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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