Quarterly Report (10-q)

Date : 08/19/2019 @ 9:53PM
Source : Edgar (US Regulatory)
Stock : Diego Pellicer Worldwide Inc (QB) (DPWW)
Quote : 0.0107  0.0 (0.00%) @ 11:52AM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Commission File Number: 333-189731

 

DIEGO PELLICER WORLDWIDE, INC.

 

 

(Name of registrant as specified in its charter)

 

Delaware   33-1223037
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

9030 Seward Park Ave, S, #501, Seattle, WA 98118

(Address of principal executive offices) (Zip Code)

 

(516) 900-3799

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated Filer   Accelerated Filer  
  Non-accelerated Filer   Small Reporting Company  
  Emerging growth company        

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of August 5, 2019 there were 59,259,662 shares of common stock issued and outstanding .

 

 

 

  1  

 

 

TABLE OF CONTENTS

 

    Page
     
  PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 30
     
  PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Mine Safety Disclosures 32
Item 5. Other Information 32
Item 6. Exhibits 32

 

 

  2  

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

 

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.

 

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 

 

  3  

 

 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

DIEGO PELLICER WORLDWIDE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

  

    June 30,   December 31,
    2019   2018
Assets                
Current assets:                
Cash and cash equivalents   $ 109,765     $ 60,437  
Accounts receivable     852,355       148,859  
Prepaid expenses     —         54,170  
                 
Total current assets     962,120       263,466  
                 
Property and equipment, net     —         139,595  
Other receivable     384,537       344,761  
Security deposits     150,000       270,000  
Right of Use Assets     3,459,606       —    
                 
Total assets   $ 4,956,263     $ 1,017,822  
Liabilities and deficiency in stockholders' equity                
Current liabilities:                
Accounts payable   $ 574,078     $ 612,580  
Accrued payable - related party     585,129       414,106  
Accrued expenses     440,074       354,121  
Notes payable - related party     140,958       140,958  
Notes payable     133,403       133,403  
Convertible notes, net of discount and costs     1,701,512       1,173,319  
Deferred rent     —         178,210  
Derivative liabilities     6,914,612       6,000,830  
Contingent liabilities     143,100       257,910  
Lease Liabilities - current     738,184       —    
Warrant liabilities     2,499       16,576  
Total current liabilities – net of current portion     11,373,549       9,282,013  
Lease Liabilities     2,592,804       —    
Total liabilities     13,966,353       9,282,013  
Deficiency in stockholders' equity:                
Preferred stock, Series A and B, par value $.0001 per share; 5,000,000 shares authorized, none issued and outstanding     —         —    
Common stock, par value $.000001 per share; 840,000,000 shares authorized,  54,504,872  and 28,287,414 shares issued, respectively     55       28  
Additional paid-in capital     42,227,015       40,378,973  
Stock to be issued     444,973       710,838  
Accumulated deficit     (51,682,133 )     (49,354,030 )
Total deficiency in stockholders' equity     (9,010,090 )     (8,264,191 )
Total liabilities and deficiency in stockholders' equity   $ 4,956,263     $ 1,017,822  

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

  4  

 

 

 

DIEGO PELLICER WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

    Three Months Ended   Three Months Ended   Six Months Ended   Six Months Ended
    June 30, 2019   June 30, 2018   June 30, 2019   June 30, 2018
Revenues                                
Net rental revenue   $ 419,022     $ 279,502     $ 869,037     $ 662,800  
Rental expense     (296,799 )     (284,768 )     (577,523 )     (553,855 )
Gross profit     122,223       (5,266 )     291,514       108,945  
Operating expenses:                                
General and administrative expenses     438,323       563,046       922,478       1,207,819  
Selling expense     16,224       17,070       30,137       23,339  
Depreciation expense     69,797       150,773       139,595       278,030  
Loss from operations     (402,121 )     (736,155 )     (800,696 )     (1,400,243 )
Other income (expense)                                
Other income (expense)     30       143       72       2,834  
Interest expense     (710,821 )     (322,593 )     (1,482,078 )     (1,033,067 )
Gain on sale of lease     534,649       —         534,649       —    
Extinguishment of debt     —         (12,414 )     —         29,753  
Change in derivative liabilities     (1,551,437 )     154,763       (594,126 )     3,212,017  
Change in value of warrants     53,498       52,862       14,076       172,458  
Total other income (loss)     (1,674,081 )     (127,239 )     (1,527,407 )     2,383,995  
Provision for taxes                                
Net income (loss)   $ (2,076,202 )   $ (863,394 )   $ (2,328,103 )   $ 983,752  
Income (loss) per share - basic   $ (0.04 )   $ (0.10 )   $ (0.05 )   $ 0.12  
Income (loss) per share - diluted   $ (0.04 )   $ (0.10 )   $ (0.05 )   $ 0.12  
Weighted average common shares outstanding - basic     50,469,287       8,247,031       43,632,529       8,247,031  
Weighted average common shares outstanding - diluted     50,469,287       8,247,031       43,632,529       8,247,031  

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

  

  5  

 

 

Diego Pellicer Worldwide, Inc.

Consolidated Statements of Stockholders' Deficit

For the Three and Six Months Ended June 30, 2019 and 2018

 

    SHARES   $
    Common   Treasury   Preferred   Common   Treasury   Preferred   Additional   Accumulated   Common Stock    
    Shares   Shares   Shares   Shares   Shares   Shares   Paid-in Capital   Deficit   to be issued   Total
Balance - March 31, 2019     43,812,125                     $ 44     $ (26,730 )           $ 41,705,148     $ (49,605,931 )   $ 579,983     $ (7,347,486 )
Issuance of common shares for services     150,000       —         —         —         —         —         8,250       —         2,007       10,257  
Issuance of common shares for services - related parties     3,611,665       —         —         4       —         —         374,054       —         (245,138 )     128,920  
Common stock issued upon conversion of notes payable     7,606,841       —         —         7       —         —         233,819       —         —         233,826  
Shares cancelled for convertible note     (675,759 )     —         —         —         —         —         (108,121 )     —         108,121       —    
Fair value of warrants and options granted for services     —         —         —         —         —         —         40,595       —         —         40,595  
Net loss     —         —         —         —         —         —         —         (2,076,202 )     —         (2,076,202 )
Balance - June 30, 2019     54,504,872       —         —       $ 55     $ (26,730 )   $ —       $ 42,253,745     $ (51,682,133 )   $ 444,973     $ (9,010,090 )

 

 

    SHARES   $
    Common   Treasury   Preferred   Common   Treasury   Preferred   Additional   Accumulated   Common Stock    
    Shares   Shares   Shares   Shares   Shares   Shares   Paid-in Capital   Deficit   to be issued   Total
Balance - December 31, 2018     28,287,414       —         —       $ 28     $ (26,730 )   $ —       $ 40,405,703     $ (49,354,030 )   $ 710,838     $ (8,264,191 )
Issuance of common shares for services     2,997,250       —         —         3       —         —         373,125       —         (310,847 )     62,281  
Issuance of common shares for services - related parties     3,611,665       —         —         4       —         —         374,054       —         69,879       443,937  
Common stock issued upon conversion of notes payable     20,284,302       —         —         20       —         —         1,127,794       —         (133,018 )     994,796  
Shares cancelled for convertible note     (675,759 )                                             (108,121 )             108,121       —    
Fair value of warrants and options granted for services     —         —         —         —         —         —         81,190       —         —         81,190  
Net loss     —         —         —         —         —         —         —         (2,328,103 )     —         (2,328,103 )
Balance - June 30, 2019     54,504,872       —         —       $ 55     $ (26,730 )   $ —       $ 42,253,745     $ (51,682,133 )   $ 444,973     $ (9,010,090 )

 

 

    SHARES   $
    Common   Treasury   Preferred   Common   Treasury   Preferred   Additional   Accumulated   Common Stock    
4/1/18   Shares   Shares   Shares   Shares   Shares   Shares   Paid-in Capital   Deficit   to be issued   Total
Balance - March 31, 2018     10,540,188       —         —       $ 10     $ (26,730 )   $ —       $ 36,766,268     $ (40,601,940 )   $ 1,580,329     $ (2,282,063 )
Issuance of common shares for services     447,222                       —         —                 557,270               (449,372 )     107,898  
Issuance of common shares for services - related parties     684,663                       1       —                 824,563               (632,143 )     192,421  
Common stock issued upon conversion of notes payable     1,199,992       —         —         1       —         —         441,958       —         (11,859 )     430,100  
Fair value of warrants and options granted for services     —         —         —         —         —         —         40,484       —         —         40,484  
Net loss     —         —         —         —         —         —         —         (863,394 )     —         (863,394 )
Balance - June 30, 2018     12,872,065       —         —       $ 12     $ (26,730 )   $ —       $ 38,630,543     $ (41,465,334 )   $ 486,955     $ (2,374,554 )

 

 

    SHARES   $
    Common   Treasury   Preferred   Common   Treasury   Preferred   Additional   Accumulated   Common Stock    
6/30/18   Shares   Shares   Shares   Shares   Shares   Shares   Paid-in Capital   Deficit   to be issued   Total
Balance - December 31, 2017     7,128,849       —         —       $ 7     $ —       $ —       $ 34,422,474     $ (42,449,086 )   $ 2,397,218     $ (5,629,387 )
Sale of common stock     41,054       —         —         —         —         —         19,769       —         1,102       20,871  
Issuance of common shares for services     1,232,118                       1       —                 953,642               (624,444 )     329,199  
Issuance of common shares for services - related parties     1,873,762                       2       —                 1,630,299               (1,275,062 )     355,239  
Common stock issued upon conversion of notes payable     2,480,783       —         —         3       —         —         1,332,706       —         (11,859 )     1,320,850  
Fair value of warrants and options granted for services     —         —         —         —         —         —         197,670       —         —         197,670  
Shares Issued to settle accounts payable     75,000       —         —         —         —         —         47,253       —         —         47,253  
Security shares     40,500       —         —         —         (26,730 )     —         26,729       —         —         —    
Net loss     —         —         —         —         —         —         —         983,752       —         983,752  
Balance - June 30, 2018     12,872,065       —         —       $ 13     $ (26,730 )   $ —       $ 38,630,542     $ (41,465,334 )   $ 486,955     $ (2,374,553 )

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

  6  

 

 

DIEGO PELLICER WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW

(Unaudited)

 

    Six Months Ended   Six Months Ended
    June 30, 2019   June 30, 2018
Cash flows from operating activities:                
Net income (loss)   $ (2,328,103 )   $ 983,752  
Adjustments to reconcile net income (loss) to net                
  Depreciation     139,595       278,030  
  Impairment     —            
  Change in fair value of derivative liability     594,126       (3,212,017 )
  Change in value of warrants     (14,076 )     (172,458 )
  Amortization of debt related cost     948,990       949,908  
  Extinguishment of debt     350,594       (29,753 )
  Stock based compensation     537,408       763,949  
  Rent     (206,828 )     —    
Changes in operating assets and liabilities:                
Accounts receivable     (683,496 )     49,854  
Inventory     —         27,945  
Prepaid expenses     54,170       (63,879 )
Other assets     (39,776 )     —    
Accounts payable     (38,504 )     (1,990,583 )
Accrued liability - related parties     171,023       173,877  
Accrued expenses     127,515       (139,836 )
Deferred rent     —         (15,461 )
Contingent liabilities     (64,810 )     —    
Cash used by operating activities     (452,172 )     (2,396,672 )
Cash flows from financing activities:                
Debt costs     (16,225 )     (16,000 )
Proceeds from notes payable     —         250,000  
Proceeds from convertible notes payable, net     517,725       439,250  
Proceeds from sale of common stock     —         20,872  
Cash provided by financing activities     501,500       694,122  
Net increase (decrease) in cash     49,328       (36,734 )
Cash, beginning of period     60,437       158,702  
Cash, end of period   $ 109,765     $ 121,968  
Cash paid for interest   $ —       $ —    
Cash paid for taxes   $ —       $ —    
Supplemental schedule of noncash financial activities:                
  Stock issued for debt settlement   $ —       $ —    
  Notes converted to stock   $ 601,212     $ 696,815  
  Accrued interest converted to stock   $ 41,560     $ 64,785  
  Value of common stock to be issued for conversion of notes and accrued interest   $ —       $ 1,508,909  
  Value of derivative liability extinguished upon conversion of notes and accrued interest   $ 678,797     $ 845,752  
  Accounts payable and accrued expenses paid with common stock   $ 50,000     $ 165,474  
  Leasehold improvements paid by tenant   $ —       $ 228,866  
  Note issue discount   $ 541,725     $ —    
  Debt issuance costs deducted from proceeds of notes   $ 16,225     $ 19,750  

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

  7  

 

 

Diego Pellicer Worldwide, Inc.

June 30, 2019 and 2018

Notes to the Consolidated Financial Statements

 

Note 1 – Organization and Operations

 

History

 

On March 13, 2015, Diego Pellicer Worldwide, Inc. (the Company) (f/k/a Type 1 Media, Inc.) closed on a merger and share exchange agreement by and among (i) the Company, and (ii) Diego Pellicer World-wide 1, Inc., a Delaware corporation, (“Diego”), and (iii) Jonathan White, the majority shareholder of the Company. Diego was merged with and into the Company with the Company to continue as the surviving corporation in the merger. The Company succeeded to and assumed all the rights, assets, liabilities, debts, and obligations of Diego.

 

Prior to the merger, 3,135,000 shares of Type 1 Media, Inc. were issued and outstanding. The principal owners of the Company agreed to transfer their 2,750,000 issued and outstanding shares to a third party in consideration for $169,000 and cancellation of their 2,750,000 shares. The remaining issued and outstanding shares are still available for trading in the marketplace. At the time of the merger, Type 1 Media, Inc. had no assets or liabilities. Accordingly, the business conducted by Type 1 prior to the merger is not being operated by the combined entity post-merger.

 

At the closing of the merger, Diego common stock issued and outstanding immediately prior to the closing of the merger was exchanged for the right to receive one share of the surviving corporation for each share of Diego. An aggregate of 1,081,613 common shares of the surviving corporation were issued to the holders of Diego in exchange for their common shares representing approximately 74% of the combined entity.

 

The merger has been accounted for as a reverse merger and recapitalization in which Diego is treated as the accounting acquirer and Diego Pellicer Worldwide, Inc. is the surviving corporation. 

 

Business Operations

 

The Company leases real estate to licensed marijuana operators providing complete turnkey growing space, processing space, recreational and medical retail sales space and related facilities to licensed marijuana growers, processors, dispensary and recreational store operators. Additionally, the Company plans to explore ancillary opportunities in the regulated marijuana industry as well as offering for wholesale distribution branded non-marijuana clothing and accessories.

 

Until Federal law allows, the Company will not grow, harvest, process, distribute or sell marijuana or any other substances that violate the laws of the United States of America or any other country.

 

Note 2 – Significant and Critical Accounting Policies and Practices

 

The management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company's financial condition and results and require management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effects of matters that are inherently uncertain. The Company's significant and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements of Diego Pellicer Worldwide, Inc. were prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with U.S. GAAP.

 

This Form 10-Q relates to the six months ended June 30, 2019 (the “Current Quarter”) and the six months ended June 30, 2018 (the “Prior Quarter”). The Company’s annual report on Form 10-K for the year ended December 31, 2018 includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. All material adjustments which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the current quarter are not necessarily indicative of the results to be expected for the full year.

 

  8  

 

 

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.

   

Reclassification s

 

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, 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 June 30, 2019 and December 31, 2018. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, prepaid expenses and accounts payable. Fair values were assumed to approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.

 

The following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands)::

 

As of June 30, 2019   Fair Value Measurement Using  
  Level 1   Level 2   Level 3   Total
Derivative liabilities   $ —       $ —       $ 6,915     $ 6,915  
Stock warrant liabilities     —         —         2       2  
    $ —       $ —       $ 6,917     $ 6,917  

 

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  

 

  9  

 

 

Cash  

The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation, and the National Credit Union Share Insurance Fund, up to $250,000. The Company's accounts at these institutions may, at times, exceed the federal insured limits. The Company has not experienced any losses in such accounts.

 

Revenue recognition 

 

The Company has adopted the new revenue recognition guidelines in accordance with ASC 606,    Revenue from Contracts with Customers    (ASC 606), commencing from the period under this report. The adoption of ASU 2016-10 did not have a material impact on the financial statements and related disclosures since the Company is primarily a lessor for revenue purposes.

  

The Company analyzes its contracts to assess that they are within the scope and in accordance with ASC 606. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, whether for goods and services or licensing, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

 

Thus, during the initial term of the lease, management has a policy of partial rent forbearance when the tenant first opens the facility to assure that the tenant has the opportunity for success. Management may be required to exercise considerable judgment in estimating revenue to be recognized.

 

Prior to the adoption of ASC Topic 842, Leases , the Company recognized lease revenue when the collectability is reasonably assured, in accordance with ASC Topic 840, Leases , as amended and interpreted, minimum annual rental revenue is recognized for rental revenues on a straight-line basis over the term of the related lease.

 

When management concludes that the Company is the owner of tenant improvements, management records the cost to construct the tenant improvements as a capital asset. In addition, management records the cost of certain tenant improvements paid for or reimbursed by tenants as capital assets when management concludes that the Company is the owner of such tenant improvements. For these tenant improvements, management records the amount funded or reimbursed by tenants as deferred revenue, which is amortized as additional rental income over the term of the related lease. When management concludes that the tenant is the owner of tenant improvements for accounting purposes, management records the Company’s contribution towards those improvements as a lease incentive, which is amortized as a reduction to rental revenue on a straight-line basis over the term of the lease.

 

In accordance with ASC 842, Leases , the Company recognized rent income in a straight-line basis over the lease term to the extent that collection is considered probable. As a result the Company been recognizing rents as they become payable.

 

Income Taxes

 

Income taxes are provided for using the liability method of accounting in accordance with the Income Taxes Topic of the FASB ASC. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized and when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The computation of limitations relating to the amount of such tax assets, and the determination of appropriate valuation allowances relating to the realizing of such assets, are inherently complex and require the exercise of judgment. As additional information becomes available, the Company continually assesses the carrying value of their net deferred tax assets.

 

  10  

 

 

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 379,881,301  and 11,133,864 common stock equivalents at June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019, the 336,248,772 potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.   

 

Diluted earnings per share for the six months ended June 30, 2018  have been calculated as follows:

 

 

Net income   $ 983,752  
Income attributable to convertible instruments     (3,414,228 )
Expense attributable to convertible instruments     1,010,892  
Diluted loss   $ (1,419,584 )
Basic shares outstanding     10,568,943  
Shares to be issued     1,678,270  
Convertible instruments     8,896,782  
Diluted shares outstanding     21,143,995  
Diluted EPS   $ (0.00 )

 

Legal and regulatory environment

 

The cannabis industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, and different taxation between federal and state. Federal government activity may increase in the future with respect to companies involved in the cannabis industry concerning possible violations of federal statutes and regulations.

 

Management believes that the Company is in compliance with local, state and federal regulations, while no regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

 

Recent accounting pronouncements.    

  

  11  

 

 

Leasing

 

Effective January 1, 2019 the Company adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Update No. 2016-02, “Leases (Topic 842)” which superseded previous lease guidance ASC 840, Leases. Topic 842 is a new lease model that requires a company to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet. The Company adopted the standard using the modified retrospective approach that does not require the restatement of prior year financial statements. The adoption of Topic 842 did not have a material impact on the Company’s consolidated income statement or consolidated cash flow statement. The adoption of Topic 842 resulted in the recognition of ROU assets of $4,110,363 and corresponding lease liabilities of $4,076,629 as of January 1, 2019 for leases classified as operating leases. In addition, the deferred rent liability as of January 1, 2019, was reclassified as a reduction in the ROU assets. Topic 842 also applies to the Company's sub-lease revenues, however, the adoption of Topic 842 did not have a significant impact on the Company's accounting for its sub-lease agreements.

 

The Company adopted the package of practical expedients and transition provisions available for expired or existing contracts, which allowed the Company carryforward its historical assessments of 1) whether contracts are or contain leases, 2) lease classification and 3) initial direct costs. Additionally, for real estate leases, the Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. The Company also elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases. Further, the Company elected the short-term lease exception policy, permitting it exclude the recognition requirements for leases with terms of 12 months or less. See Note 10 for additional information about leases.

 

Stock Compensation

 

In June 2018, the FASB issued ASU No. 2018-07 “Improvements to Non-employee Share-based Payment Accounting" ("ASU 2018-07"). ASU 2018-07 amends ASC 718, "Compensation - Stock Compensation" ("ASC 718"), with the intent of simplifying the accounting for share-based payments granted to non-employees for goods and services and aligning the accounting for share-based payments granted to non-employees with the accounting for share-based payments granted to employees. The Company adopted ASU 2018-07 on January 1, 2019 using the modified retrospective approach as required. ASU 2018-07 replaced ASC 505-50, "Equity-Based Payments to Non-employees" ("ASC 505-50") which was previously applied by the Company for warrants granted to consultants and non-employees.

In July 2018, the FASB issued ASU 2018-09,    Codification Improvements.    The amendments in ASU 2018-09 affect a wide variety of Topics in the FASB Codification and apply to all reporting entities within the scope of the affected accounting guidance. The Company has evaluated ASU 2018-09 in its entirety and determined that the amendments related to Topic 718-740,    Compensation-Stock Compensation-Income Taxes,   are the only provisions that currently apply to the Company. The amendments in ASU 2018-09 related to Topic 718-740,    Compensation-Stock Compensation-Income Taxes,    clarify that an entity should recognize excess tax benefits related to stock compensation transactions in the period in which the amount of the deduction is determined. The amendments in ASU 2018-09 related to Topic 718-740 are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The adoption of the new standard did not have a material impact on the Company’s Consolidated Financial Statements. 

Income Taxes

 

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This standard amends Accounting Standards Codification 740, Income Taxes (ASC 740) to provide guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the Tax Reform Act) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. As described in the footnotes to the Annual Report on Form 10-K, the Company’s accounting for the tax effects of enactment of the Tax Reform Act is being assessed; however, in certain cases, as described below, we made a reasonable estimate of the effects on our existing deferred tax balances and valuation allowance.

Revenue from Contracts with Customers

  

Adoption of New Accounting Standards: On January 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope. The majority of the Company’s revenues come from rental income that are outside the scope of ASC 606. The Company’s licensing revenue that fall within the scope of ASC 606 are presented within other income and are recognized as revenue as the time of grant. The Company adopted ASC 606 using the full retrospective method applied to all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 while prior period amounts continue to be reported in accordance with legacy GAAP. The Company recorded a net change in retained earnings of $369,000 as of January 1, 2017 due to the cumulative effect of adopting ASC 606. The income statement impact of adopting ASC 606 for the period ending $13,500 is outlined below: 

  For The Six Months Ended June 30, 2018 
  As reported   Under Legacy GAAP   Impact of ASC 606
Other income (expense)   $ —       $ —       $ —    
Licensing revenue     —         13,500       (13,500 )
Total other income (loss)     (127,239 )     (113,739 )     (13,500 )
Net Loss   $ (863,394 )   $ (849,894 )   $ (13,500 )
Income (loss) per share - basic   $ 0.10     $ 0.13     $ (0.00 )
Income (loss) per share - diluted   $ 0.02     $ 0.04     $ (0.00 )

 

The Company believes that other recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations and cash flows when implemented.

  

  12  

 

 

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 $10,411,429, and has an accumulated deficit of $51,682,133 at June 30, 2019. These factors, among others raise substantial doubt about its ability to continue as a going concern over the next twelve months. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

The Company believes that it has sufficient cash on hand and cash generated by real estate leases to sustain operations provided that management and board members continue to agree to be paid company stock in exchange for accrued compensation.   Through June 30, 2019, management and board members have accepted stock for accrued compensation at the same discount that has been extended to the convertible noteholders of fifty percent. There are other future noncash charges in connection with financing such as a change in derivative liability that will affect income but have no effect on cash flow.

 

Although the Company has been successful raising additional capital, there is no assurance that the company will sell additional shares of stock or borrow additional funds. The Company's inability to raise additional cash could have a material adverse effect on its financial position, results of operations, and its ability to continue in existence. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management believes that the Company's future success is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional financing. There is no assurance that the Company will be able to generate sufficient cash from operations, sell additional shares of stock or borrow additional funds. However, cash generated from lease revenues is currently exceeding lease costs, but is insufficient to cover operating expenses.

 

Note 4 - Property and Equipment

 

As of June 30, 2019 and December 31, 2018, fixed assets and the estimated lives used in the computation of depreciation are as follows:

 

    Estimated            
    Useful Lives   June 30, 2019     December 31, 2018  
Leasehold improvements   10 years      515,450       1,082,280  
Less: Accumulated depreciation and amortization         (515,450 )     (962,685 )
Property and equipment, net       $ -     $ 139,594  

 

On May 6, 2019, the Company entered into an agreement with a third party, which the Company sold the Seattle leased location for $550,000 in cash. The Company plans to allocate to its efforts in a new location and cannabis grow facilities in Colorado. In connection with the that, full amortized leasehold improvements with a historical cost of $566,830 were sold during the sale.

 

During the three months ended June 30, 2019 and 2018, the Company recorded depreciation expense of $69,797 and $150,273, respectively. During the six months ended June 30, 2019 and 2018, the Company recorded depreciation expense of $139,594 and $278,030, 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 June 30, 2019 and December 31, 2018, the remining balance was $150,000 and $170,000.

 

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 six months ended June 30, 2019, we adopted ASC Topic 842, Leases, as the result we applied remaining balance of prepaid rent to right of use assets and leases liabilities. As of June 30, 2019 and December 31, 2018, the remining balance was $0 and $100,000.

 

  13  

 

 

Note 6 – Related Party

 

As of June 30, 2019 and December 31, 2018, the Company has accrued fees to related parties in the amount of $585,129, and $414,106, respectively. For the three months ended June 30, 2019 and 2018, total cash-based compensation to related parties was $110,699 and $192,099, respectively. For the three months ended June 30, 2019 and 2018, total share-based compensation to related parties was $219,998 and $267,675, respectively. For the six months ended June 30, 2019 and 2018, total cash-based compensation to related parties was $133,384 and $380,855, respectively. For the six months ended June 30, 2019 and 2018, total share-based compensation to related parties was $488,995 and $645,639 respectively. These amounts are included in general and administrative expenses in the accompanying financial statements.

 

At June 30, 2019, the Company owed Mr. Throgmartin $140,958 pursuant to a promissory note dated August 12, 2016. This note accrued interest at the rate of 8% per annum and payable upon the earlier date of (i) the second anniversary date of the promissory notes, (ii) the date all of the current investor notes, in the outstanding aggregate principal and accrued interest amount of approximately $1,480,000 at June 30, 2016, have been paid in full and the Company has achieved gross revenues of at least $3,000,000 over any consecutive 12-month period. The balance  of related party note was $140,958 and $140,958 at June 30, 2019 and June 30, 2018, respectively. As of August 19, 2019, the note was past the maturity date, however the Company has not yet received a default notice.

 

Note 7 – Notes Payable

 

On August 31, 2015, the Company issued a note in the amount of $126,000 with third parties for use as operating capital. The note was amended to include accrued interest on October 31, 2016 and extended the maturity date to October 31, 2018. As of June 30, 2019 and December 31, 2018 the outstanding principal balance of the note was $133,403. As of August 19, 2019, the note was past the maturity date, however the Company has not yet received a default notice.

 

Note 8 – Convertible Notes Payable

 

The Company has issued several convertible notes which are outstanding. The note holders shall have the right to convert principal and accrued interest outstanding into shares of common stock at a discounted price to the market price of our common stock. The conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative liability of $6,914,612 at June 30, 2019. In connection with the issuance of certain of these notes, the Company also issued warrants to purchase its common stock. The Company allocated the proceeds of the notes and warrants based on the relative fair value at inception.

 

Several convertible note holders elected to convert their notes to stock during the six months ended June 30, 2019. The table below provides the note payable activity for the six months ended June 30, 2019, and also a reconciliation of the beginning and ending balances for the derivative liabilities measured using fair significant unobservable inputs (Level 3) for the six months ended June 30, 2019:

 

  Convertible Notes   Discount   Convertible Notes, Net of Discount   Derivative Liabilities
Balance, December 31, 2018   $ 3,324,487     $ 2,151,167     $ 1,173,319     $ 6,000,830  
Issuance of convertible notes     525,500       541,725       (16,225 )     998,453  
Conversion of convertible notes     (601,212 )     (196,639 )     (404,573 )     (678,797 )
Repayment of convertible notes     —         —         —         —    
Change in fair value of derivatives     —         —         —         594,126  
Amortization     —         (948,990 )     948,990       —    
Balance June 30, 2019   $ 3,248,775     $ 1,547,263     $ 1,701,512     $ 6,914,612  

    

During the six months ended June 30, 2019, $601,212 of notes and $41,560 of accrued interest was converted into 20,284,302 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 $83,949 has been recorded related to these conversions. As of August 19, 2019, several convertible notes in aggregate principal of $326,500 were past their maturity dates, however the Company has not yet received a default notice.

 

On July 17, 2018, the Company entered into a certain Equity and Debt Restructure Agreement with two, long-time investors in the Company (the “Restructure Agreement”). Pursuant to the material terms of the Restructure Agreement, the investors agreed to return and cancel their collective 2,774,093 restricted Company common shares, which had been received from the prior conversion of their older convertible notes, in exchange for the Company’s issue to them recast convertible promissory notes. Accordingly, on the same date, these investors were each issued a First Priority Secured Promissory Note (the “Note” or “Notes”), in the principal amount of $1,683,557.77 and $545,606.96, respectively. In connection with this transaction, one of these investors agreed to loan the Company an additional $700,000. In 2018, the Company has received $220,000 cash proceeds of the additional $700,000 loan. Fair value of 2,774,093 restricted Company common shares were determined in the amount of $443,855 using market price and fair value of the embedded conversion feature were determined in the amount of $3,555,888 using Black Sholes Merton Option Model. As the result of the transaction, the Company recorded $2,892,033 in financing costs, and $2,449,275 as debt discount during year ended December 31, 2018. On March 29, 2019, the Company received $100,000 cash proceeds from the additional $700,000 loan. The conversion feature related to $100,0000 were determined in the amount of $154,861 using Black Sholes Merton Option Model. During the six months ended June 30, 2019, we recorded $54,861 in financing costs and $100,000 as debt discount.

 

  14  

 

 

The following assumptions were used in the Black Scholes model in calculating the embedded conversion features and current liabilities for the periods ended June 30, 2019 and June 30, 2018.

 

  June 30, 2019     June 30, 2018  
Risk-free interest rates     1.92 – 2.60 %     1.93-2.33 %
Expected life (years)     0.08 – 1.25       0.25-0.93  
Expected dividends     0 %     0 %
Expected volatility     70-557 %     140-233  %

 

Note 9 – Stockholders’ Equity (Deficit)

 

During the six months ended June 30, 2019:

 

Holders of convertible notes converted $601,212 of notes, and $41,560 of accrued interest was converted into 20,284,302 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 $83,949 has been recorded in interest expense related to these conversions. As June 30, 2019, 35,844 shares for debt conversion were authorized, but not issued as of June 30, 2019.

 

We issued 2,997,250 shares of common stock, valued at $62,281, for services. Additionally, 128,532 shares, valued at $4,031 for services, were authorized during the period but not issued as of June 30, 2019. We issued 1,968,671 shares of common stock that were authorized in 2018 and classified as shares to be issued at December 31, 2018. As June 30, 2019, 140,038 shares, valued at $11,587 for services were authorized, but not issued as of June 30, 2019, and included in stock to be issued in the accompanying condensed consolidated balance sheet.

 

We issued 3,611,665 shares of common stock, valued at $374,058, for related party services. Additionally, we authorized 8,715,105 shares, valued at 443,936 for share-based compensation to related parties and included in stock to be issued in the accompanying condensed consolidated balance sheet. As June 30, 2019, 5,782,467 shares, valued at $394,892 for services were authorized, but not issued as of June 30, 2019.

 

As June 30, 2019, 5,000 shares, value at $2,648 for cash were received, but not issued as of June 30, 2019.

 

During the six months ended June 30, 2018:

 

Holders of convertible notes converted $530,461 of notes and $43,127 of accrued interest into 2,460,518 shares of common stock valued at $1,320,897. Additionally, 3,934 shares, valued at $13,983, for the conversion of notes, were authorized but not issued as of June 30, 2018. Shares authorized but unissued at December 31, 2017 totaling 24,488 shares were issued during 2018.

 

The Company issued 40,500 common shares as security for the payment of convertible notes. The shares, valued at $26,730 are held in escrow, are refundable and are recorded in a contra equity account.

 

We sold 41,500 shares of common stock and received proceeds of $20,872. Of these shares, 5,000 valued at $2,648, were not issued as of June 30, 2018. We issued 16,804 shares of common stock that were sold in 2017 and classified as shares to be issued at December 31, 2017.

 

We issued 515,620 shares of common stock, valued at $140,380 as share-based compensation to related parties. Additionally, 12,083 shares, valued at $72,500, were authorized to be issued for related party services, but were not issued as of June 30, 2018. We issued 1,023,367 shares of common stock that were authorized as share-based compensation to related parties in 2017 and classified as shares to be issued at December 31, 2017.

 

We issued 125,457 shares of common stock, valued at $68,833, for services. Additionally, 141,843 shares, valued at $48,650 for services, were authorized but not issued as of June 30, 2018. We issued 98,417 shares of common stock that were authorized as share-based compensation in 2017 and classified as shares to be issued at December 31, 2017.

 

 

  15  

 

 

We issued 669,082 shares of common stock for payment of a related party note in the amount of $166,354, plus accrued interest of $21,658. We issued 75,000 shares of common stock, valued at $47,254, to settle accounts payable to a consultant.

 

We issued an excess 273,245 shares of common stock to a related party; these shares are in the process of being cancelled. Accordingly, the Company did not value or record these shares.

 

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 June 30, 2018, there is $349,176 accrued for the annual grants, representing 1,515,459 shares. The Company recorded compensation expense of $166,591 for the six months ended June 30, 2018. We issued 165,931 shares that were accrued during 2018. The Company issued 1,161,065 shares of common stock that were accrued in 2017 and classified as shares to be issued at December 31, 2017. 

 

Common stock warrant activity:

 

The Company has determined that certain of its warrants are subject to derivative accounting. The table below provides a reconciliation of the beginning and ending balances for the warrant liabilities measured using fair significant unobservable inputs (Level 3) for the six months ended June 30, 2019:

 

Balance at December 31, 2018   $ 16,576  
Issuance of warrants     —    
Change in fair value during period     (14,077 )
Balance at June 30, 2019   $ 2,499  

  

The following assumptions were used in calculations of the Black Scholes model for the periods ended June 30, 2019 and June 30, 2018.

 

    June 30, 2019     June 30, 2018  
Annual dividend yield     0 %     0 %
Expected life (years)     0.92 – 8.13       1.9 – 8.9  
Risk-free interest rate     1.71 – 2.40 %     2.52 – 2.85 %
Expected volatility     222 - 318 %     200 - 230 %

 

Common stock option activity:

 

During the six months ended June 30, 2019 and 2018, the Company recorded total option expense of $81,190 and $197,076, respectively. Unamortized stock option expense at June 30, 2019 is $208,427, which will be charged to expense in 2019.

 

The following represents a summary of all common stock option activity:

 

  Number of   
Options
  Weighted Average   
Exercise Price
  Weighted Average   
Remaining   
Contractual Term
  Balance outstanding, December 31, 2018       294,959     $ 5,17       7.15  
  Granted       —         —            
  Forfeited       (122,480 )     5.00       7.60  
  Balance outstanding, June 30, 2019       172,479     $ 5.29       5.98  
  Exercisable, June 30, 2019       152,479     $ 5.20       6.50  

   

Note 10 – COMMITMENTS AND CONTINGENCIES

 

Leases

 

The Company leases property under operating leases. Property leases include retail and warehouse space with fixed rent payments and lease terms ranging from three to five years. The Company is obligated to pay the lessor for maintenance, real estate taxes, insurance and other operating expenses on certain property leases. These expenses are variable and are not included in the measurement of the lease asset or lease liability. These expenses are recognized as variable lease expense when incurred.

 

The Company records the lease asset and lease liability at the present value of lease payments over the lease term. The leases typically do not provide an implicit rate; therefore, the Company uses its estimated incremental borrowing rate at the time of lease commencement to discount the present value of lease payments. The Company’s discount rate for operating leases at June 30, 2019 was 12%. Leases often include rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. Lease expense is recognized on a straight-line basis over the lease term to the extent that collection is considered probable. As a result the Company been recognizing rents as they become payable. Our weighted-average remaining lease term is 4.88 years.

 

  16  

 

 

As of June 30, 2019, the maturities of operating leases liabilities are as follows (in thousands):

 

Operating Leases
Remaining 2019 $ 580  
2020 1,009  
2021 872  
2022 713  
2023 727  
2024 and beyond 443  
Total 4,344  
Less: amount representing interest (1,013 )
Present value of future minimum lease payments 3,331  
Less: current obligations under leases 738  
Long-term lease obligations $ 2,593  

 

Rent expense is recognized on a straight-line basis over the life of the lease. Rent expense consists of the following:

 

  Six months ended
  June 30, 2019
Operating lease costs $ 346,860  
Variable rent costs 228,060  
   Total rent expense $ 577,523  

 

As of December 31, 2018, the cash flows of operating leases over the next five years were as follows (in thousands):

 

    Operating Leases
2019   $ 1,258  
2020   1,098  
2021   965  
2022   809  
2023   800  
2024 and beyond   443  
Total minimum lease payments   $ 5,330  

 

Other information related to leases is as follows:

 

  Six months ended
  June 30, 2019
Other information:  
Cash paid for amounts included in the measurement of lease liabilities:  
   Operating cash flows from operating leases $ 588,789  
Weighted-average remaining lease term - operating leases 4.41 yr
Weighted-average discount rate - operating leases 12 %

 

The Company recognized sublease income of $869,037 and $662,800 during the six months ended June 30, 2019 and 2018, respectively.

 

Employment Agreements

  

As a condition of their employment, the Board of Directors approved employment agreements with three key executives. This agreement provided that additional shares will be granted each year over the term of the agreement should their shares as a percentage of the total shares outstanding fall below prescribed ownership percentages. The CEO received an annual grant of additional shares each year to maintain his ownership percentage at 10% of the outstanding stock. One other executive 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 122,000 of stock options. 

  

Note 11 – Subsequent Events

 

On July 2, 2019, the Company issued 2,377,578 shares of common stock for services.  

 

On July 23, 2019, a debt holder converted $25,000 of principal and $2,614 into 2,377,212 shares of common stock.

 

 

  17  

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS

 

The following discussion and analysis of the results of operations and financial condition of Diego Pellicer Worldwide, Inc. (the “Company”, “we”, “us” or “our”) should be read in conjunction with the financial statements of Diego Pellicer Worldwide, Inc. and the notes to those financial statements that are included elsewhere in this Form 10-Q. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Business sections in the financial statements and footnotes included in the Company’s Form 10-K filed on April 16, 2019 for the year ended December 31, 2018. Words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements.

 

Overview

 

Diego Pellicer Worldwide, Inc. was established on August 26, 2013 to take advantage of growing market for legalized cannabis being made possible by the escalating legislation allowing for the legalization of cannabis operations in the majority of states:

 

HTTPS:||CONTENT.EDGAR-ONLINE.COM|EDGAR_CONV_IMG|2019|04|16|0001731122-19-000196_IMAGE_009.JPG    

 

The industry is operating under stringent regulations within the various state jurisdictions. The Company’s primary business plan is twofold: First to lease various properties to licensed operators in these jurisdictions to grow, process and sell cannabis and related products, and the second the Diego Pellicer Management Company, will license the upscale Diego Pellicer brand to qualified operators and receive royalty payments, while providing expertise in retail, product and manufacturing from Diego’s accomplished management team with extensive industry experience, The Company will also provide educational training, compliance consultation, branding, and related accessories to their tenants. These leases and management agreements are expected to provide substantial streams of income. We believe that as laws evolve, it is possible that we will have the opportunity to participate directly in these operations. Accordingly, the Company will selectively negotiate an option on our tenants’ operating company.

 

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The Company has already established four facilities in markets that have experienced high growth, Washington and Colorado. This growth is illustrated in the tables below:

  

 

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    HTTPS:||CONTENT.EDGAR-ONLINE.COM|EDGAR_CONV_IMG|2019|04|16|0001731122-19-000196_IMAGE_011.JPG

 

Source: Headset & 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc. 

 

The legalization taking place in other states such as California and Florida present opportunities many times that of Washington and Colorado. The Company is exploring opportunities in Oregon, California and Florida and is getting inquiries from other potential operators in other jurisdictions.

  

 

  19  

 

 

This market is projected to grow rapidly in the future as this chart below illustrates:

 

HTTPS:||CONTENT.EDGAR-ONLINE.COM|EDGAR_CONV_IMG|2019|04|16|0001731122-19-000196_IMAGE_012.JPG    

Source: Marijuana Business Daily

 

Summary

 

The Company’s primary business objective is to lease various properties to licensed operators to grow, process and retail cannabis and related products. By developing a premium brand name, building upscale facilities, and providing quality accessories to a market where financing is difficult to obtain, these subleases are designed to provide a substantial stream of income. We believe that as laws evolve, it is possible that we will have the opportunity to participate directly in these operations as well.

 

2018 was a year of growth for Diego Pellicer Worldwide. Four tenants were open and generating lease revenue. The tenants were showing steady revenue increases and operating improvements. The business model was being proven. The brand name was getting national recognition and garnered the “Most Valuable Brand of the Year” at the 2018 National Cannabis Business Awards beating out tough national competition including MedMen™, The Clinic, Lightshade and Olio. Diego was also honored as the “Best Retail Center” for the second year in a row, defeating other highly regarded names including LiveWell, The Clinic, The Green Solutions, Euflora and Kind Love.

 

Following this stabilization and growth, in 2019 Diego expects that its revenues from existing tenants, new management agreements and retail acquisitions by the Company and, or it’s tenants will continue to improve the bottom line for the Company. General and administrative expenses should continue to decline also resulting in improved operating results.

 

Diego is exploring opportunities in California, Colorado, Nevada, Washington and other states. The Company will continue to raise capital to finance that expansion. This should result in increased revenues for the future and increased opportunities into new markets.

 

Opportunity in an untapped industry with multi-billion-dollar potential

 

The demand for marijuana products is a multi-billion-dollar market that has only recently begun to become mainstream. Many challenges face the marijuana entrepreneur. Therein lies the opportunity.

 

  20  

 

 

Regulation and reality

 

Total demand for marijuana in the United States, including the black market, is around $52.5 billion  , according to the estimates. That becomes a very conservative estimate of the size of the market in the United States. Distribution was driven underground for years by the Controlled Substance Act passed by Congress nearly 50 years ago. The favorable public opinion towards the legalization is rapidly changing the political attitude toward marijuana not only on the state level but on the federal level. If the Federal Government legalized marijuana nationwide, sales might start out around that level, but would likely rise as cannabis gained mainstream acceptance and the market evolved. Eventually, marijuana could surpass cigarette sales with the potential to rival beer in terms of overall sales.

  

Financing and banking

 

As doubts remain, financing is still a challenge for this industry with banks in many states not only avoiding lending to these businesses but also refusing deposits because of complicated FDIC requirements. Financing has been largely equity raises, vendor financing, and expensive convertible debt. However, with the legalization and subsequent public capital raises in Canada and the change in the political attitude, there has been an indication of more interest by institutional investors in providing capital to this industry and more banks are accepting deposits.

 

A fragmented industry

 

Most industries evolve through the same business cycle. Many small independent companies initially operate in fragmented markets in the early stages. Then there is a consolidation of the industry, with the consolidators thriving and the independent companies dwindling. The larger companies have access to less expensive capital, lower costs, better merchandising, brand name recognition, and more efficient operations. This what we offer our tenants when negotiating the lease: an agreement to acquire them when marijuana is federally legalized. This gives the tenant the ultimate opportunity to participate in the rapid consolidation that we believe will happen when marijuana is federally legalized. This consolidation will result in companies that have heretofore been unable to participate in the rapidly growing industry to be scrambling to enter the space. Diego and its tenants will already be established and consolidated. As an exit strategy, we want to position Diego to be a likely candidate for acquisition or a major player in the marketplace.

 

The opportunity

 

The first mover advantage will continue to be possible for those willing to deal with the regulatory, banking, and financial challenges in today’s market. The fragmented market, the shortage of executives skilled in challenges of the industry, scarcity of brand names, provides a company like Diego, who has proven their business model, to be a consolidator in this industry.

 

States with legalized marijuana

 

Thirty three states and the District of Columbia have laws broadly legalizing marijuana in some form. Ten states and the District of Columbia have legalized marijuana for recreational use with the largest market by far, California, becoming legal.

 

The majority of all states allow for use of medical marijuana under certain circumstances. Some states have also decriminalized the possession of small amounts of marijuana. The industry is operating under stringent regulations within the various state jurisdictions.

 

This map shows current state laws and recently approved ballot measures legalizing marijuana for medical or recreational purposes.    2

 

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There are 9,397 active licenses for marijuana businesses in the U.S., according to Ed Keating, chief data officer for Cannabiz Media, which tracks marijuana licenses. This includes cultivators, manufacturers, retailers, dispensaries, distributors, deliverers and test labs. Now 306 million Americans live in a jurisdiction that has legalized some form of cannabis use.    3    BDS Analytics estimates that the industry paid $1 billion in state taxes in 2016 and owes another $1.4 billion for 2017.    4

 

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1    “Illegal Pot Sales Topped $46.4 Billion in 2016, and that’s Good News for Marijuana Entrepreneurs,” Inc., January 17, 2017, Will Yakowicz.

2    CNN Money   , “The Legal Marijuana Market is Booming,” January 31, 2018, by Aaron Smith

3    Frontier Financial Group, ‘The Cannabis Industry Annual Report: 2017 Legal Marijuana Outlook,”

4    CNN Money   , “The Legal Marijuana Market is Booming,” January 31, 2018, by Aaron Smith

 

The recent legalization in states such as California and probable legalization in Florida present opportunities many times that of Washington and Colorado. The Company is exploring opportunities in Oregon, California and Florida and is getting inquiries from other potential operators in other jurisdictions such as Michigan.

 

States introducing and expanding legalized marijuana laws

 

The legalized cannabis market has grown considerably bigger,  with Canada federally  legalizing recreational marijuana in 2018 and Eastern states in the U.S. rushing towards legalization.

 

In May 2019, Colorado Governor Polis signed into law House Bill 19-1090. It is generally referred to as the "Public Company" bill because it allows public companies to own Colorado marijuana licenses for the first time. This law goes into effect on November 1, 2019.

 

Recent developments at the federal level   

 

Pressures from the states with legalized cannabis industries have been exerted by those state’s Senators and Congressmen. Both informal and formal efforts have been increased by these states. The following are the most recent:

 

In an April 2018 conversation with Republican U.S. Sen. Cory Gardner, President Donald Trump pledged to keep the Department of Justice from interfering with state cannabis laws and, perhaps more significantly, support legislation protecting state-legal marijuana businesses. White House officials later confirmed the president's policy stance.

 

Several bills have been introduced to Congress seeking to reform federal marijuana laws in different ways, including the removal of cannabis from the list of controlled substances, allowing MJ companies to access traditional banking services and amending the IRS code to more fairly tax cannabis businesses.

  

Similar bills have been introduced in previous sessions of Congress, but none have gained significant traction. This time, however, may be different, as marijuana reform has become a bipartisan issue that has the support of many prominent Republicans.

 

Senate Majority Leader Mitch McConnell, for example, introduced a bill in April to remove federal barriers on hemp, while former Republican House Speaker John Boehner recently disclosed his involvement with a large, multistate cannabis company.

 

Whether any significant reform of federal marijuana policy happens in 2018 and what shape it could take remains an open question, but it's clear that attitudes toward cannabis on Capitol Hill are shifting.  

 

New York Democratic Senator Chuck Schumer introducing legislation to remove cannabis from the DEA’s list of controlled substances, to decriminalize pot at a federal level and effectively allow states to decide how to regulate the use of medical or recreational marijuana without concern for federal law.

 

President Trump cut a deal with Colorado Senator Corey Gardner, R-Colo. to allow states to decide what to do about cannabis.

 

Former Speaker of the House John Boehner became a director with cannabis company Acreage Holdings.

 

The Food and Drug Administration setting up for an approval of the first cannabis-based drug from GW Pharmaceuticals Plc (“ GWPH” )

 

The Veteran’s Administration now wants to study the effectiveness of cannabis for chronic pain and PTSD. (The Street, “Cannabis Industry Sits on Precipice of Major Expansion, March 28, 2018, by Bill Meagher) 

 

 Source: 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc. 

 

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The projected U.S. cannabis industry’s growth

 

The Cannabis Industry’s Annual Report for 2018 projects  the following robust growth of legal marijuana sales:  

 

 

   

New Frontier, “The Cannabis Industry Annual Report: 2018 Legal Marijuana Outlook,”

   

Diego’s value proposition

 

Value proposition 1: By providing branding, training, unique accessories, purchasing services, site selection, standardized design, and experienced construction supervision, the tenant reduces his startup time, reduces expenses, increases their efficiency, and builds their gross margin. Diego provides the capital for preopening lease costs and tenant improvements. This results in a turnkey retail location for the tenant. Thus, Diego’s real estate, consulting and accessory sales are positioned to deliver a premium return on our investment.

 

Value proposition 2: With a demonstrated profitability,   Diego has the choice of selling the operations of a selected facility in combination with the tenant and then securing a management contract for that facility. The proceeds can be used to further expand our branded stores and production facilities.

 

Value proposition 3: On select leases, Diego negotiates an acquisition contract with selected licensed tenants to acquire their operations. This contract will be executed at Diego’s option, and upon changes to federal law, introduces our second value proposition—ownership of operations in an industry that is projected to hit $8 - $10 billion by 2019.

Source: Marijuana Business Daily 2019

 

What is Diego’s Strategy?

 

Phase 1 - brand and develop facilities and lease to licensed operators

 

Diego is initially a real estate and a consumer retail development company that is focused on high quality recurring revenues resulting from leasing real estate to licensed cannabis operators. Diego provides a competitive advantage to these operators by developing Diego Pellicer as the world’s first premium marijuana brand and by establishing the highest quality standards for its facilities and products.

 

The Company’s first phase strategy is to acquire and develop the most prominent and convenient real estate locations for the purposes of leasing them to state licensed operators in the cannabis industry. Diego’s first phase revenues result from leasing real estate and selling non-cannabis related accessories to our tenants. The company has developed a brand name strategy, providing training, design services, branded accessories, systems and systems training, locational selection, and other advisory services to their tenants. We enter into branding agreements with our tenants. In addition, part of the vetting process in finding the proper tenant is selecting a tenant that shares the Company’s values and strictly complies with state laws, follows strict safety and testing requirements and provides consistent, high-quality products. If the tenants do not comply, they will not be allowed to use the brand.

 

Simultaneous to the signing of the lease, Diego may secure an option to purchase the tenant’s operations with selected Diego operators/tenants.

 

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Diego Pellicer Management Company, will license the upscale Diego Pellicer brand to qualified operators and receive royalty payments, while providing expertise in retail, product and manufacturing from Diego’s accomplished management team with extensive industry experience. 

 

Phase 2 - Sell facilities and retain a management contract

 

Having developed a brand name and demonstrated operational excellence, the Company has facilities with a proven superior earning power. The Company, in combination with the licensed tenant, may choose to sell the real estate and the operating company and secure a management contract to manage the property the “Diego Way.” This will generate capital with which we can further expand our network of stores.

 

Phase 3 - Exercise the option to purchase and roll up licensed cannabis operations

 

When it becomes federally legal to do so, Diego will execute the acquisition contracts, consolidate our selected tenants and become a nationally branded marijuana retailer and producer concurrent with the change of federal law. We expect this to be a frantic time for larger companies to look for acquisitions, the opportunity to raise capital for further expansion or the exercise an exit strategy.

 

What does our premium branding accomplish?

 

A very important aspect of our marketing plan is to build Diego Pellicer as a luxury brand. This not only enables us to establish a premium brand, but also to generate significant revenues from non- cannabis products. 

  

 

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    HTTPS:||CONTENT.EDGAR-ONLINE.COM|EDGAR_CONV_IMG|2019|04|16|0001731122-19-000196_IMAGE_015.JPG

  

The Company is establishing several levels of branding and will use these to appeal to the various segments of the marketplace depending upon the location, competition, legal constraints, and budget. Standard store templates are being developed, complimentary accessories selectively designed, and customer preferences and segments analyzed. 

 

Our Seattle and Denver stores have been met with enthusiastic demand growing revenues quickly. This is proving the initial Diego concept.

 

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We have proven this to be a winning strategy

 

Diego is positioning itself to be a dominate player in the marijuana marketplace. Diego has proven this by being a fully integrated marijuana retail operation and premium brand, capitalizing on beautifully designed retail stores offering the finest quality products at competitive prices.

 

What we accomplished in 2018

 

2018 was a time of new growth for the Company. An effective and experienced team had to be assembled from within our operators to develop our newly formed management company, and to complement the current executives with knowledge and experience in real estate operations, banking, site selection, branding, facility design, corporate finance, investor relations, store management, and grow expertise, Additional capital needed to be raised in order to have sufficient capital to help support our operators expand within their markets, and do begin the expansion into different markets in the US. Much of the Company’s debt was renegotiated, and additional commitments were formalized for the expansion in the Colorado market. New markets had to be explored, new alliances forged, and opportunities prioritized.

     

$1,173,750 in new capital was raised. New markets were explored. Four facilities continued to see year upon year increases in revenues, which lead to increased rental revenue cash-flow to the Company. All delinquent notes were renegotiated, consolidated, and extended.    In 2018, Diego had received revenues from three Colorado facilities, and our Washington store. Diego now had four facilities generating rent in 2018 for the full year and we have actively been expanding in those markets with potential acquisitions for our tenants, and our management company. The tenants growing their sales and improving operational efficiency. Diego worked with these tenants, partially forbearing on their rent so as to allow these operators to strengthen their position and become capable of paying full rents. The properties generating rents in 2018 are as follows:

 

Table 1: Property Portfolio

 

Purpose     Size       City       State  
Retail store (recreational and medical)     3,300 sq.       Denver       CO  
Cultivation warehouse     18,600 sq.       Denver       CO  
Cultivation warehouse     14,800 sq.       Denver       CO  
Retail store (recreational and medical)     4,500 sq.       Seattle       WA  

 

Diego’s Washington tenant opened our first flagship store in Seattle in October 2016. On May 6, 2019, the Company entered into an agreement with a third party, which the Company sold the Seattle leased location provided $550,000 in capital and executive resources for expansion which the company plans to allocate to its efforts in a new location and cannabis grow facilities in Colorado. The Colorado tenant opened the Diego Denver branded flagship store in February 2017. In addition, Diego’s two cultivation facilities in Denver, CO began production in late 2016. The retail facilities have shown steady growth in sales since their opening.

 

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Diego Pellicer Denver

 

 

   

 

Diego will continue this strategy in states where recreational or medical marijuana sales and cultivation are legal under state law. Our business model is recurring lease revenue and is entirely scalable. Our success will dependent upon continuing to raise capital for expansion, continual improvement of our business model, standardizing store design, controlling costs, and continuing to develop the brand.

 

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RESULTS OF OPERATIONS

 

Three months ended June 30, 2019 compared to three months ended June 30, 2018

 

    Three Months Ended   Three Months Ended   Increase (Decrease)
    June 30, 2019   June 30, 2018   $   %
Revenues                
Net rental revenue   $ 419,022     $ 279,502     $ 139,520       50 %
Rental expense     (296,799 )     (284,768 )     (12,031 )     4 %
Gross profit     122,223       (5,266 )     127,489       -2421 %
General and administrative expenses     438,323       563,046       (124,723 )     -22 %
Selling expense     16,224       17,070       (846 )     -5 %
Depreciation expense     69,797       150,773       (80,976 )     -54 %
Loss from operations   $ (402,121 )   $ (736,155 )   $ 334,034       -45 %

 

Revenues.    For the three months ended June 30, 2019 and 2018, the Company leased three facilities to licensees in Colorado and one in Washington. Total revenue for the three months ended June 30, 2019 was $419,022, as compared to $279,502 for the three months ended June 30, 2018, an increase of $139,520, due to increase collectability from subtenants in 2019.

 

Gross profit.    Rental revenue for the periods ended June 30, 2019 increased over the prior three months ended June 30, 2018, resulting in a gross profit of $122,223, due to increase of revenue in 2019.

 

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General and administrative expense.    Our general and administrative expenses for the three months ended June 30, 2019 were $438,323, compared to $563,046 for the three months ended June 30, 2018. The decrease is primarily due to reduction of management compensation in 2019.

 

Selling expense.    Our selling expenses for the three months ended June 30, 2019 were $16,224, compared to $17,070 for the three months ended June 30, 2018.

 

    Three Months Ended   Three Months Ended   Increase (Decrease)
    June 30, 2019   June 30, 2018   $   %
Other income (expense)                                
Other income (expense)   $ 30     $ 143     $ (113 )     -79 %
Interest expense     (710,821 )     (322,593 )     (388,228 )     120 %
Gain on sale of lease     534,649       —         534,649       N/A  
Extinguishment of debt     —         (12,414 )     12,414       -100 %
Change in derivative liabilities     (1,551,437 )     154,763       (1,706,200 )     -1102 %
Change in value of warrants     53,498       52,862       636       1 %
Total other income (loss)   $ (1,674,081 )   $ (127,239 )   $ (1,546,842 )     1216 %

 

The Net Other Loss was the effect of the increase in market value of the Company’s stock had on the derivative liability of $6,914,612 offset by recording the cost of triggering technical default penalties on certain convertible notes and the financing costs of new debt incurred by the Company.

 

Six months ended June 30, 2019 compared to six months ended June 30, 2018

 

After rental expense the gross margins on the lease were as follows:

 

    Six Months Ended   Six Months Ended   Increase (Decrease)
    June 30, 2019   June 30, 2018   $   %
Revenues                
Net rental revenue   $ 869,037     $ 662,800     $ 206,237       31 %
Rental expense     (577,523 )     (553,855 )     (23,668 )     4 %
Gross profit     291,514       108,945       182,569       168 %
General and administrative expenses     922,478       1,207,819       (285,341 )     -24 %
Selling expense     30,137       23,339       6,798       29 %
Depreciation expense     139,595       278,030       (138,435 )     -50 %
Loss from operations   $ (800,696 )   $ (1,400,243 )   $ 599,547       -43 %

 

Revenues.    For the six months ended June 30, 2019 and 2018, the Company leased three facilities to licensees in Colorado and one in Washington. Total revenue for the six months ended June 30, 2019 was $869,037, as compared to $662,800 for the six months ended June 30, 2018, an increase of $206,237, due to increase collectability from subtenants in 2019.

 

Gross profit.    Rental revenue for the periods ended June 30, 2019 increased over the prior six months ended June 30, 2018, resulting in a gross profit of $291,154, due to increase of revenue in 2019.

 

General and administrative expense.    Our general and administrative expenses for the six months ended June 30, 2019 were $922,478, compared to $1,207,819 for the six months ended June 30, 2018. . The decrease is primarily due to reduction of management compensation in 2019.

 

Selling expense.    Our selling expenses for the six months ended June 30, 2019 were $30,137, compared to $23,339 for the six months ended June 30, 2018. The increase of $6,798 was due to increasing activities used related to selling and marketing. 

 

    Six Months Ended   Six Months Ended   Increase (Decrease)
    June 30, 2019   June 30, 2018   $   %
Other income (expense)                                
Other income (expense)   $ 72     $ 2,834     $ (2,762 )     -97 %
Interest expense     (1,482,078 )     (1,033,067 )     (449,011 )     43 %
Gain on sale of lease     534,649       —         534,639       N/A  
Extinguishment of debt     —         29,753       (29,753 )     -100 %
Change in derivative liabilities     (594,126 )     3,212,017       (3,806,143 )     -118 %
Change in value of warrants     14,076       172,458       (158,382 )     -92 %
Total other income (loss)   $ (1,527,407 )   $ 2,383,995     $ (3,911,402 )     -164 %

 

    

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The Net Other Income was the effect of the decline in market value of the Company’s stock had on the derivative liability of $6,914,612 offset by recording the cost of triggering technical default penalties on certain convertible notes and the financing costs of new debt incurred by the Company.

 

LIQUIDITY AND CAPITAL RESOURCES     

 

    Six Months Ended   Six Months Ended   Increase (Decrease)
    June 30, 2019   June 30, 2018   $   %
Net Cash used in operating activities   $ (452,172 )   $ (2,396,672 )   $ 1,944,500       -81 %
Net Cash used in investing activities     —         —         —         N/A  
Net Cash used in financing activities     501,500       694,122       (192,622 )     -28 %
Net Increase in Cash     49,328       (1,702,550 )     1,751,878       -103 %
Cash - beginning of period     60,437       158,702       (98,265 )        
Cash - end of period   $ 109,765     $ (1,543,848 )   $ 1,653,613       -107 %

 

Operating Activities.     For the six months ended June 30, 2019, the net cash used of $452,172 was a decrease over the same period of the prior year of $2,396,672. The loss from operations after non-cash adjustments increased by $460,295 over the prior year, offset by a decrease in net assets and liabilities of $1484,205.

 

Investing Activities.    There were no investing activities for the six months ended June 30, 2019.

 

Financing Activities.    During the six months ended June 30, 2019, $517,725 in proceeds were from convertible notes and debt cost was $16,225. For the six months ended June 30, 2018, $439,250 in proceeds were from convertible notes payable, $250,000 were from notes payable, $20,872 were from sale of common stock and debt cost was 16,000.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

We carried out an evaluation required by Rule 13a-15 of the Exchange Act under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” and “internal control over financial reporting” as of the end of the period covered by this Report.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures. Our principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of the end of the period covered by this Annual Report (the “Evaluation Date”), pursuant to Rule 13a-15(b) under the Exchange Act.

 

  30  

 

 

Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, due to material weaknesses in our control environment and financial reporting process.

 

Limitations on the Effectiveness of Controls

 

Our management, including our principal executive officer and principal financial officer, does not expect that our Disclosure Controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision- making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.

 

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the three months ended June 30, 2019 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

  31  

 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self- regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

ITEM 1A. RISK FACTORS

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During three months ended June 30, 2019, we issued 150,000 shares of common stock, valued at $10,527, for services.

 

During three months ended June 30, 2019, we issued 3,611,665 shares of common stock to various related parties, valued at $128,919, for services

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibits    
     
31.1   Certification of Principal Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Principal Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification of Principal Executive Officer pursuant to 18U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification of Principal Financial Officer of the Registrant pursuant to 18U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Schema
   
101.CAL XBRL Taxonomy Calculation Linkbase
   
101.DEF XBRL Taxonomy Definition Linkbase
   
101.LAB XBRL Taxonomy Label Linkbase
   
101.PRE XBRL Taxonomy Presentation Linkbase

 

*In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.  

 

  32  

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  DIEGO PELLICER WORLDWIDE, INC.
     
Date: August 19, 2019 By: /s/ Ron Throgmartin
    Ron Throgmartin, Chief Executive Officer
    (Principal Executive Officer)

 

 

 

  33  

 

 

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