ITEM
1. FINANCIAL STATEMENTS.
DIEGO
PELLICER WORLDWIDE, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
(Audited)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
146,318
|
|
|
$
|
158,702
|
|
Accounts receivable
|
|
|
238,827
|
|
|
|
170,677
|
|
Prepaid expenses
|
|
|
7,241
|
|
|
|
21,621
|
|
Inventory
|
|
|
28,966
|
|
|
|
32,945
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
421,352
|
|
|
|
383,945
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
510,737
|
|
|
|
409,128
|
|
Investments, at cost
|
|
|
-
|
|
|
|
-
|
|
Security deposits
|
|
|
320,000
|
|
|
|
320,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,252,089
|
|
|
$
|
1,113,073
|
|
|
|
|
|
|
|
|
|
|
Liabilities and deficiency in stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
444,942
|
|
|
$
|
626,258
|
|
Accrued payable - related party
|
|
|
418,863
|
|
|
|
449,064
|
|
Accrued expenses
|
|
|
375,769
|
|
|
|
207,558
|
|
Notes payable - related party
|
|
|
140,958
|
|
|
|
307,312
|
|
Notes payable
|
|
|
133,403
|
|
|
|
133,403
|
|
Convertible notes, net of discount and costs
|
|
|
410,088
|
|
|
|
468,116
|
|
Deferred rent
|
|
|
245,925
|
|
|
|
251,878
|
|
Deferred revenue
|
|
|
53,000
|
|
|
|
53,000
|
|
Derivative liabilities
|
|
|
1,103,373
|
|
|
|
4,106,521
|
|
Warrant liabilities
|
|
|
72,754
|
|
|
|
192,350
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,399,075
|
|
|
|
6,795,460
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
248,500
|
|
|
|
262,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,647,575
|
|
|
|
7,057,460
|
|
|
|
|
|
|
|
|
|
|
Deficiency in stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, Series A and B, par value $.0001
per share; 5,000,000 shares authorized, none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, par value $.000001 per share;
495,000,000 shares authorized, 229,650,261 and 142,576,974 shares issued, respectively
|
|
|
230
|
|
|
|
143
|
|
Additional paid-in capital
|
|
|
36,927,394
|
|
|
|
34,422,338
|
|
Stock to be issued
|
|
|
1,580,330
|
|
|
|
2,397,218
|
|
Accumulated deficit
|
|
|
(40,903,440
|
)
|
|
|
(42,764,086
|
)
|
|
|
|
|
|
|
|
|
|
Total deficiency
in stockholders’ equity
|
|
|
(2,395,486
|
)
|
|
|
(5,944,387
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities
and deficiency in stockholders’ equity
|
|
$
|
1,252,089
|
|
|
$
|
1,113,073
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
DIEGO
PELLICER WORLDWIDE, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
March
31, 2018
|
|
|
March
31, 2017
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
Net Rental Revenue
|
|
$
|
383,298
|
|
|
$
|
309,962
|
|
Rental Expense
|
|
|
(269,087
|
)
|
|
|
(347,203
|
)
|
Gross Profit
|
|
|
114,211
|
|
|
|
(37,241
|
)
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
644,773
|
|
|
|
892,995
|
|
Selling Expense
|
|
|
6,269
|
|
|
|
12
|
|
Depreciation Expense
|
|
|
127,257
|
|
|
|
130,790
|
|
Loss from Operations
|
|
|
(664,088
|
)
|
|
|
(1,061,038
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Licensing Revenue
|
|
|
13,500
|
|
|
|
13,500
|
|
Other Income (Expense)
|
|
|
2,691
|
|
|
|
3,624
|
|
Interest Expense
|
|
|
(710,474
|
)
|
|
|
(288,236
|
)
|
Impairment Loss
|
|
|
-
|
|
|
|
(27,500
|
)
|
Extinguishment of Debt
|
|
|
42,167
|
|
|
|
-
|
|
Change in Derivative Liabilities
|
|
|
3,057,254
|
|
|
|
50,839
|
|
Change in Value
of Warrants
|
|
|
119,596
|
|
|
|
-
|
|
Total Other
Income (Loss)
|
|
|
2,524,734
|
|
|
|
(247,773
|
)
|
|
|
|
|
|
|
|
|
|
Provision for taxes
|
|
|
|
|
|
|
|
|
NET INCOME
(LOSS)
|
|
$
|
1,860,646
|
|
|
$
|
(1,308,811
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss)
per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
164,940,612
|
|
|
|
50,868,784
|
|
Diluted
|
|
|
260,016,862
|
|
|
|
50,868,784
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
DIEGO
PELLICER WORLDWIDE, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited)
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
March
31, 2018
|
|
|
March
31, 2017
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,860,646
|
|
|
$
|
(1,308,810
|
)
|
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
127,257
|
|
|
|
130,790
|
|
Impairment
|
|
|
-
|
|
|
|
54,565
|
|
Change in fair value
of derivative liability
|
|
|
(3,057,254
|
)
|
|
|
(50,839
|
)
|
Change in value of
warrants
|
|
|
(119,596
|
)
|
|
|
-
|
|
Amortization of discount
|
|
|
643,966
|
|
|
|
53,678
|
|
Amortization of debt
costs
|
|
|
19,382
|
|
|
|
-
|
|
Extinguishment of
debt
|
|
|
(42,168
|
)
|
|
|
-
|
|
Stock based compensation
|
|
|
423,124
|
|
|
|
1,057,175
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(68,150
|
)
|
|
|
(42,457
|
)
|
Inventory
|
|
|
3,979
|
|
|
|
9,079
|
|
Prepaid expenses
|
|
|
14,380
|
|
|
|
(2,298
|
)
|
Other assets
|
|
|
-
|
|
|
|
(555,657
|
)
|
Accounts payable
|
|
|
(134,062
|
)
|
|
|
(235,169
|
)
|
Accrued liability
- related parties
|
|
|
88,019
|
|
|
|
167,312
|
|
Accrued expenses
|
|
|
(15,826
|
)
|
|
|
34,341
|
|
Change in derivative
liability, net of discount
|
|
|
-
|
|
|
|
186,086
|
|
Deferred rent
|
|
|
5,953
|
|
|
|
153,984
|
|
Deferred
revenue
|
|
|
(13,500
|
)
|
|
|
(13,500
|
)
|
|
|
|
|
|
|
|
|
|
Cash used by operating
activities
|
|
|
(275,756
|
)
|
|
|
(361,720
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property
and equipment
|
|
|
-
|
|
|
|
(135,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash used by investing
activities
|
|
|
-
|
|
|
|
(135,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Stock issued for convertible notes
|
|
|
-
|
|
|
|
50,000
|
|
Debt costs
|
|
|
(16,000
|
)
|
|
|
-
|
|
Proceeds from convertible notes payable
|
|
|
258,500
|
|
|
|
565,000
|
|
Repayments of notes payable
|
|
|
-
|
|
|
|
(50,000
|
)
|
Proceeds from
sale of common stock
|
|
|
20,872
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash provided
by financing activities
|
|
|
263,372
|
|
|
|
565,000
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(12,384
|
)
|
|
|
68,280
|
|
Cash, beginning
of period
|
|
|
158,702
|
|
|
|
51,333
|
|
Cash, end of period
|
|
$
|
146,318
|
|
|
$
|
119,613
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for
taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash financial activities:
|
|
|
|
|
|
|
|
|
Stock issued for
debt settlement
|
|
$
|
-
|
|
|
$
|
50,000
|
|
Notes converted to
stock
|
|
$
|
568,268
|
|
|
$
|
-
|
|
Accrued interest
converted to stock
|
|
$
|
44,829
|
|
|
$
|
-
|
|
Value of common stock
to be issued for conversion of notes and accrued interest
|
|
$
|
1,078,786
|
|
|
$
|
-
|
|
Value of derivative
liability extinguished upon conversion of notes and accrued interest
|
|
$
|
547,476
|
|
|
$
|
-
|
|
Accounts payable
and accrued expenses paid with common stock
|
|
$
|
165,474
|
|
|
$
|
-
|
|
Leasehold improvements
paid by tenant
|
|
$
|
228,866
|
|
|
$
|
-
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Diego
Pellicer Worldwide, Inc.
March
31, 2018 and 2017
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.
Basis
of Presentation
The
accompanying condensed consolidated financial statements of Diego Pellicer Worldwide, Inc. were prepared in accordance with the
instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity
with U.S. GAAP.
This
Form 10-Q relates to the three months ended March 31, 2018 (the “Current Quarter”) and the three months March 31,
2017 (the “Prior Quarter”). The Company’s annual report on Form 10-K for the year ended December 31, 2017 (“2017
Form 10-K”) includes certain definitions and a summary of significant accounting policies and should be read in conjunction
with this Form 10-Q. All material adjustments which, in the opinion of management, are necessary for a fair statement of the results
for the interim periods have been reflected. The results for the current quarter are not necessarily indicative of the results
to be expected for the full year.
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 March 31, 2018 and December 31, 2017. The respective carrying value of certain on-balance-sheet financial instruments approximated
their fair values. These financial instruments include cash, prepaid expenses and accounts payable. Fair values were assumed to
approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate
fair values or they are payable on demand.
Cash
The
Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit
Insurance Corporation, and the National Credit Union Share Insurance Fund, up to $250,000. The Company’s accounts at these
institutions may, at times, exceed the federal insured limits. The Company has not experienced any losses in such accounts.
Revenue
recognition
The
Company 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.
The
Company records rents due from the tenants on a current basis. The Company has deferred collection of such rents until the tenants
receive the proper governmental licenses to begin operation. Prior to 2017, management had reserved these deferred amounts due
to the unlikelihood of collection.
Leases
as Lessor
The
Company currently leases properties to licensed cannabis operators for locations that meet the regulatory criteria applicable
by the respective regulatory jurisdiction for the sale, production, and development of cannabis products. The Company evaluates
the lease to determine its appropriate classification as an operating or capital lease for financial reporting purposes. The Company
leases are currently all classified as operating leases.
Minimum
base rent is recorded on a straight-line basis over the lease term after an initial period during which the tenant is establishing
the business and during which the Company may forbear some or all of the rent. The Company is more likely than not to forbear
some or all of the rental income which it considers uncollectable during the tenant’s initial ramp-up period (see
Revenue
Recognition
above). The tenant is still liable for the full rent, although the collectability may be unlikely and the Company
may not expect to collect it.
Leases
as Lessee
The
Company recognizes rent expense on a straight-line basis over the non-cancelable lease term and certain option renewal periods
where failure to exercise such options would result in an economic penalty in such amount that renewal appears, at the inception
of the lease, to be reasonably assured. Deferred rent is presented on current liabilities section on the consolidated balance
sheets.
Income
Taxes
Income
taxes are provided for using the liability method of accounting in accordance with the Income Taxes Topic of the FASB ASC. Deferred
tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation
allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized and when, in the opinion
of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The computation
of limitations relating to the amount of such tax assets, and the determination of appropriate valuation allowances relating to
the realizing of such assets, are inherently complex and require the exercise of judgment. As additional information becomes available,
the Company continually assesses the carrying value of their net deferred tax assets.
Common
Stock Purchase Warrants and Other Derivative Financial Instruments
The
Company classifies as equity any contracts that require physical settlement or net-share settlement or provide us a choice of
net cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts
are indexed to our own stock as defined in ASC Topic 815-40 “Contracts in Entity’s Own Equity.” The Company
classifies as assets or liabilities any contracts that require net-cash settlement including a requirement to net cash settle
the contract if an event occurs and if that event is outside our control or give the counterparty a choice of net-cash settlement
or settlement in shares. The Company assesses classification of its common stock purchase warrants and other free-standing derivatives
at each reporting date to determine whether a change in classification between assets and liabilities is required.
Stock-Based
Compensation
The
Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. The Company calculates
the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our
common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. The estimation
of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ
from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company
considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.
Income
(loss) per common share
The
Company utilizes ASC 260, “Earnings Per Share” for calculating the basic and diluted loss per share. In accordance
with ASC 260, the basic and diluted loss per share is computed by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding. Diluted net loss per share is computed similar to basic loss per share except that
the denominator is adjusted for the potential dilution that could occur if stock options, warrants, and other convertible securities
were exercised or converted into common stock. Potentially dilutive securities are not included in the calculation of the diluted
loss per share if their effect would be anti-dilutive. The Company has 106,252,743 and 12,934,555 common stock equivalents
at March 31, 2018 and 2017, respectively. For the three month period ended March 31, 2017 the 12,934,555 potential shares were
excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.
Diluted
earnings per share for the three months ended March 31, 2018 have been calculated as follows:
Net income
|
|
$
|
1,860,646
|
|
|
|
|
|
|
Income attributable to convertible
instruments
|
|
|
(3,219,017
|
)
|
Expense
attributable to convertible instruments
|
|
|
455,642
|
|
|
|
|
|
|
Diluted
loss
|
|
$
|
(902,729
|
)
|
|
|
|
|
|
Basic shares outstanding
|
|
|
164,940,612
|
|
|
|
|
|
|
Shares to be issued
|
|
|
41,096,070
|
|
Convertible
instruments
|
|
|
53,980,180
|
|
|
|
|
|
|
Diluted
shares outstanding
|
|
|
260,016,862
|
|
|
|
|
|
|
Diluted
EPS
|
|
$
|
(0.00
|
)
|
Legal
and regulatory environment
The
cannabis industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations
include, but are not limited to, matters such as licensure, accreditation, and different taxation between federal and state. Federal
government activity may increase in the future with respect to companies involved in the cannabis industry concerning possible
violations of federal statutes and regulations.
Management
believes that the Company is in compliance with local, state and federal regulations, While no regulatory inquiries have been
made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory
actions unknown or unasserted at this time.
Recent
accounting pronouncements.
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. The
Company did comply with this for the quarter ended March 31, 2018. The adoption of ASU 2016-15 did not have a material impact
on the 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 adoption
of ASU 2016-10 did not have a material impact on the 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 $2,977,723, and has an accumulated
deficit of $40,903,440 at March 31, 2018. 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 March 31,
2018, management and board members have accepted stock for accrued compensation at the same discount that has been extended to
the convertible noteholders of fifty percent. There are other future noncash charges in connection with financing such as a change
in derivative liability that will affect income but have no effect on cash flow.
Although
the Company has been successful raising additional capital, there is no assurance that the company will sell additional shares
of stock or borrow additional funds. The Company’s inability to raise additional cash could have a material adverse effect
on its financial position, results of operations, and its ability to continue in existence. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty. Management believes that the Company’s future
success is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional
financing. There is no assurance that the Company will be able to generate sufficient cash from operations, sell additional shares
of stock or borrow additional funds. However, cash generated from lease revenues is currently exceeding lease costs, but is insufficient
to cover operating expenses.
Note
4 – Property and Equipment
As
of March 31, 2018 and December 31, 2017, fixed assets and the estimated lives used in the computation of depreciation are as follows:
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful
Lives
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
Leasehold improvements
|
|
10 years
|
|
|
1,082,279
|
|
|
|
853,413
|
|
Less: Accumulated
depreciation and amortization
|
|
|
|
|
(571,542
|
)
|
|
|
(444,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and
equipment, net
|
|
|
|
$
|
510,737
|
|
|
$
|
409,128
|
|
Note
5 – Related Party
As
of March 31, 2018 and December 31, 2017, the Company has accrued fees to related parties in the amount of $418,863 and $449,064,
respectively. For the three months ended March 31, 2018 and 2017, total cash-based compensation to related parties was $188,756
and $143,996, respectively. For the three months ended March 31, 2018 and 2017, total share-based compensation to related parties
was $377,964
and
$509,518, respectively. These amounts are included in general and administrative expenses in the accompanying financial statements.
During
the three months ended March 31, 2018, we issued 13,381,637 shares of common stock for payment of a related party note in the
amount of $166,354, plus accrued interest of $21,658.
At
March 31, 2018, the Company owed Mr. Throgmartin $140,958 pursuant to a promissory note dated August 12, 2016. This note accrued
interest at the rate of 8% per annum and payable upon the earlier date of (i) the second anniversary date of the promissory notes,
(ii) the date all of the current investor notes, in the outstanding aggregate principal and accrued interest amount of approximately
$1,480,000 at June 30, 2016, have been paid in full and the Company has achieved gross revenues of at least $3,000,000 over any
consecutive 12-month period.
The
balance of related party notes was $140,958 and $307,312 at March 31, 2018 and December 31, 2017, respectively.
Note
6 – Notes Payable
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 March 31,
2018 and December 31, 2017 the outstanding principal balance of the note was $133,403.
Note
7 – Convertible Notes Payable
The
Company has issued several convertible notes which are outstanding. The note holders shall have the right to convert principal
and accrued interest outstanding into shares of common stock at a discounted price to the market price of our common stock. The
conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative
liability of $1,103,373 at March 31, 2018. In connection with the issuance of certain of these notes, the Company also issued
warrants to purchase its common stock. The Company allocated the proceeds of the notes and warrants based on the relative fair
value at inception.
Several
convertible note holders elected to convert their notes to stock during the three months ended March 31, 2018. The table below
provides a reconciliation of the beginning and ending balances for the liabilities measured using fair significant unobservable
inputs (Level 3) for the three months ended March 31, 2018:
|
|
Convertible
notes
|
|
|
Discount
|
|
|
Convertible
Note Net of Discount
|
|
|
Derivative
Liabilities
|
|
Balance, December 31, 2017
|
|
|
971,455
|
|
|
|
503,339
|
|
|
|
468,116
|
|
|
|
4,106,521
|
|
Issuance of convertible notes
|
|
|
331,459
|
|
|
|
274,500
|
|
|
|
56,959
|
|
|
|
601,582
|
|
Conversion of convertible notes
|
|
|
(401,914
|
)
|
|
|
(39,619
|
)
|
|
|
(362,295
|
)
|
|
|
(547,476
|
)
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,057,254
|
)
|
Amortization
|
|
|
—
|
|
|
|
(247,308
|
)
|
|
|
247,308
|
|
|
|
—
|
|
Balance March 31, 2018
|
|
$
|
901,000
|
|
|
$
|
490,912
|
|
|
$
|
410,088
|
|
|
$
|
1,103,373
|
|
During
the three months ended March 31, 2018, $401,914 of notes and $23,171 of accrued interest was converted into 25,615,827 shares
of common stock. A gain on extinguishment of debt of $42,167 has been recorded related to these conversions.
The
following assumptions were used in calculations of the Black Scholes model for the periods ended March 31, 2018 and December 31,
2017.
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
Risk-free interest rates
|
|
|
1.28-1.76
|
%
|
|
|
1.28-1.76
|
%
|
Expected life
|
|
|
0.05-1
year
|
|
|
|
0.02-1.23
year
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
70-247
|
%
|
|
|
211-354
|
|
Diego Pellicer Worldwide, Inc. Common
Stock fair value
|
|
$
|
0.03
|
|
|
$
|
0.08
|
|
Note
8 – Stockholders’ Equity (Deficit)
On
January 14, 2018, the Company’s Board of Directors approved an amendment to our Certificate of Incorporation to increase
the number of authorized shares of common stock from 195,000,000 to 495,000,000 shares.
During
the three months ended March 31, 2018:
Holders
of convertible notes converted $401,914 of notes and $23,171 of accrued interest into 25,615,827 shares of common stock valued
at $890,774. Additionally, 196,983 shares, valued at $18,713, for the conversion of notes, were authorized but not issued as of
March 31, 2018. Shares authorized but unissued at December 31, 2017 totaling 370,450 shares were issued during 2018.
The
Company issued 809,994 common shares as security for the payment of convertible notes. The shares, valued at $26,730 are held
in escrow, are refundable and are recorded in a contra equity account.
We
sold 880,005 shares of common stock and received proceeds of $20,872. Of these shares,395,005 valued at $9,777,
were not issued as of March 31, 2018. We issued 336,071 shares of common stock that were sold in 2017 and classified as shares
to be issued at December 31, 2017.
We
issued 10,312,394 shares of common stock, valued at $140,380 as share-based compensation to related parties. Additionally, 25,000
shares, valued at $7,500, were authorized to be issued for related party services, but were not issued as of March 31, 2018. We
issued 20,827,986 shares of common stock that were authorized as share-based compensation to related parties in 2017 and classified
as shares to be issued at December 31, 2017.
We
issued 437,902 shares of common stock, valued at $15,433, for services. Additionally, 1,071,245 shares, valued at $36,400 for
services, were authorized but not issued as of March 31, 2018. We issued 1,968,335 shares of common stock that were authorized
as share-based compensation in 2017 and classified as shares to be issued at December 31, 2017.
We
issued 13,381,637 shares of common stock for payment of a related party note in the amount of $166,354, plus accrued interest
of $21,658.
We
issued 1,500,000 shares of common stock, valued at $47,254, were issued to settle accounts payable to a consultant.
We
issued an excess 5,464,891 shares of common stock to a related party; these shares are in the process of being cancelled.
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 March 31, 2018, there
is $1,359,777 accrued for the annual grants at February 1, 2018, representing 38,525,196 shares. We recorded
compensation expense of $144,554 for the three months ended March 31, 2018, resulting from the decline in shares
price at the vesting date of February 1, 2018. We issued 5,562,806 shares of common stock that were accrued in 2017 and classified
as shares to be issued at December 31, 2017.
Common
stock warrant activity
:
The
Company has determined that certain of its warrants are subject to derivative accounting. The table below provides a reconciliation
of the beginning and ending balances for the warrant liabilities measured using fair significant unobservable inputs (Level 3)
for the three months ended March 31, 2018:
Balance at December 31, 2017
|
|
$
|
192,350
|
|
Issuance of warrants
|
|
|
-
|
|
Change in fair
value during period
|
|
|
(119,596
|
)
|
Balance at March 31, 2018
|
|
$
|
72,754
|
|
The
following assumptions were used in calculations of the Black Scholes model for the periods ended March 31, 2018 and December 31,
2017.
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
Annual dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (years)
|
|
|
2-9
|
|
|
|
3-10
|
|
Risk-free interest rate
|
|
|
2.27
- 2.74
|
%
|
|
|
1.50
– 2.40
|
%
|
Expected volatility
|
|
|
194
- 235
|
%
|
|
|
177
- 284
|
%
|
Common
stock option activity
:
During
the three months ended March 31, 2018, the Company recorded total option expense of $197,076.
Note
9 – Subsequent Events
In
April, 2018, one of the Denver cultivation warehouses experienced a fire, burning 25 percent of the facility. All plants in the
facility had to be destroyed. At the time, it had all the most up-to-date growing equipment and was at about 50 percent capacity.
However, the other Denver cultivation warehouse was at 100 percent capacity and produced enough plants to completely supply the
Denver Diego Pellicer store. Also, the price of the product on the wholesale market had become low enough that the Diego Pellicer
Denver retail facility could buy product on the market at the same cost as it took to grow product in its own facilities to. As
a result, Diego Pellicer Worldwide and the tenant Diego Pellicer Colorado decided repair the warehouse with the insurance proceeds
and to offer both production warehouses for sale rather than restart production at the damaged facility. Management expects this
to generate cash for Diego Pellicer Worldwide providing capital for future growth.
We
issued 22,102,025 shares of common stock that were recorded as shares to be issued at March 31, 2018.
We
issued 10,783,601 shares of common stock upon the conversion of $46,641 principal amount of notes and $11,166 of accrued interest.
We
issued 1,000,000 shares of common stock as settlement for services rendered.
We
entered into two convertible notes with an aggregate principal amount of $350,000 and received proceeds of $330,750.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS
The
following discussion and analysis of the results of operations and financial condition of Diego Pellicer Worldwide, Inc. (the
“Company”, “we”, “us” or “our”) should be read in conjunction with the financial
statements of Diego Pellicer Worldwide, Inc. and the notes to those financial statements that are included elsewhere in this Form
10-Q. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from
those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the
Risk Factors and Business sections in the financial statements and footnotes included in the Company’s Form 10-K filed on
April 17, 2018 for the year ended December 31, 2017. Words such as “anticipate,” “estimate,”
“plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,”
“intend,” “may,” “will,” “should,” “could,” and similar expressions
are used to identify forward-looking statements.
Opportunity
in an untapped industry with multi-billion-dollar potential
The
demand for marijuana products is a multi-billion-dollar market that has only recently begun to become mainstream. Many challenges
face the marijuana entrepreneur. Therein lies the opportunity.
Regulation
and reality
Sales
of marijuana on the black market topped $46.4 billion in 2016. that becomes a very conservative estimate of the size of
the market in the United States. Distribution was driven underground for years by the Controlled Substance Act passed by Congress
nearly 50 years ago. The favorable public opinion towards the legalization is rapidly changing the political attitude toward marijuana
not only on the state level but on the federal level.
Financing
and banking
As
doubts remain, financing is still a challenge for this industry with banks in many states not only avoiding lending to these businesses
but also refusing deposits because of complicated FDIC requirements. Financing has been largely equity raises, vendor financing,
and expensive convertible debt. However, with the legalization and subsequent public capital raises in Canada and the change in
the political attitude, there has been an indication of more interest by institutional investors in providing capital to this
industry and more banks are accepting deposits.
A
fragmented industry
Most
industries evolve through the same business cycle. Many small independent companies initially operate in fragmented markets in
the early stages. Then there is a consolidation of the industry, with the consolidators thriving and the independent companies
dwindling. The larger companies have access to less expensive capital, lower costs, better merchandising, brand name recognition,
and more efficient operations. This what we offer our tenants when negotiating the lease: an agreement to acquire them when marijuana
is federally legalized. This gives the tenant the ultimate opportunity to participate in the rapid consolidation that we believe
will happen when marijuana is federally legalized. This consolidation will result in companies that have heretofore been unable
to participate in the rapidly growing industry to be scrambling to enter the space. Diego and its tenants will already
be established and consolidated. As an exit strategy, we want to position Diego to be a likely candidate for acquisition or a
major player in the marketplace.
The
opportunity
The
first mover advantage will continue to be possible for those willing to deal with the regulatory, banking, and financial challenges
in today’s market. The fragmented market, the shortage of executives skilled in challenges of the industry, scarcity of
brand names, provides a company like Diego, who has proven their business model, to be a consolidator in this industry.
States
with legalized marijuana
Thirty
states and the District of Columbia have laws broadly legalizing marijuana in some form. Eight states and the District of Columbia
have legalized marijuana for recreational use with the largest market by far, California, becoming legal on January 1, 2018. In
another huge market, Massachusetts, recreational sales of cannabis is expected to start later this year in July.
The
majority of all states allow for use of medical marijuana under certain circumstances. Some states have also decriminalized the
possession of small amounts of marijuana. The industry is operating under stringent regulations within the various state jurisdictions.
This
map shows current state laws and recently approved ballot measures legalizing marijuana for medical or recreational purposes.
2
There
are 9,397 active licenses for marijuana businesses in the U.S., according to Ed Keating, chief data officer for Cannabiz Media,
which tracks marijuana licenses. This includes cultivators, manufacturers, retailers, dispensaries, distributors, deliverers and
test labs. Now 306 million Americans live in a jurisdiction that has legalized some form of cannabis use.
3
BDS Analytics
estimates that the industry paid $1 billion in state taxes in 2016 and owes another $1.4 billion for 2017.
4
1
“Illegal Pot Sales Topped $46.4 Billion in 2016, and that’s Good News for Marijuana Entrepreneurs,” Inc.,
January 17, 2017, Will Yakowicz.
2
CNN Money
, “The Legal Marijuana Market is Booming,” January 31, 2018, by Aaron Smith
3
Frontier Financial Group, ‘The Cannabis Industry Annual Report: 2017 Legal Marijuana Outlook,”
4
CNN Money
, “The Legal Marijuana Market is Booming,” January 31, 2018, by Aaron Smith
The
recent legalization in states such as California and probable legalization in Florida present opportunities many times that of
Washington and Colorado. The Company is exploring opportunities in Oregon, California and Florida and is getting inquiries from
other potential operators in other jurisdictions such as Michigan.
States
introducing and expanding legalized marijuana laws
The
legalized cannabis market is about to get a lot bigger,
with Canada planning
to legalize in July and Eastern states
in the U.S. rushing towards legalization. States that have bills to legalize marijuana
Arizona
|
Louisiana
|
New
Jersey
|
|
|
|
Arkansas
|
Maryland
|
New
Mexico
|
|
|
|
Connecticut
|
Michigan
|
Ohio
|
|
|
|
Delaware
|
Minnesota
|
Pennsylvania
|
|
|
|
Florida
|
Missouri
|
Rhode
Island
|
|
|
|
Georgia
|
Mississippi
|
Vermont
|
|
|
|
Hawaii
|
Missouri
|
West
Virginia
|
|
|
|
Illinois
|
Montana
|
Wisconsin
|
|
|
|
Kansas
|
New
Hampshire
|
|
|
|
|
Kentucky
|
New
York
|
|
Recent
developments at the federal level
Pressures
from the states with legalized cannabis industries have been exerted by those state’s Senators and Congressmen. Both informal
and formal efforts have been increased by these states. The following are the most recent:
|
●
|
New
York Democratic Senator Chuck Schumer introducing legislation to remove cannabis from the DEA’s list of controlled substances,
to decriminalize pot at a federal level and effectively allow states to decide how to regulate the use of medical or recreational
marijuana without concern for federal law.
|
|
|
|
|
●
|
President
Trump cut a deal with Colorado Senator Corey Gardner, R-Colo. to allow states to decide what to do about cannabis.
|
|
|
|
|
●
|
Senator
Mitch McConnell’s R-KY introduced his own legislation to make hemp farming legal in the U.S.
|
|
|
|
|
●
|
Former
Speaker of the House John Boehner became a director with cannabis company Acreage Holdings.
|
|
|
|
|
●
|
The
Food and Drug Administration setting up for an approval of the first cannabis-based drug from GW Pharmaceuticals Plc (
GWPH
).
|
|
|
|
|
●
|
The
Veteran’s Administration now wants to study the effectiveness of cannabis for chronic pain and PTSD.
5
|
|
|
|
|
●
|
Marijuana-specific
legislation recently introduced before the 115 U.S. Congress:
6
|
|
o
|
House
Bill 974-Respect State Marijuana Laws Act of 2017- amending the Controlled Substance Act so that its language does not apply
to people complying with state marijuana laws.
|
|
|
|
|
o
|
House
Bill 1227-Ending Marijuana Prohibition Act of 2017-deregulate marijuana federally.
|
|
|
|
|
o
|
House
Bill 1823-Marijuana Revenue and Regulation Act-amending the Internal Revenue Code for taxation and regulation of marijuana
products.
|
|
|
|
|
o
|
House
Bill 1841-Regulate Marijuana Like Alcohol Act- removing marijuana from the Controlled Substance Act
|
The
projected U.S. cannabis industry’s growth
The Cannabis
Industry’s Annual Report for 2017 projects the following robust growth of legal marijuana sales:
7
5
The Street, “Cannabis Industry Sits on Precipice of Major Expansion, March 28, 2018, by Bill Meagher
6
The Cannbist, Federal Marijuana
Bills Boosted by New Supporters as Congress Gets Back to Work, January 9, 2018, Alicia Wallace.
7
New Frontier, “The Cannabis Industry Annual Report: 2017 Legal Marijuana Outlook,”
Diego’s
value proposition
Value
proposition 1: By providing branding, training, unique accessories, purchasing services, site selection, standardized design,
and experienced construction supervision, the tenant reduces his startup time, reduces expenses, increases their efficiency, and
builds their gross margin. Diego provides the capital for preopening lease costs and tenant improvements. This results in a turnkey
retail location for the tenant. Thus, Diego’s real estate, consulting and accessory sales are positioned to deliver a premium
return on our investment.
Value
proposition 2: With a demonstrated profitability, Diego has the choice of selling the operations of a selected facility in combination
with the tenant and then securing a management contract for that facility. The proceeds can be used to further expand our branded
stores and production facilities.
Value
proposition 3: On select leases, Diego negotiates an acquisition contract with selected licensed tenants to acquire their operations.
This contract will be executed at Diego’s option, and upon changes to federal law, introduces our second value proposition—ownership
of operations in an industry that is projected to exceed $8 billion by 2018.
What
is Diego’s Strategy?
Phase
1-brand and develop facilities and lease to licensed operators
Diego
is initially a real estate and a consumer retail development company that is focused on high quality recurring revenues resulting
from leasing real estate to licensed cannabis operators. Diego provides a competitive advantage to these operators by developing
Diego Pellicer as the world’s first premium marijuana brand and by establishing the highest quality standards for its facilities
and products.
The
Company’s first phase strategy is to acquire and develop the most prominent and convenient real estate locations for the
purposes of leasing them to state licensed operators in the cannabis industry. Diego’s first phase revenues result from
leasing real estate and selling non-cannabis related accessories to our tenants. The company has developed a brand name strategy,
providing training, design services, branded accessories, systems and systems training, locational selection, and other advisory
services to their tenants. We enter into branding agreements with our tenants. In addition, part of the vetting process in finding
the proper tenant is selecting a tenant that shares the Company’s values and strictly complies with state laws, follows
strict safety and testing requirements and provides consistent, high-quality products. If the tenants do not comply, they will
not be allowed to use the brand.
Simultaneous
to the signing of the lease, Diego may secure an option to purchase the tenant’s operations with selected Diego operators/tenants.
Phase
2-Sell facilities and retain a management contract
Having
developed a brand name and demonstrated operational excellence, the company has facilities with a proven superior earning power.
The company, in combination with the licensed tenant, may choose to sell the real estate and the operating company and secure
a management contract to manage the property the “Diego Way.” This will generate capital with which we can further
expand our network of stores.
Phase
3-excersize the option to purchase and roll up licensed cannabis operations
When
it becomes federally legal to do so, Diego will execute the acquisition contracts, consolidate our selected tenants and become
a nationally branded marijuana retailer and producer concurrent with the change of federal law. We expect this to be a frantic
time for larger companies to look for acquisitions, the opportunity to raise capital for further expansion or the exercise an
exit strategy.
What
does our premium branding accomplish?
A
very important aspect of our marketing plan is to build Diego Pellicer as a luxury brand. This not only enables us to establish
a premium brand, but also to generate significant revenues from non- cannabis products.
The
Company is establishing several levels of branding and will use these to appeal to the various segments of the marketplace depending
upon the location, competition, legal constraints, and budget. Standard store templates are being developed, complimentary accessories
selectively designed, and customer preferences and segments analyzed.
Our
Seattle and Denver stores have been met with enthusiastic demand growing revenues quickly. This is proving the initial Diego concept.
We
have proven this to be a winning strategy
Diego
is positioning itself to be a dominate player in the marijuana marketplace. Diego has proven this by being a fully integrated
marijuana retail operation and premium brand, capitalizing on the beautifully designed retail stores offering the finest quality
products at competitive prices.
What
we accomplished in 2017
2017
was a time of great transition for the Company. An effective and experienced team had to be assembled to complement the current
executives with knowledge and experience in real estate operations, banking, site selection, branding, facility design, corporate
finance, investor relations, Additional capital needed to be raised in order to have sufficient capital to finish construction
of the four facilities, build more facilities, and achieve a positive cash flow. Much of the Company’s debt was delinquent
and needed to be repaid or renegotiated. New markets had to be explored, new alliances forged, and opportunities prioritized.
Two
experienced executives joined the management team in the first quarter 2017 after having served in a consulting capacity since
the summer of 2016. One executive had been the CEO of a publicly traded company for 15 years and the other had founded and operated
several financial institutions and served on the boards of several public companies. The Company also engaged an advisor with
extensive experience in national brand retail site selection, a consultant for branding and design that had been instrumental
in the design of Apple stores and other facilities, and a world-renowned architect to design and standardize our retail facilities.
$1,278,500
in new capital was raised. New markets were explored. Four facilities were opened and began generating rents. All delinquent notes
were renegotiated, consolidated, and extended.
In
2017, Diego opened three Colorado facilities. With the Washington facility having opened in the latter part of 2016, Diego now
had four facilities generating rent in 2017 for nearly the full year. The tenants in their first year of operation were quickly
growing their sales and improving operational efficiency. Diego worked with these tenants, partially forbearing on their rent
so as to allow these operators to strengthen their position and become capable of paying full rents. The properties generating
rents in 2017 are as follows:
Table
1: Property Portfolio
Purpose
|
|
Size
|
|
City
|
|
State
|
Retail
store (recreational and medical)
|
|
3,300
sq.
|
|
Denver
|
|
CO
|
Cultivation
warehouse
|
|
18,600
sq.
|
|
Denver
|
|
CO
|
Cultivation
warehouse
|
|
14,800
sq.
|
|
Denver
|
|
CO
|
Retail
store (recreational and medical)
|
|
4,500
sq.
|
|
Seattle
|
|
WA
|
Diego’s
Washington tenant opened our first flagship store in Seattle in October 2016. The Colorado tenant opened the Diego Denver branded
flagship store in February 2017. In addition, Diego’s two cultivation facilities in Denver, CO began production in late
2016. The initial year’s sales by the retail stores showed rapid improvement as the year progressed. The capacity
Diego
Pellicer Seattle
Diego
Pellicer Denver
Diego
will continue this strategy in states where recreational or medical marijuana sales and cultivation are legal under state law.
Our business model is recurring lease revenue and is entirely scalable. Our success will dependent upon continuing to raise capital
for expansion, continual improvement of our business model, standardizing store design, controlling costs, and continuing to develop
the brand.
Summary
of first quarter of 2018 results
As
the result of increased revenues and decreased expenses, the loss from operations declined for the quarter ended March 31, 2018
compared to the prior year’s quarter ended March 31, 2017.
RESULTS
OF OPERATIONS
After
rental expense the gross margins on the lease were as follows:
|
|
Three
Months
Ended
|
|
|
Three
Months
Ended
|
|
|
Increase
(Decrease)
|
|
|
|
March
31, 2018
|
|
|
March
31, 2017
|
|
|
$
|
|
|
%
|
|
Total revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental Income
|
|
$
|
383,298
|
|
|
$
|
309,962
|
|
|
$
|
73,336
|
|
|
|
24
|
%
|
Rent
expense
|
|
|
269,087
|
|
|
|
347,203
|
|
|
|
(78,116
|
)
|
|
|
(22
|
)%
|
Gross Profit
|
|
|
114,211
|
|
|
$
|
(37,241
|
)
|
|
$
|
151,452
|
|
|
|
407
|
%
|
Depreciation expense
|
|
|
127,257
|
|
|
|
130,790
|
|
|
|
(3,533
|
)
|
|
|
(3)
|
%
|
General and administrative
expense
|
|
|
651,042
|
|
|
|
893,007
|
|
|
|
(241,965
|
)
|
|
|
(27
|
)%
|
Loss from operations
|
|
$
|
(664,088
|
)
|
|
$
|
(1,061,038
|
)
|
|
$
|
396,950
|
|
|
|
37
|
%
|
Revenues.
For the three months ended March 31, 2018 and 2017, the Company leased three facilities to licensees in Colorado and one in
Washington. The three months ended March 31, 2018 is the beginning of the second year of operations for these licensees and Diego
is now collecting some premium rents. Diego, however, is still forbearing on the premium rents contractually due from the tenant
as a result of the cost of leasehold improvements and the deferral of preopening rents. These will become recorded as revenue
when the Company considers the premium rents collectible considering the relative success of the tenant’s operations. These
licensees have now had their opening year behind them and are experiencing increasing revenues in the second year of operations.
This is a significant event for the company. For the first time in the company’s history there are four facilities generating
some premium rental revenue. As a result, total revenue for the three months ended March 31, 2018 was $383,298, as compared to
$309,962 for the three months ended March 31, 2017, an increase of $73,336.
Gross
profit.
While rental revenue for the quarter ended March 31, 2018 improved over the prior year’s first quarter, rental
expense declined resulting in a gross profit of $114,211, an improvement over the quarter ended March 31, 2017 of $37,241.
General
and administrative.
Our general and administrative expenses for the three months ended March 31, 2018 were $651,042,
compared to $893,007 for the three months ended March 31, 2017. The decline of $241,965 was largely attributable a reduction
in executive stock compensation and consulting fees during three months ended March 31, 2018.
|
|
Three
Months
Ended
|
|
|
Three
Months
Ended
|
|
|
Increase
(Decrease)
|
|
|
|
March
31, 2018
|
|
|
March
31, 2017
|
|
|
$
|
|
|
%
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
(710,474
|
)
|
|
$
|
(288,236
|
)
|
|
$
|
(422,238
|
)
|
|
|
(146
|
)%
|
Other income and
expense
|
|
|
58,358
|
|
|
|
10.376
|
|
|
|
68,734
|
|
|
|
662
|
%
|
Change
in fair value of derivative liabilities
|
|
|
3,176,850
|
|
|
|
50,839
|
|
|
|
3,126,011
|
|
|
|
6,149
|
%
|
Net other income
|
|
$
|
2,524,734
|
|
|
$
|
(247,773
|
)
|
|
$
|
2,772,507
|
|
|
|
1,119
|
%
|
* Not
divisible by zero
The
Net Other Income was the effect of the decline in market value of the company’s stock had on the derivative liability of
$3,176,850 offset by recorded the cost of triggering technical default penalties on certain convertible notes of $219,013
and the financing costs of new debt incurred by the Company of $212,027.
LIQUIDITY
AND CAPITAL RESOURCES
|
|
Three
Months Ended
|
|
|
Three
Months
Ended
|
|
|
Increase
(Decrease)
|
|
|
|
March
31, 2018
|
|
|
March
31, 2017
|
|
|
$
|
|
|
%
|
|
Net
Cash provided by (used in) operating activities
|
|
$
|
(275,756
|
)
|
|
$
|
(361,720
|
)
|
|
$
|
85,964
|
|
|
|
24
|
%
|
Net
Cash used in investing activities
|
|
|
-
|
|
|
|
(135,000
|
)
|
|
$
|
135,000
|
|
|
|
*
|
%
|
Net
Cash used in financing activities
|
|
|
263,372
|
|
|
|
565,000
|
|
|
|
(301,628
|
)
|
|
|
(53
|
)%
|
Net
Decrease in Cash
|
|
|
(12,384
|
)
|
|
|
68,280
|
|
|
|
(80,664
|
)
|
|
|
(118
|
)%
|
Cash
- beginning of period
|
|
|
158,702
|
|
|
|
51,333
|
|
|
|
107,369
|
|
|
|
209
|
%
|
Cash
- end of period
|
|
$
|
146,318
|
|
|
$
|
119,613
|
|
|
$
|
26,705
|
|
|
|
22
|
%
|
Operating
Activities.
For the three months ended March 31, 2018, the net cash used of $275,756 was an improvement over the same quarter
of the prior year of $361,720 the loss from operations after non-cash adjustments increased by 93,659 over the prior year offset
by an increase in net operating assets and liabilities of $179.623.
Investing
Activities.
There were no investing activities for the three months ended March 31, 2018
Financing
Activities.
During the three months ended March 31, 2018, $258,500 in proceeds were from convertible notes payable and 20,872
from the sale of common stock.
Non-Cash
Investing and Financing Activities.
Non-cash activities for the three months ended March 31, 2018 was the conversion of convertible
note of $568,268 plus interest of $44,829 to common stock valued at $1,078,786, the issuance of common stock for accounts payable,
and the assuming of a tenant’s liabilities for leasehold improvements of $228,866.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements.