Zoned Properties, Inc 10-Q for FY2021 Q2
Zoned Properties, Inc. (ZDPY)
About this 10-Q
Zoned Properties, Inc filed this 10-Q on August 12, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $550.06K
- up 83.5% from $299.82K a year earlier
- Net income
- $112.59K
- compared with a net loss of $18.93K a year earlier
- Diluted EPS
- $0.01
- compared with $0.00 a year earlier
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)
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(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 | ||
| N/A | N/A | N/A |
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. (Check one):
| 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. ☐
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As
of August 12, 2021, the registrant had
ZONED PROPERTIES, INC.
Form 10-Q
June 30, 2021
INDEX
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Deferred rent receivable | ||||||||
| Rental properties, net | ||||||||
| Prepaid expenses and other assets | ||||||||
| Convertible note receivable | ||||||||
| Property and equipment, net | ||||||||
| Intangible asset, net | ||||||||
| Investment in joint ventures | ||||||||
| Security deposits | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| LIABILITIES: | ||||||||
| Convertible note payable | $ | $ | ||||||
| Convertible note payable - related party | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Accrued expenses - related party | ||||||||
| Deferred revenues | ||||||||
| Security deposits payable | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 11) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, $ | ||||||||
| Common stock: $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| REVENUES: | ||||||||||||||||
| Rental revenues | $ | $ | $ | $ | ||||||||||||
| Advisory revenues | ||||||||||||||||
| Brokerage revenues | ||||||||||||||||
| Total revenues | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Compensation and benefits | ||||||||||||||||
| Professional fees | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Depreciation | ||||||||||||||||
| Real estate taxes | ||||||||||||||||
| Gain on sale of rental property | ( | ) | ( | ) | ||||||||||||
| Total operating expenses | ||||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | ( | ) | ||||||||||||||
| OTHER (EXPENSES) INCOME: | ||||||||||||||||
| Interest expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expenses - related party | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Total other expenses, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | ( | ) | ( | ) | ||||||||||||
| PROVISION FOR INCOME TAXES | ||||||||||||||||
| NET INCOME (LOSS) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| NET INCOME (LOSS) PER COMMON SHARE: | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020
(Unaudited)
| Additional | Total | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| # of Shares | Amount | # of Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||
| Accretion of stock based compensation related to stock options issued | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2021 | ( | ) | ||||||||||||||||||||||||||
| Common stock issued for intangible asset | ||||||||||||||||||||||||||||
| Accretion of stock based compensation related to stock options issued | - | - | ||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Additional | Total | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| # of Shares | Amount | # of Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||
| Accretion of stock based compensation related to stock options issued | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2020 | ( | ) | ||||||||||||||||||||||||||
| Accretion of stock based compensation related to stock options issued | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation expense | ||||||||
| Amortization expense | - | |||||||
| Stock-based compensation | ||||||||
| Stock option expense | ||||||||
| Gain on sale of rental property | ( | ) | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Deferred rent receivable | ( | ) | ||||||
| Prepaid expenses and other assets | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ||||||
| Accrued expenses- related parties | ||||||||
| Deferred revenues | ( | ) | ||||||
| Security deposits payable | ( | ) | ||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of convertible note receivable | ( | ) | ( | ) | ||||
| Purchase of rental property improvements | ( | ) | ( | ) | ||||
| Purchase of property and equipment | ( | ) | ||||||
| Net proceeds from sale of rental property | ||||||||
| Investment in joint ventures | ( | ) | ||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | ( | ) | ||||||
| NET INCREASE (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: | ||||||||
| Common stock issued for intangible asset | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
ZONED
PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS
Zoned Properties, Inc. (“Zoned Properties” or the “Company”), was incorporated in the State of Nevada on August 25, 2003. The Company is a leading real estate development firm for emerging and highly regulated industries, including regulated cannabis. The Company is redefining the approach to commercial real estate investment through its integrated growth services. Headquartered in Scottsdale, Arizona, Zoned Properties has developed a full spectrum of integrated growth services to support its real estate development and investment model; Advisory Services, Brokerage Services, Franchise Services, and PropTech Data Services each cross-pollinate within the model to drive project value associated with complex real estate projects. With national experience and a team of experts devoted to the emerging cannabis industry, Zoned Properties is addressing the specific needs of a modern market in highly regulated industries. Zoned Properties is an accredited member of the Better Business Bureau, the U.S. Green Building Council, and the Forbes Real Estate Council. 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 Company has the following wholly owned subsidiaries:
| ● | Gilbert Property Management, LLC (“Gilbert”) was organized in the State of Arizona on February 10, 2014. | |
| ● | 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 Oregon Properties, LLC was organized in the State of Oregon on June 16, 2015. | |
| ● | Zoned Colorado Properties, LLC (“Zoned Colorado”) was organized in the State of Colorado on September 17, 2015. | |
| ● | Zoned Illinois Properties, LLC was organized in the State of Illinois on July 15, 2015. | |
| ● | 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. (“Zoned Brokerage”) State of Arizona on March 17, 2021. | |
| ● | ZP Data Platform 1, LLC . (“ZP Data”) State of Arizona on April 14, 2021. |
On April 22, 2021, ZP Data entered into a Limited Liability Company Operating Agreement (the “Beakon Operating Agreement”) with a non-affiliated joint venture partner in connection with the formation of Beakon, LLC (“Beakon”), a Delaware limited liability company formed on April 16, 2021 (See Note 7).
On May 1, 2021, the Company entered into a Limited Liability Company Operating Agreement (the “Zoneomics 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 (See Note 7).
In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. The Company is monitoring this closely, and although operations have not been materially affected by the COVID-19 outbreak to date, the ultimate duration and severity of the outbreak and its impact on the economic environment and our business is uncertain. Currently, all of the properties in the Company’s portfolio are open to its Significant Tenants and their customers and have remained open pursuant to state and local government requirements. At this time, the Company does not foresee any material changes to its operations from COVID-19. The Company’s tenants are continuing to generate revenue at these properties, and they have continued to make rental payments in full and on time and we believe the tenants’ liquidity position is sufficient to cover its expected rental obligations. Accordingly, while the Company does not anticipate an impact on its operations, it cannot estimate the duration of the pandemic and potential impact on its business if the properties must close or if the tenants are otherwise unable or unwilling to make rental payments. In addition, a severe or prolonged economic downturn could result in a variety of risks to the Company’s business, including weakened demand for its properties and a decreased ability to raise additional capital when needed on acceptable terms, if at all. At this time, the Company is unable to estimate the impact of this event on its operations.
5
ZONED
PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
The accompanying condensed 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 condensed consolidated financial statements for the three and six months ended June 30, 2021 and 2020 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 June 30, 2021 and 2020, 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 condensed 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, 2020 included in our Annual Report on Form 10-K filed with the SEC on March 31, 2021.
Use of estimates
The preparation of condensed 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 condensed 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 six months ended June 30, 2021 and 2020 include the collectability of accounts and note receivable, the useful life of rental properties and property and equipment, assumptions used in assessing impairment of long-term assets, valuation allowances for deferred tax assets, 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 Arizona. Additionally, the Company’s
tenants operate in the medical marijuana industry. Consequently, any significant economic downturn in the Arizona market 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 that are controlled by one entity (each, a “Significant Tenant”
and collectively, the “Significant Tenants”). For the six months ended June 30, 2021 and 2020, rental and advisory revenue
associated with the Significant Tenants amounted to $
Fair value of financial instruments
The carrying amounts reported in the condensed consolidated balance sheets for cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses, and other payables approximate their fair market value based on the short-term maturity of these instruments. The carrying amount of the convertible note receivable approximates fair value based on the current interest rates for instruments with similar characteristics.
The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (the “FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with Accounting Standards Codification (“ASC”) Topic 820.
6
ZONED
PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
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 June 30, 2021 and December 31, 2020. The majority of 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 June 30, 2021 and December 31, 2020, the Company had approximately $
Accounts and convertible notes receivable
The Company recognizes an allowance for losses on accounts and notes receivable in an amount equal to the estimated probable losses net of recoveries. 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. The expense associated with the allowance for doubtful accounts is recognized in general and administrative expense. For the six months ended June 30, 2021 and 2020, the Company did not record any allowances for doubtful accounts.
Investment in 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 our 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 either 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.
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 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.
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.
7
ZONED
PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
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 condensed 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 six months ended June 30, 2021 and 2020, the Company did not record any impairment losses.
The Company has capitalized land, which is not subject to depreciation.
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 five-year life for office equipment,
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
The Company follows Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“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 also requires certain additional disclosures.
Rental income 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.
Currently, the Company’s leases provide for payments with fixed monthly base rents over the term of the leases. The leases also require the tenant to remit estimated monthly payments to the Company for property taxes. These payments are recorded as rental income and the related property tax expense reflected separately on the statements of operations.
Revenues from advisory services is recognized when the Company performs services pursuant to its agreements with clients and collectability is reasonably assured.
Brokerage revenues primarily consist of real estate sales commissions and are recognized upon the successful completion of all required services which is when escrow closes. 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.
Basic and diluted income (loss) per share
Basic (loss) income per share is computed by dividing net (loss) income available to common shareholders by the weighted average number of shares of common stock outstanding during each period. Diluted (loss) income per share is computed by dividing net (loss) income 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.
8
ZONED
PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
The following table presents a reconciliation of basic and diluted net income (loss) per share:
| Three
Months Ended June 30, | Six
Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Income (loss) per common share - basic: | ||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Less: undistributed (earnings) loss allocated to participating securities | ||||||||||||||||
| Net income (loss) allocated to common stockholders | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted average common shares outstanding – basic | ||||||||||||||||
| Net income (loss) per common share – basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| 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 – diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted average common shares outstanding – diluted | ||||||||||||||||
| Net income (loss) per common share – diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
The following potentially dilutive shares have been excluded from the calculation of diluted net loss per share as their effect would be anti-dilutive for the six months ended June 30, 2021 and 2020.
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| Convertible debt | ||||||||
| Stock options | ||||||||
Segment reporting
The Company’s business is comprised of one reportable segment. The Company has determined that its properties have similar economic characteristics to be aggregated into one reportable segment (operating, leasing and managing commercial properties, and advisory and brokerage services related to commercial properties). The Company’s determination was based primarily on its method of internal reporting.
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 June 30, 2021 and December 31, 2020 that would require either recognition or disclosure in the accompanying condensed 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 Accounting Standards Update (“ASU”) 2016-09 Improvements to Employee Share-Based
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Recently adopted accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, and a modified retrospective approach is required, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November of 2019, the FASB issued ASU 2019-10, which delayed the implementation of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies which applies to the Company. The Company is currently evaluating the impact of ASU 2016-13 on its future consolidated financial statements.
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 condensed consolidated financial statements.
NOTE 3 – CONCENTRATIONS AND RISKS
Lease Agreements with Significant Tenants
Chino Valley
On
May 1, 2018, Chino Valley and Broken Arrow Herbal Center, Inc. (“Broken Arrow”) agreed to terminate the prior Chino Valley
Lease dated April 6, 2015, as amended, in consideration of (i) entry into that certain 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 $
In addition, the parties agreed that from the period from the Effective
Date to June 30, 2022 (the “Improvement Period”), Broken Arrow will and/or Broken Arrow will cause its affiliate, CJK, to
invest a combined total of at least $
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Green Valley
On
May 1, 2018, Green Valley and Broken Arrow agreed to terminate the prior Green Valley Lease dated October 1, 2014, in consideration of
(i) entry into that certain 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
On
May 1, 2018, Zoned Arizona and CJK, Inc. (“CJK”) agreed to terminate the prior Tempe Leases dated August 15, 2015, as amended,
and June 15, 2017, in consideration of (i) entry 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 $
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 $
Kingman
On
May 1, 2018, Kingman and CJK agreed to terminate the prior Kingman Lease dated October 1, 2014, in consideration of (i) entry into that
certain Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Kingman and CJK (the “Kingman
Lease”), with a term of
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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 $
CJK and Broken Arrow, together, operate under the company brand, “Hana Meds”, and are referred to as the Company’s Significant Tenants.
The Tempe Lease, Kingman Lease, Chino Valley Lease and Green Valley
Lease (together referred to as the “New Leases”) includes a Guarantee of Payment and Performance by Mr. Abrams and the Company’s
Significant Tenants. Mr. Abrams guarantee is collateralized by the convertible debt of $
As
of June 30, 2021 and December 31, 2020, security deposits payable to the Significant Tenants amounted to $
Future minimum lease payments primarily consist of minimum base rent payments from Significant Tenants. Future minimum lease payments to be received, on all leased properties, for each of the five succeeding calendar years and thereafter as of June 30, 2021 consists of the following:
| Future annual base rent: | ||||
| 2021 (remainder of year) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total | $ | |||
Rental and advisory revenue and receivable –Significant Tenants
For
the three months ended June 30, 2021 and 2020, rental and advisory revenue associated with the Significant Tenant leases described above
amounted to $
On
June 30, 2021 and December 31, 2020, accounts receivable from advisory services provided to the Significant Tenants amounted to $
Asset concentration
As of June 30, 2021 and December 31, 2020, the Company had an asset
concentration related to the Significant Tenants. As of June 30, 2021 and December 31, 2020, the Significant Tenants represented approximately
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NOTE 4 – RENTAL PROPERTIES
On June 30, 2021 and December 31, 2020, rental properties, net consisted of the following:
| Description | Useful
Life (Years) | June
30, 2021 | December 31, 2020 | |||||||||
| Building and building improvements | $ | $ | ||||||||||
| Land | - | |||||||||||
| Rental properties, at cost | ||||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||||
| Rental properties, net | $ | $ | ||||||||||
On
June 1, 2021, the Company closed on the sale of its Gilbert, AZ property with a third party (the “Purchaser”) pursuant to
which the Company agreed to sell, and the Purchaser agreed to purchase, the property located in Gilbert, Arizona, for an aggregate purchase
price of $
For
the three months ended June 30, 2021 and 2020, depreciation of rental properties amounted to $
NOTE 5 – CONVERTIBLE NOTE RECEIVABLE
On
March 19, 2020, the Company made an initial investment of $
On
or after six months from the Issuance Date,
If (i) KCB does not elect to exercise its rights of prepayment prior to the Maturity Date, (ii) the Company does not elect to exercise its rights of conversion, and (iii) KCB pays to the Company all outstanding principal and interest accrued and due under the terms of the KCB Debenture on the Maturity Date, the Company will still be entitled to receive a number of units, in addition to such payment amount, constituting 8% of the total outstanding units and 8% of the total percentage interest following such issuance and at the time of such issuance.
Upon the occurrence of an Event of Default, as defined in the KCB Debenture, the entire principal balance and accrued and unpaid interest outstanding under the KCB Debenture, and all other obligations of KCB under the KCB Debenture, will be immediately due and payable and the Company may exercise any and all rights, power and remedies available to it at law or in equity or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in the KCB Debenture and proceed to enforce the payment thereof or any other legal or equitable right of the Company.
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Any
amount of principal or interest not paid when due will bear interest at the rate of
On
February 19, 2021 (the “Amendment Date”), the Company made an additional investment of $
| ● | Interest Accrual Commencement: Pursuant to the A&R Debenture, interest on the Initial Investment begins accruing as of March 19, 2020, while interest on the Additional Investment begins accruing on February 19, 2021. |
| ● | Franchise Fees. In the A&R Debenture, the parties acknowledge that each time that KCB sells one of its franchise locations, KCB earns a fee (an “Initial Fee”), and that KCB also earns a fee when one of its franchise locations renews its franchise with KCB (a “Renewal Fee”). Pursuant to the A&R Debenture, the Company and KCB agreed that, as additional consideration for the Additional Investment, KCB will pay to the Company, in perpetuity, |
In
addition, following the Amendment Date, KCB agreed not to decrease the amount it charges its franchise locations for an Initial Fee or
any Renewal Fee as in effect on the Amendment Date without the prior written consent of the Company, or to take any other actions that
would reduce the value of KCB’s obligation to the Company with respect to these franchise fee payments. KCB’s obligation
to pay the Company the franchise fees listed above will survive any termination, repayment or conversion of the A&R Debenture. Failure
by KCB to pay the Company the franchise fees in the manner described above will result in an event of default, and, among other things,
any due and unpaid franchise fees will accrue interest at
Apart from the terms described above, the terms of the A&R Debenture are substantially identical to the terms of the KCB Debenture.
The convertible note receivable has been accounted for at amortized cost and is evaluated for collectability at each reporting date. As of June 30, 2021 and December 31, 2020, an allowance was not deemed necessary.
On
June 30, 2021, convertible note receivable and interest receivable amounted to $
On August 4, 2021, the A&R Debenture was amended (See Note 12).
NOTE 6 – INTANGIBLE ASSETS
On
April 1, 2021, the Company’s subsidiary, Zoned Brokerage, entered in an engagement letter for real estate brokerage services with
a consultant for a guaranteed term of
On June 30, 2021 and December 31, 2020, intangible assets consisted of the following:
| Useful life | June
30, 2021 | December
31, 2020 | ||||||||
| Real estate brokerage materials and listing | $ | |||||||||
| Less: accumulated amortization | ( | ) | ||||||||
| $ | $ | |||||||||
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For
the three and six months ended June 30, 2021 and 2020, amortization of intangible assets amounted to $
NOTE 7 – INVESTMENT IN JOINT VENTURES
The entities listed below are partially owned by the Company. The Company accounts for these investments under the equity method of accounting as the Company exercises significant influence but does not exercise financial and operating control over these entities. A summary of the Company’s investments in the unconsolidated affiliated entities is as follows:
| As of | ||||||||||||||
| Entity | Date Acquired | Ownership % | June
30, 2021 | December 31,
2020 | ||||||||||
| Beakon, LLC (the “Beakon Joint Venture”) | % | $ | $ | |||||||||||
| Zoneomics Green, LLC ( the “Zoneomics Green Joint Venture”) | % | |||||||||||||
| Total investments in unconsolidated joint venture entities | $ | $ | ||||||||||||
On April 22, 2021, ZP Data entered into a Limited Liability Company
Operating Agreement (the “Beakon Operating Agreement”) with a non-affiliated joint venture partner in connection with the
formation of Beakon, LLC (“Beakon”), a Delaware limited liability company formed on April 16, 2021. Beakon signed a licensing
agreement for the licensing of a consumer data/marketing software platform that Beakon will white-label for the cannabis industry. Beakon’s
goal is to develop and leverage the platform to help drive foot traffic to brick and mortar retail (i.e. dispensaries), and thus enhance
the value of the real estate and mitigate risk. Pursuant to the Beakon Operating Agreement, ZP Data purchased
On
May 1, 2021, the Company entered into a Limited Liability Company Operating Agreement (the “Zoneomics 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 Operating
Agreement, the Company purchased
The following represents summarized financial information derived from the financial statements of the Beakon and Zoneomics Joint Ventures as of June 30, 2021.
| Beakon | Zoneomics | |||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Intangible assets | ||||||||
| Total assets | $ | $ | ||||||
| Current liabilities | $ | $ | ||||||
| Non-current liabilities | ||||||||
| Equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
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| For
the Three and Six Months Ended June 30, 2021 | ||||||||
| Beakon | Zoneomics | |||||||
| Net sales | $ | $ | ||||||
| Operating expenses | ( | ) | ||||||
| Net loss | ( | ) | ( | ) | ||||
As of June 30, 2021, no loss from joint venture has been recorded since the Joint Ventures have just begun to operate and any loss was insignificant.
NOTE 8 – 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
On
March 1, 2018, the Company and Alan Abrams entered into a Reaffirmation Agreement whereby Mr. Abrams reaffirmed his personal guarantee
of his obligations under certain of the Company’s commercial leases. Additionally, Mr. Abrams affirmed that the principal of the
Abrams Debenture in the principal amount of $
As
of June 30, 2021 and December 31, 2020, the principal balance due under the Abrams Debenture is $
As
of June 30, 2021 and December 31, 2020, accrued interest payable due under the Abrams Debenture was $
For
the three months ended June 30, 2021 and 2020, interest expense related to the Abrams Debenture amounted to $
NOTE 9 – RELATED PARTY TRANSACTION
Convertible notes payable – related party
On
January 9, 2017, the Company issued a convertible debenture (the “McLaren Debenture”) in the principal amount of $
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If
the Company defaults on payment, Mr. McLaren 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 McLaren Debenture. Any amount of principal or interest, which
is not paid when due shall bear interest at the rate of
As
of June 30, 2021 and December 31, 2020, the principal balance due under the McLaren Debenture is $
As
of June 30, 2021 and December 31, 2020, accrued interest payable due under the McLaren Debenture was $
For
the three months ended June 30, 2021 and 2020, interest expense – related party amounted to $
NOTE 10 – 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 of 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 issued for services
2020
On
January 6, 2020, the Company issued an aggregate of
2021
On
January 31, 2021, the Company issued an aggregate of
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(C) Shares issued for intangible assets
On
April 1, 2021, the Company’s subsidiary, Zoned Brokerage, entered in an engagement letter for real estate brokerage services with
a consultant for a guaranteed term of one year (the “Guaranteed Term”). During the Guaranteed Term, neither party may terminate
the engagement letter, except for “Cause” as defined in the engagement letter. In connection with the engagement letter,
the Company issued
(D) Equity incentive plans
On
August 9, 2016, the Company’s Board of Directors authorized the 2016 Equity Incentive Plan (the “2016 Plan”) and reserved
(E) Stock options
On
January 1, 2021, the Company granted a consultant an option, pursuant to the 2016 Plan, to purchase
For
the six months ended June 30, 2021 and 2020, in connection with the accretion of stock-based option expense, the Company recorded stock
option expense of $
Stock option activities for the six months ended June 30, 2021 are summarized as follows:
| Number of Options | Weighted
Average Exercise Price | Weighted
Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding December 31, 2020 | $ | $ | ||||||||||||||
| Granted | - | |||||||||||||||
| Balance Outstanding June 30, 2021 | $ | $ | ||||||||||||||
| Exercisable, June 30, 2021 | $ | |||||||||||||||
| Balance Non-vested at December 31, 2020 | $ | - | $ | |||||||||||||
| Granted | - | |||||||||||||||
| Vested during the period | ( | ) | - | |||||||||||||
| Balance Non-vested at June 30, 2021 | $ | $ | ||||||||||||||
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NOTE 11 – COMMITMENTS AND CONTINGENCIES
Rental property acquisition
On
April 22, 2016, Zoned Colorado, a wholly owned subsidiary of the Company, entered into a Contract to Buy and Sell Real Estate (the “Parachute
Agreement”) with Parachute Development Corporation (“Seller”) pursuant to which Zoned Colorado agreed to purchase,
and Seller agreed to sell, property in Parachute, Colorado (the “Property”) for a purchase price of $
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 June 30, 2021 and December 31, 2020, 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 President, Chief Executive Officer, Chief Financial Officer and Chairman
of the Board, agreed to replace Mr. McLaren’s 2014 employment agreement with a new employment agreement dated May 23, 2018 (the
“2018 Employment Agreement”).
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(e) 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.
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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 clauses (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. |
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| 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. | |
| 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. |
NOTE 12 – SUBSEQUENT EVENTS
On
July 1, 2021, the Board of Directors of Zoned Properties, Inc. (the “Company”) appointed Berekk Blackwell to serve as the
Company’s Chief Operating Officer, effective immediately. Initially, the Company will pay Mr. Blackwell an annual base salary of
$
On
July 1, 2021, the Company entered into a 12-month engagement with an individual to act as the Company’s Director of Real Estate.
In connection with this engagement letter, on July 1, 2021,
On August 2, 2021, KCB issued to the Company a second amended and restated convertible debenture (the “Second A&R Debenture”). The Second A&R Debenture amends and restates in its entirety the A&R Debenture (see Note 5). Pursuant to the Second A&R Debenture, the Company and KCB agreed to revise certain terms in the A&R Debenture, as described below.
Right
of Prepayment. KCB may prepay the Second A&R Debenture at any point after 18 months following the Issue Date, in whole or in
part.
Voluntary Conversion. On or after six months from the Issue Date, the Company is entitled to convert all or a portion of the principal balance and all accrued and unpaid interest due under the Second A&R Debenture (the “Outstanding Amount”) into a number of Class B Units equal to the proportion of the Outstanding Amount being converted multiplied by the Conversion Percentage, as defined below). Should KCB default on payment hereof, the Company may, at its option, extend all conversion rights, through and including the date KCB tenders or attempts to tender payment in full of all amounts due under the Second A&R Debenture. Conversion rights will terminate upon acceptance by the Company of payment in full of principal, accrued interest and any other amounts due under the Second A&R Debenture.
Conversion
Percentage. The Conversion Percentage will be
Right
of Maturity Units.
Apart from the terms described above, the terms of the Second A&R Debenture are substantially identical to the terms of the A&R Debenture, which are described in Note 5.
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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 annual report on Form 10-K 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 29, 2021.
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 audited financial statements and the related notes that appear in our annual report on Form 10-K as filed with the SEC on March 31, 2021.
Overview
Zoned Properties is a leading real estate development firm for emerging and highly regulated industries, including regulated cannabis. The company is redefining the approach to commercial real estate investment through its integrated growth services. Headquartered in Scottsdale, Arizona, Zoned Properties has developed a full spectrum of integrated growth services to support its real estate development and investment model; Advisory Services, Brokerage Services, Franchise Services, and PropTech Data Services each cross-pollinate within the model to drive project value associated with complex real estate projects. With national experience and a team of experts devoted to the emerging cannabis industry, Zoned Properties is addressing the specific needs of a modern market in highly regulated industries. Zoned Properties is an accredited member of the Better Business Bureau, the U.S. Green Building Council, and the Forbes Real Estate Council. We do 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”).
We are in the process of developing and expanding multiple business divisions; including an advisory services division, a licensed commercial real estate brokerage division, a real estate division focused on franchise services, a real estate division focused on real estate data, and a nonprofit charitable organization to focus on community prosperity. Each of these operating divisions are important elements of the overall business development strategy for long-term growth. We believe in the value of building relationships with clients and local communities in order to position the Company for long-term portfolio and revenue growth backed by sophisticated, safe, and sustainable assets and clients.
The core of our business involves identifying and developing commercial properties that intend to operate within highly regulated industries, including the regulated 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. These regulations often include complex permitting processes 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.
On April 22, 2021, ZP Data Platform 1 LLC, a wholly owned subsidiary of the Company (“ZP Data”), entered into a Limited Liability Company Operating Agreement (the “Beakon Operating Agreement”) with a non-affiliated joint venture partner in connection with the formation of Beakon, LLC (“Beakon”), a Delaware limited liability company formed on April 16, 2021. Beakon signed a licensing agreement for the licensing of a consumer data/marketing software platform that Beakon will white-label for the cannabis industry. Beakon’s goal is to develop and leverage the platform to help drive foot traffic to brick and mortar retail (i.e. dispensaries), and thus enhance the value of the real estate and mitigate risk. Pursuant to the Beakon Operating Agreement, ZP Data purchased 50 units of Beakon for $50, which represent 50% of the membership interests of Beakon. Each unit represents, with respect to any member, such member’s: (i) interest in Beakon’s capital, (ii) share of Beakon’s net profits and net losses (and specially allocated items of income, gain, and deduction), and the right to receive distributions of net cash flow from Beakon, (iii) right to inspect Beakon’s books and records, and (iv) right to participate in the management of and vote on matters coming before the members as provided in the Beakon Operating Agreement. The transactions discussed above resulted in a joint venture, in accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 323-10 – Investments- Equity and Joint Ventures, between ZP Data and the non-affiliated party. Each of the entities has 50% equity ownership and voting rights, and joint control in Beakon. ZP Data will account for its investment in Beakon under the equity method of accounting in accordance with ASC 323. During the three months ended June 30, 2021, we contributed $75,000 to Beakon.
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On May 1, 2021, we entered into a Limited Liability Company Operating Agreement (the “Zoneomics 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 Operating Agreement, the Company purchased 50 units of Zoneomics Green for a capital contribution of $90,000, which represent 50% of the membership interests of Zoneomics Green. Each unit represents, with respect to any member, such member’s: (i) interest in Zoneomics Green’s capital, (ii) share of Zoneomics Green’s net profits and net losses (and specially allocated items of income, gain, and deduction), and the right to receive distributions of net cash flow from Zoneomics Green, (iii) right to inspect Zoneomics Green’s books and records, and (iv) right to participate in the management of and vote on matters coming before the members as provided in the Zoneomics Operating Agreement. The transactions discussed above resulted in a joint venture, in accordance with ASC 323-10 – Investments- Equity and Joint Ventures, between the Company and the non-affiliated party. Each of the entities has 50% equity ownership and voting rights, and joint control in Zoneomics Green. In June 2021, we contributed $90,000 to Zoneomics.
For the three and six months ended June 30, 2021 and 2020, substantially all of our revenues were generated from triple-net leases to tenants that are controlled by one entity (each, a “Significant Tenant” and collectively, the “Significant Tenants”), which is located in the State of Arizona.
On June 1, 2021, we closed on the sale of our Gilbert, AZ property with a third party (the “Purchaser”) pursuant to which we agreed to sell, and the Purchaser agreed to purchase, the property located in Gilbert, Arizona, for an aggregate purchase price of $335,000. In connection with the sale, we received net proceeds of $322,332 and recorded a gain on sale of rental property of $51,944.
The Company currently maintains a portfolio of properties that we own, develop, and lease. We currently lease land and/or building space at all five of the properties in our portfolio. Four of the properties are leased to licensed and regulated cannabis tenants and are located in areas with established zoning and permitting procedures. Two of the leased properties are zoned and permitted as licensed and regulated cannabis dispensaries, and two of the leased properties are zoned and permitted as licensed and regulated cannabis cultivation facilities. Each regulated property may undergo a non-standard development process. Various development requirements in this process may include initial property identification, zoning authorization, and permitting guidance in order to qualify a commercial property for subsequent architectural design, utility installation, construction and development, property management, facilities management systems, and security system installation.
As of June 30, 2021, a summary of rental properties owned by us consisted of the following:
| Location | Tempe, AZ | Chino Valley, AZ | Green Valley, AZ | Kingman, AZ | ||||||||||||||||
| Description | Industrial/ Office | Greenhouse/ Nursery | Retail (special use) | Retail (special use) | ||||||||||||||||
| Current Use | Cannabis Facility | Cannabis Facility | Cannabis Dispensary | Cannabis Dispensary | ||||||||||||||||
| Date Acquired | March 2014 | August 2015 | October 2014 | May 2014 | ||||||||||||||||
| Lease Start Date | May 2018 | May 2018 | May 2018 | May 2018 | ||||||||||||||||
| Lease End Date | April 2040 | April 2040 | April 2040 | April 2040 | ||||||||||||||||
| Total No. of Tenants | 1 | 1 | 1 | 1 | ||||||||||||||||
| Total Properties | ||||||||||||||||||||
| Land Area (Acres) | 3.65 | 47.60 | 1.33 | 0.32 | 52.90 | |||||||||||||||
| Land Area (Sq. Feet) | 158,772 | 2,072,149 | 57,769 | 13,939 | 2,302,629 | |||||||||||||||
| Undeveloped Land Area (Sq. Feet) | - | 1,812,563 | - | 6,878 | 1,819,441 | |||||||||||||||
| Developed Land Area (Sq. Feet) | 158,772 | 259,586 | 57,769 | 7,061 | 483,188 | |||||||||||||||
| Total Rentable Building Sq. Ft. | 60,000 | 40,000 | 1,440 | 1,497 | 102,937 | |||||||||||||||
| Vacant Rentable Sq. Ft. | - | - | - | - | - | |||||||||||||||
| Sq. Ft. rented as of June 30, 2021 | 60,000 | 40,000 | 1,440 | 1,497 | 102,937 | |||||||||||||||
| Annual Base Rent (*,**) | ||||||||||||||||||||
| 2021 (remainder of year) | $ | 305,026 | $ | 196,800 | $ | 21,000 | $ | 24,000 | $ | 546,826 | ||||||||||
| 2022 | 610,053 | 393,600 | 42,000 | 48,000 | 1,093,653 | |||||||||||||||
| 2023 | 610,053 | 393,600 | 42,000 | 48,000 | 1,093,653 | |||||||||||||||
| 2024 | 610,053 | 393,600 | 42,000 | 48,000 | 1,093,653 | |||||||||||||||
| 2025 | 610,053 | 393,600 | 42,000 | 48,000 | 1,093,653 | |||||||||||||||
| Thereafter | 8,470,589 | 5,641,600 | 602,000 | 688,000 | 15,402,189 | |||||||||||||||
| Total | $ | 11,215,827 | $ | 7,412,800 | $ | 791,000 | $ | 904,000 | $ | 20,323,627 |
| * | 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. |
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Annualized $ per Rented Sq. Ft. (Base Rent)
| Year | Tempe, AZ | Chino Valley, AZ | Green Valley, AZ | Kingman, AZ | ||||||||||||
| 2021 | $ | 9.8 | $ | 9.8 | $ | 29.2 | $ | 32.1 | ||||||||
| 2022 | $ | 9.8 | $ | 9.8 | $ | 29.2 | $ | 32.1 | ||||||||
| 2023 | $ | 9.8 | $ | 9.8 | $ | 29.2 | $ | 32.1 | ||||||||
| 2024 | $ | 9.8 | $ | 9.8 | $ | 29.2 | $ | 32.1 | ||||||||
| 2025 | $ | 9.8 | $ | 9.8 | $ | 29.2 | $ | 32.1 | ||||||||
The U.S. Supreme Court has ruled that it is the federal government that has the right to regulate and criminalize cannabis, even for medical purposes. Therefore, federal law criminalizing the use of marijuana preempts state laws that legalize its use for medicinal purposes.
The U.S. federal government regulates drugs through the CSA, which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule I controlled substance. A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The DOJ defines Schedule I drugs, substances or chemicals as “drugs with no currently accepted medical use and a high potential for abuse.” However, the FDA has approved Epidiolex, which contains a purified form of the drug CBD, a non-psychoactive ingredient in the cannabis plant, for the treatment of seizures associated with two epilepsy conditions. The FDA has not approved cannabis or cannabis compounds as a safe and effective drug for any other condition. Moreover, pursuant to the Farm Bill, CBD remains a Schedule I controlled substance under the CSA, with a narrow exception for CBD derived from hemp with a THC concentration of less than 0.3%.
The Company maintains its operations to remain in compliance with the CSA. Even in those jurisdictions in which the manufacture and use of medical marijuana has been legalized at the state level, the possession, use and cultivation all remain violations of federal law that are punishable by imprisonment and substantial fines, and the prescription of marijuana is a violation of federal law. Moreover, individuals and entities may violate federal law if they intentionally aid and abet another in violating these federal controlled substance laws or conspire with another to violate them.
The inconsistencies between federal and state regulation of cannabis were addressed in the Cole Memo, which then-Deputy Attorney General James Cole sent to all U.S. District Attorneys in 2013 outlining certain priorities for the DOJ relating to the prosecution of cannabis offenses. The Cole Memo acknowledged that, notwithstanding the designation of cannabis as a Schedule I controlled substance at the federal level, several states had enacted laws authorizing the use of cannabis for medical purposes. The Cole Memo noted that jurisdictions that have enacted laws legalizing cannabis in some form have also implemented strong and effective regulatory and enforcement systems to control the cultivation, processing, distribution, sale, and possession of cannabis. As such, conduct in compliance with those laws and regulations is less likely to implicate the Cole Memo’s enforcement priorities. The DOJ did not provide (and has not provided since) specific guidelines for what regulatory and enforcement systems would be deemed sufficient under the Cole Memo. In light of limited investigative and prosecutorial resources, the Cole Memo concluded that the DOJ should be focused on addressing only the most significant threats related to cannabis, such as distribution of cannabis from states where cannabis is legal to those where cannabis is illegal, the diversion of cannabis revenues to illicit drug cartels and sales of cannabis to minors.
On January 4, 2018, former U.S. Attorney General Jeff Sessions issued the Sessions Memo, which rescinded the Cole Memo. The Sessions Memo stated, in part, that current law reflects “Congress’ determination that cannabis is a dangerous drug and cannabis activity is a serious crime,” and Mr. Sessions directed all U.S. Attorneys to enforce the laws enacted by Congress by following well-established principles when pursuing prosecutions related to cannabis activities. The Company is not aware of any prosecutions of investment companies doing routine business with licensed marijuana related businesses in light of the DOJ position following issuance of the Sessions Memo. However, there can be no assurance that the federal government will not enforce federal laws relating to cannabis in the future. As a result of the Sessions Memo, federal prosecutors are now free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities, despite the existence of state-level laws that may be inconsistent with federal prohibitions. No direction was given to federal prosecutors in the Sessions Memo as to the priority they should ascribe to such cannabis activities, and thus it is uncertain how active U.S. federal prosecutors will be in relation to such activities.
Federal prosecutors appear to continue to use the Cole Memo’s priorities as an enforcement guide. Merrick Garland, who became Attorney General on March 10, 2021, has indicated that he would deprioritize enforcement of low-level cannabis crimes such as possession and has shared his view that the government should focus on large-scale criminal enterprises that circumvent state legalization laws instead of going after people who abide by local cannabis policies. The Company believes it is too soon to determine what prosecutorial effects will be created by the rescission of the Cole Memo or any replacement thereof and when or if the Sessions Memo will be rescinded. President Joseph R. Biden, who assumed office in January 2021, has not yet indicated whether and when he will decriminalize or legalize cannabis and has previously stated that he is opposed to legalization. The sheer size of the cannabis industry, in addition to participation by state and local governments and investors, suggests that a large-scale federal enforcement operation would more than likely create unwanted political backlash for the DOJ and the current administration. It is also possible that the change of Congressional leadership in January 2021 could change the priorities of Congress and encourage reconciliation of federal and state laws. Regardless, at this time, cannabis remains a Schedule I controlled substance at the federal level. The U.S. federal government has always reserved the right to enforce federal law regarding the sale and disbursement of medical or adult use cannabis, even if state law authorizes such sale and disbursement. It is unclear whether the risk of enforcement has been altered.
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One legislative safeguard for the medical cannabis industry, appended to the federal budget bill, remains in place following the rescission of the Cole Memo. For fiscal years 2015, 2016, 2017 and 2018, Congress adopted the Rohrabacher-Blumenauer Amendment to prevent the federal government from using congressionally appropriated funds to enforce federal cannabis laws against regulated medical cannabis actors operating in compliance with state and local law. The Rohrabacher-Blumenauer Amendment was included in the fiscal year 2018 budget passed on March 23, 2018. The Rohrabacher-Blumenauer Amendment was included in the consolidated appropriations bill signed into legislation by former President Trump in February 2019. In signing the Rohrabacher-Blumenauer Amendment, former President Trump issued a signing statement noting that the Rohrabacher-Blumenauer Amendment “provides that the Department of Justice may not use any funds to prevent implementation of medical marijuana laws by various States and territories,” and further stating “I will treat this provision consistent with the President’s constitutional responsibility to faithfully execute the laws of the United States.” On June 20, 2019, the House approved a broader amendment that, in addition to protecting state medical cannabis programs, would also protect state adult use programs. On September 26, 2019, the Senate Appropriations Committee declined to take up the broader amendment but did approve the Rohrabacher-Blumenauer Amendment for the fiscal year 2020 spending bill. On September 27, 2019, the Rohrabacher-Blumenauer Amendment was renewed as part of a stopgap spending bill, in effect through November 21, 2019, and was then renewed through a series of stopgap spending bills passed in 2020. On December 27, 2020, the amendment was renewed through the signing of the fiscal year 2021 omnibus spending bill, effective through September 30, 2021. Despite the rescission of the Cole Memo, the DOJ appears to continue to adhere to the enforcement priorities set forth in the Cole Memo.
The Cole Memo and the Rohrabacher-Blumenauer Amendment gave licensed cannabis operators (particularly medical cannabis operators) and investors in states with legal regimes greater certainty regarding the DOJ’s enforcement priorities and the risk of operating cannabis businesses. While the Sessions Memo has introduced some uncertainty regarding federal enforcement, the cannabis industry continues to experience growth in legal medical and adult use markets across the United States. When she was a U.S. Senator, Vice President Kamala Harris was the lead sponsor of the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act, which seeks to end the federal prohibition of marijuana, among other things, but in March 2020, it was reported that Vice President Harris has adopted the same position as President Biden, who opposes legalization. Currently, there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will remain in place or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the U.S. Congress amends the CSA with respect to cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current U.S. federal law criminalizing cannabis.
Although the U.S. Supreme Court has ruled that it is the federal government that has the right to regulate and criminalize cannabis, and federal law criminalizing the use of marijuana preempts state laws that legalize its use, cannabis is largely regulated at the state level.
State laws that permit and regulate the production, distribution and use of cannabis for adult use or medical purposes are in direct conflict with the CSA, which makes cannabis use and possession federally illegal. Although certain states and territories of the U.S. authorize medical and/or adult use cannabis production and distribution by licensed or registered entities, under U.S. federal law, the possession, use, cultivation and transfer of cannabis and any related drug paraphernalia is illegal, and any such acts are criminal acts under federal law under any and all circumstances under the CSA. Although the Company’s activities are believed to be compliant with applicable state and local laws, strict compliance with state and local laws with respect to cannabis may neither absolve the Company of liability under U.S. federal law, nor may it provide a defense to any federal proceeding which may be brought against the Company.
As of June 30, 2021, 39 states, plus the District of Columbia (and the territories of Guam, Puerto Rico, the U.S. Virgin Islands and the Northern Mariana Islands), have legalized the cultivation and sale of cannabis for medical purposes. In 18 of those states, the sale and possession of cannabis is legal for both medical and adult use, and the District of Columbia has legalized adult use but not commercial sale. In November 2020, voters in Arizona, Montana, New Jersey, and South Dakota voted by referendum to legalize cannabis for adult use, and voters in Mississippi and South Dakota voted to legalized cannabis for medical use, and in February 2021, the Virginia legislature approved a bill that would legalize cannabis for adult use beginning in 2024. The Virginia bill is awaiting signature by the governor, and if signed, Virginia will be the first southern state to legalize cannabis for adult use. Also in February 2021, New Jersey Governor Phil Murphy signed three bills into law that legalize cannabis for adult use.
The Company will focus heavily on the growth of a diversified revenue stream in 2021. We intend to accomplish this by prospecting new advisory services across the country for private, public, and municipal clients. We believe that strategic real estate and sustainability services are likely to emerge as the growth engine for Zoned Properties. We are moving to take advantage of new opportunities.
Pursuant to the terms of the several lease amendments our Significant Tenants, among other things, base rent base rent was abated from June 1, 2020 to July 31, 2020 on all of our Significant Tenant leases which decreased our cash flow from operation during the year ended December 31, 2020 by $179,000. In addition, the parties agreed that from the period from May 31, 2020 to June 30, 2022, our Significant Tenants will invest a combined total of at least $8,000,000 improvements in and to the properties in Chino Valley and Tempe prior to June 30, 2022. Any increase in the rentable area of the leased premises will result in an increase in all amounts calculated based on the same, including, without limitation, base rent. As of June 30, 2021, the Company’s Significant Tenants have completed improvements to the Facilities totaling in excess of $8,000,000 and have satisfied the contractual obligations related to the same. As soon as the improved, rentable areas have received all required approvals for occupancy and commencement of operations, the Company and Broken Arrow expect to complete any appropriate amendments to the Lease Agreement.
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COVID-19
In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. We are monitoring this closely, and although operations have not been materially affected by the COVID-19 outbreak to date, the ultimate duration and severity of the outbreak and its impact on the economic environment and our business is uncertain. Currently, all of the properties in our portfolio are open to our Significant Tenants and their customers and have remained open pursuant to state and local government requirements. We did not experience in 2020, and we do not foresee in 2021, any material changes to our operations from COVID-19. Our tenants are continuing to generate revenue at these properties, and they have continued to make rental payments in full and on time and we believe the tenants’ liquidity position is sufficient to cover its expected rental obligations. Accordingly, while we do not anticipate an impact on our operations, we cannot estimate the duration of the pandemic and potential impact on our business if the properties must close or if the tenants are otherwise unable or unwilling to make rental payments. In addition, a severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for our properties and a decreased ability to raise additional capital when needed on acceptable terms, if at all. At this time, we are unable to estimate the impact of this event on our operations.
Results of Operations
The following comparative analysis on results of operations was based primarily on the comparative unaudited consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements for the three and six months ended June 30, 2021 and 2020, which are included elsewhere in this quarterly report on Form 10-Q. The results discussed below are for the three and six months ended June 30, 2021 and 2020.
Comparison of Results of Operations for the Three and Six Months ended June 30, 2021 and 2020
Revenues
For the three and six months ended June 30, 2021 and 2020, revenues consisted of the following:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Rent revenues | $ | 294,972 | $ | 272,216 | $ | 587,161 | $ | 548,710 | ||||||||
| Advisory revenues | 18,500 | 27,608 | 72,156 | 54,983 | ||||||||||||
| Brokerage revenues | 236,592 | - | 236,592 | - | ||||||||||||
| Total revenues | $ | 550,064 | $ | 299,824 | $ | 895,909 | $ | 603,693 | ||||||||
For the three months ended June 30, 2021, total revenues amounted to $550,064, including Significant Tenants revenues of $291,982, as compared to $299,824, including Significant Tenant revenues of $294,043, for the three months ended June 30, 2020, an increase of $250,240, or 83.5%. For the six months ended June 30, 2021, total revenues amounted to $895,909, including Significant Tenants revenues of $588,462, as compared to $603,693, including Significant Tenant revenues of $580,946, for the six months ended June 30, 2020, an increase of $292,216, or 48.4%. For the three months ended June 30, 2021, the increase in revenues was attributable to an increase in rental revenue from our Significant Tenant of $22,756 and an increase in brokerage revenue of $236,592 related to commission earned on a real estate listing, offset by a decrease in advisory revenues of $9,108. For the six months ended June 30, 2021, the increase in revenues was attributable to an increase in rental revenue from our Significant Tenant of $38,451, an increase in brokerage revenue of $236,592 related to commission earned on a real estate listing, and an increase in advisory revenues of $17,173. Substantially all of the Company’s real estate properties are leased under triple-net leases to the Significant Tenants.
Operating expenses
For the three months ended June 30, 2021, operating expenses amounted to $410,411 as compared to $290,071 for the three months ended June 30, 2020, an increase of $120,340, or 41.5%. For the six months ended June 30, 2021, operating expenses amounted to $799,624 as compared to $660,642 for the six months ended June 30, 2020, an increase of $138,982, or 21.0%. For the three and six months ended June 30, 2021 and 2020, operating expenses consisted of the following:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Compensation and benefits | $ | 64,166 | $ | 87,751 | $ | 195,310 | $ | 218,265 | ||||||||
| Professional fees | 226,818 | 42,497 | 321,238 | 113,910 | ||||||||||||
| General and administrative expenses | 49,931 | 48,018 | 101,409 | 105,114 | ||||||||||||
| Depreciation and amortization | 100,189 | 90,841 | 190,936 | 181,425 | ||||||||||||
| Real estate taxes | 21,251 | 20,964 | 42,675 | 41,928 | ||||||||||||
| Gain on sale of rental property | (51,944 | ) | - | (51,944 | ) | - | ||||||||||
| Total | $ | 410,411 | $ | 290,071 | $ | 799,624 | $ | 660,642 | ||||||||
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| ● | For the three months ended June 30, 2021, compensation and benefit expense decreased by $23,585, or 26.9%, as compared to the three months ended June 30, 2020. This decrease was primarily attributable to a decrease in compensation and benefits of $23,585. For the six months ended June 30, 2021, compensation and benefit expense decreased by $22,955, or 10.5%, as compared to the six months ended June 30, 2020. This decrease was attributable to a decrease in compensation and benefits of $54,628, offset by an increase in stock-based compensation of $31,673. The increase in stock-based compensation related to an increase in stock-based compensation from the accretion of stock option expense and an increase in the value of shares issued for services. |
| ● | For the three months ended June 30, 2021, professional fees increased by $184,321, or 433.7%, as compared to the three months ended June 30, 2020. This increase was primarily attributable to an increase in consulting fees of $37,563, an increase in public relations fees of $16,500, an increase in legal fees of $9,081, and an increase in commission fees of $124,741 primarily related to commission paid on brokerage revenues, offset by a decrease in accounting fees of $3,800. For the six months ended June 30, 2021, professional fees increased by $207,328, or 182.0%, as compared to the six months ended June 30, 2020. This increase was primarily attributable to an increase in consulting fees of $59,793, an increase in public relations fees of $23,000, an increase in legal fees of $3,851, and an increase in commission fees of $124,741 primarily related to commission paid on brokerage revenues, offset by a decrease in accounting fees of $4,042. |
| ● | General and administrative expenses consist of expenses such as rent expense, directors’ and officers’ liability insurance, travel expenses, office expenses, telephone and internet expenses and other general operating expenses. For the three months ended June 30, 2021, general and administrative expenses increased by $1,913, or 4.0%, as compared to the three months ended June 30, 2020. For the six months ended June 30, 2021, general and administrative expenses decreased by $3,705, or 3.5%, as compared to the six months ended June 30, 2020. |
| ● | For the three months ended June 30, 2021, depreciation expense increased by $9,348, or 10.3%, as compared to the three months ended June 30, 2020. For the six months ended June 30, 2021, depreciation expense increased by $9,511, or 5.2%, as compared to the six months ended June 30, 2020. |
| ● | For the three months ended June 30, 2021, real estate taxes increased by $287, or 1.4%, as compared to the three months ended June 30, 2020. For the six months ended June 30, 2021, real estate taxes increased by $747, or 1.8%, as compared to the six months ended June 30, 2020. | |
| ● | For the three and six months ended June 30, 2021, we recorded a gain from the sale of our Gilbert property of $51,944. We did not record any gain or loss from the sale of rental property during the 2020 periods. |
Loss from operations
As a result of the factors described above, for the three months ended June 30, 2021, income from operations amounted to $139,653 as compared to income from operations of $9,753 for the three months ended June 30, 2020, an increase of $129,900, or 1,331.9%. For the six months ended June 30, 2021, income from operations amounted to $96,285 as compared to a loss from operations of $(56,949) for the six months ended June 30, 2020, an increase of $153,234, or 269.1%.
Other (expense) income
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 June 30, 2021, total other expenses, net amounted to $27,059 as compared to total other expenses, net of $28,680, respectively, representing a decrease of $1,621, or 5.6%. This decrease was attributable to an increase in interest income of $1,621 attributable to interest earned on the convertible note receivable. For the six months ended June 30, 2021, total other expenses, net amounted to $55,026 as compared to total other expenses, net of $58,748, respectively, representing a decrease of $3,722, or 6.3%. This decrease was attributable to an increase in interest income of $3,722 attributable to interest earned on the convertible note receivable.
Net loss
As a result of the foregoing, for the three months ended June 30, 2021 and 2020, net income (loss) amounted to $112,594, or $0.01 per common share (basic) and $0.00 per common share (diluted), and $(18,927), or $(0.00) per common share (basic and diluted), respectively. For the six months ended June 30, 2021 and 2020, net income (loss) amounted to $41,259, or $0.00 per common share (basic) and $0.00 per common share (diluted), and $(115,697), or $(0.01) 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 $1,031,316 and $699,335 of cash as of June 30, 2021 and December 31, 2020, respectively.
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Our primary uses of cash have been for 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 advisory 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, and | |
| ● | The cost of being a public company. | |
| ● | An increase in investments in joint ventures and other projects. |
We may need to raise additional funds, particularly if we are unable to generate positive cash flow as a result of 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, from advisory fees, and from brokerage revenues, we presently have no other significant alternative source of working capital.
We have used these funds to fund our operating expenses, pay our obligations, develop rental properties, and grow our company. We 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.
On March 19, 2020, we made an initial investment of $100,000 into KCB Jade Holdings, LLC (“KCB”). In exchange for the investment, KCB issued to us a convertible debenture (the “Debenture”) dated March 19, 2020 (the “Issuance Date”) in the original principal amount of $100,000. The Debenture bears interest at the rate of 6.5% per annum and matures on March 19, 2025 (the “Maturity Date”). Interest on the outstanding principal sum of the Debenture commences accruing on the Issuance Date and is computed on the basis of a 365-day year and the actual number of days elapsed and shall be payable annually due by the first day of each calendar anniversary following the Issuance Date. KCB may prepay the Debenture at any point after 18 months following the Issuance Date, in whole or in part. However, if KCB elects to prepay the Debenture prior to the Maturity Date or prior to any conversion as provided in the Debenture in whole or in part, we will be entitled to receive a number of KCB units, in addition to such prepayment amount, constituting 10% of the total outstanding units and 10% of the total percentage interest following such issuance and at the time of such issuance. On or after six months from the Issuance Date, we may convert all or a portion of the principal balance and all accrued and unpaid interest due into a number of units equal to the proportion of the outstanding amount being converted multiplied by 33% of the total number of units issued and outstanding at the time of conversion, constituting 33% of the total percentage interest (the “Conversion Percentage”). If KCB defaults on payment of the Debenture, we may, at its option, extend all conversion rights, through and including the date KCB tenders or attempts to tender payment in full of all amounts due under the Debenture. Conversion rights terminate upon acceptance by the Company of payment in full of principal, accrued interest, and any other amounts due under the Debenture. If (i) KCB does not elect to exercise its rights of prepayment prior to the Maturity Date, (ii) we do not elect to exercise its rights of conversion, and (iii) KCB pays to the Company all outstanding principal and interest accrued and due under the terms of the Debenture on the Maturity Date, we will still be entitled to receive a number of units, in addition to such payment amount, constituting 8% of the total outstanding units and 8% of the total percentage interest following such issuance and at the time of such issuance.
On February 19, 2021, we made an additional investment of $100,000 into KCB (the “Additional Investment”). In exchange, the KCB issued to the Company an amended and restated convertible debenture (the “A&R Debenture”) on the Amendment Date. The A&R Debenture amends and restates in its entirety the Original Debenture. Pursuant to the A&R Debenture, the Company and KCB agreed to certain new terms that did not exist in the Original Debenture, which are described below.
| ● | Interest Accrual Commencement: Pursuant to the A&R Debenture, interest on the Initial Investment begins accruing as of March 19, 2020, while interest on the Additional Investment begins accruing on February 19, 2021. |
| ● | Franchise Fees. In the A&R Debenture, the parties acknowledge that each time that KCB sells one of its franchise locations, KCB earns a fee (an “Initial Fee”), and that KCB also earns a fee when one of its franchise locations renews its franchise with KCB (a “Renewal Fee”). Pursuant to the A&R Debenture, the Company and KCB agreed that, as additional consideration for the Additional Investment, KCB will pay to the Company, in perpetuity, 5% of any Initial Fee received by KCB after the Amendment Date, as well as 5% of any Renewal Fee received by KCB related to any franchise locations sold after the Amendment Date, in each case to be paid within five (5) days of receipt of KCB thereof. |
In addition, following the Amendment Date, KCB agreed not to decrease the amount it charges its franchise locations for an Initial Fee or any Renewal Fee as in effect on the Amendment Date without the prior written consent of the Company, or to take any other actions that would reduce the value of KCB’s obligation to the Company with respect to these franchise fee payments. KCB’s obligation to pay the Company the franchise fees listed above will survive any termination, repayment, or conversion of the A&R Debenture. Failure by KCB to pay the Company the franchise fees in the manner described above will result in an event of default, and, among other things, any due and unpaid franchise fees will accrue interest at 12% per year from the date the obligation was due.
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Apart from the terms described above, the terms of the A&R Debenture are substantially identical to the terms of the Original Debenture.
As discussed in the Overview section and elsewhere, during the three months ended June 30, 2021, we contributed $75,000 to the Beakon joint venture and we contributed $90,000 to the Zoneomics joint venture.
Our future operations are dependent on our ability to manage our current cash balance, on the collection of rental and advisory revenues and the attainment of new advisory clients. Our real estate properties are leased to Significant 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 June 30, 2021 and December 31, 2020, we had an asset concentration related to our Significant Tenant leases. As of June 30, 2021 and December 31, 2020, these Significant Tenants represented approximately 78.7% and 83.2% 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 included audited financial statements of our Significant Tenants as Exhibit 99.1 to our Annual Report on Form 10-K, as filed with the SEC on March 31, 2021, since such audited financial statements represent material information and are necessary for the protection of investors.
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 Six Months Ended June 30, 2021 and June 30, 2020
Net cash flow provided by operating activities was $284,408 for the six months ended June 30, 2021, as compared net cash flow provided by operating activities of $72,232 for the six months ended June 30, 2020, representing an increase of $212,176.
| ● | Net cash flow provided by operating activities for the six months ended June 30, 2021 primarily reflected net income of $41,259 adjusted for the add-back of non-cash items consisting of depreciation of $181,486, amortization expense of $9,450, stock-based compensation expense of $52,000, accretion of stock-based stock option expense of $21,909, and a gain on sale of rental property of $(51,944), offset by changes in operating assets and liabilities primarily consisting of an increase in accounts receivable of $145,479, a decrease in prepaid expenses of $79,962, an increase in accounts payable of $74,731, increase in accrued expenses of $9,191, an increase in deferred revenues of $4,000. |
| ● | Net cash flow provided by operating activities for the six months ended June 30, 2020 primarily reflected net loss of $115,697 adjusted for the add-back of non-cash items consisting of depreciation of $181,424, stock-based compensation expense of $24,200 and accretion of stock-based stock option expense of $18,036, offset by changes in operating assets and liabilities primarily consisting of a decrease in prepaid expenses of $52,397, and an increase in accounts payable of $8,152, offset by an increase in deferred rent receivable of $88,750 attributable to the abatement of May and June 2020 rent as part of lease amendments effective on May 31, 2020. |
During the six months ended June 30, 2021, net cash flow provided by investing activities amounted to $47,573 as compared to net cash used in investing activities of $109,565, a positive change of $157,138. During the six months ended June 30, 2021, cash provided by investing activities was attributable to proceeds from the sale of rental property of $322,332, offset by cash used for an investment in a convertible note receivable of $100,000 as discussed above, cash used in the improvement of rental properties of $7,135, cash used for the purchase of property and equipment of $2,624, and cash used for investment in joint ventures of $165,000. During the six months ended June 30, 2020, net cash flow used in investing activities was attributable to cash used for an investment in a convertible note receivable of $100,000 as discussed above and cash used in the improvement of rental properties of $9,565.
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.
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The following tables summarize our contractual obligations as of June 30, 2021 (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 | $ | 2,020 | $ | 20 | $ | - | $ | - | $ | 2,000 | ||||||||||
| Interest on convertible notes | 1,066 | 156 | 240 | 240 | 430 | |||||||||||||||
| Total | $ | 3,086 | $ | 176 | $ | 240 | $ | 240 | $ | 2,430 | ||||||||||
Off-balance Sheet Arrangements
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 or that are not reflected in our consolidated financial statements. 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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our audited and unaudited 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 those related to income taxes, and the 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 policies affect our more significant judgments and estimates used in the preparation of the unaudited condensed consolidated financial statements.
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.
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.
We have capitalized land, which is not subject to depreciation.
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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.
Revenue recognition
We follow the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“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 also requires certain additional disclosures.
Rental income 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.
Currently, the Company’s leases provide for payments with fixed monthly base rents over the term of the leases. The leases also require the tenant to remit estimated monthly payments to the Company for property taxes. These payments are recorded as rental income and the related property tax expense reflected separately on the statements of operations.
Revenues from advisory services is recognized when the Company performs services pursuant to its agreements with clients and collectability is reasonably assured.
Brokerage revenues primarily consists of real estate sales commissions and are recognized upon the successful completion of all required services have been performed which is when escrow closes. In accordance with the guidelines established for Reporting Revenue Gross as a Principal versus Net as an Agent in the 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 revenue that are payable upon payment of rent or other events beyond the Company’s control are recognized upon the occurrence of such events.
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 Accounting Standards Update (“ASU”) 2016-09 Improvements to Employee Share-Based Payment Accounting.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, and a modified retrospective approach is required, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November of 2019, the FASB issued ASU 2019-10, which delayed the implementation of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies which applies to the Company. The Company is currently evaluating the impact of ASU 2016-13 on its future consolidated financial statements.
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Recent 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 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 June 30, 2021, 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 period ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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, 2020 (the “2020 10-K”), as updated from time to time. However, in light of the recent coronavirus (COVID-19) pandemic, set forth below is a risk factor relating to COVID-19. Other than as set forth below, as of the filing date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors previously disclosed in the 2020 10-K, as updated from time to time.
Unfavorable global economic, business or political conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets, including conditions that are outside of our control, including the impact of health and safety concerns, such as those relating to the current COVID-19 outbreak. The most recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for our properties and our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could strain our tenants, possibly resulting in delays in tenant payments. Any of the foregoing could harm our business and we cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| Date | Name of Person or Entity |
Nature of Each Offering |
Number of Shares Offered | Amount Paid to the Issuer |
Trading Status of the Shares | Legend | ||||||||
| 4/1/2021 | Joseph Lewis | Section 4(a)(2) | 60,000 | Intangible assets acquired | Restricted | Yes | ||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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 Label 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. |
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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: August 12, 2021 | /s/ Bryan McLaren |
| President, Chief Executive Officer and Chief Financial Officer | |
| (principal executive officer, principal financial officer and principal accounting officer) |
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