Zoned Properties, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results This annual report on Form 10-K contains forward-looking statements regarding our business, financial condition, results of operations and prospects. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This annual report on Form 10-K and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the “Risk Factors” section of this annual report on Form 10-K. 28 We caution that these factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this annual report on Form 10-K. Overview Zoned Properties, Inc. (“Zoned Properties” or the “Company”) was incorporated in the State of Nevada on August 25, 2003. In October 2013, the Company changed its name to Zoned Properties, Inc. and in April 2014, the Company shifted its business model to address commercial real estate in the regulated cannabis industry. Zoned Properties is a technology-driven property investment company focused on acquiring value-add real estate within the regulated cannabis industry in the United States. The Company aspires to innovate within the real estate development sector, focusing on direct-to-consumer real estate that is leased to the best-in-class cannabis retailers. Headquartered in Scottsdale, Arizona, Zoned Properties is redefining the approach to commercial real estate investment through its standardized investment model backed by its proprietary property technology. Zoned Properties has developed a national ecosystem of real estate services to support its real estate development model, including a commercial real estate brokerage and a real estate advisory practice. The Company operates in two organized segments; (1) the operations, leasing and management of its commercial properties, herein known as the “Property Investment Portfolio” segment, and (2) the advisory, brokerage and technology services related to commercial properties, herein known as the “Real Estate Services” segment. The Company targets commercial properties that face unique zoning or development challenges, identifies solutions that can potentially have a major impact on their commercial value, and then works to acquire the properties while securing long-term, absolute-net leases. The Company does not grow, harvest, sell or distribute cannabis or any substances regulated under United States law such as the Controlled Substance Act of 1970, as amended (the “CSA”). The core of our business operations involves identifying, securing, acquiring, and leasing commercial properties that intend to operate within highly regulated industries, including the 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, including cannabis properties. We often refer to these requirements as cannabis approvals. These regulations often include complex permitting processes that require longer development timelines than traditional commercial real estate 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. Due to the complex nature of the Company’s core business operations and target investment properties, the Company may secure dozens of potential property candidates for acquisition and prospective tenant candidates for leasing at any given time, all in the normal course of business. The process of securing a potential property candidate may include completing contractual agreements such as an option agreement or a purchase agreement, which may include various contingencies and conditions precedent related to the ultimate consummation of the acquisition, investment, or transaction. Simultaneously with the securing of potential property candidates, the Company will advertise and market a property to prospective tenant candidates for a long-term, absolute-net lease agreement, which may include various contingencies and conditions precedent related to the ultimate commencement of the lease and tenancy. In order to deliver a successful investment property transaction, the Company must collectively receive all cannabis approvals from state and local governing authorities that may be required at a given property, secure a qualified tenant to lease and operate the property, and complete the acquisition of the property. The Company’s current investment properties are located in Arizona, Illinois, and Michigan with 100% occupancy and a weighted average lease term over 10 years. Each of the Company’s leased properties is occupied by a commercial cannabis tenant. Zoned Properties maintains a portfolio of properties that it owns, develops and leases. As of March 2024, the Company leases land and/or building space at the six properties in its portfolio to licensed and regulated cannabis tenants in areas with established cannabis regulations and zoning procedures. Four of the leased properties are zoned and permitted as regulated cannabis retail dispensaries, and two of the leased properties are zoned and permitted as regulated cannabis cultivation and processing facilities. The Company considers the two cultivation sites in its portfolio as legacy properties, and may consider selling or leveraging those properties to unlock equity and create capital availability in the future. The Zoned Properties investment thesis has evolved over the years as the cannabis industry has emerged, and is currently focused on investing capital into direct-to-consumer properties, located in state-markets with robust cannabis consumer demand in the industry. 29 As of March 26, 2024, 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 Chicago, IL Property Investment Portfolio Total Description Industrial /Office Greenhouse/ Nursery Retail (special use) Retail (special use) Retail (special use) Retail (special use) Current Use Cannabis Facility Cannabis Facility Cannabis Dispensary Cannabis Dispensary Cannabis Dispensary Cannabis Dispensary Date Acquired March 2014 August 2015 October 2014 May 2014 Dec 22/Feb 23 January 2024 Lease Start Date May 2018 May 2018 May 2018 May 2018 December 2022 January 2024 Lease End Date April 2040 April 2040 April 2040 April 2040 March 2037 January 2039 No. of Tenants 1 1 1 1 1 1 Land Area (Acres) 3.65 47.60 1.33 0.32 0.56 0.37 54.03 Land Area (Sq. Feet) 158,772 2,072,149 57,769 13,939 24,306 16,000 2,342,935 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 16,000 553,494 Total Rentable Building Sq. Ft. 60,000 97,312 1,440 1,497 17,192 2,800 180,576 Vacant Rentable Sq. Ft. - - - - - - - Sq. Ft. rented as of March 26, 2024 60,000 97,312 1,440 1,497 17,192 2,800 180,576 Annual Base Rent (*,**) 2024 $ 610,053 $ 1,050,970 $ 42,000 $ 48,000 $ 494,712 $ 109,996 $ 2,355,731 2025 610,053 1,050,970 42,000 48,000 509,553 226,596 2,487,172 2026 598,589 1,050,970 42,000 48,000 524,840 233,394 2,497,793 2027 590,400 1,050,970 42,000 48,000 540,585 240,395 2,512,350 2028 590,400 1,050,970 42,000 48,000 556,803 247,607 2,535,780 Thereafter 6,691,200 11,910,988 476,000 544,000 5,277,443 2,923,698 27,823,329 Total $ 9,690,695 $ 17,165,838 $ 686,000 $ 784,000 $ 7,903,936 $ 3,981,686 $ 40,212,155 * 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. 30 Annualized $ per Rented Sq. Ft. (Base Rent) Year Tempe, AZ Chino Valley, AZ Green Valley, AZ Kingman, AZ Pleasant Ridge, MI Chicago, IL 2024 $ 9.8 $ 10.8 $ 29.2 $ 32.1 28.2 39.3 2025 $ 9.8 $ 10.8 $ 29.2 $ 32.1 29.1 80.9 2026 $ 9.8 $ 10.8 $ 29.2 $ 32.1 29.9 83.4 2027 $ 9.8 $ 10.8 $ 29.2 $ 32.1 30.8 85.9 2028 $ 9.8 $ 10.8 $ 29.2 $ 32.1 31.8 88.4 Results of Operations The following comparative analysis on results of operations was based primarily on the comparative financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the consolidated financial statements and the notes to those statements for the years ended December 31, 2023 and 2022, which are included elsewhere in this annual report on Form 10-K. The results discussed below are for the years ended December 31, 2023 and 2022. Comparison of Results of Operations for the Years Ended December 31, 2023 and 2022 Revenues For the years ended December 31, 2023 and 2022, revenues by reportable business segments were as follows: Years Ended December 31, 2023 2022 Revenues: Property investment portfolio $ 2,481,892 $ 1,795,719 Real estate services 405,099 864,371 Total revenues $ 2,886,991 $ 2,660,090 For the year ended December 31, 2023, total revenues amounted to $2,886,991, including property investment portfolio revenues $2,481,892, which consists of rental revenues, as compared to total revenues of $2,660,090, including rental revenues of $1,795,719, for the year ended December 31, 2022, an overall increase of $226,901, or 8.5%. This increase was attributable to an increase in rental revenues of $686,173, or 38.2%, offset by a net decrease in real estate services revenues of $459,272, or 53.1%, attributable to a decrease in commissions earned on real estate listings of $518,522, offset by an increase in advisory services revenues of $59,250. 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. 31 Operating expenses For the year ended December 31, 2023, operating expenses amounted to $2,717,804 as compared to $2,769,041 for the year ended December 31, 2022, a decrease of $51,237, or 1.8%. For the years ended December 31, 2023 and 2022, operating expenses consisted of the following: Years Ended December 31, 2023 2022 Compensation and benefits $ 1,326,485 $ 1,232,414 Professional fees 388,807 352,643 Brokerage fees 64,680 431,029 General and administrative expenses 367,175 275,862 Depreciation and amortization 380,761 360,493 Real estate taxes 163,896 116,912 Business development costs 26,000 - Gain on sale of rental property - (312 ) Total $ 2,717,804 $ 2,769,041 ● For the year ended December 31, 2023, compensation and benefit expense increased by $94,071, or 7.6%, as compared to the year ended December 31, 2022. The increase was attributable to an increase in compensation and benefits of $314,183 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 $220,112. 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 year ended December 31, 2023, professional fees increased by $36,164, or 10.3%, as compared to the year ended December 31, 2022. This increase was primarily attributable to an increase in accounting fees of $15,740, an increase in consulting fees of $97,739, and an increase in other professional fees of $1,022, offset by a decrease in legal fees of $11,782, and a decrease in public relations fees of $66,555. ● For the years ended December 31, 2023 and 2022, we recorded brokerage fees amounting to $64,680 and $431,029, respectively, representing a decrease of $366,349, or 85.0%, from 2022 to 2023. 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 expense, and other general operating expenses. For the year ended December 31, 2023, general and administrative expenses increased by $91,313, or 33.1%, as compared to the year ended December 31, 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, and an increase in travel expense. ● For the year ended December 31, 2023, depreciation expense increased by $20,268, or 5.6%, as compared to the year ended December 31, 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 year ended December 31, 2023, real estate taxes increased by $46,984, or 40.2%, as compared to the year ended December 31, 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. ● For the year ended December 31, 2023, business development costs increased by $26,000, or 100.0%, as compared to the year ended December 31, 2022. This increase was attributable to an increase in business development activities and includes costs related to forfeited escrow deposits and the write off of costs related to projects which we decided not to pursue. ● For the year ended December 31, 2022, we recorded a gain from sale of property and equipment of $312 as compared to $0 for the year ended December 31, 2023. 32 Income (loss) from operations As a result of the factors described above, for the year ended December 31, 2023, income from operations amounted to $169,187 as compared to a loss from operations of $(108,951) for the year ended December 31, 2022, a positive change of $278,138, or 255.3%. Other (expenses) income, net Other (expense) income primarily includes interest expense incurred on debt with third parties and a related party and also includes other income (expense). For the year ended December 31, 2023, total other expenses, net amounted to $657,335 as compared to total other expenses, net of $449,143, respectively, representing an increase of $208,192, or 46.3%. This increase was attributable to an increase in interest expense of $463,543 primarily related to an increase in notes payable and a decrease in interest income of $13,000, offset by a decrease in loss in fair value from an interest rate swap of $57,595 and a decrease in loss on note receivable investment of $210,756 due to the impairment of such investment. Equity method loss For the years ended December 31, 2023 and 2022, we incurred an equity method loss of $52,110 and $16,261, respectively, an increase of $35,849, or 220.5%. During the year ended December 31, 2023, we recorded an impairment loss from unconsolidated joint ventures of $45,000 and a loss from unconsolidated joint ventures of $7,110. During the year ended December 31, 2022, we recorded a loss from unconsolidated joint ventures of $16,261. On December 31, 2023, we recorded an other-than-temporary impairment loss of $45,000 because it was determined that the fair value of our equity method investment in Zoneomics was less than its carrying value. Based on management’s evaluation, it was determined that due to market and regulatory conditions, implementing our Zoneomics business model was at risk and that our ability to recover the carrying amount of the investment in Zoneomics was impaired. Net loss As a result of the foregoing, for the years ended December 31, 2023 and 2022, net loss amounted to $540,258, or $0.04 per common share (basic and diluted), and $574,355, or $0.05 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 $3,099,795 and $4,335,840 as of December 31, 2023 and 2022, respectively. Our primary uses of cash have been for compensation and benefits, fees paid to third parties for professional services, real estate taxes, general and administrative expenses, and the development of rental properties and other lines of business. All funds received have been expended in the furtherance of growing the business. We receive funds from the collection of rental income, and real estate services, which primarily includes 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 properties. 33 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 annual report on Form 10-K. Other than revenue received from the lease of our rental properties and real estate services, 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. 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 Amended 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 “Amended Note”) to the Bank. The Amended 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 Amended 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% (9.25% as of December 31, 2023). The Amended Note matures 10 years after its effective date and payments are calculated based on a 30-year amortization schedule. In connection with the Amended Note, in 2022, Zoned Arizona received gross proceeds of $4,500,000 and paid fees of $184,596. 34 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 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 December 31, 2023, principal and interest due on the East West Bank Swap Note amounted to $4,447,068 and $8,861, 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. 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 “Woodward Property Note Payable”). The Woodward Property 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 December 31, 2023, principal and interest due on the Woodward Property Note Payable amounted to $1,408,962 and $0, respectively. On December 31, 2022, principal and interest due on the Woodward Property 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 December 31, 2023, principal and interest due on the 23634 Land Contract Note Payable amounted to $420,269 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 December 31, 2023 and 2022, we had an asset concentration related to our Significant Tenant leases. As of December 31, 2023 and 2022, these Significant Tenants represented approximately 69.4% and 68.7% of total assets, respectively. If our Significant Tenants are prohibited from operating due to federal or state regulations or due to COVID-19, or cannot pay their rent, we may not have enough working capital to support our operations and we would have to seek out new tenants at rental rates per square less than our current rate per square foot. We 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. 35 Cash Flow For the Years Ended December 31, 2023 and 2022 Net cash flow provided by operating activities was $82,547 for the year ended December 31, 2023, as compared to net cash flow provided by operating activities of $871,901 for the year ended December 31, 2022, representing a decrease of $789,354. ● Net cash flow provided by operating activities for the year ended December 31, 2023 primarily reflected a net loss of $540,258 adjusted for the add-back of non-cash items consisting of depreciation of $380,761, amortization of debt discount of $18,460, accretion of stock-based stock option expense of $116,643, a loss on forfeited escrow deposit of $15,000, a loss from unconsolidated joint ventures of $8,370, a non-cash impairment loss from unconsolidated joint ventures of $45,000, and a loss from the changes in fair value from an interest rate swap of $32,642, offset by changes in operating assets and liabilities primarily consisting of an increase in deferred rent of $167,393 attributable to rent abatement on our new tenant lease at our Woodward Properties, a decrease in prepaid expenses and other assets of $31,653, a decrease in lease incentive receivable of $27,523, an increase in accounts payable of $9,576, a decrease in accrued expenses of $11,698, an increase in contract liabilities of $42,861, and an increase in security deposits payable of $71,060 attributable to the collection of additional security deposit on our Woodward Properties. ● Net cash flow provided by operating activities for the year ended December 31, 2022 primarily reflected a net loss of $574,355 adjusted for the add-back of non-cash items consisting of depreciation of $351,043, amortization expense of $9,450, accretion of stock-based stock option expense of $336,755, a loss on note receivable investments of $210,756 attributable to the recording of an allowance for uncollectible amounts, a loss from unconsolidated joint ventures of $16,261, and a loss from the changes in fair value from an interest rate swap of $90,237, offset by changes in operating assets and liabilities primarily consisting of an increase in contract liabilities of $298,565 attributable to the receipt of cash of a $300,000 assignment fee which was reflected in contract liabilities on the accompanying consolidated balance sheet and will be amortized into rental revenue on a straight-line basis over the remaining term of the lease, and an increase in security deposits payable of $147,600 attributable to the collection of additional security deposit on our Tempe property. During the year ended December 31, 2023, net cash flow used in investing activities amounted to $1,239,084 as compared to net cash used in investing activities of $2,009,213, a decrease of $770,129. During the year ended December 31, 2023, net cash used in investing activities was attributable to the purchase of rental property of $1,007,941 primarily in connection with the acquisition of property in Pleasant Ridge, Michigan, an increase in capitalized permit costs of $38,016, and an increase in escrow deposits of $192,048 in connection with escrow deposits made on other potential acquisitions of rental properties. During the year ended December 31, 2022, net cash used in investing activities was attributable to an increase in lease incentive receivables related to the disbursement of $500,000 to a Significant Tenant to be used for leasehold improvements, the purchase of rental property of $867,549 in connection with the acquisition of property in Pleasant Ridge, Michigan, the purchase of property and equipment of $3,764, an increase in escrow deposits of $590,000 in connection with the acquisition of additional property in Pleasant Ridge, Michigan which closed in February 2023, and cash used to invest in 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 year ended December 31, 2023, net cash used in financing activities amounted to $79,508 and consisted of the repayment of notes payable of $64,508 and the purchase of treasury stock of $15,000. During the year ended December 31, 2022, net cash provided by financing activities amounted to $4,281,212 and consisted of net proceeds from notes payable of $4,315,404, offset by the repayment of notes payable of $14,192 and the repayment of notes payable – related party of $20,000. Contractual Obligations and Off-Balance Sheet Arrangements Contractual Obligations We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. 36 The following tables summarize our contractual obligations as of December 31, 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 6,276 99 225 1,820 4,132 Total $ 9,036 $ 249 $ 465 $ 2,060 $ 6,262 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 December 31, 2023, the notional amount of our interest rate swaps was $4,461,260. 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. Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including the critical ones related to an interest rate swap, the allowance for accounts receivable, impairment of rental properties, the valuation of our investments in unconsolidated joint ventures, and 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 estimates affect our more significant judgments and estimates used in the preparation of the financial statements. 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. 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. 37 Information regarding the interest rate swap is as follows: Description Notional Amount on December 31, 2023 Interest Rate Maturity Fair Value of Liability on December 31, 2023 Fair Value of Liability on December 31, 2022 December 7, 2022 interest rate swap $ 4,461,260 7.65 % December 10, 2032 $ 122,879 $ 90,237 Accounts receivable and notes receivable We recognize an allowance for losses on accounts receivable and notes receivable in an amount equal to the estimated probable losses net of recoveries under the current expected credit loss method. The allowance is based on an analysis of historical bad debt experience, current receivables aging and expected future write-offs, as well as an assessment of specific identifiable customer accounts and notes receivable considered at risk or uncollectible. On January 1, 2023, we adopted ASC 326, “Financial Instruments - Credit Losses”. In accordance with ASC 326, an allowance is maintained for estimated forward-looking losses resulting from the possible inability of customers to make required payments (current expected losses). The amount of the allowance is determined principally on the basis of past collection experience and known financial factors regarding specific customers. The expense associated with the allowance for doubtful accounts on accounts receivable is recognized in general and administrative expenses. 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. 38 Impairment occurs when the carrying amount of our rental properties exceeds its recoverable amount. For our rental property, we considered the recoverable amount to be the respective properties fair value less costs to sell (FVLCS) plus its value in use (VIU). The recoverable amount is the higher of the asset’s fair value less costs to sell (FVLCS) and its value in use (VIU). FVLCS and VIU as defined as follows: ■ Fair Value Less Costs to Sell (FVLCS): ■ Fair value is typically determined by market prices or appraisals or tax value. ■ Subtract any costs that would be incurred to sell the asset (like commissions). ■ Value in Use (VIU): ■ This is the present value of the future cash flows the asset is expected to generate. ■ Cash flows should be based on leases in place. We have capitalized land, which is not subject to depreciation. Investment in joint ventures We have equity investments in various privately held entities. We account for these investments either under the equity method or cost method of accounting depending on our ownership interest and level of influence. Investments accounted for under the equity method are recorded based upon the amount of our investment and adjusted each period for our share of the investee’s income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable. We evaluate our investments in these entities for consolidation. We consider our percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining whether or not the investment qualifies for consolidation or if it should be accounted for as an unconsolidated investment under either the equity method of accounting. If an investment qualifies for the equity method of accounting, our investment is recorded initially at cost, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. The net income or loss of an unconsolidated investment is allocated to its investors in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences, if any, between the carrying amount of our investment in the respective joint venture and our share of the underlying equity of such unconsolidated entity are amortized over the respective lives of the underlying assets as applicable. These items are reported as a single line item in the statements of operations as income or loss from investments in unconsolidated affiliated entities. 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 . In 2022, the fair value of stock option grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0%; expected volatility of 109.83%; risk-free interest rate of 2.88%; and an estimated holding period of 10 years. We did not grant any stock options in 2023. 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. Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements. 39 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable to smaller reporting companies. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules appearing on pages F-1 to F-31 of this annual report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.