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EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - DIEGO PELLICER WORLDWIDE, INCex_32-2.htm
EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - DIEGO PELLICER WORLDWIDE, INCex_32-1.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - DIEGO PELLICER WORLDWIDE, INCex_31-2.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - DIEGO PELLICER WORLDWIDE, INCex_31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Commission File Number: 333-189731

 

DIEGO PELLICER WORLDWIDE, INC.

 

 

(Name of registrant as specified in its charter)

 

Delaware   33-1223037
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

9030 Seward Park Ave, S, #501, Seattle, WA 98118

(Address of principal executive offices) (Zip Code)

 

(516) 900-3799

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated Filer   Accelerated Filer  
  Non-accelerated Filer   Small Reporting Company  
  Emerging growth company        

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of November 09, 2018 there were 20,513,249 shares of common stock issued and outstanding.

 

  

 

TABLE OF CONTENTS

 

    Page
     
  PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements 2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 23
     
  PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Mine Safety Disclosures 24
Item 5. Other Information 24
Item 6. Exhibits 24

 

 

  

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

 

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.

 

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 

 1

 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

DIEGO PELLICER WORLDWIDE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

   September 30,  December 31,
   2018  2017
   (Unaudited)   
Assets          
Current assets:          
Cash and cash equivalents  $110,125   $158,702 
Accounts receivable   190,031    170,677 
Other receivable   334,184    —   
Prepaid expenses   59,850    21,621 
Inventory   5,000    32,945 
           
Total current assets   699,190    383,945 
           
Property and equipment, net   209,393    409,128 
Security deposits   270,000    320,000 
           
Total assets  $1,178,583   $1,113,073 
           
Liabilities and deficiency in stockholders' equity          
Current liabilities:          
Accounts payable  $549,463   $626,258 
Accrued payable - related party   439,120    449,064 
Accrued expenses   293,204    207,558 
Notes payable - related party   140,958    307,312 
Notes payable   395,903    133,403 
Convertible notes, net of discount and costs   689,782    468,116 
Deferred rent   221,640    251,878 
Deferred revenue   53,000    53,000 
Derivative liabilities   5,130,804    4,106,521 
Warrant liabilities   12,081    192,350 
           
Total current liabilities   7,925,955    6,795,460 
           
Deferred revenue   221,500    262,000 
           
Total liabilities   8,147,455    7,057,460 
           
Deficiency in stockholders' equity:          
           
Preferred stock, Series A and B, par value $.0001 per share; 5,000,000 shares authorized, none issued and outstanding   —      —   
Common stock, par value $.000001 per share; 840,000,000 shares authorized, 19,134,588 and 7,128,849 shares issued, respectively   19    7 
Additional paid-in capital   39,685,478    34,422,474 
Stock to be issued   100,875    2,397,218 
Accumulated deficit   (46,755,244)   (42,764,086)
           
Total deficiency in stockholders' equity   (6,968,872)   (5,944,387)
           
Total liabilities and deficiency in stockholders' equity  $1,178,583   $1,113,073 

  

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 2

 

 

DIEGO PELLICER WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

   Three Months Ended  Three Months Ended  Nine Months Ended  Nine Months Ended
   September 30, 2018  September 30, 2017  September 30, 2018  September 30, 2017
             
Revenues                    
Net rental revenue  $405,662   $297,428   $1,068,462   $1,152,425 
Rental expense   (289,155)   (191,556)   (843,010)   (828,677)
Gross profit   116,507    105,872    225,452    323,748 
                     
Operating expenses:                    
General and administrative expenses   629,421    871,217    1,837,240    3,439,038 
Selling expense   19,616    37,855    42,955    71,744 
Depreciation expense   150,572    108,710    428,602    348,209 
Loss from operations   (683,102)   (911,910)   (2,083,345)   (3,535,243)
                     
Other income (expense)                    
Licensing revenue   13,500    13,500    40,500    40,500 
Other income (expense)   104    5,978    2,938    51,808 
Interest expense   (847,741)   (1,230,865)   (1,880,808)   (1,965,863)
Loss on debt issuance   (2,883,659)   —      (2,883,659)   —   
Write off account receivable   (23,966)   —      (23,966)   —   
Impairment loss   —      —      —      (82,478)
Extinguishment of debt   18,165    1,450,856    47,918    (4,156,980)
Change in derivative liabilities   (603,021)   (3,310,838)   2,608,996    (2,316,219)
Change in value of warrants   7,810    (67,868)   180,268    (379,084)
Total other income (loss)   (4,318,808)   (3,139,237)   (1,907,813)   (8,808,316)
                     
Provision for taxes                    
Net income (loss)  $(5,001,910)  $(4,051,147)  $(3,991,158)  $(12,343,559)
                     
Income (loss) per share - basic and diluted  $(0.30)  $(1.49)  $(0.31)  $(4.80)
                     
Weighted average common shares outstanding - basic and diluted   16,534,512    2,710,410    12,681,249    2,574,172 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 3

 

 

DIEGO PELLICER WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW

(Unaudited)

 

   Nine Months Ended  Nine Months Ended
   September 30, 2018  September 30, 2017
       
Cash flows from operating activities:          
Net income (loss)  $(3,991,158)  $(12,343,559)
Adjustments to reconcile net income (loss) to net          
  Depreciation   428,602    348,208 
  Impairment   —      82,478 
  Change in fair value of derivative liability   (2,608,996)   2,316,219 
  Change in value of warrants   (180,268)   379,084 
  Amortization of discount   1,663,917    1,289,247 
  Amortization of debt costs   46,461    —   
  Extinguishment of debt   (47,918)   4,156,980 
  Loss on debt issuance   2,883,659    —   
  Stock based compensation   1,097,350    2,094,733 
Changes in operating assets and liabilities:          
Accounts receivable   (19,354)   (25,355)
Inventory   27,945    17,049 
Prepaid expenses   (38,229)   404,019 
Deferred rent receivable   —      (20,867)
Other assets   (284,184)     
Accounts payable   (29,541)   (350,256)
Accrued liability - related parties   108,276    373,877 
Accrued expenses   (117,754)   381,097 
Deferred rent   (30,238)   (30,775)
Deferred revenue   (40,500)   (40,500)
Cash used in operating activities   (1,131,930)   (968,321)
           
Cash flows from investing activities:          
Purchase of property and equipment   —      (125,000)
           
Cash used in investing activities   —      (125,000)
           
Cash flows from financing activities:          
Debt costs   (16,000)   —   
Proceeds from notes payable   250,000    —   
Proceeds from convertible notes payable   903,750    1,278,500 
Repayments of convertible notes payable   (75,269)     
Repayments of notes payable   —      (129,050)
Proceeds from sale of common stock   20,872    —   
           
Cash provided by financing activities   1,083,353    1,149,450 
           
Net increase (decrease) in cash   (48,577)   56,129 
Cash, beginning of period   158,702    51,333 
Cash, end of period  $110,125   $107,462 
           
Cash paid for interest  $—     $—   
Cash paid for taxes  $—     $—   
           
Supplemental schedule of noncash financial activities:          
  Stock issued for debt settlement  $—     $50,000 
  Notes converted to stock  $696,815   $3,031,843 
  Accrued interest converted to stock  $64,785   $122,311 
  Value of common stock to be issued for conversion of notes and accrued interest  $1,508,909   $6,655,028 
  Value of derivative liability extinguished upon conversion of notes and accrued interest  $845,752   $5,509,516 
  Accounts payable and accrued expenses paid with common stock  $165,474   $—   
  Leasehold improvements paid by tenant  $228,866   $—   
  Debt issuance costs deducted from proceeds of notes  $35,250   $—   

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 4

 

 

Diego Pellicer Worldwide, Inc.

September 30, 2018 and 2017

Notes to the Consolidated Financial Statements

 

Note 1 – Organization and Operations

 

History

 

On March 13, 2015, Diego Pellicer Worldwide, Inc. (the Company) (f/k/a Type 1 Media, Inc.) closed on a merger and share exchange agreement by and among (i) the Company, and (ii) Diego Pellicer World-wide 1, Inc., a Delaware corporation, (“Diego”), and (iii) Jonathan White, the majority shareholder of the Company. Diego was merged with and into the Company with the Company to continue as the surviving corporation in the merger. The Company succeeded to and assumed all the rights, assets, liabilities, debts, and obligations of Diego.

 

Prior to the merger, 3,135,000 shares of Type 1 Media, Inc. were issued and outstanding. The principal owners of the Company agreed to transfer their 2,750,000 issued and outstanding shares to a third party in consideration for $169,000 and cancellation of their 2,750,000 shares. The remaining issued and outstanding shares are still available for trading in the marketplace. At the time of the merger, Type 1 Media, Inc. had no assets or liabilities. Accordingly, the business conducted by Type 1 prior to the merger is not being operated by the combined entity post-merger.

 

At the closing of the merger, Diego common stock issued and outstanding immediately prior to the closing of the merger was exchanged for the right to receive one share of the surviving corporation for each share of Diego. An aggregate of 1,081,613 common shares of the surviving corporation were issued to the holders of Diego in exchange for their common shares representing approximately 74% of the combined entity.

 

The merger has been accounted for as a reverse merger and recapitalization in which Diego is treated as the accounting acquirer and Diego Pellicer Worldwide, Inc. is the surviving corporation.

 

Business Operations

 

The Company leases real estate to licensed marijuana operators providing complete turnkey growing space, processing space, recreational and medical retail sales space and related facilities to licensed marijuana growers, processors, dispensary and recreational store operators. Additionally, the Company plans to explore ancillary opportunities in the regulated marijuana industry as well as offering for wholesale distribution branded non-marijuana clothing and accessories.

 

Until Federal law allows, the Company will not grow, harvest, process, distribute or sell marijuana or any other substances that violate the laws of the United States of America or any other country.

 

Note 2 – Significant and Critical Accounting Policies and Practices

 

The management of the Company is responsible for the selection and use of appropriate accounting policies. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements of Diego Pellicer Worldwide, Inc. were prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with U.S. GAAP.

 

This Form 10-Q relates to the three and nine months ended September 30, 2018 (the “Current Quarter”) and the three and nine months ended September 30, 2017 (the “Prior Quarter”). The Company’s annual report on Form 10-K for the year ended December 31, 2017 includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. All material adjustments which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the current quarter are not necessarily indicative of the results to be expected for the full year.

Principles of Consolidation

 

The financial statements include the accounts of Diego Pellicer Worldwide, Inc., and its wholly-owned subsidiary Diego Pellicer World-wide 1, Inc. Intercompany balances and transactions have been eliminated in consolidation.

 

Reclassifications

 

Certain prior year amounts were reclassified to conform to the manner of presentation in the current period. These reclassifications had no effect on the Company’s balance sheet, net loss or stockholders’ equity.

 

 5

 

 

Use of Estimates

 

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing transactions and share based payment arrangements, determining the fair value of the warrants received for a licensing agreement, the collectability of accounts receivable and deferred taxes and related valuation allowances.

 

Certain estimates, including evaluating the collectability of accounts receivable, could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could influence our estimates that could cause actual results to differ from our estimates. The Company intends to re-evaluate all its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.

 

Fair Value Measurements

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

Fair Value of Financial Instruments

 

As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2018 and December 31, 2017. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, prepaid expenses and accounts payable. Fair values were assumed to approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.

 

Cash

 

The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation, and the National Credit Union Share Insurance Fund, up to $250,000. The Company’s accounts at these institutions may, at times, exceed the federal insured limits. The Company has not experienced any losses in such accounts.

 

Revenue recognition

 

 

The Company has adopted the new revenue recognition guidelines in accordance with ASC 606, Revenue from Contracts with Customers (ASC 606), commencing from the period under this report. The adoption of ASU 2016-10 did not have a material impact on the financial statements and related disclosures.

 

The Company analyzes its contracts to assess that they are within the scope and in accordance with ASC 606. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, whether for goods and services or licensing, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

 

Thus, during the initial term of the lease, management has a policy of partial rent forbearance when the tenant first opens the facility to assure that the tenant has the opportunity for success. Management may be required to exercise considerable judgment in estimating revenue to be recognized.

 

 6

 

 

When the collectability is reasonably assured, in accordance with ASC Topic 840 “Leases” as amended and interpreted, minimum annual rental revenue is recognized for rental revenues on a straight-line basis over the term of the related lease.

 

When management concludes that the Company is the owner of tenant improvements, management records the cost to construct the tenant improvements as a capital asset. In addition, management records the cost of certain tenant improvements paid for or reimbursed by tenants as capital assets when management concludes that the Company is the owner of such tenant improvements. For these tenant improvements, management records the amount funded or reimbursed by tenants as deferred revenue, which is amortized as additional rental income over the term of the related lease. When management concludes that the tenant is the owner of tenant improvements for accounting purposes, management records the Company’s contribution towards those improvements as a lease incentive, which is amortized as a reduction to rental revenue on a straight-line basis over the term of the lease.

 

The Company records rents due from the tenants on a current basis. The Company has deferred collection of such rents until the tenants receive the proper governmental licenses to begin operation. Prior to 2017, management had reserved these deferred amounts due to the unlikelihood of collection.

 

Leases as Lessor

 

The Company currently leases properties to licensed cannabis operators for locations that meet the regulatory criteria applicable by the respective regulatory jurisdiction for the sale, production, and development of cannabis products. The Company evaluates the lease to determine its appropriate classification as an operating or capital lease for financial reporting purposes. The Company leases are currently all classified as operating leases.

 

Minimum base rent is recorded on a straight-line basis over the lease term after an initial period during which the tenant is establishing the business and during which the Company may forbear some or all of the rent. The Company is more likely than not to forbear some or all of the rental income which it considers uncollectable during the tenant’s initial ramp-up period (see Revenue Recognition above). The tenant is still liable for the full rent, although the collectability may be unlikely and the Company may not expect to collect it.

 

Leases as Lessee

 

The Company recognizes rent expense on a straight-line basis over the non-cancelable lease term and certain option renewal periods where failure to exercise such options would result in an economic penalty in such amount that renewal appears, at the inception of the lease, to be reasonably assured. Deferred rent is presented on current liabilities section on the consolidated balance sheets.

 

Income Taxes

 

Income taxes are provided for using the liability method of accounting in accordance with the Income Taxes Topic of the FASB ASC. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized and when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The computation of limitations relating to the amount of such tax assets, and the determination of appropriate valuation allowances relating to the realizing of such assets, are inherently complex and require the exercise of judgment. As additional information becomes available, the Company continually assesses the carrying value of their net deferred tax assets.

 

Common Stock Purchase Warrants and Other Derivative Financial Instruments

 

The Company classifies as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC Topic 815-40 “Contracts in Entity’s Own Equity.” The Company classifies as assets or liabilities any contracts that require net-cash settlement including a requirement to net cash settle the contract if an event occurs and if that event is outside our control or give the counterparty a choice of net-cash settlement or settlement in shares. The Company assesses classification of its common stock purchase warrants and other free-standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.

 

Stock-Based Compensation

 

The Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. The Company calculates the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.

 

 7

 

 

Income (loss) per common share

 

The Company utilizes ASC 260, “Earnings Per Share” for calculating the basic and diluted loss per share. In accordance with ASC 260, the basic and diluted loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per share is computed similar to basic loss per share except that the denominator is adjusted for the potential dilution that could occur if stock options, warrants, and other convertible securities were exercised or converted into common stock. Potentially dilutive securities are not included in the calculation of the diluted loss per share if their effect would be anti-dilutive. The Company has 60,158,160 and 3,054,490 common stock equivalents at September 30, 2018 and 2017, respectively. For the three month periods ended September 30, 2018 and 2017 and for the nine month period ended June 30, 2017, the potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.  

 

Legal and regulatory environment

 

The cannabis industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, and different taxation between federal and state. Federal government activity may increase in the future with respect to companies involved in the cannabis industry concerning possible violations of federal statutes and regulations.

 

Management believes that the Company is in compliance with local, state and federal regulations, While no regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

 

Recent accounting pronouncements.

 

 

In July 2018, the FASB issued ASU 2018-10 Leases (Topic 842), Codification Improvements and ASU 2018-11 Leases (Topic 842), Targeted Improvements, to provide additional guidance for the adoption of Topic 842. ASU 2018-10 clarifies certain provisions and correct unintended applications of the guidance such as the application of implicit rate, lessee reassessment of lease classification, and certain transition adjustments that should be recognized to earnings rather than to stockholders' equity. ASU 2018-11 provides an alternative transition method and practical expedient for separating contract components for the adoption of Topic 842. In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases with terms greater than 12 months. ASU 2018-11, ASU 2018-10, and ASU 2016-02 (collectively, "the new lease standards") are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect the new lease standards will have on its Condensed Consolidated Financial Statements; however, the Company anticipates recognizing assets and liabilities arising from any leases that meet the requirements under the new lease standards on the adoption date and including qualitative and quantitative disclosures in the Company’s Notes to the Condensed Consolidated Financial Statements.

 

In July 2018, the FASB issued ASU 2018-09, Codification Improvements. The amendments in ASU 2018-09 affect a wide variety of Topics in the FASB Codification and apply to all reporting entities within the scope of the affected accounting guidance. The Company has evaluated ASU 2018-09 in its entirety and determined that the amendments related to Topic 718-740, Compensation-Stock Compensation-Income Taxes, are the only provisions that currently apply to the Company. The amendments in ASU 2018-09 related to Topic 718-740, Compensation-Stock Compensation-Income Taxes, clarify that an entity should recognize excess tax benefits related to stock compensation transactions in the period in which the amount of the deduction is determined. The amendments in ASU 2018-09 related to Topic 718-740 are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of the new standard to have a material impact on the Company's Condensed Consolidated Financial Statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and supersedes the guidance in Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees . Under ASU 2018-07, equity-classified nonemployee share-based payment awards are measured at the grant date fair value on the grant date. The probability of satisfying performance conditions must be considered for equity-classified nonemployee share-based payment awards with such conditions. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the new standard on the Company's Condensed Consolidated Financial Statements.

 

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This standard amends Accounting Standards Codification 740, Income Taxes (ASC 740) to provide guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the Tax Reform Act) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. As described in the footnotes to the Annual Report on Form 10-K, the Company’s accounting for the tax effects of enactment of the Tax Reform Act is being assessed; however, in certain cases, as described below, we made a reasonable estimate of the effects on our existing deferred tax balances and valuation allowance. The Company determined that the $62.9 million recorded in connection with the re-measurement of certain deferred tax assets and liabilities, and corresponding valuation allowance was a provisional amount and a reasonable estimate at December 31, 2017. The Company has not completed the accounting with regard to the tax effects associated with an intra-entity transfer of certain intellectual property rights with the enactment of Tax Reform Act. Our accounting for the intra-entity transfer reflects the utilization of net operating losses on the basis of the laws in effect before the Tax Reform Act. The Company is evaluating the impact under Tax Reform Act on the Company's global business structure. In all aspects, the Company will continue to make and refine calculations as additional analysis is completed. The Company expects to complete the accounting assessment during the one year measurement period provided by SAB 118.

 

 8

 

 

In February 2016, the Financial Accounting Standards Board (FASB) issued guidance that requires a lessee to recognize assets and liabilities arising from leases on the balance sheet. Previous GAAP did not require lease assets and liabilities to be recognized for most leases. Additionally, companies are permitted to make an accounting policy election not to recognize lease assets and liabilities for leases with a term of 12 months or less. For both finance leases and operating leases, the lease liability should be initially measured at the present value of the remaining contractual lease payments. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change under this new guidance. This new guidance is effective for the company as of the first quarter of fiscal year 2020. The Company is evaluating the effect that this ASU will have on its financial statements and related disclosures.

 

The Company believes that other recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations and cash flows when implemented.

 

Note 3 – Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses since inception, its current liabilities exceed its current assets by $7,226,765, and has an accumulated deficit of $46,755,244 at September 30, 2018. These factors, among others raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

The Company believes that it has sufficient cash on hand and cash generated by real estate leases to sustain operations provided that management and board members continue to agree to be paid company stock in exchange for accrued compensation. Through September 30, 2018, management and board members have accepted stock for accrued compensation at the same discount that has been extended to the convertible noteholders of fifty percent. There are other future noncash charges in connection with financing such as a change in derivative liability that will affect income but have no effect on cash flow.

 

Although the Company has been successful raising additional capital, there is no assurance that the company will sell additional shares of stock or borrow additional funds. The Company’s inability to raise additional cash could have a material adverse effect on its financial position, results of operations, and its ability to continue in existence. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management believes that the Company’s future success is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional financing. There is no assurance that the Company will be able to generate sufficient cash from operations, sell additional shares of stock or borrow additional funds. However, cash generated from lease revenues is currently exceeding lease costs, but is insufficient to cover operating expenses.

 

Note 4 – Property and Equipment

 

As of September 30, 2018 and December 31, 2017, fixed assets and the estimated lives used in the computation of depreciation are as follows:

 

  

Estimated

Useful Lives

  September 30, 2018  December 31, 2017
Leasehold improvements  10 years   1,082,280    853,413 
Less: Accumulated depreciation and amortization      (872,887)   (444,285)
              
Property and equipment, net     $209,393   $409,128 

 

Note 5 – Related Party

 

As of September 30, 2018 and December 31, 2017, the Company has accrued fees to related parties in the amount of $439,120 and $449,064, respectively. For the three months ended September 30, 2018 and 2017, total cash-based compensation to related parties was $177,099 and $196,799, respectively. For the three months ended September 30, 2018 and 2017, total share-based compensation to related parties was $228,832 and $483,140, respectively. For the nine months ended September 30, 2018 and 2017, total cash-based compensation to related parties was $557,954 and $501,995, respectively. For the nine months ended September 30, 2018 and 2017, total share-based compensation to related parties was $874,471 and $2,010,853 respectively. These amounts are included in general and administrative expenses in the accompanying financial statements.

 

During the nine months ended September 30, 2018, we issued 669,082 shares of common stock for payment of a related party note in the amount of $166,354, plus accrued interest of $21,658.

 

At September 30, 2018, the Company owed Mr. Throgmartin $140,958 pursuant to a promissory note dated August 12, 2016. This note accrued interest at the rate of 8% per annum and payable upon the earlier date of (i) the second anniversary date of the promissory notes, (ii) the date all of the current investor notes, in the outstanding aggregate principal and accrued interest amount of approximately $1,480,000 at June 30, 2016, have been paid in full and the Company has achieved gross revenues of at least $3,000,000 over any consecutive 12-month period.

 

The balance of related party notes was $140,958 and $307,312 at September 30, 2018 and December 31, 2017, respectively.

 

 9

 

Note 6 – Notes Payable

 

On August 31, 2015, the Company issued a note in the amount of $126,000 with third parties for use as operating capital. The note was amended to include accrued interest on October 31, 2016 and extended the maturity date to October 31, 2018. As of September 30, 2018 and December 31, 2017 the outstanding principal balance of the note was $133,403.

 

On April 2, 2016, the Company issued a note in the amount of $262,500 for use as operating capital. Proceeds from the note were $250,000. The note bears interest at 8% per year and matures on November 29, 2018.

 

Note 7 – Convertible Notes Payable

 

The Company has issued several convertible notes which are outstanding. The note holders shall have the right to convert principal and accrued interest outstanding into shares of common stock at a discounted price to the market price of our common stock. The conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative liability of $5,130,804 at September 30, 2018. In connection with the issuance of certain of these notes, the Company also issued warrants to purchase its common stock. The Company allocated the proceeds of the notes and warrants based on the relative fair value at inception.

 

Several convertible note holders elected to convert their notes to stock during the nine months ended September 30, 2018. The table below provides a reconciliation of the beginning and ending balances for the liabilities measured using fair significant unobservable inputs (Level 3) for the nine months ended September 30, 2018:

 

   Convertible notes  Discount  Convertible Note Net of Discount  Derivative Liabilities
Balance, December 31, 2017   971,454    503,339    468,116    4,106,521 
Issuance of convertible notes   3,242,734    3,208,525    34,209    4,900,329 
Conversion of convertible notes   (830,145)   (175,000)   (655,144)   (1,267,049)
Repayment of convertible notes   (75,269)        (75,269)     
Change in fair value of derivatives   —      —      —      (2,608,997)
Amortization   —      (917,870)   917,870    —   
Balance September 30, 2018  $3,308,774   $2,618,994   $689,782   $5,130,804 

  

During the nine months ended September 30, 2018, $830,145 of notes and $69,037 of accrued interest was converted into 6,673,717 shares of common stock. A gain on extinguishment of debt of $47,918 has been recorded related to these conversions.

 

On July 17, 2018, the Company entered into a certain Equity and Debt Restructure Agreement with two, long-time investors in the Company (the “Restructure Agreement”). Pursuant to the material terms of the Restructure Agreement, the investors agreed to return and cancel their collective 2,774,093 restricted Company common shares, which had been received from the prior conversion of their older convertible notes, in exchange for the Company’s issue to them of recast convertible promissory notes. Accordingly, on the same date, these investors were each issued a First Priority Secured Promissory Note (the “Note” or “Notes”), in the principal amount of $1,683,557.77 and $545,606.96, respectively. In connection with this transaction, one of these investors agreed to loan the Company an additional $700,000. To date the Company has received $200,000 cash proceeds of the additional $700,000 loan. Fair value of 2,774,093 restricted Company common shares were determined in the amount of $443,855 using market price and fair value of the embedded conversion feature were determined in the amount of $3,527,513 using Black Sholes Merton Option Model. As the result of the transaction, the Company recorded $2,883,658 in financing costs, and $2,429,275 as debt discount. 

The following assumptions were used in calculations of the Black Scholes model for the periods ended September 30, 2018 and December 31, 2017.

 

    September 30, 2018     December 31, 2017  
Risk-free interest rates     1.89 - 2.33 %     1.28-1.76 %
Expected life (years)     0.03 - 2.00 years       0.02-1.23 year  
Expected dividends     0 %     0 %
Expected volatility     100 - 233 %     211-354  
Diego Pellicer Worldwide, Inc. Common Stock fair value   $ 0.11     $ 1.60  

 

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Note 8 – Stockholders’ Equity (Deficit)

 

On January 14, 2018, the Company’s Board of Directors approved an amendment to our Certificate of Incorporation to increase the number of authorized shares of common stock from 195,000,000 to 495,000,000 shares.

 

On June 25, 2018, the Company’s Board of Directors approved an amendment to our Certificate of Incorporation to increase the number of authorized shares of common stock from 495,000,000 to 840,000,000 shares. In addition the Board of Directors approved a 20 for 1 reverse split of the outstanding common shares of the Company.

 

Subsequent to September 30, 2018 and on October 29, 2018, the Company effected a 20 for 1 reverse stock split on its shares of common stock. The par value and number of authorized shares of the common and preferred stock were not adjusted as a result of the reverse stock split. Unless otherwise noted, impacted amounts and share information included in the financial statements and notes thereto have been retroactively adjusted for the stock split as if such stock split occurred on the first day of the first period presented. Certain amounts in the notes to the financial statements may be slightly different than previously reported due to rounding of fractional shares as a result of the reverse stock split.

 

During the nine months ended September 30, 2018:

 

Holders of convertible notes converted $830,145 of notes and $69,037 of accrued interest into 6,673,717 shares of common stock valued at $1,938,819. Additionally, 3,884 shares, valued at $13,983, for the conversion of notes, were authorized but not issued as of September 30, 2018. Shares authorized but unissued at December 31, 2017 totaling 24,488 shares were issued during 2018.

 

We issued 40,500 common shares as security for the payment of convertible notes. The shares, valued at $26,730 are held in escrow, are refundable and are recorded in a contra equity account.

 

We sold 41,500 shares of common stock and received proceeds of $20,872. Of these shares, 5,000 valued at $2,648, were not issued as of September 30, 2018. We issued 16,804 shares of common stock that were sold in 2017 and classified as shares to be issued at December 31, 2017.

 

We issued 2,108,587 shares of common stock, valued at $301,253 as share-based compensation to related parties. Additionally, 280,693 shares, valued at $130,868, were authorized to be issued for related party services, but were not issued as of September 30, 2018. We issued 1,023,367 shares of common stock that were authorized as share-based compensation to related parties in 2017 and classified as shares to be issued at December 31, 2017.

 

We issued 361,275 shares of common stock, valued at $70,680, for services. Additionally, 22,306 shares, valued at $4,232 for services, were authorized but not issued as of September 30, 2018. We issued 98,417 shares of common stock that were authorized as share-based compensation in 2017 and classified as shares to be issued at December 31, 2017.

 

We issued 669,082 shares of common stock for payment of a related party note in the amount of $166,354, plus accrued interest of $21,658.

 

We issued an excess 273,245 shares of common stock to a related party; these shares are in the process of being cancelled.

 

We issued 75,000 shares of common stock, valued at $47,254, to settle accounts payable to a consultant. 

 

We issued 125,000 shares of common stock, valued at $20,500, for an inducement of extension of sublease.

 

As a condition of management employment, the Board of Directors approved employment agreements with three key executives. This agreement provided that additional shares will be granted each year at February 1 over the term of the agreement should their shares as a percentage of the total shares outstanding fall below prescribed ownership percentages. The CEO received an annual grant of additional shares each year to maintain his ownership percentage at 10% of the outstanding stock. The other two executives receive a similar grant to maintain each executive’s ownership percentage at 7.5% of the outstanding stock. At September 30, 2018, there is $392,998 accrued for the annual grants, representing 1,849,091 shares. The Company recorded compensation expense of $544,647 for the nine months ended September 30, 2018. The Company issued 748,896 shares that were accrued during 2018. The Company issued 1,161,065 shares of common stock that were accrued in 2017 and classified as shares to be issued at December 31, 2017.

 

Common stock warrant activity:

 

The Company has determined that certain of its warrants are subject to derivative accounting. The table below provides a reconciliation of the beginning and ending balances for the warrant liabilities measured using fair significant unobservable inputs (Level 3) for the nine months ended September 30, 2018:

 

Balance at December 31, 2017  $192,350 
Issuance of warrants   —   
Change in fair value during period   (180,269)
Balance at September 30, 2018  $12,081 

 

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The following assumptions were used in calculations of the Black Scholes model for the periods ended September 30, 2018 and December 31, 2017.

 

    September 30, 2018     December 31, 2017  
Annual dividend yield     0 %     0 %
Expected life (years)     1.67 - 8.9 years       3 - 10  
Risk-free interest rate     2.52 - 3.05 %     1.50 – 2.40 %
Expected volatility     188 - 230 %     177 - 284 %

 

Common stock option activity:

 

During the nine months ended September 30, 2018, the Company recorded total option expense of $238,599.

 

Note 9 – Subsequent Events.

 

Subsequent to September 30, 2018, the Company issued 1,378,661 shares of common stock for the conversion of convertible notes and accrued interest.

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS

 

The following discussion and analysis of the results of operations and financial condition of Diego Pellicer Worldwide, Inc. (the “Company”, “we”, “us” or “our”) should be read in conjunction with the financial statements of Diego Pellicer Worldwide, Inc. and the notes to those financial statements that are included elsewhere in this Form 10-Q. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Business sections in the financial statements and footnotes included in the Company’s Form 10-K filed on April 17, 2018 for the year ended December 31, 2017. Words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements.

 

Opportunity in an untapped industry with multi-billion-dollar potential

 

The demand for marijuana products is a multi-billion-dollar market that has only recently begun to become mainstream. Many challenges face the marijuana entrepreneur. Therein lies the opportunity.

 

Regulation and reality

 

Sales of marijuana on the black market topped $46.4 billion in 2016. That becomes a very conservative estimate of the size of the market in the United States. Distribution was driven underground for years by the Controlled Substance Act passed by Congress nearly 50 years ago. The favorable public opinion towards the legalization is rapidly changing the political attitude toward marijuana not only on the state level but on the federal level.

 

Financing and banking

 

As doubts remain, financing is still a challenge for this industry with banks in many states not only avoiding lending to these businesses but also refusing deposits because of complicated FDIC requirements. Financing has been largely equity raises, vendor financing, and expensive convertible debt. However, with the legalization and subsequent public capital raises in Canada and the change in the political attitude, there has been an indication of more interest by institutional investors in providing capital to this industry and more banks are accepting deposits.

 

A fragmented industry

 

Most industries evolve through the same business cycle. Many small independent companies initially operate in fragmented markets in the early stages. Then there is a consolidation of the industry, with the consolidators thriving and the independent companies dwindling. The larger companies have access to less expensive capital, lower costs, better merchandising, brand name recognition, and more efficient operations. This what we offer our tenants when negotiating the lease: an agreement to acquire them when marijuana is federally legalized. This gives the tenant the ultimate opportunity to participate in the rapid consolidation that we believe will happen when marijuana is federally legalized. This consolidation will result in companies that have heretofore been unable to participate in the rapidly growing industry to be scrambling to enter the space. Diego and its tenants will already be established and consolidated. As an exit strategy, we want to position Diego to be a likely candidate for acquisition or a major player in the marketplace.

 

The opportunity

 

The first mover advantage will continue to be possible for those willing to deal with the regulatory, banking, and financial challenges in today’s market. The fragmented market, the shortage of executives skilled in challenges of the industry, scarcity of brand names, provides a company like Diego, who has proven their business model, to be a consolidator in this industry.

 

States with legalized marijuana

 

Thirty states and the District of Columbia have laws broadly legalizing marijuana in some form. Nine states and the District of Columbia have legalized marijuana for recreational use with the largest market by far, California, becoming legal.

 

The majority of all states allow for use of medical marijuana under certain circumstances. Some states have also decriminalized the possession of small amounts of marijuana. The industry is operating under stringent regulations within the various state jurisdictions.

 

 13

 

This map shows current state laws and recently approved ballot measures legalizing marijuana for medical or recreational purposes. 2

 

 

 

There are 9,397 active licenses for marijuana businesses in the U.S., according to Ed Keating, chief data officer for Cannabiz Media, which tracks marijuana licenses. This includes cultivators, manufacturers, retailers, dispensaries, distributors, deliverers and test labs. Now 306 million Americans live in a jurisdiction that has legalized some form of cannabis use. 3 BDS Analytics estimates that the industry paid $1 billion in state taxes in 2016 and owes another $1.4 billion for 2017. 4

 

1 “Illegal Pot Sales Topped $46.4 Billion in 2016, and that’s Good News for Marijuana Entrepreneurs,” Inc., January 17, 2017, Will Yakowicz.

2 CNN Money, “The Legal Marijuana Market is Booming,” January 31, 2018, by Aaron Smith

3 Frontier Financial Group, ‘The Cannabis Industry Annual Report: 2017 Legal Marijuana Outlook,”

4 CNN Money, “The Legal Marijuana Market is Booming,” January 31, 2018, by Aaron Smith

 

The recent legalization in states such as California and probable legalization in Florida present opportunities many times that of Washington and Colorado. The Company is exploring opportunities in Oregon, California and Florida and is getting inquiries from other potential operators in other jurisdictions such as Michigan.

 

States introducing and expanding legalized marijuana laws

 

The legalized cannabis market is about to get a lot bigger, with Canada planning to legalize in 2018 and Eastern states in the U.S. rushing towards legalization. States that have bills to legalize marijuana

 

Arizona Louisiana New Jersey
     
Arkansas Maryland New Mexico
     
Connecticut Michigan Ohio
     
Delaware Minnesota Pennsylvania
     
Florida Missouri Rhode Island
     
Georgia Mississippi Vermont
     
Hawaii Missouri West Virginia
     
Illinois Montana Wisconsin
     
Kansas New Hampshire  
     
Kentucky New York  

 

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Recent developments at the federal level

 

Pressures from the states with legalized cannabis industries have been exerted by those state’s Senators and Congressmen. Both informal and formal efforts have been increased by these states. The following are the most recent:

 

  New York Democratic Senator Chuck Schumer introducing legislation to remove cannabis from the DEA’s list of controlled substances, to decriminalize pot at a federal level and effectively allow states to decide how to regulate the use of medical or recreational marijuana without concern for federal law.
     
  President Trump cut a deal with Colorado Senator Corey Gardner, R-Colo. to allow states to decide what to do about cannabis.
     
  Senator Mitch McConnell’s R-KY introduced his own legislation to make hemp farming legal in the U.S.
     
  Former Speaker of the House John Boehner became a director with cannabis company Acreage Holdings.
     
  The Food and Drug Administration setting up for an approval of the first cannabis-based drug from GW Pharmaceuticals Plc (GWPH).
     
  The Veteran’s Administration now wants to study the effectiveness of cannabis for chronic pain and PTSD. 5
     
  Marijuana-specific legislation recently introduced before the 115 U.S. Congress: 6

 

  o House Bill 974-Respect State Marijuana Laws Act of 2017- amending the Controlled Substance Act so that its language does not apply to people complying with state marijuana laws.
     
  o House Bill 1227-Ending Marijuana Prohibition Act of 2017-deregulate marijuana federally.
     
  o House Bill 1823-Marijuana Revenue and Regulation Act-amending the Internal Revenue Code for taxation and regulation of marijuana products.
     
  o House Bill 1841-Regulate Marijuana Like Alcohol Act- removing marijuana from the Controlled Substance Act

 

The projected U.S. cannabis industry’s growth

 

The Cannabis Industry’s Annual Report for 2017 projects the following robust growth of legal marijuana sales: 7

 

 

 

5 The Street, “Cannabis Industry Sits on Precipice of Major Expansion, March 28, 2018, by Bill Meagher

6 The Cannabist, Federal Marijuana Bills Boosted by New Supporters as Congress Gets Back to Work, January 9, 2018, Alicia Wallace.

7 New Frontier, “The Cannabis Industry Annual Report: 2017 Legal Marijuana Outlook,”

 

Diego’s value proposition

 

Value proposition 1: By providing branding, training, unique accessories, purchasing services, site selection, standardized design, and experienced construction supervision, the tenant reduces his startup time, reduces expenses, increases their efficiency, and builds their gross margin. Diego provides the capital for preopening lease costs and tenant improvements. This results in a turnkey retail location for the tenant. Thus, Diego’s real estate, consulting and accessory sales are positioned to deliver a premium return on our investment.

 

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Value proposition 2: With a demonstrated profitability, Diego has the choice of selling the operations of a selected facility in combination with the tenant and then securing a management contract for that facility. The proceeds can be used to further expand our branded stores and production facilities.

 

Value proposition 3: On select leases, Diego negotiates an acquisition contract with selected licensed tenants to acquire their operations. This contract will be executed at Diego’s option, and upon changes to federal law, introduces our second value proposition—ownership of operations in an industry that is projected to exceed $8 billion by 2018.

 

What is Diego’s Strategy?

 

Phase 1 - brand and develop facilities and lease to licensed operators

 

Diego is initially a real estate and a consumer retail development company that is focused on high quality recurring revenues resulting from leasing real estate to licensed cannabis operators. Diego provides a competitive advantage to these operators by developing Diego Pellicer as the world’s first premium marijuana brand and by establishing the highest quality standards for its facilities and products.

 

The Company’s first phase strategy is to acquire and develop the most prominent and convenient real estate locations for the purposes of leasing them to state licensed operators in the cannabis industry. Diego’s first phase revenues result from leasing real estate and selling non-cannabis related accessories to our tenants. The company has developed a brand name strategy, providing training, design services, branded accessories, systems and systems training, locational selection, and other advisory services to their tenants. We enter into branding agreements with our tenants. In addition, part of the vetting process in finding the proper tenant is selecting a tenant that shares the Company’s values and strictly complies with state laws, follows strict safety and testing requirements and provides consistent, high-quality products. If the tenants do not comply, they will not be allowed to use the brand.

 

Simultaneous to the signing of the lease, Diego may secure an option to purchase the tenant’s operations with selected Diego operators/tenants.

 

Diego Pellicer Management Company, will license the upscale Diego Pellicer brand to qualified operators and receive royalty payments, while providing expertise in retail, product and manufacturing from Diego’s accomplished management team with extensive industry experience. 

 

Phase 2 - Sell facilities and retain a management contract

 

Having developed a brand name and demonstrated operational excellence, the company has facilities with a proven superior earning power. The company, in combination with the licensed tenant, may choose to sell the real estate and the operating company and secure a management contract to manage the property the “Diego Way.” This will generate capital with which we can further expand our network of stores.

 

Phase 3 - Exercise the option to purchase and roll up licensed cannabis operations

 

When it becomes federally legal to do so, Diego will execute the acquisition contracts, consolidate our selected tenants and become a nationally branded marijuana retailer and producer concurrent with the change of federal law. We expect this to be a frantic time for larger companies to look for acquisitions, the opportunity to raise capital for further expansion or the exercise an exit strategy.

 

What does our premium branding accomplish?

 

A very important aspect of our marketing plan is to build Diego Pellicer as a luxury brand. This not only enables us to establish a premium brand, but also to generate significant revenues from non- cannabis products.

 

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The Company is establishing several levels of branding and will use these to appeal to the various segments of the marketplace depending upon the location, competition, legal constraints, and budget. Standard store templates are being developed, complimentary accessories selectively designed, and customer preferences and segments analyzed.

 

Our Seattle and Denver stores have been met with enthusiastic demand growing revenues quickly. This is proving the initial Diego concept.

 

We have proven this to be a winning strategy

 

Diego is positioning itself to be a dominate player in the marijuana marketplace. Diego has proven this by being a fully integrated marijuana retail operation and premium brand, capitalizing on the beautifully designed retail stores offering the finest quality products at competitive prices.

 

What we accomplished in 2017

 

2017 was a time of great transition for the Company. An effective and experienced team had to be assembled to complement the current executives with knowledge and experience in real estate operations, banking, site selection, branding, facility design, corporate finance, investor relations, Additional capital needed to be raised in order to have sufficient capital to finish construction of the four facilities, build more facilities, and achieve a positive cash flow. Much of the Company’s debt was delinquent and needed to be repaid or renegotiated. New markets had to be explored, new alliances forged, and opportunities prioritized.

 

Two experienced executives joined the management team in the first quarter 2017 after having served in a consulting capacity since the summer of 2016. One executive had been the CEO of a publicly traded company for 15 years and the other had founded and operated several financial institutions and served on the boards of several public companies. The Company also engaged an advisor with extensive experience in national brand retail site selection, a consultant for branding and design that had been instrumental in the design of Apple stores and other facilities, and a world-renowned architect to design and standardize our retail facilities.

 

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$1,278,500 in new capital was raised. New markets were explored. Four facilities were opened and began generating rents. All delinquent notes were renegotiated, consolidated, and extended. In 2017, Diego opened three Colorado facilities. With the Washington facility having opened in the latter part of 2016, Diego now had four facilities generating rent in 2017 for nearly the full year. The tenants in their first year of operation were quickly growing their sales and improving operational efficiency. Diego worked with these tenants, partially forbearing on their rent so as to allow these operators to strengthen their position and become capable of paying full rents. The properties generating rents in 2017 are as follows:

 

Table 1: Property Portfolio

 

Purpose     Size       City       State  
Retail store (recreational and medical)     3,300 sq.       Denver       CO  
Cultivation warehouse     18,600 sq.       Denver       CO  
Cultivation warehouse     14,800 sq.       Denver       CO  
Retail store (recreational and medical)     4,500 sq.       Seattle       WA  

 

Diego’s Washington tenant opened our first flagship store in Seattle in October 2016. The Colorado tenant opened the Diego Denver branded flagship store in February 2017. In addition, Diego’s two cultivation facilities in Denver, CO began production in late 2016. The retail facilities have shown steady growth in sales since their opening.

 

 

Diego Pellicer Seattle

 

 

 

 

 

 18

 

 

 

 

 

 

Diego Pellicer Denver

 

 19

 

 

 

 

Diego will continue this strategy in states where recreational or medical marijuana sales and cultivation are legal under state law. Our business model is recurring lease revenue and is entirely scalable. Our success will dependent upon continuing to raise capital for expansion, continual improvement of our business model, standardizing store design, controlling costs, and continuing to develop the brand.

 

Summary of third quarter of 2018 results

 

As the result of decreased in general and administrative expenses, the loss from operations declined for the quarter ended September 30, 2018 compared to the prior year’s quarter ended September 30, 2017.

 

RESULTS OF OPERATION

 

Three months ended September 30, 2018 compared to three months ended September 30, 2017

 

After rental expense the gross margins on the lease were as follows:

 

   Three Months Ended  Three Months Ended
   September 30, 2018  September 30, 2017
Revenues          
Net rental revenue  $405,662   $297,428 
Rental expense   (289,155)   (191,556)
Gross profit   116,507    105,872 
General and administrative expenses   629,421    871,217 
Selling expense   19,616    37,855 
Depreciation expense   150,572    108,710 
Loss from operations   (683,102)   (911,910)

 

Revenues. For the three months ended September 30, 2018 and 2017, the Company leased three facilities to licensees in Colorado and one in Washington. The three months ended September 30, 2018 is the beginning of the second year of operations for these licensees and Diego is now collecting some premium rents. Diego, however, is still forbearing on the premium rents contractually due from the tenant as a result of the cost of leasehold improvements and the deferral of preopening rents. These will become recorded as revenue when the Company considers the premium rents collectible considering the relative success of the tenant’s operations. These licensees have now had their opening year behind them and are experiencing increasing revenues in the second year of operations. This is a significant event for the company. For the first time in the company’s history there are four facilities generating some premium rental revenue. As a result, total revenue for the three months ended September 30, 2018 was $405,662, as compared to $297,428 for the three months ended September 30, 2017, an increase of $108,234, due to premium rental revenue generated during Q3 2018.

 

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Gross profit. Rental revenue for the quarter ended September 30, 2018 increased over the prior year’s third quarter, rental income due to forbearance, resulting in a gross profit of $116,507.

 

General and administrative expense. Our general and administrative expenses for the three months ended September 30, 2018 were $629,421, compared to $871,217 for the three months ended September 30, 2017. The decline of $241,796 was largely attributable a reduction in executive stock compensation and consulting fees during nine months ended September 30, 2018.

 

Selling expense. Our selling expenses for the nine months ended September 30, 2018 were $19,616, compared to $37,855 for the nine months ended September 30, 2017. The decline of $18,239 was due to reduction of services used related to selling and marketing. 

 

   Three Months Ended  Three Months Ended
   September 30, 2018  September 30, 2017
Other income (expense)          
Licensing revenue   13,500    13,500 
Other income (expense)   104    5,978 
Interest expense   (847,741)   (1,230,865)
Loss on debt issuance   (2,907,625)   —   
Extinguishment of debt   18,165    1,450,856 
Change in derivative liabilities   (603,021)   (3,310,838)
Change in value of warrants   7,810    (67,868)
Net other income   (4,318,808)   (3,139,237)

 

The Net Other Income was the effect of the decline in market value of the company’s stock had on the derivative liability of $603,021 offset by recording the cost of triggering technical default penalties on certain convertible notes and the financing costs of new debt incurred by the Company.

 

 

Nine months ended September 30, 2018 compared to nine months ended September 30, 2017

 

After rental expense the gross margins on the lease were as follows:

 

   Nine Months Ended  Nine Months Ended
   September 30, 2018  September 30, 2017
Revenues          
Net rental revenue  $1,068,462   $1,152,425 
Rental expense   (843,010)   (828,677)
Gross profit   225,452    323,748 
General and administrative expenses   1,837,240    3,439,038 
Selling expense   42,955    71,744 
Depreciation expense   428,602    348,209 
Loss from operations   (2,083,345)   (3,535,243)

 

Revenues. For the nine months ended September 30, 2018 and 2017, the Company leased three facilities to licensees in Colorado and one in Washington. The nine months ended September 30, 2018 is the beginning of the second year of operations for these licensees and Diego is now collecting some premium rents. Diego, however, is still forbearing on the premium rents contractually due from the tenant as a result of the cost of leasehold improvements and the deferral of preopening rents. These will become recorded as revenue when the Company considers the premium rents collectible considering the relative success of the tenant’s operations. These licensees have now had their opening year behind them and are experiencing increasing revenues in the second year of operations. This is a significant event for the company. For the first time in the company’s history there are four facilities generating some premium rental revenue. As a result, total revenue for the nine months ended September 30, 2018 was $1,068,462, as compared to $1,152,425 for the nine months ended September 30, 2017, a decrease of $83,963.

 

Gross profit. Rental revenue for the periods ended September 30, 2018 decreased over the prior year’s nine months ended September 30, 2018, rental income due to forbearance, resulting in a gross profit of $225,452.

 

General and administrative expense. Our general and administrative expenses for the nine months ended September 30, 2018 were $1,837,240, compared to $3,439,038 for the nine months ended September 30, 2017. The decline of $1,370,552 was largely attributable a reduction in executive stock compensation and consulting fees during nine months ended September 30, 2018.

 

Selling expense. Our selling expenses for the nine months ended September 30, 2018 were $42,955, compared to $71,744 for the nine months ended September 30, 2017. The decline of $28,789 was due to reduction of services used related to selling and marketing

 

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   Nine Months Ended  Nine Months Ended
   September 30, 2018  September 30, 2017
Other income (expense)          
Licensing revenue   40,500    40,500 
Other income (expense)   2,938    51,808 
Interest expense   (1,880,808)   (1,965,863)
Loss on debt issuance   (2,907,625)   —   
Impairment loss   —      (82,478)
Extinguishment of debt   47,918    (4,156,980)
Change in derivative liabilities   2,608,996    (2,316,219)
Change in value of warrants   180,268    (379,084)
Net other income   (1,907,813)   (8,808,316)

 

The Net Other Income was the effect of the decline in market value of the company’s stock had on the derivative liability of $2,608,996 offset by recording the cost of triggering technical default penalties on certain convertible notes and the financing costs of new debt incurred by the Company.

 

LIQUIDITY AND CAPITAL RESOURCES 

 

  

Nine months

Ended

 

Nine months

Ended

  Increase (Decrease)
   September 30, 2018  September 30, 2017  $  %
Net Cash used in operating activities   (1,131,930)   (968,321)   (163,609)   (14)%
Net Cash used in investing activities  $—     $(125,000)  $125,000    * 
Net Cash provided by financing activities   1,083,353    1,149,450    (66,097)   (6)%
Net Increase (Decrease) in Cash   (48,577)   56,129    (104,706)   (187)%
Cash - beginning of period   158,702    51,333    107,369    209%
Cash - end of period  $110,125   $107,462   $2,663    2%

 

* Not divisible by zero

 

Operating Activities. For the nine months ended September 30, 2018, the net cash used of $1,131,930 was a decrease over the same period of the prior year of $163,609. The loss from operations after non-cash adjustments increased by $ 968,259 over the prior year, offset by a decrease in net assets and liabilities of $1,072,137.

 

Investing Activities. There were no investing activities for the nine months ended September 30, 2018.

 

Financing Activities. During the nine months ended September 30, 2018, $903,750 in proceeds were from convertible notes payable, $250,000 in proceeds were from notes payable and 20,872 from the sale of common stock. Payments of convertible notes payable was $135,000.

 

Non-Cash Investing and Financing Activities. Non-cash activities for the nine months ended September 30, 2018 was the conversion of convertible notes of $696,815 plus interest of $64,785 to common stock valued at $1,508,909. The issuance of common stock for accounts payable, and the assuming of a tenant’s liabilities for leasehold improvements of $228,866.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

 22

 

 

ITEM 4. CONTROLS AND PROCEDURES.

 

We carried out an evaluation required by Rule 13a-15 of the Exchange Act under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” and “internal control over financial reporting” as of the end of the period covered by this Report.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures. Our principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of the end of the period covered by this Annual Report (the “Evaluation Date”), pursuant to Rule 13a-15(b) under the Exchange Act.

 

Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, due to material weaknesses in our control environment and financial reporting process.

 

Limitations on the Effectiveness of Controls

 

Our management, including our principal executive officer and principal financial officer, does not expect that our Disclosure Controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision- making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.

 

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the three months ended September 30, 2018 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 23

 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self- regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

ITEM 1A. RISK FACTORS

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibits    
     
31.1   Certification of Principal Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Principal Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification of Principal Executive Officer pursuant to 18U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification of Principal Financial Officer of the Registrant pursuant to 18U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Schema
   
101.CAL XBRL Taxonomy Calculation Linkbase
   
101.DEF XBRL Taxonomy Definition Linkbase
   
101.LAB XBRL Taxonomy Label Linkbase
   
101.PRE XBRL Taxonomy Presentation Linkbase

 

*In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed. 

 

 24

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  DIEGO PELLICER WORLDWIDE, INC.
     
Date: November 14, 2018 By: /s/ Ron Throgmartin
    Ron Throgmartin, Chief Executive Officer
    (Principal Executive Officer)