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, 2016

 

☐ 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.)

 

14300 N. Northsight Blvd., #208, 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.

 

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). ☒ Yes     ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐		Accelerated filer   ☐
Non-accelerated filer   ☐ (Do not check if a smaller reporting company)		Smaller reporting company þ

 

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 12, 2016, the registrant had 17,155,125 shares of common stock, par value $.001 per share, issued and outstanding.

 

 

 

ZONED PROPERTIES, INC.

 

INDEX

 

		Page
Part I. Financial Information
	Item 1. Financial Statements	2
	Condensed Consolidated Balance Sheets—June 30, 2016 (unaudited) and December 31, 2015	2
	Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 2016 and 2015 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2016 and 2015 (unaudited)	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	25
	Item 4. Controls and Procedures	25
Part II. Other Information
	Item 1. Legal Proceedings	26
	Item 1A. Risk Factors	27
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27
	Item 3. Defaults Upon Senior Securities	27
	Item 4. Mine Safety Disclosures	27
	Item 5. Other Information	27
	Item 6. Exhibits	27
Signatures		28

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30,				December 31,
		2016				2015
		(Unaudited)
ASSETS
Cash		$	816,640			$	1,281,464
Rental properties, net (See Note 3)			7,642,196				7,224,593
Deferred rent receivable			13,406				8,909
Deferred rent receivable - related parties			609,739				367,013
Real estate tax escrow			85,221				46,072
Prepaid expenses and other current assets			55,167				105,684
Property and equipment, net			40,935				46,488
Security deposits			8,158				8,158
TOTAL ASSETS		$	9,271,462			$	9,088,381
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Mortgage payable		$	2,100,000			$	2,100,000
Convertible note payable			500,000				500,000
Convertible note payable - related party			500,000				500,000
Accounts payable			111,962				36,797
Accrued expenses			162,054				92,044
Accrued expenses - related parties			68,042				56,542
Security deposits payable			85,713				62,440
Total Liabilities			3,527,771				3,347,823
Commitments and Contingencies (See Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 5,000,000 shares authorized; 2,000,000 shares issued and outstanding at June 30, 2016 and December 31, 2015 ($1.00 per share liquidation preference)			2,000				2,000
Common stock: $.001 par value, 100,000,000 shares authorized; 17,135,850 and 17,080,850 issued and outstanding at June 30, 2016 and December 31, 2015, respectively			17,136				17,081
Additional paid-in capital			19,825,545				19,412,954
Accumulated deficit			(14,100,990	)			(13,691,477	)
Total Stockholders' Equity			5,743,691				5,740,558
Total Liabilities and Stockholders' Equity		$	9,271,462			$	9,088,381

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
REVENUES:
Rental revenues		$	58,200			$	84,843			$	119,080			$	167,018
Rental revenues - related parties			345,476				202,858				691,002				347,969
Total Revenues			403,676				287,701				810,082				514,987
OPERATING EXPENSES:
Compensation and benefits			93,561				111,238				273,385				178,164
Professional fees			205,678				520,048				482,200				641,053
General and administrative expenses			52,679				66,958				104,300				129,129
Depreciation and amortization			41,673				37,276				82,771				74,462
Property operating expenses			15,568				24,591				31,028				39,148
Real estate taxes			21,161				13,198				42,822				27,865
Consulting fees - related parties			-				24,100				-				45,350
Settlement expense			87,500				50,000				87,500				67,500
Total Operating Expenses			517,820				847,409				1,104,006				1,202,671
LOSS FROM OPERATIONS			(114,144	)			(559,708	)			(293,924	)			(687,684	)
OTHER INCOME (EXPENSES):
Interest expenses			(48,123	)			(48,123	)			(96,246	)			(96,246	)
Interest expenses - related parties			(8,750	)			(8,750	)			(17,500	)			(17,500	)
Loss on sale of property and equipment			(1,843	)			-				(1,843	)			-
Interest income			-				2,736				-				3,019
Total Other Expenses, net			(58,716	)			(54,137	)			(115,589	)			(110,727	)
LOSS BEFORE INCOME TAXES			(172,860	)			(613,845	)			(409,513	)			(798,411	)
PROVISION FOR INCOME TAXES			-				-				-				-
NET LOSS		$	(172,860	)		$	(613,845	)		$	(409,513	)		$	(798,411	)
NET LOSS PER COMMON SHARE:
Basic and Diluted		$	(0.01	)		$	(0.03	)		$	(0.02	)		$	(0.04	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and Diluted			17,135,809				19,031,853				17,123,975				18,781,304

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Six Months Ended
		June 30,
		2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(409,513	)		$	(798,411	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense			82,771				74,462
Stock-based compensation			205,575				45,000
Stock-based settlement expense			-				50,000
Accretion of stock-based stock option expense			162,071				313,511
Loss from sale of property and equipment			1,843				-
Deferred rent receivable			(4,497	)			(2,970	)
Deferred rent receivable - related parties			(242,726	)			(44,054	)
Change in operating assets and liabilities:
Real estate tax escrow			(39,149	)			(415	)
Prepaid expenses and other assets			50,517				26,189
Security deposits			-				(1,860	)
Accounts payable			75,165				51,859
Accrued expenses			70,010				17,799
Accrued expenses - related parties			11,500				63,000
Security deposits payable			23,273				-
NET CASH USED IN OPERATING ACTIVITIES			(13,160	)			(205,890	)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of buildings and improvements			(452,164	)			-
Cash received from sale of property and equipment			500				-
Acquisition of property and equipment			-				(6,961	)
NET CASH USED IN INVESTING ACTIVITIES			(451,664	)			(6,961	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock			-				1,000,000
Redemption of common stock			-				(2,250	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			-				997,750
NET (DECREASE) INCREASE IN CASH			(464,824	)			784,899
CASH, beginning of period			1,281,464				1,066,377
			\
CASH, end of period		$	816,640			$	1,851,276
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest
Interest		$	96,250			$	96,246
Income taxes		$	-			$	-
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for buildings and improvements		$	45,000			$	-

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

 

Organization

 

Zoned Properties, Inc., formerly Vanguard Minerals Corporation (“Zoned Properties” or the “Company”), was incorporated in the State of Nevada on August 25, 2003. On May 2, 2006, the Company changed its name to Knewtrino, Inc. On August 10, 2007, the Company changed its name to Vanguard Minerals Corporation. On October 2, 2013, the Company changed its name to Zoned Properties, Inc. to reflect its maturing business model that focuses on commercial property acquisition and development.

 

The Company is a strategic real estate development firm whose primary mission is to identify, develop, and manage sophisticated, safe, and sustainable properties in emerging industries, including the licensed medical marijuana industry. The Company acquires commercial properties that face unique zoning challenges and identifies solutions that can potentially have a major impact on the cash flow and value generated. Zoned Properties targets commercial properties that can be acquired and potentially re-zoned for specific purposes. Zoned Properties does not grow, harvest, sell or distribute cannabis or any substances regulated under United States law such as the Controlled Substances Act.

 

The Company has the following wholly-owned subsidiaries:

 

	·	Gilbert Property Management, LLC was organized in the State of Arizona on February 10, 2014.

	·	Tempe Industrial Properties, LLC was organized in the State of Arizona on February 19, 2014.

	·	Chino Valley Properties, LLC (“Chino Valley”) was organized in the State of Arizona on April 15, 2014.

	·	Kingman Property Group, LLC 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 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.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation and principals of consolidation

 

The accompanying 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 condensed consolidated financial statements for the three and six months ended June 30, 2016 and 2015 have been prepared by us without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments necessary to present fairly our financial position, results of operations, and cash flows as of June 30, 2016 and 2015, 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.

 

Use of estimates

 

The preparation of 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, 2016 and 2015 include the collectability of rent, the useful life of rental properties and property and equipment, assumptions used in assessing impairment of long-term assets, valuation allowances for deferred tax assets, and the fair value of non-cash equity transactions, including options and stock-based compensation.

 

Risks and uncertainties

 

The Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure. The Company conducts a significant portion of its business in Arizona. Consequently, any significant economic downturn in the Arizona market could potentially have an effect on the Company’s business, results of operations and financial condition.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Fair value of financial instruments

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, note receivable, deferred rent receivable, prepaid expenses and other current assets, real estate tax escrow, short-term notes payable, mortgages payable, convertible notes payable, 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 ASC Topic 820.

 

ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

 

Cash and cash equivalents

 

Cash and cash equivalents are carried at cost and represent 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 and cash equivalents 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 at June 30, 2016 and December 31, 2015. At June 30, 2016, the Company had approximately $567,000 of cash in excess of FDIC limits.

 

Accounts receivable

 

The Company recognizes an allowance for losses on accounts 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.

 

Real estate tax escrow

 

Real estate tax escrow consists of funds held for the purpose of real estate taxes owed. These funds will be released as required to satisfy tax payments as due.

 

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 7 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. The Company records acquired intangible assets (including acquired above-market leases and acquired in-place leases) and acquired intangible liabilities (including below-market leases) at their estimated fair value. The Company amortizes acquired above-and below-market leases as a decrease or increase to rental income, respectively, over the lives of the respective leases. Amortization of acquired in-place leases is included as a component of depreciation and amortization. For the six months ended June 30, 2016 and 2015, there were no acquired in-place leases.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Rental properties (continued)

 

The Company’s properties, including any related intangible assets, 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. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses. For the six months ended June 30, 2016 and 2015, 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 5 to 10 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.

 

Revenue recognition

 

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 steps and 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. Rental income also includes the amortization of acquired above-and below-market leases, net. Beginning in 2014, the Company began generating revenues from the non-residential rental properties.

 

Certain of the Company’s leases currently contain rental increases at specified intervals. The Company records as an asset, and include 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. Deferred rents receivable in the accompanying balance sheets includes the cumulative difference between rental revenue recorded on a straight-line basis and rents received from the tenants in accordance with the lease terms. Accordingly, management determines to what extent the deferred rent receivable applicable to each specific tenant is collectible. The Company reviews material rents receivable and takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of rent receivable with respect to any given tenant is in doubt, we record an increase in the allowance for uncollectible accounts or the Company records a direct write-off of the specific rent receivable. No such reserves related to deferred rent receivable have been recorded as of June 30, 2016 and December 31, 2015. For the six months ended June 30, 2015, in connection with certain related party leases, the Company only included in revenues the amount of rents received from the related parties in accordance with the lease terms. On August 1, 2015, the Company transferred title to its Bernalillo, New Mexico property and the respective related party lease as part of a settlement agreement, and cancelled a related party lease in June 2015.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Basic income (loss) per share

 

Basic income (loss) per share is computed by dividing net income (loss) by weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. All potentially dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact on the Company’s net losses and consisted of the following:

 

		June 30, 2016				June 30, 2015
Convertible debt			200,000				200,000
Stock options			1,250,000				1,300,000

 

Segment reporting

 

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

 

Income tax

 

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

 

The Company follows the provisions of FASB ASC 740-10 “Uncertainty in Income Taxes” (ASC 740-10). 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, 2016 and 2015 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 the Share-Based Payment Topic of ASC 718 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.

 

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the service period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date.

 

Related parties

 

Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recently issued accounting pronouncements

 

In May 2014, the FASB issued an update (“ASU 2014-09”) Revenue from Contracts with Customers. ASU 2014-09 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 and notes that lease contracts with customers are a scope exception. ASU 2014-09 requires an entity to recognize revenue when it transfers 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. On August 12, 2015, the FASB issued ASU No. 2015-14 to defer the effective date of ASU No. 2014-09. Public business entities may elect to adopt the amendments as of the original effective date; however, adoption is required for annual reporting periods beginning after December 15, 2017. The Company is currently assessing the impact of the guidance on our consolidated financial statements and notes to our consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, that will require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management will assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations within one year after the issuance date. The new standard defines substantial doubt and provides example indicators. Disclosures will be required if conditions give rise to substantial doubt. However, management will need to assess if its plans will alleviate substantial doubt to determine the specific disclosures. This standard is effective for public entities for annual periods ending after December 15, 2016. Earlier application of this standard is permitted. This standard is not expected to have a material effect on the Company’s financial position, results of operations and cash flows.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The ASU simplifies the current guidance in ASC Topic 740, Income Taxes, which requires entities to separately present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The Company does not expect the impact of ASU 2015-17 to be material to its consolidated financial statements.

 

On January 5, 2016, the FASB issued ASU No. 2016-01 to amend the accounting guidance on the classification and measurement of financial instruments. The standard requires that all investments in equity securities, including other ownership interests, are carried at fair value through net income. This requirement does not apply to investments that qualify for equity method accounting or to those that result in consolidation of the investee or for which the entity has elected the predictability exception to fair value measurement. Additionally, the standard requires that the portion of the total fair value change caused by a change in instrument-specific credit risk for financial liabilities for which the fair value option has been elected would be recognized in other comprehensive income. Any accumulated amount remaining in other comprehensive income is reclassified to earnings when the liability is extinguished. The Company does not anticipate the guidance to have a material impact on its consolidated financial statements or notes to its consolidated financial statements.

 

On February 25, 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”) to amend the accounting guidance for leases. The accounting applied by a lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease assets and lease liabilities for leases classified as operating leases on the balance sheet. Lessees will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. The Company is currently assessing the impact of the guidance on its consolidated financial statements and notes to its consolidated financial statements.

 

On March 30, 2016, the FASB issued ASU No. 2016-09 (“ASU 2016-09”) to amend the accounting guidance for share-based payment accounting. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and early adoption is permitted.

 

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.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

 

NOTE 3 – RENTAL PROPERTIES

 

On February 16, 2016, Chino Valley entered into a letter of intent (the “Chino Valley LOI”) with C3C3 Group, LLC (the “Tenant”) and Broken Arrow Herbal Center, Inc. (“Broken Arrow”). Each of the Tenant and Broken Arrow are owned by a significant stockholder of the Company. Pursuant to the terms of the Chino Valley LOI, the parties agreed to amend the existing lease agreement, dated August 6, 2015, to provide for the lease by Chino Valley to Tenant of approximately 45,000 square feet of space in Chino Valley, Arizona. The monthly rent due, pursuant to the terms of the Chino Valley LOI, will increase monthly; however, the increased rental revenue will be contingent upon the completion of the constructed expansion at the facility. In subsequent years beginning August 1, 2017, there will be a 5% annual increase in the monthly rent. The parties identified a budget of $2,000,000 for developing the property and constructing the tenant improvements. As of June 30, 2016, the existing lease agreement has not been amended. Through June 30, 2016, capitalized building improvements and construction in progress costs related to the China Valley LOI amounted to $388,200. The Chino Valley LOI and the Amendment to the lease agreement shall be contingent upon: (a) the Company obtaining financing for the development of the premises and the construction of the tenant improvements in such amount and on such terms and provisions as are acceptable to the Company in our sole and absolute discretion from a lender approved by us in our sole discretion, and (b) approval by the Town of Chino Valley of the Phased Protected Development Rights Plan. As of June 30, 2016, the Town of Chino Valley has granted the Company a five year Phased Protected Development Rights Plan for the Chino Valley Property with an option to extend for an additional two year term. In the event that the contingencies have not been satisfied, this LOI shall terminate, and all of the deposits, except for $100, shall be returned to Tenant.

 

At June 30, 2016 and December 31, 2015, rental properties, net consisted of the following:

 

Description		Useful Life (Years)				June 30, 2016				December 31, 2015
Building and building improvements			39			$	4,950,016			$	4,823,318
Construction in progress			-				370,466				-
Land			-				2,589,667				2,589,667
Equipment			7				23,164				23,164
Rental properties, at cost							7,933,313				7,436,149
Less: accumulated depreciation							(291,117	)			(211,556	)
Rental properties, net						$	7,642,196			$	7,224,593

 

For the three months ended June 30, 2016 and 2015, depreciation and amortization of rental properties amounted to $40,160 and $35,722, respectively. For the six months ended June 30, 2016 and 2015, depreciation and amortization of rental properties amounted to $79,561 and $71,444, respectively.

 

NOTE 4 - PROPERTY AND EQUIPMENT

 

At June 30, 2016 and December 31, 2015, property and equipment consisted of the following:

 

Description		Useful Life (Years)		June 30, 2016				December 31, 2015
Vehicle and site trailers		5 – 10		$	38,855			$	42,555
Office furniture and equipment		5 – 7			12,225				12,225
					51,080				54,780
Less: accumulated depreciation					(10,145	)			(8,292	)
Property and equipment, net				$	40,935			$	46,488

 

For the three months ended June 30, 2016 and 2015, depreciation expense amounted to $1,513 and $1,554, respectively. For the six months ended June 30, 2016 and 2015, depreciation expense amounted to $3,210 and $3,018, respectively.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

 

NOTE 5 – RELATED PARTY TRANSACTIONS

 

(A) Convertible notes payable – related parties

 

On August 20, 2014, the Company received, pursuant to the terms of a Senior Convertible Debenture, $500,000 from a beneficial common stockholder who also holds 50% of the issued preferred stock. The Debenture bears interest at 7% and the principal balance and all accrued interest is due on the maturity date of August 20, 2017. The holder has the option after 12 months to convert all or a portion of the Debenture into shares of the Company’s common stock at the conversion price of $5.00 per share. As of June 30, 2016 and December 31, 2015, the principal balance due and owing under this Debenture is $500,000. As of June 30, 2016 and December 31, 2015, accrued interest payable amounted to $65,042 and $47,542, respectively, and is included in accrued expenses – related parties on the accompanying consolidated balance sheets. For the three months ended June 30, 2016 and 2015, interest expenses – related party amounted to $8,750 and $8,750, respectively. For the six months ended June 30, 2016 and 2015, interest expenses – related party amounted to $17,500 and $17,500, respectively.

 

(B) Employment agreement

 

On October 26, 2015, the Company entered into an engagement letter with a Company majority owned by the Company’s chief financial officer (“CFO”). Pursuant to the engagement letter, the Company shall pay to a base fee of $6,500 in cash per month of which $2,000 shall be deferred and paid upon the earlier of six months or a capital raise, and $3,500 per month payable quarterly in advance in common shares of the Company valued at the lower of the share price from the most recent capital raise or 60% of the bid price of the Company’s common stock at the last trading day of the previous quarter with a minimum number of common shares issuable per month of 1,250 shares.

 

(C) Related party lease agreements

 

During 2014, the Company entered into lease agreements with non-profit companies and other companies whose director is a beneficial stockholder of the Company. Additionally, in August 2015, the Company entered into two lease agreements with a company owned by this beneficial shareholder of the Company to lease space in Tempe, Arizona and Chino Valley, Arizona. The Tempe lease commenced on September 1, 2015 and expires on August 31, 2035 with base monthly rent $13,500, subject to a 5% annual increase. The Chino Valley lease commenced on August 1, 2015 and expires on July 31, 2035 with base monthly rent $30,000, subject to a 5% annual increase. For the three months ended June 30, 2016 and 2015, rental income associated with these related party leases amounted to $345,476 and $202,858, respectively. For the six months ended June 30, 2016 and 2015, rental income associated with these related party leases amounted to $691,002 and $347,969, respectively. At June 30, 2016 and December 31, 2015, deferred rent receivable – related party amounted to $609,739 and $367,013, respectively. In connection with these leases, the related party tenants shall pay security deposits aggregating $60,000 payable in twelve monthly installments of $5,000 beginning September 1, 2015. At June 30, 2016 and December 31, 2015, security deposits payable to related parties amounted to $63,750 and $26,250, respectively.

 

(D) Related party letter of intent

 

On February 16, 2016, Chino Valley entered into the “Chino Valley LOI with C3C3 Group, LLC (the “Tenant”) and Broken Arrow. Each of the Tenant and Broken Arrow are owned by a significant stockholder of the Company. Pursuant to the terms of the Chino Valley LOI, the parties agreed to amend the existing lease agreement, dated August 6, 2015, to provide for the lease by Chino Valley to Tenant of approximately 45,000 square feet of space in Chino Valley, Arizona. The monthly rent due, pursuant to the terms of the Chino Valley LOI, will increase monthly; however, the increased rental revenue will be contingent upon the completion of the constructed expansion at the facility. In subsequent years beginning August 1, 2017, there will be a 5% annual increase in the monthly rent. The parties identified a budget of $2,000,000 for developing the property and constructing the tenant improvements. As of June 30, 2016, the existing lease agreement has not been amended. Through June 30, 2016, capitalized construction in progress costs related to the Chino Valley LOI amounted to $388,200. The Chino Valley LOI and the Amendment to the lease agreement shall be contingent upon: (a) the Company obtaining financing for the development of the premises and the construction of the tenant improvements in such amount and on such terms and provisions as are acceptable to the Company in our sole and absolute discretion from a lender approved by us in our sole discretion, and (b) approval by the Town of Chino Valley of the Phased Protected Development Rights Plan. As of June 30, 2016, the Town of Chino Valley has granted the Company a five year Phased Protected Development Rights Plan for the Chino Valley Property with an option to extend for an additional two year term. In the event that the contingencies have not been satisfied, this LOI shall terminate, and all of the deposits, except for $100, shall be returned to Tenant.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

 

NOTE 6 – CONVERTIBLE NOTE PAYABLE

 

On August 20, 2014, the Company received $500,000 from a stockholder pursuant to the terms of a Senior Convertible Debenture. The Debenture bears interest at 7% and is payable monthly and the principal balance and any remaining unpaid interest is due on the maturity date of August 20, 2017. The holder has the option after 12 months to convert all or a portion of the Debenture into shares of the Company’s common stock at the conversion price of $5.00 per share. As of June 30, 2016 and December 31, 2015, the principal balance due and owing under this Debenture is $500,000.

 

NOTE 7 – MORTGAGE PAYABLE

 

On March 7, 2014, the Company executed a $2,100,000 mortgage payable to acquire real estate having a carrying value of approximately $4,600,000. The mortgage bears interest at 7.5%. Monthly interest only payments began April 7, 2014 and continue each month thereafter until paid. The entire unpaid balance and accrued interest is due on March 7, 2019, the maturity date of the mortgage and is secured by the underlying property. The mortgage terms do not allow participations by the lender in either the appreciation in the fair value of the mortgaged real estate project or the results of operations of the mortgaged real estate project.

 

NOTE 8 – 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.

 

(B) Common stock issued for services

 

On January 1, 2016, pursuant to an engagement letter dated in October 2015, the Company issued 3,750 shares of its common stock to a Company majority owned by the Company’s CFO for services rendered. The shares were valued at their fair value of $10,500 or $2.80 per common share which was the fair value on the date of grant based on the value of services to be rendered. In connection with these shares, in January 2016, the Company recorded stock-based compensation expense of $10,500.

 

On January 27, 2016, the Company issued an aggregate of 30,000 shares of common stock to three members of the Company’s board of directors (10,000 each) for services rendered. The shares were valued at their fair value of $135,000 using the quoted share price on the dates of grant of $4.50 per common share. In connection with these shares, in January 2016, the Company recorded stock-based compensation expense of $135,000.

 

On February 1, 2016, pursuant to an engagement letter effective January 28, 2016, the Company agreed to issue an aggregate of 30,000 shares of its common stock to a company for architectural and design services to be rendered. Pursuant to the agreement, the Company shall issue 10,000 shares of common stock immediately and 20,000 shares of common stock at the completion of the engagement. The initial shares were valued at their aggregate fair value of $45,000 using the quoted share price on the date of grant of $4.50 per common share. In connection with the issuance of these shares, on February 1, 2016, the Company capitalized costs of $45,000 as part of construction in progress to be depreciated over the life of the building improvements. The Company shall value the remaining 20,000 shares when issued using the quoted share price on the measurement date, which shall be the date that the services are completed.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

 

NOTE 8 – STOCKHOLDERS’ EQUITY (continued)

 

(B) Common stock issued for services (continued)

 

Effective September 1, 2015, the Company entered into a one year consulting agreement with an investor relations firm for investor relations services. In connection with this consulting agreement, the Company shall compensate the consultant for services rendered 1) cash of $5,000 per month and 2) 7,500 restricted shares to be issued within the first thirty days of the contractual period and an additional 7,500 shares of restricted stock to be issued at the end of month seven. In connection with this agreement, on March 31, 2016, the Company issued 7,500 shares of restricted stock. The shares were valued at their aggregate fair value of $40,050 using the quoted share price on the dates of grant of $5.34 per common share. Accordingly, the Company recorded consulting fees of $40,050.

 

On April 1, 2016, pursuant to an engagement letter dated in October 2015, the Company issued 3,750 shares of its common stock to a Company majority owned by the Company’s CFO for services rendered. The shares were valued at their fair value of $20,025 using the quoted share price on the dates of grant of $5.34 per common share. Accordingly, the Company recorded compensation expense of $20,025.

 

(C) Equity Incentive Plan

 

On October 1, 2014, the Board of Directors authorized the 2014 Equity Compensation Plan the (“Plan”), pursuant to which the Company reserved 10,000,000 shares of common stock for issuance under the Plan. The number of shares of common stock available for issuance under the Plan shall automatically increase on the first trading day of January each calendar year during the term of the Plan, beginning with calendar year 2015, by an amount equal to one and one-half percent (1.5%) of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year, but in no event shall any such annual increase exceed 400,000 shares of common stock. If any shares of common stock that have been granted pursuant to a stock option cease 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 terminated, such shares shall again be available for distribution in connection with future grants and awards under the Plan, The Plan’s purpose is to enable the Company to offer its employees, officers, directors and consultants an opportunity to acquire a proprietary interest in the Company for their contributions. As of June 30, 2016, 1,250,000 options are outstanding pursuant to the Plan and 8,700,000 shares are available for future issuance.

 

(D) Stock options granted pursuant to consulting and employment agreements

 

On May 6, 2015, the Company entered into a 36-month consulting agreement with a stockholder for business advisory services. In connection with this consulting agreement, the Company granted options to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $1.00 per share under the Plan. The options vest as to 125,000 of such shares on July 1, 2015 and for each quarter thereafter through April 1, 2017, and expire on May 5, 2025 or earlier due to employment termination. The fair value of this option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0%; expected volatility of 120%; risk-free interest rate of 2.25%; and, an estimated holding period of 10 years. In connection with these options, the Company valued these options at a fair value of $948,400 and will record stock-based consulting expense over the vesting period. For the three months ended June 30, 2016 and 2015, the Company recorded consulting expense of $79,570 and $270,208, respectively, related to these options. For the six months ended June 30, 2016 and 2015, the Company recorded consulting expense of $191,471 and $270,208, respectively, related to these options.

 

In connection with an employment agreement with a former officer of the Company, the Company granted options to purchase 300,000 shares of the Company’s common stock at an exercise price of $1.00 per share to the employee under the Plan. The options vested as to 50,000 of such shares on August 1, 2015, and 50,000 options were to vest on May 1, 2016 and for each year thereafter through May 1, 2020, and expire five years from the date of grant or earlier due to employment termination. The fair value of these option grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0%; expected volatility of 120%; risk-free interest rate of 1.50%; and, an estimated holding period of 5 years. In connection with these options, the Company valued these options at a fair value of $248,100 and was recording stock-based consulting expense over the vesting period. For the three and six months ended June 30, 2015, the Company recorded stock-based compensation expense of zero and $43,303. Respectively, related to these options. In January 2016, the employee resigned and the employment agreement was terminated. Accordingly, on January 8, 2016, 250,000 non-vested options were cancelled. Accordingly upon termination, the Company reversed all stock-based compensation previously recognized on the non-vested stock options of $62,944 which was reflected as a reduction of compensation and benefits expense. Additionally, in April 2016, the remaining 50,000 vested stock options were cancelled due to employment termination.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

 

NOTE 8 – STOCKHOLDERS’ EQUITY (continued)

 

(D) Stock options granted pursuant to consulting and employment agreements (continued)

 

On December 30, 2015, the Company granted the Company’s Chief Executive Officer and President an option (the “Option”), pursuant to the Plan, to purchase 250,000 of the Company’s common stock at an exercise price of $1.00 per share. The grant date of the Option was December 30, 2015 and the Options expire on December 30, 2026. The options vest as to 25,000 of such shares on December 30, 2015, 25,000 options vest on December 30, 2016 and for each year thereafter through December 30, 2026. The fair value of this option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0%; expected volatility of 120%; risk-free interest rate of 2.31%; and, an estimated holding period of 10 years. In connection with these options, the Company valued these options at a fair value of $237,150 and will record stock-based compensation expense over the vesting period. For the three months ended June 30, 2016 and 2015, the Company recorded stock-based compensation expense of $16,772 and zero, respectively. For the six months ended June 30, 2016 and 2015, the Company recorded stock-based compensation expense of $33,544 and zero, respectively.

 

At June 30, 2016, there were 1,250,000 options outstanding and 525,000 options vested and exercisable. As of June 30, 2016, there was $282,765 of unvested stock-based compensation expense to be recognized through December 2024. The aggregate intrinsic value at June 30, 2016 was approximately $1,987,500 and was calculated based on the difference between the quoted share price on June 30, 2016 and the exercise price of the underlying options.

 

Stock option activities for the six months ended June 30, 2016 are summarized as follows:

 

		Number of Options				Weighted Average  Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Balance Outstanding December 31, 2015			1,550,000			$	1.00				-			$	-
Forfeited			(300,000	)			1,00				-				-
Balance Outstanding June 30, 2016			1,250,000			$	1.00				8.82			$	1,987,500
Exercisable, June 30, 2016			525,000			$	1.00				8.82			$	834,750

 

NOTE 9 – COMMITMENTS AND CONTINGENCIES

 

Legal matters

 

Holistic Patient Wellness Group, LLC v. Zoned Properties, Inc.; Court Filed: Maricopa County Superior Court, Arizona; Case Number: CV2014-003047, which has been consolidated with CV2014-005642; Date Filed: March 14, 2014

 

Holistic Patient Wellness Group, LLC (“HPWG”) leased from the Company retail space in Tempe, Arizona to operate a medical marijuana cultivation site. HPWG claims that we violated the terms of the lease for various reasons. On May 23, 2014, we concluded that HPWG had breached the lease, and terminated the lease and retook possession of the property. On May 27, 2014, HPWG filed a petition for an order to show cause, seeking an expedited ruling on its claim that we violated the terms of the stipulated preliminary injunction. The court re-set the hearing multiple times, ultimately continuing it until March 17, 2015. On April 27, 2015, two entities related to HPWG moved for leave to amend their answer and counterclaim to assert several new claims against new parties, including us. On June 2, 2015, the court sua sponte denied the motion. On August 17, 2015, the court granted a renewed request made by the two entities related to HPWG to move for leave to amend their answer and counterclaim, but expressly afforded us an opportunity to respond in opposition to such a motion. On October 20, 2015, HPWG filed a motion to enforce a purported settlement agreement with the Company and to dismiss its claims against us. The Company responded in opposition to the motion, because (i) the mutual release in the purported settlement agreement was too broad in its scope, and (ii) the Company wanted to preserve its right to seek an award of attorney’s fees and costs against HPWG. On February 1, 2016, the Court granted HPWG’s motion to enforce the settlement agreement and to dismiss the claims against the Company, each party to bear its own attorneys’ fees and costs. As of March 17, 2016, the Company submitted its proposed form of judgment, which was accepted by the Court dismissing the Company from the lawsuit. The Company has no financial obligations to HPWG as result of the settlement and dismissal. While the Company no longer is a party to the lawsuit, related claims are still pending among other parties in the lawsuit.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

 

NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)

 

Legal matters (continued)

 

Healing Healthcare 3, Inc.; Xingang, LLC v. v. Zoned Properties, Inc., et al.; Court Filed: Maricopa County Superior Court, Arizona; Case Number: CV2015-012264; Date Filed: October 21, 2015.

 

On October 21, 2015, Healing Healthcare 3, Inc. (“HH3”) and Xingang, LLC filed a complaint against the Company, President and CEO Bryan McLaren, Board member Alex McLaren, and wholly-owned subsidiary Tempe Industrial Properties, LLC, among others. The complaint concerned the Company’s lease of space in Tempe, Arizona to operate a medical marijuana cultivation site. HH3 and Xingang claim that the Company and its related parties violated the terms of the lease for various reasons. On May 23, 2014, the Company concluded that the lease had been breached, and terminated the lease and retook possession of the property. Plaintiffs asserted various contract and tort claims against the Company and its related parties, and seeks $10,000 per day “for each day that the Company remained in possession of the Tempe Property in violation of the Lease,” attorneys’ fees and costs, treble damages, punitive damages, and interest. The complaint was served on the Company and its related parties on February 17, 2016. On March 8, 2016, the Company, Bryan McLaren, Alex McLaren, and TIP (the “Moving Parties”) filed a motion to dismiss the claims asserted against them in the complaint, with prejudice, on various grounds. On April 14, 2016, the court granted in part, and denied in part, the motion to dismiss. In sum, the court granted the dismissal of the contract claims against the McLarens without leave to amend; denied the dismissal of the two contract claims against the Company and TIP; and granted the dismissal of the remaining tort claims, subject to leave to amend the complaint within 20 days of the order. On May 5, 2016 HH# and Xingang filed an amended complaint with new fact allegations, reasserting the claims that had survived the motion to dismiss. A motion to dismiss the amended complaint was filed on behalf of the Company, Bryan McLaren, and TIP. The motion was fully-briefed, and by order dated July 8, 2016, the Court granted the motion to dismiss the claims asserted by Xingang but denied the rest of the motion. The Company, Bryan McLaren, and TIP filed their answer to the amended complaint on July 27, 2016.

 

In a letter dated February 4, 2016, the Company’s former Chief Operating Officer (“COO”), through legal counsel, made a written demand on the Company related to her resignation on December 29, 2015. In her letter, the COO alleges, among other things, that we refused to establish a bonus program for the COO as had been represented to her before she joined the Company, that she was not allowed to perform her duties, and that she was subject to “mistreatment” by the Chief Executive Officer. The COO has demanded $500,000 to settle her purported claims. On February 18, 2016, the Company responded to the COO’s written demand, denied all liability, and offered an additional one-month of severance pay (approximately $8,350) in exchange for a full release to settle the dispute. On March 29, 2016, Ms. Haugland rejected the Company’s settlement offer without making a counter-offer, and proposed that the parties participate in mediation. On April 8, 2016, the Company rejected Ms. Haugland’s proposal for mediation, and re-urged its original settlement offer. Ms. Haugland’s deadline to respond was April 15, 2016. As of the date of this report, no response has been received by Ms. Haugland.

 

In a letter dated April 4, 2016, a shareholder of the Company, a certain shareholder, through legal counsel, made a demand on the Company related to a certain reverse-stock split that occurred following changes in the composition of the Company’s officers and directors in 2014. In its letter, this shareholder alleged, among other things, that: the reverse-stock split was designed to dilute existing Company interests of existing shareholders and to further entrench new management’s control over the Company. This shareholder demanded that the board of directors bring a legal action against certain officers and directors and against the Company’s transfer agent for various alleged violations of federal and state law. This shareholder indicated its intent to file a putative shareholder derivative action if its demand were not accepted. The Company evaluated this shareholders demand and engaged in settlement talks for several weeks. On July 15, 2016, the parties entered into a Confidential Settlement Agreement and Mutual Release (the “Settlement Agreement”), whereby the Company will issue an aggregate of 50,000 shares of its common stock as follows: (a) 12,500 shares were issued within three days from execution of this Settlement Agreement, (b) 12,500 shall be issued on September 30, 2016, (c) 12,500 shares shall be issued on December 30, 2016, and (d) 12,500 shares shall be issued on March 31, 2017. At June 30, 2016, in connection with this settlement agreement, the Company recorded settlement expense and an accrued expense of $87,500.

 

In a letter dated May 10, 2016, Marc Brannigan, the Company’s former CEO, and related parties (collectively “Brannigan”) sent a demand letter, through counsel, to the Company and certain other third-parties, claiming, among other things, that the Company improperly diluted Brannigan’s equity in the Company. Brannigan demands that the Company issue shares to “reverse” the dilution, invalidate shares improperly issued by the Company, pay unspecified damages, recover one-third of all Company shares owned by Alan Abrams and Chris Carra, and recover Brannigan’s purported majority ownership and voting control of the Company. The Company has evaluated Brannigan’s purported claims, and intends to vigorously defend against such claim. A mediation involving all interested parties occurred on July 29, 2016 and was unsuccessful.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

 

NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)

 

Rental property acquisitions

 

On March 15, 2016, the Company entered into a letter of intent (the “Catalina Partners LOI”) with Catalina Partners III LLC (“Catalina Partners”) and Catalina Hills Botanical Care, Inc. (“Catalina Hills”) pursuant to which the parties agreed to work together in good faith to mutually agree on the terms of a lease agreement to be entered into by the parties. The Catalina Partners LOI and execution of the lease agreement were subject to certain contingencies, including acquisition by the Company of written approval of all due diligence and underwriting matters required by the Company and/or the Company’s lender, that the Company must have obtained commercially reasonable financing for the development of the premises and the construction of certain improvements, acquisition of necessary zoning and land use entitlements, and Catalina Partners’ obtaining necessary government approval to operate the premises as a medical marijuana cultivation and production facility (collectively, the “Contingencies”). The parties also agreed that in the event the Contingencies were not mutually satisfied on or before the date that is 90 days after execution of the Catalina Partners LOI, the Catalina Partners LOI would terminate. Because the 90-day period expired on June 18, 2016 and all of the Contingencies were not satisfied, the Catalina Partners LOI terminated effective June 18, 2016.

 

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 (Commercial) (the “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 Agreement, the parties will cooperate in good faith to complete due diligence during a period of 45 days following execution of the 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 Agreement, Zoned Colorado will have a right of first refusal on eleven additional lots owned by Seller in Parachute, Colorado. In April 2016, we paid a refundable deposit of $45,000 into escrow in connection with the Agreement. As of June 30, 2016, the Company and Seller are still cooperating to complete the purchase.

 

NOTE 10 – CONCENTRATIONS

 

Rental income and rent receivable – related parties

 

During 2014, the Company entered into lease agreements with non-profit companies whose director is a beneficial stockholder of the Company. Additionally, during year ended December 31, 2015, the Company entered into lease agreements with companies owned by this beneficial stockholder of the Company. For the three months ended June 30, 2016 and 2015, rental revenue associated with these leases amounted to $345,476 and $202,858, which represents 85.6% and 70.5% of total revenues, respectively. For the six months ended June 30, 2016 and 2015, rental revenue associated with these leases amounted to $691,002 and $347,969, which represents 85.3% and 67.6% of total revenues, respectively. At June 30, 2016 and December 31, 2015, deferred rent receivable – related parties amounted to $609,739 and $367,013, respectively. A reduction in sales from or loss of such related party leases would have a material adverse effect on our consolidated results of operations and financial condition.

 

NOTE 11 – SUBSEQUENT EVENTS

 

Common shares issued

 

On July 1, 2016, pursuant to an engagement letter dated in October 2015, the Company issued 6,775 shares of its common stock to a Company majority owned by the Company’s CFO for services rendered. The shares were valued at their fair value of $20,025 using the quoted share price on the dates of grant of $2.54 per common share. Accordingly, the Company recorded compensation expense of $17,208.

 

On July 15, 2016, pursuant to a Settlement Agreement (see Note 9), the Company agree to issue an aggregate of 50,000 shares of its common stock as follows: (a) 12,500 shares were issued within three days from execution of this Settlement Agreement, (b) 12,500 shall be issued on September 30, 2016, (c) 12,500 shares shall be issued on December 30, 2016, and (d) 12,500 shares shall be issued on March 31, 2017.

 

On August 9, 2016, the Company’s Board of Directors authorized the 2016 Equity Incentive Plan (the “Plan”), which reserved 10,000,000 shares of common stock. If any share of common stock that have been granted pursuant to a stock option 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 terminates, such shares shall again be available for distribution in connection with future grants and awards under the Plan, The Plans purpose is to enable the Company to offer its employees, officers, directors and consultants an opportunity to acquire a proprietary interest in the Company for their contributions.

 

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 8, 2016, as 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.

 

Business and Corporate History

 

We are a strategic real estate development firm whose primary mission is to identify, develop, and manage sophisticated, safe, and sustainable properties in emerging industries, including the licensed medical marijuana industry. Our vision is to be recognized for creating the standard in property development for emerging industries, while increasing community prosperity and shareholder value. We believe that a strong focus on the development of real estate properties will bring value to the local communities and all of our stakeholders. We have initially established a focus on properties within the medical marijuana industry because we believe there will be increasing demand in this industry, as the national industry continues to evolve.

 

We target commercial properties that can be acquired and potentially re-zoned for specific development purposes, including but not limited to, licensed medical marijuana dispensaries or cultivation facilities. The core of our business involves identifying and acquiring properties that exist within highly regulated zoning regions and may be candidates for re-zoning. This is an essential aspect of our overall growth strategy because we target uniquely zoned properties that are developed as candidates for specific industry operators. Once the properties have been acquired and/or re-zoned, their value may be substantially higher as demand for properties within the specific zoning region increases.

 

We manage a portfolio of properties that we own, lease, and provide direct development on each property we acquire. This can include complete architectural design and subsequent build-outs, general support, landscaping, general up-keep, facilities management, and state of the art security systems. During the six months ended June 30, 2016, improvements made to rental properties amounted to $452,164.

 

 

As of June 30, 2016, a summary of rental properties owned by us consisted of the following:

 

Location

Tempe, AZ

Tempe, AZ

Gilbert, AZ

Green Valley Sahuarita, AZ

Chino Valley, AZ

Kingman, AZ

Description

Mixed -use warehouse/office

Mixed -use warehouse/office

Land

Retail (special-use)

Greenhouse / Nursery

Retail (Special-Use)

Current Use

Medical marijuana cultivation and packaging

Warehouse/office

Future development

Dispensary

Medical marijuana cultivation and packaging

Dispensary

Date Acquired

March 2014

March 2014

January 2014

October 2014

August 2015

May 2014

Lease Start Date

August 2015

April 2015

N/A

October 2014

August 2015

October 2014

Lease End Date

July 2035

March 2020

N/A

September 2024

July 2035

September 2024

Total Rentable Sq. Ft.

60,000

22,355

0

1,440

38,799

1,497

Sq. Ft. rented as of June 30, 2016

5,000

22,355

N/A

1,440

15,000

1,497

Vacant Rentable Sq. Ft.

55,000

0

N/A

0

23,799

0

Land Area

3.65 Acres 158,772 Sq. Ft.

1.28 Acres 56,000 Sq. Ft.

0.8 acres 34,717 Sq. Ft.

1.33 Acres 57,769 Sq. Ft.

47.6 Acres 2,072,149 Sq. Ft.

0.16 Acres 7,061 Sq. Ft

Total No. of Tenants

1

1

N/A

1

1

1

No. of Related Party Tenants

1

0

N/A

1

1

1

 

Annual Base Rent:
2016 (remainder of year)		$	84,375			$	98,907			$	-			$	61,346			$	250,000			$	77,490
2017			173,639				202,266				-				127,256				514,500				160,745
2018			182,328				208,329				-				133,619				540,225				168,782
2019			191,442				214,588				-				140,300				567,236				177,221
2020			201,014				54,041								147,315				595,598				186,082
Thereafter			4,375,384				-				-				620,269				12,964,099				783,497
Total		$	5,208,182			$	778,131			$	-			$	1,230,105			$	15,431,658			$	1,553,817
Annualized $ per Rented Sq. Ft.
2015		$	24			$	8				-			$	76			$	22			$	93
2016		$	33			$	9				-			$	84			$	32			$	102
2017		$	35			$	9				-			$	88			$	34			$	107

 

Recent Developments

 

On February 16, 2016, our wholly-owned subsidiary, Chino Valley entered into a letter of intent (the “Chino Valley LOI”) with C3C3 Group, LLC (the “Tenant”) and Broken Arrow Herbal Center, Inc. (“Broken Arrow”). Each of the Tenant and Broken Arrow are owned by a significant stockholder of the Company. Pursuant to the terms of the Chino Valley LOI, the parties agreed to amend the existing lease agreement, dated August 6, 2015, to provide for the lease by Chino Valley to Tenant of approximately 45,000 square feet of space in Chino Valley, Arizona. The monthly rent due, pursuant to the terms of the Chino Valley LOI, will increase monthly; however, the increased rental revenue will be contingent upon the completion of the constructed expansion at the facility. In subsequent years beginning August 1, 2017, there will be a 5% annual increase in the monthly rent. The parties identified a budget of $2,000,000 for developing the property and constructing the tenant improvements. As of June 30, 2016, the existing lease agreement has not been amended. Through June 30, 2016, capitalized construction in progress costs related to the China Valley LOI amounted to $388,200. The Chino Valley LOI and the Amendment to the lease agreement shall be contingent upon: (a) the Company obtaining financing for the development of the premises and the construction of the tenant improvements in such amount and on such terms and provisions as are acceptable to the Company in our sole and absolute discretion from a lender approved by us in our sole discretion, and (b) approval by the Town of Chino Valley of the Phased Protected Development Rights Plan. As of June 30, 2016, the Town of Chino Valley has granted the Company a five year Phased Protected Development Rights Plan for the Chino Valley Property with an option to extend for an additional two year term. In the event that the contingencies have not been satisfied, this LOI shall terminate, and all of the deposits, except for $100, shall be returned to Tenant.

 

 

On March 15, 2016, the Company entered into a letter of intent (the “Catalina Partners LOI”) with Catalina Partners III LLC (“Catalina Partners”) and Catalina Hills Botanical Care, Inc. (“Catalina Hills”) pursuant to which the parties agreed to work together in good faith to mutually agree on the terms of a lease agreement to be entered into by the parties. The Catalina Partners LOI and execution of the lease agreement were subject to certain contingencies, including acquisition by the Company of written approval of all due diligence and underwriting matters required by the Company and/or the Company’s lender, that the Company must have obtained commercially reasonable financing for the development of the premises and the construction of certain improvements, acquisition of necessary zoning and land use entitlements, and Catalina Partners’ obtaining necessary government approval to operate the premises as a medical marijuana cultivation and production facility (collectively, the “Contingencies”). The parties also agreed that in the event the Contingencies were not mutually satisfied on or before the date that is 90 days after execution of the Catalina Partners LOI, the Catalina Partners LOI would terminate. Because the 90-day period expired on June 18, 2016 and all of the Contingencies were not satisfied, the Catalina Partners LOI terminated effective June 18, 2016.

 

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 (Commercial) (the “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 Agreement, the parties will cooperate in good faith to complete due diligence during a period of 45 days following execution of the 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 Agreement, Zoned Colorado will have a right of first refusal on eleven additional lots owned by Seller in Parachute, Colorado. In April 2016, we paid a refundable deposit of $45,000 into escrow in connection with the Agreement. As of June 30, 2016, the Company and Seller are still cooperating to complete the purchase.

 

Results of Operations

 

The following comparative analysis of results of operations was based primarily on the comparative unaudited condensed consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited consolidated financial statements and the notes to those statements for the six months ended June 30, 2016 and 2015, which are included elsewhere in this quarterly report on Form 10-Q.

 

Comparison of Results of Operations for the Three and Six Months Ended June 30, 2016 and 2015

 

Revenues

 

For the three and six months ended June 30, 2016 and 2015, revenues consisted of the following:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Rent revenues		$	58,200			$	84,843			$	119,080			$	167,018
Rent revenues – related parties			345,476				202,858				691,002				347,969
Total revenues		$	403,676			$	287,701			$	810,082			$	514,987

 

For the three months ended June 30, 2016, total revenues amounted to $403,676, including related party revenues of $345,476, as compared to $287,701, including related party revenues of $202,858, for the three months ended June 30, 2015, an increase of $115,975 or 40.3%. For the six months ended June 30, 2016, total revenues amounted to $810,082, including related party revenues of $691,002, as compared to $514,987, including related party revenues of $347,969, for the six months ended June 30, 2015, an increase of $295,095 or 57.3%. In March 2014, we began recording revenue from the leases of our properties. In August 2015, in connection with a settlement agreement, we received our Chino Valley property in exchange for our New Mexico property resulting in a net increase in rent revenues – related parties of approximately $108,000 and $275,000 for the three and six months ended June 30, 2016, respectively.

 

 

Operating expenses

 

For the three months ended June 30, 2016, operating expenses amounted to $519,663 as compared to $847,409 for the six months ended June 30, 2015, representing a decrease of $327,746 or 38.9%. For the six months ended June 30, 2016, operating expenses amounted to $1,105,849 as compared to $1,202,671 for the six months ended June 30, 2015, representing a decrease of $96,822 or 8.1%. For the three and six months ended June 30, 2016 and 2015, operating expenses consisted of the following:

 

		Three Months ended June 30,								Six Months ended June 30,
		2016				2015				2016				2015
Compensation and benefits		$	93,561			$	111,238			$	273,385			$	178,164
Professional fees			205,678				520,048				482,200				641,053
General and administrative expenses			54,522				66,958				106,143				129,129
Depreciation and amortization			41,673				37,276				82,771				74,462
Property operating expenses			15,568				24,591				31,028				39,148
Real estate taxes			21,161				13,198				42,822				27,865
Consulting fees - related parties			-				24,100				-				45,350
Settlement expense			87,500				50,000				87,500				67,500
Total operating expenses		$	519,663			$	847,409			$	1,105,849			$	1,202,671

 

●

For the three months ended June 30, 2016, compensation and benefit expense decreased by $17,677 or 15.9% as compared to the three months ended June 30, 2015. For the six months ended June 30, 2016, compensation and benefit expense increased by $95,221 or 53.5% as compared to the six months ended June 30, 2015. The fluctuations were primarily attributable to the following:

 

	1.	During the three months ended June 30, 2016, we recorded stock-based compensation of $36,797 as compared to $58,303 for the comparable 2015 period, a decrease of $21,505 or 54.2%. This decrease was related to a decrease in the accretion of stock option expense in the 2016 period of $26,530 offset by an increase in stock-based compensation related to the issuance of shares to the Company’s directors and chief financial officer of $10,267. During the six months ended June 30, 2016, we recorded stock-based compensation of $136,126 as compared to $88,303 for the comparable 2015 period, an increase of $47,823 or 54.2%. The increase was related to the accretion of stock option expense in 2016 of $33,544, an increase in stock-based compensation related to the issuance of shares to the Company’s directors and chief financial officer of $77,223, offset by the reversal of stock-based compensation of $62,944 related to the cancellation of unvested stock options.

2.

During the three and six months ended June 30, 2016, we incurred additional compensation and benefit expense as compared to the comparable 2015 period related to the hiring of our chief operating officer and chief financial officer of approximately $3,828 and $47,000, respectively.

	●	For the three and six months ended June 30, 2016, professional fees decreased by $314,370, or 60.4%, and $158,853, or 24.8%, as compared to the three and six months ended June 30, 2015, respectively. For the three and six months ended June 30, 2016, the decrease was primarily attributable to a decrease in legal fees of $65,033 and $54,297 attributable to a decrease in activities related to real estate and other legal matters, a decrease in consulting fees of $190,638 and $78,738 related to a decrease in accretion of stock-based consulting expense from the granting of stock options to a consultant, a decrease in other consulting expense of $27,501 and $56,650, and a decrease in other professional fees of $49,882 and $47,688 , offset by an increase in public relations fees incurred of $18,684 and $78,520, respectively. We used consultants to assist us with introductions to potential business partners and customers, to help us with public relations services, including helping us find market makers, broker-dealers, and sources of capital, advise us on construction of indoor, outdoor and greenhouse agricultural systems, assist us with agricultural licensing and zoning, and assist with development of business modeling, market development and advice concerning equity and debt financings.
	●	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 and six months ended June 30, 2016, general and administrative expenses decreased by $12,436 or 18.6%, and $22,986 or 17.8%, as compared to the three and six months ended June 30, 2015. These decreases were primarily attributable to a decrease in in these expenses due to cost cutting measures.

 

 

	●	For the three and six months ended June 30, 2016, depreciation and amortization expense increased by $4,397 and $8,309, as compared to the comparable period in 2015, respectively, 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 and six months ended June 30, 2016, property operating expenses decreased by $9,023 or 36.7%, and $8,120 or 20.7%, as compared to the comparable period in 2015, respectively. In the third quarter of 2015, we terminated the use of a management company and now we manage all of the properties.
	●	For the three and six months ended June 30, 2016, real estate taxes increased by $7,963 or 60.3%, and $14,957 or 53.7%, as compared to the comparable 2015 period, respectively. In August 2015, we acquired additional rental properties and began incurring such taxes.
	●	For the three and six months ended June 30, 2016, consulting fees – related parties amounted to zero and zero as compared to $24,100 and $45,350 for the three and six months ended June 30, 2015, respectively. Beginning in August 2014, we incurred consulting fees in connection with a consulting agreement with a related party. In August 2015, this agreement was terminated.
	●	For the three months ended June 30, 2016, settlement expense amounted to $87,500 as compared to $50,000 for the three months ended June 30, 2015. For the six months ended June 30, 2016, settlement expense amounted to $87,500 as compared to $67,500 for the six months ended June 30, 2015. During 2016 and 2015, we settled certain litigation and claims.

 

Loss from operations

 

As a result of the factors described above, for the three months ended June 30, 2016, our loss from operations amounted to $115,987 as compared to $559,708 for the three months ended June 30, 2015, representing a decrease of $443,721 or 79.3%. Additionally, for the six months ended June 30, 2016, our loss from operations amounted to $295,767 as compared to $687,684 for the six months ended June 30, 2015, representing a decrease of $391,917 or 57.0%.

 

Other income (expenses)

 

Other expenses include interest expense and other income. For the three months ended June 30, 2016, total other expenses, net amounted to $56,873 as compared to $54,137, representing an increase of $2,736 or 5.0%. For the six months ended June 30, 2016, total other expenses, net amounted to $113,746 as compared to $110,727, representing an increase of $3,019 or 2.7%. These increases were attributable to an increase in interest income of $2,736 and $3,019, respectively.

 

Net loss

 

As a result of the foregoing, for the three months ended June 30, 2016 and 2015, net loss amounted to $172,860, or $0.01 per common share, and $613,845, or $0.03 per common share, respectively. For the six months ended June 30, 2016 and 2015, net loss amounted to $409,513, or $0.02 per common share, and $798,411, or $0.04 per common share, respectively.

 

Liquidity and Capital Resources

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for ongoing operations. We had cash of $816,640 and $1,281,464 as of June 30, 2016 and December 31, 2015, respectively.

 

Our primary uses of cash have been for salaries, fees paid for professional services such as legal fees, accounting fees and other professional fees, property operating expenses, general and administrative expenses, and for the acquisition and development of our 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 currently have material commitments for capital expenditures amounting to approximately $5,000,000 for the expansion and buildout of our Chino Valley and Tempe properties and acquisition of new rental properties. These capital expenditures are contingent upon: (a) the Company obtaining financing for the development of the premises and the construction of the tenant improvements in such amount and on such terms and provisions as are acceptable to the Company in our sole and absolute discretion from a lender approved by us in our sole discretion, and (b) approval by the Town of Chino Valley of the Phased Protected Development Rights Plan. Accordingly, we can delay or cancel these planned capital expenditures, if necessary. As of the date of this report, we have not obtained any financing and are using work capital for development of our properties,

 

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. Other than revenue received from the lease of our rental properties, funds received from the sale of our common stock 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 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.

 

Our future operation is dependent on our ability to manage our current cash balances and on the collection of rental revenues. We intend on securing 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, 2016 and 2015

 

Net cash flow used by operating activities was $13,160 for the six months ended June 30, 2016 as compared to $205,890 for the six months ended June 30, 2015, representing a decrease in cash used in operations of $192,730.

 

	●	Net cash flow used in operating activities for the six months ended June 30, 2016 primarily reflected a net loss of $409,513 adjusted for the add-back of non-cash items consisting of depreciation and amortization of $82,771, stock-based compensation expense of $205,575, net accretion of stock-based stock option expense of $162,071, loss from sale of property and equipment of $1,843, and a non-cash increase in deferred rent receivables of $247,223, and changes in operating assets and liabilities primarily consisting of a decrease in prepaid expenses of $39,149, offset by a decrease in real estate tax escrow of $50,517, an increase in accounts payable of $75,165, an increase in accrued expenses of $70,010, an increase in accrued expenses – related parties of $11,500, and an increase in security deposits payable of $23,273.
	●	Net cash flow used in operating activities for the six months ended June 30, 2015 primarily reflected a net loss of $798,411 adjusted for the add-back of non-cash items consisting of depreciation and amortization of $74,462, stock-based compensation expense of $45,000, accretion of stock-based stock option expense of $313,511, stock-based settlement expense of $50,000, and a non-cash increase in deferred rent receivables of $47,024, and changes in operating assets and liabilities primarily consisting of a decrease in prepaid expenses and other assets of $26,189, an increase in accounts payable of $51,859, an increase in accrued expenses of $17,799, and an increase in accrued expenses – related parties of $63,000.

 

Net cash flow used in investing activities reflects the purchase of property and equipment, and rental properties that primarily consists of buildings, improvements and construction in progress of $451,664 and $6,961 for the six months ended June 30, 2016 and 2015, respectively.

 

Net cash flows from financing activities was zero for the six months ended June 30, 2016 as compared to net cash provided by financing activities $997,750 for the six months ended June 30, 2015 which consisted of the sale of common stock of $1,000,000 offset by the redemption of common stock of $2,250.

 

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual Obligations

 

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of June 30, 2016 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 

		Payments Due by Period
Contractual obligations:		Total				Less than 1 year				1-3 years				3-5 years				5 + years
Convertible notes		$	1,000			$	-			$	1,000			$	-			$	-
Interest on convertible notes			146				135				11				-				-
Mortgage payable			2,100				-				2,100				-				-
Interest on mortgage payable			424				157				267				-				-
Total		$	3,670			$	292			$	3,378			$	-			$	-

 

Off-balance Sheet Arrangements

 

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

 

Critical Accounting Policies

 

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 7 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. We record acquired intangible assets (including acquired above-market leases and acquired in-place leases) and acquired intangible liabilities (including below-market leases) at their estimated fair value. We amortize acquired above-and below-market leases as a decrease or increase to rental income, respectively, over the lives of the respective leases. Amortization of acquired in-place leases is included as a component of depreciation and amortization.

 

 

Our properties, including any related intangible assets, 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. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.

 

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

 

Revenue recognition

 

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 steps and 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. Rental income also includes the amortization of acquired above-and below-market leases, net. Beginning in 2014, we began generating revenues from the non-residential rental properties.

 

Certain of our leases currently contain rental increases at specified intervals. We record as an asset, and include 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. Deferred rents receivable in the accompanying balance sheets includes the cumulative difference between rental revenue recorded on a straight-line basis and rents received from the tenants in accordance with the lease terms. Accordingly, management determines to what extent the deferred rent receivable applicable to each specific tenant is collectible. We review material rents receivable and takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of rent receivable with respect to any given tenant is in doubt, we record an increase in the allowance for uncollectible accounts or we record a direct write-off of the specific rent receivable. For the six months ended June 30, 2015, in connection with certain related party leases, we only included in revenues the amount of rents received from the related parties in accordance with the lease terms since on August 1, 2015, we transferred title to its Bernalillo, New Mexico and the respective related party lease as part of a settlement agreement.

 

Stock-based compensation

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 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.

 

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the service period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. We initially record compensation expense based on the fair value of the award at the reporting date.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an update to Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 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. ASU 2014-09 requires an entity to recognize revenue when it transfers 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. ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

 

 

In August 2014, FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, which will require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management will assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations within one year after the issuance date. The new standard defines substantial doubt and provides example indicators. Disclosures will be required if conditions give rise to substantial doubt. However, management will need to assess if its plans will alleviate substantial doubt to determine the specific disclosures. This standard is effective for public entities for annual periods ending after December 15, 2016. Earlier application of this standard is permitted. This standard is not expected to have a material effect on our financial position, results of operations and cash flows.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The ASU simplifies the current guidance in ASC Topic 740, Income Taxes, which requires entities to separately present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. We do not expect the impact of ASU 2015-17 to be material to our consolidated financial statements.

 

On January 5, 2016, the FASB issued ASU No. 2016-01 to amend the accounting guidance on the classification and measurement of financial instruments. The standard requires that all investments in equity securities, including other ownership interests, are carried at fair value through net income. This requirement does not apply to investments that qualify for equity method accounting or to those that result in consolidation of the investee or for which the entity has elected the predictability exception to fair value measurement. Additionally, the standard requires that the portion of the total fair value change caused by a change in instrument-specific credit risk for financial liabilities for which the fair value option has been elected would be recognized in other comprehensive income. Any accumulated amount remaining in other comprehensive income is reclassified to earnings when the liability is extinguished. We do not anticipate the guidance to have a material impact on our consolidated financial statements or notes to our consolidated financial statements.

 

On February 25, 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”) to amend the accounting guidance for leases. The accounting applied by a lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease assets and lease liabilities for leases classified as operating leases on the balance sheet. Lessees will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. We are currently assessing the impact of the guidance on our consolidated financial statements and notes to our consolidated financial statements.

 

On March 30, 2016, the FASB issued ASU No. 2016-09 (“ASU 2016-09”) to amend the accounting guidance for share-based payment accounting. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016

 

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

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable to smaller reporting companies.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

We maintain “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e), promulgated by the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated our company’s disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of June 30, 2016, our disclosure controls and procedures were not effective.

 

 

The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses identified in the Company’s internal control over financial reporting: (1) the lack of multiples levels of management review on complex accounting, financial reporting, and business issues, (2) a lack of adequate segregation of duties, (3) a lack of approvals on material real estate acquisitions and disbursements, and (4) we do not have an independent audit committee. Until such time as we expand our staff to include additional personnel, 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 three months ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Healing Healthcare 3, Inc.; Xingang, LLC v. v. Zoned Properties, Inc., et al.; Court Filed: Maricopa County Superior Court, Arizona; Case Number: CV2015-012264; Date Filed: October 21, 2015..

 

On October 21, 2015, Healing Healthcare 3, Inc. (“HH3”) and Xingang, LLC filed a complaint against the Company, President and CEO Bryan McLaren, Board member Alex McLaren, and wholly-owned subsidiary Tempe Industrial Properties, LLC, among others. The complaint concerned the Company’s lease of space in Tempe, Arizona to operate a medical marijuana cultivation site. HH3 and Xingang claim that the Company and its related parties violated the terms of the lease for various reasons. On May 23, 2014, the Company concluded that the lease had been breached, and terminated the lease and retook possession of the property. Plaintiffs asserted various contract and tort claims against the Company and its related parties, and seeks $10,000 per day “for each day that the Company remained in possession of the Tempe Property in violation of the Lease,” attorneys’ fees and costs, treble damages, punitive damages, and interest. The complaint was served on the Company and its related parties on February 17, 2016. On March 8, 2016, the Company, Bryan McLaren, Alex McLaren, and TIP (the “Moving Parties”) filed a motion to dismiss the claims asserted against them in the complaint, with prejudice, on various grounds. On April 14, 2016, the court granted in part, and denied in part, the motion to dismiss. In sum, the court granted the dismissal of the contract claims against the McLarens without leave to amend; denied the dismissal of the two contract claims against the Company and TIP; and granted the dismissal of the remaining tort claims, subject to leave to amend the complaint within 20 days of the order. On May 5, 2016 HH# and Xingang filed an amended complaint with new fact allegations, reasserting the claims that had survived the motion to dismiss. A motion to dismiss the amended complaint was filed on behalf of the Company, Bryan McLaren, and TIP. The motion was fully-briefed, and by order dated July 8, 2016, the Court granted the motion to dismiss the claims asserted by Xingang but denied the rest of the motion. The Company, Bryan McLaren, and TIP filed their answer to the amended complaint on July 27, 2016.

 

In a letter dated February 4, 2016, the Company’s former Chief Operating Officer (“COO”), through legal counsel, made a written demand on the Company related to her resignation on December 29, 2015. In her letter, the COO alleges, among other things, that we refused to establish a bonus program for the COO as had been represented to her before she joined the Company, that she was not allowed to perform her duties, and that she was subject to “mistreatment” by the Chief Executive Officer. The COO has demanded $500,000 to settle her purported claims. On February 18, 2016, the Company responded to the COO’s written demand, denied all liability, and offered an additional one-month of severance pay (approximately $8,350) in exchange for a full release to settle the dispute. On March 29, 2016, Ms. Haugland rejected the Company’s settlement offer without making a counter-offer, and proposed that the parties participate in mediation. On April 8, 2016, the Company rejected Ms. Haugland’s proposal for mediation, and re-urged its original settlement offer. Ms. Haugland’s deadline to respond was April 15, 2016. As of the date of this report, no response has been received by Ms. Haugland.

 

In a letter dated April 4, 2016, a shareholder of the Company, a shareholder, through legal counsel, made a demand on the Company related to a certain reverse-stock split that occurred following changes in the composition of the Company’s officers and directors in 2014. In its letter, the shareholder alleged, among other things, that: the reverse-stock split was designed to dilute existing Company interests of existing shareholders and to further entrench new management’s control over the Company. This shareholder demanded that the board of directors bring a legal action against certain officers and directors and against the Company’s transfer agent for various alleged violations of federal and state law. This shareholder indicated its intent to file a putative shareholder derivative action if its demand were not accepted. The Company evaluated this shareholders demand and engaged in settlement talks for several weeks. On July 15, 2016, the parties entered into a Confidential Settlement Agreement and Mutual Release (the “Settlement Agreement”), whereby the Company will issue an aggregate of 50,000 shares of its common stock as follows: (a) 12,500 shares were issued within three days from execution of this Settlement Agreement, (b) 12,500 shall be issued on September 30, 2016, (c) 12,500 shares shall be issued on December 30, 2016, and (d) 12,500 shares shall be issued on March 31, 2017.

 

 

In a letter dated May 10, 2016, Marc Brannigan, the Company’s former CEO, and related parties (collectively “Brannigan”) sent a demand letter, through counsel, to the Company and certain other third-parties, claiming, among other things, that the Company improperly diluted Brannigan’s equity in the Company. Brannigan demands that the Company issue shares to “reverse” the dilution, invalidate shares improperly issued by the Company, pay unspecified damages, recover one-third of all Company shares owned by Alan Abrams and Chris Carra, and recover Brannigan’s purported majority ownership and voting control of the Company. The Company has evaluated Brannigan’s purported claims, and intends to vigorously defend against such claim. A mediation involving all interested parties occurred on July 29, 2016 and was unsuccessful.

 

Item 1A. Risk Factors

 

Not required of smaller reporting companies

 

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

 

Date

Name of Person or Entity

Nature of Each Offering

Number of shares offered

Price shares were offered

Amount paid to the Issuer

Trading Status of the shares

Legend

4/1/2016

CFO Oncall, Inc.

Section 4(a)(2)

3,750

$

5.34

For Services

Restricted

Yes

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit No.		Description
10.1		Contract to Buy and Sell Real Estate (Commercial) entered into on April 21, 2016 between Zoned Colorado Properties, LLC and Parachute Development Corporation (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the Commission on April 22, 2016).
10.2		Binding Letter of Intent entered into on May 17, 2016 between Zoned Colorado Properties, LLC, American Green, Inc. and Herbal Elements, LLC (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the Commission on May 19, 2016).
31.1*		Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer
31.2*		Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer
32.1*		Section 1350 Certificate 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.

 

 

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 15, 2016	/s/ Bryan McLaren
	Bryan McLaren
	Chief Executive Officer and President
	(principal executive officer)
Date: August 15, 2016	/s/ Adam Wasserman
	Adam Wasserman Chief Financial Officer (principal financial officer and principal accounting officer)

 

 

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