UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from to
Commission
File Number
(Exact Name of Registrant as Specified in its Charter)
| (State or other jurisdiction
of incorporation or organization) |
(I.R.S. employer Identification No.) | |
| Address of Principal Executive Offices | Zip Code |
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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||
| |
OTC Pink | ||||
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Number of shares of common stock outstanding as of November 20, 2023 was .
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report on Form 10-Q, including but not limited to, statements regarding the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects, or costs and objectives of management for future acquisitions, are forward looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,” “estimates,” “predicts,” “potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
NOTE REGARDING COMPANY REFERENCES
Throughout this Quarterly Report on Form 10-Q, “Ethema,” the “Company,” “we,” “us” and “our” refer to Ethema Health Corporation.
FORM 10-Q
ETHEMA HEALTH CORPORATION
TABLE OF CONTENTS
| Page | ||
| PART I - FINANCIAL INFORMATION | ||
| Item l. | Financial Statements | 1 |
| Condensed Consolidated Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022 | 1 | |
| Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2023 and 2022 | 2 | |
| Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the nine months ended September 30, 2023 and 2022 | 3 | |
| Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 | 5 | |
| Notes to the Unaudited Condensed Consolidated Financial Statements | 6 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 31 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 36 |
| Item 4. | Controls and Procedures | 36 |
| PART II - OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 37 |
| Item 1A. | Risk Factors | 37 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 37 |
| Item 3. | Defaults Upon Senior Securities | 37 |
| Item 4. | Mine Safety Disclosures | 37 |
| Item 5. | Other Information | 37 |
| Item 6. | Exhibits | 37 |
| SIGNATURES | 38 | |
ETHEMA HEALTH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2023 | December 31, 2022 | |||||||
| ASSETS | (Unaudited) | |||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Right of use assets | ||||||||
| Deposits | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Taxes payable | ||||||||
| Convertible notes, net of discounts | ||||||||
| Short-term notes | ||||||||
| Mortgage loans | ||||||||
| Receivables funding | ||||||||
| Government assistance loans | ||||||||
| Operating lease liability | ||||||||
| Finance lease liability | ||||||||
| Accrued dividends | ||||||||
| Related party payables | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities | ||||||||
| Government assistance loans | ||||||||
| Deferred taxes | ||||||||
| Third party loans | ||||||||
| Operating lease liability | ||||||||
| Finance lease liability | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Redeemable Preferred stock - Series B; $ par value, shares authorized; and shares outstanding as of September 30, 2023 and December 31, 2022, respectively. | ||||||||
| Stockholders’ deficit | ||||||||
| Preferred stock - Series A; $ par value, shares authorized shares outstanding as of September 30, 2023 and December 31, 2022, respectively. | ||||||||
| Common stock - $ par value, shares authorized; shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Discount for shares issued below par value | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Stockholders’ deficit attributable to Ethema Health Corporation stockholders’ | ( | ) | ( | ) | ||||
| Non-controlling interest | ||||||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
| 1 |
ETHEMA HEALTH CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
| Three
months ended September 30, 2023 | Three
months ended September 30, 2022 | Nine
months ended September 30, 2023 | Nine
months ended September 30, 2022 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Rent expense | ||||||||||||||||
| Management fees | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Salaries and wages | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating Income | ||||||||||||||||
| Other Income (expense) | ||||||||||||||||
| Other income | ( | ) | ||||||||||||||
| Forgiveness of government assistance loan | ||||||||||||||||
| Penalty on convertible debt | ( | ) | ||||||||||||||
| Extension fee on property purchase | ( | ) | ||||||||||||||
| Gain on disposal of property | ||||||||||||||||
| Loss on debt extinguishment | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of debt discount | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Derivative liability movement | ||||||||||||||||
| Foreign exchange movements | ( | ) | ||||||||||||||
| Net income before income taxes | ||||||||||||||||
| Benefit from (provision for) Income taxes | ( | ) | ( | ) | ||||||||||||
| Net income | ||||||||||||||||
| Net income attributable to non-controlling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income allocable to Ethema Health Corporation Stockholders | ||||||||||||||||
| Preferred stock dividend | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income available to common shareholders of Ethema Health Corporation | ||||||||||||||||
| Accumulated other comprehensive loss | ||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Total comprehensive income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Income per share | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
| 2 |
ETHEMA HEALTH CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Series A Preferred | Common | Additional paid-in | Discount to | Accumulated other Comprehensive | Accumulated | Non-controlling shareholders | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | par value | Income | Deficit | interest | Total | |||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||
| Foreign currency translation | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Dividends accrued | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||
| Disposal of subsidiary to related party | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
| Deemed extinguishment of debt by related party | — | — | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
| Dividends accrued | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||
| Fair value of warrants issued for debt extinguishment | — | — | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||
| 3 |
| Series A Preferred | Common | Additional paid-in | Discount to | Accumulated other Comprehensive | Accumulated | Non-controlling shareholders | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | par value | Income | Deficit | interest | Total | |||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||
| Conversion of convertible notes | — | ( | ) | |||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Dividends accrued | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Dividends accrued | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||||||||||
| Dividends accrued | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
| 4 |
ETHEMA HEALTH CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
| Nine
months ended September 30, 2023 | Nine
months ended September 30, 2022 | |||||||
| Operating activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustment to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Forgiveness of government assistance loan | ( | ) | ||||||
| Non-cash interest accrual on escrow deposit | ||||||||
| Gain on disposal of property | ( | ) | ||||||
| Loss on debt extinguishment | ||||||||
| Penalty on convertible notes | ||||||||
| Amortization of debt discount | ||||||||
| Derivative liability movements | ( | ) | ||||||
| Non-cash deferred tax movements | ( | ) | ( | ) | ||||
| Amortization of right of use asset | ||||||||
| Changes in operating assets and liabilities (net of assets acquired and liabilities assumed) | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Taxes payable | ( | ) | ||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Investing activities | ||||||||
| Acquisition of property, plant and equipment | ( | ) | ( | ) | ||||
| Proceeds on disposal of property | ||||||||
| Deposit paid | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Financing activities | ||||||||
| Repayment of mortgage loans | ( | ) | ( | ) | ||||
| Proceeds from convertible loans | ||||||||
| Repayment of convertible loans | ( | ) | ||||||
| Repayment of federal assistance loans | ( | ) | ||||||
| Proceeds from short term loans | ||||||||
| Repayment of short term loans | ( | ) | ( | ) | ||||
| Repayment of third party loans | ( | ) | ( | ) | ||||
| Repayment of finance leases | ( | ) | ( | ) | ||||
| Proceeds from receivables funding | ||||||||
| Repayment of receivables funding | ( | ) | ( | ) | ||||
| Proceeds from related party notes | ||||||||
| Repayment of related party notes | ( | ) | ||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Effect of exchange rate on cash | ( | ) | ||||||
| Net change in cash | ( | ) | ||||||
| Beginning cash balance | ||||||||
| Ending cash balance | $ | $ | ||||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing activities | ||||||||
| Conversion of convertible notes | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
| 5 |
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 owned the real estate on which its Greenstone Muskoka clinic operated. The current tenant operates an addiction treatment center on these premises. The Company collected rent on this property, which is treated as a separate business segment. On June 30, 2023, the Company sold Cranberry Cove Holdings, in which the real estate was registered to Leonite Capital, in exchange for the cancellation of preferred shares and the accrued dividend liability owed on the preferred shares.
2. Summary of significant accounting policies
Financial Reporting
The (a) unaudited condensed consolidated balance sheets as of September 30, 2023, and as of December 31, 2022, which has 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 and nine months ended September 30, 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) Principles of consolidation and foreign 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).
| 6 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued)
b) Principles of consolidation and foreign 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.
On June 30, 2023, the Company disposed on Cranberry Cove Holdings whose functional currency was Canadian Dollars, all remaining subsidiaries have the U.S. dollar as a functional currency.
The relevant translation rates are as follows: The Company disposed of Cranberry cove Holdings on June 30, 2023, the exchange rates used for the six months in which it had control over Cranberry cove holdings was as follows; for the six months ended June 30, 2023, a closing rate of CDN$1 equals US$0.7553 and an average exchange rate of CDN$1 equals US$0.7420, and 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) Cash and cash equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with several financial institutions in the USA and Canada. There were no cash equivalents at September 30, 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 $
d) 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.
e) Allowance for Doubtful Accounts, Contractual and Other Discounts
The Company derives the majority of its revenues from commercial payors at in-network rates. 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, therefore management does not maintain a separate allowance for doubtful accounts, contractual and other discounts.
Management also takes into consideration the age of accounts, creditworthiness and current economic trends when evaluating the percentage of revenue to be recognized.
| 7 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued)
f) 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.
g) 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.
h) 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.
i) 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.
j) 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
| 8 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued)
k) 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.
l) Revenue recognition
ASC 606 requires companies to exercise more judgment and recognize revenue using a five-step process.
The Company’s provision for doubtful accounts are recorded as a direct reduction to revenue instead of being presented as a separate line item on the consolidated statements of operations and comprehensive loss.
As our performance obligations relate to contracts with a duration of one year or less, the Company elected the optional exemption in ASC 606-10-50-14(a). Therefore, the Company is not required to disclose the transaction price for the remaining performance obligations at the end of the reporting period or when the Company expects to recognize the revenue. The Company has minimal unsatisfied performance obligations at the end of the reporting period as our patients typically are under no obligation to remain admitted in our facilities.
The Company receives payments from the following sources for services rendered in our U.S. Facility: (i) commercial insurers; and (ii) individual patients and clients. As the period between the time of service and time of payment is typically one year or less, the Company elected the practical expedient under ASC 606-10-32-18 and does not adjust for the effects of a significant financing component.
The Company derives a significant portion of its revenue from other payors that receive discounts from established billing rates. The various managed care contracts under which these discounts must be calculated are complex, subject to interpretation and adjustment, and may include multiple reimbursement mechanisms for different types of services provided in the Company’s inpatient facilities and cost settlement provisions. Management estimates the transaction price on a payor-specific basis given its interpretation of the applicable regulations or contract terms. The services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from the Company’s estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.
Settlements with third-party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. In the opinion of management, adequate provision has been made for any adjustments and final settlements. However, there can be no assurance that any such adjustments and final settlements will not have a material effect on the Company’s financial condition or results of operations. The Company’s receivables were $681,072, $337,074 and $176,011 at September 30, 2023, December 31, 2022 and December 31, 2021, respectively. Management believes that these receivables are properly stated and are not likely to be settled for a significantly different amount.
The Company’s revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those services. The Company derives its revenues from the sale of its services. The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its revenue transactions:
| i. | identify the contract with a customer; |
| ii. | identify the performance obligations in the contract; |
| iii. | determine the transaction price; |
| iv. | allocate the transaction price to performance obligations in the contract; and |
| v. | recognize revenue as the performance obligation is satisfied. |
| 9 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued)
m) Income taxes
The Company accounts for income taxes under the provisions of ASC Topic 740, “Income Taxes”. Under ASC Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income taxes are provided using the liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax basis of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized.
ASC Topic 740 contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company recognizes interest and penalties accrued on unrecognized tax benefits within general and administrative expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in general and administrative expenses in the period that such determination is made. The tax returns for fiscal 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.
Basic net income per share is computed on the basis of the weighted average number of common stock outstanding during the year.
Diluted net income 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 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).
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 nine months ended September 30, 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.
There were no stock -based compensation awards that vested during the nine months ended September 30, 2023 and 2022 and there was no stock based compensation recorded in the unaudited condensed consolidated financial statements.
| 10 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued)
p) 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, September 30, 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.
In the opinion of management, credit risk with respect to accounts receivable is assessed as low.
| ii. | Liquidity risk |
Liquidity risk is the risk the Company will not be able to meet its financial obligations as they fall due. The Company is exposed to liquidity risk through its working capital deficiency of approximately $6.9 million, and an accumulated deficit of approximately $42.0 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.
| 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, short term loans, third party loans and government assistance loans as of September 30, 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 no longer subject to currency risk as it has disposed of its subsidiaries that operated in Canada.
| c. | Other price risk |
Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. In the opinion of management, the Company is not exposed to this risk and remains unchanged from the prior year.
| 11 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued)
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 nine months ended September 30, 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.
| 12 |
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 September 30, 2023 the Company has a working capital deficiency of $6.9 million, and total liabilities in excess of assets in the amount of $5.5 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. Disposal of subsidiary
On June 30, 2023, the Company entered into an exchange agreement with Leonite Capital, LLC, whereby it exchanged the 400,000 Series B shares with a value of $400,000 plus accrued dividends thereon of $61,184 for its entire shareholding in its property owning subsidiary, Cranberry Cove Holdings. The Series B shares were cancelled upon consummation of the transaction.
Immediately prior to the disposal of Cranberry Cove Holdings, the Company assumed the loan owed to a third party of $779,005 and the loan owing to Leon Developments of $1,973,837, Leon developments, a related party, owned by the Company’s CEO, Shawn Leon. In addition, the Company forgave the intercompany debt owing by Cranberry Cove Holdings of $4,566,848.
The assets and liabilities disposed of were as follows:
| Net book value | ||||
| Assets | ||||
| Other receivable | $ | |||
| Property and equipment | ||||
| Liabilities | ||||
| Accounts payable and accrued liabilities | ( | ) | ||
| Government assistance loans | ( | ) | ||
| Mortgage loan | ( | ) | ||
| ( | ) | |||
| Disposal of subsidiary to related party – recorded as additional paid in capital | $ | ( | ) | |
The minority shareholders interest related to the Series A preferred stock in Cranberry Cove Holdings was recorded as a deemed contribution to the Company and credited to additional paid in capital, resulting in a total credit to additional paid in capital of $2,034,885.
The cancellation of the Series B shares, were owned by Leonite Capital, a related party, was deemed to be an extinguishment of debt by a related party and recorded as a credit to additional paid in capital of $461,184.
| 13 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Property and equipment
Acquisition and simultaneous disposition of property
On October 3, 2022 the Company entered into a purchase and sale agreement with Evernia Station Limited Partnership for the purchase of 950 Evernia Street, West Palm Beach, Florida (“950”), the property in which it operates its treatment center, for gross proceeds of $5,500,000. (“Purchase Agreement”). The closing was originally scheduled for February 1, 2023, however through a series of 6 addendums to the Purchase Agreement requiring the payment of a total $180,000 in extension fees, the Closing was extended to August 3, 2023.
On February 27, 2023 the Company signed a listing agreement with Stream Capital Partners listing 950 for sale at a price of $9,568,000 with the intention of identifying a buyer that would purchase and then potentially enter into a lease agreement with the Company.
On May 4, 2023 the Company signed a Letter of Intent with Pontus Net Lease Advisers, LLC to sell 950 for $8,500,000 and lease the property to the Company for a term of twenty years with two ten year extensions. On May 19, 2023, the Company signed a purchase and sale agreement with Pontus Net Lease Advisors to sell 950 for $8,500,000. On August 4, 2023, the Company completed both the purchase of 950 from Evernia Station Limited Partnership and the subsequent sale of 950 to Pontus Net Lease Advisors, LLC.
Simultaneously with the closing of the purchase and sale agreements, on August 4, 2023, the Company entered into a long term lease for 950 with an initial term of twenty years, and two ten year extension options. The lessor is Pontus EHC Palm Beach, LLC , a Delaware limited liability company and a portfolio company of Pontus Net Lease Advisors, LLC. The lease is absolutely net and the lease cost for the initial year is $748,000 paid monthly. The lease increases at a rate of 2.75% per year for a total term lease obligation of $19,595,653 over the initial twenty-year term. The Lease is personally guaranteed by the Company President and the guarantee may be released after 5 years based on certain financial and performance metrics being met.
The Company paid gross proceeds of $1,449,000 to Leonite Capital and Leonite Fund I, LP in settlement of all amounts outstanding to both entities, disclosed in notes 8 and 9 above. In addition, $65,450 was paid to Ed Blasiak to settle the convertible promissory note disclosed in note 8 above, $179,474 was paid to Joshua Bauman to settle the convertible promissory note disclosed in note 8 above, and $260,548 was paid to Mirage Realty, LLC to settle the senior secured promissory note, disclosed in note 9 above.
The details of the property purchase and subsequent sale are as follows:
| Amount | ||||
| Purchase of 950 Evernia Street property | ||||
| Purchase price | $ | |||
| Fees and expenses related to property purchase | ||||
| Total acquisition cost | ||||
| Proceeds on sale | ||||
| Fees and expenses related to disposal of the property | ( | ) | ||
| Net proceeds on disposal of property | ||||
| Gain on sale of property | $ | |||
Property and equipment consists of the following:
| September
30, 2023 | December 31, 2022 | |||||||||||||||||
Useful lives | Cost | Accumulated depreciation | Net book value | Net book value | ||||||||||||||
| Land | $ | $ | $ | $ | ||||||||||||||
| Property | ||||||||||||||||||
| Leasehold improvements | ( | ) | ||||||||||||||||
| Furniture and fittings | ( | ) | ||||||||||||||||
| Vehicles | ( | ) | ||||||||||||||||
| Computer equipment | ( | ) | ||||||||||||||||
| $ | $ | ( | ) | $ | $ | |||||||||||||
Depreciation
expense for the three months ended September 30, 2023 and 2022 was $
On June 30, 2023, the Company sold its interest in Cranberry Cove Holdings to Leonite Capital, which includes the land and property and the associated mortgage loan as disclosed in Note 10. Refer Note 4 above.
| 14 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Intangibles
Intangible assets consist of the following:
| Useful lives |
September
30, 2023 |
December 31, 2022 | ||||||||||||||||
| Cost | Accumulated amortization | Net book value | Net book value | |||||||||||||||
| Health care Provider license | $ | $ | ( |
) | $ | $ | ||||||||||||
The Company evaluates intangible assets for impairment on an annual basis during the last month of each year and at an interim date if indications of impairment exist. Intangible asset impairment is determined by comparing the fair value of the asset to its carrying amount with an impairment being recognized only when the fair value is less than carrying value and the impairment is deemed to be permanent in nature.
The
Company recorded $
7. Leases
The Company acquired ATHI on July 1, 2021, ATHI’s wholly owned subsidiary had entered into an operating lease agreement for certain real property located at 950 Evernia Street, West Palm Beach, Florida, with effect from February 1, 2019 for a period of three years, expiring on 1 February 2022. Under the terms of the lease agreement, the lease was extended during October 2021 for a further 5 year period until 1 February 2027.
As described in note 4 above, on October 3, 2022 the Company entered into a purchase and sale agreement with Evernia Station Limited Partnership for the purchase of 950 Evernia Street, West Palm Beach, Florida, the property in which it operates its treatment center, for gross proceeds of $5,500,000. On August 3, 2023, after 6 addendums to the agreement, the Company closed on the acquisition of the property. This resulted in the termination of the lease with Evernia station, resulting in the reversal of the remaining right-of-use asset of $1,226,080 and the associated operating lease liability of $1,328,803, which liability included $102,723 of accrued rental, which was offset against the rental expense.
On August 4, 2023, the Company entered into a long term lease for 950 Evernia Street, West Palm Beach, Florida with an initial term of twenty years, and two ten year extension options. The lessor is Pontus EHC Palm Beach, LLC , a Delaware limited liability company and a portfolio company of Pontus Net Lease Advisors, LLC. The lease is absolutely net and the lease cost for the initial year is $748,000 paid monthly. The lease increases at a rate of 2.75% per year for a total term lease obligation of $19,595,653 over the initial twenty-year term. The Lease is personally guaranteed by the Company President and the guarantee may be released after 5 years based on certain financial and performance metrics being met. Due to the initial lease term of twenty years, the Company is not certain that the extension periods will be exercised at this point in time and accordingly, these have been excluded from the present value of the minimum future lease payments.
To determine the present value of minimum future lease payments for operating leases at August 4, 2023, the Company was required to estimate a rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment (the "incremental borrowing rate" or "IBR").
The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, the Company used the Fannie Mae, in excess of $3,000,000 rate based on an 80% value to loan ratio, averaging the 15 and 30 year indicative rates, resulting in a rate of 7.70%. The Company determined that 7.70% per annum was an appropriate incremental borrowing rate to apply to its real-estate operating lease.
The
present value of the future minimum lease payments was valued at $
Right of use assets are included in the consolidated balance sheet are as follows:
| September
30, 2023 | December
31, 2022 | |||||||
| Non-current assets | ||||||||
| Right-of-use assets – finance leases, net of depreciation, included in Property and equipment | $ | $ | ||||||
| Right-of-use assets - operating leases, net of amortization | $ | $ | ||||||
| 15 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Leases (continued)
Lease costs consists of the following:
| Nine months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | $ | $ | ||||||
| Interest expense on finance lease liabilities | ||||||||
| Operating lease cost | $ | $ | ||||||
| Lease cost | $ | $ | ||||||
Other lease information:
| Nine months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flows from finance leases | $ | ( | ) | $ | ( | ) | ||
| Operating cash flows from operating leases | ( | ) | ( | ) | ||||
| Financing cash flows from finance leases | ( | ) | ( | ) | ||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | ( | ) | $ | ( | ) | ||
| Weighted average lease term – finance leases | ||||||||
| Weighted average remaining lease term – operating leases | ||||||||
| Discount rate – finance leases | % | % | ||||||
| Discount rate – operating leases | % | % | ||||||
Maturity of Leases
Finance lease liability
The amount of future minimum lease payments under finance leases as of September 30, 2023 is as follows:
| Amount | ||||
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Imputed interest | ( | ) | ||
| Total finance lease liability | $ | |||
| Disclosed as: | ||||
| Current portion | $ | |||
| Non-Current portion | ||||
| Lease liability | $ | |||
| 16 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Leases (continued)
Operating lease liability
The amount of future minimum lease payments under operating leases are as follows:
| Amount | ||||
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total undiscounted minimum future lease payments | ||||
| Imputed interest | ( | ) | ||
| Total operating lease liability | $ | |||
| Disclosed as: | ||||
| Current portion | $ | |||
| Non-Current portion | ||||
| Lease liability | $ | |||
Lessor Property
Prior to the disposal of the Company’s wholly owned subsidiary CCH on June 30, 2023, the company owned 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 was 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 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$243,288 ($180,522) for the six months ended June 30, 2023, the date of disposal of CCH and the property, see Note 4 above.
8. Short-term Convertible Notes
The short-term convertible notes consist of the following:
| Interest rate | Maturity Date | Principal | Interest | September 30, 2023 | December 31, 2022 | |||||||||||||||||
| Leonite Capital, LLC | % | $ | $ | $ | $ | |||||||||||||||||
| Leonite Fund I, LP | Variable | |
||||||||||||||||||||
| Auctus Fund, LLC | % | |||||||||||||||||||||
| Labrys Fund, LP | % | |||||||||||||||||||||
| Ed Blasiak | % | |||||||||||||||||||||
| Joshua Bauman | % | |||||||||||||||||||||
| % | ||||||||||||||||||||||
| Series N convertible notes | % | |||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||
| 17 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. 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. On August 4, 2023, the Company settled all outstanding liabilities owing to Leonite Capital and Leonite fund I, L.P. for gross proceeds of $1,449,000.
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 an outstanding principal balance of $341,000, and on June 2, 2021, with an outstanding principal balance 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%.
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. On August 4, 2023, the Company settled all outstanding liabilities owing to Leonite Capital and Leonite fund I, L.P. for gross proceeds of $1,449,000.
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 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 in constant discussion with the lender on settling the note.
| 18 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. 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 matured 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 had matured and was in default, Ed Blasiak has not declared a default under the note. On August 4, 2023, the Company settled the senior secured convertible promissory note owing to Ed Blasiak for proceeds of $65,450.
Joshua Bauman
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 had matured and was in default, Mr. Bauman has not declared a default under the note. On August 4, 2023, the Company settled the senior secured convertible promissory note owing to Mr. Bauman for proceeds of $179,474.
On August 9, 2023, the Company issued a convertible promissory note to Bauman, in the aggregate principal amount of $150,000. The note bears interest at 10.0% per annum and matures on August 9, 2024. 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 is convertible into common stock at the option of the holder after the expiration of six months from the issuance date, in addition, should the note reach its maturity date, August 9, 2024, the note will automatically convert into shares of common stock at the conversion price, subject to anti-dilution provisions.
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.
| 19 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. 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. On August 4, 2023, the Company settled all outstanding liabilities owing to Leonite Capital and Leonite fund I, L.P. for gross proceeds of $1,449,000.
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. On August 4, 2023, the Company settled all outstanding liabilities owing to Leonite Capital and Leonite fund I, L.P. for gross proceeds of $1,449,000.
Mirage Realty, LLC
On March 15, 2023, the Company, entered into a senior secured Promissory Note in the aggregate principal amount of $250,000 for net proceeds of $223,500 after an original issue discount and fees of $26,500. The note earns interest at 10% per annum and matures on July 15, 2023
On August 4, 2023, the Company settled the senior secured promissory note owing to Mirage Realty for gross proceeds of $260,548.
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 September 30, 2023 was $124,886 (CDN$168,845).
10. Mortgage loans
Mortgage loans is disclosed as follows:
| Interest rate |
Maturity date | Principal Outstanding |
Accrued interest |
September
30, 2023 |
December
31, 2022 | ||||||||||||||||
| Cranberry Cove Holdings, Ltd. | |||||||||||||||||||||
| Pace Mortgage | % | $ | $ | $ | $ | ||||||||||||||||
| Disclosed as follows: | |||||||||||||||||||||
| Short-term portion | $ | $ | |||||||||||||||||||
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 $29,531.
On June 30, 2023, the Company sold its interest in CCH to Leonite Capital, which includes the real property as disclosed in Note 5 and the associated mortgage loan. Refer to Note 4 above.
| 20 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Government assistance loans
On December 1, 2020, CCH was granted a Covid-19 related government assistance loan in the aggregate principal amount of CDN$ 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. This loan was not repaid by December 31, 2022.
On June 30, 2023, the Company sold its interest in CCH to Leonite Capital, which includes the Canadian government assistance loan. Refer to Note 4 above.
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 September 30, 2023, the balance outstanding, including interest thereon was $39,207.
12. 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 $310,000 on the September 26, 2022 funding, thereby settling the receivables funding.
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 $241,458 on the December 13, 2022 funding. On September 15, 2023, the Company repaid the remaining principal outstanding of $63,542 out of the proceeds received from the September 15, 2023 receivables funding with Itria.
January 19, 2023 Funding
On January 19, 2023, the Company, through its 75% held subsidiary, Evernia Health Center, LLC, entered into a Receivables Sales 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 $49,500 on the January 19, 2023 funding. On June 2, 2023 the Company entered into another receivables funding agreement with Bizfund, whereby Bizfund forgave $8,250 of the premium due on the January 19, 2023 funding and transferred the remaining principal balance of $74,250 to the June 2, 2023 funding. The unamortized balance of the debt discount of $12,616 was expensed on June 2, 2023, thereby extinguishing the receivables funding.
| 21 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. Receivables funding (continued)
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 obligated 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 $86,130 on the February 14, 2023 funding. on September 15, 2023, the Company repaid the remaining principal outstanding of $32,670 out of the proceeds received from the September 15, 2023 receivables funding with Itria.
June 2, 2023 Funding
On June 2, 2023, the Company received funding from an agreement entered into through its 75% held subsidiary, Evernia Health Center, LLC entered into a Receivables Sale Agreement with Bizfund.com (“Bizfund)”), whereby $198,000 of the Receivables of Evernia were sold to Bizfund, for gross proceeds of $150,000, made up of a cash payment to the Company of $75,750 and the transfer of $74,250 of the January 19, 2023, outstanding principal to the June 2, 2023 funding agreement.. The Company is obliged to pay 15.0% of the receivables until the amount of $198,000 is paid in full, with periodic repayments of $4,950 per week. The guarantor of the funding is a minority shareholder in ATHI.
The Company made weekly cash payments of $4,950 totaling $79,200 on the June 2, 2023 funding. The balance outstanding at September 30, 2023 was $118,800, less unamortized discount of $30,687.
September 15, 2022 Funding
On September 15, 2023, the Company, through its 75% held subsidiary, Evernia Health Center, LLC entered into a Receivables Sale Agreement with Itria Ventures LLC (“Itria”), whereby $320,000 of the Receivables of Evernia were sold to Itria, for gross proceeds of $250,000. The Company also incurred fees of $3,000, resulting in net proceeds of $247,500. The Company is obliged to pay $6,666.67 per week until the amount of $320,000 is paid in full. The guarantor of the funding is a minority shareholder in ATHI.
The Company made weekly cash payments of $6,667 totaling $13,333 on the September 15, 2022 funding. The balance outstanding at September 30, 2023 was $306,667, less unamortized discount of $70,076.
13. 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. This loan was assumed by the Company on the disposal of CCH to Leonite Capital as disclosed in note 4 above.
During April and May 2023, the Company made ad-hoc repayments of CDN$25,000 (approximately $25,970) on the third party loan. Between August 9 and August 10, 2023, the Company made principal repayment of CDN$450,000 ($335,290) As of September 30, 2023 the balance of principal and interest outstanding on third party loans was CDN$336,320 ($248,757).
14. Related party payables
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Due to related parties | ||||||||
| Shawn E. Leon | $ | $ | ||||||
| Leon Developments Ltd. | ||||||||
| Eileen Greene | ||||||||
| Total related party payables | $ | $ | ||||||
Shawn E. Leon
As of September 30, 2023 and December 31, 2022, the Company had a payable to Shawn Leon of $124,445 and $411,611, respectively. Mr. Leon is a director and CEO of the Company. The balances payable are non-interest bearing and have 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 nine months ended September 30, 2023 and the year ended December 31, 2022.
Leon Developments, Ltd.
Leon Developments is owned by Shawn Leon, the Company’s CEO and director. As of September 30, 2023 and December 31, 2022, the Company owed Leon Developments, Ltd., $1,092,701 and $850,607, respectively.
The Company paid Leon Developments a management fee of CDN$250,000 (approximately $185,503) and $0 for the nine months ended September 30, 2023 and 2022, respectively.
On June 30, 2023, the Company assumed the liability owing to Leon developments of CDN$1,974,012 (approximately $1,490,946) from its subsidiary, CCH, immediately prior to the disposal of CCH to a related party, Leonite Capital LLC.
| 22 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 14. | Related party transactions (continued) |
Eileen Greene
As of September 30, 2023 and December 31, 2022, the Company owed Eileen Greene, the spouse of our CEO, Shawn Leon, $1,452,862 and $1,451,610, respectively. The amount owed to Ms. Greene is non-interest bearing and has no fixed repayment terms.
Leonite Capital, LLC and Leonite Fund I, LLP
Leonite Capital is considered a related party due to its Series A Preferred stock interest in CCH, which was previously a wholly-owned subsidiary of the Company, of $700,000, and its Series B Preferred stock interest in the Company of $400,000, as of December 31, 2022.
The Series A Preferred stock interest in CCH of $700,000 was recorded as a minority shareholder interest as of December 31, 2022.
Accrued dividends on the CCH Series A Preferred shares of $145,547 and accrued dividends on the Series B Preferred shares of $49,282 was owed to Leonite Capital as of December 31, 2022. Prior to the disposal of CCH to Leonite Capital on June 30, 2023, and the simultaneous cancellation of the Series B Preferred stock as discussed below, the accrued dividends on the CCH Series A Preferred shares was $184,545 and the accrued dividends on the Series B Preferred shares was $61,184.
On June 30, 2023, the Company entered into an exchange agreement with Leonite Capital whereby it exchanged the 400,000 Series B shares with a value of $400,000 plus accrued dividends thereon of $61,184 for its entire shareholding in its property owning subsidiary, Cranberry Cove Holdings. The Series B shares and the accrued dividends thereon were extinguished and cancelled upon consummation of the transaction.
Due to the related party nature of the transaction, the net result of the disposal of $1,334,885 and the $700,000 of the CCH Series A Preferred shares, totaling $2,034,885, was recorded as a credit to additional paid-in-capital.
In addition, due to the related party nature of the transaction, the cancellation of the Series B Preferred stock, of $400,000 and the dividends thereon of $61,184, totaling $461,184, was recorded as an extinguishment of debt reflected in additional paid-in-capital.
On August 4, 2023, the company repaid Leonite Capital $1,449,000 consisting of repayments of short-term convertible notes of $995,257, promissory notes of $420,069, additional penalty on settlement of $5,236 and a personal loan by Leonite to Shawn Leon of $28,438, which repayment reduced the related party payable to Shawn Leon, as disclosed above.
As disclosed in note 8 above, the Company owed Leonite Capital and Leonite Funds I, LP, an entity under common control with Leonite Capital, short-term convertible notes, including principal and interest thereon of $0 and $905,579 as of September 30, 2023 and December 31, 2022, respectively.
In addition, as disclosed in note 9 above, the Company owed Leonite capital, secured promissory notes, including principal, monitoring fees and interest thereon totaling $0 and $340,281 as of September 30, 2023 and December 31, 2022, respectively.
All related party transactions occur in the normal course of operations and in terms of agreements entered into between the parties.
15. Stockholder’s deficit
| a. | Common shares |
Authorized and outstanding
The Company has authorized 10,000,000,000 shares with a par value of $0.01 per share. The company has issued 3,729,053,805 shares of common stock at September 30, 2023 and December 31, 2022.
| 23 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
15. Stockholder’s deficit (continued)
| b. | Series A Preferred shares |
Authorized, issued and outstanding
The Company has authorized 10,000,000 Series A preferred shares with a par value of $0.01 per share. The Company has issued and outstanding 4,000,000 Series A Preferred shares at September 30, 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 0 and 400,000 Series B Preferred shares at September 30, 2023 and December 31, 2022, respectively.
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 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.
On June 30, 2023, the Company entered into an exchange agreement with Leonite Capital whereby it exchanged the shares in its wholly owned subsidiary, CCH for the return and cancellation of the Series B preferred shares, together with the dividends accrued thereon. Refer to note 4 above.
| 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 September 30, 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.
Warrant exchange agreement
On June 28, 2023 the Company entered into a Warrant Exchange Agreement with Leonite that exchanged a Warrant outstanding to Leonite originally issued on June 12, 2020 for a new Warrant dated June 30, 2023. The substantial changes to the warrant affect the number of shares in the warrant, the exercise price and the term. The original warrant provided for Leonite to have a continuing right to purchase a 20% share of the outstanding common shares until it expired on June 12, 2025 which was originally set at 326,286,847 shares. The new warrant is exercisable for 745,810,761 shares, 20% of the current number of common shares outstanding, with no allowance for adjustment, except normal adjustments due to splits or consolidations, until the new expiry date of June 30, 2027. The exercise price in the original warrant was $0.10, with allowance for adjustments, which when applied resulted in an exercise price of $0.0004 per share. The exercise price on the new warrant is $0.001 and is only adjustable if the Company issues any shares at a price less than the exercise price during the warrant period except for any issuance of shares to the Company’s president or related parties on any debt outstanding to those parties as of June 30, 2023, and limited to a conversion price of $0.0005 per share. The Warrant Exchange agreement was conditional on Leonite receiving a full payment of all of its outstanding loans originally set as by July 20, 223. This date was extended and all of the notes were repaid on August 4, 2023. Leonite held several notes at June 30, 2023, some of which were convertible into shares at variable rates, see notes 9 and 10 above. The total amount repaid to settle all of the outstanding liabilities was $1,449,000.
| 24 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
15. Stockholder’s deficit (continued)
The replacement warrants were valued effective June 30, 2023, the effective date of issuance of the warrants, as the difference between the fair value of the original warrant exercisable for 326,286,847 shares of common stock and the fair value of the replacement four-year warrant exercisable for 745,810,861 shares of common stock at an exercise price of $0.001 per share.
The warrants were valued using a Black-Scholes valuation model. The following assumptions were used in the valuation model:
Nine months ended September 30, 2023 | ||||
| Exercise price | $ | |||
| Risk free interest rate | to | % | ||
| Expected life of options | to years | |||
| Expected volatility of underlying stock | to | % | ||
| Expected dividend rate | % | |||
A summary of the Company’s warrant activity during the period from January 1, 2022 to September 30, 2023 is as follows:
Schedule of warrants outstanding
| No. of shares | Exercise
price per share |
Weighted average exercise price | ||||||||||
| Outstanding as of January 1, 2022 | $ to $ | $ | ||||||||||
| Granted | — | |||||||||||
| Forfeited/cancelled | ( |
) | $ | |||||||||
| Exercised | — | |||||||||||
| Outstanding as of December 31, 2022 | $to $ | $ | ||||||||||
| Granted | $ | |||||||||||
| Forfeited/cancelled | ( |
) | $ | |||||||||
| Exercised | — | |||||||||||
| Outstanding as of September 30, 2023 | $ to $ | $ | ||||||||||
The following table summarizes information about warrants outstanding at September 30, 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 |
||||||||||||||||
| $0.001 | |||||||||||||||||||||
| $0.002050 | |||||||||||||||||||||
| $ | $ | ||||||||||||||||||||
All of the warrants outstanding at September 30, 2023 are vested. The warrants outstanding at September 30, 2023 have an intrinsic value of $0.
| 25 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
16. Segment information
The Company had 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. In terms of an exchange agreement entered into with Leonite Capital effective June 30, 2023, the property owning subsidiary CCH was exchanged for the Series B preferred shares issued to Leonite Capital. Refer note 4 above. |
| 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 is disclosed as follows:
| Nine months ended September 30, 2023 | ||||||||||||
| Rental Operations | In-Patient services | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Operating expenses | ||||||||||||
| Operating (loss) income | ( | ) | ||||||||||
| Other (expense) income | ||||||||||||
| Forgiveness of intercompany loan | ( | ) | ||||||||||
| Other income | ||||||||||||
| Penalty on convertible notes | ( | ) | ( | ) | ||||||||
| Extension fee on property purchase | ( | ) | ( | ) | ||||||||
| Gain on disposal of property | ||||||||||||
| Loss on debt extinguishment | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||
| Amortization of debt discount | ( | ) | ( | ) | ||||||||
| Foreign exchange movements | ( | ) | ( | ) | ( | ) | ||||||
| Net income (loss) before taxes | ( | ) | ||||||||||
| Taxes | ||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | |||||||
The operating assets and liabilities of the reportable segments is as follows:
| September 30, 2023 | ||||||||||||
| Rental Operations | In-Patient services | Total | ||||||||||
| Purchase of fixed assets | $ | ( | ) | $ | $ | |||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Non-current assets | ||||||||||||
| Liabilities | ||||||||||||
| Current liabilities | ( | ) | ( | ) | ||||||||
| Non-current liabilities | ( | ) | ( | ) | ||||||||
| Net liability position | $ | $ | ( | ) | $ | ( | ) | |||||
| 26 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
16. Segment information (continued)
The segment operating results of the reportable segments is disclosed as follows:
| Nine months ended September 30, 2022 | ||||||||||||
| Rental Operations | In-Patient services | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Operating expenses | ( | ) | ( | ) | ( | ) | ||||||
| Operating income | ||||||||||||
| Other (expense) income | ||||||||||||
| Other income | ||||||||||||
| Forgiveness of government assistance loan | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||
| Amortization of debt discount | ( | ) | ( | ) | ||||||||
| Derivative liability movement | ||||||||||||
| Foreign exchange movements | ||||||||||||
| Net income before taxes | ||||||||||||
| Taxes | ( | ) | ( | ) | ||||||||
| Net Income | $ | $ | $ | |||||||||
The operating assets and liabilities of the reportable segments is as follows:
| September 30, 2022 | ||||||||||||
| Rental Operations | In-Patient services | Total | ||||||||||
| Purchase of fixed assets | $ | $ | $ | |||||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Non-current assets | ||||||||||||
| Liabilities | ||||||||||||
| Current liabilities | ( | ) | ( | ) | ( | ) | ||||||
| Non-current liabilities | ( | ) | ( | ) | ( | ) | ||||||
| Mandatory redeemable preferred shares | ( | ) | ( | ) | ||||||||
| Intercompany balances | ( | ) | ||||||||||
| Net liability position | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| 27 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended September 30, 2023, the computation of basic and diluted earnings per share is calculated as follows:
| Number of | Per share | |||||||||||
| Amount | shares | amount | ||||||||||
| Basic earnings per share | ||||||||||||
| Net income per share available for common stockholders | $ | $ | ||||||||||
| Effect of dilutive securities | ||||||||||||
| Convertible debt | ||||||||||||
| Diluted earnings per share | ||||||||||||
| Net income per share available for common stockholders | $ | $ | ||||||||||
For the three months ended September 30, 2022, the computation of basic and diluted earnings per share is calculated as follows:
| Number of | Per share | |||||||||||
| Amount | shares | amount | ||||||||||
| Basic earnings per share | ||||||||||||
| Net income per share available for common stockholders | $ | $ | ||||||||||
| Effect of dilutive securities | ||||||||||||
| Convertible debt | ||||||||||||
| Diluted earnings per share | ||||||||||||
| Net income per share available for common stockholders | $ | $ | ||||||||||
For the nine months ended September 30, 2023, the computation of basic and diluted earnings per share is calculated as follows:
| Number of | Per share | |||||||||||
| Amount | shares | amount | ||||||||||
| Basic earnings per share | ||||||||||||
| Net income per share available for common stockholders | $ | $ | ||||||||||
| Effect of dilutive securities | ||||||||||||
| Convertible debt | ||||||||||||
| Diluted earnings per share | ||||||||||||
| Net income per share available for common stockholders | $ | $ | ||||||||||
| 28 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
17. Net income per common share (continued)
For the nine months ended September 30, 2022, the computation of basic and diluted earnings per share is calculated as follows:
| Number of | Per share | |||||||||||
| Amount | shares | amount | ||||||||||
| Basic earnings per share | ||||||||||||
| Net income per share available for common stockholders | $ | $ | ||||||||||
| Effect of dilutive securities | ||||||||||||
| Convertible debt | ||||||||||||
| Diluted earnings per share | ||||||||||||
| Net income per share available for common stockholders | $ | $ | ||||||||||
18. 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.
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.
| 29 |
ETHEMA HEALTH CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
19. Subsequent events
On November 15, 2023, the Company, entered into a senior secured Promissory Note in the aggregate principal amount of $250,000 for net proceeds of $223,500 after an original issue discount and fees of $26,500. The note earns interest at 10% per annum and matures on March 15, 2024.
Other than disclosed above, the Company has evaluated subsequent events through the date of the condensed consolidated financial statements were issued, we did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our 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 organically or through acquisitions, should any opportunities present themselves. On August 4, 2023, we completed both the purchase of the property in which the Evernia operates for gross proceeds of $5,500,000 and the subsequent sale of the property to Pontus Net Lease Advisors, LLC for gross proceeds of $8,500,000. Net proceeds on the two transactions after the payment of convertible and short-term notes and fees and expenses related to the transactions above was $571,784. The proceeds were used to repay certain indebtedness and to provide some working capital to organically grow the operations. We are still pursuing a Regulation A financing to further reduce debt and allow us to pursue future acquisitions.
Results of operations for the three months ended September 30, 2023 and 2022.
Revenues
Revenues were $1,353,899 and $1,424,943 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $71,044 or 5.0%. The revenue from in-patient services related to Evernia was S1,353,899 and $1,316,425 for the three months ended September 30, 2023 and 2022, respectively. The increase is attributable to the increase in the number of patients at the facility and increasing our in-network provider status to a second insurance provider.
The revenue from rental properties was $0 and $108,518 for the three months ended September 30, 2023 and 2022. The subsidiary owning the rental property, CCH was sold on June 30, 2023.
Operating Expenses
Operating expenses were $1,320,371 and $1,169,961 for the three months ended September 30, 2023 and 2022, respectively, an increase of $150,410 or 12.9%. The increase is primarily due to the following:
| ● | Professional fees were $171,659 and $19,131 for the three months ended September 30, 2023 and 2022, respectively, an increase of $152,528 or 797.3%. The increase is primarily due to the level of corporate activity as the company prepares for a regulation A filing and an increase in outside contractors used to operate the business during the current year. |
| ● | Salaries and wages were $651,537 and $580,432 for the three months ended September 30, 2023 and 2022, respectively, an increase of $71,105 or 12.3%. the increase is primarily due to the increase in headcount to service the increase in our patient headcount and the growth of the facility over the prior year and is directly correlated to the increase in revenue. |
| ● | Depreciation and amortization was $110,185 and $136,608 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $26,423 or 19.3%. The decrease is primarily due to the depreciation associated with the assets of CCH which was disposed of in the prior quarter. |
| ● | Rent expense was $107,707 and $114,717 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $7,010 or 6.1%. This is primarily due to a credit of $102,723 related to a rental accrual made on the cancellation of the previous property lease, offset by an increase in rental expense of $74,300 in terms of the new lease agreement entered into, in addition additional property was leased on a short term basis as the patient base expands. |
| ● | General and administrative expenses was $249,283, and $289,073 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $39,970. The decrease consists of numerous individually insignificant expense items. |
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Operating income
Operating income was $33,528 and $254,982 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $221,454 or 86.9%. The decrease is due to the decrease in revenues and the increase in operating expenses as discussed in detail above.
Other income
Other income was $110 and $(1,045) for the three months ended September 30, 2023 and 2022, respectively. The amounts are immaterial.
Forgiveness of government assistance loan
Forgiveness of federal assistance loan was $0 and $104,368 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $104,368. The Company received partial forgiveness of the Government assistance loan in the prior year.
Gain on disposal of property
Gain on disposal of property was $2,484,172 and $0 for the three months ended September 30, 2023 and 2022, respectively, an increase of $2,484,172 or 100.0%. The Company exercised its option to acquire the property located at 950 Evernia Street, West Palm Beach, Florida, in which its treatment center operations, and subsequently disposed of the property to a third party, realizing a gross profit of $2,484,172, after transaction costs.
Loss on debt extinguishment
Loss on debt extinguishment was $277,175 and $0 for the three months ended September 30, 2023 and 2022, respectively, an increase of $277,175 or 100.0%. The loss on debt extinguishment is related primarily to replacement warrants issued to Leonite Capital as part of the settlement reached with Leonite, whereby all indebtedness to Leonite.
Interest expense
Interest expense was $81,371 and $163,651 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $82,280 or 50.3%. The decrease is primarily due to the disposal of CCH to Leonite on June 30, 2023, which included the disposal of the mortgage loan associated with the property, in addition, the Company settled principal of $1,124,442 of convertible notes on August 4, 2023, resulting in a reduced interest charge for the current quarter.
Amortization of debt discount
Amortization of debt discount was $73,857 and 87,704 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $13,847 or 15.8%. The decrease is primarily due to the overall decrease in receivables funding over the prior year.
Derivative liability movement
The derivative liability movement was $0 and $45,156 for the three months ended September 30, 2023 and 2022, respectively. The derivative liability movement represents the mark to market movements of variably priced convertible notes and warrants issued during the prior comparative period. The derivative liability was eliminated in the prior year as the underlying liabilities no longer qualified for derivative liability treatment under ASU2020-06.
Foreign exchange movements
Foreign exchange movements were $6,598 and $404,538 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $397,940 or 98.4%. The foreign exchange movement consists of 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. In the prior year, the Company had subsidiaries denominated in Canadian Dollars, most of the prior year movement consisted of mark-to market movements on intercompany balances, these Canadian denominated subsidiaries were disposed of in December 2022 and June 30, 2022, thereby reducing the Company’s exposure to fluctuations in the Canadian dollar exchange rate.
Net income before income taxes
Net income before income taxes was $2,092,005 and $556,734 for the three months ended September 30, 2023 and 2022, respectively, an increase of $1,535,271 or 275.8%. The increase is primarily due to the gain on disposal of property realized in the current year, offset by a reduction in operating income and the loss on debt extinguishment, discussed in detail above.
| 32 |
Income Taxes
Income taxes credit was $15,532 and $(44,652) for the three months ended September 30, 2023 and 2022, a decrease of $60,184 or 134.8%. The Company has sufficient net operating losses to offset any taxable income during the current period, the current income tax credit related to a deferred tax credit on intangible assets.
Net income
Net income was $2,107,537 and $512,082 for the three months ended September 30, 2023 and 2022, respectively, an increase of $1,595,455 or 311.6%, primarily due to the increase in net income before taxation and the movement in income taxes, discussed above.
For the nine months ended September 30, 2023 and September 30, 2022.
Revenues
Revenues were $4,219,904 and $3,586,290 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $633,614 or 17.7%. The revenue from in-patient services related to Evernia was S4,034,607 and $3,289,727 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $744,880 or 22.6%. The increase is attributable to the increase in the number of beds available at the facility and increasing our in-network provider status to a second insurance provider.
The revenue from rental properties was $180,522 and $296,533 for the nine months ended September 30, 2023 and 2022, a decrease of $116,011 or 39.1%. The company sold CCH on June 30, 2023, its rental property owning subsidiary.
Operating Expenses
Operating expenses were $4,079,204 and $3,204,606 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $874,598 or 27.3%. The increase is primarily due to the following:
| ● | Management fees was $273,003 and $90,000 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $183,003 or 203.3%. The increase is due to management fees paid to Leon developments from CCH prior to the disposal of CCH to a third party on September 30, 2023. This is a once off management fee. |
| ● | Professional fees were $460,773 and $180,867 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $279,906 or 154.8%. The increase is primarily due to the level of corporate activity for fund raising and the disposal of the CCH operation and contractor fees related to the increase of the number of patients treated at the facility. |
| ● | Salaries and wages were $1,873,280 and $1,456,099 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $417,181 or 28.7%. the increase is primarily due to the increase in patients and the growth of the facility over the prior year and is directly correlated to the increase in revenue. |
| ● | The remaining decrease in operating expenses of $5,492 consists of several individually immaterial expenses. |
Operating income
The operating income was $140,700 and $381,684 for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $240,984 or 63.1%. The decrease is due to the increase in operating expenses, offset by the increase in revenue as discussed in detail above.
Other income
Other income was $449 and $10,018 for the nine months ended September 30, 2023 and 2022, respectively. The amounts are immaterial.
Penalty on convertible debt
The penalty on convertible notes was $34,688 and $0 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $34,688 or 100%. The penalty on convertible note was agreed upon with one of our lenders whose note was in default and was subsequently settled after June 30, 2023.
Extension fee on property purchase
The extension fee on the property purchase was $130,000 and $0 for the six months ended June 30, 2023 and 2022, respectively, an increase of $130,000 or 100%. The extension fee was levied by the landlord of our West Palm Beach facility to afford us additional time to structure the acquisition of the facility, which we will in turn dispose of to a third party lender.
| 33 |
Gain on disposal of property
Gain on disposal of property was $2,484,172 and $0 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $2,484,172 or 100.0%. The Company exercised its option to acquire the property located at 950 Evernia Street, West Palm Beach, Florida, in which its treatment center operations, and subsequently disposed of the property to a third party, realizing a gross profit of $2,484,172, after transaction costs.
Loss on debt extinguishment
Loss on debt extinguishment was $277,175 and $0 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $277,175 or 100.0%. The loss on debt extinguishment is related primarily to replacement warrants issued to Leonite Capital as part of the settlement reached with Leonite, whereby all indebtedness to Leonite.
Interest expense
Interest expense was $382,448 and $367,177 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $15,271 or 4.2%. The increase is primarily due to monitoring fees incurred on two short term notes which are currently in default and default interest incurred on those borrowings, offset by a decrease in mortgage interest due to the disposal of CCH, our property owning subsidiary on June 30, 2023.
Amortization of debt discount
Amortization of debt discount was $238,304 and $551,738 for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $313,434 or 56.8%. The decrease is primarily due to the full amortization of debt discount on convertible notes in the prior periods, these convertible notes are expected to be settled in the short term out of proceeds of the simultaneous property acquisition and disposal. The current period amortization is primarily the amortization of discount on receivables funding.
Derivative liability movement
The derivative liability movement was $0 and $175,593 for the nine months ended September 30, 2023 and 2022, respectively. The derivative liability movement represents the mark to market movements of variably priced convertible notes and warrants issued during the prior comparative period. The derivative liability was eliminated in the prior year as the underlying liabilities no longer qualified for derivative liability treatment under ASU2020-06.
Foreign exchange movements
Foreign exchange movements were $(84,148) and $502,350 for the nine months ended September 30, 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. In the prior year, the Company had subsidiaries denominated in Canadian Dollars, most of the prior year movement consisted of mark-to market movements on intercompany balances, these Canadian denominated subsidiaries were disposed of in December 2022 and June 30, 2022, thereby reducing the Company’s exposure to fluctuations in the Canadian dollar exchange rate.
Net income before income taxes
Net income before income taxes was $1,478,558 and $255,098 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $1,223,460 or 479.6%. The increase is primarily due to the gain on sale of property, offset by the loss on debt extinguishment, the extension fee paid on the property purchase and the foreign exchange movements, all discussed in detail above.
Income taxes
Income taxes was a Tax credit was $221,107 and taxation charge was $(87,615) for the nine months ended September 30, 2023 and 2022, an increase in credit of $308,722 or 352.4%. The increase is due to the completion of tax returns for our operating subsidiaries during the current quarter, which resulted in the reversal of previously provided for income taxes, primarily related to accelerated depreciation allowances on property and equipment.
Net inc0me
Net income was $1,699,665 and $167,483 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $1,532,182 or 914.8%. The increase is primarily due to the increase in net income before taxation offset by the taxation credit, as discussed above.
| 34 |
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 September 30, 2023 is as follows:
| Amount | ||||||
| Remainder of 2023 | $ | 2,457 | ||||
| 2024 | 9,829 | |||||
| 2025 | 9,829 | |||||
| 2026 | 6,195 | |||||
| 2027 | 1,707 | |||||
| Total finance lease liability | $ | 30,017 | ||||
The amount of future minimum lease payments under operating leases are as follows:
| Amount | ||||||
| Remainder of 2023 | $ | 249,333 | ||||
| 2024 | 754,857 | |||||
| 2025 | 775,615 | |||||
| 2026 | 796,945 | |||||
| 2027 | 818,861 | |||||
| 16,200,042 | ||||||
| Total operating lease liability | $ | 19,595,653 | ||||
The company also has commitments under convertible loans and short term loans. If the convertible loans, as disclosed in note 11, above are not converted they will need to be repaid.
Liquidity and Capital Resources
We have prepared our unaudited condensed consolidated financial statements in accordance with US GAAP applicable to a going concern, which assumes that we will be able to meet our obligations and continue our operations in the normal course of business. At September 30, 2023 we had a working capital deficiency of $6.9 million, and total liabilities in excess of assets in the amount of $5.5 million. We believe that current available resources will not be sufficient to fund our planned expenditures over the next 12 months. These factors, individually and collectively indicate that a material uncertainty exists that raises substantial doubt about our ability to continue as a going concern for one year from the date of issuance of these condensed interim consolidated financial statements.
We are dependent on the raising additional capital through placement of common shares, and/or debt financing in order to implement our business plan and generating sufficient revenue in excess of costs. If we raise 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 we raise additional funds by issuing debt, we may be subject to limitations on its operations, through debt covenants or other restrictions. If we obtain additional funds through arrangements with collaborators or strategic partners, we may be required to relinquish our rights to certain geographical areas, or techniques that we might otherwise seek to retain. There is no assurance that we will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on our 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 we be unable to continue as a going concern.
Cash (used in) generated from operating activities was $(575,790) and $1,019,112 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $1,594,902. The increase is primarily due to the following:
| ● | An increase in net income of $1,532,183, discussed under operations above. |
| ● | Offset by an increase in the movement of non-cash items of $(2,248,019), primarily due to the gain on sale of property of $2,484,172 and the movement in the amortization of debt discount of $(325,702), offset by the movement in loss on debt extinguishment of $277,175and the prior period derivative liability movement of $175,593. |
| ● | The movement in working capital increased by $(879,066), primarily due to the increase in movement in accounts receivable of $(143,864) and an increase in the movement in accounts payable and accrued liabilities of $(321,881) and an increase in the movement of taxation payable of $(391,445). |
| 35 |
Cash provided by investing activities was $2,475,437 and cash used in investing activities was $335,103 for the nine months ended September 30, 2023 and 2022, respectively. The Company exercised its option to acquire 950 Evernia Street, where it conducts its treatment facility for net proceeds of $5,209,276, net of deposits previously paid and subsequently sold the property for net proceeds of $8,093,448, after fees and expenses related to the disposal. The Company paid a deposit of $374,000 for the new property lease entered into with the purchaser of the property.
Cash used in financing activities was $(2,099,675) and cash provided by investing activities was $393,185 for the nine months ended September 30, 2023 and 2022, respectively. In the current period the Company repaid convertible notes of $1,124,442, repaid promissory notes of $568,325, third party loans of $361,260 and net repayment of receivables funding of $267,771, primarily out of the net proceeds of the property disposal, offset by proceeds received on convertible notes of $150,000, proceeds from promissory notes of $223,500.
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 also has convertible notes, short term loans and secured promissory notes which have matured and are in default and 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 high due to this uncertainty.
We have prepared our unaudited condensed consolidated financial statements in accordance with US GAAP applicable to a going concern, which assumes that we will be able to meet our obligations and continue our operations in the normal course of business. At September 30, 2023 we had a working capital deficiency of $6.9 million, and total liabilities in excess of assets in the amount of $5.5 million. We believe that current available resources will not be sufficient to fund our planned expenditures over the next 12 months. These factors, individually and collectively indicate that a material uncertainty exists that raises substantial doubt about our ability to continue as a going concern for one year from the date of issuance of these condensed interim consolidated financial statements.
Recently Issued Accounting Pronouncements
The recent Accounting Pronouncements are fully disclosed in note 2 to our unaudited condensed consolidated financial statements.
Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying unaudited condensed consolidated financial statements.
Off balance sheet arrangements
We do not maintain off-balance sheet arrangements nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.
Inflation
The effect of inflation on our revenue and operating results was not significant.
Climate Change
We believe that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
The Company has adopted and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that due to a lack of segregation of duties the Company’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Subject to receipt of additional financing or revenue generated from operations, the Company intends to retain additional individuals to remedy the ineffective controls.
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Changes in Internal Control
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors.
Not applicable because we are a smaller reporting company.
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.
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
| 37 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ETHEMA HEALTH CORPORATION
Date: November 20, 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), | November 20, 2023 | ||
| Shawn Leon | Chief Financial Officer (Principal Financial Officer), President and Director | |||
| /s/ John O’Bireck | Director | November 20, 2023 | ||
| John O’Bireck | ||||
| /s/ Gerald T. Miller | Director | November 20, 2023 |
| 38 |