ZONED PROPERTIES, INC. Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results
This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects.The Securities and Exchange Commission (the "SEC") encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This quarterly report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management's plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "will" and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the "Risk Factors" section of our annual report on Form 10-K as filed onMarch 24, 2022 .
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 investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
The following discussion should be read in conjunction with our unaudited condensed financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q.
OverviewZoned Properties, Inc. ("Zoned Properties " or the "Company"), was incorporated in theState of Nevada onAugust 25, 2003 . The Company is a real estate development firm for emerging and highly regulated industries, including legalized cannabis. The Company is redefining the approach to commercial real estate investment through its integrated growth services. Headquartered inScottsdale, Arizona ,Zoned Properties has developed a full spectrum of integrated growth services to support its real estate development model; the Company's Property Technology, Advisory Services, Commercial Brokerage, and Investment Portfolio collectively cross-pollinate within the model to drive project value associated with complex real estate projects. With national experience and a team of experts devoted to the emerging cannabis industry,Zoned Properties is addressing the specific needs of a modern market in highly regulated industries.Zoned Properties is an accredited member of theBetter Business Bureau , theU.S. Green Building Council , and theForbes Business Council . The Company does not grow, harvest, sell or distribute cannabis or any substances regulated underUnited States law such as the Controlled Substance Act of 1970, as amended (the "CSA"). We operate our business in two reportable segments consisting of (i) the operations, leasing and management of its leased commercial properties (the "Property Investment Portfolio" segment), and (ii) advisory and brokerage services related to commercial properties (the "Real Estate Services" segment). We are in the process of developing and expanding multiple business divisions, including a property technology division, a property advisory division, a commercial brokerage division, and a property investment portfolio division focused on acquisitions to expand our property holdings. Each of these operating divisions is an important element of the overall business development strategy for long-term growth. We believe in the value of building relationships with clients and local communities to position the Company for long-term portfolio and revenue growth backed by sophisticated, safe, and sustainable assets and clients. The core of our business involves identifying and developing commercial properties that intend to operate within highly regulated industries, including the regulated and legalized cannabis industry. Within highly regulated industries, local municipalities typically develop strict regulations, including zoning and permitting requirements related to commercial real estate, that dictate the specific locations and parameters under which regulated properties can operate. These regulations often include complex permitting processes and can include non-standard codes governing each location; for example, restricting a regulated property or facility from operating within a certain distance of any parks, schools, churches, or residential districts, or restricting a regulated property from operating outside a defined set of hours of operation. When an organization can collaborate with local representatives, a proactive set of rules and regulations can be established and followed to meet the needs of both the regulated operators and the local community. The Company currently maintains a portfolio of properties that we own, develop, and lease. We lease land and/or building space at all four of the properties in our portfolio. Four of the properties are leased to licensed and regulated cannabis tenants and are located in areas with established zoning and permitting procedures. Two of the leased properties are zoned and permitted as licensed and regulated cannabis dispensaries, and two of the leased properties are zoned and permitted as licensed and regulated cannabis cultivation and processing facilities. Each regulated property may undergo a non-standard development process. Various development requirements in this process may include initial property identification, zoning authorization, and permitting guidance in order to qualify a commercial property for subsequent architectural design, utility installation, construction and development, property management, facilities management systems, and security system installation. 31 For the three and nine months endedSeptember 30, 2022 and 2021, substantially all of our Property Investment Portfolio 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 theState of Arizona . For the three months endedSeptember 30, 2022 and 2021, Real Estate Services segment revenues included$0 and$1,438 that were generated from the Significant Tenants. For the nine months endedSeptember 30, 2022 and 2021, Real Estate Services segment revenues included$0 and$15,438 that were generated from the Significant Tenants.
As of
Tempe, Chino Valley, Green Valley, Kingman,
Location AZ AZ AZ AZ
Industrial Greenhouse/ Retail Retail
Description /Office Nursery (special use) (special use)
Cannabis Cannabis Cannabis Cannabis
Current Use Facility Facility Dispensary Dispensary
Date Acquired March 2014 August 2015 October 2014 May 2014
Lease Start Date May 2018 May 2018 May 2018 May 2018
Lease End Date April 2040 April 2040 April 2040 April 2040
Total No. of Tenants 1 1 1 1 Portfolio Total
Land Area (Acres) 3.65 47.60 1.33 0.32 52.90
Land Area (Sq. Feet) 158,772 2,072,149 57,769 13,939 2,302,629
Undeveloped Land Area (Sq. Feet) - 1,782,563 - 6,878 1,789,441 Developed Land Area (Sq. Feet) 158,772 289,586 57,769 7,061 513,188 Total Rentable Building Sq. Ft. 60,000 97,312
1,440 1,497 160,249
Vacant Rentable Sq. Ft. - - - - -
Sq. Ft. rented as of September 30, 2022 60,000 97,312
1,440 1,497 160,249
Annual Base Rent (*,**)
2022 (remainder of year) $ 152,514 $ 262,743 $ 10,500 $ 12,000 $ 437,757
2023 610,053 1,050,970 42,000 48,000 1,751,023
2024 610,053 1,050,970 42,000 48,000 1,751,023
2025 610,053 1,050,970 42,000 48,000 1,751,023
2026 598,589 1,050,970 42,000 48,000 1,739,559
2027 590,400 1,050,970 42,000 48,000 1,731,370
Thereafter 7,281,600 12,961,958 518,000 592,000 21,353,558
Total $ 10,453,262 $ 18,479,551 $ 738,500 $ 844,000 $ 30,515,313 * Annual base rent represents amount of cash payments due from tenants.
** For
parking lot space used by a third party as an antenna location.
Annualized $ per Rented Sq. Ft. (Base Rent)
Tempe, Chino Valley, Green Valley, Kingman,
Year AZ AZ AZ AZ
2022 $ 9.8 $ 10.8 $ 29.2 $ 32.1
2023 $ 9.8 $ 10.8 $ 29.2 $ 32.1
2024 $ 9.8 $ 10.8 $ 29.2 $ 32.1
2025 $ 9.8 $ 10.8 $ 29.2 $ 32.1
2026 $ 9.8 $ 10.8 $ 29.2 $ 32.1
32
The Company is focusing heavily on the growth of a diversified revenue stream in
2022 and is moving to take advantage of new opportunities. We intend to
accomplish this by prospecting new real estate services across the country for
private, public, and municipal clients. We believe that strategic real estate
services are likely to emerge as the growth engine for Zoned Properties .
Pursuant to lease agreements with our Significant Tenant, from the period from
May 31, 2020 through September 30, 2022 , our Significant Tenants invested a
combined total of at least $8,000,000 improvements in and to the properties in
Chino Valley . The increase in the rentable area of the leased premises resulted
in an increase in all amounts calculated based on the same, including, without
limitation, base rent.
COVID-19
In March 2020 , the World Health Organization declared COVID-19 a global pandemic
and recommended containment and mitigation measures worldwide. The Company is
monitoring this closely, and although operations have not been materially
affected by the COVID-19 outbreak to date, the ultimate duration and severity of
the outbreak and its impact on the economic environment and our business is
uncertain. Currently, all of the properties in the Company's portfolio are open
to its Significant Tenants and will remain open pursuant to state and local
government requirements. The Company did not experience in 2020 or 2021 and does
not foresee in 2022, any material changes to its operations from COVID-19. The
Company's tenants are continuing to generate revenue at these properties, and
they have continued to make rental payments in full and on time and we believe
the tenants' liquidity position is sufficient to cover its expected rental
obligations. Accordingly, while the Company does not anticipate an impact on its
operations, it cannot estimate the duration of the pandemic and potential impact
on its business if the properties must close or if the tenants are otherwise
unable or unwilling to make rental payments. In addition, a severe or prolonged
economic downturn could result in a variety of risks to the Company's business,
including weakened demand for its properties and a decreased ability to raise
additional capital when needed on acceptable terms, if at all.
Results of Operations
The following comparative analysis on results of operations was based primarily
on the comparative 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 nine months ended September 30, 2022 and 2021,
which are included elsewhere in this quarterly report on Form 10-Q. The results
discussed below are for the three and nine months ended September 30, 2022 and 2021.
Comparison of Results of Operations for the Three and Nine Months Ended
Revenues For the three and nine months endedSeptember 30, 2022 and 2021, revenues consisted of the following: Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Rent revenues$ 450,374 $ 314,677 $ 1,290,785 $ 901,838
Advisory and franchise revenues 73,500 3,188 156,500
75,344
Brokerage revenues 91,114 69,500 605,056 306,092
Total revenues $ 614,988 $ 387,365 $ 2,052,341 $ 1,283,274 Revenues by reportable business segments for the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Revenues:
Property investment portfolio $ 450,374 314,677 $ 1,290,785 $ 901,838
Real estate services 164,614 72,688 761,556 381,436
$ 614,988 $ 387,365 $ 2,052,341 $ 1,283,274
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For the three months ended September 30, 2022 , total revenues related to our
property investment portfolio amounted to $450,374 , including Significant
Tenants revenues of $445,476 , as compared to $314,677 , including Significant
Tenant revenues of $309,625 , for the three months ended September 30, 2021 , an
increase of $135,697 , or 43.1%. For the nine months ended September 30, 2022 ,
total revenues related to our property investment portfolio amounted to
$1,290,785 , including Significant Tenants revenues of $1,276,249 , as compared to
$901,838 , including Significant Tenant revenues of $884,087 , for the nine months
ended September 30, 2021 , an increase of $388,947 , or 43.1%. For the three and
nine months ended September 30, 2022 , the increase in revenues as compared to
the 2021 comparable period was attributable to an increase in rental revenue
from our Significant Tenant of due to an increase in rental revenue at our Chino
Valley facility related to a fourth amendment to our lease agreement in
connection with an increase in rentable square footage. Substantially all of the
Company's real estate properties are leased under triple-net leases to the
Significant Tenants.
For the three months ended September 30, 2022 , total revenues related to our
real estate services segment amounted to $164,614 , including Significant Tenants
revenues of $0 , as compared to $72,688 , including Significant Tenant revenues of
$1,438 , for the three months ended September 30, 2021 , an increase of $91,926 ,
or 126.5%. For the three months ended September 30, 2022 , the increase in
revenues related to our real estate services segment as compared to the 2021
comparable period was attributable to an increase in brokerage revenue of
$21,614 related to commission earned on real estate listings, and an increase in
advisory revenues of $70,312 related to the expansion of our client base. For
the nine months ended September 30, 2022 , total revenues related to our real
estate services segment amounted to $761,556 , including Significant Tenants
revenues of $0 , as compared to $381,436 , including Significant Tenant revenues
of $15,438 , for the nine months ended September 30, 2021 , an increase of
$380,120 , or 99.6%. For the nine months ended September 30, 2022 , the increase
in revenues related to our real estate services segment as compared to the 2021
comparable period was attributable to an increase in brokerage revenue of
$298,964 related to commission earned on real estate listings, an increase in
advisory revenues of $69,906 related to the expansion of our client base, and an
increase in franchise fees earned of $11,250 .
Operating expenses
For the three months endedSeptember 30, 2022 , operating expenses amounted to$636,540 as compared to$440,816 for the three months endedSeptember 30, 2021 , an increase of$195,724 , or 44.4%. For the nine months endedSeptember 30, 2022 , operating expenses amounted to$2,073,579 as compared to$1,240,440 for the nine months endedSeptember 30, 2021 , an increase of$833,139 , or 67.2%. For the three and nine months endedSeptember 30, 2022 and 2021, operating expenses
consisted of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Compensation and benefits $ 346,655 $ 126,868 $ 883,484 $ 322,178
Professional fees 80,084 105,409 262,832 308,351
Brokerage fees 70,181 42,500 428,147 160,796General and administrative expenses 54,019 46,849
186,434 148,258 Depreciation and amortization 87,550 98,214 271,418 289,150 Real estate taxes 21,762 20,976 65,287 63,651
Gain on sale of property and equipment - -
(312 ) (51,944 ) Total$ 660,251 $ 440,816 $ 2,097,290 $ 1,240,440 ? For the three months endedSeptember 30, 2022 , compensation and benefit
expense increased by
ended
stock-based compensation of
of
team members. The increase in stock-based compensation related to an increase
in stock-based compensation from the accretion of stock option expense. During
the second quarter of 2022, we began to hire additional staff related to the
diversification of our real estate services for the expansion of both advisory
services and brokerage services. For the nine months ended
compensation and benefit expense increased by
to the nine months ended
an increase in compensation and benefits of
stock-based compensation of
full-time and part-time team members. The increase in stock-based compensation
was from the accretion of stock option expense offset by a decrease in the
value of common shares issued for services. During the second quarter of 2022,
we began to hire additional staff related to the diversification of our real
estate services for the expansion of both advisory services and brokerage
services.
34
? For the three months ended
This decrease was primarily attributable to a decrease in consulting fees of
offset by an increase in accounting fees of
of
months ended
14.8%, as compared to the nine months ended
was primarily attributable to a decrease in consulting fees of
the hiring of certain consultants that are now employees and a decrease in
transfer agent fees of
relations fees of
? For the three months ended
real estate services segment, we recorded brokerage fees amounting to
and
2021, we recorded brokerage fees amounting to
respectively. Brokerage fees occur as the result of various percentage-based
commission splits we pay to our licensed brokerage team members
participate in various real estate listing transactions.
? General and administrative expenses consist of expenses such as rent expense,
insurance expense, insurance expense, travel expenses, office expenses,
telephone and internet expenses, advertising and marketing expense, and other
general operating expenses. For the three months ended
general and administrative expenses increased by
to the three months ended
or 25.7%, as compared to the nine months ended
increases were primarily attributable to an increase in operating activities
related to our real estate services segment.
? For the three months ended
expense decreased by
expense decreased by
of intangible assets which were fully amortized.
? For the three months ended
the nine months ended
? For the nine months ended
property and equipment of
we recorded a gain from sale of our Gilbert property of $51,944 .
(Loss) Income from operations
As a result of the factors described above, for the three months ended September
30, 2022 , loss from operations amounted to $45,263 as compared to loss from
operations of $53,451 for the three months ended September 30, 2021 , a decrease
of $8,188 , or 15.3%. For the nine months ended September 30, 2022 , loss from
operations amounted to $44,949 as compared to income from operations of $42,834
for the nine months ended September 30, 2021 , a negative change of $87,783 ,or 204.9%. Other (expense) income
Other (expense) income primarily includes interest expense incurred on debt with third parties and a related party, and includes other (expense) income. For the three months endedSeptember 30, 2022 and 2021, total other expenses, net amounted to$32,065 as compared to total other expenses, net of$(42,044) , respectively, representing a decrease of$9,979 , or 23.7%. This decrease was attributable to a decrease in loss from unconsolidated joint ventures of$9,680 offset by a decrease in interest expense of$300 . For the nine months endedSeptember 30, 2022 and 2021, total other expenses, net amounted to$97,138 as compared to total other expenses, net of$97,070 , respectively, representing an increase of$68 , or less than 1.0%. Net loss
As a result of the foregoing, for the three months endedSeptember 30, 2022 and 2021, net loss amounted to$77,328 , or$(0.01) per common share (basic and diluted), and$95,495 , or$(0.01) per common share (basic and diluted), respectively. For the nine months endedSeptember 30, 2022 and 2021, net loss amounted to$142,087 , or$(0.01) per common share (basic and diluted), and$54,236 , or$(0.00) per common share (basic and diluted), respectively. 35
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had cash of$842,115 and$1,191,940 of cash as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. Our primary uses of cash have been for compensation and benefits, fees paid to third parties for professional services, real estate taxes, general and administrative expenses, and the development of rental properties and other lines of business. All funds received have been expended in the furtherance of growing the business. We receive funds from the collection of rental income and advisory fees. The following trends are reasonably likely to result in changes in our liquidity over the near to long term:
? An increase in working capital requirements to finance our current business,
? Addition of administrative and sales personnel as the business grows, and
? The cost of being a public company. ? An increase in investments in joint ventures and other projects.
? An increase in funds used for lease incentives paid to our Significant Tenant.
? An increase in funds used to secure financing. We may need to raise additional funds, particularly if we are unable to continue to generate positive cash flows from our operations. We estimate that based on current plans and assumptions, that our available cash will be sufficient to satisfy our cash requirements under our present operating expectations for the next 12 months from the date of this quarterly report on Form 10-Q. Other than revenue received from the lease of our rental properties, from advisory fees, from brokerage revenues, and from franchise services, we presently have no other significant alternative source of working capital. We have used these funds to fund our operating expenses, pay our obligations, develop rental properties, invest in joint ventures and notes receivable, and to grow our company. We may need to raise significant additional capital or debt financing to acquire new properties, to develop existing properties, to assure we have sufficient working capital for our ongoing operations and debt obligations, and to invest in new joint venture and other projects. As discussed in the Overview section and elsewhere, during the year endedDecember 31, 2021 , we contributed$86,000 to the Beakon joint venture and we contributed$90,000 to the Zoneomics Green joint venture. Additionally, onDecember 31, 2021 , we recorded an other-than-temporary impairment loss of$73,970 because it was determined that the fair value of our equity method investment in Beakon was less than its carrying value. Based on management's evaluation, it was determined that due to market conditions and lack of committed funding, our ability to recover the carrying amount of the investment in Beakon was impaired as ofDecember 31, 2021 . Our future operations are dependent on our ability to manage our current cash balance, on the collection of rental and advisory revenues and the attainment of new advisory clients. Our real estate properties are leased to Significant Tenants under triple-net leases for which terms vary. We monitor the credit of these tenants to stay abreast of any material changes in credit quality. We monitor tenant credit by (1) reviewing financial statements and related metrics and information that are publicly available or that are provided to us upon request, and (2) monitoring the timeliness of rent collections. As ofSeptember 30, 2022 andDecember 31, 2021 , we had an asset concentration related to our Significant Tenant leases. As ofSeptember 30, 2022 andDecember 31, 2021 , these Significant Tenants represented approximately 71.5% and 79.2% of total assets, respectively. If our Significant Tenants are prohibited from operating due to federal or state regulations or due to COVID-19, or cannot pay their rent, we may not have enough working capital to support our operations and we would have to seek out new tenants at rental rates per square less than our current rate per square foot. We included audited financial statements of our Significant Tenants as Exhibit 99.1 to our Annual Report on Form 10-K as filed with theSEC onMarch 24, 2022 since such audited financial statements represent material information and are necessary for the protection of investors. We may secure additional financing to acquire and develop additional and existing properties. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow our business operations. 36 Line of Credit OnJuly 11, 2022 , Zoned Arizona entered into a Loan Agreement (the "Loan Agreement"), dated as ofJuly 11, 2022 , by and betweenZoned Arizona andEast West Bank (the "Bank"). Pursuant to the terms of the Loan Agreement, subject to and upon the satisfaction of the terms and conditions of the Loan Agreement, Zoned Arizona may request advances under a multiple access loan ("MAL") during the MAL Advance Period (as hereinafter defined) in an aggregate outstanding amount not to exceed$4,500,000 . The "MAL Advance Period" means the shorter of (i) a period of one year fromJuly 11, 2022 , or (ii) a period commencing onJuly 11, 2022 and ending on the date that Zoned Arizona makes the Early Amortization Election (as hereinafter defined). Amounts borrowed under the MAL may not be re-borrowed. OnJuly 11, 2022 , Zoned Arizona paid loan and other fees of$176,472 in connection with the Loan Agreement, which have been capitalized as deferred financing costs and included in prepaid expenses and other current assets on the accompanying consolidated balance sheet as ofSeptember 30, 2022 . The proceeds of each advance under the MAL may be used by Zoned Arizona to refinance the real property at410 S. Madison Drive ,Tempe, AZ 85251 (the "Property") or to conduct certain acts related to the acquisition, improvement and maintenance of real property. On termination of the MAL, all unpaid principal, unpaid and accrued interest, and all other amounts due under the MAL will be immediately due and payable. At any time beforeJuly 11, 2023 , Zoned Arizona may elect to commence paying principal together with interest on the MAL (the "Early Amortization Election") in accordance with the repayment terms set forth in the variable rate note initially evidencing the MAL, executed by Zoned Arizona in favor of the Bank (the "Note"). If Zoned Arizona makes the Early Amortization Election, then (i) Zoned Arizona will not be entitled to any further advances under the MAL, and (ii) the 25-year amortization schedule referenced in the Note will be from the date Zoned Arizona makes the Early Amortization Election. Provided that Zoned Arizona has previously drawn one or more advances equal to or greater than$1 million under the MAL, at any time during the MAL Advance Period, Zoned Arizona may elect to reset as to such advances from the variable interest rate set forth in the Note to a fixed interest rate for the remaining term of the MAL (the "Fixed Rate Option"). In the event Zoned Arizona elects the Fixed Rate Option for any advances, such advances will become subject to a new SWAP note (a "SWAP Note") in a principal amount of at least$1 million based on an interest rate equal to the prime rate then in existence as of the effective date of the new SWAP Note plus 0.75%. The Loan Agreement contains representations, warranties and covenants customary for a transaction of this type. Among other things, the Loan Agreement provides as follows: (a) upon the occurrence of an event of default, the outstanding principal balance of the MAL will not at any time exceed 65% of the Property's most recent appraised value; (b) upon the occurrence of an event of default, Zoned Arizona will maintain a minimum Non-Cannabis Debt Service Coverage Ratio (as hereinafter defined) of 1.40 to 1.00; (c) Zoned Arizona will at all times maintain a minimum debt service coverage ratio of 1.50 to 1.0; and (d) ZonedArizona and the Company, collectively, will maintain at all times, liquid assets of at least the sum of all tenant securities deposits under leases, plus$350,000 in operating reserves. All advances under the MAL bear interest at a variable rate equal to the greater of (a) the prime rate plus 2%, or (b) a floor rate equal to the sum of the prime rate as ofJuly 11, 2022 plus 2.25%. FromJuly 11, 2022 toJuly 11, 2023 , ZonedArizona agreed to make interest payments on the outstanding principal balance of the MAL. From and afterJuly 11, 2023 and continuing untilJuly 11, 2028 (the "Maturity Date"), Zoned Arizona will pay principal together with interest on the MAL in 60 monthly installments based on the interest rate set forth in the Note and a principal amortization schedule of 25 years fromJuly 11, 2023 (or if Zoned Arizona makes the Early Amortization Election, from the date such election is made). ZonedArizona may prepay the outstanding principal under the Note, at any time, subject to the provisions of the Note. If Zoned Arizona prepays all, but not less than all, of the outstanding principal balance of the MAL at any time untilJuly 11, 2023 , then Zoned Arizona will also pay a premium equal to 1% of the amount prepaid.
As of
Cash Flow
For the Nine Months Ended
Net cash flow provided by operating activities was$398,311 for the nine months endedSeptember 30, 2022 , as compared to net cash flow provided by operating activities of$387,999 for the nine months endedSeptember 30, 2021 , representing an increase of$10,312 .
? Net cash flow provided by operating activities for the nine months ended
add-back of non-cash items consisting of depreciation of
amortization expense of
of
by changes in operating assets and liabilities primarily consisting of an
increase in accounts receivable of $346,610 attributable to an increase inbrokerage commissions receivable, a decrease in deferred rent receivable of
prepaid expenses of
attributable to an increase in brokerage fees payable, an increase in accrued
expenses of $48,797 , an increase in deferred revenues of $6,670 , and a
decrease in accrued expenses - related party of $5,400 .
37
? Net cash flow provided by operating activities for the nine months ended
add-back of non-cash items consisting of depreciation of
amortization expense of
accretion of stock-based stock option expense of
of rental property of
offset by changes in operating assets and liabilities primarily consisting of
an increase in accounts receivable of
of
expenses of $16,447 , and an increase in deferred revenues of $6,687 .
During the nine months ended September 30, 2022 , net cash flow used in investing
activities amounted to $551,664 as compared to net cash flow provided by
investing activities of $3,348 , an increase of $555,012 . During the nine months
ended September 30, 2022 , net cash used in investing activities was attributable
to an increase in lease incentive receivables related to the disbursement of
$500,000 to our Significant Tenant to be used for leasehold improvements, the
purchase of property and equipment of $3,764 , and cash used to invest equity
securities of $50,000 . These uses of cash in investing activities were offset by
proceeds from the sale of property and equipment of $2,100 . During the nine
months ended September 30, 2021 , cash provided by investing activities was
attributable to proceed from the sale of rental property of $322,332 , offset by
cash used for an investment in a convertible note receivable of $100,000 , cash
used in improvement of rental properties of $40,360 , cash used for the purchase
of property and equipment of $2,624 , and cash used for investment in joint
ventures of $176,000 .
During the nine months ended September 30, 2022 , net cash flow used in financing
activities amounted to $196,472 as compared to net cash used in financing
activities of $0 , an increase of $196,472 . During the nine months ended
September 30, 2022 , net cash used in financing activities was attributable to
the repayment of notes payable - related party of $20,000 and cash used to pay
for deferred financing costs related to our line of credit of $176,472 .
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as ofSeptember 30, 2022 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods. Payments Due by Period Less than Contractual obligations: Total 1 year 1-3 years 3-5 years 5 + years Convertible notes$ 2,000 $ - $ - $ -$ 2,000 Interest on convertible notes 910 150 240
240 280
Total $ 2,910 $ 150 $ 240 $ 240 $ 2,280 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.
38
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe 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 audited 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 several factors including historical operating results, known trends, and market/economic conditions. Our properties are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property's carrying amount over its estimated fair value. Impairment analyses are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. If our estimates of the projected future cash flows, anticipated holding periods, or market conditions change, our evaluation of impairment losses may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results.
We have capitalized land, which is not subject to depreciation.
Lease accountingFinancial Accounting Standards Board's (the "FASB") Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to recognize a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. For leases entered into on or after the effective date, where the Company is the lessor, at the inception of the contract, the Company assesses whether the contract is a sales-type, direct financing or operating lease by reviewing the terms of the lease and determining if the lessee obtains control of the underlying asset implicitly or explicitly. 39 If a change to a pre-existing lease occurs, the Company evaluates if the modification results in a separate new lease or a modified lease. A new lease results when a modification provides additional right of use. The new lease or modified lease is then reassessed to determine its classification based on the modified terms. As disclosed in Note 3, onJanuary 1, 2019 , theChino Valley lease was modified to increase the monthly base rent from$35,000 to$40,000 . OnMay 31, 2020 , theChino Valley lease was modified to decrease the monthly base rent from$40,000 to$32,800 and theTempe lease was modified to increase the monthly base rent from$33,500 to$49,200 . OnAugust 23, 2021 and effectiveSeptember 1, 2021 , theChino Valley lease was amended, and the monthly base rent was increased to$55,195 due to additional space of 27,312 square feet being leased to the lessee. OnJanuary 24, 2022 and effective onMarch 1, 2022 , theChino Valley lease was amended and the monthly base rent was increased to$87,581 due to additional space of 30,000 square feet being leased to the lessee, increasing the premises to a total of 97,312 square feet of operational space. In connection with this lease amendment, the Company paid$500,000 to tenant as a tenant improvement allowance or lease incentive for investment into the premises, which was capitalized as a lease incentive receivable and is recognized on a straight-line basis over the remaining lease term as a reduction to the lease income. The increase in monthly rent was commensurate with the additional space being leased; therefore, this modification qualifies as a separate contract under the FASB's Accounting Standards Codification ("ASC") 842. At the commencement of the modified terms, the Company reassessed its lease classification and concluded it remained properly classified as an operating lease. The Company records revenues from rental properties for its operating leases on a straight-line basis where it is the lessor. Any revenue on the straight-line basis exceeding the monthly payment amount required on the operating lease is reflected as a deferred rent receivable. EffectiveMay 31, 2020 , the Company amended its leases for which it is the lessor on itsChino Valley ,Tempe ,Kingman andGreen Valley properties. The amendments resulted in an abatement of rent for the months of June andJuly 2020 . This rent abatement resulted in a deferred rent receivable as ofSeptember 30, 2022 andDecember 31, 2021 of$158,029 and$164,770 , respectively. Additionally, if the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that can be taken in the form of cash or a credit against the tenant's rent) that is funded is treated as a lease incentive receivable and amortized as a reduction of revenue over the lease term. For contracts entered into on or after the effective date, where the Company is the lessee, at the inception of a contract, the Company assess whether the contract is, or contains, a lease. The Company's assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. The Company allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. For leases where the Company is a lessee, primarily for the Company's administrative office lease, the Company analyzed if it would be required to record a lease liability and a right of use asset on its consolidated balance sheets at fair value upon adoption of ASU 2016-02. Operating lease right of use asset represents the right to use the leased asset for the lease term and operating lease liability is recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company used its incremental borrowing rate of 6% based on the information available at the adoption date or execution of a lease agreement in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the condensed consolidated statements of operations. 40
Investment in joint ventures
We have equity investments in various privately held entities. We account for these investments either under the equity method or cost method of accounting depending on our ownership interest and level of influence. Investments accounted for under the equity method are recorded based upon the amount of our investment and adjusted each period for our share of the investee's income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable. We evaluate our investments in these entities for consolidation. We consider our percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining whether or not the investment qualifies for consolidation or if it should be accounted for as an unconsolidated investment under either the equity method of accounting. If an investment qualifies for the equity method of accounting, our investment is recorded initially at cost, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. The net income or loss of an unconsolidated investment is allocated to its investors in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences, if any, between the carrying amount of our investment in the respective joint venture and our share of the underlying equity of such unconsolidated entity are amortized over the respective lives of the underlying assets as applicable. These items are reported as a single line item in the statements of operations as income or loss from investments in unconsolidated affiliated entities. Long-term investments
Long-term investments include investments in equity securities of entities over which the Company does not have a controlling financial interest or significant influence and are accounted for at fair value. Equity investments without readily determinable fair values are measured at cost with adjustments for observable changes in price or impairments (referred to as the "measurement alternative"). In applying the measurement alternative, the Company performs a qualitative assessment on a quarterly basis and recognizes an impairment if there are sufficient indicators that the fair value of the equity investments is less than carrying values. Changes in value are recorded in non-operating income (loss). Revenue recognition
We follow ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"). This
standard establishes a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and supersedes most
of the existing revenue recognition guidance. ASC 606 requires an entity to
recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services and also requires
certain additional disclosures.
Rental income includes base rents that each tenant pays in accordance with the
terms of its respective lease and is reported on a straight-line basis over the
non-cancellable term of the lease, which includes the effects of rent abatements
under the leases. We commence rental revenue recognition when the tenant takes
possession of the leased space or controls the physical use of the leased space
and the leased space is substantially ready for its intended use. If the lease
provides for tenant improvements, we determine whether the tenant improvements,
for accounting purposes, are owned by the tenant or the Company. When we are the
owner of the tenant improvements, the tenant is not considered to have taken
physical possession or have control of the physical use of the leased asset
until the tenant improvements are substantially completed. When the tenant is
the owner of the tenant improvements, any tenant improvement allowance
(including amounts that can be taken in the form of cash or a credit against the
tenant's rent) that is funded is treated as a lease incentive receivable and
amortized as a reduction of revenue over the lease term.
Currently, the Company's leases provide for payments with fixed monthly base
rents over the term of the leases. The leases also require the tenant to remit
estimated monthly payments to the Company for property taxes. These payments are
recorded as rental income and the related property tax expense reflected
separately on the condensed consolidated statements of operations.
Revenues from advisory services is recognized when the Company performs services pursuant to its agreements with clients and collectability is reasonably assured.
Brokerage revenues primarily consist of real estate sales commissions and are
recognized upon the successful completion of all required services which is
likely to occur upon a lease commencement, when escrow closes on the sale of a
property, or as otherwise negotiated between the Brokerage and its clients. In
accordance with the guidelines established for Reporting Revenue Gross as a
Principal versus Net as an Agent in the ASC Topic 606, the Company records
commission revenues and expenses on a gross basis. Of the criteria listed in ASC
Topic 606, the Company is the primary obligor in the transaction, does not have
inventory risk, performs all or part of the service, has credit risk, and has
wide latitude in establishing the price of services rendered and discretion in
selection of agents and determination of service specifications. Brokerage
revenue that are payable upon payment of rent or other events beyond the
Company's control are recognized upon the occurrence of such events.
41
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 -
"Compensation -Stock Compensation", which requires recognition in the financial
statements of the cost of employee, director, and non-employee services received
in exchange for an award of equity instruments over the period the employee,
director, or non-employee is required to perform the services in exchange for
the award (presumptively, the vesting period). The ASC also requires measurement
of the cost of employee, director, and non-employee services received in
exchange for an award based on the grant-date fair value of the award. The
Company has elected to recognize forfeitures as they occur as permitted under
Accounting Standards Update ("ASU") 2016-09 Improvements to Employee Share-Based
Payment Accounting.
Recent Accounting Pronouncements
InJune 2016 , the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). ASU 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. ASU 2016-13 is effective for annual reporting periods beginning afterDecember 15, 2019 , including interim periods within those fiscal years, and a modified retrospective approach is required, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November of 2019, the FASB issued ASU 2019-10, which delayed the implementation of ASU 2016-13 to fiscal years beginning afterDecember 15, 2022 for smaller reporting companies which applies to the Company. The Company is currently evaluating the impact of ASU 2016-13 on its future consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
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