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 September 30, 2017

 

☐ 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.

 

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

 

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

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 November 13, 2017, the registrant had 17,355,497 shares of common stock, par value $.001 per share, issued and outstanding.

 

 

 

ZONED PROPERTIES, INC.

Form 10-Q

September 30, 2017

 

INDEX

 

	Page
Part I. Financial Information
Item 1. Financial Statements	1
Condensed Consolidated Balance Sheets – September 30, 2017 and December 31, 2016 (unaudited)	1
Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)	2
Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2017 and 2016 (unaudited)	3
Notes to Unaudited Condensed Consolidated Financial Statements	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures about Market Risk	24
Item 4. Controls and Procedures	24
Part II. Other Information
Item 1. Legal Proceedings	25
Item 1A. Risk Factors	25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3. Defaults Upon Senior Securities	25
Item 4. Mine Safety Disclosures	25
Item 5. Other Information	25
Item 6. Exhibits	25
Signatures	26

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		As of				As of
		September 30,				December 31,
		2017				2016
ASSETS
Cash		$	791,465			$	366,024
Rental properties, net			7,086,863				6,878,584
Rental property held for sale, net			-				1,140,891
Rent receivable			72,335				-
Deferred rent receivable			-				16,462
Deferred rent receivable - related parties			1,543,927				1,006,171
Real estate tax escrow			-				39,487
Note receivable - related party			179,483				-
Prepaid expenses and other current assets			133,910				140,010
Property and equipment, net			37,536				40,212
Security deposits			2,890				8,158
Total Assets		$	9,848,409			$	9,635,999
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Mortgage payable		$	-			$	2,100,000
Convertible note payable			-				500,000
Convertible notes payable - related parties			2,020,000				500,000
Accounts payable			10,652				78,311
Accrued expenses			93,301				96,748
Accrued expenses - related parties			33,300				85,541
Deferred revenues			4,000				4,750
Deferred revenues - related party			1,841				-
Security deposits payable - related parties			71,800				70,000
Security deposits payable			5,864				21,964
Total Liabilities			2,240,758				3,457,314
Commitments and Contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 5,000,000 shares authorized; 2,000,000 shares issued and outstanding at September 30, 2017 and December 31, 2016 ($1.00 per share liquidation preference)			2,000				2,000
Common stock: $.001 par value, 100,000,000 shares authorized; 17,311,701 and 17,210,318 issued and outstanding at September 30, 2017 and December 31, 2016, respectively			17,312				17,210
Additional paid-in capital			20,592,763				20,352,528
Accumulated deficit			(13,004,424	)			(14,193,053	)
Total Stockholders’ Equity			7,607,651				6,178,685
Total Liabilities and Stockholders’ Equity		$	9,848,409			$	9,635,999

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  

ZONED PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2017				2016				2017				2016
REVENUES:
Rental revenues		$	13,291			$	58,829			$	67,993			$	177,909
Rental revenues - related parties			522,103				428,912				1,512,609				1,132,961
Total revenues			535,394				487,741				1,580,602				1,310,870
OPERATING EXPENSES:
Compensation and benefits			107,173				92,814				445,401				366,199
Professional fees			45,381				122,038				166,002				604,238
General and administrative expenses			44,118				47,692				130,699				151,992
Depreciation and amortization			59,580				43,139				167,765				125,910
Property operating expenses			28,163				23,913				90,522				54,941
Real estate taxes			21,206				27,690				66,488				83,559
Settlement expense			20,500				-				20,500				87,500
Total operating expenses			326,121				357,286				1,087,377				1,474,339
INCOME (LOSS) FROM OPERATIONS			209,273				130,455				493,225				(163,469	)
OTHER (EXPENSES) INCOME:
Interest expenses			-				(48,123	)			(42,983	)			(144,369	)
Interest expenses - related parties			(30,300	)			(8,750	)			(98,988	)			(26,250	)
Gain (loss) on sale of property and equipment			-				-				831,753				(1,843	)
Interest income			2,836				-				5,622				-
Total other (expenses) income, net			(27,464	)			(56,873	)			695,404				(172,462	)
INCOME (LOSS) BEFORE INCOME TAXES			181,809				73,582				1,188,629				(335,931	)
PROVISION FOR INCOME TAXES			-				-				-				-
NET INCOME (LOSS)		$	181,809			$	73,582			$	1,188,629			$	(335,931	)
NET INCOME (LOSS) PER COMMON SHARE:
Basic		$	0.01			$	0.00			$	0.06			$	(0.02	)
Diluted		$	0.01			$	0.00			$	0.06			$	(0.02	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic			17,318,128				17,160,228				17,299,805				17,136,148
Diluted			17,930,461				17,160,228				18,142,071				17,136,148

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Nine Months Ended
		September 30,
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	1,188,629			$	(335,931	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization expense			167,765				125,910
Stock-based compensation			204,000				228,033
Stock option expense			3,962				233,009
Stock-based settlement expense			10,500				43,750
(Gain) loss from sale of property and equipment			(831,753	)			1,843
Change in operating assets and liabilities:
Rent receivable			(72,335	)			-
Deferred rent receivable			-				(6,025	)
Deferred rent receivable - related parties			(537,756	)			(430,644	)
Real estate tax escrow			39,487				(60,899	)
Note receivable			(179,483	)			-
Prepaid expenses and other assets			6,100				(59,881	)
Security deposits			5,268				-
Accounts payable			(67,659	)			37,703
Accrued expenses			18,427				55,070
Accrued expenses - related parties			(52,241	)			20,249
Deferred revenues			(750	)			-
Deferred revenues - related party			1,841				-
Security deposits payable - related party			1,800				-
Security deposits payable			(16,100	)			29,523
NET CASH USED IN OPERATING ACTIVITIES			(110,298	)			(118,290	)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of buildings and improvements			(365,863	)			(551,314	)
Cash received from sale of property and equipment			1,984,188				500
Acquisition of property and equipment			(2,586	)			(2,534	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			1,615,739				(553,348	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible debt - related parties			2,020,000				-
Repayment of convertible note - related party			(500,000	)			-
Repayment of convertible note			(500,000	)			-
Repayment of mortgage payable			(2,100,000	)			-
NET CASH USED IN FINANCING ACTIVITIES			(1,080,000	)			-
NET INCREASE (DECREASE) IN CASH			425,441				(671,638	)
CASH, beginning of period			366,024				1,281,464
CASH, end of period		$	791,465			$	609,826
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid		$	192,087			$	144,369
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for buildings and improvements		$	-			$	60,000
Common stock issued for accrued settlement payable		$	21,875			$	-

 

See accompanying notes to unaudited condensed consolidated financial statements. 

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

 

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

 

The Company has the following wholly-owned subsidiaries:

 

	●	Gilbert Property Management, LLC was organized in the State of Arizona on February 10, 2014.
	●	Chino Valley Properties, LLC (“Chino Valley”) was organized in the State of Arizona on April 15, 2014.
	●	Kingman Property Group, LLC was organized in the State of Arizona on April 15, 2014.
	●	Green Valley Group, LLC (“Green Valley”) organized in the State of Arizona on April 15, 2014.
	●	Zoned Oregon Properties, LLC was organized in the State of Oregon on June 16, 2015.
	●	Zoned Colorado Properties, LLC was organized in the State of Colorado on September 17, 2015.
	●	Zoned Illinois Properties, LLC was organized in the State of Illinois on July 15, 2015.
	●	Zoned Arizona Properties, LLC was organized in the State of Arizona on June 2, 2017.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation and principles of consolidation

 

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

 

The condensed consolidated financial statements for the three and nine months ended September 30, 2017 and 2016 have been prepared by us without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments necessary to present fairly our financial position, results of operations, and cash flows as of September 30, 2017 and 2016, and for the periods then ended, have been made. Those adjustments consist of normal and recurring adjustments. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

 

Use of estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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 nine months ended September 30, 2017 and 2016 include the collectability of rent, the useful life of rental properties and property and equipment, assumptions used in assessing impairment of long-term assets, valuation allowances for deferred tax assets, and the fair value of non-cash equity transactions, including options and stock-based compensation.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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. 

 

The majority of the Company’s cash and cash equivalents are held at major commercial banks, which may at times exceed the Federal Deposit Insurance Corporation (“FDIC”) limit. To date, the Company has not experienced any losses on its invested cash. The Company had no cash equivalents at September 30, 2017 and December 31, 2016. At September 30, 2017 and December 31, 2016, the Company had approximately $542,000 and $110,000, respectively, of cash in excess of FDIC limits.

 

Fair value of financial instruments

 

The carrying amounts reported in the consolidated balance sheets for cash, rent receivable, note receivable, prepaid expenses and other current assets, real estate tax escrow, mortgages payable, convertible notes payable, accounts payable, accrued expenses, and other payables approximate their fair market value based on the short-term maturity of these instruments.

 

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

 

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

 

Cash

 

Cash is carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.

 

Accounts and note receivable

 

The Company recognizes an allowance for losses on accounts and notes receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized in general and administrative expense.

 

Real estate tax escrow

 

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

 

Rental property held for sale

 

The Company classifies assets as held for sale when an asset or asset group meets all of the held for sale criteria in the accounting guidance for impairment and disposal of long-lived assets. Assets held for sale are initially measured at the lower of carrying amount or fair value less cost to sell. The rental property held for sale at December 31, 2016 represented a building, improvements, and land in Tempe, Arizona was sold in March 2017. At September 30, 2017, there were no assets held for sale.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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 nine months ended September 30, 2017 and 2016, 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

 

Rental income includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported on a straight-line basis over the non-cancellable term of the lease, which includes the effects of rent steps and rent abatements under the leases. 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.

 

Certain of the Company’s leases currently contain rental increases at specified intervals. The Company records as an asset, and include in revenue, rents receivable that will be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Deferred rents receivable in the accompanying consolidated balance sheets include the cumulative difference between rental revenue recorded on a straight-line basis and rents received from the tenants in accordance with the lease terms. Accordingly, management determines to what extent the deferred rent receivable applicable to each specific tenant is collectible. The Company reviews material rents receivable and takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of rent receivable with respect to any given tenant is in doubt, we record an increase in the allowance for uncollectible accounts or the Company records a direct write-off of the specific rent receivable. No such reserves related to deferred rent receivable have been recorded as of September 30, 2017 and December 31, 2016.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Basic income (loss) per share

 

Basic income (loss) per share is computed by dividing net income (loss) available to common shareholders by weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) 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 securities since the preferred shares are entitled to dividends equal to common share dividends and accordingly, are included in the computation of earnings per share pursuant to the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. The following table presents a reconciliation of basic and diluted net income per share:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Income (loss) per common share - basic:
Net income (loss)		$	181,809			$	73,582			$	1,188,629			$	(335,931	)
Less: undistributed earnings allocated to participating securities			(18,829	)			-				(123,099	)			-
Net income (loss) allocated to common stockholders		$	162,980			$	73,582			$	1,065,530			$	(335,931	)
Weighted average common shares outstanding - basic			17,318,128				17,160,228				17,299,805				17,136,148
Net income (loss) per common share - basic		$	0.01			$	0.00			$	0.06			$	(0.02	)
Income (loss) per common share - diluted:
Net income (loss) allocated to common shareholders - basic		$	162,980			$	73,582			$	1,065,530			$	(335,931	)
Add: interest on convertible debt			30,300				-				109,681				-
Numerator for income (loss) per common share - diluted		$	193,280			$	73,582			$	1,175,211			$	(335,931	)
Weighted average common shares outstanding - basic			17,318,128				17,160,228				17,299,805				17,136,148
Effect of dilutive securities:
Stock options			4,509				-				229,043				-
Convertible notes payable			404,000				-				469,802				-
Weighted average common shares outstanding – diluted			17,726,637				17,160,228				17,998,650				17,136,148
Net income (loss) per common share - diluted		$	0.01			$	0.00			$	0.06			$	(0.02	)

  

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 nine months ended September 30, 2017 and 2016.

 

		Three Months Ended								Nine Months Ended
		September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
Convertible debt			-				200,000				-				200,000
Stock options			1,250,000				1,250,000				-				1,250,000

 

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.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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 September 30, 2017 and 2016 that would require either recognition or disclosure in the accompanying consolidated financial statements.

 

Stock-based compensation

 

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

 

Pursuant to ASC 505-50 – “Equity-Based Payments to Non-Employees”, all share-based payments to non-employees, including grants of stock options, are recognized in the consolidated financial statements as compensation expense over the service period of the consulting arrangement or until performance conditions are expected to be met. Using a Black-Scholes valuation model, the Company periodically reassessed the fair value of non-employee options until service conditions are met, which generally aligns with the vesting period of the options, and the Company adjusted the expense recognized in the consolidated financial statements accordingly.

 

Related parties

 

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

 

Recently issued accounting pronouncements

 

In May 2014, the FASB issued an update (“ASU 2014-09”) Revenue from Contracts with Customers. ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance and notes that lease contracts with customers are a scope exception. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. On August 12, 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09. Public business entities may elect to adopt the amendments as of the original effective date; however, adoption is required for annual reporting periods beginning after December 15, 2017. The Company is currently assessing the impact of the guidance on the consolidated financial statements and notes to the consolidated financial statements.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recently issued accounting pronouncements (continued)

 

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

 

In August 2016, the FASB issued ASU 2016-15 which addresses eight cash flow classification issues, eliminating the diversity in practice. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively applied as of the earliest date practicable. The Company is evaluating the impact this ASU will have on its consolidated financial statements and whether to early adopt.

 

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.

 

NOTE 3 – RENTAL PROPERTIES

 

At September 30, 2017 and December 31, 2016, rental properties, net consisted of the following:

 

Description		Useful Life (Years)				September 30, 2017				December 31, 2016
Building and building improvements			5 - 39			$	4,959,167			$	4,911,591
Construction in progress			-				323,288				5,000
Land			-				2,283,214				2,283,214
Rental properties, at cost							7,565,669				7,199,805
Less: accumulated depreciation							(478,806	)			(321,221	)
Rental properties, net						$	7,086,863			$	6,878,584

 

For the three months ended September 30, 2017 and 2016, depreciation expense of rental properties amounted to $57,812 and $41,522, respectively. For the nine months ended September 30, 2017 and 2016, depreciation expense of rental properties amounted to $162,503 and $105,345, respectively.

 

NOTE 4 – RENTAL PROPERTY HELD FOR SALE

 

On December 22, 2016, the Company entered into a Commercial Real Estate Purchase Contract (the “Agreement”) with a third party (the “Purchaser”) pursuant to which the Company agreed to sell, and the Purchaser agreed to purchase, the property located at 422 S. Madison Drive in Tempe, Arizona, for an aggregate purchase price of $2.125 million. Pursuant to the terms of the Agreement, the Purchaser paid a deposit of $20,000 within three days of entry into the Agreement, which amount was held in escrow by a third party. The Purchaser deposited an additional deposit of $20,000 in 2017. The remainder of the purchase price ($2.085 million) was received at closing. Pursuant to the terms of the Agreement, the purchase closed on March 15, 2017. In connection with the sale, the Company recorded a gain of $831,753.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

 

NOTE 5 – NOTE RECEIVABLE – RELATED PARTY

 

On March 30, 2017, in connection with a fourth amendment to the commercial lease agreement (the “Amendment”) with C3C3 Group, LLC, a company owned by Alan Abrams, a significant shareholder of the Company (“C3C3”), the Company agreed to defer rent and applicable taxes due for March, April and May 2017 in the form of a note receivable to C3C3 at an 8% interest rate commencing March 1, 2017 and payable over 12 months commencing January 1, 2018. At September 30, 2017 and December 31, 2016, note receivable amounted to $179,483 and $0, respectively.

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

(A) Chief financial officer engagement letter

 

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

 

(B) Convertible notes payable – related parties

 

On August 20, 2014, the Company received, pursuant to the terms of a Senior Convertible Debenture (“Debenture”), $500,000 from a beneficial common stockholder who also holds 50% of the Company’s issued preferred stock. The Debenture bears interest at 7% per annum and the principal balance and all accrued interest is due on the maturity date of August 20, 2017. The holder has the option after 12 months to convert all or a portion of the Debenture into shares of the Company’s common stock at the conversion price of $5.00 per share. On April 20, 2017, the Company repaid the principal balance of $500,000 and all accrued interest. As of September 30, 2017 and December 31, 2016, the principal balance due and owing under this Debenture is $0 and $500,000, respectively. As of September 30, 2017 and December 31, 2016, accrued interest payable amounted to $0 and $82,542, respectively, and is included in accrued expenses – related parties on the accompanying condensed consolidated balance sheets. 

 

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, a significant stockholder of the Company, in exchange for cash from Mr. Abrams of $2,000,000. Also on January 9, 2017, the Company issued a convertible debenture (the “McLaren Debenture” and together with the Abrams Debenture, the “Debentures”) in the aggregate principal amount of $20,000 in favor of Bryan McLaren, the Company’s Chief Executive Officer and President and a member of the Company’s Board of Directors, in exchange for cash from Mr. McLaren of $20,000. Each of Mr. Abrams and Mr. McLaren is referred to herein as a “Holder.” Each of the Debentures accrues interest at the rate of 6% per annum payable quarterly by the 1^st of each quarter and matures on January 9, 2022. The Company may prepay the Debentures at any point after nine months, in whole or in part. Pursuant to the terms of each of the Debentures, the Holder is entitled to convert all or a portion of the principal balance and all accrued and unpaid interest due under the respective Debenture into shares of the Company’s common stock at a conversion price of $5.00 per share. If the Company defaults on payment, the Holder may at his option, extend all conversion rights, through and including the date the Company tenders or attempts to tender payment in full of all amounts due under the Debenture. Any amount of principal or interest, which is not paid when due shall bear interest at the rate of 12% per annum. Upon an Event of Default (as defined in each Debenture), the Holder may (i) declare the entire principal amount and all accrued and unpaid interest under the Debenture immediately due and payable, and (ii) exercise any and all rights, powers and remedies available to the Holder at law or in equity or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in the Debenture and proceed to enforce the payment thereof or any other legal or equitable right of the Holder.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

 

NOTE 6 – RELATED PARTY TRANSACTIONS (continued)

 

(B) Convertible notes payable – related parties (continued)

 

As of September 30, 2017 and December 31, 2016, the principal balance due and owing under these Debentures is $2,020,000 and $0, respectively. As of September 30, 2017 and December 31, 2016, accrued interest payable due and owing under these Debentures is $30,300 and $0, respectively.

 

For the three months ended September 30, 2017 and 2016, interest expenses – related parties amounted to $30,300 and $8,750, respectively. For the nine months ended September 30, 2017 and 2016, interest expenses – related parties amounted to $98,988 and $26,250, respectively.

 

(C) Related party lease agreements

 

During 2014, the Company entered into lease agreements with non-profit companies, CJK, Inc. and Broken Arrow, whose directors are beneficial stockholders of the Company for its properties located in Kingman, AZ and Green Valley, AZ, respectively. The Kingman, AZ lease commenced on October 1, 2014 and expires on September 30, 2024 with base monthly rent of $10,000, subject to a 5% annual increases during the lease term. The Green Valley, AZ lease commenced on October 1, 2014 and expires on September 30, 2024 with base monthly rent of $7,500, subject to a 5% annual increases during the lease term.

 

In August 2015, the Company entered into a lease agreement with C3C3 to lease space in Tempe, Arizona. The Tempe lease commenced on September 1, 2015, was amended on September 1, 2016 and October 1, 2017, and expires on July 31, 2035 with base monthly rent of $13,500, subject to a 5% annual increase through July 31, 2023 and base rent of $67,460 per month from August 1, 2023 to the end of the lease term, and increases in rental area up to 30,000 square feet.

 

In August 2015, the Company entered into a lease agreement with C3C3 to lease space in Chino Valley, Arizona. The Chino Valley lease commenced on August 1, 2015, was amended on October 10, 2016 and on March 31, 2017, and expires on July 31, 2035 with an initial base monthly rent of $30,000, subject to an annual increase and other base rent increases due to the expansion of leased space through July 2024 and base rent of $91,462 per month from August 2024 to the end of the lease term, and increases in rental area to 35,000 square feet. Additionally, pursuant to the March 30, 2017 amendment, the Company agreed to defer rent and applicable taxes due for March, April and May 2017 in the form of a note receivable to C3C3 at an 8% interest rate commencing March 1, 2017 and payable over 12 months commencing January 1, 2018 (see Note 5).

 

On June 15, 2017 and effective July 1, 2017, the Company entered into a lease agreement with AC Management Group, LLC (also known as Hana Meds), whose directors/owners are beneficial stockholders of the Company, to lease office space in Tempe, Arizona (the “Hana Meds Lease”). The Hana Meds Lease commenced on July 1, 2017 and expires on June 30, 2022 with base monthly rent of $1,800 starting on October 1, 2017. At September 30, 2017, in connection with the Hana Meds Lease, the Company reflected deferred revenue – related party of $1,841, which reflects the prepayment of the first month’s rent by Hana Meds.

 

For the three months ended September 30, 2017 and 2016, rental income associated with all related party leases amounted to $522,103 and $422,382, respectively. For the nine months ended September 30, 2017 and 2016, rental income associated with all related party leases amounted to $1,512,609 and $1,113,384, respectively. At September 30, 2017 and December 31, 2016, deferred rent receivable – related parties amounted to $1,543,927 and $1,006,171, respectively. At September 30, 2017 and December 31, 2016, security deposits payable to related parties amounted to $71,800 and $70,000, respectively.

 

NOTE 7 – SENIOR CONVERTIBLE DEBENTURE

 

On August 20, 2014, the Company received $500,000 from a third party pursuant to the terms of a senior convertible debenture (the “Senior Convertible Debenture”). The Senior Convertible Debenture bears interest at 7% per annum and is payable monthly and the principal balance and any remaining unpaid interest is due on the maturity date of August 20, 2017. The holder has the option after 12 months to convert all or a portion of the Senior Convertible Debenture into shares of the Company’s common stock at the conversion price of $5.00 per share. On April 20, 2017, the Company repaid the principal balance of $500,000 and all accrued interest. As of September 30, 2017 and December 31, 2016, the principal balance due and owing under the Senior Convertible Debenture is $0 and $500,000, respectively. For the three months ended September 30, 2017 and 2016, interest expense related to the Senior Convertible Debenture amounted to $0 and $8,748, respectively. For the nine months ended September 30, 2017 and 2016, interest expense related to the Senior Convertible Debenture amounted to $10,692 and $26,244, respectively.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

 

NOTE 8 – MORTGAGE PAYABLE

 

On March 7, 2014, the Company executed a $2,100,000 mortgage payable to acquire real estate. The mortgage bears interest at 7.5% per annum. Monthly interest only payments began April 7, 2014 and continue each month thereafter until paid. The entire unpaid balance and accrued interest is due on March 7, 2019, the maturity date of the mortgage, and is secured by the underlying property. The mortgage terms do not allow participations by the lender in either the appreciation in the fair value of the mortgaged real estate project or the results of operations of the mortgaged real estate project. For the three months ended September 30, 2017 and 2016, interest expense related to this mortgage amounted to $0 and $39,375, respectively. For the nine months ended September 30, 2017 and 2016, interest expense related to this mortgage amounted to $32,291 and $118,125, respectively. In connection with the sale of one of its buildings on March 15, 2017, the Company repaid the all outstanding principal and interest due on this mortgage.

 

NOTE 9 – 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 preferred shares will be entitled to a liquidation preference of $1.00 per share plus any remaining distributions equal to the common shareholders. The holders of the shares are entitled to dividends equal to common share dividends. Once any shares of Preferred Stock are outstanding, at least 51% of the total number of shares of Preferred Stock outstanding must approve the following transactions:

 

a.

Alter or change the rights, preferences or privileges of the Preferred Stock.

 

b.

Create any new class of stock having preferences over the Preferred Stock.

 

c.

Repurchase any of our common stock.

 

d.

Merge or consolidate with any other company, except our wholly-owned subsidiaries.

 

e.

Sell, convey or otherwise dispose of, or create or incur any mortgage, lien, or charge or encumbrance or security interest in or pledge of, or sell and leaseback, in all or substantially all of our property or business.

 

f.

Incur, assume or guarantee any indebtedness maturing more than 18 months after the date on which it is incurred, assumed or guaranteed by us, except for operating leases and obligations assumed as part of the purchase price of property.

 

(B) Common stock issued for services

 

On January 1, 2017, pursuant to an engagement letter dated in October 2015, the Company issued 8,216 shares of its common stock to a Company majority owned by the Company’s CFO for services rendered. The shares were valued at their fair value of $17,500 or $2.13 per common share which was the fair value of the common shares on the date of grant by using the quoted share price on the date of grant. In connection with the issuance of these common shares, in January 2017, the Company recorded stock-based compensation expense of $17,500. Additionally, on April 1, 2017, the Company issued 11,667 shares of its common stock to a Company majority owned by the Company’s CFO for services rendered. The shares were valued at their fair value of $17,500, or $1.50 per common share, which was the fair value of the common shares using the quoted share price on the date of grant. In connection with the issuance of these common shares, in April 2017, the Company recorded stock-based compensation expense of $17,500.

 

On January 9, 2017, the Company issued an aggregate of 55,000 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 $127,050 using the quoted share price on the date of grant of $2.31 per common share. In connection with these grants, in January 2017, the Company recorded stock-based compensation expense of $127,050. On August 20, 2017, certain members of the Company’s board of directors agreed to cancel an aggregate of 40,000 of these shares of common stock in exchange for the grant by the Company of 40,000 stock options. In connection with this cancellation, the Company cancelled these 40,000 shares of common stock. Since the 40,000 shares were fully vested on the date of grant, the Company did not adjust compensation expense upon cancellation.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

 

NOTE 9 – STOCKHOLDERS’ EQUITY (continued)

 

(B) Common stock issued for services (continued)

 

On April 1, 2017, the Company issued 10,000 shares of common stock to a new member of the Company’s board of directors for services rendered. The shares were valued at their fair value of $15,000 using the quoted share price on the date of grant of $1.50 per common share. In connection with this grant, in April 2017, the Company recorded stock-based compensation expense of $15,000.

 

In connection with a one year consulting agreement with an investor relations firm effective September 1, 2016 for investor relations services, on April 1, 2017, the Company issued 3,750 shares of restricted stock. The shares were valued at a fair value of $5,625 using the quoted share price on the date of grant of $1.50 per common share. Accordingly, the Company recorded consulting fees of $5,625.

 

On April 1, 2017, the Company issued 1,500 shares of common stock to a consultant for construction management services rendered. The shares were valued at their fair value of $2,250 using the quoted share price on the date of grant of $1.50 per common share. In connection with this grant, in April 2017, the Company recorded consulting fees of $2,250.

 

In connection with a one year consulting agreement with an investor relations firm effective September 1, 2016 for investor relations services, on July 1, 2017, the Company issued 3,750 shares of restricted stock. The shares were valued at a fair value of $4,275 using the quoted share price on the date of grant of $1.14 per common share. Accordingly, the Company recorded consulting fees of $4,275.

 

On August 18, 2017, the Company issued an aggregate of 20,000 shares of common stock to certain members of the Company’s board of directors for services rendered. The shares were valued at their fair value of $14,800 using the quoted share price on the date of grant of $0.74 per common share. In connection with these grants, in August 2017, the Company recorded stock-based compensation expense of $14,800.

 

(C) Common stock issued in connection with settlement

 

On July 15, 2016, pursuant to a Settlement Agreement, the Company agreed to issue an aggregate of 50,000 shares of its common stock as follows: (a) 12,500 shares were issued within three days from execution of this Settlement Agreement, (b) 12,500 were issued on September 30, 2016, (c) 12,500 shares were issued on December 30, 2016, and (d) 12,500 shares were issued on June 30, 2017. In connection with this settlement agreement, on the measurement date of July 15, 2016, the Company valued the 50,000 shares issuable using the quoted share price of $1.75 per common share and recorded settlement expense and an accrued expense of $87,500. During the year ended December 31, 2016, in connection with this settlement agreement, the Company issued an aggregate of 37,500 common shares and reduced accrued expenses by $65,625. On March 31, 2017, the remaining 12,500 shares were issued pursuant to this settlement agreement and accordingly, the Company reduced accrued expenses by $21,875.

 

On July 18, 2017, the Company entered into a Settlement and Mutual Release with Brannigan (See Note 10). In connection with the Settlement and Mutual Release, the Company paid $10,000 in cash representing reimbursement of Brannigan legal fees and issued 15,000 shares of its common stock. The shares were valued at their fair value of $10,500 using the quoted share price on the date of grant of $0.70 per common share. In connection with the payment of cash and the issuance of these shares, in July 2017, the Company recorded aggregate settlement expense of $20,500.

 

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

 

On May 6, 2015, the Company entered into a 36-month consulting agreement with a stockholder for business advisory services. In connection with this consulting agreement, the Company granted options to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $1.00 per share under the 2014 Plan. The options vest as to 125,000 of such shares on July 1, 2015 and for each quarter thereafter through April 1, 2017, and expire on May 5, 2025 or earlier due to employment termination. The Company recognizes compensation expenses over the period during which the services are rendered by such consultant or over the vesting period. At the end of each financial reporting period prior to completion of the service, the fair value of this option award is remeasured using the then-current fair value of the Company’s common stock and updated assumptions in the Black-Scholes option-pricing model for stock options. The Company used the following weighted-average assumptions during the three and nine months ended September 30, 2017 and 2016: dividend yield of 0%; expected volatility of 120% to 164.6%; risk-free interest rate of 2.25% to 2.40%; and, an estimated holding period of 8.1 years to 10 years. For the three months ended September 30, 2017 and 2016, the Company recorded stock-based consulting expense (income) of $0 and $54,166, respectively, related to these options. For the nine months ended September 30, 2017 and 2016, the Company recorded stock-based consulting expense (income) of $(28,567) and $245,637, respectively, related to these options.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

 

NOTE 9 – STOCKHOLDERS’ EQUITY (continued)

 

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

 

On December 30, 2015, the Company granted the Company’s Chief Executive Officer and President an option, pursuant to the 2014 Plan, to purchase 250,000 of the Company’s common stock at an exercise price of $1.00 per share. The grant date of the option was December 30, 2015 and the option expires on December 30, 2026. The option vests as to (i) 25,000 of such shares on December 30, 2015, and (ii) as to 25,000 of such shares on December 30, 2016 and each year thereafter through December 30, 2026. The fair value of this option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0%; expected volatility of 120%; risk-free interest rate of 2.31%; and, an estimated holding period of 10 years. In connection with these options, the Company valued these options at a fair value of $237,150 and will record stock-based compensation expense over the vesting period. For the three months ended September 30, 2017 and 2016, the Company recorded stock-based compensation expense of $10,843 and $16,772, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded stock-based compensation expense of $32,530 and $50,317, respectively.

 

On August 20, 2017, upon cancellation of 40,000 shares on common stock previously issued to certain board members of the Company in January 2017, the Company granted these board members fully-vested options, pursuant to the 2016 Equity Incentive Plan, to purchase an aggregate of 40,000 shares of the Company’s common stock at an exercise price of $0.74 per share. The grant date of these options was August 20, 2017 and the options expire on August 20, 2027. The fair value of these option grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0%; expected volatility of 148.4%; risk-free interest rate of 2.19%; and, an estimated holding period of 10 years. In connection with these options, the Company valued these options at a fair value of $28,574. The Company treated the modification of the equity award as a modification pursuant to ASC 718. Since the value of the stock options granted was less than the original fair value of the stock granted in January 2017 and subsequently cancelled, no additional stock-based compensation was recorded.

 

At September 30, 2017, there were 1,290,000 options outstanding and 1,090,000 options vested and exercisable. As of September 30, 2017, there was $113,815 of unvested stock-based compensation expense to be recognized through December 2026. The aggregate intrinsic value at September 30, 2017 was approximately $5,320 and was calculated based on the difference between the quoted share price on September 30, 2017 and the exercise price of the underlying options. 

 

Stock option activities for the nine months ended September 30, 2017 are summarized as follows:

 

		Number of Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Balance Outstanding December 31, 2016			1,250,000			$	1.00				7.93			$	-
Granted			40,000				0.74				9.89				-
Balance Outstanding September 30, 2017			1,290,000			$	0.99				7.99			$	5,320
Exercisable, September 30, 2017			1,090,000			$	1.00				7.99			$	5,320

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES

 

Rental property acquisition

 

On April 22, 2016, Zoned Colorado Properties, LLC (“Zoned Colorado”), a wholly owned subsidiary of the Company, entered into a Contract to Buy and Sell Real Estate (the “Agreement”) with Parachute Development Corporation (“Seller”) pursuant to which Zoned Colorado agreed to purchase, and Seller agreed to sell, property in Parachute, Colorado (the “Property”) for a purchase price of $499,857. Of the total purchase price, $274,857, or 55%, will be paid in cash at closing and $225,000, or 45%, will be financed by Seller at an interest rate of 6.5%, amortized over a five-year period, with a balloon payment at the end of the fifth year. Payments will be made monthly and there will be no pre-payment penalty. Pursuant to the terms of the Agreement, the parties will cooperate in good faith to complete due diligence during a period of 45 days following execution of the Agreement. The closing is subject to certain contingencies, including that Zoned Colorado must obtain acceptable financing for the purchase and development of the property, the grant of a special use permit by the Town of Parachute, approval of a protected development deal or equivalent agreement by the Town of Parachute, execution of a lease agreement by a prospective tenant and the prospective tenant’s obtaining a license to cultivate on the property. Pursuant to the terms of the Agreement, Zoned Colorado will have a right of first refusal on eleven additional lots owned by Seller in Parachute, Colorado. In April 2016, the Company paid a refundable deposit of $45,000 into escrow in connection with the Agreement. As of September 30, 2017, the Company and Seller have yet to complete the purchase.

 

 

ZONED PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES (continued)

 

Legal matters

 

In a letter dated May 10, 2016, Marc Brannigan, the Company’s former CEO, and related parties (collectively “Brannigan”) sent a demand letter, through counsel, to the Company and certain other third-parties, claiming, among other things, that the Company improperly diluted Brannigan’s equity in the Company. Brannigan demands that the Company issue shares to “reverse” the dilution, invalidate shares improperly issued by the Company, pay unspecified damages, recover one-third of all Company shares owned by Alan Abrams and Chris Carra, and recover Brannigan’s purported majority ownership and voting control of the Company. On July 18, 2017, the Company entered into a Settlement and Mutual Release with Brannigan. In connection with the Settlement and Mutual Release, the Company paid $10,000 in cash representing reimbursement of Brannigan legal fees and issued 15,000 shares of its common stock. The shares were valued at their fair value of $10,500 using the quoted share price on the date of grant of $0.70 per common share. In connection with the payment of cash and the issuance of these shares, in July 2017, the Company recorded aggregate settlement expense of $20,500.

 

Operating lease

 

On March 9, 2017 and effective April 1, 2017, the Company executed a one-year operating lease for its office space in Scottsdale, Arizona for annual rent of $7,200. In March 2017, the Company prepaid the first six months of this operating lease. In October 2017, the Company prepaid the remaining six months of this Operating Lease.

 

NOTE 11 – CONCENTRATIONS

 

Rental income and rent receivable – related parties

 

The Company entered into lease agreements with non-profit companies whose director is a beneficial stockholder of the Company. Additionally, during the year ended December 31, 2015 and as amended during 2016 and 2017, the Company entered into lease agreements with companies owned by this beneficial stockholder of the Company. For the three months ended September 30, 2017 and 2016, rental revenue associated with these leases amounted to $522,103 and $422,382, which represents 97.5% and 87.8% of total revenues, respectively. For the nine months ended September 30, 2017 and 2016, rental revenue associated with these leases amounted to $1,512,609 and $1,113,384, which represents 95.7% and 86.2% of total revenues, respectively. At September 30, 2017 and December 31, 2016, deferred rent receivable – related parties amounted to $1,543,927 and $1,006,171, respectively. Additionally, on March 30, 2017, in connection with a fourth amendment to the commercial lease agreement with C3C3, the Company agreed to defer rent and applicable taxes due for March, April and May 2017 in the form of a note receivable to C3C3 at an 8% interest rate commencing March 1, 2017 and payable over 12 months commencing January 1, 2018. C3C3 is owned by Alan Abrams, a significant shareholder of the Company. At September 30, 2017 and December 31, 2016, note receivable amounted to $179,483 and $0, respectively. A reduction in sales from or loss of such related party leases would have a material adverse effect on the Company’s consolidated results of operations and financial condition.

 

NOTE 12 – SUBSEQUENT EVENTS

 

In connection with a one year consulting agreement with an investor relations firm effective September 1, 2016 for investor relations services, on October 1, 2017, the Company issued 3,750 shares of restricted stock. The shares were valued at a fair value of $3,337 using the quoted share price on the date of grant of $0.89 per common share. Accordingly, the Company recorded consulting fees of $3,337.

 

On October 18, 2017, pursuant to an engagement letter dated in October 2015, the Company issued 20,046 shares of its common stock to a Company majority owned by the Company’s CFO for services rendered. The shares were valued at their fair value of $16,037, or $0.80 per common share, which was the fair value of the common shares using the quoted share price on the date of grant. In connection with the issuance of these common shares, the Company recorded stock-based compensation expense of $16,037.

 

On October 1, 2017, we entered into a third amendment to commercial lease (the “Amendment”) with C3C3 and Alan Abrams, effective October 1, 2017. Pursuant to the terms of the Amendment, the leased property in Tempe, Arizona was expanded from 15,000 square feet to 30,000 square feet, and the monthly rental rate was increased.

 

In October 2017, the Company and a third party entity that is a developer of personalized cannabis medicines and a provider of advanced cultivation methods and processes have entered into a letter of intent outlining three independent agreements to complete research and development projects for licensed medical marijuana facilities to be located in Tempe, Arizona, Parachute, Colorado, and Stockdale, Texas or other locations to be determined after approval of a provisional license under the Texas Compassionate Use program.  Under the terms of letter of intent, the two companies will work together to mutually agree upon terms, provisions and obligations of three simultaneous, independent agreements. Execution of any of the three individual agreements is subject to, among other things, satisfactory due diligence and the negotiation and execution of definitive agreements, each of which will contain customary representations, warranties, covenants and closing conditions. There is no assurance that any or all of the agreements will be executed. The letter of intent included a one-time, non-refundable payment of $25,000 to the Company. The payment is consideration for entering into the letter of intent and represents a deposit to be applied towards the potential assignment of the Company’s Parachute development rights have been valued at $250,000 within the letter of intent.

 

 

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

 

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

 

This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This quarterly report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the “Risk Factors” section of our annual report on Form 10-K as filed with the SEC on March 27, 2017, and the same may be updated from time to time in documents that we file with the SEC.

 

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

 

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

 

Business and Corporate History

 

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

 

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

 

We manage a portfolio of properties that we own, lease, and provide direct development on each property we acquire. This can include complete architectural design and subsequent build-outs, general support, landscaping, general up-keep, facilities management, and state of the art security systems.

 

 

As of September 30, 2017, a summary of rental properties owned by us consisted of the following:

 

Location		Tempe, AZ (1)				Gilbert, AZ				Green Valley, AZ				Chino Valley, AZ				Kingman, AZ
Description		Mixed -use warehouse/office				Land				Retail (special-use)				Greenhouse / Nursery				Retail (special-use)
Current Use		Medical Marijuana Business Park				Future Development				Medical Marijuana Dispensary				Medical Marijuana Cultivation Facility				Medical Marijuana Dispensary
Date Acquired			Mar 2014				Jan 2014				Oct 2014				Aug 2015				May 2014
Lease Start Date			Aug 2015				Jul 2017				Oct 2014				Aug 2015				Oct 2014
Lease End Date			Jul 2035				Jun 2018				Sep 2024				Jul 2035				Sep 2024
Total Rentable Sq. Ft.			60,000				34,717	*			1,440				40,000				1,497
Sq. Ft. rented as of September 30, 2017			17,500				34,717	*			1,440				30,000				1,497
Vacant Rentable Sq. Ft.			42,500				34,717	*			0				10,000				0
Land Area			3.65 Acres				0.8 acres				1.33 Acres				47.6 Acres				0.16 Acres
			158,772 Sq. Ft.				34,717 Sq. Ft.				57,769 Sq. Ft.				2,072,149 Sq. Ft.				7,061 Sq. Ft
Total No. of Tenants			2				1				1				1				1
No. of Related Party Tenants			2				0				1				1				1
Annual Base Rent:
2017 (remainder of year)		$	91,900			$	7,500			$	32,993			$	180,000			$	41,675
2018			482,600				15,000				133,619				796,250				168,782
2019			617,600				-				140,300				836,062				177,221
2020			701,475				-				147,315				877,866				186,082
2021			735,469				-				154,681				921,755				195,386
Thereafter			10,924,426				-				465,589				14,666,746				588,111
Total		$	13,553,470			$	22,500			$	1,074,497			$	18,278,679			$	1,357,257

 

(1)	In addition to base rent received from our tenants, we lease 800 square feet of property containing a cell tower located on the property to a third party for $1,450 per month subject to 5-year extensions. Annual base rent from the cell tower lease is not included in this table.
*	Represents the lease of the entire undeveloped land parcel to a tenant

 

Recent Developments

 

On April 22, 2016, we entered into a Contract to Buy and Sell Real Estate (Commercial) (the “Agreement”) with Parachute Development Corporation (“Seller”) pursuant to which we agreed to purchase, and Seller agreed to sell, property in Parachute, Colorado (the “Property”) for a purchase price of $499,857. Of the total purchase price, $274,857, or 55%, will be paid in cash at closing and $225,000, or 45%, will be financed by Seller at an interest rate of 6.5%, amortized over a five-year period, with a balloon payment at the end of the fifth year. Payments will be made monthly and there will be no pre-payment penalty. Pursuant to the terms of the Agreement, the parties will cooperate in good faith to complete due diligence during a period of 45 days following execution of the Agreement. The closing is subject to certain contingencies, including that we must obtain acceptable financing for the purchase and development of the property, the grant of a special use permit by the Town of Parachute, approval of a protected development deal or equivalent agreement by the Town of Parachute, execution of a lease agreement by a prospective tenant and the prospective tenant’s obtaining a license to cultivate on the property. Pursuant to the terms of the Agreement, we will have a right of first refusal on eleven additional lots owned by Seller in Parachute, Colorado. In April 2016, we paid a refundable deposit of $45,000 into escrow in connection with the Agreement. As of September 30, 2017, the Company and Seller are still cooperating to complete the purchase.

 

On October 1, 2017, we entered into a third amendment to commercial lease relating to the Tempe, Arizona property (the “Amendment”) with C3C3 Group, LLC (“C3C3”) and Alan Abrams, effective October 1, 2017. Pursuant to the terms of the Amendment, the leased property in Tempe, Arizona was expanded from 15,000 square feet to 30,000 square feet, and the monthly rental rate was increased. C3C3 is owned by Alan Abrams, a significant stockholder of the Company. Additionally, on June 15, 2017 and effective July 1, 2017, we entered into a lease agreement with AC Management Group, LLC (also known as Hana Meds), whose directors/owners are beneficial stockholders of the Company, to lease 2,500 square feet of office space in Tempe, Arizona (the “Hana Meds Lease”). The Hana Meds Lease commenced on July 1, 2017 and expires on June 30, 2022 with a base monthly rent of $1,800 starting on October 1, 2017. 

 

On March 30, 2017 and effective April 1, 2017, we entered into a fourth amendment to commercial lease agreement relating to the Chino Valley property with C3C3 and Alan Abrams. Pursuant to the terms of this amendment, the size of the leased property was expanded to 35,000 square feet and the monthly rental rate was increased. Additionally, in connection with this amendment, we agreed to defer rent and applicable taxes due for March, April and May 2017 in the form of a note receivable to C3C3 at an 8% interest rate commencing March 1, 2017 and payable over 12 months commencing January 1, 2018.

 

On December 22, 2016, we entered into a Commercial Real Estate Purchase Contract (the “Purchase Contract”) with a third party (the “Purchaser”) pursuant to which the Company agreed to sell, and the Purchaser agreed to purchase, the property located at 422 S. Madison Drive in Tempe, Arizona, for an aggregate purchase price of $2.125 million. Pursuant to the terms of the Purchase Contract, the purchase closed on March 15, 2017 for a profit of approximately $831,000.

 

On June 30, 2017 and effective July 1, 2017, we leased our land located in Gilbert, AZ for a one year period at $2,500 per month.

 

Results of Operations

 

The following comparative analysis of results of operations was based primarily on the comparative unaudited condensed consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited consolidated financial statements and the notes to those statements for the three and nine months ended September 30, 2017 and 2016, which are included elsewhere in this quarterly report on Form 10-Q.

 

Comparison of Results of Operations for the Three and Nine months Ended September 30, 2017 and 2016

 

Revenues

 

For the three and nine months ended September 30, 2017 and 2016, revenues consisted of the following:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Rent revenues		$	13,291			$	58,829			$	67,993			$	177,909
Rent revenues – related parties			522,103				428,912				1,512,609				1,132,961
Total		$	535,394			$	487,741			$	1,580,602			$	1,310,870

 

For the three months ended September 30, 2017, total revenues amounted to $535,394, including related party revenues of $522,103, as compared to $487,741, including related party revenues of $428,912, for the three months ended September 30, 2016, an increase of $47,653, or 9.8%. For the nine months ended September 30, 2017, total revenues amounted to $1,580,602, including related party revenues of $1,512,609, as compared to $1,310,870, including related party revenues of $1,132,961, for the nine months ended September 30, 2016, an increase of $269,732, or 20.6%. This increase in revenues for the nine months ended September 30, 2017 was attributable to an increase in rent revenues – related parties of $379,648, or 33.5%, due to the increase in space leased to related parties, offset by a decrease in third party rent revenues of $109,916, or 61.8%, caused by the sale of one of our Tempe buildings that was leased to a third-party tenant during the first quarter of 2017.

 

Operating expenses

 

For the three months ended September 30, 2017, operating expenses amounted to $326,121, as compared to $357,286 for the three months ended September 30, 2016, a decrease of $31,165, or 8.7%. For the nine months ended September 30, 2017, operating expenses amounted to $1,087,377, as compared to $1,474,339 for the nine months ended September 30, 2016, a decrease of $386,962, or 26.3%.

 

 

For the three and nine months ended September 30, 2017 and 2016, operating expenses consisted of the following:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Compensation and benefits		$	107,173			$	92,814			$	445,401			$	366,199
Professional fees			45,381				122,038				166,002				604,238
General and administrative expenses			44,118				47,692				130,699				151,992
Depreciation and amortization			59,580				43,139				167,765				125,910
Property operating expenses			28,163				23,913				90,522				54,941
Real estate taxes			21,206				27,690				66,488				83,559
Settlement expense			20,500				-				20,500				87,500
Total		$	326,121			$	357,286			$	1,087,377			$	1,474,339

 

	●	For the three months ended September 30, 2017, compensation and benefit expense increased by $14,359, or 15.5%, as compared to the three months ended September 30, 2016. For the nine months ended September 30, 2017, compensation and benefit expense increased by $79,202, or 21.6%, as compared to the nine months ended September 30, 2016. This increase was attributable to an increase in compensation expense resulting from an increase in compensation paid to our chief executive officer and an increase in stock-based compensation expense.
	●	For the three months ended September 30, 2017, professional fees decreased by $76,657, or 62.8%, as compared to the three months ended September 30, 2016. For the nine months ended September 30, 2017, professional fees decreased by $438,236, or 72.5%, as compared to the nine months ended September 30, 2016. For the three months ended September 30, 2017, the decrease was primarily attributable to a decrease in legal fees of $35,340 attributable to a decrease in activities related to legacy legal issues and other legal matters, a decrease in consulting fees of $54,166 related to a decrease in accretion of stock-based consulting expense from the granting of stock options to a consultant, offset by an increase in other professional fees of $12,849 which included an increase in accounting fees of $5,900, and an increase in investor relations fees of $7,059. For the nine months ended September 30, 2017, the decrease was primarily attributable to a decrease in legal fees of $190,086 attributable to a decrease in activities related to legacy legal issues and other legal matters, a decrease in consulting fees of $271,955 related to a decrease in accretion of stock-based consulting expense from the granting of stock options to a consultant, and a decrease in investor relations fees of $17,925, offset by an increase in other professional fees of $41,730 which primarily included an increase in accounting fees of $22,551, and an increase in shareholder meeting fees of $19,890.
	●	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 September 30, 2017, general and administrative expenses decreased by $3,574, or 7.5%, as compared to the three months ended September 30, 2016. For the nine months ended September 30, 2017, general and administrative expenses decreased by $21,293, or 14.0%, as compared to the nine months ended September 30, 2016. These decreases were primarily attributable to a decrease in these expenses due to cost cutting measures.
	●	For the three and nine months ended September 30, 2017, depreciation and amortization expense increased by $16,441, or 38.1%, and $41,855, or 33.2%, as compared to the three and nine months ended September 30, 2016, respectively, and was attributable to an increase in depreciable assets due to the expansion of rental properties.
	●	Property operating expenses consist of property management fees, property insurance, repairs and maintenance fees, utilities and other expenses related to our rental properties. For the three months ended September 30, 2017, property operating expenses increased by $4,250, or 17.8%, as compared to the three months ended September 30, 2016, primarily related to an increase in electric expense. For the nine months ended September 30, 2017, property operating expenses increased by $35,581, or 64.8%, as compared to the nine months ended September 30, 2016, primarily related to an increase in repair and maintenance expenses incurred of $17,861 and an increase in electric of $16,678.
	●	For the three and nine months ended September 30, 2017, real estate taxes decreased by $6,484, or 23.4%, and $17,071, or 20.4%, as compared to the three and nine months ended September 30, 2016, respectively. This decrease was attributable to a decrease in real estate taxes incurred due to the sale of one of our Tempe, AZ buildings and a decrease in real estate taxes on our Green Valley property caused by our obtaining “permanently-affixed status” for our structure located on this property.
	●	For the three and nine months ended September 30, 2017, settlement expense amounted to $20,500 and $20,500, as compared to $0 and $87,500 for the three and nine months ended September 30, 2016, respectively. During 2017 and 2016, we settled certain litigation and claims.

 

 

Income (loss) from operations

 

As a result of the factors described above, for the three months ended September 30, 2017, income from operations amounted to $209,273, as compared to $130,455 for the three months ended September 30, 2016, an increase of $78,818, or 60.4%. For the nine months ended September 30, 2017, income from operations amounted to $493,225, as compared to a loss from operations of $163,469 for the nine months ended September 30, 2016, a turnaround of $656,694, or 401.7%.

 

Other income (expenses), net

 

Other income (expenses) primarily includes interest expense incurred on debt with third parties and related parties, and also includes other income (expenses). For the three months ended September 30, 2017, total other expenses, net amounted to $27,464, as compared to total other expenses of $56,873, representing a decrease of $29,409, or 51.7%. The decrease was attributable to a net decrease in interest expense of $26,573 primarily related to the repayment of mortgage payable in April 2017. For the nine months ended September 30, 2017, total other income, net amounted to $695,404, as compared to total other expenses of $172,462, representing a change of $867,866, or 503.2%. Pursuant to the terms of a Commercial Real Estate Purchase Contract (the “Purchase Contract”) with a third party dated December 22, 2016, we sold our property located at 422 S. Madison Drive in Tempe, Arizona, for an aggregate purchase price of $2.125 million. Pursuant to the terms of the Purchase Contract, we recognized a gain on the sale of this building of approximately $831,000. Additionally, during the nine and three months ended September 30, 2017, interest expense decreased by $28,648 and $26,573, respectively, which is attributable to a net decrease in interest expense primarily related to the repayment of mortgage payable in April 2017

 

Net income (loss)

 

As a result of the foregoing, for the three months ended September 30, 2017 and 2016, net income amounted to $181,809, or $0.01 per common share (basic and diluted), and $73,582, or $0.00 per common share (basic and diluted), respectively. Additionally, for the nine months ended September 30, 2017 and 2016, net income (loss) amounted to $1,188,629, or $0.06 per common share (basic and diluted), and $(335,931), or $(0.02) 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 $791,465 and $366,024 of cash as of September 30, 2017 and December 31, 2016, respectively.

 

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

 

	●	An increase in working capital requirements to finance our current business,
	●	Acquisition and buildout of rental properties;
	●	Addition of administrative and sales personnel as the business grows, and
	●	The cost of being a public company.

 

We currently budget that we would need to spend approximately $3,500,000 on capital expenditures for the contracted expansion and buildout of our Chino Valley Property and the acquisition and development of our Parachute Project. These capital expenditures are contingent upon several factors including: the Company obtaining financing for the development of the premises and the construction of the tenant improvements in such amount and on such terms and provisions as are acceptable to the Company in our sole and absolute discretion from a lender approved by us in our sole discretion. Accordingly, we can delay or cancel these planned capital expenditures, if necessary.

 

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 issuance date of these condensed consolidated financial statements. Other than revenue received from the lease of our rental properties, funds received from the sale of our common stock and funds received from debt, we presently have no other significant alternative source of working capital. We have used these funds to fund our operating expenses, pay our obligations, acquire and develop rental properties, and grow our company. We need to raise significant additional capital or debt financing to acquire new properties, to develop existing properties, and to assure we have sufficient working capital for our ongoing operations and debt obligations.

 

 

On December 22, 2016, we entered into the Purchase Contract with a third party pursuant to which we agreed to sell, and the purchaser agreed to purchase, the property located at 422 S. Madison Drive in Tempe, Arizona, for an aggregate purchase price of $2.125 million. Pursuant to the terms of the Purchase Contract, the purchase closed on March 15, 2017. In connection with the sale of this building on March 15, 2017, we repaid the all outstanding principal of $2.1 million and interest due on this mortgage. 

 

On January 9, 2017, we issued a convertible debenture (the “Abrams Debenture”) in the aggregate principal amount of $2,000,000 in favor of Alan Abrams, a significant stockholder of the Company, in exchange for cash from Mr. Abrams of $2,000,000. Also on January 9, 2017, we issued a convertible debenture (the “McLaren Debenture” and together with the Abrams Debenture, the “Debentures”) in the aggregate principal amount of $20,000 in favor of Bryan McLaren, the Company’s Chief Executive Officer and President and a member of our Board of Directors, in exchange for cash from Mr. McLaren of $20,000. Each of Mr. Abrams and Mr. McLaren is referred to herein as a “Holder.” Each of the Debentures accrues interest at the rate of 6% per annum payable quarterly by the 1^st of each quarter and matures on January 9, 2022. We may prepay the Debentures at any point after six months, in whole or in part. Pursuant to the terms of each of the Debentures, the Holder is entitled to convert all or a portion of the principal balance and all accrued and unpaid interest due under the respective Debenture into shares of the Company’s common stock at a conversion price of $5.00 per share. If we default on payment, the Holder may at his option, extend all conversion rights, through and including the date we tender or attempt to tender payment in full of all amounts due under the Debenture. Any amount of principal or interest, which is not paid when due shall bear interest at the rate of 12% per annum. Upon an Event of Default (as defined in each Debenture), the Holder may (i) declare the entire principal amount and all accrued and unpaid interest under the Debenture immediately due and payable, and (ii) exercise any and all rights, powers and remedies available to the Holder at law or in equity or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in the Debenture and proceed to enforce the payment thereof or any other legal or equitable right of the Holder.

  

On March 30, 2017, in connection with a fourth amendment to the commercial lease agreement with C3C3, a company owned by Mr. Abrams, a significant shareholder of the Company, we agreed to defer rent and applicable taxes due for March, April and May 2017 in the form of a note receivable to C3C3 at an 8% interest rate commencing March 1, 2017 and payable over 12 months commencing January 1, 2018. At September 30, 2017, note receivable amounted to $179,483.

 

On April 20, 2017, we repaid two convertible notes issued in August 2014 for $1 million, in the aggregate, and accrued interest of approximately $96,000.

 

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

 

Cash Flows

 

For the nine months ended September 30, 2017 and 2016

 

Net cash flow used in operating activities was $110,298 for the nine months ended September 30, 2017, as compared to net cash used in operating activities of $118,290 for the nine months ended September 30, 2016, a change of $7,992.

 

	●	Net cash flow used in operating activities for the nine months ended September 30, 2017 primarily reflected net income of $1,188,629 adjusted for the add-back (deduction) of non-cash items consisting of depreciation and amortization of $167,765, stock-based compensation expense of $204,000, stock-based stock option expense of $3,962, stock-based settlement expense of $10,500, and a gain from sale of property and equipment of $(831,753), and changed in operating assets and liabilities of $(853,401), which included an increase in deferred rent receivables of $(537,756), an increase in notes receivable of $(179,483) due to us agreeing to defer rent and applicable taxes due for March, April and May 2017 in the form of a note receivable to C3C3 at an 8% interest rate commencing March 1, 2017 and payable over 12 months commencing January 1, 2018, a decrease in accounts payable of $67,659, and a net decrease in accrued expenses – related parties due the payment of accrued interest of approximately $52,241. C3C3 is owned by Mr. Abrams, a significant shareholder of the Company.
	●	Net cash flow used in operating activities for the nine months ended September 30, 2016 primarily reflected a net loss of $335,931 adjusted for the add-back of non-cash items consisting of depreciation and amortization of $125,910, stock-based compensation expense of $228,033, stock-based settlement expense of $43,750, net accretion of stock-based stock option expense of $233,009, loss from sale of property and equipment of $1,843, and a non-cash increase in deferred rent receivables of $436,669.

 

   

For the nine months ended September 30, 2017, net cash flow provided by investing activities amounted to $1,615,739 and consisted of net proceeds from the sale of a building and related improvements of $1,984,188, offset by cash used in the development of rental properties including the expansion of rentable space by remodeling hoop houses and upgrading ventilation, plumbing and electrical systems of $365,863 and the purchase of property and equipment of $2,586. During the nine months ended September 30, 2016, we used cash for the development of rental properties of $551,314 and acquired property and equipment of $2,534.

 

Net cash used in financing activities was $1,080,000 for the nine months ended September 30, 2017 as compared to $0 for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we received proceeds from convertible debt of $2,020,000, repaid a mortgage payable of $2,100,000, repaid convertible notes payable of $1,000,000.

 

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 table summarizes our contractual obligations as of September 30, 2017 (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 – related parties		$	2,020			$	-			$	-			$	2,020			$	-
Interest on convertible notes – related parties			544				151				242				151				-
Operating lease			4				4				-				-				-
Total		$	2,568			$	155			$	242			$	2,171			$	-

  

Off-balance Sheet Arrangements

 

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

 

Critical Accounting Policies

 

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

 

 

Rental Properties

 

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

 

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

 

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

 

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

  

Revenue recognition

 

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

 

Certain of our leases currently contain rental increases at specified intervals. We record as an asset, and include in revenue, rents receivable that will be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Deferred rents receivable in the accompanying balance sheets includes the cumulative difference between rental revenue recorded on a straight-line basis and rents received from the tenants in accordance with the lease terms. Accordingly, management determines to what extent the deferred rent receivable applicable to each specific tenant is collectible. We review material rents receivable and takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of rent receivable with respect to any given tenant is in doubt, we record an increase in the allowance for uncollectible accounts or we record a direct write-off of the specific rent receivable. 

 

Stock-based compensation

 

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

 

Pursuant to ASC 505-50 – “Equity-Based Payments to Non-Employees”, all share-based payments to non-employees, including grants of stock options, are recognized in the consolidated financial statements as compensation expense over the service period of the consulting arrangement or until performance conditions are expected to be met. Using a Black-Scholes valuation model, we periodically reassessed the fair value of non-employee options until service conditions are met, which generally aligns with the vesting period of the options, and we adjust the expense recognized in the consolidated financial statements accordingly.

 

 

Recent Accounting Pronouncements

 

See Note 2 to the unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements.

 

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 September 30, 2017, 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, and (2) 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 three months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.   

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

In a letter dated May 10, 2016, Marc Brannigan, the Company’s former CEO, and related parties (collectively, “Brannigan”) sent a demand letter, through counsel, to the Company and certain other third-parties, claiming, among other things, that the Company improperly diluted Brannigan’s equity in the Company. Brannigan demanded that the Company issue shares to “reverse” the dilution, invalidate shares improperly issued by the Company, pay unspecified damages, recover one-third of all Company shares owned by Alan Abrams and Chris Carra, and recover Brannigan’s purported majority ownership and voting control of the Company. In connection with the Settlement and Mutual Release, we paid $10,000 in cash representing reimbursement of Brannigan legal fees and issued 15,000 shares of our common stock. The shares were valued at their fair value of $10,500 using the quoted share price on the date of grant of $0.70 per common share. In connection with the cash paid and the issuance of these shares, in July 2017, we recorded aggregate settlement expense of $20,500.

 

Item 1A. Risk Factors

 

Not required of smaller reporting companies.

 

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

 

Date

Name of Person or Entity

Nature of Each Offering

Number of Shares Offered

Amount Paid to the Issuer

Trading Status of the Shares

Legend

7/1/2017

Hayden IR LLC

Section 4(a)(2)

3,750

For Services

Restricted

Yes

7/31/2017

Marc Brannigan

Section 4(a)(2)

15,000

For Settlement

Restricted

Yes

8/18/2017

Alex McLaren

Section 4(a)(2)

10,000

For Services

Restricted

Yes

8/18/2017

Arthur Friedman

Section 4(a)(2)

10,000

For Services

Restricted

Yes

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

  

Item 6. Exhibits

 

Exhibit No.		Description
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.

 

 

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: November 13, 2017	/s/ Bryan McLaren
	Bryan McLaren
	Chief Executive Officer and President
	(principal executive officer)

 

Date: November 13, 2017	/s/ Adam Wasserman
	Adam Wasserman Chief Financial Officer (principal financial officer and principal accounting officer)

 

 

 

26