The following discussion and analysis should be read in conjunction with, and is
qualified in its entirety by, our audited annual financial statements and the
related notes thereto, each of which appear elsewhere in this Annual Report.
This discussion contains certain forward-looking statements that involve risks
and uncertainties in this Annual Report. Actual results could differ materially
from those projected in the forward-looking statements. For additional
information regarding these risks and uncertainties. The Management Discussion
and Analysis of Financial Condition and Results of Operations below is based
upon only the financial performance of Ethema Health Corporation.
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States ("GAAP"). These accounting
principles require us to make certain estimates, judgments, and assumptions. We
believe that the estimates, judgments and assumptions upon which we rely are
reasonable based upon information available to us at the time that these
estimates, judgments, and assumptions are made. These estimates, judgments, and
assumptions can affect the reported amounts of assets and liabilities as of the
date of the consolidated financial statements as well as the reported amounts of
revenues and expenses during the periods presented. Our consolidated financial
statements would be affected to the extent there are material differences
between these estimates. This discussion and analysis should be read in
conjunction with the company's consolidated financial statements and
accompanying notes to the consolidated financial statements for the year ended
December 31, 2022.
Results of operations for the year ended December 31, 2022 and the year ended
December 31, 2021.
Revenue
Revenue was $4,820,747 and $1,942,588 for the years ended December 31, 2022 and
2021, respectively, an increase of $2,878,159 or 148.2%.
Revenue from patient treatment was $4,411,546 and $1,568,071 for the years ended
December 31, 2022 and 2021, respectively, an increase of $2,843,475 or 181.3%.
The increase is due to the consolidation of a full years trading of Evernia, a
West Palm Beach based treatment facility, in the prior year we included Evernia
in our consolidated results with effect from July 1, 2021, the date of
acquisition. In addition the facility was expanded during the current year,
allowing for more patients to be treated simultaneously.
Revenue from rental income was $377,351 and $374,517 for the years ended
December 31, 2022 and 2021, respectively, an increase of $2,834 or 0.8%, the
increase is due to the increase in monthly rental income in terms of the
agreement, offset by exchange rate fluctuations, the U.S. dollar strengthened
against the Canadian dollar during the current period.
Operating Expenses
Operating expenses was $4,331,630 and $1,940,483 for the years ended December
31, 2022 and 2021, respectively, an increase of $2,391,147 or 123.2%. The
increase in operating expenses is attributable to:
General and administrative expenses of $805,372 and $531,391 for the years
ended December 31, 2022 and 2021, respectively, an increase of $273,981 or
51.6%. The increase is due to the consolidation of the Evernia treatment
facility for a full fiscal year in the current period. Evernia was acquired on
July 1, 2021.
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Rent expense was $427,482 and $178,679 for the years ended December 31, 2022
and 2021 an increase of 248,803 or 139.2%, due to the consolidation of Evernia
for a full fiscal year during the current period and an annual escalation in
rental expense. Evernia was acquired on July 1, 2021, and enjoyed certain
rental concessions during the initial period
Management fees was $132,500 and $60,000 for the years ended December 31, 2022
and 2021, respectively, an increase of $72,500 or 120.8%. Management fees were
included in our consolidated results for the full fiscal year during the
current year and relate to management fees paid to the minority holder in
ATHI.
· Professional fees were $463,678 and $132,275 for the years ended December 31,
2022 and 2021, respectively, an increase of $331,403 or 250.5%. The increase
is primarily due to the expansion of the facility during the current year by
increasing the beds available to patients.
· Salaries and wages was $1,962,479 and $712,787 for the years ended December
31, 2022 and 2021, respectively, an increase of $1,249,692 or 175.3%. The
increase is due to the inclusion of salaries and wages in our consolidated
results for the full fiscal year in the current year and additional staff
hired to facilitate the expansion of the facility during the current fiscal
year.
· Depreciation expense was $540,119 and $325,351 for the years ended December
31, 2022 and 2021, respectively, an increase of $214,768 or 66.0%. The
increase in the depreciation charge was due to the inclusion of Evernia in our
consolidated results for the full fiscal year during the current year and the
depreciation of newly acquired assets to facilitate the expansion of the
facility.
Operating profit
The operating profit was $489,117 and $2,105 for the years ended December 31,
2022 and 2021, respectively, an increase of $487,012 or 23,136.0%. The increase
is due to the increase in revenues offset by the increase in expenses, primarily
due to the inclusion of Evernia in our consolidated results for the full fecal
year during the current year and the expansion of the facility during the
current year,
Other income
Other income was $15,760 and $273,373 for the years ended December 31, 2022 and
2021, respectively. In 2021, other income includes; (i) the reversal of a
$250,000 provision raised for rental expenses on a previous property leased by
the Company which has, subsequently been disposed of by the Landlord, and (ii) a
financial inducement granted to the Company by the Evernia landlord.
Forgiveness of government relief loan
Forgiveness of government relief loan was $104,368 and $156,782 for the years
ended December 31, 2022 and 2021, respectively, a decrease of $52,414 or 33.4%.
in 2021, we had met all requirements for forgiveness of one of its Covid-19
government relief loans, in 2022, we received partial forgiveness of a second
Covid-19 loan as we only partially met the forgiveness requirements.
Loss on advance
Loss on advance was $0 and $120,000 for the years ended December 31, 2022 and
2021, respectively, a decrease of $120,000 or 100.0%. The company wrote off
funds advanced to Local link wellness which were deemed to be uncollectible in
2021.
Fair value of warrants granted to convertible debt holders
Fair value of warrants granted to convertible debt holders was $0 and $854,140
for the years ended December 31, 2022 and 2021, a decrease of $854,140 or 100%.
In 2021, we 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. We issued warrants for
a total of 195,963,598 shares of common stock which was valued using a Black
Scholes valuation model.
Penalty on notes and convertible notes
Penalty on notes and convertible notes was $60,075 and $9,240 for the years
ended December 31, 2022 and 2021, an increase of $50,835 or 550.2%. In 2022, the
penalty on notes relates to additional principle on certain short term notes
which were not paid by due date. In 2021 the penalty on convertible notes
relates to a fee paid for the extension of repayment dates on the Labrys note.
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Interest income
Interest income was $78 and $0 for the years ended December 31, 2022 and 2021
respectively. The interest income is immaterial.
Interest expense
Interest expense was $588,477 and $829,525 for the years ended December 31, 2022
and 2021, respectively, a decrease of $241,048 or 29.1%, primarily due to the
decrease in convertible note funding during the current year.
Debt discount
Debt discount was $624,683 and $1,965,551 for the years ended December 31, 2022
and 2021, respectively, a decrease of $1,340,868 or 68.2%. The decrease is
primarily due to funding arising from other sources without significant debt
discount instruments such as warrants being issued to fund operations, the
majority of debt discount has been fully amortized in the current and prior
year.
Derivative liability movement
We adopted ASU 2020-06 during the current year, which eliminated the derivative
liability as our convertible notes with down-round features no longer met the
definition of a derivative instrument. The derivative liability movement during
the prior year represents the mark to market movements of variably priced
convertible notes and warrants issued during prior years.
Foreign exchange movements
Foreign exchange movements was $1,071,320 and $(34,301) for the years ended
December 31, 2022 and 2021, respectively and represents 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. During the
current period we disposed of Greenstone Muskoka resulting in the unrealized
translation difference becoming a realized gain.
Net income (loss) before taxation
Net income before tax was $407,408 and net loss before taxation was $(1,854,306)
for the years ended December 31, 2022 and 2021, respectively, an increase of
$$2,261,714 or 122.0%. The increase is primarily due to the acquisition of the
Evernia treatment center and the expansion of the facility during the current
period.
Taxation
Taxation charge was $112,220 and taxation credit was $280,903 for the years
ended December 31, 2022 and 2021, respectively an increase of $393,123 or
139.9%. The 2022 charge relates to the profitable Evernia operations, while the
tax credit in the prior year arose due to the reversal of prior years' accrual
for $250,000 in penalty tax for non-disclosure of foreign entities in the US tax
return, a deferred tax movement of $37,588 on the amortization of licenses which
arose on the acquisition of ATHI and Evernia, and a small tax provision on
profits realized on the ATHI and Evernia results.
Net income (loss)
Net income was $295,188 and net loss was $(1,573,403) for the years ended
December 31, 2022 and 2021, respectively, an increase of $1,868,591 or 118.8%.
The increase is due to the reasons discussed above.
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Liquidity and Capital Resources
Cash generated by operating activities was $1,577,079 and cash used in operating
activities was $85,567 for the years ended December 31, 2022 and 2021,
respectively an increase of $1,662,646 or 1,943.1%. The decrease is primarily
due to the following:
· The increase in net income of $1.9 million, as discussed above.
· The decrease in non-cash movements of $(0.3) million, primarily due to the
movement in amortization of debt discount of $(1.3) million, the movement in
fair value of warrants issued of $(0.9) million, offset by the movement in
derivative liabilities of $1.5 million, the movement in depreciation and
amortization of $0.2 million and the movement in the amortization of right of
use assets of $0.14 million.
· The release of cash from working capital of $0.1 million.
Cash used in investing activities was $0.7 million and $0.6 million for the
years ended December 31, 2022 and 2021, respectively. We invested $0.4 million
in deposits to acquire the building in which Evernia conducts its operations and
the purchase of plant and equipment on the expansion of the Evernia facility. In
2021, we invested $0.5 million in the Evernia treatment facility based in West
Palm Beach, prior to acquisition. We also purchased property and equipment of
$0.1million, primarily to support the Evernia operation during the current year.
Cash generated by financing activities was $0.3 million and $0.6 million for the
years ended December 31, 2022 and 2021, respectively. During 2022, we raised
$0.7 million in receivables funding and repaid $0.3 million. In addition we
raised $0.3 million from related parties and $0.2 million from promissory notes
and repaid $0.3 million. During 2021 we raised $1.2 million and repaid $0.5
million in convertible notes, primarily to fund the Evernia operations.
Over the next twelve months we estimate that the company will require
approximately $5.8 million in funding to repay its obligations if these
obligations are not converted to equity. We will need funding for working
capital as we continue to seek opportunities for addiction treatment in the US
markets. There is no assurance that the Company will be successful with future
financing ventures, and the inability to secure such financing may have a
material adverse effect on the Company's financial condition. In the opinion of
management, the Company's liquidity risk is assessed as high.
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