,925,000 )     $0.12       0.12  
Exercised     —         —         —    
Outstanding as of December 31, 2022     602,852,506       $0.000675 to $0.00205     $ 0.001306  
Granted     —         —         —    
Forfeited/cancelled     —         —         —    
Exercised     —         —         —    
Outstanding as of March 31, 2023     602,852,506       $0.000675 to $0.00205     $ 0.001306  

   

  

The following table summarizes information about warrants outstanding at March 31, 2023:

 

      Warrants outstanding     Warrants exercisable  
Exercise price     No. of shares    

Weighted average

remaining years

    

Weighted average

exercise price

     No. of shares    

Weighted average

exercise price

  
                                 
$0.000675       326,286,847       2.28               326,286,847          
$0.002050       276,565,659       2.77               276,565,659          
        602,852,506       2.51     $ 0.001306       602,852,506     $ 0.001306  

 

All of the warrants outstanding at March 31, 2023 are vested. The warrants outstanding at March 31, 2023 have an intrinsic value of $0. 

 

 20

 

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15. 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.

 

The segment operating results of the reportable segments for the three months ended March 31, 2023 is disclosed as follows:

 

                      
   Three months ended March 31, 2023
   Rental
Operations		  In-Patient
services		  Total
          
Revenue  $89,419   $1,210,627   $1,300,046 
Operating expenses   30,120    1,194,900    1,225,020 
                
Operating income   59,299    15,727    75,026 
                
Other (expense) income               
Interest expense   (47,733)   (109,363)   (157,096)
Amortization of debt discount   —      (76,921)   (76,921)
Foreign exchange movements   (1,035)   (1,920)   (2,955)
Net income (loss) before taxes   10,531    (172,477)   (161,946)
Taxes   —      (13,771)   (13,771)
Net income (loss)  $10,531   $(186,248)  $(175,717)

 

The operating assets and liabilities of the reportable segments as of March 31, 2023 is as follows:

 

                      
   March 31, 2023
   Rental
Operations		  In-Patient
services		  Total
          
Purchase of fixed assets  $—     $52,418   $52,418 
Assets               
Current assets   233    689,431    689,664 
Non-current assets   2,441,143    3,474,998    5,916,141 
Liabilities               
Current liabilities   (4,985,120)   (9,083,220)   (14,068,340)
Non-current liabilities   (619,856)   (1,350,792)   (1,970,648)
Intercompany balances   (1,299,110)   1,299,110    —   
Net liability position  $(4,462,710)  $(4,970,473)  $(9,433,183)

 

 21

 

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15. Segment information (continued)

 

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

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

 

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

 

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

 

16. Net income (loss) per common share

 

For the three months ended March 31, 2023 and 2022, 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.

 

   Three months ended
March 31,
2023		  Three months ended
March 31,
2022
       
Warrants to purchase shares of common stock   602,852,506    611,140,006 
Convertible notes   582,290,570    458,435,448 
    1,185,143,076    1,069,575,454 

 

 22

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

17. 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 9 above. The mortgage loan matured on July 19, 2022 and the Company currently owes $3,478,130. The terms of the loan are currently being negotiated.

 

  c. Other

 

The Company has principal and interest payment commitments under the Convertible notes disclosed under Note 7 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.

    

18. Subsequent events

 

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

  

 

 23

 

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

 

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our condensed consolidated financial statements and the notes presented herein and the consolidated financial statements and the other information set forth in our Annual Report on Form 10- K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on March 31, 2023. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.

 

Plan of Operation

 

During the next twelve months, the Company plans to continue to grow the Evernia business.

 

For the three months ended March 31, 2023 and March 31, 2022.

 

Revenues

 

Revenues were $1,300,046 and $1,023,315 for the three months ended March 31, 2023 and 2022, respectively, an increase of $276,731 or 27.0%. The revenue from in-patient services related to Evernia was $1,210,627 and $929,441 for the three months ended March 31, 2023 and 2022, respectively. The increase is due to the expansion of the Evernia facility during the prior year. The revenue from rental properties was $89,419 and $93,874 and included the rental escalation as per the agreement and an improvement in the currency exchange rate against the Canadian Dollar over the prior period.

 

Operating Expenses

 

Operating expenses were $1,225,020 and $948,375 for the three months ended March 31, 2023 and 2022, respectively, an increase of $328,661 or 34.7%. The increase is primarily due to the following:

 

● General and administrative expenses was $241,238 and 209,932 for the three months ended March 31, 2023 and 2022, respectively, an increase of $31,306 or 14.9%. The increase is primarily due to the increase in activity at the Evernia treatment facility with an increase in bed count and revenues requiring additional increases in operating expenditure. The increase consist of an increase in several individually insignificant amounts.

     

● Rent expense was $114,564 and $90,031 for the three months ended March 31, 2023 and 2022, respectively, an increase of $24,533 or 27.2%. The increase is due to additional property rented on short term leases to accommodate additional patients.

     

● Management fees were $27,500 and $30,000 for the three months ended March 31, 2023 and 2022,  respectively, a decrease of $2,500 or 8.3%.

 

● Professional fees was $111,204 and $49,587 for the three months ended March 31, 2023 and 2022, respectively, an increase of $61,617 or 124.3%. The increase is due to additional contractor expense to facilitate the increase in additional patients and additional revenues

     

● Salaries and wages was $592,036 and $436,825 for the three months ended March 31, 2023 and 2022, respectively, an increase of $155,211 or 35.5%. The increase is due the expansion of the Evernia facility which resulted in additional patients and revenues.

    

● Depreciation expense was $138,479 and $132,000 for the three months ended March 31, 2023 and 2022, respectively, an  increase of $6,479 or 4.9%, primarily due to the expansion of the Evernia facility.

 

Operating Income

 

The operating income was $75,026 and $74,940 for the three months ended March 31, 2023 and 2022, respectively, an increase of $86 or 0.1%. The increase in revenues of $276,731 was offset by the increase in operating expenses of $328,667 as discussed under revenue and operating expenses above.

 

 24

 

 

Other income

Other income was $0 and $10,018 for the three months ended March 31, 2023 and 2022, an increase of $10,018 or 100%.

 

Interest expense

 

Interest expense was $157,096 and $80,768 for the three months ended March 31, 2023 and 2022, respectively, an increase of $76,328 or 94.5%, primarily due to penalty interest rates incurred on convertible notes and short term notes which had matured during previous periods.

 

Amortization of debt discount

 

Amortization of debt discount was $76,921 and $252,832 for the three months ended March 31, 2022 and 2021, respectively, a decrease of $175,911 or 69.6%. In the prior year the conversion of convertible debt resulted in the acceleration of the amortization of debt discount. In the current period amortization of debt discount related to short -term receivables funding.

 

Derivative liability movement

 

The derivative liability movement was $0 and $197,476 for the three months ended March 31, 2023 and 2022, respectively. The derivative liability movement represents the mark to market movements of variably priced convertible notes and warrants issued during the current and prior comparative period. The decrease in the mark to market movement of $197,476, using a Black-Scholes valuation model with a calculated stock price ranging from $0.0006 to $0.0010 per share, a risk free interest rate of $0.06% to 2.45% and expected lives of convertible notes and warrants of 3 to 39 months, with an expected underlying volatility of 167.1% to 238.1%, with no dividends expected for the foreseeable future. The decrease in the derivative liability was primarily due to the conversion and repayment of several convertible notes during the past twelve months and an overall reduction in our stock price, impacting favorably on the mark-to-market adjustment.

 

Foreign exchange movements

 

Foreign exchange movements was $(2,955) and $(95,556) for the three months ended March 31, 2023 and 2022, respectively, representing the realized exchange gains and (losses) on monetary assets and liabilities settled during the current year as well as mark to market adjustments on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars. The Dollar strengthened against the Canadian Dollar during the current period, resulting in an unrealized loss on Canadian denominated assets.

 

Taxation

 

Taxation was $13,771 and $18,263 for the three months ended March 31, 2023 and 2022, respectively, a decrease of $4,492 or 24.6%. A slight decrease in profit generated by the Evernia operations resulted in a lower tax provision.

 

Net loss

 

Net loss was $175,717 and $164,985 for the three months ended March 31, 2023 and 2022, respectively, an increase of $10,732 or 6.5%. The increase is primarily due to the increase in interest expense of $76,328, the reduction in the derivative liability movement of $197,476, the reduction in the foreign exchange movement of $92,601, offset by the reduction in amortization of debt discount of $175,911, which is fully discussed above.

 

Commitments and contingencies

 

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

 

The amount of future minimum lease payments under finance leases as of March 31, 2023 is as follows:

 

    Amount
Remainder of 2023   $ 7,372  
2024     9,829  
2025     9,829  
2026     6,195  
2027      1,707  
       34,932  

 25

 

 

 

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

 

    Amount
     
Remainder of 2023   $ 262,549  
2024     366,110  
2025     384,416  
2026     403,637  
2027     33,771  
Total undiscounted minimum future lease payments     1,450,483  

    

The company also has commitments under convertible loans, short term loans and mortgage loans. If the convertible loans, as disclosed in note 7, above are not converted they will need to be repaid. The short term loans disclosed in note 8 are repayable on demand and mortgage loans, disclosed on note 9 above have matured.

 

Liquidity and Capital Resources

 

Cash generated by operating activities was $105,874 and cash used in operating activities was $69,074 for the three months ended March 31, 2023 and 2022, respectively, an increase of $174,948. The increase is primarily due to the following:

 

● An increase in net loss of $10,732, as discussed under results of operations above.

     

● Offset by an increase in the movement of non-cash items of $38,461, primarily due to the movement in the amortization of debt discount of $(175,911), offset by the movement in derivative liabilities of $197,476.

     

● Working capital movements increased by $147,219, primarily due to an increase in the movement of accounts payable and accrued liabilities of $273,397 due to an advance by a realty company and an increase in the movement in accounts receivable of $36,744 and the movement in other current assets of $63,305.

 

Cash used in investing activities was $102,418 and $72,858 for the three months ended March 31, 2023 and 2022, respectively. In the current period we invested in leasehold improvements and furniture and fittings to increase capacity at our Evernia facility, and paid an additional deposit of $50,000.

 

Cash used in financing activities was $117,743 and cash provided by financing was $46,846 for the three months ended March 31, 2023 and 2022, respectively, a decrease of $164,589.

 

In the current year the Company received receivables funding of $190,000, and repaid $204,133, in addition mortgage repayments of $29,300 and repayments to related parties of $58,917 during the current period.

 

In the prior year we repaid $201,733 of convertible notes as we reduce our debt to third parties.

 

Over the next twelve months we estimate that the company will require approximately $0.5 million in working capital as it continues to develop the Evernia facility and it is also exploring several other treatment center options and sources of patients throughout the country. The company may have to raise equity or secure debt. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, the Company’s liquidity risk is assessed as medium.

 

Recently Issued Accounting Pronouncements

 

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

 

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

 

 26

 

 

Off balance sheet arrangements

 

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

 

Inflation 

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

 

Climate Change 

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

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

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

 

Changes in Internal Control

 

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 27

 

 

PART II

 

Item 1. Legal Proceedings.

 

 

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

 

Item 1A. Risk Factors.

 

Not applicable because we are a smaller reporting company.

 

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

  

None.

 

Item 3. Defaults upon senior securities

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.

 

Not applicable.

 

 28

 

 

Item 6. Exhibits

 

Exhibit No.  Description
   
31.1 Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002 *
   
32.1 Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002*
   
101.INS Inline XBRL Instance Document
101.SCH  Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline Taxonomy Extension CAL XBRL Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB  Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
101 Cover Page Interactive Data File (embedded within the Inline XBRL Document)

 

* filed herewith

 29

 

 

SIGNATURES

 

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

 

ETHEMA HEALTH CORPORATION

 

Date: May 22, 2023

By:/s/ Shawn E. Leon 

Name: Shawn E. Leon 

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

 

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

 

Name   Position   Date
         
/s/Shawn E. Leon   Chief Executive Officer (Principal Executive Officer),   May 22, 2023
Shawn Leon   Chief Financial Officer (Principal Financial Officer), President and Director    
         
/s/ John O’Bireck   Director   May 22, 2023
John O’Bireck        
         
/s/ Gerald T. Miller   Director   May 22, 2023
         

 

 30

 

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