ZONED PROPERTIES, INC. Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results
This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects.The Securities and Exchange Commission (the "SEC") encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This quarterly report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management's plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "will" and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the "Risk Factors" section of our annual report on Form 10-K as filed onMarch 24, 2022 , as the same may be updated from time to time. 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 such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q.
OverviewZoned Properties, Inc. ("Zoned Properties " or the "Company"), was incorporated in theState of Nevada onAugust 25, 2003 . The Company is a real estate development firm for emerging and highly regulated industries, including regulated cannabis. The Company is redefining the approach to commercial real estate investment through its integrated growth services. Headquartered inScottsdale, Arizona ,Zoned Properties has developed a full spectrum of integrated growth services to support its real estate development model; the Company's Property Technology, Advisory Services, Commercial Brokerage, and Investment Portfolio collectively cross-pollinate within the model to drive project value associated with complex real estate projects. With national experience and a team of experts devoted to the emerging cannabis industry,Zoned Properties is addressing the specific needs of a modern market in highly regulated industries.Zoned Properties is an accredited member of theBetter Business Bureau , theU.S. Green Building Council , and theForbes Real Estate Council . The Company does not grow, harvest, sell or distribute cannabis or any substances regulated underUnited States law such as the Controlled Substance Act of 1970, as amended (the "CSA"). We operate our business in two reportable segments consisting of (i) the operations, leasing and management of its leased commercial properties (the "Property Investment Portfolio" segment), and (ii) advisory and brokerage services related to commercial properties (the "Real Estate Services" segment). We are in the process of developing and expanding multiple business divisions, including a property technology division, and a property investment portfolio division focused on acquisitions to expand our property holdings. Each of these operating divisions is an important element of the overall business development strategy for long-term growth. We believe in the value of building relationships with clients and local communities to position the Company for long-term portfolio and revenue growth backed by sophisticated, safe, and sustainable assets and clients. The core of our business involves identifying and developing commercial properties that intend to operate within highly regulated industries, including the regulated cannabis industry. Within highly regulated industries, local municipalities typically develop strict regulations, including zoning and permitting requirements related to commercial real estate, that dictate the specific locations and parameters under which regulated properties can operate. These regulations often include complex permitting processes and can include non-standard codes governing each location; for example, restricting a regulated property or facility from operating within a certain distance of any parks, schools, churches, or residential districts, or restricting a regulated property from operating outside a defined set of hours of operation. When an organization can collaborate with local representatives, a proactive set of rules and regulations can be established and followed to meet the needs of both the regulated operators and the local community. 30
OnApril 22, 2021 , ZP Data Platform 1 LLC, a wholly owned subsidiary of the Company ("ZP Data"), entered into a Limited Liability Company Operating Agreement (the "Beakon Operating Agreement") with a non-affiliated joint venture partner in connection with the formation ofBeakon, LLC ("Beakon"), aDelaware limited liability company formed onApril 16, 2021 . Beakon signed a licensing agreement for the licensing of a consumer data/marketing software platform that Beakon will white-label for the cannabis industry. Beakon's goal is to develop and leverage the platform to help drive foot traffic to brick and mortar retail (i.e. dispensaries), and thus enhance the value of the real estate and mitigate risk. Pursuant to the Beakon Operating Agreement, ZP Data purchased 50 units of Beakon for$50 , which represent 50% of the membership interests of Beakon. Each unit represents, with respect to any member, such member's: (i) interest in Beakon's capital, (ii) share of Beakon's net profits and net losses (and specially allocated items of income, gain, and deduction), and the right to receive distributions of net cash flow from Beakon, (iii) right to inspect Beakon's books and records, and (iv) right to participate in the management of and vote on matters coming before the members as provided in the Beakon Operating Agreement. The transactions discussed above resulted in a joint venture, in accordance with theFinancial Accounting Standards Board's (the "FASB") Accounting Standards Codification ("ASC") 323-10 -Investments- Equity and Joint Ventures , between ZP Data and the non-affiliated party. Each of the entities has 50% equity ownership and voting rights, and joint control in Beakon. ZP Data will account for its investment in Beakon under the equity method of accounting in accordance with ASC 323. During the year endedDecember 31, 2021 , we contributed$86,000 to Beakon. OnDecember 31, 2021 , the Company recorded an other-than-temporary impairment loss of$73,970 because it was determined that the fair value of its equity method investment in Beakon was less than its carrying value. Based on management's evaluation, it was determined that due to market conditions and lack of committed funding, the Company's ability to recover the carrying amount of the investment in Beakon was impaired. For the year endedDecember 31, 2021 , the$73,970 impairment loss is included in other expenses on the consolidated statement of operations. OnMay 1, 2021 , we entered into a Limited Liability Company Operating Agreement (the "Zoneomics Green Operating Agreement") with a non-affiliated joint venture partner in connection with the formation ofZoneomics Green, LLC ("Zoneomics Green"), aDelaware limited liability company formed onMay 1, 2021 . Zoneomics Green's goal is to utilize advanced property technology to provide solutions for property identification in regulated industries such as regulated cannabis. Pursuant to the Zoneomics Green Operating Agreement, the Company purchased 50 units of Zoneomics Green for a capital contribution of$90,000 , which represent 50% of the membership interests of Zoneomics Green. Each unit represents, with respect to any member, such member's: (i) interest in Zoneomics Green's capital, (ii) share of Zoneomics Green's net profits and net losses (and specially allocated items of income, gain, and deduction), and the right to receive distributions of net cash flow from Zoneomics Green, (iii) right to inspect Zoneomics Green's books and records, and (iv) right to participate in the management of and vote on matters coming before the members as provided in the Zoneomics Green Operating Agreement. The transactions discussed above resulted in a joint venture, in accordance with ASC 323-10 -Investments- Equity and Joint Ventures , between the Company and the non-affiliated party. Each of the entities has 50% equity ownership and voting rights, and joint control in Zoneomics Green. InJune 2021 , we contributed$90,000 to Zoneomics Green. OnJune 1, 2021 , we closed on the sale of ourGilbert, AZ property with a third party (the "Purchaser") pursuant to which we agreed to sell, and the Purchaser agreed to purchase, the property located inGilbert, Arizona , for an aggregate purchase price of$335,000 . In connection with the sale, we received net proceeds of$322,332 and recorded a gain on sale of rental property of$51,944 . The Company currently maintains a portfolio of properties that we own, develop, and lease. We lease land and/or building space at all four of the properties in our portfolio. Four of the properties are leased to licensed and regulated cannabis tenants and are located in areas with established zoning and permitting procedures. Two of the leased properties are zoned and permitted as licensed and regulated cannabis dispensaries, and two of the leased properties are zoned and permitted as licensed and regulated cannabis cultivation facilities. Each regulated property may undergo a non-standard development process. Various development requirements in this process may include initial property identification, zoning authorization, and permitting guidance in order to qualify a commercial property for subsequent architectural design, utility installation, construction and development, property management, facilities management systems, and security system installation. For the three months endedMarch 31, 2022 and 2021, substantially all of our Property Investment Portfolio segment revenues were generated from triple-net leases to tenants that are controlled by one entity (each, a "Significant Tenant" and collectively, the "Significant Tenants"), which is located in theState of Arizona . For the three months endedMarch 31, 2022 and 2021, Real Estate Services segment revenues included$0 and$9,250 , respectively, that were generated from the Significant Tenants. 31 As ofMarch 31, 2022 , a summary of rental properties owned by us consisted of the following: Tempe, Chino Valley, Green Valley, Kingman, Location AZ AZ AZ AZ Industrial/ Greenhouse/ Retail Retail Description Office Nursery (special use) (special use) Cannabis Cannabis Cannabis Cannabis Current Use Facility Facility Dispensary Dispensary Date Acquired March 2014 August 2015 October 2014 May 2014 Lease Start Date May 2018 May 2018 May 2018 May 2018 Lease End Date April 2040 April 2040 April 2040 April 2040 Total No. of Tenants 1 1 1 1 Total Properties Land Area (Acres) 3.65 47.60 1.33 0.32 52.90 Land Area (Sq. Feet) 158,772 2,072,149 57,769 13,939 2,302,629 Undeveloped Land Area (Sq. Feet) - 1,782,563
- 6,878 1,789,441
Developed Land Area (Sq. Feet) 158,772 289,586
57,769 7,061 513,188
Total Rentable Building Sq. Ft. 60,000 97,312
1,440 1,497 160,249 Vacant Rentable Sq. Ft. - - - - -
Sq. Ft. rented as of March 31, 2022 60,000 97,312
1,440 1,497 160,249
Annual Base Rent (*,**) 2022 (remainder of year)$ 457,450 $ 788,227 $
31,500$ 36,000 $ 1,313,267 2023 610,053 1,050,970 42,000 48,000 1,751,023 2024 610,053 1,050,970 42,000 48,000 1,751,023 2025 610,053 1,050,970 42,000 48,000 1,751,023 2026 598,589 1,050,970 42,000 48,000 1,739,559 2027 590,400 1,050,970 42,000 48,000 1,731,370 Thereafter 7,281,600 12,961,958 518,000 592,000 21,353,558 Total$ 10,676,400 $ 19,005,035 $ 759,500 $ 868,000 $ 31,390,823
* Annual base rent represents amount of cash payments due from tenants.
** For
parking lot space used by a third party as an antenna location.
32
Annualized $ per Rented Sq. Ft. (Base Rent)
Tempe, Chino Valley, Green Valley, Kingman,
Year AZ AZ AZ AZ
2022 $ 9.8 $ 10.8 $ 29.2 $ 32.1
2023 $ 9.8 $ 10.8 $ 29.2 $ 32.1
2024 $ 9.8 $ 10.8 $ 29.2 $ 32.1
2025 $ 9.8 $ 10.8 $ 29.2 $ 32.1
2026 $ 9.8 $ 10.8 $ 29.2 $ 32.1
The Company will focus heavily on the growth of a diversified revenue stream in
2022 and is moving to take advantage of new opportunities. We intend to
accomplish this by prospecting new 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 .
Pursuant to lease agreements with our Significant Tenant, from the period from
May 31, 2020 through March 31, 2022 , our Significant Tenants invested a combined
total of at least $8,000,000 in improvements in and to the properties in Chino
Valley . The increase in the rentable area of the leased premises resulted in an
increase in all amounts calculated based on the same, including, without
limitation, base rent.
COVID-19
In March 2020 , the World Health Organization declared COVID-19 a global pandemic
and recommended containment and mitigation measures worldwide. The Company is
monitoring this closely, and although operations have not been materially
affected by the COVID-19 outbreak to date, the ultimate duration and severity of
the outbreak and its impact on the economic environment and our business is
uncertain. Currently, all of the properties in the Company's portfolio are open
to its Significant Tenants and will remain open pursuant to state and local
government requirements. The Company did not experience in 2020 or 2021 and does
not foresee in 2022, any material changes to its operations from COVID-19. The
Company's tenants are continuing to generate revenue at these properties, and
they have continued to make rental payments in full and on time and we believe
the tenants' liquidity position is sufficient to cover its expected rental
obligations. Accordingly, while the Company does not anticipate an impact on its
operations, it cannot estimate the duration of the pandemic and potential impact
on its business if the properties must close or if the tenants are otherwise
unable or unwilling to make rental payments. In addition, a severe or prolonged
economic downturn could result in a variety of risks to the Company's business,
including weakened demand for its properties and a decreased ability to raise
additional capital when needed on acceptable terms, if at all.
Results of Operations
The following comparative analysis 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 condensed consolidated financial
statements and the notes to those statements for the three months ended
March 31, 2022 and 2021, which are included elsewhere in this quarterly report
on Form 10-Q. The results discussed below are for the three months ended
March 31, 2022 and 2021.
33
Comparison of Results of Operations for the Three Months Ended
Revenues For the three months endedMarch 31, 2022 and 2021, revenues consisted of the following: Three Months Ended March 31, 2022 2021 Rental revenues$ 390,097 $ 292,189 Advisory revenues 31,250 53,656 Brokerage revenues 511,104 - Franchise fees 6,250 - Total revenues$ 938,701 $ 345,845
Revenues by reportable business segments for the three months ended
For the
Three Months Ended
March 31,
2022 2021
Revenues:
Property investment portfolio $ 390,097 $ 345,845
Real estate services 548,604 -
938,701 345,845
For the three months ended March 31, 2022 , total revenues amounted to $938,701 ,
including Significant Tenant revenues of $385,294 , as compared to $345,845 ,
including Significant Tenant revenues of $296,480 , for the three months ended
March 31, 2021 , an increase of $592,856 , or 171.4%. For the three months ended
March 31, 2022 , the increase in revenues as compared to the 2021 comparable
period was attributable to an increase in rental revenue from our Significant
Tenants of $89,365 due to an increase in rental revenue at our Chino Valley
facility related to a fourth amendment to our lease agreement in connection with
an increase in rentable square footage, an increase in brokerage revenue of
$511,104 related to commission earned on real estate listings, and an increase
in franchise fees earned of $6,250 , offset by a decrease in advisory revenues of
$22,406 . Substantially all of the Company's real estate properties are leased
under triple-net leases to the Significant Tenants.
Operating expenses
For the three months ended March 31, 2022 , operating expenses amounted to
$929,183 as compared to $389,213 for the three months ended March 31, 2021 , an
increase of $539,970 , or 138.70%. For the three months ended March 31, 2022 and
2021, operating expenses consisted of the following:
Three Months Ended
March 31,
2022 2021
Compensation and benefits $ 272,130 $ 131,144
Professional fees 116,319 94,420
Brokerage fees 356,547 -
General and administrative expenses 65,108 51,478
Depreciation and amortization 97,317 90,747
Real estate taxes 21,762 21,424
Total $ 929,183 $ 389,213
34
? For the three months ended March 31, 2022 , compensation and benefit
expense increased by
ended March 31, 2022 . This increase was attributable to an increase in
stock-based compensation of $49,094 and an increase in compensation and
benefits of
an increase in stock-based compensation from the accretion of stock option
expense, offset by shares issued for services during the three months
ended
2021, we began to hire additional staff related to the diversification of
our services into brokerage services and the expansion of our advisory
services which caused an increase in compensation and benefit expense
during the first quarter of 2022.
? For the three months ended
This increase was primarily attributable to an increase in accounting fees
of
in consultants used in our brokerage business, an increase in public
relations fees of
? For the three months ended
amounting to
months ended
percentage-based commission splits we pay to our licensed brokerage team
members
? General and administrative expenses consist of expenses such as rent
expense, insurance expense, insurance expense, travel expenses, officeexpenses, telephone and internet expenses, advertising and marketing
expense, and other general operating expenses. For the three months ended
or 26.5%, as compared to the three months ended March 31, 2021 .
? For the three months ended
? For the three months ended
$338 , or 1.6%, as compared to the three months endedMarch 31, 2021 .
Income (loss) from operations
As a result of the factors described above, for the three months endedMarch 31, 2022 , income from operations amounted to$9,518 as compared to a loss from operations of$(43,368) for the three months endedMarch 31, 2021 , a positive change of decrease of$52,886 , or 121.9%. Other (expense) income
Other (expense) income primarily includes interest expense incurred on debt with third parties and a related party, and includes other (expense) income. For the three months endedMarch 31, 2022 and 2021, total other expenses, net amounted to$35,214 as compared to total other expenses, net of$27,967 , respectively, representing an increase of$7,247 , or 25.9%. This increase was attributable to an increase in loss from unconsolidated joint ventures of$7,819 and an increase in interest expense of$300 , offset by an increase in interest income of$872 attributable to interest earned on the convertible note receivable. Net loss
As a result of the foregoing, for the three months ended
35
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had$787,918 and$1,191,940 of cash as ofMarch 31, 2022 andDecember 31, 2021 , respectively. Our primary uses of cash have been for compensation and benefits, fees paid to third parties for professional services, real estate taxes, general and administrative expenses, and the development of rental properties and other lines of business. All funds received have been expended in the furtherance of growing the business. We receive funds from the collection of rental income and advisory fees. The following trends are reasonably likely to result in changes in our liquidity over the near to long term: ? An increase in working capital requirements to finance our current business,
? Addition of administrative and sales personnel as the business grows,
? The cost of being a public company,
? An increase in investments in joint ventures and other projects, and
? An increase in funds used for lease incentives paid to our Significant
Tenant.
We may need to raise additional funds, particularly if we are unable to continue
to generate positive cash flows from our operations. We estimate that based on
current plans and assumptions, that our available cash will be sufficient to
satisfy our cash requirements under our present operating expectations for the
next 12 months from the date of this quarterly report on Form 10-Q. Other than
revenue received from the lease of our rental properties, from advisory fees,
from brokerage revenues, and from franchise services, we presently have no other
significant alternative source of working capital.
We have used these funds to fund our operating expenses, pay our obligations,
develop rental properties, invest in joint ventures and notes receivable, and to
grow our company. We may need to raise significant additional capital or debt
financing to acquire new properties, to develop existing properties, to assure
we have sufficient working capital for our ongoing operations and debt
obligations, and to invest in new joint venture and other projects.
On March 19, 2020 , we made an initial investment of $100,000 into KCB Jade
Holdings, LLC ("KCB"), an entity founded by an individual related to the
Company's COO. KCB, doing business as Open Dør Dispensaries, provides services
to cannabis dispensary license holders utilizing the Open Dør Dispensaries
retail model as franchisee partners.. In exchange for the investment, KCB issued
to us a convertible debenture (the "Debenture") dated March 19, 2020 (the
"Issuance Date") in the original principal amount of $100,000 . The Debenture
bears interest at the rate of 6.5% per annum and matures on March 19, 2025 (the
"Maturity Date"). Interest on the outstanding principal sum of the Debenture
commences accruing on the Issuance Date and is computed on the basis of a
365-day year and the actual number of days elapsed and shall be payable annually
due by the first day of each calendar anniversary following the Issuance Date.
KCB may prepay the Debenture at any point after 18 months following the Issuance
Date, in whole or in part. However, if KCB elects to prepay the Debenture prior
to the Maturity Date or prior to any conversion as provided in the Debenture in
whole or in part, we will be entitled to receive a number of KCB units, in
addition to such prepayment amount, constituting 10% of the total outstanding
units and 10% of the total percentage interest following such issuance and at
the time of such issuance. On or after six months from the Issuance Date, we may
convert all or a portion of the principal balance and all accrued and unpaid
interest due into a number of units equal to the proportion of the outstanding
amount being converted multiplied by 33% of the total number of units issued and
outstanding at the time of conversion, constituting 33% of the total percentage
interest (the "Conversion Percentage"). If KCB defaults on payment of the
Debenture, we may, at its option, extend all conversion rights, through and
including the date KCB tenders or attempts to tender payment in full of all
amounts due under the Debenture. Conversion rights terminate upon acceptance by
the Company of payment in full of principal, accrued interest, and any other
amounts due under the Debenture. If (i) KCB does not elect to exercise its
rights of prepayment prior to the Maturity Date, (ii) we do not elect to
exercise its rights of conversion, and (iii) KCB pays to the Company all
outstanding principal and interest accrued and due under the terms of the
Debenture on the Maturity Date, we will still be entitled to receive a number of
units, in addition to such payment amount, constituting 8% of the total
outstanding units and 8% of the total percentage interest following such
issuance and at the time of such issuance.
36
OnFebruary 19, 2021 , we made an additional investment of$100,000 into KCB (the "Additional Investment "). In exchange, the KCB issued to the Company an amended and restated convertible debenture (the "A&R Debenture") on the Amendment Date. The A&R Debenture amends and restates in its entirety the Original Debenture. Pursuant to the A&R Debenture, the Company and KCB agreed to certain new terms that did not exist in the Original Debenture, which are described below.
? Interest Accrual Commencement: Pursuant to the A&R Debenture, interest on
the
on the Additional Investment began accruing on February 19, 2021 .
? Franchise Fees. In the A&R Debenture, the parties acknowledge that each time
that KCB sells one of its franchise locations, KCB earns a fee (an "Initial
Fee"), and that KCB also earns a fee when one of its franchise locations
renews its franchise with KCB (a "Renewal Fee"). Pursuant to the A&R
Debenture, the Company and KCB agreed that, as additional consideration for
the
any Initial Fee received by KCB after the Amendment Date, as well as 5% of any
Renewal Fee received by KCB related to any franchise locations sold after the
Amendment Date, in each case to be paid within five (5) days of receipt of KCB
thereof.
In addition, following the Amendment Date, KCB agreed not to decrease the amount
it charges its franchise locations for an Initial Fee or any Renewal Fee as in
effect on the Amendment Date without the prior written consent of the Company,
or to take any other actions that would reduce the value of KCB's obligation to
the Company with respect to these franchise fee payments. KCB's obligation to
pay the Company the franchise fees listed above will survive any termination,
repayment, or conversion of the A&R Debenture. Failure by KCB to pay the Company
the franchise fees in the manner described above will result in an event of
default, and, among other things, any due and unpaid franchise fees will accrue
interest at 12% per year from the date the obligation was due.
Apart from the terms described above, the terms of the A&R Debenture are substantially identical to the terms of the Original Debenture.
OnAugust 2, 2021 , KCB issued to the Company a second amended and restated convertible debenture (the "Second A&R Debenture"). The Second A&R Debenture amends and restates in its entirety the A&R Debenture. Pursuant to the Second A&R Debenture, the Company and KCB agreed to revise certain terms in the A&R Debenture, as described below. Right of Prepayment. KCB may prepay the Second A&R Debenture at any point after 18 months following the Issue Date, in whole or in part. However, if KCB elects to prepay the Second A&R Debenture prior toMarch 19, 2025 (the "Maturity Date") or prior to any conversion in whole or in part, the Company will be entitled to receive a number of KCB Class B units ("ClassB Units "), in addition to such prepayment amount, constituting 10% of the total outstanding KCB Units (as defined in KCB's Limited Liability Company Operating Agreement (the "Operating Agreement")), for the avoidance of doubt, being 10% of the total of KCB's Class A units ("Class A Units") and the ClassB Units together, and 10% of the total Percentage Interest (as defined in the Operating Agreement) following such issuance and at the time of such issuance. Voluntary Conversion. On or after six months from the Issue Date, the Company is entitled to convert all or a portion of the principal balance and all accrued and unpaid interest due under the Second A&R Debenture (the "Outstanding Amount") into a number of ClassB Units equal to the proportion of the Outstanding Amount being converted multiplied by the Conversion Percentage, as defined below). Should KCB default on payment hereof, the Company may, at its option, extend all conversion rights, through and including the date KCB tenders or attempts to tender payment in full of all amounts due under the Second A&R Debenture. Conversion rights will terminate upon acceptance by the Company of payment in full of principal, accrued interest and any other amounts due under the Second A&R Debenture. Conversion Percentage. The Conversion Percentage will be 33% of the total number of Units (for the avoidance of doubt, being 33% of the total of the Class A Units and the ClassB Units together), issued and outstanding at the time of conversion, constituting 33% of the total Percentage Interest (the "Conversion Percentage"). Right of Maturity Units. If (i) KCB does not elect to exercise its prepayment rights prior to the Maturity Date, and (ii) the Company does not elect to exercise its conversion rights, and (iii) KCB pays to the Company all outstanding principal and interest accrued and due under the terms of the Second A&R Debenture on the Maturity Date, then the Company will still be entitled to receive a number of ClassB Units , in addition to such payment amount, constituting 8% of the total outstanding Units (for the avoidance of doubt, being 8% of the total of the Class A Units and the ClassB Units together) and 8% of the total Percentage Interest (as such term is defined in the Second A&R Debenture) following such issuance and at the time of such issuance. 37
Apart from the terms described above, the terms of the Second A&R Debenture are substantially identical to the terms of the A&R Debenture.
As discussed in the Overview section and elsewhere, during the year endedDecember 31, 2021 , we contributed$86,000 to the Beakon joint venture and we contributed$90,000 to the Zoneomics Green joint venture. Additionally, onDecember 31, 2021 , we recorded an other-than-temporary impairment loss of$73,970 because it was determined that the fair value of our equity method investment in Beakon was less than its carrying value. Based on management's evaluation, it was determined that due to market conditions and lack of committed funding, our ability to recover the carrying amount of the investment in Beakon was impaired as ofDecember 31, 2021 . Our future operations are dependent on our ability to manage our current cash balance, on the collection of rental and advisory revenues and the attainment of new advisory clients. Our real estate properties are leased to Significant Tenants under triple-net leases for which terms vary. We monitor the credit of these tenants to stay abreast of any material changes in credit quality. We monitor tenant credit by (1) reviewing financial statements and related metrics and information that are publicly available or that are provided to us upon request, and (2) monitoring the timeliness of rent collections. As ofMarch 31, 2022 andDecember 31, 2021 , we had an asset concentration related to our Significant Tenant leases. As ofMarch 31, 2022 andDecember 31, 2021 , these Significant Tenants represented approximately 82.3% and 79.2% of total assets, respectively. If our Significant Tenants are prohibited from operating due to federal or state regulations or due to COVID-19, or cannot pay their rent, we may not have enough working capital to support our operations and we would have to seek out new tenants at rental rates per square less than our current rate per square foot. We included audited financial statements of our Significant Tenants as Exhibit 99.1 to our Annual Report on Form 10-K as filed with theSEC onMarch 24, 2022 since such audited financial statements represent material information and are necessary for the protection of investors. We may secure additional financing to acquire and develop additional and existing properties. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow our business operations. Cash Flow
For the Three Months Ended
Net cash flow provided by operating activities was$119,742 for the three months endedMarch 31, 2022 , as compared to net cash flow provided by operating activities of$165,035 for the three months endedMarch 31, 2021 , representing a decrease of$45,293 .
? Net cash flow provided by operating activities for the three months ended
add-back of non-cash items consisting of depreciation of
expense of
and a loss from unconsolidated joint ventures of
operating assets and liabilities primarily consisting of an increase in
accounts receivable of
commissions receivable, a decrease in prepaid expenses of
in accounts payable of
payable, a decrease in accrued expenses of
rent receivable of$2,247 .
? Net cash flow provided by operating activities for the three months ended
add-back of non-cash items consisting of depreciation of
compensation expense of
expense of
primarily consisting of a decrease in prepaid expenses of$56,555 and an increase in accounts payable of$26,095 . 38 During the three months endedMarch 31, 2022 , net cash flow used in investing activities amounted to$503,764 as compared to net cash used in investing activities of$107,135 , an increase of$396,629 . During the three months endedMarch 31, 2022 , net cash used in investing activities was attributable to an increase in lease incentive receivables related to the disbursement of$500,000 to our Significant Tenant to be used for leasehold improvements, and the purchase of property and equipment of$3,764 . For the three months endedMarch 31, 2021 , cash used in investing activities was attributable to cash used for an investment in a convertible note receivable of$100,000 and cash used in the improvement of rental properties of$7,135 . During the three months endedMarch 31, 2022 , net cash flow used in financing activities amounted to$20,000 as compared to net cash used in financing activities of$0 , an increase of$20,000 . During the three months endedMarch 31, 2022 , net cash used in financing activities was attributable to the repayment of notes payable - related party of$20,000 .
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as ofMarch 31, 2022 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods. Payments Due by Period Less than Contractual obligations: Total 1 year 1-3 years 3-5 years 5 + years Convertible notes$ 2,000 $ - $ - $ -$ 2,000 Interest on convertible notes 970 150 240
240 340
Total $ 2,970 $ 150 $ 240 $ 240 $ 2,340 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 stockholders' 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 and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the unaudited condensed consolidated financial statements. 39 Rental properties Rental properties are carried at cost less accumulated depreciation and amortization. Betterments, major renovations and certain costs directly related to the improvement of rental properties are capitalized. Maintenance and repair expenses are charged to expense as incurred. Depreciation is recognized on a straight-line basis over estimated useful lives of the assets, which range from 5 to 39 years. Tenant improvements are amortized on a straight-line basis over the lives of the related leases, which approximate the useful lives of the assets. Upon the acquisition of real estate, we assess the fair value of acquired assets (including land, buildings and improvements, identified intangibles, such as acquired above-market leases and acquired in-place leases) and acquired liabilities (such as acquired below-market leases) and allocate the purchase price based on these assessments. The Company assesses fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on several factors including historical operating results, known trends, and market/economic conditions. Our properties are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property's carrying amount over its estimated fair value. Impairment analyses are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. If our estimates of the projected future cash flows, anticipated holding periods, or market conditions change, our evaluation of impairment losses may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results.
We have capitalized land, which is not subject to depreciation.
Lease accountingFinancial Accounting Standards Board's (the "FASB") Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to recognize a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. For leases entered into on or after the effective date, where the Company is the lessor, at the inception of the contract, the Company assesses whether the contract is a sales-type, direct financing or operating lease by reviewing the terms of the lease and determining if the lessee obtains control of the underlying asset implicitly or explicitly. If a change to a pre-existing lease occurs, the Company evaluates if the modification results in a separate new lease or a modified lease. A new lease results when a modification provides additional right of use. The new lease or modified lease is then reassessed to determine its classification based on the modified terms. As disclosed in Note 3, onJanuary 1, 2019 , theChino Valley lease was modified to increase the monthly base rent from$35,000 to$40,000 . OnMay 31, 2020 , theChino Valley lease was modified to decrease the monthly base rent from$40,000 to$32,800 and theTempe lease was modified to increase the monthly base rent from$33,500 to$49,200 . OnAugust 23, 2021 and effectiveSeptember 1, 2021 , theChino Valley lease was amended, and the monthly base rent was increased to$55,195 due to additional space of 27,312 square feet being leased to the lessee. OnJanuary 24, 2022 and effective onMarch 1, 2022 , theChino Valley lease was amended and the monthly base rent was increased to$87,581 due to additional space of 30,000 square feet being leased to the lessee, increasing the premises to a total of 97,312 square feet of operational space. In connection with this lease amendment, the Company paid$500,000 to tenant as a tenant improvement allowance or lease incentive for investment into the premises, which was capitalized as a lease incentive receivable and is recognized on a straight-line basis over the remaining lease term as a reduction to the lease income. The increase in monthly rent was commensurate with the additional space being leased; therefore, this modification qualifies as a separate contract under the FASB's Accounting Standards Codification ("ASC") 842. At the commencement of the modified terms, the Company reassessed its lease classification and concluded it remained properly classified as an operating lease. 40 The Company records revenues from rental properties for its operating leases on a straight-line basis where it is the lessor. Any revenue on the straight-line basis exceeding the monthly payment amount required on the operating lease is reflected as a deferred rent receivable. EffectiveMay 31, 2020 , the Company amended its leases for which it is the lessor on itsChino Valley ,Tempe ,Kingman andGreen Valley properties. The amendments resulted in an abatement of rent for the months of June andJuly 2020 . This rent abatement resulted in a deferred rent receivable as ofMarch 31, 2022 andDecember 31, 2021 of$162,523 and$164,770 , respectively. Additionally, if the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that can be taken in the form of cash or a credit against the tenant's rent) that is funded is treated as a lease incentive receivable and amortized as a reduction of revenue over the lease term. For contracts entered into on or after the effective date, where the Company is the lessee, at the inception of a contract, the Company assess whether the contract is, or contains, a lease. The Company's assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. The Company allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. For leases where the Company is a lessee, primarily for the Company's administrative office lease, the Company analyzed if it would be required to record a lease liability and a right of use asset on its consolidated balance sheets at fair value upon adoption of ASU 2016-02. Operating lease right of use asset represents the right to use the leased asset for the lease term and operating lease liability is recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company used its incremental borrowing rate of 6% based on the information available at the adoption date or execution of a lease agreement in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the condensed consolidated statements of operations.
Investment in joint ventures
We have equity investments in various privately held entities. We account for these investments either under the equity method or cost method of accounting depending on our ownership interest and level of influence. Investments accounted for under the equity method are recorded based upon the amount of our investment and adjusted each period for our share of the investee's income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable. We evaluate our investments in these entities for consolidation. We consider our percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining whether or not the investment qualifies for consolidation or if it should be accounted for as an unconsolidated investment under either the equity method of accounting. If an investment qualifies for the equity method of accounting, our investment is recorded initially at cost, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. The net income or loss of an unconsolidated investment is allocated to its investors in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences, if any, between the carrying amount of our investment in the respective joint venture and our share of the underlying equity of such unconsolidated entity are amortized over the respective lives of the underlying assets as applicable. These items are reported as a single line item in the statements of operations as income or loss from investments in unconsolidated affiliated entities. Revenue recognition
We follow ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"). This
standard establishes a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and supersedes most
of the existing revenue recognition guidance. ASC 606 requires an entity to
recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services and also requires
certain additional disclosures.
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Rental income includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported on a straight-line basis over the non-cancellable term of the lease, which includes the effects of rent abatements under the leases. We commence rental revenue recognition when the tenant takes possession of the leased space or controls the physical use of the leased space and the leased space is substantially ready for its intended use. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that can be taken in the form of cash or a credit against the tenant's rent) that is funded is treated as a lease incentive receivable and amortized as a reduction of revenue over the lease term. Currently, the Company's leases provide for payments with fixed monthly base rents over the term of the leases. The leases also require the tenant to remit estimated monthly payments to the Company for property taxes. These payments are recorded as rental income and the related property tax expense reflected separately on the condensed consolidated statements of operations.
Revenues from advisory services is recognized when the Company performs services pursuant to its agreements with clients and collectability is reasonably assured.
Brokerage revenues primarily consists of real estate sales commissions and are recognized upon the successful completion of all required services have been performed which is when escrow closes. In accordance with the guidelines established for Reporting Revenue Gross as a Principal versus Net as an Agent in the ASC Topic 606, the Company records commission revenues and expenses on a gross basis. Of the criteria listed in ASC Topic 606, the Company is the primary obligor in the transaction, does not have inventory risk, performs all or part of the service, has credit risk, and has wide latitude in establishing the price of services rendered and discretion in selection of agents and determination of service specifications. Brokerage revenue that are payable upon payment of rent or other events beyond the Company's control are recognized upon the occurrence of such events. Franchise fee revenues consist of fees earned each time thatKCB Jade Holdings, LLC sells one of its franchise locations. Franchise fee revenues are recognized when earned and collectability is reasonably assured. Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 - "Compensation -Stock Compensation", which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment Accounting.
Recent Accounting Pronouncements
InJune 2016 , the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). ASU 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. ASU 2016-13 is effective for annual reporting periods beginning afterDecember 15, 2019 , including interim periods within those fiscal years, and a modified retrospective approach is required, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November of 2019, the FASB issued ASU 2019-10, which delayed the implementation of ASU 2016-13 to fiscal years beginning afterDecember 15, 2022 for smaller reporting companies which applies to the Company. The Company is currently evaluating the impact of ASU 2016-13 on its future consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
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