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Leases

3 Months Ended

Mar. 31, 2025

Leases

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

On October 3, 2022, the Company entered into a purchase and sale agreement with Evernia Station Limited Partnership for the purchase of Evernia Street, 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 Evernia Street. 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 immediately sold Evernia Street to Pontus EHC Palm Beach, LLC, a Delaware limited liability company and a portfolio company of Pontus Net Lease Advisors, LLC, and entered into a long-term lease for Evernia Street with an initial term of twenty years, and two ten-year extension options. The lessor is Pontus EHC Palm Beach, 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 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 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.

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.

As disclosed in note 4 above, in terms of an APA agreement entered into on October 22, 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 likely 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 details of the related party property leases are as follows:

Schedule of related party property leases
	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
	Total	$	1,038,000

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.

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 the present value of future lease payments of properties leased from third parties was $1,149,642 on January 1, 2025.

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

Schedule of right of use assets are included in the consolidated balance
	March 31, 2025		December 31, 2024
Non-current assets
Right-of-use assets – finance leases, net of depreciation, included in Property and equipment	$	12,901	$	15,699
Right-of-use assets – operating leases, net of amortization		10,948,291		9,920,592
Right-of-use assets – operating leases, related party, net of amortization		7,538,237		—
	$	18,499,429	$	9,936,291

Lease costs consists of the following:

Schedule of lease costs
	Three months ended March 31,
	2025		2024
Finance lease cost:
Depreciation of right-of-use assets	$	2,797	$	2,797
Interest expense on finance lease liabilities		258		401
Total finance lease cost		3,055		3,198
Operating lease costs
Third parties	$	486,069	$	244,677
Related parties		253,732		—
Total Operating lease costs		739,801		244,677
Lease cost	$	742,856	$	247,875

Other lease information:

Schedule of other lease
	Three months ended March 31,
	2025			2024
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	(258	)	$	(401	)
Operating cash flows from operating leases – third parties		(405,412	)		(199,000	)
Operating cash flows from operating leases – related parties		(230,683	)		—
Financing cash flows from finance leases		(2,199	)		(2,069	)
Cash paid for amounts included in the measurement of lease liabilities	$	(638,552	)	$	(201,458	)

Weighted average lease term – finance leases		1 years and 9 months			2 years and 7 months
Weighted average remaining lease term – operating leases		13 years and 8 months			19 years and 5 months

Discount rate – finance leases		6.56	%		6.59	%
Discount rate – operating leases		7.67	%		7.70	%

Maturity of Leases

Finance lease liability

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

Schedule of future minimum lease payments under finance leases
	Amount
Remainder of 2025	$	7,372
2026		6,195
2027		1,707
Total finance lease		15,274
Imputed interest		(1,064	)
Total finance lease liability	$	14,210
Disclosed as:
Current portion	$	9,156
Non-Current portion		5,054
Lease liability	$	14,210

Operating lease liability

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

Schedule of future minimum lease payments under operating leases
	Amount
Remainder of 2025	$	2,010,187
2026		2,688,015
2027		2,553,337
2028		2,230,672
2029		2,230,672
2029 and thereafter		19,069,434
Total undiscounted minimum future lease payments		30,782,317
Imputed interest		(11,890,447	)
Total operating lease liability	$	18,891,870

Disclosed as:
Current portion – third parties	$	498,381
Current portion – related parties		410,826
Non-current portion – third parties		10,832,204
Non-current portion – related parties		7,150,459
Lease liability	$	18,891,870