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.
The
accompanying condensed consolidated balance sheet at December 31, 2018, has been derived from audited consolidated financial statements,
but does not include all disclosures required by accounting principles generally accepted in the United States of America ("U.S.
GAAP"). The accompanying unaudited condensed consolidated financial statements as of September 30, 2019 and for the three
and nine months ended September 30, 2019 and 2018, have been prepared in accordance with U.S. GAAP for interim financial information
and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U.S. GAAP for complete financial statements, and should be read in conjunction with the audited consolidated
financial statements and related notes to the financial statements included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2018 as filed with the U.S. Securities and Exchange Commission ("SEC") on the opinion
of management, all material adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation
have been made to the condensed consolidated financial statements. The condensed consolidated financial statements include all
material adjustments (consisting of normal recurring accruals) necessary to make the condensed consolidated financial statements
not misleading as required by Regulation S-X Rule 10-01. Operating results for the three and nine months ended September 30, 2019
are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any future periods.
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
$344,761 of other
receivable of prior year amounts were reclassified from current assets to long term assets 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, valuation of right of use assets and lease liabilities 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 September 30, 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 September 30, 2019
|
|
Fair
Value Measurement Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level
3
|
|
Total
|
Derivative
liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,893
|
|
|
$
|
4,893
|
|
Stock
warrant liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,894
|
|
|
$
|
4,894
|
|
As
of December 31, 2018
|
|
Fair
Value Measurement Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level
3
|
|
Total
|
Derivative
Liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,001
|
|
|
$
|
6,001
|
|
Stock
warrant Liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
|
|
17
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,018
|
|
|
$
|
6,018
|
|
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 primarily 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.
Prior
to the adoption of ASC Topic 842, Leases , the Company recognized lease revenue 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.
In
accordance with ASC 842, Leases , the Company recognized rent income on a straight-line basis over the lease
term to the extent that collection is considered probable. As a result the Company been recognizing rents as they become payable.
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. The adoption of new standard did not
have a material impact on the Company’s Consolidated Financial Statements.
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 533,059,641 and 60,158,160 common stock equivalents at
September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019, the 482,633,150 potential
shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per
share.
Legal
and regulatory environment
The
cannabis industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations
include, but are not limited to, matters such as licensure, accreditation, and different taxation between federal and state. Federal
government activity may increase in the future with respect to companies involved in the cannabis industry concerning possible
violations of federal statutes and regulations.
Management
believes that the Company is in compliance with local, state and federal regulations, while no regulatory inquiries have been
made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory
actions unknown or unasserted at this time.
Recent
accounting pronouncements.
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 $4,110,363 and corresponding
lease liabilities of $4,076,629 as of January 1, 2019 for leases classified as operating leases. In addition, the deferred rent
liability as of January 1, 2019, was reclassified as a reduction in the ROU assets. 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 adoption
of the new standard did not 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
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 nine months ended September 30, 2019 $40,500 is outlined below:
|
|
For
The Nine months Ended September 30, 2018
|
|
|
As reported
|
|
Under
Legacy GAAP
|
|
Impact
of ASC 606
|
Other
income (expense)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Licensing
revenue
|
|
|
—
|
|
|
|
40,500
|
|
|
|
(40,500
|
)
|
Total
other income (loss)
|
|
|
(1,948,313
|
)
|
|
|
(1,907,813
|
)
|
|
|
(40,500
|
)
|
Net
Loss
|
|
$
|
(4,031,658
|
)
|
|
$
|
(3,991,158
|
)
|
|
$
|
(40,500
|
)
|
Income (loss) per
share - basic
|
|
$
|
0.32
|
|
|
$
|
(0.31
|
)
|
|
$
|
(0.01
|
)
|
Income (loss) per
share - diluted
|
|
$
|
0.32
|
|
|
$
|
(0.31
|
)
|
|
$
|
(0.01
|
)
|
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 $8,742,316, and has an accumulated deficit of $50,235,931 at September
30, 2019. These factors 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. There are other
future noncash charges in connection with financing such as a change in derivative liability that will affect income but have
no effect on cash flow.
Although
the Company has been successful raising additional capital, there is no assurance that the company will sell additional shares
of stock or borrow additional funds. The Company's inability to raise additional cash could have a material adverse effect on
its financial position, results of operations, and its ability to continue in existence. These financial statements do not include
any adjustments that might result from the outcome of this uncertainty. Management believes that the Company's future success
is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional
financing. There is no assurance that the Company will be able to generate sufficient cash from operations, sell additional shares
of stock or borrow additional funds. However, cash generated from lease revenues is currently exceeding lease costs, but is insufficient
to cover operating expenses.
Note
4 - Property and Equipment
As
of September 30, 2019 and December 31, 2018, fixed assets and the estimated lives used in the computation of depreciation are
as follows:
|
|
Estimated
|
|
|
|
|
|
|
Useful
Lives
|
|
September
30, 2019
|
|
December
31, 2018
|
Leasehold
improvements
|
|
10
years
|
|
|
515,450
|
|
|
|
1,082,280
|
|
Less:
Accumulated depreciation and amortization
|
|
|
|
|
(515,450
|
)
|
|
|
(942,685
|
)
|
Property
and equipment, net
|
|
|
|
$
|
—
|
|
|
$
|
139,595
|
|
On
May 6, 2019, the Company entered into an agreement with a third party, which the Company sold the Seattle leased location for
$550,000 in cash. The Company plans to allocate to its efforts in a new location and cannabis grow facilities in Colorado. In
connection with the that, full amortized leasehold improvements with a historical cost of $566,830 were sold during the sale.
During the three months
ended September 30, 2019 and 2018, the Company recorded depreciation expense of $0 and $150,572, respectively. During the nine
months ended September 30, 2019 and 2018, the Company recorded depreciation expense of $139,595 and $428,602, 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. On May 6, 2019, $20,000 security deposit related to the Seattle leased location were expensed due to the sale of
the Seattle leased location. As of September 30, 2019 and December 31, 2018, the remining balance was $150,000 and $170,000, respectively.
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. During the nine months
ended September 30, 2019, we adopted ASC Topic 842, Leases, as the result we applied remaining balance of prepaid rent to right
of use assets and leases liabilities. As of September 30, 2019 and December 31, 2018, the remining balance was $0 and $100,000.
Note 6 –
Related Party
As of September 30,
2019 and December 31, 2018, the Company has accrued compensation to CEO, CFO and Director in the amount of $464,028, and $414,106,
respectively. For the three months ended September 30, 2019 and 2018, total cash-based compensation to related parties was $122,099
and $177,099, respectively. For the three months ended September 30, 2019 and 2018, total share-based compensation to related parties
was $136,616 and $228,832, respectively. For the nine months ended September 30, 2019 and 2018, total cash-based compensation to
related parties was $379,597 and $557,954, respectively. For the nine months ended September 30, 2019 and 2018, total share-based
compensation to related parties was $661,742 and $874,471 respectively. These amounts are included in general and administrative
expenses in the accompanying financial statements.
At September 30, 2019,
the Company owed Mr. Throgmartin, former CEO (See Note 11), $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 September 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 September 30, 2019 and December
31, 2018, respectively. As of August 19, 2019, the note was past the maturity date, however the Company has not yet received a
default notice.
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 September
30, 2019 and December 31, 2018 the outstanding principal balance of the note was $133,403. As of August 19, 2019, the note was
past the maturity date, however the Company has not yet received a default notice.
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 $4,892,629
at September 30, 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 nine months ended September 30, 2019. The table below
provides the note payable activity for the nine months ended September 30, 2019, and also a reconciliation of the beginning and
ending balances for the derivative liabilities measured using fair significant unobservable inputs (Level 3) for the nine months
ended September 30, 2019:
|
|
Convertible Notes
|
|
Discount
|
|
Convertible Notes, 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
|
|
|
870,500
|
|
|
|
886,725
|
|
|
|
(16,225
|
)
|
|
|
1,656,840
|
|
Conversion of convertible notes
|
|
|
(767,533
|
)
|
|
|
(210,217
|
)
|
|
|
(557,316
|
)
|
|
|
(835,725
|
)
|
Repayment of convertible notes
|
|
|
(122,500
|
)
|
|
|
—
|
|
|
|
(120,500
|
)
|
|
|
(56,197
|
)
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,873,119
|
)
|
Amortization
|
|
|
—
|
|
|
|
(1,409,516
|
)
|
|
|
1,409,516
|
|
|
|
—
|
|
Balance September 30, 2019
|
|
$
|
3,306,954
|
|
|
$
|
1,418,159
|
|
|
$
|
1,888,795
|
|
|
$
|
4,892,629
|
|
During the nine months
ended September 30, 2019, $767,533 of notes and $47,165 of accrued interest was converted into 36,938,746 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 $165,659 has been recorded related to these conversions. As of November 15, 2019, several convertible notes in aggregate
principal of $217,500 were past their maturity dates, however the Company has not yet received a default notice.
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 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 from the additional $700,000
loan. The conversion feature related to $100,000 were determined in the amount of $154,861 using Black Sholes Merton Option Model.
During three months ended September 30, 2019, the Company received $345,000 cash proceeds from the additional $700,000 loan. The
conversion feature related to $345,0000 were determined in the amount of $547,864 using Black Sholes Merton Option Model. During
the nine months ended September 30, 2019, we recorded $257,725 loss related to financing costs and $445,000 as debt
discount.
The
following assumptions were used in the Black Scholes model in calculating the embedded conversion features and current liabilities
for the periods ended September 30, 2019 and September 30, 2018.
|
|
September
30, 2019
|
|
|
September
30, 2018
|
Risk-free
interest rates
|
|
1.72
– 2.60
|
%
|
|
|
1.89-2.33
|
%
|
Expected life (years)
|
|
0.08
– 1.25
|
|
|
|
0.03-2.00
|
|
Expected dividends
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
70-557
|
%
|
|
|
100-233
|
%
|
Note
9 – Stockholders’ Equity (Deficit)
During the nine months
ended September 30, 2019:
During the nine
months ended September 30, 2019, $767,533 of notes and $47,165 of accrued interest was converted into 36,938,746 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
$165,659 has been recorded related to these conversions. As of September 30, 2019, 35,844 shares, valued at $35,844 for
debt conversion were authorized, but not issued as of September 30, 2019.
We issued 4,475,943 shares of common stock,
valued at $85,618, for services. As September 30, 2019, 46,880 shares, valued at $9,594 for services were authorized, but not issued
as of September 30, 2019, and included in stock to be issued in the accompanying condensed consolidated balance sheet.
We issued 7,244,637 shares of common stock,
valued at $539,956, for related party services. As September 30, 2019, 8,668,120 shares, valued at $409,713 for services
were authorized, but not issued as of September 30, 2019.
As of September 30, 2019, 5,000 shares were
sold for $2,648 previously, but not issued.
During
the nine months ended September 30, 2018:
Holders
of convertible notes converted $830,145 of notes and $69,037 of accrued interest into 6,673,717 shares of common stock valued
at $1,938,819. Additionally, 3,884 shares, valued at $13,983, for the conversion of notes, were authorized but not issued as of
September 30, 2018. Shares authorized but unissued at December 31, 2017 totaling 24,488 shares were issued during 2018.
We
issued 40,500 common shares as security for the payment of convertible notes. The shares, valued at $26,730 are held in escrow,
are refundable and are recorded in a contra equity account.
We
sold 41,500 shares of common stock and received proceeds of $20,872. Of these shares, 5,000 valued at $2,648, were not issued
as of September 30, 2018. We issued 16,804 shares of common stock that were sold in 2017 and classified as shares to be issued
at December 31, 2017.
We
issued 2,108,587 shares of common stock, valued at $301,253 as share-based compensation to related parties. Additionally, 280,693
shares, valued at $130,868, were authorized to be issued for related party services, but were not issued as of September 30, 2018.
We issued 1,023,367 shares of common stock that were authorized as share-based compensation to related parties in 2017 and classified
as shares to be issued at December 31, 2017.
We
issued 361,275 shares of common stock, valued at $70,680, for services. Additionally, 22,306 shares, valued at $4,232 for services,
were authorized but not issued as of September 30, 2018. We issued 98,417 shares of common stock that were authorized as share-based
compensation in 2017 and classified as shares to be issued at December 31, 2017.
We
issued 669,082 shares of common stock for payment of a related party note in the amount of $166,354, plus accrued interest of
$21,658.
We
issued an excess 273,245 shares of common stock to a related party; these shares are in the process of being cancelled.
We
issued 75,000 shares of common stock, valued at $47,254, to settle accounts payable to a consultant.
We
issued 125,000 shares of common stock, valued at $20,500, for an inducement of extension of sublease.
As
a condition of management employment, the Board of Directors approved employment agreements with three key executives. This agreement
provided that additional shares will be granted each year at February 1 over the term of the agreement should their shares as a
percentage of the total shares outstanding fall below prescribed ownership percentages. The CEO received an annual grant of additional
shares each year to maintain his ownership percentage at 10% of the outstanding stock. The other two executives receive a similar
grant to maintain each executive’s ownership percentage at 7.5% of the outstanding stock. At September 30, 2018, there is
$392,998 accrued for the annual grants, representing 1,849,091 shares. The Company recorded compensation expense of $544,647 for
the nine months ended September 30, 2018. The Company issued 748,896 shares that were accrued during 2018. The Company issued 1,161,065
shares of common stock that were accrued in 2017 and classified as shares to be issued at December 31, 2017.
Common
stock warrant activity:
The
Company has determined that certain of its warrants are subject to derivative accounting. The table below provides a reconciliation
of the beginning and ending balances for the warrant liabilities measured using fair significant unobservable inputs (Level 3)
for the nine months ended September 30, 2019:
Balance at December 31, 2018
|
|
$
|
16,576
|
|
Issuance of warrants
|
|
|
—
|
|
Change
in fair value during period
|
|
|
(15,114
|
)
|
Balance at September
30, 2019
|
|
$
|
1,462
|
|
The
following assumptions were used in calculations of the Black Scholes model for the periods ended September 30, 2019 and September
30, 2018.
|
|
September
30, 2019
|
|
|
September
30, 2018
|
|
Annual
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (years)
|
|
|
0.67
– 8.13
|
|
|
|
1.67
– 8.9
|
|
Risk-free interest
rate
|
|
|
1.56
– 2.40
|
%
|
|
|
2.52
– 3.05
|
%
|
Expected volatility
|
|
|
165
- 318
|
%
|
|
|
188
- 230
|
%
|
Common
stock option activity:
During the nine months
ended September 30, 2019 and 2018, the Company recorded total option expense of $121,786 and $197,076, respectively. Unamortized
stock option expense at September 30, 2019 is $127,218, 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
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(122,480
|
)
|
|
|
5.00
|
|
|
|
7.35
|
|
|
Balance
outstanding, September 30, 2019
|
|
|
|
172,479
|
|
|
$
|
5.29
|
|
|
|
5.72
|
|
|
Exercisable,
September 30, 2019
|
|
|
|
162,479
|
|
|
$
|
5.25
|
|
|
|
5.97
|
|
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.
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 September 30, 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. Lease expense is recognized on a straight-line basis over the lease term to
the extent that collection is considered probable. As a result the Company been recognizing rents as they become payable. Our
weighted-average remaining lease term is 4.88 years.
As
of September 30, 2019, the maturities of operating leases liabilities are as follows (in thousands):
|
Operating
Leases
|
Remaining
2019
|
$
|
290
|
|
2020
|
1,009
|
|
2021
|
872
|
|
2022
|
713
|
|
2023
|
727
|
|
2024 and beyond
|
443
|
|
Total
|
4,055
|
|
Less: amount representing
interest
|
(916
|
)
|
Present value of future
minimum lease payments
|
3,139
|
|
Less: current obligations
under leases
|
717
|
|
Long-term lease obligations
|
$
|
2,422
|
|
Rent
expense is recognized on a straight-line basis over the life of the lease. Rent expense consists of the following:
|
Nine
months ended
|
|
September
30, 2019
|
Operating
lease costs
|
$
|
507,440
|
|
Variable rent costs
|
350,696
|
|
Total
rent expense
|
$
|
858,136
|
|
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
|
|
443
|
|
Total minimum lease payments
|
|
$
|
5,330
|
|
Other
information related to leases is as follows:
|
Nine
months ended
|
|
September
30, 2019
|
Other information:
|
|
Cash paid for amounts
included in the measurement of lease liabilities:
|
|
Operating
cash flows from operating leases
|
$
|
924,316
|
|
Weighted-average remaining
lease term - operating leases
|
4.46
|
yr
|
Weighted-average discount
rate - operating leases
|
12
|
%
|
The
Company recognized sublease income of $1,257,255 and $1,068,462 during the nine months ended September 30, 2019 and 2018, respectively.
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 received a similar grant each to maintain his ownership
percentage at 9% 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 122,000 of stock options.
Note
11 – Subsequent Events
On
October 29, 2019, Diego Pellicer Worldwide, Inc. (“Registrant”) accepted the resignation of Ron Throgmartin from his
positions as CEO, President and Director. Mr. Throgmartin’s resignation was not the result of any disagreements with
Registrant’s plan of operations, policies or management. On the same date, Registrant appointed Christopher D. Strachan,
Registrant’s Chief Financial Officer, to membership on Registrant’s Board of Directors and appointed Nello Gonfiatini
III, Regiatrant’s Chief Operations Officer, to the additional post of Chief Executive Officer.
Ron
Throgmartin signed a 5-year term Separation Agreement which, among other matters, terminated his Employment Agreement, as amended.
The Corporation acknowledges that the Corporation currently owes to the Mr. Throgmartin the amount of $517,252.06 in principle
and accrued interest of note payable, salary and fees, accrued during the 5 years of his employment. In addition, the Corporation
further acknowledges that it will pay Mr Throgmartin fifty (50%) percent of his compensation due under the remaining Employment
Agreement, or $614,583.33 under certain condition. This agreement provides that the Registrant will pay him $5,000 monthly against
his accrued salary/fees and 50% of future compensation due under his terminated Employment Agreement, with certain accelerated
payments in the event Registrant’s financial results attain certain EBITA benchmarks. Registrant shall have the right to
require Mr. Throgmartin to provide consulting services to Registrant for a per diem fee of $500.