Company Quick10K Filing
Quick10K
Zoned Properties
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-08-08 Earnings, Regulation FD, Exhibits
8-K 2019-05-13 Earnings, Regulation FD, Exhibits
8-K 2019-03-28 Earnings, Regulation FD, Exhibits
8-K 2019-01-11 Accountant, Exhibits
8-K 2019-01-01 Enter Agreement, Other Events, Exhibits
8-K 2018-10-04 Regulation FD, Exhibits
8-K 2018-08-13 Earnings, Exhibits
8-K 2018-08-07 Regulation FD, Exhibits
8-K 2018-08-01 Regulation FD, Exhibits
8-K 2018-05-23 Officers, Regulation FD, Exhibits
8-K 2018-05-14 Shareholder Vote
8-K 2018-05-01 Enter Agreement, Leave Agreement, Other Events, Exhibits
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SRRE Sunrise Real Estate Group 0
TLX Trans Lux 0
WMG Warner Music Group 0
CNCL Cancer Capital 0
VXBT Vortex Blockchain Technologies 0
ZDPY 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Organization and Nature of Operations
Note 2 - Summary of Significant Accounting Policies
Note 3 - Concentrations and Risks
Note 4 - Rental Properties
Note 5 - Convertible Note Payable
Note 6 - Related Party Transactions
Note 7 - Stockholders' Equity
Note 8 - Commitments and Contingencies
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 f10q0619ex31-1_zoned.htm
EX-31.2 f10q0619ex31-2_zoned.htm
EX-32.1 f10q0619ex32-1_zoned.htm

Zoned Properties Earnings 2019-06-30

ZDPY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 f10q0619_zonedproperties.htm QUARTERLY REPORT

 

 

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 June 30, 2019

 

☐ 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   (I.R.S. Employer
incorporation or organization)   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

 

As of August 8, 2019, the registrant had 11,901,548 shares of common stock, par value $0.001 per share, issued and outstanding.

 

 

 

 

 

  

ZONED PROPERTIES, INC.

Form 10-Q

June 30, 2019

 

INDEX

 

  Page
Part I. Financial Information  
   
Item 1. Financial Statements 1
   
Condensed Consolidated Balance Sheets – June 30, 2019 and December 31, 2018 (unaudited) 1
   
Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 2019 and 2018 (unaudited) 2
   
Condensed Consolidated Statements of Changes in Stockholders’ Equity – Six Months Ended June 30, 2019 and 2018 (unaudited) 3
   
Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2019 and 2018 (unaudited) 4
   
Notes to Unaudited Condensed Consolidated Financial Statements 5
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
   
Item 4. Controls and Procedures 29
   
Part II. Other Information  
   
Item 1. Legal Proceedings 30
   
Item 1A. Risk Factors 30
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
   
Item 3. Defaults Upon Senior Securities 30
   
Item 4. Mine Safety Disclosures 30
   
Item 5. Other Information 30
   
Item 6. Exhibits 30
   
Signatures 31

 

i

 

  

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

  

ZONED PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   June 30,   December 31, 
   2019   2018 
         
ASSETS          
Cash  $497,529   $354,867 
Accounts receivable   30,017    - 
Rental properties, net   7,552,447    7,730,087 
Prepaid expenses and other assets   74,993    116,967 
Property and equipment, net   25,279    28,695 
Security deposits   600    600 
           
Total Assets  $8,180,865   $8,231,216 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
LIABILITIES:          
Convertible note payable  $2,000,000   $- 
Convertible note payable - related party   20,000    2,020,000 
Accounts payable   10,990    117,985 
Accrued expenses   98,382    54,636 
Accrued expenses - related parties   2,400    34,800 
Deferred revenues   2,250    2,750 
Security deposits payable - related parties   -    71,800 
Security deposits payable   77,833    6,032 
           
Total Liabilities   2,211,855    2,308,003 
           
Commitments and Contingencies          
           
STOCKHOLDERS' EQUITY:          
Preferred stock, $0.001 par value, 5,000,000 shares authorized; 2,000,000 shares issued and outstanding at June 30, 2019 and December 31, 2018 ($1.00 per share liquidation preference)   2,000    2,000 
Common stock: $0.001 par value, 100,000,000 shares authorized; 11,901,548 and 17,441,552 issued and outstanding at June 30, 2019 and December 31, 2018, respectively   11,902    17,442 
Additional paid-in capital   20,794,646    20,746,200 
Accumulated deficit   (14,839,538)   (14,842,429)
           
Total Stockholders' Equity   5,969,010    5,923,213 
           
Total Liabilities and Stockholders' Equity  $8,180,865   $8,231,216 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

1

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   For the Three
Months Ended
   For the Six
Months Ended
 
   June 30,   June 30, 
   2019   2018   2019   2018 
                 
REVENUES:                    
Rental revenues  $278,214   $12,216   $555,950   $24,403 
Rental revenues - related parties   -    166,425    -    687,499 
Advisory revenues   46,227    -    46,227    - 
                     
Total revenues   324,441    178,641    602,177    711,902 
                     
OPERATING EXPENSES:                    
Compensation and benefits   86,898    95,523    208,967    254,982 
Professional fees   51,431    85,874    134,909    157,499 
General and administrative expenses   32,106    37,661    74,898    77,526 
Depreciation and amortization   90,498    63,485    181,056    126,904 
Property operating expenses   810    11,007    1,620    36,299 
Real estate taxes   22,720    22,040    45,440    44,294 
Impairment loss   -    1,853,539    -    1,853,539 
                     
Total operating expenses   284,463    2,169,129    646,890    2,551,043 
                     
INCOME (LOSS) FROM OPERATIONS   39,978    (1,990,488)   (44,713)   (1,839,141)
                     
OTHER (EXPENSES) INCOME:                    
Interest expenses   (30,000)   -    (60,000)   - 
Interest expenses - related parties   (300)   (30,300)   (600)   (60,600)
Other income   -    -    108,204    - 
Interest income   -    1,951    -    3,680 
                     
Total other (expenses) income,  net   (30,300)   (28,349)   47,604    (56,920)
                     
INCOME (LOSS) BEFORE INCOME TAXES   9,678    (2,018,837)   2,891    (1,896,061)
                     
PROVISION FOR INCOME TAXES   -    -    -    - 
                     
NET INCOME (LOSS)  $9,678   $(2,018,837)  $2,891   $(1,896,061)
                     
NET INCOME (LOSS) PER COMMON SHARE:                    
Basic   0.00  $(0.12)  $0.00  $(0.11)
Diluted  $0.00  $(0.12)  $0.00  $(0.11)
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                    
Basic   11,901,548    17,433,667    11,924,973    17,414,977 
Diluted   11,901,548    17,433,667    11,924,973    17,414,977 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

2

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018

(Unaudited)

 

                   Additional       Total 
   Preferred Stock   Common Stock   Paid-in   Accumulated   Stockholders' 
   # of Shares   Amount   # of Shares   Amount   Capital   Deficit   Equity 
                             
Balance, December 31, 2017   2,000,000   $2,000    17,345,497   $17,345   $20,630,649   $(12,815,151)  $7,834,843 
                                    
Common stock issued for services and future services   -    -    71,055    72    68,487    -    68,559 
                                    
Accretion of stock based compensation related to stock options issued   -    -    -    -    7,878    -    7,878 
                                    
Net income   -    -    -    -    -    122,776    122,776 
                                    
Balance, March 31, 2018   2,000,000    2,000    17,416,552    17,417    20,707,014    (12,692,375)   8,034,056 
                                    
Common stock issued for services and future services   -    -    17,500    17    10,834    -    10,851 
                                    
Accretion of stock based compensation related to stock options issued   -    -    -    -    7,878    -    7,878 
                                    
Net loss   -    -    -    -    -    (2,018,837)   (2,018,837)
                                    
Balance, June 30, 2018   2,000,000   $2,000    17,434,052   $17,434   $20,725,726   $(14,711,212)  $6,033,948 

 

                   Additional       Total 
   Preferred Stock   Common Stock   Paid-in   Accumulated   Stockholders' 
   # of Shares   Amount   # of Shares   Amount   Capital   Deficit   Equity 
                             
Balance, December 31, 2018   2,000,000   $2,000    17,441,552   $17,442   $20,746,200   $(14,842,429)  $5,923,213 
                                    
Stock redemption and cencellation   -    -    (5,640,004)   (5,640)   5,640    -    - 
                                    
Common stock issued for services   -    -    100,000    100    31,000    -    31,100 
                                    
Accretion of stock based compensation related to stock options issued   -    -    -    -    5,903    -    5,903 
                                    
Net loss   -    -    -    -    -    (6,787)   (6,787)
                                    
Balance, March 31, 2019   2,000,000    2,000    11,901,548    11,902    20,788,743    (14,849,216)   5,953,429 
                                    
Accretion of stock based compensation related to stock options issued   -    -    -    -    5,903    -    5,903 
                                    
Net loss   -    -    -    -    -    9,678    9,678 
                                    
Balance, June 30, 2019   2,000,000   $2,000    11,901,548   $11,902   $20,794,646   $(14,839,538)  $5,969,010 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3

 

  

ZONED PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

         

   For the Six
Months Ended
 
   June 30, 
   2019   2018 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income (loss)  $2,891   $(1,896,061)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation and amortization expense   181,056    126,904 
Stock-based compensation   31,100    79,408 
Stock option expense   11,806    15,758 
Write-off of deferred rent receivable - related parties   -    1,853,539 
Change in operating assets and liabilities:          
Deferred rent receivable - related parties   -    (144,805)
Accounts receivable   (30,017)   - 
Note receivable   -    90,205 
Prepaid expenses and other assets   41,974    44,134 
Security deposits   -    2,290 
Accounts payable   (106,994)   (3,834)
Accrued expenses   10,746    13,269 
Accrued expenses  - related parties   600    600 
Deferred revenues   (500)   24,500 
           
NET CASH PROVIDED BY OPERATING ACTIVITIES   142,662    205,907 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Acquisition of buildings and improvements   -    (268,038)
           
NET CASH USED IN INVESTING ACTIVITIES   -    (268,038)
           
NET INCREASE (DECREASE) IN CASH   142,662    (62,131)
           
CASH, beginning of period   354,867    824,240 
           
CASH, end of period  $497,529   $762,109 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Interest paid  $60,000   $60,000 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Reclassification of convertible note payable - related party to convertible note payable  $2,000,000   $- 
Reclassification of security deposits - related party to security deposits  $71,800   $- 
Reclassification of accrued expenses - related party to accrued expenses  $33,000   $- 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

  

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

 

Organization

 

Zoned Properties, Inc. (“Zoned Properties” or the “Company”), was incorporated in the State of Nevada on August 25, 2003. The Company is a strategic real estate development firm whose primary mission is to provide real estate and sustainability services for clients in the regulated cannabis industry, positioning the company for real estate acquisitions and revenue growth. The Company intends to pioneer sustainable development for emerging industries, including the regulated cannabis industry. The Company 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.

 

Effective January 1, 2019, the Company and certain beneficial shareholders of the Company entered into a Stock Redemption Agreement (the “Stock Redemption Agreement”). Pursuant to the terms of the Stock Redemption Agreement, the parties agreed that the Company would redeem an aggregate of 5,640,004 owned by such beneficial shareholders (See Note 7). In exchange for the Stock Redemption, in addition to other terms, the parties amended the May 1, 2018 leases to reduce the gross revenue fee payable by related party tenants from 10% of gross revenue to 0% of gross revenue (See Note 3).

 

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 and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.

 

The unaudited condensed consolidated financial statements for the three and six months ended June 30, 2019 and 2018 have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, all adjustments necessary to present fairly our consolidated financial position, results of operations, and cash flows as of June 30, 2019 and 2018, and for the periods then ended, have been made. Those adjustments consist of normal and recurring adjustments. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. Accordingly, the condensed consolidated financial statements do not include all the information and notes necessary for a comprehensive presentation of our financial position and results of operations and should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2018 included in our form 10-K filed with the SEC on March 26, 2019.

 

5

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

Effective January 1, 2019, the Company and certain beneficial shareholders entered into a Stock Redemption Agreement (See Note 7). Pursuant to Securities and Exchange Commission (the “SEC”) rules, each of these beneficial shareholders was deemed to be a “related person” due solely to their status as significant stockholders of the Company. Pursuant to the terms of the Stock Redemption Agreement, these beneficial shareholders would no longer be significant stockholders of the Company and would no longer be deemed to be “related persons” under SEC rules. Accordingly, as of January 1, 2019, the Company will no longer reflect transactions and balances related to these beneficial shareholders as related party transactions. Prior to January 1, 2019, transactions with these beneficial shareholders have been reflected as related party transactions on the accompanying unaudited condensed consolidated financial statements.

 

Use of estimates

 

The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for the six months ended June 30, 2019 and 2018 include the collectability of rent, the useful life of rental properties and property and equipment, valuation allowances for deferred tax assets, and the fair value of non-cash equity transactions, including 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 (the “Significant Tenants”). For the six months ended June 30, 2019 and 2018, rental and advisory revenue associated with the Significant Tenants amounted to $556,335 and $687,499, which represents 92.4% and 96.6% 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, 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 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.

 

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 majority of the Company’s cash are 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. The Company had no cash equivalents as of June 30, 2019 and December 31, 2018. As of June 30, 2019 and December 31, 2018, the Company had approximately $247,000 and $122,000, respectively, of cash in excess of FDIC limits.

 

6

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

Accounts receivable

 

During the six months ended June 30, 2019 and 2018, the Company did not record any allowances for doubtful accounts. 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 considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized in general and administrative expense.

 

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 consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. For the six months ended June 30, 2019 and 2018, 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.

 

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.

 

7

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

Basic and diluted income (loss) per share

 

Basic income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net 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 earnings (loss) per share is an earnings allocation formula that determines earnings (loss) 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
June 30,
   Six Months Ended
June 30,
 
   2019   2018   2019   2018 
Income (loss) per common share - basic:                
Net income (loss)  $9,678   $(2,018,837)  $2,891   $(1,896,061)
Net income (loss) allocated to common stockholders  $9,678   $(2,018,837)  $2,891   $(1,896,061)
Weighted average common shares outstanding - basic   11,901,548    17,433,667    11,924,973    17,414,977 
Net income (loss) per common share - basic  $0.00   $(0.12)  $0.00   $(0.11)
                     
Income (loss) per common share - diluted:                    
Net income (loss) allocated to common shareholders - basic  $9,678   $(2,018,837)  $2,891   $(1,896,061)
Add: interest of convertible debt   -    -    -    - 
Numerator for income (loss) per common share - diluted  $9,678   $(2,018,837)  $2,891   $(1,896,061)
                     
Weighted average common shares outstanding - basic   11,901,548    17,433,667    11,924,973    17,414,977 
Weighted average common shares outstanding – diluted   11,901,548    17,433,667    11,924,973    17,414,977 
Net income (loss) per common share - diluted  $0.00   $(0.12)  $0.00   $(0.11)

 

The following potentially dilutive shares have been excluded from the calculation of diluted net income (loss) per share as their effect would be anti-dilutive for the three and six months ended June 30, 2019 and 2018.

 

   June 30,
2019
   June 30,
2018
 
Convertible debt   404,000    404,000 
Stock options   1,290,000    1,283,354 

 

Segment reporting

 

The Company’s business is comprised of one reportable segment. The Company has determined that its properties have similar economic characteristics to be aggregated into one reportable segment (operating, leasing, advising and managing commercial properties). The Company’s determination was based primarily on its method of internal reporting.

 

8

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

Revenue recognition

 

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 and ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, 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. This standard 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. The Company adopted this standard using the modified retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The adoption of ASU 2014-09 did not have any impact on the process for, timing of, and presentation and disclosure of revenue recognition from contracts with tenants.

 

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.

 

Through April 30, 2018, certain of the Company’s leases contained rental increases at specified intervals. During the six months ended June 30, 2018, the Company recorded as an asset, and included in revenue, deferred rents receivable that were to be received if the tenant made all rent payments required through the expiration of the initial term of the lease.

 

On May 1, 2018, the Company and the Significant Tenants cancelled their existing lease agreements and entered into new lease agreements relating to the same properties (See Note 3). These 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.

 

See below for the adoption of ASU 2016-02, “Leases (Topic 842)” and its impact on our consolidated financial statements upon adoption.

 

Revenues from advisory services is recognized when the Company performs services pursuant to its agreements with clients and collectability is reasonably assured.

 

Income tax

 

Deferred income tax assets and liabilities arise from temporary differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

The Company follows the provisions of FASB ASC 740-10, “Uncertainty in Income Taxes”. Certain recognition thresholds must be met before a tax position is recognized in the financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not” threshold.   The Company does not believe it has any uncertain tax positions as of June 30, 2019 and December 31, 2018 that would require either recognition or disclosure in the accompanying consolidated financial statements.

 

Stock-based compensation

 

Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director 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 and director services received in exchange for an award based on the grant-date fair value of the award. Additionally, the Company adopted ASU No. 2016-09 (“ASU 2016-09”), Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 permits the election of an accounting policy for forfeitures of share-based payment awards, either to recognize forfeitures as they occur or estimate forfeitures over the vesting period of the award. The Company has elected to recognize forfeitures as they occur and the cumulative impact of this change did not have any effect on the Company’s consolidated financial statements and related disclosures.

 

9

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

Through March 31, 2018, pursuant to ASC 505-50 – “Equity-Based Payments to Non-Employees”, all share-based payments to non-employees, including grants of stock options, were recognized in the consolidated financial statements as compensation expense over the service period of the consulting arrangement or until performance conditions were expected to be met. Using a Black-Scholes valuation model, the Company periodically reassessed the fair value of non-employee options until service conditions were met, which generally aligned with the vesting period of the options, and the Company adjusted the expense recognized in the consolidated financial statements accordingly. In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new revenue recognition guidance in ASC 606. The Company early adopted ASU No. 2018-07 in the second quarter of 2018, and the adoption did not have any impact on its consolidated financial statements.

 

Recently adopted accounting pronouncements

 

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)” using a modified retrospective method. On adoption the Company also applied the package of practical expedients to leases, where the Company is the lessee or lessor, that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases.

 

ASU 2016-02, “Leases (Topic 842)” sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to recognize a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.

 

For contracts entered into on or after the effective date, where we are the lessee, at the inception of a contract the Company assess whether the contract is, or contains, a lease. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. We allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. Leases entered into prior to January 1, 2019, are accounted for under ASC 840 and were not reassessed.

 

For leases entered into on or after the effective date, where we are the lessor, at the inception of the contract the Company assess whether the contract is a sales-type, direct financing or operating lease by reviewing the terms of the lease and determining if the lessee obtains control of the underlying asset implicitly or explicitly.

 

If a change to a pre-existing lease occurs, we evaluate if the modification results in a separate new lease or a modified lease. A new lease results when a modification provides additional right of use. The new lease or modified lease is then reassessed to determine its classification based on the modified terms. As disclosed in Note 3, the Chino Valley lease was modified on January 1, 2019 increasing the monthly base rent from $35,000 to $40,000. At the commencement of the modified terms, the Company reassessed its lease classification and concluded it remained properly classified as an operating lease.

 

The adoption of ASU 2016-02 did not have a material impact on the operating leases where the Company is a lessor. The Company will continue to record revenues from rental properties for its operating leases on a straight-line basis. For leases where the Company is a lessee, primarily for the Company’s administrative office lease, the Company analyzed if it would be required to record a lease liability and a right of use asset on its consolidated balance sheets at fair value upon adoption of ASU 2016-02. Since the terms of the Company’s operating lease for its office space is 12 months or less, pursuant to ASC 842, the Company determined that the lease meets the definition of a short-term lease and the Company did not recognize the right-of use asset and lease liability arising from this lease.

 

Recently issued accounting pronouncements

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying condensed consolidated financial statements.

 

10

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

NOTE 3 – CONCENTRATIONS AND RISKS

 

Terminated Lease Agreements with Significant Tenants

 

During 2014, the Company entered into lease agreements with non-profit companies, CJK, Inc. (“CJK”) and Broken Arrow Herbal Center, Inc. (“Broken Arrow”), for its properties located in Kingman, AZ and Green Valley, AZ, respectively. CJK and Broken Arrow are owned, in whole or in part, directly or indirectly, by Alan Abrams and Chris Carra, each of whom was a significant stockholder of the Company through December 31, 2018. The Kingman, AZ lease commenced on October 1, 2014 and was to expire on September 30, 2024 (the “Prior Kingman Lease”). The Green Valley, AZ lease commenced on October 1, 2014 and was to expire on September 30, 2024 with base monthly rent subject to a 5% annual increases during the lease term (the “Prior Green Valley Lease”). These leases were cancelled and new leases were executed on May 1, 2018.

 

In August 2015, the Company entered into a lease agreement with C3C3 Group, LLC (“C3C3”), a wholly owned subsidiary of a company owned by Messrs. Abrams and Carra, each of whom was a significant stockholder of the Company through December 31, 2018, to lease space in Tempe, Arizona. The Tempe lease commenced on September 1, 2015, was amended on September 1, 2016 and October 1, 2017, and was to expire on July 31, 2035 (the “Prior Tempe Leases”). This lease was cancelled and a new lease was executed on May 1, 2018.

 

In August 2015, the Company entered into a lease agreement with C3C3 to lease space in Chino Valley, Arizona (the “Prior Chino Valley Lease”). The Prior Chino Valley Lease commenced on August 1, 2015, was amended on October 10, 2016 and on March 30, 2017, and was to expire on July 31, 2035. Additionally, pursuant to the March 30, 2017 amendment, the Company agreed to defer rent and applicable taxes due for March, April and May 2017 in the form of a note receivable to C3C3 at an 8% interest rate commencing March 1, 2017 and was paid in full over 12 months commencing January 1, 2018. This lease was cancelled and a new lease was executed on May 1, 2018.

 

On June 15, 2017 and effective July 1, 2017, the Company entered into a lease agreement with AC Management Group, LLC (also known as Hana Meds and who is the sole member and manager of C3C3), whose directors/owners were significant stockholders of the Company through December 31, 2018, to lease office space in Tempe, Arizona (the “Hana Meds Lease”). The Hana Meds Lease commenced on July 1, 2017 and was to expire on June 30, 2022 with base monthly rent of $1,800 starting on October 1, 2017. This lease was cancelled on May 1, 2018.

 

On March 1, 2018, the Company and Alan Abrams entered into a Reaffirmation Agreement related to the personal guarantee.

 

New Lease Agreements with Significant Tenants

 

On May 1, 2018, the Company and C3C3, CJK, and Broken Arrow cancelled their existing lease agreements and entered into new lease agreements relating to the same properties. Additionally, the Company entered into confidential advisory services agreements with CJK and Broken Arrow.

 

On May 1, 2018, Chino Valley, a wholly owned subsidiary of the Company, and 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 “New 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 under the Prior Chino Valley Lease. The New Chino Valley Lease provides 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 New Chino Valley Lease, Broken Arrow agreed to maintain insurance in full force during the term of the New Chino Valley Lease and any other period of occupancy of the premises by Broken Arrow. Broken Arrow is owned, in whole or in part, directly or indirectly, by Messrs. Abrams and Carra, each of whom was a significant stockholder of the Company through December 31, 2018. On January 1, 2019, Chino Valley and Broken Arrow entered into that the First Amendment to the Chino Valley Lease (the “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 New Chino Valley Lease remain in full force and effect.

 

11

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

On May 1, 2018, Green Valley, a wholly owned subsidiary of the Company, 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 “New 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 under the Prior Green Valley Lease. The New Green Valley Lease provides 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 New Green Valley Lease, Broken Arrow agreed to maintain insurance in full force during the term of the New Green Valley Lease and any other period of occupancy of the premises by Broken Arrow.

 

On May 1, 2018, Zoned Arizona, a wholly owned subsidiary of the Company, and CJK agreed to terminate the Prior Tempe Leases dated August 15, 2015, as amended, and June 15, 2017, in consideration of (i) entry into that certain Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Zoned Arizona and CJK (the “New 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 under the Prior Tempe Leases. The New Tempe Lease provides 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 New Tempe Lease, CJK agreed to maintain insurance in full force during the term of the New Tempe Lease and any other period of occupancy of the premises by CJK.

  

On May 1, 2018, Kingman, a wholly owned subsidiary of the Company, 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 “New 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 under the Prior Kingman Lease. The New 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 New Kingman Lease, CJK agreed to maintain insurance in full force during the term of the New Kingman Lease and any other period of occupancy of the premises by CJK.

 

CJK and Broken Arrow are owned, in whole or in part, directly or indirectly, by Messrs. Abrams and Carra, each of whom was a significant stockholder of the Company through December 31, 2018 (see Note 7). CJK and Broken Arrow, together, are referred to as the Company’s Significant Tenants.

 

The New Tempe Lease, New Kingman Lease, New Chino Valley Lease and New Green Valley Lease (together referred to as the “New Leases”) includes a Guarantee of Payment and Performance by Messrs. Abrams and Carra.

 

Prior to May 1, 2018, the Company’s leases contained rental increases at specified intervals. Accordingly, during the six months ended June 30, 2018, rental income included base rents that each tenant paid in accordance with the terms of its respective lease and was reported on a straight-line basis over the term of the respective lease, which included the effects of rent abatements under the leases. During the six months ended June 30, 2018, the Company recorded as an asset, and included in revenue, rents receivable that will be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Based on the terms in the New Lease agreements discussed above, the New Leases do not contain rental increases at specified intervals and base rent revenue will be constant over the New Lease terms.

 

As of June 30, 2019 and December 31, 2018, security deposits payable to the Significant Tenants amounted to $71,800. No additional deposits were required on the New Leases.

 

Future minimum lease payments primarily consist of minimum base rent payments from Significant Tenants. Future minimum lease payments to be received for each of the five succeeding calendar years and thereafter as of June 30, 2019 consists of the following:

 

Future annual base rent:    
2019 (remainder of year)  $494,874 
2020   989,748 
2021   989,748 
2022   989,748 
2023   989,748 
Thereafter   15,876,000 
Total  $20,329,866 

 

12

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

Rental and advisory revenue and rent receivable –Significant Tenants

 

On May 1, 2018, the Company and C3C3, CJK, and Broken Arrow cancelled their existing lease agreements. Also on May 1, 2018, the Company entered into new lease agreements relating to the same properties. This lease restructuring caused a reduction in the Company’s revenue in 2018 and beyond. Additionally, effective January 1, 2019, the Company entered into the Stock Redemption Agreement (see Note 7) and as such the Company’s May 1, 2018 advisory agreements were amended to reduce the gross revenue fee payable by the Significant Tenants from 10% of gross revenue to 0% of gross revenue. Any additional reduction in revenue from or loss of such Significant Tenants leases would have a material adverse effect on the Company’s consolidated results of operations and financial condition.

 

For the six months ended June 30, 2019 and 2018, rental and advisory revenue associated with the Significant Tenant leases described above amounted to $556,335 and $687,499, which represents 92.4% and 96.6% of the Company’s total revenues, respectively.

 

Asset concentration

 

The majority of the Company’s real estate properties are leased to the Significant Tenant 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 June 30, 2019 and December 31, 2018, the Company had an asset concentration related to the Significant Tenants. As of June 30, 2019 and December 31, 2018, the Significant Tenants represented approximately 89.1% and 90.7% of the Company’s total assets, respectively. Through the date of this report, all rental payments have been made on a timely basis. As of June 30, 2019, the lease agreements with the Significant Tenants were personally guaranteed by Alan Abrams. On March 1, 2018, the Company and Alan Abrams entered into a Reaffirmation Agreement (See Note 5).

 

Confidential advisory services agreements

 

On May 1, 2018, the Company entered into that certain Confidential Advisory Services Agreement by and between the Company and Broken Arrow (the “Broken Arrow CASA”), with a term expiring on April 30, 2040, unless earlier terminated as provided in the Broken Arrow CASA. Additionally, on May 1, 2018, the Company entered into that certain Confidential Advisory Services Agreement by and between the Company and CJK (the “CJK CASA”), with a term expiring on April 30, 2040, unless earlier terminated as provided in the CJK CASA. These Agreements may be terminated prior to the expiration of the Term upon the occurrence of any of the following: (a) by the Company for any reason at any time upon thirty calendar days’ written notice to the other party; (b) by either party immediately upon the mutual agreement of the parties, evidenced by a writing signed by the parties; or (c) immediately by either party in the event of an actual finding, by a court of competent jurisdiction, of fraud, gross negligence or willful misconduct of the other party in connection with these Agreements. Pursuant to the terms of the Broken Arrow CASA and CJK CASA, Broken Arrow and CJK engaged the Company to perform certain advisory services in exchange for a fee equal to 10% of Broken Arrow’s and CJK’s gross revenues (the (“Revenue Fee”), commencing January 2019.

 

On January 1, 2019, as part of the Stock Redemption Agreement, the Company, on behalf of Chino Valley, and Broken Arrow entered into the First Amendment to Confidential Advisory Services Agreement (the “Broken Arrow CASA Amendment”). The Broken Arrow CASA Amendment amended the Broken Arrow CASA to (i) reduce the gross revenue fee payable by Broken Arrow from 10% to 0%, and (ii) add a $250 hourly advisory fee payable by Broken Arrow. Except as set forth herein, the terms of the Broken Arrow CASA remain in full force and effect.

 

On January 1, 2019, as part of the Stock Redemption Agreement, the Company, on behalf of Zoned Arizona, and CJK entered into the First Amendment to Confidential Advisory Services Agreement (the “CJK CASA Amendment”). The CJK CASA Amendment amended the CJK CASA to (i) reduce the gross revenue fee payable by CJK from 10% to 0%, and (ii) add a $250 hourly advisory fee payable by CJK. Except as set forth herein, the terms of the CJK CASA remain in full force and effect.

 

13

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

NOTE 4 – RENTAL PROPERTIES

 

As of June 30, 2019 and December 31, 2018, rental properties, net consisted of the following:

 

Description  Useful Life
(Years)
  June 30,
2019
   December 31,
2018
 
Building and building improvements  5-39  $6,250,959   $6,250,959 
Land  -   2,283,214    2,283,214 
Rental properties, at cost      8,534,173    8,534,173 
Less: accumulated depreciation      (981,726)   (804,086)
Rental properties, net     $7,552,447   $7,730,087 

 

For the three months ended June 30, 2019 and 2018, depreciation and amortization related to rental properties amounted to $88,820 and $61,716, respectively. For the six months ended June 30, 2019 and 2018, depreciation and amortization related to rental properties amounted to $177,640 and $123,367, respectively.

 

NOTE 5 – 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 (see Note 7), 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 the 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 this Debenture at any point after nine months, in whole or in part. Pursuant to the terms of each of the Debentures, the Holder 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.

   

If the Company defaults on payment, the Holder 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 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 each Debenture), the Holder may (i) declare the entire principal amount and all accrued and unpaid interest under the Debenture immediately due and payable, and (ii) exercise any and all rights, powers and remedies available to the Holder at law or in equity or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in the Debenture and proceed to enforce the payment thereof or any other legal or equitable right of the Holder. 

 

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 June 30, 2019 and December 31, 2018, the principal balance due under the Abrams Debenture is $2,000,000.

 

As of June 30, 2019 and December 31, 2018, accrued interest payable due under these Debentures was $30,000. As disclosed in Note 7, effective January 1, 2019, Mr. Abrams is no longer a significant stockholder of the Company nor considered to be a related party. As such the convertible principal balance of $2,000,000 and related accrued interest of $30,000 has been reclassified to convertible note payable and accrued expenses as of June 30, 2019, respectively, from Convertible debt – related parties and Accrued expenses – related parties on the consolidated balance sheets.

 

For the three months ended June 30, 2019 and 2018, interest expense related to this debenture amounted to $30,000. For the three months ended June 30, 2019 and 2018, interest expense of $30,000 related to this debenture was reflected as interest expense and interest expense – related parties, respectively, on the accompanying unaudited condensed consolidated statement of operations.

 

14

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

For the six months ended June 30, 2019 and 2018, interest expense related to this debenture amounted to $60,000. For the six months ended June 30, 2019 and 2018, interest expense of $60,000 related to this debenture was reflected as interest expense and interest expense – related parties, respectively, on the accompanying unaudited condensed consolidated statement of operations.

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

(B) 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 Debenture at any point after nine months, in whole or in part. Pursuant to the terms of the McLaren Debenture, the Holder is entitled to convert all or a portion of the principal balance and all accrued and unpaid interest due under this Debenture into shares of the Company’s common stock at a conversion price of $5.00 per share.

   

If the Company defaults on payment, the Holder 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 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 Debenture), the Holder may (i) declare the entire principal amount and all accrued and unpaid interest under the Debenture immediately due and payable, and (ii) exercise any and all rights, powers and remedies available to the Holder at law or in equity or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in the Debenture and proceed to enforce the payment thereof or any other legal or equitable right of the Holder. 

 

As of June 30, 2019 and December 31, 2018, the principal balance due under the McLaren Debenture is $20,000.

 

As of June 30, 2019 and December 31, 2018, accrued interest payable due under these Debentures is $2,400 and $1,800, respectively.

 

For the three months ended June 30, 2019 and 2018, interest expense – related parties amounted to $300 and $30,300, respectively. For the six months ended June 30, 2019 and 2018, interest expense – related parties amounted to $600 and $60,600, respectively. For the three and six months ended June 30, 2018, interest expense - related parties included $30,000 and $60,000 of interest expense, respectively, related to the Abrams Debenture which is not considered a related party transaction subsequent to December 31, 2018 (see Note 7).

 

NOTE 7 – 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. 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.

 

15

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

(B) Common stock issued for services

 

On January 14, 2019, the Company issued an aggregate of 100,000 shares of common stock to the members of the Company’s board of directors for services rendered. The shares were valued at their fair value of $31,100 using the quoted share price on the date of grant of $0.311 per common share. In connection with these grants, in January 2019, the Company recorded stock-based compensation expense of $31,100.

 

(C) Equity incentive plans

 

On August 9, 2016, the Company’s Board of Directors authorized the 2016 Equity Incentive Plan (the “2016 Plan”) and reserved 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, 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 three-year 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 June 30, 2019 and December 31, 2018, 40,000 stock option awards have been made under the 2016 Plan which are exercisable. As of June 30, 2019 and December 31, 2018, 9,960,000 shares are 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 June 30, 2019 and December 31, 2018, options to purchase 1,250,000 shares of common stock are outstanding and 1,100,000 are exercisable pursuant to the 2014 Plan.

 

(D) Stock options

 

For the six months ended June 30, 2019 and 2018, in connection with the accretion of stock-based option expense, the Company recorded stock-based compensation expense of $11,806 and $15,758, respectively. As of June 30, 2019, there were 1,290,000 options outstanding and 1,140,000 options vested and exercisable. As of June 30, 2019, there was $59,650 of unvested stock-based compensation expense to be recognized through December 2024. The aggregate intrinsic value as of June 30, 2019 was nil and was calculated based on the difference between the quoted share price on June 28, 2019 of $0.2139 and the exercise price of the underlying options.

 

Stock option activities for the six months ended June 30, 2019 are summarized as follows:

 

   Number of Options   Weighted Average Exercise Price   Weighted Average Remaining Contractual Term (Years)   Aggregate Intrinsic Value 
Balance Outstanding December 31, 2018   1,290,000   $0.99    6.74   $         0 
Granted   -    -           
Balance Outstanding June 30, 2019   1,290,000   $0.99    6.25   $0 
Exercisable, June 30, 2019   1,140,000   $0.99    6.08    0 
                     
Balance Non-vested at December 31, 2018   150,000   $1.00    6.74   $0 
Vested during the period   -                
Balance Non-vested as of June 30, 2019   150,000   $1.00    6.49   $0 

 

16

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

(E) Stock redemption agreement

 

Effective January 1, 2019, the Company, Christopher Carra, Alan Abrams, Clayton Abrams Revocable Trust (the “Clayton Abrams Trust”), and Kyle Abrams Revocable Trust (the “Kyle Abrams Trust” and together with the Clayton Abrams Trust, the “Trusts”) entered into a Stock Redemption Agreement (the “Stock Redemption Agreement”). Prior to entry into the Stock Redemption Agreement, (i) Mr. Carra was the owner 2,028,335 shares of the Company’s common stock, representing approximately 11.6% of the Company’s outstanding shares as of January 1, 2019, and (ii) Mr. Abrams, together with the Trusts (collectively, the “Abrams Affiliates”), owned 3,611,669 shares of the Company’s common stock, representing approximately 20.7% of the Company’s outstanding common stock as of January 1, 2019. Pursuant to Securities and Exchange Commission (the “SEC”) rules, each of Messrs. Carra and Abrams was deemed to be a “related person” due solely to their status as significant stockholders of the Company. Pursuant to the terms of the Stock Redemption Agreement, the parties agreed that the Company would redeem an aggregate of 5,640,004 owned by Mr. Carra and the Abrams Affiliates (the “Stock Redemption”) such that Messrs. Carra and Abrams would no longer be significant and stockholders of the Company and would no longer be deemed to be “related persons” under SEC rules. In exchange for the Stock Redemption, the parties agreed that:

 

The Company and Broken Arrow, which is owned, in whole or in part, directly or indirectly, by Messrs. Abrams and Carra, amended the Broken Arrow CASA to reduce the gross revenue fee payable by Broken Arrow from 10% of gross revenue to 0% of gross revenue, and added a $250 an hour advisory fee.

  

The Company and CJK, which is owned, in whole or in part, directly or indirectly, by Messrs. Abrams and Carra, amended the CJK CASA to reduce the gross revenue fee payable by CJK from 10% of gross revenue to 0% of gross revenue, and added a $250 an hour advisory fee.

 

The Company and Mr. Abrams amended the convertible debenture dated January 9, 2017 (the “Abrams Debenture”) to extend the maturity date of the Abrams Debenture from January 9, 2022 until January 9, 2030, and

 

Chino Valley and Broken Arrow amended the Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 (the “New Chino Valley Lease”) to increase the monthly base rent payable by Broken Arrow from $35,000 to $40,000.

 

Following effectiveness of the Stock Redemption and the transactions set forth above:

 

Messrs. Carra and Abrams will no longer beneficially own any shares of the Company’s common stock. Accordingly, they will no longer be significant stockholders of the Company or “related persons” under the SEC rules.  Therefore, transactions between the Company and Carra or Abrams or entities related in whole or in part, directly or indirectly, to Carra and Abrams have not been reflected as related party transactions in these unaudited condensed consolidated financial statements after the effectiveness of the Stock Redemption.

 

Broken Arrow will continue to be owned, in whole or in part, directly or indirectly, by Messrs. Abrams and Carra, and Broken Arrow will continue to be a Significant Tenant of the Company.

 

CJK will continue to be owned, in whole or in part, directly or indirectly, by Messrs. Abrams and Carra, and CJK will continue to be a Significant Tenant of the Company.

 

The Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Chino Valley and Broken Arrow will continue in full force and effect, except as amended by the Chino Valley Lease Amendment to increase the monthly base rent payable by Broken Arrow from $35,000 to $40,000.

 

The Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Green Valley and Broken Arrow will continue in full force and effect.

 

The Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement (concerning the Company’s Tempe, Arizona property) dated May 1, 2018 between Zoned Arizona and CJK will continue in full force and effect.

 

The Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Kingman and CJK will continue in full force and effect.

 

17

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

NOTE 8 – COMMITMENTS AND CONTINGENCIES

 

Rental property acquisition

 

On April 22, 2016, Zoned Colorado Properties, LLC (“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 consolidated balance sheets as of June 30, 2019 and 2018. As of June 30, 2019, the Company and Seller have yet to complete the purchase.

 

Legal matters

 

From time to time, the Company may be involved in litigation related to claims arising out of its operations in the normal course of business. As of June 30, 2019, 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 the Company’s Chief Executive Officer (the “CEO”) agreed to replace CEO’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 CEO his current base annual salary of $215,000, and to award CEO 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 CEO’s employment will terminate (a “Termination”) in any of the following circumstances:

 

  (i) immediately, if CEO dies;
  (ii) immediately, if CEO receives benefits under the long-term disability insurance coverage then provided by the Company or, if no such insurance is in effect, upon CEO’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 CEO of the basis for such Termination;
  (v) at the option of the Company, without Cause;
  (vi) by CEO 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 CEO 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 CEO, except for his obligation under the restrictive covenants in the 2018 Employment Agreement.

 

18

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

 

The Company and CEO 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 (the “Exchange Act”).

 

For purposes of the Golden Parachute Agreement, “Cause” means termination upon (a) the willful and continued failure to substantially perform duties with the Company after a written demand for substantial performance is delivered by the Board, which demand specifically identifies the manner in which the Board believes that duties have not substantially been performed, or (b) the willful engaging in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise.

 

For purposes of the Golden Parachute Agreement, “Good Reason” means, without express written consent, the occurrence after a change in control of the Company of any of the following circumstances unless, such circumstances are fully corrected prior to the date of Termination specified in the notice of Termination:

 

  (a) a material diminution in CEO’s authority, duties or responsibility from those in effect immediately prior to the change in control of the Company;
  (b) a material diminution in CEO’s base compensation;
  (c) a material change in the geographic location at which CEO performs his duties;
  (d) a material diminution in the authority, duties, or responsibilities of the supervisor to whom CEO is required to report, including a requirement that CEO report to a corporate officer or employee instead of reporting directly to the Board;
  (e) a material diminution in the budget over which CEO retains authority;
  (f) a material breach under any agreement with the Company to continue in effect any bonus to which CEO was entitled, or any compensation plan in which CEO participates immediately prior to the change in control of the Company which is material to CEO’s total compensation;
  (g) a material breach under any agreement with the Company to provide CEO benefits substantially similar to those enjoyed by CEO 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 CEO with a Company automobile or allowance in lieu of it, if CEO 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 CEO of any material fringe benefit enjoyed by CEO at the time of the change in control of the Company, or the failure by the Company to provide him with the number of paid vacation days to which he is entitled on the basis of years of service with the Company in accordance with the Company’s normal vacation policy in effect at the time of the change in control of the Company;

   

Following a change in control of the Company, upon termination of CEO’s employment or during a period of disability, CEO will be entitled to the following benefits:

 

  (i) During any period that CEO fails to perform his full-time duties with the Company as a result of incapacity due to physical or mental illness, CEO 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 CEO under any compensation plan of the Company during such period, until the Golden Parachute Agreement is terminated.
  (ii) If CEO’s employment is terminated by the Company for Cause or by CEO other than for Good Reason, disability, death or retirement, the Company will pay CEO 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 CEO 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 CEO for Good Reason, CEO will be entitled to benefits provided below:

 

a.The Company will pay CEO 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 CEO is entitled under any compensation plan of the Company.

b.In lieu of any further salary payments to CEO for periods subsequent to the date of Termination, the Company will pay as severance pay to CEO a lump sum severance payment (together with the payments provided in clauses (c) and (d) below) equal to five times the sum of CEO’s annual base salary in effect immediately prior to the occurrence of the circumstance giving rise to the notice of Termination given in respect of them.

c.The Company will pay to CEO any deferred compensation allocated or credited to CEO 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 CEO under the Company’s stock option plans (which options shall be cancelled upon the making of the payment referred to below), CEO 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 CEO (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 CEO all legal fees and expenses incurred by CEO as a result of such Termination.

 

19

 

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results

 

This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This quarterly report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the “Risk Factors” section of our annual report on Form 10-K as filed with the SEC on March 28, 2019, and the same may be updated from time to time in documents that we file with the SEC.

 

We caution that these factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

The following discussion should be read in conjunction with our unaudited financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q.

 

Overview

 

Zoned Properties is a strategic real estate development firm whose primary mission is to provide real estate and sustainability services for clients in the regulated cannabis industry, positioning the company for real estate acquisitions and revenue growth. The Company intends to pioneer sustainable development for emerging industries, including the regulated cannabis industry. The Company 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 intends to develop and expand multiple business divisions, including a commercial real estate brokerage team, an advisory services division, 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. The Company believes 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 properties that intend to operate within highly regulated zoning and permitting regions, including the regulated cannabis and marijuana industry. Within highly regulated industries, local municipalities typically develop strict planning and zoning regulations that dictate the specific locations at which regulated properties can operate. These regulations often create complex permitting processes and can include non-standard setbacks for each location; for example, restricting a regulated property or facility from operating within a certain distance of any parks, schools, churches, or residential districts. 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.

 

The Company currently maintains a portfolio of properties that we own, develop, and lease. In addition, we may provide on-going advisory services at each property that is leased to operating tenants. Each property undergoes a development life cycle. Areas of development that may require advisory services can range from initial property identification and zoning authorization to complete architectural design, utility installation, property management protocol, facilities management systems, and security system installation. During the year ended December 31, 2018, improvements made to rental properties amounted to $829,357. No improvements were made during the six months ended June 30, 2019.

 

20

 

 

As of June 30, 2019, 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  Mixed-use warehouse/office   Greenhouse / Nursery   Land   Retail (special-use)   Retail (special-use)     
Current Use  Medical Marijuana Business Park   Medical Marijuana Cultivation Facility   Future Development   Medical Marijuana Dispensary   Medical Marijuana Dispensary     
                         
Date Acquired  Mar-14   Aug-15   Jan-14   Oct-14   May-14      
Lease Start Date  May-18   May-18   Jul-18   May-18   May-18      
Lease End Date  Apr-40   Apr-40   Month to month   Apr-40   Apr-40     
                             
Total No. of Tenants   1    1    1    1    1     
No. of Related Party Tenants   1    1    -    1    1     
                            Total Properties 
Land Area (Acres)   3.65    47.6    0.8    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 June 30, 2019   60,000    40,000    -    1,440    1,497    102,937 
                               
Annual Base Rent: *                              
2019 (remainder of year)  $201,000   $240,000   $-   $21,000   $24,000   $486,000 
2020   402,000    480,000    -    42,000    48,000    972,000 
2021   402,000    480,000    -    42,000    48,000    972,000 
2022   402,000    480,000    -    42,000    48,000    972,000 
2023   402,000    480,000    -    42,000    48,000    972,000 
Thereafter   6,566,000    7,840,000    -    686,000    784,000    15,876,000 
Total  $8,375,000   $10,000,000   $-   $875,000   $1,000,000   $20,250,000 

 

*Annual base rent represents amount of cash payments due from Significant Tenants.

 

Annualized $ per Rented Building Sq. Ft. (Base Rent)

 

Year  Tempe, AZ   Chino Valley, AZ   Gilbert, AZ   Green Valley, AZ   Kingman, AZ 
2019  $6.7   $12.0              -   $29.2   $32.1 
2020  $6.7   $12.0    -   $29.2   $32.1 
2021  $6.7   $12.0    -   $29.2   $32.1 
2022  $6.7   $12.0    -   $29.2   $32.1 
2023  $6.7   $12.0    -   $29.2   $32.1 

 

21

 

 

Recent Developments

 

Currently, 33 U.S. states plus the District of Columbia have passed laws permitting their citizens to use medical cannabis. Marijuana remains classified as a Schedule I controlled substance by the U.S. Drug Enforcement Agency (the “DEA”), and the U.S. Department of Justice (the “DOJ”), and therefore it is illegal to grow, possess and consume cannabis under federal law. On September 27, 2018, however, the DEA announced that drugs, including “finished dosage formulations” of cannabidiol (“CBD”) and tetrahydrocannabinol (“THC”) below 0.1%, will be considered Schedule 5 drugs as long as the medications have been approved by the U.S. Food and Drug Administration. THC and CBD are two natural compounds found in cannabis plants. THC is the main psychoactive compound in marijuana, while CBD is an antagonist to, and inhibits the physiological action to, THC. The CSA bans cannabis-related businesses; the possession, cultivation and production of cannabis-infused products; and the distribution of cannabis and products derived from it. Furthermore, the U.S. Supreme Court has confirmed that the federal government has the right to regulate and criminalize cannabis, including for medical purposes, and that federal law criminalizing the use of cannabis preempts state laws that legalize its use.

 

Under the Obama Administration, the DOJ previously issued memoranda, including the so-called “Cole Memo” on August 29, 2013, providing internal guidance to federal prosecutors concerning enforcement of federal cannabis prohibitions under the CSA. This guidance essentially characterized use of federal law enforcement resources to prosecute those complying with state laws allowing the use, manufacture and distribution of cannabis as an inefficient use of such federal resources when state laws and enforcement efforts are effective with respect to specific federal enforcement priorities under the CSA.

 

On January 4, 2018, then-U.S. Attorney General Jeff Sessions issued a written memorandum rescinding the Cole Memo and related internal guidance issued by the DOJ regarding federal law enforcement priorities involving marijuana (the “Sessions Memo”). The Sessions Memo instructs federal prosecutors that when determining which marijuana-related activities to prosecute under federal law with the DOJ’s finite resources, prosecutors should follow the well-established principles set forth in the U.S. Attorneys’ Manual governing all federal prosecutions. The Sessions Memo states that “these principles require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” The Sessions Memo went on to state that given the DOJ’s well-established general principles, “previous nationwide guidance specific to marijuana is unnecessary and is rescinded, effective immediately.”

 

It is unclear at this time what impact the Sessions Memo will have on the regulated cannabis and marijuana industry. In addition, pursuant to the current omnibus spending bill previously approved by Congress, the DOJ was prohibited from using funds appropriated by Congress to prevent states from implementing their medical-use cannabis laws. This provision, however, will expire on September 30, 2019. There is no assurance that Congress will approve inclusion of a similar prohibition on DOJ spending in the appropriations bill for 2019. Although we are not engaged in the purchase, sale, growth, cultivation, harvesting, or processing of medical-use marijuana products, we lease our properties to tenants who engage in such activities, and therefore strict enforcement of federal prohibitions regarding marijuana could irreparably harm our business, subject us to criminal prosecution and/or adversely affect the trading price of our securities.

 

Effective January 1, 2019, the Company, Christopher Carra, Alan Abrams, Clayton Abrams Revocable Trust (the “Clayton Abrams Trust”), and Kyle Abrams Revocable Trust (the “Kyle Abrams Trust” and together with the Clayton Abrams Trust, the “Trusts”) entered into a Stock Redemption Agreement (the “Stock Redemption Agreement”). Prior to entry into the Stock Redemption Agreement, (i) Mr. Carra was the owner 2,028,335 shares of the Company’s common stock, representing approximately 11.6% of the Company’s outstanding shares as of January 1, 2019, and (ii) Mr. Abrams, together with the Trusts (collectively, the “Abrams Affiliates”), owned 3,611,669 shares of the Company’s common stock, representing approximately 20.7% of the Company’s outstanding common stock as of January 1, 2019. Pursuant to Securities and Exchange Commission (the “SEC”) rules, each of Messrs. Carra and Abrams was deemed to be a “related person” due solely to their status as significant stockholders of the Company. Pursuant to the terms of the Stock Redemption Agreement, the parties agreed that the Company would redeem an aggregate of 5,640,004 owned by Mr. Carra and the Abrams Affiliates (the “Stock Redemption”) such that Messrs. Carra and Abrams would no longer be significant and stockholders of the Company and would no longer be deemed to be “related persons” under SEC rules. In exchange for the Stock Redemption, the parties agreed that:

 

The Company and Broken Arrow, which is owned, in whole or in part, directly or indirectly, by Messrs. Abrams and Carra, amended the Broken Arrow CASA to reduce the gross revenue fee payable by Broken Arrow from 10% of gross revenue to 0% of gross revenue, and added $250 an hour as an advisory fee.

 

The Company and Hana Meds, which is owned, in whole or in part, directly or indirectly, by Messrs. Abrams and Carra, amended the Hana Meds CASA to reduce the gross revenue fee payable by Hana Meds from 10% of gross revenue to 0% of gross revenue, and added $250 an hour as an advisory fee.

 

The Company and Mr. Abrams amended the convertible debenture dated January 9, 2017 (the “Abrams Debenture”) to extend the maturity date of the Abrams Debenture from January 9, 2022 until January 9, 2030, and

 

Chino Valley and Broken Arrow amended the Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 (the “New Chino Valley Lease”) to increase the monthly base rent payable by Broken Arrow from $35,000 to $40,000.

 

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The Company will focus heavily on the growth of a diversified revenue stream in 2019. We intend to accomplish this by prospecting new advisory services across the country for private, public, and municipal clients. We believe that strategic real estate and sustainability services are likely to emerge as the growth engine for Zoned Properties. We are moving to take advantage of new opportunities.

 

Results of Operations

 

The following comparative analysis on results of operations was based primarily on the comparative consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the audited consolidated financial statements and the notes to those statements for the three and six months ended June 30, 2019 and 2018, which are included elsewhere in this quarterly report on Form 10-Q. The results discussed below are for the three and six months ended June 30, 2019 and 2018.

 

Comparison of Results of Operations for the Three and Six Months ended June 30, 2019 and 2018

 

Revenues

 

For the three and six months ended June 30, 2019 and 2018, revenues consisted of the following:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2019   2018   2019   2018 
Rent revenues  $278,214   $12,216   $555,950   $24,403 
Rent revenues – related parties   -    166,425    -    687,499 
Advisory revenues   46,227    -    46,227    - 
Total revenues  $324,441   $178,641   $602,177   $711,902 

 

During the three and six months ended June 30, 2019, we generated revenues from advisory services of $46,227, including advisory services performed for our Significant Tenants of $26,167.

 

For the three months ended June 30, 2019, total revenues amounted to $324,441, including Significant Tenants revenues of $291,475, as compared to $178,641, including Significant Tenant revenues that were considered related parties of $166,425, for the three months ended June 30, 2018, an increase of $145,800, or 81.6%. This increase in revenues was primarily attributable to an increase in rent revenues from the Significant Tenants of $98,893, or 59.4%, an increase in advisory revenues from our Significant Tenants of $26,167, and an increase in third party advisory revenues of $20,060.

 

For the six months ended June 30, 2019, total revenues amounted to $602,177, including Significant Tenants revenues of $556,335, as compared to $711,902, including Significant Tenant revenues that were considered related parties of $687,499, for the six months ended June 30, 2018, a decrease of $109,725, or 15.4%. This decrease in revenues was primarily attributable to a decrease in rent revenues from the Significant Tenant of $157,331, or 22.9%, offset by an increase in advisory revenues from our Significant Tenant of $26,167, and an increase in third party advisory revenues of $20,060.

 

On May 1, 2018, we cancelled our existing lease agreements and entered into new lease agreements relating to the same properties. Additionally, in connection with the May 1, 2018 amended leases, the April 2018 rent was abated. This Significant Tenant lease restructuring caused an overall reduction in our revenue in 2018 and beyond. In the 2018 period, Significant Tenant revenues were considered revenues – related parties.

 

Operating expenses

 

For the three months ended June 30, 2019, operating expenses amounted to $284,463 as compared to $2,169,129 for the three months ended June 30, 2018, a decrease of $1,884,666, or 86.9%. For the six months ended June 30, 2019, operating expenses amounted to $646,890 as compared to $2,551,043 for the six months ended June 30, 2018, a decrease of $1,904,153, or 74.6%.

 

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For the three and six months ended June 30, 2019 and 2018, operating expenses consisted of the following: 

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2019   2018   2019   2018 
Compensation and benefits  $86,898   $95,523   $208,967   $254,982 
Professional fees   51,431    85,874    134,909    157,499 
General and administrative expenses   32,106    37,661    74,898    77,526 
Depreciation and amortization   90,498    63,485    181,056    126,904 
Property operating expenses   810    11,007    1,620    36,299 
Real estate taxes   22,720    22,040    45,440    44,294 
Write-off of deferred rent receivable – related parties   -    1,853,539    -    1,853,539 
Total  $284,463   $2,169,129   $646,890   $2,551,043 

 

For the three months ended June 30, 2019, compensation and benefit expense decreased by $8,625, or 9.0%, as compared to the three months ended June 30, 2018. This decrease was attributable to a decrease in stock-based compensation of $14,079 offset by an increase in compensation and benefits of $5,454. For the six months ended June 30, 2019, compensation and benefit expense decreased by $46,015, or 18.0%, as compared to the six months ended June 30, 2018. This decrease was attributable to a decrease in stock-based compensation of $47,610 offset by an increase in compensation and benefits of $1,595.

 

For the three months ended June 30, 2019, professional fees decreased by $34,443, or 40.1%, as compared to the three months ended June 30, 2018. The decrease was primarily attributable to an increase in accounting and auditing fees of $3,700 and an increase in consulting fees of $8,125 offset by a decrease in public relations fees of $17,243, a decrease in proxy service fees incurred of $21,195, a decrease in transfer agent fees of $105, and a decrease in legal fees of $7,725. For the six months ended June 30, 2019, professional fees decreased by $22,590, or 14.3%, as compared to the six months ended June 30, 2018. This decrease was primarily attributable to an increase in accounting and auditing fees of $22,740 and an increase in consulting fees of $8,125 offset by a decrease in public relations fees of $22,795, a decrease in in proxy service fees incurred of $21,195, a decrease in transfer agent fees of $259, and a decrease in legal fees of $9,206.

 

General and administrative expenses consist of expenses such as rent expense, directors’ and officers’ liability insurance, travel expenses, office expenses, telephone and internet expenses and other general operating expenses. For the three months ended June 30, 2019, general and administrative expenses decreased by $5,555, or 14.8%, as compared to the three months ended June 30, 2018. For the six months ended June 30, 2019, general and administrative expenses decreased by $2,628, or 3.4%, as compared to the six months ended June 30, 2018.

 

For the three months ended June 30, 2019, depreciation and amortization expense increased by $27,013, or 42.6%, as compared to the three months ended June 30, 2018. For the six months ended June 30, 2019, depreciation and amortization expense increased by $54,152, or 42.7%, as compared to the six months ended June 30, 2018. These increases were attributable to an increase in depreciable assets.

 

Property operating expenses consist of property management fees, property insurance, repairs and maintenance fees, utilities and other expenses related to our rental properties. For the three months ended June 30, 2019, property operating expenses decreased by $10,197, or 92.6%, as compared to the three months ended June 30, 2018. For the six months ended June 30, 2019, property operating expenses decreased by $34,679, or 95.5%, as compared to the six months ended June 30, 2018. The decrease was primarily related to the restructuring of our leases in May 2018. Beginning in May 2018, substantially all of the property operating expenses are paid by the Significant Tenants.

 

  For the three months ended June 30, 2019, real estate taxes increased by $680, or 3.1%, as compared to the three months ended June 30, 2018. For the six months ended June 30, 2019, real estate taxes increased by $1,146, or 2.6%, as compared to the six months ended June 30, 2018.
     
 

During the three and six months ended June 30, 2018, we recorded a write-off of deferred rent receivable – related parties of $1,853,539 in operating expenses on the accompanying condensed consolidation statements of operations. We did not record any write-off of receivables during the 2019 periods. On May 1, 2018, we and the related party tenants cancelled their existing lease agreements. Also on May 1, 2018, we entered into new lease agreements relating to the same properties. The new leases provide for payments of fixed monthly base rents over the term of the leases with no base rent increases. Accordingly, we reviewed our deferred rent receivable and determined that the deferred rent receivable of $1,853,539 should be written off since, pursuant to the new lease terms, the deferred rent receivable was not collectible. Accordingly, on May 1, 2018, we recorded a write-off of deferred rent receivable – related parties of $1,853,539.

 

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Income (loss) from operations

 

As a result of the factors described above, for the three months ended June 30, 2019, income from operations amounted to $39,978 as compared to a loss from operations of $(1,990,488) for the three months ended June 30, 2018, a positive change of $2,030,466, or 102.0%. For the six months ended June 30, 2019, loss from operations amounted to $(44,713) as compared to a loss from operations of $(1,839,141) for the six months ended June 30, 2018, a decrease of $1,794,428, or 97.6%. The decreases in loss from operations for the 2019 periods as compared to the 2018 periods is primarily due to the 2018 write-off of deferred rent receivable – related parties of $1,853,539, as discussed above.

  

Other income (expenses)

 

Other income (expenses) primarily includes interest expense incurred on debt with third parties and related parties and also includes other income (expenses). For the three months ended June 30, 2019, total other (expense), net amounted to $30,300 as compared to total other expenses, net of $28,349, representing an increase of $1,951, or 6.9%. For the six months ended June 30, 2019, total other income, net amounted to $47,604 as compared to total other expenses, net of $(56,920), representing a change of $104,524, or 183.6%. During the six months ended June 30, 2019, we recognized other income of $108,204 related to a cash rebate received from the utility company.

 

Net income (loss)

 

As a result of the foregoing, for the three months ended June 30, 2019 and 2018, net income (loss) amounted to $9,678, or $0.00 per common share (basic and diluted), and $(2,018,837), or $(0.12) per common share (basic and diluted), respectively. As a result of the foregoing, for the six months ended June 30, 2019 and 2018, net income (loss) amounted to $2,891, or $0.00 per common share (basic and diluted), and $(1,896,061), or $(0.11) per common share (basic and diluted), respectively.

 

Liquidity and Capital Resources

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had cash of $497,529 and $354,867 of cash as of June 30, 2019 and December 31, 2018, respectively.

 

Our primary uses of cash have been for salaries, fees paid to third parties for professional services, property operating expenses, general and administrative expenses, and the development of rental properties. All funds received have been expended in the furtherance of growing the business. We have received funds from the collection of rental income, and from various financing activities such as from the sale of our common stock and from debt financings. The following trends are reasonably likely to result in changes in our liquidity over the near to long term:

 

An increase in working capital requirements to finance our current business,

 

Acquisition and buildout of rental properties;

 

Addition of administrative and sales personnel as the business grows, and

 

The cost of being a public company.

 

We may need to raise additional funds, particularly if we are unable to generate positive cash flow as a result of our operations. We estimate that based on current plans and assumptions, that our available cash will be sufficient to satisfy our cash requirements under our present operating expectations for the next 12 months from the date of this report. Other than revenue received from the lease of our rental properties and advisory services, and funds received from debt, we presently have no other significant alternative source of working capital.

 

We have used these funds to fund our operating expenses, pay our obligations, acquire and develop rental properties, and grow our company. We need to raise significant additional capital or debt financing to acquire new properties, to develop existing properties, and to assure we have sufficient working capital for our ongoing operations and debt obligations.

 

As discussed, on May 1, 2018, we cancelled our existing related party lease agreements and entered into new related party lease agreements relating to the same properties. Pursuant to the terms of the new leases, our cash flows have decreased. Additionally, effective January 1, 2019, the May 1, 2018 new leases were amended to reduce the gross revenue fee payable by related party tenants from 10% of gross revenue to 0% of gross revenue. Any additional reduction in revenue from or loss of such leases would have a material adverse effect on our consolidated results of operations and financial condition.

 

25

 

 

Our future operations are dependent on our ability to manage our current cash balance, on the collection of rental and advisory revenues and the attainment of new advisory clients. Our real estate properties are leased to Significant Tenants who were related parties through December 31, 2018 under triple-net leases for which terms vary. We monitor the credit of these tenants to stay abreast of any material changes in credit quality. We monitor tenant credit by (1) reviewing financial statements and related metrics and information that are publicly available or that are provided to us upon request, and (2) monitoring the timeliness of rent collections. As of June 30, 2019 and December 31, 2018, we had an asset concentration related to our Significant Tenant leases. As of June 30, 2019 and December 31, 2018, these Significant Tenants represented approximately 89.1% and 90.7% of total assets, respectively. If our Significant Tenants are prohibited from operating or cannot pay their rent, we may not have enough working capital to support our operations and we would have to seek out new tenants at rental rates per square less than our current rate per square foot.

 

In Exhibit 99.1 and 99.2 to our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on March 28, 2019, we included audited financial statements of our Significant Tenants.

 

We intend to secure additional financing to acquire and develop additional and existing properties. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow our business operations.

  

Cash Flow

 

For the Six Months Ended June 30, 2019 and 2018

 

Net cash flow provided by operating activities was $142,662 for the six months ended June 30, 2019 as compared to net cash flow provided by operating activities of $205,907 for the six months ended June 30, 2018, a decrease of $63,245.

 

Net cash flow provided by operating activities for the six months ended June 30, 2019 primarily reflected net income of $2,891 adjusted for the add-back of non-cash items consisting of depreciation and amortization of $181,056, stock-based compensation expense of $31,100,  and accretion of stock-based stock option expense of $11,806, offset by changes in operating assets and liabilities primarily consisting of a decrease in prepaid expenses of $41,974 and an increase in accrued expenses of $11,346 offset by an increase in accounts receivable of $30,017, and a decrease in accounts payable of $106,994 which was primarily attributable to the payment of outstanding amounts due for property improvements made in 2018.

 

Net cash flow provided by operating activities for the six months ended June 30, 2018 primarily reflected net loss of $(1,896,061) adjusted for the add-back of non-cash items consisting of depreciation and amortization of $126,904, stock-based compensation expense of $79,408, the accretion of stock-based stock option expense of $15,758, and a non-cash write-off of deferred rent receivable – related parties of $1,853,539 associated with the write-off of all remaining deferred rent receivable, and changed in operating assets and liabilities consisting of an increase in deferred rent receivables of $144,805, a decrease in notes receivable of $90,205 due to the receipt of funds from the repayment of this note , and net changes in other operating assets and liabilities of $80,959.

 

For the six months ended June 30, 2019, net cash flow used in investing activities amounted to $0 and compared to $268,038 for the six months ended June 30, 2018. During the six months ended June 30, 2018, we used cash in the development of rental properties including the expansion of rentable space by remodeling hoop houses and upgrading ventilation, plumbing and electrical systems.

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual Obligations

 

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

 

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The following tables summarize our contractual obligations as of June 30, 2019 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 

   Payments Due by Period 
Contractual obligations:  Total   Less than
1 year
   1-2 years   3-4 years   5 + years 
Convertible notes  $2,020   $-   $-   $20   $2,000 
Interest on convertible notes   1,305    153    242    240    670 
Total  $3,325   $153   $242   $260   $2,670 

 

Off-balance Sheet Arrangements

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our audited and unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the unaudited consolidated financial statements.

 

Rental properties

 

Rental properties are carried at cost less accumulated depreciation and amortization. Betterments, major renovations and certain costs directly related to the improvement of rental properties are capitalized. Maintenance and repair expenses are charged to expense as incurred. Depreciation is recognized on a straight-line basis over estimated useful lives of the assets, which range from 5 to 39 years. Tenant improvements are amortized on a straight-line basis over the lives of the related leases, which approximate the useful lives of the assets.

 

Upon the acquisition of real estate, we assess the fair value of acquired assets (including land, buildings and improvements, identified intangibles, such as acquired above-market leases and acquired in-place leases) and acquired liabilities (such as acquired below-market leases) and allocate the purchase price based on these assessments. The Company assesses fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known trends, and market/economic conditions.

 

Our properties are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property’s carrying amount over its estimated fair value. Impairment analyses are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. If our estimates of the projected future cash flows, anticipated holding periods, or market conditions change, our evaluation of impairment losses may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results.

 

We have capitalized land, which is not subject to depreciation.

 

27

 

 

Revenue recognition

 

Effective on January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09 and Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, 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. This standard 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. We adopted this standard using the modified retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The adoption of ASU 2014-09 did not have any impact on the process for, timing of, and presentation and disclosure of revenue recognition from contracts with tenants.

 

Rental income includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported on a straight-line basis over the non-cancellable term of the lease, which includes the effects of rent abatements under the leases. We commence rental revenue recognition when the tenant takes possession of the leased space or controls the physical use of the leased space and the leased space is substantially ready for its intended use.

 

Through April 30, 2018, certain of our leases contained rental increases at specified intervals. During the three months ended June 30, 2018, we recorded as an asset, and included in revenue, rents receivable that was to be received if the tenant made all rent payments required through the expiration of the initial term of the lease.

 

Revenues from advisory services is recognized when the Company performs services pursuant to its agreements with customers and collectability is reasonably assured.

 

Stock-based compensation

 

Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director 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 and director services received in exchange for an award based on the grant-date fair value of the award. Additionally, effective January 1, 2017, we adopted ASU No. 2016-09 (“ASU 2016-09”), Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 permits the election of an accounting policy for forfeitures of share-based payment awards, either to recognize forfeitures as they occur or estimate forfeitures over the vesting period of the award. We elected to recognize forfeitures as they occur and the cumulative impact of this change did not have any effect on the Company’s consolidated financial statements and related disclosures.

 

Through March 31, 2018, pursuant to ASC 505-50 – “Equity-Based Payments to Non-Employees”, all share-based payments to non-employees, including grants of stock options, were recognized in the consolidated financial statements as compensation expense over the service period of the consulting arrangement or until performance conditions are expected to be met. Using a Black-Scholes valuation model, we periodically reassessed the fair value of non-employee options until service conditions are met, which generally aligns with the vesting period of the options, and we adjusted the expense recognized in the consolidated financial statements accordingly. In June 2018, the Financial Accounting Standards Board issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new revenue recognition guidance in ASC 606. We early adopted ASU No. 2018-07 in the second quarter of 2018, and the adoption did not have any impact on our consolidated financial statements.

 

Recent Accounting Pronouncements

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable to smaller reporting companies.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

We maintain “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e), promulgated by the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated our company’s disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of June 30, 2019, our disclosure controls and procedures were not effective.

 

The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses which we identified in our internal control over financial reporting: (1) the lack of multiples levels of management review on complex accounting and financial reporting issues, (2) we had not implemented adequate system and manual controls, and (3) a lack of adequate segregation of duties and necessary corporate accounting resources in our financial reporting process and accounting function as a result of our limited financial resources to support hiring of personnel and implementation of accounting systems. Until such time as we expand our staff to include additional accounting personnel and hire a full time chief financial officer, it is likely we will continue to report material weaknesses in our internal control over financial reporting.

 

Changes in Internal Control

 

There were no changes in our internal control over financial reporting during the period ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

Not required of smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit No.   Description
     
31.1*   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
     
31.2*   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
     
32.1*   Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
     
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema
101.CAL*   XBRL Taxonomy Extension Calculation
101.DEF*   XBRL Taxonomy Extension Definition
101.LAB*   XBRL Taxonomy Extension Labels
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase

 

*Filed herewith.

  

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SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Zoned Properties, Inc.

(Registrant)

   
Date: August 8, 2019 /s/ Bryan McLaren
  President, Chief Executive Officer and Chief Financial Officer
  (principal executive officer, principal financial officer and principal accounting officer)

 

 

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