ITEM
1. FINANCIAL STATEMENTS.
DIEGO
PELLICER WORLDWIDE, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
178,706
|
|
|
$
|
60,437
|
|
Accounts receivable
|
|
|
224,870
|
|
|
|
148,859
|
|
Other receivable
|
|
|
353,009
|
|
|
|
344,761
|
|
Prepaid expenses
|
|
|
21,976
|
|
|
|
54,170
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
778,561
|
|
|
|
608,227
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
69,797
|
|
|
|
139,595
|
|
Security deposits
|
|
|
270,000
|
|
|
|
270,000
|
|
Right of Use Assets
|
|
|
4,056,802
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,175,160
|
|
|
$
|
1,017,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and deficiency in stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
565,796
|
|
|
$
|
612,580
|
|
Accrued payable - related party
|
|
|
475,130
|
|
|
|
414,106
|
|
Accrued expenses
|
|
|
417,533
|
|
|
|
354,121
|
|
Notes payable - related party
|
|
|
140,958
|
|
|
|
140,958
|
|
Notes payable
|
|
|
133,403
|
|
|
|
133,403
|
|
Convertible notes, net of discount and costs
|
|
|
1,401,914
|
|
|
|
1,173,319
|
|
Deferred rent
|
|
|
—
|
|
|
|
178,210
|
|
Derivative liabilities
|
|
|
5,113,301
|
|
|
|
6,000,830
|
|
Contingent liabilities
|
|
|
146,250
|
|
|
|
257,910
|
|
Warrant liabilities
|
|
|
55,997
|
|
|
|
16,576
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,450,282
|
|
|
|
9,282,013
|
|
|
|
|
|
|
|
|
|
|
Lease Liabilities
|
|
|
4,072,364
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
12,522,646
|
|
|
|
9,282,013
|
|
|
|
|
|
|
|
|
|
|
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, 43,812,125 and 28,287,414 shares issued, respectively
|
|
|
44
|
|
|
|
28
|
|
Additional paid-in capital
|
|
|
41,678,418
|
|
|
|
40,378,973
|
|
Stock to be issued
|
|
|
579,983
|
|
|
|
710,838
|
|
Accumulated deficit
|
|
|
(49,605,931
|
)
|
|
|
(49,354,030
|
)
|
|
|
|
|
|
|
|
|
|
Total deficiency in stockholders' equity
|
|
|
(7,347,486
|
)
|
|
|
(8,264,191
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and deficiency in stockholders' equity
|
|
$
|
5,175,160
|
|
|
$
|
1,017,822
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
DIEGO
PELLICER WORLDWIDE, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
March 31, 2019
|
|
March 31, 2018
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Net rental revenue
|
|
$
|
450,015
|
|
|
$
|
383,298
|
|
Operating Lease expenses
|
|
|
(280,724
|
)
|
|
|
(269,087
|
)
|
Gross profit
|
|
|
169,291
|
|
|
|
114,211
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
484,155
|
|
|
|
644,773
|
|
Selling expense
|
|
|
13,913
|
|
|
|
6,269
|
|
Depreciation expense
|
|
|
69,798
|
|
|
|
127,257
|
|
Loss from operations
|
|
|
(398,575
|
)
|
|
|
(664,088
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
42
|
|
|
|
2,691
|
|
Interest expense
|
|
|
(771,257
|
)
|
|
|
(710,474
|
)
|
Extinguishment of debt
|
|
|
—
|
|
|
|
42,167
|
|
Change in derivative liabilities
|
|
|
957,311
|
|
|
|
3,057,254
|
|
Change in value of warrants
|
|
|
(39,422
|
)
|
|
|
119,596
|
|
Total other income (loss)
|
|
|
146,674
|
|
|
|
2,511,234
|
|
|
|
|
|
|
|
|
|
|
Provision for taxes
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(251,901
|
)
|
|
$
|
1,847,146
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share - basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.22
|
|
Income (loss) per share - diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
36,793,777
|
|
|
|
8,247,031
|
|
Weighted average common shares outstanding - diluted
|
|
|
36,793,777
|
|
|
|
13,000,843
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Diego
Pellicer Worldwide, Inc.
Consolidated
Statements of Stockholders' Deficit
For
Three Month Ended March 31, 2019 and 2018
|
|
SHARES
|
|
$
|
|
|
Common
|
|
Treasury
|
|
Preferred
|
|
Common
|
|
Treasury
|
|
Preferred
|
|
Additional
|
|
Accumulated
|
|
Common
Stock
|
|
|
|
|
Shares
|
|
Shares
|
|
Shares
|
|
Shares
|
|
Shares
|
|
Shares
|
|
Paid-in
Capital
|
|
Deficit
|
|
to
be issued
|
|
Total
|
Balance
- December 31, 2017
|
|
|
7,128,849
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34,422,474
|
|
|
$
|
(42,449,086
|
)
|
|
$
|
2,397,218
|
|
|
$
|
(5,629,387
|
)
|
Sale
of common stock
|
|
|
41,054
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
19,769
|
|
|
|
—
|
|
|
|
1,102
|
|
|
|
20,871
|
|
Issuance
of common shares for services
|
|
|
784,896
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
396,372
|
|
|
|
|
|
|
|
(175,072
|
)
|
|
|
221,301
|
|
Issuance
of common shares for services - related parties
|
|
|
1,189,098
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
805,736
|
|
|
|
|
|
|
|
(642,919
|
)
|
|
|
162,818
|
|
Common
stock issued upon conversion of notes payable
|
|
|
1,280,791
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
890,748
|
|
|
|
—
|
|
|
|
—
|
|
|
|
890,749
|
|
Fair
value of warrants and options granted for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157,186
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157,186
|
|
Shares
Issued to settle accounts payable
|
|
|
75,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
47,253
|
|
|
|
—
|
|
|
|
—
|
|
|
|
47,253
|
|
Security shares
|
|
|
40,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(26,730
|
)
|
|
|
—
|
|
|
|
26,730
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Shares
to be cancelled for convertible note
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,847,146
|
|
|
|
—
|
|
|
|
1,847,146
|
|
Balance
- March 31, 2018
|
|
|
10,540,188
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
10
|
|
|
$
|
(26,730
|
)
|
|
$
|
—
|
|
|
$
|
36,766,268
|
|
|
$
|
(40,601,940
|
)
|
|
$
|
1,580,329
|
|
|
$
|
(2,282,063
|
)
|
|
|
SHARES
|
|
$
|
|
|
Common
|
|
Treasury
|
|
Preferred
|
|
Common
|
|
Treasury
|
|
Preferred
|
|
Additional
|
|
Accumulated
|
|
Common Stock
|
|
|
|
|
Shares
|
|
Shares
|
|
Shares
|
|
Shares
|
|
Shares
|
|
Shares
|
|
Paid-in
Capital
|
|
Deficit
|
|
to
be issued
|
|
Total
|
Balance
- December 31, 2018
|
|
|
28,287,414
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
28
|
|
|
$
|
(26,730
|
)
|
|
$
|
—
|
|
|
$
|
40,405,703
|
|
|
$
|
(49,354,030
|
)
|
|
$
|
710,838
|
|
|
$
|
(8,264,191
|
)
|
Issuance of common
shares for services
|
|
|
2,847,250
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
364,875
|
|
|
|
—
|
|
|
|
(312,854
|
)
|
|
|
52,024
|
|
Issuance of common
shares for services - related parties
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
315,017
|
|
|
|
315,017
|
|
Common stock issued
upon conversion of notes payable
|
|
|
12,677,461
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13
|
|
|
|
—
|
|
|
|
—
|
|
|
|
893,975
|
|
|
|
—
|
|
|
|
(133,018
|
)
|
|
|
760,970
|
|
Fair value of warrants
and options granted for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40,595
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40,595
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(251,901
|
)
|
|
|
—
|
|
|
|
(251,901
|
)
|
Balance
- March 31, 2019
|
|
|
43,812,125
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
44
|
|
|
$
|
(26,730
|
)
|
|
$
|
—
|
|
|
$
|
41,705,148
|
|
|
$
|
(49,605,931
|
)
|
|
$
|
579,983
|
|
|
$
|
(7,347,486
|
)
|
See Accompanying
Notes to Unaudited Condensed Consolidated Financial Statements.
DIEGO
PELLICER WORLDWIDE, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited)
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
March 31, 2019
|
|
March 31, 2018
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(251,901
|
)
|
|
$
|
1,847,146
|
|
Adjustments to reconcile net income (loss) to net
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
69,798
|
|
|
|
127,257
|
|
Change in fair value of derivative liability
|
|
|
(957,311
|
)
|
|
|
(3,057,254
|
)
|
Change in value of warrants
|
|
|
39,422
|
|
|
|
(119,596
|
)
|
Amortization of debt related cost
|
|
|
519,135
|
|
|
|
663,348
|
|
Extinguishment of debt
|
|
|
157,365
|
|
|
|
(42,168
|
)
|
Stock based compensation
|
|
|
357,635
|
|
|
|
423,124
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(76,011
|
)
|
|
|
(68,150
|
)
|
Inventory
|
|
|
—
|
|
|
|
3,979
|
|
Prepaid expenses
|
|
|
32,194
|
|
|
|
14,380
|
|
Deferred rent receivable
|
|
|
(178,210
|
)
|
|
|
—
|
|
Other assets
|
|
|
(8,248
|
)
|
|
|
—
|
|
Accounts payable
|
|
|
(15,437
|
)
|
|
|
(145,968
|
)
|
Accrued liability - related parties
|
|
|
61,024
|
|
|
|
88,019
|
|
Accrued expenses
|
|
|
63,412
|
|
|
|
(15,826
|
)
|
Deferred rent
|
|
|
—
|
|
|
|
5,953
|
|
Rent
|
|
|
15,562
|
|
|
|
—
|
|
Contingent liabilities
|
|
|
(61,660
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash used by operating activities
|
|
|
(233,231
|
)
|
|
|
(275,756
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Debt costs
|
|
|
(8,225
|
)
|
|
|
(16,000
|
)
|
Proceeds from notes payable
|
|
|
—
|
|
|
|
258,500
|
|
Proceeds from convertible notes payable
|
|
|
359,725
|
|
|
|
—
|
|
Proceeds from sale of common stock
|
|
|
—
|
|
|
|
20,872
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities
|
|
|
351,500
|
|
|
|
263,372
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
118,269
|
|
|
|
(12,384
|
)
|
Cash, beginning of period
|
|
|
60,437
|
|
|
|
158,702
|
|
Cash, end of period
|
|
$
|
178,706
|
|
|
$
|
146,318
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash paid for taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash financial activities:
|
|
|
|
|
|
|
|
|
Stock issued for debt settlement
|
|
$
|
—
|
|
|
$
|
—
|
|
Notes converted to stock
|
|
$
|
450,212
|
|
|
$
|
568,268
|
|
Accrued interest converted to stock
|
|
$
|
31,345
|
|
|
$
|
44,829
|
|
Value of common stock to be issued for conversion of notes and accrued interest
|
|
$
|
—
|
|
|
$
|
1,078,786
|
|
Value of derivative liability extinguished upon conversion of notes and accrued interest
|
|
$
|
577,340
|
|
|
$
|
547,476
|
|
Accounts payable and accrued expenses paid with common stock
|
|
$
|
50,000
|
|
|
$
|
165,474
|
|
Leasehold improvements paid by tenant
|
|
$
|
—
|
|
|
$
|
228,866
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Diego
Pellicer Worldwide, Inc.
March
31, 2019 and 2018
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 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 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 months ended March 31, 2019 (the “Current Quarter”) and the three months ended March
31, 2018 (the “Prior Quarter”). The Company’s annual report on Form 10-K for the year ended December 31, 2018
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.
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 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 March 31, 2019 and December 31, 2018. 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.
The following table reflects assets and liabilities that
are measured at fair value on a recurring basis (in thousands)::
|
As
of March 31, 2019
|
Fair
Value Measurement Using
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Derivative
liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,113
|
|
|
$
|
5,113
|
|
Stock
warrant liabilities
|
—
|
|
|
—
|
|
|
56
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2018
|
Fair
Value Measurement Using
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Derivative
Liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,001
|
|
|
$
|
6,001
|
|
Stock
warrant Liabilities
|
—
|
|
|
—
|
|
|
17
|
|
|
17
|
|
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 since the Company is primary a lessor for revenue purposes.
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.
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.
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.
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 195,518,293 and 5,312,637 common stock equivalents at March
31, 2019 and 2018, respectively. For the three month periods ended March 31, 2019, the 136,181,607 potential shares were excluded
from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.
Diluted
earnings per share for the three months ended March 31, 2018 have been calculated as follows:
Net
income
|
|
$
|
1,847,146
|
|
|
|
|
|
|
Income
attributable to convertible instruments
|
|
|
(3,219,017
|
)
|
Expense
attributable to convertible instruments
|
|
|
455,642
|
|
|
|
|
|
|
Diluted
loss
|
|
$
|
(889,229
|
)
|
|
|
|
|
|
Basic shares outstanding
|
|
|
8,247,031
|
|
|
|
|
|
|
Shares
to be issued
|
|
|
2,054,804
|
|
Convertible
instruments
|
|
|
2,699,009
|
|
|
|
|
|
|
Diluted
shares outstanding
|
|
|
13,000,843
|
|
|
|
|
|
|
Diluted
EPS
|
|
$
|
(0.00
|
)
|
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.
Leasing
Effective
January 1, 2019 the Company adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Update
No. 2016-02, “Leases (Topic 842)” which superseded previous lease guidance ASC 840, Leases. Topic 842 is a new lease
model that requires a company to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet.
The Company adopted the standard using the modified retrospective approach that does not require the restatement of prior year
financial statements. The adoption of Topic 842 did not have a material impact on the Company’s consolidated income statement
or consolidated cash flow statement. The adoption of Topic 842 resulted in the recognition of ROU assets of $4,061,387 and corresponding
lease liabilities of $4,127,653 as of January 1, 2019 for leases classified as operating leases. Topic 842 also applies to the
Company's sub-lease revenues, however, the adoption of Topic 842 did not have a significant impact on the Company's accounting
for its sub-lease agreements.
The
Company adopted the package of practical expedients and transition provisions available for expired or existing contracts, which
allowed the Company carryforward its historical assessments of 1) whether contracts are or contain leases, 2) lease classification
and 3) initial direct costs. Additionally, for real estate leases, the Company adopted the practical expedient that allows lessees
to treat the lease and non-lease components of leases as a single lease component. The Company also elected the hindsight practical
expedient to determine the reasonably certain lease term for existing leases. Further, the Company elected the short-term lease
exception policy, permitting it exclude the recognition requirements for leases with terms of 12 months or less. See Note 10 for
additional information about leases.
Stock
Compensation
In
June 2018, the FASB issued ASU No. 2018-07 “Improvements to Non-employee Share-based Payment Accounting" ("ASU
2018-07"). ASU 2018-07 amends ASC 718, "Compensation - Stock Compensation" ("ASC 718"), with the intent
of simplifying the accounting for share-based payments granted to non-employees for goods and services and aligning the accounting
for share-based payments granted to non-employees with the accounting for share-based payments granted to employees. The Company
adopted ASU 2018-07 on January 1, 2019 using the modified retrospective approach as required. ASU 2018-07 replaced ASC 505-50,
"Equity-Based Payments to Non-employees" ("ASC 505-50") which was previously applied by the Company for warrants
granted to consultants and non-employees.
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 Consolidated Financial Statements.
Income
Taxes
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.
Revenue
from Contracts with Customers
Adoption
of New Accounting Standards: On January 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all
subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue
from contracts with customers that fall within its scope. The majority of the Company’s revenues come from rental income
that are outside the scope of ASC 606. The Company’s licensing revenue that fall within the scope of ASC 606 are presented
within other income and are recognized as revenue as the time of grant. The Company adopted ASC 606 using the full retrospective
method applied to all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1,
2018 are presented under ASC 606 while prior period amounts continue to be reported in accordance with legacy GAAP. The Company
recorded a net change in retained earnings of $369,000 as of January 1, 2017 due to the cumulative effect of adopting ASC 606.
The income statement impact of adopting ASC 606 for the period ending $13,500 is outlined below:
|
|
For
The Three Months Ended March 31, 2018
|
|
|
As
reported
|
|
Under
Legacy GAAP
|
|
Impact
of ASC 606
|
Other
income (expense)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Licensing
revenue
|
|
|
—
|
|
|
|
13,500
|
|
|
|
(13,500
|
)
|
Total
other income (loss)
|
|
|
2,511,234
|
|
|
|
2,524,734
|
|
|
|
(13,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,847,146
|
|
|
$
|
1,860,646
|
|
|
$
|
(13,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share - basic
|
|
$
|
0.22
|
|
|
$
|
0.23
|
|
|
$
|
(0.01
|
)
|
Income
(loss) per share - diluted
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
$
|
(0.00
|
)
|
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 $7,671,721, and has an accumulated deficit of $49,605,931 at March
31, 2019. These factors, among others raise substantial doubt about its ability to continue as a going concern over the next twelve
months. 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 March 31,
2019, 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 March 31, 2019 and December 31, 2018, fixed assets and the estimated lives used in the computation of depreciation are as follows:
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful
Lives
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Leasehold
improvements
|
|
10
years
|
|
|
1,082,280
|
|
|
|
1,082,280
|
|
Less:
Accumulated depreciation and amortization
|
|
|
|
|
(1,012,483
|
)
|
|
|
(962,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
|
$
|
69,797
|
|
|
$
|
139,594
|
|
During
the three months ended March 31, 2019 and 2018, the Company recorded depreciation expense of 69,797 and 127,757, respectively.
Note
5 – Other Assets
Security
deposits:
Security deposits reflect the deposits on various property leases, most of which require for two months’
rental expense in the form of a deposit. These have remained unchanged at $170,000 for March 31, 2019 and December 31, 2018.
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. During 2018, we applied $50,000 deposit against monthly rent. As of March 31, 2019
and December 31, 2018, the remining balance was $100,000 and $100,000.
Note
6 – Related Party
As
of March 31, 2019 and December 31, 2018, the Company has accrued fees to related parties in the amount of $475,130 and $414,106,
respectively. For the three months ended March 31, 2019 and 2018, total cash-based compensation to related parties was $48,275
and $188,756, respectively. For the three months ended March 31, 2019 and 2018, total share-based compensation to related parties
was $355,612 and $377,965 respectively. These amounts are included in general and administrative expenses in the accompanying
financial statements.
At
March 31, 2019, 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 note was $140,958 and $140,958 at March 31, 2019 and March 31, 2018,
respectively. As of May 15, 2019, the note was past the maturity date, and no default notice was received.
Note
7 – 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 March 31,
2019 and December 31, 2018 the outstanding principal balance of the note was $133,403. As of May 15, 2019, the note was past the
maturity date, and no default notice was received.
Note
8 – 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 $5,113,301 at March 31, 2019. 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 three months ended March 31, 2019. 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 three months ended March 31, 2019:
|
|
Convertible
notes
|
|
Discount
|
|
Convertible
Note Net of Discount
|
|
Derivative
Liabilities
|
Balance,
December 31, 2018
|
|
$
|
3,324,487
|
|
|
$
|
2,151,167
|
|
|
$
|
1,173,319
|
|
|
$
|
6,000,830
|
|
Issuance
of convertible notes
|
|
|
365,500
|
|
|
|
373,725
|
|
|
|
(8,225
|
)
|
|
|
647,122
|
|
Conversion
of convertible notes
|
|
|
(450,212
|
)
|
|
|
(167,897
|
)
|
|
|
(282,315
|
)
|
|
|
(577,340
|
)
|
Repayment
of convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Change
in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(957,311
|
)
|
Amortization
|
|
|
—
|
|
|
|
(519,135
|
)
|
|
|
519,135
|
|
|
|
—
|
|
Balance
March 31, 2019
|
|
$
|
3,239,775
|
|
|
$
|
1,837,861
|
|
|
$
|
1,401,914
|
|
|
$
|
5,113,301
|
|
During
the three months ended March 31, 2019, $450,212 of notes and $31,345 of accrued interest was converted into 12,242,678 shares
of common stock and 434,783 shares were issued which were authorized as of December 31, 2018. A gain on extinguishment of debt
of $130,031 has been recorded related to these conversions. As of May 15, 2019, several convertible notes in aggregate
principal of $414,500 was past the maturity date, and no default notice was received.
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. In 2018, the Company has received $220,000 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 $3,555,888 using Black Sholes Merton
Option Model. As the result of the transaction, the Company recorded $2,892,033 in financing costs, and $2,449,275 as debt discount
during year ended December 31, 2018. On March 29, 2019, the Company received $100,000 cash proceeds of the additional $700,000
loan. The conversion feature related to $100,0000 were determined in the amount of $154,861 using Black Sholes Merton Option Model.
During the three months ended March 31, 2019, we recorded $54,861 in financing costs and $100,000 as debt discount.
The
following assumptions were used in calculations of the Black Scholes model for the periods ended March 31, 2019 and March 31,
2018.
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
Risk-free
interest rates
|
|
|
2.39
– 2.60
|
%
|
|
|
1.28-1.76
|
%
|
Expected life (years)
|
|
|
0.08
– 1.25
|
|
|
|
0.05-1.00
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
70-557
|
%
|
|
|
70-247
|
|
Note
9 – Stockholders’ Equity (Deficit)
During
the three months ended March 31, 2019:
Holders
of convertible notes converted $450,212 of notes, and $31,345 of accrued interest was converted into 12,242,678 shares of
common stock and 434,783 shares were issued which were authorized as of December 31, 2018. A gain on extinguishment of debt of
$130,031 has been recorded related to these conversions.
We
issued 878,579 shares of common stock, valued at $50,000, for services. Additionally, 44,584 shares, valued at $2,024 for services,
were authorized but not issued as of March 31, 2019. We issued 1,968,671 shares of common stock that were authorized in 2018 and
classified as shares to be issued at December 31, 2018.
We authorized 4,380,509 shares, valued at 315,017
for share-based compensation to related parties. These were classified as shares to be issued at March 31, 2018.
During
the three months ended March 31, 2018:
Holders
of convertible notes converted $401,914 of notes and $23,171 of accrued interest into 25,615,827 shares of common stock valued
at $890,774. Additionally, 196,983 shares, valued at $18,713, for the conversion of notes, were authorized but not issued as of
March 31, 2018. Shares authorized but unissued at December 31, 2017 totaling 370,450 shares were issued during 2018.
The
Company issued 809,994 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 880,005 shares of common stock and received proceeds of $20,872. Of these shares,395,005 valued at $9,777, were not issued
as of March 31, 2018. We issued 336,071 shares of common stock that were sold in 2017 and classified as shares to be issued at
December 31, 2017.
We
issued 10,312,394 shares of common stock, valued at $140,380 as share-based compensation to related parties. Additionally, 25,000
shares, valued at $7,500, were authorized to be issued for related party services, but were not issued as of March 31, 2018. We
issued 20,827,986 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 437,902 shares of common stock, valued at $15,433, for services. Additionally, 1,071,245 shares, valued at $36,400 for
services, were authorized but not issued as of March 31, 2018. We issued 1,968,335 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 13,381,637 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 1,500,000 shares of common stock, valued at $47,254, were issued to settle accounts payable to a consultant.
We
issued an excess 5,464,891 shares of common stock to a related party; these shares are in the process of being cancelled.
As
a condition of their 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 March 31, 2018, there
is $1,359,777 accrued for the annual grants at February 1, 2018, representing 38,525,196 shares. We recorded compensation expense
of $144,554 for the three months ended March 31, 2018, resulting from the decline in shares price at the vesting date of February
1, 2018. We issued 5,562,806 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 three months ended March 31, 2019:
Balance at December 31, 2018
|
|
$
|
16,576
|
|
Issuance of warrants
|
|
|
—
|
|
Change in fair value
during period
|
|
|
39,422
|
|
Balance at March
31, 2019
|
|
$
|
55,997
|
|
The
following assumptions were used in calculations of the Black Scholes model for the periods ended March 31, 2019 and March 31,
2018.
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
Annual
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (years)
|
|
|
1.17
– 8.13
|
|
|
|
2
- 9
|
|
Risk-free interest
rate
|
|
|
2.21
– 2.40
|
%
|
|
|
2.27
– 2.74
|
%
|
Expected volatility
|
|
|
222
- 284
|
%
|
|
|
194
- 235
|
%
|
Common
stock option activity:
During
the three months ended March 31, 2019 and 2018, the Company recorded total option expense of $40,595 and $197,076, respectively.
Unamortized stock option expense at March 31, 2019 is $208,427, which will be charged to expense in 2019.
The
following represents a summary of all common stock option activity:
|
|
Number
of
Options
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual Term
|
|
Balance
outstanding, December 31, 2018
|
|
|
|
294,959
|
|
|
$
|
5,17
|
|
|
|
7.15
|
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Balance
outstanding, March 31, 2019
|
|
|
|
294,959
|
|
|
$
|
5.17
|
|
|
|
6.90
|
|
|
Exercisable,
March 31, 2019
|
|
|
|
274,959
|
|
|
$
|
6.00
|
|
|
|
7.23
|
|
Note
10 – COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases property under operating leases. Property leases include retail and warehouse space with fixed rent payments and
lease terms ranging from three to five years. The Company is obligated to pay the lessor for maintenance, real estate taxes, insurance
and other operating expenses on certain property leases. These expenses are variable and are not included in the measurement of
the lease asset or lease liability. These expenses are recognized as variable lease expense when incurred and are immaterial.
The
Company records the lease asset and lease liability at the present value of lease payments over the lease term. The leases typically
do not provide an implicit rate; therefore, the Company uses its estimated incremental borrowing rate at the time of lease commencement
to discount the present value of lease payments. The Company’s discount rate for operating leases at March 31, 2019 was
12%. Leases often include rental escalation clauses, renewal options and/or termination options that are factored into the determination
of lease payments when appropriate. Although not material, the amount of such options is reflected in the “Maturity of Lease
Liabilities” table below. Lease expense is recognized on a straight-line basis over the lease term. Our weighted-average
remaining lease term is 4.88 years.
As
of March 31, 2019, the maturities of operating leases liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
Operating
Leases
|
Remaining 2019
|
|
$
|
941
|
|
2020
|
|
1,098
|
|
2021
|
|
965
|
|
2022
|
|
809
|
|
2023
|
|
800
|
|
2024 and beyond
|
|
543
|
|
Total
|
|
5,156
|
|
Less: amount representing
interest
|
|
(1,084
|
)
|
Present value of future
minimum lease payments
|
|
4,072
|
|
Less: current obligations
under leases
|
|
814
|
|
Long-term lease obligations
|
|
$
|
3,258
|
|
Rent
expense is recognized on a straight-line basis over the life of the lease. Rent expense consists of the following:
|
|
|
|
|
|
Three
months ended
|
|
March 31,
2019
|
Operating lease costs
|
$
|
190,900
|
|
Variable rent costs
|
(89,824
|
)
|
Total
rent expense
|
$
|
280,724
|
|
As
of December 31, 2018, the cash flows of operating leases over the next five years were as follows (in thousands):
|
|
|
|
|
|
|
|
Operating
Leases
|
2019
|
|
$
|
1,258
|
|
2020
|
|
1,098
|
|
2021
|
|
965
|
|
2022
|
|
809
|
|
2023
|
|
800
|
|
2024 and beyond
|
|
543
|
|
Total minimum lease payments
|
|
$
|
5,473
|
|
Other
information related to leases is as follows:
|
|
|
|
|
|
Three
months ended
|
|
March 31,
2019
|
Other information:
|
|
Cash paid for amounts
included in the measurement of lease liabilities:
|
|
Operating
cash flows from operating leases
|
$
|
374,005
|
|
|
|
|
|
Weighted-average remaining
lease term - operating leases
|
4.88
|
yr
|
Weighted-average discount
rate - operating leases
|
12
|
%
|
Employment
Agreements
As
a condition of their employment, the Board of Directors approved employment agreements with three key executives. This agreement
provided that additional shares will be granted each year 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. One other executive receive a similar grant each
to maintain his ownership percentage at 7.5% of the outstanding stock.
Departure
of Executive Officer
On
January 30, 2019, the Company executed a Separation Agreement and Release with David Thompson, its former Senior Vice President-
Finance, finalizing his departure from the Company as an employee. Pursuant to its material terms, the Company will pay to Mr.
Thompson aggregate cash payments of $206,250, based upon the Company’s receipt of certain gross sales receipts derived from
its Alameda Store in Colorado, and certain stock grants based upon the Company’s outstanding common shares as of February
1, 2019, including a stock grant of 53,717 restricted common shares for accrued salary and 122,934 restricted common shares in
exchange for his approximate 50,000,000 of stock options.
Note
11 – Subsequent Events
On
April 2, 2019, the Company issued 3,611,665 shares of common stock to three executives for services rendered.
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 16, 2019 for the year ended December 31, 2018. 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.
Overview
Diego
Pellicer Worldwide, Inc. was established on August 26, 2013 to take advantage of growing market for legalized cannabis being made
possible by the escalating legislation allowing for the legalization of cannabis operations in the majority of states:
The
industry is operating under stringent regulations within the various state jurisdictions. The Company’s primary business
plan is twofold: First to lease various properties to licensed operators in these jurisdictions to grow, process and sell cannabis
and related products, and the second the 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, The Company will also provide educational training, compliance consultation,
branding, and related accessories to their tenants. These leases and management agreements are expected to provide substantial
streams of income. We believe that as laws evolve, it is possible that we will have the opportunity to participate directly in
these operations. Accordingly, the Company will selectively negotiate an option on our tenants’ operating company.
The
Company has already established four facilities in markets that have experienced high growth, Washington and Colorado. This growth
is illustrated in the tables below:
Source:
Headset & 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc.
The
legalization taking place in other states such as California and 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.
This
market is projected to grow rapidly in the future as this chart below illustrates:
Source:
Marijuana Business Daily
Summary
The
Company’s primary business objective is to lease various properties to licensed operators to grow, process and retail cannabis
and related products. By developing a premium brand name, building upscale facilities, and providing quality accessories to a
market where financing is difficult to obtain, these subleases are designed to provide a substantial stream of income. We believe
that as laws evolve, it is possible that we will have the opportunity to participate directly in these operations as well.
2018
has been a year of growth for Diego Pellicer Worldwide. Four tenants were open and generating lease revenue. The tenants were
showing steady revenue increases and operating improvements. The business model was being proven. The brand name was getting national
recognition and garnered the “Most Valuable Brand of the Year” at the 2018 National Cannabis Business Awards beating
out tough national competition including MedMen™, The Clinic, Lightshade and Olio. Diego was also honored as the “Best
Retail Center” for the second year in a row, defeating other highly regarded names including LiveWell, The Clinic, The Green
Solutions, Euflora and Kind Love.
Following
this stabilization and growth, in 2019 Diego expects that its revenues from existing tenants, new management agreements and retail
acquisitions by the Company and, or it’s tenants will continue to improve the bottom line for the Company. General and administrative
expenses should continue to decline also resulting in improved operating results.
Diego
is exploring opportunities in California, Colorado, Nevada, Washington and other states. The Company will continue to raise
capital to finance that expansion. This should result in increased revenues for the future and increased opportunities into new
markets.
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
Total
demand for marijuana in the United States, including the black market, is around $52.5 billion, according to the estimates.. 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. If the Federal
Government legalized marijuana nationwide, sales might start out around that level, but would likely rise as cannabis gained mainstream
acceptance and the market evolved. Eventually, marijuana could surpass cigarette sales with the potential to rival beer in terms
of overall sales.
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
three states and the District of Columbia have laws broadly legalizing marijuana in some form. Ten 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.
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 has grown considerably bigger,
with Canada federally
legalizing recreational
marijuana in 2018 and Eastern states in the U.S. rushing towards legalization.
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:
In
an April 2018 conversation with Republican U.S. Sen. Cory Gardner, President Donald Trump pledged to keep the Department of Justice
from interfering with state cannabis laws and, perhaps more significantly, support legislation protecting state-legal marijuana
businesses. White House officials later confirmed the president's policy stance.
Several
bills have been introduced to Congress seeking to reform federal marijuana laws in different ways, including the removal of cannabis
from the list of controlled substances, allowing MJ companies to access traditional banking services and amending the IRS code
to more fairly tax cannabis businesses.
Similar
bills have been introduced in previous sessions of Congress, but none have gained significant traction. This time, however, may
be different, as marijuana reform has become a bipartisan issue that has the support of many prominent Republicans.
Senate
Majority Leader Mitch McConnell, for example, introduced a bill in April to remove federal barriers on hemp, while former Republican
House Speaker John Boehner recently disclosed his involvement with a large, multistate cannabis company.
Whether
any significant reform of federal marijuana policy happens in 2018 and what shape it could take remains an open question, but
it's clear that attitudes toward cannabis on Capitol Hill are shifting.
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.
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.
(
The
Street, “Cannabis Industry Sits on Precipice of Major Expansion, March 28, 2018, by Bill Meagher)
Source:
2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc.
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:
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.
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.
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 2018
2018
was a time of new growth for the Company. An effective and experienced team had to be assembled from within our operators to develop
our newly formed management company, and to complement the current executives with knowledge and experience in real estate operations,
banking, site selection, branding, facility design, corporate finance, investor relations, store management, and grow expertise,
Additional capital needed to be raised in order to have sufficient capital to help support our operators expand within their markets,
and do begin the expansion into different markets in the US. Much of the Company’s debt was renegotiated, and additional
commitments were formalized for the expansion in the Colorado market. New markets had to be explored, new alliances forged, and
opportunities prioritized.
$1,173,750
in
new capital was raised. New markets were explored. Four facilities continued to see year upon year increases in revenues, which
lead to increased rental revenue cash-flow to the Company. All delinquent notes were renegotiated, consolidated, and extended.
In
2018, Diego had received revenues from three Colorado facilities, and our Washington store. Diego now had four facilities generating
rent in 2018 for the full year and we have actively been expanding in those markets with potential acquisitions for our tenants,
and our management company. The tenants 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 2018 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
Diego
Pellicer Denver
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.
RESULTS
OF OPERATIONS
Three
months ended March 31, 2019 compared to three months ended March 31, 2018
After
rental expense the gross margins on the lease were as follows:
|
|
Year
Ended
|
|
Year
Ended
|
|
Increase
(Decrease)
|
|
|
March
31, 2019
|
|
March
31, 2018
|
|
$
|
|
%
|
Revenues
|
|
|
|
|
|
|
|
|
Net
rental revenue
|
|
$
|
450,015
|
|
|
$
|
383,298
|
|
|
$
|
66,717
|
|
|
|
17
|
%
|
Rental
expense
|
|
|
(280,724
|
)
|
|
|
(269,087
|
)
|
|
|
100,307
|
|
|
|
4
|
%
|
Gross
profit
|
|
|
169,291
|
|
|
|
114,211
|
|
|
|
167,024
|
|
|
|
48
|
%
|
General
and administrative expenses
|
|
|
484,155
|
|
|
|
644,773
|
|
|
|
(48,674
|
)
|
|
|
-25
|
%
|
Selling
expense
|
|
|
13,913
|
|
|
|
6,269
|
|
|
|
7,644
|
|
|
|
122
|
%
|
Depreciation
expense
|
|
|
69,798
|
|
|
|
127,257
|
|
|
|
(57,459
|
)
|
|
|
-45
|
%
|
Loss
from operations
|
|
$
|
(398,575
|
)
|
|
$
|
(664,088
|
)
|
|
$
|
265,513
|
|
|
|
-40
|
%
|
Revenues.
For
the three months ended March 31, 2019 and 2018, the Company leased three facilities to licensees in Colorado and one in Washington.
Total revenue for the three months ended March 31, 2019 was $450,015, as compared to $382,298 for the three months ended March
31, 2018, an increase of $66,717.
Gross profit.
Rental revenue
for the periods ended March 31, 2019 increased over the prior three months ended March 31, 2018, resulting in a gross profit of
$169,291.
General and administrative expense.
Our
general and administrative expenses for the three months ended March 31, 2019 were $484,155, compared to $644,774 for the three
months ended March 31, 2018.
Selling
expense.
Our selling expenses for the three months ended March 31, 2019 were $13,913, compared to $6,269 for the
three months ended March 31, 2018. The increase of $7,644 was due to increasing activities used related to selling and marketing.
|
|
Year Ended
|
|
Year Ended
|
|
Increase (Decrease)
|
|
|
March 31, 2019
|
|
March 31, 2018
|
|
$
|
|
%
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
$
|
42
|
|
|
$
|
2,691
|
|
|
$
|
(2,649
|
)
|
|
|
-98
|
%
|
Interest expense
|
|
|
(771,257
|
)
|
|
|
(710,474
|
)
|
|
|
(60,783
|
)
|
|
|
9
|
%
|
Extinguishment of debt
|
|
|
—
|
|
|
|
42,167
|
|
|
|
(42,167
|
)
|
|
|
-100
|
%
|
Change in derivative liabilities
|
|
|
957,311
|
|
|
|
3,057,254
|
|
|
|
(2,099,943
|
)
|
|
|
-69
|
%
|
Change in value of warrants
|
|
|
(39,422
|
)
|
|
|
119,596
|
|
|
|
(159,018
|
)
|
|
|
-133
|
%
|
Total other income (loss)
|
|
$
|
146,674
|
|
|
$
|
2,511,234
|
|
|
$
|
(2,364,560
|
)
|
|
|
-94
|
%
|
The
Net Other Income was the effect of the decline in market value of the Company’s stock had on the derivative liability of
$5,113,301 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
|
|
Year
Ended
|
|
Year
Ended
|
|
Increase
(Decrease)
|
|
|
March
31, 2019
|
|
March
31, 2018
|
|
$
|
|
%
|
Net
Cash used in operating activities
|
|
$
|
(233,231
|
)
|
|
$
|
(275,756
|
)
|
|
$
|
42,525
|
|
|
|
-15
|
%
|
Net
Cash used in investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
N/A
|
|
Net
Cash used in financing activities
|
|
|
351,500
|
|
|
|
263,372
|
|
|
|
88,128
|
|
|
|
33
|
%
|
Net
Increase in Cash
|
|
|
118,269
|
|
|
|
(12,384
|
)
|
|
|
130,653
|
|
|
|
-1055
|
%
|
Cash
- beginning of period
|
|
|
60,437
|
|
|
|
158,702
|
|
|
|
(98,265
|
)
|
|
|
|
|
Cash
- end of period
|
|
$
|
178,706
|
|
|
$
|
146,318
|
|
|
$
|
32,388
|
|
|
|
22
|
%
|
Operating
Activities.
For the three months ended March 31, 2019, the net cash used of $233,231 was a decrease over
the same period of the prior year of $275,756. The loss from operations after non-cash adjustments increased by $44.143 over the
prior year, offset by a decrease in net assets and liabilities of $277,374.
Investing
Activities.
There were no investing activities for the three months ended March 31, 2019.
Financing
Activities.
During the three months ended March 31, 2019, $359,725 in proceeds were from convertible notes and
debt cost was $8,225. For the three months ended March 31, 2018, $258,500 in proceeds were from convertible notes payable, $20,872
were from sale of common stock and debt cost was 16,000.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements.