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.
The
properties generating rents in 2019 are as follows:
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) - Sold
|
|
|
4,500
sq.
|
|
|
|
Seattle
|
|
|
|
WA
|
|
The
Company’s three properties are leased to Royal Asset Management, LLC (“Royal Asset Management”). Royal Asset
Management opened the Diego Denver branded flagship store in February 2017. This store known as “Diego Colorado”.
The retail facilities have shown steady growth in sales since its opening. For the other two properties subleased, Royal Asset
Management uses these properties for its cultivation facilities in Denver, CO. Production at these facilities began in late 2016.
The Company is currently is exploring the acquisition of this entity, and the parties are in negotiation.
In
regards to the Seattle property, on May 6, 2019, the Company entered into an agreement with a third party, and sold the Seattle
leased location. The sale provided $550,000 in capital and executive resources for expansion which the company allocated to its
efforts in a new location and cannabis grow facilities in Colorado.
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 consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”) and presented in accordance with accounting principles generally
accepted in the United States of America (US GAAP).
Principles
of Consolidation
The
financial statements include the accounts of Diego Pellicer Worldwide, Inc., and its wholly-owned subsidiary Diego Pellicer World-wide
1, Inc. Intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
$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, the collectability of accounts receivable and other receivables (See Note 6),
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 December 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 December 31, 2019
|
|
Fair
Value Measurement Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level
3
|
|
Total
|
Derivative
liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,024
|
|
|
$
|
5,024
|
|
Stock
warrant liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,025
|
|
|
$
|
5,025
|
|
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
|
|
Derivative
liabilities and stock warrant liberties were valued use Binomial Option Pricing Model in calculating the embedded conversion features
for the year ended December 31, 2019 and Black-Scholes Option Pricing Model in calculating the embedded conversion features and
current liabilities for the year ended December 31, 2018.
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
In
accordance with ASC 842, Leases , the Company recognizes 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.
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.
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 and recognizes rent income under
ASC 842, Leases.
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.
Advertising
During
the year ended December 31, 2019 and 2018, advertising expense was $52,605 and $66,511, respectively.
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 631,737,597 and 60,158,160 common stock equivalents at
December 31, 2019 and 2018, respectively. For the year ended December 31, 2019, the potential shares were excluded from the shares
used to calculate diluted earnings per share as their inclusion would reduce net loss per share.
Legal
and regulatory environment
The
cannabis industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations
include, but are not limited to, matters such as licensure, accreditation, and different taxation between federal and state. Federal
government activity may increase in the future with respect to companies involved in the cannabis industry concerning possible
violations of federal statutes and regulations.
Management
believes that the Company is in compliance with local, state and federal regulations, while no regulatory inquiries have been
made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory
actions unknown or unasserted at this time.
Recent
accounting pronouncements.
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 $4,069,296 and corresponding
lease liabilities of $4,151,427 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.
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 $10,002,826, and has an accumulated deficit
of $ 51,968,902 at December 31, 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 December 31, 2019 and December 31, 2018, fixed assets and the estimated lives used in the computation of depreciation are as
follows:
|
|
Estimated
|
|
|
|
|
|
|
Useful
Lives
|
|
December
31, 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 years ended December 31, 2019 and 2018, the Company recorded depreciation expense of $139,595 and $498,400, 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 December 31, 2019 and December 31, 2018, the remaining
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
year ended December 31, 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 December 31, 2019 and December 31, 2018, the remaining balance was $0 and $100,000.
Note
6 – Accounts Receivables and Other Receivables
As
disclosed in Note 1, the Company subleases three properties in Colorado to Royal Asset Management. At December 31, 2019, the Company
had outstanding receivables from the subleases totaling $391,273, and during 2019 the Company’s subleases with Royal Asset
Management accounted for 93% of the Company’s revenues.
In
addition to the receivables from the subleases, the Company has agreed to provide Royal Asset Management and affiliates of Royal
Asset Management up to aggregate amount of $1,030,000 in financing. These notes accrue interest at the rates ranging from 12%
to 18% per annum. As of December 31, 2019, the outstanding balance of these notes receivable total $1,017,143, including accrued
interest of $153,509. The amount presented in our balance sheet is $788,177, which represents the $1,017,143 due to us, less $228,966
that we owe to Royal Asset Management for leasehold improvements. The notes are secured by a UCC filing and also $400,000 of the
balance is personally guaranteed by the managing member of Royal Asset Management.
If
we do acquire Royal Asset Management, part of the purchase price will be paid through receivables that are owed to us.
Note
7 – Related Party Transactions
As
of December 31, 2019 and 2018, the Company has accrued compensation to CEO, CFO and Director in the amount of $155,841, and $414,106,
respectively. As of December 31, 2019 and 2018, accrued payable due to former officers were $1,137,397 and $0. For the years ended
December 31, 2019 and 2018, total cash-based compensation to related parties was $507,430 and $716,753, respectively. For
the years ended December 31, 2019 and 2018, total share-based compensation to related parties was $894,408 and $960,915 respectively.
These amounts are included in general and administrative expenses in the accompanying financial statements.
From
2017 to 2019, Mr. Gonfiantini, CEO, personally and through his Company, Crystal Bay Financial LLC, loaned an aggregate amount
of $1,020,000 to Royal Asset Management. These notes accrue interest at 17%-18% per annum, and require monthly payment approximately
from $5,000 to $20,000. These notes are personally guaranteed by the managing member of Royal Asset Management, and secured by
certain equipment and other tangible properties of Royal Asset Management. Among these notes, $500,000 note was also secured by
the medical marijuana licenses held by Royal Asset Management.
At
December 31, 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 December
31, 2019 and December 31, 2018, respectively. As of March 31, 2020, the note was past the maturity date, however the Company has
not yet received a default notice.
Note
8 – 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 December
31, 2019 and December 31, 2018 the outstanding principal balance of the note was $133,403. As of December 31, 2019, the note was
past the maturity date, however the Company has not yet received a default notice.
Note
9 – 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 Binomial Option Pricing Model that resulted
in a derivative liability of $4,834,190 at December 31, 2019 and using Black-Scholes Option Pricing Model that resulted in a derivative
liability of $6,000,830 at December 31, 2018. All notes accrue interest ranging from 8% to 12% and will mature in 2020.
In connection with the issuance of certain of these notes, the Company also issued warrants to purchase its common stock.
Several
convertible note holders elected to convert their notes to stock during the year ended December 31, 2019. The table below provides
the note payable activity for the year ended December 31, 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 year ended December 31, 2019:
|
|
Convertible
Notes
|
|
Discount
|
|
Convertible
Notes, Net of Discount
|
|
Derivative
Liabilities
|
Balance,
December 31, 2018
|
|
$
|
3,324,487
|
|
|
$
|
2,151,168
|
|
|
$
|
1,173,319
|
|
|
$
|
6,000,830
|
|
Issuance of convertible
notes
|
|
|
905,500
|
|
|
|
905,500
|
|
|
|
—
|
|
|
|
1,803,495
|
|
Conversion of convertible
notes
|
|
|
(842,712
|
)
|
|
|
(233,571
|
)
|
|
|
(609,141
|
)
|
|
|
(940,382
|
)
|
Repayment of convertible
notes
|
|
|
(120,500
|
)
|
|
|
(3,659
|
)
|
|
|
(116,841
|
)
|
|
|
(56,197
|
)
|
Change in fair value
of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,973,556
|
)
|
Amortization
|
|
|
—
|
|
|
|
(1,905,193
|
)
|
|
|
1,905,193
|
|
|
|
—
|
|
Balance
December 31, 2019
|
|
$
|
3,266,775
|
|
|
$
|
914,245
|
|
|
$
|
2,352,530
|
|
|
$
|
4,834,190
|
|
During
the year ended December 31, 2019, the Company entered into several convertible notes in an aggregate amount of $905,500, bearing
interest ranging from 10% to 12% per annum.
During
the year ended December 31, 2019, $120,500 of notes principal and $14,195 of accrued interest were repaid to a debt holder.
During
the year ended December 31, 2019, $842,712 of notes and $60,627 of accrued interest was converted into 48,684,667 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 $159,233, extinguishment of debt discount of $233,571 and reduction of derivative liabilities of $940,382 have been recorded
related to these conversions. As of December 31, 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 $1,683,558 and $545,607, 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 Binomial Option Pricing Model.
During year ended December 31, 2019, the Company received $380,000 cash proceeds from the additional $700,000 loan. The conversion
feature related to $380,0000 were determined in the amount of $586,710 using Binomial Option Pricing Model. During the year ended
December 31, 2019, we recorded $206,710 loss related to financing costs and $380,000 as debt discount.
The
following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current
liabilities for the year ended December 31, 2019 and Black-Scholes Option Pricing Model in calculating the embedded conversion
features and current liabilities for the year ended December 31, 2018.
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Risk-free
interest rates
|
|
1.53
– 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
10 – Stockholders’ Equity (Deficit)
Series
C Preferred Stock
On
December 16, 2019, Diego Pellicer Worldwide sold 140,000 of its Series C Convertible Preferred Shares, with an annual accruing
dividend of 10%, to Geneva Roth Remark Holdings, Inc. (“Geneva”), for $130,000 pursuant to a Series C Preferred Purchase
Agreement with Geneva. To accommodate this transaction, Registrant’s Board of Directors approved and filed a certain Certificate
of Designations with the Secretary of State of Delaware, designating 1,500,000 of its available preferred shares as Series C Preferred
Convertible Stock, Stated Value of $1.00 per share, and with a par value of $0.0001 per share. This Certificate of Designations
provides Registrant with the opportunity to redeem the Series C Shares at various increased prices at time intervals up to the
6-month anniversary of the closing and mandates full redemption on the 24-month anniversary. Geneva may convert the Series C Shares
into Registrant’s common shares, commencing on the 6-month anniversary of the closing at a 30% discount to the public market
price. The Company recorded a derivative liability of $165,218, valued using a Binomial Option Pricing Model, associated with
Series C Preferred Shares. On December 31, 2019, the fair value of the conversion feature was a derivative liability of $190,131,
valued using a Binomial Option Pricing Model, associated with Series C Preferred Shares. The Series C Preferred Stock is classified
as temporary equity due to that the shares are immediately convertible at the option of the note holder. During the year ended
Decembers 31, 2019, we recorded $8,750 accretion of discount. As of December 31, 2019, there were 140,000 shares outstanding and
a discount of $131,250.
The
following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current
liabilities for the year ended December 31, 2019.
|
|
December
31, 2019
|
|
|
Risk-free
interest rates
|
|
1.58
– 1.66
|
%
|
|
Expected life (years)
|
|
1.95
– 2.00
|
|
|
Expected dividends
|
|
0
|
%
|
|
Expected volatility
|
|
248-250
|
%
|
|
Common
Stock
During
the year ended December 31, 2019:
During
the year ended December 31, 2019, $842,712 of notes and $60,627 of accrued interest was converted into 48,684,667 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 $159,233, extinguishment of debt discount of $233,571 and reduction of derivative liabilities of $940,382 have been recorded
related to these conversions. As of December 31, 2019, 35,844 shares, valued at $35,844 for debt conversion were authorized,
but not issued as of December 31, 2019.
We
issued 4,987,610 shares of common stock, valued at $170,348, for services. As December 31, 2019, 209,782 shares, valued at $11,598
for services were authorized, but not issued as of December 31, 2019, and included in stock to be issued in the accompanying condensed
consolidated balance sheet. In connection with Debt Restructure Agreements dated on July 17, 2018, 675,759 shares of common stock
were cancelled, valued at $108,121.
We
issued 24,566,400 shares of common stock, valued at $732,029 , for related party services. As December 31, 2019, 3,299,665 shares,
valued at $79,817 for services were authorized, but not issued as of December 31, 2019.
During
the year ended December 31, 2019, 8,071,000 shares were issued for cashless warrant exercise.
During
the year ended December 31, 2019, we issued 5,000 shares for $2,648, which were authorized in prior period.
During
the year ended December 31, 2018:
We
sold 41,054 shares of common stock and received proceeds of $20,872. Additionally, 5,000 valued at $2,648 were not issued as of
December 31, 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.
Holders
of convertible notes converted $1,019,933 of notes and $78,107 of accrued interest into 15,230,423 shares of common stock valued
at $2,726,567. Additionally, 85,110 shares, valued at $168,862, for the conversion of notes, were authorized but not issued as
of December 31, 2018.
2,116,857
shares of common stock were returned in connection with Debt Restructure Agreements dated On July 17, 2018, additionally 675,759
shares of common stock, valued at $108,121, were agreed to be cancelled, has not been returned as of December 31, 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
issued 1,780,074 shares of common stock, valued at $618,532, for services. Additionally, 1,980,179 shares, valued at $322,433
for services, were authorized but not issued as of December 31, 2018.
We
issued 669,082 shares of common stock for payment of a former employee note in the amount of $166,354, plus accrued interest of
$21,658. In addition, 273,245 excessive shares of common stock were issued, 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.
We
issued 2,308,938 shares of common stock, valued at $202,443 as share-based compensation to related parties. Additionally, 29,486
shares, valued at $95,983 were authorized to be issued for related party services, but were not issued as of December 31, 2018.
As
a condition of management employment, the Board of Directors approved employment agreements with two 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. During the year ended
December 31, 2018, 2,732,106 shares were issued. At December 31, 2018, there is $229,031 accrued for the annual grants, representing
649,541 shares authorized not issued. The Company recorded compensation expense of $610,284 for the year ended December 31, 2018.
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 year ended December 31, 2019:
Balance at December 31, 2018
|
|
$
|
16,576
|
|
Issuance of warrants
|
|
|
—
|
|
Change in fair value
during period
|
|
|
(15,609
|
)
|
Balance at December
31, 2019
|
|
$
|
967
|
|
The
following assumptions were used in calculations of the Binomial Option Pricing Model for the periods ended December 31, 2019 and
the Black-Scholes Option Pricing Model in calculating the embedded conversion features and current liabilities for the periods
ended December 31, 2018.
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Annual
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (years)
|
|
|
0.42
– 8.13
|
|
|
|
1.67
– 8.9
|
|
Risk-free interest
rate
|
|
|
1.56
– 2.40
|
%
|
|
|
2.52
– 3.05
|
%
|
Expected volatility
|
|
|
165
- 318
|
%
|
|
|
188
- 230
|
%
|
The
following represents a summary of all common stock warrant activity:
|
|
Number
of
Warrants
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual Term
|
|
Balance outstanding, December
31, 2018
|
|
|
|
263,866
|
|
|
$
|
12.04
|
|
|
|
3.62
|
|
|
Exercised
|
|
|
|
(12,500
|
)
|
|
|
2.95
|
|
|
|
2.55
|
|
|
Expired
|
|
|
|
(39,540
|
)
|
|
|
20.00
|
|
|
|
-
|
|
|
Balance outstanding, December 31, 2019
|
|
|
|
211,826
|
|
|
$
|
10.08
|
|
|
|
3.51
|
|
|
Exercisable, December 31, 2019
|
|
|
|
211,826
|
|
|
$
|
10.08
|
|
|
|
3.51
|
|
Common
stock option activity:
The
Company maintains an Equity Incentive Plan pursuant of which 124,000 shares of Common Stock are reserved for issuance thereunder.
This Plan was established to award certain founding members, who were instrumental in the development of the Company, as well
as key employees, directors and consultants, and to promote the success of the Company’s business. The terms allow for each
option to vest immediately, with a term no greater than 10 years from the date of grant, at an exercise price equal to par value
at date of the grant. As of December 31, 2019, 88,750 shares had been granted, with 10,000 of those shares granted with warrants
attached. There remain 35,250 shares available for future grants.
During the years ended
December 31, 2019 and 2018, the Company recorded total option expense of $162,381 and $279,528, respectively. Unamortized stock
option expense at December 31, 2019 is $86,606, which will be charged to expense in 2020. The aggregate intrinsic value of stock
options outstanding at December 31, 2019 is $0.
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
|
|
|
|
7.09
|
|
|
Balance outstanding, December 31, 2019
|
|
|
|
172,479
|
|
|
$
|
5.29
|
|
|
|
5.47
|
|
|
Exercisable, December 31, 2019
|
|
|
|
162,479
|
|
|
$
|
5.25
|
|
|
|
5.72
|
|
Note
11 – 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 December 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. 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 4.24 years.
As
of December 31, 2019, the maturities of operating leases liabilities are as follows (in thousands):
|
Operating
Leases
|
2020
|
$
|
985
|
|
2021
|
863
|
|
2022
|
719
|
|
2023
|
733
|
|
2024
|
445
|
|
2025 and beyond
|
45
|
|
Total
|
3,791
|
|
Less: amount representing
interest
|
(816
|
)
|
Present value of future
minimum lease payments
|
2,975
|
|
Less: current obligations
under leases
|
676
|
|
Long-term lease obligations
|
$
|
2,299
|
|
Rent
expense is recognized on a straight-line basis over the life of the lease. Rent expense consists of the following:
|
Year
ended
|
|
December
31, 2019
|
Operating
lease costs
|
$
|
756,515
|
|
Variable rent costs
|
432,837
|
|
Total
rent expense
|
$
|
1,189,352
|
|
Right
of use assets obtained in exchange for lease liabilities:
Operating
lease
|
$ 4,069,296
|
|
As
of December 31, 2018, the aggregate remaining minimal annual lease payments under these operating leases plus NNN were as follows: (in
thousands):
2019
|
|
$
|
1,258
|
|
2020
|
|
|
1,099
|
|
2021
|
|
|
964
|
|
2022
|
|
|
809
|
|
2023
|
|
|
801
|
|
2024
|
|
|
498
|
|
2025
|
|
|
264
|
|
Total
|
|
$
|
5,693
|
|
Other
information related to leases is as follows:
|
Year
ended
|
|
December
31, 2019
|
Other information:
|
|
Cash paid for amounts
included in the measurement of lease liabilities:
|
|
Operating
cash flows from operating leases
|
$
|
1,294,653
|
|
Weighted-average remaining
lease term - operating leases
|
4.24
|
yr
|
Weighted-average discount
rate - operating leases
|
12
|
%
|
The
Company recognized sublease income of $1,646,369 and $1,456,939 during the years ended December 31, 2019 and 2018, respectively.
These
three leases have three to five years terms with optional extension, expiration dates range from July 2021 to June 2025, and monthly
base rent approximately $20,000-$40,000 plus variable NNN.
As
of December 31, 2019, the maturities of expected base sublease income are as follows (in thousands):
|
Operating
Leases
|
2020
|
$
|
1,256
|
|
2021
|
1,079
|
|
2022
|
855
|
|
2023
|
868
|
|
2024
|
550
|
|
2025 and beyond
|
58
|
|
Total
|
$ 4,666
|
|
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 2% of the outstanding stock. During the year ended December 31, 2019, the Company
accrued compensation expense of approximately $593,000 on 20,782,014 shares of common stock, of which 19,494,887 were issued,
under these agreements.
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 agreed to pay 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. During the year ended December 31, 2019, $9,450 were paid under this agreement.
As of December 31, 2019, the outstanding balance was $196,800, and is included in Accrued payable – related party in the
accompanying Consolidated Balance Sheet.
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. On the date of
the Separation Agreement, the Company acknowledged it owed 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 acknowledged
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, which the Company accrued in full as the date of Mr Throgmartin’s separation. 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.
Note
12 – Deferred Tax Assets and Income Tax Provision
The
U.S. tax reform bill that Congress voted to approve December 20, 2017, also known as the “Tax Cuts and Jobs Act”,
made sweeping modifications to the Internal Revenue Code, including a much lower corporate tax rate, changes to credits and deductions,
and a move to a territorial system for corporations that have overseas earnings.
The
act replaced the prior-law graduated corporate tax rate, which taxed income over $10 million at 35%, with a flat rate of 21%.
The
reconciliation of income tax benefit at the U.S. statutory rate of 21% for the year ended December 31, 2019 and for the year ended
December 31, 2018 respectively to the Company’s effective tax rate is as follows:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Statutory federal income
tax rate
|
|
|
(21
|
)%
|
|
|
(21
|
)%
|
State income tax, net of federal benefits
|
|
|
(5
|
)%
|
|
|
(5
|
)%
|
Change in federal tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
Change in valuation
allowance
|
|
|
26
|
%
|
|
|
26
|
%
|
Income tax provision
(benefit)
|
|
|
—
|
%
|
|
|
—
|
%
|
The
benefit for income tax is summarized as follows:
|
|
Year
Ended
December 31, 2019
|
|
Year
Ended
December 31, 2018
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
|
479,000
|
|
|
|
278,000
|
|
State
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
105,000
|
|
|
|
51,775
|
|
Change in valuation
allowance
|
|
|
(584,000
|
)
|
|
|
(329,775
|
)
|
Income tax provision
(benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
tax assets (liabilities) consist of the following:
|
|
Year
Ended
|
|
Year
Ended
|
|
|
December
31, 2019
|
|
December
31, 2018
|
Net
operating loss carry forwards
|
|
$
|
(6,413,626
|
)
|
|
$
|
(5,934,619
|
)
|
Warrants
issued for services
|
|
|
1,417,025
|
|
|
|
1,232,477
|
|
Impairment of investment
|
|
|
111,662
|
|
|
|
311,365
|
|
Depreciation
|
|
|
101,728
|
|
|
|
95,159
|
|
Interest
expense on convertible notes
|
|
|
2,140,769
|
|
|
|
2,034,683
|
|
Change
in fair value of derivative liability
|
|
|
|
|
|
|
|
|
Total
gross deferred tax asset/liabilities
|
|
|
(2,642,442
|
)
|
|
|
(2,260,935
|
)
|
Valuation
allowance
|
|
|
2,642,442
|
|
|
|
2,260,935
|
|
Net
deferred taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of December 31, 2019, the Company had accumulated Federal net operating loss carryovers (“NOLs”) of $30,541,077. These
NOLs can be carried forward indefinitely and the utilization of NOLs may be subject to limitation under the Internal Revenue Code
Section 382 should there be a greater than 50% ownership change as determined under the regulations.
The
Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. Among other things, the Act reduces the U.S. federal
corporate tax rate from 34 percent to 21 percent, eliminates the alternative minimum tax (“AMT”) for corporations,
and creates a one-time deemed repatriation of profits earned outside of the U.S. The tax rate reduction also resulted in a write-down
of the net deferred tax asset of approximately $5 million. The write-down of the net deferred tax asset related to the rate reduction
resulted in a corresponding write-down of the valuation allowance of approximately $4 million. The Company fully reserves its
deferred tax assets as such there was no impact.
In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based
on the assessment, management has established a full valuation allowance against the entire deferred tax asset relating to NOLs
for every period because it is more likely than not that all of the deferred tax asset will not be realized.
The
Company files U.S. Federal and various State tax returns that are subject to audit by tax authorities beginning with the year
ended December 31, 2014. The Company’s policy is to classify assessments, if any, for tax and related interest and penalties
as tax expense.
Note
13 – Subsequent Events
The
Company evaluated subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated
financial statements are available to be issued. Any material events that occur between the balance sheet date and the date that
the consolidated financial statements were available for issuance are disclosed as subsequent events, while the consolidated financial
statements are adjusted to reflect any conditions that existed at the balance sheet date. Based upon this review, except as disclosed
within the footnotes or as discussed below, the Company did not identify any recognized or non-recognized subsequent events that
would have required adjustment or disclosure in the consolidated financial statements.
During
Q1 2020, $89,000 of notes and $6,282 of accrued interest was converted into 13,767,631 shares of common stock.
On
May 13, 2020, the company issued 2,049,386 shares of common stock to a former officer per separation agreement.
On
May 13, 2020, the company issued 504,583 shares of common stock to Mr. Strachan for services rendered.
On
January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency in response to a new strain
of a coronavirus (the “COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic
based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date
of this report. Management is actively monitoring the global situation and its effects on the Company’s industry, financial
condition, liquidity, and operations. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its
spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition,
or liquidity for fiscal year 2020. However, if the pandemic continues, it may have a material adverse effect on the Company’s
results of future operations, financial position, and liquidity in fiscal year 2020.