Notes
to the Consolidated Financial Statements
Note
1 – Organization and Operations
History
On
March 13, 2015 (“closing date”), Diego Pellicer Worldwide, Inc. (f/k/a Type 1 Media, Inc.) (the “Company”)
closed on a merger and share exchange agreement (the “Merger 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 (the “Majority Shareholder”). Pursuant to the terms of the Merger Agreement, Diego was merged with
and into the Company, with the Company to continue as the surviving corporation (the “Surviving Corporation”) in the
Merger, and the Company succeeding to and assuming all the rights, assets, liabilities, debts, and obligations of Diego (the “Merger”).
Prior
to the merger, Type 1 had 62,700,000 shares issued and outstanding. The principal owners of the company have agreed to transfer
their 55,000,000 issued and outstanding shares to a third party in consideration for $169,000 and cancellation of their 55,000,000
shares. The remaining issued and outstanding shares are still available for trading in the marketplace. At the time of the merger,
Type 1 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 1 share of the surviving legal entity. An aggregate of 21,632,252 common shares of the surviving entity
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. (f/k/a Type 1 Media, Inc.) is the surviving legal entity.
Business
Operations
The
Company leases real estate to licensed marijuana operators, including but not limited to, 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.
The
Company does not and will not, until such time as Federal law allows, 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 and the appropriateness
of accounting policies and their application. 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 as a result 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
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”).
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
Financial
statement amounts for the year ended December 31, 2014 have been reclassified to conform to current period presentation.
New
accounting pronouncements
From
time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies
that may have an impact on the Company’s accounting and reporting. The Company believes that such 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.
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 the licensing agreement,
the collectability of accounts receivable and deferred taxes and related valuation allowances.
Certain
of our 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 have an effect
on our estimates that could cause actual results to differ from our estimates. We re-evaluate all of our 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 or not 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 and December 31, 2015 and December 31, 2014. 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 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.
Property
and equipment and depreciation policy
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is provided for on a straight-line basis over the
useful lives of the assets. Expenditures for additions and improvements are capitalized; repairs and maintenance are expensed
as incurred.
The
Company intends to take depreciation or amortization on a straight-line basis for all properties, beginning when they are put
into service, using the following life expectancy:
Equipment
– 5 years
Leasehold
Improvements – 10 years, or the term of the lease, whichever is shorter
Buildings
– 20 years
Inventory
The
Company’s inventory is stated at the lower of cost or estimated realizable value, with cost primarily determined on a weighted-average
cost basis on the first-in, first-out (“FIFO”) method.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are presented at their face amount, less an allowance for doubtful accounts, on the balance sheets. Accounts receivable
consist of revenue earned and currently due from sub lessee. We evaluate the collectability of accounts receivable based on a
combination of factors. We recognize reserves for bad debts based on estimates developed using standard quantitative measures
that incorporate historical write-offs and current economic conditions. As of December 31, 2015, the outstanding balance allowance
for doubtful accounts is zero.
The
policy for determining past due status is based on the contractual payment terms of each customer. Once collection efforts by
the Company and its collection agency are exhausted, the determination for charging off uncollectible receivables is made.
Revenue
recognition
The
Company recognizes revenue from rent, tenant reimbursements, and other revenue sources once all of the following criteria are
met in accordance with SEC Staff Accounting Bulletin 104,
Revenue Recognition,
(“SAB 104”): (a) the
agreement has been fully executed and delivered; (b) services have been rendered; (c) the amount is fixed or determinable; and
(d) the collectability of the amount is reasonably assured.
In
accordance with ASC 840
(“Leases”), as amended and interpreted, minimum annual rental revenue is recognized
in rental revenues on a straight-line basis over the term of the related lease. Rental revenue recognition commences when the
tenant takes possession or controls the physical use of the leased space. In order for the tenant to take possession, the leased
space must be substantially ready for its intended use. To determine whether the leased space is substantially ready for its intended
use, management evaluates whether the Company or the tenant is the owner of tenant improvements for accounting purposes. When
management concludes that the Company is the owner of tenant improvements, rental revenue recognition begins when the tenant takes
possession of the finished space, which is when such tenant improvements are substantially complete. In certain instances, when
management concludes that the Company is not the owner (the tenant is the owner) of tenant improvements, rental revenue recognition
begins when the tenant takes possession of or controls the space.
When
management concludes that the Company is the owner of tenant improvements, for accounting purposes, 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.
In
January 2014, the Company entered into an agreement to license certain intellectual property to a third party. In consideration,
the Company received warrants to purchase shares of common stock, which were valued based on an appraisal of the warrants by an
independent third party appraiser. The revenue from the licensing agreement, which is initially recorded as deferred revenue,
is being amortized over the ten year term of the licensing agreement.
The
Company records rents due from the tenants on a current basis. However, as part of the Line of Credit Agreement, the Company has
deferred collection of such rents until the tenants receive the proper governmental licenses to begin operation. It is anticipated
that such licenses should be obtained prior to the 3
rd
quarter 2016. Management has decided to take the approach and
reserve these amounts due to the contingency factor and experience with typical delays in governmental action.
Leases
as lessor
The
Company currently leases properties in locations that would be acceptable for regulatory purposes and acceptable to sub-lessees
for the manufacturing and development of their products. The Company evaluates the lease to determine its appropriate classification
as an operating or capital lease for financial reporting purposes. The Company currently has a number of leases, which are all
classified as operating leases.
Minimum
base rent for the Company’s operating leases, which generally have escalating rentals over the term of the lease, is recorded
on a straight-line basis over the lease term. The initial rent term includes the build-out, or may include a short rent holiday
period, for the Company’s leases, where no rent payments are typically due under the terms of the lease.
Leases
For
lease agreements that provide for escalating rent payments or free-rent occupancy periods, the Company recognizes rent expense
on a straight-line basis over the non-cancelable lease term and 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.
The lease term commences on the date that the Company takes possession of or controls the physical use of the property. 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.
Research
and development costs
Research
and development costs are charged to the statement of operations as incurred.
Preferred
Stock
We
apply the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification
and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments
and are measured at fair value. We classify conditionally redeemable preferred shares (if any), which includes preferred shares
that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of
uncertain events not solely within our control, as temporary equity. At all other times, we classified our preferred shares in
stockholders’ equity. Our preferred shares do not feature any redemption rights within the holders’ control or conditional
redemption features not within our control. Accordingly all issuances of preferred stock are presented as a component of consolidated
stockholders’ equity (deficit).
Common
Stock Purchase Warrants and Other Derivative Financial Instruments
We
classify 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 815-40 (“Contracts in Entity’s Own Equity”). We classify 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 (physical
settlement or net-share settlement). We assess classification of our 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
We
recognize compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards,
we calculate 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.
For non-employee stock-based awards, we calculate the fair value of the award on the date of grant in the same manner as employee
awards, however, the awards are revalued at the end of each reporting period and the pro rata compensation expense is adjusted
accordingly until such time the nonemployee award is fully vested, at which time the total compensation recognized to date equals
the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s
performance is complete. 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. We consider many factors when estimating expected forfeitures, including types of awards, employee class,
and historical experience.
Loss
per common share
Net
loss per share is provided in accordance with ASC Subtopic 260-10. We present basic loss per share (“EPS”) and diluted
EPS on the face of statements of operations. Basic EPS is computed by dividing reported losses by the weighted average shares
outstanding. Loss per common share has been computed using the weighted average number of common shares outstanding during the
year.
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 $1,844,746 and has a stockholders
deficiency of $936,325 at December 31, 2015 . 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.
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 from its stockholders. The Company’s inability
to obtain 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.
The
Company intends to continue to raise additional capital and assist the leaseholder in obtaining the proper licenses in order to
conduct their business in growing, processing and retailing cannabis products. Once the licenses are granted, we believe that
a steady stream of income will be achieved and the repayment of our advances would begin.
Note
4 – Revolving Credit Line
In
2014 the Company entered into an agreement with a tenant who intended to operate their business out of three separate properties
leased to him by the Company. He was required to obtain a state operating license to grow, process and sell cannabis products.
Until the tenant received such license, the Company provided the tenant a $2,500,000 revolving line of credit established to provide
funding to the tenant, consisting of two separate elements: (a) to fund operating costs until the development is completed, and
(b) to underwrite the rent due on the sublease agreements (the “Line”). Interest was accruing at the annual rate of
20% on the average monthly amount due on advances under the Line.
During
2014 the Company had extended $707,250 in advances against the Line to underwrite rent due during that period under the lease
agreements. As well, the Company incurred accrued and unpaid interest expenses of $70,596 for the period. The total amount, $777,846
was written off as the Company believed these amounts to be uncollectable.
During
the year ended December 31, 2015, further advances of $200,000 were made and interest was recorded in the amount of $153,523. On
September 7, 2015, the Company entered into an agreement terminating the line of credit in exchange for a one-time payment of
$200,000. The remaining accrued interest as of that date, $153,523 was written off pursuant to the agreement.
On
September 7, 2015, the Company entered into an agreement terminating the Line, and settling the amounts due under the Line for
a one time cash payment of $200,000, which was received by the Company. The Company had previously impaired the advances during
the year ended December 31, 2014 in the amount of $707,250 for advances under the Line for rent underwriting, and $70,596 for
accrued interest. During the year ended December 31, 2015 the Company wrote off $153,523 for accrued and unpaid interest expenses.
Note
5 – Note receivable
During
2015 the Company advanced $40,000 to an unrelated third party. The note was non-interest bearing and due on November 10, 2015.
The Company determined that the amount was uncollectable as of December 31, 2015.
Note
6 – Investment
In
January 2014, the Company entered into an Agreement with Plandai Biotechnology, Inc. (a publicly traded company) to license to
them certain intellectual property rights in exchange for warrants to purchase 1,666,667 shares of Plandai Biotechnology,
Inc. (“Plandai”) common stock. This license agreement carries a 10-year term with an exercise price of $0.01 per share.
The Company is to obtain certain Trademark rights certified by the government (expected by 2
nd
quarter 2016). On October
10, 2014 the Company filed its Notice of Exercise to execute the warrants to acquire the shares of Plandai, in which the shares
have not yet been issued. The sale of such shares has a “leak out” restriction on them requiring that the sale of
such shares must reach a certain traded price of $0.50 per share. The Company used a third party appraisal firm to ascertain the
fair value of warrants held by the company, which was determined to be $525,567. With the Plandai shares currently trading at
$.07 per share, the Company recorded an impairment loss of $408,900 during the year ended December 31, 2015. The Company accounts
for its investment under the cost method of accounting.
Note
7 – Property And Equipment
The
Company has incurred expenses in the build out of one of its leased properties and acquired a large POD equipment for use in growing
operations by lessee. Since the facility and equipment have not yet been put into service, no amortization on the leasehold improvement
nor depreciation on the equipment has been provided.
As
of December 31, 2015 and 2014, Fixed Assets and the estimated lives used in the computation of depreciation are as follows:
|
|
Estimated
|
|
December
31,
|
|
|
December
31,
|
|
|
|
Useful
Lives
|
|
2015
|
|
|
2014
|
|
Machinery and equipment
|
|
5 years
|
|
$
|
174,145
|
|
|
$
|
39,145
|
|
Leasehold Improvements
|
|
10
years
|
|
|
664,609
|
|
|
|
214,845
|
|
|
|
|
|
|
838,754
|
|
|
|
253,990
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated
depreciation and amortization
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and
Equipment, net
|
|
|
|
$
|
838,754
|
|
|
$
|
253,990
|
|
Note
8 – Other Assets
Security
deposits
These
deposits reflect the deposits on various property leases, most of which call for two months of rental.
Deposits
– end of lease
These
deposits represent an additional two months of rent on various property leases that apply to the “end-of-lease” period.
Note
9 – Related Party
As
of December 31, 2015 and December 31, 2014, the Company has unpaid consulting fees to related parties in the amount of $511,454
and $124,333, respectively. For the year ended December 31, 2015 and 2014, the consulting fees expensed were $870,000 and $605,989,
respectively to related parties. These amounts are included in general and administrative expenses in the accompanying financial
statements.
Note
10 – Note Payable
On
May 20, 2015, the Company entered into notes in total amount of $450,000 with third parties for use as operating capital. The
notes payable agreements require the Company to repay the principal, together with 10% annual interest by the maturity date of
November 17, 2015 or the date the Company raises capital whether through the issuance of debt, equity or any other securities.
The Company will not effect a Financing unless either (a) the proceeds of such Financing are being directed at the closing of
such Financing to irrevocably repay this Note in full, or (b) Investor consents to an alternative use of proceeds from such Financing.
The Company received a waiver from investor for the convertible note entered into May 29, 2015 (see Note 11 ). As
of December 31, 2015, the outstanding principle balance of the note is $450,000.
On
July 8, 2015, the Company entered into notes in total amount of $135,628 with third parties for use as operating capital. The
notes payable agreements require the Company to repay the principal, together with 10% annual interest by the maturity date of
October 6, 2015 or the date the Company raises capital whether through the issuance of debt, equity or any other securities, the
Company will not effect a Financing unless either (a) the proceeds of such Financing are being directed at the closing of such
Financing to irrevocably repay this Note in full, or (b) Investor consents to an alternative use of proceeds from such Financing.
As of December 31, 2015, the outstanding principal balance of the note is $135,628. In connection with the issuance of these notes,
the Company 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. The Company allocated $90,563 to the warrants and 45,065 to the debt. The difference between
the face value of the notes and the allocated value will be accreted to interest expense over the life of the loan. As of December
31, 2015, the outstanding principle balance of the note is $135,628 and $90,563 has been accreted to interest expense for the
year ended December 31, 2015.
On
August 31, 2015, the Company entered into notes in total amount of $126,000 with third parties for use as operating capital. The
notes payable agreements require the Company to repay the principal, together with 5% annual interest by the maturity date of
October 31, 2015 or the closing of a financing whereby the company receives a minimum of $126,000. As of December 31, 2015, the
outstanding principal balance of the note is $126,000. In connection with the issuance of these notes, the Company issued 126,000
shares of common stock. The Company allocated the proceeds of the notes and warrants based on the relative fair value at inception.
The Company allocated $84,000 to the common stock and $42,000 to the debt. The difference between the face value of the notes
and the allocated value will be accreted to interest expense over the life of the loan. As of December 31, 2015, the outstanding
principal balance of the note is $126,000 and $84,000 has been accreted to interest expense for the year ended December 31, 2015.
On
November 27, 2015, the Company entered into notes in total amount of $135,000 with third parties for purchasing a fixed asset.
The notes payable agreements require the Company to repay the principal, together with $15,000 interest by the maturity date of
January 26, 2016. As of December 31, 2015, the outstanding principle balance of the note is $135,000.
Note
11 – Convertible Note Payable
On
May 29, 2015, the Company entered into convertible notes in total amount of $300,000 with third parties for use as operating capital.
The convertible notes require the Company to repay the principal, together with 10% annual interest by the maturity date of November
26, 2015. In the event that the Note is not paid on the maturity date and the common stock price has a set price below $1.50,
then the note holder shall have the right to convert the amount outstanding into shares of common stock at a price of ninety percent
of the lowest trade VWAP (Volume Weighted Average Price) of twenty days prior to conversion. The Company evaluated the conversion
feature embedded in the notes in amount of $342,604 on default. In connection with the issuance of these notes, the Company 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. The Company allocated $225,920 to the warrants and 74,080 to the convertible debt. The difference between
the face value of the notes and the allocated value will be accreted to interest expense over the life of the loan. On November
26, 2015, pursuant to the original terms of the note, the holder received the rights to convert the principal balance into common
shares of the Company. The conversion feature was recognized as an embedded derivative and was valued using a Black Scholes
model that resulted in a derivative liability of $342,604 as of the measurement date. The gain on change in the value of
the derivative liability upon subsequent re-measurement as of December 31, 2015 was $133,809. As of December 31, 2015, the outstanding
principle balance of the note is $300,000 and $225,920 has been accreted to interest expense for the year ended December 31, 2015.
The
table below provides a reconciliation of the beginning and ending balances for the liabilities measured using fair significant
unobservable inputs (Level 3):
Balance at January 1, 2015
|
|
$
|
-
|
|
Issuance of embedded conversion
features on convertible note
|
|
|
342,604
|
|
Change in fair
value during period
|
|
|
(133,809
|
)
|
Balance at December 31, 2015
|
|
$
|
208,795
|
|
The
fair value of embedded conversion feature of convertible note determined using a Black Scholes Simulation. This model requires
the input of highly subjective assumptions, including the expected price volatility, which is based on the historical volatility
of a peer group of publicly traded companies. Changes in the subjective input assumptions can materially affect the estimate of
fair value of the warrants and the Company’s results of operations could be impacted.
The following
assumptions were used in calculations of the Black Scholes model for the year ended December 31, 2015 and 2014
|
|
Year
ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Risk-free interest rates
|
|
|
0.52-0.65
|
%
|
|
|
-
|
|
Expected life
|
|
|
1 year
|
|
|
|
-
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
-
|
|
Expected volatility
|
|
|
345-348
|
%
|
|
|
-
|
|
Diego Pellicer Worldwide, Inc. Common
Stock fair value
|
|
|
$0.75 -$1.24
|
|
|
|
-
|
|
NOTE
12 – Stockholders’ Equity
The
Company has authority to issue up to 100,000,000 shares, of which 5,000,000 shares reserved as Preferred shares and 95,000,000
are designated as Common shares. As of December 31, 2015, there were 29,498,165 common shares exchanged for the common shares
held by the former shareholders of Diego Pellicer Worldwide 1 Inc. (“Diego”), 4,304,317 shares of common stock issued
for services provided, 3,881,251 share issued for $1,164,375 and 126,000 shares of common stock issued in connection with $126,000
promissory note (see Note 10 ). For the year ended December 31, 2015, 753,333 Preferred shares were issued and subsequently
converted to common shares in the reverse merger. As of December 31, 2015, there were no Preferred shares outstanding. The common
shares and the preferred shares, have a par value of $0.000001.
At
the completion of the merger, 21,754,832 restricted common shares of the new Company were issued to the former Diego shareholders
as follows:
|
(a)
|
The
original Founders of the Company converted their 13,520,000 shares into restricted common shares on a 1:1 basis.
|
|
|
|
|
(b)
|
The
Series A and B Preferred shareholders converted 5,841,097 shares into restricted common shares on a 1:1 basis.
|
|
|
|
|
(c)
|
Non-employees,
which consisted of founding members and others were awarded a total of 2,451,935 shares, at a value of $0.9375 per share.
|
|
|
|
|
(d)
|
58,200
shares of common stock were returned as treasury stock.
|
For
the years ended December 31, 2014 the Company sold 4,275,093 Series A Preferred shares for $3,507,907, and 200,000 Series B Preferred
shares for proceeds received in the amount of $300,000.
There
are currently 1,901,426 warrants outstanding relating to the former Diego shareholders in varying amounts:
|
(a)
|
In
March 2014, an investor was granted 640,000 warrants attached to his initial common stock purchase at an exercise price
of $1.24 share, and expire in 5 years from grant date.
|
|
|
|
|
(b)
|
During
2014, several preferred stockholders were granted a total of 150,798 warrants attached to their initial common stock purchase
at an exercise price of $1.40 per share, and expire in 5 years from grant date.
|
|
|
|
|
(c)
|
In
April and May 2015, various investors in the Equity Incentive group were granted 200,000 warrants for the purchase of common
shares at an exercise price at $0.000001, and expire in 10 years from grant date valued at $574,250.
|
|
|
|
|
(d)
|
In
February 2015, certain preferred stockholders were granted 475,000 warrants for the purchase of common shares at an exercise
price of $1.50 per share, and expire in 5 years from grant date.
|
|
|
|
|
(e)
|
On
May 2015, the Company granted 300,000 warrants to a convertible note holder at an exercise
price of $1.50 per share, and expire in 5 years from grant date. The warrant was valued
at $914,902 using the Black-Scholes fair value option-pricing model and $225,920 proceed
was allocated to warrant, amortized over 180 days.
|
|
(f)
|
On
July 2015, the Company granted 135,628 warrants to a promissory note holder at an exercise price of $1.00 per share, and expire
in 5 years from grant date. The warrant was valued at $272,557 using the Black-Scholes fair value option-pricing model and
$90,563 proceed was allocated to warrant, amortized over 90 days.
|
The
following table presents our warrants and embedded conversion features which have no observable market data and are derived using
Black-Scholes measured at fair value on a recurring basis, using Level 3 inputs, as of December 31, 2015 and 2014:
|
|
For
the Year Ended
December 31, 2015
|
|
Annual dividend yield
|
|
|
0
|
%
|
Expected life (years)
|
|
|
1-10
|
|
Risk-free interest rate
|
|
|
0.52%
– 2.14
|
%
|
Expected volatility
|
|
|
323%-354
|
%
|
The
following represents a summary of all common stock warrant activity:
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
Balance outstanding, December 31, 2014
|
|
|
790,798
|
|
|
$
|
0.26
|
|
|
|
4.03
|
|
Granted
|
|
|
1,110,628
|
|
|
|
1.17
|
|
|
|
5.18
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, December 31,
2015
|
|
|
1,901,426
|
|
|
$
|
1.21
|
|
|
|
4.40
|
|
Exercisable, December 31, 2015
|
|
|
1,901,426
|
|
|
$
|
1.21
|
|
|
|
4.40
|
|
The
Company maintains an Equity Incentive Plan pursuant to which 2,480,000 shares of Common Stock are reserved for issuance thereunder.
This Plan was established to award certain founding members, who were instrumental in the development of the Company, as well
as key employees, directors and consultants, and to promote the success of the Company’s business. The terms allow for each
option to vest immediately, with a term no greater than 10 years from the date of grant, at an exercise price equal to par value
at date of the grant. As of December 31, 2015, 1,775,000 shares had been granted, with 200,000 of those shares granted with warrants
attached. There remains 705,000 shares available for future grants.
NOTE
13 – COMMITMENTS AND CONTINGENCIES
The
Company’s business is to lease property in appropriate and desirable locations, and to make available such property for
sub-lease to specifically assigned businesses that grow, process and sell certain products to the general public. Currently the
Company has five (4) separate properties under lease in the states of Colorado and Washington.
In
Colorado, there are three properties leased in 2014 and 2015. Properties were leased for a three (3) to five (5) year period with
an option for an additional five (5) years, and carry terms requiring triple net (NNN) conditions. Each of the properties, except
for one, have fixed monthly rentals (exclusive of the triple net terms). As of December 31, 2015, the aggregate remaining minimal
annual lease payments under these operating leases were as follows:
2016
|
|
$
|
1,101,716
|
|
2017
|
|
|
1,020,000
|
|
2018
|
|
|
888,128
|
|
2019
|
|
|
346,566
|
|
Total
|
|
$
|
3,356,410
|
|
In
Washington, there is only one (1) property leased in 2014. The property was leased for a five (5) year period with an option for
an additional five (5) years, and carry terms requiring triple net (NNN) conditions. The property has an escalating annual rental
(exclusive of the triple net terms). As of December 31, 2015, the aggregate remaining minimal annual lease payments due under
these operating leases were as follows:
2016
|
|
$
|
84,999
|
|
2017
|
|
|
87,723
|
|
2018
|
|
|
67,365
|
|
Total
|
|
$
|
240,087
|
|
Rent
expense for the Company’s operating leases for the year ended December 31, 2015 and 2014 was $1,228,028 and $487,533, respectively.
Note
14 – Deferred Tax Assets and Income Tax Provision
The
reconciliation of income tax benefit at the U.S. statutory rate of 34% for the year ended December 31, 2015 and for the year ended
December 31, 2014 respectively to the Company’s effective tax rate is as follows:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Statutory federal income
tax rate
|
|
|
-34
|
%
|
|
|
-34
|
%
|
State income tax, net of federal benefits
|
|
|
-6
|
%
|
|
|
-6
|
%
|
Change
in valuation allowance
|
|
|
40
|
%
|
|
|
40
|
%
|
Income tax provision
(benefit)
|
|
|
-
|
%
|
|
|
-
|
%
|
The
benefit for income tax is summarized as follows:
|
|
Year
Ended
December 31, 2015
|
|
|
Year
Ended
December 31, 2014
|
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
( 5,395,000
|
)
|
|
|
(141,000
|
)
|
State
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
( 952,000
|
)
|
|
|
(25,000
|
)
|
Change in valuation
allowance
|
|
|
6,347,000
|
|
|
|
166,000
|
|
Income tax provision
(benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
tax assets (liabilities) consist of the following
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Net operating loss carry
forwards
|
|
$
|
(8,419,000
|
)
|
|
$
|
(2,072,000
|
)
|
Warrants issued for services
|
|
|
230,000
|
|
|
|
-
|
|
Impairment of investment
|
|
|
164,000
|
|
|
|
-
|
|
Interest expense on convertible notes
|
|
|
297,000
|
|
|
|
-
|
|
Change in
fair value of derivative liability
|
|
|
(54,000
|
)
|
|
|
-
|
|
Total gross deferred tax asset/liabilities
|
|
|
(7,782,000
|
)
|
|
|
(2,072,000
|
)
|
Valuation
allowance
|
|
|
7,782,000
|
|
|
|
2,072,000
|
|
Net deferred
taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of December 31, 2015, the Company had accumulated Federal net operating loss carryovers (“NOLs”) of $19,455,000.
These NOLs begin to expire in 2033, and the utilization of NOLs may be subject to limitation under the Internal Revenue Code
Section 382 should there be a greater than 50% ownership change as determined under the regulations.
In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based
on the assessment, management has established a full valuation allowance against the entire deferred tax asset relating to NOLs
for every period because it is more likely than not that all of the deferred tax asset will not be realized.
The
Company files U.S. Federal and various State tax returns that are subject to audit by tax authorities beginning with the year
ended December 31, 2013. The Company’s policy is to classify assessments, if any, for tax and related interest and penalties
as tax expense.
Note
15 – Subsequent Events
In
April 2016, the Company issued CEO 1,900,000 shares of common stock for services rendered valued at $1,577,000 and issued an investor
additional 1,866,666 shares of common stock for repricing original stock purchase agreement in amount of $700,000 from $1.50 per
share to $0.30 per share.