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Ethema Health (PK) News
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Quarterly Report (10-q)
November 14 2022 - 04:49PM
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☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-54748
ETHEMA HEALTH CORPORATION.
Colorado 84-1227328
950 Evernia Street
Address of Principal Executive Offices Zip Code
Registrant's Telephone Number, Including Area Code
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
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 14, 2022 was 3,729,053,805.
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, including those identified below, under Part II, Item 1A. "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q, and those identified under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on April 14, 2022. 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.
ETHEMA HEALTH CORPORATION
Item l. Financial Statements 1
Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021 1
Unaudited Condensed Consolidated Statements of Operations and Comprehensive (loss) Income for the three and nine months ended September 30, 2022 and 2021 2
Unaudited Condensed Consolidated Statements of Stockholders' Deficit for the three and nine months ended September 30, 2022 and 2021 3
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 4
Notes to the Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
Item 1A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Mine Safety Disclosures 36
Item 5. Other Information 36
Cash $ 561,083 $ 48,822
Accounts receivable, net 287,265 176,011
Prepaid expenses 44,155 29,731
Other current assets 67,692 17,235
Due on sale of subsidiary 4,731 5,115
Property and equipment, net 2,961,837 3,012,663
Intangible assets, net 1,342,428 1,610,913
Right of use assets, net 1,459,729 1,653,816
Total non-current assets 5,768,725 6,282,507
Total assets $ 6,728,920 $ 6,554,306
Accounts payable and accrued liabilities $ 351,421 $ 438,482
Taxes payable 763,456 658,836
Convertible loans, net of discounts 5,167,244 4,891,938
Short term loans 317,604 122,167
Mortgage loans 3,490,791 3,864,312
Government assistance loans 53,757 157,367
Operating lease liability, current portion 275,372 241,083
Finance lease liability, current portion 7,762 7,386
Receivables funding 375,903 —
Derivative liability 300,582 515,901
Accrued dividends on preferred stock 169,396 105,049
Related party payables 2,748,419 2,514,281
Total current liabilities 14,021,707 13,516,802
Government assistance loans 43,773 47,326
Deferred taxes 216,675 273,057
Third party loans 559,784 646,176
Operating lease liability, net of current portion 1,280,132 1,493,431
Finance lease liability, net of current portion 26,988 32,895
Total non-current liabilities 2,127,352 2,492,885
Preferred stock - Series B; $1.00 par value, 10,000,000 authorized, 400,000 shares outstanding at September 30, 2022 and December 31, 2021. 400,000 400,000
Stockholders' deficit
Preferred stock - Series A; $0.01 par value, 10,000,000 authorized, 4,000,000 shares outstanding at September 30, 2022 and December 31, 2021. 40,000 40,000
Common stock - $0.01 par value, 10,000,000,000 shares authorized; 3,729,053,805 and 3,579,053,805 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively. 37,290,539 35,790,539
Additional paid-in capital 22,791,350 22,791,350
Discount for shares issued below par value (27,363,367 ) (26,013,367 )
Accumulated deficit (44,062,177 ) (44,103,311 )
Stockholders' deficit attributable to Ethema Health Corporation stockholders (10,695,440 ) (10,678,257 )
Non-controlling interest 875,301 822,876
Total stockholders' deficit (9,820,139 ) (9,855,381 )
Total liabilities and stockholders' deficit $ 6,728,920 $ 6,554,306
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
AND COMPREHENSIVE INCOME (LOSS)
September 30, 2022 Three months ended
September 30, 2021 Nine months ended
Revenues $ 1,424,943 $ 866,432 $ 3,586,290 $ 1,053,383
General and administrative 289,073 245,546 760,533 254,012
Rent expense 114,717 87,874 314,256 90,386
Management fees 30,000 229,175 90,000 229,175
Professional fees 19,131 102,040 180,867 49,332
Salaries and wages 580,432 415,224 1,456,099 474,351
Depreciation and amortization 136,608 125,959 402,851 191,192
Total operating expenses 1,169,961 747,468 3,204,606 830,098
Operating Income 254,982 118,964 381,684 225,285
Other income (1,045 ) — 10,018 —
Forgiveness of government assistance loan 104,368 — 104,368 —
Penalty on convertible debt — — — (9,240 )
Loss on advance — — — (120,000 )
Fair value of warrants granted to convertible debt holders — — — (976,788 )
Interest expense (163,561 ) 29,052 (367,177 ) (708,936 )
Amortization of debt discount (87,704 ) (333,237 ) (551,738 ) (1,683,779 )
Derivative liability movement 45,156 1,510,046 175,593 (213,573 )
Foreign exchange movements 404,538 184,956 502,350 4,218
Net income (loss) before income taxes 556,734 1,509,781 255,098 (3,484,813 )
Income taxes (44,652 ) 18,794 (87,615 ) 18,794
Net income (loss) 512,082 1,528,575 167,483 (3,466,019 )
Net (income) loss attributable to non-controlling interest (28,787 ) 22,049 (52,425 ) 22,049
Net income (loss) allocable to Ethema Health Corporation Stockholders 483,295 1,550,624 115,058 (3,443,970 )
Preferred stock dividend (24,582 ) (24,858 ) (73,923 ) (74,937 )
Net income (loss) available to common shareholders of Ethema Health Corporation 458,713 1,525,766 41,135 (3,518,907 )
Accumulated other comprehensive loss
Foreign currency translation adjustment (169,965 ) (67,002 ) (208,317 ) (2,085 )
Total comprehensive income (loss) $ 288,748 $ 1,458,764 $ (167,182 ) $ (3,520,992 )
Loss 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 2,875,702,002 3,696,636,223 2,474,937,755
Diluted 4,276,544,380 3,996,020,553 4,244,126,798 2,474,937,755
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Series A Preferred Common
Shares Amount Shares Amount Additional Paid in Capital Discount to par value Comprehensive Income Accumulated Deficit Non-controlling shareholders interest Total
Balance as of December 31, 2021 4,000,000 $ 40,000 3,579,053,805 $ 35,70,539 $ 22,791,350 $ (26,013,367 ) $ 816,532 $ (44,103,311 ) $ 822,876 $ (9,855,381 )
Conversion of convertible notes — — 150,000,000 1,500,000 — (1,350,000 ) — — — 150,000
Foreign currency translation — — — — — — 34,517 — — 34,517
Net loss — — — — — — (174,447 ) 9,462 (164,985 )
Dividends accrued — — — — — — — (24,613 ) — (24,613 )
Balance as of March 31, 2022 4,000,000 $ 40,000 3,729,053,805 $ 37,290,539 $ 22,791,350 $ (27,363,367 ) $ 851,049 $ (44,302,371 ) $ 832,338 $ (9,860,462 )
Foreign currency translation — — — — — — (72,869 ) — — (72,869 )
Net loss — — — — — — — (193,790 ) 14,176 (179,614 )
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 ) — — (169,964 )
Net income — — — — — — — 483,294 28,787 512,081
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 )
Shares Amount Shares Amount Additional Paid in Capital Discount to par value Comprehensive Income Accumulated Deficit
Non-controlling
shareholders interest
Balance as of December 31, 2020 4,000,000 $ 40,000 2,027,085,665 $ 20,270,857 $ 23,344,885 $ (17,728,779 ) $ 806,719 $ (42,459,781 ) $ 700,000 $ (15,026,099 )
Fair value of warrants issued to convertible debt holders — — — — 1,207,214 — — — — 1,207,214
Warrants exercised — — 59,999,999 600,000 — (510,000 ) — — — 90,000
Conversion of convertible notes — — 175,763,466 1,757,635 97,000 (582,850 ) — — — 1,271,785
Net loss — — — — — — (2,368,156 ) — (2,368,156 )
Balance as of March 31, 2021 4,000,000 $ 40,000 2,262,849,130 $ 22,628,492 $ 24,649,099 $ (18,821,629 ) $ 836,325 $ (44,858,784 ) $ 700,000 $ (14,826,497 )
Fair value of warrants issued to convertible debt holders — — — — 677,700 — — — — 677,700
Conversion of convertible notes — — 296,313,108 2,963,133 — (1,603,511 ) — — — 1,359,622
Warrants exercised — — 178,272,725 1,782,727 — (1,201,210 ) — — — 581,517
Shares issued in consideration of acquisition — — 100,000,000 1,000,000 — 590,000 — — — 410,000
Fair value of non-controlling interest on acquisition of subsidiary — — — — — — — — 153,333 153,333
Net income — — — — — — 1,550,624 (22,049 ) 1,528,575
Balance as of September 30, 2021 4,000,000 $ 40,000 3,111,047,811 $ 31,110,478 $ 25,326,799 $ (24,137,786 ) $ 804,634 $ (45,978,688 ) $ 831,284 $ (12,003,279 )
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
2022 Nine months ended
Net income (loss) $ 167,482 $ (3,466,019 )
Adjustment to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 402,851 191,192
Forgiveness of government assistance loan (104,368 ) —
Non-cash interest accrual on escrow deposit 758 —
Non-cash interest converted to equity — 146,174
Fair value of warrants granted — 976,788
Amortization of debt discount 564,006 1,683,779
Derivative liability movements (175,593 ) 213,573
Non-cash deferred tax movements (56,382 ) (18,794 )
Amortization of right of use asset 194,086 59,028
Changes in operating assets and liabilities (net of assets acquired and liabilities assumed)
Accounts receivable (145,833 ) (11,821 )
Prepaid expenses and other current assets (14,891 ) 130,311
Accounts payable and accrued liabilities 211,771 184,746
Operating lease liability (179,009 ) (50,475 )
Taxes payable 154,234 37,430
Net cash provided by operating activities 1,019,112 75,912
Acquisition of subsidiary, net of cash of $60,324 — 10,324
Other investments — (450,537 )
Acquisition of property, plant and equipment (285,103 ) (31,214 )
Deposit paid (50,000 ) —
Net cash used in investing activities (335,103 ) (471,427 )
Repayment of mortgage loans (88,586 ) (87,225 )
Proceeds from convertible loans — 1,017,700
Repayment of convertible loans — (478,389 )
Proceeds from federal assistance loans — 173,240
Proceeds from short term loans 160,000 420,449
Repayment of short term loans (289,044 ) (404,338 )
Repayment of third party loans (77,953 ) —
Repayment of finance leases (5,531 ) —
Proceeds from receivables funding 440,000 —
Repayment of receivables funding (80,000 ) —
Proceeds from related party notes 334,299 —
Repayment of related party notes — (269,238 )
Net cash provided by financing activities 393,185 372,199
Effect of exchange rate on cash (564,936 ) (5,003 )
Net change in cash 512,261 (28,319 )
Beginning cash balance 48,822 90,500
Ending cash balance $ 561,083 $ 62,181
Supplemental cash flow information
Cash paid for interest $ 158,511 $ 363,251
Cash paid for income taxes $ — $ —
Non-cash investing and financing activities
Fair value of warrants issued $ — $ 1,884,914
Shares issued in consideration of acquisition $ — $ 410,000
Conversion of convertible notes $ 150,000 $ 3,359,274
Fair value of non-controlling interest $ — $ 153,333
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 though owned properties in Delray Beach and subsequently though leased properties in West Palm Beach, Florida. Since June 30, 2020, the Company has been actively involved in the management of a treatment center operated by Evernia in West Palm Beach Florida. On July 1, 2021, the Company closed on the acquisition of 75% of ATHI, which owns 100% of Evernia, once the probationary approval of a license was obtained from the Department of Children and Family Services of Florida. Evernia is the only active treatment center operated by the Company.
The Company also owns the real estate on which its Greenstone Muskoka clinic operated. The current tenant operates an addiction treatment center on these premises. The Company collects rent on this property, which is treated as a separate business segment.
2. Summary of significant accounting policies
The (a) unaudited condensed consolidated balance sheets as of September 30, 2022, which have been derived from the unaudited condensed consolidated financial statements, and as of December 31, 2021, which have been derived from audited consolidated financial statements, and (b) the unaudited condensed consolidated statements of operations, stockholders' deficit and cash flows of the Company, have been prepared in accordance with accounting principles generally accepted in the United States ("US GAAP") for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of results that may be expected for the year ending December 31, 2022. 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, 2021, filed with the Securities and Exchange Commission ("SEC") on April 14, 2022.
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 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 dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities issued in share-based payment arrangements, determining the fair value of assets acquired, allocation of purchase price, impairment of long-lived assets, the collectability of receivables, leasing arrangements, convertible debentures, contingencies and the value of deferred taxes and related valuation allowances. Certain estimates, including evaluating the collectability of receivables and advances, could be affected by external conditions, including those unique to the Company's industry and general economic conditions. It is possible that these external factors could have an effect on the Company's estimates that could cause actual results to differ from the Company's estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.
2. Summary of significant accounting policies (continued)
b) Principals of consolidation and foreign currency translation
The accompanying condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. ATHI and its wholly owned subsidiary Evernia, have been consolidated since July 1, 2021. 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.
● Non-monetary, non-current and equity at historical rates.
● Revenue and expense items and cash flows at the average rate of exchange prevailing during the period.
Adjustments arising from such translations are deferred until realization and are included as a separate component of stockholders' deficit as a component of accumulated other comprehensive income or loss. Therefore, translation adjustments are not included in determining net income (loss) but reported as other comprehensive income (loss).
For foreign currency transactions, the Company translates these amounts to the Company's functional currency at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time actual payment is made, a foreign exchange transaction gain or loss results which is included in determining net income for the period.
The relevant translation rates are as follows: For the nine months ended September 30, 2022, a closing rate of CDN$1.0000 equals US$0.7295 and an average exchange rate of CDN$1.0000 equals US$0.7795. For the nine months ended September 30, 2021, a closing rate of CAD$1.0000 equals US$0.7849 and an average exchange rate of CAD$1.0000 equals US$0.78937.
c) Business Combinations
The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed 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 institutions in the USA and Canada.
The Company primarily places cash balances in the USA with high-credit quality financial institutions located in the United States which are insured by the Federal Deposit Insurance Corporation up to a limit of $250,000 per institution, in Canada which are insured by the Canadian Deposit Insurance Corporation up to a limit of CDN$100,000 per institution.
e) Accounts receivable
Accounts receivable primarily consists of amounts due from third-party payors (non-governmental) and private pay patients and is recorded net of allowances for doubtful accounts and contractual discounts. The Company's ability to collect outstanding receivables is critical to its results of operations and cash flows. Accordingly, accounts receivable reported in the Company's condensed consolidated financial statements are recorded at the net amount expected to be received. The Company's primary collection risks are (i) the risk of overestimating net revenues at the time of billing that may result in the Company receiving less than the recorded receivable, (ii) the risk of non-payment as a result of commercial insurance companies denying claims, (iii) the risk that patients will fail to remit insurance payments to the Company when the commercial insurance company pays out-of-network claims directly to the patient, (iv) resource and capacity constraints that may prevent the Company from handling the volume of billing and collection issues in a timely manner, (v) the risk that patients do not pay the Company for their self-pay balances (including co-pays, deductibles and any portion of the claim not covered by insurance) and (vi) the risk of non-payment from uninsured patients.
f) Allowance for Doubtful Accounts, Contractual and Other Discounts
The Company derives the majority of its revenues from commercial payors at in-network rates. Management estimates the allowance for contractual and other discounts based on its historical collection experience. The services authorized and provided and related reimbursement are often subject to interpretation and negotiation that could result in payments that differ from the Company's estimates. The Company's allowance for doubtful accounts is based on historical experience, but management also takes into consideration the age of accounts, creditworthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. An account is written off only after the Company has pursued collection efforts or otherwise determines an account to be uncollectible. Uncollectible balances are written-off against the allowance. Recoveries of previously written-off balances are credited to income when the recoveries are made.
g) Property and equipment
Property and equipment is recorded at cost. Depreciation is calculated on the straight line basis over the estimated life of the asset.
h) Intangible assets
Intangible assets are stated at acquisition cost less accumulated amortization, if applicable, less any adjustments for impairment losses.
Amortization is charged on a straight-line basis over the estimated remaining useful lives of the individual intangibles. Where intangibles are deemed to be impaired the Company recognizes an impairment loss measured as the difference between the estimated fair value of the intangible and its book value.
Licenses to provide substance abuse rehabilitation services are amortized over the expected life of the contract, including any anticipated renewals. The Company expects its licenses to remain in operation for a period of five years.
i) Leases
The Company accounts for leases in terms of ASC 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. Equipment recorded under finance leases is amortized on the same basis as described above. Operating leases are recognized on the balance sheet as a lease liability with a corresponding right of use asset for all leases with a term that is more than twelve months. Payments under operating leases are expensed as incurred.
j) Derivatives
The Company evaluates embedded conversion features within convertible debt under ASC 815 "Derivatives and Hedging" to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. The Company uses a Black Scholes Option Pricing model to estimate the fair value of convertible debt conversion features at the end of each applicable reporting period. Changes in the fair value of these derivatives during each reporting period are included in the condensed consolidated statements of operations. Inputs into the Black Scholes Option Pricing model require estimates, including such items as estimated volatility of the Company's stock, risk free interest rate and the estimated life of the financial instruments being fair valued.
If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 "Debt with Conversion and Other Options" for consideration of any beneficial conversion feature.
k) Financial instruments
The Company initially measures its financial assets and liabilities at fair value, except for certain non-arm's length transactions. The Company subsequently measures all its financial assets and financial liabilities at amortized cost.
Financial assets measured at amortized cost include cash and accounts receivable.
Financial liabilities measured at amortized cost include bank indebtedness, accounts payable and accrued liabilities, harmonized sales tax payable, withholding taxes payable, convertible notes payable, loans payable and related party notes.
Financial assets measured at cost are tested for impairment when there are indicators of impairment. The amount of the write-down is recognized in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income. The Company recognizes its transaction costs in net income in the period incurred. However, financial instruments that will not be subsequently measured at fair value are adjusted by the transaction costs that are directly attributable to their origination, issuance or assumption.
FASB ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 establishes a three tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
● Level 1. Observable inputs such as quoted prices in active markets;
● Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
● Level 3. Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions.
The Company measures its convertible debt and derivative liabilities associated therewith at fair value. These liabilities are revalued periodically and the resultant gain or loss is realized through the Statement of Operations and Comprehensive Loss.
l) Related parties
Parties are considered to be related to the Company if the parties directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions are recorded at fair value of the goods or services exchanged.
m) Revenue Recognition
ASC 606 requires companies to exercise more judgment and recognize revenue using a five-step process.
The Company's provision for doubtful accounts are recorded as a direct reduction to revenue instead of being presented as a separate line item on the consolidated statements of operations and comprehensive loss.
As our performance obligations relate to contracts with a duration of one year or less, the Company elected the optional exemption in ASC 606-10-50-14(a). Therefore, the Company is not required to disclose the transaction price for the remaining performance obligations at the end of the reporting period or when the Company expects to recognize the revenue. The Company has minimal unsatisfied performance obligations at the end of the reporting period as our patients typically are under no obligation to remain admitted in our facilities.
The Company receives payments from the following sources for services rendered in our U.S. Facility: (i) commercial insurers; and (ii) individual patients and clients. As the period between the time of service and time of payment is typically one year or less, the Company elected the practical expedient under ASC 606-10-32-18 and does not adjust for the effects of a significant financing component.
The Company derives a significant portion of its revenue from other payors that receive discounts from established billing rates. The various managed care contracts under which these discounts must be calculated are complex, subject to interpretation and adjustment, and may include multiple reimbursement mechanisms for different types of services provided in the Company's inpatient facilities and cost settlement provisions. Management estimates the transaction price on a payor-specific basis given its interpretation of the applicable regulations or contract terms. The services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from the Company's estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.
Settlements with third-party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. In the opinion of management, adequate provision has been made for any adjustments and final settlements. However, there can be no assurance that any such adjustments and final settlements will not have a material effect on the Company's financial condition or results of operations. The Company's receivables were $287,265 and $176,011 at September 30, 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.
n) Income taxes
The Company accounts for income taxes under the provisions of ASC Topic 740, "Income Taxes". Under ASC Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income taxes are provided using the liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax basis of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of, the deferred tax assets will not be realized.
ASC Topic 740 contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company recognizes interest and penalties accrued on unrecognized tax benefits within general and administrative expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in general and administrative expenses in the period that such determination is made.
o) Net income (loss) per Share
Basic net income (loss) per share is computed on the basis of the weighted average number of common stock outstanding during the period.
Diluted net income (loss) per share is computed on the basis of the weighted average number of common stock and common stock equivalents outstanding. Dilutive securities having an anti-dilutive effect on diluted net income (loss) per share are excluded from the calculation.
Dilution is computed by applying the treasury stock method for options and warrants. Under this method, "in-the money" options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Dilution is computed by applying the if-converted method for convertible preferred stocks. Under this method, convertible preferred stock is assumed to be converted at the beginning of the period (or at the time of issuance, if later), and preferred dividends (if any) will be added back to determine income applicable to common stock. The shares issuable upon conversion will be added to weighted average number of common stock outstanding. Conversion will be assumed only if it reduces earnings per share (or increases loss per share).
p) Stock based compensation
Stock based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the employee's requisite service period or vesting period on a straight-line basis. Share-based compensation expense recognized in the consolidated statements of operations 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.
q) Financial instruments Risks
The Company is exposed to various risks through its financial instruments. The following analysis provides a measure of the Company's risk exposure and concentrations at September 30, 2022 and December 31, 2021.
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 $13.1milion, which includes derivative liabilities of $0.3 million , and an accumulated deficit of $44.1 million. The Company is dependent upon the raising of additional capital in order to implement its business plan. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company's financial condition. In the opinion of management, liquidity risk is assessed as high, material and remains unchanged from that of the prior year.
iii. Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises of three types of risk: interest rate risk, currency risk, and other price risk. The Company is exposed to interest rate risk and currency risk.
a. Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk on its convertible debt, mortgage loans, short term loans, third party loans and government assistance loans as of September 30, 2022. In the opinion of management, interest rate risk is assessed as moderate.
b. Currency risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is subject to currency risk as it has subsidiaries that operate in Canada and are subject to fluctuations in the Canadian dollar. A substantial portion of the Company's financial assets and liabilities are denominated in Canadian dollars. Based on the net exposures at September 30, 2022, a 5% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an approximate $26,666 increase or decrease in the Company's after tax net income from operations. The Company has not entered into any hedging agreements to mitigate this risk. In the opinion of management, currency risk is assessed as low, material and remains unchanged from that of the prior year.
q) Financial instruments Risks (continued)
iii. Market risk (continued)
c. Other price risk
Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. In the opinion of management, the Company is not exposed to this risk and remains unchanged from the prior year.
r) Recent accounting pronouncements
In August 2020, the Financial Accounting Standard board ("FASB") issued ASU 2020-06 "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06"). The update simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and limiting the number of embedded conversion features separately recognized from the primary contract. The guidance also includes targeted improvements to the disclosures for convertible instruments and earnings per share. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is assessing the impact, if any, on the adoption of this update on the Company's consolidated financial statements.
The FASB issued several additional updates during the period, none of these standards are either applicable to the Company or require adoption at a future date and none are expected to have a material impact on the consolidated financial statements upon adoption.
s) Comparative and prior period disclosures
The comparative and prior period disclosed amounts presented in these unaudited condensed consolidated financial statements have been reclassified where necessary to conform to the presentation used in the current period.
3. Going concern
The Company's 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, 2022 the Company has a working capital deficiency of $13.1 million, including derivative liabilities of $0.3 million and total liabilities in excess of assets in the amount of $9.8million. Management believes that there is substantial doubt that current available resources will be sufficient to fund the Company's planned expenditures over the next 12 months. Accordingly, the Company will be dependent upon the raising of additional capital through placement of common shares, and/or debt financing in order to implement its business plan and generating sufficient revenue in excess of costs. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain geographical areas, or techniques that it might otherwise seek to retain. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company's financial condition. These 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. Acquisition of subsidiaries
On June 30, 2020, the Company entered into an 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 in turn owns 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 purchaser to Evernia in the amount of $500,000. As of the date of acquisition, July 1, 2021, the Company had advanced Evernia approximately $1,140,985.
The Company originally had a 180 day option, from the advancement of the first tranche to Evernia, to purchase an additional 9% of ATHI for a purchase consideration of $50,000.
On April 28, 2021, the Stock Purchase Agreement date June 30, 2020 between the Company and the Q Global Trust, and ATHI was amended whereby the option to purchase an additional 9% of ATHI for $50,000 was amended to purchase an additional 24%, an increase of 15% over the prior option, for 100,000,000 shares of common stock. The remaining condition to closing, the receipt of approval for the change of ownership of the license from the Department of Children and Family Services of Florida, was satisfied by the probationary approval, which was received on June 30, 2021. The Company exercised the option and issued the 100,000,000 shares of common stock and paid $42,500 of the $50,000 due to the Seller, in terms of the amended agreement as of the date of this report. In addition to the consideration paid for the additional equity the Company agreed to execute a promissory note for the payment of any unpaid management fees at the time of Closing such that the unpaid fees shall be paid pari-passu with the repayment of the Loan Agreement and Seller agrees that any funds advanced to the Company by Behavioural Health Holdings, LLC shall be forgiven and considered contributed capital to ATHI. The Company agrees to advance up to $1,100,000 under the Loan Agreement for the funding of the operations of ATHI as required without any contribution required by the Seller. As at the date of acquisition, July 1, 2021, the Company had advanced Evernia $1,140,985, subsequent to July 1, 2021 to September 30, 2022, Evernia had repaid $294,598. The balance owing to the company at September 30, 2022 was $846,387.
Pursuant to the terms of the Purchase Agreement, the consideration paid for 75% of the equity of ATHI was $50,000 in cash plus the issuance of 100,000,000 shares of the Company's common stock with a market value of $410,000 on the date of acquisition.
In terms of the agreement, the preliminary purchase price was allocated to the fair market value of tangible and intangible assets acquired and liabilities assumed as follows:
Schedule of assets acquired and liabilities assumed
Cash $ 50,000
100,000,000 shares of common stock at fair market value 410,000
Total purchase consideration $ 460,000
Recognized amounts of identifiable assets acquired and liabilities assumed
Other Current assets 198,133
Property, plant and equipment 130,234
Right of use asset 1,772,560
Intangibles 1,789,903
Less: liabilities assumed
Current liabilities assumed (50,040 )
Intercompany advance (1,140,985 )
Operating lease liabilities assumed (1,836,151 )
Imputed Deferred taxation on identifiable intangible acquired (310,645 )
Total liabilities (3,337,821 )
Net identifiable assets acquired and liabilities assumed 613,333
Fair value of non-controlling interest (153,333 )
Total $ 460,000
4. Acquisition of subsidiaries (continued)
The amount of revenue and earnings include in the Company's condensed consolidated statements of operations and comprehensive income (loss) for the nine months ended September 30, 2022 and the revenue and earnings of the combined entity had the acquisition date been January 1, 2021.
Schedule of revenue and earnings
Revenue Earnings
Actual from January 1, 2022 to September 30, 2022 $ 3,263,987 $ 157,276
2021 Supplemental pro forma from January 1, 2021 to September 30, 2021 $ 2,135,092 $ (3,838,726 )
The 2021 Supplemental pro forma earnings information was adjusted to account for amortization of intangibles on acquisition of $178,990.
5. Due on sale of business
On February 14, 2017, the Company sold its Canadian Rehab Clinic for gross proceeds of CDN$10,000,000, of which CDN$1,500,000 had been retained in an escrow account for a period of up to two years in order to guarantee the warranties provided by the Company in terms of the APA. As of September 30, 2022, CDN$1,055,042 of the escrow had been refunded to the Company and CDN$461,318 had been used to affect building improvements to the premises owned by CCH, for a total reduction of CDN$1,516,360. The remaining escrow balance was CDN$6,485 (approximately US$ 4,731), and has not been refunded as yet.
6. Property and equipment
Property and equipment consists of the following:
Schedule of sale of property
2022 December 31, 2021
Cost Accumulated depreciation Net book value Net book value
Land $ 156,854 $ — $ 156,854 $ 168,585
Property 2,967,203 (654,558 ) 2,312,645 2,596,590
Leasehold improvements 396,173 (33,260 ) 362,913 153,730
Furniture and fittings 106,644 (19,081 ) 87,563 42,140
Vehicles 55,949 (15,073 ) 40,876 49,268
Computer equipment 1,450 (464 ) 986 1,350
$ 3,684,273 $ (722,436 ) $ 2,961,837 $ 3,012,663
Depreciation expense for the nine months ended September 30, 2022 and 2021 was $134,366 and $101,696, respectively.
On July 18, 2022, the Company, through its subsidiary Evernia, entered into an option and Memorandum of Understanding Purchase, Sale and Financing Agreement, with the Evernia landlord, Evernia Station Limited Partnership ("Seller"), whereby the Company paid $50,000 for the option to acquire the building on September 30, 2022 for $5,500,000, with an initial deposit of $1,500,000, which was subsequently renegotiated to $350,000 and paid on October 3, 2022, the $50,000 option price to be applied to the deposit. The expected closing is expected to be February 1, 2023. The current rental of $27,783 was reduced to $20,206 on payment of the option price of $50,000. The Seller will provide financing of $4,000,000 at a coupon of 6.36% per annum, with interest only payments of $21,217 per month. The term of the seller funding will be one year, due and payable on January 31, 2024.
7. Intangibles
Intangible assets consist of the Company's estimate of the fair value of intangibles acquired with the acquisition of ATHI disclosed in Note 4 above. 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
Cost Accumulated amortization Net book value Net book value
Health care Provider license $ 1,789,903 $ (447,475 ) $ 1,342,428 $ 1,610,913
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 $268,485 and $89,495 in amortization expense for finite-lived assets for the nine months ended September 30, 2022 and 2021, respectively.
8. Leases
On April 25, 2022, the Company entered into a real property lease for 5 apartments located at 921 Fern Street, West Palm Beach, Florida. The lease commenced on May 2, 2022 for a twelve month period, terminating on May 15, 2023. The Company applied the practical expedient whereby operating leases with a duration of twelve months or less are expensed as incurred
Right of use assets are included in the condensed consolidated balance sheet are as follows:
Schedule of Right of use assets
Right-of-use assets – finance leases, net of depreciation, included in Property and equipment $ 40,876 $ 49,268
Right-of-use assets - operating leases, net of amortization $ 1,459,729 $ 1,653,816
Lease costs consists of the following:
Schedule of Lease costs
Nine months ended September 30,
Finance lease cost:
Amortization of right-of-use assets $ 8,392 $ —
Interest expense on finance lease liabilities 1,880 —
Finance lease cost 10,272 —
Operating lease cost 194,086 90,386
Lease cost $ 204,358 $ 90,386
8. Leases (continued)
Other lease information:
Schedule of Other lease
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases $ (5,531 ) $ —
Operating cash flows from operating leases (248,724 ) (87,934 )
$ (254,255 ) $ (87,934 )
Weighted average remaining lease term – finance leases 4 years and one month —
Weighted average remaining lease term – operating leases 4 years and 4 months —
Discount rate – finance leases 6.61 % —
Discount rate – operating leases 4.64 % —
Maturity of Leases
Finance lease liability
The amount of future minimum lease payments under finance leases is as follows:
Schedule of Finance lease liability
Remainder of 2022 $ 2,457
Total undiscounted minimum future lease payments 39,846
Imputed interest (5,095 )
Total finance lease liability $ 34,751
Disclosed as:
Current portion $ 7,762
Non-Current portion 26,989
Lease liability $ 34,751
Operating lease liability
The amount of future minimum lease payments under operating leases are as follows:
Schedule of Operating lease liability
Remainder of 2022 $ 83,349
2023 348,677
Total undiscounted minimum future lease payments 1,619,959
Imputed interest (64,455 )
Total operating lease liability $ 1,555,504
Current portion $ 275,372
Non-Current portion 1,280,132
Lease liability $ 1,555,504
9. Taxes Payable
The taxes payable consist of:
● A payroll tax liability of $133,209 (CDN$182,589) in Greenstone Muskoka which has not been settled as yet.
● A GST/HST tax payable of $123,471 (CDN$169,242).
Schedule of taxation payable
Payroll taxes $ 133,209 $ 144,020
HST/GST payable 123,471 123,134
Income tax payable 506,776 391,682
Taxes Payable $ 763,456 $ 658,836
10. Short-term Convertible Notes
The short-term convertible notes consist of the following:
Schedule of short-term convertible notes
Interest rate Maturity Date Principal Interest Debt Discount
Leonite Capital, LLC 12.0 % On Demand $ 129,379 $ 51,457 $ — $ 180,836 $ 315,579
Variable March 1, 2023 745,375 26,803 (86,905 ) 685,273 —
Auctus Fund, LLC 0.0 % On Demand 80,000 — — 80,000 100,000
Labrys Fund, LP 12.0 % On Demand — 8,826 — 8,826 8,826
11.0 % — — — — — 354,504
Ed Blasiak 6.5 % On Demand 55,000 7,408 — 62,408 59,697
Joshua Bauman 11.0 % October 21, 2022 150,000 15,551 (8,630 ) 156,921 32,387
Geneva Roth Remark Holdings, Inc. 8.0 % October 1, 2022 — — — — 24,384
Series N convertible notes 6.0 % On Demand 3,229,000 763,980 — 3,992,980 3,848,073
$ 4,388,754 $ 874,025 $ (95,535 ) $ 5,167,244 $ 4,891,938
10. Short-term Convertible Notes (continued)
Leonite Capital, LLC
On July 12, 2020, the Company entered into a Senior Secured Convertible Note agreement with Leonite for $440,000 with an original issue discount of $40,000 for gross proceeds of $400,000, the initial tranche advanced will be for cash of $200,000 plus the OID of $20,000, the remaining advances will be at the discretion of the Leonite. The loan bears interest at 6.5% per annum and matures on June 12, 2021. The Company is required to make monthly payments of the accrued interest on the advances made. The note is convertible into common shares at the option of the holder at $0.10 per share, or 80% multiplied by the price per share paid in subsequent financings or after a six month period from the effective date at 60% of the lowest trading price during the preceding 21 consecutive trading days. The note has both conversion price protection and anti-dilution protection provisions.
On February 28, 2022, in terms of a conversion notice, Leonite converted the principal sum of $149,250 of the Leonite Note into 150,000,000 shares of common stock at a conversion price of $0.0010 per share.
Leonite Fund I, LP
Effective June 1, 2022, The Company entered into a Note Exchange Agreement whereby the convertible promissory notes entered into with Labrys Fund LP on May 7, 2021, with. A principal outstanding of $341,000, and on June 2, 2021 with a principal outstanding of $230,000 and accrued interest thereon of $25,300, were exchanged for a new Senior Secured Convertible Promissory note in the principal amount of $745,375, including an OID of $149,075. The Note matures on March 1, 2023, and bears 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, if prepaid prior to October 3, 2022, the Company will receive a credit of $150,000 towards the repayment of the note, if the note is prepaid after October 3, 2022, the prepayment penalty shall be 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.
Auctus Fund, LLC
On August 7 2019, the Company, entered into a Securities Purchase Agreement with Auctus Fund, LLC, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $225,000. The Note had a maturity date of May 7, 2020 and bore interest at the rate of ten percent per annum from the date on which the Note was issued until the same became due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company had the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of Auctus Fund, LLC during the period beginning on the date that is 180 days following the issue date into shares of the Company's common stock at a conversion price equal to 60% of the lowest closing bid price of the Company's common stock for the thirty trading days prior to conversion.
On June 15, 2020, The Company entered into an amended agreement with Auctus whereby the Company agreed to discharge the principal amount of the note by nine equal monthly installments of $25,000 commencing in October 2020. During the year ended December 31, 2021, the Company repaid Auctus the principal sum of $50,000.
During March 2022, the Company paid $20,000 of principal on the convertible note, thereby reducing the principal outstanding to $80,000. The note matured May 7, 2020, Auctus Fund LLC has not declared a default and we are in constant discussion with the lender on settling the note.
Labrys Fund, LP
On November 30, 2020, the Company, entered into a Securities Purchase Agreement with Labrys, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $275,000 for net proceeds of $239,050 after an original issue discount of $27,500 and certain legal expenses. The Note has a maturity date of November 30, 2021 and bears interest at the rate of twelve percent per annum from the date on which the Note was issued until the same became due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note was convertible at any time and from time to time at the election of Labrys during the period beginning on the date that is 180 days following the issue date into shares of the Company's common stock at a conversion price equal to 60% of the lowest closing bid price of the Company's common stock for the thirty trading days prior to conversion.
On May 3, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $57,000 including interest thereon of $33,000 into 100,000,000 shares of common stock.
On July 7, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $100,800 into 112,000,000 shares of common stock.
On September 28, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $54,000 into 60,000,000 shares of common stock.
On October 8, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $55,800 into 62,000,000 shares of common stock.
On October 15, 2021, in terms of a conversion notice received by the company, Labrys converted the aggregate principal sum of $7,400 into 8,222,222 shares of common stock. The Company has $8,826 of interest outstanding under the convertible promissory note.
On May 7, 2021, the Company, entered into a Securities Purchase Agreement with Labrys, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $550,000 for net proceeds of $477,700 after an original issue discount of $55,000 and certain legal expenses of $17,300. The Note has a maturity date of May 7, 2022 and bears interest at the rate of eleven percent per annum from the date on which the Note was issued until the same became due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note was convertible at any time and from time to time at the election of Labrys during the period beginning on the date that is 180 days following the issue date into shares of the Company's common stock at a conversion price equal to $0.005, subject to anti-dilution adjustments.
On November 23, 2021, in terms of a conversion notice received by the Company, Labrys converted the aggregate principal sum of $6,329 and interest of $60,500 into 75,000,000 shares of common stock.
Effective December 29, 2021, the Company entered into a modification of the convertible note agreement with Labrys whereby the May 7, 2021 note were amended as follows:
· The Maturity date of the note was extended to May 31, 2022.
· The triggering of the dilutive event on October 25, 2021 which reduced the conversion price of the convertible note to $0.001 per share, will not be utilized as long as any events of default under the note are not triggered.
· The Company agreed to make monthly payments under the note totaling $536,000 between January 10, and May 31, 2022.
During the nine months ended September 30, 2022, the Company repaid $195,000 of the outstanding principal of the convertible note, effective June 1, 2022, Labrys sold the note to Leonite Fund I, LP, who was issued a new senior secured convertible promissory note, see above.
Labrys Fund, LP (continued)
On June 2, 2021, the Company, entered into a Securities Purchase Agreement with Labrys, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $230,000 for net proceeds of $200,000 after an original issue discount of $23,000 and certain legal expenses of $7,000. The Note has a maturity date of June 2, 2022 and bears interest at the rate of eleven percent per annum from the date on which the Note was issued until the same became due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the Note in terms of agreement. The outstanding principal amount of the Note was convertible at any time and from time to time at the election of Labrys during the period beginning on the date that is 180 days following the issue date into shares of the Company's common stock at a conversion price equal to $0.004, subject to anti-dilution adjustments.
· The Maturity date of the note was extended to June 30, 2022.
· The Company agreed to make two equal payments of $127,650 on the note on May 31, and June 30, 2022.
Effective June 1, 2022, Labrys sold the note to Leonite Fund I, LP, who was issued a new senior secured convertible promissory note, see above.
Ed Blasiak
On September 14, 2020, the Company entered into a Securities Purchase Agreement with Ed Blasiak ("Blasiak"), pursuant to which the Company issued a senior secured convertible promissory note in the aggregate principal amount of $55,000, including an original issue discount of $5,000. The note bears interest at 6.5% per annum and matures on September 14, 2021. The note is senior to any future borrowings and commencing on October 1, 2020 the Company will make monthly payments of the accrued interest under the note. The note may be prepaid at certain prepayment penalties and is convertible into shares of common stock at a conversion price at the option of the holder at $0.001 per share, adjusted for anti-dilution provisions; or 80% of the price per share of subsequent equity financings or; after six months 60% of the lowest trading price during the preceding six month period.
The note has matured and is in default, Ed Blasiak has not declared a default under the note and we are in communication with Mr. Blasiak on our ability to repay the note.
On September 14, 2020, the Company entered into a Securities Purchase Agreement with Bauman, pursuant to which the Company issued a senior secured convertible promissory note in the aggregate principal amount of $110,000, including an original issue discount of $10,000. The note bears interest at 6.5% per annum and matures on September 14, 2021. The note is senior to any future borrowings and commencing on October 1, 2020 the Company will make monthly payments of the accrued interest under the note. The note may be prepaid at certain prepayment penalties and is convertible into shares of common stock at a conversion price at the option of the holder at $0.001 per share, adjusted for anti-dilution provisions; or 80% of the price per share of subsequent equity financings or; after six months 60% of the lowest trading price during the preceding six month period.
On June 8, 2021, in terms of a conversion notice received by the Company, Bauman converted the aggregate principal sum of $100,000 including interest thereon of $5,563 into 106,313,288 shares of common stock.
On October 25, 2021, in terms of a conversion notice received by the Company, Bauman converted the aggregate principal sum of $37,500 including interest thereon of $1,155 into 39,405,310 shares of common stock, thereby extinguishing the note.
Joshua Bauman (continued)
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 matures on October 21, 2022. The note may be prepaid at certain prepayment penalties and is convertible into shares of common stock at a conversion price at the option of the holder at $0.001 per share, adjusted for anti-dilution provisions.
Geneva Roth Remark Holdings, Inc
On October 1, 2021, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $95,200, for net proceeds of $85,000 before the payment of legal fees and origination fees amounting to $3,750. The note has a maturity date of October 1, 2022 and bears interest at the rate of 8.0% per annum, due immediately on the issuance date of the note. The outstanding principal amount of the note is payable in nine monthly payments of $11,424 commencing on November 15, 2021. The note is convertible into shares of common stock upon an event of default at the election of the purchaser. The conversion price is 75% of the lowest trading price for the preceding five days prior to the date of conversion.
The note has been repaid as of September 20, 2022.
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.
11. Short term loans
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.
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. The Note had a maturity date of April 1, 2022. This note has not been repaid at the date of this report and no default has been declared.
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. The Note had a maturity date of June 17, 2022 and bears interest at the rate of zero percent per annum from the date on which the Note was issued until the same became due and payable.
We are in discussions with Leonite on the repayment of these notes.
12. Mortgage loans
Mortgage loans is disclosed as follows:
Schedule of mortgage loans
rate Maturity
date Principal
Outstanding Accrued
interest September 30,
Cranberry Cove Holdings, Ltd.
Pace Mortgage 4.2 % July 19, 2022 $ 3,486,377 $ 4,414 $ 3,490,791 $ 3,864,312
Disclosed as follows:
Short-term portion $ 3,490,791 $ 3,864,312
On July 19, 2017, CCH, a wholly owned subsidiary, closed on a loan agreement in the principal amount of CDN$5,500,000. The loan is secured by a first mortgage on the premises owned by CCH located at 3571 Muskoka Road 169, Bala, Ontario.
The loan bears interest at the fixed rate of 4.2% with a 5-year primary term and a 25-year amortization. The Company has guaranteed the loan and the Company's chief executive officer and controlling shareholder also has personally guaranteed the Loan. CCH and the Company have granted the Lender a general security interest in its assets to secure repayment of the Loan. The loan is amortized with monthly installments of CDN $29,531.
The loan matured on July 19, 2022, and is currently being renegotiated with the lender, no new terms have been presented to the Company as yet.
13. Government assistance loans
On December 1, 2020, CCH was granted a Covid-19 related government assistance loan in the aggregate principal amount of CDN$ 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.
On January 12, 2021, CCH received a further CDN$ 20,000 Covid-19 related government assistance loan. The loan is interest free and if repaid by December 31, 2022, CDN$ 10,000 is forgivable.
On May 3, 2021, the Company 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. No payments have been made to date and the Company expects the loan to be forgiven, therefore no interest has been accrued.
On September 21, 2022, the Company received partial forgiveness of the government assistance loan of $104,368, the balance of the loan plus accrued interest is due and payable. As of September 30, 2022, the balance outstanding, including interest thereon was $53,757.
14. Receivables Funding
On May 31, 2022 the Company, through its 75% held subsidiary, Evernia Health Center, LLC entered into a Receivables Sale Agreement with Itria Ventures LLC ("Itria"), whereby $240,000 the Receivables of Evernia were sold to Itria, for gross proceeds of $200,000. The Company also incurred fees of $4,500, resulting in net proceeds of $195,500. The Company is obliged to pay 6.5% of the receivables until the amount of $240,000 is paid in full, with periodic repayments of $5,000 per week. The guarantor of the funding is a minority shareholder in ATHI.
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.
15. Third party loans
On April 12, 2019, Eileen Greene, a related party assigned CDN$1,000,000 of the amount owed by the Company to her, to a third party. The loan bears interest at 12% per annum which the Company agreed to pay.
During the current period the Company repaid CDN$100,000 (approximately $77,953).
16. Derivative liability
The short-term convertible notes issued to convertible note holders disclosed in note 10 above, have variable priced conversion rights with no fixed floor price and will reprice dependent on the share price performance over varying periods of time. This gives rise to a derivative financial liability, which was initially valued at inception of the convertible notes at $1,959,959 using a Black-Scholes valuation model.
The derivative liability is marked-to-market on a quarterly basis. As of September 30, 2022, the derivative liability was valued at $300,582.
The following assumptions were used in the Black-Scholes valuation model:
Schedule of assumption used in Black Scholes
Calculated stock price $0.0004 to $0.0010
Risk free interest rate 0.06% to 4.25 %
Expected life of convertible notes and warrants 3 to 33 months
expected volatility of underlying stock 167.1% to 247.0 %
Expected dividend rate 0 %
The movement in derivative liability is as follows:
Schedule of derivative liability
Opening balance $ 515,901 $ 4,765,387
Derivative liability extinguished on convertible notes converted to equity (39,726 ) (2,914,119 )
Derivative liability on issued convertible notes — 190,824
Fair value adjustments to derivative liability (175,593 ) (1,526,191 )
Closing balance $ 300,582 $ 515,901
17. Related party transactions
Shawn E. Leon
As of September 30, 2022 and December 31, 2021 the Company had a payable to Shawn Leon of $423,394 and $106,100, respectively. Mr. Leon is a director and CEO of the Company. The balances payable are non-interest bearing and has no fixed repayment terms.
Due to the current financial position of the Group, Mr. Leon forfeited the management fees due to him for the nine months ended September 30, 2022 and the year ended December 31, 2021.
Leon Developments, Ltd.
As of September 30, 2022 and December 31, 2021, the Company owed Leon Developments, Ltd., $835,805 and $935,966, respectively, for funds advanced to the Company.
Eileen Greene
As of September 30, 2022 and December 31, 2021, the Company owed Eileen Greene, the spouse of our CEO, Shawn Leon, $1,489,220 and $1,472,215, respectively. The amount owing to Ms. Greene is non-interest bearing and has no fixed repayment terms.
All related party transactions occur in the normal course of operations and in terms of agreements entered into between the parties.
18. Stockholder's deficit
a) Common shares
Authorized and outstanding
The Company has authorized 10,000,000,000 shares with a par value of $0.01 per share. The company has issued and outstanding 3,729,053,805 and 3,579,053,805 shares of common stock at September 30, 2022 and December 31, 2021, 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 September 30, 2022 and December 31, 2021, respectively.
c) Series B Preferred shares
The Company has authorized 400,000 Series B preferred shares with a par value of $1.00 per share. The company has issued and outstanding 400,000 Series B Preferred shares at September 30, 2022 and December 31, 2021, respectively.
The Series B preferred shares are mandatorily redeemable by the Company and are therefore classified as mezzanine debt.
d) Stock options
Our board of directors adopted the Greenstone Healthcare Corporation 2013 Stock Option Plan (the "Plan") to promote our long-term growth and profitability by (i) providing our key directors, officers and employees with incentives to improve stockholder value and contribute to our growth and financial success and (ii) enable us to attract, retain and reward the best available persons for positions of substantial responsibility. A total of 10,000,000 shares of our common stock have been reserved for issuance upon exercise of options granted pursuant to the Plan. The Plan allows us to grant options to our employees, officers and directors and those of our subsidiaries; provided that only our employees and those of our subsidiaries may receive incentive stock options under the Plan. We have no issued options at September 30, 2022 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.
e) Warrants (continued)
A summary of the Company's warrant activity during the period from January 1, 2021 to September 30, 2022 is as follows:
Schedule of warrants outstanding
No. of shares Exercise price
per share Weighted
average exercise
Outstanding as of January 1, 2021 615,561,379 $0.000675 to $0.12 $ 0.011380
Granted 471,010,103 $0.0020500 0.003080
Forfeited/cancelled (101,682,866 ) $0.0015 to $0.12 0.039029
Exercised (361,111,110 ) $0.00150 to $0.00205 0.003291
Outstanding as of December 31, 2021 623,777,506 $0.000675 to $0.12 $ 0.0052875
Granted — — —
Forfeited/cancelled (20,925,000 ) $0.12 0.12
Exercised — — —
Outstanding as of September 30, 2022 602,852,506 $0.000675 to $0.00205 $ 0.001306
The following table summarizes information about warrants outstanding at September 30, 2022:
Schedule of assumption
Warrants outstanding Warrants exercisable
Exercise price No. of shares
remaining years
No. of shares
$0.000675 326,286,847 2.78 326,286,847
602,852,506 3.01 $ 0.001306 602,852,506 $ 0.001306
All of the warrants outstanding at September 30, 2022 are vested. The warrants outstanding at September 30, 2022 have an intrinsic value of $0.
19. Segment information
The Company has two reportable operating segments:
a. Rental income from the property owned by CCH subsidiary located at 3571 Muskoka Road, #169, Bala, on which the operations of the Canadian Rehab Clinic were located prior to disposal on February 14, 2017 and subsequently leased to the purchasers of the business of the Canadian Rehab Clinic, for a period of 5 years renewable for a further three five-year periods and with an option to acquire the property at a fixed price.
b. Rehabilitation Services provided to customers, these services were provided to customers at our Evernia, Addiction Recovery Institute of America and Seastone of Delray operations.
19. Segment information (continued)
The segment operating results of the reportable segments for the nine months ended September 30, 2022 is disclosed as follows:
Schedule of segment information
Operations In-Patient
services Total
Revenue $ 292,303 $ 3,297,387 $ 3,586,290
Operating expenses (99,515 ) (3,105,091 ) (3,204,606 )
Operating income 192,788 188,896 381,684
Other (expense) income
Other income — 10,018 10,018
Forgiveness of government assistance loan — 104,368 104,368
Interest expense (156,297 ) (210,880 ) (367,177 )
Amortization of debt discount — (551,738 ) (551,738 )
Derivative liability movement — 175,593 175,593
Foreign exchange movements 116,635 385,715 502,350
Net income before taxes 153,126 101,972 255,098
Taxes — (87,615 ) (87,615 )
Net Income $ 153,126 $ 14,357 $ 167,483
The operating assets and liabilities of the reportable segments as of September 30, 2022 is as follows:
Purchase of fixed assets $ — $ 285,103 $ 285,103
Current assets 7,972 952,223 960,195
Non-current assets 2,469,499 3,299,226 5,768,725
Current liabilities (4,974,475 ) (9,047,232 ) (14,021,707 )
Non-current liabilities (603,557 ) (1,523,795 ) (2,127,352 )
Mandatory redeemable preferred shares — (400,000 ) (400,000 )
Intercompany balances (1,263,485 ) 1,263,485 —
Net liability position $ (4,364,046 ) $ (8,131,754 ) $ (9,820,139 )
Revenue $ 278,806 $ 774,577 $ 1,053,383
Operating expenses 111,163 718,935 830,098
Operating income 167,643 55,642 223,285
Penalty on convertible debt — (9,240 ) (9,240 )
Loss on advance — (120,000 ) (120,000 )
Warrant exercise — (758,340 ) (758,340 )
Fair value of warrants granted to convertible debt holders — (976,788 ) (976,788 )
Amortization of debt discount — (1,683,779 ) (1,683,779 )
Foreign exchange movements (9,024 ) 13,242 4,218
Net loss before taxes (14,930 ) (3,469,883 ) (3,484,813 )
Taxes — 18,794 18,794
Net loss $ (14,930 ) $ (3,451,089 ) $ (3,466,019 )
Purchase of fixed assets $ — $ 31,214 $ 31,214
Current liabilities (5,395,477 ) (10,341,386 ) (15,736,863 )
Intercompany balances 1,254,879 (1,254,879 ) —
Net liability position $ (2,027,411 ) $ (9,975,868 ) $ (12,003,279 )
20. Net income (loss) per common share
For the three months ended September 30, 2022, the computation of basic and diluted earnings per share is calculated as follows:
Schedule of Earnings Per Share
Number of Per share
Amount shares amount
Basic earnings per share
Net income per share available for common stockholders $ 458,713 3,729,053,805 $ 0.00
Effect of dilutive securities
Convertible debt 163,565 547,490,575
Net income per share available for common stockholders $ 1,525,766 2,875,702,002 $ 0.00
Warrants — 297,205,984
For the nine months ended September 30, 2022, the computation of basic and diluted earnings per share is calculated as follows:
Net income per share available for common stockholders $ 41,135 3,693,636,223 $ 0.00
For the nine months ended September 30, 2021, the following warrants and convertible securities were excluded from the computation of diluted net loss per share as the results would have been anti-dilutive.
Schedule of Antidilutive Securities
Warrants to purchase shares of common stock 684,345,057
Convertible notes (in shares) 1,056,854,401
21. Commitments and contingencies
a. Options granted to purchase shares in ATHI
On July 12, 2020, the Company entered into a five year option agreement with Leonite Capital LLC ("Leonite") and other investors (collectively the "Transferees"), the Company agreed to sell to Leonite a portion of the total outstanding shares of ATHI from the shares of ATHI held by the company. The Company provided Leonite an option to purchase 4,000,000 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $400), based on the advances that Leonite made to the Company totaling $396,000. Leonite shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Leonite to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
On September 14, 2020, the Company entered into a five year option agreement with Ed Blasiak ("Blasiak") whereby the Company agreed to sell to Blasiak a portion of the total outstanding shares of ATHI. The Company provided Blasiak an option to purchase 571,428 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $57), based on the advances that Blasiak made to the Company totaling $50,000. Blasiak shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Blasiak to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
On October 29, 2020, the Company entered into a five year option agreement with First Fire whereby the Company agreed to sell to First Fire a portion of the total outstanding shares of ATHI. The Company provided First Fire an option to purchase 1,428,571 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $143), based on the advances that First Fire made to the Company totaling $120,000. First Fire shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by First Fire to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
On October 29, 2020, the Company entered into a five year option agreement entered into with Bauman, so that the Company agreed to sell to Bauman a portion of the total outstanding shares of ATHI. The Company provided Bauman an option to purchase 1,428,571 shares of ATHI from the Company for a purchase consideration of $0.0001 per share (a total consideration of $143), based on the advances that Bauman made to the Company totaling $120,000. Bauman shall share in all distributions by ATHI to the Company, on an as exercised basis, equal to the advances made by Bauman to the Company, thereafter the option will be reduced to 50% of the shares exercisable under the option.
b. Mortgage loans
The company has a mortgage loan as disclosed in note 12 above. The mortgage loan matured on July 19, 2022 and the Company currently owes $3,490,791. The terms of the loan are currently being negotiated.
c. Other
The Company has principal and interest payment commitments under the Convertible notes disclosed under Note 10 above. Conversion of these notes are at the option of the investor, if not converted these notes may need to be repaid.
From time to time, the Company and its subsidiaries enter into legal disputes in the ordinary course of business. The Company believes there are no material legal or administrative matters pending that are likely to have, individually or in the aggregate, a material adverse effect on its business or results of operations.
22. Subsequent events
Subsequent to September 30, 2022, the Company re-negotiated the deposit payable for the acquisition of the Evernia building , in which the treatment center is housed from $1,500,000 to $350,000 which was paid on October 3, 2022. The expected closing is expected to be February 1, 2023. The Seller will provide financing of $4,000,000 at a coupon of 6.36% per annum, with interest only payments of $21,217 per month.
Other than disclosed above, the Company has evaluated subsequent events through the date of the condensed consolidated financial statements were issued, we did not identify any other subsequent events that would have required adjustment or disclosure in the financial statements.
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein and the consolidated financial statements and the other information set forth in our Annual Report on Form 10- K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on April 14, 2022. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.
Plan of Operation
During the next twelve months, the Company plans to continue to grow the Evernia business.
With effect from July 1, 2021, the operations of ATHI, which include Evernia are included in the results of operations.
For the three months ended September 30, 2022 and September 30, 2021.
Revenues were $1,424,943 and $866,432 for the three months ended September 30, 2022 and 2021, respectively, an increase of $558,511 or 64.5%. The revenue from in-patient services related to Evernia was $1,286,425 and $774,577 for the three months ended September 30, 2022 and 2021, respectively. He increase in Evernia revenue is due to expansion of the facility and the increase in the number of beds available for patients. The revenue from rental properties was $108,518 and $91,855 and included the rental escalation as per the agreement.
Operating expenses were $1,169,961 and $747,468 for the three months ended September 30, 2022 and 2021, respectively, an increase of $422,493 or 56.5%. The increase is primarily due to the following:
● Payroll expense was $580,433 and $474,351 for the three months ended September 30, 2022 and 2021, respectively, an increase of $106,082 or 22.4%. The increase is primarily due to an increase in headcount to support the growth in revenue.
● Rent expense was $114,717 and $87,874 for the three months ended September 30, 2022 and 2021, respectively, an increase of $26,843 or 30.5%. The increase in rental is due to additional rental expense incurred on apartments used to house additional patients as the business expands.
● Management fees was $30,000 and management fee reversal was $(259,175) for the three months ended September 30, 2022 and 2021, respectively, an increase of $289,175 or 111.6%. Management fees accrued as a payable to our CEO were reversed during the prior period as these fees had not been paid for several years, the current year fee of $30,000 was paid to current management.
● Depreciation expense was $136,609 and $125,959 for the three months ended September 30, 2022 and 2021, respectively, an increase of $10,650 or 8.5%. The increase in depreciation expense is due to the expansion undertaken at the Evernia facility to support the increase in revenue generated by additional patient beds.
The operating income was $254,982 and $118,964 for the three months ended September 30, 2022 and 2021, respectively, an increase of $136,018 or 114.3%. The increase in operating income is due to the increased revenues, offset by the increase in operating expenses, as discussed above.
Forgiveness of government assistance loan
Forgiveness of federal assistance loan was $104,368 and $0 for the three months ended September 30, 2022 and 2021, respectively, an increase of $104,368. The Company received partial relief of the Government assistance loan received in the prior year.
Interest expense was $163,651 and $(29,052) for the three months ended September 30, 2022 and 2021, respectively, an increase of $192,703 or 663.3%. the increase is due to an adjustment made to accrued interest in the prior year.
Amortization of debt discount
Amortization of debt discount was $87,704 and $333,237 for the three months ended September 30, 2022 and 2021, respectively, a decrease of $245,533 or 73.7%. The decrease is primarily due to the conversion of convertible debt over the past twelve months and the repayment of debt during the prior period, resulting in acceleration of amortization expense in periods prior to the current period.
Derivative liability movement
The derivative liability movement was $45,156 and $1,510,046 for the three months ended September 30, 2022 and 2021, respectively. The derivative liability movement represents the mark to market movements of variably priced convertible notes and warrants issued during the current and prior comparative period. The decrease in the mark to market movement of $1,464,890, or 97.0%, was primarily due to the conversion of several convertible notes during the prior period.
Foreign exchange movements
Foreign exchange movements was $404,538 and $184,956 for the three months ended September 30, 2022 and 2021, respectively, an increase of $219,582 or 118.7%, representing the realized exchange gains and (losses) on monetary assets and liabilities settled during the current year as well as mark to market adjustments on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars.
Net income before taxes
Net income before taxes was $556,734 and $1,509,781 for the three months ended September 30, 2022 and 2021, respectively, a decrease of $953,047 or 63.1%. The decrease is primarily due to the decrease in the derivative liability movement of $1,464,890, offset by the decrease in the amortization of debt discount of $245,533, the increase in foreign exchange gain of $219,582, the forgiveness of the government assistance loan of $104,368 and the increase in operating income of $136,018, as discussed above.
Income taxes was $(44,652) and $18,794 for the three months ended September 30, 2022 and 2021, an increase of $63,446 or 337.6%. The increase is due to the profit generated by Evernia during the current period. In the prior period, the credit related to deferred tax on the value of the intangible asset on the Evernia acquisition.
Net Income was $512,082 and $1,528,575 for the three months ended September 30, 2022 and 2021, respectively, a decrease of $1,016,493 or 66.5%, is primarily due to the decrease in net income before taxation and the increase in the income taxes, as discussed above.
For the nine months ended September 30, 2022 and September 30, 2021.
Revenues were $3,586,290 and $1,053,383 for the nine months ended September 30, 2022 and 2021, respectively, an increase of $2,532,907 or 240.5%. The revenue from in-patient services related to Evernia was $3,289,727 and $774,577 for the nine months ended September 30, 2022 and 2021, respectively. Evernia was acquired on July 1, 2021, the revenue for the current period represents nine months of revenue compared to three months in the prior period. The revenue from rental properties was $296,563 and $278,806 for the nine months ended September 30, 2022 and 2021, respectively and included the rental escalation as per the agreement.
Operating expenses were $3,204,606 and $830,098 for the nine months ended September 30, 2022 and 2021, respectively, an increase of $2,374,508 or 286.1%. The increase is primarily due to the following:
● Operating expenses related to ATHI and Evernia was $2,958,903 for the nine months ended September 30, 2022, Evernia was acquired on July 1, 2021. Included in Evernia operating expenses is payroll costs of $1,336,504, outside contractors and professional fees of $374,028, advertising and promotion costs of $80,924 management fees of $90,000, rental expenses of $314,256, and depreciation and amortization expenses of $307,738, which relate primarily to the amortization of intangibles.
● Operating expenses, excluding ATHI and Evernia was $245,703 and $22,628 for the nine months ended September 30, 2022 and 2021, respectively, an increase of $223,075 or 985.8%, primarily due to the $259,175 reversal of unpaid management fees recorded in prior year payables.
● Rent expense, excluding ATHI and Evernia was $0 and $2,512 for the nine months ended September 30, 2022 and 2021, respectively, a decrease of $2,512 or 100.0%. This amount is immaterial.
● Management fees, excluding ATHI and Evernia was $0 and $259,975 for the nine months ended September 30, 2022 and 2021, respectively. Management fees were waived during the current and $259,175 of management fees were reversed as they remained unpaid.
● Salaries and wages, excluding ATHI and Evernia was $119,595 and $83,073 for the nine months ended September 30, 2022 and 2021, respectively, an increase of $36,522 or 43.9%, the increase is due to additional employees retained for administrative functions with the acquisition of Evernia.
● Depreciation expense, excluding ATHI and Evernia was $95,113 and $96,837 for the nine months ended September 30, 2022 and 2021, respectively, a decrease of $1,724, the decrease is immaterial.
The operating income was $381,684 and $225,285 for the nine months ended September 30, 2022 and 2021, respectively, an increase of $156,399 or 69.3%. In the prior period, management fees of $259,175 were reversed, after eliminating the reversal of management fees, operating income increased by $415,574, primarily due to the operating income of $305,084, and the operating income generated by the rental operations.
Penalty on convertible notes
Penalty on convertible notes was $0 and $9,240 for the nine months ended September 30, 2022 and 2021, a decrease of $9,240. The penalty on convertible notes relates to a fee paid in the previous year for the extension of repayment dates on the Labrys note.
Loss on advance
Loss on advance was $0 and $120,000 for the nine months ended September 30, 2022 and 2021, respectively, a decrease of $120,000 or 100.0%. The company provided against funds that were advanced to Local link wellness in the prior year, which management determined to be uncollectible.
Fair value of warrants granted to convertible debt holders
Fair value of warrants granted to convertible debt holders was $0 and $976,788 for the nine months ended September 30, 2022 and 2021, a decrease of $976,788 or 100%. In the prior period, the Company granted warrants to certain convertible debt holders in terms of agreements entered into with them, whereby any debt issued subsequent to their debt on more favorable terms would result in the debt holders being entitled to the same terms as issued to the subsequent debt holders. The company issued warrants for a total of 246,464,649 shares of common stock valued using a Black Scholes valuation model.
Interest expense was $367,177 and $708,936 for the nine months ended September 30, 2022 and 2021, respectively, a decrease of $341.759 or 48.2%, primarily due to a reduction in overall debt due to conversion of convertible notes over the prior 12 months and the repayment of convertible notes during the current period.
Amortization of debt discount was $551,738 and $1,683,779 for the nine months ended September 30, 2022 and 2021, respectively, a decrease of $1,132,041 or 67.2%. The decrease is primarily due to the conversion of convertible debt over the past twelve months and the repayment of debt during the prior period, resulting in acceleration of amortization expense in periods prior to the current period.
The derivative liability movement was $175,593 and $(213,573) for the nine months ended September 30, 2022 and 2021, respectively, an increase of $389,166 or 182.2%. The derivative liability movement represents the mark to market movements of variably priced convertible notes and warrants issued during the current and prior comparative period.
Foreign exchange movements was $502,350 and $4,218 for the nine months ended September 30, 2022 and 2021, respectively, an increase of $498,132 or 11,809.7%, representing the realized exchange gains and (losses) on monetary assets and liabilities settled during the current year as well as mark to market adjustments on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars.
Net income (loss) before income taxes
Net income before income taxes was $255,098 and net loss before income taxes was $(3,484,813) for the nine months ended September 30, 2022 and 2021, respectively, an increase of $3,739,911 or 107.3%, is primarily due to the loss on advance in the prior year, the fair value of the warrants granted to convertible debt holders, the decrease in interest expense, the decrease in amortization of debt discount and the decrease in derivative liability movements, as discussed above and the foreign exchange movements, as discussed above.
Income taxes was $(87,615) and $18,794 for the nine months ended September 30, 2022 and 2021, an increase of $106,409 or 566.2%. The increase is due to the profit generated by Evernia, which was acquired on July 1, 2021. In the prior year, the credit to income taxes related to deferred taxation on the intangibles acquired on the acquisition of Evernia.
Net income ( loss)
Net income was $167,483 and net loss was $(3,466,019) for the nine months ended September 30, 2022 and 2021, respectively, an increase of $3,633,502 or 104.8%, is primarily due to the increase in net income (loss) before taxation, offset by the increase in taxation, as discussed above.
The company has commitments under operating and finance leases as follows:
The amount of future minimum lease payments under finance leases as of September 30, 2022 is as follows: