UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
For
the quarterly period ended
COMMISSION
FILE NO.
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ZONED PROPERTIES, INC.
Form 10-Q
March 31, 2022
INDEX
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Deferred rent receivable | ||||||||
| Lease incentive receivable | ||||||||
| Rental properties, net | ||||||||
| Prepaid expenses and other assets | ||||||||
| Convertible note receivable | ||||||||
| Property and equipment, net | ||||||||
| Right of use asset, net | ||||||||
| Intangible asset, net | ||||||||
| Investment in unconsolidated joint ventures | ||||||||
| Security deposits | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| LIABILITIES: | ||||||||
| Convertible note payable | $ | $ | ||||||
| Convertible note payable - related party | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Lease liability | ||||||||
| Accrued interest - 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 | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUES: | ||||||||
| Rental revenues | $ | $ | ||||||
| Advisory revenues | ||||||||
| Brokerage revenues | ||||||||
| Franchise fees | ||||||||
| Total revenues | ||||||||
| OPERATING EXPENSES: | ||||||||
| Compensation and benefits | ||||||||
| Professional fees | ||||||||
| Brokerage fees | ||||||||
| General and administrative expenses | ||||||||
| Depreciation | ||||||||
| Real estate taxes | ||||||||
| Total operating expenses | ||||||||
| INCOME (LOSS) FROM OPERATIONS | ( | ) | ||||||
| OTHER (EXPENSES) INCOME: | ||||||||
| Interest expenses | ( | ) | ( | ) | ||||
| Interest expenses - related party | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Loss from unconsolidated joint ventures | ( | ) | ||||||
| Total other expenses, net | ( | ) | ( | ) | ||||
| LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ||||
| PROVISION FOR INCOME TAXES | ||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | ||
| NET 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 MONTHS ENDED MARCH 31, 2022 AND 2021
(Unaudited)
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | 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 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders' | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Accretion of stock based compensation related to stock options issued | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Year Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation expense | ||||||||
| Amortization expense | ||||||||
| Stock-based compensation | ||||||||
| Stock option expense | ||||||||
| Lease costs | ( | ) | ||||||
| Loss from unconsolidated joint ventures | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Deferred rent receivable | ||||||||
| Lease incentive receivable | ||||||||
| Prepaid expenses and other assets | ||||||||
| Security deposit | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| 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 | ( | ) | ||||||
| Lease incentive provided to tenant | ( | ) | ||||||
| Purchases of rental property improvements | ( | ) | ||||||
| Purchases of property and equipment | ( | ) | ||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Repayment of note payable - related party | ( | ) | ||||||
| NET CASH USED IN FINANCING ACTIVITIES | ( | ) | ||||||
| NET (DECREASE) INCREASE IN CASH | ( | ) | ||||||
| CASH, beginning of period | ||||||||
| CASH, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
ZONED
PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
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 renamed the corporation, Zoned Properties, Inc., and shifted its business model during the first quarter of 2014. The Company is a real estate development firm for emerging and highly regulated industries, including regulated cannabis. Headquartered in Scottsdale, Arizona, Zoned Properties has developed integrated growth services to support its real estate development model; the Company’s Property Technology, Advisory Services, Commercial Brokerage, and Investment Portfolio collectively cross-pollinate within the model to drive project value associated with complex real estate projects. 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”) was organized in the State of Arizona on March 17, 2021. | |
| ● | ZP Data Platform 1, LLC (“ZP Data”) was organized in the State of Arizona on April 14, 2021. |
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 will remain open pursuant to state and local government requirements. The Company did not experience in 2020 or 2021 and does not foresee in 2022, 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.
5
ZONED
PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
The accompanying unaudited 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 months ended March 31, 2022 and 2021 have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, all adjustments necessary to present fairly our consolidated financial position, results of operations, and cash flows as of March 31, 2022 and 2021, and for the periods then ended, have been made. Those adjustments consist of normal and recurring adjustments. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. Accordingly, the unaudited 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, 2021 included in our Annual Report on Form 10-K filed with the SEC on March 24, 2022.
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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for the three months ended March 31, 2022 and 2021 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 including rental property and investment in joint ventures, 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 regulated cannabis 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 three
months ended March 31, 2022 and 2021, 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
MARCH 31, 2022
Cash
Cash
is carried at cost and represents cash on hand, demand deposits placed with banks or other financial institutions and all highly
liquid investments with an original maturity of three months or less as of the purchase date of such investments. The Company
had no cash equivalents on March 31, 2022 and December 31, 2021. 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 March 31, 2022 and December 31, 2021, 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. During the three months ended March 31, 2022 and 2021, 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 the Company’s ownership interest and level of influence. Investments accounted for under the equity method are recorded based upon the amount of the Company’s investment and adjusted each period for its share of the investee’s income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable. The Company evaluates its investments in these entities for consolidation. It considers its percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining whether or not the investment qualifies for consolidation or if it should be accounted for as an unconsolidated investment under 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.
7
ZONED
PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
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.
The Company has capitalized land, which is not subject to depreciation. If the Company’s estimates of the projected future cash flows, anticipated holding periods, or market conditions change, the Company’s evaluation of impairment losses may be different and such differences could be material to its consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. During the three months ended March 31, 2022 and 2021, the Company did not record any impairment losses.
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 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. If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that can be taken in the form of cash or a credit against the tenant’s rent) that is funded is treated as a lease incentive receivable and amortized as a reduction of revenue over the lease term.
Currently, the Company’s leases provide for payments with fixed monthly base rents over the term of the leases. The leases also require the tenant to remit estimated monthly payments to the Company for property taxes and common area maintenance. These payments are recorded as rental income and the related property tax expense is reflected separately on the condensed consolidated 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.
8
ZONED
PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
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.
Franchise fee revenues consist of fees earned each time that KCB Jade Holdings, LLC sells one of its franchise locations. Franchise fee revenues are recognized when earned and collectability is reasonably assured (See Note 5).
Lease accounting
The FASB’s Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to recognize a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.
For leases entered into on or after the effective date, where the Company is the lessor, at the inception of the contract, the Company assesses whether the contract is a sales-type, direct financing or operating lease by reviewing the terms of the lease and determining if the lessee obtains control of the underlying asset implicitly or explicitly.
If
a change to a pre-existing lease occurs, the Company evaluates if the modification results in a separate new lease or a modified
lease. A new lease results when a modification provides additional right of use. The new lease or modified lease is then reassessed
to determine its classification based on the modified terms. As disclosed in Note 3, on January 1, 2019, the Chino Valley
lease was modified to increase the monthly base rent from $
The
Company records revenues from rental properties for its operating leases where it is the lessor on a straight-line basis. Any
revenue on the straight-line basis exceeding the monthly payment amount required on the operating lease is reflected as a deferred
rent receivable. Effective May 31, 2020, the Company amended its leases for which it is the lessor on its Chino Valley, Tempe,
Kingman and Green Valley properties. The amendments resulted in an abatement of rent for the months of June and July 2020.
This rent abatement resulted in a deferred rent receivable as of March 31, 2022 and December 31, 2021 of $
9
ZONED
PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
For contracts entered into on or after the effective date, where the Company is the lessee, at the inception of a contract, the Company assess whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. The Company allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. For leases where the Company is a lessee, primarily for the Company’s administrative office lease, the Company analyzed if it would be required to record a lease liability and a right of use asset on its consolidated balance sheets at fair value upon adoption of ASU 2016-02.
Operating lease right of use asset represents the right to use the leased asset for the lease term and operating lease liability is recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company used its incremental borrowing rate of 6% based on the information available at the adoption date or execution of a lease agreement in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the condensed consolidated statements of operations.
Basic and diluted loss per share
Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period using the treasury stock method and as-if converted method. Potentially dilutive common shares and participating securities are excluded from the computation of diluted shares outstanding if they would have an anti-dilutive impact on the Company’s net losses. The Company’s preferred stock is considered a participating security since the preferred shares are entitled to dividends equal to common share dividends and accordingly, are included in the computation of earnings per share pursuant to the two-class method. The two-class method of computing (loss) income per share is an earnings allocation formula that determines (loss) income per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings.
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 three months ended March 31, 2022 and 2021.
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Convertible debt | ||||||||
| Stock options | ||||||||
Segment reporting
Prior to January 1, 2022, the Company determined that its properties had 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. Beginning on January 1, 2022, the Company changed its method of internal reporting and determined that the Company operates in two reportable segments which consists of (1) the operations, leasing and management of its leased commercial properties, herein known as the “Property Investment Portfolio” segment, and (2) advisory and brokerage services related to commercial properties, herein known as the “Real Estate Services” segment. The Company has determined that these reportable segments were strategic business units that offered different products. These reportable segments are being managed separately based on the fundamental differences in their operations.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
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 December 31, 2021 and 2020 that would require either recognition or disclosure in the accompanying consolidated financial statements.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment Accounting.
Recently issued accounting pronouncements
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.
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.
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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
January 1, 2019, Chino Valley and Broken Arrow entered into that the First Amendment to the 2018 Chino Valley Lease (the
“2019 Chino Valley Lease Amendment”), pursuant to which the monthly base rent was increased from $
On
May 29, 2020, Chino Valley and Broken Arrow entered into a Second Amendment to the 2018 Chino Valley Lease, as amended (the
“2020 Chino Valley Amendment”), effective May 31, 2020 (“Effective Date”). Pursuant to the terms
of the 2020 Chino Valley Amendment, among other things, the base rent was adjusted to $
On
August 23, 2021, Chino Valley and Broken Arrow entered into the Third Amendment (the “Third Chino Valley Amendment”)
to the 2018 Chino Valley Lease, as amended (the “Chino Valley Lease”), effective September 1, 2021. The parties
previously agreed that the base rental payments under the Chino Valley Lease would increase commensurate to any and all expanded
and operational square footage on the premises by calculating the fixed rate of $
On
January 24, 2022 and effective on March 1, 2022, Chino Valley and Broken Arrow entered into the Fourth Amendment (the
“Fourth Chino Valley Amendment”) to the Chino Valley Lease, as amended. Pursuant to the terms of the Fourth Chino
Valley Amendment, the parties acknowledge that an additional
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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 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 $
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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
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
$
Significant Tenants
CJK and Broken Arrow, together, operate under the company brand, “Hana Meds” or “Hana”, 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 “Significant Tenant 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 March 31, 2022 and December 31, 2021, security deposits payable to the Significant Tenants amounted to $
Future minimum lease payments to be received, on all leased properties, for each of the five succeeding calendar years and thereafter as of period ended March 31, 2022, consists of the following:
| Future annual base rent: | ||||
| 2022 (remainder of year) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
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Rental and advisory revenue and receivable –Significant Tenants
For
the three months ended March 31, 2022 and 2021, rental and advisory revenue associated with the Significant Tenant leases
described above amounted to $
On
March 31, 2022 and December 31, 2021, accounts receivable from advisory services provided to the Significant Tenants
amounted to $
Asset concentration
As
of March 31, 2022 and December 31, 2021, the Company had an asset concentration related to the Significant Tenants.
As of March 31, 2022 and December 31, 2021, the Significant Tenants leased approximately
NOTE 4 – RENTAL PROPERTIES
On March 31, 2022 and December 31, 2021, rental properties, net consisted of the following:
| Description | Useful Life (Years) | March 31, 2022 | December 31, 2021 | ||||||||
| Building and building improvements | $ | $ | |||||||||
| Land | - | ||||||||||
| Rental properties, at cost | |||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | |||||||
| Rental properties, net | $ | $ | |||||||||
For
the three months ended March 31, 2022 and 2021, depreciation of rental properties amounted to $
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NOTE 5 – CONVERTIBLE NOTE RECEIVABLE
On March 19, 2020, the Company made an initial
investment of $
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.
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, |
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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.
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. Pursuant to the Second A&R Debenture, the Company and KCB agreed to revise certain terms in the A&R Debenture, as follows.
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.
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.
The convertible note receivable has been accounted for at amortized cost and is evaluated for collectability at each reporting date. As of March 31, 2022 and December 31, 2021, an allowance was not deemed necessary.
On
March 31, 2022, convertible note receivable and interest receivable amounted to $
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MARCH 31, 2022
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 March 31, 2022 and December 31, 2021, intangible assets consisted of the following:
| Useful life | March 31, 2022 | December 31, 2021 | ||||||||
| Real estate brokerage materials and listing | $ | |||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||
| $ | $ | |||||||||
For
the three months ended March 31, 2022 and 2021, amortization of intangible assets amounted to $
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NOTE 7 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
On
March 31, 2022 and December 31, 2021, the Company held investments with aggregate carrying values of $
| Original | Net Carrying Value | |||||||||||||||||
| Entity | Date Acquired | Ownership % | Investment Amount | March 31, 2022 | December 31, 2021 | |||||||||||||
| 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
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On
May 1, 2021, the Company entered into a Limited Liability Company Operating Agreement (the “Zoneomics Green Operating
Agreement”) with a non-affiliated joint venture partner in connection with the formation of Zoneomics Green, LLC (“Zoneomics
Green”), a Delaware limited liability company formed on May 1, 2021. Zoneomics Green’s goal is to utilize advanced
property technology to provide solutions for property identification in regulated industries such as regulated cannabis. Pursuant
to the Zoneomics Green Operating Agreement, the Company purchased
The following represents unaudited summarized financial information derived from the financial statements of the Beakon and Zoneomics Green Joint Ventures, respectively, as of March 31, 2022 and for the three months ended March 31, 2022 and 2021.
| Balance sheets (Unaudited) | Beakon | Zoneomics Green | ||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Licensing agreement | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities | $ | $ | ||||||
| Equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
| For the Three Months Ended March 31, 2022 | ||||||||
| Statement of operations (Unaudited) | Beakon | Zoneomics Green | ||||||
| Net sales | $ | $ | ||||||
| Operating expenses | ( | ) | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Company’s share of loss from unconsolidated joint ventures | $ | $ | ( | ) | ||||
During
the three months ended March 31, 2022 and 2021, the Company recorded a loss from unconsolidated joint ventures of $
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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 March 31, 2022 and December 31, 2021, the principal balance due under the Abrams Debenture is $
For the three months ended March 31, 2022
and 2021, 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 $
On January 7, 2022, the Company repaid this debt and all accrued and unpaid interest due.
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As
of March 31, 2022 and December 31, 2021, the principal balance due under the McLaren Debenture was $
As
of March 31, 2022 and December 31, 2021, accrued interest payable due under the McLaren Debenture was $
For
the three months ended March 31, 2022 and 2021, interest expense – related party amounted to $
Indemnification agreements
On August 23, 2021, the Company entered into indemnification agreements with each of its directors and executive officers. In general, these indemnification agreements require the Company to indemnify a director and officer to the fullest extent permitted by law against liabilities that may arise in connection with that director’s service as a director and officer for the Company. Additionally, the Company shall advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. In August 2021, the Company did not renew its officers’ and directors’ insurance.
NOTE 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 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. |
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(B) Common stock issued for services
2021
On
January 31, 2021, the Company issued an aggregate of
(C) Equity incentive plans
On
August 9, 2016, the Company’s Board of Directors authorized the 2016 Equity Incentive Plan (the “2016 Plan”)
and reserved
(E) Stock options
On
January 1, 2021, the Company granted a consultant, now Chief Operating Officer of the Company as of July 1, 2021, an
option, pursuant to the 2016 Plan, to purchase
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, the Company granted the consultant an option, pursuant
to the 2016 Plan, to purchase
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In January 2022, the Company’s Board
of Directors unanimously agreed to stop receiving any direct stock issuance or cash payments related to their compensation for services
on the Company’s Board of Directors. The Company and its Directors believe it is in the Company’s best interest to transition
Directors’ compensation to a multi-year stock option plan. Accordingly, on January 21, 2022, the Company granted stock options
to purchase an aggregate of
On
January 21, 2022, the Company granted a stock option to purchase an aggregate of
For
the three months ended March 31, 2022 and 2021, in connection with the accretion of stock-based option expense, the Company
recorded stock option expense of $
Stock option activities for the three months ended March 31, 2022 are summarized as follows:
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding December 31, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Balance Outstanding March 31, 2022 | $ | $ | ||||||||||||||
| Exercisable, March 31, 2022 | $ | $ | ||||||||||||||
| Balance Non-vested on December 31, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Vested during the period | ( | ) | ||||||||||||||
| Balance Non-vested on March 31, 2022 | $ | $ | ||||||||||||||
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NOTE 11 – COMMITMENTS AND CONTINGENCIES
Legal matters
From time to time, the Company may be involved in litigation related to claims arising out of its operations in the normal course of business. As of March 31, 2022 and December 31, 2021, 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”). Pursuant to the terms of the 2018 Employment Agreement, the Company
agreed to continue to pay Mr. McLaren his then-current base annual salary of $
The
2018 Employment Agreement has a term of
| (i) | immediately, if Mr. McLaren dies; | |
| (ii) | immediately, if Mr. McLaren receives benefits under the long-term disability insurance coverage then provided by the Company or, if no such insurance is in effect, upon Mr. McLaren’s disability; | |
| (iii) | on the expiration date, as the same may be extended by the parties by written amendment to the 2018 Employment Agreement prior to the occasion thereof; | |
| (iv) | at the option of the Company for Cause (as defined in the 2018 Employment Agreement) upon the Company’s provision of written notice to Mr. McLaren of the basis for such Termination; | |
| (v) | at the option of the Company, without Cause; | |
| (vi) | by Mr. McLaren at any time with Good Reason (as defined in the 2018 Employment Agreement), upon 30 days’ prior written notice to the Company delivered not later than within 90 days of the existence of the condition therefor; or | |
| (vii) | by Mr. McLaren at any time without Good Reason, upon not less than three months’ prior written notice to the Company. |
In the event of a Termination for any reason or for no reason whatsoever, or upon the expiration date of the 2018 Employment Agreement, whichever comes first, all rights and obligations under the 2018 Employment Agreement shall cease (i) as to the Company, except for the Company’s obligations for the payment of applicable severance benefits thereunder, and for indemnification thereunder, and (ii) as to Mr. McLaren, except for his obligation under the restrictive covenants in the 2018 Employment Agreement.
The Company and Mr. McLaren also entered into a Golden Parachute Agreement (the “Golden Parachute Agreement”) on May 23, 2018. No benefits shall be payable under the Golden Parachute Agreement unless there shall have been a change in control of the Company, as set forth below. For purposes of the Golden Parachute Agreement, amongst other terms in the Golden Parachute Agreement, a “change in control of the Company” shall mean a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended.
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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.
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. |
26
ZONED
PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
| (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. |
| 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. |
401(k) Plan
On September 29, 2021, the Company’s board
of directors adopted the Zoned Properties 401(k) Plan (the “Plan”) effective January 1, 2021. The Company will contribute
a matching contribution to the Plan for each employee in an amount equal to
27
ZONED
PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
NOTE 12 – SEGMENT REPORTING
Prior to January 1, 2022, the Company determined that its properties had 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. Beginning on January 1, 2022, the Company changed its method of internal reporting and determined that the Company operates in two reportable segments which consists of (1) the operations, leasing and management of its leased commercial properties, herein known as the “Property Investment Portfolio” segment, and (2) advisory and brokerage services related to commercial properties, herein known as the “Real Estate Services” segment. The Company has determined that these reportable segments were strategic business units that offer different products. Currently, these reportable segments are being managed separately based on the fundamental differences in their operations.
Information with respect to these reportable business segments for the three months ended March 31, 2022 and 2021 was as follows:
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Property Investment Portfolio | $ | $ | ||||||
| Real Estate Services | ||||||||
| Depreciation and amortization: | ||||||||
| Property Investment Portfolio | ||||||||
| Real estate services | - | |||||||
| Interest expense: | ||||||||
| Property Investment Portfolio | ||||||||
| Real Estate Services | ||||||||
| Loss from unconsolidated joint ventures: | ||||||||
| Property Investment Portfolio | ||||||||
| Real Estate Services | ||||||||
| Net (loss) income: | ||||||||
| Property Investment Portfolio | ( | ) | ( | ) | ||||
| Real Estate Services | ||||||||
| $ | ( | ) | $ | ( | ) | |||
| March 31, 2022 | December 31, 2021 | |||||||
| Identifiable long-lived tangible assets on March 31, 2022 and December 31, 2021 by segment | ||||||||
| Property Investment Portfolio | $ | $ | ||||||
| Real Estate Services | ||||||||
| $ | $ | |||||||
28
ZONED
PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
NOTE 13 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITY
On
March 15, 2022, the Company entered to an Assumption of Lease and Consent Agreement with a landlord, whereby the landlord
consented to the assignment of an office lease, as amended, from the original tenant to the Company. The lease term shall begin
on March 15, 2022 and expire on November 30, 2024, provided the Company has the option to extend the lease for an additional
five years. The monthly base rent shall be $
In adopting ASC Topic 842, Leases (Topic 842) on January 1, 2019, the Company had elected the ‘package of practical expedients’, which permitted it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs (see Note 2). In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. Since the terms of the Company’s operating lease for its office space prior to March 15, 2022 was 12 months or less on the date of adoption, pursuant to ASC 842, the Company determined that the lease met the definition of a short-term lease, and the Company did not recognize the right-of use asset and lease liability arising from this lease. Upon signing of the Assumption of Lease and Consent Agreement on March 15, 2022, the Company analyzed the new lease and determined it is required to record a lease liability and a right of use asset on its consolidated balance sheet, at fair value.
During
the three months ended March 31, 2022 and 2021, in connection with its operating leases, the Company recorded rent expense
of $
The
significant assumption used to determine the present value of the lease liability in March 2022 was a discount rate of
On March 31, 2022, right-of-use asset (“ROU”) is summarized as follows:
March 31, 2022 | ||||
| Office lease right of use asset | $ | |||
| Less: accumulated amortization | ( | ) | ||
| Balance of ROU assets | $ | |||
On March 31, 2022, future minimum base lease payments due under a non-cancelable operating lease are as follows:
| Year ended December 31, | Amount | |||
| 2022 (remainder of year) | $ | |||
| 2023 | ||||
| 2024 | ||||
| Total minimum non-cancelable operating lease payments | ||||
| Less: discount to fair value | ( | ) | ||
| Total lease liability on March 31, 2022 | $ | |||
NOTE 14 – SUBSEQUENT EVENTS
On
April 1, 2022, the Company granted a stock option to purchase
On May 3, 2022, the Company's Board of Directors approved the appointment of Daniel R. Gauthier as the Company’s Chief Legal Officer, Chief Compliance Officer, and Corporate Secretary. The Company is still finalizing the start date and terms of his employment.
29
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results
This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This quarterly report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the “Risk Factors” section of our annual report on Form 10-K as filed on March 24, 2022, as the same may be updated from time to time.
We caution that these factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q.
Overview
Zoned Properties, Inc. (“Zoned Properties” or the “Company”), was incorporated in the State of Nevada on August 25, 2003. The Company is a 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 model; the Company’s Property Technology, Advisory Services, Commercial Brokerage, and Investment Portfolio collectively 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”).
We operate our business in two reportable segments consisting of (i) the operations, leasing and management of its leased commercial properties (the “Property Investment Portfolio” segment), and (ii) advisory and brokerage services related to commercial properties (the “Real Estate Services” segment). We are in the process of developing and expanding multiple business divisions, including a property technology division, and a property investment portfolio division focused on acquisitions to expand our property holdings. Each of these operating divisions is an important element of the overall business development strategy for long-term growth. We believe in the value of building relationships with clients and local communities 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.
30
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 year ended December 31, 2021, we contributed $86,000 to Beakon. On December 31, 2021, the Company recorded an other-than-temporary impairment loss of $73,970 because it was determined that the fair value of its equity method investment in Beakon was less than its carrying value. Based on management’s evaluation, it was determined that due to market conditions and lack of committed funding, the Company’s ability to recover the carrying amount of the investment in Beakon was impaired. For the year ended December 31, 2021, the $73,970 impairment loss is included in other expenses on the consolidated statement of operations.
On May 1, 2021, we entered into a Limited Liability Company Operating Agreement (the “Zoneomics Green Operating Agreement”) with a non-affiliated joint venture partner in connection with the formation of Zoneomics Green, LLC (“Zoneomics Green”), a Delaware limited liability company formed on May 1, 2021. Zoneomics Green’s goal is to utilize advanced property technology to provide solutions for property identification in regulated industries such as regulated cannabis. Pursuant to the Zoneomics Green Operating Agreement, the Company purchased 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 Green 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 Green.
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 lease land and/or building space at all four 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.
For the three months ended March 31, 2022 and 2021, substantially all of our Property Investment Portfolio segment 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. For the three months ended March 31, 2022 and 2021, Real Estate Services segment revenues included $0 and $9,250, respectively, that were generated from the Significant Tenants.
31
As of March 31, 2022, 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) | - | 1,782,563 | - | 6,878 | 1,789,441 | |||||||||||||||
| Developed Land Area (Sq. Feet) | 158,772 | 289,586 | 57,769 | 7,061 | 513,188 | |||||||||||||||
| Total Rentable Building Sq. Ft. | 60,000 | 97,312 | 1,440 | 1,497 | 160,249 | |||||||||||||||
| Vacant Rentable Sq. Ft. | - | - | - | - | - | |||||||||||||||
| Sq. Ft. rented as of March 31, 2022 | 60,000 | 97,312 | 1,440 | 1,497 | 160,249 | |||||||||||||||
| Annual Base Rent (*,**) | ||||||||||||||||||||
| 2022 (remainder of year) | $ | 457,450 | $ | 788,227 | $ | 31,500 | $ | 36,000 | $ | 1,313,267 | ||||||||||
| 2023 | 610,053 | 1,050,970 | 42,000 | 48,000 | 1,751,023 | |||||||||||||||
| 2024 | 610,053 | 1,050,970 | 42,000 | 48,000 | 1,751,023 | |||||||||||||||
| 2025 | 610,053 | 1,050,970 | 42,000 | 48,000 | 1,751,023 | |||||||||||||||
| 2026 | 598,589 | 1,050,970 | 42,000 | 48,000 | 1,739,559 | |||||||||||||||
| 2027 | 590,400 | 1,050,970 | 42,000 | 48,000 | 1,731,370 | |||||||||||||||
| Thereafter | 7,281,600 | 12,961,958 | 518,000 | 592,000 | 21,353,558 | |||||||||||||||
| Total | $ | 10,676,400 | $ | 19,005,035 | $ | 759,500 | $ | 868,000 | $ | 31,390,823 | ||||||||||
| * | Annual base rent represents amount of cash payments due from tenants. |
| ** | For Tempe, AZ, table includes rental income generated from the lease of parking lot space used by a third party as an antenna location. |
32
Annualized $ per Rented Sq. Ft. (Base Rent)
| Year | Tempe, AZ | Chino Valley, AZ | Green Valley, AZ | Kingman, AZ | ||||||||||||
| 2022 | $ | 9.8 | $ | 10.8 | $ | 29.2 | $ | 32.1 | ||||||||
| 2023 | $ | 9.8 | $ | 10.8 | $ | 29.2 | $ | 32.1 | ||||||||
| 2024 | $ | 9.8 | $ | 10.8 | $ | 29.2 | $ | 32.1 | ||||||||
| 2025 | $ | 9.8 | $ | 10.8 | $ | 29.2 | $ | 32.1 | ||||||||
| 2026 | $ | 9.8 | $ | 10.8 | $ | 29.2 | $ | 32.1 | ||||||||
The Company will focus heavily on the growth of a diversified revenue stream in 2022 and is moving to take advantage of new opportunities. 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.
Pursuant to lease agreements with our Significant Tenant, from the period from May 31, 2020 through March 31, 2022, our Significant Tenants invested a combined total of at least $8,000,000 in improvements in and to the properties in Chino Valley. The increase in the rentable area of the leased premises resulted in an increase in all amounts calculated based on the same, including, without limitation, base rent.
COVID-19
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 will remain open pursuant to state and local government requirements. The Company did not experience in 2020 or 2021 and does not foresee in 2022, 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.
Results of Operations
The following comparative analysis of results of operations was based primarily on the comparative unaudited condensed 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 months ended March 31, 2022 and 2021, which are included elsewhere in this quarterly report on Form 10-Q. The results discussed below are for the three months ended March 31, 2022 and 2021.
33
Comparison of Results of Operations for the Three Months Ended March 31, 2022 and 2021
Revenues
For the three months ended March 31, 2022 and 2021, revenues consisted of the following:
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Rental revenues | $ | 390,097 | $ | 292,189 | ||||
| Advisory revenues | 31,250 | 53,656 | ||||||
| Brokerage revenues | 511,104 | - | ||||||
| Franchise fees | 6,250 | - | ||||||
| Total revenues | $ | 938,701 | $ | 345,845 | ||||
Revenues by reportable business segments for the three months ended March 31, 2022 and 2021 were as follows:
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Property investment portfolio | $ | 390,097 | $ | 345,845 | ||||
| Real estate services | 548,604 | - | ||||||
| 938,701 | 345,845 | |||||||
For the three months ended March 31, 2022, total revenues amounted to $938,701, including Significant Tenant revenues of $385,294, as compared to $345,845, including Significant Tenant revenues of $296,480, for the three months ended March 31, 2021, an increase of $592,856, or 171.4%. For the three months ended March 31, 2022, the increase in revenues as compared to the 2021 comparable period was attributable to an increase in rental revenue from our Significant Tenants of $89,365 due to an increase in rental revenue at our Chino Valley facility related to a fourth amendment to our lease agreement in connection with an increase in rentable square footage, an increase in brokerage revenue of $511,104 related to commission earned on real estate listings, and an increase in franchise fees earned of $6,250, offset by a decrease in advisory revenues of $22,406. 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 March 31, 2022, operating expenses amounted to $929,183 as compared to $389,213 for the three months ended March 31, 2021, an increase of $539,970, or 138.70%. For the three months ended March 31, 2022 and 2021, operating expenses consisted of the following:
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Compensation and benefits | $ | 272,130 | $ | 131,144 | ||||
| Professional fees | 116,319 | 94,420 | ||||||
| Brokerage fees | 356,547 | - | ||||||
| General and administrative expenses | 65,108 | 51,478 | ||||||
| Depreciation and amortization | 97,317 | 90,747 | ||||||
| Real estate taxes | 21,762 | 21,424 | ||||||
| Total | $ | 929,183 | $ | 389,213 | ||||
34
| ● | For the three months ended March 31, 2022, compensation and benefit expense increased by $140,986, or 107.5%, as compared to the three months ended March 31, 2022. This increase was attributable to an increase in stock-based compensation of $49,094 and an increase in compensation and benefits of $91,892. The increase in stock-based compensation related to an increase in stock-based compensation from the accretion of stock option expense, offset by shares issued for services during the three months ended March 31, 2021. Additionally, subsequent to the first quarter of 2021, we began to hire additional staff related to the diversification of our services into brokerage services and the expansion of our advisory services which caused an increase in compensation and benefit expense during the first quarter of 2022. | |
| ● | For the three months ended March 31, 2022, professional fees increased by $21,899, or 23.2%, as compared to the three months ended March 31, 2021. This increase was primarily attributable to an increase in accounting fees of $1,268, an increase in consulting fees of $6,039 related to an increase in consultants used in our brokerage business, an increase in public relations fees of $10,625, and an increase in legal fees of $3,968. | |
| ● | For the three months ended March 31, 2022, we recorded brokerage fees amounting to $356,547. We did not record brokerage fees during the three months ended March 31, 2021. Brokerage fees occur as the result of various percentage-based commission splits we pay to our licensed brokerage team members who participate in various real estate listing transactions. | |
| ● | General and administrative expenses consist of expenses such as rent expense, insurance expense, insurance expense, travel expenses, office expenses, telephone and internet expenses, advertising and marketing expense, and other general operating expenses. For the three months ended March 31, 2022, general and administrative expenses increased by $13,630, or 26.5%, as compared to the three months ended March 31, 2021. |
| ● | For the three months ended March 31, 2022, depreciation expense increased by $6,570, or 7.2%, as compared to the three months ended March 31, 2021. | |
| ● | For the three months ended March 31, 2022, real estate taxes increased by $338, or 1.6%, as compared to the three months ended March 31, 2021. |
Income (loss) from operations
As a result of the factors described above, for the three months ended March 31, 2022, income from operations amounted to $9,518 as compared to a loss from operations of $(43,368) for the three months ended March 31, 2021, a positive change of decrease of $52,886, or 121.9%.
Other (expense) income
Other (expense) income primarily includes interest expense incurred on debt with third parties and a related party, and includes other (expense) income. For the three months ended March 31, 2022 and 2021, total other expenses, net amounted to $35,214 as compared to total other expenses, net of $27,967, respectively, representing an increase of $7,247, or 25.9%. This increase was attributable to an increase in loss from unconsolidated joint ventures of $7,819 and an increase in interest expense of $300, offset by an increase in interest income of $872 attributable to interest earned on the convertible note receivable.
Net loss
As a result of the foregoing, for the three months ended March 31, 2022 and 2021, net loss amounted to $25,696, or $(0.00) per common share (basic and diluted), and $71,335, or $(0.01) per common share (basic and diluted), respectively.
35
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 $787,918 and $1,191,940 of cash as of March 31, 2022 and December 31, 2021, respectively.
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, | |
| ● | The cost of being a public company, | |
| ● | An increase in investments in joint ventures and other projects, and | |
| ● | An increase in funds used for lease incentives paid to our Significant Tenant. |
We may need to raise additional funds, particularly if we are unable to continue to generate positive cash flows from our operations. We estimate that based on current plans and assumptions, that our available cash will be sufficient to satisfy our cash requirements under our present operating expectations for the next 12 months from the date of this quarterly report on Form 10-Q. Other than revenue received from the lease of our rental properties, from advisory fees, from brokerage revenues, and from franchise services, 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, invest in joint ventures and notes receivable, and to grow our company. We may need to raise significant additional capital or debt financing to acquire new properties, to develop existing properties, to assure we have sufficient working capital for our ongoing operations and debt obligations, and to invest in new joint venture and other projects.
On March 19, 2020, we made an initial investment of $100,000 into KCB Jade Holdings, LLC (“KCB”), an entity founded by an individual related to the Company’s COO. KCB, doing business as Open Dør Dispensaries, provides services to cannabis dispensary license holders utilizing the Open Dør Dispensaries retail model as franchisee partners.. 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.
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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 began accruing as of March 19, 2020, while interest on the Additional Investment began 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.
Apart from the terms described above, the terms of the A&R Debenture are substantially identical to the terms of the Original Debenture.
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. 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. However, if KCB elects to prepay the Second A&R Debenture prior to March 19, 2025 (the “Maturity Date”) or prior to any conversion in whole or in part, the Company will be entitled to receive a number of KCB Class B units (“Class B Units”), in addition to such prepayment amount, constituting 10% of the total outstanding KCB Units (as defined in KCB’s Limited Liability Company Operating Agreement (the “Operating Agreement”)), for the avoidance of doubt, being 10% of the total of KCB’s Class A units (“Class A Units”) and the Class B Units together, and 10% of the total Percentage Interest (as defined in the Operating Agreement) following such issuance and at the time of such issuance.
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 33% of the total number of Units (for the avoidance of doubt, being 33% of the total of the Class A Units and the Class B Units together), issued and outstanding at the time of conversion, constituting 33% of the total Percentage Interest (the “Conversion Percentage”).
Right of Maturity Units. If (i) KCB does not elect to exercise its prepayment rights prior to the Maturity Date, and (ii) the Company does not elect to exercise its conversion rights, and (iii) KCB pays to the Company all outstanding principal and interest accrued and due under the terms of the Second A&R Debenture on the Maturity Date, then the Company will still be entitled to receive a number of Class B Units, in addition to such payment amount, constituting 8% of the total outstanding Units (for the avoidance of doubt, being 8% of the total of the Class A Units and the Class B Units together) and 8% of the total Percentage Interest (as such term is defined in the Second A&R Debenture) following such issuance and at the time of such issuance.
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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.
As discussed in the Overview section and elsewhere, during the year ended December 31, 2021, we contributed $86,000 to the Beakon joint venture and we contributed $90,000 to the Zoneomics Green joint venture. Additionally, on December 31, 2021, we recorded an other-than-temporary impairment loss of $73,970 because it was determined that the fair value of our equity method investment in Beakon was less than its carrying value. Based on management’s evaluation, it was determined that due to market conditions and lack of committed funding, our ability to recover the carrying amount of the investment in Beakon was impaired as of December 31, 2021.
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 March 31, 2022 and December 31, 2021, we had an asset concentration related to our Significant Tenant leases. As of March 31, 2022 and December 31, 2021, these Significant Tenants represented approximately 82.3% and 79.2% 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 24, 2022 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 Three Months Ended March 31, 2022 and 2021
Net cash flow provided by operating activities was $119,742 for the three months ended March 31, 2022, as compared to net cash flow provided by operating activities of $165,035 for the three months ended March 31, 2021, representing a decrease of $45,293.
| ● | Net cash flow provided by operating activities for the three months ended March 31, 2022 primarily reflected a net loss of $25,696 adjusted for the add-back of non-cash items consisting of depreciation of $87,867, amortization expense of $9,450, accretion of stock-based stock option expense of $116,916, and a loss from unconsolidated joint ventures of $7,819, offset by changes in operating assets and liabilities primarily consisting of an increase in accounts receivable of $311,877 attributable to an increase in brokerage commissions receivable, a decrease in prepaid expenses of $10,881, an increase in accounts payable of $248,067 attributable to an increase in brokerage fees payable, a decrease in accrued expenses of $25,802, and a decrease in deferred rent receivable of $2,247. |
| ● | Net cash flow provided by operating activities for the three months ended March 31, 2021 primarily reflected net loss of $71,335 adjusted for the add-back of non-cash items consisting of depreciation of $90,746, stock-based compensation expense of $52,000 and accretion of stock-based stock option expense of $15,822, offset by changes in operating assets and liabilities primarily consisting of a decrease in prepaid expenses of $56,555 and an increase in accounts payable of $26,095. |
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During the three months ended March 31, 2022, net cash flow used in investing activities amounted to $503,764 as compared to net cash used in investing activities of $107,135, an increase of $396,629. During the three months ended March 31, 2022, net cash used in investing activities was attributable to an increase in lease incentive receivables related to the disbursement of $500,000 to our Significant Tenant to be used for leasehold improvements, and the purchase of property and equipment of $3,764. For the three months ended March 31, 2021, cash used in investing activities was attributable to cash used for an investment in a convertible note receivable of $100,000 and cash used in the improvement of rental properties of $7,135.
During the three months ended March 31, 2022, net cash flow used in financing activities amounted to $20,000 as compared to net cash used in financing activities of $0, an increase of $20,000. During the three months ended March 31, 2022, net cash used in financing activities was attributable to the repayment of notes payable – related party of $20,000.
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, to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.
The following tables summarize our contractual obligations as of March 31, 2022 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
| Payments Due by Period | ||||||||||||||||||||
| Contractual obligations: | Total | Less than 1 year | 1-3 years | 3-5 years | 5 + years | |||||||||||||||
| Convertible notes | $ | 2,000 | $ | - | $ | - | $ | - | $ | 2,000 | ||||||||||
| Interest on convertible notes | 970 | 150 | 240 | 240 | 340 | |||||||||||||||
| Total | $ | 2,970 | $ | 150 | $ | 240 | $ | 240 | $ | 2,340 | ||||||||||
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 stockholders’ 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 unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed 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.
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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 several 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.
Lease accounting
Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to recognize a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.
For leases entered into on or after the effective date, where the Company is the lessor, at the inception of the contract, the Company assesses whether the contract is a sales-type, direct financing or operating lease by reviewing the terms of the lease and determining if the lessee obtains control of the underlying asset implicitly or explicitly.
If a change to a pre-existing lease occurs, the Company evaluates if the modification results in a separate new lease or a modified lease. A new lease results when a modification provides additional right of use. The new lease or modified lease is then reassessed to determine its classification based on the modified terms. As disclosed in Note 3, on January 1, 2019, the Chino Valley lease was modified to increase the monthly base rent from $35,000 to $40,000. On May 31, 2020, the Chino Valley lease was modified to decrease the monthly base rent from $40,000 to $32,800 and the Tempe lease was modified to increase the monthly base rent from $33,500 to $49,200. On August 23, 2021 and effective September 1, 2021, the Chino Valley lease was amended, and the monthly base rent was increased to $55,195 due to additional space of 27,312 square feet being leased to the lessee. On January 24, 2022 and effective on March 1, 2022, the Chino Valley lease was amended and the monthly base rent was increased to $87,581 due to additional space of 30,000 square feet being leased to the lessee, increasing the premises to a total of 97,312 square feet of operational space. In connection with this lease amendment, the Company paid $500,000 to tenant as a tenant improvement allowance or lease incentive for investment into the premises, which was capitalized as a lease incentive receivable and is recognized on a straight-line basis over the remaining lease term as a reduction to the lease income. The increase in monthly rent was commensurate with the additional space being leased; therefore, this modification qualifies as a separate contract under the FASB’s Accounting Standards Codification (“ASC”) 842. At the commencement of the modified terms, the Company reassessed its lease classification and concluded it remained properly classified as an operating lease.
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The Company records revenues from rental properties for its operating leases on a straight-line basis where it is the lessor. Any revenue on the straight-line basis exceeding the monthly payment amount required on the operating lease is reflected as a deferred rent receivable. Effective May 31, 2020, the Company amended its leases for which it is the lessor on its Chino Valley, Tempe, Kingman and Green Valley properties. The amendments resulted in an abatement of rent for the months of June and July 2020. This rent abatement resulted in a deferred rent receivable as of March 31, 2022 and December 31, 2021 of $162,523 and $164,770, respectively. Additionally, if the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that can be taken in the form of cash or a credit against the tenant’s rent) that is funded is treated as a lease incentive receivable and amortized as a reduction of revenue over the lease term.
For contracts entered into on or after the effective date, where the Company is the lessee, at the inception of a contract, the Company assess whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. The Company allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. For leases where the Company is a lessee, primarily for the Company’s administrative office lease, the Company analyzed if it would be required to record a lease liability and a right of use asset on its consolidated balance sheets at fair value upon adoption of ASU 2016-02.
Operating lease right of use asset represents the right to use the leased asset for the lease term and operating lease liability is recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company used its incremental borrowing rate of 6% based on the information available at the adoption date or execution of a lease agreement in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the condensed consolidated statements of operations.
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 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.
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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. We commence rental revenue recognition when the tenant takes possession of the leased space or controls the physical use of the leased space and the leased space is substantially ready for its intended use. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that can be taken in the form of cash or a credit against the tenant’s rent) that is funded is treated as a lease incentive receivable and amortized as a reduction of revenue over the lease term.
Currently, the Company’s leases provide for payments with fixed monthly base rents over the term of the leases. 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 condensed consolidated 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.
Franchise fee revenues consist of fees earned each time that KCB Jade Holdings, LLC sells one of its franchise locations. Franchise fee revenues are recognized when earned and collectability is reasonably assured.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment Accounting.
Recent Accounting Pronouncements
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.
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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable to smaller reporting companies.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e), promulgated by the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated our company’s disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of March 31, 2022, 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 March 31, 2022 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, 2021, as updated from time to time.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| * | Filed herewith. | |
| ** | Furnished 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: May 12, 2022 | /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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