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EX-32.1 - CERTIFICATION - Zoned Properties, Inc.f10q0620ex32-1_zoned.htm
EX-31.2 - CERTIFICATION - Zoned Properties, Inc.f10q0620ex31-2_zoned.htm
EX-31.1 - CERTIFICATION - Zoned Properties, Inc.f10q0620ex31-1_zoned.htm

 

 

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, 2020

 

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

COMMISSION FILE NO. 000-51640

 

 

ZONED PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   46-5198242
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
14269 N. 87th Street, #205, Scottsdale, AZ   85260
(Address of principal executive offices)   (Zip Code)

 

(877) 360-8839

(Registrant’s telephone number, including area code)

 

 

Former name, former address and former fiscal year, if changed since last report: Not applicable.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
N/A   N/A   N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

 

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

 

Large accelerated filer ☐   Accelerated filer ☐ 
Non-accelerated filer   ☒ Smaller reporting company ☒ Emerging growth company  ☐ 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

 

As of August 13, 2020, the registrant had 12,011,548 shares of common stock, par value $0.001 per share, issued and outstanding.

 

 

 

 

 

 

ZONED PROPERTIES, INC.

Form 10-Q

June 30, 2020

 

INDEX

 

  Page
Part I. Financial Information  
   
Item 1. Financial Statements 1
   
Condensed Consolidated Balance Sheets – June 30, 2020 and December 31, 2019 (unaudited) 1
   
Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 2020 and 2019 (unaudited) 2
   
Condensed Consolidated Statements of Changes in Stockholders’ Equity – Three and Six Months Ended June 30, 2020 and 2019 (unaudited) 3
   
Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2020 and 2019 (unaudited) 4
   
Notes to Unaudited Condensed Consolidated Financial Statements 5
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
   
Item 4. Controls and Procedures 29
   
Part II. Other Information 30
   
Item 1. Legal Proceedings 30
   
Item 1A. Risk Factors 30
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
   
Item 3. Defaults Upon Senior Securities 30
   
Item 4. Mine Safety Disclosures 30
   
Item 5. Other Information 30
   
Item 6. Exhibits 30
   
Signatures 31

 

i

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   June 30,   December 31, 
   2020   2019 
         
ASSETS        
Cash  $602,448   $639,781 
Accounts receivable   9,420    8,188 
Deferred rent receivable   88,750    - 
Rental properties, net   7,206,034    7,374,807 
Prepaid expenses and other assets   61,195    113,592 
Convertible note receivable   100,000    - 
Property and equipment, net   18,949    22,035 
Security deposits   1,100    1,100 
           
Total Assets  $8,087,896   $8,159,503 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
LIABILITIES:          
Convertible note payable  $2,000,000   $2,000,000 
Convertible note payable - related party   20,000    20,000 
Accounts payable   8,152    - 
Accrued expenses   90,911    94,641 
Accrued expenses - related party   3,600    3,000 
Deferred revenues   1,250    1,750 
Security deposits payable   71,800    74,468 
           
Total Liabilities   2,195,713    2,193,859 
           
Commitments and Contingencies          
           
STOCKHOLDERS’ EQUITY:          
Preferred stock, $0.001 par value, 5,000,000 shares authorized; 2,000,000 shares issued and outstanding at June 30, 2020 and December 31, 2019 ($1.00 per share liquidation preference)   2,000    2,000 
Common stock: $0.001 par value, 100,000,000 shares authorized; 12,011,548 and 11,901,548 issued and outstanding at June 30, 2020 and December 31, 2019, respectively   12,012    11,902 
Additional paid-in capital   20,848,578    20,806,452 
Accumulated deficit   (14,970,407)   (14,854,710)
           
Total Stockholders’ Equity   5,892,183    5,965,644 
           
Total Liabilities and Stockholders’ Equity  $8,087,896   $8,159,503 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

1

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
                 
REVENUES:                
Rental revenues  $272,216   $278,214   $548,710   $555,950 
Advisory revenues   27,608    46,227    54,983    46,227 
                     
Total revenues   299,824    324,441    603,693    602,177 
                     
OPERATING EXPENSES:                    
Compensation and benefits   87,751    86,898    218,265    208,967 
Professional fees   42,497    51,431    113,910    134,909 
General and administrative expenses   48,018    32,916    105,114    76,518 
Depreciation and amortization   90,841    90,498    181,425    181,056 
Real estate taxes   20,964    22,720    41,928    45,440 
                     
Total operating expenses   290,071    284,463    660,642    646,890 
                     
INCOME (LOSS) FROM OPERATIONS   9,753    39,978    (56,949)   (44,713)
                     
OTHER (EXPENSES) INCOME:                    
Interest expenses   (30,000)   (30,000)   (60,000)   (60,000)
Interest expenses - related party   (300)   (300)   (600)   (600)
Other income   -    -    -    108,204 
Interest income   1,620    -    1,852    - 
                     
Total other (expenses) income, net   (28,680)   (30,300)   (58,748)   47,604 
                     
(LOSS) INCOME BEFORE INCOME TAXES   (18,927)   9,678    (115,697)   2,891 
                     
PROVISION FOR INCOME TAXES   -    -    -    - 
                     
NET (LOSS) INCOME  $(18,927)  $9,678   $(115,697)  $2,891 
                     
NET (LOSS) INCOME PER COMMON SHARE:                    
Basic  $(0.00)  $0.00   $(0.01)  $0.00 
Diluted  $(0.00)  $0.00   $(0.01)  $0.00 
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                    
Basic   12,011,548    11,901,548    12,007,922    11,924,973 
Diluted   12,011,548    11,901,548    12,007,922    11,924,973 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

2

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(Unaudited)

 

   Preferred Stock   Common Stock   Additional       Total 
   # of
Shares
   Amount   # of
Shares
   Amount   Paid-in
Capital
   Accumulated
Deficit
   Stockholders’
Equity
 
                             
Balance, December 31, 2018   2,000,000   $2,000    17,441,552   $17,442   $20,746,200   $(14,842,429)  $5,923,213 
                                    
Stock redemption and cencellation   -    -    (5,640,004)   (5,640)   5,640    -    - 
                                    
Common stock issued for services   -    -    100,000    100    31,000    -    31,100 
                                    
Accretion of stock based compensation related to stock options issued   -    -    -    -    5,903    -    5,903 
                                    
Net loss   -    -    -    -    -    (6,787)   (6,787)
                                    
Balance, March 31, 2019   2,000,000    2,000    11,901,548    11,902    20,788,743    (14,849,216)   5,953,429 
                                    
Accretion of stock based compensation related to stock options issued   -    -    -    -    5,903    -    5,903 
                                    
Net income   -    -    -    -    -    9,678    9,678 
                                    
Balance, June 30, 2019   2,000,000   $2,000    11,901,548   $11,902   $20,794,646   $(14,839,538)  $5,969,010 
                             
   Preferred Stock   Common Stock   Additional       Total 
   # of
Shares
   Amount   # of
Shares
   Amount   Paid-in
Capital
   Accumulated
Deficit
   Stockholders’
Equity
 
                             
Balance, December 31, 2019   2,000,000   $2,000    11,901,548   $11,902   $20,806,452   $(14,854,710)  $5,965,644 
                                    
Common stock issued for services   -    -    110,000    110    24,090    -    24,200 
                                    
Accretion of stock based compensation related to stock options issued   -    -    -    -    12,292    -    12,292 
                                    
Net loss   -    -    -    -    -    (96,770)   (96,770)
                                    
Balance, March 31, 2020   2,000,000    2,000    12,011,548    12,012    20,842,834    (14,951,480)   5,905,366 
                                    
Accretion of stock based compensation related to stock options issued   -    -    -    -    5,744    -    5,744 
                                    
Net loss   -    -    -    -    -    (18,927)   (18,927)
                                    
Balance, June 30, 2020   2,000,000   $2,000    12,011,548   $12,012   $20,848,578   $(14,970,407)  $5,892,183 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Six Months Ended 
   June 30, 
   2020   2019 
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net (loss) income  $(115,697)  $2,891 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:          
Depreciation expense   181,424    181,056 
Stock-based compensation   24,200    31,100 
Stock option expense   18,036    11,806 
Change in operating assets and liabilities:          
Accounts receivable   (1,232)   (30,017)
Deferred rent receivable   (88,750)     
Prepaid expenses and other assets   52,397    41,974 
Accounts payable   8,152    (106,994)
Accrued expenses   (3,730)   10,746 
Accrued expenses - related parties   600    600 
Deferred revenues   (500)   (500)
Security deposits payable   (2,668)   - 
           
NET CASH PROVIDED BY OPERATING ACTIVITIES   72,232    142,662 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of convertible note receivable   (100,000)   - 
Purrchase of rental property improvements   (9,565)   - 
           
NET CASH USED IN INVESTING ACTIVITIES   (109,565)   - 
           
NET (DECREASE) INCREASE IN CASH   (37,333)   142,662 
           
CASH, beginning of period   639,781    354,867 
           
CASH, end of period  $602,448   $497,529 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Interest paid  $60,000   $60,000 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Reclassification of convertible note payable - related party to convertible note payable  $-   $2,000,000 
Reclassification of security deposits - related party to security deposits  $-   $71,800 
Reclassification of accrued expenses - related party to accrued expenses  $-   $33,000 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

 

Organization

 

Zoned Properties, Inc. (“Zoned Properties” or the “Company”), was incorporated in the State of Nevada on August 25, 2003. The Company is a strategic real estate development firm whose primary mission is to provide real estate and sustainability services for clients in the regulated cannabis industry, positioning the company for real estate acquisitions and revenue growth. The Company intends to pioneer sustainable development for emerging industries, including the regulated cannabis industry. The Company is an accredited member of the Better Business Bureau, the U.S. Green Building Council, and the Forbes Real Estate Council. The Company focuses on investing capital to acquire and develop commercial properties to be leased on a triple-net basis, and engaging clients that face zoning, permitting, development, and operational challenges. The Company provides development strategies and advisory services that could potentially have a major impact on cash flow and property value. The Company does not grow, harvest, sell or distribute cannabis or any substances regulated under United States law such as the Controlled Substance Act of 1970, as amended (the “CSA”).

 

The Company has the following wholly owned subsidiaries:

 

Gilbert Property Management, LLC (“Gilbert”) was organized in the State of Arizona on February 10, 2014.

 

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

 

Kingman Property Group, LLC (“Kingman”) was organized in the State of Arizona on April 15, 2014.

 

Green Valley Group, LLC (“Green Valley”) organized in the State of Arizona on April 15, 2014.

 

Zoned Oregon Properties, LLC was organized in the State of Oregon on June 16, 2015.

 

Zoned Colorado Properties, LLC (“Zoned Colorado”) was organized in the State of Colorado on September 17, 2015.

 

Zoned Illinois Properties, LLC was organized in the State of Illinois on July 15, 2015.

 

Zoned Arizona Properties, LLC (“Zoned Arizona”) was organized in the State of Arizona on June 2, 2017.

 

Zoned Advisory Services, LLC (“Zoned Advisory”) was organized in the State of Arizona on July 27, 2018.

 

In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. The Company is monitoring this closely, and although operations have not been materially affected by the COVID-19 outbreak to date, the ultimate duration and severity of the outbreak and its impact on the economic environment and our business is uncertain. As of August 13, 2020, all of the properties in the Company’s portfolio are open to its Significant Tenants and their customers and will remain open pursuant to state and local government requirements. At this time, the Company does not foresee any material changes to its operations from COVID-19. The Company’s tenants are continuing to generate revenue at these properties and they have continued to make rental payments in full and on time and we believe the tenants’ liquidity position is sufficient to cover its expected rental obligations. Accordingly, while the Company does not anticipate an impact on its operations, it cannot estimate the duration of the pandemic and potential impact on its business if the properties must close or if the tenants are otherwise unable or unwilling to make rental payments. In addition, a severe or prolonged economic downturn could result in a variety of risks to the Company’s business, including weakened demand for its properties and a decreased ability to raise additional capital when needed on acceptable terms, if at all. At this time, the Company is unable to estimate the impact of this event on its operations.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation and principles of consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.

 

5

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

The unaudited condensed consolidated financial statements for the six months ended June 30, 2020 and 2019 have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, all adjustments necessary to present fairly the consolidated financial position, results of operations, and cash flows as of June 30, 2020 and 2019, and for the periods then ended, have been made. Those adjustments consist of normal and recurring adjustments. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. Accordingly, the condensed consolidated financial statements do not include all the information and notes necessary for a comprehensive presentation of our consolidated financial position and consolidated results of operations and should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2019 included in our Annual Report on form 10-K filed with the SEC on March 26, 2020.

 

Effective January 1, 2019, the Company and certain beneficial shareholders entered into a Stock Redemption Agreement. Pursuant to SEC rules, each of these beneficial shareholders was deemed to be a “related person” due solely to their status as significant stockholders of the Company. Pursuant to the terms of the Stock Redemption Agreement, these beneficial shareholders would no longer be significant stockholders of the Company and are no longer deemed to be “related persons” under SEC rules. Accordingly, as of January 1, 2019, the Company no longer reflects transactions and balances related to these beneficial shareholders as related party transactions.

 

Use of estimates

 

The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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, 2020 and 2019 include the collectability of accounts receivable, the useful life of rental properties and property and equipment, assumptions used in assessing impairment of long-term assets, valuation allowances for deferred tax assets, and the fair value of non-cash equity transactions, including options and stock-based compensation.

 

Risks and uncertainties

 

The Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure. The Company conducts a significant portion of its business in Arizona. Additionally, the Company’s tenants operate in the medical marijuana industry. Consequently, any significant economic downturn in the Arizona market or any changes in the federal government’s enforcement of current federal laws or changes in state laws could potentially have a negative effect on the Company’s business, results of operations and financial condition. Additionally, substantially all of the Company’s real estate properties are leased under triple-net leases to tenants that are controlled by one entity (each, a “Significant Tenant” and collectively, the “Significant Tenants”). For the six months ended June 30, 2020 and 2019, rental and advisory revenue associated with the Significant Tenants amounted to $492,196 and $556,335, which represents 95.6% and 92.4% of the Company’s total revenues, respectively (see Note 3).

 

Fair value of financial instruments

 

The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses, and other payables approximate their fair market value based on the short-term maturity of these instruments.

 

The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (the “FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with Accounting Standards Codification (“ASC”) Topic 820.

 

Cash

 

Cash is carried at cost and represents cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments. The Company had no cash equivalents at June 30, 2020 and December 31, 2019. The majority of the Company’s cash is held at major commercial banks, which may at times exceed the Federal Deposit Insurance Corporation (“FDIC”) limit. To date, the Company has not experienced any losses on its invested cash. At June 30, 2020 and December 31, 2019, the Company had approximately $352,000 and $390,000, respectively, of cash in excess of FDIC limits of $250,000.

 

6

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

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. For the six months ended June 30, 2020 and 2019, the Company did not record any allowances for doubtful accounts.

 

Rental properties

 

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

 

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

 

The Company’s rental properties are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property’s carrying amount over its estimated fair value. Impairment analyses are based on our current plans, intended holding periods and available market information at the time the analyses are prepared.

 

If the Company’s estimates of the projected future cash flows, anticipated holding periods, or market conditions change, the Company’s evaluation of impairment losses may be different and such differences could be material to its consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. For the six months ended June 30, 2020 and 2019, the Company did not record any impairment losses.

 

The Company has capitalized land, which is not subject to depreciation.

 

Property and equipment

 

Property and equipment is stated at cost, less accumulated depreciation. Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives. The Company uses a five-year life for office equipment, seven years for furniture and fixtures, and five to ten years for vehicles. Expenditures for maintenance and repairs are charged to expense as incurred. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in statements of operations. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

 

Revenue recognition

 

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 and ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. The Company adopted this standard using the modified retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The adoption of ASU 2014-09 did not have any impact on the process for, timing of, and presentation and disclosure of revenue recognition from contracts with tenants.

 

7

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

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

 

Currently, the Company’s leases provide for payments with fixed monthly base rents over the term of the leases. The leases also require the tenant to remit estimated monthly payments to the Company for property taxes. These payments are recorded as rental income and the related property tax expense reflected separately on the statements of operations.

 

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

 

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

 

Basic and diluted (loss) income per share

 

Basic (loss) income per share is computed by dividing net (loss) income available to common shareholders by the weighted average number of shares of common stock outstanding during each period. Diluted (loss) income per share is computed by dividing net (loss) income available to common shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period using the treasury stock method and as-if converted method. Potentially dilutive common shares and participating securities are excluded from the computation of diluted shares outstanding if they would have an anti-dilutive impact on the Company’s net losses. The Company’s preferred stock is considered a participating security since the preferred shares are entitled to dividends equal to common share dividends and accordingly, are included in the computation of earnings per share pursuant to the two-class method. The two-class method of computing (loss) income per share is an earnings allocation formula that determines (loss) income per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings.

 

The following potentially dilutive shares have been excluded from the calculation of diluted net loss per share as their effect would be anti-dilutive for the three and six months ended June 30, 2020 and 2019.

 

   June 30,
2020
   June 30,
2019
 
Convertible debt   404,000    404,000 
Stock options   1,415,000    1,290,000 

 

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”. 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, 2020 and December 31, 2019 that would require either recognition or disclosure in the accompanying unaudited condensed consolidated financial statements.

 

8

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

Stock-based compensation

 

Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director , or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment.

 

Recently adopted accounting pronouncements

 

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

 

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

 

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

 

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

 

If a change to a pre-existing lease occurs, we evaluate if the modification results in a separate new lease or a modified lease. A new lease results when a modification provides additional right of use. The new lease or modified lease is then reassessed to determine its classification based on the modified terms. As disclosed in Note 3, on January 1, 2019, the Chino Valley lease was modified to increase the monthly base rent from $35,000 to $40,000. Additionally, on May 31, 2020, the Chino Valley lease was modified to decrease the monthly base rent from $40,000 to $32,800 and the Tempe lease was modified to increase the monthly base rent from $33,500 to $49,200. At the commencement of the modified terms, the Company reassessed its lease classification and concluded it remained properly classified as an operating lease.

 

The adoption of ASU 2016-02 did not have a material impact on the operating leases where the Company is a lessor. The Company will continue to record revenues from rental properties for its operating leases on a straight-line basis. Any revenue on the straight-line basis exceeding the monthly payment amount required on the operating lease is reflected as a deferred rent receivable. Effective May 31, 2020, the Company amended its leases for which it is the lessor on its Chino Valley, Tempe, Kingman and Green Valley properties. The amendments resulted in an abatement of rent for the months of June and July 2020. This rent abatement resulted in a deferred rent receivable as of June 30, 2020 of $88,750 (see Note 3).

 

9

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

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

 

Recently issued accounting pronouncements

 

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

 

NOTE 3 – CONCENTRATIONS AND RISKS

 

Lease Agreements with Significant Tenants

 

Chino Valley

 

On May 1, 2018, Chino Valley and Broken Arrow Herbal Center, Inc. (“Broken Arrow”) agreed to terminate the prior Chino Valley Lease dated April 6, 2015, as amended, in consideration of (i) entry into that certain Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Chino Valley and Broken Arrow (the “2018 Chino Valley Lease”), with a term of 22 years, expiring April 30, 2040, and (ii) abatement of rent that would otherwise have been due for the month of April 2018 under the prior Chino Valley Lease. The 2018 Chino Valley Lease provided for payment by Broken Arrow of a fixed monthly base rent of $35,000, as well as real property taxes, personal property taxes, privilege, sales, rental, excise, use and/or other taxes (excluding income or estate taxes) levied upon or assessed against Chino Valley. In addition, pursuant to the terms of the 2018 Chino Valley Lease, Broken Arrow agreed to maintain insurance in full force during the term of the 2018 Chino Valley Lease and any other period of occupancy of the premises by Broken Arrow. On January 1, 2019, Chino Valley and Broken Arrow entered into that the First Amendment to the 2018 Chino Valley Lease (the “2019 Chino Valley Lease Amendment”), pursuant to which the monthly base rent was increased from $35,000 to $40,000. Except for the increase in base rent, the terms of the 2018 Chino Valley Lease remain in full force and effect.

 

On May 29, 2020, Chino Valley and Broken Arrow entered into a second amendment to the 2018 Chino Valley Lease, as amended (the “2020 Chino Valley Amendment”), effective May 31, 2020 (“Effective Date”). Pursuant to the terms of the 2020 Chino Valley Amendment, among other things, the base rent was adjusted to $32,800 per month, and the base rent was abated from June 1, 2020 to July 31, 2020. Any increase in the rentable area of the leased premises will result in an increase in all amounts calculated based on the same, including, without limitation, base rent. Pursuant to the terms of the 2020 Chino Valley Amendment, the parties agreed that if there is any change in laws such that the dispensing, sale or cultivation of marijuana upon the premises is prohibited or materially and adversely affected as mutually and reasonably determined by Chino Valley and Broken Arrow, Broken Arrow may terminate the 2018 Chino Valley Lease, as amended, by delivering written notice to Chino Valley, together with a termination payment which shall be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the balance of the term.

 

In addition, the parties agreed that from the period from the Effective Date to June 30, 2020 (the “Improvement Period”), Broken Arrow will and/or Broken Arrow will cause its affiliate, CJK, to invest a combined total of at least $8,000,000 of improvements (“Investment by Tenants”) in and to the property that is the subject of the Chino Valley Lease and the property that is the subject of the Tempe Lease (discussed below, and collectively referred to as the “Facilities”). If Broken Arrow and/or CJK fails to deliver to the Company receipted bills for hard and soft costs of improvements to the Facilities totaling at least $8,000,000 on or before June 30, 2022, Broken Arrow will be in default under the Chino Valley Lease and Tempe Lease, as amended.

 

Green Valley

 

On May 1, 2018, Green Valley and Broken Arrow agreed to terminate the prior Green Valley Lease dated October 1, 2014, in consideration of (i) entry into that certain Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Green Valley and Broken Arrow (the “Green Valley Lease”), with a term of 22 years, expiring April 30, 2040, and (ii) abatement of rent that would otherwise have been due for the month of April 2018 under the prior Green Valley Lease. The Green Valley Lease provided for payment by Broken Arrow of a fixed monthly base rent of $3,500, as well as real property taxes, personal property taxes, privilege, sales, rental, excise, use and/or other taxes (excluding income or estate taxes) levied upon or assessed against Chino Valley. In addition, pursuant to the terms of the Green Valley Lease, Broken Arrow agreed to maintain insurance in full force during the term of the Green Valley Lease and any other period of occupancy of the premises by Broken Arrow.

 

10

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

On May 29, 2020, Green Valley and Broken Arrow entered into the First Amendment (the “Green Valley Amendment”) to the Green Valley Lease, effective May 31, 2020. Pursuant to the terms of the Green Valley Amendment, among other things, the parties agreed to abate the fixed base rent of $3,500 from June 1, 2020 to July 31, 2020. In addition, the Green Valley Amendment provides that any increase in the rentable area of the leases premises will result in an increase in all amounts calculated based on the same, including, without limitation, base rent. The parties also agreed that if there is any change in laws such that the dispensing, sale or cultivation of marijuana upon the premises is prohibited or materially and adversely affected as mutually and reasonably determined by Green Valley and Broken Arrow, Broken Arrow may terminate the Green Valley Lease by delivering written notice to Green Valley, together with a termination payment which shall be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the balance of the term.

 

Tempe

 

On May 1, 2018, Zoned Arizona and CJK, Inc. (“CJK”) agreed to terminate the prior Tempe Leases dated August 15, 2015, as amended, and June 15, 2017, in consideration of (i) entry into that certain Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Zoned Arizona and CJK (the “Tempe Lease”), with a term of 22 years, expiring April 30, 2040, and (ii) abatement of rent that would otherwise have been due for the month of April 2018 under the prior Tempe Leases. The Tempe Lease provided for payment by CJK of a fixed monthly base rent of $33,500, as well as real property taxes, personal property taxes, privilege, sales, rental, excise, use and/or other taxes (excluding income or estate taxes) levied upon or assessed against Zoned Arizona. In addition, pursuant to the terms of the Tempe Lease, CJK agreed to maintain insurance in full force during the term of the Tempe Lease and any other period of occupancy of the premises by CJK.

 

On May 29, 2020, Zoned Arizona and CJK entered into the First Amendment (the “Tempe Amendment”) to the Tempe Lease, effective May 31, 2020. Pursuant to the terms of the Tempe Amendment, among other things, the base rent was increased to $49,200 per month, and the base rent was abated from June 1, 2020 to July 31, 2020. Any increase in the rentable area of the leased premises will result in an increase in all amounts calculated based on the same, including, without limitation, base rent. Pursuant to the terms of the Tempe Amendment, the parties agreed that if there is any change in laws such that the dispensing, sale or cultivation of marijuana upon the premises is prohibited or materially and adversely affected as mutually and reasonably determined by Zoned Arizona and CJK, CJK may terminate the Tempe Lease by delivering written notice to Zoned Arizona, together with a termination payment which shall be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the balance of the term.

 

In addition, under the Tempe Amendment the parties agreed to an Investment by Tenant (as defined above in the subheading Chino Valley) to the property that is the subject of the Chino Valley Lease and the property that is the subject of the Tempe Lease . If Broken Arrow and/or CJK fails to deliver to the Company receipted bills for hard and soft costs of improvements to the Facilities totaling at least $8,000,000 on or before June 30, 2022, Broken Arrow and CJK will be in default under the Chino Valley Lease and Tempe Lease, as amended.

 

Kingman

 

On May 1, 2018, Kingman and CJK agreed to terminate the prior Kingman Lease dated October 1, 2014, in consideration of (i) entry into that certain Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Kingman and CJK (the “Kingman Lease”), with a term of 22 years, expiring April 30, 2040, and (ii) abatement of rent that would otherwise have been due for the month of April 2018 under the Prior Kingman Lease. The Kingman Lease provides for payment by CJK of a fixed monthly base rent of $4,000, as well as real property taxes, personal property taxes, privilege, sales, rental, excise, use and/or other taxes (excluding income or estate taxes) levied upon or assessed against Kingman. In addition, pursuant to the terms of the Kingman Lease, CJK agreed to maintain insurance in full force during the term of the Kingman Lease and any other period of occupancy of the premises by CJK.

 

11

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

On May 29, 2020, Kingman and CJK entered into the First Amendment (the “Kingman Amendment”) to the Kingman Lease, effective May 31, 2020. Pursuant to the terms of the Kingman Amendment, among other things, the parties agreed to abate the $4,000 base rent from June 1, 2020 to July 31, 2020. In addition, the Kingman Amendment provides that any increase in the rentable area of the leases premises will result in an increase in all amounts calculated based on the same, including, without limitation, base rent. The parties also agreed that if there is any change in laws such that the dispensing, sale or cultivation of marijuana upon the premises is prohibited or materially and adversely affected as mutually and reasonably determined by Kingman and CJK, CJK may terminate the Kingman Lease by delivering written notice to Kingman, together with a termination payment which shall be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the balance of the term.

 

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

 

The Tempe Lease, Kingman Lease, Chino Valley Lease and Green Valley Lease (together referred to as the “New Leases”) includes a Guarantee of Payment and Performance by Mr. Abrams and the Company’s Significant Tenants. Mr. Abrams guarantee is collateralized by the convertible debt of $2,000,000 owed to him (see Note 6).

 

As of June 30, 2020 and December 31, 2019, security deposits payable to the Significant Tenants amounted to $71,800.

 

Future minimum lease payments primarily consist of minimum base rent payments from Significant Tenants. Future minimum lease payments to be received, on all leased properties, for each of the five succeeding calendar years and thereafter as of June 30, 2020 consists of the following:

 

Future annual base rent:    
2020 (remainder of year)  $456,917 
2021   1,082,005 
2022   1,074,000 
2023   1,074,000 
2024   1,074,000 
Thereafter   16,468,000 
Total  $21,238,922 

 

Rental and advisory revenue and receivable –Significant Tenants

 

For the three months ended June 30, 2020 and 2019, rental and advisory revenue associated with the Significant Tenant leases described above amounted to $294,043 and $291,475, which represents 98.1% and 95.4% of the Company’s total revenues, respectively. For the six months ended June 30, 2020 and 2019, rental and advisory revenue associated with the Significant Tenant leases described above amounted to $580,946 and $556,335, which represents 96.2% and 92.4% of the Company’s total revenues, respectively. At June 30, 2020 and December 31, 2019, accounts receivable from advisory services provided to the Significant Tenant amounted to $9,420 and $8,188, respectively. Further, as of June 30, 2020 a deferred rent receivable of $88,750 is due from Significant Tenants due to the abatement of rent in the month of June 2020 under the amendments executed effective May 31, 2020 discussed above.

 

Asset concentration

 

The majority of the Company’s real estate properties are leased to the Significant Tenant under triple-net leases that terminate in April 2040. The Company monitors the credit of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing financial statements and related metrics and information that are publicly available or that are provided to us upon request, and (2) monitoring the timeliness of rent collections.  As of June 30, 2020 and December 31, 2019, the Company had an asset concentration related to the Significant Tenants. As of June 30, 2020 and December 31, 2019, the Significant Tenants represented approximately 85.8% and 87.1% of the Company’s total assets, respectively. Through June 30, 2020, all rental payments have been made on a timely basis. As of June 30, 2020, the lease agreements with the Significant Tenants were personally guaranteed by Alan Abrams and are collateralized by convertibles notes of $2,000,000 owed to Mr. Abrams (see Note 6). On March 1, 2018, the Company and Alan Abrams entered into a Reaffirmation Agreement (See Note 6).

 

12

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

Confidential advisory services agreements

 

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

 

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

 

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

 

NOTE 4 – RENTAL PROPERTIES

 

At June 30, 2020 and December 31, 2019, rental properties, net consisted of the following:

 

Description  Useful Life
(Years)
  June 30,
2020
   December 31,
2019
 
Building and building improvements  5-39  $6,260,524   $6,250,959 
Land  -   2,283,214    2,283,214 
Rental properties, at cost      8,543,738    8,534,173 
Less: accumulated depreciation      (1,337,704)   (1,159,366)
Rental properties, net     $7,206,034   $7,374,807 

 

For the three months ended June 30, 2020 and 2019, depreciation and amortization of rental properties amounted to $89,297 and $88,820, respectively. For the six months ended June 30, 2020 and 2019, depreciation and amortization of rental properties amounted to $178,338 and $177,640, respectively.

 

NOTE 5 – CONVERTIBLE NOTE RECEIVABLE

 

On March 19, 2020, the Company made an initial investment of $100,000 into KCB Jade Holdings, LLC (“KCB”). In exchange for the investment, KCB issued to the Company a convertible debenture (the “KCB Debenture”) dated March 19, 2020 (the “Issuance Date”) in the original principal amount of $100,000. The KCB Debenture bears interest at the rate of 6.5% per annum and matures on March 19, 2025 (the “Maturity Date”). Interest on the outstanding principal sum of the KCB Debenture commences accruing on the Issuance Date and is computed on the basis of a 365-day year and the actual number of days elapsed, and shall be payable annually due by the first day of each calendar anniversary following the Issuance Date. KCB may prepay the KCB Debenture at any point after 18 months following the Issuance Date, in whole or in part. However, if KCB elects to prepay the KCB Debenture prior to the Maturity Date or prior to any conversion as provided in the KCB Debenture in whole or in part, the Company will be entitled to receive a number of KCB units, in addition to such prepayment amount, constituting 10% of the total outstanding units and 10% of the total percentage interest following such issuance and at the time of such issuance.

 

13

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

On or after six months from the Issuance Date, the Company may convert all or a portion of the principal balance and all accrued and unpaid interest due into a number of units equal to the proportion of the outstanding amount being converted multiplied by 33% of the total number of units issued and outstanding at the time of conversion, constituting 33% of the total percentage interest (the “Conversion Percentage”). If KCB defaults on payment of the KCB Debenture, the Company may, at its option, extend all conversion rights, through and including the date KCB tenders or attempts to tender payment in full of all amounts due under the KCB Debenture. Conversion rights terminate upon acceptance by the Company of payment in full of principal, accrued interest and any other amounts due under the KCB Debenture.

 

If (i) KCB does not elect to exercise its rights of prepayment prior to the Maturity Date, (ii) the Company does not elect to exercise its rights of conversion, and (iii) KCB pays to the Company all outstanding principal and interest accrued and due under the terms of the KCB Debenture on the Maturity Date, the Company will still be entitled to receive a number of units, in addition to such payment amount, constituting 8% of the total outstanding units and 8% of the total percentage interest following such issuance and at the time of such issuance.

 

Upon the occurrence of an Event of Default, as defined in the KCB Debenture, the entire principal balance and accrued and unpaid interest outstanding under the KCB Debenture, and all other obligations of KCB under the KCB Debenture, will be immediately due and payable and the Company may exercise any and all rights, power and remedies available to it at law or in equity or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in the KCB Debenture and proceed to enforce the payment thereof or any other legal or equitable right of the Company.

 

Any amount of principal or interest not paid when due will bear interest at the rate of 12% per annum from the due date thereof until paid.

 

At June 30, 2020, convertible note receivable and interest receivable amounted to $100,000 and $1,852, respectively.

 

NOTE 6 – CONVERTIBLE NOTE PAYABLE

 

On January 9, 2017, the Company issued a convertible debenture (the “Abrams Debenture”) in the aggregate principal amount of $2,000,000 in favor of Alan Abrams, who was a significant stockholder of the Company through December 31, 2018, in exchange for cash from Mr. Abrams of $2,000,000. The Abrams Debenture accrues interest at the rate of 6% per annum payable quarterly by the 1st of each quarter and was originally due on January 9, 2022. On January 2, 2019, as part of a Stock Redemption Agreement, the Company and Mr. Abrams entered into an amendment of the Abrams Debenture (the “Debenture Amendment”), pursuant to which the parties agreed to extend the maturity date of the Abrams Debenture from January 9, 2022 to January 9, 2030. Except as set forth herein, the terms of the Abrams Debenture remain in full force and effect.

 

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

 

If the Company defaults on payment, Mr. Abrams may at his option, extend all conversion rights, through and including the date the Company tenders or attempts to tender payment in full of all amounts due under the Abrams Debenture. Any amount of principal or interest, which is not paid when due shall bear interest at the rate of 12% per annum. Upon an Event of Default (as defined in the Abrams Debenture), Mr. Abrams may (i) declare the entire principal amount and all accrued and unpaid interest under the Abrams Debenture immediately due and payable, and (ii) exercise any and all rights, powers and remedies available to Mr. Abrams at law or in equity or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in the Abrams Debenture and proceed to enforce the payment thereof or any other legal or equitable right of Mr. Abrams.

 

On March 1, 2018, the Company and Alan Abrams entered into a Reaffirmation Agreement whereby Mr. Abrams reaffirmed his personal guarantee of his obligations under certain of the Company’s commercial leases. Additionally, Mr. Abrams affirmed that the principal of the Abrams Debenture in the principal amount of $2,000,000 was acknowledged as collateral within the scope of the guaranty included in the commercial lease agreements.

 

14

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

As of June 30, 2020 and December 31, 2019, the principal balance due under the Abrams Debenture is $2,000,000.

 

As of June 30, 2020 and December 31, 2019, accrued interest payable due under the Abrams Debenture was $30,000 which is included in accrued expenses on the accompanying unaudited condensed consolidated balance sheets. For the three months ended June 30, 2020 and 2019, interest expense related to the Abrams Debenture amounted to $30,000. For the six months ended June 30, 2020 and 2019, interest expense related to the Abrams Debenture amounted to $60,000.

 

NOTE 7 – RELATED PARTY TRANSACTIONS

 

Convertible notes payable – related party

 

On January 9, 2017, the Company issued a convertible debenture (the “McLaren Debenture”) in the principal amount of $20,000 in favor of Bryan McLaren, the Company’s Chief Executive Officer, President, Chief Financial Officer, and a member of the Company’s Board of Directors, in exchange for cash from Mr. McLaren of $20,000. The McLaren Debenture accrues interest at the rate of 6% per annum payable quarterly by the 1st of each quarter and matures on January 9, 2022. The Company may prepay the McLaren Debenture at any point after nine months, in whole or in part. Pursuant to the terms of the McLaren Debenture, Mr. McLaren is entitled to convert all or a portion of the principal balance and all accrued and unpaid interest due under this McLaren Debenture into shares of the Company’s common stock at a conversion price of $5.00 per share.

 

If the Company defaults on payment, Mr. McLaren may at his option, extend all conversion rights, through and including the date the Company tenders or attempts to tender payment in full of all amounts due under the McLaren Debenture. Any amount of principal or interest, which is not paid when due shall bear interest at the rate of 12% per annum. Upon an Event of Default (as defined in the McLaren Debenture), Mr. McLaren may (i) declare the entire principal amount and all accrued and unpaid interest under the McLaren Debenture immediately due and payable, and (ii) exercise any and all rights, powers and remedies available to Mr. McLaren at law or in equity or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in the McLaren Debenture and proceed to enforce the

 

As of June 30, 2020 and December 31, 2019, the principal balance due under the McLaren Debenture is $20,000.

 

As of June 30, 2020 and December 31, 2019, accrued interest payable due under the McLaren Debenture is $3,600 and $3,000, respectively, which is included in accrued expenses – related party on the accompanying unaudited condensed consolidated balance sheets. For the three months ended June 30, 2020 and 2019, interest expense – related party amounted to $300. For the six months ended June 30, 2020 and 2019, interest expense – related party amounted to $600.

 

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, $0.001 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 of preferred stock 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.

 

15

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

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

 

On January 6, 2020, the Company issued an aggregate of 110,000 shares of common stock to members of the Company’s board of directors for services rendered. The shares were valued at their aggregate fair value of $24,200 using the quoted per share price on the date of grant of $0.22. In connection with these grants, in January 2020, the Company recorded stock-based compensation expense of $24,200 which is included in compensation and benefits on the unaudited condensed consolidated statements of operations.

 

(C) Equity incentive plans

 

On August 9, 2016, the Company’s Board of Directors authorized the 2016 Equity Incentive Plan (the “2016 Plan”) and reserved 10,000,000 shares of common stock for issuance thereunder. The 2016 Plan was approved by shareholders on November 21, 2016. The 2016 Plan’s purpose is to encourage ownership in the Company by employees, officers, directors and consultants whose long-term service the Company considers essential to its continued progress and, thereby, encourage recipients to act in the stockholders’ interest and share in the Company’s success. The 2016 Plan authorizes the grant of awards in the form of options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, options that do not qualify (non-statutory stock options) and grants of restricted shares of common stock. Restricted shares granted pursuant to the 2016 Plan are amortized to expense over the vesting period. Options vest and expire over a period not to exceed seven years. If any share of common stock underlying a stock option that has been granted ceases to be subject to a stock option, or if any shares of common stock that are subject to any other stock-based award granted are forfeited or terminate, such shares shall again be available for distribution in connection with future grants and awards under the 2016 Plan. As of March 31, 2020, 165,000 stock option awards are outstanding and 75,000 options are exercisable under the 2016 Plan. As of December 31, 2019, 40,000 stock option awards are outstanding and 40,000 options are exercisable under the 2016 Plan. As of June 30, 2020 and December 31, 2019, 9,835,000 and 9,960,000 shares are available for future issuance.

 

The Company also continues to maintain its 2014 Equity Compensation Plan (the “2014 Plan”), pursuant to which 1,250,000 previously awarded stock options are outstanding. The 2014 Plan has been superseded by the 2016 Plan. Accordingly, no additional shares subject to the existing 2014 Plan will be issued and the 1,250,000 shares issuable upon exercise of stock options will be issued pursuant to the 2014 Plan, if exercised. As of June 30, 2020 and December 31, 2019, options to purchase 1,250,000 shares of common stock are outstanding and 1,125,000 options are exercisable pursuant to the 2014 Plan.

 

(D) Stock options

 

On January 6, 2020, the Company granted an employee an option, pursuant to the 2016 Plan, to purchase 125,000 of the Company’s common stock at an exercise price of $1.00 per share. The grant date of the option was January 6, 2020 and the option expires on January 6, 2030. The option vests as to (i) 35,000 of such shares on January 6, 2020, and (ii) as to 10,000 of such shares on January 6, 2021 and each year thereafter through January 6, 2029. 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 110%; risk-free interest rate of 1.81%; and, an estimated holding period of 10 years. In connection with these options, the Company valued these options at a fair value of $23,388 and will record stock-based compensation expense over the vesting period. In July 2020, this employee was terminated and these options shall be cancelled.

 

16

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

For the six months ended June 30, 2020 and 2019, in connection with the accretion of stock-based option expense, the Company recorded stock-based compensation expense of $18,036 and $11,806, respectively. As of June 30, 2020, there were 1,415,000 options outstanding and 1,200,000 options vested and exercisable. As of June 30, 2020, there was $53,195 of unvested stock-based compensation expense to be recognized through December 2028. The aggregate intrinsic value at June 30, 2020 was nil and was calculated based on the difference between the quoted share price on June 30, 2020 of $0.13 and the exercise price of the underlying options.

 

Stock option activities for the six months ended June 30, 2020 are summarized as follows:

 

   Number of
Options
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term
(Years)
   Aggregate
Intrinsic
Value
 
Balance Outstanding December 31, 2019   1,290,000   $0.99    5.74   $        - 
Granted   125,000    1.00    -    - 
Balance Outstanding June 30, 2020   1,415,000   $0.99    5.62   $- 
Exercisable, June 30, 2020   1,200,000   $0.99    5.24    - 
                     
Balance Non-vested at December 31, 2019   125,000   $1.00        $- 
Granted   125,000    1.00           
Vested during the period   (35,000)   1.00    -    - 
Balance Non-vested at June 30, 2020   215,000   $1.00    7.77   $- 

 

NOTE 9 – COMMITMENTS AND CONTINGENCIES

 

Rental property acquisition

 

On April 22, 2016, Zoned Colorado, a wholly owned subsidiary of the Company, entered into a Contract to Buy and Sell Real Estate (the “Parachute Agreement”) with Parachute Development Corporation (“Seller”) pursuant to which Zoned Colorado agreed to purchase, and Seller agreed to sell, property in Parachute, Colorado (the “Property”) for a purchase price of $499,857. Of the total purchase price, $274,857, or 55%, will be paid in cash at closing and $225,000, or 45%, will be financed by Seller at an interest rate of 6.5%, amortized over a five-year period, with a balloon payment at the end of the fifth year. Payments will be made monthly and there will be no pre-payment penalty. Pursuant to the terms of the Parachute Agreement, the parties will cooperate in good faith to complete due diligence during a period of 45 days following execution of the Parachute Agreement. The closing is subject to certain contingencies, including that Zoned Colorado must obtain acceptable financing for the purchase and development of the Property, the grant of a special use permit by the Town of Parachute, approval of a protected development deal or equivalent agreement by the Town of Parachute, execution of a lease agreement by a prospective tenant and the prospective tenant’s obtaining a license to cultivate on the Property.

 

Pursuant to the terms of the Parachute Agreement, Zoned Colorado will have a right of first refusal on eleven additional lots owned by Seller in Parachute, Colorado. In April 2016, the Company paid a refundable deposit of $45,000 into escrow in connection with the Parachute Agreement which is included in prepaid expenses and other assets on the unaudited condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019. As of June 30, 2020, the Company and Seller have yet to complete the purchase.

 

Legal matters

 

From time to time, the Company may be involved in litigation related to claims arising out of its operations in the normal course of business. As of June 30, 2020, the Company is not involved in any pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations, or cash flows.

 

17

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

Confidential Advisory Services Agreements

 

On May 1, 2018, the Company entered into that certain Confidential Advisory Services Agreement by and between the Company and Broken Arrow (the “Broken Arrow CASA”), with a term expiring on April 30, 2040, unless earlier terminated as provided in the Broken Arrow CASA. Additionally, on May 1, 2018, the Company entered into that certain Confidential Advisory Services Agreement by and between the Company and CJK (the “CJK CASA” and together with the Broken Arrow CASA, the “CASAs”), with a term expiring on April 30, 2040, unless earlier terminated as provided in the CJK CASA. The CASAs may be terminated prior to the expiration of their respective term upon the occurrence of any of the following: (a) by the Company for any reason at any time upon thirty calendar days’ written notice to the other party; (b) by either party immediately upon the mutual agreement of the parties, evidenced by a writing signed by the parties; or (c) immediately by either party in the event of an actual finding, by a court of competent jurisdiction, of fraud, gross negligence or willful misconduct of the other party in connection with the CASAs. Pursuant to the terms of the CASAs, Broken Arrow and CJK engaged the Company to perform certain advisory services in exchange for a fee equal to 10% of Broken Arrow’s and CJK’s gross revenues (the (“Revenue Fee”). Effective January 1, 2019, the parties agreed to amend the May 1, 2018 leases to reduce the Revenue Fee payable pursuant to each of the CASAs from 10% of gross revenue to 0% of gross revenue.

 

Employment and Related Golden Parachute Agreement

 

On May 23, 2018, the Company and Mr. McLaren, the Company’s President, Chief Executive Officer, Chief Financial Officer and Chairman of the Board, agreed to replace Mr. McLaren’s 2014 employment agreement with a new employment agreement dated May 23, 2018 (the “2018 Employment Agreement”). Pursuant to the terms of the 2018 Employment Agreement, the Company agreed to continue to pay Mr. McLaren his then-current base annual salary of $215,000, and to award Mr. McLaren with an annual and/or quarterly bonus payable in either cash and/or equity of no less than 2% of the Company’s net income for the associated period.

 

The 2018 Employment Agreement has a term of 10 years. The term and Mr. McLaren’s employment will terminate (a “Termination”) in any of the following circumstances:

 

(i)immediately, if Mr. McLaren dies;

 

(ii)immediately, if Mr. McLaren receives benefits under the long-term disability insurance coverage then provided by the Company or, if no such insurance is in effect, upon Mr. McLaren’s disability;

 

(iii)on the expiration date, as the same may be extended by the parties by written amendment to the 2018 Employment Agreement prior to the occasion thereof;

 

(iv)at the option of the Company for Cause (as defined in the 2018 Employment Agreement) upon the Company’s provision of written notice to Mr. McLaren of the basis for such Termination;

  

(v)at the option of the Company, without Cause;

 

(vi)by Mr. McLaren at any time with Good Reason (as defined in the 2018 Employment Agreement), upon 30 days’ prior written notice to the Company delivered not later than within 90 days of the existence of the condition therefor; or

 

(vii)by Mr. McLaren at any time without Good Reason, upon not less than three months’ prior written notice to the Company.

 

In the event of a Termination for any reason or for no reason whatsoever, or upon the expiration date of the 2018 Employment Agreement, whichever comes first, all rights and obligations under the 2018 Employment Agreement shall cease (i) as to the Company, except for the Company’s obligations for the payment of applicable severance benefits thereunder, and for indemnification thereunder, and (ii) as to Mr. McLaren, except for his obligation under the restrictive covenants in the 2018 Employment Agreement.

 

The Company and Mr. McLaren also entered into a Golden Parachute Agreement (the “Golden Parachute Agreement”) on May 23, 2018. No benefits shall be payable under the Golden Parachute Agreement unless there shall have been a change in control of the Company, as set forth below. For purposes of the Golden Parachute Agreement, amongst other terms in the Golden Parachute Agreement, a “change in control of the Company” shall mean a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended.

 

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

 

18

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 

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

 

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

 

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

 

  (i) During any period that he fails to perform his full-time duties with the Company as a result of incapacity due to physical or mental illness, Mr. McLaren will continue to receive his base salary at the rate in effect at the commencement of any such period, together with all amounts payable to him under any compensation plan of the Company during such period, until the Golden Parachute Agreement is terminated.
     
  (ii) If Mr. McLaren’s employment is terminated by the Company for Cause or by Mr. McLaren other than for Good Reason, disability, death or retirement, the Company will pay Mr. McLaren his full base salary through the date of Termination at the rate in effect at the time notice of Termination is given, plus all other amounts and benefits to which he is entitled under any compensation plan of the Company at the time such payments are due.
     
  (iii) If employment by the Company shall be terminated (a) by the Company other than for Cause, death or disability or (b) by Mr. McLaren for Good Reason, Mr. McLaren will be entitled to benefits provided below:

 

a.The Company will pay Mr. McLaren his full base salary through the date of Termination at the rate in effect at the time notice of Termination is given, plus all other amounts and benefits to which he is entitled under any compensation plan of the Company.

 

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

 

c.The Company will pay to Mr. McLaren any deferred compensation allocated or credited to him or his account as of the date of Termination.

 

d.In lieu of shares of common stock of the Company issuable upon exercise of outstanding options, if any, granted to Mr. McLaren under the Company’s stock option plans (which options shall be cancelled upon the making of the payment referred to below), Mr. McLaren will receive an amount in cash equal to the product of (i) the excess of the closing price of the Company’s common stock as reported on or nearest the date of Termination (or, if not so reported, on the basis of the average of the lowest asked and highest bid prices on or nearest the date of Termination), over the per share exercise price of each option held by Mr. McLaren (whether or not then fully exercisable) plus the amount of any applicable cash appreciation rights, times (ii) the number of the Company’s common stock covered by each such option.

 

e.The Company will also pay to Mr. McLaren all legal fees and expenses incurred by him as a result of such Termination.

 

19

 

 

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

 

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

 

This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This annual report on Form 10-K and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the “Risk Factors” section of our annual report on Form 10-K as filed on March 26, 2020.

 

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

 

The following discussion should be read in conjunction with our audited financial statements and the related notes that appear in our annual report on Form 10-K as filed with the SEC on March 26, 2020.

 

Overview

 

Zoned Properties is a strategic real estate development firm whose primary mission is to provide real estate and sustainability services for clients in the regulated cannabis industry, positioning the company for real estate acquisitions and revenue growth. The Company intends to pioneer sustainable development for emerging industries, including the regulated cannabis industry. The Company is an accredited member of the Better Business Bureau, the U.S. Green Building Council, and the Forbes Real Estate Council. The Company focuses on investing capital to acquire and develop commercial properties to be leased on a triple-net basis, and engaging clients that face zoning, permitting, development, and operational challenges. The Company provides development strategies and advisory services that could potentially have a major impact on cash flow and property value. The Company does not grow, harvest, sell or distribute cannabis or any substances regulated under United States law such as the Controlled Substance Act of 1970, as amended (the “CSA”).

 

The Company intends to develop and expand multiple business divisions, including a commercial real estate brokerage team, an advisory services division, and a nonprofit charitable organization to focus on community prosperity. Each of these operating divisions are important elements of the overall business development strategy for long-term growth. The Company believes in the value of building relationships with clients and local communities in order to position the Company for long-term portfolio and revenue growth backed by sophisticated, safe, and sustainable business practices.

 

The core of our business involves identifying and developing properties that intend to operate within highly regulated zoning and permitting regions, including the regulated cannabis industry. Within highly regulated industries, local municipalities typically develop strict planning and zoning regulations that dictate the specific locations at which regulated properties can operate. These regulations often create complex permitting processes and can include non-standard setbacks for each location; for example, restricting a regulated property or facility from operating within a certain distance of any parks, schools, churches, or residential districts. When an organization can collaborate with local representatives, a proactive set of rules and regulations can be established and followed to meet the needs of both the regulated operators and the local community.

 

For the three and six months ended June 30, 2020 and 2019, substantially all of our revenues were generated from triple-net leases to tenants that are controlled by one entity (each, a “Significant Tenant” and collectively, the “Significant Tenants”), which is located in the State of Arizona.

 

The Company currently maintains a portfolio of properties that we own, develop, and lease. In addition, we may provide on-going advisory services at each property that is leased to operating tenants. Each property undergoes a development life cycle. Areas of development that may require advisory services can range from initial property identification and zoning authorization to complete architectural design, utility installation, property management protocol, facilities management systems, and security system installation. During the six months ended June 30, 2020, improvements made to rental properties amounted to $9,565. No improvements were made during the six months ended June 30, 2019.

 

20

 

 

As of June 30, 2020, a summary of rental properties owned by us consisted of the following:

  

Location  Tempe, AZ  

Chino Valley,

AZ

   Gilbert, AZ  

Green Valley,

AZ

  

Kingman,

AZ

     
Description  Mixed-use warehouse/office   Greenhouse/ Nursery   Land  

Retail

(special-use)

  

Retail

(special-use)

     
Current Use 

Medical

Marijuana

Business Park

   Medical Marijuana Cultivation Facility   Future Development   Medical Marijuana Dispensary   Medical Marijuana Dispensary     
                         
Date Acquired   March 2014    August 2015    January 2014    October 2014    May 2014      
Lease Start Date   May 2018    May 2018    July 2018    May 2018    May 2018      
Lease End Date   April 2040    April 2040     Vacant    April 2040    April 2040      
                               
Total No. of Tenants   1    1    0    1    1      
                               
                       Total
Properties
 
Land Area (Acres)   3.65    47.60    0.80    1.33    0.32    53.70 
                               
Land Area (Sq. Feet)   158,772    2,072,149    34,717    57,769    13,939    2,337,346 
Undeveloped Land Area (Sq. Feet)   -    1,812,563    34,717    -    6,878    1,854,158 
Developed Land Area (Sq. Feet)   158,772    259,586    -    57,769    7,061    483,188 
                               
Total Rentable Building Sq. Ft.   60,000    40,000    -    1,440    1,497    102,937 
Vacant Rentable Sq. Ft.   -    -    -    -    -    - 
Sq. Ft. rented as of June 30, 2020   60,000    40,000    -    1,440    1,497    102,937 
                               
Annual Base Rent: *                              
2020 (remainder per year)  $246,000   $164,000   $-   $17,500   $20,000   $447,500 
2021   590,400    393,600    -    42,000    48,000    1,074,000 
2022   590,400    393,600    -    42,000    48,000    1,074,000 
2023   590,400    393,600    -    42,000    48,000    1,074,000 
2024   590,400    393,600         42,000    48,000    1,074,000 
Thereafter   9,052,800    6,035,000    -    644,000    736,000    16,468,000 
Total  $11,660,400   $7,773,600   $-   $829,500   $948,000   $21,211,500 

 

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

 

21

 

 

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

  

Year  Tempe,
AZ
  

Chino Valley,

AZ

  

Gilbert,

AZ (a)

  

Green Valley,

AZ

  

Kingman,

AZ

 
2020  $9.8   $9.8    -   $29.2   $32.1 
2021  $9.8   $9.8    -   $29.2   $32.1 
2022  $9.8   $9.8    -   $29.2   $32.1 
2023  $9.8   $9.8    -   $29.2   $32.1 
2024  $9.8   $9.8    -   $29.2   $32.1 

 

(a)Base rent is for land only and annualized $ per rented square foot is not presented.

   

Currently, 33 U.S. states plus the District of Columbia have passed laws permitting their citizens to use medical cannabis. Additionally, 11 states and the District have legalized cannabis for recreational use by adults. Marijuana remains classified as a Schedule I controlled substance by the U.S. Drug Enforcement Agency (the “DEA”), and the U.S. Department of Justice (the “DOJ”), and therefore it is illegal to grow, possess and consume cannabis under federal law. On September 27, 2018, however, the DEA announced that drugs, including “finished dosage formulations” of cannabidiol (“CBD”) and tetrahydrocannabinol (“THC”) below 0.1%, will be considered Schedule 5 drugs as long as the medications have been approved by the U.S. Food and Drug Administration. THC and CBD are two natural compounds found in cannabis plants. THC is the main psychoactive compound in marijuana, while CBD is an antagonist to, and inhibits the physiological action to, THC. Also, under the 2018 Farm Bill or Agriculture Improvement Act of 2018, CBD remains a Schedule I controlled substance under the CSA, with a narrow exception for CBD derived from hemp with a THC concentration of less than 0.3%. The CSA bans cannabis-related businesses; the possession, cultivation and production of cannabis-infused products; and the distribution of cannabis and products derived from it. Furthermore, the U.S. Supreme Court has confirmed that the federal government has the right to regulate and criminalize cannabis, including for medical purposes, and that federal law criminalizing the use of cannabis preempts state laws that legalize its use.

 

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

 

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

 

It is unclear at this time what impact the Sessions Memo will have on the regulated cannabis and marijuana industry. During the January 2018 confirmation hearings of current Attorney General William Barr, Mr. Barr commented that he would not prosecute marijuana businesses operating within state law. Also, in April 2019, Mr. Barr stated that he would prefer that Congress enact legislation allowing states to legalize marijuana, rather than continuing the current approach under the which a growing number of states have ended cannabis prohibition in conflict with federal law.

 

In addition, pursuant to the current omnibus spending bill previously approved by Congress, the DOJ was prohibited from using funds appropriated by Congress to prevent states from implementing their medical-use cannabis laws. This provision, however, will expire on September 30, 2020. There is no assurance that Congress will approve inclusion of a similar prohibition on DOJ spending in the appropriations bill for future years. Although we are not engaged in the purchase, sale, growth, cultivation, harvesting, or processing of medical-use marijuana products, we lease our properties to tenants who engage in such activities, and therefore strict enforcement of federal prohibitions regarding marijuana could irreparably harm our business, subject us to criminal prosecution and/or adversely affect the trading price of our securities.

 

The Company will focus heavily on the growth of a diversified revenue stream in 2020. We intend to accomplish this by prospecting new advisory services across the country for private, public, and municipal clients. We believe that strategic real estate and sustainability services are likely to emerge as the growth engine for Zoned Properties. We are moving to take advantage of new opportunities.

 

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Pursuant to the terms of the several lease amendments our Significant Tenants, among other things, base rent base rent was abated from June 1, 2020 to July 31, 2020 on all of our Significant Tenant leases which decreased our cash flow from operation during the six months ended June 30, 2020 by $89,500. In addition, the parties agreed that from the period from May 31, 2020 to June 30, 2022, Significant Tenants will invest a combined total of at least $8,000,000 improvements in and to the properties in Chino Valley and Tempe prior to June 30, 2020. Any increase in the rentable area of the leased premises will result in an increase in all amounts calculated based on the same, including, without limitation, base rent.

 

COVID-19

 

In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. We are monitoring this closely, and although operations have not been materially affected by the COVID-19 outbreak to date, the ultimate duration and severity of the outbreak and its impact on the economic environment and our business is uncertain. As of August 13, 2020, all of the properties in our portfolio are open to our Significant Tenants and their customers and will remain open pursuant to state and local government requirements. At this time, we do not foresee any material changes to our operations from COVID-19. Our tenants are continuing to generate revenue at these properties and they have continued to make rental payments in full and on time and we believe the tenants’ liquidity position is sufficient to cover its expected rental obligations. Accordingly, while we do not anticipate an impact on our operations, we cannot estimate the duration of the pandemic and potential impact on our business if the properties must close or if the tenants are otherwise unable or unwilling to make rental payments. In addition, a severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for our properties and a decreased ability to raise additional capital when needed on acceptable terms, if at all. At this time, the Company is unable to estimate the impact of this event on its operations.

 

Results of Operations

 

The following comparative analysis on results of operations was based primarily on the comparative consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements for the three and six months ended June 30, 2020 and 2019, which are included elsewhere in this quarterly report on Form 10-Q. The results discussed below are for the three and six months ended June 30, 2020 and 2019.

 

Comparison of Results of Operations for the Three and Six Months ended June 30, 2020 and 2019

 

Revenues

 

For the three and six months ended June 30, 2020 and 2019, revenues consisted of the following:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2020   2019   2020   2019 
Rent revenues  $272,216   $278,214   $548,710   $555,950 
Advisory revenues   27,608    46,227    54,983    46,227 
Total revenues  $299,824   $324,441   $603,693   $602,177 

 

For the three months ended June 30, 2020, total revenues amounted to $299,824, including Significant Tenants revenues of $294,043, as compared to $324,441, including Significant Tenant revenues of $291,475, for the three months ended June 30, 2019, a decrease of $24,617, or 7.6%. For the six months ended June 30, 2020, total revenues amounted to $603,693, including Significant Tenants revenues of $580,946, as compared to $602,177, including Significant Tenant revenues of $556,335, for the six months ended June 30, 2019, an increase of $1,516, or 0.3%. For the three months ended June 30, 2020, the decrease in revenues was attributable to a decrease in advisory revenues of $18,619, or 40,3%, and a decrease in rent revenues of $5,998, or 2.2%. Substantially all of the Company’s real estate properties are leased under triple-net leases to the Significant Tenants.

 

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Operating expenses

 

For the three months ended June 30, 2020, operating expenses amounted to $290,071 as compared to $284,463 for the three months ended June 30, 2019, an increase of $5,608, or 2.0%. For the six months ended June 30, 2020, operating expenses amounted to $660,642 as compared to $646,890 for the six months ended June 30, 2019, an increase of $13,752, or 2.1%. For the three and six months ended June 30, 2020 and 2019, operating expenses consisted of the following:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2020   2019   2020   2019 
Compensation and benefits  $87,751   $86,898   $218,265   $208,967 
Professional fees   42,497    51,431    113,910    134,909 
General and administrative expenses   48,018    32,106    105,114    74,898 
Depreciation and amortization   90,841    90,498    181,425    181,056 
Real estate taxes   20,964    22,720    41,928    45,440 
Total  $290,071   $284,463   $660,642   $646,890 

 

  For the three months ended June 30, 2020, compensation and benefit expense increased by $853, or 1.0%, as compared to the three months ended June 30, 2019. For the six months ended June 30, 2020, compensation and benefit expense increased by $9,298, or 4.5%, as compared to the six months ended June 30, 2019, and was primarily attributable to an increase in stock-based compensation related to the accretion of stock option expense.

 

  For the three months ended June 30, 2020, professional fees decreased by $8,934, or 17.4%, as compared to the three months ended June 30, 2019. This decrease in professional fees was primarily attributable to a decrease in public relations fees of $2.479, a decrease in legal fees of $8,717, and a decrease in other professional fees of $5,938, offset by an increase in accounting fees of $8,200. For the six months ended June 30, 2020, professional fees decreased by $20,999, or 15.6%, as compared to the six months ended June 30, 2019. This decrease in professional fees was primarily attributable to a decrease in public relations fees of $12,383 a decrease in legal fees of $4,348, and a decrease in other professional fees of $4,268.

 

  General and administrative expenses consist of expenses such as rent expense, directors’ and officers’ liability insurance, travel expenses, office expenses, telephone and internet expenses and other general operating expenses. For the three months ended June 30, 2020, general and administrative expenses increased by $15,102, or 45.9%, as compared to the three months ended June 30, 2019. This increase was primarily attributable in an increase in advertising and promotion expense of $2,061 related to attending conferences, an increase in technology fees of $4,158. and an increase in insurance expense of $4,159. Additionally, in the 2019 period, we received a tax refund of $8,704 which we did not receive in the 2020 period. For the six months ended June 30, 2020, general and administrative expenses increased by $28,596, or 37.8%, as compared to the six months ended June 30, 2019. This increase was primarily attributable in an increase in advertising and promotion expense of $6,461 related to attending conferences, an increase in technology fees of $7,062. and an increase in insurance expense of $6,272. Additionally, in the 2019 period, we received a tax refund of $8,704 which we did not receive in the 2020 period.

 

  For the three and six months ended June 30, 2020, depreciation and amortization expense increased by $343, or 0.4%, and $369, or 0.2%, as compared to the three and six months ended June 30, 2019, respectively.

 

  For the three and six months ended June 30, 2020, real estate taxes decreased by $1,756, or 7.7%, and $3,512, or 7.7% as compared to the three and six months ended June 30, 2019, respectively.

 

Income (Loss) from operations

 

As a result of the factors described above, for the three months ended June 30, 2020, income from operations amounted to $9,753 as compared to income from operations of $39,978 for the three months ended June 30, 2019, a decrease of $30,225, or 75.6%. For the six months ended June 30, 2020, loss from operations amounted to $56,949 as compared to a loss from operations of $44,713 for the six months ended June 30, 2019, an increase of $12,236, or 27.4%.

 

Other (expenses) income

 

Other (expenses) income primarily includes interest expense incurred on debt with third parties and a related party and also includes other income (expenses). For the three months ended June 30, 2020, total other expenses, net amounted to $(28,680) as compared to $(30,300), respectively, a decrease of $1,620, or 5.3%. For the six months ended June 30, 2020, total other expenses, net amounted to $(58,748) as compared to total other income, net of $47,604, respectively, a change of $(106,352), or 223.4%. During the six months ended June 30, 2019, we recognized other income of $108,204 related to a cash rebate received from the utility company as compared to nil during the six months ended June 30, 2020.

 

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Net loss

 

As a result of the foregoing, for the three months ended June 30, 2020 and 2019, net (loss) income amounted to $(18,927), or $(0.00) per common share (basic and diluted), and $9,678, or $0.00 per common share (basic and diluted), respectively. For the six months ended June 30, 2020 and 2019, net (loss) income amounted to $(115,697), or $(0.01) per common share (basic and diluted), and $2,891, or $0.00 per common share (basic and diluted), respectively.

 

Liquidity and Capital Resources

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had cash of $602,448 and $639,781 of cash as of June 30, 2020 and December 31, 2019, respectively.

 

Our primary uses of cash have been for compensation and benefits, fees paid to third parties for professional services, real estate taxes, general and administrative expenses, and the development of rental properties. All funds received have been expended in the furtherance of growing the business. We receive funds from the collection of rental income and advisory fees. The following trends are reasonably likely to result in changes in our liquidity over the near to long term:

 

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

 

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

 

  The cost of being a public company.

 

We may need to raise additional funds, particularly if we are unable to generate positive cash flow as a result of our operations. We estimate that based on current plans and assumptions, that our available cash will be sufficient to satisfy our cash requirements under our present operating expectations for the next 12 months from the date of this quarterly report on Form 10-Q. Other than revenue received from the lease of our rental properties and from advisory fees, we presently have no other significant alternative source of working capital.

 

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

 

On March 19, 2020, we made an initial investment of $100,000 into KCB Jade Holdings, LLC (“KCB”). In exchange for the investment, KCB issued to us a convertible debenture (the “Debenture”) dated March 19, 2020 (the “Issuance Date”) in the original principal amount of $100,000. The Debenture bears interest at the rate of 6.5% per annum and matures on March 19, 2025 (the “Maturity Date”). Interest on the outstanding principal sum of the Debenture commences accruing on the Issuance Date and is computed on the basis of a 365-day year and the actual number of days elapsed, and shall be payable annually due by the first day of each calendar anniversary following the Issuance Date. KCB may prepay the Debenture at any point after 18 months following the Issuance Date, in whole or in part. However, if KCB elects to prepay the Debenture prior to the Maturity Date or prior to any conversion as provided in the Debenture in whole or in part, we will be entitled to receive a number of KCB units, in addition to such prepayment amount, constituting 10% of the total outstanding units and 10% of the total percentage interest following such issuance and at the time of such issuance. On or after six months from the Issuance Date, we may convert all or a portion of the principal balance and all accrued and unpaid interest due into a number of units equal to the proportion of the outstanding amount being converted multiplied by 33% of the total number of units issued and outstanding at the time of conversion, constituting 33% of the total percentage interest (the “Conversion Percentage”). If KCB defaults on payment of the Debenture, we may, at its option, extend all conversion rights, through and including the date KCB tenders or attempts to tender payment in full of all amounts due under the Debenture. Conversion rights terminate upon acceptance by the Company of payment in full of principal, accrued interest and any other amounts due under the Debenture. If (i) KCB does not elect to exercise its rights of prepayment prior to the Maturity Date, (ii) we do not elect to exercise its rights of conversion, and (iii) KCB pays to the Company all outstanding principal and interest accrued and due under the terms of the Debenture on the Maturity Date, we will still be entitled to receive a number of units, in addition to such payment amount, constituting 8% of the total outstanding units and 8% of the total percentage interest following such issuance and at the time of such issuance.

 

Our future operations are dependent on our ability to manage our current cash balance, on the collection of rental and advisory revenues and the attainment of new advisory clients. Our real estate properties are leased to Significant Tenants under triple-net leases for which terms vary. We monitor the credit of these tenants to stay abreast of any material changes in credit quality. We monitor tenant credit by (1) reviewing financial statements and related metrics and information that are publicly available or that are provided to us upon request, and (2) monitoring the timeliness of rent collections. As of June 30, 2020 and December 31, 2019, we had an asset concentration related to our Significant Tenant leases. As of June 30, 2020 and December 31, 2019, these Significant Tenants represented approximately 85.8% and 87.1% of total assets, respectively. If our Significant Tenants are prohibited from operating due to federal or state regulations or due to COVID-19, or cannot pay their rent, we may not have enough working capital to support our operations and we would have to seek out new tenants at rental rates per square less than our current rate per square foot.

 

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We included audited financial statements of our Significant Tenants as Exhibits 99.1 and 99.2 to our Annual Report on Form 10-K, as filed with the SEC on March 26, 2020, since such audited financial statements represent material information and are necessary for the protection of investors.

 

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

 

Cash Flow

 

For the Six Months Ended June 30, 2020 and 2019

 

Net cash flow provided by operating activities was $72,232 for the six months ended June 30, 2020, as compared net cash flow provided by operating activities of $142,662 for the six months ended June 30, 2019, representing a decrease of $70,430.

 

  Net cash flow provided by operating activities for the six months ended June 30, 2020 primarily reflected net loss of $115,697 adjusted for the add-back of non-cash items consisting of depreciation and amortization of $181,424, stock-based compensation expense of $24,200 and accretion of stock-based stock option expense of $18,036, offset by changes in operating assets and liabilities primarily consisting of a decrease in prepaid expenses of $52,397, and an increase in accounts payable of $8,152, offset by an increase in deferred rent receivable of $88,750 attributable to the abatement of May and June 2020 rent as part of lease amendments effective on May 31, 2020.

 

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

 

For the six months ended June 30, 2020, net cash flow used in investing activities amounted to $109,565. This use of cash was attributable to cash used for an investment in a convertible note receivable of $100,000 as discussed above and as used in the improvement of rental properties of $9,565. We did not have any investing activities for the six months ended June 30, 2019.

 

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, 2020 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 

   Payments Due by Period 
Contractual obligations:  Total   Less than
1 year
   1-3 years   3-5 years   5 + years 
Convertible notes  $2,020   $-   $-   $20   $2,000 
Interest on convertible notes   1,186    155    241    240    550 
Total  $3,206   $155   $241   $260   $2,550 

 

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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 condensed consolidated financial statements.

 

Rental Properties

 

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

 

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

 

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

  

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

 

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Revenue recognition

 

Effective on January 1, 2018, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2014-09 and Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. We adopted this standard using the modified retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The adoption of ASU 2014-09 did not have any impact on the process for, timing of, and presentation and disclosure of revenue recognition from contracts with tenants.

 

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

 

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

 

Stock-based compensation

 

Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director , or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment.

 

Recent Accounting Pronouncements

 

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

   

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

 

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

 

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

 

If a change to a pre-existing lease occurs, we evaluate if the modification results in a separate new lease or a modified lease. A new lease results when a modification provides additional right of use. The new lease or modified lease is then reassessed to determine its classification based on the modified terms.

 

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

 

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Recent Accounting Pronouncements

 

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

  

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable to smaller reporting companies.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

We maintain “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e), promulgated by the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated our company’s disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of June 30, 2020, our disclosure controls and procedures were not effective.

 

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

 

Changes in Internal Control

 

There were no changes in our internal control over financial reporting during the period ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

Unfavorable global economic, business or political conditions could adversely affect our business, financial condition or results of operations.

 

Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets, including conditions that are outside of our control, including the U.S. presidential election and the impact of health and safety concerns, such as those relating to the current COVID-19 outbreak. The most recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for our properties and our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could strain our tenants, possibly resulting in delays in tenant payments. Any of the foregoing could harm our business and we cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact our business.

 

To date, the COVID-19 outbreak has not had a material adverse impact on our operations. However, the future impact of the COVID-19 outbreak is highly uncertain, cannot be predicted and there is no assurance that the COVID-19 outbreak will not have a material adverse impact on the future results of the Company. The extent of the impact, if any, will depend on future developments, including actions taken to contain the coronavirus.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

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

 

* Filed herewith.

 

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SIGNATURES

 

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

 

  Zoned Properties, Inc.
  (Registrant)
   
Date: August 13, 2020 /s/ Bryan McLaren
  President, Chief Executive Officer and
Chief Financial Officer
  (principal executive officer, principal financial officer and principal accounting officer)

 

 

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