ETHEMA HEALTH Corp 10-K for FY2023
ETHEMA HEALTH Corp (GRST)
About this 10-K
ETHEMA HEALTH Corp filed this 10-K on May 7, 2024, covering the fiscal year ended December 31, 2023 (FY2023).
Headline figures
Fiscal year ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $5.34M
- up 10.9% from $4.82M a year earlier
- Net income
- $1.01M
- up 240.9% from net income of $295.19K a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the fiscal year ended:
or
For the transition period from ______to _________
Commission
file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
(Address of principal executive offices)
(
(Registrant’s telephone number, including area code)
| Securities registered under Section 12(b) of the Exchange Act: | |
| Title of each class | Name of each exchange on which registered |
| None | N/A |
Securities registered under Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
Indicate
by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. ☒
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data
file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D.1(b).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, a non-accelerated file, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ||
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The
aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2023, based on
a closing share price of $0.0006 was approximately $
As of May 6, 2024, the registrant had shares of its common stock, par value $0.01 per share, outstanding.
ETHEMA HEALTH CORPORATION
YEAR ENDED DECEMBER 31, 2023
TABLE OF CONTENTS
PART I
Special Note Regarding Forward-Looking Statements
Many of the matters discussed within this Annual Report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) on our current expectations and projections about future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. Such risks and uncertainties include the risks noted under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere. We do not undertake any obligation to update any forward looking statements. Unless the context requires otherwise, references to “we,” “us,” “our,” and “Ethema,” refer to Ethema Health Corporation and its subsidiaries.
Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake any obligation to update any forward-looking statements.
Item 1. Business.
Company History
Ethema Health Corporation (the “Company” or “Ethema”), a Colorado corporation was incorporated under the laws of the State of Colorado on April 1, 1993, and is the surviving company of a merger, effective February 1, 1995, between the Company and Nova Natural Resources Corporation, a Delaware corporation (“Nova Delaware”). The merger was effectuated solely for the purpose of changing the Company’s domicile from Delaware to Colorado. At all times prior to 2001, the Company was engaged in the oil and gas exploration business. Nova Delaware was the successor entity to Nova Petroleum Corporation, a Delaware corporation, and Power Resources Corporation, a Delaware corporation, which merged in 1986 (“the 1986 Merger”). Prior to the 1986 Merger, Nova Petroleum Corporation and Power Resources Corporation had operated since 1979 and 1972, respectively. In 2001, the Company entered into the electronics business and this business was active in 2001 and 2002, as part of the Torita Group. After 2002, the Company continued with various stages of development in this business until 2010.
On April 1, 2010, the Company changed its principal operations from development stage electronics to healthcare services. On March 29, 2010, the Company entered into a one year consulting agreement with GreeneStone Clinic Inc., a Canadian corporation (“Greenestone Clinic”), whereby Greenestone Clinic provided consulting services for the Company’s development and operation of medical clinics in the province of Ontario, Canada. Specifically, Greenestone Clinic provided medical and business expertise in the initial startup of private clinics and technical assistance to ensure that the clinics were in compliance with governmental policy and procedure requirements as well as any operational requirements. At the time of entering into this consulting agreement, Greenestone Clinic operated a clinic at the Muskoka property housing its addiction treatment clinic and provided endoscopy services. The Company started offering medical services in June 2010, offering various medical services, including endoscopy, cardiology and executive medicals, which services were subsequently sold.
During December 2016, the Company obtained a license to operate and provide addiction treatment healthcare services in Florida, USA. The company commenced operations under this license with effect from January 2017.
On February 14, 2017, the Company completed a series of transactions (referred to collectively as the “Restructuring Transactions”), including a Share Purchase Agreement (the “SPA”) whereby the Company acquired 100% of the stock of Cranberry Cove Holdings Ltd. (“CCH”) from Leon Developments Ltd. (“Leon Developments”), a company wholly owned by Shawn E. Leon, who is the President, CEO, and CFO of the Company, for an assignment to Leon Developments of CDN$659,918 owing to the Company and the issuance of 60,000,000 shares of the Company’s common stock valued at $2,184,000. CCH held the real estate on which the Company’s GreeneStone Muskoka operated. The Company entered into an Asset Purchase Agreement (the “APA”) whereby the assets of GreeneStone Muskoka were sold by GreeneStone Muskoka, to Canadian Addiction Residential Treatment LP (the “Purchaser” or “CART”), for a total consideration of CDN$10,000,000. The company also entered into a lease agreement whereby the Company leased the real estate to Cart for an initial 5 year period with three 5 year renewal options.
On February 14, 2017, immediately after closing on the sale of the assets of GreeneStone Muskoka, the Company closed on the acquisition of the business and real estate assets of Seastone Delray pursuant to certain real estate and asset purchase agreements through its wholly owned subsidiary, Addiction Recovery Institute of America, LLC (“ARIA”). The purchase price for the ARIA assets was US$6,070,000.
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On April 4, 2017 the Company changed its Corporate name from Greenestone Healthcare Corporation to Ethema Health Corporation.
On November 2, 2017, the Company entered into an Agreement to purchase certain buildings in West Palm Beach, Florida, totaling approximately 80,000 square feet, on which the Company planned to operate a substance abuse treatment center. The purchase price of the Property was $20,530,000. The Company made a series of nonrefundable down payments totaling $2,940,546 in 2017 and 2018. On May 23, 2018, the Company converted the agreement to purchase the buildings from the Landlord into a real property lease agreement with a purchase option. The lease was for an initial 10 years and provided for two additional 10 year extensions. In June 2018, the Company moved its ARIA operations into the West Palm Beach properties and in September 2018 received a license to operate in-patient detoxification and residential treatment services. On December 20,2019, the Company entered into an agreement with the landlord to terminate the lease agreement on January 31, 2020.
On April 2, 2019, the Company disposed of the real estate assets in ARIA located at 801 Andrews Avenue, Delray Beach for gross proceeds of $3,500,000, and on October 10, 2019, the Company transferred the remaining real estate asset located at 810 Andrews Avenue, Delray Beach, Florida to Leonite Capital, LLC, for net proceeds of $1,398,510, which proceeds were offset against the convertible loan owing to Leonite.
On June 30, 2020, the Company entered into an agreement (“the Stock Purchase Agreement”), whereby the Company agreed to acquire 51% of American Treatment Holdings, Inc. (“ATHI”) from The Q Global Trust (“Seller”) and Lawrence B Hawkins (“Hawkins”), which owned 100% of Evernia Health Services LLC. (“Evernia”), which operates drug rehabilitation facilities. The consideration for the acquisition was a loan to be provided by the Company to Evernia in the amount of $500,000. The Company has an option to acquire an additional 24% of ATHI for 100,000,000 shares of common stock and $50,000, on the condition that a probationary license was approved by the Florida Department of Family and Child Services, which was received on June 30,2021, upon which the Company exercised its option to acquire the additional 24% of ATHI, resulting in a 75% ownership of ATHI.
On December 30, 2022, the company entered into two agreements whereby it sold two non-operating subsidiaries, Greenstone Muskoka and ARIA to the Company Chairman and CEO for gross proceeds of $0, after Greenstone Muskoka forgave its intercompany receivable owing from the Company of $6,690,381 and the Company forgave its intercompany balance owing from ARIA of $9,605,315.
On June 30, 2023, the Company entered into an exchange agreement with Leonite Capital, LLC, whereby it exchanged 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, CCH. The Series B shares were cancelled upon consummation of the transaction.
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.
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.
Corporate Structure
The Company consists of the following entities:
| Ethema Health Corporation (Parent company); |
Ethema is the publicly traded investment holding company, registered in Colorado, U.S.
| American Treatment Holdings, Inc, a US registered company (75% owned); |
ATHI owns 100% of the members interest of Evernia.
| Evernia Health Center, a US registered company; |
Evernia operates a treatment center in West Palm Beach Florida and is a wholly owned subsidiary of ATHI which was acquired by Ethema effective July 1, 2021. The Company has been actively involved in the operation of this treatment center since June 30, 2020.
| Delray Andrews RE, LLC (“DARE”), a US registered company (wholly owned and dormant); |
DARE has remained dormant since inception.
Employees
As of December 31, 2023, Ethema had 65 employees.
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Marketing
The addiction treatment business in the USA operates as an insured healthcare service. Our marketing efforts are long-term processes of establishing relationships with relevant professionals and our treatment staff. We use industry specific conferences and functions to network with these professionals.
Through Evernia, the Company has an in-network relationship with several health care providers and the majority of the Company’s clients are sourced from these health care providers.
Competition
There are a significant amount of treatment facilities in the United States, we compete with these clinics for patients who are typically covered by insured healthcare services.
Environmental Regulations
The Company is not currently subject to any pending administrative or judicial enforcement proceedings arising under environmental laws or regulations. Environmental laws and regulations may be adopted in the future which may have an impact upon the Company’s operations.
Item 1A. Risk Factors.
Not applicable because we are a smaller reporting company.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties.
Ethema Executive Offices
The Company’s executive offices are located at 950 Evernia Street, West Palm Beach, Florida, 33406.
West Palm Beach Treatment Operations
The Company, through its acquisition of ATHI, effectively acquired 75% of the Evernia treatment facility located at 950 Evernia Street, West Palm Beach Florida. The Company has been actively involved in the operation of the Evernia treatment facility since June 2020.
Item 3. 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 4. Mine Safety Disclosures.
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .
The Company’s common stock is quoted on the Over-the-counter Market (the “OTC PINK”) under the symbol “GRST”. The Company was sponsored by the market maker Wilson Davis & Co. from Salt Lake City, Utah, which filed a Form 15c2-11 application with the Financial Industry Regulatory Authority (“FINRA”) for the Company in 2011. This application was approved by FINRA in February 2012, and Wilson Davis & Co. first quoted the stock in March 2012.
From March 2012 to January 2020, our common stock had been traded on the OTCQB markets under the symbol “GRST”, in January 2020, the stock was downgraded to the OTC Pink Sheets market.
The last reported sale price of our common stock on the OTC Pink on May 6, 2024 was $0.0003 per share. As of May 6, 2024, there were approximately 157 holders of record of our common stock.
Dividend Policy
We have not paid any cash dividends on our common stock to date, and we have no intention of paying cash dividends in the foreseeable future. Whether we declare and pay dividends is determined by our Board of Directors at their discretion, subject to certain limitations imposed under Colorado corporate law. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors.
Equity Compensation Plan Information
See Item 11 - Executive Compensation for equity compensation plan information.
Recent Sales of Unregistered Securities
Other than as set forth below or as previously disclosed in our filings with the Securities and Exchange Commission, we did not sell any equity securities during the year ended December 31, 2023 in transactions that were none registered under the Securities Act.
On June 28, 2023 the Company entered into a Warrant Exchange Agreement with a previous lender that exchanged a Warrant outstanding to
the previous lender 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 the previous lender 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 number of common shares outstanding on June
28, 2023, 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.
Penny Stock
The U.S. Securities and Exchange Commission (the “SEC”) has adopted rules that regulate broker dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws. (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.
The broker dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer’s account.
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In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.
Issuer Purchases of Equity Securities
There were no issuer purchases of equity securities during the fiscal year ended December 31, 2023.
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, our audited annual financial statements and the related notes thereto, each of which appear elsewhere in this Annual Report. This discussion contains certain forward-looking statements that involve risks and uncertainties in this Annual Report. Actual results could differ materially from those projected in the forward-looking statements. The Management Discussion and Analysis of Financial Condition and Results of Operations below is based upon only the financial performance of Ethema Health Corporation.
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our consolidated financial statements would be affected to the extent there are material differences between these estimates. This discussion and analysis should be read in conjunction with the company’s consolidated financial statements and accompanying notes to the consolidated financial statements for the year ended December 31, 2023.
Results of operations for the year ended December 31, 2023 and the year ended December 31, 2022.
Revenue
Revenue was $5,344,976 and $4,820,747 for the years ended December 31, 2023 and 2022, respectively, an increase of $524,229 or 10.9%.
Revenue from patient treatment was $5,159,680 and 4,411,546 for the years ended December 31, 2023 and 2022, respectively, an increase of $748,134 or 17.0%. The increase is due to the increase in the number of in-network patients at the facility due to the approval of the facility by a number of health care plans over the current year.
Revenue from rental income was $185,296 and $377,351 for the years ended December 31, 2023 and 2022, respectively, a decrease of $192,055 or 50.4%. The Company disposed of its real property owning subsidiary, Cranberry Cove Holdings, to a related party , Leonite Capital, LLC on June 30, 2023, revenue was only recognized for the first half of the current fiscal year.
Operating Expenses
Operating expenses was $5,886,896 and $4,331,630 for the years ended December 31, 2023 and 2022, respectively, an increase of $1,555,266 or 35.9%. The increase in operating expenses is attributable to:
| · | General and administrative expenses was $1,041,501 and $805,372 for the years ended December 31, 2023 and 2022, respectively, an increase of $236,129 or 29.3%. The increase is primarily attributable to due to an increase in insurance costs of $85,701, due to the general hardening of the insurance market in South Florida, an increase in capital raising costs of $40,470 for funds spent on exploring capital raising opportunities, and the balance of $117,959 consisting of increase in numerous individually insignificant costs, related to the increase in the number of patients passing through the facility during the current period. |
| · | Rent expense was $614,793 and $427,482 for the years ended December 31, 2023 and 2022 an increase of $187,311 or 43.8%. The increase is primarily due to an increase in rental which arose on the acquisition of the building from our landlord and the immediate disposal of the building to a third party on August 4, 2023, resulting in the cancellation of the old lease which expired in January 2027 and entering into a new 20 year lease expiring in August 2043, at an increased current rental of $33,161 per month as adjusted for rental smoothing over the term of the lease on both the cancelled old lease and the new 20 year lease, see gain on disposal of property below. |
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| · | Management fees were $368,003 and $132,500 for the years ended December 31, 2023 and 2022, respectively, an increase of $235,503 or 177.7%. Management fees included a once off charge of $185,503 related to a fee charged by Leon Developments to Cranberry Cove prior to its disposal to a related party Leonite Capital on June 30, 2023. In addition, the Company paid management fees of $182,500 to the minority shareholder of ATHI during the year. |
| · | Professional fees were $707,413 and $463,678 for the years ended December 31, 2023 and 2022, respectively, an increase of $243,735 or 52.6%. The increase is primarily due to the increase in professional fees related to the acquisition and immediate disposal of the real property in which the treatment facility operates on August 4, 2023, see gain on disposal of property, below, and an increase in contractor fees related to the increase in the number of patients treated at the facility during the current year, which resulted in increased revenues. |
| · | Salaries and wages was $2,656,267 and $1,962,479 for the years ended December 31, 2023 and 2022, respectively, an increase of $693,788 or 35.4%. The increase is due to the increase in headcount to service the increase in the number of patients treated at the facility during the current year. |
| · | Depreciation expense was $498,919 and $540,119 for the years ended December 31, 2023 and 2022, respectively, a decrease of $41,200 or 7.6%. The decrease is primarily due to the disposal of Cranberry Cove Holdings to Leonite Capital, a related party, on June 30, 2023. Cranberry Cove assets included buildings and leasehold improvements which were being depreciated prior to disposal. |
Operating (loss) profit
The operating (loss) profit was $(541,920) and $489,117 for the years ended December 31, 2023 and 2022, respectively, an increase in loss of $1,031,037 or 210.8%. The increase in loss is due to the increase in operating expenses of $1,555,266, discussed in detail above, including once off management fees of $245,503, increased professional fees and capital raising fees which are not expected to incur in future periods, offset by the increase in revenue of $524,229, discussed in detail above.
Other income
Other income was $0 and $15,760 for the years ended December 31, 2023 and 2022, respectively. In 2022 other income consisted of a financial inducement granted to the Company by the previous landlord.
Forgiveness of government relief loan
Forgiveness of government relief loan was $0 and $104,368 for the years ended December 31, 2023 and 2022, respectively, a decrease of $104,368 or 100.0%. 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 year ended December 31, 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 profit on disposal of $2,484,172, after transaction costs.
Loss on debt extinguishment
Loss on debt extinguishment was $277,175 and $0 for the years ended December 31, 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 debt settlement reached with Leonite.
Extension fee on property purchase
The extension fee on the property purchase was $140,000 and $0 for the years ended December 31, 2023 and 2022, respectively, an increase of $140,000 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 in turn disposed of to a third party lender.
Penalty on convertible debt
The penalty on convertible notes was $34,688 and $60,075 for the years ended December 31, 2023 and 2022, respectively, an increase of $25,387 or 42.3%. 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.
Interest income
Interest income was $676 and $78 for the years ended December 31, 2023 and 2022 respectively. Interest income is immaterial.
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Interest expense
Interest expense was $500,226 and $588,477 for the years ended December 31, 2023 and 2022, respectively, a decrease of $88,251 or 15.0%, primarily due to the decrease in mortgage interest due to the disposal of CCH, our property owning subsidiary on June 30, 2023, and a decrease in interest expense on convertible notes and promissory notes settled during the current period.
Debt discount
Debt discount was $281,354 and $624,683 for the years ended December 31, 2023 and 2022, respectively, a decrease of $343,329 or 54.6%. The decrease is primarily due to the full amortization of debt discount on convertible notes in the prior year. The current year amortization consists of the amortization of discount on receivables funding.
Foreign exchange movements
Foreign exchange movements were $(95,032) and $1,071,320 for the years ended December 31, 2023 and 2022, respectively, Foreign exchange movements represents the realized exchange gains and (losses) on monetary assets and liabilities settled during the current year as well as mark to market unrealized gains and losses on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars. In the prior year, the foreign exchange movements included the realization of significant translation differences on foreign subsidiaries sold and in the current year we disposed of Cranberry Cove Holdings, our last foreign subsidiary denominated in Canadian Dollars, to a related party.
Net income before taxation
Net income before taxation was $614,453 and $407,408 for the years ended December 31, 2023 and 2022, respectively, an increase of $207,045 or 50.8%. The increase is primarily due to the gain on sale of property, and the decrease in debt discount and interest expense, offset by the increase in the operating loss, the loss on debt extinguishment, the extension fee paid on the property purchase and the foreign exchange movements, all discussed in detail above.
Taxation
Taxation was $391,962 and $(112,220) for the years ended December 31, 2023 and 2022, respectively an increase of $504,182 or 449.3%. The increase is due to the completion of tax returns for our operating subsidiaries during the current year, which resulted in the reversal of previously provided for income taxes, primarily related to accelerated depreciation allowances on property and equipment and the reversal of the deferred tax liability related to intangible assets. The 2022 charge relates to the profitable Evernia operations, which has been subsequently reversed in the 2023 year.
Net income
Net income was $1,006,415 and $295,188 for the years ended December 31, 2023 and 2022, respectively, an increase of $711,227 or 240.9%. The increase is due to the increase in income before taxation and the reversal of prior period taxation charges and deferred tax balances, discussed above.
Liquidity and Capital Resources
Cash used in operating activities was $(0.5) million and cash generated by operating activities was $1.6 million for the years ended December 31, 2023 and 2022, respectively a decrease of $2.1 million or 129.6%. The decrease is primarily due to the following:
| · | The increase in net income of $0.7 million, as discussed above; |
| · | The decrease in non-cash movements of $(2.7) million, primarily due to the gain on disposal of property of $(2.5) million, as discussed above; |
| · | The increase in working capital of $(0.1) million, primarily due to an increase in the movement of accounts receivable of $0.3 million, a decrease in the movement in accounts payable and accrued liabilities of $(0.1) million, and a decrease in the movement of taxes payable of $0.4 million due to the reversal of prior year tax provisions. |
Cash provided by investing activities was $2.5 million and cash used in investing activities was $0.7 million for the years ended December 31, 2023 and 2022, respectively. The Company exercised its option to acquire 950 Evernia Street, where it conducts its treatment facility for net proceeds of $5.2 million, net of $0.4 million of deposits previously paid. Upon acquisition, we immediately sold the property for net proceeds of $8.1 million, after fees and expenses related to the disposal. During the current year, we paid a lease deposit of $374,000 for the real property lease entered into immediately upon disposal of the real property. In the prior year we invested $0.4 million in deposits for the purchase of the Evernia Street property and a further $0.3 million in property and equipment for the treatment center.
| 7 |
Cash used in financing activities was $(2.1) million and cash provided by investing activities was $0.3 million for the years ended December 31, 2023 and 2022, respectively. In the current year, the Company used a portion of the proceeds from investing activities for the net repayment of convertible notes of $(1.0) million, the net repayment of promissory notes of $(0.1) million and the payment of third party loans of $0.3 million.. The Company also repaid net receivables funding of $0.4 million, mortgage loans of $0.1 million and related party loans of $0.2 million during the current year. In the prior year, we repaid net promissory notes of $0.1 million, mortgage loans of $0.1 million, and third party loans of $0.1 million, funded by net receivables funding of $$.4 million and related party loans of $0.3 million.
Over the next twelve months we estimate that the company will require approximately $4.8 million in funding to repay its obligations if these obligations are not converted to equity. We will need funding for working capital as we continue to seek opportunities for addiction treatment in the US markets. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, the Company’s liquidity risk is assessed as high.
Going Concern
Our consolidated financial statements have been prepared 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 December 31, 2023, we had a working capital deficiency of $7.9 million, and total liabilities in excess of assets in the amount of $6.2 million. We believe that current available resources will not be sufficient to fund our planned expenditures over the next 12 months. Accordingly, we will be dependent upon the raising of additional capital through placement of common shares, and/or debt financing in order to implement our business plan and generate 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 it 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 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.
Critical accounting policies
Revenue recognition
We recognize revenue in terms of ASC 606 which requires us to exercise more judgment and recognize revenue using a five-step process as described under our accounting policies in note 2 to the consolidated financial statements.
We derive substantially all of our revenue from 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.
Allowance for Doubtful Accounts, Contractual and Other Discounts
In conjunction with Revenue recognition, we recognize 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 our 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.
| 8 |
Leases
We account for leases in terms of ASC 842. In terms of ASC 842, the Company assesses whether any asset based leases entered into for periods longer than twelve months meet the definition of financial leases or operation leases, by evaluating the terms of the lease, including the following; the duration of the lease; the implied interest rate in the lease; the cash flows of the lease; and whether the Company intends to retain ownership of the asset at the end of the lease term.
Leases which imply that we will not acquire the asset at the end of the lease term are classified as operating leases, our right to use the asset is reflected as a non-current right of use asset with a corresponding operational lease liability raised at the date of lease inception. The right of use asset and the operational lease liability are amortized over the right of use period using the effective interest rate implied in the operating lease agreement.
Long Lived Assets
The Company evaluates the carrying value of its long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value of the assets when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value will be charged to earnings.
Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals, and, if appropriate, current estimated net sales proceeds from pending offers.
Critical Accounting Estimates
Preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. Our estimates are based on our historical experience, information received from third parties and on various other factors that we believe are reasonable under the circumstances, that results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimated under different assumption or conditions. Significant accounting policies are fundamental to understanding our financial condition and results as they require the use of estimates and assumptions which affect the financial statements and accompanying notes. See Note 2 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report for further information.
The Critical accounting policies that involved significant estimation include the following:
Revenue recognition
Management constantly monitors the level of billings and collections on those billings and makes an estimation of the percentage of billings that will ultimately be recorded as revenue. 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.
Since we already make adjustments for expected collections we are constantly taking into account any expected credit losses.
Leases
On August 4, 2023, we entered into an acquisition and immediate disposal transaction with two unrelated third parties for the building which we currently operate our West Palm Beach treatment facility, see note 5 to the consolidated financial statements.
Simultaneously with the acquisition and disposal, on August 4, 2023, we 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 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. Due to the initial lease term of twenty years, we are 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, we were 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"). Wey 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%. We 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 $9,333,953 on August 4, 2023.
Long-lived assets
We have significant long-lived assets, including property and equipment, intangible assets, right-of-use assets and deposits. The Company evaluates the carrying value of its long-lived assets for impairment by comparing managements estimates of undiscounted future cash flows of the assets to the net book value of the assets when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. This requires significant estimation of future revenue streams, based on management’s understanding of the business which may not be accurate and may require re-estimation at a future date. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value will be charged to earnings.
Fair value is based upon discounted cash flows of the assets at a rate deemed by management to be reasonable for the type of asset and prevailing market conditions, appraisals, and, if appropriate, current estimated net sales proceeds from pending offers.
| 9 |
Item 8. Financial Statements and Supplementary Data.
ETHEMA HEALTH CORPORATION
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US$ unless otherwise indicated)
| 10 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Ethema Health Corporation and Subsidiaries
West Palm Beach, FL 33401
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Ethema Health Corporation and Subsidiaries (collectively, the “Company”) as of December 31, 2023, the related consolidated statement of operations, stockholders’ deficit and cash flows for each of the year ended December 31, 2023, and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for each of the year ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America.
The Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the accompanying consolidated financial statements, the Company has suffered recurring losses from operations, generated negative cash flows from operating activities, has an accumulated deficit and has stated that substantial doubt exists about Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans in regarding these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.
We determined that there are no critical audit matters.
/s/
We have served as the Company’s auditor since 2023.
May 7, 2024
New York, NY Washington DC Mumbai & Pune, India Boca Raton, FL
San Francisco, CA Las Vegas, NV Beijing, China Athens, Greece
Member: ANTEA International with affiliated offices worldwide
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of Ethema Health Corporation
West Palm Beach, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Ethema Health Corporation (the Company) at December 31, 2022, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ deficit, and cash flows for each of the year ended December 31, 2022, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The accompanying consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 3 to the consolidated financial statements, the Company has accumulated deficit of approximately $43.5 million and negative working capital of approximately $12.7 million at December 31, 2022, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Accounting for Embedded Conversion Features on Convertible Notes – Refer to Notes 9 and 14 to the Financial Statements
The principal considerations for our determination that performing procedures relating to the valuation of derivatives is a critical audit matter are the significant judgment by management when developing the fair value of the derivative liabilities. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the valuation models used and related variable inputs used within those models.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing management’s process for developing the fair value estimate; evaluating the appropriateness of the valuation techniques; testing the completeness and accuracy of underlying data used in the model; and evaluating the significant assumptions used by management, including the values of expected volatility and discount rate. Evaluating management’s assumptions related to the volatility amounts and discount rates involved evaluating whether the assumptions used by management were reasonable considering the current and historical performance, the consistency with external market and industry data, and whether these assumptions were consistent with evidence obtained in other areas of the audit.
| /s/ Daszkal Bolton LLP | |
| Boca Raton, Florida | |
| March 31, 2023 | |
| We served as the Company’s auditor from 2018 to March 2023. | |
| F-2 |
ETHEMA HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
| December 31, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Property and equipment | ||||||||
| Intangible assets, net | ||||||||
| Right of use assets | ||||||||
| Deposits paid | ||||||||
| 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 taxation | ||||||||
| Third party loans | ||||||||
| Operating lease liability | ||||||||
| Finance lease liability | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Preferred stock - Series B; $ par value authorized, 0 and shares issued and outstanding as of December 31, 2023 and 2022, respectively. | ||||||||
| Stockholders’ deficit | ||||||||
| Preferred stock - Series A; $ par value, authorized, shares issued and outstanding as of December 31, 2023 and 2022. | ||||||||
| Common stock - $ par
value, shares
authorized; shares issued and outstanding as of December 31, 2023 and December 31, 2022. | ||||||||
| 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 consolidated financial statements
| F-3 |
ETHEMA HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
| Year
ended December 31, 2023 | Year
ended December 31, 2022 | |||||||
| Revenues | $ | $ | ||||||
| Operating expenses | ||||||||
| General and administrative | ||||||||
| Rent expense | ||||||||
| Management fees | ||||||||
| Professional fees | ||||||||
| Salaries and wages | ||||||||
| Depreciation expense | ||||||||
| Total operating expenses | ||||||||
| Operating (loss) profit | ( | ) | ||||||
| Other (expense) income | ||||||||
| Other income | ||||||||
| Forgiveness of government relief loan | ||||||||
| Gain on sale of property | ||||||||
| Loss on debt extinguishment | ( | ) | ||||||
| Extension fee on property purchase | ( | ) | ||||||
| Penalty on notes and convertible notes | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Debt discount | ( | ) | ( | ) | ||||
| Foreign exchange movements | ( | ) | ||||||
| Net income before taxation | ||||||||
| Taxation | ( | ) | ||||||
| Net income | ||||||||
| Net loss (income) attributable to non-controlling interest | ( | ) | ||||||
| Net income attributable 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) | $ | $ | ( | ) | ||||
| Basic income per common share | $ | $ | ||||||
| Diluted income per common share | $ | $ | ||||||
| Weighted average common shares outstanding – Basic | ||||||||
| Weighted average common shares outstanding – Diluted | ||||||||
The accompanying notes are an integral part of the consolidated financial statements
| F-4 |
ETHEMA HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Series A Preferred | Common | Additional Paid | Discount | Comprehensive | Accumulated | Non- controlling shareholders | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | in Capital | to par value | Income | Deficit | Interest | Total | |||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Adjustments to prior period on adoption of ASU 2020-06 | — | — | ||||||||||||||||||||||||||||||||||||||
| Conversion of convertible notes | — | ( | ) | |||||||||||||||||||||||||||||||||||||
| Transactions with related parties | — | — | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||||||||||
| Dividends accrued | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||
| Disposal of subsidiary to related party | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
| Deemed extinguishment of debt by related party | — | — | ||||||||||||||||||||||||||||||||||||||
| Fair value of warrants issued on debt extinguishment | — | — | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
| Dividends accrued | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2023 | $ | $ | $ | $ | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statement
| F-5 |
ETHEMA HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2023 | Year ended December 31, 2022 | |||||||
| Operating activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustment to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Amortization of debt discount | ||||||||
| Gain on disposal of property | ( | ) | ||||||
| Loss on debt extinguishment | ||||||||
| Forgiveness of federal relief loan | ( | ) | ||||||
| Penalty on promissory notes | ||||||||
| Amortization of right of use asset | ||||||||
| Deferred taxation movement | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Other current assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Taxes payable | ( | ) | ||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Investing activities | ||||||||
| Acquisition
of real property, net of $ | ( | ) | ||||||
| Proceeds on disposal of real property | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Proceeds
on sale of subsidiary, net of cash of $ | ( | ) | ||||||
| Proceeds from deposits | ||||||||
| Investment in deposits | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Financing activities | ||||||||
| Repayment of mortgage | ( | ) | ( | ) | ||||
| Proceeds from convertible notes | ||||||||
| Repayment of convertible notes | ( | ) | ||||||
| Proceeds from promissory notes | ||||||||
| Repayment of promissory notes | ( | ) | ( | ) | ||||
| Proceeds from receivables funding | ||||||||
| Repayment of receivables funding | ( | ) | ( | ) | ||||
| Repayment of government assistance loans | ( | ) | ( | ) | ||||
| Repayment of third party loans | ( | ) | ( | ) | ||||
| Repayment of finance leases | ( | ) | ( | ) | ||||
| (Repayment) proceeds 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 | ||||||||
| Fair value of warrant issued on debt extinguishment | $ | $ | ||||||
| Disposal of subsidiary to related party | $ | $ | ||||||
| Deemed extinguishment of debt by related party | $ | $ | ||||||
| Conversion of convertible notes | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements
| F-6 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of business
Since 2010, the Company has operated addiction treatment centers. Initially the Company operated an addiction treatment center in Ontario Canada under its Greenestone Muskoka clinic, which was sold on February 14, 2017. Simultaneously with this sale the Company purchased buildings and operated an addiction treatment center in Delray Beach Florida under its Addiction recovery Institute of America subsidiary with a license obtained in December 2016, initially though owned properties in Delray Beach and subsequently though leased properties in West Palm Beach, Florida. Since June 30, 2020, the Company has been actively involved in the management of a treatment center operated by Evernia in West Palm Beach Florida. On July 1, 2021, the Company closed on the acquisition of 75% of ATHI, which owns 100% of Evernia, once the probationary approval of a license was obtained from the Department of Children and Family Services of Florida. Evernia is currently the only active treatment center operated by the Company.
The Company sold its real estate on which its Greenstone Muskoka clinic operated during the current year, see note 4 below.
2. Summary of significant accounting policies
Financial Reporting
The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).
Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that i) recorded transactions are valid; ii) valid transactions are recorded; and iii) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.
a) Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
b) Principals of consolidation and foreign currency translation
The accompanying consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany transactions and balances have been eliminated on consolidation.
Certain of the Company’s previous subsidiaries functional currency was 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 were deferred until realization and were included as a separate component of stockholders’ deficit as a component of accumulated other comprehensive income or loss. Therefore, translation adjustments were not included in determining net income (loss) but reported as other comprehensive income (loss).
For foreign currency transactions, the Company translates these amounts to the Company’s functional currency at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time actual payment is made, a foreign exchange transaction gain or loss results which is included in determining net income for the year.
The relevant translation rates are as follows: For the year ended December 31, 2023, a closing rate of CDN$1 equals US$0.7561 and an average exchange rate of CDN$1 equals US$0.7409, 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.
| F-7 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued)
c) Business Combinations
The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed for business combinations with third parties based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.
Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from a market participant perspective, useful lives and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
d) Cash and cash equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with several financial institution in the USA and Canada. There were no cash equivalents at December 31, 2023 and 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 $
e) Accounts receivable
Accounts receivable primarily consists of amounts due from third-party payors (non-governmental) and private pay patients and is recorded net of allowances for doubtful accounts and contractual discounts. The Company’s ability to collect outstanding receivables is critical to its results of operations and cash flows. Accordingly, accounts receivable reported in the Company’s consolidated financial statements is recorded at the net amount expected to be received. The Company’s primary collection risks are (i) the risk of overestimating net revenues at the time of billing that may result in the Company receiving less than the recorded receivable, (ii) the risk of non-payment as a result of commercial insurance companies denying claims, (iii) the risk that patients will fail to remit insurance payments to the Company when the commercial insurance company pays out-of-network claims directly to the patient, (iv) resource and capacity constraints that may prevent the Company from handling the volume of billing and collection issues in a timely manner, (v) the risk that patients do not pay the Company for their self-pay balances (including co-pays, deductibles and any portion of the claim not covered by insurance) and (vi) the risk of non-payment from uninsured patients.
f) Allowance for Doubtful Accounts, Contractual and Other Discounts
The Company derives the majority of its revenues from commercial payors at in-network rates. 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.
g) Leases
The Company accounts for leases in terms of ASC 842. In terms of ASC 842, the Company assesses whether any asset based leases entered into for periods longer than twelve months meet the definition of financial leases or operation leases, by evaluating the terms of the lease, including the following; the duration of the lease; the implied interest rate in the lease; the cash flows of the lease; and whether the Company intends to retain ownership of the asset at the end of the lease term.
Leases which imply that the Company will retain ownership at the end of the lease term are classified as financial leases, are included in property and equipment with a corresponding financial liability raised at the date of lease inception. Interest incurred on financial leases are expensed using the effective interest rate method.
Leases which imply that the Company will not acquire the asset at the end of the lease term are classified as operating leases, the Company’s right to use the asset is reflected as a non-current right of use asset with a corresponding operational lease liability raised at the date of lease inception. The right of use asset and the operational lease liability are amortized over the right of use period using the effective interest rate implied in the operating lease agreement.
h) Property and equipment
Property and equipment is recorded at cost. Depreciation is calculated on the straight line basis over the estimated life of the asset.
| F-8 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued)
i) Long Lived Assets
The Company evaluates the carrying value of its long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value of the assets when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value will be charged to earnings.
Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals, and, if appropriate, current estimated net sales proceeds from pending offers.
j) 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.
k) 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.
l) Derivatives
The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. The Company previously used a Black Scholes Option Pricing model to estimate the fair value of convertible debt conversion features at the end of each applicable reporting period. Changes in the fair value of these derivatives during each reporting period were included in the statements of operations. Inputs into the Black Scholes Option Pricing model require estimates, including such items as estimated volatility of the Company’s stock, risk free interest rate and the estimated life of the financial instruments being fair valued.
If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.
m) Financial instruments
The Company initially measures its financial assets and liabilities at fair value, except for certain non-arm’s length transactions. The Company subsequently measures all its financial assets and financial liabilities at amortized cost.
Financial assets measured at amortized cost include cash and accounts receivable.
Financial liabilities measured at amortized cost include bank indebtedness, accounts payable and accrued liabilities, 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 any 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.
| F-9 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued)
n) 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.
o) 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 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 $313,338 and $337,074 at December 31, 2023 and December 31, 2022, respectively. Management believes that these receivables are properly stated and are not likely to be settled for a significantly different amount.
The Company’s revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those services. The Company derives its revenues from the sale of its services. The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its revenue transactions:
| i. | identify the contract with a customer; | |
| ii. | identify the performance obligations in the contract; | |
| iii. | determine the transaction price; | |
| iv. | allocate the transaction price to performance obligations in the contract; and |
| v. | recognize revenue as the performance obligation is satisfied. |
| F-10 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued)
p) 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 2021 are subject to audit or review by the US tax authorities, whereas fiscal 2011 through 2021 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 year ended December 31, 2023 and 2022 is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. This estimate will be revised in subsequent periods if actual forfeitures differ from those estimates. We have no awards with performance conditions and no awards dependent on market conditions.
| F-11 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued)
s) Financial instruments Risks
The Company is exposed to various risks through its financial instruments. The following analysis provides a measure of the Company’s risk exposure and concentrations at the balance sheet date, December 31, 2023 and 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 $7.9 million, and an accumulated deficit of approximately $42.4 million. The Company is dependent upon the raising of additional capital in order to implement its business plan. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, liquidity risk is assessed as high, material and remains unchanged from that of the prior year.
| iii. | Market risk |
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises of three types of risk: interest rate risk, currency risk, and other price risk. The Company is exposed to interest rate risk and currency risk.
| a. | Interest rate risk |
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk on its convertible debt, short term loans, third party loans and government assistance loans as of December 31, 2023. In the opinion of management, interest rate risk is assessed as moderate.
| b. | Currency risk |
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company has limited exposure to assets and liabilities denominated in foreign currencies. The Company has not entered into any hedging agreements to mitigate this risk. In the opinion of management, currency risk is assessed as low, material and remains unchanged from that of the prior year.
| c. | Other price risk |
Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. In the opinion of management, the Company is not exposed to this risk and remains unchanged from the prior year.
t) Recent accounting pronouncements
The Financial Accounting Standards Board (“FASB”) issued additional updates during the year ended December 31, 2023. None of these standards are either applicable to the Company or require adoption at a future date and none are expected to have a material impact on the Company’s consolidated financial statements upon adoption.
| F-12 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. Going concern
The
Company’s consolidated financial statements have been prepared in accordance with US GAAP applicable to a going concern, which
assumes that the Company will be able to meet its obligations and continue its operations in the normal course of business. At December
31, 2023, the Company has a working capital deficiency of $
4. Disposal of subsidiaries
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:
Schedule of assets and liabilities Disposal
| 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 $
The
cancellation of the Series B shares, which 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 $
| F-13 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 4. | Disposal of subsidiaries (continued) |
On December 30, 2022, the Company entered into two agreements whereby it sold Greenstone Muskoka and ARIA to the Company Chairman and CEO for gross proceeds of $0.
Immediately prior to the disposal of these subsidiaries, Greenstone Muskoka forgave its intercompany receivable owing from the Company of $6,690,381 and the Company forgave its intercompany balance owing from ARIA of $9,605,315.
The
Company also assumed the liability to pay for the Government assistance loan of $
The assets and liabilities disposed of were as follows:
| Greenstone Muskoka | ARIA | Net book value | ||||||||||
| Assets | ||||||||||||
| Cash | $ | $ | $ | |||||||||
| Liabilities | ||||||||||||
| Accounts payable and accrued liabilities | ||||||||||||
| Payroll taxes | ||||||||||||
| Income taxes payable | ||||||||||||
| Net liabilities sold | ||||||||||||
| Net proceeds realized | ||||||||||||
| Gain on disposal booked as adjustment to paid in capital | $ | $ | $ | |||||||||
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 9 and 10 below. In addition, $65,450 was paid to Ed Blasiak to settle the convertible promissory note disclosed in note 9 below, $179,474 was paid to Joshua Bauman to settle the convertible promissory note disclosed in note 9 below, and $260,548 was paid to Mirage Realty, LLC to settle the senior secured promissory note, disclosed in note 10 below.
| F-14 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 5. | Property and equipment (continued) |
Acquisition and simultaneous disposition of property (Continued)
The details of the property purchase and subsequent sale are as follows:
Property purchase and subsequent sale
| 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:
Schedule of sale of property
| December
31, 2023 | December 31, 2022 | |||||||||||||||
| Cost | Accumulated depreciation | Net book value | Net book value | |||||||||||||
| Land | $ | $ | $ | $ | ||||||||||||
| Property | ||||||||||||||||
| Leasehold improvements | ( | ) | ||||||||||||||
| Furniture and fittings | ( | ) | ||||||||||||||
| Vehicles | ( | ) | ||||||||||||||
| Computer equipment | ( | ) | ||||||||||||||
| $ | $ | ( | ) | $ | $ | |||||||||||
Depreciation
expense for the year ended December 31, 2023 and 2022 was $
6. Intangibles
Intangible assets consist of the Company’s estimate of the fair value of intangibles acquired with the acquisition of ATHI. The Company allocated the excess over the tangible assets acquired, less the liabilities assumed to the contract provided to the Company by a health care service provider.
Intangible assets consist of the following:
Schedule of Intangible assets
| December
31, 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 $
Estimated future amortization expense is as follows:
Estimated future amortization expense
| Amount | |||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| Total estimated amortization expense | $ |
| F-15 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 5 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 $9,333,953 on August 4, 2023.
Right of use assets are included in the consolidated balance sheet are as follows:
Schedule of Right of use assets
| December
31, 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 | $ | $ | ||||||
Lease costs consists of the following:
Schedule of lease cost
| Year ended December 31, | ||||||||
| 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:
Schedule of Other lease
| Year ended December 31, | ||||||||
| 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 | % | % | ||||||
| F-16 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 7. | Leases (continued) |
Maturity of Leases
Finance lease liability
The amount of future minimum lease payments under finance leases as of December 31, 2023 is as follows:
Schedule of Finance lease liability
| Amount | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Imputed interest | ( |
|||
| Total finance lease liability | $ | |||
| Disclosed as: | ||||
| Current portion | $ | |||
| Non-Current portion | ||||
| Lease liability | $ | |||
Operating lease liability
The amount of future minimum lease payments under operating leases are as follows:
Schedule of Operating lease liability
| Amount | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and thereafter | ||||
| Total undiscounted minimum future lease payments | ||||
| Imputed interest | ( |
) | ||
| Total operating lease liability | $ | |||
| Disclosed as: | ||||
| Current portion | $ | |||
| Non-Current portion | ||||
| Lease liability | $ | |||
8. Taxes Payable
Taxes payable consist of:
Schedule of taxation payable
| December
31, 2023 | December
31, 2022 | |||||||
| HST/GST payable | ||||||||
| Income tax payable | ||||||||
| $ | $ | |||||||
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 HST/GST payable was settled prior to disposal.
The income tax provision raised in previous years was reversed in the current year upon filing the tax returns with no taxation payable.
| F-17 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. Short-term Convertible Notes
The short-term convertible notes consist of the following:
Schedule of short-term convertible notes
| Interest rate | Maturity Date | Principal | Interest | December 31, 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 | % | |||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||
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, LP, 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.
| F-18 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. Short-term Convertible Notes (continued)
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.
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 technical default which had not been formally declared by Ed Blasiak. 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 technical default which had not been formally declared by Mr. Bauman. 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 Mr. 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.
During November 2023 and December 2023, the company repaid $29,224 and $4,597 in principal and interest, respectively.
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.
| F-19 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10. 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.
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 originally
matured on March 15, 2024. The maturity date was extended to April 15, 2024, with no change to the terms of the note or any additional
consideration paid to the noteholder.
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 December 31, 2023 was $129,184 (CDN$170,859).
Third Party Note
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 interest repayments of CDN$35,000 (approximately $25,970) on the third party loan. Between August 9 and August 10, 2023, the Company made principal repayments of CDN$345,890 ($257,775) and interest repayments of CDN$104,110 (approximately $77,515). As of December 31, 2023 the balance of principal and interest outstanding on third party loans was CDN$416,709 (approximately $315,068).
11. Mortgage loans
Mortgage loans is disclosed as follows:
Schedule of mortgage loans
| Interest rate |
Maturity date | Principal Outstanding |
Accrued interest |
December
31, 2023 |
December
31, 2022 |
|||||||||||||
| Cranberry Cove Holdings, Ltd. | ||||||||||||||||||
| Pace Mortgage | % | July 19, 2022 | $ | $ | $ | $ | |
|||||||||||
| 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 $29,531.
On June 30, 2023, the Company sold its interest in CCH to Leonite Capital, which includes the real property as disclosed in Note 5 and the associated mortgage loan. Refer to Note 4 above.
| F-20 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. Government assistance loans
On December 1, 2020, CCH was granted a Covid-19 related government assistance loan in the aggregate principal amount of CDN$ 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 December 31, 2023, the balance outstanding, including interest thereon was $35,482.
13. 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 by August 29, 2023, 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 by September 12, 2023. 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 by May 30, 2023. 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.
| F-21 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. 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 by September 6, 2023. 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 $138,600 by December 19, 2023. The balance outstanding at December 31, 2023 was $59,400, less unamortized discount of $16,072.
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 $100,000 by December 29, 2023. The balance outstanding at December 31, 2023 was $220.000, less unamortized discount of $51,367.
14. Derivative liability
In prior years, the short-term convertible notes, together with certain warrants issued to convertible note holders disclosed in note 9 above and 15 below, had fixed conversion price rights. The convertible notes as well as the warrants were afforded down-round protection which in terms of previous guidance resulted in a derivate liability. The Company adopted ASU 2020-06 with effect from January 1, 2022, which excluded down-round protection from the determination of a derivative liability.
The consolidated financial statements for the year ended December 31, 2021 and years prior to that, have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods.
The original derivative financial liability was valued at inception at $1,959,959 using a Black-Scholes valuation model.
As of December 31, 2021, the derivative liability was valued at $515,901.
The movement in derivative liability is as follows:
Schedule of Derivative Instruments
| December 31, 2022 | ||||
| Opening balance | $ | |||
| Elimination of derivative liability on adoption of ASU 2020-06 | ( | ) | ||
| Mark-to-market adjustments on converted notes | ||||
| Derivative liability on issued convertible notes | ||||
| Fair value adjustments to derivative liability | ||||
| Closing balance | $ | |||
15. Related party payables
Schedule of Related party payable
| December 31, | 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 December 31, 2023 and December 31, 2022, the Company had a payable to Shawn Leon of $61,267 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.
On August 4, 2023, the company repaid a personal loan by Leonite Capital to Shawn Leon of $28,438, which repayment reduced the related party payable to Shawn Leon.
Due to the current financial position of the Group, Mr. Leon forfeited the management fees due to him for the years ended December 31, 2023 and 2022.
| F-22 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
15. Related party payables (continued)
Leon Developments, Ltd.
Leon Developments is owned by Shawn Leon, the Company’s CEO and director. As of December 31, 2023 and December 31, 2022, the Company owed Leon Developments, Ltd., $1,092,701 and $850,607, 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.
The Company paid Leon Developments a management fee of CDN$250,000 (approximately $185,503) and $0 for the years ended December 31, 2023 and 2022, respectively.
Eileen Greene
As of December 31, 2023 and December 31, 2022, the Company owed Eileen Greene, the spouse of our CEO, Shawn Leon, $1,418,324 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 previous investment of $700,000 in Series A Preferred stock interest in CCH, which was previously a wholly-owned subsidiary of the Company, and its previous investment of $400,000 in Series B Preferred stock of the Company, 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 9 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 $905,579 as of December 31, 2022.
In addition, as disclosed in note 10 above, the Company owed Leonite capital, secured promissory notes, including principal, monitoring fees and interest thereon totaling $340,281 as of December 31, 2022.
All related party transactions occur in the normal course of operations and in terms of agreements entered into between the parties.
| F-23 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. 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 December 31, 2023 and December 31, 2022, respectively.
On February 28, 2022, the Company issued 150,000,000 shares of common stock to Leonite in connection with a conversion notice received, converting principal of $149,250.
| b. | Series A Preferred shares |
Authorized, issued and outstanding
The Company has authorized 10,000,000 Series A preferred shares with a par value of $0.01 per share. The company has issued and outstanding 4,000,000 Series A Preferred shares at December 31, 2023 and December 31, 2022.
| c. | Series B Preferred shares |
Authorized and outstanding
The Company has authorized 400,000 Series B preferred shares with a par value of $1.00 per share. The company has issued and outstanding 0 and 400,000 Series B Preferred shares at December 31, 2023 and December 31, 2022, respectively.
The Series B preferred shares were 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 December 31, 2023 under the Plan.
| e. | Warrants |
All of the warrants have cashless exercise terms whereby in-the-money warrants may be exercised by reducing the number of shares issued in terms of the warrant exercise to offset the proceeds due on the exercise.
All of the warrants have price protection features whereby any securities issued subsequent to the date of the warrant issuance date, were issued at a lower price, or have conversion features that are lower than the current exercise price, or were converted at a lower price, or are exercisable at a lower price, to the current warrant exercise price, will result in the exercise price of the warrant being set to the lower issue, conversion or exercise price.
| F-24 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 17. | Stockholder’s deficit (continued) |
| e. | Warrants (continued) |
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.
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:
Year ended December 31, 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 December 31, 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 | $0.000675 to $0.12 | $ | ||||||||||
| Granted | ||||||||||||
| Forfeited/cancelled | ( |
) | $ |
|||||||||
| Exercised | ||||||||||||
| Outstanding as of December 31, 2022 | $0.000675 to $0.00205 | $ | ||||||||||
| Granted | $ |
|||||||||||
| Forfeited/cancelled | ( |
) | $ |
|||||||||
| Exercised | ||||||||||||
| Outstanding as of December 31, 2023 | $0.001 to $0.00205 | $ | ||||||||||
The following table summarizes information about warrants outstanding at December 31, 2023:
| Warrants outstanding | Warrants exercisable | ||||||||||||||||||||||||||||||||
| Exercise price | No. of shares | Weighted average remaining years |
Weighted average exercise price |
No. of shares | Weighted average exercise price |
||||||||||||||||||||||||||||
| $0.001 | |||||||||||||||||||||||||||||||||
| $0.002050 | |||||||||||||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||||||||||||
All of the warrants outstanding at December 31, 2023 are vested. The warrants outstanding at December 31, 2023 have an intrinsic value of $0.
| F-25 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17. Segment information
The Company had two reportable operating segments until the disposal of its property owning subsidiary, CCH on June 30, 2023, thereafter the Company has one operating segment in one geographic location, Rehabilitation services in West Palm Beach, Florida.
The operating segments disclosed below consist of:
| a. | Rental income from the property owned by CCH subsidiary located at 3571 Muskoka Road, #169, Bala, on which the operations of the Canadian Rehab Clinic were located prior to disposal on February 14, 2017 and subsequently leased to the purchasers of the business of the Canadian Rehab Clinic, for a period of 5 years renewable for a further three five-year periods and with an option to acquire the property at a fixed price. |
| b. | Rehabilitation Services provided to customers, these services were provided to customers at our Evernia, Addiction Recovery Institute of America operations. |
The segment operating results of the reportable segments for the year ended December 31, 2023 is disclosed as follows:
Schedule of segment information
| Year ended December 31, 2023 | ||||||||||||
| Rental Operations | In-Patient services | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Operating expenses | ||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ||||||
| Other (expense) income | ||||||||||||
| Intercompany gain (loss) on debt forgiveness | ( | ) | ||||||||||
| Gain on disposal of property | ||||||||||||
| Loss on debt extinguishment | ( | ) | ( | ) | ||||||||
| Extension fee on property purchase | ( | ) | ( | ) | ||||||||
| Penalty on convertible notes | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||
| 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 as of December 31, 2023 is as follows:
| December 31, 2023 | ||||||||||||
| Rental Operations | In-Patient services | Total | ||||||||||
| Purchase of fixed assets | $ | (43,611 | ) | $ | 5,293,489 | $ | 5,249,878 | |||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Non-current assets | ||||||||||||
| Liabilities | ||||||||||||
| Current liabilities | ( | ) | ( | ) | ||||||||
| Non-current liabilities | ( | ) | ( | ) | ||||||||
| Net liability position | $ | $ | ( | ) | $ | ( | ) | |||||
| F-26 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17. Segment information (continued)
The segment operating results of the reportable segments for the year ended December 31, 2022 is disclosed as follows:
| Year ended December 31, 2022 | ||||||||||||
| Rental Operations | In-Patient services | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Operating expenses | ||||||||||||
| Operating income | ||||||||||||
| Other (expense) income | ||||||||||||
| Other income | ||||||||||||
| Forgiveness of government relief loan | ||||||||||||
| Penalty on convertible notes | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||
| Amortization of debt discount | ( | ) | ( | ) | ||||||||
| Foreign exchange movements | ||||||||||||
| Net income before taxes | ||||||||||||
| Taxes | ( | ) | ( | ) | ||||||||
| Net income | $ | $ | $ | |||||||||
The operating assets and liabilities of the reportable segments as of December 31, 2022 is as follows:
| December 31, 2022 | ||||||||||||
| Rental Operations | In-Patient services | Total | ||||||||||
| Purchase of fixed assets | $ | — | $ | 315,822 | $ | 315,822 | ||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Non-current assets | ||||||||||||
| Liabilities | ||||||||||||
| Current liabilities | ( | ) | ( | ) | ( | ) | ||||||
| Non-current liabilities | ( | ) | ( | ) | ( | ) | ||||||
| Mandatory redeemable preferred shares | ( | ) | ( | ) | ||||||||
| Intercompany balances | ( | ) | ||||||||||
| Net liability position | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
For the year ended December 31, 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 | ||||||||||||
| Warrants | ||||||||||||
| Convertible debt | ||||||||||||
| Diluted earnings per share | ||||||||||||
| Net income per share available for common stockholders | $ | $ | ||||||||||
| F-27 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 18. | Net income per common share (continued) |
For the year ended December 31, 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 | ||||||||||||
| Warrants | ||||||||||||
| Convertible debt | ||||||||||||
| Diluted earnings per share | ||||||||||||
| Net income per share available for common stockholders | $ | $ | ||||||||||
19. Commitments and contingencies
| a. | Options granted to purchase shares in ATHI |
On July 12, 2020, the Company entered into a five year option agreement with Leonite Capital LLC (“Leonite”) and other investors (collectively the “Transferees”). The Company agreed to sell to Leonite a portion of the total outstanding shares of ATHI from the shares of ATHI held by the company. The Company provided Leonite an option to purchase 4,000,000 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $400), based on the advances that Leonite made to the Company totaling $396,000. Leonite shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Leonite to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
On September 14, 2020, the Company entered into a five year option agreement with Ed Blasiak (“Blasiak”) whereby the Company agreed to sell to Blasiak a portion of the total outstanding shares of ATHI. The Company provided Blasiak an option to purchase 571,428 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $57), based on the advances that Blasiak made to the Company totaling $50,000. Blasiak shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Blasiak to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
On October 29, 2020, the Company entered into a five year option agreement with First Fire whereby the Company agreed to sell to First Fire a portion of the total outstanding shares of ATHI. The Company provided First Fire an option to purchase 1,428,571 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $143), based on the advances that First Fire made to the Company totaling $120,000. First Fire shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by First Fire to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
On October 29, 2020, the Company entered into a five year option agreement entered into with Bauman, so that the Company agreed to sell to Bauman a portion of the total outstanding shares of ATHI. The Company provided Bauman an option to purchase 1,428,571 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $143), based on the advances that Bauman made to the Company totaling $120,000. Bauman shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Bauman to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
| b. | Other |
The Company has principal and interest payment commitments under the Convertible notes disclosed under Note 9 above. Conversion of these notes are at the option of the investor, if not converted these notes may need to be repaid.
From time to time, the Company and its subsidiaries enter into legal disputes in the ordinary course of business. The Company believes there are no material legal or administrative matters pending that are likely to have, individually or in the aggregate, a material adverse effect on its business or results of operations.
F-27
| F-28 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20. Income taxes
The Company is current in its US and Canadian tax filings as of December 31, 2022, tax filings are due for the Company as of December 31, 2022.
The provision for income taxes consists of the following:
Schedule of reconciliation of income taxes
| Year ended December 31, 2023 |
||||
| Current | ||||
| Federal | $ | |||
| State | ||||
| Foreign | ||||
| $ | ||||
| Deferred | ||||
| Federal | $ | |||
| State | ||||
| Foreign | ||||
| $ | ||||
| Tax benefit (expense) | ||||
The income tax provision/ (benefit) is different from that which would be obtained by applying the statutory Federal income tax rate of 21% and applicable state tax rates of 5.5% to income before income tax expense. The items causing this difference for the years ended December 31, 2023 and 2022 are as follows:
Schedule of Components of Income Tax Expense (Benefit)
| Year ended December 31, 2023 | Year ended December 31, 2022 | |||||||
| Taxation (charge) credit at the federal and state statutory rate | $ | ( | ) | $ | ( | ) | ||
| State taxation | ( | ) | ||||||
| Prior year over provision | ||||||||
| Permanent differences | ( | ) | ||||||
| Foreign tax rate differential | ( | ) | ||||||
| Net operating loss utilized | ( | ) | ||||||
| Prior year net operating loss true up | ||||||||
| Forfeiture of net operating loss on disposal of subsidiary | ( | ) | ||||||
| Valuation allowance | ||||||||
| Net tax benefit (expense) | $ | $ | ( | ) | ||||
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities at December 31, 2023 and 2022 are as follows:
Schedule of Deferred Tax Assets and Liabilities
| December 31, 2023 |
||||
| Property and equipment | $ | ( |
) | |
| Intangible assets | ||||
| Net operating losses | ||||
| Other | ||||
| Valuation allowance | ( |
) | ||
| Net deferred income tax assets (liabilities) | $ | |||
The movement in federal net operating losses was as follows:
Summary of Deferred Tax Liability Not Recognized
| December 31, 2023 | December 31, 2022 | |||||||
| Net operating loss carry forward | ||||||||
| Prior year adjustment to opening balances | ||||||||
| Foreign exchange differential | ( | ) | ||||||
| Net operating loss utilized | ( | ) | ( | ) | ||||
| Net taxable loss | ||||||||
| Disposal of subsidiary | ( | ) | ( | ) | ||||
| Valuation allowance | ( | ) | ( | ) | ||||
The Company has established a valuation allowance against its gross deferred tax assets sufficient to bring its net deferred tax assets to zero due to the uncertainty surrounding the realization of such assets. Management has determined it is more likely than not that the net deferred tax assets are not realizable due to the Company’s historical loss position. The valuation allowance for the year ended December 31, 2023 decreased by a total of $336,075.
As of December 31, 2023, the prior three tax years remain open for examination by the federal or state regulatory agencies for purposes of an audit for tax purposes.
As of December 31, 2023, the Company had available for income tax purposes approximately $31,6 million in federal and $0.5 million in state net operating loss carry forwards, which may be available to offset future taxable income. $8.1 million of the net operating losses will begin to expire in 2034 and $21.4 million has an indefinite life. Due to the uncertainty of the utilization and recoverability of the loss carryforwards and other deferred tax assets, Management has determined a full valuation allowance for the deferred tax assets since it is more likely than not that the deferred tax assets will not be realizable.
Pursuant to the Internal Revenue Code of 1986, as amended (“IRC”), §382, the Company’s ability to use its net operating loss carry forwards to offset future taxable income is limited if the Company experiences a cumulative change in ownership of more than 50% within a three-year period.
| F-29 |
ETHEMA HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21. Subsequent events
Revolving line of credit
On February 1, 2024 Ethema Health Corporation, American Treatment Holdings Inc, and Evernia Health Center LLC (the “Company” or “Companies”) entered into a secured revolving line of credit agreement (“ Agreement”) with Testing 123, LLC. The minimum draw under the agreement is $80,000 and limited to a maximum of 80% of the Receivables balance as provided to the Lender, subject to the maximum borrowing under the Term Loan Agreement of $1,000,000. The interest on the term loan is 5% per month. The revolving credit line is valid for a period of two years and each draw will have a maturity date that is two years from the draw date, with an origination fee of $1,000 per draw. Each loan may be prepaid at any time without penalty. The Company will pay a commitment fee of $40,000 to the borrower in common shares on the completion of a public offering, unless no such offering takes place within a year, whereby the outstanding principal will. E increased by $40,000. The revolving credit line is secured by all assets, tangible and intangible of the Company and its direct and indirect subsidiaries, American Treatment Holdings, Inc. and Evernia Health Center, LLC.
Senior secured promissory notes
On April 8 and April 17, 2024, the Company issued two senior secured promissory notes to investors, each note for $55,000 for gross proceeds of $50,000, including an original issue discount of $5,000. The maturity date of the note is March 31, 2025 and bears interest at 3% per annum for the quarter ending June 30, 2024, 6% per annum for the quarter ending September 30, 2024, 9% per annum for the quarter ending December 31, 2024 and 12% per annum for the quarter ending March 31, 2025. The note also provides for default interest of 24% per annum on all amounts outstanding after maturity.
On April 30, 2024, a Series N note holder entered into a swap agreement with an Investor (Investor 3”) whereby his $250,000 Series N convertible note was assigned and transferred to Investor 3. Subsequently, on May 2, 2024, the Company issued a further senior secured promissory notes to Investor 3 for $275,000 for gross proceeds of $250,000, including an original issue discount of $25,000. The maturity date of the note is March 31, 2025 and bears interest at 3% per annum for the quarter ending June 30, 2024, 6% per annum for the quarter ending September 30, 2024, 9% per annum for the quarter ending December 31, 2024 and 12% per annum for the quarter ending March 31, 2025. The note also provides for default interest of 24% per annum on all amounts outstanding after maturity. A portion of the proceeds of this Investor 3 note was used to repay the accrued and outstanding interest on the exchanged Series N note. Upon the payment of the accrued interest, on May 2, 2024, the Company exchanged the $250,000 Series N note for a senior secured promissory note for $275,000, including an original issue discount of $25,000. The maturity date of the note is March 31, 2025 and bears interest at 3% per annum for the quarter ending June 30, 2024, 6% per annum for the quarter ending September 30, 2024, 9% per annum for the quarter ending December 31, 2024 and 12% per annum for the quarter ending March 31, 2025. The note also provides for default interest of 24% per annum on all amounts outstanding after maturity.
Non-binding Letter Of Intent (”LOI”) to acquire assets and assignment of lease and sub lease for Boca cove Detox Center
On March 22, 2024, the Company executed a LOI to acquire certain assets, including furniture, equipment inventory and supplies of Boca Cove Detox, LLC, along with the assignment of lease and sub-lease for premises located at 899 Meadow Avenue, Boca Raton, Florida.
The purchase price is $240,000 with monthly repayment of $20,000 per month beginning on the Effective Date, defined below, of the agreement for a period of 12 months. The Company paid a non-refundable Exclusivity Deposit (“Exclusivity Deposit”) to the Seller, which deposit will be applied to the purchase price. In addition, upon the execution of the transaction documents, the Company will pay to the seller a Security Deposit (“Security Deposit”) of $83,393 which will be applied to the purchase price if the assignment of the lease is completed within 12 months of the effective date, if not completed within 11 months of the effective date, than $20,000 will be applied to the 12 installment of the purchase price, with the remaining balance of $63,393 remaining as the Security Deposit and applied to the last month of the sub-lease agreement.
The Effective Date is the earlier of the Company obtaining a license for the premises or 30 days from the signing of the LOI and the payment of the Exclusivity Deposit.
The Exclusivity period is to last as long as the parties are negotiating the terms of the transaction documents or 30 days from the date of execution of the LOI, which was executed on Match 25, 2024, whichever date is later.
| F-30 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
Annual Evaluation of Disclosure Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Exchange Act), that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), to allow for timely decisions regarding required disclosure.
As required by Exchange Act Rule 13a-15, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer concluded that due to our limited resources our disclosure controls and procedures are not effective in providing material information required to be included in our periodic SEC filings on a timely basis and to ensure that information required to be disclosed in our periodic SEC filings is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure about our internal control over financial reporting discussed below.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Our internal control system was designed to, in general, provide reasonable assurance to our management and board regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2023. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on that assessment, our management has determined that as of December 31, 2023, our internal control over financial reporting was not effective due to material weaknesses related to a limited segregation of duties due to our limited resources and the small number of employees. Management has determined that this control deficiency constitutes a material weakness which could result in material misstatements of significant accounts and disclosures that could result in a material misstatement to our interim or annual financial statements that would not be prevented or detected. In addition, due to limited staffing, we are not always able to detect minor errors or omissions in reporting.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding management’s assessment of our internal control over financial reporting pursuant to temporary rules of the SEC.
| 11 |
Evaluation of Disclosure Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
As required by the SEC Rules 13a-15(b) and 15d-15(b), we carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to material weaknesses in internal controls over financial reporting (as described below).
Deficiencies and Significant Deficiencies
A material weakness is a deficiency, or a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCAOB”) Audit Standard No. 5, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weaknesses which have caused management to conclude that as of December 31, 2023, our internal controls over financial reporting were not effective at the reasonable assurance level:
| 1. | We do not have sufficient written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of the Sarbanes-Oxley Act which is applicable to us for the year ended December 31, 2023. Management evaluated the impact of our failure to have sufficient written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. |
| 2. | We do not have sufficient resources in our accounting function, which restricts the Company’s ability to gather, analyze and properly review information related to financial reporting in a timely manner. In addition, due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. |
We have taken steps to remediate some of the weaknesses described above and we are in discussions with the risk advisory departments of reputable accounting firms to assist us in the COSO framework documentation and testing of the internal controls. We intend to continue to address these weaknesses as resources permit, including the employment of new qualified employees.
Remediation of Deficiencies and Significant Deficiencies
To address these material weaknesses, management engaged financial consultants, performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Additionally, we will continue to establish and implement proper processes and systems to remediate the deficiencies we have had, including preventive controls with the segregation of duties on main areas such as payroll, billing, cash recording, and IT control and detective controls involving account reconciliations on a monthly basis.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
| 12 |
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Our current directors and executive officers, their ages and their positions, as of the date of this Annual Report, as follows:
| Name | Position | |
| Shawn E. Leon | 64 | Chief Executive Officer, Chief Financial Officer, President and Director |
| Gerald T Miller | 66 | Director |
Set forth below is a brief description of the background and business experience of each of our current executive officers and directors.
Shawn E. Leon, Chief Executive Officer, Chief Financial Officer, President and Director
Shawn E. Leon has been an officer and director of the Company since November 2010 and served as the President of the Company’s subsidiaries at all times. In April 2011, Mr. Leon was appointed as the Company’s Chief Executive Officer. Prior to joining the Company, Mr. Leon held the role of President of Greenestone Clinic Inc., Leon Developments Ltd, Port Carling Inn Developments Ltd., 1871 at the Locks Developments Ltd. and Leon Developments Ltd. Mr. Leon graduated with Honors in Business Administration from Wilfrid Laurier University in 1982. Mr. Leon was elected to the Board because of his prior management experience.
Gerald T. Miller, Director
Gerry Miller of Toronto, Ontario, Canada is the Managing Partner of the Law Firm Gardiner Miller Arnold LLP. Mr. Miller’s practice focuses on a comprehensive range of business, finance and real estate issues. In addition to managing the law firm. Mr. Miller’s runs the business law and real estate practice at Gardiner Miller Arnold LLP Law firm. He advises small to medium sized companies in manufacturing, investing and service related industries. Mr. Miller supervises all merger and acquisition transactions and institutional finance work.
CORPORATE GOVERNANCE
Code of Business Conduct and Ethics
We have adopted a code of conduct that applies to all officers, directors and employees, including those officers responsible for financial reporting. If we make any substantive amendments to the code of conduct or grant any waiver from a provision of the code of conduct to any executive officer or director, we will promptly disclose the nature of the amendment or in a Current Report on Form 8-K to be filed with the SEC.
Our Board of Directors
Our Board currently consists of two members. Our Board judges the independence of its directors by the heightened standards established by the Nasdaq Stock Market. Accordingly, the Board of Directors has determined that our non-employee directors, Mr. Miller, meets the independence standards established by the Nasdaq Stock Market and the applicable independence rules and regulations of the SEC. Our Board considers a director to be independent when the director is not one of our or our subsidiaries’ officers or employees or director of our subsidiaries, does not have any relationship which would, or could reasonably appear to, materially interfere with the independent judgment of such director, and the director otherwise meets the independence requirements under the listing standards of the Nasdaq Stock Market and the rules and regulations of the SEC.
Board Committees
Our Board of Directors act as our Audit Committee, our Compensation Committee and our Nominating and Governance Committees.
Audit Committee
The primary purpose of the audit committee is to oversee the quality and integrity of our accounting and financial reporting processes and the audit of our financial statements. The audit committee is responsible for selecting, compensating, overseeing and terminating our independent registered public accounting firm. Specifically, the audit committee’s duties are to recommend to our Board of Directors the engagement of an independent registered public accounting firm to audit our financial statements and to review our accounting and auditing principles. The audit committee will review the scope, timing and fees for the annual audit and the results of audit examinations performed by the external auditors and independent registered public accounting firm, including their recommendations to improve the system of accounting and internal controls.
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Compensation Committee
The compensation committee is responsible for, among other things, reviewing and recommending to our Board the annual salary, bonus, stock compensation and other benefits of our executive officers, including our Chief Executive Officer and Chief Financial Officer; reviewing and providing recommendations regarding compensation and bonus levels of other members of senior management; reviewing and making recommendations to our Board on all new executive compensation programs; reviewing the compensation of our Board; and administering our equity incentive plans. The compensation committee may delegate any or all of its duties or responsibilities to a subcommittee of the compensation committee, to the extent consistent with the Company’s organizational documents and all applicable laws, regulations and rules of markets in which our securities trade, as applicable.
Nominating and Governance Committee
The nominating and governance committee is responsible for, among other things, annually assessing the composition, skills, size and tenure of the Board of Directors in advance of annual meetings and whenever individual directors indicate that their status may change; annually considering new members for nomination to the Board of Directors; causing the Board of Directors to annually review the independence of directors; and developing and monitoring our general approach to corporate governance issues as they may arise.
Compliance with Section 16(A) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish the Company with copies of all reports filed by them in compliance with Section 16(a).
Based solely on our review of certain reports filed with the SEC pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, at December 31, 2023, none of the officers, directors or 10% shareholders were in compliance with Section 16(a).
Item 11. Executive Compensation.
There has been no annuity, pension or retirement benefits paid to our officers or directors during the past two fiscal years. We currently do not have an employment agreement with the Company’s Chief Executive Officer. There is no compensation committee of the Board. The Board approved the terms of a certain management agreement with Greenestone Clinic, Inc., wholly owned by the Company’s Chief Executive Officer, Shawn Leon, and with Shawn Leon, whereby a management agreement was initially for a term of one year and was for the development of medical clinics in Ontario, Canada. The agreement has been extended from year to year and has been expanded to include overall company management and the development of clinics in the United States. The management agreement allowed for a maximum compensation of $300,000 per year.
Summary Compensation Table
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Awards ($) | Non-Equity Plan Compensation ($) | Non-Qualified Deferred Compensation Earnings ($) |
All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||
| Shawn E. Leon, President CEO, CFO | 2023 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||
| 2022 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
Outstanding Equity Awards at Fiscal Year End
There were no equity awards issued to executive officers during the fiscal year ended December 31, 2023 and there are no outstanding equity awards to named officers as of December 31, 2023.
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Information regarding equity compensations plans is set forth in the table below:
| Number
of securities to be issued upon exercise of outstanding options |
Weighted average exercise price of outstanding options | Number
of securities remaining for future issuance under equity compensation plans | ||||||||||
| Equity Compensation plans approved by the stockholders | ||||||||||||
| 2013 Equity compensation plan | — | $ | — | 10,000,000 | ||||||||
| Equity Compensation plans not approved by the stockholders | ||||||||||||
| None | — | — | — | |||||||||
| — | $ | — | 10,000,000 | |||||||||
Directors Compensation
The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named directors by us during the year ended December 31, 2023.
| Name | Fees earned or paid in cash ($) |
Stock awards ($) | Option awards ($) | Non-Equity Plan Compensation ($) |
Non-Qualified Deferred Compensation Earnings ($) |
All Other Compensation ($) | Total ($) |
|||||||||||||||||||||
| Shawn E. Leon | — | — | — | — | — | — | — | |||||||||||||||||||||
| John O’ Bireck* | — | — | — | — | — | — | — | |||||||||||||||||||||
| Gerald T Miller | — | — | — | — | — | — | — | |||||||||||||||||||||
* Mr. John O’Bireck died during October 2023. No replacement for Mr. O’Bireck has been nominated as of the date of this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
| Name of beneficial owner | Amount
and nature of beneficial ownership, including common stock |
Percentage
of common stock beneficially owned(1) | ||||||
| Directors and Officers | ||||||||
| Shawn E. Leon | 171,864,342 | (2) | 4.6 | % | ||||
| Gerald T. Miller | 500,000 | (3) | * | |||||
| All officers and directors as a group (3 persons) | 172,864,342 | 4.6 | % | |||||
* Less than 1%
| (1) | Based on 3,729,053,805 shares of common stock outstanding as of May 6, 2024. |
| (2) | Includes 500,000 shares held by Mr. Leon, a further 2,687,300 shares held by Greenestone Clinic, a company controlled by Mr. Leon, a further 60,000,000 shares owned by Leon Developments, a company controlled by Mr. Leon, 8,677,042 shares owned by Eileen Greene, Mr. Leon's spouse and 100,000,000 shares owned by Mr. Leon’s’ son. |
| (3) | Includes 500,000 shares of common stock. |
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Item 13. Certain Relationships and Related Party Transactions, and Director Independence
Related Party Transactions
As of December 31, 2023, amounts payable to executive officers or their affiliates for related party payables, as detailed in the below table:
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Due to related parties | ||||||||
| Shawn E. Leon | $ | 61,267 | $ | 411,611 | ||||
| Leon Developments Ltd. | 1,092,701 | 850,657 | ||||||
| Eileen Greene | 1,418,324 | 1,451,610 | ||||||
| Total related party payables | $ | 2,572,292 | $ | 2,713,878 | ||||
Shawn E. Leon
As of December 31, 2023 and December 31, 2022, we had a payable to Shawn Leon of $61,267 and $411,611, respectively. Mr. Leon is a director and CEO of our Company. The balances payable are non-interest bearing and have no fixed repayment terms.
On December 30, 2022, we sold our wholly-owned subsidiaries, Greenestone Muskoka and ARIA, to Mr. Leon for gross proceeds of $0. We 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.
On August 4, 2023, the company repaid a personal loan by Leonite Capital to Shawn Leon of $28,438, which repayment reduced the related party payable to Shawn Leon.
Due to the current financial position of the Group, Mr. Leon forfeited the management fees due to him for the years ended December 31, 2023 and 2022.
Leon Developments, Ltd.
Leon Developments is owned by Shawn Leon, our Company’s CEO and director. As of December 31, 2023 and December 31, 2022, we owed Leon Developments, Ltd., $1,092,701 and $850,607, respectively.
On June 30, 2023, we assumed the liability owing to Leon developments of CDN$1,974,012 (approximately $1,490,946) from our subsidiary, CCH, immediately prior to the disposal of CCH to a related party, Leonite Capital LLC.
We paid Leon Developments a management fee of CDN$250,000 (approximately $185,503) and $0 for the years ended December 31, 2023 and 2022, respectively.
Eileen Greene
As of December 31, 2023 and December 31, 2022, we owed Eileen Greene, the spouse of our CEO, Shawn Leon, $1,418,324 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 was considered a related party due to its previous investment of $700,000 in Series A Preferred stock interest in CCH, which was previously a wholly-owned subsidiary of our Company, and its previous investment of $400,000 in Series B Preferred stock of our Company, 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, we entered into an exchange agreement with Leonite Capital whereby we exchanged the 400,000 Series B shares with a value of $400,000 plus accrued dividends thereon of $61,184 for our entire shareholding in our property owning subsidiary, Cranberry Cove Holdings. The Series B shares and the accrued dividends thereon were extinguished and cancelled upon consummation of the transaction.
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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.
We 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 $905,579 as of December 31, 2022.
In addition, we owed Leonite capital, secured promissory notes, including principal, monitoring fees and interest thereon totaling $340,281 as of December 31, 2022.
Directors Independence
The common stock of the Company is currently quoted on the OTC Pink, a quotation system which currently does not have director independence requirements. On an annual basis, each director and executive officer will be obligated to disclose any transactions with the Company in which a director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest in accordance with Item 407(a) of Regulation S-K. Following completion of these disclosures, the Board will make an annual determination as to the independence of each director using the current standards for “independence” that satisfy the criteria for the NASDAQ Stock Market, Inc.
As of December 31, 2023, the Board determined that Gerald T Miller is independent and that Mr. Leon is not independent under these standards.
Item 14. Principal Accountant Fees and Services.
Daszkal Bolton LLP served as our independent registered public accounting firm for the year ended 31 December 2022 and RBSM LLP serves as our independent registered public accounting firm for the year ended 31 December 2023.
The following is a summary of the fees paid by us to Daszkal Bolton LLP and RBSM LLP the years ended December 31, 2023 and 2022 for professional services rendered:
| Year ended December 31, 2023 | Year ended December 31, 2022 | |||||||
| Audit fees and expenses | $ | 86,500 | $ | 80,000 | ||||
| Taxation preparation fees | — | — | ||||||
| Audit related fees | — | — | ||||||
| Other fees | — | — | ||||||
| $ | 86,500 | $ | 80,000 | |||||
Audit Fees
Consists of fees billed for professional services rendered for the audit of our consolidated financial statements and review of interim condensed consolidated financial statements included in quarterly reports and services that are normally provided by Daszkal Bolton LLP in connection with statutory and regulatory filings or engagements in fiscal year ended December 31, 2022 and by RBSM, LLP for the year ended December 31, 2023.
Audit Related Fees
Consists of fees billed for accounting, assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees”.
Tax Fees
Tax Fees consist of the aggregate fees billed for professional services rendered by our principal accounts for tax compliance, tax advice, and tax planning. These services include preparation for federal and state income tax returns.
All Other Fees
We did not incur any other fees billed by auditors for services rendered to our Company, other than the services listed above for the fiscal years ended December 31, 2023 and 2022, respectively.
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PART IV
Item 15. Exhibits, Financial Statement Item 15. Exhibits and Financial Statement Schedules and Reports on Form 10-K
| (a) | (1) | The following financial statements are included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2022 |
| 1. | Independent Auditor’s Report | |
| 2. | Consolidated Balance Sheets as of December 31, 2023 and 2022 | |
| 3. | Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2023 and 2022 | |
| 4. | Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2023 and 2022 | |
| 5. | Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 | |
| 6. | Notes to Consolidated Financial Statements |
| (2) | All financial statement schedules have been omitted as the required information is either inapplicable or included in the Consolidated Financial Statements or related notes. |
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| (b) | Exhibits |
| 19 |
| Exhibit No. | Description | Form | SEC File No. | Date | Filed Herewith | Filed by Reference |
| 10.9 | Asset Purchase Agreement re: Sale of Muskoka Clinic | 8-K | 000-15078 | February 17, 2017 |
X | |
| 10.10 | Lease of Muskoka Clinic | 8-K | 000-15078 | February 17 2017 |
X | |
| 16.1 | Letter from Jarvis Ryan Associates, LLP | 8-K | 000-15078 | July 19, 2014 |
X |
| 31.1 | Certification of the Principal Executive Officer and Principal Financial Officer of the registrant pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (Rule 13(a) -14(a) or Rule 15(d( - 14 (a) | X | ||||
| 32.1 | Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Rule 18 U.S.C 1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 | X | ||||
| 101.INS | Inline XBRL Instance Document | X | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||
| 101.CAL | Inline Taxonomy Extension CAL XBRL Calculation Linkbase Document | X | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||
| 101 | Cover Page Interactive Data File (embedded within the Inline XBRL Document) |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ETHEMA HEALTH CORPORATION.
Date: May 7, 2024
By: /s/ Shawn E. Leon
Name: Shawn E. Leon
Title: Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | Position | Date |
| /s/Shawn E. Leon | Chief Executive Officer (Principal Executive Officer), | May 7, 2024 |
| Shawn Leon |
Chief Financial Officer (Principal Financial Officer), President and Director |
|
| /s/ Gerald T. Miller | Director | May 7, 2024 |
| Gerald T. Miller |
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Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14 OR RULE
15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Shawn E. Leon, certify that:
I have reviewed this Annual Report on Form 10-K of Ethema Health Corporation;
| 1. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: May 7, 2024
| /s/ Shawn E. Leon | |
Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Ethema Health Corporation, a Colorado corporation (the “Company”), on Form 10-K for the period ended December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Shawn E. Leon, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ Shawn E. Leon | |
Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) | |
| May 7, 2024 |