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 consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”).
Reclassifications
Certain
prior year amounts were reclassified to conform to the manner of presentation in the current period. These reclassifications had
no effect on the Company's balance sheet, net loss or stockholders' equity.
Use
of Estimates
The
preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those
estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing
transactions and share based payment arrangements, determining the fair value of the warrants received for a licensing agreement,
the collectability of accounts receivable and deferred taxes and related valuation allowances.
Certain
estimates, including evaluating the collectability of accounts receivable, could be affected by external conditions, including
those unique to our industry, and general economic conditions. It is possible that these external factors could influence our
estimates that could cause actual results to differ from our estimates. The Company intends to re-evaluate all its accounting
estimates at least quarterly based on these conditions and record adjustments when necessary.
Fair
Value Measurements
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
Fair
Value of Financial Instruments
As
required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level
1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or
liabilities;
Level
2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially
the full term of the asset or liability; and
Level
3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable
(supported by little or no market activity).
Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as
of December 31, 2018 and December 31, 2017. The respective carrying value of certain on-balance-sheet financial instruments approximated
their fair values. These financial instruments include cash, prepaid expenses and accounts payable. Fair values were assumed to
approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate
fair values or they are payable on demand.
Cash
The
Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit
Insurance Corporation, and the National Credit Union Share Insurance Fund, up to $250,000. The Company's accounts at these institutions
may, at times, exceed the federal insured limits. The Company has not experienced any losses in such accounts.
Revenue
recognition
The
Company has adopted the new revenue recognition guidelines in accordance with ASC 606,
Revenue from Contracts with Customers
(ASC
606), commencing from the period under this report. The adoption of ASU 2016-10 did not have a material impact on the financial
statements and related disclosures since the Company is primary a lessor for revenue purposes.
The
Company analyzes its contracts to assess that they are within the scope and in accordance with ASC 606. In determining the appropriate
amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, whether for goods and
services or licensing, the Company performs the following steps: (i) identification of the promised goods or services in the contract;
(ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in
the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv)
allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue
when (or as) the Company satisfies each performance obligation.
Thus,
during the initial term of the lease, management has a policy of partial rent forbearance when the tenant first opens the facility
to assure that the tenant has the opportunity for success. Management may be required to exercise considerable judgment in estimating
revenue to be recognized.
When
the collectability is reasonably assured, in accordance with ASC Topic 840 “Leases” as amended and interpreted, minimum
annual rental revenue is recognized for rental revenues on a straight-line basis over the term of the related lease.
When
management concludes that the Company is the owner of tenant improvements, management records the cost to construct the tenant
improvements as a capital asset. In addition, management records the cost of certain tenant improvements paid for or reimbursed
by tenants as capital assets when management concludes that the Company is the owner of such tenant improvements. For these tenant
improvements, management records the amount funded or reimbursed by tenants as deferred revenue, which is amortized as additional
rental income over the term of the related lease. When management concludes that the tenant is the owner of tenant improvements
for accounting purposes, management records the Company’s contribution towards those improvements as a lease incentive,
which is amortized as a reduction to rental revenue on a straight-line basis over the term of the lease.
The
Company records rents due from the tenants on a current basis. The Company has deferred collection of such rents until the tenants
receive the proper governmental licenses to begin operation. Prior to 2017, management had reserved these deferred amounts due
to the unlikelihood of collection.
Leases
as Lessor
The
Company currently leases properties to licensed cannabis operators for locations that meet the regulatory criteria applicable
by the respective regulatory jurisdiction for the sale, production, and development of cannabis products. The Company evaluates
the lease to determine its appropriate classification as an operating or capital lease for financial reporting purposes. The Company
leases are currently all classified as operating leases.
Minimum
base rent is recorded on a straight-line basis over the lease term after an initial period during which the tenant is establishing
the business and during which the Company may forbear some or all of the rent. The Company is more likely than not to forbear
some or all of the rental income which it considers uncollectable during the tenant's initial ramp-up period (see
Revenue Recognition
above). The tenant is still liable for the full rent, although the collectability may be unlikely and the Company may not
expect to collect it.
Leases
as Lessee
The
Company recognizes rent expense on a straight-line basis over the non-cancelable lease term and certain option renewal periods
where failure to exercise such options would result in an economic penalty in such amount that renewal appears, at the inception
of the lease, to be reasonably assured. Deferred rent is presented on current liabilities section on the consolidated balance
sheets.
Income
Taxes
Income
taxes are provided for using the liability method of accounting in accordance with the Income Taxes Topic of the FASB ASC. Deferred
tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation
allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized and when, in the opinion
of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The computation
of limitations relating to the amount of such tax assets, and the determination of appropriate valuation allowances relating to
the realizing of such assets, are inherently complex and require the exercise of judgment. As additional information becomes available,
the Company continually assesses the carrying value of their net deferred tax assets.
Common
Stock Purchase Warrants and Other Derivative Financial Instruments
The
Company classifies as equity any contracts that require physical settlement or net-share settlement or provide us a choice of
net cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts
are indexed to our own stock as defined in ASC Topic 815-40 "Contracts in Entity's Own Equity." The Company classifies as assets
or liabilities any contracts that require net-cash settlement including a requirement to net cash settle the contract if an event
occurs and if that event is outside our control or give the counterparty a choice of net-cash settlement or settlement in shares.
The Company assesses classification of its common stock purchase warrants and other free-standing derivatives at each reporting
date to determine whether a change in classification between assets and liabilities is required.
Stock-Based
Compensation
The
Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. The Company calculates
the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our
common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. The estimation
of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ
from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company
considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.
Income
(loss) per common share
The
Company utilizes ASC 260, “Earnings Per Share” for calculating the basic and diluted loss per share. In accordance
with ASC 260, the basic and diluted loss per share is computed by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding. Diluted net loss per share is computed similar to basic loss per share except that
the denominator is adjusted for the potential dilution that could occur if stock options, warrants, and other convertible securities
were exercised or converted into common stock. Potentially dilutive securities are not included in the calculation of the diluted
loss per share if their effect would be anti-dilutive. The Company has 60,158,160 and 3,054,490 common stock equivalents at December
31, 2018 and 2017, respectively. For the three month periods ended December 31, 2018 and 2017 and for the nine month period ended
June 30, 2017, the potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion
would reduce net loss per share.
Legal
and regulatory environment
The
cannabis industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations
include, but are not limited to, matters such as licensure, accreditation, and different taxation between federal and state. Federal
government activity may increase in the future with respect to companies involved in the cannabis industry concerning possible
violations of federal statutes and regulations.
Management
believes that the Company is in compliance with local, state and federal regulations, while no regulatory inquiries have been
made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory
actions unknown or unasserted at this time.
Recent
accounting pronouncements.
Leasing
In July 2018, the FASB issued ASU 2018-10
Leases
(Topic 842), Codification Improvements
and ASU 2018-11
Leases (Topic 842), Targeted Improvements,
to provide
additional guidance for the adoption of Topic 842.
ASU 2018-10 clarifies certain provisions and correct unintended
applications of the guidance such as the application of implicit rate, lessee reassessment of lease classification, and certain
transition adjustments that should be recognized to earnings rather than to stockholders' equity. ASU 2018-11 provides an alternative
transition method and practical expedient for separating contract components for the adoption of Topic 842.
In February
2016, the FASB issued ASU 2016-02 Leases
(Topic 842)
which requires an entity to recognize assets and liabilities
arising from a lease for both financing and operating leases with terms greater than 12 months. ASU 2018-11, ASU 2018-10, and
ASU 2016-02 (collectively, "the new lease standards") are effective for fiscal years beginning after December 15, 2018,
with early adoption permitted.
The Company has elected
to adopt certain of the optional practical expedients, including the package of practical expedients, which, among other things,
gives the option not to reassess: 1) whether expired or existing contracts are or contain leases; 2) the lease classification for
expired or existing leases; and 3) initial direct costs for existing leases. Management has evaluated the impact of the adoption
of this standard and expects to record the right of use assets of $4,294,180 and lease obligations of $4,763,529.
For sub-lease arrangements where the Company
is the lessor, the same practical expedients apply to both lessor and lessee. Therefore, the sub-lease is classified as an operating
lease under ASC 842. The Company does not make any accounting entries for the subleases at the adoption date which is Jan 1, 2019,
as all the expected sublease income exceeded the expected lease costs for the head leases over the remaining period of the original
lease term, and therefore, no impairment of the ROU is needed upon the adoption of ASC 842. Rental revenue will be recognized
on a straight-line basis (or another systematic basis if that basis is more representative of the pattern in which income is earned
from the underlying asset over the term of the respective lease). The difference between the cash received, and the straight-line
lease income recognized, if any, will be recorded as rent receivable. Or, if cash received is higher than the straight line lease
income, deferred rent will be recorded on the balance sheet.
Stock Compensation
In June 2018, the FASB issued ASU 2018-07,
Compensation
- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,
to expand the scope of
Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and supersedes the guidance
in Subtopic 505-50,
Equity - Equity-Based Payments to Non-Employees
. Under ASU 2018-07, equity-classified nonemployee
share-based payment awards are measured at the grant date fair value on the grant date. The probability of satisfying performance
conditions must be considered for equity-classified nonemployee share-based payment awards with such conditions. ASU 2018-07 is
effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating
the impact of the new standard on the Company’s Consolidated Financial Statements.
In July 2018, the FASB issued ASU 2018-09,
Codification
Improvements.
The amendments in ASU 2018-09 affect a wide variety of Topics in the FASB Codification and apply to all
reporting entities within the scope of the affected accounting guidance. The Company has evaluated ASU 2018-09 in its entirety
and determined that the amendments related to Topic 718-740,
Compensation-Stock Compensation-Income Taxes,
are
the only provisions that currently apply to the Company. The amendments in ASU 2018-09 related to Topic 718-740,
Compensation-Stock
Compensation-Income Taxes,
clarify that an entity should recognize excess tax benefits related to stock compensation
transactions in the period in which the amount of the deduction is determined. The amendments in ASU 2018-09 related to Topic
718-740 are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company does not
expect the adoption of the new standard to have a material impact on the Company’s Consolidated Financial Statements.
Income Taxes
In March 2018, the FASB issued ASU 2018-05, Income
Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This standard amends
Accounting Standards Codification 740, Income Taxes (ASC 740) to provide guidance on accounting for the tax effects
of the Tax Cuts and Jobs Act (the Tax Reform Act) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete
the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective
upon issuance. As described in the footnotes to the Annual Report on Form 10-K, the Company’s accounting for the tax effects
of enactment of the Tax Reform Act is being assessed; however, in certain cases, as described below, we made a reasonable estimate
of the effects on our existing deferred tax balances and valuation allowance.
Revenue from Contracts with Customers
Adoption of New Accounting Standards: On January 1, 2018,
the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively,
“ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within
its scope. The majority of the Company’s revenues come from rental income that are outside the scope of ASC 606. The Company’s
licensing revenue that fall within the scope of ASC 606 are presented within other income and are recognized as revenue as the
time of grant. The Company adopted ASC 606 using the full retrospective method applied to all contracts not completed as of January
1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 while prior period amounts
continue to be reported in accordance with legacy GAAP. The Company recorded a net change in retained earnings of $369,000 as
of January 1, 2017 due to the cumulative effect of adopting ASC 606. The income statement impact of adopting ASC 606 for the period
ending $54,000 is outlined below:
|
|
For the Year Ended December 31, 2017
|
|
|
As reported
|
|
Under Legacy GAAP
|
|
Impact of ASC 606
|
Other income (expense)
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
Licensing revenue
|
|
|
—
|
|
|
|
54,000
|
|
|
|
(54,000
|
)
|
Total other income (loss)
|
|
|
(8,721,652
|
)
|
|
|
(8,667,652
|
)
|
|
|
(54,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(14,703,961
|
)
|
|
$
|
(14,649,961
|
)
|
|
$
|
(54,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share - basic and diluted
|
|
$
|
(4.69
|
)
|
|
$
|
(4.67
|
)
|
|
$
|
(0.02
|
)
|
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 $8,673,786, and has an accumulated deficit
of $49,354,030 at December 31, 2018. These factors, among others raise substantial doubt about its ability to continue as a going
concern over the next twelve months. The financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
The
Company believes that it has sufficient cash on hand and cash generated by real estate leases to sustain operations provided that
management and board members continue to agree to be paid company stock in exchange for accrued compensation. Through March 31, 2019, management and board members have accepted stock for accrued compensation at the same discount that has been extended
to the convertible noteholders of fifty percent. There are other future noncash charges in connection with financing such as a
change in derivative liability that will affect income but have no effect on cash flow.
Although
the Company has been successful raising additional capital, there is no assurance that the company will sell additional shares
of stock or borrow additional funds. The Company's inability to raise additional cash could have a material adverse effect on
its financial position, results of operations, and its ability to continue in existence. These financial statements do not include
any adjustments that might result from the outcome of this uncertainty. Management believes that the Company's future success
is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional
financing. There is no assurance that the Company will be able to generate sufficient cash from operations, sell additional shares
of stock or borrow additional funds. However, cash generated from lease revenues is currently exceeding lease costs, but is insufficient
to cover operating expenses.
Note
4 - Investment
In
January 2014, the Company entered into an agreement with Plandai Biotechnology, Inc. (a publicly traded company) to license to
them certain intellectual property rights in exchange for warrants to purchase 1,666,667 shares of Plandai Biotechnology, Inc.
common stock. This licensing agreement carries a 10-year term with an exercise price of $0.01 per share. The Company was to obtain
certain trademark rights certified by the government. The warrant has a restriction on them requiring that the sale of such shares
must reach a certain traded price of $0.50 per share. In 2014, the Company used a third-party appraisal firm to ascertain the
fair value of warrants held by the Company, which was determined to be $525,567 at the date of issuance. During the years ended
December 31, 2018 and 2017, the Company recorded impairment losses of $0 and $43,333, respectively.
Note
5 - Property and Equipment
As
of December 31, 2018 and 2017, fixed assets and the estimated lives used in the computation of depreciation are as follows:
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful
Lives
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Leasehold improvements
|
|
10 years
|
|
|
1,082,280
|
|
|
|
853,413
|
|
Less: Accumulated
depreciation and amortization
|
|
|
|
|
(942,685
|
)
|
|
|
(444,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net
|
|
|
|
$
|
139,595
|
|
|
$
|
409,128
|
|
During
the year ended December 31, 2018 and 2017, the Company recorded depreciation expense of 498,400 and 456,918, respectively.
Note
6 – Other Assets
Security
deposits:
Security deposits reflect the deposits on various property leases, most of which require for two months’ rental
expense in the form of a deposit. These have remained unchanged at $170,000 for December 31, 2018 and 2017.
Deposits
– end of lease:
These deposits represent an additional two months of rent on various property leases that apply to the
“end-of- lease” period. During 2018, we applied $50,000 deposit against monthly rent. As of December 31, 2018 and
2017, the remining balance was $100,000 and $150,000.
Note
7 – Related Party
As
of December 31, 2018 and December 31, 2017, the Company has accrued fees to related parties in the amount of $414,106 and $449,064,
respectively. For the year ended December 31, 2018 and 2017, total cash-based compensation to related parties was $716,753 and
$693,093, respectively. For the year ended December 31, 2018 and 2017, total share-based compensation to related parties was $960,915
and $4,618,594 respectively. These amounts are included in general and administrative expenses in the accompanying
financial statements.
During
the year ended December 31, 2018, we issued 669,082 shares of common stock for payment of a related party note in the amount of
$166,354, plus accrued interest of $21,658.
At
December 31, 2018, the Company owed Mr. Throgmartin $140,958 pursuant to a promissory note dated August 12, 2016. This note accrued
interest at the rate of 8% per annum and payable upon the earlier date of (i) the second anniversary date of the promissory notes,
(ii) the date all of the current investor notes, in the outstanding aggregate principal and accrued interest amount of approximately
$1,480,000 at June 30, 2016, have been paid in full and the Company has achieved gross revenues of at least $3,000,000 over any
consecutive 12-month period.
The balance of related
party notes was $140,958 and $307,312 at December 31, 2018 and December 31, 2017, respectively. As of April 16, 2019, the note
was past the maturity date, and no default notice was received.
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, 2018 and December 31, 2017 the outstanding
principal balance of the note was $133,403. As of April 16, 2019, the note was past the maturity date, and no default notice was
received.
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 Black Scholes model that resulted in a derivative
liability of $5,701,831 at December 31, 2018. In connection with the issuance of certain of these notes, the Company also issued
warrants to purchase its common stock. The Company allocated the proceeds of the notes and warrants based on the relative fair
value at inception.
Several
convertible note holders elected to convert their notes to stock during the year ended December 31, 2018. The table below provides
a reconciliation of the beginning and ending balances for the liabilities measured using fair significant unobservable inputs
(Level 3) for the year ended December 31, 2018:
|
|
Convertible
notes
|
|
Discount
|
|
Convertible
Note Net of Discount
|
|
Derivative
Liabilities
|
Balance,
December 31, 2017
|
|
|
971,455
|
|
|
|
503,339
|
|
|
|
468,116
|
|
|
|
4,106,521
|
|
Issuance
of convertible notes
|
|
|
3,520,234
|
|
|
|
3,480,525
|
|
|
|
23,709
|
|
|
|
5,388,426
|
|
Conversion
of convertible notes
|
|
|
(1,019,933
|
)
|
|
|
(255,295
|
)
|
|
|
(836,638
|
)
|
|
|
(1,807,899
|
)
|
Repayment
of convertible notes
|
|
|
(75,269
|
)
|
|
|
—
|
|
|
|
(75,269
|
)
|
|
|
—
|
|
Change
in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,686,218
|
)
|
Amortization
|
|
|
—
|
|
|
|
(1,577,401
|
)
|
|
|
1,577,401
|
|
|
|
—
|
|
Balance
December 31, 2018
|
|
$
|
3,324,487
|
|
|
$
|
2,115,168
|
|
|
$
|
1,173,319
|
|
|
$
|
6,000,830
|
|
During the year ended December 31, 2018, $1,019,933
of notes and $78,107 of accrued interest was converted into 15,230,423 shares of common stock. A gain on extinguishment
of debt of $121,217 has been recorded related to these conversions. As of April 16, 2019, several convertible notes in aggregate
principal of $217,500 was past the maturity date, and no default notice was received.
On
July 17, 2018, the Company entered into a certain Equity and Debt Restructure Agreement with two, long-time investors in the Company
(the “Restructure Agreement”). Pursuant to the material terms of the Restructure Agreement, the investors agreed to
return and cancel their collective 2,774,093 restricted Company common shares, which had been received from the prior conversion
of their older convertible notes, in exchange for the Company’s issue to them of recast convertible promissory notes. Accordingly,
on the same date, these investors were each issued a First Priority Secured Promissory Note (the “Note” or “Notes”),
in the principal amount of $1,683,557.77 and $545,606.96, respectively. In connection with this transaction, one of these investors
agreed to loan the Company an additional $700,000. To date 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.
The
following assumptions were used in calculations of the Black Scholes model for the periods ended December 31, 2018 and December
31, 2017.
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Risk-free
interest rates
|
|
|
1.89
- 2.81
|
%
|
|
|
1.28-1.76
|
%
|
Expected life (years)
|
|
|
0.03
- 2.00
|
|
|
|
0.02-1.23
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
100
- 629
|
%
|
|
|
211-354
|
|
Diego Pellicer
Worldwide, Inc. Common Stock fair value
|
|
$
|
0.13
|
|
|
$
|
1.60
|
|
Note
10 – Stockholders’ Equity (Deficit)
On
January 14, 2018, the Company’s Board of Directors approved an amendment to our Certificate of Incorporation to increase
the number of authorized shares of common stock from 195,000,000 to 495,000,000 shares.
On
June 25, 2018, the Company’s Board of Directors approved an amendment to our Certificate of Incorporation to increase the
number of authorized shares of common stock from 495,000,000 to 840,000,000 shares. In addition, the Board of Directors approved
a 20 for 1 reverse split of the outstanding common shares of the Company.
On
October 29, 2018, the Company effected a 20 for 1 reverse stock split on its shares of common stock. The par value and number
of authorized shares of the common and preferred stock were not adjusted as a result of the reverse stock split. Unless otherwise
noted, impacted amounts and share information included in the financial statements and notes thereto have been retroactively adjusted
for the stock split as if such stock split occurred on the first day of the first period presented. Certain amounts in the notes
to the financial statements may be slightly different than previously reported due to rounding of fractional shares as a result
of the reverse stock split.
During
the 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.
During
the year ended December 31, 2017:
During
2017, 85,500 common shares valued at $256,327 were issued as payment of finance cost related to convertible notes.
During
2017, 95,000 common shares were issued as security for the payment of convertible notes. The shares, valued at $257,259 are held
in escrow, are refundable and are recorded in a contra equity account.
During
2017, we sold 116,554 shares of common stock and received proceeds of $56,951. Of these shares, 16,804 valued at $8,675, were
not issued as of December 31, 2017.
During
2017, 171,525 shares of common stock, valued at $740,762 were issued as share-based compensation to related parties. Additionally,
1,248,669 shares, valued at $1,960,643, were authorized to be issued for related party services, but were not issued as of December
31, 2017.
During
2017, 8,000 shares of common stock, valued at $5,521, were issued for service.
During
2017 the Company recorded total option expense of $1,277,088.
During
2017, 50,000 shares of common stock, valued at $245,600, were issued for a related party debt settlement. 1,051,263 shares valued
at $394,500, were authorized but not issued.
During
2017, 12,500 shares of common stock, valued at $47,245, were issued to settle accounts payable to a consultant.
During
2017, owners of convertible notes have converted $2,986,387 of notes and $139,263 of accrued interest into 4,195,813 shares of
common stock valued at $7,553,246. Additionally, 28,372 shares, valued at $33,401, for the conversion of notes, were authorized
but not issued as of December 31, 2018. 43,333 shares valued at $260,000 were cancelled due to reclassify the fund received to
a note payable.
As
a condition of their employment, the Board of Directors approved employment agreements with three key executives. This agreement
provided that additional shares will be granted each year at February 1 over the term of the agreement should their shares as
a percentage of the total shares outstanding fall below prescribed ownership percentages. The CEO received an annual grant of
additional shares each year to maintain his ownership percentage at 10% of the outstanding stock. The other two executives receive
a similar grant to maintain each executive’s ownership percentage at 7.5% of the outstanding stock. At December 31, 2017
there is $1,779,943 accrued for the annual grant at February 1, 2018, representing 1,171,065 shares.
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, 2018:
Balance at December 31, 2017
|
|
$
|
192,350
|
|
Issuance of warrants
|
|
|
—
|
|
Change in fair value
during period
|
|
|
(175,774
|
)
|
Balance at December
31, 2018
|
|
$
|
16,576
|
|
The
following assumptions were used in calculations of the Black Scholes model for the periods ended December 31, 2018 and December
31, 2017.
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Annual
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (years)
|
|
|
1.42
- 8.9
|
|
|
|
3
- 10
|
|
Risk-free interest
rate
|
|
|
2.46
- 3.05
|
%
|
|
|
1.50
– 2.40
|
%
|
Expected volatility
|
|
|
188
- 300
|
%
|
|
|
177
- 284
|
%
|
Common
stock option activity:
During
the year ended December 31, 2018, the Company recorded total option expense of $279,528.
The
Company maintains an Equity Incentive Plan pursuant to 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, 2018, 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.
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, January
1, 2017
|
|
50,000
|
|
6.00
|
|
4.50
|
Granted
|
|
244,959
|
|
5.00
|
|
5.00
|
Balance outstanding, December 31, 2017
|
|
294,959
|
$
|
5,17
|
|
8.16
|
Granted
|
|
—
|
|
—
|
|
|
Balance outstanding,
December 31, 2018
|
|
294,959
|
$
|
5.17
|
|
7.15
|
Exercisable, December
31, 2018
|
|
274,959
|
$
|
6.00
|
|
7.48
|
During the years ended December 31, 2018 and
2017, the Company incurred total option expense of $279,528 and $1,277,088, respectively. Unamortized stock option expense at December
31, 2018 is $249,022, which will be charged to expense in 2018.
Note
11 – COMMITMENTS AND CONTINGENCIES
Leasing
Activity
The
Company’s business is to lease property in appropriate and desirable locations, and to make available such property for
sub-lease to specifically assigned businesses that grow, process, and sell certain products to the public. Currently the Company
has four separate properties under lease in the states of Colorado and Washington.
As
Lessee
In
Colorado, there are three properties leased in 2013-2017. Properties were leased for a three (3) to five (5) year period with
an option for an additional five years, and carry terms requiring triple net payments. Each of the properties have fixed
monthly rentals with periodic increases in the monthly rental rate. Two of the leases were extended to 2024-2025. In
Washington, there is one property which was leased in 2014, which were extended to 2023. The property was leased for a five
(5) year period with an option for an additional five (5) years, and carry terms requiring triple net (NNN) conditions.
The property has an escalating annual rental. As of December 31, 2018, the aggregate remaining minimal annual lease
payments under these operating leases were as follows:
2019
|
|
$
|
1,258,009
|
|
2020
|
|
|
1,098,903
|
|
2021
|
|
|
964,621
|
|
2022
|
|
|
808,840
|
|
2023
|
|
|
800,840
|
|
2024
|
|
|
498,665
|
|
2025
|
|
|
263,808
|
|
Total
|
|
$
|
5,693,126
|
|
Rent
expense for the Company’s operating leases for the years ended December 31, 2018 and 2017 was $1,130,135 and $1,212,161,
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 receive a similar grant each
to maintain his ownership percentage at 7.5% of the outstanding stock.
Departure
of Executive Officer
On January 30, 2019, the Company executed a
Separation Agreement and Release with David Thompson, its former Senior Vice President- Finance, finalizing his departure from
the Company as an employee. Pursuant to its material terms, the Company will pay to Mr. Thompson aggregate cash payments of $206,250,
based upon the Company’s receipt of certain gross sales receipts derived from its Alameda Store in Colorado, and certain
stock grants based upon the Company’s outstanding common shares as of February 1, 2019, including a stock grant of 53,717
restricted common shares for accrued salary and 122,934 restricted common shares in exchange for his approximate 50,000,000 of
stock options.
Note
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, 2018 and for the year ended December 31, 2017 respectively to the
Company’s effective tax rate is as follows:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Statutory federal income
tax rate
|
|
|
(21
|
)%
|
|
|
(34
|
)%
|
State income tax, net of federal benefits
|
|
|
(5
|
)%
|
|
|
(6
|
)%
|
Change in federal tax rate
|
|
|
—
|
%
|
|
|
13
|
%
|
Change in valuation
allowance
|
|
|
26
|
%
|
|
|
27
|
%
|
Income tax provision
(benefit)
|
|
|
—
|
%
|
|
|
—
|
%
|
The
benefit for income tax is summarized as follows:
|
|
Year Ended
December 31, 2018
|
|
Year Ended
December 31, 2017
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
|
278,000
|
|
|
|
1,212,219
|
|
State
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
51,775
|
|
|
|
106,961
|
|
Change in valuation allowance
|
|
|
(329,775
|
)
|
|
|
(1,319180
|
)
|
Income tax provision (benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
tax assets (liabilities) consist of the following:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Net operating loss carry forwards
|
|
$
|
(5,934,619
|
)
|
|
$
|
(5,657,043
|
)
|
Warrants issued for services
|
|
|
1,232,477
|
|
|
|
1,480,740
|
|
Impairment of investment
|
|
|
311,365
|
|
|
|
476,760
|
|
Depreciation
|
|
|
95,159
|
|
|
|
38,280
|
|
Interest expense on convertible notes
|
|
|
2,034,683
|
|
|
|
1,162,320
|
|
Change in fair value of derivative liability
|
|
|
|
|
|
|
-
|
|
Loss on sales of assets
|
|
|
-
|
|
|
|
-
|
|
Total gross deferred tax asset/liabilities
|
|
|
(2,260,935)
|
|
|
|
(2,498,943
|
)
|
Valuation allowance
|
|
|
2,260,935
|
|
|
|
2,498,943
|
|
Net deferred taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2018, the Company had accumulated
Federal net operating loss carryovers (“NOLs”) of $28,260,090. 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
On January 30, 2019, the Company executed a
Separation Agreement and Release with David Thompson, its former Senior Vice President- Finance, finalizing his departure from
the Company as an employee. Pursuant to its material terms, the Company will pay to Mr. Thompson aggregate cash payments of $206,250,
based upon the Company’s receipt of certain gross sales receipts derived from its Alameda Store in Colorado, and certain
stock grants based upon the Company’s outstanding common shares as of February 1, 2019, including a stock grant of 53,717
restricted common shares for accrued salary and 122,934 restricted common shares in exchange for his approximate 50,000,000 of
stock options. As the result, stock portion of the settlement was satisfied with 1,968,671 shares issued on February 21, 2019.
From January 3, 2019 to March 26, 2019, holders
of convertible notes converted $450,212 of notes and $31,345 of accrued interest into 12,242,678 shares of common stock. Additionally,
49,266 share were issued for shares authorized but not issued as of December 31, 2018.
On March 28, 2019, the Company executed a Settlement
Agreement and Release with KCSA Strategic Communications. In connection with this settlement, the Company paid KCSA $80,000 and
issued 875,504 shares of common stock, with each party releasing all claims against each other.
On April 2, 2019, the Company issued 3,611,665
shares of common stock to three executives for services rendered.
On January 2, 2019, we entered into a convertible note agreement
with an unrelated party, pursuant to which we borrowed $115,500 at an annual percentage rate of 12% with a maturity date on August
5, 2019.
On January 31, 2019, we entered into a convertible note
agreement with an unrelated party, pursuant to which we borrowed $150,000 at an annual percentage rate of 12% with a maturity date
on January 28, 2020.