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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board - Other OTC  >  Zoned Properties, Inc.    ZDPY

ZONED PROPERTIES, INC.

(ZDPY)
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ZONED PROPERTIES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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03/26/2020 | 03:34pm EDT

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




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



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



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



Overview


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



                                       18





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



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



For the year ended December 31, 2019 and 2018, substantially all of our revenues were generated from our Significant Tenant which is located in the State of Arizona.




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



Location                             Tempe, AZ           Chino Valley, AZ         Gilbert, AZ          Green Valley, AZ          Kingman, AZ
                                     Mixed-use             Greenhouse /                                     Retail                 Retail
Description                       warehouse/office           Nursery                  Land               (special-use)         (special-use)
                                                             Medical
                                                            Marijuana
                                 Medical Marijuana         Cultivation                                 Medical Marijuana     Medical Marijuana
Current Use                        Business Park             Facility          Future Development         Dispensary             Dispensary

Date Acquired                                 Mar-14               Aug-15                   Jan-14                Oct-14                 May-14
Lease Start Date                              May-18               May-18                   Jul-18                May-18                 May-18
Lease End Date                                Apr-40               Apr-40           Month to month                Apr-40                 Apr-40

Total No. of Tenants                               1                    1                        1                     1                      1

                                                                                                                                                     Total Properties
Land Area (Acres)                               3.65                 47.6                      0.8                  1.33                   0.32                  53.70

Land Area (Sq. Feet)                         158,772            2,072,149                   34,717                57,769                 13,939              2,337,346
Undeveloped Land Area (Sq.
Feet)                                              -            1,812,563                   34,717                     -                  6,878              1,854,158
Developed Land Area (Sq.
Feet)                                        158,772              259,586                        -                57,769                  7,061                483,188

Total Rentable Building Sq.
Ft.                                           60,000               40,000                        -                 1,440                  1,497                102,937
Vacant Rentable Sq. Ft.                            -                    -                        -                     -                      -                      -
Sq. Ft. rented as of December
31, 2019                                      60,000               40,000                        -                 1,440                  1,497                102,937

Annual Base Rent: *
2020                            $            402,000     $        480,000     $                  -     $          42,000     $           48,000     $          972,000
2021                                         402,000              480,000                        -                42,000                 48,000                972,000
2022                                         402,000              480,000                        -                42,000                 48,000                972,000
2023                                         402,000              480,000                        -                42,000                 48,000                972,000
2024                                         402,000              480,000                                         42,000                 48,000                972,000
Thereafter                                 6,164,000            7,360,000                        -               644,000                736,000             14,904,000
Total                           $          8,174,000     $      9,760,000     $                  -     $         854,000     $          976,000     $       19,764,000

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



                                       19





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



        Tempe,                              Gilbert, AZ                              Kingman,
Year      AZ         Chino Valley, AZ           (a)           Green Valley, AZ          AZ
2020   $    6.7     $             12.0                 -     $             29.2     $     32.1
2021   $    6.7     $             12.0                 -     $             29.2     $     32.1
2022   $    6.7     $             12.0                 -     $             29.2     $     32.1
2023   $    6.7     $             12.0                 -     $             29.2     $     32.1
2024   $    6.7     $             12.0                 -     $             29.2     $     32.1

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

    presented.




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



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



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



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



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



                                       20







Results of Operations



The following comparative analysis on results of operations was based primarily
on the comparative consolidated financial statements, footnotes and related
information for the periods identified below and should be read in conjunction
with the audited consolidated financial statements and the notes to those
statements for the years ended December 31, 2019 and 2018, which are included
elsewhere in this annual report on Form 10-K. The results discussed below are
for the years ended December 31, 2019 and 2018.



Comparison of Results of Operations for the Years ended December 31, 2019 and 2018




Revenues



For the years ended December 31, 2019 and 2018, revenues consisted of the
following:



                                          Years Ended
                                         December 31,
                                     2019            2018
Rent revenues                     $ 1,115,861$    50,155
Rent revenues - related parties             -       1,186,775
Advisory revenues                     144,560               -
Total revenues                    $ 1,260,421$ 1,236,930




During the year ended December 31, 2019, we generated revenues from advisory
services of $144,560, including advisory services performed for our Significant
Tenants (as hereinafter defined) of $85,872. Substantially all of the Company's
real estate properties are leased under triple-net leases to tenants that are
controlled by one entity (each, a "Significant Tenant" and collectively, the
"Significant Tenants").



For the year ended December 31, 2019, total revenues amounted to $1,260,421,
including Significant Tenants revenues of $855,659, as compared to $1,236,930,
including Significant Tenant revenues that were considered related parties of
$1,186,775, for the year ended December 31, 2018, an increase of $23,491, or
1.9%. This increase in revenues was primarily attributable to a decrease in rent
revenues from the Significant Tenant of $125,993, or 10.6%, offset by an
increase in advisory revenues from our Significant Tenant of $85,872, and an
increase in third party advisory revenues of $58,688.



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



Operating expenses



For the year ended December 31, 2019, operating expenses amounted to $1,259,706
as compared to $3,198,413 for the year ended December 31, 2018, a decrease of
$1,938,707, or 60.6%. For the years ended December 31, 2019 and 2018, operating
expenses consisted of the following:



                                                                           Years Ended
                                                                          December 31,
                                                                      2019            2018
Compensation and benefits                                          $   383,648$   411,682
Professional fees                                                      233,940         340,134
General and administrative expenses                                    193,059         187,361
Depreciation and amortization                                          361,940         276,665
Property operating expenses                                              3,240          37,919
Real estate taxes                                                       83,879          91,113
Impairment loss related to write-off of related party receivable           
 -       1,853,539
Total                                                              $ 1,259,706$ 3,198,413




  ? For the year ended December 31, 2019, compensation and benefit expense

decreased by $28,034, or 6.8%, as compared to the year ended December 31,

2018. This decrease was attributable to a decrease in stock-based compensation

of $51,563 offset by an increase in compensation and benefits of $23,529.

? For the year ended December 31, 2019, professional fees decreased by $106,194,

or 31.2%, as compared to the year ended December 31, 2018. This decrease was

primarily attributable to a decrease in public relations fees of $58,936, a

decrease in in proxy service fees incurred of $21,195, and a decrease in legal

    fees of $25,955.




                                       21




? 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 year ended December 31, 2019, general and administrative

expenses increased by $5,698, or 3.0%, as compared to the year ended December

    31, 2018.



? For the year ended December 31, 2019, depreciation and amortization expense

increased by $85,275, or 30.8%, as compared to the year ended December 31,

    2018 and was attributable to an increase in depreciable assets.



? Property operating expenses consist of property management fees, property

insurance, repairs and maintenance fees, utilities and other expenses related

to our rental properties. For the year ended December 31, 2019, property

operating expenses decreased by $34,679, or 91.5%, as compared to the year

ended December 31, 2018. The decrease was primarily related to the

restructuring of our leases in May 2018. Beginning in May 2018, substantially

all of the property operating expenses are paid by the Significant Tenants.

? For the year ended December 31, 2019, real estate taxes decreased by $7,234,

    or 7.9%, as compared to the year ended December 31, 2018.



? During the year ended December 31, 2018, we recorded an impairment loss from

the write-off of deferred rent receivable - related parties of $1,853,539 in

operating expenses on the accompanying consolidation statements of operations.

We did not record any write-off of receivables during the year ended December

31, 2019. On May 1, 2018, we and the related party tenants cancelled their

existing lease agreements. Additionally, on May 1, 2018, we entered into new

lease agreements relating to the same properties. The new leases provide for

payments of fixed monthly base rents over the term of the leases with no base

rent increases. Accordingly, we reviewed our deferred rent receivable and

determined that the deferred rent receivable of $1,853,539 should be written

off since, pursuant to the new lease terms, the deferred rent receivable was

not collectible. Accordingly, on May 1, 2018, we recorded an impairment loss

    from the write-off of deferred rent receivable - related parties of
    $1,853,539.




Income (loss) from operations



As a result of the factors described above, for the year ended December 31, 2019, income from operations amounted to $715 as compared to loss from operations of $(1,961,483) for the year ended December 31, 2018, a positive change of $1,962,198, or 100.0%. This change is primarily due to the 2018 write-off of deferred rent receivable - related parties of $1,853,539, as discussed above.




Other (expenses) income



Other (expenses) income primarily includes interest expense incurred on debt
with third parties and related parties and also includes other income
(expenses). For the year ended December 31, 2019, total other expenses, net
amounted to $12,996 as compared to total other expenses, net of $65,795,
respectively, representing a decrease of $52,799, or 80.3%. During the year
ended December 31, 2019, we recognized other income of $108,204 related to a
cash rebate received from the utility company as compared to other income of
$50,000 during the year ended December 31, 2018.



Net loss



As a result of the foregoing, for the years ended December 31, 2019 and 2018,
net loss amounted to $12,281, or $(0.00) per common share (basic and diluted),
and $2,027,278, or $(0.12) per common share (basic and diluted), respectively.



                                       22




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 $639,781 and $354,867 of
cash as of December 31, 2019 and 2018, respectively.



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


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

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




  ? The cost of being a public company.




We may need to raise additional funds, particularly if we are unable to generate
positive cash flow as a result of our operations. We estimate that based on
current plans and assumptions, that our available cash will be sufficient to
satisfy our cash requirements under our present operating expectations for the
next 12 months from the date of this report. Other than revenue received from
the lease of our rental properties, 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.



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



Our future operations are dependent on our ability to manage our current cash
balance, on the collection of rental and advisory revenues and the attainment of
new advisory clients. Our real estate properties are leased to Significant
Tenants who were related parties through December 31, 2018 under triple-net
leases for which terms vary. We monitor the credit of these tenants to stay
abreast of any material changes in credit quality. We monitor tenant credit by
(1) reviewing financial statements and related metrics and information that are
publicly available or that are provided to us upon request, and (2) monitoring
the timeliness of rent collections. As of December 31, 2019 and 2018, we had an
asset concentration related to our Significant Tenant leases. As of December 31,
2019 and 2018, these Significant Tenants represented approximately 87.1% and
90.7% of total assets, respectively. If our Significant Tenants are prohibited
from operating or cannot pay their rent, we may not have enough working capital
to support our operations and we would have to seek out new tenants at rental
rates per square less than our current rate per square foot.



As included in exhibit 99.1 and 99.2 to this report, we have included audited
financial statements of our Significant Tenants since they represent material
information and are necessary for the protection of investors.



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.



                                       23





Cash Flow


For the Years Ended December 31, 2019 and 2018




Net cash flow provided by operating activities was $284,914 for the year ended
December 31, 2019 as compared net cash flow provided by operating activities of
$359,984 for the year ended December 31, 2018, a decrease of $75,070.



? Net cash flow provided by operating activities for the year ended December 31,

2019 primarily reflected net loss of $12,281 adjusted for the add-back of

non-cash items consisting of depreciation and amortization of $361,940,

stock-based compensation expense of $31,100 and accretion of stock-based stock

option expense of $23,612, offset by changes in operating assets and

liabilities primarily consisting of a decrease in accounts payable of

$(117,984), and net changes in other operating assets and liabilities of

    $(1,473).



? Net cash flow provided by operating activities for the year ended December 31,

2018 primarily reflected net loss of $2,027,278 adjusted for the add-back of

non-cash items consisting of depreciation and amortization of $276,665,

stock-based compensation expense of $84,132, accretion of stock-based stock

option expense of $31,516 and impairment of related party deferred rent

receivable in the amount of $1,853,539, offset by changed in operating assets

and liabilities consisting of an increase in deferred rent receivables of

$144,805, a decrease in notes receivable of $182,365 from the collection of

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 payable over 12 months

commencing January 1, 2018, an increase in accounts payable of $109,089, and

    net changes in other operating assets and liabilities of $(5,239).




For the year ended December 31, 2018, net cash flow used in investing activities
amounted to $829,357 used in the development of rental properties including the
expansion of rentable space by remodeling hoop houses and upgrading ventilation,
plumbing and electrical systems. We did not have any investing activities for
the year ended December 31, 2019.



Contractual Obligations and Off-Balance Sheet Arrangements



Contractual Obligations


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



The following tables summarize our contractual obligations as of December 31,
2019 (dollars in thousands), and the effect these obligations are expected to
have on our liquidity and cash flows in future periods.



                                                           Payments Due by Period
                                                 Less than
Contractual obligations:            Total         1 year         1-3 years       3-5 years       5 + years
Convertible notes                 $   2,020     $         -     $         -     $        20$     2,000
Interest on convertible notes         1,245             154             241
            240             610
Total                             $   3,265$       154$       241$       260$     2,610

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.



                                       24





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



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



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



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




Stock-based compensation



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



                                       25




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


Recent Accounting Pronouncements




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



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



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



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


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



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



Recent Accounting Pronouncements

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

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Managers
NameTitle
Bryan McLaren Chairman, President, CEO, CFO & Secretary
Art Friedman Independent Director
Alex C. McLaren Director
David G. Honaman Independent Director
Derek Overstreet Independent Director