Item 1A. Risk Factors
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
legalized marijuana grow facilities, or with respect to any other activity in the cannabis industry. Moreover, we are subject to all
risks inherent in 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.
Although
we generate positive cash flows from operations, we may need to raise additional capital to fund our expansion.
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.
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 legalized 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.
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If
we fail to diversify our property investment 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 significant tenants. 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, 2023 and 2022, we had an asset concentration related
to our Significant Tenant leases at our Tempe, Chino Valley, Green Valley and Kingman, Arizona properties and our property located in
Pleasant Ridge, Michigan. As of December 31, 2023 and 2022, these Significant Tenants represented approximately 69.4% and 59.8% 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.
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.
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 has experienced significant volatility and such volatility is expected to continue in 2024. Obtaining
favorable financing in the current environment remains challenging.
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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.
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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 and conflicts in Ukraine and the Middle East. 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
hold our cash and cash equivalents that we use to meet our working capital and operating expense needs in deposit accounts that could
be adversely affected if the financial institution holding such funds fail.
We
hold our cash and cash equivalents that we use to meet our working capital and operating expense needs in deposit accounts at one financial
institution. The balance held in these accounts exceeds the Federal Deposit Insurance Corporation, or FDIC, standard deposit insurance
limit of $250,000. If the financial institution in which we hold such funds fails or is subject to significant adverse conditions in
the financial or credit markets, we could be subject to a risk of loss of all or a portion of such uninsured funds or be subject to a
delay in accessing all or a portion of such uninsured funds. Any such loss or lack of access to these funds could adversely impact our
short-term liquidity and ability to meet our operating expense obligations, including payroll obligations.
For
example, on March 10, 2023, Silicon Valley Bank, or SVB, and Signature Bank, were closed by state regulators and the FDIC was appointed
receiver for each bank. The FDIC created successor bridge banks and all deposits of SVB and Signature Bank were transferred to the bridge
banks under a systemic risk exception approved by the United States Department of the Treasury, the Federal Reserve and the FDIC. If
the financial institution in which we hold funds for working capital and operating expenses were to fail, we cannot provide any assurances
that such governmental agencies would take action to protect our uninsured deposits or investments in a similar manner.
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. We previously 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 2024. The loss of Mr. McLaren’s services could have a material adverse effect on our business and operations.
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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.
In the United States, cannabis is largely regulated
at the state level. To the Company’s knowledge, as of December 31, 2023, 37 states, the District of Columbia, Guam, Puerto Rico,
the Northern Mariana Islands and the U.S. Virgin Islands have passed laws broadly legalizing marijuana for medicinal use by eligible patients.
In the District of Columbia, the Northern Mariana Islands, Guam and 21 of these states, marijuana has been legalized for adult use, although
not all of those jurisdictions have fully implemented their legalization programs. These include the states in which the Company operates.
Notwithstanding the permissive regulatory environment of cannabis at the state level, cannabis continues to be categorized as a Schedule
1 controlled substance under the CSA and as such, cultivation, distribution, sale and possession of cannabis violates federal law in the
United States. The inconsistency between federal and state laws and regulations poses material risks to the Company and its tenants.
Federal prosecutors are 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.
It is not yet known whether the Department of Justice under President Biden and Attorney General Garland will re-adopt the Cole Memo or
announce a substantive marijuana enforcement policy. Attorney General Garland stated at a confirmation hearing before the United States
Senate that “It does not seem to me a useful use of limited resources that we have, to be pursuing prosecutions in states that have
legalized and that are regulating the use of marijuana, either medically or otherwise. I don’t think that’s a useful use.”1
Garland reiterated this view at a Senate Appropriations subcommittee hearing on April 26, 2022. When asked by Senator Brian Schatz whether
he intended to reissue guidance encouraging federal prosecutors to use discretion in marijuana cases in states that have legalized. “I
laid this out in my confirmation hearing, and my view hasn’t really changed since then,” Garland replied. “The Justice
Department has almost never prosecuted use of marijuana, and it’s not going to be.”2 Marijuana prosecutions are “not
an efficient use of the resources given the opioid and methamphetamine epidemic that we have,” he said. However, Garland declined
to comment on whether the Department of Justice intended to formally re-adopt the Cole Memo. Recently, in testimony in February of 2023
before the Senate Judiciary Committee, Attorney General Garland said the DOJ is “still working on a marijuana policy” and
that policy – when issued – “will be very close to what was done in the Cole Memorandum.” Nevertheless, there
can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant
with state law. Federal law is separate from state law in these circumstances; therefore, the federal government can assert criminal violations
of federal law despite state law.
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.
We will continue to monitor compliance on an ongoing basis in accordance
with our compliance program and standard operating procedures. While our operations are believed to be in full compliance with all applicable
state laws, regulations and licensing requirements, such activities remain illegal under federal law. Accordingly, there are significant
risks associated with our business.
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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 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.
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.
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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.
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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.
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 45.5% and 45.8% 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.
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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 control over financial reporting
as of December 31, 2022 were not effective. Management realizes there are deficiencies in the design or operation of our internal control
over financial reporting that adversely affect our internal controls, and management considers such deficiencies to be material weaknesses.
As of the end of our 2022 fiscal year, management 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.
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.
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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.
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.
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