12. Leases

As of January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use ("ROU") asset and lease liability for all leases. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The Company implemented this new accounting standard using the modified retrospective method for its existing leases, which did not cause any adjustments to prior year financial statements.

The Company elected the package of transition practical expedients available for existing contracts, which allowed it to carry forward its historical assessments of whether contracts are or contain leases, lease classification and determination of initial direct costs. These leases contain both lease and non-lease components, which the Company has elected to treat as a single lease component. The Company elected not to recognize leases that have an original lease term, including reasonably certain renewal or purchase obligations, of twelve months or less in its consolidated balance sheets for all classes of underlying assets. Lease costs for such short-term leases are recognized on a straight-line basis in net income over the lease term.

The Company leases property and equipment under operating leases, primarily land, office and warehouse locations. For leases with terms greater than twelve months, the related asset and obligation are recorded at the present value of lease payments over the term. Many of these leases contain rental escalation clauses which are factored into the determination of lease payments when appropriate. When available, the lease payments are discounted using the rate implicit in the lease; however, the current leases entered into do not provide a readily determinable implicit rate. Therefore, the Company’s incremental borrowing rate is estimated to discount the lease payments based on information available at lease commencement.

The land used by the Company to operate its seawater desalination plants in the Cayman Islands and The Bahamas are owned by the Company or leased to the Company for immaterial annual amounts and are not included in the lease amounts presented on the consolidated balance sheets.

AdR has entered into a lease for land to be used in the Project with an initial effective term of 20-years from the date of full operation of the Rosarito seawater desalination plant. The amounts due on this lease are payable in Mexican pesos at an amount that is currently equivalent to approximately $30,000 every two months. The lease is cancellable by AdR should it ultimately not proceed with the project. All lease assets denominated in a foreign currency are measured using the exchange rate at commencement of the lease or the adoption of ASU 2016-02, whichever is later. All lease liabilities denominated in a foreign currency are remeasured using the exchange rate as of December 31, 2019.

Effective May 1, 2019, the Company executed a new lease for its office located in the Cayman Islands under similar terms compared to the prior lease. This new lease expires April 30, 2024.

Lease assets and liabilities

The following table presents the lease-related assets and liabilities and their respective location on the consolidated balance sheets:


	December 31, 2019
ASSETS
Current
Prepaid expenses and other current assets	$	36,097
Noncurrent
Operating lease right-of-use assets		4,439,212
Total lease right-of-use assets	$	4,475,309


LIABILITIES
Current
Current maturities of operating leases	$	755,751
Noncurrent
Noncurrent operating leases		3,836,475
Total lease liabilities	$	4,592,226

Weighted average remaining lease term:
Operating leases		17.8 years

Weighted average discount rate:
Operating leases		4.59%

The components of lease cost were as follows:


	Year Ended
	December 31, 2019
Operating lease costs	$	797,403
Short-term lease costs		16,469
Total lease costs	$	813,872

Total rental expense for the year ended December 31, 2018 was $870,833 and is included within general and administrative expenses in the accompanying consolidated statement of income.

Supplemental cash flow information related to leases is as follows:


	Year Ended
	December 31, 2019
Cash paid for amounts included in measurement of liabilities:
Operating cash flows from operating leases	$	968,005

Future lease payments relating to the Company's operating lease liabilities as of December 31, 2019 were as follows:


Years ending December 31,	Total
2020	$	949,603
2021		632,754
2022		525,579
2023		532,809
2024		313,176
Thereafter		3,602,600
Total future lease payments		6,556,521
Less: Imputed interest		(1,964,295)
Total lease obligations		4,592,226
Less: Current obligations		(755,751)
Noncurrent lease obligations	$	3,836,475