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”). 32 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 September 30, 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. 33 As of September 30, 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 Surprise, AZ Property Investment Portfolio Total Description Industrial /Office Greenhouse/ Nursery Retail (special use) Retail (special use) Retail (special use) Retail (special use) Development Project 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 July 2024 Lease Start Date May 2018 May 2018 May 2018 May 2018 December 2022 January 2024 July 2024 Lease End Date April 2040 April 2040 April 2040 April 2040 March 2037 January 2039 June 2040 No. of Tenants 1 1 1 1 1 1 1 Land Area: (Acres) 3.65 47.60 1.33 0.32 0.56 0.37 1.11 55.14 Land Area: (Sq. Feet) 158,772 2,072,149 57,769 13,939 24,306 16,000 48,541 2,391,476 Undeveloped Land Area (Sq. Feet) - 1,782,563 - 6,878 - - 48,541 1,837,982 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 September 30, 2024 60,000 97,312 1,440 1,497 17,192 2,800 - 180,576 Annual Base Rent (*,**) 2024 (remainder of year) $ 152,696 $ 262,741 $ 10,500 $ 12,000 $ 106,251 $ 54,999 $ - $ 599,187 2025 611,093 1,050,970 42,000 48,000 434,567 226,596 150,000 2,563,226 2026 599,149 1,050,970 42,000 48,000 447,604 233,394 304,500 2,725,617 2027 590,400 1,050,970 42,000 48,000 461,032 240,395 313,635 2,746,432 2028 590,400 1,050,970 42,000 48,000 474,862 247,607 323,044 2,776,883 2029 590,400 1,050,970 42,000 48,000 489,109 255,036 332,732 2,808,247 Thereafter 6,100,800 10,860,019 434,000 496,000 6,622,835 2,668,663 4,155,757 31,338,074 Total $ 9,234,938 $ 16,377,610 $ 654,500 $ 748,000 $ 9,036,260 $ 3,926,690 $ 5,579,668 $ 45,557,666 * 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. Annualized $ per Rented Sq. Ft. (Base Rent) Year Tempe, AZ Chino Valley, AZ Green Valley, AZ Kingman, AZ Pleasant Ridge, MI Chicago, IL Surprise, AZ 2024 $ 9.8 $ 10.8 $ 29.2 $ 32.1 $ 28.2 $ 39.3 $ - 2025 $ 9.8 $ 10.8 $ 29.2 $ 32.1 $ 24.8 $ 80.9 $ 53.6 2026 $ 9.8 $ 10.8 $ 29.2 $ 32.1 $ 25.5 $ 83.4 $ 108.8 2027 $ 9.8 $ 10.8 $ 29.2 $ 32.1 $ 26.3 $ 85.9 $ 112.0 2028 $ 9.8 $ 10.8 $ 29.2 $ 32.1 $ 27.1 $ 88.4 $ 115.4 2029 $ 9.8 $ 10.8 $ 29.2 $ 32.1 $ 27.9 $ 91.1 $ 118.8 34 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 and nine months ended September 30, 2024 and 2023, which are included elsewhere in this quarterly report on Form 10-Q. The results discussed below are for the three and nine months ended September 30, 2024 and 2023. Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2024 and 2023 Revenues For the three and nine months ended September 30, 2024 and 2023, revenues by reportable business segments were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Revenues: Property investment portfolio $ 750,926 $ 637,143 $ 2,121,544 $ 1,857,208 Real estate services 278,704 83,307 437,464 323,883 Total revenues $ 1,029,630 $ 720,450 $ 2,559,008 $ 2,181,091 For the three months ended September 30, 2024, total revenues amounted to $1,029,630, including property investment portfolio revenues $750,926, which consists of rental revenues, as compared to total revenues of $720,450, including property investment portfolio revenues of $637,143, for the three months ended September 30, 2023, an overall decrease of $309,180, or 42.9%. This increase was attributable to a net increase in real estate services revenues of $195,397, or 234.6%, attributable to an increase in commissions earned on real estate listings and a decrease in advisory fees, and an increase in rental revenues of $113,783, or 17.9%, primarily attributable to an increase in rental revenue from our recently acquired property in Chicago, IL and Surprise, AZ. For the nine months ended September 30, 2024, total revenues amounted to $2,559,008, including property investment portfolio revenues $2,121,544, which consists of rental revenues, as compared to total revenues of $2,181,091, including property investment portfolio revenues of $1,857,208, for the nine months ended September 30, 2023, an overall increase of $377,917, or 17.3%. This increase was attributable to an increase in rental revenues of $264,336, or 14.2%, primarily attributable to an increase in rental revenue from our recently acquired property in Chicago, IL and Surprise, AZ, and a net increase in real estate services revenues of $113,581, or 35.1%, attributable to an increase in commissions earned on real estate listings and a decrease in advisory fees. The increase in property investment portfolio revenues was primarily due to the signing of a new lease with new tenants at our recently acquired properties located in Chicago, Illinois which began in January 2024 and Surprise, AZ which began in July 2024. All of the Company’s real estate properties are leased under absolute-net or triple-net leases with our tenants. 35 Operating expenses For the three months ended September 30, 2024, operating expenses amounted to $584,442 as compared to $671,338 for the three months ended September 30, 2023, a decrease of $86,896, or 12.9%. For the nine months ended September 30, 2024, operating expenses amounted to $1,881,773 as compared to $2,090,560 for the nine months ended September 30, 2023, a decrease of $208,787, or 10.0%. For the three and nine months ended September 30, 2024 and 2023, operating expenses consisted of the following: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Compensation and benefits $ 259,268 $ 345,907 $ 798,447 $ 1,055,284 Professional fees 65,291 86,152 276,426 288,735 Brokerage fees 19,033 - 122,363 50,571 General and administrative expenses 84,613 95,716 262,977 274,283 Depreciation and amortization 89,701 91,224 269,218 290,854 Real estate taxes 49,536 52,339 112,467 115,833 Business development costs 17,000 - 39,875 15,000 Total $ 584,442 $ 671,338 $ 1,881,773 $ 2,090,560 ● For the three months ended September 30, 2024, compensation and benefit expense decreased by $86,639, or 25.1%, as compared to the three months ended September 30, 2023. The decrease was attributable to a decrease in stock-based compensation of $20,468 related to a decrease in accretion of stock option expense, a decrease in health insurance expense of $10,434, and a decrease in other compensation and benefits of $55,737. For the nine months ended September 30, 2024, compensation and benefit expense decreased by $256,837, or 24.3%, as compared to the nine months ended September 30, 2023. The decrease was attributable to a decrease in stock-based compensation of $71,403 related to a decrease in accretion of stock option expense, a decrease in health insurance expense of $37,894, and a decrease in other compensation and benefits of $147,540. ● For the three months ended September 30, 2024, professional fees decreased by $20,861, or 24.2%, as compared to the three months ended September 30, 2023. This decrease was primarily attributable to a decrease in consulting fees of $23,919. For the nine months ended September 30, 2024, professional fees decreased by $12,309, or 4.3%, as compared to the nine months ended September 30, 2023. This decrease was primarily attributable to a decrease in consulting fees of $16,910, and a decrease in legal fees of $2,658, offset by an increase in accounting fees of $6,447. ● For the three months ended September 30, 2024 and 2023, we recorded brokerage fees amounting to $19,033 and $0, respectively, representing an increase of $19,033, or 100.0%. For the nine months ended September 30, 2024 and 2023, we recorded brokerage fees amounting to $122,363 and $50,571, respectively, representing an increase of $71,792, or 142.0%. 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 September 30, 2024, general and administrative expenses decreased by $11,103, or 11.6%, as compared to the three months ended September 30, 2023. For the nine months ended September 30, 2024, general and administrative expenses decreased by $11,306, or 4.1%, as compared to the nine months ended September 30, 2023. 36 ● For the three months ended September 30, 2024, depreciation expense decreased by $1,523, or 1.7%, as compared to the three months ended September 30, 2023. For the nine months ended September 30, 2024, depreciation expense decreased by $21,636, or 7.4%, as compared to the nine months ended September 30, 2023. ● For the three months ended September 30, 2024, real estate taxes decreased by $2,803, or 5.4%, as compared to the three months ended September 30, 2023. For the nine months ended September 30, 2024, real estate taxes decreased by $3,366, or 2.9%, as compared to the nine months ended September 30, 2023 ● For the three months ended September 30, 2024, business development costs increased by $17,000, or 100.0%, as compared to the three months ended September 30, 2023. For the nine months ended September 30, 2024, business development costs increased by $24,875, or 165.8%, as compared to the nine months ended September 30, 2023. Business development costs are costs related to forfeited escrow deposits and the write off of costs related to projects which we decided not to pursue. Income from operations As a result of the factors described above, for the three months ended September 30, 2024, income from operations amounted to $445,188 as compared to income from operations of $49,112 for the three months ended September 30, 2023, an increase of $396,076, or 806.5%. For the nine months ended September 30, 2024, income from operations amounted to $677,235 as compared to income from operations of $90,531 for the nine months ended September 30, 2023, an increase of $586,704, or 648.1%. Other (expenses) income, net Other (expense) income primarily includes interest expense incurred on debt with third parties and also includes other income (expense). For the three months ended September 30, 2024, total other expenses, net amounted to $(386,316) as compared to total other income, net of $65,411, respectively, representing a negative change of $(451,727), or 690.1%. This change was attributable to an increase in interest expense of $31,791 primarily related to an increase in notes payable, and an increase in loss in fair value from an interest rate swap of $419,936. For the nine months ended September 30, 2024, total other expenses, net amounted to $554,173 as compared to total other expenses, net of $236,387, respectively, representing an increase of $317,786, or 134.4%. This increase was attributable to an increase in interest expense of $34,804 primarily related to an increase in notes payable, and an increase in loss in fair value from an interest rate swap of $282,982. Equity method loss For the three months ended September 30, 2024 and 2023, we incurred an equity method loss of $0. For the nine months ended September 30, 2024 and 2023, we incurred an equity method loss of $0 and $7,110, respectively, a decrease of $7,110, or 100.0%. Net income (loss) As a result of the foregoing, for the three months ended September 30, 2024 and 2023, net income amounted to $58,872, or $0.00 per common share (basic and diluted), and $114,523, or $0.01 per common share (basic and diluted), respectively. For the nine months ended September 30, 2024 and 2023, net income (loss) amounted to $123,062, or $0.01 per common share (basic and diluted), and $(152,966), or $(0.01) per common share (basic and diluted), respectively. 37 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 $1,152,090 and $3,099,795 as of September 30, 2024 and December 31, 2023, respectively. 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. Recent Property Acquisitions and Related Note Payables On July 8, 2024 (the “Closing”), ZP Dysart acquired a property in Surprise AZ (the “Surprise Property”) from NWC Dysart & Bell LLC (“NWC”). Surprise Property is a tract or parcel of land containing approximately 1.114 acres, together with all improvements, buildings, leases, rights, easements, and appurtenances pertaining thereto. The Surprise Property was acquired for an aggregate purchase price of $1,712,541, which included (i) $1,100,000, representing the Purchase Price, (ii) reimburse to NWC for onsite and offsite improvements of $492,022, and (iii) closing costs, commissions, and fees customary to the acquisition of real estate of $120,519. As previously disclosed, on January 23, 2023, ZPRE Holdings entered into a Purchase and Sale Agreement and Joint Escrow Instructions, by and between NWC, as the seller, and ZPRE Holdings, as the buyer. Such agreement was subsequently amended on May 12, 2023, October 25, 2023, and December 20, 2023 (as amended, the “Agreement”). Pursuant to the terms of the Agreement, NWC also agreed to complete a number of on-site and off-site improvements to the Surprise Property (the “NWC’s Work”) in exchange for ZPRE Holdings’ reimbursement of up to $250,000 for the off-site work and reimbursement of up to $350,000 for the on-site work (collectively, the “Reimbursements”). The obligation to complete the Reimbursements was conditioned upon the closing of the sale of the Surprise Property. Subsequent to entry into the Agreement and as approved by NWC under the terms of the Agreement, ZPRE Holdings designated ZP Dysart as the named buyer for the Closing. 38 In connection with the Surprise Property Closing, ZP Dysart entered into the Construction Loan Agreement (the “PMF Loan Agreement”), dated as of July 8, 2024, by and between ZP Dysart and Private Money Funding, LLC (“PMF”). Pursuant to the terms of the PMF Loan Agreement, PMF agreed to loan up to $1,620,000 to ZP Dysart, which loan is evidenced by a promissory note (the “PMF Note”). ZP Dysart’s obligations under the PMF Note and the PMF Loan Agreement are secured by a Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing (the “PMF Deed”). The PMF Loan Agreement, the PMF Note, any guaranties, and all other related documents executed and delivered concurrently with the PMF Loan Agreement are referred to herein as the “PMF Loan Documents.” Pursuant to the terms of the PMF Loan Agreement, on July 8, 2024, ZP Dysart issued the PMF Note with the maximum principal amount of $1,620,000 to PMF (the “Maximum Amount”). Interest accrues at the rate of 12% per annum, with ZP Dysart paying interest only in arrears, in monthly installment payments, beginning on August 1, 2024 through July 1, 2029 (the “Maturity Date”). ZP Dysart may prepay the PMF Loan in full or in part at any time. However, during the first 48 months of the term of the loan, if ZP Dysart pays any principal payment, ZP Dysart will pay to PMF a prepayment premium equal to (i) 5% of the amount of principal prepaid in months 1-24; (ii) 2% of the amount of principal prepaid in months 25-36; and (iii) 1% of the amount of principal prepaid in months 36-48, which amount will be due and payable at the time ZP Dysart pays the principal payment. During the nine months ended September 30, 2024, the Company borrowed $1,020,000 of the Maximum Amount and received net proceeds of $983,940, net of origination fees and costs of $36,060. As of September 30, 2024, the principal amount of the loan is $1,020,000 and accrued interest payable amounted to $10,200. During the existence of any event of default, PMF may, at its option, exercise any one or more of the remedies described in the PMF Loan Documents or otherwise available, including declaring all unpaid indebtedness then evidenced by the Note (including any late charges that are then due and payable, any advances thereafter made from the loan and any accruing costs and reasonable attorneys’ fees which are the obligation of ZP Dysart under the PMF Loan Documents) to become immediately due and payable. Unless PMF otherwise elects, such acceleration will occur automatically upon the occurrence of any event of default described in PMF Loan Agreement or PMF Deed. After maturity or during the existence of any event of default, or at any time that ZP Dysart is more than 10 days delinquent in the payment of money as required by the Note or the other Loan Documents (whether or not Holder has given any notice of default or any cure period has expired), then all amounts outstanding thereunder will thereafter bear interest at the default rate of 18% per annum from the date such payment became due until paid, but in no event to exceed the highest rate lawfully collectible under applicable law. Pursuant to the terms of the PMF Loan Agreement, following ZP Dysart’s satisfaction of the conditions to funding the PMF Loan and recordation of the PMF Deed, the loan proceeds will be disbursed in multiple advances through escrow, first in the form of an initial advance in the amount of $1,020,000 for the purpose of contributing funding towards acquiring the Surprise Property (the “Acquisition Advance”). The remaining loan proceeds will be used for the purpose of financing for the completion of Sunday Goods’ Work (as hereinafter defined) (the “Construction Advances”). Following the Acquisition Advance, subject to satisfying the conditions set forth in the PMF Loan Agreement, ZP Dysart will be entitled to request the Construction Advances from the remaining loan proceeds at the following stages of completion of the construction of Sunday Goods’ Work: (i) first advance in the amount of $300,000 at 50% completion, and (ii) final advance in the amount of $300,000 at 100% completion and issuance of certificate of occupancy. The PMF Loan Agreement contains representations, warranties and covenants customary for a transaction of this type. Pursuant to the terms of the Unconditional Repayment Guaranty (the “PMF Guaranty”), dated as of July 8, 2024, by Zoned Properties, Inc. in favor of PMF, the Company guaranteed to PMF the full and prompt payment of the principal sum of the PMF Note or so much thereof that may be outstanding at any one time or from time to time in accordance with its terms when due, by acceleration or otherwise, together with all interest accrued thereon, and the full and prompt payment of all other sums, together with all interest accrued thereon, when due under the terms of the PMF Loan Agreement, the PMF Note, and in any deed of trust, security agreement, lease assignment and other assignment or agreement referred to in the PMF Loan Agreement or the PMF Note and/or now or hereafter securing the PMF Note or setting forth any obligations of ZP Dysart in connection with the loan. 39 We may secure additional financing to acquire and develop additional and existing properties. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow our business operations. Cash Flow For the Nine Months Ended September 30, 2024 and 2023 Net cash flow provided by operating activities was $455,363 for the nine months ended September 30, 2024, as compared to net cash flow provided by operating activities of $28,325 for the nine months ended September 30, 2023, representing an increase of $427,038. ● Net cash flow provided by operating activities for the nine months ended September 30, 2024 primarily reflected net income of $123,062, adjusted for the add-back of non-cash items consisting of depreciation of $269,218, amortization of debt discount of $15,648, accretion of stock-based stock option expense of $39,133, a loss on forfeited escrow deposit of $22,875, an increase in bad debt expense of $10,000, and loss from the changes in fair value from an interest rate swap of $52,503, offset by changes in operating assets and liabilities primarily consisting of an increase in deferred rent of $252,884 attributable to rent abatement on our new tenant leases at our Chicago, Illinois and Surprise, AZ properties, a decrease in accounts payable of $73,098, an increase in accrued expenses of $174,818, and an increase in security deposits payable of $62,645. ● Net cash flow provided by operating activities for the nine months ended September 30, 2023 primarily reflected a net loss of $152,966 adjusted for the add-back of non-cash items consisting of depreciation of $290,854, amortization of debt discount of $13,845, accretion of stock-based stock option expense of $110,537, a loss on forfeited escrow deposit of $15,000, a loss from unconsolidated joint ventures of $8,370, and a gain from the changes in fair value from an interest rate swap of $230,479, offset by changes in operating assets and liabilities primarily consisting of an increase in accounts receivable of $28,611, an increase in deferred rent of $145,704 attributable to rent abatement on our new tenant lease at our Woodward Properties, a decrease in prepaid expenses and other assets of $23,790, a decrease in lease incentive receivable of $20,642, a decrease in accounts payable of $11,121, an increase in contract liabilities of $38,871, and an increase in security deposits payable of $71,060 attributable to the collection of additional security deposit on our Woodward Properties. During the nine months ended September 30, 2024, net cash flow used in investing activities amounted to $3,318,916 as compared to net cash used in investing activities of $1,297,306, an increase of $2,021,610. During the nine months ended September 30, 2024, net cash used in investing activities was attributable to the purchase of rental properties of $3,290,956 primarily in connection with the acquisition of properties in Chicago, IL and Surprise, AZ, a purchase of property and equipment of $6,480, an increase in capitalized permit costs of $18,484, and an increase in escrow deposits of $2,996. During the nine months ended September 30, 2023, net cash used in investing activities was attributable to the purchase of rental property of $1,011,340 primarily in connection with the acquisition of property in Pleasant Ridge, Michigan, an increase in capitalized permit costs of $25,418, and an increase in escrow deposits of $260,548 in connection with escrow deposits made on other potential acquisitions of rental properties. During the nine months ended September 30, 2024 and 2023, net cash provided by (used in) financing activities amounted to $915,848 and $(59,803), respectively. During the nine months ended September 30, 2024, net cash provided by financing activities consisted of net proceeds from a note payable of $983,940 used to acquire our Surprise, AZ property, offset by cash used for the repayment of notes payable of $66,107 and the purchase of treasury stock of $1,985. During the nine months ended September 30, 2023, net cash used in financing activities consisted of the repayment of notes payable of $59,803. 40 Contractual Obligations and Off-Balance Sheet Arrangements Contractual Obligations We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of September 30, 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 640 120 240 240 40 Notes payable 7,230 101 575 2,443 4,111 Total $ 9,870 $ 221 $ 815 $ 2,683 $ 6,151 Off-balance Sheet Arrangements Other than discussed below, we have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us. Our off-balance sheet arrangement includes the notional amount of our interest rate swaps which we use to hedge a portion of our exposure to interest rate fluctuations. Currently, our interest rate swap fixes the variable rate interest on our bank swap note payable. We intend to fund our interest rate swap payments utilizing cash flows from operations. As of September 30, 2024, the notional amount of our interest rate swaps was $4,429,704. 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. 41 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, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting 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 sheets with changes in the fair value reflected in income (loss) from derivative - interest rate swap on 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 September 30, 2024 Interest Rate Maturity Fair Value of Liability on September 30, 2024 Fair Value of Liability on December 31, 2023 December 7, 2022 interest rate swap $ 4,429,704 7.65 % December 10, 2032 $ 175,382 $ 122,879 42 Accounts receivable We recognize an allowance for losses on accounts 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 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. 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. 43 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 . Assumptions used in the estimation of stock-based grants may include the volatility of our common stock, expected term of exercise, our discount rate and our dividend rate. 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.