Notes
to the Consolidated Financial Statements
Note
1 – Organization and Operations
History
On
March 13, 2015 (the “closing date”), Diego Pellicer Worldwide, Inc. (f/k/a Type 1 Media, Inc.) (the “Company”)
closed on a merger and share exchange agreement (the “Merger 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 (the “Majority Shareholder”). Pursuant to the terms of the Merger Agreement, Diego was merged with
and into the Company, with the Company to continue as the surviving corporation (the “Surviving Corporation”) in the
Merger, and the Company succeeding to and assuming all the rights, assets, liabilities, debts, and obligations of Diego (the “Merger”).
Prior
to the Merger, 62,700,000 shares of Type 1 Media, Inc. were issued and outstanding. The principal owners of the Company
agreed to transfer their 55,000,000 issued and outstanding shares to a third party in consideration for $169,000 and cancellation
of their 55,000,000 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 1 share of the surviving legal entity. An aggregate of 21,632,252 common shares of the surviving entity
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. (f/k/a Type 1 Media, Inc.) is the surviving legal entity.
Business
Operations
The
Company leases real estate to licensed marijuana operators, including but not limited to, providing complete turnkey growing space,
processing space, recreational and medical retail sales space and related facilities to licensed marijuana growers, processors,
dispensary and recreational store operators. Additionally, the Company plans to explore ancillary opportunities in the regulated
marijuana industry as well as offering for wholesale distribution branded non-marijuana clothing and accessories.
The
Company does not and will not, until such time as Federal law allows, 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 as a result 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
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”).
Principles
of Consolidation
The
financial statements include the accounts of Diego Pellicer Worldwide, Inc., and its wholly-owned subsidiary Diego Pellicer World-wide
1, Inc., Intercompany balances and transactions have been eliminated in consolidation.
New
accounting pronouncements
From
time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies
that may have an impact on the Company’s accounting and reporting. The Company believes that such 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.
Reclassifications
Financial
statement amounts for the year ended December 31, 2015 have been reclassified to conform to current period presentation.
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 the licensing agreement,
the collectability of accounts receivable and deferred taxes and related valuation allowances.
Certain
estimates, including evaluating the collectability of accounts receivable, could be affected by external conditions, including
those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect
on our estimates that could cause actual results to differ from our estimates. The Company intends to re-evaluate all of
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 condensed 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 or not net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
Fair
Value of Financial Instruments
As
required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level
1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or
liabilities;
Level
2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially
the full term of the asset or liability; and
Level
3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable
(supported by little or no market activity).
Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as
of December 31, 2016 and 2015. The respective carrying value of certain on-balance-sheet financial instruments approximated their
fair values. These financial instruments include cash, prepaid expenses and accounts payable. Fair values were assumed to approximate
carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values
or they are payable on demand.
Cash
The
Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit
Insurance Corporation 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.
Property
and Equipment, and Depreciation Policy
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is provided for on a straight-line basis over the
useful lives of the assets. Expenditures for additions and improvements are capitalized; repairs and maintenance are expensed
as incurred.
The
Company intends to take depreciation or amortization on a straight-line basis for all properties, beginning when they are put
into service, using the following life expectancy:
Equipment
– 5 years
Leasehold
Improvements – 10 years, or the term of the lease, whichever is shorter
Buildings
– 20 years
Inventory
The
Company’s inventory is stated at the lower of cost or estimated realizable value, with cost primarily determined on a weighted-average
cost basis on the first-in, first-out (“FIFO”) method.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are presented at their face amount, less an allowance for doubtful accounts, on the balance sheets. Accounts receivable
consist of revenue earned and currently due from sub lessee. We evaluate the collectability of accounts receivable based on a
combination of factors. We recognize reserves for bad debts based on estimates developed using standard quantitative measures
that incorporate historical write-offs and current economic conditions. As of December 31, 2016, the outstanding balance allowance
for doubtful accounts is zero.
The
policy for determining past due status is based on the contractual payment terms of each customer. Once collection efforts by
the Company and its collection agency are exhausted, the determination for charging off uncollectible receivables is made.
Revenue
recognition
The
Company recognizes revenue from rent, tenant reimbursements, and other revenue sources once all of the following criteria are
met in accordance with SEC Staff Accounting Bulletin 104,
Revenue Recognition,
(“SAB 104”): (a) the agreement
has been fully executed and delivered; (b) services have been rendered; (c) the amount is fixed or determinable; and (d) the collectability
of the amount is reasonably assured.
In
accordance with ASC 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. Rental revenue recognition commences when the
tenant takes possession or controls the physical use of the leased space. In order for the tenant to take possession, the leased
space must be substantially ready for its intended use. To determine whether the leased space is substantially ready for its intended
use, management evaluates whether the Company or the tenant is the owner of tenant improvements for accounting purposes. When
management concludes that the Company is the owner of tenant improvements, rental revenue recognition begins when the tenant takes
possession of the finished space, which is when such tenant improvements are substantially complete. In certain instances, when
management concludes that the Company is not the owner (the tenant is the owner) of tenant improvements, rental revenue recognition
begins when the tenant takes possession of or controls the space.
When
management concludes that the Company is the owner of tenant improvements, for accounting purposes, 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
January 2014, the Company entered into an agreement to license certain intellectual property to a third party. In consideration,
the Company received warrants to purchase shares of common stock, which were valued based on an appraisal of the warrants by an
independent third party appraiser. The revenue from the licensing agreement, which is initially recorded as deferred revenue,
is being amortized over the ten year term of the licensing agreement.
The
Company records rents due from the tenants on a current basis. However, as part of the Line of Credit Agreement, the Company has
deferred collection of such rents until the tenants receive the proper governmental licenses to begin operation. Management has
decided to reserve these deferred amounts due to the contingency factor and experience with typical delays in governmental action.
Leases
as Lessor
The
Company currently leases properties in locations that would be acceptable for regulatory purposes and acceptable to sub-lessees
for the manufacturing and development of their products. The Company evaluates the lease to determine its appropriate classification
as an operating or capital lease for financial reporting purposes. The Company currently has a number of leases, which are all
classified as operating leases.
Minimum
base rent for the Company’s operating leases, which generally have escalating rentals over the term of the lease, is recorded
on a straight-line basis over the lease term. The initial rent term includes the build-out, or may include a short rent holiday
period, for the Company’s leases, where no rent payments are typically due under the terms of the lease.
Leases
For
lease agreements that provide for escalating rent payments or free-rent occupancy periods, the Company recognizes rent expense
on a straight-line basis over the non-cancelable lease term and option renewal periods where failure to exercise such options
would result in an economic penalty in such amount that renewal appears, at the inception of the lease, to be reasonably assured.
The lease term commences on the date that the Company takes possession of or controls the physical use of the property. Deferred
rent is presented on current liabilities section on the consolidated balance sheets.
Income
Taxes
Income
taxes are provided for using the liability method of accounting in accordance with the Income Taxes Topic of the FASB ASC. Deferred
tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation
allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized and when, in the opinion
of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The computation
of limitations relating to the amount of such tax assets, and the determination of appropriate valuation allowances relating to
the realizing of such assets, are inherently complex and require the exercise of judgment. As additional information becomes available,
the Company continually assesses the carrying value of their net deferred tax assets.
Research
and Development Costs
Research
and development costs are charged to the statement of operations as incurred.
Preferred
Stock
The
Company applies the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification
and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments
and are measured at fair value. It classifies conditionally redeemable preferred shares (if any), which includes preferred shares
that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of
uncertain events not solely within our control, as temporary equity. At all other times, it classifies its preferred shares in
stockholders’ equity. Preferred shares do not feature any redemption rights within the holders’ control or conditional
redemption features not within our control. Accordingly all issuances of preferred stock are presented as a component of consolidated
stockholders’ equity (deficit).
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 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 (physical settlement or net-share settlement).
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. For employee stock-based
awards, it 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. For non-employee stock-based awards, it calculates the fair value of the award on the date of grant in the same manner
as employee awards, however, the awards are revalued at the end of each reporting period and the pro rata compensation expense
is adjusted accordingly until such time the nonemployee award is fully vested, at which time the total compensation recognized
to date equals the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award
recipient’s performance is complete. 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.
Loss
per common share
Net
loss per share is provided in accordance with ASC Subtopic 260-10. The Company presents basic loss per share (“EPS”)
and diluted EPS on the face of statements of operations. Basic EPS is computed by dividing reported losses by the weighted average
shares outstanding. Loss per common share has been computed using the weighted average number of common shares outstanding during
the year.
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 $4,411,156, and has an accumulated
deficit of $28,114,125 at December 31, 2016. These factors, among others raise substantial doubt about its ability
to continue as a going concern. The 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 from its stockholders. The Company’s inability
to obtain 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.
The
Company intends to continue to raise additional capital to be used for ongoing preopening expenses. Once the tenants commence
operations and generate profits, rental revenues should exceed rental expense for the four properties.
Note
4 – Revolving Credit Line
In
2014 the Company entered into an agreement with a tenant who intended to operate their business out of three separate properties
leased to him by the Company. He was required to obtain a state operating license to grow, process and sell cannabis products.
Until the tenant received such license, the Company provided the tenant a $2,500,000 revolving line of credit established to provide
funding to the tenant, consisting of two separate elements: (a) to fund operating costs until the development is completed, and
(b) to underwrite the rent due on the sublease agreements (the “Line”). Interest was accruing at the annual rate of
20% on the average monthly amount due on advances under the Line.
During
2014 the Company had extended $707,250 in advances against the Line to underwrite rent due during that period under the lease
agreements. As well, the Company incurred accrued and unpaid interest expenses of $70,596 for the period. The total amount, $777,846
was written off as the Company believed these amounts to be uncollectable.
During
the year ended December 31, 2015, further advances under the Line of $200,000 were made and interest was recorded in the
amount of $153,523. On September 7, 2015, the Company entered into an agreement terminating the Line in exchange for a
one-time payment of $200,000. The remaining accrued interest as of that date, $153,523 was written off pursuant to the agreement.
Note
5 – Note Receivable
During
2015 the Company advanced $40,000 to an unrelated third party. The note was non-interest bearing and due on November 10, 2015.
The Company determined that the amount was uncollectable as of December 31, 2015 and wrote off the amount as uncollectible.
Note
6 – Investment
In
January 2014, the Company entered into an agreement with Plandai Biotechnology, Inc. (a publicly traded company) to license
to them certain intellectual property rights in exchange for warrants to purchase 1,666,667 shares of Plandai Biotechnology, Inc.
(“Plandai”) common stock. This licensing agreement carries a 10-year term with an exercise price of $0.01 per
share. The Company is to obtain certain trademark rights certified by the government (expected by the end of 2016). On October
10, 2014 the Company filed its Notice of Exercise to execute the warrants to acquire the shares of Plandai, as of December
31, 2016 the shares had not yet been issued. The sale of such shares has a “leak out” restriction on them
requiring that the sale of such shares must reach a certain traded price of $0.50 per share. The Company used a third party appraisal
firm to ascertain the fair value of warrants held by the Company, which was determined to be $525,567 at the date of
issuance. With the Plandai shares trading at $.07 per share, the Company recorded an impairment loss of $408,900 during the
year ended December 31, 2015. During the year ended December 31, 2016, the Company recorded an additional impairment
loss of $73,334 based on the trading price of $0.026 per share as of December 31, 2016. The Company accounts for its investment
under the cost method of accounting.
Note
7 – Property and Equipment
The Company has incurred expenses
in the build-out of one of its leased properties and acquired a large POD
equipment
for use in growing operations by lessee.
As
of December 31, 2016 and 2015, fixed assets and the estimated lives used in the computation of depreciation are as follows:
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful
Lives
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Machinery and equipment
|
|
5 years
|
|
$
|
39,145
|
|
|
$
|
174,145
|
|
Leasehold improvements
|
|
10 years
|
|
|
728,414
|
|
|
|
664,609
|
|
|
|
|
|
|
767,559
|
|
|
|
838,754
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated
depreciation and amortization
|
|
|
|
|
(9,447
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and
equipment, net
|
|
|
|
$
|
758,112
|
|
|
$
|
838,754
|
|
During
the year ended December 31, 2016, the Company recorded an impairment loss of $1,066,664 for leasehold improvements
to adjust the carrying value to the estimated fair value. The fair value was estimated at 30% discounted cash flow from sublease
revenues net of lease.
Note
8 – 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.
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.
Note
9 – Related Party
As
of December 31, 2016 and December 31, 2015, the Company has accrued and unpaid consulting fees to related parties in the amount
of $509,294 and $511,454, respectively. For the year ended December 31, 2016 and 2015, the consulting fees expense was $715,533
and $652,500, respectively to related parties. These amounts are included in general and administrative expenses in the accompanying
financial statements.
On
April 14, 2016, the Company issued 1,900,000 shares of common stock to Phoenix Consulting Enterprises valued at $1,577,000, a
company owned by Mr. Throgmartin, for services.
On
August 12, 2016, the Company entered into an agreement for the balance of accrued compensation payable to Alan Valdes in
the amount of $332,709 as of June 1, 2016, to be converted (a) 50% of the accrued amount ($166,355) will be converted into restricted
common stock at the price of $0.30 per share (554,517 shares), and; (b) 50% of the accrued amount ($166,355) will be converted
into Company promissory notes, accruing interest at the rate of eight (8%) percent, 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.
On August 12, 2016,
the Company entered into an agreement for the balance of accrued compensation payable to Mr. Throgmartin in amount of $281,914
as of June 1, 2016 to be converted (a) 50% of the accrued amount ($140,957) will be converted into restricted common
stock at the price of $0.30 per share (396,190 shares), and; (b) 50% of the accrued amount ($140,957) will be converted
into Company promissory notes, accruing interest at the rate of eight (8%) percent, 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.
Note
10 – Notes Payable
On
May 20, 2015, the Company entered into notes in total amount of $450,000 with third parties for use as operating capital. The
notes payable agreements required the Company to repay the principal, together with 10% annual interest upon earlier of (i)
the maturity date of November 17, 2015 and (ii) the date the Company raises capital whether through the issuance of
debt, equity or any other securities, whichever occurs first. The Company will not raise this capital unless either (a)
the proceeds of such financing are being directed at the closing of such financing to irrevocably repay this note in full, or
(b) Investor consents to an alternative use of proceeds from such financing. The Company received a waiver from investor for the
convertible note entered into May 29, 2015 (see Note 11).
As
of December 31, 2016 and December 31, 2015, the outstanding principle balance of the note is $450,000.
Subsequent to
the period ended December 31, 2016 and on April 11, 2017, this note was consolidated into a convertible note due April 10, 2019.
On
July 8, 2015, the Company entered into notes in total amount of $135,628 with third parties for use as operating capital. The
notes payable agreements required the Company to repay the principal, together with 10% annual interest upon earlier of (i)
the maturity date of October 6, 2015 and (ii) the date the Company raises capital whether through the issuance of debt,
equity or any other securities , whichever occurs first. The Company will not raise this capital unless either (a) the
proceeds of such financing are being directed at the closing of such financing to irrevocably repay this note in full, or (b)
Investor consents to an alternative use of proceeds from such financing. In connection with the issuance of these notes, the Company
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. The Company allocated $90,563 to the warrants and $45,065 to the debt. The difference between the face
value of the notes and the allocated value has been accreted to interest expense over the life of the loan.
As
of December 31, 2016, the outstanding principle balance of the note is $135,628.
Subsequent to
the period ended December 31, 2016 and on April 11, 2017, this note was consolidated into a convertible note due April 10,
2019.
On
August 31, 2015, the Company entered into notes in total amount of $126,000 with third parties for use as operating capital. The
notes payable agreements required the Company to repay the principal, together with 5% annual interest by the maturity date of
October 31, 2015 or the closing of a financing whereby the company receives a minimum of $126,000. In connection with the issuance
of these notes, the Company issued 126,000 shares of common stock. The Company allocated the proceeds of the notes and warrants
based on the relative fair value at inception. The Company allocated $84,000 to the common stock and $42,000 to the debt. The
difference between the face value of the notes and the allocated value has been accreted to interest expense over the life of
the loan.
As
of December 31, 2016, the outstanding principal balance of the note is $126,000.
On
November 27, 2015, the Company entered into notes in total amount of $135,000 with third parties for purchasing a fixed asset.
The notes payable agreements require the Company to repay the principal, together with $15,000 interest by the maturity date of
January 26, 2016. During the year ended December 31, 2016, the Company paid $15,000 towards accrued interest and $5,950 towards
principal.
As
of December 31, 2016, the outstanding principle balance of the note is $129,050.
On
February 8, 2016, the Company entered into notes in total amount of $470,000 with third parties, bearing interest at 12% per annum
with a maturity date of February 7, 2017.
As
of December 31, 2016, the outstanding principle balance of the note is $470,000.
Subsequent to
the period ended December 31, 2016 and on April 11, 2017, this note was consolidated into a convertible note due April 10, 2019.
Note
11 – Convertible Note Payable
On
May 29, 2015, the Company entered into convertible notes in total amount of $300,000 with third parties for use as operating capital.
The convertible notes require the Company to repay the principal, together with 10% annual interest by the maturity date of November
26, 2015. In the event that the Note is not paid on the maturity date and the common stock price has a set price below $1.50,
then the note holder shall have the right to convert the amount outstanding into shares of common stock at a price of ninety percent
of the lowest trade VWAP (Volume Weighted Average Price) of twenty days prior to conversion. The Company evaluated the conversion
feature embedded in the notes in amount of $342,604 on default. In connection with the issuance of these notes, the Company 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. The Company allocated $225,920 to the warrants and $74,080 to the convertible debt. The difference between
the face value of the notes and the allocated value has been accreted to interest expense over the life of the loan. On November
26, 2015, pursuant to the original terms of the note, the holder received the rights to convert the principal balance into common
shares of the Company. The conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model
that resulted in a derivative liability of $342,604 as of the measurement date.
As
of December 31, 2016 and December 31, 2015, the outstanding principle balance of the note is $300,000.
On
April 1, 2016, the Company converted outstanding invoice due to a convertible note in total amount of $25,000 with a third party.
The convertible notes require the Company to repay the principal, together with 8% annual interest by the maturity date of October
1, 2016. This note is currently at default. The convertible notes can be converted into common stock of the Company valued at
80% of the lowest closing price for the Company’s common stock during the five (5) trading days immediately preceding a
conversion date, as reported by OTC Markets. In any event, the conversion price for this Note can never be less than $0.30 per
share. The conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted
in a derivative liability of $12,608 as of the measurement date.
On
December 31, 2016, principle balance of $25,000 and accrued interest of $1,522 were converted into 88,407 shares of common stock.
On
July 11, 2016, the Company entered into a convertible note in total amount of $50,000 with third parties for use as operating
capital. The convertible note requires the Company to repay the principal, together with 12% annual interest by the maturity date
of April 11, 2017. The convertible note can be converted into common stock of the Company at the lower of (i) a 45% discount to
the lowest trading price during the previous twenty (20) trading days to the date of a Conversion Notice; or (ii) a 45% discount
to the lowest trading price during the previous twenty (20) trading days before the date that this note was executed. The conversion
feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative liability
of $85,274 as of the measurement date.
As
of December 31, 2016, the outstanding principle balance of the note is $50,000.
On
October 17, 2016, the Company entered into convertible notes in total amount of $2,500 with third parties for use as operating
capital. The convertible note requires the Company to repay the principal, together with 10% annual interest by the second anniversary
date of this note. The convertible note can be converted into common stock of the Company at the lower of (A) fifty (50%) percent
of the 10-day trailing average closing price of the Company’s Common Stock, calculated on the Conversion Date, or (B) $0.20
(the “Fixed Price Component”) (subject to equitable adjustments for stock splits, stock dividends or rights offerings
by the Company relating to the Company’s securities or the securities of any subsidiary of the Company, combinations, recapitalization,
reclassifications, extraordinary distributions and similar events and issuances of securities at specified lower prices). The
conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative
liability of $4,905 as of the measurement date. $2,500 was recorded as debt discount and the remaining $2,405 was expensed
immediately.
As
of December 31, 2016, the outstanding principle balance of the note is $2,500.
On
October 21, 2016, the Company entered into convertible notes in total amount of $50,000 with third parties for use as operating
capital. The convertible note requires the Company to repay the principal, together with 10% annual interest by the second anniversary
date of this note. The convertible note can be converted into common stock of the Company at the lower of (A) fifty (50%) percent
of the 10-day trailing average closing price of the Company’s Common Stock, calculated on the Conversion Date, or (B) $0.20
(the “Fixed Price Component”) (subject to equitable adjustments for stock splits, stock dividends or rights offerings
by the Company relating to the Company’s securities or the securities of any subsidiary of the Company, combinations, recapitalization,
reclassifications, extraordinary distributions and similar events and issuances of securities at specified lower prices). The
Company recorded beneficial conversion feature in amount of $6,667.
As
of December 31, 2016, the outstanding principle balance of the note is $50,000.
On
October 24, 2016, the Company entered into convertible notes in total amount of $3,000 with third parties for use as operating
capital. The convertible note requires the Company to repay the principal, together with 10% annual interest by the second anniversary
date of this note. The convertible note can be converted into common stock of the Company at the lower of (A) fifty (50%) percent
of the 10-day trailing average closing price of the Company’s Common Stock, calculated on the Conversion Date, or (B) $0.20
(the “Fixed Price Component”) (subject to equitable adjustments for stock splits, stock dividends or rights offerings
by the Company relating to the Company’s securities or the securities of any subsidiary of the Company, combinations, recapitalization,
reclassifications, extraordinary distributions and similar events and issuances of securities at specified lower prices). The
conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative
liability of $5,273 as of the measurement date. $3,000 was recorded as debt discount and the remaining $2,273 was expensed
immediately.
As
of December 31, 2016, the outstanding principle balance of the note is $3,000.
On
October 24, 2016, the Company entered into convertible notes in total amount of $15,000 with third parties for use as operating
capital. The convertible note requires the Company to repay the principal, together with 10% annual interest by the second anniversary
date of this note. The convertible note can be converted into common stock of the Company at the lower of (A) fifty (50%) percent
of the 10-day trailing average closing price of the Company’s Common Stock, calculated on the Conversion Date, or (B) $0.20
(the “Fixed Price Component”) (subject to equitable adjustments for stock splits, stock dividends or rights offerings
by the Company relating to the Company’s securities or the securities of any subsidiary of the Company, combinations, recapitalization,
reclassifications, extraordinary distributions and similar events and issuances of securities at specified lower prices). The
conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative
liability of $26,366 as of the measurement date. $15,000 was recorded as debt discount and the remaining $11,366 was expensed
immediately.
As
of December 31, 2016, the outstanding principle balance of the note is $15,000.
The
table below provides a reconciliation of the beginning and ending balances for the liabilities measured using fair significant
unobservable inputs (Level 3):
Balance at January 1, 2015
|
|
$
|
-
|
|
Issuance of embedded conversion
features on convertible note
|
|
|
342,604
|
|
Change in fair value during period
|
|
|
(133,809
|
)
|
Balance at December 31, 2015
|
|
|
208,795
|
|
Issuance of embedded conversion features
on convertible note
|
|
|
134,846
|
|
Change in fair
value during period
|
|
|
(5,359
|
)
|
Balance at December 31, 2016
|
|
$
|
338,282
|
|
The
following assumptions were used in calculations of the Black Scholes model for the year ended December 31, 2016 and 2015
|
|
Year
ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rates
|
|
|
0.29-1.20
|
%
|
|
|
0.52-0.65
|
%
|
Expected life
|
|
|
0.25-1 year
|
|
|
|
1 year
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
142-356
|
%
|
|
|
345-348
|
|
Diego Pellicer Worldwide, Inc. Common Stock
fair value
|
|
$
|
0.20 -0.77
|
|
|
$
|
$0.75 -$1.24
|
|
Note
12 – Stockholders’ Equity (Deficit)
During
the year ended December 31, 2016, the Company issued Mr. Throgmartin 2,428,193 shares of common stock valued at $1,735,455 for
services.
During
the year ended December 31, 2016, the Company issued Mr. Valdes 671,181 shares of common stock valued at $201,354 for services.
During
the year ended December 31, 2016, the Company issued Mr. Norris 238,333 s
hares of common stock valued
at $88,000 for services.
During
the year ended December 31,2016, the Company issued Mr. Strachan for 128,333 shares of common stock valued at $38,500 for services.
During
the year ended December 31,2016, the Company issued 2,228,297 shares of common stock to various third parties valued at $1,259,944
for services.
During
the year ended December 31,2016, the Company issued to various investors 5,393,718 shares of common stock for cash received in
amount of $865,491.
For the year
ended December 31, 2015, the Company issued 37,805,416 shares of common sto
ck
as follows
●
|
At the completion
of the merger, 29,498,165 restricted common shares of the new Company were issued to the former Diego shareholders as follows:
|
|
o
|
The original Founders
of the Company converted their 13,520,000 shares into restricted common shares on a 1:1 basis.
|
|
o
|
7,743,333 shares
were issued to former Diego shareholders.
|
|
o
|
The Series A and
B Preferred shareholders converted 5,841,097 shares into restricted common shares on a 1:1 basis.
|
|
o
|
Non-employees, which
consisted of founding members and others were awarded a total of 2,451,935 shares, at a value of $0.9375 per share.
|
|
o
|
58,200 shares of
common stock were returned as treasury stock.
|
●
|
4,300,000 shares
of common stock issued for services provided.
|
●
|
3,881,251 shares
issued for $1,164,375.
|
●
|
126,000 shares of
common stock issued in connection with $126,000 promissory note (see Note 10).
|
For
the year ended December 31, 2015, 753,333 Preferred shares were issued and subsequently converted to common shares in the reverse
merger. As of December 31, 2015, there were no Preferred shares outstanding. The common shares and the preferred shares, have
a par value of $0.000001.
As
of December 31, 2016, there are currently 1,991,172 warrants outstanding relating to the former Diego shareholders.
The following table presents
our warrants and embedded conversion features which have no observable market data and are derived using Black-Scholes measured
at fair value on a recurring basis, using Level 3 inputs, as of December 31, 2016 and 2015:
|
|
For
the Year Ended
December 31, 2016
|
|
|
For
the Year Ended
December 31, 2015
|
|
Annual dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (years)
|
|
|
5
|
|
|
|
1-10
|
|
Risk-free interest rate
|
|
|
0.90
|
%
|
|
|
0.52% – 2.14
%
|
|
Expected volatility
|
|
|
266
|
%
|
|
|
323%-354 %
|
|
The
following represents a summary of all common stock warrant activity:
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual Term
|
|
Balance outstanding, January 31, 2015
|
|
|
790,798
|
|
|
|
0.26
|
|
|
|
4.03
|
|
Granted
|
|
|
1,110,628
|
|
|
|
1.17
|
|
|
|
5.18
|
|
Balance outstanding, December 31, 2015
|
|
|
1,901,426
|
|
|
$
|
1.21
|
|
|
|
4.40
|
|
Granted
|
|
|
125,887
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, December 31,
2016
|
|
|
2,027,313
|
|
|
$
|
1.18
|
|
|
|
3.43
|
|
Exercisable, December 31, 2016
|
|
|
1,991,172
|
|
|
$
|
1.18
|
|
|
|
3.43
|
|
The
Company maintains an Equity Incentive Plan pursuant to which 2,480,000 shares of Common Stock are reserved for issuance thereunder.
This Plan was established to award certain founding members, who were instrumental in the development of the Company, as well
as key employees, directors and consultants, and to promote the success of the Company’s business. The terms allow for each
option to vest immediately, with a term no greater than 10 years from the date of grant, at an exercise price equal to par value
at date of the grant. As of December 31, 2016, 1,775,000 shares had been granted, with 200,000 of those shares granted with warrants
attached. There remain 705,000 shares available for future grants.
Note
13 – COMMITMENTS AND CONTINGENCIES
The
Company’s business is to lease property in appropriate and desirable locations, and to make available such property for
sub-lease to specifically assigned businesses that grow, process and sell certain products to the general public. Currently the
Company has four (4) separate properties under lease in the states of Colorado and Washington.
In
Colorado, there are three properties leased in 2016 and 2015. Properties were leased for a three (3) to five (5) year period with
an option for an additional five (5) years, and carry terms requiring triple net (NNN) conditions. Each of the properties, except
for one, have fixed monthly rentals (exclusive of the triple net terms). As of December 31, 2016, the aggregate remaining minimal
annual lease payments under these operating leases were as follows:
2017
|
|
$
|
1,055,472
|
|
2018
|
|
|
868,038
|
|
2019
|
|
|
346,566
|
|
Total
|
|
$
|
2,270,076
|
|
In
Washington, there is one (1) property leased in 2014. The property was leased for a five (5) year period with an option for an
additional five (5) years, and carry terms requiring triple net (NNN) conditions. The property has an escalating annual rental
(exclusive of the triple net terms). As of September 30, 2016, the aggregate remaining minimal annual lease payments due under
these operating leases were as follows:
2017
|
|
$
|
87,723
|
|
2018
|
|
|
67,365
|
|
Total
|
|
$
|
155,088
|
|
Rent
expense for the Company’s operating leases for the year ended December 31, 2016 and 2015 was $1,103,824 and $1,228,028,
respectively.
Note
14 – Deferred Tax Assets and Income Tax Provision
The
reconciliation of income tax benefit at the U.S. statutory rate of 34% for the year ended December 31, 2016 and for the year ended
December 31, 2015 respectively to the Company’s effective tax rate is as follows:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Statutory federal income
tax rate
|
|
|
-34
|
%
|
|
|
-34
|
%
|
State income tax, net of federal benefits
|
|
|
-6
|
%
|
|
|
-6
|
%
|
Change in valuation
allowance
|
|
|
40
|
%
|
|
|
40
|
%
|
Income tax provision
(benefit)
|
|
|
-
|
%
|
|
|
-
|
%
|
The
benefit for income tax is summarized as follows:
|
|
Year
Ended
December 31, 2016
|
|
|
Year
Ended
December 31, 2015
|
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
--
|
|
|
$
|
--
|
|
Deferred
|
|
|
(2,353,000
|
)
|
|
|
(5,395,000
|
)
|
State
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
--
|
|
Deferred
|
|
|
(415,000
|
)
|
|
|
(952,000
|
)
|
Change in valuation
allowance
|
|
|
2,769,000
|
|
|
|
6,347,000
|
|
Income tax provision
(benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
tax assets (liabilities) consist of the following
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Net operating loss carry
forwards
|
|
$
|
(11,1880,000
|
)
|
|
$
|
(8,419,000
|
)
|
Warrants issued for services
|
|
|
288,000
|
|
|
|
230,000
|
|
Impairment of investment
|
|
|
620,000
|
|
|
|
164,000
|
|
Interest expense on convertible notes
|
|
|
413,000
|
|
|
|
297,000
|
|
Change in fair
value of derivative liability
|
|
|
(52,000
|
)
|
|
|
(54,000
|
)
|
Total gross deferred tax asset/liabilities
|
|
|
(10,064,069
|
)
|
|
|
(7,782,000
|
)
|
Valuation allowance
|
|
|
10,064,069
|
|
|
|
7,782,000
|
|
Net deferred
taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of December 31, 2016, the Company had accumulated Federal net operating loss carryovers (“NOLs”) of $25,160,000.
These NOLs begin to expire in 2033, and the utilization of NOLs may be subject to limitation under the Internal Revenue Code Section
382 should there be a greater than 50% ownership change as determined under the regulations.
In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based
on the assessment, management has established a full valuation allowance against the entire deferred tax asset relating to NOLs
for every period because it is more likely than not that all of the deferred tax asset will not be realized.
The
Company files U.S. Federal and various State tax returns that are subject to audit by tax authorities beginning with the year
ended December 31, 2013. The Company’s policy is to classify assessments, if any, for tax and related interest and penalties
as tax expense.
Note
15 – Subsequent Events
Subsequent
to the year ended December 31, 2016, the Company issued 161,593 shares of common stock for services of $41,659 and
469,260 shares of common stock for conversion $50,000 of debt.
Subsequent
to the year ended December 31, 2016 and on April 11, 2017, the Company agreed with one of its lenders to amend the terms of several
of its loans. See Note 10, Notes Payable.