10-Q: Zoned Properties Reports Q3 Net Income Growth Amidst Tenant Challenges

Zoned Properties, Inc. reported increased net income and operating cash flow for the nine months ended September 30, 2025, despite a slight revenue dip in Q3 and ongoing tenant payment issues.

Summary

• Net income for the nine months ended September 30, 2025, increased to $327,381, up from $123,062 in the prior year period.
• Total revenues for the nine months ended September 30, 2025, rose by 14.3% to $2,925,459, driven by new property acquisitions in Chicago, IL, and Surprise, AZ.
• Property Investment Portfolio revenues increased by 7.7% to $2,284,015 for the nine months ended September 30, 2025.
• Real Estate Services revenues saw a significant increase of 46.6% to $641,444 for the nine months ended September 30, 2025.
• Income from operations for the nine months ended September 30, 2025, increased by 57.7% to $1,068,283.
• Cash provided by operating activities for the nine months ended September 30, 2025, was $661,392, an increase of $206,029 from the prior year.
• The company had a cash balance of $1,113,900 as of September 30, 2025, up from $1,019,980 at December 31, 2024.
• Stockholders' equity increased to $6,247,173 as of September 30, 2025, from $5,860,514 at December 31, 2024.
• A notice of default was delivered to Broken Arrow Herbal Center, Inc. (Hana Dispensaries) for the Chino Valley lease, as they remitted only 17% of the September 2025 rent due.
• The New Tenant (Rapid Fish LLC) at the Woodward Property in Pleasant Ridge, MI, faced operational challenges and remitted only 50% of rent in July 2025, but has since become current as of November 2025.
• Construction of the new retail dispensary building on the Chicago, IL, property has been delayed due to regulatory challenges, with an expected completion and opening in late 2026.
• Material weaknesses in internal control over financial reporting were identified, including a lack of multiple levels of management review, inadequate system and manual controls, and insufficient segregation of duties due to limited financial resources.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to strong nine-month financial performance, including increased net income and operating cash flow, and successful property acquisitions. However, this is tempered by significant concerns such as a decline in three-month revenues and operating income, a tenant default, ongoing operational challenges with another key tenant, construction delays, and critically, identified material weaknesses in internal controls over financial reporting.

Positives

• Net income for the nine months ended September 30, 2025, significantly increased to $327,381 from $123,062 in the prior year.
• Total revenues for the nine months ended September 30, 2025, grew by 14.3% to $2,925,459, driven by new property acquisitions.
• Property Investment Portfolio revenues increased by 7.7% for the nine months, primarily from new properties in Chicago, IL, and Surprise, AZ.
• Real Estate Services revenues increased by 46.6% for the nine months, due to higher advisory fees, commissions, and assignment fees.
• Income from operations for the nine months ended September 30, 2025, rose by 57.7% to $1,068,283.
• Net cash provided by operating activities increased by $206,029 to $661,392 for the nine months ended September 30, 2025.
• The cash balance increased to $1,113,900 as of September 30, 2025, from $1,019,980 at December 31, 2024.
• Stockholders' equity improved to $6,247,173 as of September 30, 2025, from $5,860,514 at December 31, 2024.
• VSM completed over $10,000,000 worth of improvements to the Tempe property as of June 1, 2025.
• Sunday Goods completed construction of a new retail dispensary building on the Surprise Property and opened for business in September 2025.
• The New Tenant at the Woodward Property is current on rent obligations as of November 2025, after addressing prior payment issues.

Negatives

• Total revenues for the three months ended September 30, 2025, decreased by 1.6% to $1,013,133 compared to the same period in 2024.
• Real Estate Services revenues decreased by 11.1% for the three months ended September 30, 2025, due to a decrease in advisory fees, commissions, and assignment fees.
• Operating expenses for the three months ended September 30, 2025, increased by 10.5% to $645,809.
• Income from operations for the three months ended September 30, 2025, decreased by 17.5% to $367,324.
• Total other expenses, net, increased by 33.4% to $739,247 for the nine months ended September 30, 2025, primarily due to higher interest expense and loss from interest rate swap.
• Interest expense increased by $87,546 for the nine months ended September 30, 2025, primarily due to an increase in notes payable.
• A loss from derivative interest rate swap of $150,031 was recorded for the nine months ended September 30, 2025.
• An equity method loss of $1,655 was incurred from unconsolidated joint ventures for the nine months ended September 30, 2025.
• Broken Arrow Herbal Center, Inc. (Hana Dispensaries) remitted only approximately 17% of the September 2025 rent due for the Chino Valley lease, leading to a notice of default.
• Construction of the Chicago, IL, retail dispensary building has faced delays due to various events and regulatory challenges, pushing the expected opening to late 2026.
• Three directors resigned on April 23, 2025, resulting in the cancellation of 262,500 unvested stock options.

Risks

• Operations are subject to risks and uncertainties including financial, operational, regulatory, and the potential risk of business failure, particularly within the regulated cannabis industry.
• Any significant economic downturn in state markets where the company operates or changes in federal/state cannabis laws could negatively affect business, results of operations, and financial condition.
• Substantially all real estate properties are leased under triple-net or absolute-net leases to a limited number of Significant Tenants, creating concentration risk (60.4% of revenues from 3 tenants for the nine months ended September 30, 2025).
• Downturns in the cannabis industry or a decline in the financial stability of Significant Tenants could lead to defaults on multiple leases, reducing net income and stock value, and limiting the ability to pay operating expenses or dividends.
• If tenants are prohibited from operating or cannot pay rent, the company may lack sufficient working capital and need to seek new tenants at potentially lower rental rates.
• The Zoneomics Green technology platform's successful launch relies on an appropriate merchant banking component, which is uncertain given the federal status of regulated cannabis and related banking regulations.
• The company may need to raise significant additional capital or debt financing to acquire new properties, develop existing ones, ensure sufficient working capital, and invest in new joint ventures.
• Material weaknesses in internal control over financial reporting exist, including a lack of multiple levels of management review on complex accounting issues, inadequate system and manual controls, and insufficient segregation of duties due to limited financial resources.
• The company is exposed to market risk from changes in interest rates, managed through an interest rate swap, but the swap is not considered an effective cash flow hedge, leading to fair value changes recognized in income.
• A significant portion of the company's cash ($600,000 as of September 30, 2025) is held at major commercial banks in excess of the FDIC limit of $250,000, posing a risk of loss or lack of access to funds.

Future Outlook

The company expects to receive the full rent amount due from Broken Arrow Herbal Center, Inc. in the near future, despite the current default. The development of the new retail dispensary building in Chicago, IL, is anticipated to be completed and open for business in late 2026, though challenges related to permitting and development may cause further delays. The final payment for the Sunday Goods tenant improvement allowance is expected to be completed during the fourth quarter of 2025. The company believes its available cash will be sufficient to meet obligations for at least the next twelve months but may need to raise additional capital or debt financing for new property acquisitions, existing property development, ongoing operations, and new joint venture projects.

Management Comments

• Bryan McLaren, CEO and CFO, and Berekk Blackwell, President and COO, received bonuses of $87,413 each for the nine months ended September 30, 2025, related to project fees generated by transactions.
• The Chief Executive Officer (Bryan McLaren) is the Chief Operating Decision Maker (CODM) who evaluates segment performance and makes resource allocation decisions.

Industry Context

Zoned Properties operates within the highly regulated U.S. cannabis real estate industry, which faces unique zoning, permitting, and development challenges. The company's business model is focused on acquiring value-add direct-to-consumer real estate in state markets with robust cannabis demand. The industry is also impacted by the uncertain federal status of regulated cannabis, particularly concerning banking reforms, which affects ancillary services like the company's Zoneomics Green technology platform.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results to assess against global benchmarks or industry standards. It primarily focuses on internal financial performance and operational updates within its niche market.

Management Changes

Corporate Governance

Legal Proceedings

• No pending or threatened legal proceedings that are expected to have a material adverse effect on financial condition, results of operations, or cash flows.

Related Party Transactions

• Indemnification agreements were entered into with each of the company's directors and executive officers on August 23, 2021, requiring the company to indemnify them to the fullest extent permitted by law and advance expenses.
• Bryan McLaren, CEO and CFO, has an employment agreement (May 23, 2018) with a base annual salary of $215,000 and an annual/quarterly bonus of no less than 2% of net income, plus a Golden Parachute Agreement.
• Bryan McLaren and Berekk Blackwell, President and COO, each received a bonus of $87,413 for the nine months ended September 30, 2025, based on project fee splits.
• The company guaranteed a $300,000 loan for ZP OH Antwerp, LLC (a wholly-owned subsidiary of ZP Ohio B LLC, a cost method investee) with Jonestown Bank & Trust Co. on March 12, 2025.
• The company guaranteed a $1,500,000 loan for ZP OH Columbus, LLC (a wholly-owned subsidiary of ZP Ohio B LLC, a cost method investee) with First Fidelity Bank on April 4, 2025.

Stakeholder Impact

• Shareholders: Positive impact from increased net income and operating cash flow, but potential negative impact from tenant defaults, construction delays, and internal control weaknesses. Dilution risk from potential future capital raises.
• Employees: Compensation and benefits increased, including bonus splits on project fees, indicating positive impact on employee incentives.
• Customers (Tenants): Some tenants (Broken Arrow, Rapid Fish) are experiencing operational challenges impacting rent payments, potentially leading to lease renegotiations or defaults. Other tenants (VSM, Sunday Goods) are making significant property improvements and opening new facilities.
• Creditors: The company has increased notes payable and guaranteed loans for joint venture subsidiaries, increasing overall debt exposure. Tenant defaults could impact the company's ability to service its own debt obligations.
• Regulatory Authorities: The company's operations are subject to complex and evolving state and federal regulations in the cannabis industry, which can impact business operations and financial stability.

Next Steps

• Continue discussions with Broken Arrow Herbal Center, Inc. regarding possible rent relief and remedies to cure the event of default for the Chino Valley Lease.
• Continue discussions with the New Tenant (Rapid Fish LLC) related to future operations at the Woodward Property and under the Woodward Lease due to past operational challenges.
• Complete the final payment to Sunday Goods as part of the tenant improvement allowance during the fourth quarter of 2025.
• Address material weaknesses in internal control over financial reporting by expanding staff to include additional accounting personnel and hiring a full-time chief financial officer.
• Potentially secure additional financing through equity or debt securities, credit facilities, or other mechanisms to fund growth and operations.

Key Dates

Recommendation

The company demonstrates strong nine-month financial growth in net income and operating cash flow, driven by strategic property acquisitions and increased real estate services. However, the recent three-month performance shows a decline in revenues and operating income, coupled with significant concerns such as a major tenant default, operational challenges with another key tenant, and persistent construction delays. Critically, the identified material weaknesses in internal controls over financial reporting introduce substantial uncertainty and risk regarding the reliability of financial data and operational efficiency. While the long-term strategy in the cannabis real estate sector has potential, these immediate operational and governance issues warrant a cautious 'hold' stance until there is clear evidence of resolution for the tenant defaults and a concrete plan with demonstrable progress in addressing the internal control weaknesses.

Keywords

Cannabis Real Estate, Property Investment, SEC 10-Q, Regulated Cannabis Industry, Commercial Real Estate, Financial Performance, Tenant Default, Internal Controls, Arizona, Illinois, Michigan, Real Estate Services, Net Lease, Operating Cash Flow