Leases

9 Months Ended

Sep. 30, 2023

Leases

Leases

7.   Leases

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

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

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

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

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

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

 
Right of use assets are included in the consolidated balance sheet are as follows:

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

Lease costs consists of the following:  

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

Other lease information: 

	Nine months ended September 30,
	2023			2022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	(1,504	)	$	(1,880	)
Operating cash flows from operating leases		(446,189	)		(199,539	)
Financing cash flows from finance leases		(5,868	)		(5,492	)
Cash paid for amounts included in the measurement of lease liabilities	$	(453,361	)	$	(204,479	)
Weighted average lease term – finance leases		3 years and 2 months			4 years and 1 months
Weighted average remaining lease term – operating leases		19 years and 11 months			4 years and 4 months
Discount rate – finance leases		6.60	%		6.61	%
Discount rate – operating leases		7.70	%		4.64	%

Maturity of Leases

Finance lease liability

The amount of future minimum lease payments under finance leases as of September 30, 2023 is as follows:

	Amount
Remainder of 2023	$	2,457
2024		9,829
2025		9,829
2026		6,195
2027		1,707
		30,017
Imputed interest		(3,080	)
Total finance lease liability	$	26,937
Disclosed as:
Current portion	$	8,289
Non-Current portion		18,648
Lease liability	$	26,937

Operating lease liability

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

	Amount
Remainder of 2023	$	249,333
2024		754,857
2025		775,615
2026		796,945
2027		818,861
		16,200,042
Total undiscounted minimum future lease payments		19,595,653
Imputed interest		(10,223,673	)
Total operating lease liability	$	9,371,980
Disclosed as:
Current portion	$	32,753
Non-Current portion		9,339,227
Lease liability	$	9,371,980

Lessor Property

Prior to the disposal of the Company’s wholly owned subsidiary CCH on June 30, 2023, the company owned a property 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. The property was leased to the purchasers of the business of the Canadian Rehab Clinic, initially for a period of 5 years, which was renewed for an additional 5 years, with a further two 5 year renewal periods available to the lessee.

The Lease was considered in terms of ASC 842, Leases and determined to be an operating lease as the criteria for the lease to be a sales-type lease or a direct financing lease were not met, including the possibility of the lessee exercising the option to purchase the property being considered as remote.

The Company derived rental income of CDN$243,288 ($180,522) for the six months ended June 30, 2023, the date of disposal of CCH and the property, see Note 4 above.