Zoned Properties, Inc. 10-Q

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This quarterly report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the “Risk Factors” section of our annual report on Form 10-K as filed on March 26, 2024, as the same may be updated from time to time. We caution that these factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q. Overview Zoned Properties, Inc. (“Zoned Properties” or the “Company”) 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. 31 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. As of March 31, 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 Oct 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 31, 2024 60,000 97,312 1,440 1,497 17,192 2,800 180,576 Annual Base Rent (*,**) 2024 (remainder of year) $ 457,540 $ 788,227 $ 31,500 $ 36,000 $ 373,755 $ 109,996 $ 1,797,018 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 2029 590,400 1,050,970 42,000 48,000 573,507 255,036 2,559,913 Thereafter 6,100,800 10,860,019 434,000 496,000 4,703,936 2,668,663 25,263,418 Total $ 9,538,182 $ 16,903,096 $ 675,500 $ 772,000 $ 7,782,979 $ 3,981,687 $ 39,653,444 * Annual base rent represents amount of cash payments due from tenants. ** For Tempe, AZ, table includes rental income generated from the lease of parking lot space used by a third party as an antenna location. 32 Annualized $ per Rented Sq. Ft. (Base Rent) Year Tempe, AZ Chino Valley, AZ Green Valley, AZ Kingman, AZ Pleasant Ridge, MI 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 2029 $ 9.8 $ 10.8 $ 29.2 $ 32.1 32.7 91.1 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 unaudited consolidated financial statements and the notes to those statements for the three months ended March 31, 2024 and 2023, which are included elsewhere in this quarterly report on Form 10-Q. The results discussed below are for the three months ended March 31, 2024 and 2023. Comparison of Results of Operations for the Three Months Ended March 31, 2024 and 2023 Revenues For the three months ended March 31, 2024 and 2023, revenues by reportable business segments were as follows: Three Months Ended March 31, 2024 2023 Revenues: Property investment portfolio $ 691,292 $ 610,474 Real estate services 145,760 77,550 Total revenues $ 837,052 $ 688,024 For the three months ended March 31, 2024, total revenues amounted to $837,052, including property investment portfolio revenues $691,292, which consists of rental revenues, as compared to total revenues of $688,024, including rental revenues of $610,474, for the three months ended March 31, 2023, an overall increase of $149,028, or 21.7%. This increase was attributable to an increase in rental revenues of $80,818, or 13.2%, and a net increase in real estate services revenues of $68,210, or 88.0%, attributable to an increase in commissions earned on real estate listings of $142,460, offset by a decrease in advisory services revenues of $74,250. The increase in property investment portfolio revenues was primarily due to the signing of a new lease with a new tenant at our recently acquired property located in Chicago, Illinois which began in January 2024. All of the Company’s real estate properties are leased under absolute-net or triple-net leases with our 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. Operating expenses For the three months ended March 31, 2024, operating expenses amounted to $708,143 as compared to $711,410 for the three months ended March 31, 2023, a decrease of $3,267, or 0.5%. For the three months ended March 31, 2024 and 2023, operating expenses consisted of the following: Years Ended December 31, 2023 2022 Compensation and benefits $ 265,164 $ 345,495 Professional fees 122,270 142,662 Brokerage fees 103,330 - General and administrative expenses 78,776 78,923 Depreciation and amortization 89,647 97,582 Real estate taxes 27,356 31,748 Business development costs 21,600 15,000 Total $ 708,143 $ 711,410 33 ● For the three months ended March 31, 2024, compensation and benefit expense decreased by $80,331, or 23.2%, as compared to the three months ended March 31, 2023. The decrease was attributable to a decrease in stock-based compensation of $26,768 related to a decrease in accretion of stock option expense, a decrease in health insurance expense of $16,386, and a decrease in other compensation and benefits of $37,177. ● For the three months ended March 31, 2024, professional fees decreased by $20,392, or 14.3%, as compared to the three months ended March 31, 2023. This decrease was primarily attributable to a decrease in public relations fees of $20,080. ● For the three months ended March 31, 2024 and 2023, we recorded brokerage fees amounting to $103,330 and $0, respectively, representing an increase of $103,350, or 100.0%. 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 three months ended March 31, 2024, general and administrative expenses decreased by $147, or 0.20%, as compared to the three months ended March 31, 2023. ● For the three months ended March 31, 2024, depreciation expense decreased by $7,935, or 8.1%, as compared to the three months ended March 31, 2023. ● For the three months ended March 31, 2024, real estate taxes decreased by $4,392, or 13.8%, as compared to the three months ended March 31, 2023. ● For the three months ended March 31, 2024, business development costs increased by $6,600, or 44.0%, as compared to the three months ended March 31, 2023. This increase was attributable to an increase in costs related to forfeited escrow deposits and the write off of costs related to projects which we decided not to pursue. Income (loss) from operations As a result of the factors described above, for the three months ended March 31, 2024, income from operations amounted to $128,909 as compared to a loss from operations of $(23,386) for the three months ended March 31, 2023, a positive change of $152,295, or 651.23%. 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 three months ended March 31, 2024, total other expenses, net amounted to $32,436 as compared to total other expenses, net of $284,793, respectively, representing a decrease of $252,357, or 88.6%. This decrease was attributable to an increase in interest expense of $3,539 primarily related to an increase in notes payable, offset by an increase in income in fair value from an interest rate swap of $255,896. Equity method loss For the three months ended March 31, 2024 and 2023, we incurred an equity method loss of $0 and $1,469, respectively, a decrease of $1,469, or 100.0%. Net income (loss) As a result of the foregoing, for the three months ended March 31, 2024 and 2023, net income (loss) amounted to $96,473, or $0.01 per common share (basic and diluted), and $(309,648), or $(0.03) 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 $1,519,903 and $3,099,795 as of March 31, 2024 and December 31, 2023, respectively. 34 Our primary uses of cash have been for the acquisition of new property investments, 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. We may need to raise additional funds, particularly if we are unable to continue to generate positive cash flows from our operations. We estimate that based on current plans and assumptions, that our available cash will be sufficient to satisfy our cash requirements under our present operating expectations for the next 12 months from the date of this quarterly report on Form 10-Q. Other than revenue received from the lease of our rental properties 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 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 March 31, 2024 and 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. 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. 35 On March 31, 2024, principal and interest due on the East West Bank Swap Note amounted to $4,436,449 and $7,520, respectively. On December 31, 2023, principal and interest due on the East West Bank Swap Note amounted to $4,447,068 and $8,861, 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 March 31, 2024, principal and interest due on the 23616 Land Contract Note Payable amounted to $1,402,071 and $0, On December 31, 2023, principal and interest due on the 23616 Land Contract Note Payable amounted to $1,408,962 and $0, 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 March 31, 2024, principal and interest due on the 23634 Land Contract Note Payable amounted to $415,986 and $0, respectively. On December 31, 2023, principal and interest due on the 23634 Land Contract Note Payable amounted to $420,270 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 and other 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 March 31, 2024 and December 31, 2023, we had an asset concentration related to our Significant Tenant leases. As of March 31, 2023 and December 31, 2023, these Significant Tenants represented approximately 73.6% and 69.4% of total assets, respectively. If our Significant Tenants are prohibited from operating due to federal or state regulations or due to COVID-19, or cannot pay their rent, we may not have enough working capital to support our operations and we would have to seek out new tenants at rental rates per square less than our current rate per square foot. We may secure additional financing to acquire and develop additional and existing properties. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow our business operations. Cash Flow For the Three Months Ended March 31, 2024 and 2023 Net cash flow provided by operating activities was $207,218 for the three months ended March 31, 2024, as compared to net cash flow provided by operating activities of $3,589 for the three months ended March 31, 2023, representing an increase of $203,629. ● Net cash flow provided by operating activities for the three months ended March 31, 2024 primarily reflected net income of $96,473, adjusted for the add-back of non-cash items consisting of depreciation of $89,647, amortization of debt discount of $4,615, accretion of stock-based stock option expense of $16,494, a loss on forfeited escrow deposit of $21,600, and income from the changes in fair value from an interest rate swap of $125,603, offset by changes in operating assets and liabilities primarily consisting of an increase in accounts receivable of $42,908, an increase in deferred rent of $88,048 attributable to rent abatement on our new tenant lease at our Chicago, Illinois Property, an increase in accounts payable of $58,025, an increase in accrued expenses of $128,038, an increase in contract liabilities of $23,508, and an increase in security deposits payable of $27,730. 36 ● Net cash flow provided by operating activities for the three months ended March 31, 2023 primarily reflected a net loss of $309,648 adjusted for the add-back of non-cash items consisting of depreciation of $97,582, amortization of debt discount of $4,615, accretion of stock-based stock option expense of $43,262, a loss on forfeited escrow deposit of $15,000, a loss from unconsolidated joint ventures of $1,469, and a loss from the changes in fair value from an interest rate swap of $130,293, offset by changes in operating assets and liabilities primarily consisting of an increase in deferred rent of $102,327 attributable to rent abatement on our new tenant lease at our Woodward Properties, an increase in contract liabilities of $49,700, and an increase in security deposits payable of $56,100 attributable to the collection of additional security deposit on our Woodward Properties. During the three months ended March 31, 2024, net cash flow used in investing activities amounted to $1,771,916 as compared to net cash used in investing activities of $1,071,456, an increase of $700,460. During the three months ended March 31, 2024, net cash used in investing activities was attributable to the purchase of rental property of $1,585,878 primarily in connection with the acquisition of property in Chicago, Illinois, a purchase of property and equipment of $6,480, an increase in capitalized permit costs of $56,290, and an increase in escrow deposits of $123,268 in connection with escrow deposits made on other potential acquisitions of rental properties. During the three months ended March 31, 2023, net cash used in investing activities was attributable to the purchase of rental property of $992,214 in connection with the acquisition of property in Pleasant Ridge, Michigan, an increase in capitalized permit costs of $6,242, and an increase in escrow deposits of $73,000 in connection with escrow deposits made on other potential acquisitions of rental properties. During the three months ended March 31, 2024 and 2023, net cash used in financing activities amounted to $21,794 and $20,258, respectively, and consisted of the repayment of notes payable. Contractual Obligations and Off-Balance Sheet Arrangements Contractual Obligations We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of March 31, 2024 (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 730 150 240 240 100 Notes payable 6,254 114 582 1,445 4,115 Total $ 8,984 $ 264 $ 822 $ 1,683 $ 6,215 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 March 31, 2024, the notional amount of our interest rate swaps was $4,450,642. 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. 37 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. Information regarding the interest rate swap is as follows: Description Notional Amount on March 31, 2024 Interest Rate Maturity Fair Value of Asset on March 31, 2024 Fair Value of Liability on December 31, 2023 December 7, 2022 interest rate swap $ 4,450,642 7.65 % December 10, 2032 $ 2,724 $ 122,879 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. 38 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. 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. 39 Stock-based compensation Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation ”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment Accounting . Recent Accounting Pronouncements Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable to smaller reporting companies.