UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 000-51640
ZONED PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
14269 N. 87th Street, #205, Scottsdale, AZ
(Address of principal executive offices)
46-5198242
(I.R.S. Employer
Identification No.)
85260
(Zip Code)
Registrant’s telephone number, including area code: (877) 360-8839
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
N/A
Trading Symbol
N/A
Name of each exchange on which registered
N/A
Securities registered pursuant to Section 12(g) of the Exchange Act: Common stock, par value $0.001
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
☐
☒
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates based upon the closing price of $0.131 per share of
common stock as of June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter), was $1,165,557.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 12,141,548 shares of
common stock are issued and outstanding as of March 30, 2021.
None
Documents Incorporated by Reference
ZONED PROPERTIES, INC.
TABLE OF CONTENTS
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Reserved
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
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Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
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Item 15.
Item 16.
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ITEM 1. BUSINESS
PART I
The following discussion should be read in conjunction with our consolidated financial statements and the related notes to the consolidated financial
statements that appear elsewhere in this annual report on Form 10-K.
As used in this annual report on Form 10-K and unless otherwise indicated, the terms the terms “Zoned Properties”, “Company,” “we,” “us,” or “our” refer
to Zoned Properties, Inc. and its wholly owned subsidiaries, Gilbert Property Management, LLC, Green Valley Group, LLC, Kingman Property Group,
LLC, Chino Valley Properties, LLC, Zoned Oregon Properties, LLC, Zoned Colorado Properties, LLC, Zoned Illinois Properties, LLC, Zoned Arizona
Properties, LLC, Zoned Advisory Services, LLC and Zoned Properties Brokerage, LLC, as the context may require.
Overview
Zoned Properties, Inc. (“Zoned Properties” or the “Company”), was incorporated in the State of Nevada on August 25, 2003. The Company is a strategic
real estate development firm whose primary mission is to provide specialized real estate and sustainability services for clients in the regulated cannabis
industry, positioning the company for real estate investments and revenue growth. We intend to pioneer sustainable development for emerging industries,
including the regulated cannabis industry. We are an accredited member of the Better Business Bureau, the U.S. Green Building Council, and the Forbes
Real Estate Council. We focus 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. We provide development strategies and advisory services that could potentially have a
major impact on cash flow and property value. We do not grow, harvest, sell or distribute cannabis or any substances regulated under United States law
such as the Controlled Substance Act of 1970, as amended (the “CSA”).
The Company has the following wholly owned subsidiaries:
● Gilbert Property Management, LLC (“Gilbert”) was organized in the State of Arizona on February 10, 2014.
● Chino Valley Properties, LLC (“Chino Valley”) was organized in the State of Arizona on April 15, 2014.
● Kingman Property Group, LLC (“Kingman”) was organized in the State of Arizona on April 15, 2014.
● Green Valley Group, LLC (“Green Valley”) organized in the State of Arizona on April 15, 2014.
● Zoned Oregon Properties, LLC was organized in the State of Oregon on June 16, 2015.
● Zoned Colorado Properties, LLC (“Zoned Colorado”) was organized in the State of Colorado on September 17, 2015.
● Zoned Illinois Properties, LLC was organized in the State of Illinois on July 15, 2015.
● Zoned Arizona Properties, LLC (“Zoned Arizona”) was organized in the State of Arizona on June 2, 2017.
● Zoned Advisory Services, LLC (“Zoned Advisory”) was organized in the State of Arizona on July 27, 2018.
● Zoned Properties Brokerage, LLC (“Zoned Brokerage”) was organized in the State of Arizona on March 17, 2021.
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 their customers and will remain open pursuant to state and local government requirements. The
Company did not experience in 2020, and does not foresee in 2021, 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.
Our Business
Zoned Properties is a strategic real estate development firm whose primary mission is to provide specialized real estate and sustainability services for
clients in the regulated cannabis industry, positioning the company for real estate investments and revenue growth. We intend to pioneer sustainable
development for emerging industries, including the regulated cannabis industry. We are an accredited member of the Better Business Bureau, the U.S.
Green Building Council, and the Forbes Real Estate Council. We focus 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. We provide development strategies and
advisory services that could potentially have a major impact on cash flow and property value. We do not grow, harvest, sell or distribute cannabis or any
substances regulated under United States law such as the CSA.
1
We are in the process of developing and expanding multiple business divisions; including an advisory services division, a licensed commercial real estate
brokerage division, a real estate division focused on franchise services, a real estate division focused on real estate data, 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. We believe 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 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.
The Company currently maintains a portfolio of properties that we own, develop, and lease. We currently lease land and/or building space at all five 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.
There are significant challenges that take place when zoning, permitting, and developing facilities that intend to operate within a regulated industry,
including the regulated cannabis industry. Each state and local jurisdiction may adopt specific zoning and permitting regulations that may be unique
compared to alternative jurisdictions. The Company has gained valuable knowledge and developed best practices in this area by successfully completing
four major projects in the state of Arizona, a highly regulated market for the regulated cannabis industry. The Company intends to replicate this business
model in other states as markets mature and rules and regulations are established.
The process for obtaining zoning authorizations and permitting for a regulated cannabis facility can take several months to complete. The process primarily
involves working directly with the local government representatives. Notwithstanding proper zoning and permitted use, we may work with local zoning
authorities in order to revise zoning codes and regulations. The Company has been involved with local representatives for each of the properties currently
held in our portfolio and on behalf of third-part client properties. For example, the Company worked directly with local representatives in Tempe, Arizona
to update the local zoning code that regulates licensed cannabis facilities. The successfully adoption of these code amendments directly impact the
continued development of any licensed cannabis facilities that operate within municipal limits.
In the event a property is not currently zoned or does not currently allow permitted use as a regulated cannabis facility, we may work with local authorities
to seek changes to existing zoning or permitted use. Our efforts may not be successful. For example, our property located in Gilbert, Arizona has not been
successfully zoned and permitted for a prospective regulated cannabis facility nor has it been leased to a licensed cannabis operator. We may lease this
property to a non-cannabis tenant in the interim or divest our ownership of the property entirely.
The Company has established a network of experts in the fields of real estate, design, construction, operations, and corporate social responsibility in order
to provide tenants and clients with comprehensive solutions to best meet their needs. We require our prospective tenants and clients to go through extensive
due diligence in order to meet the Company’s standards as sophisticated and experienced operators.
Our vision is to be recognized for setting the standard in sustainable development for emerging industries, while increasing community prosperity and
shareholder value. We believe that a focus on real estate and the sustainable development of properties will bring value to the local communities in which
we operate and to local stakeholders. While we intend to expand into a variety of emerging industries, our current focus is on developing projects within
the regulated cannabis industry.
We are the sole member of nine limited liability companies: Zoned Advisory Services, LLC (“Zoned Advisory Services”), Zoned Arizona Properties, LLC
(“Zoned Arizona”), Gilbert Property Management LLC (“Gilbert Management”), Green Valley Group LLC (“Green Valley Group”), Kingman Property
Group LLC (“Kingman Property”), Chino Valley Properties LLC (“Chino Valley Properties”), Zoned Colorado Properties LLC (“Zoned Colorado”), Zoned
Illinois Properties LLC (“Zoned Illinois”), and Zoned Oregon Properties LLC (“Zoned Oregon”). Five of these entities own our properties: Zoned Arizona,
Gilbert Management, Green Valley Group, Kingman Property, and Chino Valley Properties have all acquired land and/or real property.
Multiple state-licensed operators from across the United States have approached Zoned Properties for strategic partnership and/or advisory services for
development and prospective sale-lease back arrangements. We are continuously evaluating these projects as we seek development partnerships,
prospective sale-lease back arrangements, and explore financing terms with capital funding sources.
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We believe that we are well positioned to benefit from ancillary development opportunities that the regulated cannabis industry presents without having to
deal with the risk of directly cultivating, distributing, or dispensing the product, which is still illegal under federal law.
Our initial holdings and acquisition targets have been in the State of Arizona. Unlike many other states that have legalized and regulated cannabis,
Arizona’s program has some of the strictest regulations in the country and limits the number of dispensaries that will be allowed to be open and operate
within the state. While there are hundreds of dispensaries in Denver, Colorado, the entire state of Arizona can have a maximum of 130 operating
dispensaries under current legislation. Two of our properties in Arizona (Kingman and Green Valley) are leased to licensed operators that have been
awarded dispensary licenses. This limitation on the number of dispensaries permitted to operate in Arizona under current legislation will limit our ability to
purchase additional property in Arizona for lease to dispensary operators.
Recent Corporate History and Transactions
On April 22, 2016, Zoned Colorado Properties, LLC (“Zoned Colorado”), a wholly owned subsidiary of the Company, entered into a Contract to Buy and
Sell Real Estate (the “Parachute Agreement”) with Parachute Development Corporation (“Seller”) pursuant to which Zoned Colorado agreed to purchase,
and Seller agreed to sell, property in Parachute, Colorado (the “Property”) for a purchase price of $499,857. Of the total purchase price, $274,857, or 55%,
was to be paid in cash at closing and $225,000, or 45%, was to be financed by Seller at an interest rate of 6.5%, amortized over a five-year period, with a
balloon payment at the end of the fifth year. Pursuant to the terms of the Parachute Agreement, the parties cooperated in good faith to complete due
diligence during a period of 45 days following execution of the Parachute Agreement. The closing was subject to certain contingencies, including that
Zoned Colorado must obtain acceptable financing for the purchase and development of the Property, the grant of a special use permit by the Town of
Parachute, approval of a protected development deal or equivalent agreement by the Town of Parachute, execution of a lease agreement by a prospective
tenant and the prospective tenant’s obtaining a license to cultivate on the Property. Pursuant to the terms of the Parachute Agreement, Zoned Colorado had
a right of first refusal on eleven additional lots owned by Seller in Parachute, Colorado. In April 2016, the Company paid a refundable deposit of $45,000
into escrow in connection with the Parachute Agreement. In January 2021, the Parachute Agreement was mutually terminated and the refundable deposit of
$45,000 was returned to the Company.
On May 1, 2018, Zoned Arizona, Green Valley Group, Kingman Property, and Chino Valley Properties executed lease agreements with our Significant
Tenant at each of the respective properties. These locations generate rental revenue. The lease agreements have a 22-year term, expiring on April 30, 2040.
Additionally, we own land located in Gilbert, Arizona that is leased as vacant land.
The leases dated May 1, 2018, with Zoned Arizona, Green Valley Group, Kingman Property, and Chino Valley Properties each include a Guarantee of
Payment and Performance by Mr. Abrams and the tenant organizations.
Also on May 1, 2018, the Company entered into that certain Confidential Advisory Services Agreement by and between the Company and Broken Arrow
Herbal Center, Inc. (“Broken Arrow”) (the “Broken Arrow CASA”), with a term expiring on April 30, 2040, unless earlier terminated as provided in the
Broken Arrow CASA. Additionally, on May 1, 2018, the Company entered into that certain Confidential Advisory Services Agreement by and between the
Company and CJK, Inc. (“CJK”) (the “CJK CASA”), with a term expiring on April 30, 2040, unless earlier terminated as provided in the CJK CASA. Each
of the Broken Arrow CASA and the CJK CASA may be terminated prior to the expiration of the respective term upon the occurrence of any of the
following: (a) by the Company for any reason at any time upon 30 calendar days’ written notice to the other party; (b) by either party immediately upon the
mutual agreement of the parties, evidenced by a writing signed by the parties; or (c) immediately by either party in the event of an actual finding, by a court
of competent jurisdiction, of fraud, gross negligence or willful misconduct of the other party in connection with these agreements. Pursuant to the terms of
the Broken Arrow CASA and CJK CASA, Broken Arrow and CJK engaged the Company to perform certain advisory services in exchange for a fee equal
to 10% of Broken Arrow’s and CJK’s gross revenues (the “Revenue Fee”), commencing January 2019. The Revenue Fee was to be paid on a monthly
basis, no later than 30 calendar days following the end of the immediately preceding calendar month, and the amount of such monthly payment of the
Revenue Fee is equal to the product of (a) 10%, multiplied by (b) the gross revenues of Broken Arrow or CJK, as the case may be, for such immediately
preceding calendar month. Notwithstanding the foregoing, upon the filing of the federal or state tax returns of Broken Arrow or CJK, as the case may be, (i)
the advisory client shall calculate the Revenue Fee based on the amount of the advisory client’s gross revenue reported on such federal or state tax returns,
and (ii), if the amount of such calculation is greater than the sum of all monthly Revenue Fees payable to the Company under the Broken Arrow CASA or
the CJK CASA, as the case may be, the applicable advisory client is required to pay to the Company the amount of such difference, which amount is in
addition to all monthly Revenue Fees due to the Company under the Broken Arrow CASA or the CJK CASA.
Through December 31, 2018, each of Messrs. Abrams and Carra was a significant stockholder of the Company.
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Effective January 1, 2019, the Company, Christopher Carra, Alan Abrams, Clayton Abrams Revocable Trust (the “Clayton Abrams Trust”), and Kyle
Abrams Revocable Trust (the “Kyle Abrams Trust” and together with the Clayton Abrams Trust, the “Trusts”) entered into a Stock Redemption Agreement
(the “Stock Redemption Agreement”). Prior to entry into the Stock Redemption Agreement, (i) Mr. Carra was the owner 2,028,335 shares of the
Company’s common stock, representing approximately 11.6% of the Company’s outstanding shares as of January 1, 2019, and (ii) Mr. Abrams, together
with the Trusts (collectively, the “Abrams Affiliates”), owned 3,611,669 shares of the Company’s common stock, representing approximately 20.7% of the
Company’s outstanding common stock as of January 1, 2019. Pursuant to SEC rules, each of Messrs. Carra and Abrams was deemed to be a “related
person” due solely to their status as significant stockholders of the Company. Pursuant to the terms of the Stock Redemption Agreement, the parties agreed
that the Company would redeem an aggregate of 5,640,004 owned by Mr. Carra and the Abrams Affiliates (the “Stock Redemption”) such that Messrs.
Carra and Abrams would no longer be stockholders of the Company and would no longer be deemed to be “related persons” under SEC rules. In exchange
for the Stock Redemption, the parties agreed that:
●
●
●
The Company and Broken Arrow, which was owned at the time of the transaction, in whole or in part, directly or indirectly, by Messrs. Abrams
and Carra, amended the Broken Arrow CASA to reduce the gross revenue fee payable by Broken Arrow from 10% of gross revenue to 0% of
gross revenue,
The Company and CJK, which was owned at the time of the transaction, in whole or in part, directly or indirectly, by Messrs. Abrams and Carra,
amended the CJK CASA to reduce the gross revenue fee payable by CJK from 10% of gross revenue to 0% of gross revenue,
The Company and Mr. Abrams amended the convertible debenture dated January 9, 2017 (the “Abrams Debenture”) to extend the maturity date
of the Abrams Debenture from January 9, 2022 until January 9, 2030, and
● Chino Valley and Broken Arrow amended the Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 (the
“Chino Valley Lease”) to increase the monthly base rent payable by Broken Arrow from $35,000 to $40,000.
Following effectiveness of the Stock Redemption and the transactions set forth above:
● Messrs. Carra and Abrams no longer beneficially own any shares of the Company’s common stock. Accordingly, they are no longer be significant
stockholders of the Company or “related persons” under the SEC rules.
●
●
●
●
The Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Chino Valley and Broken Arrow
continues in full force and effect, except as amended by the Chino Valley Lease Amendment to increase the monthly base rent payable by Broken
Arrow from $35,000 to $40,000.
The Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Green Valley and Broken Arrow
continues in full force and effect.
The Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement (concerning the Company’s Tempe, Arizona property) dated May
1, 2018 between Zoned Arizona and CJK continues in full force and effect.
The Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Kingman and CJK continues in full
force and effect.
Chino Valley
On May 29, 2020, Chino Valley and Broken Arrow entered into a second amendment to the 2018 Chino Valley Lease, as amended (the “2020 Chino Valley
Amendment”), effective May 31, 2020 (“Effective Date”). Pursuant to the terms of the 2020 Chino Valley Amendment, among other things, the base rent
was adjusted to $32,800 per month, and the base rent was abated from June 1, 2020 to July 31, 2020. Any increase in the rentable area of the leased
premises will result in an increase in all amounts calculated based on the same, including, without limitation, base rent. Pursuant to the terms of the 2020
Chino Valley Amendment, the parties agreed that if there is any change in laws such that the dispensing, sale or cultivation of regulated cannabis upon the
premises is prohibited or materially and adversely affected as mutually and reasonably determined by Chino Valley and Broken Arrow, Broken Arrow may
terminate the 2018 Chino Valley Lease, as amended, by delivering written notice to Chino Valley, together with a termination payment which shall be the
sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the balance of the term. In addition,
the parties agreed that from the period from the Effective Date to June 30, 2022 (the “Improvement Period”), Broken Arrow will and/or Broken Arrow will
cause its affiliate, CJK, to invest a combined total of at least $8,000,000 of improvements (“Investment by Tenants”) in and to the property that is the
subject of the Chino Valley Lease and the property that is the subject of the Tempe Lease (discussed below, and collectively referred to as the “Facilities”).
If Broken Arrow and/or CJK fails to deliver to the Company receipted bills for hard and soft costs of improvements to the Facilities totaling at least
$8,000,000 on or before June 30, 2022, Broken Arrow will be in default under the Chino Valley Lease and Tempe Lease, as amended.
Green Valley
On May 29, 2020, Green Valley and Broken Arrow entered into the First Amendment (the “Green Valley Amendment”) to the Green Valley Lease,
effective May 31, 2020. Pursuant to the terms of the Green Valley Amendment, among other things, the parties agreed to abate the fixed base rent of $3,500
from June 1, 2020 to July 31, 2020. In addition, the Green Valley Amendment provides that any increase in the rentable area of the leases premises will
result in an increase in all amounts calculated based on the same, including, without limitation, base rent. The parties also agreed that if there is any change
in laws such that the dispensing, sale or cultivation of cannabis upon the premises is prohibited or materially and adversely affected as mutually and
reasonably determined by Green Valley and Broken Arrow, Broken Arrow may terminate the Green Valley Lease by delivering written notice to Green
Valley, together with a termination payment which shall be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been
earned after termination for the balance of the term.
4
Tempe
On May 29, 2020, Zoned Arizona and CJK entered into the First Amendment (the “Tempe Amendment”) to the Tempe Lease, effective May 31, 2020.
Pursuant to the terms of the Tempe Amendment, among other things, the base rent was increased to $49,200 per month, and the base rent was abated from
June 1, 2020 to July 31, 2020. Any increase in the rentable area of the leased premises will result in an increase in all amounts calculated based on the
same, including, without limitation, base rent. Pursuant to the terms of the Tempe Amendment, the parties agreed that if there is any change in laws such
that the dispensing, sale or cultivation of cannabis upon the premises is prohibited or materially and adversely affected as mutually and reasonably
determined by Zoned Arizona and CJK, CJK may terminate the Tempe Lease by delivering written notice to Zoned Arizona, together with a termination
payment which shall be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the
balance of the term. In addition, under the Tempe Amendment the parties agreed to an Investment by Tenant (as defined above in the subheading Chino
Valley) to the property that is the subject of the Chino Valley Lease and the property that is the subject of the Tempe Lease. If Broken Arrow and/or CJK
fails to deliver to the Company receipted bills for hard and soft costs of improvements to the Facilities totaling at least $8,000,000 on or before June 30,
2022, Broken Arrow and CJK will be in default under the Chino Valley Lease and Tempe Lease, as amended.
Kingman
On May 29, 2020, Kingman and CJK entered into the First Amendment (the “Kingman Amendment”) to the Kingman Lease, effective May 31, 2020.
Pursuant to the terms of the Kingman Amendment, among other things, the parties agreed to abate the $4,000 base rent from June 1, 2020 to July 31, 2020.
In addition, the Kingman Amendment provides that any increase in the rentable area of the leases premises will result in an increase in all amounts
calculated based on the same, including, without limitation, base rent. The parties also agreed that if there is any change in laws such that the dispensing,
sale or cultivation of cannabis upon the premises is prohibited or materially and adversely affected as mutually and reasonably determined by Kingman and
CJK, CJK may terminate the Kingman Lease by delivering written notice to Kingman, together with a termination payment which shall be the sum of (i)
any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the balance of the term.
CJK and Broken Arrow, together, operate under the company brand, “Hana Meds”, and are referred to as the Company’s Significant Tenants.
During the years ended December 31, 2020 and 2019, 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 years ended December 31, 2020 and
2019, rental and advisory revenue associated with the Significant Tenants amounted to $1,176,666 and $1,146,654, which represents 96.8% and 91.0% of
the Company’s total revenues, respectively. As of December 31, 2020 and 2019, the Company had an asset concentration related to the Significant Tenants.
As of December 31, 2020 and 2019, the Significant Tenants represented approximately 83.2% and 87.1% of the Company’s total assets, respectively.
KCB Jade Holdings, LLC Investment
On March 19, 2020, the Company made an initial investment of $100,000 into KCB Jade Holdings, LLC (“KCB”). In exchange for the investment, KCB
issued to the Company a convertible debenture (the “Original Debenture”) dated March 19, 2020 (the “Issuance Date”) in the original principal amount of
$100,000. The Original 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 Original 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 Original Debenture at any point after 18 months following the Issuance Date, in whole or in part. However, if KCB elects to prepay
the Original Debenture prior to the Maturity Date or prior to any conversion as provided in the Original Debenture in whole or in part, the Company will be
entitled to receive a number of KCB units, in addition to such prepayment amount, constituting 10% of the total outstanding units and 10% of the total
percentage interest following such issuance and at the time of such issuance.
On or after six months from the Issuance Date, the Company may convert all or a portion of the principal balance and all accrued and unpaid interest due
into a number of units equal to the proportion of the outstanding amount being converted multiplied by 33% of the total number of units issued and
outstanding at the time of conversion, constituting 33% of the total percentage interest (the “Conversion Percentage”). If KCB defaults on payment of the
Original Debenture, the Company may, at its option, extend all conversion rights, through and including the date KCB tenders or attempts to tender
payment in full of all amounts due under the Original Debenture. Conversion rights terminate upon acceptance by the Company of payment in full of
principal, accrued interest and any other amounts due under the Original Debenture.
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If (i) KCB does not elect to exercise its rights of prepayment prior to the Maturity Date, (ii) the Company does not elect to exercise its rights of conversion,
and (iii) KCB pays to the Company all outstanding principal and interest accrued and due under the terms of the Original Debenture on the Maturity Date,
the Company will still be entitled to receive a number of units, in addition to such payment amount, constituting 8% of the total outstanding units and 8%
of the total percentage interest following such issuance and at the time of such issuance.
For purposes of the Original Debenture, an “Event of Default” will be deemed to have occurred upon the occurrence of any of the following:
(a) KCB fails to make any payment of the principal, interest, costs, indemnities, or expenses pursuant to the Original Debenture when and as the same
shall become due and payable;
(b) There occurs any default, whether in whole or in part, in the due observance or performance of any obligations or other covenants, terms or
provisions to be performed by KCB under the Original Debenture or any of the representations and warranties of KCB ceases to be true and
correct in all respects;
(c) KCB makes a general assignment for the benefit of its creditors;
(d) KCB applies for or consents to the appointment of a receiver, trustee, assignee, custodian, sequestrator, conservator, liquidator or similar official
for itself or any of its assets and properties;
(e) KCB voluntarily commences any proceeding or file any petition seeking liquidation, reorganization or other relief as a debtor under the United
States Bankruptcy Code or any other liquidation, conservatorship, bankruptcy, general assignment for the benefit of creditors, moratorium,
rearrangement, receivership, insolvency, reorganization, or similar debtor relief laws of the United States or other applicable jurisdictions from
time to time in effect and affecting the rights of creditors generally (collectively, the “Debtor Relief Laws”);
(f) An involuntary proceeding is commenced or an involuntary petition is filed against KCB seeking (1) liquidation, reorganization or other relief in
respect of KCB or its debts, or of a substantial part of its assets, under any Debtor Relief Law, or (2) the appointment of a receiver, trustee,
assignee, custodian, sequestrator, conservator, liquidator or similar official for itself or any of its assets and properties;
(g) KCB consents to the institution of or fails to contest in a timely and appropriate manner, any proceeding or petition described in clause (f) above.
Upon the occurrence of an Event of Default, the entire principal balance and accrued and unpaid interest outstanding under the Original Debenture, and all
other obligations of KCB under the Original Debenture, will be immediately due and payable and the Company may exercise any and all rights, power and
remedies available to it at law or in equity or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in
the Original Debenture and proceed to enforce the payment thereof or any other legal or equitable right of the Company.
Any amount of principal or interest not paid when due will bear interest at the rate of 12% per annum from the due date thereof until paid.
The Original Debenture contains customary representations, warranties and covenants of KCB.
On February 19, 2021, after the end of the 2020 fiscal year, the Company 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 same date (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 Initial Investment begins accruing as of March 19, 2020, while interest
on the Additional Investment begins 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 Additional Investment, KCB will pay to the Company, in perpetuity, 5%
of 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.
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Gilbert Commercial Lease
On March 3, 2021, subsequent to the 2020 fiscal year end, Gilbert Property Management, LLC (“Gilbert”), a wholly owned subsidiary of Zoned Properties,
Inc. (the “Company”), entered into that certain Commercial Lease Agreement (the “Lease”), dated as of February 26, 2021, between Gilbert and AZ2CAL
Enterprises, LLC (the “Tenant”).
Pursuant to the terms of the Lease, Gilbert agreed to rent the property located at 988 S. 182nd Place, Gilbert, AZ (the “Property”) to the Tenant for a term of
24 months, from April 1, 2021 to March 31, 2023, for monthly rent of $2,750; provided, however, that no rent is due for the month of April 2021.
In addition, pursuant to the terms of the Lease, the Tenant has an option to purchase the Property (the “Option”) that can be exercised any time after the
fourth month of the lease term, but no later than the end of the 12th month of the lease term. The purchase price of the Property would be $335,000. If the
Tenant exercises its Option, $750 of each lease payment made prior to close of escrow, along with the security deposit will be credited toward the purchase
price of the Property. If the Tenant exercises its Option, close of escrow will occur no later than 30 days after opening of escrow. The parties agreed to
make every reasonable attempt to fully execute a purchase contract within seven business days of the Tenant’s notice of its desire to exercise the Option.
Clients
We target clients who require assistance with the identification and development of regulated cannabis properties. Our ideal prospective clients will have a
commitment to sophisticated, safe, and sustainable project development. The most significant barrier to success for many industry operators and
prospective clients includes distractions from primary business operations. These distractions often include services related to the identification, zoning,
permitting, and development of real estate.
We complete significant due diligence on prospective tenants and prospective clients regardless of industry focus. Credit-worthiness, character, and cash
flows are all important traits that contribute to a sophisticated client for the Company.
Marketing
Currently, the Company does not actively market its services using any direct marketing campaigns. Industry reputation, word-of-mouth, and networking
are the primary tools used to complete the marketing of our services. We maintain an updated website, shareholder presentation, and profile outlining the
Company’s services. These tools are created for transparency of operations and activities. Our executive management believes the reputation of having
integrity is an essential tool for marketing and business development.
Competition
The commercial real estate market is highly competitive. We believe finding properties that are zoned for the specific use of allowing regulated cannabis
operations may be limited as more competitors enter the market. Several competitors have recently entered the marketplace. We face significant
competition from a diverse mix of market participants, including but not limited to, other public companies with similar business models, independent
investors, hedge funds and other real estate investors, hard money lenders, as well as would be clients, regulated cannabis operators themselves, all of
whom, who may compete against us in our efforts to acquire real estate zoned for cannabis grow and retail operations. In some instances, we will be
competing to acquire real estate with persons who have no interest in the regulated cannabis business, but have identified value in a piece of real estate that
we may be interested in acquiring.
Government Regulation
Real Estate & General Business Regulations
We are subject to applicable provisions of federal and state securities laws and to regulations specifically governing the real estate industry, including those
governing fair housing and federally backed mortgage programs. Our operations will also be subject to regulations normally incident to business
operations, such as occupational safety and health acts, workmen’s compensation statutes, unemployment insurance legislation and income tax and social
security related regulations. Although we will use our best efforts to comply with applicable regulations, we can provide no assurance of our ability to do
so, nor can we fully predict the effect of these regulations on our proposed activities.
In addition, zoning commercial properties for specific purposes, such as regulated cannabis dispensaries or cultivation facilities, is subject to specific
regulations to the zoning requirements for the city, county and state related to any regulated cannabis facility. We expect regulations to get tighter as time
goes on.
Federal and State Regulation of Cannabis
The U.S. Supreme Court has ruled that it is the federal government that has the right to regulate and criminalize cannabis, even for medical purposes.
Therefore, federal law criminalizing the use of marijuana preempts state laws that legalize its use for medicinal purposes.
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The U.S. federal government regulates drugs through the CSA, which places controlled substances, including cannabis, in a schedule. Cannabis is
classified as a Schedule I controlled substance. A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the
United States, a lack of safety for use under medical supervision and a high potential for abuse. The U.S. Department of Justice (the “DOJ”) defines
Schedule I drugs, substances or chemicals as “drugs with no currently accepted medical use and a high potential for abuse.” However, the U.S. Food and
Drug Administration (the “FDA”) has approved Epidiolex, which contains a purified form of the drug CBD, a non-psychoactive ingredient in the cannabis
plant, for the treatment of seizures associated with two epilepsy conditions. The FDA has not approved cannabis or cannabis compounds as a safe and
effective drug for any other condition. Moreover, pursuant to the Agriculture Improvement Act of 2018 (the “Farm Bill”), CBD remains a Schedule I
controlled substance under the CSA, with a narrow exception for CBD derived from hemp with a tetrahydrocannabinol (“THC”) concentration of less than
0.3%.
The Company maintains its operations so as to remain in compliance with the CSA. Even in those jurisdictions in which the manufacture and use of
medical marijuana has been legalized at the state level, the possession, use and cultivation all remain violations of federal law that are punishable by
imprisonment and substantial fines, and the prescription of marijuana is a violation of federal law. Moreover, individuals and entities may violate federal
law if they intentionally aid and abet another in violating these federal controlled substance laws, or conspire with another to violate them.
The inconsistencies between federal and state regulation of cannabis were addressed in a memorandum (the “Cole Memo”) which then-Deputy Attorney
General James Cole sent to all U.S. District Attorneys in 2013 outlining certain priorities for the DOJ relating to the prosecution of cannabis offenses. The
Cole Memo acknowledged that, notwithstanding the designation of cannabis as a Schedule I controlled substance at the federal level, several states had
enacted laws authorizing the use of cannabis for medical purposes. The Cole Memo noted that jurisdictions that have enacted laws legalizing cannabis in
some form have also implemented strong and effective regulatory and enforcement systems to control the cultivation, processing, distribution, sale and
possession of cannabis. As such, conduct in compliance with those laws and regulations is less likely to implicate the Cole Memo’s enforcement priorities.
The DOJ did not provide (and has not provided since) specific guidelines for what regulatory and enforcement systems would be deemed sufficient under
the Cole Memo. In light of limited investigative and prosecutorial resources, the Cole Memo concluded that the DOJ should be focused on addressing only
the most significant threats related to cannabis, such as distribution of cannabis from states where cannabis is legal to those where cannabis is illegal, the
diversion of cannabis revenues to illicit drug cartels and sales of cannabis to minors.
On January 4, 2018, former U.S. Attorney General Jeff Sessions issued a new memorandum which rescinded the Cole Memo (the “Sessions Memo”). The
Sessions Memo stated, in part, that current law reflects “Congress’ determination that cannabis is a dangerous drug and cannabis activity is a serious
crime,” and Mr. Sessions directed all U.S. Attorneys to enforce the laws enacted by Congress by following well-established principles when pursuing
prosecutions related to cannabis activities. The Company is not aware of any prosecutions of investment companies doing routine business with licensed
marijuana related businesses in light of the DOJ position following issuance of the Sessions Memo. However, there can be no assurance that the federal
government will not enforce federal laws relating to cannabis in the future. As a result of the Sessions Memo, federal prosecutors are now free to utilize
their prosecutorial discretion to decide whether to prosecute cannabis activities, despite the existence of state-level laws that may be inconsistent with
federal prohibitions. No direction was given to federal prosecutors in the Sessions Memo as to the priority they should ascribe to such cannabis activities,
and thus it is uncertain how active U.S. federal prosecutors will be in relation to such activities.
Federal prosecutors appear to continue to use the Cole Memo’s priorities as an enforcement guide. Merrick Garland, who became Attorney General on
March 10, 2021 has indicated that he would deprioritize enforcement of low-level cannabis crimes such as possession, and has shared his view that the
government should focus on large-scale criminal enterprises that circumvent state legalization laws instead of going after people who abide by local
cannabis policies. The Company believes it is too soon to determine what prosecutorial effects will be created by the rescission of the Cole Memo or any
replacement thereof and when or if the Sessions Memo will be rescinded. President Joseph R. Biden, who assumed office in January 2021, has not yet
indicated whether and when he will decriminalize or legalize cannabis and has previously stated that he is opposed to legalization. The sheer size of the
cannabis industry, in addition to participation by state and local governments and investors, suggests that a large-scale federal enforcement operation would
more than likely create unwanted political backlash for the DOJ and the current administration. It is also possible that the change of Congressional
leadership in January 2021 could change the priorities of Congress and encourage reconciliation of federal and state laws. Regardless, at this time, cannabis
remains a Schedule I controlled substance at the federal level. The U.S. federal government has always reserved the right to enforce federal law in regard to
the sale and disbursement of medical or adult use cannabis, even if state law authorizes such sale and disbursement. It is unclear whether the risk of
enforcement has been altered.
One legislative safeguard for the medical cannabis industry, appended to the federal budget bill, remains in place following the rescission of the Cole
Memo. For fiscal years 2015, 2016, 2017 and 2018, Congress adopted a so-called “rider” provision to the Consolidated Appropriations Acts (formerly
referred to as the Rohrabacher-Farr Amendment and currently referred to as the Rohrabacher-Blumenauer Amendment) to prevent the federal government
from using congressionally appropriated funds to enforce federal cannabis laws against regulated medical cannabis actors operating in compliance with
state and local law. The Rohrabacher-Blumenauer Amendment was included in the fiscal year 2018 budget passed on March 23, 2018. The Rohrabacher-
Blumenauer Amendment was included in the consolidated appropriations bill signed into legislation by former President Trump in February 2019. In
signing the Rohrabacher-Blumenauer Amendment, former President Trump issued a signing statement noting that the Rohrabacher-Blumenauer
Amendment “provides that the Department of Justice may not use any funds to prevent implementation of medical marijuana laws by various States and
territories,” and further stating “I will treat this provision consistent with the President’s constitutional responsibility to faithfully execute the laws of the
United States.” On June 20, 2019, the House approved a broader amendment that, in addition to protecting state medical cannabis programs, would also
protect state adult use programs. On September 26, 2019, the Senate Appropriations Committee declined to take up the broader amendment but did approve
the Rohrabacher-Blumenauer Amendment for the fiscal year 2020 spending bill. On September 27, 2019, the Rohrabacher-Blumenauer Amendment was
renewed as part of a stopgap spending bill, in effect through November 21, 2019, and was then renewed through a series of stopgap spending bills passed in
2020. On December 27, 2020, the amendment was renewed through the signing of the fiscal year 2021 omnibus spending bill, effective through
September 30, 2021. Despite the rescission of the Cole Memo, the DOJ appears to continue to adhere to the enforcement priorities set forth in the Cole
Memo.
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The Cole Memo and the Rohrabacher-Blumenauer Amendment gave licensed cannabis operators (particularly medical cannabis operators) and investors in
states with legal regimes greater certainty regarding the DOJ’s enforcement priorities and the risk of operating cannabis businesses. While the Sessions
Memo has introduced some uncertainty regarding federal enforcement, the cannabis industry continues to experience growth in legal medical and adult use
markets across the United States. Vice President Kamala Harris is the lead sponsor of the Marijuana Opportunity, Reinvestment, and Expungement
(MORE) Act, which seeks to end the federal prohibition of marijuana, among other things, but in March 2020, it was reported that Vice President Harris
has adopted the same position as President Biden, who opposes legalization. Currently, there is no guarantee that state laws legalizing and regulating the
sale and use of cannabis will remain in place or that local governmental authorities will not limit the applicability of state laws within their respective
jurisdictions. Unless and until the U.S. Congress amends the CSA with respect to cannabis (and as to the timing or scope of any such potential amendments
there can be no assurance), there is a risk that federal authorities may enforce current U.S. federal law criminalizing cannabis.
Although the U.S. Supreme Court has ruled that it is the federal government that has the right to regulate and criminalize cannabis, and federal law
criminalizing the use of marijuana preempts state laws that legalize its use, cannabis is largely regulated at the state level.
State laws that permit and regulate the production, distribution and use of cannabis for adult use or medical purposes are in direct conflict with the CSA,
which makes cannabis use and possession federally illegal. Although certain states and territories of the U.S. authorize medical and/or adult use cannabis
production and distribution by licensed or registered entities, under U.S. federal law, the possession, use, cultivation and transfer of cannabis and any
related drug paraphernalia is illegal and any such acts are criminal acts under federal law under any and all circumstances under the CSA. Although the
Company’s activities are believed to be compliant with applicable state and local laws, strict compliance with state and local laws with respect to cannabis
may neither absolve the Company of liability under U.S. federal law, nor may it provide a defense to any federal proceeding which may be brought against
the Company.
As of December 31, 2020, 35 states, plus the District of Columbia (and the territories of Guam, Puerto Rico, the U.S. Virgin Islands and the Northern
Mariana Islands), have legalized the cultivation and sale of cannabis for medical purposes. In 15 of those states, the sale and possession of cannabis is legal
for both medical and adult use, and the District of Columbia has legalized adult use but not commercial sale. In November 2020, voters in Arizona,
Montana, New Jersey and South Dakota voted by referendum to legalize cannabis for adult use, and voters in Mississippi and South Dakota voted to
legalized cannabis for medical use, and in February 2021, the Virginia legislature approved a bill that would legalize cannabis for adult use beginning in
2024. The Virginia bill is awaiting signature by the governor, and if signed, Virginia will be the first southern state to legalize cannabis for adult use. Also
in February 2021, New Jersey Governor Phil Murphy signed three bills into law that legalize cannabis for adult use.
In addition, in November 2010, Arizona voters passed the Arizona Medical Marijuana Act (“AMMA”). The AMMA designates the Arizona Department of
Health Services (“ADHS”) as the licensing authority for the program. ADHS is tasked with issuing Registry Identification Cards (“RIC”) to qualifying
patients, designated caregivers, and dispensary agents, as well as selecting, registering, and providing oversight for nonprofit medical marijuana
dispensaries. With permission from ADHS, qualifying patients or their caregivers may cultivate marijuana if the patient lives more than 25 miles from a
dispensary.
Qualifying patients can legally possess and purchase medical marijuana under Arizona law as long as they hold a RIC. They acquire their medicine from
non-profit medical marijuana dispensaries. These dispensaries acquire, possess, cultivate, manufacture, deliver, transfer, transport, supply, sell, and
dispense medical marijuana. Arizona is divided into 126 Community Health Assessment Areas (each, a “CHAA”) and each CHAA may only have one
dispensary located within it. Dispensaries are the only place patients are legally allowed to purchase medical marijuana in Arizona. Arizona law permits the
number of CHAAs to change based on the number of registered pharmacies in Arizona. In order to operate, a dispensary must have a Dispensary
Registration Certificate and Approval to Operate Certificate from ADHS. The first dispensaries began operation in 2012, and it is anticipated that at
maturity, there will be about 112 dispensaries statewide - one in each CHAA not part of one of Arizona’s Native American Indian Reservations.
We will continue to monitor compliance on an ongoing basis in accordance with our compliance program and standard operating procedures. While our
operations are in full compliance with all applicable state laws, regulations and licensing requirements, such activities remain illegal under federal law. For
the reasons described above and the risks further described in the section entitled “Risk Factors,” there are significant risks associated with our business.
Financial transactions involving proceeds generated by marijuana-related conduct can form the basis for prosecution under the federal money laundering
statutes, unlicensed money transmitter statute and the Bank Secrecy Act. Previous guidance issued by the Financial Crimes Enforcement Network, a
division of the U.S. Department of the Treasury (“FinCEN”), clarifies how financial institutions can provide services to marijuana-related businesses
consistent with their obligations under the Bank Secrecy Act. Prior to the DOJ’s announcement in 2018 of the rescission of the Cole Memo and related
memoranda, supplemental guidance from the DOJ directed federal prosecutors to consider the federal enforcement priorities enumerated in the Cole Memo
when determining whether to charge institutions or individuals with any of the financial crimes described above based upon marijuana-related activity.
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Consequently, those businesses involved in the marijuana industry continue to encounter difficulty establishing banking relationships, which may increase
over time. Our inability to maintain our current bank accounts would make it difficult for us to operate our business, increase our operating costs, and pose
additional operational, logistical and security challenges and could result in our inability to implement our business plan.
The inability of our current and potential tenants to open accounts and continue using the services of banks will limit their ability to enter into triple-net
lease arrangements with us or may result in their default under our lease agreements, either of which could materially harm our business and the trading
price of our securities.
Local, state and federal marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur
substantial costs associated with compliance or alter our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt
our business and result in a material adverse effect on its operations. In addition, it is possible that regulations may be enacted in the future that will be
directly applicable to our proposed business. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we
determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.
Employees
As of December 31, 2020, we had one full-time employee, our chief executive officer, and multiple part-time employees who operate as independent
contractors of the Company. We have established an extensive network of external partners, contractors, and consultants to which we outsource various
operational tasks in an effort to minimize administrative overhead and maximize efficiency.
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should not invest in our stock unless you are able to bear the complete loss of your
investment. You should carefully consider the risks described below, as well as other information provided to you in this annual report on Form 10-K,
including information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Note Regarding
Forward-Looking Information and Factors That May Affect Future Results” before making an investment decision. The risks and uncertainties described
below are not the only ones facing Zoned Properties. Additional risks and uncertainties not presently known to us or that we currently believe are
immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations
could be materially adversely affected, the value of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business and Our Industry
Because we have limited operating history in the real estate industry, we may not succeed.
We have limited operating history or experience in procuring, building out or leasing real estate for agricultural purposes, specifically medical marijuana
grow facilities, or with respect to any other activity in the cannabis industry. Moreover, we are subject to all risks inherent in a developing a new business
enterprise. Our likelihood of success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered
in connection with establishing a new business and the competitive and regulatory environment in which we operate. For example, the regulated cannabis
industry is new and may not succeed, particularly should the federal government change course and decide to prosecute those dealing in medical marijuana.
If that happens there may not be an adequate market for our properties or other activities we propose to engage in.
You should further consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us,
are in their early stages. For example, unanticipated expenses, delays and or complications with build outs, zoning issues, legal disputes with neighbors,
local governments, communities and or tenants. We may not successfully address these risks and uncertainties or successfully implement our operating
strategies. If we fail to do so, it could materially harm our business to the point of having to cease operations and could impair the value of our common
stock to the point investors may lose their entire investment.
We may be unable to continue as a going concern if we do not successfully raise additional capital.
We may need to raise additional funds through public or private debt or equity financings, as well as obtain credit from vendors to be able to fully execute
our business plan. If we cannot raise additional capital, we may be otherwise unable to achieve our goals or continue our property development. While we
believe that we will be able to raise the capital we need to continue our operations, there can be no assurances that we will be successful in these efforts or
will be able to resolve any liquidity issues or eliminate our operating losses. In addition, any additional capital raised through the sale of equity may dilute
your ownership interest. We may not be able to raise additional funds on favorable terms, or at all. If we are unable to obtain additional funds or credit from
our vendors, we may be unable to execute our business plan and you could lose your investment.
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Because we may be unable to identify and or successfully acquire properties which are suitable for our business, our financial condition may be
negatively affected.
Our business plan involves the identification and the successful acquisition of properties, which are zoned for medical cannabis businesses, including
cultivation and retail. The properties we acquire will be leased to regulated cannabis operators. Local governments must approve and adopt zoning
ordinances for medical cannabis facilities and retail dispensaries. A lack of properly zoned real estate may reduce our prospects and limit our opportunity
for growth and or increase the cost at which suitable properties are available to us. Conversely a surplus of real estate zoned for medical cannabis
establishments may reduce demand and prices we are able to charge for properties we may have previously acquired.
In addition, some jurisdictions, such as Arizona, impose limits on the number of medical cannabis dispensaries that will be permitted to operate within
designated geographic areas. Such limitations inherently place constraints on the number of properties we acquire for lease to operators in the cannabis
industry.
If we fail to diversify our property portfolio or advisory and real estate services offered, downturns relating to certain industries or business sectors or
the financial stability of our significant tenants may have a significant adverse impact on our assets and our ability to pay our operating expenses or
pay dividends than if we had a diversified property portfolio and service offerings.
While we intend to diversify our portfolio of properties, we are not required to observe specific diversification criteria. Therefore, our total assets are
concentrated into a limited number of tenants who were considered related parties through December 31, 2018 and are considered Significant Tenets
thereafter. To the extent that our total assets are concentrated in a limited number of tenants that are in the regulated cannabis industry, downturns relating
generally to such industry or business sector, or a decline in the financial stability of our Significant Tenants may result in defaults on all of our leases
within a short time period, which may reduce our net income and the value of our common stock and accordingly, limit our ability to pay or operating
expenses or pay dividends to our stockholders. As of December 31, 2020 and 2019, we had an asset concentration related to our Significant Tenant leases at
our Tempe, Chino Valley, Green Valley and Kingman, Arizona properties. As of December 31, 2020 and 2019, these Significant tenants represented
approximately 83.2% and 87.1% of total assets, respectively. If our 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 foot that may be less than our current rate
per square foot.
Any adverse economic or real estate developments in the medical cannabis industry could adversely affect our operating results and our ability to collect
rent from out tenants, pay our operating expenses or pay dividends to our stockholders.
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.
Because our business is dependent upon continued market acceptance by our tenants’ consumers, any negative trends will adversely affect our
business operations.
Out tenants are substantially dependent on continued market acceptance and proliferation of consumers of regulated cannabis. We believe that as cannabis
becomes more accepted, the stigma associated with cannabis use will diminish and as a result, consumer demand will continue to grow. And while we
believe that the market and opportunity in the cannabis space continues to grow, we cannot predict the future growth rate and size of the market. Any
negative outlook on the cannabis industry will adversely affect our tenants’ business operations and their ability to pay rent to us.
In addition, it is believed by many that large well-funded businesses may have a strong economic opposition to the cannabis industry. We believe that the
pharmaceutical industry clearly does not want to cede control of any product that could generate significant revenue. For example, medical cannabis will
likely adversely impact the existing market for the current “marijuana pill” sold by the mainstream pharmaceutical industry, should cannabis displace other
drugs or encroach upon the pharmaceutical industry’s products. The pharmaceutical industry is well funded with a strong and experienced lobby that
eclipses the funding of the medical cannabis movement. Any inroads the pharmaceutical could make in halting the impending cannabis industry could have
a detrimental impact on our proposed business.
Because we buy and lease property, we will be subject to general real estate risks.
We will be subject to risks generally incident to the ownership of real estate, including: (a) changes in general economic or local conditions; (b) changes in
supply of, or demand for, similar or competing properties in the area; (c) bankruptcies, financial difficulties or defaults by tenants or other parties; (d)
increases in operating costs, such as taxes and insurance; (e) the inability to achieve full stabilized occupancy at rental rates adequate to produce targeted
returns; (f) periods of high interest rates and tight money supply; (g) excess supply of rental properties in the market area; (h) liability for uninsured losses
resulting from natural disasters or other perils; (i) liability for environmental hazards; and (j) changes in tax, real estate, environmental, zoning or other
laws or regulations. For these and other reasons, no assurance can be given that we will be profitable.
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Our growth depends on external sources of capital, which may not be available on favorable terms or at all. In addition, banks and other financial
institutions may be reluctant to enter into lending transactions with us, including secured lending, because our properties are used in the cannabis
industry. If this source of funding is unavailable to us, our growth may be limited and our business may be materially adversely affected.
Our ability to acquire, operate and sell properties, engage in the business activities that we have planned and achieve positive financial performance
depends, in large measure, on our ability to obtain financing in amounts and on terms that are favorable. The capital markets in the United States in general,
and in the cannabis sector in particular, have undergone a turbulent period in which lending was severely restricted. Although there appear to be signs that
financial institutions are resuming lending, the market has not yet returned to its pre-2008 state. The cannabis sector experienced significant volatility in
2019 and 2020 and such volatility is expected to continue in 2021. Obtaining favorable financing in the current environment remains challenging.
In order to grow our business, we may seek financing through newly issued equity or debt. We may not be in a position to take advantage of attractive
investment opportunities for growth if we are unable, due to global or regional economic uncertainty, changes in the state or federal regulatory environment
relating to the medical-use cannabis industry, changes in market conditions for the regulated cannabis industry, our own operating or financial performance
or otherwise, to access capital markets on a timely basis and on favorable terms, or at all.
Our access to capital will depend upon a number of factors over which we have little or no control, including general market conditions and the market’s
perception of our current and potential future earnings. If general economic instability or downturn, or volatility within the cannabis sector, leads to an
inability to borrow at attractive rates or at all, our ability to obtain capital could be negatively impacted. In addition, banks and other financial institutions
may be reluctant to enter into lending transactions with us, particularly secured lending, because our properties are used in the cultivation, production or
dispensing of medical-use cannabis. If this source of funding is unavailable to us, our growth may be limited and our business may be materially adversely
affected.
If we are unable to obtain capital on terms and conditions that we find acceptable, we likely will have to curtail operations and reduce the number of
properties we purchase in the future. In addition, our ability to refinance all or any debt we may incur in the future, on acceptable terms or at all, is subject
to all of the above factors, and will also be affected by our future financial position, results of operations and cash flows, which additional factors are also
subject to significant uncertainties, and therefore we may be unable to refinance any debt we may incur in the future, as it matures, on acceptable terms or
at all. All of these events would have a material adverse effect on our business, financial condition, liquidity and results of operations.
In addition, securities clearing firms may refuse to accept deposits of our securities, which may negatively impact the trading of our securities and have a
material adverse impact on our ability to obtain capital.
Because we will compete with others for suitable properties, competition will result in higher costs that could materially affect our financial condition.
We will experience competition for real estate investments from individuals, corporations and other entities engaged in real estate investment activities,
many of whom have greater financial resources than us. Competition for investments may have the effect of increasing costs and reducing returns to our
investors.
Because we are liable for hazardous substances on our properties, environmental liabilities are possible and can be costly.
Federal, state and local laws impose liability on a landowner for releases or the otherwise improper presence on the premises of hazardous substances. This
liability is without regard to fault for, or knowledge of, the presence of such substances. A landowner may be held liable for hazardous materials brought
onto a property before it acquired title and for hazardous materials that are not discovered until after it sells the property. Similar liability may occur under
applicable state law. Sellers of properties may make only limited representations as to the absence of hazardous substances. If any hazardous materials are
found within our properties in violation of law at any time, we may be liable for all cleanup costs, fines, penalties and other costs. This potential liability
will continue after we sell the properties and may apply to hazardous materials present within the properties before we acquire the properties. If losses arise
from hazardous substance contamination, which cannot be recovered from a responsible party, the financial viability of the properties may be adversely
affected. It is possible that we will purchase properties with known or unknown environmental problems, which may require material expenditures for
remediation.
Because we may not be adequately insured, we could experience significant liability for uninsured events.
While our tenants currently carry comprehensive insurance on our properties, including fire, liability and extended coverage insurance, there are certain
risks that may be uninsurable or not insurable on terms that management believes to be economical. For example, management may not obtain insurance
against floods, terrorism, mold-related claims, or earthquake insurance. If such an event occurs to, or causes the damage or destruction of, a property, we
could suffer financial losses.
If we are found non-compliance with the Americans with Disabilities Act, we will be subject to significant liabilities.
If any of our properties are not in compliance with the Americans with Disabilities Act of 1990, as amended (the “ADA”), we may be required to pay for
any required improvements. Under the ADA, public accommodations must meet certain federal requirements related to access and use by disabled persons.
The ADA requirements could require significant expenditures and could result in the imposition of fines or an award of damages to private litigants. We
cannot assure that ADA violations do not or will not exist at any of our properties.
12
Our inability to effectively manage our growth could harm our business and materially and adversely affect our operating results and financial
condition.
Our strategy envisions growing our business. Any growth in or expansion of our business is likely to continue to place a strain on our management and
administrative resources, infrastructure and systems. As with other growing businesses, we expect that we will need to further refine and expand our
business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise and manage
new employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. We
cannot assure you that we will be able to:
●
●
expand our business effectively or efficiently or in a timely manner;
allocate our human resources optimally;
● meet our capital needs;
●
●
identify and hire qualified employees or retain valued employees; or
effectively incorporate the components of any business or product line that we may acquire in our effort to achieve growth.
Our inability or failure to manage our growth and expansion effectively could harm our business and materially and adversely affect our operating results
and financial condition.
Unfavorable global economic, business or political conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets, including conditions
that are outside of our control, including the impact of health and safety concerns, such as those relating to the current COVID-19 outbreak. The most
recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could
result in a variety of risks to our business, including weakened demand for our properties and our ability to raise additional capital when needed on
acceptable terms, if at all. A weak or declining economy could strain our tenants, possibly resulting in delays in tenant payments. Any of the foregoing
could harm our business and we cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely
impact our business.
We will be required to attract and retain top quality talent to compete in the marketplace.
We believe our future growth and success will depend in part on our ability to attract and retain highly skilled managerial, sales and marketing, and finance
personnel. There can be no assurance of success in attracting and retaining such personnel. Shortages in qualified personnel could limit our ability to
compete in the marketplace.
We are dependent on Bryan McLaren, our Chief Executive Officer, President, Chief Financial Officer and Chairman of the Board, and the loss of this
officer could harm our business and prevent us from implementing our business plan in a timely manner.
In view of his direct relationships with industry partners that directly contribute to our business development strategy, our success depends substantially
upon the continued services of Mr. McLaren. In January 2019, we purchased a one-year key person life insurance policy on Mr. McLaren with a base
coverage amount of $8,000,000 renewable annually at a 10-year fixed guaranteed premium. The policy was renewed in January 2021. The loss of Mr.
McLaren’s services could have a material adverse effect on our business and operations.
Risks Related to Government Regulation
Marijuana remains illegal under federal law, and therefore, strict enforcement of federal laws regarding marijuana would likely result in our inability
and the inability of our tenants to execute our respective business plans.
Marijuana is a Schedule I controlled substance under the CSA. Even in those jurisdictions in which the manufacture and use of medical marijuana has been
legalized at the state level, the possession, use and cultivation all remain violations of federal law that are punishable by imprisonment and substantial
fines, and the prescription of marijuana is a violation of federal law. Moreover, individuals and entities may violate federal law if they intentionally aid and
abet another in violating these federal controlled substance laws or conspire with another to violate them. The U.S. Supreme Court has ruled in United
States v. Oakland Cannabis Buyers’ Coop. and Gonzales v. Raich that it is the federal government that has the right to regulate and criminalize marijuana,
even for medical purposes. We would likely be unable to execute our business plan if the federal government were to strictly enforce federal law regarding
marijuana.
On January 4, 2018, then-U.S. Attorney General Jeff Sessions issued the Sessions Memo, rescinding the Cole Memo and related internal guidance issued
by the DOJ regarding federal law enforcement priorities involving marijuana. 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.”
13
Federal prosecutors appear to continue to use the Cole Memo’s priorities as an enforcement guide. Attorney General Merrick Garland has indicated that he
would deprioritize enforcement of low-level cannabis crimes such as possession, and has shared his view that the government should focus on large-scale
criminal enterprises that circumvent state legalization laws instead of going after people who abide by local cannabis policies. The Company believes,
however, it is too soon to determine what prosecutorial effects will be created by the rescission of the Cole Memo or any replacement thereof and when or
if the Sessions Memo will be rescinded. At this time, cannabis remains a Schedule I controlled substance at the federal level. The U.S. federal government
has always reserved the right to enforce federal law in regard to the sale and disbursement of medical or adult use cannabis, even if state law authorizes
such sale and disbursement. It is unclear whether the risk of enforcement has been altered.
It is unclear at this time what impact the Sessions Memo will have on the medical-use marijuana industry. One legislative safeguard for the medical
cannabis industry, appended to the federal budget bill, remains in place following the rescission of the Cole Memo. For fiscal years 2015, 2016, 2017 and
2018, Congress adopted a so-called “rider” provision to the Consolidated Appropriations Acts (formerly referred to as the Rohrabacher-Farr Amendment
and currently referred to as the Rohrabacher-Blumenauer Amendment) to prevent the federal government from using congressionally appropriated funds to
enforce federal cannabis laws against regulated medical cannabis actors operating in compliance with state and local law. On September 27, 2019, the
Rohrabacher-Blumenauer Amendment was renewed as part of a stopgap spending bill, in effect through November 21, 2019, and was then renewed
through a series of stopgap spending bills passed in 2020. On December 27, 2020, the amendment was renewed through the signing of the fiscal year 2021
omnibus spending bill, effective through September 30, 2021. Despite the rescission of the Cole Memo, the DOJ appears to continue to adhere to the
enforcement priorities set forth in the Cole Memo.
Federal prosecutors have significant discretion, however, and no assurance can be given that the federal prosecutor in each judicial district where we own a
property will not choose to strictly enforce the federal laws governing marijuana production or distribution. Any change in the federal government’s
enforcement posture with respect to state-licensed cultivation of medical-use cannabis, including the enforcement postures of individual federal prosecutors
in judicial districts where we own or may purchase properties, would result in our inability to execute our business plan, and we would likely suffer
significant losses with respect to our investment in marijuana facilities in the United States, which would adversely affect the trading price of our securities.
Furthermore, following any such change in the federal government’s enforcement position, we could be subject to criminal prosecution, which could lead
to imprisonment and/or the imposition of penalties, fines, or forfeiture.
Owners of properties located in close proximity to our properties may assert claims against us regarding the use of the property as a marijuana
dispensary or marijuana cultivation and processing facility, which if successful, could materially and adversely affect our business.
Owners of properties located in close proximity to our properties may assert claims against us regarding the use of our properties as cannabis dispensaries
or for cannabis cultivation and processing, including assertions that the use of the property constitutes a nuisance that diminishes the market value of such
owner’s nearby property. Such property owners may also attempt to assert such a claim in federal court as a civil matter under the Racketeer Influenced and
Corrupt Organizations Act. If a property owner were to assert such a claim against us, we may be required to devote significant resources and costs to
defending ourselves against such a claim, and if a property owner were to be successful on such a claim, our tenants may be unable to continue to operate
their business in its current form at the property, which could materially adversely impact the tenant’s business and the value of our property, our business
and financial results and the trading price of our securities.
We and our tenants may have difficulty accessing the services of banks, which may make it difficult to contract for real estate needs.
Financial transactions involving proceeds generated by cannabis and cannabis-related conduct can form the basis for prosecution under the federal money
laundering statutes, unlicensed money transmitter statute and the Bank Secrecy Act. Previous guidance issued by FinCEN clarifies how financial
institutions can provide services to marijuana-related businesses consistent with their obligations under the Bank Secrecy Act. Prior to the DOJ’s
announcement in 2018 of the rescission of the Cole Memo and related memoranda, supplemental guidance from the DOJ directed federal prosecutors to
consider the federal enforcement priorities enumerated in the Cole Memo when determining whether to charge institutions or individuals with any of the
financial crimes described above based upon marijuana-related activity. It is unclear what impact the rescission of the Cole Memo will have, but federal
prosecutors may increase enforcement activities against institutions or individuals that are conducting financial transactions related to marijuana activities.
The increased uncertainty surrounding financial transactions related to marijuana activities may also result in financial institutions discontinuing services to
the marijuana industry.
Consequently, those businesses involved in the marijuana industry continue to encounter difficulty establishing banking relationships, which may increase
over time. Our inability to maintain our current bank accounts would make it difficult for us to operate our business, increase our operating costs, and pose
additional operational, logistical and security challenges and could result in our inability to implement our business plan.
The inability of our current and potential tenants to open accounts and continue using the services of banks will limit their ability to enter into triple-net
lease arrangements with us or may result in their default under our lease agreements, either of which could materially harm our business and the trading
price of our securities.
14
Laws and regulations affecting the regulated cannabis and marijuana industry are constantly changing, which could materially adversely affect our
operations, and we cannot predict the impact that future regulations may have on us.
Local, state and federal marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur
substantial costs associated with compliance or alter our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt
our business and result in a material adverse effect on its operations. In addition, it is possible that regulations may be enacted in the future that will be
directly applicable to our proposed business. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we
determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.
FDA regulation of marijuana and the possible registration of facilities where medical marijuana is grown could negatively affect the marijuana
industry, which would directly affect our financial condition.
Should the federal government legalize marijuana for medical use, it is possible that the FDA would seek to regulate it under the Food, Drug and Cosmetics
Act of 1938. Additionally, the FDA may issue rules and regulations including cGMPs (certified good manufacturing practices) related to the growth,
cultivation, harvesting and processing of medical marijuana. Clinical trials may be needed to verify efficacy and safety. It is also possible that the FDA
would require that facilities where medical marijuana is grown be registered with the FDA and comply with certain federally prescribed regulations. In the
event that some or all of these regulations are imposed, we do not know what the impact would be on the medical marijuana industry, what costs,
requirements and possible prohibitions may be enforced. If we or our tenants are unable to comply with the regulations and or registration as prescribed by
the FDA, we and or our tenants may be unable to continue to operate their and our business in its current form or at all.
Risks Related to Our Common Stock
Our common stock is quoted on the OTCQB, which may limit the liquidity and price of our common stock more than if our common stock were listed
on The NASDAQ Stock Market or another national exchange.
Our securities are currently quoted on the OTCQB, an inter-dealer automated quotation system for equity securities. Quotation of our securities on the
OTCQB may limit the liquidity and price of our securities more than if our securities were listed on The NASDAQ Stock Market (“NASDAQ”) or another
national exchange. As an OTCQB company, we do not attract the extensive analyst coverage that accompanies companies listed on national securities
exchanges. Further, institutional and other investors may have investment guidelines that restrict or prohibit investing in securities traded on the OTCQB.
These factors may have an adverse impact on the trading and price of our common stock.
The trading price of our common stock may decrease due to factors beyond our control.
The stock market from time to time has experienced extreme price and volume fluctuations, which have particularly affected the market prices for smaller
reporting companies and which often have been unrelated to the operating performance of the companies. These broad market fluctuations may adversely
affect the market price of our common stock. If our shareholders sell substantial amounts of their common stock in the public market, the price of our
common stock could fall. These sales also might make it more difficult for us to sell equity, or equity-related securities, in the future at a price we deem
appropriate.
The market price of our common stock may also fluctuate significantly in response to the following factors, most of which are beyond our control:
●
●
●
●
●
●
variations in our quarterly operating results,
changes in general economic conditions and in the real estate industry,
changes in market valuations of similar companies,
announcements by us or our competitors of significant new contracts, acquisitions, strategic partnerships or joint ventures, or capital
commitments,
loss of a major customer, partner or joint venture participant and
the addition or loss of key managerial and collaborative personnel.
Any such fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. As a result, stockholders
may be unable to sell their shares, or may be forced to sell them at a loss.
15
The market price for our common shares is particularly volatile given our status as a relatively unknown company with a small and thinly traded public
float, limited operating history and lack of profits which could lead to wide fluctuations in our share price. You may be unable to sell your common
shares at or above your purchase price, which may result in substantial losses to you.
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of
shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example,
decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to
our limited operating history and lack of profits to date. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing
all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at
greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market
price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price
for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the
sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.
Our preferred stockholders together have voting control, which will limit your ability to influence the outcome of important transactions, including a
change in control.
Each of our preferred stockholders beneficially owns 1,000,000 shares of our preferred stock. Each share of preferred stock entitles the holder to 50 votes
per share. In contrast, each share of our common stock has one vote per share. Each of our two preferred stockholders holds approximately 46.1% and
45.7% of the voting power of our outstanding capital stock, respectively. Because of the 50-to-1 voting ratio between our preferred stock and our common
stock, our preferred stockholders together control a majority of the combined voting power of our capital stock and therefore are able to control all matters
submitted to our stockholders for approval. The preferred stockholders may also have interests that differ from yours and may vote in a way with which
you disagree and which may be adverse to your interests. This concentrated control may have the effect of delaying, preventing or deterring a change in
control of our company, could deprive our stockholders of an opportunity to receive a premium for their capital stock as part of a sale of our company and
might ultimately affect the market price of our common stock.
We may face continuing challenges in complying with the Sarbanes-Oxley Act, and any failure to comply or any adverse result from management’s
evaluation of our internal control over financial reporting may have an adverse effect on our stock price.
As a smaller reporting company as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are required to
evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Section 404 requires us to
include an internal control report with our Annual Report on Form 10-K. The report must include management’s assessment of the effectiveness of our
internal control over financial reporting as of the end of the fiscal year. This report must also include disclosure of any material weaknesses in internal
control over financial reporting that we have identified.
Failure to comply, or any adverse results from such evaluation, could result in a loss of investor confidence in our financial reports and have an adverse
effect on the trading price of our equity securities. Management concluded that our internal controls and procedures as of December 31, 2020 were not
effective. Management realizes there are deficiencies in the design or operation of our internal control that adversely affect our internal controls, and
management considers such deficiencies to be material weaknesses. As of the end of our fiscal year, management had identified the following material
weaknesses:
● we had not implemented comprehensive entity-level internal controls;
● we had not implemented adequate system and manual controls; and
● we did not have sufficient segregation of duties.
Achieving continued compliance with Section 404 may require us to incur significant costs and expend significant time and management resources. We
cannot assure you that we will be able to fully comply with Section 404 or that we will be able to conclude that our internal control over financial reporting
is effective at fiscal year-end. As a result, investors could lose confidence in our reported financial information, which could have an adverse effect on the
trading price of our securities.
We have never paid dividends on our common stock, and cannot guarantee that we will pay dividends to our stockholders in the future.
We have never paid dividends on our common stock. For the foreseeable future, we intend to retain our future earnings, if any, in order to reinvest in the
development and growth of our business and, therefore, do not intend to pay dividends on our common stock. However, in the future, our board of directors
may declare dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will depend
on our financial condition, results of operations, capital requirements, and such other factors as our board of directors deems relevant. Accordingly,
investors may need to sell their shares of our common stock to realize a return on their investment, and they may not be able to sell such shares at or above
the price paid for them. We cannot guarantee that we will pay dividends to our stockholders in the future.
16
Our common stock is a “penny stock” under SEC rules. It may be more difficult to resell securities classified as “penny stock.”
Our common stock is considered a “penny stock” under applicable SEC rules (generally defined as non-exchange traded stock with a per-share price below
$5.00). Unless we maintain a per-share price above $5.00, these rules impose additional sales practice requirements on broker-dealers that recommend the
purchase or sale of penny stocks to persons other than those who qualify as “established customers” or “accredited investors.” For example, broker-dealers
must determine the appropriateness for non-qualifying persons of investments in penny stocks. Broker-dealers must also provide, prior to a transaction in a
penny stock not otherwise exempt from the rules, a standardized risk disclosure document that provides information about penny stocks and the risks in the
penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, disclose the compensation
of the broker-dealer and its salesperson in the transaction, furnish monthly account statements showing the market value of each penny stock held in the
customer’s account, provide a special written determination that the penny stock is a suitable investment for the purchaser, and receive the purchaser’s
written agreement to the transaction.
Legal remedies available to an investor in “penny stocks” may include the following:
●
●
If a “penny stock” is sold to the investor in violation of the requirements listed above, or other federal or states securities laws, the investor may
be able to cancel the purchase and receive a refund of the investment.
If a “penny stock” is sold to the investor in a fraudulent manner, the investor may be able to sue the persons and firms that committed the fraud
for damages.
However, investors who have signed arbitration agreements may have to pursue their claims through arbitration.
These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that is or becomes subject to
the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting
transactions in our securities, which could severely limit the market price and liquidity of our securities. These requirements may restrict the ability of
broker-dealers to sell our common stock and may affect your ability to resell our common stock.
Many brokerage firms will discourage or refrain from recommending investments in penny stocks. Most institutional investors will not invest in penny
stocks. In addition, many individual investors will not invest in penny stocks due, among other reasons, to the increased financial risk generally associated
with these investments.
For these reasons, penny stocks may have a limited market and, consequently, limited liquidity. We can give no assurance that our common stock will not
be classified as a “penny stock” in the future.
Rule 144 Related Risks
Pursuant to Rule 144, a person who has beneficially owned restricted shares of our common stock for at least six months is entitled to sell his or her
securities provided that: (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the three months preceding, a
sale, (ii) we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale and (iii) if the sale occurs prior to
satisfaction of a one-year holding period, we provide current information at the time of sale.
Persons who have beneficially owned restricted shares of our common stock for at least six months but who are our affiliates at the time of, or at any time
during the three months preceding a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month
period only a number of securities that does not exceed the greater of either of the following:
●
●
1% of the total number of securities of the same class then outstanding; or
the average weekly trading volume of such securities during the four calendar weeks preceding the filing of a notice on Form 144 with respect to
the sale;
provided, in each case that we are subject to the Exchange Act periodic reporting requirements for at least three months before the sale. Such sales by
affiliates must also comply with the manner of sale, current public information and notice provisions of Rule 144.
17
In addition, as a former shell company, we are subject to additional restrictions. Historically, the SEC staff has taken the position that Rule 144 is not
available for the resale of securities initially issued by companies that are, or previously were, shell companies, such as Zoned Properties. Rule 144 is not
available for resale of securities issued by any shell companies (other than business combination related shell companies) or any issuer that has been at any
time previously a shell company. The SEC has provided an exception to this prohibition, however, if the following conditions are met:
●
●
●
The issuer of the securities that was formerly a shell company has ceased to be a shell company,
The issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act,
The issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable, during the preceding 12 months (or
such shorter period that the issuer was required to file such reports and materials), other than current reports on Form 8-K, and
● At least one year has elapsed from the time that the issuer filed current comprehensive disclosure with the SEC reflecting its status as an entity
that is not a shell company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
This Item 1B is not applicable to smaller reporting companies.
ITEM 2. PROPERTIES
Our principal executive office is currently located at 14269 N. 87th Street, #205, Scottsdale, AZ 85260.
Effective April 1, 2019, we extended our one-year operating lease for our office space in Scottsdale, Arizona to end on March 31, 2020. The annual base
rent increased from $7,800 to $9,107. On July 16, 2019, we added additional office space and our monthly base rent increased to $1,325 per month. On
March 6, 2020, we extended our lease for twelve months to end on March 31, 2021 at an annual base rent of $16,695. On March 17, 2021, we extended our
lease for twelve months to end on March 31, 2022 at an annual base rent of $17,583.
We are in the business of property acquisition, development, and commercial leasing and intend to primarily structure lease agreements with prospective
tenants using a triple-net lease model. The property portfolio currently includes (i) land and real property constructed in Green Valley, Arizona, (ii) land and
real property in Kingman, Arizona, (iii) vacant land in Gilbert, Arizona, (iv) land and real property in Tempe Arizona, and (v) land and real property of
approximately 47 acres in Chino Valley, Arizona. The properties in Tempe, Green Valley, Kingman, and Chino Valley, Arizona are currently leasing space
to tenants that operate licensed medical cannabis facilities. We lease our vacant land in Gilbert, Arizona to a third party. Each of these leased properties is
generating revenue to date.
ITEM 3. LEGAL PROCEEDINGS
There are no pending or threatened legal or administrative actions pending or threatened against us that we believe would have a material effect on our
business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
18
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock is quoted on the OTCQB, operated by the OTC Markets Group, under the symbol “ZDPY.” Trading in OTCQB stocks can be volatile,
sporadic and risky, as thinly traded stocks tend to move more rapidly in price than more liquid securities. Such trading may also depress the market price of
our common stock and make it difficult for our stockholders to resell their common stock.
The following table reflects the high and low closing price for our common stock for the period indicated. The bid information was obtained from the OTC
Markets Group, Inc. and reflects inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual
transactions.
Quarter Ended
December 31, 2020
September 30, 2020
June 30, 2020
March 31, 2020
December 31, 2019
September 30, 2019
June 30, 2019
March 31, 2019
High
Low
0.53 $
0.48 $
0.19 $
0.27 $
0.33 $
0.46 $
0.42 $
0.53 $
0.22
0.12
0.11
0.13
0.21
0.20
0.21
0.27
$
$
$
$
$
$
$
$
On March 30, 2021 the closing price of our common stock on the OTCQB was $0.13 per share.
Holders of Common Stock
As of March 30, 2021, there were approximately 103 record holders of our common stock. The number of record holders does not include beneficial
owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Securities Authorized for Issuance under Equity Compensation Plans
On August 9, 2016, our Board of Directors authorized the 2016 Equity Incentive Plan (the “2016 Plan”) and reserved 10,000,000 shares of common stock
for issuance thereunder. The 2016 Plan’s purpose is to encourage ownership in the Company by employees, officers, directors and consultants whose long-
term service the Company considers essential to its continued progress and, thereby, encourage recipients to act in the stockholders’ interest and share in
the Company’s success. The 2016 Plan authorizes the grant of awards in the form of options intended to qualify as incentive stock options under Section
422 of the Internal Revenue Code (the “Code”), options that do not qualify (non-statutory stock options) and grants of restricted shares of common stock.
Restricted shares granted pursuant to the 2016 Plan are amortized to expense over the three-year vesting period. Options vest and expire over a period not
to exceed seven years. If any share of common stock underlying a stock option that has been granted ceases to be subject to a stock option, or if any shares
of common stock that are subject to any other stock-based award granted are forfeited or terminate, such shares shall again be available for distribution in
connection with future grants and awards under the 2016 Plan. As of December 31, 2020, 75,000 stock option awards have been granted under the 2016
Plan. At December 31, 2020, 9,925,000 shares are available for future issuance.
The Company also continues to maintain its 2014 Equity Compensation Plan (the “2014 Plan”), pursuant to which 1,250,000 previously awarded stock
options are outstanding. The 2014 Plan has been superseded by the 2016 Plan. Accordingly, no additional shares subject to the existing 2014 Plan will be
issued and the 1,250,000 shares issuable upon exercise of stock options will be issued pursuant to the 2014 Plan, if exercised. As of December 31, 2020,
options to purchase 1,250,000 shares of common stock are outstanding pursuant to the 2014 Plan.
DESCRIPTION OF SECURITIES
General
Outstanding Shares and Holders
As of March 30, 2021, our authorized capital stock consists of 100,000,000 shares of common stock, $0.001 par value per share, 12,141,548 of which were
issued and outstanding, and 5,000,000 shares of preferred stock, $0.001 par value per share, 2,000,000 of which were issued and outstanding.
19
Common Stock
Holders of the Company’s common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of common stock
do not have cumulative voting rights. Holders of the Company’s common stock are entitled to share in all dividends that our board of directors, in its
discretion, declares from legally available funds. In the event of a liquidation, dissolution or winding up, each outstanding share entitles its holder to
participate pro rata in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the
common stock. The Company’s common stock has no pre-emptive rights, no conversion rights and there are no redemption provisions applicable to the
Company’s common stock.
Preferred Stock
Our articles of incorporation, as amended, authorizes our board of directors, subject to any limitations prescribed by law, without further stockholder
approval, to establish and to issue from time to time one or more classes or series of preferred stock. Each class or series of preferred stock will cover the
number of shares and will have the powers, preferences, rights, qualifications, limitations and restrictions determined by the board of directors, which may
include, among others, dividend rights, liquidation preferences, voting rights, conversion rights, preemptive rights and redemption rights. Except as
provided by law or in a preferred stock designation, the holders of preferred stock will not be entitled to vote at or receive notice of any meeting of
stockholders.
The certificate of designation for the preferred stock provides that the shares are not convertible into any other class or series of stock. Holders of preferred
shares are entitled to 50 votes for each share held. Voting rights are not subject to adjustment for splits that increase or decrease the common shares
outstanding. Upon liquidation, holders of preferred stock will be entitled to receive $1.00 per share plus redemption provision before assets are distributed
to other stockholders. Holders of preferred shares are entitled to dividends equal to common share dividends. Once any shares of preferred stock are
outstanding, at least 51% of the total number of shares of preferred stock outstanding must approve the following transactions:
●
●
●
alteration of the rights, preferences of privileges of the preferred stock,
creation of any new class of stock having preferences over the preferred stock,
repurchase of any of our common stock,
● merger of consolidation with any other company, other than one of our wholly owned subsidiaries,
●
●
sale, conveyance or other disposal of, or creation or incurrence of any mortgage, lien, or charge or encumbrance or security interest in or pledge
of, or sale and leaseback of, all or substantially all of our property or business, or
incurrence, assumption or guarantee of any indebtedness maturing more than 18 months after the date on which it is incurred, assumed or
guaranteed by us, except for operating leases and obligations assumed as part of the purchase price of property.
Holders of a majority of the voting power of our capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary to
constitute a quorum at any meeting of stockholders. A vote by the holders of a majority of our outstanding voting shares is required to effectuate certain
fundamental corporate changes such as liquidation, merger or an amendment to our articles of incorporation.
Holders of preferred shares vote along with common stockholders on each matter submitted to a vote of security holders. As a result of the multiple votes
accorded to holders of the preferred stock, Greg Johnston and Alex McLaren have the ability to control the outcome of all matters submitted to a vote of
stockholders, including the election of directors. On those matters that require the approval of at least 51% of the preferred stock, both Mr. Johnston and
Mr. McLaren must provide their approval inasmuch as each of them owns 50% of the outstanding preferred stock.
Dividends
Historically, we have not paid any cash dividends on our common stock. It is our present intention not to pay any cash dividends in the foreseeable future,
but rather to reinvest earnings, if any, in our business operations. However, in the future, our board of directors may declare dividends on our common
stock. Payment of future dividends on our common stock, if any, will be at the discretion of our board of directors and will depend on, among other things,
our results of operations, cash requirements and surplus, financial condition, contractual restrictions and other factors that our board of directors may deem
relevant. In addition, the agreements into which we may enter in the future, including indebtedness, may impose limitations on our ability to pay dividends
or make other distributions on our capital stock. We cannot guarantee that we will pay dividends to our stockholders in the future. Holders of preferred
shares are entitled to dividends equal to common share dividends.
Anti-Takeover Effects of Certain Provisions of Our Articles of Incorporation, as Amended, and Our Bylaws
These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection and our
potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of
discouraging these proposals because, among other things, negotiation of these proposals could result in an improvement of their terms.
Preferred Stock. Our articles of incorporation, as amended, authorize our board of directors to issue from time to time any series of preferred stock and fix
the voting powers, designation, powers, preferences and rights of the shares of such series of preferred stock.
20
Calling of Special Meetings of Stockholders. Our bylaws provide that special meetings of the stockholders may be called only by the chairman of the board
or the chief executive officer, and shall be called by the chairman of the board or the secretary (i) when so directed by the board, or (ii) at the written
request of stockholders owning shares representing at least 25% of voting power in the election of directors.
Advance Notice Requirements for Stockholder Proposals and Director Nominations. Our bylaws establish an advance notice procedure for stockholder
proposals to be brought before a meeting of our stockholders, including proposed nominations of persons for election to the board of directors.
Removal of Directors; Vacancies. Our bylaws provide that a director may be removed from office by stockholders for cause, or without cause by a majority
vote of the stockholders. A vacancy on the board of directors may be filled only by a majority of the directors then in office.
ITEM 6. RESERVED
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results
This 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 specialized real estate and sustainability services for
clients in the regulated cannabis industry, positioning the company for real estate investments and revenue growth. We intend to pioneer sustainable
development for emerging industries, including the regulated cannabis industry. We are an accredited member of the Better Business Bureau, the U.S.
Green Building Council, and the Forbes Real Estate Council. We focus 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. We provide development strategies and
advisory services that could potentially have a major impact on cash flow and property value. We do not grow, harvest, sell or distribute cannabis or any
substances regulated under United States law such as the CSA.
We are in the process of developing and expanding multiple business divisions; including an advisory services division, a licensed commercial real estate
brokerage division, a real estate division focused on franchise services, a real estate division focused on real estate data, 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. We believe 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 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.
21
For the year ended December 31, 2020 and 2019, substantially all of our revenues were generated from triple-net leases to tenants that are controlled by
one entity (each, a “Significant Tenant” and collectively, the “Significant Tenants”), which is located in the State of Arizona.
The Company currently maintains a portfolio of properties that we own, develop, and lease. We currently lease land and/or building space at all five 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.
During the year ended December 31, 2020, we made improvements to rental properties of $9,565. No improvements were made during the year ended
December 31, 2019.
As of December 31, 2020, a summary of rental properties owned by us consisted of the following:
Location
Description
Current Use
Date Acquired
Lease Start Date
Lease End Date
Total No. of Tenants
Green Valley,
AZ
Retail
(special use)
Tempe, AZ
Industrial
/Office
Cannabis
Facility
Chino Valley,
AZ
Greenhouse/
Nursery
Cannabis
Facility
Gilbert, AZ
Vacant
Land
Vacant
Land
March 2014 August 2015
May 2018
April 2021
April 2040 March 2023
1
May 2018
April 2040
1
1
Cannabis
Dispensary
January 2014 October 2014
May 2018
April 2040
1
Kingman,
AZ
Retail
(special use)
Cannabis
Dispensary
May 2014
May 2018
April 2040
1
Land Area (Acres)
3.65
47.60
0.80
1.33
0.32
Total
Properties
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
Total Rentable Building Sq. Ft.
60,000
40,000
Vacant Rentable Sq. Ft.
-
-
-
-
-
57,769
7,061
1,440
1,497
-
-
483,188
102,937
-
Sq. Ft. rented as of December 31,
2020
60,000
40,000
-
1,440
1,497
102,937
Annual Base Rent:*
2021
2022
2023
2024
2025
Thereafter
Total
$
590,400 $
590,400
590,400
590,400
590,400
8,462,400
$ 11,414,400 $
393,600 $
393,600
393,600
393,600
393,600
5,641,600
7,609,600 $
22,000 $
33,000
8,250
-
-
-
63,250 $
42,000 $
42,000
42,000
42,000
42,000
602,000
812,000 $
48,000
48,000
48,000
48,000
48,000
688,000
928,000
$ 1,096,000
1,107,000
1,082,250
1,074,000
1,074,000
15,394,000
$20,827,250
* Annual base rent represents amount of cash payments due from tenants.
22
Annualized $ per Rented Building Sq. Ft. (Base Rent)
Tempe,
AZ
Chino
Valley,
AZ
$
$
$
$
$
9.8 $
9.8 $
9.8 $
9.8 $
9.8 $
9.8
9.8
9.8
9.8
9.8
Gilbert,
AZ **
Green Valley,
AZ
Kingman,
AZ
$
$
$
- $
- $
29.2 $
29.2 $
29.2 $
29.2 $
29.2 $
32.1
32.1
32.1
32.1
32.1
Year
2021
2022
2023
2024
2025
** - rented vacant land only.
The U.S. Supreme Court has ruled that it is the federal government that has the right to regulate and criminalize cannabis, even for medical purposes.
Therefore, federal law criminalizing the use of marijuana preempts state laws that legalize its use for medicinal purposes.
The U.S. federal government regulates drugs through the CSA, which places controlled substances, including cannabis, in a schedule. Cannabis is
classified as a Schedule I controlled substance. A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the
United States, a lack of safety for use under medical supervision and a high potential for abuse. The DOJ defines Schedule I drugs, substances or chemicals
as “drugs with no currently accepted medical use and a high potential for abuse.” However, the FDA has approved Epidiolex, which contains a purified
form of the drug CBD, a non-psychoactive ingredient in the cannabis plant, for the treatment of seizures associated with two epilepsy conditions. The FDA
has not approved cannabis or cannabis compounds as a safe and effective drug for any other condition. Moreover, pursuant to the Farm Bill, CBD remains
a Schedule I controlled substance under the CSA, with a narrow exception for CBD derived from hemp with a THC concentration of less than 0.3%.
The Company maintains its operations so as to remain in compliance with the CSA. Even in those jurisdictions in which the manufacture and use of
medical marijuana has been legalized at the state level, the possession, use and cultivation all remain violations of federal law that are punishable by
imprisonment and substantial fines, and the prescription of marijuana is a violation of federal law. Moreover, individuals and entities may violate federal
law if they intentionally aid and abet another in violating these federal controlled substance laws, or conspire with another to violate them.
The inconsistencies between federal and state regulation of cannabis were addressed in the Cole Memo, which then-Deputy Attorney General James Cole
sent to all U.S. District Attorneys in 2013 outlining certain priorities for the DOJ relating to the prosecution of cannabis offenses. The Cole Memo
acknowledged that, notwithstanding the designation of cannabis as a Schedule I controlled substance at the federal level, several states had enacted laws
authorizing the use of cannabis for medical purposes. The Cole Memo noted that jurisdictions that have enacted laws legalizing cannabis in some form
have also implemented strong and effective regulatory and enforcement systems to control the cultivation, processing, distribution, sale and possession of
cannabis. As such, conduct in compliance with those laws and regulations is less likely to implicate the Cole Memo’s enforcement priorities. The DOJ did
not provide (and has not provided since) specific guidelines for what regulatory and enforcement systems would be deemed sufficient under the Cole
Memo. In light of limited investigative and prosecutorial resources, the Cole Memo concluded that the DOJ should be focused on addressing only the most
significant threats related to cannabis, such as distribution of cannabis from states where cannabis is legal to those where cannabis is illegal, the diversion
of cannabis revenues to illicit drug cartels and sales of cannabis to minors.
On January 4, 2018, former U.S. Attorney General Jeff Sessions issued the Sessions Memo, which rescinded the Cole Memo. The Sessions Memo stated,
in part, that current law reflects “Congress’ determination that cannabis is a dangerous drug and cannabis activity is a serious crime,” and Mr. Sessions
directed all U.S. Attorneys to enforce the laws enacted by Congress by following well-established principles when pursuing prosecutions related to
cannabis activities. The Company is not aware of any prosecutions of investment companies doing routine business with licensed marijuana related
businesses in light of the DOJ position following issuance of the Sessions Memo. However, there can be no assurance that the federal government will not
enforce federal laws relating to cannabis in the future. As a result of the Sessions Memo, federal prosecutors are now free to utilize their prosecutorial
discretion to decide whether to prosecute cannabis activities, despite the existence of state-level laws that may be inconsistent with federal prohibitions. No
direction was given to federal prosecutors in the Sessions Memo as to the priority they should ascribe to such cannabis activities, and thus it is uncertain
how active U.S. federal prosecutors will be in relation to such activities.
Federal prosecutors appear to continue to use the Cole Memo’s priorities as an enforcement guide. Merrick Garland, who became Attorney General on
March 10, 2021 has indicated that he would deprioritize enforcement of low-level cannabis crimes such as possession, and has shared his view that the
government should focus on large-scale criminal enterprises that circumvent state legalization laws instead of going after people who abide by local
cannabis policies. The Company believes it is too soon to determine what prosecutorial effects will be created by the rescission of the Cole Memo or any
replacement thereof and when or if the Sessions Memo will be rescinded. President Joseph R. Biden, who assumed office in January 2021, has not yet
indicated whether and when he will decriminalize or legalize cannabis and has previously stated that he is opposed to legalization. The sheer size of the
cannabis industry, in addition to participation by state and local governments and investors, suggests that a large-scale federal enforcement operation would
more than likely create unwanted political backlash for the DOJ and the current administration. It is also possible that the change of Congressional
leadership in January 2021 could change the priorities of Congress and encourage reconciliation of federal and state laws. Regardless, at this time, cannabis
remains a Schedule I controlled substance at the federal level. The U.S. federal government has always reserved the right to enforce federal law in regard to
the sale and disbursement of medical or adult use cannabis, even if state law authorizes such sale and disbursement. It is unclear whether the risk of
enforcement has been altered.
23
One legislative safeguard for the medical cannabis industry, appended to the federal budget bill, remains in place following the rescission of the Cole
Memo. For fiscal years 2015, 2016, 2017 and 2018, Congress adopted the Rohrabacher-Blumenauer Amendment to prevent the federal government from
using congressionally appropriated funds to enforce federal cannabis laws against regulated medical cannabis actors operating in compliance with state and
local law. The Rohrabacher-Blumenauer Amendment was included in the fiscal year 2018 budget passed on March 23, 2018. The Rohrabacher-Blumenauer
Amendment was included in the consolidated appropriations bill signed into legislation by former President Trump in February 2019. In signing the
Rohrabacher-Blumenauer Amendment, former President Trump issued a signing statement noting that the Rohrabacher-Blumenauer Amendment “provides
that the Department of Justice may not use any funds to prevent implementation of medical marijuana laws by various States and territories,” and further
stating “I will treat this provision consistent with the President’s constitutional responsibility to faithfully execute the laws of the United States.” On
June 20, 2019, the House approved a broader amendment that, in addition to protecting state medical cannabis programs, would also protect state adult use
programs. On September 26, 2019, the Senate Appropriations Committee declined to take up the broader amendment but did approve the Rohrabacher-
Blumenauer Amendment for the fiscal year 2020 spending bill. On September 27, 2019, the Rohrabacher-Blumenauer Amendment was renewed as part of
a stopgap spending bill, in effect through November 21, 2019, and was then renewed through a series of stopgap spending bills passed in 2020. On
December 27, 2020, the amendment was renewed through the signing of the fiscal year 2021 omnibus spending bill, effective through September 30, 2021.
Despite the rescission of the Cole Memo, the DOJ appears to continue to adhere to the enforcement priorities set forth in the Cole Memo.
The Cole Memo and the Rohrabacher-Blumenauer Amendment gave licensed cannabis operators (particularly medical cannabis operators) and investors in
states with legal regimes greater certainty regarding the DOJ’s enforcement priorities and the risk of operating cannabis businesses. While the Sessions
Memo has introduced some uncertainty regarding federal enforcement, the cannabis industry continues to experience growth in legal medical and adult use
markets across the United States. Vice President Kamala Harris is the lead sponsor of the Marijuana Opportunity, Reinvestment, and Expungement
(MORE) Act, which seeks to end the federal prohibition of marijuana, among other things, but in March 2020, it was reported that Vice President Harris
has adopted the same position as President Biden, who opposes legalization. Currently, there is no guarantee that state laws legalizing and regulating the
sale and use of cannabis will remain in place or that local governmental authorities will not limit the applicability of state laws within their respective
jurisdictions. Unless and until the U.S. Congress amends the CSA with respect to cannabis (and as to the timing or scope of any such potential amendments
there can be no assurance), there is a risk that federal authorities may enforce current U.S. federal law criminalizing cannabis.
Although the U.S. Supreme Court has ruled that it is the federal government that has the right to regulate and criminalize cannabis, and federal law
criminalizing the use of marijuana preempts state laws that legalize its use, cannabis is largely regulated at the state level.
State laws that permit and regulate the production, distribution and use of cannabis for adult use or medical purposes are in direct conflict with the CSA,
which makes cannabis use and possession federally illegal. Although certain states and territories of the U.S. authorize medical and/or adult use cannabis
production and distribution by licensed or registered entities, under U.S. federal law, the possession, use, cultivation and transfer of cannabis and any
related drug paraphernalia is illegal and any such acts are criminal acts under federal law under any and all circumstances under the CSA. Although the
Company’s activities are believed to be compliant with applicable state and local laws, strict compliance with state and local laws with respect to cannabis
may neither absolve the Company of liability under U.S. federal law, nor may it provide a defense to any federal proceeding which may be brought against
the Company.
As of December 31, 2020, 35 states, plus the District of Columbia (and the territories of Guam, Puerto Rico, the U.S. Virgin Islands and the Northern
Mariana Islands), have legalized the cultivation and sale of cannabis for medical purposes. In 15 of those states, the sale and possession of cannabis is legal
for both medical and adult use, and the District of Columbia has legalized adult use but not commercial sale. In November 2020, voters in Arizona,
Montana, New Jersey and South Dakota voted by referendum to legalize cannabis for adult use, and voters in Mississippi and South Dakota voted to
legalized cannabis for medical use, and in February 2021, the Virginia legislature approved a bill that would legalize cannabis for adult use beginning in
2024. The Virginia bill is awaiting signature by the governor, and if signed, Virginia will be the first southern state to legalize cannabis for adult use. Also
in February 2021, New Jersey Governor Phil Murphy signed three bills into law that legalize cannabis for adult use.
The Company will focus heavily on the growth of a diversified revenue stream in 2021. 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.
Pursuant to the terms of the several lease amendments our Significant Tenants, among other things, base rent base rent was abated from June 1, 2020 to
July 31, 2020 on all of our Significant Tenant leases which decreased our cash flow from operation during the year ended December 31, 2020 by $179,000.
In addition, the parties agreed that from the period from May 31, 2020 to June 30, 2022, our Significant Tenants will invest a combined total of at least
$8,000,000 improvements in and to the properties in Chino Valley and Tempe prior to June 30, 2022. Any increase in the rentable area of the leased
premises will result in an increase in all amounts calculated based on the same, including, without limitation, base rent.
COVID-19
In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide.
We are monitoring this closely, and although operations have not been materially affected by the COVID-19 outbreak to date, the ultimate duration and
severity of the outbreak and its impact on the economic environment and our business is uncertain. Currently, all of the properties in our portfolio are open
to our Significant Tenants and their customers and will remain open pursuant to state and local government requirements. We did not experience in 2020,
and we do not foresee in 2021, any material changes to our operations from COVID-19. Our tenants are continuing to generate revenue at these properties
and they have continued to make rental payments in full and on time and we believe the tenants’ liquidity position is sufficient to cover its expected rental
obligations. Accordingly, while we do not anticipate an impact on our operations, we cannot estimate the duration of the pandemic and potential impact on
our business if the properties must close or if the tenants are otherwise unable or unwilling to make rental payments. In addition, a severe or prolonged
economic downturn could result in a variety of risks to our business, including weakened demand for our properties and a decreased ability to raise
additional capital when needed on acceptable terms, if at all.
24
Results of Operations
The following comparative analysis of results of operations was based primarily on 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, 2020 and 2019, which are included elsewhere in this annual report on Form 10-K. The results discussed
below are for the years ended December 31, 2020 and 2019.
Comparison of Results of Operations for the Years ended December 31, 2020 and 2019
Revenues
For the years ended December 31, 2020 and 2019, revenues consisted of the following:
Rent revenues
Advisory revenues
Total revenues
Years Ended
December 31,
2020
1,125,346 $
90,096
1,215,442 $
2019
1,115,861
144,560
1,260,421
$
$
For the year ended December 31, 2020, total revenues amounted to $1,215,442, including Significant Tenants revenues of $1,176,666, as compared to
$1,260,421, including Significant Tenant revenues of $1,115,861, for the year ended December 31, 2019, a decrease of $44,979, or 3.6%.
For the year ended December 31, 2020, the decrease in revenues was attributable to a decrease in advisory revenues of $54,464, or 37.7%, and an increase
in rent revenues of $9,485, or 0.9%. Substantially all of the Company’s real estate properties are leased under triple-net leases to the Significant Tenants.
Operating expenses
For the year ended December 31, 2020, operating expenses amounted to $1,177,709 as compared to $1,259,706 for the year ended December 31, 2019, a
decrease of $81,997, or 6.5%. For the years ended December 31, 2020 and 2019, operating expenses consisted of the following:
Compensation and benefits
Professional fees
General and administrative expenses
Depreciation and amortization
Real estate taxes
Total
Years Ended
December 31,
2020
342,692 $
195,684
190,806
362,833
85,694
1,177,709 $
2019
383,648
233,940
196,299
361,940
83,879
1,259,706
$
$
●
●
For the year ended December 31, 2020, compensation and benefit expense decreased by $40,956, or 10.7%, as compared to the year ended
December 31, 2019 and was primarily attributable to a decrease in stock-based compensation related to the accretion of stock option expense and
the value of shares issued for services, and a decrease in salary paid due to the reduction of one employee.
For the year ended December 31, 2020, professional fees decreased by $38,256, or 16.3%, as compared to the year ended December 31, 2019.
This decrease in professional fees was primarily attributable to a decrease in public relations fees of $13,908, a decrease in legal fees of $7,853, a
decrease in accounting fees of $5,515, and a decrease in other professional fees of $10,980 related to the decrease in advisory fees.
● 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, 2020, general and
administrative expenses decreased by $5,493, or 2.8%, as compared to the year ended December 31, 2019. This decrease was primarily
attributable to a decrease in travel expense of $4,736, a decrease in due and subscription fees of $7,030, a decrease in filing fees of $8,262 and a
decrease in other general and administrative expenses of $10,888, offset by an increase in advertising and promotion expense of $3,084 related to
attending conferences, an increase in technology fees of $7,076, an increase in rent expense of $4,520. and an increase in insurance expense of
$2,039. Additionally, in the 2019 period, we received a tax refund of $8,704 which we did not receive in the 2020 period.
●
For the year ended December 31, 2020, depreciation and amortization expense increased by $893, or 0.3%, as compared to the year ended
December 31, 2019.
●
For the year ended December 31, 2020, real estate taxes increased by $1,815, or 2.2%, as compared to the year ended December 31, 2019.
25
Income from operations
As a result of the factors described above, for the year ended December 31, 2020, income from operations amounted to $37,733 as compared to income
from operations amounted to $715 for the year ended December 31, 2019, an increase of $37,018, or 5,177.3%.
Other (expenses) income
Other (expenses) income primarily includes interest expense incurred on debt with third parties and a related party and also includes other income
(expenses). For the year ended December 31, 2020, total other expenses, net amounted to $116,071 as compared to total other expenses, net of $12,996,
respectively, representing an increase of $103,075, or 793.1%. 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 nil during the year ended December 31, 2020.
Net loss
As a result of the foregoing, for the years ended December 31, 2020 and 2019, net loss amounted to $78,338, or $(0.01) per common share (basic and
diluted), and $12,281, or $(0.00) per common share (basic and diluted), respectively.
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had cash of $699,335 and
$639,781 of cash as of December 31, 2020 and 2019, respectively.
Our primary uses of cash have been for compensation and benefits, fees paid to third parties for professional services, real estate taxes, general and
administrative expenses, and the development of rental properties. All funds received have been expended in the furtherance of growing the business. We
receive funds from the collection of rental income and advisory fees. The following trends are reasonably likely to result in changes in our liquidity over
the near to long term:
● An increase in working capital requirements to finance our current business,
● Addition of administrative and sales personnel as the business grows, and
●
The cost of being a public company.
We may need to raise additional funds, particularly if we are unable to generate positive cash flow as a result of our operations. We estimate that based on
current plans and assumptions, that our available cash will be sufficient to satisfy our cash requirements under our present operating expectations for the
next 12 months from the date of this annual report on Form 10-K. Other than revenue received from the lease of our rental properties and from advisory
fees, we presently have no other significant alternative source of working capital.
We have used these funds to fund our operating expenses, pay our obligations, develop rental properties, and grow our company. We need to raise
significant additional capital or debt financing to acquire new properties, to develop existing properties, and to assure we have sufficient working capital for
our ongoing operations and debt obligations.
On March 19, 2020, we made an initial investment of $100,000 into KCB Jade Holdings, LLC (“KCB”). In exchange for the investment, KCB issued to us
a convertible debenture (the “Debenture”) dated March 19, 2020 (the “Issuance Date”) in the original principal amount of $100,000. The Debenture bears
interest at the rate of 6.5% per annum and matures on March 19, 2025 (the “Maturity Date”). Interest on the outstanding principal sum of the Debenture
commences accruing on the Issuance Date and is computed on the basis of a 365-day year and the actual number of days elapsed and shall be payable
annually due by the first day of each calendar anniversary following the Issuance Date. KCB may prepay the Debenture at any point after 18 months
following the Issuance Date, in whole or in part. However, if KCB elects to prepay the Debenture prior to the Maturity Date or prior to any conversion as
provided in the Debenture in whole or in part, we will be entitled to receive a number of KCB units, in addition to such prepayment amount, constituting
10% of the total outstanding units and 10% of the total percentage interest following such issuance and at the time of such issuance. On or after six months
from the Issuance Date, we may convert all or a portion of the principal balance and all accrued and unpaid interest due into a number of units equal to the
proportion of the outstanding amount being converted multiplied by 33% of the total number of units issued and outstanding at the time of conversion,
constituting 33% of the total percentage interest (the “Conversion Percentage”). If KCB defaults on payment of the Debenture, we may, at its option,
extend all conversion rights, through and including the date KCB tenders or attempts to tender payment in full of all amounts due under the Debenture.
Conversion rights terminate upon acceptance by the Company of payment in full of principal, accrued interest and any other amounts due under the
Debenture. If (i) KCB does not elect to exercise its rights of prepayment prior to the Maturity Date, (ii) we do not elect to exercise its rights of conversion,
and (iii) KCB pays to the Company all outstanding principal and interest accrued and due under the terms of the Debenture on the Maturity Date, we will
still be entitled to receive a number of units, in addition to such payment amount, constituting 8% of the total outstanding units and 8% of the total
percentage interest following such issuance and at the time of such issuance.
On February 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 Initial Investment begins accruing as of March 19, 2020, while
interest on the Additional Investment begins accruing on February 19, 2021.
26
● 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 Additional Investment, KCB will pay to the Company, in
perpetuity, 5% of 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.
Our future operations are dependent on our ability to manage our current cash balance, on the collection of rental and advisory revenues and the attainment
of new advisory clients. Our real estate properties are leased to Significant Tenants under triple-net leases for which terms vary. We monitor the credit of
these tenants to stay abreast of any material changes in credit quality. We monitor tenant credit by (1) reviewing financial statements and related metrics
and information that are publicly available or that are provided to us upon request, and (2) monitoring the timeliness of rent collections. As of December
31, 2020 and 2019, we had an asset concentration related to our Significant Tenant leases. As of December 31, 2020 and 2019, these Significant Tenants
represented approximately 83.2% and 90.7% 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 Exhibits 99.1 and 99.2 to this Annual Report on Form 10-K 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 Years Ended December 31, 2020 and 2019
Net cash flow provided by operating activities was $170,040 for the year ended December 31, 2020 as compared net cash flow provided by operating
activities of $284,914 for the year ended December 31, 2019, representing a decrease of $114,874.
● Net cash flow provided by operating activities for the year ended December 31, 2020 primarily reflected net loss of $78,338 adjusted for the add-
back of non-cash items consisting of depreciation and amortization of $362,833, stock-based compensation expense of $24,200 and accretion of
stock-based stock option expense of $24,231, offset by changes in operating assets and liabilities primarily consisting of an increase in deferred
rent receivable of $173,757 attributable to the abatement of May and June 2020 rent as part of lease amendments effective on May 31, 2020.
● Net cash flow provided by operating activities for the 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).
For the year ended December 31, 2020, net cash flow used in investing activities amounted to $110,486. This use of cash was attributable to cash used for
an investment in a convertible note receivable of $100,000 as discussed above and cash used in the improvement of rental properties of $9,563 and for the
purchase of property and equipment of $923.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.
27
The following tables summarize our contractual obligations as of December 31, 2020 (dollars in thousands), and the effect these obligations are expected to
have on our liquidity and cash flows in future periods.
Contractual obligations:
Convertible notes
Interest on convertible notes
Total
Off-balance Sheet Arrangements
Total
$
$
2,020 $
1,126
3,146 $
Payments Due by Period
Less than
1 year
1-3 years
3-5 years
5 + years
- $
155
155 $
20 $
241
261 $
- $
240
240 $
2,000
490
2,490
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit,
liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market
risk or credit support to us or engages in leasing, hedging or research and development services with us.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our audited and unaudited consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. We continually evaluate our estimates, including those related to income taxes, and the valuation of equity transactions.
We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future
changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual
results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of the unaudited 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 the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2014-09 and
Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09, as amended by subsequent
ASUs on the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and
supersedes most of the existing revenue recognition guidance. This standard requires an entity to recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
and also requires certain additional disclosures. We adopted this standard using the modified retrospective approach, which requires applying the new
standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the
beginning of the fiscal year of adoption. The adoption of ASU 2014-09 did not have any impact on the process for, timing of, and presentation and
disclosure of revenue recognition from contracts with tenants.
28
Rental income includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported on a straight-line basis over the
non-cancellable term of the lease, which includes the effects of rent abatements under the leases. We commence rental revenue recognition when the tenant
takes possession of the leased space or controls the physical use of the leased space and the leased space is substantially ready for its intended use.
Revenues from advisory services is recognized when the Company performs services pursuant to its agreements with customers and collectability is
reasonably assured.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation – Stock Compensation”, which requires recognition in
the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the
period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC
also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair
value of the award. The Company has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-
Based Payment.
Recent Accounting Pronouncements
Effective January 1, 2019, we adopted ASU 2016-02, “Leases (Topic 842)” using a modified retrospective method. On adoption we also applied the
package of practical expedients to leases, where we are the lessee or lessor, that commenced before the effective date whereby we elected to not reassess
the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial
direct costs for any existing leases.
ASU 2016-02, “Leases (Topic 842)” sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a
contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based
on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is
recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to recognize a right-of-use
asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will
be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is
substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.
For contracts entered into on or after the effective date, where we are the lessee, at the inception of a contract the Company assess whether the contract is,
or contains, a lease. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to
substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. We
allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. Leases entered
into prior to January 1, 2019, are accounted for under ASC 840 and were not reassessed.
For leases entered into on or after the effective date, where we are the lessor, at the inception of the contract we assess whether the contract is a sales-type,
direct financing or operating lease by reviewing the terms of the lease and determining if the lessee obtains control of the underlying asset implicitly or
explicitly.
If a change to a pre-existing lease occurs, we evaluate if the modification results in a separate new lease or a modified lease. A new lease results when a
modification provides additional right of use. The new lease or modified lease is then reassessed to determine its classification based on the modified terms.
The adoption of ASU 2016-02 did not have a material impact on the operating leases where we are the lessor. We will continue to record revenues from
rental properties for our operating leases on a straight-line basis. For leases where we are a lessee, primarily for our administrative office lease, we analyzed
if it would be required to record a lease liability and a right of use asset on our consolidated balance sheets at fair value upon adoption of ASU 2016-02.
Since the terms of the Company’s operating lease for its office space is 12 months or less, pursuant to ASC 842, we determined that the lease meets the
definition of a short-term lease and we did not recognize the right-of use asset and lease liability arising from this lease.
Recent Accounting Pronouncements
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on
the accompanying consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules appearing on pages F-1 to F-24 of this annual report on
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure controls and procedures
We maintain “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e), promulgated by the SEC pursuant to the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include controls and procedures designed to ensure that information
required to be disclosed in our company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive
officer and principal financial officer, to allow timely decisions regarding required disclosure. Our management, with the participation of our principal
executive officer and principal financial officer, evaluated our company’s disclosure controls and procedures as of the end of the period covered by this
annual report on Form 10-K. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of December 31,
2020, our disclosure controls and procedures were not effective. The ineffectiveness of our disclosure controls and procedures was due to material
weaknesses, which we identified in our report on internal control over financial reporting.
Internal control over financial reporting
Management’s annual report on internal control over financial reporting
Our management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, with the participation of our principal executive
officer and principal financial officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2020. Our
management’s evaluation of our internal control over financial reporting was based on the 2013 framework in Internal Control-Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that as of
December 31, 2020, our internal control over financial reporting was not effective.
The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses which we identified in our internal control over
financial reporting: (1) the lack of multiples levels of management review on complex accounting and financial reporting issues, (2) we had not
implemented adequate system and manual controls, and (3) a lack of adequate segregation of duties and necessary corporate accounting resources in our
financial reporting process and accounting function as a result of our limited financial resources to support hiring of personnel and implementation of
accounting systems. Until such time as we expand our staff to include additional accounting personnel and hire a full time chief financial officer, it is likely
we will continue to report material weaknesses in our internal control over financial reporting.
A material weakness is a deficiency or a combination of control deficiencies in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Limitations on Effectiveness of Controls
Our principal executive officer and principal financial officer does not expect that our disclosure controls or our internal control over financial reporting
will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additional controls can
be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any
system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting during the fourth quarter of our fiscal year ended December 31, 2020 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The following table sets forth the names, positions and ages of our directors and executive officers as of the date of this annual report on Form 10-K. Our
Board of Directors currently has five members. All of the current directors’ terms expire as of the Annual Meeting and will serve until their successors are
duly elected and qualified.
Set forth below is certain information regarding our executive officers and directors.
Name
Bryan McLaren
Art Friedman
Alex McLaren, MD
David G. Honaman
Derek Overstreet, PhD.
Age
33
61
68
69
34
Position
Chief Executive Officer, Chief Financial Officer, President, Treasurer, Secretary and Chairman
Director
Director
Director
Director
Bryan McLaren is the son of Dr. Alex McLaren.
Background Information about our Officers and Directors
Biographical information concerning the directors and executive officers listed above is set forth below. The information presented includes information
each individual has given us about all positions they hold and their principal occupation and business experience for the past five years. In addition to the
information presented below regarding each director’s specific experience, qualifications, attributes and skills that led our board to conclude that he should
serve as a director, we also believe that each of our directors has a reputation for integrity, honesty and adherence to high ethical standards. Each has
demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to our company and our board of directors.
Bryan McLaren. Mr. McLaren has a dedicated history of work in the sustainability industry and in business development. Prior to his appointment as
President, CEO and a director of our company in 2014, Mr. McLaren was recruited as our Chief Sustainability Officer and VP of Operations. Before
joining the Company, from 2013 to 2014, Mr. McLaren worked as a sustainability consultant for Waste Management, Inc., where he served as a Project
Manager for the Arizona State University account. Prior to 2013, Mr. McLaren worked as a Sustainability Manager for Northern Arizona University and as
a Sustainability Commissioner for the City of Flagstaff, Arizona. Mr. McLaren has a Master’s Degree in Sustainable Community Development, and
Executive Master’s Degree in Sustainability Leadership, and a Masters of Business Administration Degree with an emphasis on Sustainable Development.
Mr. McLaren has served as the Chairman of our board of directors since 2014. As Chief Executive Officer and President, Mr. McLaren is able to provide
our Board with valuable insight regarding the Company’s operations, its management team and associates as a result of his day-to-day involvement with
the Company. Mr. McLaren’s business development experience, academic achievements, and knowledge of our business, has led our board of directors to
conclude that he should continue to serve as a director and in his current roles.
Art Friedman. Mr. Friedman, who was appointed as a director in 2014, has served as Owner/Principal of Triple J Management Services, which specializes
in consulting and professional services for the alcoholic beverage industry. Art was most recently President and CEO of Gold Coast Beverage Distributors,
a position he held for the last 10 years of his 23 years with the company. During his tenure as President/CEO, Gold Coast more than tripled sales revenue
and increased EBITDA by more than five-fold. Over the same period, Mr. Friedman led significant market share gains through organic growth as well as
consolidating wholesaler acquisitions. Mr. Friedman began his career with General Foods Corporation, now part of Kraft Foods. He has served on the
distributor advisory councils of Diageo-Guinness, Heineken USA, InBev and Miller-Coors. Mr. Friedman graduation Cum Laude with a Bachelor of
Science in Business Management from the University of Florida, Warrington School of Business. We believe that Mr. Friedman’s background as an advisor
in the area of business management and his experience in operating, growing and advising companies provides us with the requisite skills and
qualifications to serve on our board. Mr. Friedman’s service as a director at the Company since 2014 together with his business background, provides
business, governance, organizational and strategic planning expertise to our Board and makes him a valued member of the Audit Committee, the
Compensation Committee, which he chairs, and the Strategic Committee.
Alex McLaren, MD. Dr. McLaren, who has served as a director since 2014, is an accomplished and well-known orthopedic surgeon, professor and
researcher. He joined SharedClarity, LLC as Vice President of Clinical Outcomes in 2016. From 2006 until 2016, Dr. McLaren served as program director
of the Banner University Medical Center-Phoenix (Ariz.) Residency Program in Orthopaedic Surgery. He is the former director of Orthopaedic Education
for Banner Good Samaritan Medical Center in Phoenix. He was also the program director of the Phoenix Orthopedic Residency Program at Maricopa
County Medical Center between 1998 and 2000. He has been in private orthopedic surgery practice twice during his career in Phoenix. After graduating
from Queen’s University School of Medicine, Kingston, Ontario, Canada in 1977, Dr. McLaren completed an orthopedic residency at the University of
Western Ontario in 1982 and a fellowship at the University of Southern California in 1983. Dr. McLaren is first and foremost an orthopedic educator and
researcher whose career has included teaching, research and administration of educational programs. His clinical interest includes orthopedic infections,
revision arthroplasty and complex musculoskeletal trauma. With hundreds of publications, numerous grand-funded projects, and medical association
postings, Dr. McLaren has established a prized reputation in his field. We believe that Dr. McLaren’s services provided to numerous organizations provides
us with the requisite skills and qualifications to serve on our board and as a member of the Compensation Committee and the Strategic Committee, which
he chairs.
31
David G. Honaman. Mr. Honaman, who has served as a director since 2016, has served as Principal and CFO of Advanced Benefit Solutions, Inc. (d/b/a
44 North), an insurance agent and consultant, since 2010. From 2008 to 2009, Mr. Honaman served as an independent financial consultant. Prior to that
time, Mr. Honaman spent seven years at Wilcox Associates, Inc., a civil engineering firm, most recently as CFO and Treasurer. Mr. Honaman also served in
several capacities at Wolohan Lumber Co. for over 20 years, including as Vice President of Merchandising, Senior Vice President of Finance and CFO. Mr.
Honaman began his career as a CPA on the audit staff at Ernst & Young LLP. Mr. Honaman brings to the Board extensive experience dealing with and
overseeing the implementation of accounting principles and financial reporting rules and regulations. With his substantial business and management
experience for five years as a certified public accountant and an auditor at Ernst & Young LLP serving numerous public companies in various business
sectors, including insurance agencies, Mr. Honaman provides relevant expertise on accounting, investment and financial matters. His service as a chief
financial officer at Advanced Benefit Solutions, Inc. (d/b/a 44 North), Wilcox Associates, Inc. and Wolohan Lumber Co., together with his accounting and
management experience, make him a valued member of our Board, Compensation Committee and Strategic Committee, and an effective Non-Executive
Chair of the Audit Committee. Mr. Honaman meets the definition of an “audit committee financial expert” as established by the SEC.
Derek Overstreet, PhD. Dr. Overstreet has served as a director since April 2017. In 2012, Dr. Overstreet co-founded Sonoran Biosciences, Inc. and has
served as its CEO since that time. Sonoran Biosciences, Inc. develops new sustained-release pharmaceutical formulations for applications including
orthopedic infection and postoperative pain management. Dr. Overstreet holds a Bachelor’s degree in Biomedical Engineering from Case Western Reserve
University and a Doctoral degree in Biomedical Engineering from Arizona State University. His expertise is in the development of novel polymer-based
materials for medical applications including drug delivery. He has authored 11 peer-reviewed scientific publications and two patent applications. We
believe that Dr. Overstreet’s experience navigating the scientific field of pharmaceuticals and drug delivery can be instrumental in assisting the strategic
development and implementation of the Zoned Properties’ business model. Prior to 2012, Dr. Overstreet was a post-doctoral fellow at the Laboratory for
Nanomedicine at the Barrow Neurological Institute.
Involvement in Certain Legal Proceedings
Our directors and executive officers have not been involved in any of the following events during the past 10 years:
1.
2.
3.
4.
5.
6.
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking
activities;
being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed,
suspended or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or
regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of
disgorgement or restitution, civil money penalty or temporary or permanent cease- and-desist order, or removal or prohibition order; or (iii) any
law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as
defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any
equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Code of Ethics
We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those employees responsible
for financial reporting. The code of business conduct and ethics is available on our corporate website, www.zonedproperties.com. We intend to disclose any
amendments to our code of business conduct and ethics, or waivers of its requirements, on our website or in filings under the Exchange Act to the extent
required by applicable rules and exchange requirements.
32
Director Independence
Three of our five board members are independent. The Board has determined that each of Messrs. Friedman and Honaman and Dr. Overstreet is an
independent director pursuant to the NASDAQ listing standards. Under the NASDAQ rules, no director qualifies as independent unless the Board
affirmatively determines that the director has no material relationship with us (directly, or as a partner, stockholder or officer of an organization that has a
relationship with us).
In assessing the independence of our directors, the Board considers all of the business relationships between the Company and our directors and their
respective affiliated companies. This review is based primarily on the Company’s review of its own records and on responses of the directors to questions
in a questionnaire regarding employment, business, familial, compensation and other relationships with the Company and our management. Where
relationships exist, the Board determines whether the relationship between the Company and the directors or the directors’ affiliated companies impairs the
directors’ independence. After consideration of the directors’ relationships with the Company, the Board has affirmatively determined that none of the
individuals serving as non-employee directors during the fiscal year ended December 31, 2020 had a material relationship with us and that each of such
non-employee directors is independent.
Bryan McLaren was not considered an independent director during his service on the Board during the fiscal year ended December 31, 2020 because of his
employment as our CEO, President, Treasurer, Secretary and Chairman of the Board. Alex McLaren, MD was not considered an independent director
during his service on the Board during the fiscal year ended December 31, 2020 because Bryan McLaren is the son of Dr. McLaren.
Board of Directors and Board Committees
All of our directors and director nominees are encouraged to attend the annual meetings of our stockholders.
The Board of Directors held one meeting during the fiscal year ended December 31, 2020. Each of our current directors attended 100% of the aggregate
number of the meetings of the Board and meetings of the committees on which he or she served.
Our Board currently has three committees: the Audit Committee, the Strategic Committee, and the Compensation Committee. As of March 30, 2021, the
members and Chairs of our standing Board committees were:
Independent Directors
Art Friedman
David G. Honaman
Derek Overstreet
Non-Independent Director
Alex McLaren, MD
Audit Committee
Audit
Compensation
Strategic
X
Chair
X
Chair
X
X
X
X
X
X
Chair
All Audit Committee members are “independent” under the NASDAQ listing standards and SEC rules and regulations. Our Board of Directors has
determined that one of the members of the Audit Committee, Mr. Honaman, meets the definition of an “audit committee financial expert” as established by
the SEC, and that Mr. Friedman and Dr. Overstreet, the two other members of the Audit Committee, meet the definition of “financially literate” as
established by the SEC. The Audit Committee provides assistance to the Board in fulfilling its oversight responsibilities relating to the quality and integrity
of the financial reports of the Company. The Audit Committee has the sole authority to appoint, review and discharge our independent accountants, and has
established procedures for the receipt, retention, response to and treatment of complaints regarding accounting, internal controls and audit matters. In
addition, the Audit Committee is responsible for:
●
●
●
●
●
reviewing the scope, results, timing and costs of the audit with our independent accountants and reviewing the results of the annual audit
examination and any accompanying management letters;
assessing the independence of the outside accountants on an annual basis, including receipt and review of a written report from the independent
accountants regarding their independence consistent with the independence standards of the board;
reviewing and approving the services provided by the independent accountants;
overseeing the internal audit function; and
reviewing our significant accounting policies, financial results and earnings releases, and the adequacy of our internal controls and procedures.
The responsibilities of the Audit Committee are more fully described in the Audit Committee’s charter.
The Audit Committee held four meetings during the fiscal year ended December 31, 2020.
33
Compensation Committee
All Compensation Committee members (except for Dr. McLaren) are “independent” under applicable NASDAQ listing standards. The Compensation
Committee assists the Board in fulfilling its oversight responsibilities relating to executive compensation, employee compensation and benefit programs
and plans, and leadership development and succession planning. In addition, the Compensation Committee is responsible for:
●
●
●
●
reviewing the performance of our Chief Executive Officer;
determining the compensation and benefits for our Chief Executive Officer and other executive officers;
establishing our compensation policies and practices;
administering our incentive compensation and stock plans (except for the issuance of securities to non-employee directors for services which is
administered by the Board); and
●
approving the adoption of material changes to or the termination of our benefit plans.
The Compensation Committee reviews and discusses with management the disclosures regarding executive compensation to be included in our annual
proxy statement. The responsibilities of the Compensation Committee are more fully described in the Compensation Committee’s charter.
The Compensation Committee held one meeting during the fiscal year ended December 31, 2020.
Strategic Committee
All Strategic Committee members (except for Dr. McLaren) are “independent” under the applicable NASDAQ listing standards. The Strategic Committee
assists the Board in developing and maintaining the Company’s business strategies and any related matters required by federal securities laws. In addition,
the Strategic Committee is responsible for:
● Review the Company’s current business strategies.
●
Explore new business strategies for the Company.
● Report business strategy analyses to the Board.
The Strategic Committee held one meeting during the fiscal year ended December 31, 2020.
During the fourth quarter of the fiscal year ended December 31, 2020, there were no material changes to the procedures by which stockholders may
recommend nominees to the Board.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table summarizes all compensation recorded by us for the years ended December 31, 2020 and 2019 for our “named executive officers” as
such term is defined in Item 402(m)(2) of Regulation S-K.
2020 Summary Compensation Table
Name and principal
position
Bryan McLaren,
Year
Salary
$
Bonus
$
Stock
Awards
$
Option
Awards
$
Non-Equity
Incentive
Plan
Compensation
$
Nonqualified
Deferred
Compensation
Earnings
$
All Other
Compensation
$
Total
$
Chief Executive Officer, 2020 214,500
President and Chief
Financial Officer(1)
2019 214,500
-
-
-
-
-
-
-
-
-
-
- 214,500
- 214,500
34
Narrative Disclosure to Summary Compensation Table
Except as otherwise described below, there are no compensatory plans or arrangements, including payments to be received from the Company with respect
to any executive officer, that would result in payments to such person because of his or her resignation, retirement or other termination of employment with
the Company, or our subsidiaries, any change in control, or a change in the person’s responsibilities following a change in control of the Company.
On May 23, 2018, we entered into an employment agreement with Mr. McLaren (the “2018 Employment Agreement”). Pursuant to the terms of the 2018
Employment Agreement, the Company agreed to continue to pay Mr. McLaren a base annual salary of $214,500, and to award Mr. McLaren with an annual
and/or quarterly bonus payable in either cash and/or equity of no less than 2% of the Company’s net income for the associated period.
The 2018 Employment Agreement has a term of 10 years. The term and Mr. McLaren’s employment will terminate (a “Termination”) in any of the
following circumstances:
(i)
immediately, if Mr. McLaren dies;
(ii)
immediately, if Mr. McLaren receives benefits under the long-term disability insurance coverage then
(iii) provided by the Company or, if no such insurance is in effect, upon Mr. McLaren’s disability;
(iv) on the expiration date, as the same may be extended by the parties by written amendment to the 2018 Employment Agreement prior to the
occasion thereof;
(v)
at the option of the Company for Cause (as hereinafter defined) upon the Company’s provision of written notice to Mr. McLaren of the basis for
such Termination;
(vi) at the option of the Company, without Cause;
(vii) by Mr. McLaren at any time with Good Reason (as hereinafter defined), upon 30 days’ prior written notice to the Company delivered not later
than within 90 days of the existence of the condition therefor; or
(viii) by Mr. McLaren at any time without Good Reason, upon not less than three months’ prior written notice to the Company.
In the event of a Termination for any reason or for no reason whatsoever, or upon the expiration date of the 2018 Employment Agreement, whichever
comes first, all rights and obligations under the 2018 Employment Agreement shall cease (i) as to the Company, except for the Company’s obligations for
the payment of applicable severance benefits thereunder, and for indemnification thereunder, and (ii) as to Mr. McLaren, except for his obligation under the
restrictive covenants in the 2018 Employment Agreement.
The Company and Mr. McLaren also entered into a Golden Parachute Agreement (the “Golden Parachute Agreement”) on May 23, 2018. No benefits shall
be payable under the Golden Parachute Agreement unless there shall have been a change in control of the Company, as set forth below. For purposes of the
Golden Parachute Agreement, a “change in control of the Company” shall mean a change of control of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
whether or not the Company is in fact required to comply with that regulation, provided that, without limitation, such a change in control shall be deemed
to have occurred if (A) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company’s then
outstanding securities; or (B) during any period of two consecutive years (not including any period prior to the execution of the Golden Parachute
Agreement), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a person who
has entered into an agreement with the Company to effect a transaction described in clauses (A) or (D) of this paragraph) whose election by the Board or
nomination for election by the Company’s shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a
majority; (C) the Company enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Company; or
(D) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding immediately prior to it continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving entity) of more than 50% of the combined voting power of the voting securities of the Company
or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets.
For purposes of the Golden Parachute Agreement, “Cause” means termination upon (a) the willful and continued failure to substantially perform duties
with the Company after a written demand for substantial performance is delivered by the Board, which demand specifically identifies the manner in which
the Board believes that duties have not substantially been performed, or (b) the willful engaging in conduct which is demonstrably and materially injurious
to the Company, monetarily or otherwise.
For purposes of the Golden Parachute Agreement, “Good Reason” means, without express written consent, the occurrence after a change in control of the
Company of any of the following circumstances unless, such circumstances are fully corrected prior to the date of Termination specified in the notice of
Termination:
(a) a material diminution in Mr. McLaren’s authority, duties or responsibility from those in effect immediately prior to the change in control of the
Company;
35
(b) a material diminution in Mr. McLaren’s base compensation;
(c) a material change in the geographic location at which Mr. McLaren performs his duties;
(d) a material diminution in the authority, duties, or responsibilities of the supervisor to whom Mr. McLaren is required to report, including a
requirement that McLaren report to a corporate officer or employee instead of reporting directly to the Board;
(e) a material diminution in the budget over which Mr. McLaren retains authority;
(f) a material breach under any agreement with the Company to continue in effect any bonus to which Mr. McLaren was entitled, or any
compensation plan in which Mr. McLaren participates immediately prior to the change in control of the Company which is material to Mr.
McLaren’s total compensation;
(g) a material breach under any agreement with the Company to provide Mr. McLaren benefits substantially similar to those enjoyed by Mr. McLaren
under any of the Company’s life insurance, medical, health and accident, or disability plans in which he was participating at the time of the
change in control of the Company, the failure to continue to provide Mr. McLaren with a Company automobile or allowance in lieu of it, if Mr.
McLaren was provided with such an automobile or allowance in lieu of it at the time of the change of control of the Company, the taking of any
action by the Company which would directly or indirectly materially reduce any of such benefits or deprive Mr. McLaren of any material fringe
benefit enjoyed by Mr. McLaren at the time of the change in control of the Company, or the failure by the Company to provide him with the
number of paid vacation days to which he is entitled on the basis of years of service with the Company in accordance with the Company’s normal
vacation policy in effect at the time of the change in control of the Company;
Following a change in control of the Company, upon termination of Mr. McLaren’s employment or during a period of disability, Mr. McLaren will be
entitled to the following benefits:
(i) During any period that Mr. McLaren fails to perform his full-time duties with the Company as a result of incapacity due to physical or mental
illness, Mr. McLaren will continue to receive his base salary at the rate in effect at the commencement of any such period, together with all
amounts payable to Mr. McLaren under any compensation plan of the Company during such period, until the Golden Parachute Agreement is
terminated.
(ii) If Mr. McLaren’s employment is terminated by the Company for Cause or by Mr. McLaren other than for Good Reason, disability, death or
retirement, the Company will pay Mr. McLaren his full base salary through the date of Termination at the rate in effect at the time notice of
Termination is given, plus all other amounts and benefits to which Mr. McLaren is entitled under any compensation plan of the Company at the
time such payments are due.
(iii) If employment by the Company shall be terminated (a) by the Company other than for Cause, death or disability or (b) by Mr. McLaren for Good
Reason, Mr. McLaren will be entitled to benefits provided below:
a. The Company will pay Mr. McLaren his full base salary through the date of Termination at the rate in effect at the time notice of Termination
is given, plus all other amounts and benefits to which Mr. McLaren is entitled under any compensation plan of the Company.
b.
In lieu of any further salary payments to Mr. McLaren for periods subsequent to the date of Termination, the Company will pay as severance
pay to Mr. McLaren a lump sum severance payment (together with the payments provided in clauses (c) and (d) below) equal to five times
the sum of Mr. McLaren’s annual base salary in effect immediately prior to the occurrence of the circumstance giving rise to the notice of
Termination given in respect of them.
c. The Company will pay to Mr. McLaren any deferred compensation allocated or credited to Mr. McLaren or his account as of the date of
Termination.
d.
In lieu of shares of common stock of the Company issuable upon exercise of outstanding options, if any, granted to Mr. McLaren under the
Company’s stock option plans (which options shall be cancelled upon the making of the payment referred to below), Mr. McLaren will
receive an amount in cash equal to the product of (i) the excess of the closing price of the Company’s common stock as reported on or nearest
the date of Termination (or, if not so reported, on the basis of the average of the lowest asked and highest bid prices on or nearest the date of
Termination), over the per share exercise price of each option held by Mr. McLaren (whether or not then fully exercisable) plus the amount of
any applicable cash appreciation rights, times (ii) the number of the Company’s common stock covered by each such option.
e. The Company will also pay to Mr. McLaren all legal fees and expenses incurred by Mr. McLaren as a result of such Termination.
(iv) In the event that Mr. McLaren is a “disqualified individual” within the meaning of Section 280G of the Code, the parties expressly agree that the
payments described herein and all other payments to Mr. McLaren under any other agreements or arrangements with any persons which constitute
“parachute payments” within the meaning of Section 280G of the Code are collectively subject to an overall maximum limit. Such maximum
limit shall be $1 less than the aggregate amount which would otherwise cause any such payments to be considered a “parachute payment” within
the meaning of Section 280G of the Code, as determined by the Company.
36
Outstanding Equity Awards at 2020 Fiscal Year-End
The following table sets forth information as options outstanding on December 31, 2020.
OUTSTANDING EQUITY AWARDS AT 2020 FISCAL YEAR-END
OPTION AWARDS
STOCK AWARDS
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
Unexercisable
Number of
Securities
Underlying
Unexercised
options (#)
Exercisable
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
Option
Exercise
Price
($)
150,000
100,000 (a)
—
1.00
Option
Expiration
Date
12/26/2026
Name
Bryan McLaren
(a) Vest annually at 25,000 options per year through December 2024.
Securities Authorized for Issuance under Equity Compensation Plans
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other Rights
that have
not
Vested
(#)
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
other Rights
that have not
Vested
($)
Number
of Shares
or Units
of Stock
that have
not
Vested
(#)
Market
Value of
Shares or
Units of
Stock
that
Have not
Vested
($)
—
—
—
—
On August 9, 2016, our Board of Directors authorized the 2016 Plan and reserved 10,000,000 shares of common stock for issuance thereunder. The 2016
Plan was approved by shareholders on November 21, 2016. The 2016 Plan’s purpose is to encourage ownership in the Company by employees, officers,
directors and consultants whose long-term service the Company considers essential to its continued progress and, thereby, encourage recipients to act in the
stockholders’ interest and share in the Company’s success. The 2016 Plan authorizes the grant of awards in the form of options intended to qualify as
incentive stock options under Section 422 of the Code, options that do not qualify (non-statutory stock options) and grants of restricted shares of common
stock. Restricted shares granted pursuant to the 2016 Plan are amortized to expense over the three-year vesting period. Options vest and expire over a
period not to exceed seven years. If any share of common stock underlying a stock option that has been granted ceases to be subject to a stock option, or if
any shares of common stock that are subject to any other stock-based award granted are forfeited or terminate, such shares shall again be available for
distribution in connection with future grants and awards under the 2016 Plan. As of December 31, 2020, 75,000 stock option awards have been granted
under the 2016 Plan. At December 31, 2020, 9,925,000 shares are available for future issuance.
The Company also continues to maintain its 2014 Plan, pursuant to which 1,250,000 previously awarded stock options are outstanding. The 2014 Plan has
been superseded by the 2016 Plan. Accordingly, no additional shares subject to the existing 2014 Plan will be issued and the 1,250,000 shares issuable upon
exercise of stock options will be issued pursuant to the 2014 Plan, if exercised. As of December 31, 2020, options to purchase 1,325,000 shares of common
stock are outstanding pursuant to the 2014 Plan.
The table below sets forth information as of December 31, 2020.
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of
securities to
be issued upon
exercise of
outstanding
options,
warrants and
rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c)
9,925,000
0
9,925,000
0.86
1.00
0.99
75,000 $
1,250,000 $
1,325,000 $
37
Director Compensation
The following table sets forth compensation paid, earned or awarded during 2020 to each of our directors, other than Bryan McLaren, whose compensation
is described above in the “2020 Summary Compensation Table”.
2020 Director Compensation
Name
Art Friedman
David G. Honaman
Alex McLaren, MD
Derek Overstreet
Fees Earned
or Paid in
Cash ($)
Stock
Awards
($) (1)
All Other
Compensation ($)
Total ($)
1,050
-
-
-
6,600
5,500
7,700
4,400
-
-
-
-
7,650
5,500
7,700
4,400
(1) As required by SEC rules, the amounts in this column reflect the grant date or modification date fair value as required by FASB ASC Topic 718. A
discussion of the assumptions and methodologies used to calculate these amounts is contained in the notes to our financial statements under
“Shareholders’ Deficit”. In January 2020, Mr. Freidman received 30,000 shares of restricted stock, Dr. Overstreet received 20,000 shares of restricted
stock, Dr. McLaren received 35,000 shares of restricted stock and Mr. Honaman received 25,000 shares of restricted stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The following table sets forth certain information regarding beneficial ownership of our common stock and preferred stock as of March 30, 2021, by:
●
Each director and each of our Named Executive Officers,
● All executive officers and directors as a group, and
●
Each person known by us to be the beneficial owner of more than 5% of our outstanding common stock.
As of March 30, 2021, there were 12,141,548 shares of our common stock outstanding and 2,000,000 shares of Preferred Stock outstanding.
The number of shares of common stock beneficially owned by each person is determined under the rules of the SEC and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which such person has sole or
shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days after the date hereof, through the
exercise of any stock option, warrant or other right. Unless otherwise indicated, each person has sole investment and voting power (or shares such power
with his or her spouse) with respect to the shares set forth in the following table. The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of those shares.
Common Stock
Name and Address of Beneficial Owner
Named Executive Officers and Directors:
Bryan McLaren
Art Friedman
Alex McLaren, MD
David G. Honaman
Derek Overstreet, PhD
All executive officers and directors as a group (five persons)
Other 5% Stockholders:
Greg Johnston
16912 61st Dr. NW
Stanwood, WA 98292
Melinda Jay Johnston
915 Stitch Rd.
Lake Stevens, WA 98258
Joseph Bartonek
949 Durham Rd.
Edison, NJ 08817
Amount and
Nature of
Beneficial
Ownership
Percent of
Class
150,000(1)
140,000
1,676,667(2)
115,000(3)
90,000(4)
2,171,667(5)
1.2%
1.2%
13.8%
*
*
17.6%
1,262,500
10.4%
1,250,000
10.3%
756,250
6.2%
Less than 1%.
*
(1) Consists of 150,000 vested stock options.
(2)
Includes 1,501,667 shares held by McLaren Family LLLP. Dr. McLaren is the general partner of McLaren Family LLLP and has voting and
dispositive power over such shares and includes 15,000 vested stock options.
Includes 15,000 vested stock options.
Includes 10,000 vested stock options.
Includes 190,000 vested stock options.
(3)
(4)
(5)
38
Name and Address of Beneficial Owner
Greg Johnston
c/o Zoned Properties, Inc.
14269 N. 87th Street, #205
Scottsdale, AZ 85260
Alex McLaren
c/o Zoned Properties, Inc.
14269 N. 87th Street, #205
Scottsdale, AZ 85260
Preferred Stock
Shares of
Preferred Stock
Beneficially
Owned
Percent of Class
Beneficially
Owned
Percent of
Voting
Power (1)
1,000,000
50.0%
44.6%(2)
1,000,000(3)
50.0%
44.6%(4)
(1) As a result of the multiple votes accorded to holders of the preferred stock (50 votes per share), Mr. Johnston and Dr. McLaren have the ability to
control the outcome of all matters submitted to a vote of stockholders, including the election of directors. The percent of voting power in the table
gives effect to the holder’s beneficial ownership of common stock and preferred stock.
(2) Combined with Mr. Johnston’s common stockholdings, Mr. Johnston holds 45.7% of the voting power of the Company.
(3) Shares are held by McLaren Family LLLP. Dr. McLaren is the general partner of McLaren Family LLLP and has voting and dispositive power over
such shares.
(4) Combined with Dr. McLaren’s common stockholdings, Dr. McLaren holds 46.1% of the voting power of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
We do not have a written policy for the review, approval or ratification of transactions with related parties or conflicted transactions. When such
transactions arise, they are referred to the audit committee for consideration for referral to our board of directors for its consideration.
Convertible Notes Payable
On January 9, 2017, the Company issued a convertible debenture (the “Abrams Debenture”) in the aggregate principal amount of $2,000,000 in favor of
Alan Abrams, a significant stockholder of the Company, in exchange for cash from Mr. Abrams of $2,000,000. Also on January 9, 2017, the Company
issued a convertible debenture (the “McLaren Debenture” and together with the Abrams Debenture, the “Debentures”) in the aggregate principal amount of
$20,000 in favor of Bryan McLaren, the Company’s then Chief Executive Officer and President and a member of the Company’s Board of Directors
(effective May 23, 2018, Mr. McLaren also assumed the title of Chief Financial Officer), in exchange for cash from Mr. McLaren of $20,000. Each of Mr.
Abrams and Mr. McLaren is referred to herein as a “Holder.” Each of the Debentures accrues interest at the rate of 6% per annum payable quarterly by the
first of each quarter and matures on January 9, 2022. The Company may prepay the Debentures at any point after nine months, in whole or in part. Pursuant
to the terms of each of the Debentures, the Holder is entitled to convert all or a portion of the principal balance and all accrued and unpaid interest due
under the respective Debenture into shares of the Company’s common stock at a conversion price of $5.00 per share. If the Company defaults on payment,
the Holder may at his option, extend all conversion rights, through and including the date the Company tenders or attempts to tender payment in full of all
amounts due under the Debenture. Any amount of principal or interest, which is not paid when due shall bear interest at the rate of 12% per annum. Upon
an Event of Default (as defined in each Debenture), the Holder may (i) declare the entire principal amount and all accrued and unpaid interest under the
Debenture immediately due and payable, and (ii) exercise any and all rights, powers and remedies available to the Holder at law or in equity or other
appropriate proceeding, whether for the specific performance of any covenant or agreement contained in the Debenture and proceed to enforce the payment
thereof or any other legal or equitable right of the Holder.
Pursuant to a Stock Redemption Agreement, effective January 1, 2019, the Company and Mr. Abrams amended the Abrams Debenture to extend the
maturity date of the Abrams Debenture from January 9, 2022 until January 9, 2030.
Director Independence
Three of our five board members are independent. The Board has determined that each of Messrs. Friedman and Honaman and Dr. Overstreet is an
independent director pursuant to the NASDAQ listing standards. Under the NASDAQ rules, no director qualifies as independent unless the Board
affirmatively determines that the director has no material relationship with us (directly, or as a partner, stockholder or officer of an organization that has a
relationship with us).
In assessing the independence of our directors, the Board considers all of the business relationships between the Company and our directors and their
respective affiliated companies. This review is based primarily on the Company’s review of its own records and on responses of the directors to questions
in a questionnaire regarding employment, business, familial, compensation and other relationships with the Company and our management. Where
relationships exist, the Board determines whether the relationship between the Company and the directors or the directors’ affiliated companies impairs the
directors’ independence. After consideration of the directors’ relationships with the Company, the Board has affirmatively determined that none of the
individuals serving as non-employee directors during the fiscal year ended December 31, 2020 had a material relationship with us and that each of such
non-employee directors is independent.
Bryan McLaren was not considered an independent director during his service on the Board during the fiscal year ended December 31, 2020 because of his
employment as our CEO, President, Treasurer, Secretary and Chairman of the Board. Alex McLaren, MD was not considered an independent director
during his service on the Board during the fiscal year ended December 31, 2020 because Bryan McLaren is the son of Dr. McLaren.
39
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the fees that were billed or that will be billed to our company for the years ended December 31, 2020 and 2019 for
professional services rendered by D. Brooks and Associates CPAs, P.A.:
Fees
Audit Fees
Audit-Related Fees
Tax Fees
Other Fees
Total Fees
Audit Fees
2020
2019
45,000 $
0
0
0
45,000 $
45,000
0
0
0
45,000
$
$
Audit fees were for professional services rendered for the audits of our financial statements and for review of our quarterly financial statements.
Audit-Related Fees
During 2020 and 2019, our independent registered public accountants did not provide any assurance and related services that are reasonably related to the
performance of the audit or review or our financial statements that are not reported under the caption “Audit Fees” above.
Tax Fees
As our independent registered public accountants did not provide any services to us for tax compliance, tax advice and tax planning during 2020 and 2019,
no tax fees were billed or paid during those fiscal years.
All Other Fees
Our independent registered public accountants did not provide any products and services not disclosed in the table above during 2020 and 2019. As a
result, there were no other fees billed or paid during 2020 and 2019.
Pre-Approval Policies and Procedures
Our Audit Committee pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by
our Audit Committee before the respective services were rendered.
Our board of directors has considered the nature and amount of fees billed by our independent registered public accounting firm and believe that the
provision of services for activities unrelated to the audit is compatible with maintaining their respective independence.
40
ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
Exhibits required by Item 601 of Regulation S-K:
PART IV
Exhibit
Number
3.1
3.2
10.1+
10.2+
10.3+
10.4+
10.5
10.6
10.7
10.8
10.9
10.10
10.11+
10.12
10.13
10.14+
10.15
10.16
10.17
10.18
EXHIBIT INDEX
Description of Exhibit
Articles of Incorporation, as amended, of Zoned Properties, Inc. (1)
Bylaws of Zoned Properties, Inc. (1)
Board Member Agreement dated as of October 1, 2014 by and between the registrant and Alex McLaren. (1)
Board Member Agreement dated as of October 1, 2014 by and between the registrant and Art Friedman. (1)
Board Member Agreement dated as of September 26, 2016 by and between the registrant and David G, Honaman. (8)
Board Member Agreement effective April 1, 2017 by and between Zoned Properties, Inc. and Derek Overstreet. (9)
Lease dated as of August 6, 2015 by and between Chino Valley Properties, LLC and CCC Holdings, LLC. (1)
First Amendment to Commercial Lease Agreement dated September 25, 2015 by and among Chino Valley Properties, LLC, CCC Holdings,
LLC and Alan Abrams. (1)
Lease dated as of August 15, 2015 by and between the registrant and CCC Holdings, LLC. (1)
First Amendment to Commercial Lease Agreement dated September 25, 2015 by and among the registrant, CCC Holdings, LLC and Alan
Abrams. (1)
Lease Agreement dated as of October 1, 2014 by and between Green Valley Group, LLC and Broken Arrow Herbal Center, Inc. (1)
Lease dated as of October 1, 2014 by and between Kingman Property Group, LLC and CJK, Inc. (1)
Agreement dated as of October 1, 2015 by and between the registrant and CFO Oncall, Inc. (1)
Stock Option Grant Notice and Agreement between registrant and Newbridge Financial, Inc. (1)
Deed of Trust dated March 7, 2015 in favor of Investment Property Exchange Services, Inc. covering Tempe, AZ property. (1)
Stock Option Grant Notice and Agreement dated December 20, 2015 between Zoned Properties, Inc. and Bryan McLaren. (2)
Contract to Buy and Sell Real Estate (Commercial) entered into on April 21, 2016 between Zoned Colorado Properties, LLC and Parachute
Development Corporation. (3)
Second Amendment to Commercial Lease by and between Zoned Properties, Inc., C3C3 Group, LLC and Alan Abrams. (4)
Third Amendment to Commercial Lease by and between Chino Valley Properties, LLC, C3C3 Group, LLC and Alan Abrams. (5)
Commercial Real Estate Purchase Contract dated December 22, 2016 by and between Zoned Properties, Inc. and Big Lake Estates, LLC. (6)
41
Exhibit
Number
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29+
10.30+
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
21.1*
23.1*
Description of Exhibit
Convertible Debenture dated January 9, 2017 Issued by Zoned Properties, Inc. in Favor of Alan Abrams. (7)
Convertible Debenture dated January 9, 2017 Issued by Zoned Properties, Inc. in Favor of Bryan McLaren .(7)
Fourth Amendment to Commercial Lease by and between Chino Valley Properties, LLC, C3C3 Group, LLC and Alan Abrams. (9)
Third Amendment to Commercial Lease by and between Zoned Properties, Inc., C3C3 Group, LLC and Alan Abrams, and Zoned Arizona
Properties, LLC, dated as of October 1, 2017. (10)
Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 by and between Chino Valley Properties, LLC
and Broken Arrow Herbal Center, Inc. (11)
Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 by and between Green Valley Group, LLC and
Broken Arrow Herbal Center, Inc. (11)
Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 by and between Zoned Arizona Properties,
LLC and CJK, Inc. (11)
Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 by and between Kingman Property Group, LLC
and CJK, Inc. (11)
Confidential Advisory Services Agreement dated May 1, 2018 by and between Zoned Properties, Inc. and Broken Arrow Herbal Center, Inc.
(11)
Confidential Advisory Services Agreement dated May 1, 2018 by and between Zoned Properties, Inc. and CJK, Inc. (11)
Employment Agreement by and between the registrant and Bryan McLaren dated May 23, 2018. (12)
Golden Parachute Agreement by and between the registrant and Bryan McLaren dated May 23, 2018. (12)
Stock Redemption Agreement effective January 1, 2019 by and among Zoned Properties, Inc., Christopher Carra, Alan B. Abrams, Clayton
Abrams Revocable Trust and Kyle Abrams Revocable Trust. (13)
First Amendment to Confidential Advisory Services Agreement dated January 1, 2019 by and between Zoned Properties, Inc., on behalf of
Chino Valley Properties, LLC and Broken Arrow Herbal Center, Inc. (13)
First Amendment to Confidential Advisory Services Agreement dated January 1, 2019 by and between Zoned Properties, Inc., on behalf of
Zoned Arizona Properties, LLC and CJK, Inc. (13)
Amendment to Convertible Debenture entered into as of January 2, 2019 by and between Zoned Properties, Inc. and Alan Abrams. (13)
First Amendment to Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated January 1, 2019 by and between Chino
Valley Properties, LLC and Broken Arrow Herbal Center, Inc. (13)
Convertible Debenture issued March 19, 2020 from KCB Jade Holdings, LLC. (14)
First Amendment to Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated as of May 31, 2020, by and between
Zoned Arizona Properties, LLC and CJK, Inc. (15)
Second Amendment to Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated as of May 31, 2020, by and between
Chino Valley Properties, LLC and Broken Arrow Herbal Center, Inc. (15)
First Amendment to Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated as of May 31, 2020, by and between
Green Valley Properties, LLC and Broken Arrow Herbal Center, Inc. (15)
First Amendment to Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated as of May 31, 2020, by and between
Kingman Property Group, LLC and CJK, Inc. (15)
Amended and Restated Convertible Debenture issued February 19, 2021 from KCB Jade Holdings, LLC. (16)
Commercial Lease Agreement entered into on March 3, 2021, and dated as of February 26, 2021, between Gilbert Property Management,
LLC and AZ2CAL Enterprises, LLC. (17)
List of Subsidiaries.
Consent of Independent Registered Public Accounting Firm – D, Brooks and Associates CPA’s P.A. *
42
Exhibit
Number
31.1*
31.2*
32.1*
Certification of Chief Executive Officer pursuant to Rule 13(a)-14(a) under the Securities Exchange Act of 1934, as amended.
Certification of Chief Financial Officer pursuant to Rule 13(a)-14(a) under the Securities Exchange Act of 1934, as amended.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
Description of Exhibit
of the Sarbanes-Oxley Act of 2002.
Audited financial statements of AC Management Group, LLC for the year ended December 31, 2020.
99.1
101.INS*
XBRL INSTANCE DOCUMENT
101.SCH* XBRL TAXONOMY EXTENSION SCHEMA
101.CAL* XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEF* XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
101.LAB* XBRL TAXONOMY EXTENSION LABEL LINKBASE
101.PRE* XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
+
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
Management contract or compensatory plan or arrangement.
Filed herewith
Incorporated by reference to exhibit to Registration Statement on Form S-1 filed by the Company on November 25, 2015.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on January 7, 2016.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on April 22, 2016.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on August 25, 2016.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on October 13, 2016.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on December 29, 2016.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on January 12, 2017.
Incorporated by reference to exhibit to Annual Report on Form 10-K filed with the SEC by the Company on March 27, 2017.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on April 4, 2017.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on October 3, 2017.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on May 3, 2018.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on May 24, 2018.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on January 3, 2019.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on March 23, 2020.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on June 4, 2020.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on February 19, 2021.
Incorporated by reference to exhibit to Current Report on Form 8-K filed with the SEC by the Company on March 8, 2021.
ITEM 16. 10-K SUMMARY
As permitted, the registrant has elected not to supply a summary of information required by Form 10-K.
43
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 31, 2021
Zoned Properties, Inc.
By: /s/ Bryan McLaren
Bryan McLaren
Chief Executive Officer, President and
Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Bryan McLaren as attorney-in-fact with full power of substitution to execute in the
name and on behalf of the registrant and each such person, individually and in each capacity stated below, one or more amendments to the annual report on
Form 10-K, which amendments may make such changes in the report as the attorney-in-fact acting deems appropriate and to file any such amendment to
the annual report on Form 10-K with the Securities and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Bryan McLaren
Bryan McLaren
/s/ Derek Overstreet
Derek Overstreet
/s/ Art Friedman
Art Friedman
/s/ Alex McLaren
Alex McLaren
/s/ David G. Honaman
David G. Honaman
Chief Executive Officer, Chief Financial Officer,
President, Treasurer, Secretary and Director
(principal executive officer, principal financial officer and
principal accounting officer)
Director
Director
Director
Director
44
March 31, 2021
March 31, 2021
March 31, 2021
March 31, 2021
March 31, 2021
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
ZONED PROPERTIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations – For the Years Ended December 31, 2020 and 2019
Consolidated Statements of Changes in Stockholders’ Equity - For the Years Ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows – For the Years Ended December 31, 2020 and 2019
Page
F-2
F-3
F-4
F-5
F-6
Notes to Consolidated Financial Statements
F-7 to F-24
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Zoned Properties, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Zoned Properties, Inc. (the Company) as of December 31, 2020 and 2019, and the
related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2020 and 2019, and related notes
(collectively referred to as the consolidated financial statements)
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020
and 2019 the results of its operations and its cash flows for the years ended December 31, 2020 and 2019 in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain
an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be
communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2)
involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters.
D. Brooks and Associates CPAs, P.A.
We have served as the Company’s auditor since 2018.
Palm Beach Gardens, Florida
March 30, 2021
F-2
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash
Accounts receivable
Deferred rent receivable
Rental properties, net
Prepaid expenses and other assets
Convertible note receivable
Property and equipment, net
Security deposits
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Convertible note payable
Convertible note payable - related party
Accrued expenses
Accrued expenses - related party
Deferred revenues
Security deposits payable
Total Liabilities
Commitments and Contingencies (Note 11)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; 2,000,000 shares issued and outstanding at
December 31, 2020 and 2019 ($1.00 per share liquidation preference)
Common stock: $0.001 par value, 100,000,000 shares authorized; 12,011,548 and 11,901,548 issued and
outstanding at December 31, 2020 and 2019, respectively
Additional paid-in capital
Accumulated deficit
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See accompanying notes to consolidated financial statements.
F-3
December 31, December 31,
2020
2019
$
699,335 $
4,988
173,757
7,027,436
104,062
100,000
17,059
1,100
639,781
8,188
-
7,374,807
113,592
-
22,035
1,100
$
8,127,737 $
8,159,503
$
2,000,000 $
20,000
92,750
4,200
3,250
71,800
2,000,000
20,000
94,641
3,000
1,750
74,468
2,192,000
2,193,859
2,000
2,000
12,012
20,854,773
(14,933,048)
11,902
20,806,452
(14,854,710)
5,935,737
5,965,644
$
8,127,737 $
8,159,503
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
REVENUES:
Rental revenues
Advisory revenues
Total revenues
OPERATING EXPENSES:
Compensation and benefits
Professional fees
General and administrative expenses
Depreciation and amortization
Real estate taxes
Total operating expenses
INCOME FROM OPERATIONS
OTHER (EXPENSES) INCOME:
Interest expenses
Interest expenses - related party
Other income
Interest income
Total other expenses, net
LOSS BEFORE INCOME TAXES
PROVISION FOR INCOME TAXES
NET LOSS
NET LOSS PER COMMON SHARE:
Basic
Diluted
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic
Diluted
See accompanying notes to consolidated financial statements.
F-4
For the Year Ended
December 31,
2020
2019
$
1,125,346 $
90,096
1,115,861
144,560
1,215,442
1,260,421
342,692
195,684
190,806
362,833
85,694
383,648
233,940
196,299
361,940
83,879
1,177,709
1,259,706
37,733
715
(120,000)
(1,200)
-
5,129
(120,000)
(1,200)
108,204
-
(116,071)
(12,996)
(78,338)
(12,281)
-
-
$
(78,338) $
(12,281)
$
$
(0.01) $
(0.01) $
0.00
0.00
12,009,745
12,009,745
11,913,164
11,913,164
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Preferred Stock
Common Stock
Additional
Accumulated
# of Shares
Amount
# of Shares
Amount
Paid-in Capital
Deficit
Total
Stockholders’
Equity
Balance, December 31, 2018
2,000,000
$
2,000
17,441,552
$
17,442
$
20,746,200
$
(14,842,429) $
5,923,213
Stock redemption and
cencellation
Common stock issued for
services
Accretion of stock based
compensation related to
stock options issued
Net loss
-
-
-
-
-
-
-
-
(5,640,004)
(5,640)
5,640
100,000
100
31,000
-
-
-
-
23,612
-
-
-
-
(12,281)
-
31,100
23,612
(12,281)
Balance, December 31, 2019
2,000,000
2,000
11,901,548
11,902
20,806,452
(14,854,710)
5,965,644
Common stock issued for
services
Accretion of stock based
compensation related to
stock options issued
Net loss
-
-
-
-
-
-
110,000
110
24,090
-
-
-
-
24,231
-
-
-
(78,338)
24,200
24,231
(78,338)
Balance, December 31, 2020
2,000,000
$
2,000
12,011,548
$
12,012
$
20,854,773
$
(14,933,048) $
5,935,737
See accompanying notes to consolidated financial statements.
F-5
ZONED PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense
Stock-based compensation
Stock option expense
Change in operating assets and liabilities:
Accounts receivable
Deferred rent receivable
Prepaid expenses and other assets
Security deposits
Accounts payable
Accrued expenses
Accrued expenses - related parties
Deferred revenues
Security deposits payable
For the Year Ended
December 31,
2020
2019
$
(78,338) $
(12,281)
362,833
24,200
24,231
3,200
(173,757)
9,530
-
-
(1,891)
1,200
1,500
(2,668)
361,940
31,100
23,612
(8,188)
-
3,375
(500)
(117,984)
7,005
1,200
(1,000)
(3,365)
NET CASH PROVIDED BY OPERATING ACTIVITIES
170,040
284,914
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of convertible note receivable
Purrchase of rental property improvements
Purrchase of property and equipment
NET CASH USED IN INVESTING ACTIVITIES
NET INCREASE IN CASH
CASH, beginning of year
CASH, end of year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Reclassification of convertible note payable - related party to convertible note payable
Reclassification of security deposits - related party to security deposits
Reclassification of accrued expenses - related party to accrued expenses
See accompanying notes to consolidated financial statements.
F-6
(100,000)
(9,563)
(923)
(110,486)
-
-
-
-
59,554
284,914
639,781
354,867
$
699,335 $
639,781
$
120,000 $
120,000
$
$
$
- $
- $
- $
2,000,000
71,800
33,000
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS
Organization
Zoned Properties, Inc. (“Zoned Properties” or the “Company”), was incorporated in the State of Nevada on August 25, 2003. The Company is a strategic
real estate development firm whose primary mission is to provide real estate and sustainability services for clients in the regulated cannabis industry,
positioning the company for real estate acquisitions and revenue growth. The Company intends to pioneer sustainable development for emerging industries,
including the regulated cannabis industry. The Company is an accredited member of the Better Business Bureau, the U.S. Green Building Council, and the
Forbes Real Estate Council. The Company focuses on investing capital to acquire and develop commercial properties to be leased on a triple-net basis, and
engaging clients that face zoning, permitting, development, and operational challenges. The Company provides development strategies and advisory
services that could potentially have a major impact on cash flow and property value. The Company does not grow, harvest, sell or distribute cannabis or any
substances regulated under United States law such as the Controlled Substance Act of 1970, as amended (the “CSA”).
The Company has the following wholly owned subsidiaries:
● Gilbert Property Management, LLC (“Gilbert”) was organized in the State of Arizona on February 10, 2014.
● Chino Valley Properties, LLC (“Chino Valley”) was organized in the State of Arizona on April 15, 2014.
● Kingman Property Group, LLC (“Kingman”) was organized in the State of Arizona on April 15, 2014.
● Green Valley Group, LLC (“Green Valley”) organized in the State of Arizona on April 15, 2014.
●
●
●
●
●
Zoned Oregon Properties, LLC was organized in the State of Oregon on June 16, 2015.
Zoned Colorado Properties, LLC (“Zoned Colorado”) was organized in the State of Colorado on September 17, 2015.
Zoned Illinois Properties, LLC was organized in the State of Illinois on July 15, 2015.
Zoned Arizona Properties, LLC (“Zoned Arizona”) was organized in the State of Arizona on June 2, 2017.
Zoned Advisory Services, LLC (“Zoned Advisory”) was organized in the State of Arizona on July 27, 2018.
In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide.
The Company is monitoring this closely, and although operations have not been materially affected by the COVID-19 outbreak to date, the ultimate
duration and severity of the outbreak and its impact on the economic environment and our business is uncertain. Currently, all of the properties in the
Company’s portfolio are open to its Significant Tenants and their customers and will remain open pursuant to state and local government requirements. At
this time, the Company does not foresee any material changes to its operations from COVID-19. The Company’s tenants are continuing to generate revenue
at these properties, and they have continued to make rental payments in full and on time and we believe the tenants’ liquidity position is sufficient to cover
its expected rental obligations. Accordingly, while the Company does not anticipate an impact on its operations, it cannot estimate the duration of the
pandemic and potential impact on its business if the properties must close or if the tenants are otherwise unable or unwilling to make rental payments. In
addition, a severe or prolonged economic downturn could result in a variety of risks to the Company’s business, including weakened demand for its
properties and a decreased ability to raise additional capital when needed on acceptable terms, if at all. At this time, the Company is unable to estimate the
impact of this event on its operations.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been
eliminated upon consolidation.
F-7
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Effective January 1, 2019, the Company and certain beneficial shareholders entered into a Stock Redemption Agreement (See Note 8). Pursuant to
Securities and Exchange Commission (“SEC”) rules, each of these beneficial shareholders was deemed to be a “related person” due solely to their status as
significant stockholders of the Company. Pursuant to the terms of the Stock Redemption Agreement, these beneficial shareholders would no longer be
significant stockholders of the Company and would no longer be deemed to be “related persons” under SEC rules. Accordingly, as of January 1, 2019, the
Company will no longer reflect transactions and balances related to these beneficial shareholders as related party transactions.
Use of estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for the years
ended December 31, 2020 and 2019 include the collectability of accounts and note receivable, the useful life of rental properties and property and
equipment, assumptions used in assessing impairment of long-term assets, valuation allowances for deferred tax assets, and the fair value of non-cash
equity transactions, including options and stock-based compensation.
Risks and uncertainties
The Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of
business failure. The Company conducts a significant portion of its business in Arizona. Additionally, the Company’s tenants operate in the medical
marijuana industry. Consequently, any significant economic downturn in the Arizona market or any changes in the federal government’s enforcement of
current federal laws or changes in state laws could potentially have a negative effect on the Company’s business, results of operations and financial
condition. Additionally, substantially all of the Company’s real estate properties are leased under triple-net leases to tenants that are controlled by one entity
(each, a “Significant Tenant” and collectively, the “Significant Tenants”). For the years ended December 31, 2020 and 2019, rental and advisory revenue
associated with the Significant Tenants amounted to $1,176,666 and $1,146,654, which represents 96.8% and 91.0% of the Company’s total revenues,
respectively (see Note 3).
Fair value of financial instruments
The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, prepaid expenses and other assets, accounts payable,
accrued expenses, and other payables approximate their fair market value based on the short-term maturity of these instruments.
The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (the “FASB”)
accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement. The Company did not identify any assets or liabilities that are required to be presented on the balance
sheet at fair value in accordance with Accounting Standards Codification (“ASC”) Topic 820.
Cash
Cash is carried at cost and represents cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with
an original maturity of three months or less as of the purchase date of such investments. The Company had no cash equivalents on December 31, 2020 and
2019. The majority of the Company’s cash is held at major commercial banks, which may at times exceed the Federal Deposit Insurance Corporation
(“FDIC”) limit. To date, the Company has not experienced any losses on its invested cash. On December 31, 2020 and 2019, the Company had
approximately $449,000 and $390,000, respectively, of cash in excess of FDIC limits of $250,000.
Accounts receivable
The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The
allowance is based on an analysis of historical bad debt experience, current receivables aging and expected future write-offs, as well as an assessment of
specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized
in general and administrative expense. For the years ended December 31, 2020 and 2019, the Company did not record any allowances for doubtful
accounts.
F-8
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Rental properties
Rental properties are carried at cost, less accumulated depreciation and amortization. Betterments, major renovations and certain costs directly related to
the improvement of rental properties are capitalized. Maintenance and repair expenses are charged to expense as incurred. Depreciation is recognized on a
straight-line basis over estimated useful lives of the assets, which range from 5 to 39 years. Tenant improvements are amortized on a straight-line basis over
the lives of the related leases, which approximate the useful lives of the assets.
Upon the acquisition of real estate, the Company assesses the fair value of acquired assets (including land, buildings and improvements, identified
intangibles, such as acquired above-market leases and acquired in-place leases) and acquired liabilities (such as acquired below-market leases) and allocate
the purchase price based on these assessments. The Company assesses fair value based on estimated cash flow projections that utilize appropriate discount
and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating
results, known trends, and market/economic conditions.
The Company’s rental properties are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the
anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property’s carrying amount over its
estimated fair value. Impairment analyses are based on our current plans, intended holding periods and available market information at the time the
analyses are prepared.
If the Company’s estimates of the projected future cash flows, anticipated holding periods, or market conditions change, the Company’s evaluation of
impairment losses may be different and such differences could be material to its consolidated financial statements. The evaluation of anticipated cash flows
is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual
results. For the years ended December 31, 2020 and 2019, the Company did not record any impairment losses.
The Company has capitalized land, which is not subject to depreciation.
Property and equipment
Property and equipment is stated at cost, less accumulated depreciation. Depreciation of property and equipment is provided utilizing the straight-line
method over the estimated useful lives. The Company uses a five-year life for office equipment, seven years for furniture and fixtures, and five to ten years
for vehicles. Expenditures for maintenance and repairs are charged to expense as incurred. Upon sale or retirement of property and equipment, the related
cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in statements of operations.
The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded
value may not be recoverable.
Revenue recognition
The Company follows Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). This standard
establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the
existing revenue recognition guidance. ASC 606 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain
additional disclosures.
Rental income includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported on a straight-line basis over the
non-cancellable term of the lease, which includes the effects of rent abatements under the leases. The Company commences rental revenue recognition
when the tenant takes possession of the leased space or controls the physical use of the leased space and the leased space is substantially ready for its
intended use.
Currently, the Company’s leases provide for payments with fixed monthly base rents over the term of the leases. The leases also require the tenant to remit
estimated monthly payments to the Company for property taxes. These payments are recorded as rental income and the related property tax expense
reflected separately on the statements of operations.
F-9
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
See below for the adoption of ASU 2016-02, “Leases (Topic 842)” and its impact on our consolidated financial statements upon adoption.
Revenues from advisory services is recognized when the Company performs services pursuant to its agreements with clients and collectability is
reasonably assured.
Basic and diluted income (loss) per share
Basic (loss) income per share is computed by dividing net (loss) income available to common shareholders by the weighted average number of shares of
common stock outstanding during each period. Diluted (loss) income per share is computed by dividing net (loss) income available to common
shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during
the period using the treasury stock method and as-if converted method. Potentially dilutive common shares and participating securities are excluded from
the computation of diluted shares outstanding if they would have an anti-dilutive impact on the Company’s net losses. The Company’s preferred stock is
considered a participating security since the preferred shares are entitled to dividends equal to common share dividends and accordingly, are included in the
computation of earnings per share pursuant to the two-class method. The two-class method of computing (loss) income per share is an earnings allocation
formula that determines (loss) income per share for common stock and any participating securities according to dividends declared (whether paid or
unpaid) and participation rights in undistributed earnings.
The following potentially dilutive shares have been excluded from the calculation of diluted net loss per share as their effect would be anti-dilutive for the
years ended December 31, 2020 and 2019.
Convertible debt
Stock options
Segment reporting
December 31,
2020
404,000
1,325,000
1,729,000
2019
404,000
1,290,000
1,694,000
The Company’s business is comprised of one reportable segment. The Company has determined that its properties have similar economic characteristics to
be aggregated into one reportable segment (operating, leasing and managing commercial properties, and advisory services related to commercial
properties). The Company’s determination was based primarily on its method of internal reporting.
Income tax
Deferred income tax assets and liabilities arise from temporary differences between the financial statements and tax basis of assets and liabilities, as
measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as
current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to an
asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company follows the provisions of FASB ASC 740-10, “Uncertainty in Income Taxes”. Certain recognition thresholds must be met before a tax
position is recognized in the financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not”
threshold. The Company does not believe it has any uncertain tax positions as of December 31, 2020 and 2019 that would require either recognition or
disclosure in the accompanying consolidated financial statements.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in
the financial statements of the cost of employee, 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.
F-10
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Recently adopted accounting pronouncements
Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)” using a modified retrospective method. On adoption the Company
also applied the package of practical expedients to leases, where the Company is the lessee or lessor, that commenced before the effective date whereby the
Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or
existing leases; and (iii) initial direct costs for any existing leases.
ASU 2016-02, “Leases (Topic 842)” sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a
contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based
on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is
recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to recognize a right-of-use
asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will
be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is
substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.
For contracts entered into on or after the effective date, where we are the lessee, at the inception of a contract the Company assess whether the contract is,
or contains, a lease. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to
substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. We
allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. Leases entered
into prior to January 1, 2019, are accounted for under ASC 840 and were not reassessed.
For leases entered into on or after the effective date, where we are the lessor, at the inception of the contract the Company assess whether the contract is a
sales-type, direct financing or operating lease by reviewing the terms of the lease and determining if the lessee obtains control of the underlying asset
implicitly or explicitly.
If a change to a pre-existing lease occurs, we evaluate if the modification results in a separate new lease or a modified lease. A new lease results when a
modification provides additional right of use. The new lease or modified lease is then reassessed to determine its classification based on the modified terms.
As disclosed in Note 3, on January 1, 2019, the Chino Valley lease was modified to increase the monthly base rent from $35,000 to $40,000. Additionally,
on May 31, 2020, the Chino Valley lease was modified to decrease the monthly base rent from $40,000 to $32,800 and the Tempe lease was modified to
increase the monthly base rent from $33,500 to $49,200. At the commencement of the modified terms, the Company reassessed its lease classification and
concluded it remained properly classified as an operating lease.
The adoption of ASU 2016-02 did not have a material impact on the operating leases where the Company is a lessor. The Company will continue to record
revenues from rental properties for its operating leases on a straight-line basis. Any revenue on the straight-line basis exceeding the monthly payment
amount required on the operating lease is reflected as a deferred rent receivable. Effective May 31, 2020, the Company amended its leases for which it is
the lessor on its Chino Valley, Tempe, Kingman and Green Valley properties. The amendments resulted in an abatement of rent for the months of June and
July 2020. This rent abatement resulted in a deferred rent receivable as of December 31, 2020 of $173,757 (see Note 3).
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. Since the terms of the Company’s
operating lease for its office space is 12 months or less, pursuant to ASC 842, the Company determined that the lease meets the definition of a short-term
lease and the Company did not recognize a right-of use asset and lease liability arising from this lease.
Recently issued accounting pronouncements
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on
the accompanying consolidated financial statements.
F-11
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 3 – CONCENTRATIONS AND RISKS
Lease Agreements with Significant Tenants
Chino Valley
On May 1, 2018, Chino Valley and Broken Arrow Herbal Center, Inc. (“Broken Arrow”) agreed to terminate the prior Chino Valley Lease dated April 6,
2015, as amended, in consideration of (i) entry into that certain Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1,
2018 between Chino Valley and Broken Arrow (the “2018 Chino Valley Lease”), with a term of 22 years, expiring April 30, 2040, and (ii) abatement of
rent that would otherwise have been due for the month of April 2018 under the prior Chino Valley Lease. The 2018 Chino Valley Lease provided for
payment by Broken Arrow of a fixed monthly base rent of $35,000, as well as real property taxes, personal property taxes, privilege, sales, rental, excise,
use and/or other taxes (excluding income or estate taxes) levied upon or assessed against Chino Valley. In addition, pursuant to the terms of the 2018 Chino
Valley Lease, Broken Arrow agreed to maintain insurance in full force during the term of the 2018 Chino Valley Lease and any other period of occupancy
of the premises by Broken Arrow. On January 1, 2019, Chino Valley and Broken Arrow entered into that the First Amendment to the 2018 Chino Valley
Lease (the “2019 Chino Valley Lease Amendment”), pursuant to which the monthly base rent was increased from $35,000 to $40,000. Except for the
increase in base rent, the terms of the 2018 Chino Valley Lease remain in full force and effect.
On May 29, 2020, Chino Valley and Broken Arrow entered into a second amendment to the 2018 Chino Valley Lease, as amended (the “2020 Chino Valley
Amendment”), effective May 31, 2020 (“Effective Date”). Pursuant to the terms of the 2020 Chino Valley Amendment, among other things, the base rent
was adjusted to $32,800 per month, and the base rent was abated from June 1, 2020 to July 31, 2020. Any increase in the rentable area of the leased
premises will result in an increase in all amounts calculated based on the same, including, without limitation, base rent. Pursuant to the terms of the 2020
Chino Valley Amendment, the parties agreed that if there is any change in laws such that the dispensing, sale or cultivation of marijuana upon the premises
is prohibited or materially and adversely affected as mutually and reasonably determined by Chino Valley and Broken Arrow, Broken Arrow may terminate
the 2018 Chino Valley Lease, as amended, by delivering written notice to Chino Valley, together with a termination payment which shall be the sum of (i)
any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the balance of the term.
In addition, the parties agreed that from the period from the Effective Date to June 30, 2022 (the “Improvement Period”), Broken Arrow will and/or Broken
Arrow will cause its affiliate, CJK, to invest a combined total of at least $8,000,000 of improvements (“Investment by Tenants”) in and to the property that
is the subject of the Chino Valley Lease and the property that is the subject of the Tempe Lease (discussed below, and collectively referred to as the
“Facilities”). If Broken Arrow and/or CJK fails to deliver to the Company receipted bills for hard and soft costs of improvements to the Facilities totaling at
least $8,000,000 on or before June 30, 2022, Broken Arrow will be in default under the Chino Valley Lease and Tempe Lease, as amended.
Green Valley
On May 1, 2018, Green Valley and Broken Arrow agreed to terminate the prior Green Valley Lease dated October 1, 2014, in consideration of (i) entry into
that certain Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Green Valley and Broken Arrow (the
“Green Valley Lease”), with a term of 22 years, expiring April 30, 2040, and (ii) abatement of rent that would otherwise have been due for the month of
April 2018 under the prior Green Valley Lease. The Green Valley Lease provided for payment by Broken Arrow of a fixed monthly base rent of $3,500, as
well as real property taxes, personal property taxes, privilege, sales, rental, excise, use and/or other taxes (excluding income or estate taxes) levied upon or
assessed against Chino Valley. In addition, pursuant to the terms of the Green Valley Lease, Broken Arrow agreed to maintain insurance in full force during
the term of the Green Valley Lease and any other period of occupancy of the premises by Broken Arrow.
On May 29, 2020, Green Valley and Broken Arrow entered into the First Amendment (the “Green Valley Amendment”) to the Green Valley Lease,
effective May 31, 2020. Pursuant to the terms of the Green Valley Amendment, among other things, the parties agreed to abate the fixed base rent of $3,500
from June 1, 2020 to July 31, 2020. In addition, the Green Valley Amendment provides that any increase in the rentable area of the leases premises will
result in an increase in all amounts calculated based on the same, including, without limitation, base rent. The parties also agreed that if there is any change
in laws such that the dispensing, sale or cultivation of marijuana upon the premises is prohibited or materially and adversely affected as mutually and
reasonably determined by Green Valley and Broken Arrow, Broken Arrow may terminate the Green Valley Lease by delivering written notice to Green
Valley, together with a termination payment which shall be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been
earned after termination for the balance of the term.
F-12
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Tempe
On May 1, 2018, Zoned Arizona and CJK, Inc. (“CJK”) agreed to terminate the prior Tempe Leases dated August 15, 2015, as amended, and June 15,
2017, in consideration of (i) entry into that certain Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between
Zoned Arizona and CJK (the “Tempe Lease”), with a term of 22 years, expiring April 30, 2040, and (ii) abatement of rent that would otherwise have been
due for the month of April 2018 under the prior Tempe Leases. The Tempe Lease provided for payment by CJK of a fixed monthly base rent of $33,500, as
well as real property taxes, personal property taxes, privilege, sales, rental, excise, use and/or other taxes (excluding income or estate taxes) levied upon or
assessed against Zoned Arizona. In addition, pursuant to the terms of the Tempe Lease, CJK agreed to maintain insurance in full force during the term of
the Tempe Lease and any other period of occupancy of the premises by CJK.
On May 29, 2020, Zoned Arizona and CJK entered into the First Amendment (the “Tempe Amendment”) to the Tempe Lease, effective May 31, 2020.
Pursuant to the terms of the Tempe Amendment, among other things, the base rent was increased to $49,200 per month, and the base rent was abated from
June 1, 2020 to July 31, 2020. Any increase in the rentable area of the leased premises will result in an increase in all amounts calculated based on the
same, including, without limitation, base rent. Pursuant to the terms of the Tempe Amendment, the parties agreed that if there is any change in laws such
that the dispensing, sale or cultivation of marijuana upon the premises is prohibited or materially and adversely affected as mutually and reasonably
determined by Zoned Arizona and CJK, CJK may terminate the Tempe Lease by delivering written notice to Zoned Arizona, together with a termination
payment which shall be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the
balance of the term.
In addition, under the Tempe Amendment the parties agreed to an Investment by Tenant (as defined above in the subheading Chino Valley) to the property
that is the subject of the Chino Valley Lease and the property that is the subject of the Tempe Lease. If Broken Arrow and/or CJK fails to deliver to the
Company receipted bills for hard and soft costs of improvements to the Facilities totaling at least $8,000,000 on or before June 30, 2022, Broken Arrow
and CJK will be in default under the Chino Valley Lease and Tempe Lease, as amended.
Kingman
On May 1, 2018, Kingman and CJK agreed to terminate the prior Kingman Lease dated October 1, 2014, in consideration of (i) entry into that certain
Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Kingman and CJK (the “Kingman Lease”), with a
term of 22 years, expiring April 30, 2040, and (ii) abatement of rent that would otherwise have been due for the month of April 2018 under the Prior
Kingman Lease. The Kingman Lease provides for payment by CJK of a fixed monthly base rent of $4,000, as well as real property taxes, personal property
taxes, privilege, sales, rental, excise, use and/or other taxes (excluding income or estate taxes) levied upon or assessed against Kingman. In addition,
pursuant to the terms of the Kingman Lease, CJK agreed to maintain insurance in full force during the term of the Kingman Lease and any other period of
occupancy of the premises by CJK.
On May 29, 2020, Kingman and CJK entered into the First Amendment (the “Kingman Amendment”) to the Kingman Lease, effective May 31, 2020.
Pursuant to the terms of the Kingman Amendment, among other things, the parties agreed to abate the $4,000 base rent from June 1, 2020 to July 31, 2020.
In addition, the Kingman Amendment provides that any increase in the rentable area of the leases premises will result in an increase in all amounts
calculated based on the same, including, without limitation, base rent. The parties also agreed that if there is any change in laws such that the dispensing,
sale or cultivation of marijuana upon the premises is prohibited or materially and adversely affected as mutually and reasonably determined by Kingman
and CJK, CJK may terminate the Kingman Lease by delivering written notice to Kingman, together with a termination payment which shall be the sum of
(i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the balance of the term.
CJK and Broken Arrow, together, operate under the company brand, “Hana Meds”, and are referred to as the Company’s Significant Tenants.
The Tempe Lease, Kingman Lease, Chino Valley Lease and Green Valley Lease (together referred to as the “New Leases”) includes a Guarantee of
Payment and Performance by Mr. Abrams and the Company’s Significant Tenants. Mr. Abrams guarantee is collateralized by the convertible debt of
$2,000,000 owed to him (see Note 7).
F-13
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
As of December 31, 2020 and 2019, security deposits payable to the Significant Tenants amounted to $71,800 in both periods.
Future minimum lease payments primarily consist of minimum base rent payments from Significant Tenants and the Commercial Lease Agreement
executed by Gilbert subsequent to December 31, 2020 (see Note 12). Future minimum lease payments to be received, on all leased properties, for each of
the five succeeding calendar years and thereafter as of December 31, 2020 consists of the following:
Future annual base rent:
2021
2022
2023
2024
2025
Thereafter
Total
$
$
1,096,000
1,107,000
1,082,250
1,074,000
1,074,000
15,394,000
20,827,250
Rental and advisory revenue and receivable –Significant Tenants
For the years ended December 31, 2020 and 2019, rental and advisory revenue associated with the Significant Tenant leases described above amounted to
$1,176,666 and $1,146,654, which represents 96.8% and 91.0% of the Company’s total revenues, respectively.
On December 31, 2020 and 2019, accounts receivable from advisory services provided to the Significant Tenant amounted to $2,375 and $8,188,
respectively. Further, as of December 31, 2020 a deferred rent receivable of $173,757 is due from Significant Tenants due to the abatement of rent in the
months of June and July 2020 under the amendments executed effective May 31, 2020 discussed above.
Asset concentration
The majority of the Company’s real estate properties are leased to the Significant Tenant under triple-net leases that terminate in April 2040. The Company
monitors the credit of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing financial
statements and related metrics and information that are publicly available or that are provided to us upon request, and (2) monitoring the timeliness of rent
collections.
As of December 31, 2020 and 2019, the Company had an asset concentration related to the Significant Tenants. As of December 31, 2020 and 2019, the
Significant Tenants represented approximately 83.2% and 87.1% of the Company’s total assets, respectively. Through December 31, 2020, all rental
payments have been made on a timely basis. As of December 31, 2020, the lease agreements with the Significant Tenants were personally guaranteed by
Alan Abrams and are collateralized by convertibles notes of $2,000,000 owed to Mr. Abrams (see Note 7). On March 1, 2018, the Company and Alan
Abrams entered into a Reaffirmation Agreement (See Note 7).
Confidential advisory services agreements
On May 1, 2018, the Company entered into that certain Confidential Advisory Services Agreement by and between the Company and Broken Arrow (the
“Broken Arrow CASA”), with a term expiring on April 30, 2040, unless earlier terminated as provided in the Broken Arrow CASA. Additionally, on May
1, 2018, the Company entered into that certain Confidential Advisory Services Agreement by and between the Company and CJK (the “CJK CASA”), with
a term expiring on April 30, 2040, unless earlier terminated as provided in the CJK CASA. These Agreements may be terminated prior to the expiration of
the Term upon the occurrence of any of the following: (a) by the Company for any reason at any time upon thirty calendar days’ written notice to the other
party; (b) by either party immediately upon the mutual agreement of the parties, evidenced by a writing signed by the parties; or (c) immediately by either
party in the event of an actual finding, by a court of competent jurisdiction, of fraud, gross negligence or willful misconduct of the other party in connection
with these Agreements. Pursuant to the terms of the Broken Arrow CASA and CJK CASA, Broken Arrow and CJK engaged the Company to perform
certain advisory services in exchange for a fee equal to 10% of Broken Arrow’s and CJK’s gross revenues (the (“Revenue Fee”), commencing January
2019.
F-14
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
On January 1, 2019, as part of a Stock Redemption Agreement, the Company, on behalf of Chino Valley, and Broken Arrow entered into the First
Amendment to Confidential Advisory Services Agreement (the “Broken Arrow CASA Amendment”). The Broken Arrow CASA Amendment amended the
Broken Arrow CASA to (i) reduce the gross revenue fee payable by Broken Arrow from 10% to 0%, and (ii) add a $250 hourly advisory fee payable by
Broken Arrow. Except as set forth herein, the terms of the Broken Arrow CASA remain in full force and effect.
On January 1, 2019, as part of the Stock Redemption Agreement, the Company, on behalf of Zoned Arizona, and CJK entered into the First Amendment to
Confidential Advisory Services Agreement (the “CJK CASA Amendment”). The CJK CASA Amendment amended the CJK CASA to (i) reduce the gross
revenue fee payable by CJK from 10% to 0%, and (ii) add a $250 hourly advisory fee payable by CJK. Except as set forth herein, the terms of the CJK
CASA remain in full force and effect.
NOTE 4 – RENTAL PROPERTIES
On December 31, 2020 and 2019, rental properties, net consisted of the following:
Description
Building and building improvements
Land
Rental properties, at cost
Less: accumulated depreciation
Rental properties, net
Useful Life
(Years)
5-39
-
December 31,
2020
6,260,524 $
2,283,214
8,543,738
(1,516,302)
7,027,436 $
December 31,
2019
6,250,959
2,283,214
8,534,173
(1,159,366)
7,374,807
$
$
For the years ended December 31, 2020 and 2019, depreciation of rental properties amounted to $356,934 and $355,280, respectively.
NOTE 5 – PROPERTY AND EQUIPMENT
On December 31, 2020 and 2019, property and equipment consisted of the following:
Description
Vehicle and site trailers
Office furniture and equipment
Less: accumulated depreciation
Property and equipment, net
Useful Life
(Years)
5 - 10
5 - 7
December 31,
2020
December 31,
2019
$
$
38,855 $
18,268
57,123
(40,064)
17,059 $
38,855
17,345
56,200
(34,165)
22,035
For the years ended December 31, 2020 and 2019, depreciation expense amounted to $5,899 and $6,660, respectively.
NOTE 6 – CONVERTIBLE NOTE RECEIVABLE
On March 19, 2020, the Company made an initial investment of $100,000 into KCB Jade Holdings, LLC (“KCB”). In exchange for the investment, KCB
issued to the Company a convertible debenture (the “KCB Debenture”) dated March 19, 2020 (the “Issuance Date”) in the original principal amount of
$100,000. The KCB Debenture bears interest at the rate of 6.5% per annum and matures on March 19, 2025 (the “Maturity Date”). Interest on the
outstanding principal sum of the KCB Debenture commences accruing on the Issuance Date and is computed on the basis of a 365-day year and the actual
number of days elapsed and shall be payable annually due by the first day of each calendar anniversary following the Issuance Date. KCB may prepay the
KCB Debenture at any point after 18 months following the Issuance Date, in whole or in part. However, if KCB elects to prepay the KCB Debenture prior
to the Maturity Date or prior to any conversion as provided in the KCB Debenture in whole or in part, the Company will be entitled to receive a number of
KCB units, in addition to such prepayment amount, constituting 10% of the total outstanding units and 10% of the total percentage interest following such
issuance and at the time of such issuance.
On or after six months from the Issuance Date, the Company may convert all or a portion of the principal balance and all accrued and unpaid interest due
into a number of units equal to the proportion of the outstanding amount being converted multiplied by 33% of the total number of units issued and
outstanding at the time of conversion, constituting 33% of the total percentage interest (the “Conversion Percentage”). If KCB defaults on payment of the
KCB Debenture, the Company may, at its option, extend all conversion rights, through and including the date KCB tenders or attempts to tender payment in
full of all amounts due under the KCB Debenture. Conversion rights terminate upon acceptance by the Company of payment in full of principal, accrued
interest and any other amounts due under the KCB Debenture.
F-15
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
If (i) KCB does not elect to exercise its rights of prepayment prior to the Maturity Date, (ii) the Company does not elect to exercise its rights of conversion,
and (iii) KCB pays to the Company all outstanding principal and interest accrued and due under the terms of the KCB Debenture on the Maturity Date, the
Company will still be entitled to receive a number of units, in addition to such payment amount, constituting 8% of the total outstanding units and 8% of
the total percentage interest following such issuance and at the time of such issuance.
Upon the occurrence of an Event of Default, as defined in the KCB Debenture, the entire principal balance and accrued and unpaid interest outstanding
under the KCB Debenture, and all other obligations of KCB under the KCB Debenture, will be immediately due and payable and the Company may
exercise any and all rights, power and remedies available to it at law or in equity or other appropriate proceeding, whether for the specific performance of
any covenant or agreement contained in the KCB Debenture and proceed to enforce the payment thereof or any other legal or equitable right of the
Company.
Any amount of principal or interest not paid when due will bear interest at the rate of 12% per annum from the due date thereof until paid.
On December 31, 2020, convertible note receivable and interest receivable amounted to $100,000 and $5,129, respectively.
On February 19, 2021, the Company made an additional investment of $100,000 into KCB. In exchange, the KCB issued to the Company an amended and
restated convertible debenture (the “A&R Debenture”) on February 19, 2021 (the “Amendment Date”). (See Note - 12 – Subsequent Events).
NOTE 7 – CONVERTIBLE NOTE PAYABLE
On January 9, 2017, the Company issued a convertible debenture (the “Abrams Debenture”) in the aggregate principal amount of $2,000,000 in favor of
Alan Abrams, who was a significant stockholder of the Company through December 31, 2018, in exchange for cash from Mr. Abrams of $2,000,000. The
Abrams Debenture accrues interest at the rate of 6% per annum payable quarterly by the 1st of each quarter and was originally due on January 9, 2022. On
January 2, 2019, as part of a Stock Redemption Agreement, the Company and Mr. Abrams entered into an amendment of the Abrams Debenture (the
“Debenture Amendment”), pursuant to which the parties agreed to extend the maturity date of the Abrams Debenture from January 9, 2022 to January 9,
2030. Except as set forth herein, the terms of the Abrams Debenture remain in full force and effect.
The Company may prepay the Abrams Debenture at any point after nine months, in whole or in part. Pursuant to the terms of the Abrams Debenture, Mr.
Abrams is entitled to convert all or a portion of the principal balance and all accrued and unpaid interest due under the Abrams Debenture into shares of the
Company’s common stock at a conversion price of $5.00 per share.
If the Company defaults on payment, Mr. Abrams may at his option, extend all conversion rights, through and including the date the Company tenders or
attempts to tender payment in full of all amounts due under the Abrams Debenture. Any amount of principal or interest, which is not paid when due shall
bear interest at the rate of 12% per annum. Upon an Event of Default (as defined in the Abrams Debenture), Mr. Abrams may (i) declare the entire principal
amount and all accrued and unpaid interest under the Abrams Debenture immediately due and payable, and (ii) exercise any and all rights, powers and
remedies available to Mr. Abrams at law or in equity or other appropriate proceeding, whether for the specific performance of any covenant or agreement
contained in the Abrams Debenture and proceed to enforce the payment thereof or any other legal or equitable right of Mr. Abrams.
On March 1, 2018, the Company and Alan Abrams entered into a Reaffirmation Agreement whereby Mr. Abrams reaffirmed his personal guarantee of his
obligations under certain of the Company’s commercial leases. Additionally, Mr. Abrams affirmed that the principal of the Abrams Debenture in the
principal amount of $2,000,000 was acknowledged as collateral within the scope of the guaranty included in the commercial lease agreements.
As of December 31, 2020 and 2019, the principal balance due under the Abrams Debenture is $2,000,000.
As of December 31, 2020 and 2019, accrued interest payable due under the Abrams Debenture was $30,000 which is included in accrued expenses on the
accompanying consolidated balance sheets.
For the years ended December 31, 2020 and 2019, interest expense related to the Abrams Debenture amounted to $120,000.
F-16
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 8 – RELATED PARTY TRANSACTIONS
Convertible notes payable – related parties
On January 9, 2017, the Company issued a convertible debenture (the “McLaren Debenture”) in the principal amount of $20,000 in favor of Bryan
McLaren, the Company’s Chief Executive Officer, President, Chief Financial Officer, and a member of the Company’s Board of Directors, in exchange for
cash from Mr. McLaren of $20,000. The McLaren Debenture accrues interest at the rate of 6% per annum payable quarterly by the 1st of each quarter and
matures on January 9, 2022. The Company may prepay the McLaren Debenture at any point after nine months, in whole or in part. Pursuant to the terms of
the McLaren Debenture, Mr. McLaren is entitled to convert all or a portion of the principal balance and all accrued and unpaid interest due under this
McLaren Debenture into shares of the Company’s common stock at a conversion price of $5.00 per share.
If the Company defaults on payment, Mr. McLaren may at his option, extend all conversion rights, through and including the date the Company tenders or
attempts to tender payment in full of all amounts due under the McLaren Debenture. Any amount of principal or interest, which is not paid when due shall
bear interest at the rate of 12% per annum. Upon an Event of Default (as defined in the McLaren Debenture), Mr. McLaren may (i) declare the entire
principal amount and all accrued and unpaid interest under the McLaren Debenture immediately due and payable, and (ii) exercise any and all rights,
powers and remedies available to Mr. McLaren at law or in equity or other appropriate proceeding, whether for the specific performance of any covenant or
agreement contained in the McLaren Debenture and proceed to enforce the
As of December 31, 2020 and 2019, the principal balance due under the McLaren Debenture is $20,000.
As of December 31, 2020 and 2019, accrued interest payable due under the McLaren Debenture was $4,200 and $3,000, respectively, which is included in
accrued expenses – related parties on the accompanying consolidated balance sheets.
For the years ended December 31, 2020 and 2019, interest expense – related parties amounted to $1,200.
Stock redemption agreement
Effective January 1, 2019, the Company and certain beneficial shareholders entered into a Stock Redemption Agreement (See Note 3 and 9). Pursuant to
SEC rules, each of these beneficial shareholders was deemed to be a “related person” due solely to their status as significant stockholders of the Company.
Pursuant to the terms of the Stock Redemption Agreement, these beneficial shareholders would no longer be significant stockholders of the Company and
would no longer be deemed to be “related persons” under SEC rules. Accordingly, as of January 1, 2019, the Company will no longer reflect transactions
and balances related to these beneficial shareholders as related party transactions. Prior to January 1, 2019, transactions with these beneficial shareholders
were reflected as related party transactions on the Company’s consolidated financial statements.
NOTE 9 – STOCKHOLDERS’ EQUITY
(A) Preferred Stock
On December 13, 2013, the Board of Directors of the Company authorized and approved the creation of a new class of Preferred Stock consisting of
5,000,000 shares authorized, $.001 par value. The preferred stock is not convertible into any other class or series of stock. The holders of the preferred
stock are entitled to fifty (50) votes for each share held. Voting rights are not subject to adjustment for splits that increase or decrease the common shares
outstanding. Upon liquidation, the holders of the shares will be entitled to receive $1.00 per share plus redemption provision before assets distributed to
other shareholders. The holders of the shares are entitled to dividends equal to common share dividends. Once any shares of Preferred Stock are
outstanding, at least 51% of the total number of shares of Preferred Stock outstanding must approve the following transactions:
a. Alter or change the rights, preferences or privileges of the Preferred Stock.
b. Create any new class of stock having preferences over the Preferred Stock.
c. Repurchase any of our common stock.
d. Merge or consolidate with any other company, except our wholly owned subsidiaries.
e.
f.
Sell, convey or otherwise dispose of, or create or incur any mortgage, lien, or charge or encumbrance or security interest in or pledge of, or sell
and leaseback, in all or substantially all of our property or business.
Incur, assume or guarantee any indebtedness maturing more than 18 months after the date on which it is incurred, assumed or guaranteed by us,
except for operating leases and obligations assumed as part of the purchase price of property.
F-17
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
(B) Common stock issued for services
2019
On January 14, 2019, the Company issued an aggregate of 100,000 shares of common stock to the members of the Company’s board of directors for
services rendered. The shares were valued at their fair value of $31,100 using the quoted share price on the date of grant of $0.311 per common share. In
connection with these grants, in January 2019, the Company recorded stock-based compensation expense of $31,100.
2020
On January 6, 2020, the Company issued an aggregate of 110,000 shares of common stock to members of the Company’s board of directors for services
rendered. The shares were valued at their aggregate fair value of $24,200 using the quoted per share price on the date of grant of $0.22. In connection with
these grants, in January 2020, the Company recorded stock-based compensation expense of $24,200 which is included in compensation and benefits on the
consolidated statements of operations.
(C) Equity incentive plans
On August 9, 2016, the Company’s Board of Directors authorized the 2016 Equity Incentive Plan (the “2016 Plan”) and reserved 10,000,000 shares of
common stock for issuance thereunder. The 2016 Plan was approved by shareholders on November 21, 2016. The 2016 Plan’s purpose is to encourage
ownership in the Company by employees, officers, directors and consultants whose long-term service the Company considers essential to its continued
progress and, thereby, encourage recipients to act in the stockholders’ interest and share in the Company’s success. The 2016 Plan authorizes the grant of
awards in the form of options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, options
that do not qualify (non-statutory stock options) and grants of restricted shares of common stock. Restricted shares granted pursuant to the 2016 Plan are
amortized to expense over the vesting period. Options vest and expire over a period not to exceed seven years. If any share of common stock underlying a
stock option that has been granted ceases to be subject to a stock option, or if any shares of common stock that are subject to any other stock-based award
granted are forfeited or terminate, such shares shall again be available for distribution in connection with future grants and awards under the 2016 Plan. As
of December 31, 2019, 40,000 stock option awards are outstanding and 40,000 options are exercisable under the 2016 Plan. As of December 31, 2020,
75,000 stock option awards are outstanding and 75,000 options are exercisable under the 2016 Plan. As of December 31, 2020 and 2019, 9,925,000 and
9,960,000 shares are available for future issuance.
The Company also continues to maintain its 2014 Equity Compensation Plan (the “2014 Plan”), pursuant to which 1,250,000 previously awarded stock
options are outstanding. The 2014 Plan has been superseded by the 2016 Plan. Accordingly, no additional shares subject to the existing 2014 Plan will be
issued and the 1,250,000 shares issuable upon exercise of stock options will be issued pursuant to the 2014 Plan, if exercised. As of December 31, 2020 and
2019, options to purchase 1,250,000 shares of common stock are outstanding and 1,150,000 options are exercisable pursuant to the 2014 Plan.
(D) Stock options
On January 6, 2020, the Company granted an employee an option, pursuant to the 2016 Plan, to purchase 125,000 of the Company’s common stock at an
exercise price of $1.00 per share. The grant date of the option was January 6, 2020 and the option expires on January 6, 2030. The option vests as to (i)
35,000 of such shares on January 6, 2020; and (ii) as to 10,000 of such shares on January 6, 2021 and each year thereafter through January 6, 2029. The fair
value of this option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of 0%; expected volatility of 110%; risk-free interest rate of 1.81%; and an estimated holding period of 10 years. In connection
with these options, the Company valued these options at a fair value of $23,388 and will record stock-based compensation expense over the vesting period.
In July 2020, this employee was terminated and 90,000 unvested options were cancelled.
For the years ended December 31, 2020 and 2019, in connection with the accretion of stock-based option expense, the Company recorded stock-based
compensation expense of $24,231 and $23,612, respectively. As of December 31, 2020, there were 1,325,000 options outstanding and 1,225,000 options
vested and exercisable. As of December 31, 2020, there was $34,582 of unvested stock-based compensation expense to be recognized through December
2024. The aggregate intrinsic value on December 31, 2020 was nil and was calculated based on the difference between the quoted share price on December
31, 2020 of $0.43 and the exercise price of the underlying options.
F-18
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Stock option activities for the years ended December 31, 2020 and 2019 are summarized as follows:
Balance Outstanding December 31, 2018
Granted
Balance Outstanding December 31, 2019
Granted
Forfeited
Balance Outstanding December 31, 2020
Exercisable, December 31, 2020
Balance Non-vested at December 31, 2019
Granted
Forfeited
Vested during the period
Balance Non-vested at December 31, 2020
(E) Stock redemption agreement
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
0.99
-
0.99
1.00
1.00
0.99
0.99
1.00
1.00
1.00
1.00
1.00
6.74 $
-
5.74
-
-
4.85 $
4.76
- $
-
-
-
6.00 $
-
-
-
-
-
-
-
-
-
-
-
-
Number of
Options
1,290,000 $
-
1,290,000
125,000
(90,000)
1,325,000 $
1,225,000 $
125,000 $
125,000
(90,000)
(60,000)
100,000 $
Effective January 1, 2019, the Company, Christopher Carra, Alan Abrams, Clayton Abrams Revocable Trust (the “Clayton Abrams Trust”), and Kyle
Abrams Revocable Trust (the “Kyle Abrams Trust” and together with the Clayton Abrams Trust, the “Trusts”) entered into the Stock Redemption
Agreement. Prior to entry into the Stock Redemption Agreement, (i) Mr. Carra was the owner 2,028,335 shares of the Company’s common stock,
representing approximately 11.6% of the Company’s outstanding shares as of January 1, 2019, and (ii) Mr. Abrams, together with the Trusts (collectively,
the “Abrams Affiliates”), owned 3,611,669 shares of the Company’s common stock, representing approximately 20.7% of the Company’s outstanding
common stock as of January 1, 2019. Pursuant to SEC rules, each of Messrs. Carra and Abrams was deemed to be a “related person” due solely to their
status as significant stockholders of the Company. Pursuant to the terms of the Stock Redemption Agreement, the parties agreed that the Company would
redeem an aggregate of 5,640,004 owned by Mr. Carra and the Abrams Affiliates (the “Stock Redemption”) such that Messrs. Carra and Abrams would no
longer be significant and stockholders of the Company and would no longer be deemed to be “related persons” under SEC rules. In exchange for the Stock
Redemption, the parties agreed that:
●
●
●
The Company and Broken Arrow, which was owned at the time of the transaction, in whole or in part, directly or indirectly, by Messrs. Abrams
and Carra, amended the Broken Arrow CASA to reduce the gross revenue fee payable by Broken Arrow from 10% of gross revenue to 0% of
gross revenue, and added a $250 an hour advisory fee.
The Company and CJK, which is owned at the time of the transaction, in whole or in part, directly or indirectly, by Messrs. Abrams and Carra,
amended the CJK CASA to reduce the gross revenue fee payable by CJK from 10% of gross revenue to 0% of gross revenue, and added a $250
an hour advisory fee.
The Company and Mr. Abrams amended the convertible debenture dated January 9, 2017 (the “Abrams Debenture”) to extend the maturity date
of the Abrams Debenture from January 9, 2022 until January 9, 2030.
● Chino Valley and Broken Arrow amended the Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 (the
“New Chino Valley Lease”) to increase the monthly base rent payable by Broken Arrow from $35,000 to $40,000.
F-19
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Following effectiveness of the Stock Redemption and the transactions set forth above:
● Messrs. Carra and Abrams will no longer beneficially own any shares of the Company’s common stock. Accordingly, they will no longer be
significant stockholders of the Company or “related persons” under the SEC rules. Therefore, transactions between the Company and Carra or
Abrams or entities related in whole or in part, directly or indirectly, to Carra and Abrams have not been reflected as related party transactions in
these consolidated financial statements after the effectiveness of the Stock Redemption.
●
●
●
●
The Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Chino Valley and Broken Arrow will
continue in full force and effect, except as amended by the Chino Valley Lease Amendment to increase the monthly base rent payable by Broken
Arrow from $35,000 to $40,000.
The Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Green Valley and Broken Arrow will
continue in full force and effect.
The Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement (concerning the Company’s Tempe, Arizona property) dated May
1, 2018 between Zoned Arizona and CJK will continue in full force and effect.
The Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Kingman and CJK will continue in full
force and effect.
NOTE 10 - INCOME TAXES
The Company maintains deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred tax assets on December 31, 2020 and 2019
consist of net operating loss carryforwards. The net deferred tax asset has been fully offset by a valuation allowance because of the uncertainty of the
attainment of future taxable income.
The items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes for the years ended
December 31, 2020 and 2019 were as follows:
Income tax benefit at U.S. statutory rate
Income tax benefit – state
Non-deductible expenses
Change in valuation allowance
Total provision for income tax
The Company’s approximate net deferred tax asset as of December 31, 2020 and 2019 was as follows:
Deferred Tax Asset:
Net operating loss carryforward
Net deferred tax assets before valuation allowance
Valuation allowance
Net deferred tax asset
F-20
Years Ended
December 31,
2020
2019
$
$
(16,311) $
(5,092)
6,663
14,740
- $
(2,579)
(798)
6,920
(3,543)
-
December 31,
2020
December 31,
2019
$
$
485,172 $
485,172
(485,172)
- $
470,432
470,432
(470,432)
-
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
The net operating loss carryforward was approximately $1,764,000 on December 31, 2020. The Company provided a valuation allowance equal to the net
deferred income tax asset as of December 31, 2020 and 2019 because it was not known whether future taxable income will be sufficient to utilize the loss
carryforward. Additionally, the future utilization of the net operating loss carryforward to offset future taxable income is subject to an annual limitation as a
result of ownership changes that occurred in 2014 and may occur in the future. Based on the Company’s analysis to determine the limitation on the
utilization of its net operating loss carryforward amounts, in 2018, the deferred tax asset was reduced by any carryforward that cannot be utilized or expires
prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance. In 2020, the valuation allowance increased by
$14,740. The potential tax benefit arising from the loss carryforward will expire in 2040.
The Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2020, 2019 and 2018 Corporate
Income Tax Returns are subject to Internal Revenue Service examination.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Rental property acquisition
On April 22, 2016, Zoned Colorado, a wholly owned subsidiary of the Company, entered into a Contract to Buy and Sell Real Estate (the “Parachute
Agreement”) with Parachute Development Corporation (“Seller”) pursuant to which Zoned Colorado agreed to purchase, and Seller agreed to sell, property
in Parachute, Colorado (the “Property”) for a purchase price of $499,857. Of the total purchase price, $274,857, or 55%, will be paid in cash at closing and
$225,000, or 45%, will be financed by Seller at an interest rate of 6.5%, amortized over a five-year period, with a balloon payment at the end of the fifth
year. Payments will be made monthly and there will be no pre-payment penalty. Pursuant to the terms of the Parachute Agreement, the parties will
cooperate in good faith to complete due diligence during a period of 45 days following execution of the Parachute Agreement. The closing is subject to
certain contingencies, including that Zoned Colorado must obtain acceptable financing for the purchase and development of the Property, the grant of a
special use permit by the Town of Parachute, approval of a protected development deal or equivalent agreement by the Town of Parachute, execution of a
lease agreement by a prospective tenant and the prospective tenant’s obtaining a license to cultivate on the Property.
Pursuant to the terms of the Parachute Agreement, Zoned Colorado will have a right of first refusal on eleven additional lots owned by Seller in Parachute,
Colorado. In April 2016, the Company paid a refundable deposit of $45,000 into escrow in connection with the Parachute Agreement which is included in
prepaid expenses and other assets on the consolidated balance sheets as of December 31, 2020 and 2019. In January 2021, the Parachute Agreement was
mutually terminated, and the refundable deposit was returned to the Company (See Note 12).
Legal matters
From time to time, the Company may be involved in litigation related to claims arising out of its operations in the normal course of business. As of
December 31, 2020 and 2019, the Company is not involved in any pending or threatened legal proceedings that it believes could reasonably be expected to
have a material adverse effect on its financial condition, results of operations, or cash flows.
Confidential Advisory Services Agreements
On May 1, 2018, the Company entered into that certain Confidential Advisory Services Agreement by and between the Company and Broken Arrow (the
“Broken Arrow CASA”), with a term expiring on April 30, 2040, unless earlier terminated as provided in the Broken Arrow CASA. Additionally, on May
1, 2018, the Company entered into that certain Confidential Advisory Services Agreement by and between the Company and CJK (the “CJK CASA” and
together with the Broken Arrow CASA, the “CASAs”), with a term expiring on April 30, 2040, unless earlier terminated as provided in the CJK CASA.
The CASAs may be terminated prior to the expiration of their respective term upon the occurrence of any of the following: (a) by the Company for any
reason at any time upon thirty calendar days’ written notice to the other party; (b) by either party immediately upon the mutual agreement of the parties,
evidenced by a writing signed by the parties; or (c) immediately by either party in the event of an actual finding, by a court of competent jurisdiction, of
fraud, gross negligence or willful misconduct of the other party in connection with the CASAs. Pursuant to the terms of the CASAs, Broken Arrow and
CJK engaged the Company to perform certain advisory services in exchange for a fee equal to 10% of Broken Arrow’s and CJK’s gross revenues (the
“Revenue Fee”). Effective January 1, 2019, the parties agreed to amend the May 1, 2018 leases to reduce the Revenue Fee payable pursuant to each of the
CASAs from 10% of gross revenue to 0% of gross revenue.
F-21
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Effective January 1, 2019, the Company and Messrs. Abrams and Carra or entities controlled by Messrs. Abrams and Carra entered into Stock Redemption
Agreements (see Note 9). Prior to entry into the Stock Redemption Agreement, pursuant to the terms of the Stock Redemption Agreement, the parties
agreed that the Company would redeem an aggregate of 5,640,004 owned by such related party shareholders’ in exchange for the Stock Redemption. In
addition to other terms, the parties agreed to amend the May 1, 2018 leases to reduce the gross revenue fee payable by these related party tenants from 10%
of gross revenue to 0% of gross revenue (See Note 3).
Employment and Related Golden Parachute Agreement
On May 23, 2018, the Company and Mr. McLaren, the Company’s President, Chief Executive Officer, Chief Financial Officer and Chairman of the Board,
agreed to replace Mr. McLaren’s 2014 employment agreement with a new employment agreement dated May 23, 2018 (the “2018 Employment
Agreement”). Pursuant to the terms of the 2018 Employment Agreement, the Company agreed to continue to pay Mr. McLaren his then-current base annual
salary of $215,000, and to award Mr. McLaren with an annual and/or quarterly bonus payable in either cash and/or equity of no less than 2% of the
Company’s net income for the associated period.
The 2018 Employment Agreement has a term of 10 years. The term and Mr. McLaren’s employment will terminate (a “Termination”) in any of the
following circumstances:
(i)
immediately, if Mr. McLaren dies;
(ii) immediately, if Mr. McLaren receives benefits under the long-term disability insurance coverage then provided by the Company or, if no such
insurance is in effect, upon Mr. McLaren’s disability;
(iii) on the expiration date, as the same may be extended by the parties by written amendment to the 2018 Employment Agreement prior to the
occasion thereof;
(iv) at the option of the Company for Cause (as defined in the 2018 Employment Agreement) upon the Company’s provision of written notice to Mr.
McLaren of the basis for such Termination;
(v) at the option of the Company, without Cause;
(vi) by Mr. McLaren at any time with Good Reason (as defined in the 2018 Employment Agreement), upon 30 days’ prior written notice to the
Company delivered not later than within 90 days of the existence of the condition therefor; or
(vii)by Mr. McLaren at any time without Good Reason, upon not less than three months’ prior written notice to the Company.
In the event of a Termination for any reason or for no reason whatsoever, or upon the expiration date of the 2018 Employment Agreement, whichever
comes first, all rights and obligations under the 2018 Employment Agreement shall cease (i) as to the Company, except for the Company’s obligations for
the payment of applicable severance benefits thereunder, and for indemnification thereunder, and (ii) as to Mr. McLaren, except for his obligation under the
restrictive covenants in the 2018 Employment Agreement.
The Company and Mr. McLaren also entered into a Golden Parachute Agreement (the “Golden Parachute Agreement”) on May 23, 2018. No benefits shall
be payable under the Golden Parachute Agreement unless there shall have been a change in control of the Company, as set forth below. For purposes of the
Golden Parachute Agreement, amongst other terms in the Golden Parachute Agreement, a “change in control of the Company” shall mean a change of
control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended.
For purposes of the Golden Parachute Agreement, “Cause” means termination upon (a) the willful and continued failure to substantially perform duties
with the Company after a written demand for substantial performance is delivered by the Board, which demand specifically identifies the manner in which
the Board believes that duties have not substantially been performed, or (b) the willful engaging in conduct, which is demonstrably and materially injurious
to the Company, monetarily or otherwise.
For purposes of the Golden Parachute Agreement, “Good Reason” means, without express written consent, the occurrence after a change in control of the
Company of any of the following circumstances unless, such circumstances are fully corrected prior to the date of Termination specified in the notice of
Termination:
(a) a material diminution in Mr. McLaren’s authority, duties or responsibility from those in effect immediately prior to the change in control of the
Company;
(b) a material diminution in Mr. McLaren’s base compensation;
(c) a material change in the geographic location at which Mr. McLaren performs his duties;
(d) a material diminution in the authority, duties, or responsibilities of the supervisor to whom Mr. McLaren is required to report, including a
requirement that Mr. McLaren report to a corporate officer or employee instead of reporting directly to the Board;
F-22
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
(e) a material diminution in the budget over which Mr. McLaren retains authority;
(f) a material breach under any agreement with the Company to continue in effect any bonus to which Mr. McLaren was entitled, or any
compensation plan in which Mr. McLaren participates immediately prior to the change in control of the Company which is material to Mr.
McLaren’s total compensation;
(g) a material breach under any agreement with the Company to provide Mr. McLaren benefits substantially similar to those enjoyed by him under
any of the Company’s life insurance, medical, health and accident, or disability plans in which he was participating at the time of the change in
control of the Company, the failure to continue to provide Mr. McLaren with a Company automobile or allowance in lieu of it, if Mr. McLaren
was provided with such an automobile or allowance in lieu of it at the time of the change of control of the Company, the taking of any action by
the Company which would directly or indirectly materially reduce any of such benefits or deprive him of any material fringe benefit enjoyed by
him at the time of the change in control of the Company, or the failure by the Company to provide him with the number of paid vacation days to
which he is entitled on the basis of years of service with the Company in accordance with the Company’s normal vacation policy in effect at the
time of the change in control of the Company;
Following a change in control of the Company, upon termination of Mr. McLaren’s employment or during a period of disability, Mr. McLaren will be
entitled to the following benefits:
(i) During any period that he fails to perform his full-time duties with the Company as a result of incapacity due to physical or mental illness, Mr.
McLaren will continue to receive his base salary at the rate in effect at the commencement of any such period, together with all amounts payable
to him under any compensation plan of the Company during such period, until the Golden Parachute Agreement is terminated.
(ii) If Mr. McLaren’s employment is terminated by the Company for Cause or by Mr. McLaren other than for Good Reason, disability, death or
retirement, the Company will pay Mr. McLaren his full base salary through the date of Termination at the rate in effect at the time notice of
Termination is given, plus all other amounts and benefits to which he is entitled under any compensation plan of the Company at the time such
payments are due.
(iii) If employment by the Company shall be terminated (a) by the Company other than for Cause, death or disability or (b) by Mr. McLaren for Good
Reason, Mr. McLaren will be entitled to benefits provided below:
a. The Company will pay Mr. McLaren his full base salary through the date of Termination at the rate in effect at the time notice of Termination
is given, plus all other amounts and benefits to which he is entitled under any compensation plan of the Company.
b.
In lieu of any further salary payments to Mr. McLaren for periods subsequent to the date of Termination, the Company will pay as severance
pay to Mr. McLaren a lump sum severance payment (together with the payments provided in clauses (c) and (d) below) equal to five times
the sum of his annual base salary in effect immediately prior to the occurrence of the circumstance giving rise to the notice of Termination
given in respect of them.
c. The Company will pay to Mr. McLaren any deferred compensation allocated or credited to him or his account as of the date of Termination.
d.
In lieu of shares of common stock of the Company issuable upon exercise of outstanding options, if any, granted to Mr. McLaren under the
Company’s stock option plans (which options shall be cancelled upon the making of the payment referred to below), Mr. McLaren will
receive an amount in cash equal to the product of (i) the excess of the closing price of the Company’s common stock as reported on or nearest
the date of Termination (or, if not so reported, on the basis of the average of the lowest asked and highest bid prices on or nearest the date of
Termination), over the per share exercise price of each option held by Mr. McLaren (whether or not then fully exercisable) plus the amount of
any applicable cash appreciation rights, times (ii) the number of the Company’s common stock covered by each such option.
e. The Company will also pay to Mr. McLaren all legal fees and expenses incurred by him as a result of such Termination.
F-23
ZONED PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 12 – SUBSEQUENT EVENTS
On January 1, 2021, the Company granted a consultant an option, pursuant to the 2016 Plan, to purchase 125,000 of the Company’s common stock at an
exercise price of $1.00 per share. The grant date of the option was January 1, 2021 and the option expires on January 1, 2031. The option vests as to (i)
25,000 of such shares on January 1, 2021; and (ii) as to 10,000 of such shares on January 1, 2022 and each year thereafter through January 1, 2031. The fair
value of this option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of 0%; expected volatility of 117%; risk-free interest rate of 0.93%; and an estimated holding period of 10 years. In connection
with these options, the Company valued these options at a fair value of $48,677 and will record stock-based compensation expense over the vesting period.
On January 31, 2021, the Company issued an aggregate of 130,000 shares of common stock to members of the Company’s board of directors for services
rendered. The shares were valued at their aggregate fair value of $52,000 using the quoted per share price on the date of grant of $0.40. In connection with
these grants, in January 2021, the Company recorded stock-based compensation expense of $52,000 which will be included in compensation and benefits
on the consolidated statements of operations.
In January 2021, the Parachute Agreement was mutually terminated, and the refundable deposit was returned to the Company (see Note 11).
On February 19, 2021 (the “Amendment Date”), the Company made an additional investment of $100,000 into KCB (the “Additional Investment”) (See
Note 6). In exchange, 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 KCB Debenture (see Note 6). Pursuant to the A&R Debenture, the Company and KCB agreed to
certain new terms that did not exist in the KCB Debenture, which are described below.
● Interest Accrual Commencement: Pursuant to the A&R Debenture, interest on the Initial Investment begins accruing as of March 19, 2020,
while interest on the Additional Investment begins 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 Additional Investment, KCB will pay
to the Company, in perpetuity, 5% of 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 KCB Debenture (See Note 6).
On March 3, 2021, Gilbert entered into that certain Commercial Lease Agreement (the “Lease”), dated as of February 26, 2021, between Gilbert and
AZ2CAL Enterprises, LLC (the “Tenant”). Pursuant to the terms of the Lease, Gilbert agreed to rent its vacant land in Gilbert, AZ (the “Property”) to the
Tenant for a term of 24 months, from April 1, 2021 to March 31, 2023, for monthly rent of $2,750; provided, however, that no rent is due for the month of
April 2021. In addition, pursuant to the terms of the Lease, the Tenant has an option to purchase the Property (the “Option”) that can be exercised any time
after the fourth month of the lease term, but no later than the end of the 12th month of the lease term. The purchase price of the Property would be
$335,000. If the Tenant exercises its Option, $750 of each lease payment made prior to close of escrow, along with the security deposit will be credited
toward the purchase price of the Property. If the Tenant exercises its Option, close of escrow will occur no later than 30 days after opening of escrow. The
parties agreed to make every reasonable attempt to fully execute a purchase contract within seven business days of the Tenant’s notice of its desire to
exercise the Option.
On March 17, 2021, the Company formed a new wholly-owned subsidiary, Zoned Brokerage, LLC. that was organized in the State of Arizona.
F-24
SUBSIDIARIES
Exhibit 21.1
Subsidiary Name
Gilbert Property Management, LLC
Green Valley Group, LLC
Kingman Property Group, LLC
Chino Valley Properties, LLC
Zoned Arizona Properties, LLC
Zoned Advisory Services, LLC
Zoned Oregon Properties, LLC
Zoned Colorado Properties, LLC
Zoned Illinois Properties, LLC
Zoned Properties Brokerage, LLC
Jurisdiction of Incorporation
Arizona
Arizona
Arizona
Arizona
Arizona
Arizona
Oregon
Colorado
Illinois
Arizona
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference to the Registration Statement on Form S-8 (File No. 333-213150) of Zoned Properties, Inc. of our
report dated March 30, 2021, relating to the consolidated financial statements of Zoned Properties, Inc. which appear in this Form 10-K.
Exhibit 23.1
D. Brooks and Associates CPAs, P.A.
Palm Beach, FL
March 30, 2021
Exhibit 31.1
I, Bryan McLaren, certify that:
Certifications
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2020 of Zoned Properties, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 31, 2021
/s/ Bryan McLaren
Bryan McLaren
(Chief Executive Officer and President
(principal executive officer)
Exhibit 31.2
I, Bryan McLaren, certify that:
Certifications
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2020 of Zoned Properties, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 31, 2021
/s/ Bryan McLaren
Bryan McLaren
Chief Financial Officer
(principal financial officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the annual report of Zoned Properties, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2020, as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bryan McLaren, Chief Executive Officer, President and Chief Financial
Officer of the Company, certify to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 31, 2021
/s/ Bryan McLaren
Bryan McLaren
Chief Executive Officer, President and
Chief Financial Officer
(principal executive officer and
principal financial officer)
Exhibit 99.1
AC Management Group, LLC and Affiliates
Consolidated Financial Statements
December 31, 2020 and 2019
5300 N. Central #200 ● Phoenix, Arizona 85012
602.776.6300 ● 1.888.346.0072 ● FAX: 602.279.4537 ● WWW.PRICEKONG.COM
Table of Contents
Independent Auditor’s Report
Consolidated Financial Statements
Consolidated Statements of Financial Position
Consolidated Statements of Income
Consolidated Statements of Changes in Members’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
1
2
3
4
5
6
To the Board of Directors
AC Management Group, LLC and Affiliates
Tempe, Arizona
INDEPENDENT AUDITORS’ REPORT
We have audited the accompanying consolidated financial statements of AC Management Group, LLC and Affiliates, which comprise the consolidated
statements of financial position as of December 31, 2020 and 2019, and the related consolidated statements of income, changes in members’ equity, and
cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally
accepted in the United States of America; this includes the design, implementation, and maintenance of internal controls relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free from material mistatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected
depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements
in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AC Management
Group, LLC and Affiliates as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in accordance
with accounting principles generally accepted in the United States of America.
Price, Kong & Co., CPA’s, P.A.
Phoenix, Arizona
March 29, 2021
5300 N. Central #200 ● Phoenix, Arizona 85012
602.776.6300 ● 1.888.346.0072 ● FAX: 602.279.4537 ● WWW.PRICEKONG.COM
1
AC MANAGEMENT GROUP, LLC & AFFILIATES
Consolidated Statements of Financial Position
December 31, 2020 and 2019
ASSETS
Current Assets
Cash and cash equivalents
Accounts receivable
Inventory
Prepaid expenses
Total Current Assets
Noncurrent Assets
Property and equipment, net of accumulated depreciation
Security deposits
Total Noncurrent Assets
Total Assets
LIABILITIES AND MEMBERS’ EQUITY
Current Liabilities
Accounts payable
Accrued expenses
Income tax payable
Due to related parties
Sales tax payable
Total Current Liabilities
Noncurrent Liabilities
Deferred tax liability
Total Liabilities
Members’ Equity
2020
2019
$
2,133,021 $
107,462
1,272,231
172,685
3,685,399
737,337
184,614
840,746
25,079
1,787,776
6,553,836
77,100
6,630,936
298,947
77,100
376,047
$
10,316,335 $
2,163,823
$
245,874 $
516,800
521,355
179,750
64,685
1,528,464
58,029
212,486
52,209
40,563
67,275
430,562
30,000
-
1,558,464
430,562
8,757,871
1,733,261
Total Liabilities and Members’ Equity
$
10,316,335 $
2,163,823
The accompanying notes are an integral part of these consolidated financial statements.
2
Revenues
Retail Sales
Wholesale Sales
Total Revenues
Cost of Goods Sold
Gross Profit
Operating Expenses
Salaries and wages
Rent
Advertising
Professional fees
Royalties
Travel and training
Office expenses
Computer and internet
Insurance
Repairs and maintenance
Utilities
Bad debt expense
Depreciation
Licensing
Other
Total Operating Expenses
Operating Income (Loss)
Other Income (Expense)
ATM fees
Interest expense
Income tax expense
Deferred tax expense
Other income
Total Other Income (Expense)
Net Income
AC MANAGEMENT GROUP, LLC & AFFILIATES
Consolidated Statements of Income
December 31, 2020 and 2019
2020
2019
$
6,214,283 $
4,159,630
10,373,913
5,112,883
2,193,406
7,306,289
6,437,456
5,250,497
3,936,457
2,055,792
1,324,339
305,555
212,904
167,334
163,749
52,893
36,845
36,633
34,854
23,511
19,368
11,400
1,053
-
79,031
2,469,469
1,460,787
355,984
212,573
140,678
47,721
29,265
34,241
46,319
38,225
28,236
17,453
25,000
219
281
56,227
2,493,209
1,466,988
(437,417)
9,437
-
(523,173)
(30,000)
50,000
(493,736)
8,560
(57,942)
(52,209)
-
864,407
762,816
$
973,252 $
325,399
The accompanying notes are an integral part of these consolidated financial statements.
3
AC MANAGEMENT GROUP, LLC & AFFILIATES
Consolidated Statements of Changes in Members’ Equity
December 31, 2020 and 2019
Members’ Deficit as of January 1, 2019
Members’ Contributions
Net Income
Members’ Equity as of December 31, 2019
Members’ Contributions
Net Income
Members’ Equity as of December 31, 2020
The accompanying notes are an integral part of these consolidated financial statements.
4
$
(2,713,035)
4,120,897
325,399
1,733,261
6,051,358
973,252
$
8,757,871
AC MANAGEMENT GROUP, LLC & AFFILIATES
Consolidated Statements of Cash Flows December 31, 2020 and 2019
Net income
Adjustments to reconcile change in members’ equity to net cash provided by (used for ) operating activities:
Depreciation expense
(Increase) decrease in operating assets:
Accounts receivable
Inventory
Prepaid expenses
Increase (decrease) in operating liabilities:
Accounts payable
Accrued expenses
Income tax payable
Sales tax payable
Due to related party
Deferred tax liability
Net cash provided by (used for) operating activities
Cash Flows from Investing Activities:
Purchases of property and equipment
Net cash used for investing activities
Cash Flows from Financing Activities:
Principal payments on notes payable to related party
Contributions from members
Net cash provided by financing activities
Net Change in Cash
Cash - Beginning of Year
Cash - End of Year
Supplemental Disclosure of Cash Flow Information
Income taxes paid
2020
2019
$
973,252 $
325,399
38,866
15,616
77,152
(431,485)
(147,606)
187,845
304,314
469,146
(2,590)
139,187
30,000
1,638,081
(127,358)
(626,951)
(6,512)
(98,135)
128,034
52,209
67,275
40,563
-
(229,860)
(6,293,755)
(6,293,755)
(291,297)
(291,297)
-
6,051,358
6,051,358
(3,053,129)
4,120,897
1,067,768
1,395,684
546,611
737,337
190,726
$
2,133,021 $
737,337
$
51,300 $
-
The accompanying notes are an integral part of these consolidated financial statements.
5
AC Management Group, LLC and Affiliates
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
NOTE 1 – NATURE OF OPERATIONS
AC Management Group, LLC (“AC Management”) is an Arizona Limited Liability Company organized in May 2015. The Company is engaged in the
leasing of supplies, labor, and other managed services to two medical marijuana dispensaries located in the state of Arizona, as described below. AC
Management engages only with those dispensaries that are properly licensed and in good standing with the state of Arizona. The services are performed
under cost- plus-fee contracts, fixed-price contracts, and fixed-price contracts modified by incentive and penalty provisions.
CJK, Inc. dba Hana Meds (“CJK”) is an Arizona corporation operating on a not-for-profit basis that was incorporated in April 2012. CJK’s mission is to
function as a full service alternative health and wellness facility that provides medicinal cannabis and natural homeopathic remedies in a compassionate,
safe and supportive environment for qualified patients and caregivers. To this end, CJK operates as a medical marijuana dispensary and a medical
marijuana cultivation facility, while at all times complying with the Arizona Medical Marijuana Act, Arizona Revised Statutes (A.R.S.) Title 36, Chapter
28 (the “Act”), and the rules and regulations propagated by the Arizona Department of Health Services (“DHS”) (the “Rules” thereunder).
Broken Arrow Herbal Center, Inc. dba Hana Meds (“Broken Arrow”) is an Arizona corporation operating on a not-for-profit basis that was incorporated in
June 2011. Broken Arrow’s mission is to function as a full service alternative health and wellness facility that provides medicinal cannabis and natural
homeopathic remedies in a compassionate, safe and supportive environment for qualified patients and caregivers. To this end, Broken Arrow operates as a
medical marijuana dispensary and a medical marijuana cultivation facility, while at all times complying with the Act, and the Rules.
Altogether, the entities listed above are referred to as AC Management Group, LLC and Affiliates (“the Company”).
The Company’s operations are dependent on the Arizona medical marijuana dispensaries, including the economic and legal conditions which affect the
medicinal cannabis and health care industries. Changes in those conditions may affect the Company’s continuing operations.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principals of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America and include the accounts of the Company and its affiliates described in Note 1. All intercompany balances and transactions have been
eliminated upon consolidation.
6
AC Management Group, LLC and Affiliates
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued
Accounting Method
The consolidated financial statements of the Company have been prepared on the accrual basis of accounting under accounting principles generally
accepted in the United States of America (“U.S. GAAP”). In accordance with this method of accounting, revenue is recognized in the period in which it is
earned and expenses are recognized in the period in which they are incurred. All revenue and expenses which are applicable to future periods have been
presented as deferred or prepaid on the accompanying statements of financial position
Risks and Uncertainties
The Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of
business failure. The Company conducts substantially all of its business in Arizona. Additionally, the Company operates in the medical marijuana industry.
Consequently, any significant economic downturn in the Arizona market or any changes in the federal government’s enforcement of current federal laws or
changes in state laws could potentially have a negative effect on the Company’s business, results of operations and financial condition. The majority of the
Company’s cash and cash equivalents are held at major commercial banks, which may at times exceed the Federal Deposit Insurance Corporation (“FDIC”)
limit. To date, the Company has not experienced any losses on its invested cash. The Company had no cash equivalents at December 31, 2020 and 2019.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated statements of financial position for cash, accounts receivable, prepaid expenses, inventory, and other
current assets, accounts payable, accrued expenses, and other payables approximate their fair market value based on the short- term maturity of these
instruments.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements,
and the reported amounts of revenues and expenses during the reporting period. The more significant estimates and assumptions are those used in
determining collectability of accounts receivable and useful lives of property and equipment. Actual results may differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, and deposits in financial institutions and other deposits that are readily convertible into cash. For purposes
of the statements of cash flows, the Company considers all highly liquid instruments with original maturities of three months or less to be cash and cash
equivalents.
7
AC Management Group, LLC and Affiliates
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued
Accounts Receivable
Accounts receivable due under the management contracts are recorded based on contractual prices and terms specific to the contract. The Company
provides for potentially uncollectable accounts receivable by use of the allowance method. The allowance is provided based upon a review of the individual
accounts outstanding, prior history of uncollectable accounts receivable and existing economic conditions. It is reasonably possible that the Company’s
estimate of the allowance for doubtful accounts will change. Normal accounts receivable are due 15 days after the issuance of the invoice. Receivables past
due more than 60 days are considered delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of
the customer.
At December 31, 2020, 2019, and 2018, the net trade accounts receivable balance was $107,462, $184,614, and $57,256, respectively. The allowance for
doubtful accounts was $25,000, $25,000, and $0, as of December 31, 2020, 2019, and 2018, respectively.
Inventory
Inventories are stated at the lower of cost or net realizable value, with cost determined by the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost and depreciated on the straight-line method over their estimated useful lives, typically three to ten years and up to
40 years for buildings. Amortization of leasehold improvements is computed on the straight-line method over the shorter of the life of the improvement or
the term of the lease. The Company has a capitalization policy of $2,500.
Operating Leases
A lease of property and equipment is classified as an operating lease whenever the terms of the lease do not transfer substantially all of the risks and
rewards of ownership to the lessee. Lease payments are recognized as an expense on a straight-line basis over the lease term, except where another
systematic basis is more representative of the time pattern in which the economic benefits are consumed.
Revenues
The Organization derives its revenues primarily from the sale of medicinal marijuana, CBD, and related products in Arizona. Revenues are recognized at a
point in time when control of these products is transferred to its customers, in an amount that reflects the consideration the Organization expects to be
entitled to in exchange for those products. Sales and other taxes the Organization collects concurrent with revenue-producing activities are excluded from
revenue. Any shipping and handling fees charged to customers are reported within revenue. Incidental items that are immaterial in the context of the
contract are recognized as expense.
8
AC Management Group, LLC and Affiliates
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued
Revenues - continued
The Organization does not have any significant financing components as payment is received at or shortly after the point of sale. Costs incurred to obtain a
contract will be expenses as incurred when the amortization period is less than a year.
Variable Consideration
The nature of the Company’s business gives rise to variable consideration, including rebates, allowances, and returns that generally decrease the transaction
price which reduces revenue. These variable amounts are generally credited to the customer, based on achieving certain levels of sales activity, product
returns or price concessions.
Variable consideration is estimated at the most likely amount that is expected to be earned. Estimated amounts are included in the transaction price to the
extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable
consideration is resolved. Estimates of variable consideration are estimated based upon historical experience and known trends.
The Company determined that no reserve was necessary for variable consideration based on its historical experience.
Advertising
The Company expenses advertising as incurred. During the years ended December 31, 2020 and 2019, the Company incurred advertising expenses of
$212,904 and $212,573, respectively.
Income Taxes – AC Management Group, LLC
AC Management Group, LLC has elected to be taxed as a partnership for Federal and state income tax purposes, wherein all income or loss of the
Company are passed through to the members and reported on their respective income tax returns. Accordingly, no provision for income taxes has been
included in these consolidated financial statements related to AC Management Group, LLC.
U.S. GAAP require management to perform an evaluation of all income tax positions taken or expected to be taken in the course of preparing the
Company’s income tax returns to determine whether the income tax positions meet a “more likely than not” standard of being sustained under examination
by the applicable taxing authorities. This evaluation is required to be performed for all open tax years, as defined by the various statutes of limitations, for
Federal and state purposes. Due to the nature of the industry the Company serves, it is possible that the IRS would impose Internal Revenue Code Section
280E (“280E”). The imposition of 280E would disallow all tax deductions for general and administrative expenses. Management believes the imposition of
280E cannot be reasonably estimated and is unlikely to occur.
9
AC Management Group, LLC and Affiliates
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued
Income Taxes – CJK and Broken Arrow
In accordance with the Act, CJK and Broken Arrow are registered non-profit entities under Arizona law, and therefore not subject to state income tax.
However, due to the nature of the dispensary activities under Federal law, these entities are subject to Federal income tax, with limited deductions for
certain operating expenses in accordance with Section 280E of the Code. U.S. GAAP, imposes a threshold for determining when an income tax benefit can
be recognized. The threshold imposed for financial statement reporting is generally higher than the threshold imposed for claiming deductions in income
tax returns. There is no liability, asset, or provision for income taxes reported by the Organization as a result of applying this threshold.
CJK and Broken Arrow adopted the accounting standard for uncertainty in income taxes, which addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the entities may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit
that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also
addresses de-recognition, classification, interest and penalties on income taxes, and accounting in interim periods. As a result of implementation of this
guidance, management believes that any uncertainties do not represent a significant liability.
Deferred Tax Asset
The entire deferred tax assets resulting from the net operating losses at CJK and Broken Arrow have been allowed for, as the implications of 280E leave
uncertainty regarding the ability to realize the tax benefit of the net operating losses in the future. Management believes that the guidance under Code
Section 280E has been appropriately applied.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 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 pronouncement
requires a modified retrospective method of adoption and is effective for private companies on January 1, 2022, with early adoption permitted. The
Company has not yet completed its assessment of the impact the adoption of this pronouncement will have on the financial statements.
10
AC Management Group, LLC and Affiliates
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued
Subsequent Events
Subsequent events have been evaluated by management through March 29, 2021, which is the date the consolidated financial statements were available to
be issued. See Note 9 for subsequent event disclosure.
NOTE 3 – INVENTORIES
Components of the Company’s inventories as of December 31, 2020 and 2019, consist of the following:
Flower
Materials and supplies
Concentrates
Edibles
Accessories
Topicals
Total inventory
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2020 and 2019 are summarized as follows:
Leasehold improvements
Vehicles and equipment
Less: Accumulated depreciation
Net, depreciable property and equipment
Construction in progress
Net, property and equipment
2020
2019
972,743 $
138,459
103,870
53,889
2,827
443
1,272,231 $
702,648
-
99,033
30,128
5,106
3,831
840,746
2020
2019
397,678 $
238,546
(81,050)
555,174
5,998,662
6,553,836 $
-
170,133
(42,185)
127,948
170,999
298,947
$
$
$
$
Depreciation expense for the years ended December 31, 2020 and 2019, totaled $38,866 and $15,616, a portion of which has been allocated to cost of
goods sold.
NOTE 5 – OPERATING LEASES
On May 1, 2018, Broken Arrow entered into a new lease for the Chino Valley, AZ property, with a term of 22 years, expiring April 30, 2040. The second
amendment to this agreement dictates a fixed monthly base rent of $32,800, as well as property and other taxes.
11
AC Management Group, LLC and Affiliates
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
NOTE 5 – OPERATING LEASES – continued
On May 1, 2018, Broken Arrow entered into a new lease for the Green Valley, AZ property, with a term of 22 years, expiring April 30, 2040 with a fixed
monthly base rent of $3,500, as well as property and other taxes.
On May 1, 2018, CJK entered into a lease for the Tempe, AZ property, with a term of 22 years, expiring April 30, 2040. The first amendment to this
agreement dictates a fixed monthly base rent of $49,200, as well as real property and other taxes. The rent is allocated between CJK, for use of cultivation
space, and AC Management, for use of administration space.
On May 1, 2018, CJK entered into a new lease for the Kingman, AZ property, with a term of 22 years, expiring April 30, 2040, with a fixed monthly base
rent of $4,000, as well as real property and other taxes.
Future minimum rental payments on the non-cancelable leases are as follows as of December 31,
2021
2022
2023
2024
2025
Thereafter
Total
$
$
1,074,000
1,074,000
1,074,000
1,074,000
1,074,000
15,394,000
20,764,000
The total rental expense for the years ending December 31, 2020 and 2019 was $979,363 and $1,123,893, respectively, a portion of which has been
allocated to cost of goods sold.
NOTE 6 – RELATED PARTY TRANSACTIONS
TC AZ Holdings II, Inc.
CJK entered into an agreement for royalties with a company that is owned by certain members of CJK’s Board of Directors. The royalty is calculated on an
annual basis and shall be payable no later than 90 days after the end of each calendar year. The total due to the related party for the year ended December
31, 2020 and 2019 was $179,750 and $40,563, respectively.
12
AC Management Group, LLC and Affiliates
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
NOTE 7 – INCOME TAXES
Under Federal law, the Organization is a taxable entity and is therefore subject to Federal income tax. Deferred income taxes are a result of timing
differences between book and taxable income. The major timing difference for deferred income taxes payable as of December 31, 2020 is as follows:
Deferred Tax Liability
Tax versus book depreciation differences
Approximate federal tax rates over recovery period
Deferred Income Tax Liability (rounded)
NOTE 8 – COMMITMENTS AND CONTINGENCIES
$
$
142,881
21%
30,000
The Company operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines,
restrictions on its operations, or losses of permits or licenses that could result in the Company ceasing operations. While management of the Company
believe that the Company are in compliance with applicable local and state regulation as of December 31, 2020, medical marijuana regulations continue to
evolve and are subject to differing interpretations. As a result, the Company could indirectly be subject to regulatory fines, penalties, or restrictions.
Periodically, the Company may be contingently liable with respect to claims incidental to the ordinary course of its operations. In the opinion of
management, and based on management’s consultation with legal counsel, the ultimate outcome of such matters will not have a materially adverse effect on
the Company. Accordingly, no provision has been made in the accompanying financial statements for losses, if any, which might result from the ultimate
disposition of these matters should they arise.
NOTE 9 – SUBSEQUENT EVENT
The State of Arizona passed the ballot measure Arizona Proposition 207 (the “Smart and Safe Act”) in November 2020, which allows for the legalization
and taxation of recreational cannabis for adult use. Subsequent to year-end, CJK and Broken Arrow were approved for adult use sales by the Arizona
Department of Health Services. As a result of the modifications to the regulatory environment in which these entities operate, management anticipates
significant increases in net sales.
13
AC Management Group, LLC and Affiliates
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
NOTE 9 – SUBSEQUENT EVENT – continued
The Smart and Safe Act allows CJK and Broken Arrow the opportunity to convert to a for-profit entity. Currently, the entities intend to maintain their non-
profit entity status. One result of this will be that medicinal sales will not be subject to Arizona state income taxes; however, in accordance with the Smart
and Safe Act, adult-use sales will be subject to Arizona state income taxes. Various other financial and nonfinancial impacts are likely to occur as a result of
the Smart and Safe Act.
* * * * * * *
14