Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, our audited annual financial statements and the related notes thereto, each of which appear elsewhere in this Annual Report. This discussion contains certain forward-looking statements that involve risks and uncertainties in this Annual Report. Actual results could differ materially from those projected in the forward-looking statements. The Management Discussion and Analysis of Financial Condition and Results of Operations below is based upon only the financial performance of Ethema Health Corporation.

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our consolidated financial statements would be affected to the extent there are material differences between these estimates. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and accompanying notes to the consolidated financial statements for the year ended December 31, 2025.

Results of operations for the year ended December 31, 2025 and the year ended December 31, 2024.

Revenue

Revenue was $18,764,817 and $6,017,204 for the years ended December 31, 2025 and 2024, respectively, an increase of $12,747,613 or 211.9%. Revenues included $10,846,266 from the acquisition of the business of ERC. Revenues from existing business was $7,918,551 and $6,017,204 for the years ended December 31, 2025 and 2024, respectively, an increase of $1,901,347 or 31.6%. The increase is primarily due to the increase in patient count at the West Palm Beach facility and the acquisition of the Boca Raton rehab and detox facility during June 2024, which commenced revenue generating operations in January 2025, after obtaining all necessary regulatory approvals.

During the last quarter of 2025, a health care provider, which is a significant customer of ours reduced its reimbursement rates on services we provide to their patients by significant amounts, this resulted in some services we provide to this customer being no longer profitable. We have reacted to these reduced rates by ceasing to offer certain services to this customer's patients and by restructuring our operations to reduce expenses in the first and second quarters of 2026.

Operating Expenses

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General and administrative expenses were $3,934,900, and $1,550,799 for the years ended December 31, 2025 and 2024, respectively, an increase of $2,384,101 or 153.7%. General and administrative expenses include $2,042,981 from the acquisition of the business of ERC. General and administrative expenses from existing operations was $1,891,919 and $1,550,799 for the years ended December 31, 2025 and 2024, respectively, an increase of $341,120 or 22.0%. The increase is primarily due to an increase in client costs related to the additional client count at the Boca Cove facility and an increased patient count at the West Palm Beach facility, an increase in advertising and promotional activity to attract customers to our facilities and an increase in property expenses, which includes property taxes at the Boca Cove facility for the full year compared to eight months from the prior year.

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Salaries and wages were $9,547,395 and $3,072,654 for the years ended December 31, 2025 and 2024, respectively, an increase of $6,474,741 or 210.7%. Salaries and wages includes $5,672,662 from the acquisition of the business of ERC. Salaries and wages from existing operations was $3,874,733 and $3,072,654 for the years ended December 31, 2025 and 2024, respectively, an increase of $802,079 or 26.1%. The increase is due to the acquisition of the Boca Raton facility, which was fully staffed up and operational beginning January 2025, and additional staff at our West Palm Beach facility to meet increased patient capacity.

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Rent expense was $3,013,306 and $1,304,127 for the years ended December 31, 2025 and 2024, respectively, an increase of $1,709,179 or 131.1%. Rent expense includes $1,501,163 from the acquisition of the business of ERC. Rental expense from existing operations was $1,512,143 and $1,304,127 for the years ended December 31, 2025 and 2024, respectively, an increase of $208,016 or 16.0%. The increase is primarily due to the additional rent incurred at the Boca Cove detox facility of $170,835 which was acquired in June 2024 and additional rental costs for an apartment in West Palm Beach during the current period.

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Professional fees were $1,597,072 and $955,801 for the years ended December 31, 2025 and 2024, respectively, an increase of $641,271 or 67.1%. Professional fees includes $645,582 from the acquisition of the business of ERC. Professional fees from existing operations was $951,490 and $955,801 for the years ended December 31, 2025 and 2024, respectively, a decrease of $4,311 or 0.5%. Professional fees include fees incurred for the acquisition of the Edgewater facility and in the prior period due to the acquisition of the 25% non-controlling shareholders interest in Evernia and the assets of the Boca Cove detox center.

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Management fees were $120,000 and $0 for the years ended December 31, 2025 and 2024, respectively, an increase of $120,000 or 100.0%. Due to an improvement in the Company's performance, 50% of the monthly management fee of $20,000 was accrued during the current year. In the prior year the historical management fee of $20,000 per month was forfeited due to the operating loss realized.

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Depreciation and amortization expense was $812,279 and $466,952 for the years ended December 31, 2025 and 2024, respectively, an increase of $345,327 or 74.0%. Depreciation and amortization includes depreciation and amortization from the acquisition of the business of ERC amounting to $317,406. Depreciation and amortization expense from existing operations was $494,873 and $466,952 for the years ended December 31, 2025 and 2024, respectively, an increase of $27,921 or 6.0%. The increase is primarily due to additional depreciation incurred on assets acquired with the Boca Raton facility in June 2024.

Operating loss

The operating loss was $260,135 and $1,333,129 for the years ended December 31, 2025 and 2024, respectively, a decrease in loss of $1,072,994 or 80.5%. The decrease is primarily due to the increase in revenue, primarily due to the acquisition of ERC and the increased revenue in our Florida locations, offset by an increase in operating expenses, as discussed in detail above.

Other income

Other income was $66,107 and $110,000 for the years ended December 31, 2025 and 2024, respectively, a decrease of $43,893 or 39.9%. The decrease in other income was primarily related to management fees earned from Edgewater Recovery in the prior year. During the current year an employee retention credit was received from the federal government.

Other expense

Other expense was $0 and $1,160 for the years ended December 31, 2025 and 2024, respectively, a decrease of $1,160 or 100.0%.

Interest income

Interest income was $3,884 and $2,292 for the years ended December 31, 2025 and 2024 respectively. Interest income represents interest earned on positive bank balances.

Interest expense

Interest expense was $1,388,074 and $565,343 for the years ended December 31, 2025 and 2024, respectively, an increase of $822,731 or 145.5%. Included in interest expense is interest of $486,234 related to the acquisition of the business of ERC. Interest expense on the existing business was $901,840 and $565,343 for the years ended December 31, 2025 and 2024, respectively, an increase of $336,498 or 59.5%, primarily due to default interest on letter of credit funding, additional interest on Series R promissory notes which were entered into during the period March to May 2024, and interest on promissory notes issued to acquire the assets of the Boca Raton facility and the non-controlling shareholders interest in the prior year.

Amortization of debt discount

Amortization of debt discount was $616,072 and $416,120 for the years ended December 31, 2025 and 2024, respectively, an increase of $199,952 or 48.1%. Included in amortization of debt discount is amortization of $209,212 related to funding arrangements in ARIA Kentucky. Amortization of debt discount in the existing business was $406,860 and $416,120, a decrease of $9,260 or 2.2%. The amortization of debt discount relates primarily to short-term funding arrangements. In the current period the Company increased its funding arrangements to fund working capital requirements in both the ARIA Kentucky operation and our Florida operations.

Foreign exchange movements

Foreign exchange movements were $(36,023) and $37,523 for the years ended December 31, 2025 and 2024, respectively. Foreign exchange movements represents the realized exchange gains and (losses) on monetary assets and liabilities settled during the current year as well as mark to market unrealized gains and losses on monetary assets and liabilities reflected on the balance sheet and denominated in Canadian Dollars.

Net loss before income taxes

Net loss before income taxes was $2,230,313 and $2,165,937 for the years ended December 31, 2025 and 2024, respectively, an increase in loss of $64,376 or 3.0%. The increase is primarily due to an increase in operating expenses, interest expense and amortization of debt discount, offset by the increased revenue, all discussed in detail above.

Income taxes

Income taxes was a credit of $52,644 and $0 for the years ended December 31, 2025 and 2024, respectively an increase in credit of $52,644 or 100.0%. The taxation charge represents the deferred tax movement on the value of certain identifiable intangibles acquired from Edgewater. The Company made losses during the current year, increasing its Net Operating loss for tax purposes, a full valuation allowance has been provided against deferred tax assets.

Net loss

Net loss was $2,177,669 and $2,165,937 for the years ended December 31, 2025 and 2024, respectively, an increase in loss of $11,732 or 0.5%. The increase is due to the increase in loss before income taxes, offset by the deferred tax credit relating to the acquisition of intangibles assets on the acquisition of the assets of Edgewater.

Liquidity and Capital Resources

Cash used in operating activities was $0.03 million and $0.46 million for the years ended December 31, 2025 and 2024, respectively a decrease of $0.43 million or 93.5%. The decrease is primarily due to the following:

●	The increase in net loss of $0.01 million, as discussed above;
●	The increase in non-cash movements of $1.8 million, primarily due to the increase in the movement on right-of-use assets, due to new leases entered into in ARIA Kentucky, the increase in the movement for provision for credit losses of $0.46 million on ARIA Kentucky receivables, the increase in the movement of depreciation and amortization of $0.35 million due to the ARIA Kentucky acquisition of property and equipment assets and intangibles, and the increase in the movement of amortization of debt discount of $0.2 million due to the increased level of debt subject to discount borrowed during the current year;
●	The decrease in working capital movements of $(1.39) million, primarily due to an increase in the movement of accounts receivable of $1.1 million, due to the acquisition of the business of Edgewater and the increase in receivables balances in existing operations, a decrease in the movement in related party balances of $(0.28) million as some of the ARIA Kentucky acquisition liabilities were repaid, a decrease in the movement of operating lease liabilities of $(0.70) million, primarily related to new leases entered into in ARIA Kentucky and the increase in the liability for the West Palm Beach facility, related to rent smoothing adjustments, offset by an increase in the movement of accounts payable and accrued liability balances of $0.67 million, primarily due to interest accruals during the current year.

Cash used in investing activities was $0.25 million and $1.0 million for the years ended December 31, 2025 and 2024, respectively. In the current year, we acquired the business of ERC for gross proceeds of $0.25 million net of cash on acquisition of $0.3 million, resulting in a net cash generated on acquisition of $0.05 million, we also invested $0.28 million in property and equipment, including leasehold improvements to leased properties and purchases of fittings and fixtures to increase the capacity of our facilities. In the prior period we paid $0.63 million for the acquisition of the minority interest in ATHI, a further $0.24 million for the acquisition of the assets of Boca Cove Detox and a further $0.08 million for the assumption of the real property deposit on the Boca Cove facility.

Cash provided by financing activities was $0.08 million and $1.7 million for the years ended December 31, 2025 and 2024, respectively. During the current period, we raised $2.64 million from funding arrangements and repaid $2.56 million, a net movement of $0.08 million, we received an additional bank loan of $0.3 million and issued two promissory notes for an additional $0.3 million, additionally we repaid $0.17 million of short-term notes and $0.12 million in principal on bank loans. We repaid assumed liabilities of $0.16 million and promissory notes of $0.14 million. In the prior period the Company received $1.9 million and repaid $0.8 million of short-term notes and received $0.69 million and repaid $0.59 million from funding arrangements, we repaid $0.07 million of promissory notes, and in addition we received an advance of $0.25 million from related parties and $0.2 million from subscribers for common and preferred stock.

Over the next twelve months we estimate that the Company will require approximately $3.9 million in funding to repay its obligations other than convertible notes and promissory notes. We will need funding for working capital as we continue to seek additional opportunities for addiction treatment in the US markets. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company's financial condition. In the opinion of management, the Company's liquidity risk is assessed as high.

Going Concern

The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. For the year ended December 31, 2025, we had a negative cash flow from operating activities of $0.03 million. As of December 31, 2025, we had an accumulated deficit of $46.6 million, working capital deficiency of $13.8 million and total liabilities in excess of total assets of $9.6 million. These matters raise substantial doubt about our ability to continue as a going concern.

Management believes that current available resources will not be sufficient to fund our planned expenditures over the next 12 months. Accordingly, we will be dependent upon the raising of additional capital through placement of common shares, and/or debt financing in order to implement our business plan and generate sufficient revenue in excess of costs. If we raise additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If we raise additional funds by issuing debt, we may be subject to limitations on our operations, through debt covenants or other restrictions. If we obtain additional funds through arrangements with collaborators or strategic partners, we may be required to relinquish our rights to certain geographical areas, or techniques that it might otherwise seek to retain. There is no assurance that we will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on our financial condition.

Based on the uncertainties described above, we believe our business plan does not alleviate the existence of substantial doubt about our ability to continue as a going concern within one year from the date of the issuance of these consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should we be unable to continue as a going concern.

Commitments and contingencies

The Company has commitments under operating and finance leases as follows:

The amount of future minimum lease payments under finance leases at December 31, 2025 is as follows:

		Amount
2026		$	6,195
2027			1,707
Total undiscounted minimum future finance lease payments		$	7,902

The amount of future minimum lease payments under operating leases are as follows:

		Amount
2026		$	2,854,105
2027			2,717,331
2028			2,400,557
2029			2,400,557
2030			2,400,557
2031 and thereafter			16,630,172
Total undiscounted minimum future operating lease payments		$	29,403,279

The Company also has commitments under bank loans, assumed liabilities, promissory notes, convertible loans and short-term loans, as disclosed in the financial statements.

Critical accounting policies

Revenue recognition

We recognize revenue in terms of ASC 606 which requires us to exercise more judgment and recognize revenue using a five-step process as described under our accounting policies in note 2 to the consolidated financial statements.

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

Settlements with third-party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. In the opinion of management, adequate provision has been made for any adjustments and final settlements.

Allowance for credit losses

In conjunction with Revenue recognition, we recognize revenue based on historical collections received from health care providers, recognizing only a percentage of revenues actually billed. Effectively recognizing revenue net of any expected billing differentials. Based on our collection experience, the percentage of revenue recognized is adjusted on a periodic basis, thereby taking into account expected credit losses in the revenue recognition process. The revenue we recognize is already net of expected credit losses.

Leases

We account for leases in terms of ASC 842. In terms of ASC 842, the Company assesses whether any asset based leases entered into for periods longer than twelve months meet the definition of financial leases or operating leases, by evaluating the terms of the lease, including the following; the duration of the lease; the implied interest rate in the lease; the cash flows of the lease; and whether the Company intends to retain ownership of the asset at the end of the lease term.

Leases which imply that we will not acquire the asset at the end of the lease term are classified as operating leases, our right to use the asset is reflected as a non-current right of use asset with a corresponding operating lease liability raised at the date of lease inception. The right of use asset and the operating lease liability are amortized over the right of use period using the effective interest rate implied in the operating lease agreement.

Long Lived Assets

The Company evaluates the carrying value of its long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value of the assets when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value will be charged to earnings.

Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals, and, if appropriate, current estimated net sales proceeds from pending offers.

Critical Accounting Estimates

Preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. Our estimates are based on our historical experience, information received from third parties and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Significant accounting policies are fundamental to understanding our financial condition and results as they require the use of estimates and assumptions which affect the financial statements and accompanying notes. See Note 2 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report for further information.

The Critical accounting policies that involved significant estimation include the following:

Business combination

In Terms of ASC 805, the Company allocated the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed for the acquisition of Edgewater Recovery Center on January 9, 2025 for gross proceeds of $250,000 and bank loan proceeds and related party proceeds, paid directly to settle the sellers debt in connection with the acquisition of $4,250,000 and $66,741, respectively. The fair value of the intangible assets acquired was estimated at $2,996,000 and the excess of the fair value of purchase consideration over the fair values of the identified assets and liabilities, recorded as goodwill amounted to $3,427,847.

Revenue recognition

Management constantly monitors the level of billings and collections on those billings and makes an estimation of the percentage of billings that will ultimately be recorded as revenue. The various managed care contracts under which these discounts must be calculated are complex, subject to interpretation and adjustment, and may include multiple reimbursement mechanisms for different types of services provided in the Company's inpatient facilities and cost settlement provisions. Management estimates the transaction price on a payor-specific basis given its interpretation of the applicable regulations or contract terms. The services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from the Company's estimates.

Since we already make adjustments for expected collections we are constantly taking into account any expected credit losses.

Leases

On August 4, 2023, we entered into an acquisition and immediate disposal transaction with two unrelated third parties for the building which we currently operate our West Palm Beach treatment facility.

Simultaneously with the acquisition and disposal, on August 4, 2023, we entered into a long-term lease for 950 Evernia Street, West Palm Beach, Florida with an initial term of twenty years, and two ten-year extension options. The lease is absolutely net and the lease cost for the initial year is $748,000 paid monthly. The lease increases at a rate of 2.75% per year for a total term lease obligation of $19,655,717 over the initial twenty-year term. Due to the initial lease term of twenty years, we are not certain that the extension periods will be exercised at this point in time and accordingly, these have been excluded from the present value of the minimum future lease payments.

To determine the present value of minimum future lease payments for operating leases at August 4, 2023, we were required to estimate a rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment (the "incremental borrowing rate" or "IBR"). We determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, the Company used the Fannie Mae, in excess of $3,000,000 rate based on an 80% value to loan ratio, averaging the 15- and 30-year indicative rates, resulting in a rate of 7.70%. We determined that 7.70% per annum was an appropriate incremental borrowing rate to apply to its real estate operating lease.

The present value of the future minimum lease payments was valued at $9,333,953 on August 4, 2023.

On May 1, 2024 the Company, through its subsidiary Evernia Health Center LLC, entered into a Definitive Agreement whereby the Company would assume the lease for suites 100, 101, 201, 202 and 203 located at 899 Meadows Road, Boca Raton, Florida (the "Leased Premises") and the furniture, fixtures and equipment located therein, upon the assignment of the lease from the property owner. The lease was assigned on June 10, 2024 and the Company entered into a Bill of Sale to give effect to the Definitive Agreement.

The assigned lease has a remaining term of 3 years, expiring on June 30, 2027, with an initial monthly lease cost of $21,843 from July 1, 2024 to December 31, 2024, escalating by 2.9% per annum, each annual period being a calendar year.

To determine the present value of minimum future lease payments for operating leases at June 10, 2024, the Company was required to estimate a rate of interest that it would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment (the "incremental borrowing rate" or "IBR").

The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, the Company used the Bank rate 3/1 adjustable-rate mortgage which represents the average rate for several mortgage lenders in the market of 6.36%. The Company determined that 6.36% per annum was an appropriate incremental borrowing rate to apply to its real estate operating lease.

The present value of the future minimum lease payments was valued at $744,256 on June 10, 2024.

On January 9, 2025, the Company consummated the acquisition of the Acquired Assets of ERC. Simultaneously, with the acquisition of the assets of ERC, BH Properties, a company controlled by Mr. Shawn Leon, the Company's CEO and a related party, acquired certain of the real property associated with the operations of ERC.

The acquired properties are fully leveraged and required personal guarantees which the Company was unable to provide. The entities owning the real property were acquired in a separate transaction by BH Properties, which then, through its acquired subsidiaries entered into lease agreements with ARIA Kentucky on an arms-length basis, at market related rates.

The Company entered into 7 lease agreements, effective January 1, 2025, with its related party, BH Properties, all of which were for an initial period of five years with an option to extend for an additional five years, since the transaction is between related parties the option is reasonably certain to be exercised, the lease agreements all include an annual escalation of 1.5% of the base rent and the lessee is responsible for utilities, property taxes, repairs and maintenance expenditure and insurance costs.

The Company also entered into a third-party lease agreement with Trent Developments, LLC for a property located at 141, 141.5 and 143 East Main Street, Morehead Kentucky. The lease is for a period of 5 years commencing on January 1, 2025, with a base annual rental of $138,000, escalating by 1.5% on the second anniversary of the lease term and each anniversary thereafter.

In addition, the Company entered into an assignment of lease agreement with MAT Properties, LLC for a property located at 154 S Owens Road, Morehead Kentucky. The original lease was modified and the term of the lease was extended to 2 years commencing on January 1, 2025, ending on December 31, 2027. The base rental of the lease is $180,000 per annum with no escalations.

The Company, through its subsidiary ARIA Kentucky, entered into 2 lease agreements, effective July 1, 2025, with its related party, BH Properties and its subsidiary, Viking Assets, LLC. The first lease is for property situated at 417 South 4^th Street, Paducah, Kentucky, with an annual base rent of $96,000 and the second lease is for property situated at 425 South 6^th Street, Paducah Kentucky, with an annual base rent of $72,000. Each lease is for an initial period of four years and six months with an option to extend for an additional five years, since the transaction is between related parties the option is reasonably certain to be exercised. Each lease agreement includes an escalation of 1.5% of the base rent, commencing on January 1, 2026, and annually thereafter. The Company is responsible for utilities, property taxes, repairs and maintenance expenditure and insurance costs.

To determine the present value of minimum future lease payments for the operating leases entered into, the Company used the borrowing rate of 7.72% at which it had recently secured to consummate the acquisition of the assets of Edgewater Recovery and is indicative of the borrowing costs the Company would expect to incur on asset funding.

The present value of the future minimum lease payments of the properties leased from related parties was $7,622,084 on January 9, 2025 and $1,243,831 on July 1, 2025, totaling $8,865,915 and the present value of future lease payments of properties leased from third parties was $1,149,642 on January 1, 2025.

Effective October 1, 2025, the Company entered into rental abatement agreements with its related party, ERC Investments, LLC, whereby rental on the 425 Clinic Drive and the 1111 US 60 W properties was abated for the three months ended December 31, 2025 by $60,000 and $90,000, respectively. This abatement was evaluated under ASC 842 and determined to be a lease modification. The Company re-evaluated the IBR rate at the date of modification and determined that the rate was 7.8% which was used to calculate the present value of future minimum lease payments of the 425 Clinic Drive and 1111 US 60 W properties at $5,409,062, a net reduction of $165,975, on the date of modification. The modification also resulted in a decrease in the rental smoothing liability of $45,761 on the date of modification, and an increase in the smoothing expense of $147,183 over the three-month period ended December 31, 2025, a net impact of $101,422 increase in rental smoothing liability for the year ended December 31, 2025.

The details of the related party property leases are as follows:

Description		Base Rental (annual)
425 Clinic Drive, Morehead, Kentucky*		$	312,000
445 Clinic Drive, Morehead, Kentucky			120,000
1111 US 60 W, Morehead, Kentucky*			480,000
2180 US 60 W, Morehead, Kentucky			36,000
721 White Street, Morehead Kentucky			30,000
214 Jackson Drive, Morehead, Kentucky			30,000
1135 Rodburn Hollow Drive, Morehead, Kentucky			30,000
417 South 4th Street, Paducah, Kentucky			96,000
425 South 6th Street, Paducah, Kentucky			72,000
Total		$	1,206,000

* During 2025, a once off rental abatement of $60,000 and $90,000 was granted to ARIA Kentucky by ERC Investments on the 425 Clinic Drive property and the 1111 US60W property, respectively.

Long-lived assets

We have significant long-lived assets, including property and equipment, intangible assets, right-of-use assets and deposits. The Company evaluates the carrying value of its long-lived assets for impairment by comparing management's estimates of undiscounted future cash flows of the assets to the net book value of the assets when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. This requires significant estimation of future revenue streams, based on management's understanding of the business which may not be accurate and may require re-estimation at a future date. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value will be charged to earnings.

Fair value is based upon discounted cash flows of the assets at a rate deemed by management to be reasonable for the type of asset and prevailing market conditions, appraisals, and, if appropriate, current estimated net sales proceeds from pending offers.