UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31,September 30, 2021
☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
COMMISSION FILE NO. 000-51640
ZONED PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 46-5198242 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 14269 N. 87th Street, #205, Scottsdale, AZ | 85260 | |
| (Address of principal executive offices) | (Zip Code) |
(877) 360-8839 (Registrant’s telephone number, including area code) |
Former name, former address and former fiscal year, if changed since last report: Not applicable.
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No☒No
As of May 13,November 10, 2021, the registrant had 12,201,548 shares of common stock, par value $0.001 per share, issued and outstanding.
ZONED PROPERTIES, INC.
Form 10-Q
March 31,September 30, 2021
INDEX
i
PART I. FINANCIAL INFORMATION
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Cash | $ | 757,235 | $ | 699,335 | ||||
| Accounts receivable | 9,838 | 4,988 | ||||||
| Deferred rent receivable | 171,510 | 173,757 | ||||||
| Rental properties, net | 6,945,274 | 7,027,436 | ||||||
| Prepaid expenses and other assets | 47,507 | 104,062 | ||||||
| Convertible note receivable | 200,000 | 100,000 | ||||||
| Property and equipment, net | 15,610 | 17,059 | ||||||
| Security deposits | 1,100 | 1,100 | ||||||
| Total Assets | $ | 8,148,074 | $ | 8,127,737 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| LIABILITIES: | ||||||||
| Convertible note payable | $ | 2,000,000 | $ | 2,000,000 | ||||
| Convertible note payable - related party | 20,000 | 20,000 | ||||||
| Accounts payable | 26,095 | - | ||||||
| Accrued expenses | 83,080 | 92,750 | ||||||
| Accrued expenses - related party | 4,500 | 4,200 | ||||||
| Deferred revenues | 7,625 | 3,250 | ||||||
| Security deposits payable | 74,550 | 71,800 | ||||||
| Total Liabilities | 2,215,850 | 2,192,000 | ||||||
| Commitments and Contingencies (Note 9) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, $0.001 par value, 5,000,000 shares authorized; 2,000,000 shares issued and outstanding at March 31, 2021 and December 31, 2020 ($1.00 per share liquidation preference) | 2,000 | 2,000 | ||||||
| Common stock: $0.001 par value, 100,000,000 shares authorized; 12,141,548 and 12,011,548 issued and outstanding at March 31, 2021 and December 31, 2020, respectively | 12,142 | 12,012 | ||||||
| Additional paid-in capital | 20,922,465 | 20,854,773 | ||||||
| Accumulated deficit | (15,004,383 | ) | (14,933,048 | ) | ||||
| Total Stockholders’ Equity | 5,932,224 | 5,935,737 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 8,148,074 | $ | 8,127,737 | ||||
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Cash | $ | 1,090,682 | $ | 699,335 | ||||
| Accounts receivable | 23,575 | 4,988 | ||||||
| Deferred rent receivable | 167,016 | 173,757 | ||||||
| Rental properties, net | 6,528,082 | 7,027,436 | ||||||
| Prepaid expenses and other assets | 35,152 | 104,062 | ||||||
| Convertible note receivable | 200,000 | 100,000 | ||||||
| Property and equipment, net | 15,345 | 17,059 | ||||||
| Intangible asset, net | 18,900 | - | ||||||
| Investment in joint ventures | 160,979 | - | ||||||
| Security deposits | 1,100 | 1,100 | ||||||
| Total Assets | $ | 8,240,831 | $ | 8,127,737 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| LIABILITIES: | ||||||||
| Convertible note payable | $ | 2,000,000 | $ | 2,000,000 | ||||
| Convertible note payable - related party | 20,000 | 20,000 | ||||||
| Accounts payable | 8,148 | - | ||||||
| Accrued expenses | 108,533 | 92,750 | ||||||
| Accrued expenses - related party | 5,100 | 4,200 | ||||||
| Deferred revenues | 9,937 | 3,250 | ||||||
| Security deposits payable | 71,800 | 71,800 | ||||||
| Total Liabilities | 2,223,518 | 2,192,000 | ||||||
| Commitments and Contingencies (Note 11) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, $0.001 par value, 5,000,000 shares authorized; 2,000,000 shares issued and outstanding at September 30, 2021 and December 31, 2020 ($1.00 per share liquidation preference) | 2,000 | 2,000 | ||||||
| Common stock: $0.001 par value, 100,000,000 shares authorized; 12,201,548 and 12,011,548 issued and outstanding at September 30, 2021 and December 31, 2020, respectively | 12,202 | 12,012 | ||||||
| Additional paid-in capital | 20,990,395 | 20,854,773 | ||||||
| Accumulated deficit | (14,987,284 | ) | (14,933,048 | ) | ||||
| Total Stockholders’ Equity | 6,017,313 | 5,935,737 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 8,240,831 | $ | 8,127,737 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| REVENUES: | ||||||||
| Rental revenues | $ | 292,189 | $ | 276,494 | ||||
| Advisory revenues | 53,656 | 27,375 | ||||||
| Total revenues | 345,845 | 303,869 | ||||||
| OPERATING EXPENSES: | ||||||||
| Compensation and benefits | 131,144 | 130,514 | ||||||
| Professional fees | 94,420 | 71,413 | ||||||
| General and administrative expenses | 51,478 | 57,096 | ||||||
| Depreciation | 90,747 | 90,584 | ||||||
| Real estate taxes | 21,424 | 20,964 | ||||||
| Total operating expenses | 389,213 | 370,571 | ||||||
| LOSS FROM OPERATIONS | (43,368 | ) | (66,702 | ) | ||||
| OTHER (EXPENSES) INCOME: | ||||||||
| Interest expenses | (30,000 | ) | (30,000 | ) | ||||
| Interest expenses - related party | (300 | ) | (300 | ) | ||||
| Interest income | 2,333 | 232 | ||||||
| Total other expenses, net | (27,967 | ) | (30,068 | ) | ||||
| LOSS BEFORE INCOME TAXES | (71,335 | ) | (96,770 | ) | ||||
| PROVISION FOR INCOME TAXES | - | - | ||||||
| NET LOSS | $ | (71,335 | ) | $ | (96,770 | ) | ||
| NET LOSS PER COMMON SHARE: | ||||||||
| Basic | $ | (0.01 | ) | $ | (0.01 | ) | ||
| Diluted | $ | (0.01 | ) | $ | (0.01 | ) | ||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||
| Basic | 12,096,770 | 12,004,295 | ||||||
| Diluted | 12,096,770 | 12,004,295 | ||||||
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| REVENUES: | ||||||||||||||||
| Rental revenues | $ | 314,677 | $ | 284,897 | $ | 901,838 | $ | 833,607 | ||||||||
| Advisory revenues | 3,188 | 17,875 | 75,344 | 72,858 | ||||||||||||
| Brokerage revenues | 69,500 | - | 306,092 | - | ||||||||||||
| Total revenues | 387,365 | 302,772 | 1,283,274 | 906,465 | ||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Compensation and benefits | 126,868 | 59,418 | 322,178 | 277,683 | ||||||||||||
| Professional fees | 147,909 | 35,700 | 469,147 | 149,610 | ||||||||||||
| General and administrative expenses | 46,849 | 42,279 | 148,258 | 147,393 | ||||||||||||
| Depreciation | 98,214 | 90,661 | 289,150 | 272,086 | ||||||||||||
| Real estate taxes | 20,976 | 20,963 | 63,651 | 62,891 | ||||||||||||
| Gain on sale of rental property | - | - | (51,944 | ) | - | |||||||||||
| Total operating expenses | 440,816 | 249,021 | 1,240,440 | 909,663 | ||||||||||||
| (LOSS) INCOME FROM OPERATIONS | (53,451 | ) | 53,751 | 42,834 | (3,198 | ) | ||||||||||
| OTHER (EXPENSES) INCOME: | ||||||||||||||||
| Interest expenses | (30,000 | ) | (30,000 | ) | (90,000 | ) | (90,000 | ) | ||||||||
| Interest expenses - related party | (300 | ) | (300 | ) | (900 | ) | (900 | ) | ||||||||
| Interest income | 3,277 | 1,638 | 8,851 | 3,490 | ||||||||||||
| Loss from joint ventures | (15,021 | ) | - | (15,021 | ) | - | ||||||||||
| Total other expenses, net | (42,044 | ) | (28,662 | ) | (97,070 | ) | (87,410 | ) | ||||||||
| (LOSS) INCOME BEFORE INCOME TAXES | (95,495 | ) | 25,089 | (54,236 | ) | (90,608 | ) | |||||||||
| PROVISION FOR INCOME TAXES | - | - | - | - | ||||||||||||
| NET (LOSS) INCOME | $ | (95,495 | ) | $ | 25,089 | $ | (54,236 | ) | $ | (90,608 | ) | |||||
| NET (LOSS) INCOME PER COMMON SHARE: | ||||||||||||||||
| Basic | $ | (0.01 | ) | $ | 0.00 | $ | (0.00 | ) | $ | (0.01 | ) | |||||
| Diluted | $ | (0.01 | ) | $ | 0.00 | $ | (0.00 | ) | $ | (0.01 | ) | |||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic | 12,201,548 | 12,011,548 | 12,166,786 | 12,009,139 | ||||||||||||
| Diluted | 12,201,548 | 12,011,548 | 12,166,786 | 12,009,139 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2021 AND 2020
(Unaudited)
| Additional | Total | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| # of Shares | Amount | # of Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, December 31, 2019 | 2,000,000 | $ | 2,000 | 11,901,548 | $ | 11,902 | $ | 20,806,452 | $ | (14,854,710 | ) | $ | 5,965,644 | |||||||||||||||
| Common stock issued for services | - | - | 110,000 | 110 | 24,090 | - | 24,200 | |||||||||||||||||||||
| Accretion of stock-based compensation related to stock options issued | - | - | - | - | 12,292 | - | 12,292 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (96,770 | ) | (96,770 | ) | |||||||||||||||||||
| Balance, March 31, 2020 | 2,000,000 | $ | 2,000 | 12,011,548 | $ | 12,012 | $ | 20,842,834 | $ | (14,951,480 | ) | $ | 5,905,366 | |||||||||||||||
| Additional | Total | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| # of Shares | Amount | # of Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, December 31, 2020 | 2,000,000 | $ | 2,000 | 12,011,548 | $ | 12,012 | $ | 20,854,773 | $ | (14,933,048 | ) | $ | 5,935,737 | |||||||||||||||
| Common stock issued for services | - | - | 130,000 | 130 | 51,870 | - | 52,000 | |||||||||||||||||||||
| Accretion of stock based compensation related to stock options issued | - | - | - | - | 15,822 | - | 15,822 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (71,335 | ) | (71,335 | ) | |||||||||||||||||||
| Balance, March 31, 2021 | 2,000,000 | 2,000 | 12,141,548 | 12,142 | 20,922,465 | (15,004,383 | ) | 5,932,224 | ||||||||||||||||||||
| Common stock issued for intangible asset | - | - | 60,000 | 60 | 37,740 | - | 37,800 | |||||||||||||||||||||
| Accretion of stock based compensation related to stock options issued | - | - | - | - | 6,087 | - | 6,087 | |||||||||||||||||||||
| Net income | - | - | - | - | - | 112,594 | 112,594 | |||||||||||||||||||||
| Balance, June 30, 2021 | 2,000,000 | 2,000 | 12,201,548 | 12,202 | 20,966,292 | (14,891,789 | ) | 6,088,705 | ||||||||||||||||||||
| Accretion of stock based compensation related to stock options issued | - | - | - | - | 24,103 | - | 24,103 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (95,495 | ) | (95,495 | ) | |||||||||||||||||||
| Balance, September 30, 2021 | 2,000,000 | $ | 2,000 | 12,201,548 | $ | 12,202 | $ | 20,990,395 | $ | (14,987,284 | ) | $ | 6,017,313 | |||||||||||||||
| Additional | Total | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| # of Shares | Amount | # of Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, December 31, 2020 | 2,000,000 | $ | 2,000 | 12,011,548 | $ | 12,012 | $ | 20,854,773 | $ | (14,933,048 | ) | $ | 5,935,737 | |||||||||||||||
| Common stock issued for services | - | - | 130,000 | 130 | 51,870 | - | 52,000 | |||||||||||||||||||||
| Accretion of stock-based compensation related to stock options issued | - | - | - | - | 15,822 | - | 15,822 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (71,335 | ) | (71,335 | ) | |||||||||||||||||||
| Balance, March 31, 2021 | 2,000,000 | 2,000 | 12,141,548 | 12,142 | 20,922,465 | (15,004,383 | ) | $ | 5,932,224 | |||||||||||||||||||
| Additional | Total | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| # of Shares | Amount | # of Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, December 31, 2019 | 2,000,000 | $ | 2,000 | 11,901,548 | $ | 11,902 | $ | 20,806,452 | $ | (14,854,710 | ) | $ | 5,965,644 | |||||||||||||||
| Common stock issued for services | - | - | 110,000 | 110 | 24,090 | - | 24,200 | |||||||||||||||||||||
| Accretion of stock based compensation related to stock options issued | - | - | - | - | 12,292 | - | 12,292 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (96,770 | ) | (96,770 | ) | |||||||||||||||||||
| Balance, March 31, 2020 | 2,000,000 | 2,000 | 12,011,548 | 12,012 | 20,842,834 | (14,951,480 | ) | 5,905,366 | ||||||||||||||||||||
| Accretion of stock based compensation related to stock options issued | - | - | - | - | 5,744 | - | 5,744 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (18,927 | ) | (18,927 | ) | |||||||||||||||||||
| Balance, June 30, 2020 | 2,000,000 | 2,000 | 12,011,548 | 12,012 | 20,848,578 | (14,970,407 | ) | 5,892,183 | ||||||||||||||||||||
| Accretion of stock based compensation related to stock options issued | - | - | - | - | 1,774 | - | 1,774 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | 25,089 | 25,089 | |||||||||||||||||||||
| Balance, September 30, 2020 | 2,000,000 | $ | 2,000 | 12,011,548 | $ | 12,012 | $ | 20,850,352 | $ | (14,945,318 | ) | $ | 5,919,046 | |||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (54,236 | ) | $ | (90,608 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation expense | 270,250 | 272,086 | ||||||
| Amortization expense | 18,900 | - | ||||||
| Stock-based compensation | 52,000 | 24,200 | ||||||
| Stock option expense | 46,012 | 19,810 | ||||||
| Gain on sale of rental property | (51,944 | ) | - | |||||
| Loss on joint ventures | 15,021 | - | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | (18,587 | ) | (1,205 | ) | ||||
| Deferred rent receivable | 6,741 | (176,004 | ) | |||||
| Prepaid expenses and other assets | 68,910 | (14,954 | ) | |||||
| Accounts payable | 8,148 | 880 | ||||||
| Accrued expenses | 16,447 | 16,783 | ||||||
| Accrued expenses - related parties | 900 | 900 | ||||||
| Deferred revenues | 6,687 | (750 | ) | |||||
| Security deposits payable | 2,750 | (2,668 | ) | |||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 387,999 | 48,470 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of convertible note receivable | (100,000 | ) | (100,000 | ) | ||||
| Purchase of rental property improvements | (40,360 | ) | (9,565 | ) | ||||
| Purchase of property and equipment | (2,624 | ) | (923 | ) | ||||
| Net proceeds from sale of rental property | 322,332 | - | ||||||
| Investment in joint ventures | (176,000 | ) | - | |||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 3,348 | (110,488 | ) | |||||
| NET INCREASE (DECREASE) IN CASH | 391,347 | (62,018 | ) | |||||
| CASH, beginning of period | 699,335 | 639,781 | ||||||
| CASH, end of period | $ | 1,090,682 | $ | 577,763 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | 120,000 | $ | 90,000 | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Common stock issued for intangible asset | $ | 37,800 | $ | - | ||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (71,335 | ) | $ | (96,770 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation expense | 90,746 | 90,584 | ||||||
| Stock-based compensation | 52,000 | 24,200 | ||||||
| Stock option expense | 15,822 | 12,292 | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | (4,850 | ) | 563 | |||||
| Deferred rent receivable | 2,247 | - | ||||||
| Prepaid expenses and other assets | 56,555 | 22,282 | ||||||
| Accounts payable | 26,095 | 19,728 | ||||||
| Accrued expenses | (9,670 | ) | 25,696 | |||||
| Accrued expenses - related parties | 300 | 300 | ||||||
| Deferred revenues | 4,375 | (250 | ) | |||||
| Security deposits payable | 2,750 | - | ||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 165,035 | 98,625 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of convertible note receivable | (100,000 | ) | (100,000 | ) | ||||
| Purchase of rental property improvements | (7,135 | ) | (9,565 | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | (107,135 | ) | (109,565 | ) | ||||
| NET INCREASE (DECREASE) IN CASH | 57,900 | (10,940 | ) | |||||
| CASH, beginning of period | 699,335 | 639,781 | ||||||
| CASH, end of period | $ | 757,235 | $ | 628,841 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | 30,000 | $ | 30,000 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31,
SEPTEMBER 30, 2021
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS
Zoned Properties, Inc. (“Zoned Properties” or the “Company”), was incorporated in the State of Nevada on August 25, 2003. The Company renamed the corporation, Zoned Properties, Inc., and shifted its business model during the first quarter of 2014. The Company is now a strategic real estate development firm whose primary missionfor emerging and highly regulated industries, including regulated cannabis. The Company is redefining the approach to providecommercial real estate investment through its integrated growth services. Headquartered in Scottsdale, Arizona, Zoned Properties has developed a full spectrum of integrated growth services to support its real estate development and sustainability services for clients ininvestment model; Advisory Services, Brokerage Services, Franchise Services, and PropTech Data Services each cross-pollinate within the regulatedmodel to drive project value associated with complex real estate projects. With national experience and a team of experts devoted to the emerging cannabis industry, positioningZoned Properties is addressing the company for real estate acquisitions and revenue growth. The Company intends to pioneer sustainable development for emerging industries, including thespecific needs of a modern market in highly regulated cannabis industry. The Companyindustries. 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 focuses on investing capital to acquire and develop commercial properties to be leased on a triple-net basis, and engaging clients that face zoning, permitting, development, and operational challenges. The Company provides development strategies and advisory services that could potentially have a major impact on cash flow and property value. 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, | |
| ● | ZP Data Platform 1, LLC |
On April 22, 2021, ZP Data entered into a Limited Liability Company Operating Agreement (the “Beakon Operating Agreement”) with a non-affiliated joint venture partner in connection with the formation of Beakon, LLC (“Beakon”), a Delaware limited liability company formed on April 16, 2021 (See Note 7).
On May 1, 2021, the Company entered into a Limited Liability Company Operating Agreement (the “Zoneomics Operating Agreement”) with a non-affiliated joint venture partner in connection with the formation of Zoneomics Green, LLC (“Zoneomics Green”), a Delaware limited liability company formed on May 1, 2021 (See Note 7).
In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. The Company is monitoring this closely, and although operations have not been materially affected by the COVID-19 outbreak to date, the ultimate duration and severity of the outbreak and its impact on the economic environment and our business is uncertain. Currently, all of the properties in the Company’s portfolio are open to its Significant Tenants and their customers and have remained open pursuant to state and local government requirements. At this time, the Company does not foresee any material changes to its operations from COVID-19. The Company’s tenants are continuing to generate revenue at these properties, and they have continued to make rental payments in full and on time and we believe the tenants’ liquidity position is sufficient to cover its expected rental obligations. Accordingly, while the Company does not anticipate an impact on its operations, it cannot estimate the duration of the pandemic and potential impact on its business if the properties must close or if the tenants are otherwise unable or unwilling to make rental payments. In addition, a severe or prolonged economic downturn could result in a variety of risks to the Company’s business, including weakened demand for its properties and a decreased ability to raise additional capital when needed on acceptable terms, if at all. At this time, the Company is unable to estimate the impact of this event on its operations.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31,
SEPTEMBER 30, 2021
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 and nine months ended March 31,September 30, 2021 and 2020 have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, all adjustments necessary to present fairly our consolidated financial position, results of operations, and cash flows as of March 31,September 30, 2021 and 2020, and for the periods then ended, have been made. Those adjustments consist of normal and recurring adjustments. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. Accordingly, the 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, 2020 included in our Annual Report on Form 10-K filed with the SEC on March 31, 2021.
Use of estimates
The preparation of unaudited 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 unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for the threenine months ended March 31,September 30, 2021 and 2020 include the collectability of accounts and note receivable, the useful life of rental properties and property and equipment, assumptions used in assessing impairment of long-term assets, valuation allowances for deferred tax assets, and the fair value of non-cash equity transactions, including options and stock-based compensation.
Risks and uncertainties
The Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure. The Company conducts a significant portion of its business in Arizona. Additionally, the Company’s tenants operate in the medical marijuana industry. Consequently, any significant economic downturn in the Arizona market or any changes in the federal government’s enforcement of current federal laws or changes in state laws could potentially have a negative effect on the Company’s business, results of operations and financial condition. Additionally, substantially all of the Company’s real estate properties are leased under triple-net leases to tenants that are controlled by one entity (each, a “Significant Tenant” and collectively, the “Significant Tenants”). For the threenine months ended March 31,September 30, 2021 and 2020, rental and advisory revenue associated with the Significant Tenants amounted to $296,480$899,525 and $286,903,$878,759, respectively, which represents 85.7%70.1% and 94.4%96.9% of the Company’s total revenues, respectively (see Note 3).
Fair value of financial instruments
The carrying amounts reported in the unaudited 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.
ZONED PROPERTIES, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31, 2021Cash
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,September 30, 2021 and December 31, 2020. The majority of the Company’s cash is held at major commercial banks, which may at times exceed the Federal Deposit Insurance Corporation (“FDIC”) limit. To date, the Company has not experienced any losses on its invested cash. On March 31,September 30, 2021 and December 31, 2020, the Company had approximately $507,000$690,000 and $449,000, respectively, of cash in excess of FDIC limits of $250,000.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
Accounts and convertible notes receivable
The Company recognizes an allowance for losses on accounts and notes receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging and expected future write-offs, as well as an assessment of specific identifiable customer accounts and notes receivable considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized in general and administrative expense. For the threenine months ended March 31,September 30, 2021 and 2020, the Company did not record any allowances for doubtful accounts.
Rental propertiesInvestment in Joint Ventures
The Company has equity investments in various privately held entities. The Company accounts for these investments either under the equity method or cost method of accounting depending on our ownership interest and level of influence. Investments accounted for under the equity method are recorded based upon the amount of the Company’s investment and adjusted each period for its share of the investee’s income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable. The Company evaluates its investments in these entities for consolidation. It considers its percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining whether or not the investment qualifies for consolidation or if it should be accounted for as an unconsolidated investment under either the equity method of accounting.
If an investment qualifies for the equity method of accounting, the Company’s investment is recorded initially at cost, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. The net income or loss of an unconsolidated investment is allocated to its investors in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences, if any, between the carrying amount of our investment in the respective joint venture and the Company’s share of the underlying equity of such unconsolidated entity are amortized over the respective lives of the underlying assets as applicable. These items are reported as a single line item in the statements of operations as income or loss from investments in unconsolidated affiliated entities.
Rental properties
Rental properties are carried at cost, less accumulated depreciation and amortization. Betterments, major renovations and certain costs directly related to the improvement of rental properties are capitalized. Maintenance and repair expenses are charged to expense as incurred. Depreciation is recognized on a straight-line basis over estimated useful lives of the assets, which range from 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, the Company assesses the fair value of acquired assets (including land, buildings and improvements, identified intangibles, such as acquired above-market leases and acquired in-place leases) and acquired liabilities (such as acquired below-market leases) and allocate the purchase price based on these assessments. The Company assesses fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known trends, and market/economic conditions.
The Company’s rental properties are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property’s carrying amount over its estimated fair value. Impairment analyses are based on our current plans, intended holding periods and available market information at the time the analyses are prepared.
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 unaudited condensed consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. For the threenine months ended March 31,September 30, 2021 and 2020, the Company did not record any impairment losses.
The Company has capitalized land, which is not subject to depreciation.
Property and equipment
Property and equipment is stated at cost, less accumulated depreciation. Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives. The Company uses a five-year life for office equipment, seven years for furniture and fixtures, and five to ten years for vehicles. Expenditures for maintenance and repairs are charged to expense as incurred. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in statements of operations.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31,
SEPTEMBER 30, 2021
The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Revenue recognition
The Company follows Accounting Standards Codification (“ASC”)ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). This standard establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASC 606 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures.
Rental income includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported on a straight-line basis over the non-cancellable term of the lease, which includes the effects of rent abatements under the leases. The Company commences rental revenue recognition when the tenant takes possession of the leased space or controls the physical use of the leased space and the leased space is substantially ready for its intended use.
Currently, the Company’s leases provide for payments with fixed monthly base rents over the term of the leases. The leases also require the tenant to remit estimated monthly payments to the Company for property taxes. These payments are recorded as rental income and the related property tax expense reflected separately on the statements of operations.
Revenues from advisory services is recognized when the Company performs services pursuant to its agreements with clients and collectability is reasonably assured.
Brokerage revenues primarily consist of real estate sales commissions and are recognized upon the successful completion of all required services which is when escrow closes. In accordance with the guidelines established for reporting revenue gross as a principal versus net as an agent in ASC Topic 606, the Company records commission revenues and expenses on a gross basis. Of the criteria listed in ASC Topic 606, the Company is the primary obligor in the transaction, does not have inventory risk, performs all or part of the service, has credit risk, and has wide latitude in establishing the price of services rendered and discretion in selection of agents and determination of service specifications. Brokerage revenues that are payable upon payment of rent or other events beyond the Company’s control are recognized upon the occurrence of such events.
Basic and diluted (loss) income (loss) per share
Basic (loss) income per share is computed by dividing net (loss) income available to common shareholders by the weighted average number of shares of common stock outstanding during each period. Diluted (loss) income per share is computed by dividing net (loss) income available to common shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period using the treasury stock method and as-if converted method. Potentially dilutive common shares and participating securities are excluded from the computation of diluted shares outstanding if they would have an anti-dilutive impact on the Company’s net losses. The Company’s preferred stock is considered a participating security since the preferred shares are entitled to dividends equal to common share dividends and accordingly, are included in the computation of earnings per share pursuant to the two-class method. The two-class method of computing (loss) income per share is an earnings allocation formula that determines (loss) income per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings.
The following table presents a reconciliation of basic and diluted net income (loss) per share:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Loss (income) per common share - basic: | ||||||||||||||||
| Net (loss) income | $ | (95,495 | ) | $ | 25,089 | $ | (54,236 | ) | $ | (90,608 | ) | |||||
| Less: undistributed (earnings) loss allocated to participating securities | - | - | - | - | ||||||||||||
| Net (loss) income allocated to common stockholders | $ | (95,495 | ) | $ | 25,089 | $ | (54,236 | ) | $ | (90,608 | ) | |||||
| Weighted average common shares outstanding – basic | 12,201,548 | 12,011,548 | 12,166,786 | 12,009,139 | ||||||||||||
| Net (loss) income per common share – basic | $ | (0.01 | ) | $ | 0.00 | $ | (0.00 | ) | $ | (0.01 | ) | |||||
| (Loss) income per common share - diluted: | ||||||||||||||||
| Net (loss) income allocated to common shareholders – basic | $ | (95,495 | ) | $ | 25,089 | $ | (54,236 | ) | $ | (90,608 | ) | |||||
| Add: interest of convertible debt | - | - | - | - | ||||||||||||
| Numerator for (loss) income per common share – diluted | $ | (95,495 | ) | $ | 25,089 | $ | (54,236 | ) | $ | (90,608 | ) | |||||
| Weighted average common shares outstanding – diluted | 12,201,548 | 12,011,548 | 12,166,786 | 12,009,139 | ||||||||||||
| Net (loss) income per common share – diluted | $ | (0.01 | ) | $ | 0.00 | $ | (0.00 | ) | $ | (0.01 | ) | |||||
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
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 threenine months ended March 31,September 30, 2021 and 2020.
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| Convertible debt | 404,000 | 404,000 | ||||||
| Stock options | 1,450,000 | 1,415,000 | ||||||
| 1,854,000 | 1,819,000 | |||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Convertible debt | 404,000 | 404,000 | ||||||
| Stock options | 1,575,000 | 1,325,000 | ||||||
| 1,979,000 | 1,729,000 | |||||||
Segment reporting
The Company’s business is comprised of one1 reportable segment. The Company has determined that its properties have similar economic characteristics to be aggregated into one reportable segment (operating, leasing and managing commercial properties, and advisory and brokerage services related to commercial properties). The Company’s determination was based primarily on its method of internal reporting.
ZONED PROPERTIES, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31, 2021Income tax
Income tax
Deferred income tax assets and liabilities arise from temporary differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company follows the provisions of FASB ASC 740-10, “Uncertainty in Income Taxes”. Certain recognition thresholds must be met before a tax position is recognized in the financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not” threshold. The Company does not believe it has any uncertain tax positions as of March 31,September 30, 2021 and December 31, 2020 that would require either recognition or disclosure in the accompanying unaudited condensed consolidated financial statements.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under Accounting Standards Update (“ASU”) 2016-09 Improvements to Employee Share-Based .
Recently adopted accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, and a modified retrospective approach is required, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November of 2019, the FASB issued ASU 2019-10, which delayed the implementation of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies which applies to the Company. The Company is currently evaluating the impact of ASU 2016-13 on its future consolidated financial statements.
Recently issued accounting pronouncements
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying unaudited condensed consolidated financial statements.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31,
SEPTEMBER 30, 2021
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 22 years, expiring April 30, 2040, and (ii) abatement of rent that would otherwise have been due for the month of April 2018 under the prior Chino Valley Lease. The 2018 Chino Valley Lease provided for payment by Broken Arrow of a fixed monthly base rent of $35,000, as well as real property taxes, personal property taxes, privilege, sales, rental, excise, use and/or other taxes (excluding income or estate taxes) levied upon or assessed against Chino Valley. In addition, pursuant to the terms of the 2018 Chino Valley Lease, Broken Arrow agreed to maintain insurance in full force during the term of the 2018 Chino Valley Lease and any other period of occupancy of the premises by Broken Arrow. 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 $35,000 to $40,000. Except for the increase in base rent, the terms of the 2018 Chino Valley Lease remain in full force and effect.
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 $32,800 per month, and the base rent was abated from June 1, 2020 to July 31, 2020. Any increase in the rentable area of the leased premises will result in an increase in all amounts calculated based on the same, including, without limitation, base rent. Pursuant to the terms of the 2020 Chino Valley Amendment, the parties agreed that if there is any change in laws such that the dispensing, sale or cultivation of marijuana upon the premises is prohibited or materially and adversely affected as mutually and reasonably determined by Chino Valley and Broken Arrow, Broken Arrow may terminate the 2018 Chino Valley Lease, as amended, by delivering written notice to Chino Valley, together with a termination payment which shall be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the balance of the term.
In addition, the parties agreed that from the period from the Effective Date to June 30, 2022 (the “Improvement Period”), Broken Arrow will and/or Broken Arrow will cause its affiliate, CJK, Inc. (“CJK”), to invest a combined total of at least $8,000,000 of improvements (“Investment by Tenants”) in and to the property that is the subject of the Chino Valley Lease and the property that is the subject of the Tempe Lease (discussed below, and collectively referred to as the “Facilities”). If Broken Arrow and/or CJK fails to deliver toAs of September 30, 2021, the Company receipted bills for hard and soft costs ofCompany’s Significant Tenants have completed improvements to the Facilities totaling in excess of $8,000,000 and have satisfied the contractual obligations related to the same.
On August 23, 2021, Chino Valley and Broken Arrow entered into the Third Amendment (the “Third Chino Valley Amendment”) to the Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018, between Chino Valley and CJK, as amended (the “Chino Valley Lease”), effective September 1, 2021.
Pursuant to the terms of the Chino Valley Lease, the parties previously agreed that between May 31, 2020 and May 31, 2022 (the “Improvement Period”), Broken Arrow would and/or Broken Arrow would cause its affiliate, CJK, to invest a combined total of at least $8,000,000 on or before June 30, 2022, Broken Arrow will beof improvements in defaultand to the property that is the subject of the Chino Valley Lease. The parties also previously agreed that the base rental payments under the Chino Valley Lease would increase commensurate to any and Tempe Lease, as amended.all expanded and operational square footage on the premises by calculating the fixed rate of $0.82 per square foot per month by the new operational square footage. Broken Arrow has now satisfied its contractual obligation regarding these capital improvements.
Accordingly, in the Third Chino Valley Amendment, the parties agreed that, as of September 1, 2021, the rental payment is increased to $55,195 per month base rental payment, plus additional rental payments, as a result of the increase in the square footage of the operational space. In addition, the parties agreed that additional space will become operational in the forthcoming months, which will require an additional lease amendment to be executed and causing the rental payment to increase to $79,795 base rental payment monthly, plus additional payments for rental and property tax.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
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 22 years, expiring April 30, 2040, and (ii) abatement of rent that would otherwise have been due for the month of April 2018 under the prior Green Valley Lease. The Green Valley Lease provided for payment by Broken Arrow of a fixed monthly base rent of $3,500, as well as real property taxes, personal property taxes, privilege, sales, rental, excise, use and/or other taxes (excluding income or estate taxes) levied upon or assessed against Chino Valley. In addition, pursuant to the terms of the Green Valley Lease, Broken Arrow agreed to maintain insurance in full force during the term of the Green Valley Lease and any other period of occupancy of the premises by Broken Arrow.
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 $3,500 from June 1, 2020 to July 31, 2020. In addition, the Green Valley Amendment provides that any increase in the rentable area of the leases premises will result in an increase in all amounts calculated based on the same, including, without limitation, base rent. The parties also agreed that if there is any change in laws such that the dispensing, sale or cultivation of marijuana upon the premises is prohibited or materially and adversely affected as mutually and reasonably determined by Green Valley and Broken Arrow, Broken Arrow may terminate the Green Valley Lease by delivering written notice to Green Valley, together with a termination payment which shall be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the balance of the term.
ZONED PROPERTIES, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31, 2021Tempe
Tempe
On May 1, 2018, Zoned Arizona and CJK Inc. (“CJK”) agreed to terminate the prior Tempe Leases dated August 15, 2015, as amended, and June 15, 2017, in consideration of (i) entry into that certain Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Zoned Arizona and CJK (the “Tempe Lease”), with a term of 22 years, expiring April 30, 2040, and (ii) abatement of rent that would otherwise have been due for the month of April 2018 under the prior Tempe Leases. The Tempe Lease provided for payment by CJK of a fixed monthly base rent of $33,500, as well as real property taxes, personal property taxes, privilege, sales, rental, excise, use and/or other taxes (excluding income or estate taxes) levied upon or assessed against Zoned Arizona. In addition, pursuant to the terms of the Tempe Lease, CJK agreed to maintain insurance in full force during the term of the Tempe Lease and any other period of occupancy of the premises by CJK.
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 $49,200 per month, and the base rent was abated from June 1, 2020 to July 31, 2020. Any increase in the rentable area of the leased premises will result in an increase in all amounts calculated based on the same, including, without limitation, base rent. Pursuant to the terms of the Tempe Amendment, the parties agreed that if there is any change in laws such that the dispensing, sale or cultivation of marijuana upon the premises is prohibited or materially and adversely affected as mutually and reasonably determined by Zoned Arizona and CJK, CJK may terminate the Tempe Lease by delivering written notice to Zoned Arizona, together with a termination payment which shall be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the balance of the term.
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 $8,000,000 on or before June 30, 2022, Broken Arrow and CJK will be in default under the Chino Valley Lease and Tempe Lease, as amended. As of September 30, 2021, the Company’s Significant Tenants have completed improvements to the Facilities totaling in excess of $8,000,000 and have satisfied the contractual obligations related to the same. As soon as the improved, rentable areas have received all required approvals for occupancy and commencement of operations, the Company and Broken Arrow expect to complete any appropriate amendments to the Lease Agreement.
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 22 years, expiring April 30, 2040, and (ii) abatement of rent that would otherwise have been due for the month of April 2018 under the Prior Kingman Lease. The Kingman Lease provides for payment by CJK of a fixed monthly base rent of $4,000, as well as real property taxes, personal property taxes, privilege, sales, rental, excise, use and/or other taxes (excluding income or estate taxes) levied upon or assessed against Kingman. In addition, pursuant to the terms of the Kingman Lease, CJK agreed to maintain insurance in full force during the term of the Kingman Lease and any other period of occupancy of the premises by CJK.
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 $4,000 base rent from June 1, 2020 to July 31, 2020. In addition, the Kingman Amendment provides that any increase in the rentable area of the leases premises will result in an increase in all amounts calculated based on the same, including, without limitation, base rent. The parties also agreed that if there is any change in laws such that the dispensing, sale or cultivation of marijuana upon the premises is prohibited or materially and adversely affected as mutually and reasonably determined by Kingman and CJK, CJK may terminate the Kingman Lease by delivering written notice to Kingman, together with a termination payment which shall be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the balance of the term.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
CJK and Broken Arrow, together, operate under the company brand, “Hana Meds”, and are referred to as the Company’s Significant Tenants.
The Tempe Lease, Kingman Lease, Chino Valley Lease and Green Valley Lease (together referred to as the “New Leases”) includes a Guarantee of Payment and Performance by Mr. Abrams and the Company’s Significant Tenants. Mr. Abrams guarantee is collateralized by the convertible debt of $2,000,000 owed to him (see Note 6)8).
As of March 31,September 30, 2021 and December 31, 2020, security deposits payable to the Significant Tenants amounted to $71,800 in both periods.
ZONED PROPERTIES, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31, 2021
Future minimum lease payments primarily consist of minimum base rent payments from Significant Tenants and the Commercial Lease Agreement executed by Gilbert.Tenants. Future minimum lease payments to be received, on all leased properties, for each of the five succeeding calendar years and thereafter as of March 31,September 30, 2021 consists of the following:
| Future annual base rent: | ||||
| 2021 (remainder of year) | $ | 830,710 | ||
| 2022 | 1,107,000 | |||
| 2023 | 1,082,250 | |||
| 2024 | 1,074,000 | |||
| 2025 | 1,074,000 | |||
| Thereafter | 15,394,000 | |||
| Total | $ | 20,561,960 | ||
| Future annual base rent: | ||||
| 2021 (remainder of year) | $ | 340,488 | ||
| 2022 | 1,362,393 | |||
| 2023 | 1,362,393 | |||
| 2024 | 1,362,393 | |||
| 2025 | 1,362,393 | |||
| Thereafter | 19,254,129 | |||
| Total | $ | 25,044,189 | ||
Rental and advisory revenue and receivable –Significant Tenants
For the three months ended March 31,September 30, 2021 and 2020, rental and advisory revenue associated with the Significant TenantsTenant leases described above amounted to $296,480$311,065 and $286,903,$297,793, which represents 85.7%80.3% and 94.4%98.4% of the Company’s total revenues, respectively. For the nine months ended September 30, 2021 and 2020, rental and advisory revenue associated with the Significant Tenant leases described above amounted to $899,525 and $878,759, which represents 70.1% and 96.9% of the Company’s total revenues, respectively.
On March 31,September 30, 2021 and December 31, 2020, accounts receivable from advisory services provided to the Significant Tenants amounted to $3,562$1,437 and $2,375, respectively. Further, as of March 31,September 30, 2021 and December 31, 2020 a deferred rent receivable of $171,510$167,016 and $173,757 is due from Significant Tenants due to the abatement of rent in the months of June and July 2020 under the amendments executed effective May 31, 2020 discussed above, respectively.
Asset concentration
The majority of the Company’s real estate properties are leased to the Significant Tenants under triple-net leases that terminate in April 2040. The Company monitors the credit of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing financial statements and related metrics and information that are publicly available or that are provided to us upon request, and (2) monitoring the timeliness of rent collections.
As of March 31,September 30, 2021 and December 31, 2020, the Company had an asset concentration related to the Significant Tenants. As of March 31,September 30, 2021 and December 31, 2020, the Significant Tenants represented approximately 81.9%79.2% and 83.2%84.32% of the Company’s total assets, respectively. Through March 31,September 30, 2021, all rental payments have been made on a timely basis. As of March 31,September 30, 2021, the lease agreements with the Significant Tenants were personally guaranteed by Alan Abrams and are collateralized by convertibles notes of $2,000,000 owed to Mr. Abrams (see Note 6)8). On March 1, 2018, the Company and Alan Abrams entered into a Reaffirmation Agreement (See Note 6)8).
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
NOTE 4 – RENTAL PROPERTIES
On March 31,September 30, 2021 and December 31, 2020, rental properties, net consisted of the following:
| Description | Useful Life (Years) | March 31, 2021 | December 31, 2020 | ||||||||
| Building and building improvements | 5-39 | $ | 6,267,659 | $ | 6,260,524 | ||||||
| Land | - | 2,283,214 | 2,283,214 | ||||||||
| Rental properties, at cost | 8,550,873 | 8,543,738 | |||||||||
| Less: accumulated depreciation | (1,605,599 | ) | (1,516,302 | ) | |||||||
| Rental properties, net | $ | 6,945,274 | $ | 7,027,436 | |||||||
| Description | Useful Life (Years) | September 30, 2021 | December 31, 2020 | |||||||||
| Building and building improvements | 5-39 | $ | 6,293.748 | $ | 6,260,524 | |||||||
| Land | - | 2,016,548 | 2,283,214 | |||||||||
| Rental properties, at cost | 8,310,296 | 8,543,738 | ||||||||||
| Less: accumulated depreciation | (1,782,214 | ) | (1,516,302 | ) | ||||||||
| Rental properties, net | $ | 6,528,082 | $ | 7,027,436 | ||||||||
On June 1, 2021, the Company closed on the sale of its Gilbert, AZ property with a third party (the “Purchaser”) pursuant to which the Company agreed to sell, and the Purchaser agreed to purchase, the property located in Gilbert, Arizona, for an aggregate purchase price of $335,000. In connection with the sale, the Company received net proceeds of $322,332 and recorded a gain on sale of rental property of $51,944.
For the three months ended March 31,September 30, 2021 and 2020, depreciation of rental properties amounted to $89,297$87,316 and $89,041,$89,298, respectively. For the nine months ended September 30, 2021 and 2020, depreciation of rental properties amounted to $265,912 and $267,636, respectively.
ZONED PROPERTIES, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31, 2021
NOTE 5 – CONVERTIBLE NOTE RECEIVABLE
On March 19, 2020, the Company made an initial investment of $100,000 into KCB Jade Holdings, LLC (“KCB”). In exchange for the investment, KCB issued to the Company a convertible debenture (the “KCB Debenture”) dated March 19, 2020 (the “Issuance Date”) in the original principal amount of $100,000. The KCB 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 KCB 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 KCB Debenture at any point after 18 months following the Issuance Date, in whole or in part. However, if KCB elects to prepay the KCB Debenture prior to the Maturity Date or prior to any conversion as provided in the KCB Debenture in whole or in part, the Company 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, the Company 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 KCB Debenture, 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 KCB Debenture. Conversion rights terminate upon acceptance by the Company of payment in full of principal, accrued interest and any other amounts due under the KCB Debenture.
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.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
Any amount of principal or interest not paid when due will bear interest at the rate of 12% per annum from the due date thereof until paid.
On February 19, 2021 (the “Amendment Date”), the Company made an additional investment of $100,000 into KCB (the “Additional Investment”). In exchange, 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 KCB Debenture. Pursuant to the A&R Debenture, the Company and KCB agreed to certain new terms that did not exist in the KCB Debenture, which are described below.
| ● | Interest Accrual Commencement: Pursuant to the A&R Debenture, interest on the Initial Investment begins accruing as of March 19, 2020, while interest on the Additional Investment begins accruing on February 19, 2021. |
| ● | Franchise Fees. In the A&R Debenture, the parties acknowledge that each time that KCB sells one of its franchise locations, KCB earns a fee (an “Initial Fee”), and that KCB also earns a fee when one of its franchise locations renews its franchise with KCB (a “Renewal Fee”). Pursuant to the A&R Debenture, the Company and KCB agreed that, as additional consideration for the Additional Investment, KCB will pay to the Company, in perpetuity, 5% of any Initial Fee received by KCB after the Amendment Date, as well as 5% of any Renewal Fee received by KCB related to any franchise locations sold after the Amendment Date, in each case to be paid within five (5) days of receipt of KCB thereof. |
ZONED PROPERTIES, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31, 2021
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 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 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.
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,September 30, 2021 and December 31, 2020, an allowance was not deemed necessary.
On March 31,September 30, 2021, convertible note receivable and interest receivable amounted to $200,000 and $962,$7,480, respectively. On December 31, 2020, convertible note receivable and interest receivable amounted to $100,000 and $5,129, respectively.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
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 one year (the “Guaranteed Term”). During the Guaranteed Term, neither party may terminate the engagement letter, except for “Cause” as defined in the engagement letter. In connection with the engagement letter, the Company issued 60,000 shares of its common stock for the acquisition of brokerage materials and active real estate listings. In the event of termination of the engagement letter due to cause with respect to the consultant, the consultant must return to the Company a portion of the stock equal to the remaining portion of the Guaranteed Term. The shares were valued at their fair value of $37,800 using the quoted per share price on the date of grant of $0.63. In connection with these shares, on April 1, 2021, the Company recorded an intangible asset of $37,800 which is amortized over the one-year term of the engagement letter.
On September 30, 2021 and December 31, 2020, intangible assets consisted of the following:
| Useful life | September 30, 2021 | December 31, 2020 | ||||||||
| Real estate brokerage materials and listing | 1 year | $ | 37,800 | - | ||||||
| Less: accumulated amortization | (18,900 | ) | - | |||||||
| $ | 18,900 | $ | - | |||||||
For the three and nine months ended September 30, 2021, amortization of intangible assets amounted to $9,450 and $18,900, respectively.
NOTE 7 – INVESTMENT IN JOINT VENTURES
The entities listed below are partially owned by the Company. The Company accounts for these investments under the equity method of accounting as the Company exercises significant influence but does not exercise financial and operating control over these entities. A summary of the Company’s investments in the unconsolidated affiliated entities is as follows:
| As of | ||||||||||||
| Entity | Date Acquired | Ownership % | September 30, 2021 | December 31, 2020 | ||||||||
| Beakon, LLC (the “Beakon Joint Venture”) | April 22, 2021 | 50.0% | $ | 86,000 | $ | - | ||||||
| Zoneomics Green, LLC ( the “Zoneomics Green Joint Venture”) | May 1, 2021 | 50.0% | 90,000 | - | ||||||||
| Total investments in unconsolidated joint venture entities | $ | 176,000 | $ | - | ||||||||
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 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 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 nine months ended September 30, 2021, the Company contributed $86,000 to Beakon.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
On May 1, 2021, the Company entered into a Limited Liability Company Operating Agreement (the “Zoneomics Operating Agreement”) with a non-affiliated joint venture partner in connection with the formation of Zoneomics Green, LLC (“Zoneomics Green”), a Delaware limited liability company formed on May 1, 2021. Zoneomics Green’s goal is to utilize advanced property technology to provide solutions for property identification in regulated industries such as regulated cannabis. Pursuant to the Zoneomics Operating Agreement, the Company purchased 50 units of Zoneomics Green for a capital contribution of $90,000, which represent 50% of the membership interests of Zoneomics Green. Each unit represents, with respect to any member, such member’s: (i) interest in Zoneomics Green’s capital, (ii) share of Zoneomics Green’s net profits and net losses (and specially allocated items of income, gain, and deduction), and the right to receive distributions of net cash flow from Zoneomics Green, (iii) right to inspect Zoneomics Green’s books and records, and (iv) right to participate in the management of and vote on matters coming before the members as provided in the Zoneomics Operating Agreement. The transactions discussed above resulted in a joint venture, in accordance with ASC 323-10 – Investments- Equity and Joint Ventures, between the Company and the non-affiliated party. Each of the entities has 50% equity ownership and voting rights, and joint control in Zoneomics Green. In June 2021, the Company contributed $90,000 to Zoneomics.
The following represents summarized financial information derived from the unaudited financial statements of the Beakon and Zoneomics Joint Ventures, respectively, as of September 30, 2021.
| Beakon | Zoneomics | |||||||
| Current assets: | �� | |||||||
| Cash | $ | 5,440 | $ | 76,518 | ||||
| Intangible assets | 150,000 | - | ||||||
| Total assets | $ | 155,440 | $ | 76,518 | ||||
| Current liabilities | $ | - | $ | - | ||||
| Non-current liabilities | - | - | ||||||
| Equity | 155,440 | 76,518 | ||||||
| Total liabilities and equity | $ | 155,440 | $ | 76,518 | ||||
For the Nine Months September 30, | ||||||||
| Beakon | Zoneomics | |||||||
| Net sales | $ | - | $ | - | ||||
| Operating expenses | (16,560 | ) | (13,482 | ) | ||||
| Net loss | (16,560 | ) | (13,482 | ) | ||||
During the three and nine months ended September 30, 2021, the Company recorded a loss from joint venture of $15,021 which represents the Company’s proportionate share of losses from its joint ventures..
NOTE 68 – CONVERTIBLE NOTE PAYABLE
On January 9, 2017, the Company issued a convertible debenture (the “Abrams Debenture”) in the aggregate principal amount of $2,000,000 in favor of Alan Abrams, who was a significant stockholder of the Company through December 31, 2018, in exchange for cash from Mr. Abrams of $2,000,000. The Abrams Debenture accrues interest at the rate of 6% per annum payable quarterly by the 1st of each quarter and was originally due on January 9, 2022. On January 2, 2019, as part of a Stock Redemption Agreement, the Company and Mr. Abrams entered into an amendment of the Abrams Debenture (the “Debenture Amendment”), pursuant to which the parties agreed to extend the maturity date of the Abrams Debenture from January 9, 2022 to January 9, 2030. Except as set forth herein, the terms of the Abrams Debenture remain in full force and effect.
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 $5.00 per share.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
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 12% per annum. Upon an Event of Default (as defined in the Abrams Debenture), Mr. Abrams may (i) declare the entire principal amount and all accrued and unpaid interest under the Abrams Debenture immediately due and payable, and (ii) exercise any and all rights, powers and remedies available to Mr. Abrams at law or in equity or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in the Abrams Debenture and proceed to enforce the payment thereof or any other legal or equitable right of Mr. Abrams.
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 $2,000,000 was acknowledged as collateral within the scope of the guaranty included in the commercial lease agreements.
As of March 31,September 30, 2021 and December 31, 2020, the principal balance due under the Abrams Debenture is $2,000,000.
As of March 31,September 30, 2021 and December 31, 2020, accrued interest payable due under the Abrams Debenture was $0 and $30,000, respectively, which is included in accrued expenses on the accompanying unaudited condensed consolidated balance sheets.
For the three months ended March 31,September 30, 2021 and 2020, interest expense related to the Abrams Debenture amounted to $30,000. For the nine months ended September 30, 2021 and 2020, interest expense related to the Abrams Debenture amounted to $90,000.
ZONED PROPERTIES, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31, 2021
NOTE 79 – 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 $20,000 in favor of Bryan McLaren, the Company’s Chief Executive Officer, President, Chief Financial Officer, and a member of the Company’s Board of Directors, in exchange for cash from Mr. McLaren of $20,000. The McLaren Debenture accrues interest at the rate of 6% per annum payable quarterly by the 1st of each quarter and matures on January 9, 2022. The Company may prepay the McLaren Debenture at any point after nine months, in whole or in part. Pursuant to the terms of the McLaren Debenture, Mr. McLaren is entitled to convert all or a portion of the principal balance and all accrued and unpaid interest due under this McLaren Debenture into shares of the Company’s common stock at a conversion price of $5.00 per share.
If the Company defaults on payment, Mr. McLaren may at his option, extend all conversion rights, through and including the date the Company tenders or attempts to tender payment in full of all amounts due under the McLaren Debenture. Any amount of principal or interest, which is not paid when due shall bear interest at the rate of 12% per annum. Upon an Event of Default (as defined in the McLaren Debenture), Mr. McLaren may (i) declare the entire principal amount and all accrued and unpaid interest under the McLaren Debenture immediately due and payable, and (ii) exercise any and all rights, powers and remedies available to Mr. McLaren at law or in equity or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in the McLaren Debenture and proceed to enforce the payment thereof or any other legal or equitable right of the Holder.
As of March 31,September 30, 2021 and December 31, 2020, the principal balance due under the McLaren Debenture is $20,000.
As of March 31,September 30, 2021 and December 31, 2020, accrued interest payable due under the McLaren Debenture was $4,500$5,100 and $4,200, respectively, which is included in accrued expenses – related party on the accompanying unaudited condensed consolidated balance sheets.
For the three months ended March 31,September 30, 2021 and 2020, interest expense – related partiesparty amounted to $300. For the nine months ended September 30, 2021 and 2020, interest expense – related party amounted to $900.
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.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
NOTE 810 – 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 5,000,000 shares authorized, $.001 par value. The preferred stock is not convertible into any other class or series of stock. The holders of the preferred stock are entitled to fifty (50) votes for each share held. Voting rights are not subject to adjustment for splits that increase or decrease the common shares outstanding. Upon liquidation, the holders of the shares will be entitled to receive $1.00 per share plus redemption provision before assets distributed to other shareholders. The holders of the shares are entitled to dividends equal to common share dividends. As of September 30, 2021 and December 31, 2020, there were 2,000,000 shares of preferred stock outstanding. Once any shares of Preferred Stock are outstanding, at least 51% of the total number of shares of Preferred Stock outstanding must approve the following transactions:
| a. | Alter or change the rights, preferences or privileges of the Preferred Stock. | |
| b. | ||
| Create any new class of stock having preferences over the Preferred Stock. | ||
| c. | ||
| Repurchase any of our common stock. | ||
| d. | ||
| Merge or consolidate with any other company, except our wholly owned subsidiaries. | ||
| e. | ||
| Sell, convey or otherwise dispose of, or create or incur any mortgage, lien, or charge or encumbrance or security interest in or pledge of, or sell and leaseback, in all or substantially all of our property or business. | ||
| f. | ||
| Incur, assume or guarantee any indebtedness maturing more than 18 months after the date on which it is incurred, assumed or guaranteed by us, except for operating leases and obligations assumed as part of the purchase price of property. |
ZONED PROPERTIES, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31, 2021
(B) Common stock issued for services
2020
On January 6, 2020, the Company issued an aggregate of 110,000 shares of common stock to members of the Company’s board of directors for services rendered. The shares were valued at their aggregate fair value of $24,200 using the quoted per share price on the date of grant of $0.22. In connection with these grants, in January 2020, the Company recorded stock-based compensation expense of $24,200 which is included in compensation and benefits on the unaudited condensed consolidated statements of operations.
2021
On January 31, 2021, the Company issued an aggregate of 130,000 shares of common stock to members of the Company’s board of directors for services rendered. The shares were valued at their aggregate fair value of $52,000 using the quoted per share price on the date of grant of $0.40. In connection with these grants, in January 2021, the Company recorded stock-based compensation expense of $52,000 which is included in compensation and benefits on the unaudited condensed consolidated statements of operations.
(C) Shares issued for intangible assets
On April 1, 2021, the Company’s subsidiary, Zoned Brokerage, entered in an engagement letter for real estate brokerage services with a consultant for a guaranteed term of one year (the “Guaranteed Term”). During the Guaranteed Term, neither party may terminate the engagement letter, except for “Cause” as defined in the engagement letter. In connection with the engagement letter, the Company issued 60,000 shares of its common stock for the acquisition of brokerage materials and active real estate listings. In the event of termination of the engagement letter due to Cause with respect to the consultant, the consultant must return to the Company a portion of the stock equal to the remaining portion of the Guaranteed Term. The shares were valued at their fair value of $37,800 using the quoted per share price on the date of grant of $0.63. In connection with these shares, on April 1, 2021, the Company recorded an intangible asset of $37,800 which is amortized over the one-year term of the engagement letter.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(D) Equity incentive plans
On August 9, 2016, the Company’s Board of Directors authorized the 2016 Equity Incentive Plan (the “2016 Plan”) and reserved 10,000,000 shares of common stock for issuance thereunder. The 2016 Plan was approved by shareholders on November 21, 2016. The 2016 Plan’s purpose is to encourage ownership in the Company by employees, officers, directors and consultants whose long-term service the Company considers essential to its continued progress and, thereby, encourage recipients to act in the stockholders’ interest and share in the Company’s success. The 2016 Plan authorizes the grant of awards in the form of options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, options that do not qualify (non-statutory stock options) and grants of restricted shares of common stock. Restricted shares granted pursuant to the 2016 Plan are amortized to expense over the vesting period. Options vest and expire over a period not to exceed seven years. If any share of common stock underlying a stock option that has been granted ceases to be subject to a stock option, or if any shares of common stock that are subject to any other stock-based award granted are forfeited or terminate, such shares shall again be available for distribution in connection with future grants and awards under the 2016 Plan. As of March 31,September 30, 2021, 200,000325,000 stock option awards are outstanding and 100,000125,000 options are exercisable under the 2016 Plan. As of December 31, 2020, 75,000 stock option awards arewere outstanding and 75,000 options arewere exercisable under the 2016 Plan. As of March 31,September 30, 2021 and December 31, 2020, 9,800,0009,675,000 and 9,925,000 shares, arerespectively, were available for future issuance.
The Company also continues to maintain its 2014 Equity Compensation Plan (the “2014 Plan”), pursuant to which 1,250,000 previously awarded stock options are outstanding. The 2014 Plan has been superseded by the 2016 Plan. Accordingly, no additional shares subject to the existing 2014 Plan will be issued and the 1,250,000 shares issuable upon exercise of stock options will be issued pursuant to the 2014 Plan, if exercised. As of March 31,September 30, 2021 and December 31, 2020, options to purchase 1,250,000 shares of common stock are outstanding and 1,150,000 options are exercisable pursuant to the 2014 Plan.
(D)(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 125,000 of the Company’s common stock at an exercise price of $1.00 per share. The grant date of the option was January 1, 2021 and the option expires on January 1, 2031. The option vests as to (i) 25,000 of such shares on January 1, 2021; and (ii) as to 10,000 of such shares on January 1, 2022 and each year thereafter through January 1, 2031. The fair value of this option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0%; expected volatility of 117%; risk-free interest rate of 0.93%; and an estimated holding period of 10 years. In connection with these options, the Company valued these options at a fair value of $48,677 and will record stock-based compensation expense over the vesting period.
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 125,000 of the Company’s common stock at an exercise price of $1.00 per share. The grant date of the option was July 1, 2021 and the option expires on July 1, 2031. The option vests as to (i) 25,000 of such shares on July 1, 2021; and (ii) as to 10,000 of such shares on July 1, 2022 and each year thereafter through July 1, 2031. The fair value of this option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0%; expected volatility of 119%; risk-free interest rate of 1.48%; and an estimated holding period of 10 years. In connection with these options, the Company valued these options at a fair value of $69,677 and will record stock-based compensation expense over the vesting period.
For the threenine months ended March 31,September 30, 2021 and 2020, in connection with the accretion of stock-based option expense, the Company recorded stock-based compensationstock option expense of $15,822$46,012 and $12,292,$19,810, respectively. As of March 31,September 30, 2021, there were 1,450,0001,575,000 options outstanding and 1,250,0001,275,000 options vested and exercisable. As of March 31,September 30, 2021, there was $63,017$102,503 of unvested stock-based compensation expense to be recognized through December 2030. The aggregate intrinsic value on March 31,September 30, 2021 was nil and was calculated based on the difference between the quoted share price on March 31,September 30, 2021 of $0.625 and the exercise price of the underlying options.
Stock option activities for the nine months ended September 30, 2021 are summarized as follows:
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding December 31, 2020 | 1,325,000 | $ | 0.99 | 4.85 | $ | - | ||||||||||
| Granted | 250,000 | 1.00 | - | - | ||||||||||||
| Balance Outstanding September 30, 2021 | 1,575,000 | $ | 0.99 | 4.96 | $ | - | ||||||||||
| Exercisable, September 30, 2021 | 1,275,000 | $ | 0.99 | 4.37 | - | |||||||||||
| Balance Non-vested at December 31, 2020 | 100,000 | $ | 1.00 | - | $ | - | ||||||||||
| Granted | 250,000 | 1.00 | - | - | ||||||||||||
| Vested during the period | (50,000 | ) | 1.00 | - | - | |||||||||||
| Balance Non-vested at September 30, 2021 | 300,000 | $ | 1.00 | 8.1 | $ | - | ||||||||||
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31,
SEPTEMBER 30, 2021
Stock option activities for the three months ended March 31, 2021 are summarized as follows:
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding December 31, 2020 | 1,325,000 | $ | 0.99 | 4.85 | $ | - | ||||||||||
| Granted | 125,000 | 1.00 | - | - | ||||||||||||
| Balance Outstanding March 31, 2021 | 1,450,000 | $ | 0.99 | 5.05 | $ | - | ||||||||||
| Exercisable, March 31, 2021 | 1,250,000 | $ | 0.99 | 4.62 | - | |||||||||||
| Balance Non-vested at December 31, 2020 | 100,000 | $ | 1.00 | - | $ | - | ||||||||||
| Granted | 125,000 | 1.00 | - | - | ||||||||||||
| Vested during the period | (25,000 | ) | 1.00 | - | - | |||||||||||
| Balance Non-vested at March 31, 2021 | 200,000 | $ | 1.00 | 7.75 | $ | - | ||||||||||
NOTE 911 – COMMITMENTS AND CONTINGENCIES
Rental property acquisition
On April 22, 2016, Zoned Colorado, a wholly owned subsidiary of the Company, entered into a Contract to Buy and Sell Real Estate (the “Parachute Agreement”) with Parachute Development Corporation (“Seller”) pursuant to which Zoned Colorado agreed to purchase, and Seller agreed to sell, property in Parachute, Colorado (the “Property”) for a purchase price of $499,857. Of the total purchase price, $274,857, or 55%, will be paid in cash at closing and $225,000, or 45%, will be financed by Seller at an interest rate of 6.5%, amortized over a five-year period, with a balloon payment at the end of the fifth year. Payments will be made monthly and there will be no pre-payment penalty. Pursuant to the terms of the Parachute Agreement, the parties will cooperate in good faith to complete due diligence during a period of 45 days following execution of the Parachute Agreement. The closing is subject to certain contingencies, including that Zoned Colorado must obtain acceptable financing for the purchase and development of the Property, the grant of a special use permit by the Town of Parachute, approval of a protected development deal or equivalent agreement by the Town of Parachute, execution of a lease agreement by a prospective tenant and the prospective tenant’s obtaining a license to cultivate on the Property.
Pursuant to the terms of the Parachute Agreement, Zoned Colorado will have a right of first refusal on eleven additional lots owned by Seller in Parachute, Colorado. In April 2016, the Company paid a refundable deposit of $45,000 into escrow in connection with the Parachute Agreement which is included in prepaid expenses and other assets on the unaudited condensed consolidated balance sheet as of December 31, 2020. In January 2021, the Parachute Agreement was mutually terminated, and the refundable deposit was returned to the Company.
Lease agreement and related purchase option
On March 3, 2021, Gilbert entered into that certain Commercial Lease Agreement (the “Lease”), dated as of February 26, 2021, between Gilbert and AZ2CAL Enterprises, LLC (the “Tenant”). Pursuant to the terms of the Lease, Gilbert agreed to rent its vacant land in Gilbert, AZ (the “Property”) to the Tenant for a term of 24 months, from April 1, 2021 to March 31, 2023, for monthly rent of $2,750; provided, however, that no rent is due for the month of April 2021. In addition, pursuant to the terms of the Lease, the Tenant has an option to purchase the Property (the “Option”) that can be exercised any time after the fourth month of the lease term, but no later than the end of the 12th month of the lease term. The purchase price of the Property would be $335,000. If the Tenant exercises its Option, $750 of each lease payment made prior to close of escrow, along with the security deposit will be credited toward the purchase price of the Property. If the Tenant exercises its Option, close of escrow will occur no later than 30 days after opening of escrow. The parties agreed to make every reasonable attempt to fully execute a purchase contract within seven business days of the Tenant’s notice of its desire to exercise the Option.
ZONED PROPERTIES, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31, 2021
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,September 30, 2021 and December 31, 2020, the Company is not involved in any pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations, or cash flows.
Employment and Related Golden Parachute Agreement
On May 23, 2018, the Company and Mr. McLaren, the Company’s President, Chief Executive Officer, Chief Financial Officer and Chairman of the Board, agreed to replace Mr. McLaren’s 2014 employment agreement with a new employment agreement dated May 23, 2018 (the “2018 Employment Agreement”). 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 $215,000, and to award Mr. McLaren with an annual and/or quarterly bonus payable in either cash and/or equity of no less than 2% of the Company’s net income for the associated period.
The 2018 Employment Agreement has a term of 10 years. The term and Mr. McLaren’s employment will terminate (a “Termination”) in any of the following circumstances:
| (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.
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
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.
ZONED PROPERTIES, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31, 2021
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; |
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
Following a change in control of the Company, upon termination of Mr. McLaren’s employment or during a period of disability, Mr. McLaren will be entitled to the following benefits:
| (i) | During any period that he fails to perform his full-time duties with the Company as a result of incapacity due to physical or mental illness, Mr. McLaren will continue to receive his base salary at the rate in effect at the commencement of any such period, together with all amounts payable to him under any compensation plan of the Company during such period, until the Golden Parachute Agreement is terminated. | |
| (ii) | If Mr. McLaren’s employment is terminated by the Company for Cause or by Mr. McLaren other than for Good Reason, disability, death or retirement, the Company will pay Mr. McLaren his full base salary through the date of Termination at the rate in effect at the time notice of Termination is given, plus all other amounts and benefits to which he is entitled under any compensation plan of the Company at the time such payments are due. | |
| (iii) | If employment by the Company shall be terminated (a) by the Company other than for Cause, death or disability or (b) by Mr. McLaren for Good Reason, Mr. McLaren will be entitled to benefits provided below: |
| a. | The Company will pay Mr. McLaren his full base salary through the date of Termination at the rate in effect at the time notice of Termination is given, plus all other amounts and benefits to which he is entitled under any compensation plan of the Company. |
| b. | ||
| In lieu of any further salary payments to Mr. McLaren for periods subsequent to the date of Termination, the Company will pay as severance pay to Mr. McLaren a lump sum severance payment (together with the payments provided in clauses (c) and (d) below) equal to five times the sum of his annual base salary in effect immediately prior to the occurrence of the circumstance giving rise to the notice of Termination given in respect of them. |
ZONED PROPERTIES, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMARCH 31, 2021
| c. | The Company will pay to Mr. McLaren any deferred compensation allocated or credited to him or his account as of the date of Termination. | |
| d. | In lieu of shares of common stock of the Company issuable upon exercise of outstanding options, if any, granted to Mr. McLaren under the Company’s stock option plans (which options shall be cancelled upon the making of the payment referred to below), Mr. McLaren will receive an amount in cash equal to the product of (i) the excess of the closing price of the Company’s common stock as reported on or nearest the date of Termination (or, if not so reported, on the basis of the average of the lowest asked and highest bid prices on or nearest the date of Termination), over the per share exercise price of each option held by Mr. McLaren (whether or not then fully exercisable) plus the amount of any applicable cash appreciation rights, times (ii) the number of the Company’s common stock covered by each such option. | |
| e. | The Company will also pay to Mr. McLaren all legal fees and expenses incurred by him as a result of such Termination. |
NOTE 10 – SUBSEQUENT EVENTS401(k) Plan
On April 1,September 29 2021, the Company’s subsidiary,board of directors adopted the Zoned Brokerage, enteredProperties 401(k) Plan (the “Plan”) effective January 1, 2021. The Company will contribute a matching contribution to the Plan for each employee in an engagement letter for real estate brokerage services with a consultant for a guaranteed termamount equal to 100% of one year (the “Guaranteed Term”).the matched employee contributions that are not in excess of 4% of the employee’s plan compensation. During the Guaranteed Term, neither party may terminate the engagement letter, except for “Cause” as defined in the engagement letter. In connection with the engagement letter, the Company issued 60,000 shares of its common stock for the acquisition of brokerage materialsthree and active real estate listings. In the event of termination of the engagement letter due to Cause with respect to the consultant, the consultant must return to the Company a portion of the stock equal to the remaining portion of the Guaranteed Term. The shares were valued at their fair value of $37,800 using the quoted per share price on the date of grant of $0.63. In connection with these shares, on April 1,nine month period ended September 30, 2021, the Company recorded an intangible asset of $37,800 which is amortized overdid not make any contributions into the one-year term of the engagement letter.Plan.
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 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. On April 28, 2021, the Company contributed $50,000 to Beakon.
On May 1, 2021, the Company entered into a Limited Liability Company Operating Agreement (the “Zoneomics Operating Agreement”) with a non-affiliated joint venture partner in connection with the formation of Zoneomics Green, LLC (“Zoneomics Green”), a Delaware limited liability company formed on May 1, 2021. Zoneomics Green’s goal is to utilize advanced property technology to provide solutions for property identification in regulated industries such as regulated cannabis. Pursuant to the Zoneomics Operating Agreement, the Company purchased 50 units of Zoneomics Green for a capital contribution of $90,000, which represent 50% of the membership interests of Zoneomics Green. Each unit represents, with respect to any member, such member’s: (i) interest in Zoneomics Green’s capital, (ii) share of Zoneomics Green’s net profits and net losses (and specially allocated items of income, gain, and deduction), and the right to receive distributions of net cash flow from Zoneomics Green, (iii) right to inspect Zoneomics Green’s books and records, and (iv) right to participate in the management of and vote on matters coming before the members as provided in the Zoneomics Operating Agreement. The transactions discussed above resulted in a joint venture, in accordance with ASC 323-10 – Investments- Equity and Joint Ventures, between the Company and the non-affiliated party. Each of the entities has 50% equity ownership and voting rights, and joint control in Zoneomics Green.
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results
This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This annual report on Form 10-K and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the “Risk Factors” section of our annual report on Form 10-K as filed on March 29,31, 2021.
We caution that these factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
The following discussion should be read in conjunction with our audited financial statements and the related notes that appear in our annual report on Form 10-K as filed with the SEC on March 29,31, 2021.
Overview
Zoned Properties is a strategicleading real estate development firm whose primary missionfor emerging and highly regulated industries, including regulated cannabis. The company is redefining the approach to provide specializedcommercial real estate investment through its integrated growth services. Headquartered in Scottsdale, Arizona, Zoned Properties has developed a full spectrum of integrated growth services to support its real estate development and sustainability services for clients ininvestment model; Advisory Services, Brokerage Services, Franchise Services, and PropTech Data Services each cross-pollinate within the regulatedmodel to drive project value associated with complex real estate projects. With national experience and a team of experts devoted to the emerging cannabis industry, positioningZoned Properties is addressing the company for real estate investments and revenue growth. We intend to pioneer sustainable development for emerging industries, including thespecific needs of a modern market in highly regulated cannabis industry. We areindustries. Zoned Properties is an accredited member of the Better Business Bureau, the U.S. Green Building Council, and the Forbes Real Estate Council. We focus on investing capital to acquire and develop commercial properties to be leased on a triple-net basis, and engaging clients that face zoning, permitting, development, and operational challenges. We provide development strategies and advisory services that could potentially have a major impact on cash flow and property value. We do not grow, harvest, sell or distribute cannabis or any substances regulated under United States law such as the Controlled Substance Act of 1970, as amended (the “CSA”).
We are in the process of developing and expanding multiple business divisions; including an advisory services division, a licensed commercial real estate brokerage division, a real estate division focused on franchise services, a real estate division focused on real estate data, and a nonprofit charitable organization to focus on community prosperity. Each of these operating divisions are important elements of the overall business development strategy for long-term growth. We believe in the value of building relationships with clients and local communities in order to position the Company for long-term portfolio and revenue growth backed by sophisticated, safe, and sustainable assets and clients.
The core of our business involves identifying and developing commercial properties that intend to operate within highly regulated industries, including the regulated cannabis industry. Within highly regulated industries, local municipalities typically develop strict regulations, including zoning and permitting requirements related to commercial real estate, that dictate the specific locations and parameters under which regulated properties can operate. These regulations often include complex permitting processes and can include non-standard codes governing each location; for example, restricting a regulated property or facility from operating within a certain distance of any parks, schools, churches, or residential districts, or restricting a regulated property from operating outside a defined set of hours of operation. When an organization can collaborate with local representatives, a proactive set of rules and regulations can be established and followed to meet the needs of both the regulated operators and the local community.
On April 22, 2021, ZP Data Platform 1 LLC, a wholly owned subsidiary of the Company (“ZP Data”), entered into a Limited Liability Company Operating Agreement (the “Beakon Operating Agreement”) with a non-affiliated joint venture partner in connection with the formation of Beakon, LLC (“Beakon”), a Delaware limited liability company formed on April 16, 2021. Beakon signed a licensing agreement for the licensing of a consumer data/marketing software platform that Beakon will white-label for the cannabis industry. Beakon’s goal is to develop and leverage the platform to help drive foot traffic to brick and mortar retail (i.e. dispensaries), and thus enhance the value of the real estate and mitigate risk. Pursuant to the Beakon Operating Agreement, ZP Data purchased 50 units of Beakon for $50, which represent 50% of the membership interests of Beakon. Each unit represents, with respect to any member, such member’s: (i) interest in Beakon’s capital, (ii) share of Beakon’s net profits and net losses (and specially allocated items of income, gain, and deduction), and the right to receive distributions of net cash flow from Beakon, (iii) right to inspect Beakon’s books and records, and (iv) right to participate in the management of and vote on matters coming before the members as provided in the Beakon Operating Agreement. The transactions discussed above resulted in a joint venture, in accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 323-10 – Investments- Equity and Joint Ventures, between ZP Data and the non-affiliated party. Each of the entities has 50% equity ownership and voting rights, and joint control in Beakon. ZP Data will account for its investment in Beakon under the equity method of accounting in accordance with ASC 323. During the nine months ended September 30, 2021, we contributed $86,000 to Beakon.
On May 1, 2021, we entered into a Limited Liability Company Operating Agreement (the “Zoneomics Operating Agreement”) with a non-affiliated joint venture partner in connection with the formation of Zoneomics Green, LLC (“Zoneomics Green”), a Delaware limited liability company formed on May 1, 2021. Zoneomics Green’s goal is to utilize advanced property technology to provide solutions for property identification in regulated industries such as regulated cannabis. Pursuant to the Zoneomics Operating Agreement, the Company purchased 50 units of Zoneomics Green for a capital contribution of $90,000, which represent 50% of the membership interests of Zoneomics Green. Each unit represents, with respect to any member, such member’s: (i) interest in Zoneomics Green’s capital, (ii) share of Zoneomics Green’s net profits and net losses (and specially allocated items of income, gain, and deduction), and the right to receive distributions of net cash flow from Zoneomics Green, (iii) right to inspect Zoneomics Green’s books and records, and (iv) right to participate in the management of and vote on matters coming before the members as provided in the Zoneomics Operating Agreement. The transactions discussed above resulted in a joint venture, in accordance with ASC 323-10 – Investments- Equity and Joint Ventures, between the Company and the non-affiliated party. Each of the entities has 50% equity ownership and voting rights, and joint control in Zoneomics Green. In June 2021, we contributed $90,000 to Zoneomics.
For the three and nine months ended March 31,September 30, 2021 and 2020, substantially all of our revenues were generated from triple-net leases to tenants that are controlled by one entity (each, a “Significant Tenant” and collectively, the “Significant Tenants”), which is located in the State of Arizona.
On June 1, 2021, we closed on the sale of our Gilbert, AZ property with a third party (the “Purchaser”) pursuant to which we agreed to sell, and the Purchaser agreed to purchase, the property located in Gilbert, Arizona, for an aggregate purchase price of $335,000. In connection with the sale, we received net proceeds of $322,332 and recorded a gain on sale of rental property of $51,944.
The Company currently maintains a portfolio of properties that we own, develop, and lease. We currently lease land and/or building space at all five of the properties in our portfolio. Four of the properties are leased to licensed and regulated cannabis tenants and are located in areas with established zoning and permitting procedures. Two of the leased properties are zoned and permitted as licensed and regulated cannabis dispensaries, and two of the leased properties are zoned and permitted as licensed and regulated cannabis cultivation facilities. Each regulated property may undergo a non-standard development process. Various development requirements in this process may include initial property identification, zoning authorization, and permitting guidance in order to qualify a commercial property for subsequent architectural design, utility installation, construction and development, property management, facilities management systems, and security system installation.
As of March 31,September 30, 2021, a summary of rental properties owned by us consisted of the following:
| Location | Tempe, AZ | Chino Valley, AZ | Gilbert, AZ | Green Valley, AZ | Kingman, AZ | |||||||||||||||||||
| Description | Industrial /Office | Greenhouse/ Nursery | Vacant Land | Retail (special use) | Retail (special use) | |||||||||||||||||||
| Current Use | Cannabis Facility | Cannabis Facility | Vacant Land | Cannabis Dispensary | Cannabis Dispensary | |||||||||||||||||||
| Date Acquired | March 2014 | August 2015 | January 2014 | October 2014 | May 2014 | |||||||||||||||||||
| Lease Start Date | May 2018 | May 2018 | April 2021 | May 2018 | May 2018 | |||||||||||||||||||
| Lease End Date | April 2040 | April 2040 | March 2023 | April 2040 | April 2040 | |||||||||||||||||||
| Total No. of Tenants | 1 | 1 | 1 | 1 | 1 | |||||||||||||||||||
| Total Properties | ||||||||||||||||||||||||
| Land Area (Acres) | 3.65 | 47.60 | 0.80 | 1.33 | 0.32 | 53.70 | ||||||||||||||||||
| Land Area (Sq. Feet) | 158,772 | 2,072,149 | 34,717 | 57,769 | 13,939 | 2,337,346 | ||||||||||||||||||
| Undeveloped Land Area (Sq. Feet) | - | 1,812,563 | 34,717 | - | 6,878 | 1,854,158 | ||||||||||||||||||
| Developed Land Area (Sq. Feet) | 158,772 | 259,586 | - | 57,769 | 7,061 | 483,188 | ||||||||||||||||||
| Total Rentable Building Sq. Ft. | 60,000 | 40,000 | - | 1,440 | 1,497 | 102,937 | ||||||||||||||||||
| Vacant Rentable Sq. Ft. | - | - | - | - | - | - | ||||||||||||||||||
| Sq. Ft. rented as of March 31, 2021 | 60,000 | 40,000 | - | 1,440 | 1,497 | 102,937 | ||||||||||||||||||
| Annual Base Rent *,** | ||||||||||||||||||||||||
| 2021 (remainder of year) | $ | 446,010 | $ | 295,200 | $ | 22,000 | $ | 31,500 | $ | 36,000 | $ | 830,710 | ||||||||||||
| 2022 | 590,400 | 393,600 | 33,000 | 42,000 | 48,000 | 1,107,000 | ||||||||||||||||||
| 2023 | 590,400 | 393,600 | 8,250 | 42,000 | 48,000 | 1,082,250 | ||||||||||||||||||
| 2024 | 590,400 | 393,600 | - | 42,000 | 48,000 | 1,074,000 | ||||||||||||||||||
| 2025 | 590,400 | 393,600 | - | 42,000 | 48,000 | 1,074,000 | ||||||||||||||||||
| Thereafter | 8,462,400 | 5,641,600 | - | 602,000 | 688,000 | 15,394,000 | ||||||||||||||||||
| Total | $ | 11,270,010 | $ | 7,511,200 | $ | 63,250 | $ | 801,500 | $ | 916,000 | $ | 20,561,960 | ||||||||||||
| Location | Tempe, AZ | Chino Valley, AZ | Green Valley, AZ | Kingman, AZ | ||||||||||||||||
| Description | Industrial /Office | Greenhouse/ Nursery | Retail (special use) | Retail (special use) | ||||||||||||||||
| Current Use | Cannabis Facility | Cannabis Facility | Cannabis Dispensary | Cannabis Dispensary | ||||||||||||||||
| Date Acquired | March 2014 | August 2015 | October 2014 | May 2014 | ||||||||||||||||
| Lease Start Date | May 2018 | May 2018 | May 2018 | May 2018 | ||||||||||||||||
| Lease End Date | April 2040 | April 2040 | April 2040 | April 2040 | ||||||||||||||||
| Total No. of Tenants | 1 | 1 | 1 | 1 | ||||||||||||||||
| Total Properties | ||||||||||||||||||||
| Land Area (Acres) | 3.65 | 47.60 | 1.33 | 0.32 | 52.90 | |||||||||||||||
| Land Area (Sq. Feet) | 158,772 | 2,072,149 | 57,769 | 13,939 | 2,302,629 | |||||||||||||||
| Undeveloped Land Area (Sq. Feet) | - | 1,812,563 | - | 6,878 | 1,819,441 | |||||||||||||||
| Developed Land Area (Sq. Feet) | 158,772 | 259,586 | 57,769 | 7,061 | 483,188 | |||||||||||||||
| Total Rentable Building Sq. Ft. | 60,000 | 67,312 | 1,440 | 1,497 | 130,249 | |||||||||||||||
| Vacant Rentable Sq. Ft. | - | - | - | - | - | |||||||||||||||
| Sq. Ft. rented as of September 30, 2021 | 60,000 | 67,312 | 1,440 | 1,497 | 130,249 | |||||||||||||||
| Annual Base Rent (*,**) | ||||||||||||||||||||
| 2021 (remainder of year) | $ | 152,403 | $ | 165,585 | $ | 10,500 | $ | 12,000 | $ | 340,488 | ||||||||||
| 2022 | 610,053 | 662,340 | 42,000 | 48,000 | 1,362,393 | |||||||||||||||
| 2023 | 610,053 | 662,340 | 42,000 | 48,000 | 1,362,393 | |||||||||||||||
| 2024 | 610,053 | 662,340 | 42,000 | 48,000 | 1,362,393 | |||||||||||||||
| 2025 | 610,053 | 662,340 | 42,000 | 48,000 | 1,362,393 | |||||||||||||||
| Thereafter | 8,470,589 | 9,493,540 | 602,000 | 688,000 | 19,254,129 | |||||||||||||||
| Total | $ | 11,063,204 | $ | 12,308,485 | $ | 780,500 | $ | 892,000 | $ | 25,044,189 | ||||||||||