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 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.
Principles
of Consolidation
The
financial statements include the accounts of Diego Pellicer Worldwide, Inc., and its wholly-owned subsidiary Diego Pellicer World-wide
1, Inc. Intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain
prior year amounts were reclassified to conform to the manner of presentation in the current period. These reclassifications had
no effect on the Company’s balance sheet, net loss or stockholders’ equity.
Use
of Estimates
The
preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those
estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing
transactions and share based payment arrangements, determining the fair value of the warrants received for a licensing agreement,
the collectability of accounts receivable and deferred taxes and related valuation allowances.
Certain
estimates, including evaluating the collectability of accounts receivable, could be affected by external conditions, including
those unique to our industry, and general economic conditions. It is possible that these external factors could influence our
estimates that could cause actual results to differ from our estimates. The Company intends to re-evaluate all its accounting
estimates at least quarterly based on these conditions and record adjustments when necessary.
Fair
Value Measurements
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the 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 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, 2017 and 2016. The respective carrying value of certain on-balance-sheet financial instruments approximated their
fair values. These financial instruments include cash, prepaid expenses and accounts payable. Fair values were assumed to approximate
carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values
or they are payable on demand.
Cash
The
Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit
Insurance Corporation, and the National Credit Union Share Insurance Fund, up to $250,000. The Company’s accounts at these
institutions may, at times, exceed the federal insured limits. The Company has not experienced any losses in such accounts.
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. Leasehold improvements are amortized over the term of the lease. 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 expectancies:
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 cost basis on the first-in, first-out (“FIFO”)
method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs
of completion, disposal, and transportation. Inventory consists solely of finished goods.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are presented at their face amount, less an allowance for doubtful accounts. Accounts receivable consist of revenue
earned and currently due from sub lessees. 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, 2017 and 2016, allowance for doubtful accounts is $9,908.
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 the following criteria are met
in accordance with SEC Staff Accounting Bulletin 104,
Revenue Recognition
: (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. 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.
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
January 2014, the Company entered into an agreement to license certain intellectual property to an unrelated company. In consideration,
the Company received warrants to purchase shares of the licensee’s common stock, the value of the warrants was recorded
as an investment and the 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 a line of credit agreement, the Company has deferred collection
of such rents until the tenants receive the proper governmental licenses to begin operation. For 2016, management had 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 to licensed cannabis operators for locations that meet the regulatory criteria applicable
by the respective regulatory jurisdiction for the sale, production, and development of cannabis products. The Company evaluates
the lease to determine its appropriate classification as an operating or capital lease for financial reporting purposes. The Company
leases are currently all classified as operating leases.
Minimum
base rent is recorded on a straight-line basis over the lease term after an initial period during which the tenant is establishing
the business and during which the Company may forbear some or all of the rent. The Company is more likely than not to forbear
some or all of the rental income which it considers uncollectable during the tenant’s initial ramp-up period (see
Revenue
Recognition
above). The tenant is still liable for the full rent, although the collectability may be unlikely and the Company
may not expect to collect it.
Leases
as Lessee
The
Company recognizes rent expense on a straight-line basis over the non-cancelable lease term and certain option renewal periods
where failure to exercise such options would result in an economic penalty in such amount that renewal appears, at the inception
of the lease, to be reasonably assured. Deferred rent is presented on current liabilities section on the consolidated balance
sheets.
Income
Taxes
Income
taxes are provided for using the liability method of accounting in accordance with the Income Taxes Topic of the FASB ASC. Deferred
tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation
allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized and when, in the opinion
of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The computation
of limitations relating to the amount of such tax assets, and the determination of appropriate valuation allowances relating to
the realizing of such assets, are inherently complex and require the exercise of judgment. As additional information becomes available,
the Company continually assesses the carrying value of their net deferred tax assets.
Common
Stock Purchase Warrants and Other Derivative Financial Instruments
The
Company classifies as equity any contracts that require physical settlement or net-share settlement or provide us a choice of
net cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts
are indexed to our own stock as defined in ASC Topic 815-40 “Contracts in Entity’s Own Equity.” The Company
classifies as assets or liabilities any contracts that require net-cash settlement including a requirement to net cash settle
the contract if an event occurs and if that event is outside our control or give the counterparty a choice of net-cash settlement
or settlement in shares. The Company assesses classification of its common stock purchase warrants and other free-standing derivatives
at each reporting date to determine whether a change in classification between assets and liabilities is required.
Stock-Based
Compensation
The
Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. The Company calculates
the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our
common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. The estimation
of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ
from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company
considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.
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 142,576,974 and 5,417,837 common stock equivalents at December
31, 2017 and 2016, respectively. For the years ended December 31, 2017 and 2016 these potential shares were excluded from the
shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.
Legal and regulatory environment
The cannabis industry
is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are
not limited to, matters such as licensure, accreditation, and different taxation between federal and state. Federal government
activity may increase in the future with respect to companies involved in the cannabis industry concerning possible violations
of federal statutes and regulations.
Management believes
that the Company is in compliance with local, state and federal regulations, While no regulatory inquiries have been made, compliance
with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown
or unasserted at this time.
New accounting pronouncements
Recent Accounting Pronouncements.
The
Financial Accounting Standards Board (“FASB”) issued Accounting Standards
On December 22, 2017 the SEC staff issued
Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Cuts and
Jobs Act (the TCJA). SAB 118 provides a measurement period that should not extend beyond one year from the enactment
date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income
tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s
accounting for certain income tax effects of the TCJA is incomplete but for which they are able to determine a reasonable
estimate, it must record a provisional amount in the financial statements. Provisional treatment is proper in light of anticipated
additional guidance from various taxing authorities, the SEC, the FASB, and even the Joint Committee on Taxation. If a company
cannot determine a provisional amount to be included in the financial statements, it should continue to apply ASC 740 on the basis
of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA. The Company has applied
this guidance to its financial statements.
In May
2014, the FASB issued ASU
No. 2014-09, Revenue from Contracts with Customers
for
guidance to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International
Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers. Lease contracts will be excluded from this revenue recognition criteria
. For other
transactions the standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
The Company revenues are principally from leasing. Therefore, this ASU has minimal applicability to the Company.
In February 2016, the Financial Accounting
Standards Board (FASB) issued guidance that requires a lessee to recognize assets and liabilities arising from leases on the balance
sheet. Previous GAAP did not require lease assets and liabilities to be recognized for most leases. Additionally, companies are
permitted to make an accounting policy election not to recognize lease assets and liabilities for leases with a term of 12 months
or less. For both finance leases and operating leases, the lease liability should be initially measured at the present value of
the remaining contractual lease payments. The recognition, measurement and presentation of expenses and cash flows arising from
a lease by a lessee will not significantly change under this new guidance. This new guidance is effective for the company as of
the first quarter of fiscal year 2020. The Company is evaluating the effect that this ASU will have on its financial statements
and related disclosures.
In
August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies
the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. This ASU is effective
for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early
adoption is permitted. The Company is currently assessing the potential impact of ASU 2016-15 on its financial statements and
related disclosures.
In
April 2016 the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606). The core principle of Topic 606 is
that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services This ASU is effective for
public business entities for fiscal years, and interim periods within those years, beginning after January 1. 2018. The Company
is currently assessing the potential impact of ASU 2016-10 on its financial statements and related disclosures.
The
Company believes that other recently issued accounting pronouncements and other authoritative guidance for which the effective
date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to
its financial position, results of operations and cash flows when implemented.
Note
3 – Going Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has
incurred losses since inception, its current liabilities exceed its current assets by $
6,411,515,
and has an accumulated deficit of $42,764,086 at December 31, 2017. 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.
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 December
31, 2017, management and board members have accepted stock for accrued compensation at the same discount that has been extended
to the convertible noteholders of fifty percent. There are other future noncash charges in connection with financing such as a
change in derivative liability that will affect income but have no effect on cash flow.
Although
the Company has been successful raising additional capital, there is no assurance that the company will sell additional shares
of stock or borrow additional funds. The Company’s inability to raise additional cash could have a material adverse effect
on its financial position, results of operations, and its ability to continue in existence. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty. Management believes that the Company’s future
success is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional
financing. There is no assurance that the Company will be able to generate sufficient cash from operations, sell additional shares
of stock or borrow additional funds. However, cash generated from lease revenues is currently exceeding lease
costs, but
is insufficient to cover operating expenses.
Note
4 – Investment
In
January 2014, the Company entered into an agreement with Plandai Biotechnology, Inc. (a publicly traded company) to license to
them certain intellectual property rights in exchange for warrants to purchase 1,666,667 shares of Plandai Biotechnology, Inc.
common stock. This licensing agreement carries a 10-year term with an exercise price of $0.01 per share. The Company was to obtain
certain trademark rights certified by the government. The warrant has a restriction on them requiring that the sale of such shares
must reach a certain traded price of $0.50 per share. In 2014, the Company used a third-party appraisal firm to ascertain the
fair value of warrants held by the Company, which was determined to be $525,567 at the date of issuance. During the years ended
December 31, 2017 and 2016, the Company recorded impairment losses of $43,333 and $73,334, respectively.
Note
5 – Property and Equipment
As
of December 31, 2017 and 2016, fixed assets and the estimated lives used in the computation of depreciation are as follows:
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful
Lives
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Machinery
and equipment
|
|
5
years
|
|
$
|
-
|
|
|
$
|
39,145
|
|
Leasehold
improvements
|
|
10
years
|
|
|
853,413
|
|
|
|
728,413
|
|
|
|
|
|
|
853,413
|
|
|
|
767,558
|
|
Less:
Accumulated depreciation and amortization
|
|
|
|
|
(444,285
|
)
|
|
|
(9,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
|
$
|
409,128
|
|
|
$
|
758,112
|
|
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. During 2017, the Company abandoned equipment with a cost basis of $39,145. This loss is included in the impairment
loss for the year ended December 31, 2017.
Note
6 – Other Assets
Security
deposits
: Security deposits reflect the deposits on various property leases, most of which require for two months’ rental
expense in the form of a deposit. These have remained unchanged at $170,000 for December 31, 2017 and 2016.
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. These have remained unchanged at $150,000 for December 31, 2017 and 2016.
Note
7 – Related Party
As of December 31,
2017 and 2016, the Company has accrued fees to related parties in the amount of $449,064 and $509,294, respectively. For the years
ended December 31, 2017 and 2016, total cash based compensation was $693,093 and $2,424,100, respectively to related parties.
For the years ended December 31, 2017 and 2016, total share-based compensation was $3,984,014 and $105,233, 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.
The
balance of the above two notes, aggregating $307,312 at December 31, 2017 and 2016, is reported as related party notes payable
on the balance sheet.
Note
8 – Notes Payable
On
April 11, 2017, the Company issued two convertible notes aggregating $2,123,676 (see Note 9). These were issued to refinance the
following notes:
On
May 20, 2015, the Company issued a note in total amount of $450,000 with third parties for use as operating capital. As of December
31, 2016, the outstanding principle balance of the note was $450,000.
On
July 8, 2015, the Company issued a note in total amount of $135,628 with third parties for use as operating capital. As of December
31, 2016, the outstanding principle balance of the note was $135,628.
On
February 8, 2016, the Company issued 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 was $470,000.
In
accordance with in accordance with FASB Codification- Liabilities, 470-50-40-10, these liabilities were considered extinguished
and a loss on extinguishment of debt was recorded in the amount of $5,607,836.
On
August 31, 2015, the Company issued a note in total amount of $126,000 with third parties for use as operating capital. The note
was amended to include accrued interest on October 31, 2016 and extended the maturity date to October 31, 2018. As of December
31, 2017 and 2016, the outstanding principal balance of the note was $133,403 and $126,000, respectively.
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. This note was extinguished during
2017 by applying the balance against rental income.
Note
9 – Convertible Notes Payable
In
addition to the two notes issued on April 11, 2017 referred to in Note 8, the Company issued several convertible notes during
the year ended December 31, 2017. The note holders shall have the right to convert principal and accrued interest outstanding
into shares of common stock at a discounted price to the market price of our common stock. The conversion feature was recognized
as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative liability of $4,106,521 at
December 31, 2017. In connection with the issuance of certain of these notes, the Company also issued warrants to purchase its
common stock. The Company allocated the proceeds of the notes and warrants based on the relative fair value at inception.
Several
convertible note holders elected to convert their notes to stock during the year ended December 31, 2017. The table below provides
a reconciliation of the beginning and ending balances for the liabilities measured using fair significant unobservable inputs
(Level 3) for the year ended December 31, 2017:
|
|
Convertible notes
|
|
|
Discount
|
|
|
Convertible Note Net of Discount
|
|
|
Derivative Liabilities
|
|
Balance, December 31, 2016
|
|
|
370,500
|
|
|
|
36,344
|
|
|
|
334,156
|
|
|
|
338,282
|
|
Issuance of convertible notes
|
|
|
3,587,342
|
|
|
|
1,403,500
|
|
|
|
2,183,842
|
|
|
|
8,017,473
|
|
Conversion of convertible notes
|
|
|
(2,986,387
|
)
|
|
|
(166,204
|
)
|
|
|
(2,820,183
|
)
|
|
|
(6,066,511
|
)
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,817,277
|
|
Amortization
|
|
|
—
|
|
|
|
(770,301
|
)
|
|
|
770,301
|
|
|
|
—
|
|
Balance December 31, 2017
|
|
$
|
971,455
|
|
|
$
|
503,339
|
|
|
$
|
468,116
|
|
|
$
|
4,106,521
|
|
During
the year ended December 31, 2017, $2,986,387 of notes and $139,263 of accrued interest was converted into 83,916,269
shares of common stock. A gain on extinguishment of debt of $1,427,583 has been recorded related to these conversions.
The
following assumptions were used in calculations of the Black Scholes model for the periods ended December 31, 2017 and 2016.
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Risk-free
interest rates
|
|
|
1.28-1.76
|
%
|
|
|
0.29-1.2
|
%
|
Expected
life
|
|
|
0.02-1.23
year
|
|
|
|
0.25-1
year
|
|
Expected
dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
211-354
|
%
|
|
|
142-356
|
|
Diego
Pellicer Worldwide, Inc. Common Stock fair value
|
|
$
|
0.08
|
|
|
$
|
0.20
-0.77
|
|
Note
10 – Stockholders’ Equity (Deficit)
2017
Transactions:
During 2017, 1,710,000 common shares
valued at $256,327 were issued as payment of finance cost related to convertible notes.
During 2017, 1,899,990 common shares were issued
as security for the payment of convertible notes. The shares, valued at $257,259 are held in escrow, are refundable and are recorded
in a contra equity account.
During 2017, we sold 2,331,071 shares of
common stock and received proceeds of $56,951. Of these shares, 336,071 valued at $8,675, were not issued as of December 31, 2017.
During 2017, 3,430,504 shares of common stock,
valued at $740,762 were issued as share-based compensation to related parties. Additionally, 24,973,389 shares, valued at $1,960,643,
were authorized to be issued for related party services, but were not issued as of December 31, 2017.
During 2017, 160,000 shares of common stock,
valued at $5,521, were issued for service.
During 2017 the Company recorded total option
expense of $1,277,088.
During 2017, 1,000,000 shares of common stock,
valued at $245,600, were issued for a related party debt settlement. 21,025,254 shares valued at 394,500, were authorized
but not issued.
During 2017, 250,000 shares of common stock,
valued at $47,245, were issued to settle accounts payable to a consultant.
During 2017, owners of convertible notes have
converted $2,986,387 of notes and $139,263 of accrued interest into 83,916,269 shares of common stock valued at $7,553,246.
Additionally, 567,433 shares, valued at $33,401, for the conversion of notes, were authorized but not issued as of December 31,
2017. 866,667 shares, valued at $260,000 were cancelled due to reclassify the fund received to a note payable.
As a condition of their employment, the Board
of Directors approved employment agreements with three key executives. This agreement provided that additional shares will be
granted each year at February 1 over the term of the agreement should their shares as a percentage of the total shares outstanding
fall below prescribed ownership percentages. The CEO received an annual grant of additional shares each year to maintain his ownership
percentage at 10% of the outstanding stock. The other two executives receive a similar grant to maintain each executive’s
ownership percentage at 7.5% of the outstanding stock. At December 31, 2017 there is $1,779,943 accrued for the annual
grant at February 1, 2018, representing 23,421,306 shares.
2016
Transactions:
During
2016, the Company issued to officers and employees 3,466,040 shares of common stock, valued at $2,063,309 for services.
During
2016, the Company issued 2,228,297 shares of common stock, valued at $1,259,944, to various third parties for services.
During
2016, the Company sold 5,393,718 shares of common stock for cash proceeds of $865,491.
Common
stock warrant activity
:
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 1, 2016
|
|
|
1,901,426
|
|
|
|
1.21
|
|
|
|
|
|
Granted
|
|
|
125,887
|
|
|
|
-
|
|
|
|
|
|
Balance outstanding,
December 31, 2016
|
|
|
2,027,313
|
|
|
$
|
1.18
|
|
|
|
|
|
Granted
|
|
|
3,250,000
|
|
|
|
0.26
|
|
|
|
6.07
|
|
Balance
outstanding, December 31, 2017
|
|
|
5,277,313
|
|
|
$
|
0.61
|
|
|
|
4.74
|
|
Exercisable,
December 31, 2017
|
|
|
5,277,313
|
|
|
$
|
0.61
|
|
|
|
4.83
|
|
The
Company has determined that certain of its warrants are subject to derivative accounting. The table below provides a reconciliation
of the beginning and ending balances for the warrant liabilities measured using fair significant unobservable inputs (Level 3)
for the year ended December 31, 2017:
Balance at
January 1, 2016
|
|
$
|
-
|
|
Issuance
of warrants
|
|
|
342,867
|
|
Change
in fair value during period
|
|
|
(150,517
|
)
|
Balance
at December 31, 2017
|
|
$
|
192,350
|
|
The
following assumptions were used in calculations of the Black Scholes model for the periods ended December 31, 2017 and 2016:
|
|
For
the Year Ended
December 31, 2017
|
|
|
For
the Year Ended
December 31, 2016
|
|
Annual
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
life (years)
|
|
|
3-10
|
|
|
|
5
|
|
Risk-free
interest rate
|
|
|
1.50
- 2.40
|
%
|
|
|
0.90
|
%
|
Expected
volatility
|
|
|
177
- 284
|
%
|
|
|
266
|
%
|
Common
stock option activity
:
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, 2017, 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.
The
following represents a summary of all common stock option activity:
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Term
|
|
Balance outstanding,
January 1, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
1,000,000
|
|
|
|
0.30
|
|
|
|
|
|
Balance outstanding,
December 31, 2016
|
|
|
1,000,000
|
|
|
$
|
0.30
|
|
|
|
|
|
Granted
|
|
|
4,899,180
|
|
|
|
0.25
|
|
|
|
|
|
Balance
outstanding, December 31, 2017
|
|
|
5,899,180
|
|
|
$
|
0.26
|
|
|
|
8.15
|
|
Exercisable,
December 31, 2017
|
|
|
2,849,590
|
|
|
$
|
0.26
|
|
|
|
8.31
|
|
During the years ended December 31, 2017 and
2016, the Company incurred total option expense of $1,277,088 and $145,362, respectively. Unamortized stock option expense at
December 31, 2017 is $597,006, which will be charged to expense in 2018.
Note
11 – COMMITMENTS AND CONTINGENCIES
Leasing
Activity
The
Company’s business is to lease property in appropriate and desirable locations, and to make available such property for
sub-lease to specifically assigned businesses that grow, process, and sell certain products to the public. Currently the Company
has four separate properties under lease in the states of Colorado and Washington.
As
Lessor
In
Colorado, there are three properties leased in 2017 and 2016. Properties were leased for a three to five year period with an option
for an additional five years, and carry terms requiring triple net payments. Each of the properties have fixed monthly rentals
with periodic increases in the monthly rental rate. In Washington, there is one property which was 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. As of December 31, 2017, the aggregate remaining minimal annual lease
payments under these operating leases were as follows:
2018
|
|
$
|
1,131,078
|
|
2019
|
|
|
746,039
|
|
2020
|
|
|
594,444
|
|
2021
|
|
|
431,227
|
|
2022
|
|
|
240,000
|
|
2023
|
|
|
240,000
|
|
2024
|
|
|
240,000
|
|
2025
|
|
|
40,000
|
|
Total
|
|
$
|
3,662,788
|
|
Rent
expense for the Company’s operating leases for the years ended December 31, 2017 and 2016 was $1,212,161 and $1,103,824,
respectively.
As
Lessee
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. The other two executives receive a similar grant
each to maintain his ownership percentage at 7.5% of the outstanding stock.
Note
12 – 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, 2017 and for the year ended December 31, 2016 respectively to
the Company’s effective tax rate is as follows:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Statutory
federal income tax rate
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
State
income tax, net of federal benefits
|
|
|
(3
|
)%
|
|
|
(6
|
)%
|
Non-deductible
expense
|
|
|
7
|
%
|
|
|
-
|
|
Other
|
|
|
15
|
%
|
|
|
-
|
|
Tax
rate change and true-up
|
|
|
11
|
%
|
|
|
-
|
|
Change
in valuation allowance
|
|
|
4
|
%
|
|
|
40
|
%
|
Income
tax provision (benefit)
|
|
|
-
|
%
|
|
|
-
|
%
|
The
benefit for income tax is summarized as follows:
|
|
Year Ended
December 31, 2017
|
|
|
Year Ended
December 31, 2016
|
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
|
1,212,219
|
|
|
|
(2,353,000
|
)
|
State
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
—
|
|
Deferred
|
|
|
106,961
|
|
|
|
(415,000
|
)
|
Change in valuation allowance
|
|
|
(1,319180
|
)
|
|
|
2,769,000
|
|
Income tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
tax assets (liabilities) consist of the following
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Net operating loss carry
forwards
|
|
$
|
(13,784,280
|
)
|
|
$
|
(11,188,000
|
)
|
Warrants issued for services
|
|
|
1,480,740
|
|
|
|
288,000
|
|
Impairment of investment
|
|
|
476,760
|
|
|
|
620,000
|
|
Depreciation
|
|
|
38,280
|
|
|
|
-
|
|
Interest expense on convertible notes
|
|
|
1,162,320
|
|
|
|
413,000
|
|
Change in fair value of derivative liability
|
|
|
-
|
|
|
|
(52,000
|
)
|
Loss on sales of assets
|
|
|
-
|
|
|
|
145,069
|
|
Total gross deferred tax asset/liabilities
|
|
|
(10,626,180
|
)
|
|
|
(10,064,069
|
)
|
Valuation allowance
|
|
|
10,626,180
|
|
|
|
10,064,069
|
|
Net deferred
taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2017, the Company had
accumulated Federal net operating loss carryovers (“NOLs”) of $26,938,000. 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.
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017.
Among other things, the Act reduces the U.S. federal corporate tax rate from 34 percent to 21 percent, eliminates the alternative
minimum tax (“AMT”) for corporations, and creates a one-time deemed repatriation of profits earned outside of the
U.S. The tax rate reduction also resulted in a write-down of the net deferred tax asset of approximately $5 million. The write-down
of the net deferred tax asset related to the rate reduction resulted in a corresponding write-down of the valuation allowance
of approximately $4 million. The Company fully reserves its deferred tax assets as such there was no impact.
In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based
on the assessment, management has established a full valuation allowance against the entire deferred tax asset relating to NOLs
for every period because it is more likely than not that all of the deferred tax asset will not be realized.
The
Company files U.S. Federal and various State tax returns that are subject to audit by tax authorities beginning with the year
ended December 31, 2014. The Company’s policy is to classify assessments, if any, for tax and related interest and penalties
as tax expense.
Note
13 – Subsequent Events
Subsequent to the year ended December
31, 2017 through March 23, 2018, the Company issued 87,073,287 shares of common stock for the conversion of debt and the
payment of liabilities.
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.