UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
For the quarterly period ended
COMMISSION FILE NO.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
| (Registrant’s telephone number, including area code) |
Former name, former address and former fiscal year, if changed since last report: Not applicable.
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. ☒
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes
As of May 14, 2024, the registrant had
ZONED PROPERTIES, INC.
Form 10-Q
March 31, 2024
INDEX
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Deferred rent | ||||||||
| Lease incentive receivable | ||||||||
| Rental properties, net | ||||||||
| Prepaid expenses and other assets | ||||||||
| Escrow deposits | ||||||||
| Capitalized permit costs | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right of use asset, net | ||||||||
| Investment in unconsolidated joint ventures | ||||||||
| Investment in equity securities | ||||||||
| Interest rate swap asset | - | |||||||
| Security deposits | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| LIABILITIES: | ||||||||
| Convertible note payable | $ | $ | ||||||
| Notes payable, net | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Lease liability | ||||||||
| Contract liabilities | ||||||||
| Derivative liability - interest rate swap, at fair value | - | |||||||
| Security deposits payable | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 11) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, $ | ||||||||
| Common stock: $ | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost ( | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to unaudited consolidated financial statements.
1
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| REVENUES: | ||||||||
| Property investment portfolio revenues | $ | $ | ||||||
| Real estate services revenues | ||||||||
| Total revenues | ||||||||
| OPERATING EXPENSES: | ||||||||
| Compensation and benefits | ||||||||
| Professional fees | ||||||||
| Brokerage fees | - | |||||||
| General and administrative expenses | ||||||||
| Depreciation and amortization | ||||||||
| Real estate taxes | ||||||||
| Property portfolio business development costs | ||||||||
| Total operating expenses, net | ||||||||
| INCOME (LOSS) FROM OPERATIONS | ( | ) | ||||||
| OTHER INCOME (EXPENSES): | ||||||||
| Interest expenses | ( | ) | ( | ) | ||||
| Income (loss) from derivative - interest rate swap | ( | ) | ||||||
| Total other income (expenses), net | ( | ) | ( | ) | ||||
| INCOME (LOSS) BEFORE EQUITY METHOD LOSSES | ( | ) | ||||||
| EQUITY METHOD LOSS: | ||||||||
| Equity method loss from unconsolidated joint ventures | - | ( | ) | |||||
| Total equity method loss | - | ( | ) | |||||
| NET INCOME (LOSS) | $ | $ | ( | ) | ||||
| NET INCOME (LOSS) PER COMMON SHARE: | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to unaudited consolidated financial statements.
2
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023
(Unaudited)
| Additional | Total | |||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Treasury Stock | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
| Accretion of stock based compensation related to stock options issued | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | |||||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Additional | Total | |||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Treasury Stock | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Accretion of stock based compensation related to stock options issued | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | - | $ | - | $ | ( | ) | $ | ||||||||||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
3
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation expense | ||||||||
| Amortization of debt discount | ||||||||
| Stock option expense | ||||||||
| Loss on forfeited escrow deposit | ||||||||
| Lease costs | ( | ) | ||||||
| Loss from unconsolidated joint ventures | ||||||||
| (Income) loss from interest rate swap | ( | ) | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Deferred rent receivable | ( | ) | ( | ) | ||||
| Lease incentive receivable | ||||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Security deposit | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ||||||
| Contract liabilities | ||||||||
| Security deposits payable | ||||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Lease incentive provided to tenant | ||||||||
| Purchases of rental properties and improvements | ( | ) | ( | ) | ||||
| Purchases of property and equipment | ( | ) | ||||||
| Proceeds from sale of property and equipment | ||||||||
| Increase in capitalized permit costs | ( | ) | ( | ) | ||||
| Increase in escrow deposits | ( | ) | ( | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| NET CASH USED IN FINANCING ACTIVITIES | ( | ) | ( | ) | ||||
| NET DECREASE IN CASH | ( | ) | ( | ) | ||||
| CASH, beginning of period | ||||||||
| CASH, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | $ | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Acquisition of rental properties financed through note payable | $ | $ | ||||||
| Reclassification of escrow deposits for acquisition of rental properties | $ | $ | ||||||
See accompanying notes to unaudited consolidated financial statements.
4
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS
Zoned Properties, Inc. (“Zoned Properties”
or the “Company”) was incorporated in the State of Nevada on
The Company has the following wholly owned subsidiaries:
| ● | Chino Valley Properties, LLC (“Chino Valley”) was organized in the State of Arizona on April 15, 2014. | |
| ● | Kingman Property Group, LLC (“Kingman”) was organized in the State of Arizona on April 15, 2014. | |
| ● | Green Valley Group, LLC (“Green Valley”) organized in the State of Arizona on April 15, 2014. | |
| ● | Zoned Arizona Properties, LLC (“Zoned Arizona”) was organized in the State of Arizona on June 2, 2017. | |
| ● | Zoned Advisory Services, LLC (“Zoned Advisory”) was organized in the State of Arizona on July 27, 2018. | |
| ● | Zoned Properties Brokerage, LLC (“Arizona Brokerage”) was organized in the State of Arizona on March 17, 2021. | |
| ● | ZP Data Platform 1, LLC (“ZP Data 1”) was organized in the State of Arizona on April 14, 2021 (inactive). | |
| ● | ZP Data Platform 2, LLC (“ZP Data 2”) was organized in the State of Arizona on June 21, 2022. | |
| ● | ZP RE Holdings, LLC (“ZPRE Holdings”) was organized in the State of Arizona on September 20, 2022. | |
| ● | ZP Brokerage MS, LLC (“Mississippi Brokerage”) was organized in the State of Mississippi on October 4, 2022 (inactive). | |
| ● | ZP Brokerage FL, LLC (“Florida Brokerage”) was organized in the State of Florida on October 20, 2022. | |
| ● | ZP Brokerage AL, LLC (“Alabama Brokerage”) was organized in the State of Alabama on October 20, 2022 (inactive). | |
| ● | ZP RE MI Woodward, LLC (“ZP Woodward”) was organized in the State of Michigan on November 22, 2022 | |
| ● | ZP Brokerage MO, LLC (“Missouri Brokerage”) was organized in the State of Missouri on November 30, 2022. | |
| ● | ZP RE IL Ashland, LLC (“ZP Ashland”) was organized in the State of Illinois on February 14, 2024. |
The Company also maintains a
During 2023, the Company dissolved the following wholly owned subsidiary:
| ● | ZP RE AZ Stone, LLC (“ZP Stone”) was organized in the State of Arizona on October 19, 2022. This subsidiary was dissolved on March 28, 2023. |
5
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.
The unaudited consolidated financial statements for the three months ended March 31, 2024 and 2023 have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, all adjustments necessary to present fairly our consolidated financial position, results of operations, and cash flows as of March 31, 2024 and 2023, and for the periods then ended, have been made. Those adjustments consist of normal and recurring adjustments. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. Accordingly, the unaudited consolidated financial statements do not include all the information and notes necessary for a comprehensive presentation of our financial position and results of operations and should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2023 included in our Annual Report on Form 10-K filed with the SEC on March 26, 2024.
Liquidity
As reflected in the accompanying unaudited consolidated
financial statements, the Company generated net income of $
The cash balance and positive net cash provided by operating activities serves to mitigate the conditions that historically raised substantial doubt about the Company’s ability to continue as a going concern. The Company believes that the Company has sufficient cash and positive cash flows to meet its obligations for a minimum of twelve months from the date of this filing.
Use of estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for the three months ended March 31, 2024 and 2023 include the collectability of accounts receivable, valuation of investment in equity securities, the useful life of rental properties and property and equipment, assumptions used in assessing impairment of long-term assets including rental property and investment in unconsolidated joint ventures, valuation allowances for deferred tax assets, the fair value of derivative asset or liability related to interest rate swap, and the fair value of non-cash equity transactions, including options and stock-based compensation.
Risks and uncertainties
The Company’s operations are subject to
risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure.
The Company conducts a significant portion of its business in states that have legalized and regulated cannabis. Additionally, the Company’s
tenants operate in the state-legalized and state-regulated cannabis industry. Consequently, any significant economic downturn in the state
markets in which the Company operates or any changes in the federal government’s enforcement of current federal laws or changes
in state laws could potentially have a negative effect on the Company’s business, results of operations and financial condition.
Additionally, substantially all of the Company’s real estate properties are leased under triple-net leases to tenants (each, a “Significant
Tenant” and collectively, the “Significant Tenants”). For the three months ended March 31, 2024 and 2023, revenues associated
with Significant Tenants amounted to $
Fair value of financial instruments
The carrying amounts reported in the unaudited consolidated balance sheets for cash, accounts receivable, prepaid expenses and other assets, capitalized permit costs, escrow deposits, accounts payable, accrued expenses, and other payables approximate their fair market value based on the short-term maturity of these instruments.
The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”), requires companies to determine fair value based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.
6
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
The guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:
| ● | Level 1: Quoted market prices in active markets for identical assets or liabilities. |
| ● | Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. |
| ● | Level 3: Unobservable inputs that are not corroborated by market data. |
Other than the interest rate swap, the Company did not identify any other assets or liabilities that are required to be presented on the balance sheets at fair value, on a recurring basis, in accordance with ASC Topic 820.
| March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||
| Description | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| Interest rate swap asset (liability) | $ | $ | $ | $ | $ | ( | ) | $ | — | |||||||||||||||
Interest rate swap
In connection with a bank loan executed in 2022, the Company entered into an interest rate swap agreement to manage interest rate risk related to debt that accrues interest at variable rates. The Company accounts for its interest rate swap agreement in accordance with the guidance related to derivatives and hedging activities. The Company is exposed to market risk from changes in interest rates. The Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. Interest payments receivable and payable under the terms of the interest rate swap agreement are accrued over the period to which the payment relates and the net difference is treated as an adjustment of interest expense related to the underlying liability. Because the variable interest rates used to calculate payments under the terms of the swap agreement are calculated using different benchmarks than those included in the Company’s variable rate debt agreement, the swap agreement is not considered an effective cash flow hedge.
Accordingly, changes in the underlying market value of the remaining swap payments are recognized into income as an increase or decrease to other income (expense) each reporting period. In accordance with ASC 820, Fair Value Measurements and Disclosures, the Company believes values provided by East West Bank (the “Counterparty”) represent the fair value of its swap agreement. The Company believes that the quality of the Counterparty to its swap agreement mitigates the Counterparty credit risk.
The estimated fair value of the interest rate swap agreement is determined by the Counterparty based on market data used by Counterparty and is reflected as a derivative asset or liability on the accompanying unaudited consolidated balance sheet with changes in the fair value reflected in change in fair value of interest rate swap on the accompanying unaudited consolidated statements of operations. The Company uses derivative financial instruments only to manage interest rate risks and not as investment vehicles.
| Description | Notional Amount on March 31, 2024 | Interest Rate | Maturity | Fair Value of Asset on March 31, 2024 | Fair Value of Liability on December 31, 2023 | |||||||||||||
| December 7, 2022 interest rate swap | $ | % | $ | $ | ||||||||||||||
Cash
Cash is carried at cost and represents cash on
hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of
three months or less as of the purchase date of such investments. The Company had no cash equivalents on March 31, 2024 and December 31,
2023. The Company’s cash is held at major commercial banks, which may at times exceed the Federal Deposit Insurance Corporation
(“FDIC”) limit. To date, the Company has not experienced any losses on its invested cash. On March 31, 2024 and December 31,
2023, the Company had approximately $
7
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
Accounts receivable
The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries under the current expected credit loss method. The allowance is based on an analysis of historical bad debt experience, current receivables aging and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. On January 1, 2023, the Company adopted ASC 326, “Financial Instruments - Credit Losses”. In accordance with ASC 326, an allowance is maintained for estimated forward-looking losses resulting from the possible inability of customers to make required payments (current expected losses). The amount of the allowance is determined principally on the basis of past collection experience and known financial factors regarding specific customers. The expense associated with the allowance for doubtful accounts on accounts receivable is recognized in general and administrative expenses.
Investment in unconsolidated joint ventures
The Company has equity investments in various privately held entities. The Company accounts for these investments either under the equity method or cost method of accounting depending on the Company’s ownership interest and level of influence. Investments accounted for under the equity method are recorded based upon the amount of the Company’s investment and adjusted each period for its share of the investee’s income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable. The Company evaluates its investments in these entities for consolidation. It considers its percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining whether or not the investment qualifies for consolidation or if it should be accounted for as an unconsolidated investment under the equity method of accounting.
If an investment qualifies for the equity method of accounting, the Company’s investment is recorded initially at cost, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. The net income or loss of an unconsolidated investment is allocated to its investors in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences, if any, between the carrying amount of our investment in the respective joint venture and the Company’s share of the underlying equity of such unconsolidated entity are amortized over the respective lives of the underlying assets as applicable. These items are reported as a single line item in the statements of operations as income or loss from investments in unconsolidated affiliated entities.
Long-term investments
Long-term investments include investments in equity securities of entities over which the Company does not have a controlling financial interest or significant influence and are accounted for at fair value. Equity investments without readily determinable fair values are measured at cost with adjustments for observable changes in price or impairments (referred to as the “measurement alternative”). In applying the measurement alternative, the Company performs a qualitative assessment on a quarterly basis and recognizes an impairment if there are sufficient indicators that the fair value of the equity investments is less than carrying values. Changes in value are recorded in non-operating income (loss). On March 31, 2024 and December 31, 2023, long-term investments consisted of an investment in convertible preferred stock that does not have a readily determinable fair value (see Note 5).
Rental properties
Rental properties are carried at cost, less accumulated
depreciation and amortization. Betterments, major renovations and certain costs directly related to the improvement of rental properties
are capitalized. Maintenance and repair expenses are charged to expense as incurred. Depreciation is recognized on a straight-line basis
over estimated useful lives of the assets, which range from
Upon the acquisition of real estate, the Company assesses the fair value of acquired assets (including land, buildings and improvements, identified intangibles, such as acquired above-market leases and acquired in-place leases) and acquired liabilities (such as acquired below-market leases) and allocates the purchase price based on these assessments. The Company assesses fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known trends, and market/economic conditions.
8
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
The Company’s rental properties are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property’s carrying amount over its estimated fair value. Impairment analyses are based on our current plans, intended holding periods and available market information at the time the analyses are prepared.
If the Company’s estimates of the projected future cash flows, anticipated holding periods, or market conditions change, the Company’s evaluation of impairment losses may be different and such differences could be material to its consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. For the three months ended March 31, 2024 and 2023, the Company did not record any impairment losses.
The Company has land which is not subject to depreciation.
Escrow deposits
The Company is in the business of pursuing real
estate acquisitions and investments that may include various contractual instruments to secure a property, such as an Option Agreement
or a Purchase and Sale Agreement. These agreements often include the requirement to make escrow deposits. Escrow deposits include cash
deposits made by the Company for the future acquisition of properties or for the option to acquire a property. In most cases, upon closing
of the acquisition of a property, the escrow deposit will be applied to the purchase price. In some cases, the Company may discontinue
pursuit of an acquisition of a property and therefore terminate an existing agreement, which can cause forfeiture of escrow deposits if
those deposits are non-refundable. During the three months ended March 31, 2024 and 2023, the Company forfeited escrow deposits of $
Property and equipment
Property and equipment is stated at cost, less
accumulated depreciation. Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful
lives. The Company uses a
The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Revenue recognition
Property Investment Portfolio Revenues
Rental income is accounted for pursuant to ASC Topic 842 “Leases” and includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported on a straight-line basis over the non-cancellable term of the lease, which includes the effects of rent abatements under the leases. The Company commences rental revenue recognition when the tenant takes possession of the leased space or controls the physical use of the leased space and the leased space is substantially ready for its intended use. If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that can be taken in the form of cash or a credit against the tenant’s rent) that is funded by the Company is treated as a lease incentive receivable and amortized as a reduction of revenue over the lease term.
Currently, the Company’s leases provide for payments with fixed monthly base rents over the term of the leases or annual percentage increases in base rent over the term of the lease. The leases also require the tenant to remit estimated monthly payments to the Company for property taxes and common area maintenance. These payments are recorded as rental income and the related property tax expense is reflected separately on the accompanying unaudited consolidated statements of operations.
9
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
Real Estate Services Revenues
The Company follows ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), except for revenues from lease contracts within the scope of ASC 842, which are excluded from ASC 606. This standard establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASC 606 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and requires certain additional disclosures.
Revenues from advisory services is recognized when the Company performs services pursuant to its agreements with clients and collectability is probable.
Brokerage revenues primarily consist of real estate sales commissions and are recognized upon the successful completion of all required services which is likely to occur upon a lease commencement, when escrow closes on the sale of a property, or as otherwise negotiated between the Brokerage and its clients. In accordance with the guidelines established for reporting revenue gross as a principal versus net as an agent in ASC Topic 606, the Company records commission revenues and expenses on a gross basis. Of the criteria listed in ASC Topic 606, the Company is the primary obligor in the transaction, does not have inventory risk, performs all or part of the service, has credit risk, and has wide latitude in establishing the price of services rendered and discretion in selection of agents and determination of service specifications. Brokerage revenues that are payable upon payment of rent or other events beyond the Company’s control are recognized upon the occurrence of such events.
Contract liabilities
Contract liabilities include advisory fees received
in advance that are deferred and recognized when the services are complete or over the actual or expected contract term, rental revenue
received in advance, and other deferred revenue for when the Company receives consideration from an agreement before certain criteria
have been met for revenue to be recognized in conformity with GAAP.
Three Months | Three Months Ended March 31, 2023 | |||||||
| Balance at beginning of period | $ | $ | ||||||
| Rental payments received in advance | ||||||||
| Accretion of contract liabilities to revenue | ( | ) | ( | ) | ||||
| Customer refund | ( | ) | ||||||
| Balance at end of period | $ | $ | ||||||
Lease accounting
The FASB’s ASC Topic 842, “Leases” sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to recognize a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to previous guidance for sales-type leases, direct financing leases and operating leases.
For leases entered into on or after the effective
date, where the Company is the lessor, at the inception of the contract, the Company assesses whether the contract is a sales-type, direct
financing or operating lease by reviewing the terms of the lease and determining if the lessee obtains control of the underlying asset
implicitly or explicitly. If a change to a pre-existing lease occurs, the Company evaluates if the modification results in a separate
new lease or a modified lease. A new lease results when a modification provides additional right of use. The new lease or modified lease
is then reassessed to determine its classification based on the modified terms. As disclosed in Note 3, on January 24, 2022 and effective
on March 1, 2022, the Chino Valley lease was amended and the monthly base rent was increased to $
10
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
The Company records revenues from rental properties
for its operating leases where it is the lessor on a straight-line basis. Any revenue on the straight-line basis exceeding the monthly
payment amount required on the operating lease is reflected as deferred rent. In 2020, the Company amended its leases for which it is
the lessor on its Chino Valley, Tempe, Kingman and Green Valley properties. The amendments resulted in an abatement of rent for the months
of June and July 2020. Additionally, in connection with an operating lease on the Company’s Michigan property acquired in December
2022, the Company abated certain lease payments for the period from December 2022 to March 2023, and in connection with an operating lease
on the Company’s Chicago property acquired in January 2024, the Company abated certain lease payments for the period from January
2024 to August 2024. These rent abatements and the effect of recording rent on a straight-line basis resulted in aggregate deferred rent
as of March 31, 2024 and December 31, 2023 of $
For contracts entered into on or after the effective date, where the Company is the lessee, at the inception of a contract, the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. The Company allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. For leases where the Company is a lessee, primarily for the Company’s administrative office lease, the Company analyzed if it would be required to record a lease liability and a right of use asset on its consolidated balance sheets at fair value upon adoption of ASC 842.
Operating lease right of use asset represents
the right to use the leased asset for the lease term and operating lease liability is recognized based on the present value of the future
minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company used its
incremental borrowing rate of
Basic and diluted loss per share
Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period using the treasury stock method and as-if converted method. Potentially dilutive common shares and participating securities are excluded from the computation of diluted shares outstanding if they would have an anti-dilutive impact on the Company’s net losses. The Company’s preferred stock is considered a participating security since the preferred shares are entitled to dividends equal to common share dividends and accordingly, are included in the computation of earnings per share pursuant to the two-class method. The two-class method of computing (loss) income per share is an earnings allocation formula that determines (loss) income per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings.
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net income (loss) per common share - basic: | ||||||||
| Net income (loss) allocated to common stockholders | $ | $ | ( | ) | ||||
| Weighted average common shares outstanding – basic | ||||||||
| Net income (loss) per common share – basic | $ | $ | ( | ) | ||||
| Net income (loss) per common share - diluted: | ||||||||
| Net income (loss) allocated to common shareholders – basic | $ | $ | ( | ) | ||||
| Add: interest of convertible debt | ||||||||
| Numerator for income (loss) per common share – basic | $ | $ | ( | ) | ||||
| Weighted average common shares outstanding – diluted | ||||||||
| Add: dilutive shares related to: | ||||||||
| Stock options | ||||||||
| Convertible debt | ||||||||
| Weighted average common shares outstanding – diluted | ||||||||
| Net income (loss) per common share – diluted | $ | $ | ( | ) | ||||
11
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Convertible debt | ||||||||
| Stock options | ||||||||
Segment reporting
The Company operates in
Income tax
Deferred income tax assets and liabilities arise from temporary differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company follows the provisions of FASB ASC 740-10, “Uncertainty in Income Taxes”. Certain recognition thresholds must be met before a tax position is recognized in the financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not” threshold. The Company does not believe it has any uncertain tax positions as of March 31, 2024 and December 31, 2023 that would require either recognition or disclosure in the accompanying unaudited consolidated financial statements.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation – Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment Accounting.
Recently issued accounting pronouncements
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying unaudited consolidated financial statements.
NOTE 3 – CONCENTRATIONS AND RISKS
Lease Agreements with Significant Tenants
Our property located in Chino Valley is leased by Broken Arrow Herbal Center, Inc. (“Broken Arrow”), doing business as Hana Dispensaries.
Our property located in Green Valley is leased by Broken Arrow, doing business as Hana Dispensaries.
12
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
Our property located in Kingman is leased by CJK, Inc. (“CJK”), and subleased by Helping Camo LLC, doing business as Story Cannabis.
Our property located in Tempe is leased by VSM, LLC (“VSM”), doing business as Green Dot Labs.
Our property located in Pleasant Ridge is leased by Rapid Fish, LLC (“Rapid Fish”), doing business as NOXX Cannabis.
Our property located in Chicago is leased by JG IL LLC (“Justice Grown”), doing business as Justice Cannabis Co.
The Company considers a tenant whose annual base
rent exceeds over
Chino Valley, AZ
On May 1, 2018, Chino Valley and Broken Arrow
entered into a Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Chino Valley and Broken
Arrow (the “2018 Chino Valley Lease”), with a term of
On May 29, 2020, Chino Valley and Broken Arrow
entered into a Second Amendment to the 2018 Chino Valley Lease, as amended (the “2020 Chino Valley Amendment”), effective
May 31, 2020 (“Effective Date”). Pursuant to the terms of the 2020 Chino Valley Amendment, among other things, the base rent
was adjusted to $
On August 23, 2021, Chino Valley and Broken Arrow
entered into the Third Amendment (the “Third Chino Valley Amendment”) to the 2018 Chino Valley Lease, as amended (the “Chino
Valley Lease”), effective September 1, 2021. The parties previously agreed that the base rental payments under the Chino Valley
Lease would increase commensurate to any and all expanded and operational square footage on the premises by calculating the fixed rate
of $
13
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
On January 24, 2022 and effective on March 1,
2022, Chino Valley and Broken Arrow entered into the Fourth Amendment (the “Fourth Chino Valley Amendment”) to the Chino Valley
Lease, as amended. Pursuant to the terms of the Fourth Chino Valley Amendment, the parties acknowledge that an additional
Green Valley, AZ
On May 1, 2018, Green Valley and Broken Arrow
entered into a Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Green Valley and Broken
Arrow (the “Green Valley Lease”), with a term of
On May 29, 2020, Green Valley and Broken Arrow
entered into the First Amendment (the “Green Valley Amendment”) to the Green Valley Lease, effective May 31, 2020. Pursuant
to the terms of the Green Valley Amendment, among other things, the parties agreed to abate the fixed base rent of $
Tempe, AZ
On May 1, 2018, Zoned Arizona and CJK entered
into that certain Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Zoned Arizona and CJK
(the “Tempe Lease”), with a term of
On May 29, 2020, Zoned Arizona and CJK entered
into the First Amendment (the “Tempe Amendment”) to the Tempe Lease, effective May 31, 2020. Pursuant to the terms of the
Tempe Amendment, among other things, the base rent was increased to $
14
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
In addition, under the Tempe Amendment the parties
agreed to an Investment by Tenant (as defined above in the subheading Chino Valley) to the property that is the subject of the
Chino Valley Lease and the property that is the subject of the Tempe Lease. If Broken Arrow and/or CJK fails to deliver to the Company
receipted bills for hard and soft costs of improvements to the Facilities totaling at least $
In connection with a promissory note (See Note 8), on July 11, 2022 and reaffirmed on December 7, 2022, the Company entered into a Deed of Trust Agreement that secures the Company’s performance under the promissory note. The Deed of Trust Agreement transfers and assigns to the lender the right to sell the assets of Tempe and rights to rental income in case of default under the promissory note.
On November 30, 2022, Zoned Arizona, CJK, and VSM entered into that Second Amendment (the “Tempe Second Amendment”) to the Tempe Lease, as amended. Concurrently with the execution of the Tempe Second Amendment: (i) CJK assigned all its interest in the Tempe Lease to VSM (the “Assignment”), and (ii) VSM subleased a portion of the Premises (as defined in the Tempe Lease), pursuant to that certain Sublease dated November 30, 2022 between VSM, as sublessor, and CJK, as sublessee.
Pursuant to the terms of the Tempe Second Amendment,
among other things, and in consideration of Zoned Arizona’s agreement to enter into the Tempe Second Amendment: (i) VSM paid Zoned
Arizona $
Pursuant to ASC 842-10-25, the lease modification
was not accounted for as a separate contract and the Company shall account for the modification as if it were a termination of the existing
lease and the creation of a new lease that commenced on the effective date of the modification. Accordingly, the Company recorded the
$
Additionally, on the Tempe property, the Company leases parking lot space for an antenna location to a third party.
Kingman, AZ
On May 1, 2018, Kingman and CJK entered into a
Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Kingman and CJK (the “Kingman Lease”),
with a term of
15
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
On May 29, 2020, Kingman and CJK entered into
the First Amendment (the “Kingman Amendment”) to the Kingman Lease, effective May 31, 2020. Pursuant to the terms of the Kingman
Amendment, among other things, the parties agreed to abate the $
On November 30, 2022, Kingman and CJK entered into the Second Amendment (the “Kingman Second Amendment”) to the Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Kingman and CJK. Pursuant to the terms of the Kingman Second Amendment, CJK agreed to grant Kingman a right to terminate the Kingman Lease upon 15 days’ prior written notice in Kingman’s sole discretion, without any obligation to do so, provided that Kingman may not exercise this right to terminate if CJK is operating its business as a going concern at the premises which is the subject of the Kingman Lease.
On August 2, 2023, the Company entered into a Sublease Agreement (the “Sublease”) with CJK and a subtenant in connection with the Company’s Kingman property. Pursuant to the Sublease, the Sublease shall be effective on August 2, 2023 and end on the one year anniversary, or (ii) the last day of the Term of the Master Lease (whether due to expiration or termination thereof by the Company, whichever is earlier (the “Sublease Expiration Date”), such period being referred to herein as the “Sublease Term”, unless terminated earlier pursuant to the terms of this Sublease or otherwise by consent of the Company, CJK and Subtenant. The subtenant shall have two options to extend the Sublease Term by one-year periods each (each a “Sublease Term Extension” and collectively the “Sublease Term Extensions”), which shall be exercisable by Subtenant no later than 90 days prior to the expiration of the Sublease Term, as may be extended.
Pursuant to the Kingman Lease, if pursuant to
any assignment or sublease, CJK receives rent, either initially or over the Term of the assignment or sublease, in excess of the Rent
called for hereunder, or in the case of this sublease of a portion of the Premises in excess of such Rent fairly allocable to such portion,
after appropriate adjustments to assure that all other payments called for hereunder are appropriately taken into account, CJK shall pay
to the Company, as Additional Rent hereunder,
Additionally, the subtenant paid a security deposit
of $
Pleasant Ridge, MI
On November 29, 2022, ZP Woodward, as landlord,
entered into a Licensed Cannabis Facility Absolute Net Lease Agreement (the “Woodward Lease”) with Rapid Fish 2 LLC, as tenant
(“Woodward Tenant”), whereby ZP Woodward leased the Woodward Property located in Pleasant Ridge, Michigan to the Woodward
Tenant.
16
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
On May 14, 2023, ZP Woodward entered into an Assignment and Assumption of Lease (“Assignment”) whereby the Woodward Lease was assigned from Rapid Fish 2 LLC (“Old Tenant”) to Rapid Fish LLC (“New Tenant”). Old Tenant and New Tenant share common ownership. The assignment of the Woodward Lease is conditioned upon issuance by the City of Pleasant Ridge, Michigan of a final cannabis business license to New Tenant and ZP Woodward’s receipt of a fully executed Reaffirmation of Guaranty from the guarantors of the Woodward Lease. The Assignment contains other terms as are customary for a document of this type.
Chicago, IL
On January 18, 2024, ZPRE Holdings entered into
a Licensed Cannabis Facility Absolute Net Lease Agreement (the “Justice Grown Lease”), with a commencement date of January
19, 2024, by and between ZPRE Holdings, as landlord, and JG IL LLC (“Justice Grown”), as tenant. Pursuant to the terms of
the Lease, ZPRE Holdings agreed to lease the Ashland Avenue Property located in Chicago, IL to Justice Grown for use as a licensed recreational
adult-use (and, if permitted, medical) cannabis dispensary in accordance with Illinois law. The Justice Grown Lease has a term of
Summary
As of March 31, 2024 and December 31, 2023, security
deposits payable to the collective Significant Tenants amounted to $
| Future annual base rent: | Amount | |||
| 2024 (remainder of year) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Thereafter | ||||
| Total | $ | |||
Revenues – Significant Tenants
| For the Three Months Ended March 31, 2024 | % of Total Revenues | For the Three Months Ended March 31, 2023 | % of Total Revenues | |||||||||||||
| Broken Arrow | $ | % | $ | % | ||||||||||||
| VSM | % | % | ||||||||||||||
| Rapid Fish | % | % | ||||||||||||||
| Total | $ | % | $ | % | ||||||||||||
Further, as of March 31, 2024 and December 31,
2023, deferred rent of $
17
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
Asset concentration
The Company’s real estate properties are leased to Significant Tenants under absolute-net and triple-net leases that terminate through March 2037 and April 2040, respectively. The Company monitors the credit of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing financial statements and related metrics and information that are publicly available or that are provided to us upon request, and (2) monitoring the timeliness of rent collections.
As of March 31, 2024 and December 31, 2023, the
Company had an asset concentration related to the Significant Tenants. As of March 31, 2024 and December 31, 2023, the Significant Tenants
collectively leased approximately
Industry risk
Downturns relating to certain industries or business sectors or the financial stability of the Company’s significant tenants may have a significant adverse impact on the Company’s assets and its ability to pay its operating expenses or pay dividends than if the Company had a diversified property portfolio and service offerings. The Company’s total assets are concentrated into a limited number of tenants who were considered significant tenants. To the extent that the Company’s total assets are concentrated in a limited number of tenants that are in the regulated cannabis industry, downturns relating generally to such industry or business sector, or a decline in the financial stability of the Company’s Significant Tenants may result in defaults on all of the Company’s leases within a short time period, which may reduce the Company’s net income and the value of the Company’s common stock and accordingly, limit the Company’s ability to pay our operating expenses or pay dividends to its stockholders. If the Company’s tenants are prohibited from operating or cannot pay their rent, the Company may not have enough working capital to support its operations and the Company would need to consider seeking out new tenants at rental rates per square foot that may be less than its current rate per square foot.
NOTE 4 – RENTAL PROPERTIES
| Description | Useful Life (Years) | March 31, 2024 | December 31, 2023 | |||||||||
| Building and building improvements | $ | $ | ||||||||||
| Construction in progress | ||||||||||||
| Land | ||||||||||||
| Rental properties, at cost | ||||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||||
| Rental properties, net | $ | $ | ||||||||||
18
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
Agreement Regarding Purchase and Sale Contract – Ashland Property
Pursuant to the terms of the Agreement Regarding
Purchase and Sale Contract (See Note 11), ZPRE Holdings agreed to deposit the following amounts into escrow: (i) $
On January 19, 2024, ZPRE Holdings and Keystone
entered into that certain Assignment and Assumption Agreement, dated as of January 19, 2024, by and between Keystone and ZP Holdings (the
“Assignment Agreement”). Pursuant to the terms of the Assignment Agreement, Keystone assigned to ZP Holdings all of Keystone’s
right, title and interest in and to the Original PSA to purchase the Ashland Avenue Property for $
On January 19, 2024, the transactions contemplated
by the Agreement and Assignment and Assumption Agreement closed and ZPE Holdings completed the acquisition of the Ashland Avenue Property
under the Original PSA, as assigned. The completed transactions were subject to closing costs, commissions, and fees customary to the
acquisition of real estate of $
For the three months ended March 31, 2024 and
2023, depreciation of rental properties amounted to $
NOTE 5 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES AND EQUITY SECURITIES
Investment in unconsolidated joint ventures
On March 31, 2024 and December 31, 2023, the Company
held investments with aggregate carrying values of $
| Original | Net Carrying Value | |||||||||||||||||
| Entity | Date Acquired | Ownership % | Investment Amount | March 31, 2024 | December 31, 2023 | |||||||||||||
| Zoneomics Green, LLC (the “Zoneomics Green Joint Venture”) | % | |||||||||||||||||
| Total investments in unconsolidated joint venture entities | $ | $ | $ | |||||||||||||||
On May 1, 2021, the Company entered into a Limited
Liability Company Operating Agreement (the “Zoneomics Green Operating Agreement”) with a non-affiliated joint venture partner
in connection with the formation of Zoneomics Green, LLC (“Zoneomics Green”), a Delaware limited liability company formed
on May 1, 2021. Zoneomics Green’s goal is to utilize advanced property technology to provide solutions for property identification
in regulated industries such as regulated cannabis. Pursuant to the Zoneomics Green Operating Agreement, the Company purchased
19
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
| Balance sheets (Unaudited): | Zoneomics Green | |||
| Current assets: | ||||
| Cash | $ | |||
| Total assets | $ | |||
| Liabilities | $ | |||
| Equity | ||||
| Total liabilities and equity | $ | |||
| Statement of operations (Unaudited) | Zoneomics Green | |||
| Net sales | $ | |||
| Operating recovery (expenses) | ||||
| Net income (loss) | $ | |||
| Company’s share of income (loss) from unconsolidated joint ventures | $ | |||
During the three months ended March 31, 2024 and
2023, the Company recorded a loss from unconsolidated joint ventures of and $
Investment in equity securities
On June 24, 2022, the Company’s wholly-owned
subsidiary, ZP Data Platform 2 LLC, purchased
NOTE 6 – NOTES PAYABLE
| March 31, 2024 | December 31, 2023 | |||||||
| Note payable - East West Bank | $ | $ | ||||||
| Notes payable - Woodward Properties | ||||||||
| Total principal due on notes payable | ||||||||
| Less: debt discount | ( | ) | ( | ) | ||||
| Notes payable, net | $ | $ | ||||||
20
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
East West Bank Swap note
On July 11, 2022, Zoned Arizona entered into a
Loan Agreement (the “Loan Agreement”), dated as of July 11, 2022, by and between Zoned Arizona and East West Bank (the “Bank”).
Pursuant to the terms of the Loan Agreement, subject to and upon the satisfaction of the terms and conditions of the Loan Agreement, Zoned
Arizona could request advances under a multiple access loan (“MAL”) during the term of the MAL. On July 11, 2022, in connection
with the Loan Agreement, Zoned Arizona paid loan and other fees of $
At any time before July 11, 2023, Zoned Arizona may elect to commence paying principal together with interest on the MAL (the “Early Amortization Election”) in accordance with the repayment terms set forth in the variable rate note initially evidencing the MAL, executed by Zoned Arizona in favor of the Bank (the “Note”). If Zoned Arizona makes the Early Amortization Election, then (i) Zoned Arizona will not be entitled to any further advances under the MAL, and (ii) the 25-year amortization schedule referenced in the Note will be from the date Zoned Arizona makes the Early Amortization Election.
The Loan Agreement contains representations, warranties
and covenants customary for a transaction of this type. Among other things, the Loan Agreement provides as follows: (a) upon the occurrence
of an event of default, the outstanding principal balance of the MAL will not at any time exceed
On December 7, 2022, Zoned Arizona and the Bank
entered into a First Amendment to Loan Agreement (the “First Amendment”). Pursuant to the terms of the First Amendment, Zoned
Arizona has elected to make its Early Amortization Election (defined in the First Amendment and Loan Agreement), which election requires
Zoned Arizona to commence paying principal and interest on the MAL as set forth in the Amended Note (defined below). Except as provided
in the First Amendment, the terms of the Loan Agreement remain in full force and effect. Pursuant to the terms of the Loan Agreement and
First Amendment, on December 7, 2022, Zoned Arizona issued an Amended and Restated Promissory Note (the “Amended Note”) to
the Bank. The Amended Note has an original principal amount of $
Zoned Arizona may prepay the outstanding principal under the Swap Note, at any time, subject to the provisions of the Swap Note.
Also as previously disclosed, on July 11, 2022 and pursuant to the terms of the Loan Agreement, the Company executed a Guaranty (the “Guaranty”) in favor of the Bank, pursuant to which the Company agreed to guarantee all indebtedness of Zoned Arizona to the Bank arising under or in connection with the MAL or any of the loan documents. On December 7, 2022, the Company executed an Acknowledgement of Amendment and Reaffirmation of Guaranty (the “Reaffirmation”) in favor of the Bank. The Reaffirmation reaffirms the Guaranty and provides the Company’s consent to the First Amendment and Swap Note.
On December 7, 2022, Zoned Arizona and the Bank
entered into an Interest Rate Swap Transaction Confirmation (the “Confirmation”). The Confirmation incorporates by reference
the 2002 ISDA Master Agreement as published by the International Swaps and Derivatives Association, Inc. as if the parties to the Confirmation
executed such agreement in such form. The Confirmation provides the terms and conditions governing the interest rate swap transaction
afforded to Zoned Arizona, including a fixed interest rate of
During the three months ended March 31, 2024 and
2023, amortization of debt discount amounted to $
21
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
On March 31, 2024, principal and interest due
on the East West Bank Swap Note amounted to $
23616 Land Contract Note Payable
On December 5, 2022, in connection with the acquisition
of the Woodward Property located in Pleasant Ridge, Michigan, the Company entered into a land contract note in the amount of $
| 1) | 60 monthly payments of principal and interest of $ |
| 2) | A balloon payment of $ |
On March 31, 2024, principal and interest due
on the 23616 Land Contract Note Payable amounted to $
23634 Land Contract Note Payable
On February 24, 2023, in connection with the 23634
Land Contract dated February 24, 2023 (see Note 4), the Company entered into a land contract note payable of $
| Years ending March 31, | Amount | |||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Thereafter | ||||
| Total principal payments due on March 31, 2024 | $ | |||
NOTE 7 – CONVERTIBLE NOTE PAYABLE
On January 9, 2017, the Company issued a convertible
debenture (the “Abrams Debenture”) in the aggregate principal amount of $
The Company may prepay the Abrams Debenture at
any point after nine months, in whole or in part. Pursuant to the terms of the Abrams Debenture, Mr. Abrams is entitled to convert all
or a portion of the principal balance and all accrued and unpaid interest due under the Abrams Debenture into shares of the Company’s
common stock at a conversion price of $
If the Company defaults on payment, Mr. Abrams
may at his option, extend all conversion rights, through and including the date the Company tenders or attempts to tender payment in full
of all amounts due under the Abrams Debenture. Any amount of principal or interest, which is not paid when due shall bear interest at
the rate of
22
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
As of March 31, 2024 and December 31, 2023, the
principal balance due under the Abrams Debenture is $
NOTE 8 – RELATED PARTY TRANSACTION
Indemnification agreements
On August 23, 2021, the Company entered into indemnification agreements with each of its directors and executive officers. In general, these indemnification agreements require the Company to indemnify a director and officer to the fullest extent permitted by law against liabilities that may arise in connection with that director’s service as a director and officer for the Company. Additionally, the Company shall advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. In August 2021, the Company did not renew its officers and directors insurance.
NOTE 9 – STOCKHOLDERS’ EQUITY
(A) Preferred Stock
On December 13, 2013, the Board of Directors of
the Company authorized and approved the creation of a new class of Preferred Stock consisting of
| a. | Alter or change the rights, preferences or privileges of the Preferred Stock. | |
| b. | Create any new class of stock having preferences over the Preferred Stock. | |
| c. | Repurchase any of our common stock. | |
| d. | Merge or consolidate with any other company, except our wholly owned subsidiaries. | |
| e. | Sell, convey or otherwise dispose of, or create or incur any mortgage, lien, or charge or encumbrance or security interest in or pledge of, or sell and leaseback, in all or substantially all our property or business. | |
| f. | Incur, assume or guarantee any indebtedness maturing more than 18 months after the date on which it is incurred, assumed or guaranteed by us, except for operating leases and obligations assumed as part of the purchase price of property. |
(B) Common stock redemption
On October 10, 2023, the Company entered into
a Stock Redemption Agreement, whereby the Company purchased
23
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
(C) Equity incentive plans
On August 9, 2016, the Company’s Board of
Directors authorized the 2016 Equity Incentive Plan (the “2016 Plan”) and reserved
The Company also continues to maintain its 2014
Equity Compensation Plan (the “2014 Plan”), pursuant to which
(D) Stock options
For the year ended December 31, 2023 and 2022,
in connection with the accretion of stock-based option expense, the Company recorded stock option expense over the vesting period of $
On October 1, 2023, the Company cancelled
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding December 31, 2023 | $ | $ | ||||||||||||||
| Forfeited | ||||||||||||||||
| Balance Outstanding March 31, 2024 | $ | $ | ||||||||||||||
| Exercisable, March 31, 2024 | $ | $ | ||||||||||||||
| Balance non-vested on December 31, 2023 | $ | $ | ||||||||||||||
| Forfeited during the period | ||||||||||||||||
| Vested during the period | ( | ) | ||||||||||||||
| Balance non-vested on March 31, 2024 | $ | $ | ||||||||||||||
24
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Legal matters
From time to time, the Company may be involved in litigation related to claims arising out of its operations in the normal course of business. As of March 31, 2024, the Company is not involved in any pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations, or cash flows.
Employment and Related Golden Parachute Agreement
On May 23, 2018, the Company and Mr. McLaren,
the Company’s Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors, agreed to replace Mr. McLaren’s
2014 employment agreement with a new employment agreement dated May 23, 2018 (the “2018 Employment Agreement”). Pursuant to
the terms of the 2018 Employment Agreement, the Company agreed to continue to pay Mr. McLaren his then-current base annual salary of $
The 2018 Employment Agreement has a term of
| (i) | immediately, if Mr. McLaren dies; | |
| (ii) | immediately, if Mr. McLaren receives benefits under the long-term disability insurance coverage then provided by the Company or, if no such insurance is in effect, upon Mr. McLaren’s disability; | |
| (iii) | on the expiration date, as the same may be extended by the parties by written amendment to the 2018 Employment Agreement prior to the occasion thereof; | |
| (iv) | at the option of the Company for Cause (as defined in the 2018 Employment Agreement) upon the Company’s provision of written notice to Mr. McLaren of the basis for such Termination; |
| (v) | at the option of the Company, without Cause; | |
| (vi) | by Mr. McLaren at any time with Good Reason (as defined in the 2018 Employment Agreement), upon 30 days’ prior written notice to the Company delivered not later than within 90 days of the existence of the condition therefor; or | |
| (vii) | by Mr. McLaren at any time without Good Reason, upon not less than three months’ prior written notice to the Company. |
In the event of a Termination for any reason or for no reason whatsoever, or upon the expiration date of the 2018 Employment Agreement, whichever comes first, all rights and obligations under the 2018 Employment Agreement shall cease (i) as to the Company, except for the Company’s obligations for the payment of applicable severance benefits thereunder, and for indemnification thereunder, and (ii) as to Mr. McLaren, except for his obligation under the restrictive covenants in the 2018 Employment Agreement.
The Company and Mr. McLaren also entered into a Golden Parachute Agreement (the “Golden Parachute Agreement”) on May 23, 2018. No benefits shall be payable under the Golden Parachute Agreement unless there shall have been a change in control of the Company, as set forth below. For purposes of the Golden Parachute Agreement, amongst other terms in the Golden Parachute Agreement, a “change in control of the Company” shall mean a change of control of a nature that would be required to be reported in response to Item 6 of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended.
For purposes of the Golden Parachute Agreement, “Cause” means termination upon (a) the willful and continued failure to substantially perform duties with the Company after a written demand for substantial performance is delivered by the Board, which demand specifically identifies the manner in which the Board believes that duties have not substantially been performed, or (b) the willful engaging in conduct, which is demonstrably and materially injurious to the Company, monetarily or otherwise.
25
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
For purposes of the Golden Parachute Agreement, “Good Reason” means, without express written consent, the occurrence after a change in control of the Company of any of the following circumstances unless, such circumstances are fully corrected prior to the date of Termination specified in the notice of Termination:
| (a) | a material diminution in Mr. McLaren’s authority, duties or responsibility from those in effect immediately prior to the change in control of the Company; | |
| (b) | a material diminution in Mr. McLaren’s base compensation; | |
| (c) | a material change in the geographic location at which Mr. McLaren performs his duties; | |
| (d) | a material diminution in the authority, duties, or responsibilities of the supervisor to whom Mr. McLaren is required to report, including a requirement that Mr. McLaren report to a corporate officer or employee instead of reporting directly to the Board; |
| (e) | a material diminution in the budget over which Mr. McLaren retains authority; |
| (f) | a material breach under any agreement with the Company to continue in effect any bonus to which Mr. McLaren was entitled, or any compensation plan in which Mr. McLaren participates immediately prior to the change in control of the Company which is material to Mr. McLaren’s total compensation; | |
| (g) | a material breach under any agreement with the Company to provide Mr. McLaren benefits substantially similar to those enjoyed by him under any of the Company’s life insurance, medical, health and accident, or disability plans in which he was participating at the time of the change in control of the Company, the failure to continue to provide Mr. McLaren with a Company automobile or allowance in lieu of it, if Mr. McLaren was provided with such an automobile or allowance in lieu of it at the time of the change of control of the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive him of any material fringe benefit enjoyed by him at the time of the change in control of the Company, or the failure by the Company to provide him with the number of paid vacation days to which he is entitled on the basis of years of service with the Company in accordance with the Company’s normal vacation policy in effect at the time of the change in control of the Company; |
Following a change in control of the Company, upon termination of Mr. McLaren’s employment or during a period of disability, Mr. McLaren will be entitled to the following benefits:
| (i) | During any period that he fails to perform his full-time duties with the Company as a result of incapacity due to physical or mental illness, Mr. McLaren will continue to receive his base salary at the rate in effect at the commencement of any such period, together with all amounts payable to him under any compensation plan of the Company during such period, until the Golden Parachute Agreement is terminated. |
| (ii) | If Mr. McLaren’s employment is terminated by the Company for Cause or by Mr. McLaren other than for Good Reason, disability, death or retirement, the Company will pay Mr. McLaren his full base salary through the date of Termination at the rate in effect at the time notice of Termination is given, plus all other amounts and benefits to which he is entitled under any compensation plan of the Company at the time such payments are due. |
| (iii) | If employment by the Company shall be terminated (a) by the Company other than for Cause, death or disability or (b) by Mr. McLaren for Good Reason, Mr. McLaren will be entitled to benefits provided below: |
| a. | The Company will pay Mr. McLaren his full base salary through the date of Termination at the rate in effect at the time notice of Termination is given, plus all other amounts and benefits to which he is entitled under any compensation plan of the Company. |
| b. | In lieu of any further salary payments to Mr. McLaren for periods subsequent to the date of Termination, the Company will pay as severance pay to Mr. McLaren a lump sum severance payment (together with the payments provided in clause I(c) and (d) below) equal to five times the sum of his annual base salary in effect immediately prior to the occurrence of the circumstance giving rise to the notice of Termination given in respect of them. |
| c. | The Company will pay to Mr. McLaren any deferred compensation allocated or credited to him or his account as of the date of Termination. |
26
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
| d. | In lieu of shares of common stock of the Company issuable upon exercise of outstanding options, if any, granted to Mr. McLaren under the Company’s stock option plans (which options shall be cancelled upon the making of the payment referred to below), Mr. McLaren will receive an amount in cash equal to the product of (i) the excess of the closing price of the Company’s common stock as reported on or nearest the date of Termination (or, if not so reported, on the basis of the average of the lowest asked and highest bid prices on or nearest the date of Termination), over the per share exercise price of each option held by Mr. McLaren (whether or not then fully exercisable) plus the amount of any applicable cash appreciation rights, times (ii) the number of the Company’s common stock covered by each such option. |
| e. | The Company will also pay to Mr. McLaren all legal fees and expenses incurred by him as a result of such Termination. |
On July 23, 2022, the Board of Directors of the
Company appointed Berekk Blackwell, the Company’s Chief Operating Officer, as President of the Company, effective immediately. On
July 26, 2022, the Company entered into an employment agreement, effective July 1, 2022, with Mr. Blackwell (the “Blackwell Employment
Agreement”). Pursuant to the terms of the Blackwell Employment Agreement, the Company agreed to pay Mr. Blackwell a base annual
salary of $
401(k) Plan
On September 29, 2021, the Company’s board
of directors adopted the Zoned Properties 401(k) Plan (the “Plan”) effective January 1, 2021. The Company contributes a matching
contribution to the Plan for each employee in an amount equal to
Purchase and Sale Agreement and Joint Escrow – Surprise Property
On February 23, 2024, ZPRE Holdings provided an
approval notice to the Seller (as hereinafter defined) of the Surprise Property (as hereinafter defined), related to the Company’s
intent to consummate the purchase of the Surprise Property, following notice from the City of Surprise that the Company had received final
approvals of its cannabis entitlements, after satisfaction of the appeal period (the “Cannabis Approvals”), related to a use-permit
for a cannabis retail dispensary to be developed at the Surprise Property. As used herein, the “Surprise Property” refers
to that certain property commonly known as Bella Fiesta Pad B in Surprise, Arizona, which property is a certain tract or parcel of land
containing approximately 1.114 acres, together with all improvements, buildings, leases, rights, easements, and appurtenances pertaining
thereto. Previously, on January 23, 2023, ZPRE Holdings entered into a Purchase and Sale Agreement and Joint Escrow Instructions, by and
between NWC Dysart & Bell LLC (the “Seller”) and ZPRE Holdings as the buyer. Such agreement was subsequently amended on
May 12, 2023, October 25, 2023, and December 20, 2023 (as amended, the “Agreement”). Pursuant to the terms of the Agreement,
the Seller agreed to sell to ZPRE Holdings, and ZPRE Holdings agreed to purchase, the Surprise Property in exchange for a purchase price
of $
NOTE 11 – SEGMENT REPORTING
The Company operates in
27
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues: | ||||||||
| Property investment portfolio | $ | $ | ||||||
| Real estate services | ||||||||
| Depreciation and amortization: | ||||||||
| Property investment portfolio | ||||||||
| Real estate services | ||||||||
| Interest expense: | ||||||||
| Property investment portfolio | ||||||||
| Real estate services | ||||||||
| Loss from unconsolidated joint ventures: | ||||||||
| Property investment portfolio | ||||||||
| Real estate services | ||||||||
| Net income (loss): | ||||||||
| Property investment portfolio (a) | ( | ) | ||||||
| Real estate services | ( | ) | ( | ) | ||||
| $ | $ | ( | ) | |||||
| March 31, 2024 | December 31, 2023 | |||||||
| Identifiable long-lived tangible assets on March 31, 2024 and December 31, 2023 by segment: | ||||||||
| Property investment portfolio | $ | $ | ||||||
| Real estate services | ||||||||
| $ | $ | |||||||
| (a) |
NOTE 12 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITY
On March 15, 2022, the Company entered to an Assumption
of Lease and Consent Agreement with a landlord, whereby the landlord consented to the assignment of an office lease, as amended, from
the original tenant to the Company. The lease term shall begin on March 15, 2022 and expire on
In adopting ASC Topic 842, Leases (Topic 842) on January 1, 2019, the Company had elected the ‘package of practical expedients’, which permitted it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs (see Note 2). In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 months or less. Since the terms of the Company’s operating lease for its office space prior to March 15, 2022 was 12 months or less on the date of adoption, pursuant to ASC 842, the Company determined that the lease met the definition of a short-term lease, and the Company did not recognize the right-of use asset and lease liability arising from this lease. Upon signing of the Assumption of Lease and Consent Agreement on March 15, 2022, the Company analyzed the new lease and determined it is required to record a lease liability and a right of use asset on its consolidated balance sheet, at fair value.
28
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
For the three months ended March 31, 2024 and
2023, in connection with its operating leases, the Company recorded rent expense of $
The significant assumption used to determine the
present value of the lease liability in March 2022 was a discount rate of
| March 31, 2024 | December 31, 2023 | |||||||
| Office lease right of use asset | $ | $ | ||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Balance of ROU assets | $ | $ | ||||||
| Year ended March 31, | Amount | |||
| 2025 | $ | |||
| Total minimum non-cancelable operating lease payments | ||||
| Less: discount to fair value | ( | ) | ||
| Total lease liability on March 31, 2024 | $ | |||
NOTE 13 – SUBSEQUENT EVENTS
On May 1, 2024, ZP Woodward and Rapid Fish, LLC (the “Parties”), with individual Guarantors, Thomas Nafso and Ammar Kattoula (the “Guarantors”), entered into a First Amendment to the Absolute Net Lease Agreement (the “First Amendment”) pertaining to premises located at 23600-23634 Woodward Ave, Pleasant Ridge MI 48069 (See Note 3). The Parties also agreed to a fully executed Reaffirmation of Guaranty from the Guarantors.
According to the terms of the First Amendment, the following changes have been agreed to by the Parties:
Amended Rental Payment Schedule
The First Amendment provides that as long as the Company’s Conditions, as outlined in this First Amendment, are satisfied including a Renovation Completion Commitment, the Rental Payment Schedule of the Lease will be amended to the schedule set forth in the First Amendment.
Capital Commitment
The First Amendment provides for the inclusion
of the Capital Commitment as follows: Tenant shall cause a total of at least $
29
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
Renovation Completion Commitment
The First Amendment provides for the inclusion of the Renovation Completion Commitment as follows: Tenant shall cause its Capital Commitment at the Premises (the “Renovation Completion Commitment”) to be completed within three (3) months after the First Amendment Effective Date (the “Renovation Completion Commitment Date”). In order to satisfy the Renovation Completion Commitment, Tenant must satisfy the following prior to the Renovation Completion Commitment Date (i) deliver to the Company the appropriate deliverables evidencing renovation completion (the “Renovation Completion Deliverables”) (as defined below) (ii) open for business to the public for its intended Use of the Premises (the “Store Opening”), (iii) and complete its first bona fide sale to the public. The Renovation Completion Deliverables include the following: (x) Tenant has furnished to the Company a copy of a commercially reasonably detailed final cost breakdown for Tenant’s Work and the Company has inspected the Premises to confirm that Tenant’s Work has been completed in a good and workmanlike manner according to the Tenant’s Approved Plans; (y) Tenant has furnished to the Company commercially reasonable final affidavits and final lien releases from Tenant’s general contractor, if any, all subcontractors and all material suppliers for all labor and materials performed or supplied as part of Tenant’s Work (whether or not the Allowance is applicable thereto); (z) a copy of the certificate of occupancy from the governmental authority having jurisdiction has been delivered to the Company. Tenant acknowledges that the Renovation Completion Commitment is material to the Company and the Company would not have agreed to enter into this First Amendment but for Tenant’s obligations in this paragraph. If the Renovation Completion Commitment is not completed in the prescribed time period, Tenant’s failure shall constitute an Event of Default under the Lease. the Company shall grant Tenant up to two (2) additional 30-day extension upon request, so long as at the time of the extension the site is conducting inspections toward certificate of occupancy.
North Lot
The First Amendment also provides that if within
18 months of the date of this First Amendment, Tenant is able to complete all of the following related to 23634 Woodward Ave, Pleasant
Ridge MI 48069 with an APN of 25-27-181-003 (the “North Lot”): (i) obtain authorization from all required jurisdictions (including
the City of Pleasant Ridge) that the use of the North Lot parking spaces is no longer required and releases the Company from all obligations
related to the North Lot under the Declaration of Restrictions and Parking Easement (the “Parking Agreement”), and (ii) confirm
that the Tenant is able to continue to use the lot for purposes of ingress and egress, and (iii) Tenant is able to arrange a deal with
the seller of the North Lot, which is currently under a Land Contract with outstanding installment payments, that (x) provides the Company
with indemnity from Tenant that completely releases the Company of any operational obligations or liabilities related to the North Lot,
(y) provides the Company with indemnity from Tenant that completely release the Company of any financial obligations or liabilities related
to the North Lot, and (z) does not cause any encumbrance or legal liability to the remaining properties at the Premises; then within
Reaffirmation of Guarantee
In consideration of the
First Amendment, the Guarantors executed and delivered a Reaffirmation of Guaranty, attached to the First Amendment as Addendum B (the
“Reaffirmation of Guaranty”) effective as of the First Amendment Effective Date, May 3, 2024. Related to the Guaranty and
the Original Guarantors, The Company agrees, that so long as there are no uncured Events of Default and Tenant remains in good standing
under the Lease, then the Original Guarantors shall be released of their guarantees following the original lease term of fourteen and
a half (
30
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results
This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This quarterly report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the “Risk Factors” section of our annual report on Form 10-K as filed on March 26, 2024, as the same may be updated from time to time.
We caution that these factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q.
Overview
Zoned Properties, Inc. (“Zoned Properties” or the “Company”) was incorporated in the State of Nevada on August 25, 2003. In October 2013, the Company changed its name to Zoned Properties, Inc. and in April 2014, the Company shifted its business model to address commercial real estate in the regulated cannabis industry. Zoned Properties is a technology-driven property investment company focused on acquiring value-add real estate within the regulated cannabis industry in the United States. The Company aspires to innovate within the real estate development sector, focusing on direct-to-consumer real estate that is leased to the best-in-class cannabis retailers. Headquartered in Scottsdale, Arizona, Zoned Properties is redefining the approach to commercial real estate investment through its standardized investment model backed by its proprietary property technology. Zoned Properties has developed a national ecosystem of real estate services to support its real estate development model, including a commercial real estate brokerage and a real estate advisory practice.
The Company operates in two organized segments; (1) the operations, leasing and management of its commercial properties, herein known as the “Property Investment Portfolio” segment, and (2) the advisory, brokerage and technology services related to commercial properties, herein known as the “Real Estate Services” segment. The Company targets commercial properties that face unique zoning or development challenges, identifies solutions that can potentially have a major impact on their commercial value, and then works to acquire the properties while securing long-term, absolute-net leases. The Company does not grow, harvest, sell or distribute cannabis or any substances regulated under United States law such as the Controlled Substance Act of 1970, as amended (the “CSA”).
The core of our business operations involves identifying, securing, acquiring, and leasing commercial properties that intend to operate within highly regulated industries, including the legalized cannabis industry. Within highly regulated industries, local municipalities typically develop strict regulations, including zoning and permitting requirements related to commercial real estate, that dictate the specific locations and parameters under which regulated properties can operate, including cannabis properties. We often refer to these requirements as cannabis approvals. These regulations often include complex permitting processes that require longer development timelines than traditional commercial real estate and can include non-standard codes governing each location; for example, restricting a regulated property or facility from operating within a certain distance of any parks, schools, churches, or residential districts, or restricting a regulated property from operating outside a defined set of hours of operation. When an organization can collaborate with local representatives, a proactive set of rules and regulations can be established and followed to meet the needs of both the regulated operators and the local community.
31
Due to the complex nature of the Company’s core business operations and target investment properties, the Company may secure dozens of potential property candidates for acquisition and prospective tenant candidates for leasing at any given time, all in the normal course of business. The process of securing a potential property candidate may include completing contractual agreements such as an option agreement or a purchase agreement, which may include various contingencies and conditions precedent related to the ultimate consummation of the acquisition, investment, or transaction. Simultaneously with the securing of potential property candidates, the Company will advertise and market a property to prospective tenant candidates for a long-term, absolute-net lease agreement, which may include various contingencies and conditions precedent related to the ultimate commencement of the lease and tenancy. In order to deliver a successful investment property transaction, the Company must collectively receive all cannabis approvals from state and local governing authorities that may be required at a given property, secure a qualified tenant to lease and operate the property, and complete the acquisition of the property.
The Company’s current investment properties are located in Arizona, Illinois, and Michigan with 100% occupancy and a weighted average lease term over 10 years. Each of the Company’s leased properties is occupied by a commercial cannabis tenant.
Zoned Properties maintains a portfolio of properties that it owns, develops and leases. As of March 2024, the Company leases land and/or building space at the six properties in its portfolio to licensed and regulated cannabis tenants in areas with established cannabis regulations and zoning procedures. Four of the leased properties are zoned and permitted as regulated cannabis retail dispensaries, and two of the leased properties are zoned and permitted as regulated cannabis cultivation and processing facilities. The Company considers the two cultivation sites in its portfolio as legacy properties, and may consider selling or leveraging those properties to unlock equity and create capital availability in the future. The Zoned Properties investment thesis has evolved over the years as the cannabis industry has emerged, and is currently focused on investing capital into direct-to-consumer properties, located in state-markets with robust cannabis consumer demand in the industry.
As of March 31, 2024, a summary of rental properties owned by us consisted of the following:
| Location | Tempe, AZ | Chino Valley, AZ | Green Valley, AZ | Kingman, AZ | Pleasant Ridge, MI | Chicago, IL | Property Investment Portfolio Total | |||||||||||||||||||||
| Description | Industrial /Office | Greenhouse/ Nursery | Retail (special use) | Retail (special use) | Retail (special use) | Retail (special use) | ||||||||||||||||||||||
| Current Use | Cannabis Facility | Cannabis Facility | Cannabis Dispensary | Cannabis Dispensary | Cannabis Dispensary | Cannabis Dispensary | ||||||||||||||||||||||
| Date Acquired | March 2014 | August 2015 | Oct 2014 | May 2014 | Dec 22/Feb 23 | January 2024 | ||||||||||||||||||||||
| Lease Start Date | May 2018 | May 2018 | May 2018 | May 2018 | December 2022 | January 2024 | ||||||||||||||||||||||
| Lease End Date | April 2040 | April 2040 | April 2040 | April 2040 | March 2037 | January 2039 | ||||||||||||||||||||||
| No. of Tenants | 1 | 1 | 1 | 1 | 1 | 1 | ||||||||||||||||||||||
| Land Area (Acres) | 3.65 | 47.60 | 1.33 | 0.32 | 0.56 | 0.37 | 54.03 | |||||||||||||||||||||
| Land Area (Sq. Feet) | 158,772 | 2,072,149 | 57,769 | 13,939 | 24,306 | 16,000 | 2,342,935 | |||||||||||||||||||||
Undeveloped Land Area (Sq. Feet) | - | 1,782,563 | - | 6,878 | - | - | 1,789,441 | |||||||||||||||||||||
| Developed Land Area (Sq. Feet) | 158,772 | 289,586 | 57,769 | 7,061 | 24,306 | 16,000 | 553,494 | |||||||||||||||||||||
| Total Rentable Building Sq. Ft. | 60,000 | 97,312 | 1,440 | 1,497 | 17,192 | 2,800 | 180,576 | |||||||||||||||||||||
| Vacant Rentable Sq. Ft. | - | - | - | - | - | - | - | |||||||||||||||||||||
| Sq. Ft. rented as of March 31, 2024 | 60,000 | 97,312 | 1,440 | 1,497 | 17,192 | 2,800 | 180,576 | |||||||||||||||||||||
| Annual Base Rent (*,**) | ||||||||||||||||||||||||||||
| 2024 (remainder of year) | $ | 457,540 | $ | 788,227 | $ | 31,500 | $ | 36,000 | $ | 373,755 | $ | 109,996 | $ | 1,797,018 | ||||||||||||||
| 2025 | 610,053 | 1,050,970 | 42,000 | 48,000 | 509,553 | 226,596 | 2,487,172 | |||||||||||||||||||||
| 2026 | 598,589 | 1,050,970 | 42,000 | 48,000 | 524,840 | 233,394 | 2,497,793 | |||||||||||||||||||||
| 2027 | 590,400 | 1,050,970 | 42,000 | 48,000 | 540,585 | 240,395 | 2,512,350 | |||||||||||||||||||||
| 2028 | 590,400 | 1,050,970 | 42,000 | 48,000 | 556,803 | 247,607 | 2,535,780 | |||||||||||||||||||||
| 2029 | 590,400 | 1,050,970 | 42,000 | 48,000 | 573,507 | 255,036 | 2,559,913 | |||||||||||||||||||||
| Thereafter | 6,100,800 | 10,860,019 | 434,000 | 496,000 | 4,703,936 | 2,668,663 | 25,263,418 | |||||||||||||||||||||
| Total | $ | 9,538,182 | $ | 16,903,096 | $ | 675,500 | $ | 772,000 | $ | 7,782,979 | $ | 3,981,687 | $ | 39,653,444 | ||||||||||||||
| * | Annual base rent represents amount of cash payments due from tenants. |
| ** | For Tempe, AZ, table includes rental income generated from the lease of parking lot space used by a third party as an antenna location. |
32
Annualized $ per Rented Sq. Ft. (Base Rent)
| Year | Tempe, AZ | Chino Valley, AZ | Green Valley, AZ | Kingman, AZ | Pleasant Ridge, MI | Chicago, IL | ||||||||||||||||||
| 2024 | $ | 9.8 | $ | 10.8 | $ | 29.2 | $ | 32.1 | 28.2 | 39.3 | ||||||||||||||
| 2025 | $ | 9.8 | $ | 10.8 | $ | 29.2 | $ | 32.1 | 29.1 | 80.9 | ||||||||||||||
| 2026 | $ | 9.8 | $ | 10.8 | $ | 29.2 | $ | 32.1 | 29.9 | 83.4 | ||||||||||||||
| 2027 | $ | 9.8 | $ | 10.8 | $ | 29.2 | $ | 32.1 | 30.8 | 85.9 | ||||||||||||||
| 2028 | $ | 9.8 | $ | 10.8 | $ | 29.2 | $ | 32.1 | 31.8 | 88.4 | ||||||||||||||
| 2029 | $ | 9.8 | $ | 10.8 | $ | 29.2 | $ | 32.1 | 32.7 | 91.1 | ||||||||||||||
Results of Operations
The following comparative analysis on results of operations was based primarily on the comparative financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited consolidated financial statements and the notes to those statements for the three months ended March 31, 2024 and 2023, which are included elsewhere in this quarterly report on Form 10-Q. The results discussed below are for the three months ended March 31, 2024 and 2023.
Comparison of Results of Operations for the Three Months Ended March 31, 2024 and 2023
Revenues
For the three months ended March 31, 2024 and 2023, revenues by reportable business segments were as follows:
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues: | ||||||||
| Property investment portfolio | $ | 691,292 | $ | 610,474 | ||||
| Real estate services | 145,760 | 77,550 | ||||||
| Total revenues | $ | 837,052 | $ | 688,024 | ||||
For the three months ended March 31, 2024, total revenues amounted to $837,052, including property investment portfolio revenues $691,292, which consists of rental revenues, as compared to total revenues of $688,024, including rental revenues of $610,474, for the three months ended March 31, 2023, an overall increase of $149,028, or 21.7%. This increase was attributable to an increase in rental revenues of $80,818, or 13.2%, and a net increase in real estate services revenues of $68,210, or 88.0%, attributable to an increase in commissions earned on real estate listings of $142,460, offset by a decrease in advisory services revenues of $74,250.
The increase in property investment portfolio revenues was primarily due to the signing of a new lease with a new tenant at our recently acquired property located in Chicago, Illinois which began in January 2024. All of the Company’s real estate properties are leased under absolute-net or triple-net leases with our tenants. Additionally, beginning in August 2023, we began receiving additional rental revenue of $3,500 per month in connection with a Sublease Agreement with CJK and a subtenant in connection with our Kingman property.
Operating expenses
For the three months ended March 31, 2024, operating expenses amounted to $708,143 as compared to $711,410 for the three months ended March 31, 2023, a decrease of $3,267, or 0.5%. For the three months ended March 31, 2024 and 2023, operating expenses consisted of the following:
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Compensation and benefits | $ | 265,164 | $ | 345,495 | ||||
| Professional fees | 122,270 | 142,662 | ||||||
| Brokerage fees | 103,330 | - | ||||||
| General and administrative expenses | 78,776 | 78,923 | ||||||
| Depreciation and amortization | 89,647 | 97,582 | ||||||
| Real estate taxes | 27,356 | 31,748 | ||||||
| Business development costs | 21,600 | 15,000 | ||||||
| Total | $ | 708,143 | $ | 711,410 | ||||
33
| ● | For the three months ended March 31, 2024, compensation and benefit expense decreased by $80,331, or 23.2%, as compared to the three months ended March 31, 2023. The decrease was attributable to a decrease in stock-based compensation of $26,768 related to a decrease in accretion of stock option expense, a decrease in health insurance expense of $16,386, and a decrease in other compensation and benefits of $37,177. | |
| ● | For the three months ended March 31, 2024, professional fees decreased by $20,392, or 14.3%, as compared to the three months ended March 31, 2023. This decrease was primarily attributable to a decrease in public relations fees of $20,080. | |
| ● | For the three months ended March 31, 2024 and 2023, we recorded brokerage fees amounting to $103,330 and $0, respectively, representing an increase of $103,350, or 100.0%. Brokerage fees occur as the result of various percentage-based commission splits we pay to our licensed brokerage team members who participate in various real estate listing transactions. | |
| ● | General and administrative expenses consist of expenses such as rent expense, insurance expense, insurance expense, travel expenses, office expenses, telephone and internet expenses, advertising and marketing expense, and other general operating expenses. For the three months ended March 31, 2024, general and administrative expenses decreased by $147, or 0.20%, as compared to the three months ended March 31, 2023. |
| ● | For the three months ended March 31, 2024, depreciation expense decreased by $7,935, or 8.1%, as compared to the three months ended March 31, 2023. | |
| ● | For the three months ended March 31, 2024, real estate taxes decreased by $4,392, or 13.8%, as compared to the three months ended March 31, 2023. | |
| ● | For the three months ended March 31, 2024, business development costs increased by $6,600, or 44.0%, as compared to the three months ended March 31, 2023. This increase was attributable to an increase in costs related to forfeited escrow deposits and the write off of costs related to projects which we decided not to pursue. |
Income (loss) from operations
As a result of the factors described above, for the three months ended March 31, 2024, income from operations amounted to $128,909 as compared to a loss from operations of $(23,386) for the three months ended March 31, 2023, a positive change of $152,295, or 651.23%.
Other (expenses) income, net
Other (expense) income primarily includes interest expense incurred on debt with third parties and a related party and also includes other income (expense). For the three months ended March 31, 2024, total other expenses, net amounted to $32,436 as compared to total other expenses, net of $284,793, respectively, representing a decrease of $252,357, or 88.6%. This decrease was attributable to an increase in interest expense of $3,539 primarily related to an increase in notes payable, offset by an increase in income in fair value from an interest rate swap of $255,896.
Equity method loss
For the three months ended March 31, 2024 and 2023, we incurred an equity method loss of $0 and $1,469, respectively, a decrease of $1,469, or 100.0%.
Net income (loss)
As a result of the foregoing, for the three months ended March 31, 2024 and 2023, net income (loss) amounted to $96,473, or $0.01 per common share (basic and diluted), and $(309,648), or $(0.03) per common share (basic and diluted), respectively.
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had cash of $1,519,903 and $3,099,795 as of March 31, 2024 and December 31, 2023, respectively.
34
Our primary uses of cash have been for the acquisition of new property investments, compensation and benefits, fees paid to third parties for professional services, real estate taxes, general and administrative expenses, and the development of rental properties and other lines of business. All funds received have been expended in the furtherance of growing the business. We receive funds from the collection of rental income, and real estate services, which primarily includes advisory fees and brokerage fees. The following trends are reasonably likely to result in changes in our liquidity over the near to long term:
| ● | An increase in working capital requirements to finance our current business, | |
| ● | Addition of administrative and sales personnel as the business grows, | |
| ● | The cost of being a public company, | |
| ● | An increase in investments in joint ventures and other projects, and | |
| ● | An increase in investments in rental properties. |
We may need to raise additional funds, particularly if we are unable to continue to generate positive cash flows from our operations. We estimate that based on current plans and assumptions, that our available cash will be sufficient to satisfy our cash requirements under our present operating expectations for the next 12 months from the date of this quarterly report on Form 10-Q. Other than revenue received from the lease of our rental properties and real estate services, and from a bank note, we presently have no other significant alternative source of working capital.
We have used these funds to fund our operating expenses, pay our obligations, acquire and develop rental properties, invest in joint ventures and notes receivable, and to grow our company. We may need to raise significant additional capital or debt financing to acquire new properties, to develop existing properties, to assure we have sufficient working capital for our ongoing operations and debt obligations, and to invest in new joint venture and other projects.
East West Bank Swap and Amended Note
On December 7, 2022, Zoned Arizona and the Bank entered into a First Amendment to Loan Agreement (the “First Amendment”). Pursuant to the terms of the First Amendment, Zoned Arizona has elected to make its Early Amortization Election (defined in the First Amendment and Loan Agreement), which election requires Zoned Arizona to commence paying principal and interest on the MAL as set forth in the Amended Note (defined below). Except as provided in the First Amendment, the terms of the Loan Agreement remain in full force and effect. Pursuant to the terms of the Loan Agreement and First Amendment, on December 7, 2022, Zoned Arizona issued an Amended and Restated Promissory Note (the “Amended Note”) to the Bank. The Amended Note has an original principal amount of $4,500,000, a 50% loan-to-value as determined by the bank-ordered appraisal completed on the Tempe Property. The Amended Note requires Zoned Arizona to pay monthly principal and interest payments to the Bank at an interest rate equal to the prime rate plus 0.75% (9.25% as of March 31, 2024 and December 31, 2023). The Amended Note matures 10 years after its effective date and payments are calculated based on a 30-year amortization schedule. In connection with the Amended Note, in 2022, Zoned Arizona received gross proceeds of $4,500,000 and paid fees of $184,596.
Zoned Arizona may prepay the outstanding principal under the Swap Note, at any time, subject to the provisions of the Swap Note.
Also as previously disclosed, on July 11, 2022 and pursuant to the terms of the Loan Agreement, the Company executed a Guaranty (the “Guaranty”) in favor of the Bank, pursuant to which the Company agreed to guarantee all indebtedness of Zoned Arizona to the Bank arising under or in connection with the MAL or any of the loan documents. On December 7, 2022, the Company executed an Acknowledgement of Amendment and Reaffirmation of Guaranty (the “Reaffirmation”) in favor of the Bank. The Reaffirmation reaffirms the Guaranty and provides the Company’s consent to the First Amendment and Swap Note.
On December 7, 2022, Zoned Arizona and the Bank entered into an Interest Rate Swap Transaction Confirmation (the “Confirmation”). The Confirmation incorporates by reference the 2002 ISDA Master Agreement as published by the International Swaps and Derivatives Association, Inc. as if the parties to the Confirmation executed such agreement in such form. The Confirmation provides the terms and conditions governing the interest rate swap transaction afforded to Zoned Arizona, including a fixed interest rate of 7.65%. The Company recorded the swap at fair value in the consolidated balance sheets with changes in fair value recorded contemporaneously in earnings. The Company has entered into an interest rate swap to mitigate variability in interest payments on its variable-rate debt.
35
On March 31, 2024, principal and interest due on the East West Bank Swap Note amounted to $4,436,449 and $7,520, respectively. On December 31, 2023, principal and interest due on the East West Bank Swap Note amounted to $4,447,068 and $8,861, respectively.
23616 Land Contract Note Payable
On December 5, 2022, in connection with the acquisition of the Woodward Property located in Pleasant Ridge, Michigan, the Company entered into a land contract note in the amount of $1,425,000 (the “Woodward Property Note Payable”). The Woodward Property Note Payable bears interest at 9% per annum and is due in full as follows:
| 1) | 60 monthly payments of principal and interest of $12,821 beginning on January 1, 2023, and | |
| 2) | A balloon payment of $1,274,117 including the remaining principal and interest on or before December 1, 2028. |
On March 31, 2024, principal and interest due on the 23616 Land Contract Note Payable amounted to $1,402,071 and $0, On December 31, 2023, principal and interest due on the 23616 Land Contract Note Payable amounted to $1,408,962 and $0, respectively.
23634 Land Contract Note Payable
On February 24, 2023, in connection with the 23634 Land Contract dated February 24, 2023 (see Note 4), the Company entered into a land contract note payable of $430,000 (the “23634 Land Contract Note Payable”). The 23634 Land Contract Note Payable accrues interest at the rate of 7% and is payable in 48 monthly installments of $3,865, beginning April 1, 2023, until the purchase price and interest are fully paid, provided that such purchase price and all interest will be fully paid on or before March 31, 2027. On March 31, 2024, principal and interest due on the 23634 Land Contract Note Payable amounted to $415,986 and $0, respectively. On December 31, 2023, principal and interest due on the 23634 Land Contract Note Payable amounted to $420,270 and $0, respectively.
Our future operations are dependent on our ability to manage our current cash balance, on the collection of rental and real estate services revenues and the attainment of new advisory and brokerage clients. Our real estate properties are leased to Significant Tenants and other tenants under triple-net leases for which terms vary. We monitor the credit of these tenants to stay abreast of any material changes in credit quality. We monitor tenant credit by (1) reviewing financial statements and related metrics and information that are publicly available or that are provided to us upon request, and (2) monitoring the timeliness of rent collections. As of March 31, 2024 and December 31, 2023, we had an asset concentration related to our Significant Tenant leases. As of March 31, 2023 and December 31, 2023, these Significant Tenants represented approximately 73.6% and 69.4% of total assets, respectively. If our Significant Tenants are prohibited from operating due to federal or state regulations or due to COVID-19, or cannot pay their rent, we may not have enough working capital to support our operations and we would have to seek out new tenants at rental rates per square less than our current rate per square foot.
We may secure additional financing to acquire and develop additional and existing properties. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow our business operations.
Cash Flow
For the Three Months Ended March 31, 2024 and 2023
Net cash flow provided by operating activities was $207,218 for the three months ended March 31, 2024, as compared to net cash flow provided by operating activities of $3,589 for the three months ended March 31, 2023, representing an increase of $203,629.
| ● | Net cash flow provided by operating activities for the three months ended March 31, 2024 primarily reflected net income of $96,473, adjusted for the add-back of non-cash items consisting of depreciation of $89,647, amortization of debt discount of $4,615, accretion of stock-based stock option expense of $16,494, a loss on forfeited escrow deposit of $21,600, and income from the changes in fair value from an interest rate swap of $125,603, offset by changes in operating assets and liabilities primarily consisting of an increase in accounts receivable of $42,908, an increase in deferred rent of $88,048 attributable to rent abatement on our new tenant lease at our Chicago, Illinois Property, an increase in accounts payable of $58,025, an increase in accrued expenses of $128,038, an increase in contract liabilities of $23,508, and an increase in security deposits payable of $27,730. |
36
| ● | Net cash flow provided by operating activities for the three months ended March 31, 2023 primarily reflected a net loss of $309,648 adjusted for the add-back of non-cash items consisting of depreciation of $97,582, amortization of debt discount of $4,615, accretion of stock-based stock option expense of $43,262, a loss on forfeited escrow deposit of $15,000, a loss from unconsolidated joint ventures of $1,469, and a loss from the changes in fair value from an interest rate swap of $130,293, offset by changes in operating assets and liabilities primarily consisting of an increase in deferred rent of $102,327 attributable to rent abatement on our new tenant lease at our Woodward Properties, an increase in contract liabilities of $49,700, and an increase in security deposits payable of $56,100 attributable to the collection of additional security deposit on our Woodward Properties. |
During the three months ended March 31, 2024, net cash flow used in investing activities amounted to $1,771,916 as compared to net cash used in investing activities of $1,071,456, an increase of $700,460. During the three months ended March 31, 2024, net cash used in investing activities was attributable to the purchase of rental property of $1,585,878 primarily in connection with the acquisition of property in Chicago, Illinois, a purchase of property and equipment of $6,480, an increase in capitalized permit costs of $56,290, and an increase in escrow deposits of $123,268 in connection with escrow deposits made on other potential acquisitions of rental properties. During the three months ended March 31, 2023, net cash used in investing activities was attributable to the purchase of rental property of $992,214 in connection with the acquisition of property in Pleasant Ridge, Michigan, an increase in capitalized permit costs of $6,242, and an increase in escrow deposits of $73,000 in connection with escrow deposits made on other potential acquisitions of rental properties.
During the three months ended March 31, 2024 and 2023, net cash used in financing activities amounted to $21,794 and $20,258, respectively, and consisted of the repayment of notes payable.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.
The following tables summarize our contractual obligations as of March 31, 2024 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
| Payments Due by Period | ||||||||||||||||||||
| Contractual obligations: | Total | Less than 1 year | 1-3 years | 3-5 years | 5 + years | |||||||||||||||
| Convertible notes | $ | 2,000 | $ | - | $ | - | $ | - | $ | 2,000 | ||||||||||
| Interest on convertible notes | 730 | 150 | 240 | 240 | 100 | |||||||||||||||
| Notes payable | 6,254 | 114 | 582 | 1,445 | 4,115 | |||||||||||||||
| Total | $ | 8,984 | $ | 264 | $ | 822 | $ | 1,683 | $ | 6,215 | ||||||||||
Off-balance Sheet Arrangements
Other than discussed below, we have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us. Our off-balance sheet arrangement includes the notional amount of our interest rate swaps which we use to hedge a portion of our exposure to interest rate fluctuations. Currently, our interest rate swap fixes the variable rate interest on our bank swap note payable. We intend to fund our interest rate swap payments utilizing cash flows from operations. As of March 31, 2024, the notional amount of our interest rate swaps was $4,450,642. In interest rate swaps, the notional amount is the specified value upon which interest rate payments will be exchanged. The notional amount in interest rate swaps is used to come up with the amount of interest due.
37
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including the critical ones related to an interest rate swap, the allowance for accounts receivable, impairment of rental properties, the valuation of our investments in unconsolidated joint ventures, and valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting estimates affect our more significant judgments and estimates used in the preparation of the financial statements.
Interest rate swap
In connection with a bank loan executed in 2022, the Company entered into an interest rate swap agreement to manage interest rate risk related to debt that accrues interest at variable rates. The Company accounts for its interest rate swap agreement in accordance with the guidance related to derivatives and hedging activities. The Company is exposed to market risk from changes in interest rates. The Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. Interest payments receivable and payable under the terms of the interest rate swap agreement are accrued over the period to which the payment relates and the net difference is treated as an adjustment of interest expense related to the underlying liability. Because the variable interest rates used to calculate payments under the terms of the swap agreement are calculated using different benchmarks than those included in the Company’s variable rate debt agreement, the swap agreement is not considered an effective cash flow hedge.
Accordingly, changes in the underlying market value of the remaining swap payments are recognized into income as an increase or decrease to other income (expense) each reporting period. In accordance with ASC 820, Fair Value Measurements and Disclosures, the Company believes values provided by its counterparty represent the fair value of its swap agreement. The Company believes that the quality of the counterparty to its swap agreement mitigates the counterparty credit risk.
The estimated fair value of the interest rate swap agreement is reflected as a derivative liability on the accompanying balance sheet with changes in the fair value reflected in interest expense in the accompanying statements of operations. The Company uses derivative financial instruments only to manage interest rate risks and not as investment vehicles.
Information regarding the interest rate swap is as follows:
| Description | Notional Amount on March 31, 2024 | Interest Rate | Maturity | Fair Value of Asset on March 31, 2024 | Fair Value of Liability on December 31, 2023 | |||||||||||||
| December 7, 2022 interest rate swap | $ | 4,450,642 | 7.65 | % | December 10, 2032 | $ | 2,724 | $ | 122,879 | |||||||||
Accounts receivable and notes receivable
We recognize an allowance for losses on accounts receivable and notes receivable in an amount equal to the estimated probable losses net of recoveries under the current expected credit loss method. The allowance is based on an analysis of historical bad debt experience, current receivables aging and expected future write-offs, as well as an assessment of specific identifiable customer accounts and notes receivable considered at risk or uncollectible. On January 1, 2023, we adopted ASC 326, “Financial Instruments - Credit Losses”. In accordance with ASC 326, an allowance is maintained for estimated forward-looking losses resulting from the possible inability of customers to make required payments (current expected losses). The amount of the allowance is determined principally on the basis of past collection experience and known financial factors regarding specific customers. The expense associated with the allowance for doubtful accounts on accounts receivable is recognized in general and administrative expenses.
Rental properties
Rental properties are carried at cost less accumulated depreciation and amortization. Betterments, major renovations and certain costs directly related to the improvement of rental properties are capitalized. Maintenance and repair expenses are charged to expense as incurred. Depreciation is recognized on a straight-line basis over estimated useful lives of the assets, which range from 5 to 39 years. Tenant improvements are amortized on a straight-line basis over the lives of the related leases, which approximate the useful lives of the assets.
38
Upon the acquisition of real estate, we assess the fair value of acquired assets (including land, buildings and improvements, identified intangibles, such as acquired above-market leases and acquired in-place leases) and acquired liabilities (such as acquired below-market leases) and allocate the purchase price based on these assessments. The Company assesses fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known trends, and market/economic conditions.
Our properties are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property’s carrying amount over its estimated fair value. Impairment analyses are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. If our estimates of the projected future cash flows, anticipated holding periods, or market conditions change, our evaluation of impairment losses may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results.
Impairment occurs when the carrying amount of our rental properties exceeds its recoverable amount. For our rental property, we considered the recoverable amount to be the respective properties fair value less costs to sell (FVLCS) plus its value in use (VIU). The recoverable amount is the higher of the asset’s fair value less costs to sell (FVLCS) and its value in use (VIU). FVLCS and VIU as defined as follows:
| ■ | Fair Value Less Costs to Sell (FVLCS): |
| ■ | Fair value is typically determined by market prices or appraisals or tax value. |
| ■ | Subtract any costs that would be incurred to sell the asset (like commissions). |
| ■ | Value in Use (VIU): |
| ■ | This is the present value of the future cash flows the asset is expected to generate. |
| ■ | Cash flows should be based on leases in place. |
We have capitalized land, which is not subject to depreciation.
Investment in joint ventures
We have equity investments in various privately held entities. We account for these investments either under the equity method or cost method of accounting depending on our ownership interest and level of influence. Investments accounted for under the equity method are recorded based upon the amount of our investment and adjusted each period for our share of the investee’s income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable. We evaluate our investments in these entities for consolidation. We consider our percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining whether or not the investment qualifies for consolidation or if it should be accounted for as an unconsolidated investment under either the equity method of accounting. If an investment qualifies for the equity method of accounting, our investment is recorded initially at cost, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. The net income or loss of an unconsolidated investment is allocated to its investors in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences, if any, between the carrying amount of our investment in the respective joint venture and our share of the underlying equity of such unconsolidated entity are amortized over the respective lives of the underlying assets as applicable. These items are reported as a single line item in the statements of operations as income or loss from investments in unconsolidated affiliated entities.
39
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment Accounting.
Recent Accounting Pronouncements
Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable to smaller reporting companies.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e), promulgated by the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated our company’s disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of March 31, 2024, our disclosure controls and procedures were not effective.
The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses which we identified in our internal control over financial reporting: (1) the lack of multiples levels of management review on complex accounting and financial reporting issues, (2) we had not implemented adequate system and manual controls, and (3) a lack of adequate segregation of duties and necessary corporate accounting resources in our financial reporting process and accounting function as a result of our limited financial resources to support hiring of personnel and implementation of accounting systems. Until such time as we expand our staff to include additional accounting personnel and hire a full-time chief financial officer, it is likely we will continue to report material weaknesses in our internal control over financial reporting.
Changes in Internal Control
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
As a smaller reporting company, the Company is not required to disclose material changes to the risk factors that were contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as updated from time to time.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
| Exhibit No. | Description | |
| 31.1* | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |
| 31.2* | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | |
| 32.1** | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer | |
| 101.INS* | Inline XBRL Instance Document. | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase Document. | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | Filed herewith. |
| ** | Furnished herewith. |
41
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Zoned Properties, Inc. (Registrant) | |
| Date: May 14, 2024 | /s/ Bryan McLaren |
| Chief Executive Officer and Chief Financial Officer | |
| (principal executive officer, principal financial officer and principal accounting officer) |
42