Zoned Properties, Inc. 10-Q

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This quarterly report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the “Risk Factors” section of our annual report on Form 10-K as filed on March 28, 2023, as the same may be updated from time to time. We caution that these factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q. Overview Zoned Properties, Inc. (“Zoned Properties” or the “Company”) is a real estate development firm for emerging and highly regulated industries, including legalized cannabis. The Company is redefining the approach to commercial real estate investment through its integrated growth services. Headquartered in Scottsdale, Arizona, Zoned Properties has developed a full spectrum of integrated growth services to support its real estate development model; the Company’s Property Technology, Advisory Services, Commercial Brokerage, and Investment Portfolio divisions collectively cross-pollinate within the model to drive project value associated with complex real estate projects. With national experience and a team of experts devoted to the emerging cannabis industry, Zoned Properties is addressing the specific needs of a modern market in highly regulated industries. 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”). We operate our business in two reportable segments consisting of (i) the operations, leasing and management of its leased commercial properties (the “Property Investment Portfolio” segment), and (ii) technology, advisory and brokerage services related to commercial properties (the “Real Estate Services” segment). We are in the process of developing and expanding multiple business divisions, including a property technology division, a property advisory division, a commercial brokerage division, and a property investment portfolio division focused on acquisitions to expand our property holdings. Each of these operating divisions is an important element of the overall business development strategy for long-term growth. We believe in the value of building relationships with clients and local communities to position the Company for long-term portfolio and revenue growth backed by sophisticated, safe, and sustainable assets and clients. The core of our business involves identifying and developing commercial properties that intend to operate within highly regulated industries, including the regulated and legalized cannabis industry. Within highly regulated industries, local municipalities typically develop strict regulations, including zoning and permitting requirements related to commercial real estate, that dictate the specific locations and parameters under which regulated properties can operate. These regulations often include complex permitting processes and can include non-standard codes governing each location; for example, restricting a regulated property or facility from operating within a certain distance of any parks, schools, churches, or residential districts, or restricting a regulated property from operating outside a defined set of hours of operation. When an organization can collaborate with local representatives, a proactive set of rules and regulations can be established and followed to meet the needs of both the regulated operators and the local community. The Company currently maintains a portfolio of properties that we own, develop, and lease. We lease land and/or building space at all five of the properties in our portfolio. All of the properties are leased to licensed and regulated cannabis tenants and are located in areas with established zoning and permitting procedures. Three of the leased properties are zoned and permitted as licensed and regulated cannabis dispensaries, and two of the leased properties are zoned and permitted as licensed and regulated cannabis cultivation and processing facilities. Each regulated property may undergo a non-standard development process. Various development requirements in this process may include initial property identification, zoning authorization, and permitting guidance in order to qualify a commercial property for subsequent architectural design, utility installation, construction and development, property management, facilities management systems, and security system installation. 31 The Company is in the business of pursuing real estate acquisitions and investments that may include various contractual agreements to secure a property, such as an Option Agreement or a Purchase and Sale Agreement. These agreements often include the requirement to fund escrow deposits. Escrow deposits include cash deposits made by the Company for the future acquisition of properties or for the option to acquire a property. In most cases, upon closing of the acquisition of a property, the escrow deposit will be applied to the purchase price. In some cases, the Company may discontinue pursuit of an acquisition of a property and therefore may terminate an existing agreement, which can cause forfeiture of escrow deposits if those deposits are non-refundable. During the nine months ended September 30, 2023, the Company forfeited escrow deposits of $15,000 which is reflected as a loss on forfeited escrow deposit on the accompanying consolidated statement of operations. The Company is in pursuit of property acquisitions that can be characterized as consumer-facing, retail dispensary properties that are positioned to be leased to retail dispensary cannabis tenants under net leasing structures. As of September 30. 2023, the Company had agreements in place to acquire properties located in Arizona and Missouri. The Company utilizes terms within the agreements to acquire properties that often include material contingencies to complete the acquisition, such as local real estate approvals or the ability to secure an operating tenant at the property. As of September 30, 2023, the Company has deposited escrow funds for the future acquisition of properties or for the option to acquire properties of $245,548. As of September 30, 2023, a summary of rental properties owned by us consisted of the following: Location Tempe, AZ Chino Valley, AZ Green Valley, AZ Kingman, AZ Pleasant Ridge, MI Description Industrial/ Office Greenhouse/ Nursery Retail (special use) Retail (special use) Retail (special use) Current Use Cannabis Facility Cannabis Facility Cannabis Dispensary Cannabis Dispensary Cannabis Dispensary Date Acquired March 2014 August 2015 October 2014 May 2014 Dec 2022/Feb 2023 Lease Start Date May 2018 May 2018 May 2018 May 2018 December 2022 Lease End Date April 2040 April 2040 April 2040 April 2040 March 2037 Total No. of Tenants 1 1 1 1 1 Portfolio Total Land Area (Acres) 3.65 47.60 1.33 0.32 0.56 53.66 Land Area (Sq. Feet) 158,772 2,072,149 57,769 13,939 24,306 2,326,935 Undeveloped Land Area (Sq. Feet) - 1,782,563 - 6,878 - 1,789,441 Developed Land Area (Sq. Feet) 158,772 289,586 57,769 7,061 24,306 537,494 Total Rentable Building Sq. Ft. 60,000 97,312 1,440 1,497 17,192 177,441 Vacant Rentable Sq. Ft. - - - - - - Sq. Ft. rented as of September 30, 2023 60,000 97,312 1,440 1,497 17,192 177,441 Annual Base Rent (*,**) 2023 (remainder of year) 152,597 262,742 10,500 12,000 120,956 558,795 2024 610,053 1,050,970 42,000 48,000 494,712 2,245,735 2025 610,053 1,050,970 42,000 48,000 509,553 2,260,576 2026 598,589 1,050,970 42,000 48,000 524,840 2,264,399 2027 590,400 1,050,970 42,000 48,000 540,585 2,271,955 2028 590,400 1,050,970 42,000 48,000 556,803 2,288,173 Thereafter 6,691,200 11,910,988 476,000 544,000 5,277,443 24,899,631 Total $ 9,843,292 $ 17,428,580 $ 696,500 796,000 $ 8,024,892 $ 36,789,264 * Annual base rent represents amount of cash payments due from tenants. ** For Tempe, AZ, table includes rental income generated from the lease of parking lot space used by a third party as an antenna location. 32 Annualized $ per Rented Sq. Ft. (Base Rent) Year Tempe, AZ Chino Valley, AZ Green Valley, AZ Kingman, AZ Pleasant Ridge, MI 2023 $ 9.8 $ 10.8 $ 29.2 $ 32.1 $ 23.5 2024 $ 9.8 $ 10.8 $ 29.2 $ 32.1 $ 28.8 2025 $ 9.8 $ 10.8 $ 29.2 $ 32.1 $ 29.6 2026 $ 9.8 $ 10.8 $ 29.2 $ 32.1 $ 30.5 2027 $ 9.8 $ 10.8 $ 29.2 $ 32.1 $ 31.4 2028 $ 9.8 $ 10.8 $ 29.2 $ 32.1 $ 32.4 The Company focused heavily on the growth of a diversified revenue stream in 2022 and is moving to take advantage of new opportunities in 2023 and beyond. We intend to accomplish this by prospecting new real estate services across the country for private, public, and municipal clients. We believe that strategic real estate services are likely to emerge as the growth engine for Zoned Properties. Pursuant to lease agreements with a Significant Tenant, from the period from May 31, 2020 through September 30, 2022, a Significant Tenant invested a combined total greater than $8,000,000 of improvements in and to the properties in Chino Valley. The increase in the rentable area of the leased premises resulted in an increase in all amounts calculated based on the same, including, without limitation, base rent. Results of Operations The following comparative analysis on results of operations was based primarily on the comparative unaudited consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited consolidated financial statements and the notes to those statements for the three and nine months ended September 30, 2023 and 2022, which are included elsewhere in this quarterly report on Form 10-Q. The results discussed below are for the three and nine months ended September 30, 2023 and 2022. Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 Revenues For the three and nine months ended September 30, 2023 and 2022, revenues by reportable business segments were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenues: Property investment portfolio: Rental revenues $ 637,143 $ 450,374 $ 1,857,208 $ 1,290,785 Real estate services: Advisory revenues 82,750 73,500 239,000 156,500 Brokerage revenues 557 91,114 84,883 605,056 Total real estate services revenues 83,307 164,614 323,883 761,556 Total revenues $ 720,450 $ 614,988 $ 2,181,091 $ 2,052,341 For the three months ended September 30, 2023, total revenues amounted to $720,450, including rental revenues of $637,143, as compared to $614,988, including rental revenues of $450,374, for the three months ended September 30, 2022, an overall increase of $105,462, or 17.2%. This increase was attributable to an increase in rental revenues of $186,769, or 41.5%, and an increase in advisory revenues of $9,250, or 12.6%, offset by a decrease in brokerage revenues of $90,557, or 99.4%, attributable to a decrease in commissions earned on real estate listings. For the nine months ended September 30, 2023, total revenues amounted to $2,181,091, including rental revenues of $1,857,208, as compared to $2,052,341, including rental revenues of $1,290,785, for the nine months ended September 30, 2022, an overall increase of $128,750, or 6.3%. This increase was attributable to an increase in rental revenues of $566,423, or 43.9%, and an increase in advisory revenues of $82,500, or 52.7%, offset by a decrease in brokerage revenues of $520,173, or 86.0%, attributable to a decrease in commissions earned on real estate listings. The increase in property investment portfolio revenues was primarily due to an amendment to the Company’s leased property in Chino Valley, Arizona in March 2022, and the signing of a new lease with a new tenant at our recently acquired property located in Pleasant Ridge, Michigan which began on December 1, 2022. All of the Company’s real estate properties are leased under absolute-net or triple-net leases with the Significant Tenants. Additionally, beginning in August 2023, we began receiving additional rental revenue of $3,500 per month in connection with a Sublease Agreement with CJK and a subtenant in connection with our Kingman property. 33 Operating expenses For the three months ended September 30, 2023, operating expenses amounted to $671,338 as compared to $660,251 for the three months ended September 30, 2022, an increase of $11,087, or 1.68%. For the nine months ended September 30, 2023, operating expenses amounted to $2,075,560 as compared to $2,097,290 for the nine months ended September 30, 2022, a decrease of $21,730, or 1.0%. For the three and nine months ended September 30, 2023 and 2022, operating expenses consisted of the following: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Compensation and benefits $ 345,907 $ 346,655 $ 1,055,284 $ 883,484 Professional fees 86,152 80,084 288,735 262,832 Brokerage fees - 70,181 50,571 428,147 General and administrative expenses 95,716 54,019 274,283 186,434 Depreciation and amortization 91,224 87,550 290,854 271,418 Real estate taxes 52,339 21,762 115,833 65,287 Gain on sale of property and equipment - - - (312 ) Total $ 671,338 $ 660,251 $ 2,075,560 $ 2,097,290 ● For the three months ended September 30, 2023, compensation and benefits expense decreased by $748, or 0.2%, as compared to the three months ended September 30, 2022. For the nine months ended September 30, 2023, compensation and benefits expense increased by $171,800, or 19.4%, as compared to the nine months ended September 30, 2022. The increase was attributable to an increase in compensation and benefits of $343,798 related to the addition of multiple new full-time and part-time team members, and an increase in health insurance expense, offset by a decrease in stock-based compensation of $171,998. The decrease in stock-based compensation was from a decrease in accretion of stock option expense. During the second quarter of 2022, we began to hire additional staff related to the diversification of our real estate services for the expansion of both advisory services and brokerage services. ● For the three months ended September 30, 2023, professional fees increased by $6,068, or 7.6%, as compared to the three months ended September 30, 2022. This increase was primarily attributable to an increase in accounting fees of $1,561, an increase in consulting fees of $35,669, and an increase in other professional fees of $523, offset by a decrease in legal fees of $11,269, and a decrease in public relations fees of $20,416. For the nine months ended September 30, 2023, professional fees increased by $25,903, or 9.9%, as compared to the nine months ended September 30, 2022. This increase was primarily attributable to an increase in accounting fees of $11,975, an increase in consulting fees of $60,169, and an increase in other professional fees of $512, offset by a decrease in legal fees of $2,962, and a decrease in public relations fees of $43,791. ● For the three months ended September 30, 2023 and 2022, we recorded brokerage fees amounting to $0 and $70,181, respectively, representing a decrease of $70,181, or 100.0%. For the nine months ended September 30, 2023 and 2022, we recorded brokerage fees amounting to $50,571 and $428,147, respectively, representing a decrease of $377,576, or 88.2%. Brokerage fees occur as the result of various percentage-based commission splits we pay to our licensed brokerage team members who participate in various real estate listing transactions. ● General and administrative expenses consist of expenses such as rent expense, insurance expense, insurance expense, travel expenses, office expenses, telephone and internet expenses, advertising and marketing expenses, and other general operating expenses. For the three months ended September 30, 2023, general and administrative expenses increased by $41,697, or 77.2%, as compared to the three months ended September 30, 2022. For the nine months ended September 30, 2023, general and administrative expenses increased by $87,849, or 47.1%, as compared to the nine months ended September 30, 2022. These increases were primarily attributable to an increase in operating activities related to attendance at various industry-related conferences, an increase in technology services, an increase in travel expense. 34 ● For the three months ended September 30, 2023, depreciation expense increased by $3,674, or 4.2%, as compared to the three months ended September 30, 2022. For the nine months ended September 30, 2023, depreciation expense increased by $19,436, or 7.2%, as compared to the nine months ended September 30, 2022. This increase was related to an increase depreciation of rental properties associated with the purchase of the Pleasant Ridge, MI property, offset by a decrease in amortization of intangible assets which were fully amortized. ● For the three months ended September 30, 2023 real estate taxes increased by $30,577, or 140.5%, as compared to the three months ended September 30, 2022. For the nine months ended September 30, 2023 real estate taxes increased by $50,546, or 77.4%, as compared to the nine months ended September 30, 2022. This increase was attributable to an increase in assessed real taxes associated with improvements made on our Chino Valley property and the purchase of the Pleasant Ridge, MI property. Income (loss) from operations As a result of the factors described above, for the three months ended September 30, 2023, income from operations amounted to $49,112 as compared to a loss from operations of $(45,263) for the three months ended September 30, 2022, a change of $94,375, or 208.5%. For the nine months ended September 30, 2023, income from operations amounted to $105,531 as compared to a loss from operations of $(44,949) for the nine months ended September 30, 2022, a change of $150,480, or 334.8%. Other (expenses) income, net Other (expenses) income, net primarily includes interest expense incurred on debt with third parties and includes other income (expenses). For the three months ended September 30, 2023, total other income, net amounted to $65,411 as compared to total other expenses, net of $(32,065), respectively, representing a change of $97,476, or 304.0%. This change was attributable to the recording of a gain in fair value from an interest rate swap of $220,797 in connection with our bank note payable, an increase in interest expense of $125,376 primarily related to an increase in notes payable, and a decrease in interest income of $3,276, and a decrease in loss from unconsolidated joint ventures of $5,341. For the nine months ended September 30, 2023, total other expenses, net amounted to $258,497 as compared to total other expenses, net of $97,138, respectively, representing an increase of $161,359, or 166.1%. This increase was attributable to an increase in interest expense of $376,266 primarily related to an increase in notes payable, and a decrease in interest income of $9,723. Additionally, during the nine months ended September 30, 2023, we recorded a loss on forfeited escrow deposit of $15,000. These increases were offset by the recording of a gain in fair value from an interest rate swap of $230,479 in connection with our bank note payable, and a decrease in loss from unconsolidated joint ventures of $9,151. Net Income (Loss) As a result of the foregoing, for the three months ended September 30, 2023 and 2022, net income (loss) amounted to $114,523, or $0.01 per common share (basic) and $0.00 per common share (diluted), and $(77,328), or $(0.01) per common share (basic and diluted), respectively. For the nine months ended September 30, 2023 and 2022, net loss amounted to $152,966, or $(0.01) per common share (basic and diluted), and $142,087, or $(0.01) 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 $3,007,056 and $4,335,840 as of September 30, 2023 and December 31, 2022, respectively. 35 Our primary uses of cash have been for compensation and benefits, fees paid to third parties for professional services, real estate taxes, general and administrative expenses, and the development of rental properties and other lines of business. All funds received have been expended in the furtherance of growing the business. We receive funds from the collection of rental income, advisory fees and brokerage fees. The following trends are reasonably likely to result in changes in our liquidity over the near to long term: ● An increase in working capital requirements to finance our current business, ● Addition of administrative and sales personnel as the business grows, ● The cost of being a public company, ● An increase in investments in joint ventures and other projects, and ● An increase in investments in rental property. We may need to raise additional funds, particularly if we are unable to continue to generate positive cash flows from our operations. We estimate that based on current plans and assumptions, that our available cash will be sufficient to satisfy our cash requirements under our present operating expectations for the next 12 months from the date of this quarterly report on Form 10-Q. Other than revenue received from the lease of our rental properties, from advisory fees, and from brokerage revenues, and from a bank note, we presently have no other significant alternative source of working capital. We have used these funds to fund our operating expenses, pay our obligations, acquire and develop rental properties, invest in joint ventures and notes receivable, and to grow our company. We may need to raise significant additional capital or debt financing to acquire new properties, to develop existing properties, to assure we have sufficient working capital for our ongoing operations and debt obligations, and to invest in new joint venture and other projects. East West Bank Swap and Amended Note On July 11, 2022, Zoned Arizona entered into a Loan Agreement (the “Loan Agreement”), dated as of July 11, 2022, by and between Zoned Arizona and East West Bank (the “Bank”). Pursuant to the terms of the Loan Agreement, subject to and upon the satisfaction of the terms and conditions of the Loan Agreement, Zoned Arizona could request advances under a multiple access loan (“MAL”) during the MAL. On July 11, 2022, in connection with the Loan Agreement, Zoned Arizona paid loan and other fees of $176,472, and in connection with the First Amendment to the Loan Agreement discussed below, paid additional fees of $8,124. These loan and other fees aggregating $184,596 are reflected as a debt discount and are being amortized ratably and charged to interest expense over the term of the related debt. The proceeds of each advance under the MAL may be used by Zoned Arizona to refinance the real property at 410 S. Madison Drive, Tempe, AZ 85251 (the “Property”) or to conduct certain acts related to the acquisition, improvement and maintenance of real property. On termination of the MAL, all unpaid principal, unpaid and accrued interest, and all other amounts due under the MAL will be immediately due and payable. The Loan Agreement contains representations, warranties and covenants customary for a transaction of this type. Among other things, the Loan Agreement provides as follows: (a) upon the occurrence of an event of default, the outstanding principal balance of the MAL will not at any time exceed 65% of the Property’s most recent appraised value; (b) upon the occurrence of an event of default, Zoned Arizona will maintain a minimum Non-Cannabis Debt Service Coverage Ratio (as hereinafter defined) of 1.40 to 1.00; (c) Zoned Arizona will at all times maintain a minimum debt service coverage ratio of 1.50 to 1.0; and (d) Zoned Arizona and the Company, collectively, will maintain at all times, liquid assets of at least the sum of all tenant securities deposits under leases, plus $350,000 in operating reserves. 36 All advances under the MAL bear interest at a variable rate equal to the greater of (a) the prime rate plus 2%, or (b) a floor rate equal to the sum of the prime rate as of July 11, 2022 plus 2.25%. From July 11, 2022 to July 11, 2023, Zoned Arizona agreed to make interest payments on the outstanding principal balance of the MAL. From and after July 11, 2023 and continuing until July 11, 2028 (the “Maturity Date”), Zoned Arizona will pay principal together with interest on the MAL in 60 monthly installments based on the interest rate set forth in the Note and a principal amortization schedule of 25 years from July 11, 2023 (or if Zoned Arizona makes the Early Amortization Election, from the date such election is made). Zoned Arizona may prepay the outstanding principal under the Note, at any time, subject to the provisions of the Note. If Zoned Arizona prepays all, but not less than all, of the outstanding principal balance of the MAL at any time until July 11, 2023, then Zoned Arizona will also pay a premium equal to 1% of the amount prepaid. On December 7, 2022, Zoned Arizona and the Bank entered into a First Amendment to Loan Agreement (the “First Amendment”). Pursuant to the terms of the First Amendment, Zoned Arizona has elected to make its Early Amortization Election (defined in the First Amendment and Loan Agreement), which election requires Zoned Arizona to commence paying principal and interest on the MAL as set forth in the Swap Note (defined below). Except as provided in the First Amendment, the terms of the Loan Agreement remain in full force and effect. Pursuant to the terms of the Loan Agreement and First Amendment, on December 7, 2022, Zoned Arizona issued an Amended and Restated Promissory Note (the “Swap Note”) to the Bank. The Swap Note has an original principal amount of $4,500,000, a 50% loan-to-value as determined by the bank-ordered appraisal completed on the Tempe Property. The Swap Note requires Zoned Arizona to pay monthly principal and interest payments to the Bank at an interest rate equal to the prime rate plus 0.75%. The Swap Note matures 10 years after its effective date and payments are calculated based on a 30-year amortization schedule. In connection with the Swap Note, Zoned Arizona received net proceeds of $4,315,404 which is net of fees of $184,596. Zoned Arizona may prepay the outstanding principal under the Swap Note, at any time, subject to the provisions of the Swap Note. Also as previously disclosed, on July 11, 2022 and pursuant to the terms of the Loan Agreement, the Company executed a Guaranty (the “Guaranty”) in favor of the Bank, pursuant to which the Company agreed to guarantee all indebtedness of Zoned Arizona to the Bank arising under or in connection with the MAL or any of the loan documents. On December 7, 2022, the Company executed an Acknowledgement of Amendment and Reaffirmation of Guaranty (the “Reaffirmation”) in favor of the Bank. The Reaffirmation reaffirms the Guaranty and provides the Company’s consent to the First Amendment and Swap Note. On December 7, 2022, Zoned Arizona and the Bank entered into an Interest Rate Swap Transaction Confirmation (the “Confirmation”). The Confirmation incorporates by reference the 2002 ISDA Master Agreement as published by the International Swaps and Derivatives Association, Inc. as if the parties to the Confirmation executed such agreement in such form. The Confirmation provides the terms and conditions governing the interest rate swap transaction afforded to Zoned Arizona, including a fixed interest rate of 7.65%. The Company recorded the swap at fair value in the unaudited consolidated balance sheets with changes in fair value recorded contemporaneously in earnings. The Company has entered into an interest rate swap to mitigate variability in interest payments on its variable-rate debt. On September 30, 2023, principal and interest due on the East West Bank Swap Note amounted to $4,457,510 and $10,814, respectively. On December 31, 2022, principal and interest due on the East West Bank Swap Note amounted to $4,485,808 and $28,324, respectively. 37 23616 Land Contract Note Payable On December 5, 2022, in connection with the acquisition of the Woodward Property located in Pleasant Ridge, Michigan, the Company entered into a land contract note in the amount of $1,425,000 (the “23616 Land Contract Note Payable”). The 23616 Land Contract Note Payable bears interest at 9% per annum and is due in full as follows: 1) 60 monthly payments of principal and interest of $12,821 beginning on January 1, 2023, and 2) A balloon payment of $1,274,117 including the remaining principal and interest on or before December 1, 2028. On September 30, 2023, principal and interest due on the 23616 Land Contract Note Payable amounted to $1,402,881 and $0, respectively. On December 31, 2022, principal and interest due on the 23616 Land Contract Note Payable amounted to $1,425,000 and $10,687, respectively. 23634 Land Contract Note Payable On February 24, 2023, in connection with the 23634 Land Contract dated February 24, 2023 (see Note 4), the Company entered into a land contract note payable of $430,000 (the “23634 Land Contract Note Payable”). The 23634 Land Contract Note Payable accrues interest at the rate of 7% and is payable in 48 monthly installments of $3,865, beginning April 1, 2023, until the purchase price and interest are fully paid, provided that such purchase price and all interest will be fully paid on or before March 31, 2027. On September 30, 2023, principal and interest due on the 23634 Land Contract Note Payable amounted to $420,614 and $0, respectively. Our future operations are dependent on our ability to manage our current cash balance, on the collection of rental and real estate services revenues and the attainment of new advisory and brokerage 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 September 30, 2023 and December 31, 2022, we had an asset concentration related to our Significant Tenant leases. As of September 30, 2023 and December 31, 2022, these Significant Tenants represented approximately 68.7% and 59.8% 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 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 Nine Months Ended September 30, 2023 and 2022 Net cash flow provided by operating activities was $28,325 for the nine months ended September 30, 2023, as compared to net cash flow provided by operating activities of $369,986 for the nine months ended September 30, 2022, representing a decrease of $369,986. ● Net cash flow provided by operating activities for the nine months ended September 30, 2023 primarily reflected a net loss of $152,966 adjusted for the add-back of non-cash items consisting of depreciation of $290,854, amortization of debt discount of $13,845, accretion of stock-based stock option expense of $110,537, a loss on forfeited escrow deposit of $15,000, a loss from unconsolidated joint ventures of $8,370, and a gain from the changes in fair value from an interest rate swap of $230,479, offset by changes in operating assets and liabilities primarily consisting of an increase in accounts receivable of $28,611, an increase in deferred rent of $145,704 attributable to rent abatement on our new tenant lease at our Woodward Properties, a decrease in prepaid expenses and other assets of $23,790, a decrease in lease incentive receivable of $20,642, a decrease in accounts payable of $11,121, an increase in contract liabilities of $38,871, and an increase in security deposits payable of $71,060 attributable to the collection of additional security deposit on our Woodward Properties. 38 ● Net cash flow provided by operating activities for the nine months ended September 30, 2022 primarily reflected a net loss of $142,087 adjusted for the add-back of non-cash items consisting of depreciation of $261,968, amortization expense of $9,450, accretion of stock-based stock option expense of $282,535, and a loss from unconsolidated joint ventures of $16,261, offset by changes in operating assets and liabilities primarily consisting of an increase in accounts receivable of $346,610 attributable to an increase in brokerage commissions receivable, a decrease in deferred rent receivable of $6,741, a decrease in lease incentive receivable of $16,055, an increase in prepaid expenses of $16,511, an increase in accounts payable of $262,654 attributable to an increase in brokerage fees payable, an increase in accrued expenses of $48,797, an increase in deferred revenues of $6,670, and a decrease in accrued expenses – related party of $5,400. During the nine months ended September 30, 2023, net cash flow used in investing activities amounted to $1,297,306 as compared to net cash used in investing activities of $551,664, an increase of $745,642. During the nine months ended September 30, 2023, net cash used in investing activities was attributable to the purchase of rental property of $1,011,340 primarily in connection with the acquisition of property in Pleasant Ridge, Michigan, an increase in capitalized permit costs of $25,418, and an increase in escrow deposits of $260,548 in connection with escrow deposits made on other potential acquisitions of rental properties. During the nine months ended September 30, 2022, net cash used in investing activities was attributable to an increase in lease incentive receivables related to the disbursement of $500,000 to our Significant Tenant to be used for leasehold improvements, the purchase of property and equipment of $3,764, and cash used to invest equity securities of $50,000. These uses of cash in investing activities were offset by proceeds from the sale of property and equipment of $2,100. During the nine months ended September 30, 2023, net cash used in financing activities amounted to $59,803 and consisted of the repayment of notes payable. During the nine months ended September 30, 2022, net cash used in financing activities amounted to $196,472 and was attributable to the repayment of notes payable – related party of $20,000 and cash used to pay for deferred financing costs related to our line of credit of $176,472. Contractual Obligations and Off-Balance Sheet Arrangements Contractual Obligations We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of September 30, 2023 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods. Payments Due by Period Contractual obligations: Total Less than 1 year 1-3 years 3-5 years 5 + years Convertible notes $ 2,000 $ - $ - $ - $ 2,000 Interest on convertible notes 760 150 240 240 130 Notes payable 6,281 72 214 1,817 4,178 Total $ 9,041 $ 222 $ 454 $ 2,057 $ 6,308 Off-balance Sheet Arrangements Other than discussed below, 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. 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. Our off-balance sheet arrangement includes the notional amount of our interest rate swaps which we use to hedge a portion of our exposure to interest rate fluctuations. Currently, our interest rate swap fixes the variable rate interest on our bank swap note payable. We intend to fund our interest rate swap payments utilizing cash flows from operations. As of September 30, 2023, the notional amount of our interest rate swaps was $4,471,702. In interest rate swaps, the notional amount is the specified value upon which interest rate payments will be exchanged. The notional amount in interest rate swaps is used to come up with the amount of interest due. 39 Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited 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 financial statements. Fair value of financial instruments The carrying amounts reported in the unaudited 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”), requires companies to determine fair value based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. The guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories: ● Level 1: Quoted market prices in active markets for identical assets or liabilities. ● Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. ● Level 3: Unobservable inputs that are not corroborated by market data. Other than the interest rate swap, the Company did not identify any other assets or liabilities that are required to be presented on the balance sheets at fair value, on a recurring basis, in accordance with ASC Topic 820. Interest rate swap In connection with a bank loan executed in 2022, the Company entered into an interest rate swap agreement to manage interest rate risk related to debt that accrues interest at variable rates. The Company accounts for its interest rate swap agreement in accordance with the guidance related to derivatives and hedging activities. The Company is exposed to market risk from changes in interest rates. The Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. Interest payments receivable and payable under the terms of the interest rate swap agreement are accrued over the period to which the payment relates and the net difference is treated as an adjustment of interest expense related to the underlying liability. Because the variable interest rates used to calculate payments under the terms of the swap agreement are calculated using different benchmarks than those included in the Company’s variable rate debt agreement, the swap agreement is not considered an effective cash flow hedge. Accordingly, changes in the underlying market value of the remaining swap payments are recognized into income as an increase or decrease to other income (expense) each reporting period. In accordance with ASC 820, Fair Value Measurements and Disclosures , the Company believes values provided by its counterparty represent the fair value of its swap agreement. The Company believes that the quality of the counterparty to its swap agreement mitigates the counterparty credit risk. 40 The estimated fair value of the interest rate swap agreement is reflected as a derivative liability on the accompanying balance sheet with changes in the fair value reflected in interest expense in the accompanying statements of operations. The Company uses derivative financial instruments only to manage interest rate risks and not as investment vehicles. Information regarding the interest rate swap is as follows: Description Notional Amount Interest Rate Maturity Fair Value of Asset on September 30, 2023 Fair Value of Liability on December 31, 2022 December 7, 2022 interest rate swap $ 4,471,702 7.65 % December 10, 2032 $ 140,242 $ 90,237 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. Lease accounting The FASB’s Accounting Standards Update (“ASU”) 2016-02, “ Leases (Topic 842)” sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to recognize a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. 41 For leases entered into on or after the effective date, where the Company is the lessor, at the inception of the contract, the Company assesses whether the contract is a sales-type, direct financing or operating lease by reviewing the terms of the lease and determining if the lessee obtains control of the underlying asset implicitly or explicitly. If a change to a pre-existing lease occurs, the Company evaluates if the modification results in a separate new lease or a modified lease. A new lease results when a modification provides additional right of use. The new lease or modified lease is then reassessed to determine its classification based on the modified terms. As disclosed in Note 3, on January 24, 2022 and effective on March 1, 2022, the Chino Valley lease was amended and the monthly base rent was increased to $87,581 due to additional space of 30,000 square feet being leased to the lessee, increasing the premises to a total of 97,312 square feet of operational space. In connection with this lease amendment, the Company paid $500,000 to the tenant as a tenant improvement allowance or lease incentive for investment into the premises, which was capitalized as a lease incentive receivable and is recognized on a straight-line basis over the remaining lease term as a reduction to the lease income. The increase in monthly rent was commensurate with the additional space being leased; therefore, this modification qualifies as a separate contract under ASC 842 which does not require lease classification reassessment. The Company records revenues from rental properties for its operating leases where it is the lessor 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 deferred rent. 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. Additionally, in connection with an operating lease on the Company’s Michigan property acquired in December 2022, the Company abated certain lease payments for the period from December 2022 to March 2023. These rent abatements resulted in aggregate deferred rent as of September 30, 2023 and December 31, 2022 of $328,092 and $204,079, respectively (see Note 3). Additionally, if the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that can be taken in the form of cash or a credit against the tenant’s rent) that is funded is treated as a lease incentive receivable and amortized as a reduction of revenue over the lease term. For contracts entered into on or after the effective date, where the Company is the lessee, at the inception of a contract, the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. The Company allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. For leases where the Company is a lessee, primarily for the Company’s administrative office lease, the Company analyzed if it would be required to record a lease liability and a right of use asset on its consolidated balance sheets at fair value upon adoption of ASU 2016-02. Operating lease right of use asset represents the right to use the leased asset for the lease term and operating lease liability is recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company used its incremental borrowing rate of 6% based on the information available at the adoption date or execution of a lease agreement in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the unaudited consolidated statements of operations. Investment in unconsolidated joint ventures We have equity investments in various privately held entities. We account for these investments either under the equity method or cost method of accounting depending on our ownership interest and level of influence. Investments accounted for under the equity method are recorded based upon the amount of our investment and adjusted each period for our share of the investee’s income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable. We evaluate our investments in these entities for consolidation. We consider our percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining whether or not the investment qualifies for consolidation or if it should be accounted for as an unconsolidated investment under either the equity method of accounting. If an investment qualifies for the equity method of accounting, our investment is recorded initially at cost, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. The net income or loss of an unconsolidated investment is allocated to its investors in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences, if any, between the carrying amount of our investment in the respective joint venture and our share of the underlying equity of such unconsolidated entity are amortized over the respective lives of the underlying assets as applicable. These items are reported as a single line item in the statements of operations as income or loss from investments in unconsolidated affiliated entities. 42 Revenue recognition We follow ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). This standard establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASC 606 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. Rental income includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported on a straight-line basis over the non-cancellable term of the lease, which includes the effects of rent abatements under the leases. 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. Revenues from advisory services are recognized when the Company performs services pursuant to its agreements with clients and collectability is reasonably assured. Brokerage revenues primarily consists of real estate sales commissions and are recognized upon the successful completion of all required services which is when escrow closes. In accordance with the guidelines established for Reporting Revenue Gross as a Principal versus Net as an Agent in the ASC Topic 606, the Company records commission revenues and expenses on a gross basis. Of the criteria listed in ASC Topic 606, the Company is the primary obligor in the transaction, does not have inventory risk, performs all or part of the service, has credit risk, and has wide latitude in establishing the price of services rendered and discretion in selection of agents and determination of service specifications. Brokerage revenues that are payable upon payment of rent or other events beyond the Company’s control are recognized upon the occurrence of such events. Stock-based compensation Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation ”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment Accounting . Recent Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, and a modified retrospective approach is required, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November of 2019, the FASB issued ASU 2019-10, which delayed the implementation of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies which applies to the Company. The adoption of ASU 2016-13 had no financial impact on our consolidated financial statements. 43 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 unaudited consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable to smaller reporting companies.