GRST Ethema Health Corporation (PK)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2023

 

or

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

 

For the transition period from to

 

Commission File Number 000-54748

 

ETHEMA HEALTH CORPORATION.

(Exact Name of Registrant as Specified in its Charter)

 

Colorado		84-1227328
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer Identification No.)
950 Evernia Street West Palm Beach, Florida		33401
Address of Principal Executive Offices		Zip Code

 

(416) 500-0020

Registrant’s Telephone Number, Including Area Code

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Title of each class		Trading Symbol(s)			Name of each exchange on which registered
Common shares		GRST		OTC Pink

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Number of shares of common stock outstanding as of November 20, 2023 was 3,729,053,805.

 

 

 

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

NOTE REGARDING COMPANY REFERENCES

 

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

 

 

FORM 10-Q

ETHEMA HEALTH CORPORATION

TABLE OF CONTENTS

 

		Page
	PART I - FINANCIAL INFORMATION
Item l.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022	1
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2023 and 2022	2
	Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the nine months ended September 30, 2023 and 2022	3
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September  30, 2023 and 2022	5
	Notes to the Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
SIGNATURES		38

 

 

 

 

ETHEMA HEALTH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

  

		September 30, 2023				December 31, 2022
ASSETS			(Unaudited)
Current assets
Cash		$	11,728			$	140,757
Accounts receivable, net			681,072				337,074
Prepaid expenses			39,069				44,718
Other current assets			62,652				20,347
Total current assets			794,521				542,896
Non-current assets
Property and equipment, net			523,699				2,974,395
Intangible assets, net			984,447				1,252,932
Right of use assets			9,331,261				1,393,071
Deposits			374,000				400,000
Total non-current assets			11,213,407				6,020,398
Total assets		$	12,007,928			$	6,563,294
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable and accrued liabilities		$	129,415			$	170,934
Taxes payable			—				248,644
Convertible notes, net of discounts			4,408,209				5,269,250
Short-term notes			124,886				460,534
Mortgage loans			—				3,504,605
Receivables funding			324,704				416,731
Government assistance loans			14,925				14,818
Operating lease liability			32,753				287,017
Finance lease liability			8,289				7,891
Accrued dividends			—				194,829
Related party payables			2,670,008				2,713,878
Total current liabilities			7,713,189				13,289,131
Non-current liabilities
Government assistance loans			24,282				79,555
Deferred taxes			170,855				217,451
Third party loans			248,757				578,335
Operating lease liability			9,339,227				1,206,413
Finance lease liability			18,648				24,952
Total non-current liabilities			9,801,769				2,106,706
Total liabilities			17,514,958				15,395,837
Redeemable Preferred stock - Series B; $1.00 par value, 10,000,000 shares authorized; 0 and 400,000 shares outstanding as of September 30, 2023 and December 31, 2022, respectively.			—				400,000
Stockholders’ deficit
Preferred stock - Series A; $0.01 par value, 10,000,000 shares authorized 4,000,000 shares outstanding as of September 30, 2023 and December 31, 2022, respectively.			40,000				40,000
Common stock - $0.01 par value, 10,000,000,000 shares authorized; 3,729,053,805 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively.			37,290,539				37,290,539
Additional paid-in capital			26,187,925				23,419,917
Discount for shares issued below par value			(27,363,367	)			(27,363,367	)
Accumulated other comprehensive loss			—				(5,065	)
Accumulated deficit			(41,960,217	)			(43,484,751	)
Stockholders’ deficit attributable to Ethema Health Corporation stockholders’			(5,805,120	)			(10,102,727	)
Non-controlling interest			298,090				870,184
Total stockholders’ deficit			(5,507,030	)			(9,232,543	)
Total liabilities and stockholders’ deficit		$	12,007,928			$	6,563,294

  

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

 

 

ETHEMA HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

AND COMPREHENSIVE INCOME (LOSS)

 

		Three months ended September 30, 2023				Three months ended September 30, 2022				Nine months ended September 30, 2023				Nine months ended September 30, 2022
Revenues		$	1,353,899			$	1,424,943			$	4,219,904			$	3,586,290
Operating expenses
General and administrative			249,283				289,073				755,685				760,533
Rent expense			107,707				114,717				328,204				314,256
Management fees			30,000				30,000				273,003				90,000
Professional fees			171,659				19,131				460,773				180,867
Salaries and wages			651,537				580,432				1,873,280				1,456,099
Depreciation and amortization			110,185				136,608				388,259				402,851
Total operating expenses			1,320,371				1,169,961				4,079,204				3,204,606
Operating Income			33,528				254,982				140,700				381,684
Other Income (expense)
Other income			110				(1,045	)			449				10,018
Forgiveness of government assistance loan			—				104,368				—				104,368
Penalty on convertible debt			—				—				(34,688	)			—
Extension fee on property purchase			—				—				(130,000	)			—
Gain on disposal of property			2,484,172								2,484,172
Loss on debt extinguishment			(277,175	)			—				(277,175	)			—
Interest expense			(81,371	)			(163,561	)			(382,448	)			(367,177	)
Amortization of debt discount			(73,857	)			(87,704	)			(238,304	)			(551,738	)
Derivative liability movement			—				45,156				—				175,593
Foreign exchange movements			6,598				404,538				(84,148	)			502,350
Net income before income taxes			2,092,005				556,734				1,478,558				255,098
Benefit from (provision for) Income taxes			15,532				(44,652	)			221,107				(87,615	)
Net income			2,107,537				512,082				1,699,665				167,483
Net income attributable to non-controlling interest			(31,058	)			(28,787	)			(127,906	)			(52,425	)
Net income allocable to Ethema Health Corporation Stockholders			2,076,479				483,295				1,571,759				115,058
Preferred stock dividend			—				(24,582	)			(47,225	)			(73,923	)
Net income available to common shareholders of Ethema Health Corporation			2,076,479				458,713				1,524,534				41,135
Accumulated other comprehensive loss
Foreign currency translation adjustment			—				(169,965	)			5,065				(208,317	)
Total comprehensive income (loss)		$	2,076,479			$	288,748			$	1,529,599			$	(167,182	)
Income per share
Basic		$	0.00			$	0.00			$	0.00			$	0.00
Diluted		$	0.00			$	0.00			$	0.00			$	0.00
Weighted average common shares outstanding
Basic			3,729,053,805				3,729,053,805				3,729,053,805				3,696,636,223
Diluted			3,931,379,775				4,276,544,380				3,931,379,775				4,244,126,798

  

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

 

 

ETHEMA HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

  

 

		Series A Preferred								Common								Additional paid-in				Discount to				Accumulated other Comprehensive				Accumulated				Non-controlling shareholders
		Shares				Amount				Shares				Amount				Capital				par value				Income				Deficit				interest				Total
Balance as of December 31, 2022			4,000,000			$	40,000				3,729,053,805			$	37,290,539			$	23,419,917			$	(27,363,367	)		$	(5,065	)		$	(43,484,751	)		$	870,184			$	(9,232,543	)
Foreign currency translation			—				—				—				—				—				—				(1,504	)			—				—				(1,504	)
Net loss			—				—				—				—				—								—				(178,685	)			2,968				(175,717	)
Dividends accrued			—				—				—				—				—				—				—				(23,419	)			—				(23,419	)
Balance as of March 31, 2023			4,000,000			$	40,000				3,729,053,805			$	37,290,539			$	23,419,917			$	(27,363,367	)		$	(6,569	)		$	(43,686,855	)		$	873,152			$	(9,433,183	)
Disposal of subsidiary to related party			—				—				—				—				2,034,885				—				—				—				(700,000	)			1,334,885
Deemed extinguishment of debt by related party			—				—				—				—				461,184				—				—				—				—				461,184
Foreign currency translation			—				—				—				—				—				—				6,569				—				—				6,569
Net loss			—				—				—				—				—				—				—				(326,035	)			93,880				232,155
Dividends accrued			—				—				—				—				—				—				—				(23,806	)			—				(23,806	)
Balance as of June 30, 2023			4,000,000			$	40,000				3,729,053,805			$	37,290,539			$	25,915,986			$	(27,363,367	)		$	—			$	(44,036,696	)		$	267,032			$	(7,886,506	)
Fair value of warrants issued for debt extinguishment			—				—				—				—				271,939				—				—				—				—				271,939
Net income			—				—				—				—				—				—				—				2,076,479				31,058				2,107,537
Balance as of September 30, 2023			4,000,000			$	40,000				3,729,053,805			$	37,290,539			$	26,187,925			$	(27,363,367	)		$	—			$	(41,960,217	)		$	298,090			$	(5,507,030	)

 

		Series A Preferred								Common								Additional paid-in				Discount to				Accumulated other Comprehensive				Accumulated				Non-controlling shareholders
		Shares				Amount				Shares				Amount				Capital				par value				Income				Deficit				interest				Total
Balance as of December 31, 2021			4,000,000			$	40,000				3,579,053,805			$	35,790,539			$	22,791,350			$	(26,013,367	)		$	816,532			$	(44,103,311	)		$	822,876			$	(9,855,381	)
Conversion of convertible notes			—				—				150,000,000				1,500,000				—				(1,350,000	)			—				—				—				150,000
Foreign currency translation			—				—				—				—				—				—				34,517				—				—				34,517
Net loss			—				—				—				—				—								—				(174,447	)			9,462				(164,985	)
Dividends accrued			—				—				—				—				—				—				—				(24,613	)			—				(24,613	)
Balance as of March 31, 2022			4,000,000			$	40,000				3,729,053,805			$	37,290,539			$	22,791,350			$	(27,363,367	)		$	851,049			$	(44,302,371	)		$	832,338			$	(9,860,462	)
Foreign currency translation			—				—				—				—				—				—				(72,869	)			—				—				(72,869	)
Net loss			—				—				—				—				—				—				—				(193,790	)			14,176				(179,614	)
Dividends accrued			—				—				—				—				—				—				—				(24,728	)			—				(24,728	)
Balance as of June 30, 2022			4,000,000			$	40,000				3,729,053,805			$	37,290,539			$	22,791,350			$	(27,363,367	)		$	778,180			$	(44,520,889	)		$	846,514			$	(10,137,673	)
Foreign currency translation			—				—				—				—				—				—				(169,965	)			—				—				(169,965	)
Net income			—				—				—				—				—				—				—				483,294				28,787				512,082
Dividends accrued			—				—				—				—				—				—				—				(24,582	)			—				(24,582	)
Balance as of September 30, 2022			4,000,000			$	40,000				3,729,053,805			$	37,290,539			$	22,791,350			$	(27,363,367	)		$	608,215			$	(44,062,177	)		$	875,301			$	(9,820,139	)

 

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

 

 

ETHEMA HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

		Nine months ended September 30, 2023				Nine months ended September 30, 2022
Operating activities
Net income		$	1,699,665			$	167,483
Adjustment to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization			388,259				402,851
Forgiveness of government assistance loan			—				(104,368	)
Non-cash interest accrual on escrow deposit			—				758
Gain on disposal of property			(2,484,172	)			—
Loss on debt extinguishment			277,175				—
Penalty on convertible notes			34,688				—
Amortization of debt discount			238,304				564,006
Derivative liability movements			—				(175,593	)
Non-cash deferred tax movements			(46,597	)			(56,382	)
Amortization of right of use asset			169,682				194,086
Changes in operating assets and liabilities (net of assets acquired and liabilities assumed)
Accounts receivable			(289,697	)			(145,833	)
Prepaid expenses and other current assets			(48,457	)			(14,891	)
Accounts payable and accrued liabilities			(110,110	)			211,771
Operating lease liability			(167,319	)			(179,009	)
Taxes payable			(237,211	)			154,234
Net cash (used in) provided by operating activities			(575,790	)			1,019,113
Investing activities
Acquisition of property, plant and equipment			(5,244,011	)			(285,103	)
Proceeds on disposal of property			8,093,448				—
Deposit paid			(374,000	)			(50,000	)
Net cash provided by (used in) investing activities			2,475,437				(335,103	)
Financing activities
Repayment of mortgage loans			(58,320	)			(88,586	)
Proceeds from convertible loans			150,000				—
Repayment of convertible loans			(1,124,442	)			—
Repayment of federal assistance loans			(10,855	)			—
Proceeds from short term loans			223,500				160,000
Repayment of short term loans			(568,325	)			(289,044	)
Repayment of third party loans			(361,260	)			(77,953	)
Repayment of finance leases			(5,907	)			(5,531	)
Proceeds from receivables funding			580,646				440,000
Repayment of receivables funding			(848,417	)			(80,000	)
Proceeds  from related party notes			—				334,299
Repayment of related party notes			(76,296	)			—
Net cash (used in) provided by financing activities			(2,099,676	)			393,185
Effect of exchange rate on cash			71,000				(564,934	)
Net change in cash			(129,029	)			512,261
Beginning cash balance			140,757				48,822
Ending cash balance		$	11,728			$	561,083
Supplemental cash flow information
Cash paid for interest		$	334,735			$	158,511
Cash paid for income taxes		$	—			$	—
Non-cash investing and financing activities
Conversion of convertible notes		$	—			$	150,000

 

 

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

  

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  Nature of business

 

Since 2010, the Company has operated addiction treatment centers. Initially the Company operated an addiction treatment center in Ontario Canada under its Greenestone Muskoka clinic, which was sold on February 14, 2017. Simultaneously with this sale the Company purchased buildings and operated an addiction treatment center in Delray Beach, Florida under its Addiction Recovery Institute of America subsidiary with a license obtained in December 2016, initially through owned properties in Delray Beach and subsequently though leased properties in West Palm Beach, Florida. Since June 30, 2020, the Company has been actively involved in the management of a treatment center operated by Evernia in West Palm Beach, Florida. On July 1, 2021, the Company closed on the acquisition of 75% of ATHI, which owns 100% of Evernia, once the probationary approval of a license was obtained from the Department of Children and Family Services of Florida. Evernia is the only active treatment center operated by the Company.

 

The Company also owned the real estate on which its Greenstone Muskoka clinic operated. The current tenant operates an addiction treatment center on these premises. The Company collected rent on this property, which is treated as a separate business segment. On June 30, 2023, the Company sold Cranberry Cove Holdings, in which the real estate was registered to Leonite Capital, in exchange for the cancellation of preferred shares and the accrued dividend liability owed on the preferred shares.

     

2.  Summary of significant accounting policies

 

Financial Reporting

 

The (a) unaudited condensed consolidated balance sheets as of September 30, 2023, and as of December 31, 2022, which has been derived from audited consolidated financial statements, and (b) the unaudited condensed consolidated statements of operations, stockholders’ deficit and cash flows of the Company, have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of results that may be expected for the year ending December 31, 2023. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023.

 

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

 

a)  Use of Estimates

 

The preparation of unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

b)  Principles of consolidation and foreign translation

 

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

 

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

 

●

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

  

●

Certain non-monetary assets and liabilities and equity at historical rates.

 

●

Revenue and expense items and cash flows at the average rate of exchange prevailing during the year.

 

Adjustments arising from such translations are deferred until realization and are included as a separate component of stockholders’ deficit as a component of accumulated other comprehensive income or loss. Therefore, translation adjustments are not included in determining net income (loss) but reported as other comprehensive income (loss).

 

6

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.  Summary of significant accounting policies (continued)

 

b)   Principles of consolidation and foreign translation (continued)

  

For foreign currency transactions, the Company translates these amounts to the Company’s functional currency at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time actual payment is made, a foreign exchange transaction gain or loss results which is included in determining net income for the year.

 

On June 30, 2023, the Company disposed on Cranberry Cove Holdings whose functional currency was Canadian Dollars, all remaining subsidiaries have the U.S. dollar as a functional currency.

 

The relevant translation rates are as follows: The Company disposed of Cranberry cove Holdings on June 30, 2023, the exchange rates used for the six months in which it had control over Cranberry cove holdings was as follows; for the six months ended June 30, 2023, a closing rate of CDN$1 equals US$0.7553 and an average exchange rate of CDN$1 equals US$0.7420, and for the year ended December 31, 2022, a closing rate of CDN$1.0000 equals US$0.7383 and an average exchange rate of CDN$1.0000 equals US$0.7686.

 

c)  Cash and cash equivalents

 

For purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with several financial institutions in the USA and Canada. There were no cash equivalents at September 30, 2023 and December 31, 2022.

 

The Company primarily places cash balances in the USA with high-credit quality financial institutions located in the United States which are insured by the Federal Deposit Insurance Corporation up to a limit of $250,000 per institution, in Canada which are insured by the Canadian Deposit Insurance Corporation up to a limit of CDN$100,000 per institution.

 

d)  Accounts receivable

 

Accounts receivable primarily consists of amounts due from third-party payors (non-governmental) and private pay patients and is recorded net of allowances for doubtful accounts and contractual discounts. The Company’s ability to collect outstanding receivables is critical to its results of operations and cash flows. Accordingly, accounts receivable reported in the Company’s unaudited condensed consolidated financial statements is recorded at the net amount expected to be received. The Company’s primary collection risks are (i) the risk of overestimating net revenues at the time of billing that may result in the Company receiving less than the recorded receivable, (ii) the risk of non-payment as a result of commercial insurance companies denying claims, (iii) the risk that patients will fail to remit insurance payments to the Company when the commercial insurance company pays out-of-network claims directly to the patient, (iv) resource and capacity constraints that may prevent the Company from handling the volume of billing and collection issues in a timely manner, (v) the risk that patients do not pay the Company for their self-pay balances (including co-pays, deductibles and any portion of the claim not covered by insurance) and (vi) the risk of non-payment from uninsured patients.

 

e)  Allowance for Doubtful Accounts, Contractual and Other Discounts

  

The Company derives the majority of its revenues from commercial payors at in-network rates. The Company recognizes revenue based on historical collections received from healthcare providers, recognizing only a percentage of revenues actually billed. Effectively recognizing revenue net of any expected billing differentials. Based on the Company’s collection experience, the percentage of revenue recognized is adjusted on a periodic basis, thereby taking into account expected credit losses in the revenue recognition process. The revenue we recognize is already net of expected credit losses, therefore management does not maintain a separate allowance for doubtful accounts, contractual and other discounts.

  

Management also takes into consideration the age of accounts, creditworthiness and current economic trends when evaluating the percentage of revenue to be recognized.

    

7

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.  Summary of significant accounting policies (continued)

 

f)  Property and equipment

  

Property and equipment is recorded at cost. Depreciation is calculated on the straight line basis over the estimated life of the asset.

 

g)  Intangible assets

 

Intangible assets are stated at acquisition cost less accumulated amortization, if applicable, less any adjustments for impairment losses.

 

Amortization is charged on a straight-line basis over the estimated remaining useful lives of the individual intangibles. Where intangibles are deemed to be impaired the Company recognizes an impairment loss measured as the difference between the estimated fair value of the intangible and its book value.

 

Licenses to provide substance abuse rehabilitation services are amortized over the expected life of the contract, including any anticipated renewals. The Company expects its licenses to remain in operation for a period of five years.

   

h)  Leases

 

The Company accounts for leases in terms of AC 842 whereby leases are classified as either finance or operating leases. Leases that transfer substantially all of the benefits and inherent risks of ownership of property to the Company are accounted for as finance leases. At the time a finance lease is entered into, an asset is recorded together with its related long-term obligation to reflect the acquisition and financing. Property and equipment recorded under finance leases is amortized on the same basis as described above. Operating leases are recognized on the balance sheet as a lease liability with a corresponding right of use asset for all leases with a term that is more than twelve months. Payments under operating leases are expensed as incurred.

 

i)  Derivatives

 

The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. The Company previously used a Black Scholes Option Pricing model to estimate the fair value of convertible debt conversion features at the end of each applicable reporting period. Changes in the fair value of these derivatives during each reporting period were included in the statements of operations. Inputs into the Black Scholes Option Pricing model require estimates, including such items as estimated volatility of the Company’s stock, risk free interest rate and the estimated life of the financial instruments being fair valued.

 

j)  Financial instruments

 

The Company initially measures its financial assets and liabilities at fair value. The Company subsequently measures all its financial assets and financial liabilities at amortized cost.

 

Financial assets measured at amortized cost include cash and accounts receivable.

 

Financial liabilities measured at amortized cost include bank indebtedness, accounts payable and accrued liabilities, harmonized sales tax payable, withholding taxes payable, convertible notes payable, loans payable and related party notes.

 

Financial assets measured at cost are tested for impairment when there are indicators of impairment. The amount of the write-down is recognized in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income. The Company recognizes its transaction costs in net income in the period incurred. However, financial instruments that will not be subsequently measured at fair value are adjusted by the transaction costs that are directly attributable to their origination, issuance or assumption.

 

FASB ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 establishes a three tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

·

Level 1. Observable inputs such as quoted prices in active markets;

 

·

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

·

Level 3. Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions.

 

The Company measures its convertible debt and derivative liabilities associated therewith at fair value. These liabilities are revalued periodically and the resultant gain or loss is realized through the consolidated Statement of Operations and Comprehensive Loss

  

 

8

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.  Summary of significant accounting policies (continued)

  

k)  Related parties

 

Parties are considered to be related to the Company if the parties directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions are recorded at fair value of the goods or services exchanged.

 

l)  Revenue recognition

 

ASC 606 requires companies to exercise more judgment and recognize revenue using a five-step process.

 

The Company’s provision for doubtful accounts are recorded as a direct reduction to revenue instead of being presented as a separate line item on the consolidated statements of operations and comprehensive loss.

 

As our performance obligations relate to contracts with a duration of one year or less, the Company elected the optional exemption in ASC 606-10-50-14(a). Therefore, the Company is not required to disclose the transaction price for the remaining performance obligations at the end of the reporting period or when the Company expects to recognize the revenue. The Company has minimal unsatisfied performance obligations at the end of the reporting period as our patients typically are under no obligation to remain admitted in our facilities.

 

The Company receives payments from the following sources for services rendered in our U.S. Facility: (i) commercial insurers; and (ii) individual patients and clients. As the period between the time of service and time of payment is typically one year or less, the Company elected the practical expedient under ASC 606-10-32-18 and does not adjust for the effects of a significant financing component.

 

The Company derives a significant portion of its revenue from other payors that receive discounts from established billing rates. The various managed care contracts under which these discounts must be calculated are complex, subject to interpretation and adjustment, and may include multiple reimbursement mechanisms for different types of services provided in the Company’s inpatient facilities and cost settlement provisions. Management estimates the transaction price on a payor-specific basis given its interpretation of the applicable regulations or contract terms. The services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from the Company’s estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.

 

Settlements with third-party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. In the opinion of management, adequate provision has been made for any adjustments and final settlements. However, there can be no assurance that any such adjustments and final settlements will not have a material effect on the Company’s financial condition or results of operations. The Company’s receivables were $681,072, $337,074 and $176,011 at September 30, 2023, December 31, 2022 and December 31, 2021, respectively. Management believes that these receivables are properly stated and are not likely to be settled for a significantly different amount.

 

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

 

i.

identify the contract with a customer;

 

ii.

identify the performance obligations in the contract;

 

iii.

determine the transaction price;

 

iv.

allocate the transaction price to performance obligations in the contract; and

  

v.

recognize revenue as the performance obligation is satisfied.

  

9

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.  Summary of significant accounting policies (continued)

  

m)  Income taxes

 

The Company accounts for income taxes under the provisions of ASC Topic 740, “Income Taxes”. Under ASC Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income taxes are provided using the liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax basis of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized.

  

ASC Topic 740 contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company recognizes interest and penalties accrued on unrecognized tax benefits within general and administrative expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in general and administrative expenses in the period that such determination is made. The tax returns for fiscal 2019, through 2022 are subject to audit or review by the US tax authorities, whereas fiscal 2011 through 2022 are subject to audit or review by the Canadian tax authority.

  

n)  Net income per Share

 

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). 

 

o)  Stock based compensation

 

Stock based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the employee’s requisite service period or vesting period on a straight-line basis. Share-based compensation expense recognized in the consolidated statements of operations for the nine months ended September 30, 2023 and 2022 is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. This estimate will be revised in subsequent periods if actual forfeitures differ from those estimates. We have no awards with performance conditions and no awards dependent on market conditions.

 

There were no stock -based compensation awards that vested during the nine months ended September 30, 2023 and 2022 and there was no stock based compensation recorded in the unaudited condensed consolidated financial statements.

 

10

 

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.  Summary of significant accounting policies (continued)

 

p)  Financial instruments risks

 

The Company is exposed to various risks through its financial instruments. The following analysis provides a measure of the Company’s risk exposure and concentrations at the balance sheet dates, September 30, 2023 and December 31, 2022.

 

i.

Credit risk

 

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Financial instruments that subject the Company to credit risk consist primarily of accounts receivable.

 

Credit risk associated with accounts receivable is mitigated as only a percentage of the revenue billed to health insurance companies is recognized as income until such time as the actual funds are collected. The revenue is concentrated amongst several health insurance companies located in the US.

 

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

 

ii.

Liquidity risk

 

Liquidity risk is the risk the Company will not be able to meet its financial obligations as they fall due. The Company is exposed to liquidity risk through its working capital deficiency of approximately $6.9 million, and an accumulated deficit of approximately $42.0 million. The Company is dependent upon the raising of additional capital in order to implement its business plan. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. In the opinion of management, liquidity risk is assessed as high, material and remains unchanged from that of the prior year.

 

iii.

Market risk

 

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

 

a.

Interest rate risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk on its convertible debt, short term loans, third party loans and government assistance loans as of September 30, 2023. In the opinion of management, interest rate risk is assessed as moderate.

 

b.

Currency risk

 

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is no longer subject to currency risk as it has disposed of its subsidiaries that operated in Canada.

 

c.

Other price risk

  

Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. In the opinion of management, the Company is not exposed to this risk and remains unchanged from the prior year.

   

11

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.  Summary of significant accounting policies (continued)

         

q)  Allowance for credit losses

 

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

 

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

 

r)  Recent accounting pronouncements

 

The Financial Accounting Standards Board (“FASB”) issued additional updates during the nine months ended September 30, 2023. None of these standards are either applicable to the Company or require adoption at a future date and none are expected to have a material impact on the Company’s consolidated financial statements upon adoption.

 

12

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

3.  Going concern

 

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with US GAAP applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations in the normal course of business. At September 30, 2023 the Company has a working capital deficiency of $6.9 million, and total liabilities in excess of assets in the amount of $5.5 million. Management believes that current available resources will not be sufficient to fund the Company’s planned expenditures over the next 12 months. These factors, individually and collectively indicate that a material uncertainty exists that raises substantial doubt about the Company's ability to continue as a going concern for one year from the date of issuance of these condensed interim consolidated financial statements. 

 

The Company will be dependent upon the raising of additional capital through placement of common shares, and/or debt financing in order to implement its business plan and generating sufficient revenue in excess of costs. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain geographical areas, or techniques that it might otherwise seek to retain. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. These unaudited condensed consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

 

4.   Disposal of subsidiary

 

On June 30, 2023, the Company entered into an exchange agreement with Leonite Capital, LLC, whereby it exchanged the 400,000 Series B shares with a value of $400,000 plus accrued dividends thereon of $61,184 for its entire shareholding in its property owning subsidiary, Cranberry Cove Holdings. The Series B shares were cancelled upon consummation of the transaction.

 

Immediately prior to the disposal of Cranberry Cove Holdings, the Company assumed the loan owed to a third party of $779,005 and the loan owing to Leon Developments of $1,973,837, Leon developments, a related party, owned by the Company’s CEO, Shawn Leon. In addition, the Company forgave the intercompany debt owing by Cranberry Cove Holdings of $4,566,848.

The assets and liabilities disposed of were as follows:

 

 Schedule of Other Assets and Liabilities Disposed

		Net book value
Assets
Other receivable		$	12,015
Property and equipment			2,420,499
			2,432,514
Liabilities
Accounts payable and accrued liabilities			(196,859	)
Government assistance loans			(45,317	)
Mortgage loan			(3,525,223	)
			(3,767,399	)
Disposal of subsidiary to related party – recorded as additional paid in capital		$	(1,334,885	)

 

The minority shareholders interest related to the Series A preferred stock in Cranberry Cove Holdings was recorded as a deemed contribution to the Company and credited to additional paid in capital, resulting in a total credit to additional paid in capital of $2,034,885.

 

The cancellation of the Series B shares, were owned by Leonite Capital, a related party, was deemed to be an extinguishment of debt by a related party and recorded as a credit to additional paid in capital of $461,184.

 

 

13

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

5.   Property and equipment

 

Acquisition and simultaneous disposition of property

 

On October 3, 2022 the Company entered into a purchase and sale agreement with Evernia Station Limited Partnership for the purchase of 950 Evernia Street, West Palm Beach, Florida (“950”), the property in which it operates its treatment center, for gross proceeds of $5,500,000. (“Purchase Agreement”). The closing was originally scheduled for February 1, 2023, however through a series of 6 addendums to the Purchase Agreement requiring the payment of a total $180,000 in extension fees, the Closing was extended to August 3, 2023.

 

On February 27, 2023 the Company signed a listing agreement with Stream Capital Partners listing 950 for sale at a price of $9,568,000 with the intention of identifying a buyer that would purchase and then potentially enter into a lease agreement with the Company.

 

On May 4, 2023 the Company signed a Letter of Intent with Pontus Net Lease Advisers, LLC to sell 950 for $8,500,000 and lease the property to the Company for a term of twenty years with two ten year extensions. On May 19, 2023, the Company signed a purchase and sale agreement with Pontus Net Lease Advisors to sell 950 for $8,500,000. On August 4, 2023, the Company completed both the purchase of 950 from Evernia Station Limited Partnership and the subsequent sale of 950 to Pontus Net Lease Advisors, LLC.

 

Simultaneously with the closing of the purchase and sale agreements, on August 4, 2023, the Company entered into a long term lease for 950 with an initial term of twenty years, and two ten year extension options. The lessor is Pontus EHC Palm Beach, LLC , a Delaware limited liability company and a portfolio company of Pontus Net Lease Advisors, LLC. The lease is absolutely net and the lease cost for the initial year is $748,000 paid monthly. The lease increases at a rate of 2.75% per year for a total term lease obligation of $19,595,653 over the initial twenty-year term. The Lease is personally guaranteed by the Company President and the guarantee may be released after 5 years based on certain financial and performance metrics being met.

 

The Company paid gross proceeds of $1,449,000 to Leonite Capital and Leonite Fund I, LP in settlement of all amounts outstanding to both entities, disclosed in notes 8 and 9 above. In addition, $65,450 was paid to Ed Blasiak to settle the convertible promissory note disclosed in note 8 above, $179,474 was paid to Joshua Bauman to settle the convertible promissory note disclosed in note 8 above, and $260,548 was paid to Mirage Realty, LLC to settle the senior secured promissory note, disclosed in note 9 above.

 

The details of the property purchase and subsequent sale are as follows:

Property purchase and subsequent

		Amount
Purchase of 950 Evernia Street property
Purchase price		$	5,500,000
Fees and expenses related to property purchase			109,276
Total acquisition cost			5,609,276
Proceeds on sale			8,500,000
Fees and expenses related to disposal of the property			(406,552	)
Net proceeds on disposal of property			8,093,448
Gain on sale of property		$	2,484,172

 

Property and equipment consists of the following:  

 Schedule of sale of property

				September 30, 2023												December 31, 2022
		Useful lives		Cost				Accumulated depreciation				Net book value				Net book value
Land		Indefinite		$	—			$	—			$	—			$	158,742
Property		25 years			—				—				—				2,310,448
Leasehold improvements		Life of lease			456,547				(76,676	)			379,871				373,320
Furniture and fittings		6 years			149,260				(41,234	)			108,026				92,941
Vehicles		5 years			55,949				(26,263	)			29,686				38,079
Computer equipment		3 years			7,525				(1,409	)			6,116				865
				$	669,281			$	(145,582	)		$	523,699			$	2,974,395

  

Depreciation expense for the three months ended September 30, 2023 and 2022 was $20,690 and $47,113, respectively, and for the nine months ended September 30, 2023 and 2022 was $119,773 and $134,366, respectively.

 

On June 30, 2023, the Company sold its interest in Cranberry Cove Holdings to Leonite Capital, which includes the land and property and the associated mortgage loan as disclosed in Note 10. Refer Note 4 above.

  

14

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

    

6.   Intangibles

 

Intangible assets consist of the following:

  Schedule of Intangible assets

		Useful lives		September 30, 2023												December 31, 2022
				Cost				Accumulated amortization				Net book value				Net book value
Health care Provider license		5 years		$	1,789,903			$	(805,456	)		$	984,447			$	1,252,932

 

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

 

The Company recorded $89,495 in amortization expense for finite-lived assets for each of the three months ended September 30, 2023 and 2022 and $268,485 for each of the nine months ended September 30, 2023 and 2022.

   

7.   Leases

 

The Company acquired ATHI on July 1, 2021, ATHI’s wholly owned subsidiary had entered into an operating lease agreement for certain real property located at 950 Evernia Street, West Palm Beach, Florida, with effect from February 1, 2019 for a period of three years, expiring on 1 February 2022. Under the terms of the lease agreement, the lease was extended during October 2021 for a further 5 year period until 1 February 2027.

 

As described in note 4 above, on October 3, 2022 the Company entered into a purchase and sale agreement with Evernia Station Limited Partnership for the purchase of 950 Evernia Street, West Palm Beach, Florida, the property in which it operates its treatment center, for gross proceeds of $5,500,000. On August 3, 2023, after 6 addendums to the agreement, the Company closed on the acquisition of the property. This resulted in the termination of the lease with Evernia station, resulting in the reversal of the remaining right-of-use asset of $1,226,080 and the associated operating lease liability of $1,328,803, which liability included $102,723 of accrued rental, which was offset against the rental expense.

 

On August 4, 2023, the Company entered into a long term lease for 950 Evernia Street, West Palm Beach, Florida with an initial term of twenty years, and two ten year extension options. The lessor is Pontus EHC Palm Beach, LLC , a Delaware limited liability company and a portfolio company of Pontus Net Lease Advisors, LLC. The lease is absolutely net and the lease cost for the initial year is $748,000 paid monthly. The lease increases at a rate of 2.75% per year for a total term lease obligation of $19,595,653 over the initial twenty-year term. The Lease is personally guaranteed by the Company President and the guarantee may be released after 5 years based on certain financial and performance metrics being met. Due to the initial lease term of twenty years, the Company is not certain that the extension periods will be exercised at this point in time and accordingly, these have been excluded from the present value of the minimum future lease payments.

 

To determine the present value of minimum future lease payments for operating leases at August 4, 2023, the Company was required to estimate a rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment (the "incremental borrowing rate" or "IBR").

 

The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, the Company used the Fannie Mae, in excess of $3,000,000 rate based on an 80% value to loan ratio, averaging the 15 and 30 year indicative rates, resulting in a rate of 7.70%. The Company determined that 7.70% per annum was an appropriate incremental borrowing rate to apply to its real-estate operating lease.

 

The present value of the future minimum lease payments was valued at $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

		September 30, 2023				December 31, 2022
Non-current assets
Right-of-use assets – finance leases, net of depreciation, included in Property and equipment		$	26,937			$	38,079
Right-of-use assets - operating leases, net of amortization		$	9,331,261			$	1,393,071

 

   

15

 

ETHEMA HEALTH CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7.  Leases (continued)

  

Lease costs consists of the following:  

 Schedule of finance and operating lease

		Nine months ended September 30,
		2023				2022
Finance lease cost:
Amortization of right-of-use assets		$	8,392			$	8,392
Interest expense on finance lease liabilities			1,504				1,880
			9,896				10,272
Operating lease cost		$	446,189			$	194,086
Lease cost		$	456,085			$	204,358

  

Other lease information: 

 Schedule of Other lease

		Nine months ended September 30,
		2023				2022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases		$