Notes
to the Consolidated Financial Statements
Note
1 – Organization and Operations
History
On
March 13, 2015, Diego Pellicer Worldwide, Inc. (the Company) (f/k/a Type 1 Media, Inc.) closed on a merger and share exchange
agreement by and among (i) the Company, and (ii) Diego Pellicer World-wide 1, Inc., a Delaware corporation, (“Diego”),
and (iii) Jonathan White, the majority shareholder of the Company. Diego was merged with and into the Company with the Company
to continue as the surviving corporation in the merger. The Company succeeded to and assumed all the rights, assets, liabilities,
debts, and obligations of Diego.
Prior to the merger,
3,135,000 shares of Type 1 Media, Inc. were issued and outstanding. The principal owners of the Company agreed to transfer their
2,750,000 issued and outstanding shares to a third party in consideration for $169,000 and cancellation of their 2,750,000 shares.
The remaining issued and outstanding shares are still available for trading in the marketplace. At the time of the merger, Type
1 Media, Inc. had no assets or liabilities. Accordingly, the business conducted by Type 1 prior to the merger is not being operated
by the combined entity post-merger.
At the closing of
the merger, Diego common stock issued and outstanding immediately prior to the closing of the merger was exchanged for the right
to receive one share of the surviving corporation for each share of Diego. An aggregate of 1,081,613 common shares of the surviving
corporation were issued to the holders of Diego in exchange for their common shares representing approximately 74% of the combined
entity.
The
merger has been accounted for as a reverse merger and recapitalization in which Diego is treated as the accounting acquirer and
Diego Pellicer Worldwide, Inc. is the surviving corporation.
Business
Operations
The
Company leases real estate to licensed marijuana operators providing complete turnkey growing space, processing space, recreational
and medical retail sales space and related facilities to licensed marijuana growers, processors, dispensary and recreational store
operators. Additionally, the Company plans to explore ancillary opportunities in the regulated marijuana industry as well as offering
for wholesale distribution branded non-marijuana clothing and accessories.
Until
Federal law allows, the Company will not grow, harvest, process, distribute or sell marijuana or any other substances that violate
the laws of the United States of America or any other country.
Note
2 – Significant and Critical Accounting Policies and Practices
The
management of the Company is responsible for the selection and use of appropriate accounting policies. 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 and nine months ended September 30, 2018 (the “Current Quarter”) and the three and
nine months ended September 30, 2017 (the “Prior Quarter”). The Company’s annual report on Form 10-K for the
year ended December 31, 2017 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 September 30, 2018 and December 31, 2017. The respective carrying value of certain on-balance-sheet financial instruments approximated
their fair values. These financial instruments include cash, prepaid expenses and accounts payable. Fair values were assumed to
approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate
fair values or they are payable on demand.
Cash
The
Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit
Insurance Corporation, and the National Credit Union Share Insurance Fund, up to $250,000. The Company’s accounts at these
institutions may, at times, exceed the federal insured limits. The Company has not experienced any losses in such accounts.
Revenue
recognition
The
Company has adopted the new revenue recognition guidelines in accordance with ASC 606,
Revenue from Contracts with Customers
(ASC 606), commencing from the period under this report. The adoption of ASU 2016-10 did not have a material impact on the
financial statements and related disclosures.
The
Company analyzes its contracts to assess that they are within the scope and in accordance with ASC 606. In determining the appropriate
amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, whether for goods and
services or licensing, the Company performs the following steps: (i) identification of the promised goods or services in the contract;
(ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in
the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv)
allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue
when (or as) the Company satisfies each performance obligation.
Thus,
during the initial term of the lease, management has a policy of partial rent forbearance when the tenant first opens the facility
to assure that the tenant has the opportunity for success. Management may be required to exercise considerable judgment in estimating
revenue to be recognized.
When
the collectability is reasonably assured, in accordance with ASC Topic 840 “Leases” as amended and interpreted, minimum
annual rental revenue is recognized for rental revenues on a straight-line basis over the term of the related lease.
When
management concludes that the Company is the owner of tenant improvements, management records the cost to construct the tenant
improvements as a capital asset. In addition, management records the cost of certain tenant improvements paid for or reimbursed
by tenants as capital assets when management concludes that the Company is the owner of such tenant improvements. For these tenant
improvements, management records the amount funded or reimbursed by tenants as deferred revenue, which is amortized as additional
rental income over the term of the related lease. When management concludes that the tenant is the owner of tenant improvements
for accounting purposes, management records the Company’s contribution towards those improvements as a lease incentive,
which is amortized as a reduction to rental revenue on a straight-line basis over the term of the lease.
The
Company records rents due from the tenants on a current basis. The Company has deferred collection of such rents until the tenants
receive the proper governmental licenses to begin operation. Prior to 2017, management had reserved these deferred amounts due
to the unlikelihood of collection.
Leases
as Lessor
The
Company currently leases properties to licensed cannabis operators for locations that meet the regulatory criteria applicable
by the respective regulatory jurisdiction for the sale, production, and development of cannabis products. The Company evaluates
the lease to determine its appropriate classification as an operating or capital lease for financial reporting purposes. The Company
leases are currently all classified as operating leases.
Minimum
base rent is recorded on a straight-line basis over the lease term after an initial period during which the tenant is establishing
the business and during which the Company may forbear some or all of the rent. The Company is more likely than not to forbear
some or all of the rental income which it considers uncollectable during the tenant’s initial ramp-up period (see
Revenue
Recognition
above). The tenant is still liable for the full rent, although the collectability may be unlikely and the Company
may not expect to collect it.
Leases
as Lessee
The
Company recognizes rent expense on a straight-line basis over the non-cancelable lease term and certain option renewal periods
where failure to exercise such options would result in an economic penalty in such amount that renewal appears, at the inception
of the lease, to be reasonably assured. Deferred rent is presented on current liabilities section on the consolidated balance
sheets.
Income
Taxes
Income
taxes are provided for using the liability method of accounting in accordance with the Income Taxes Topic of the FASB ASC. Deferred
tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation
allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized and when, in the opinion
of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The computation
of limitations relating to the amount of such tax assets, and the determination of appropriate valuation allowances relating to
the realizing of such assets, are inherently complex and require the exercise of judgment. As additional information becomes available,
the Company continually assesses the carrying value of their net deferred tax assets.
Common
Stock Purchase Warrants and Other Derivative Financial Instruments
The
Company classifies as equity any contracts that require physical settlement or net-share settlement or provide us a choice of
net cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts
are indexed to our own stock as defined in ASC Topic 815-40 “Contracts in Entity’s Own Equity.” The Company
classifies as assets or liabilities any contracts that require net-cash settlement including a requirement to net cash settle
the contract if an event occurs and if that event is outside our control or give the counterparty a choice of net-cash settlement
or settlement in shares. The Company assesses classification of its common stock purchase warrants and other free-standing derivatives
at each reporting date to determine whether a change in classification between assets and liabilities is required.
Stock-Based
Compensation
The
Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. The Company calculates
the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our
common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. The estimation
of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ
from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company
considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.
Income
(loss) per common share
The
Company utilizes ASC 260, “Earnings Per Share” for calculating the basic and diluted loss per share. In accordance
with ASC 260, the basic and diluted loss per share is computed by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding. Diluted net loss per share is computed similar to basic loss per share except that
the denominator is adjusted for the potential dilution that could occur if stock options, warrants, and other convertible securities
were exercised or converted into common stock. Potentially dilutive securities are not included in the calculation of the diluted
loss per share if their effect would be anti-dilutive. The Company has 60,158,160 and 3,054,490 common stock equivalents at
September 30, 2018 and 2017, respectively. For the three month periods ended September 30, 2018 and 2017 and for the nine month
period ended June 30, 2017, the potential shares were excluded from the shares used to calculate diluted earnings per share as
their inclusion would reduce net loss per share.
Legal
and regulatory environment
The
cannabis industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations
include, but are not limited to, matters such as licensure, accreditation, and different taxation between federal and state. Federal
government activity may increase in the future with respect to companies involved in the cannabis industry concerning possible
violations of federal statutes and regulations.
Management
believes that the Company is in compliance with local, state and federal regulations, While no regulatory inquiries have been
made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory
actions unknown or unasserted at this time.
Recent
accounting pronouncements.
In
July 2018, the FASB issued ASU 2018-10
Leases (Topic 842), Codification Improvements
and ASU 2018-11
Leases (Topic 842),
Targeted Improvements
, to provide additional guidance for the adoption of Topic 842
.
ASU 2018-10 clarifies certain
provisions and correct unintended applications of the guidance such as the application of implicit rate, lessee reassessment of
lease classification, and certain transition adjustments that should be recognized to earnings rather than to stockholders' equity.
ASU 2018-11 provides an alternative transition method and practical expedient for separating contract components for the adoption
of Topic 842
.
In February 2016, the FASB issued ASU 2016-02
Leases (Topic 842)
which requires an entity
to recognize assets and liabilities arising from a lease for both financing and operating leases with terms greater than 12 months.
ASU 2018-11, ASU 2018-10, and ASU 2016-02 (collectively, "the new lease standards") are effective for fiscal years beginning
after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect the new lease standards
will have on its Condensed Consolidated Financial Statements; however, the Company anticipates recognizing assets and liabilities
arising from any leases that meet the requirements under the new lease standards on the adoption date and including qualitative
and quantitative disclosures in the Company’s Notes to the Condensed Consolidated Financial Statements.
In
July 2018, the FASB issued ASU 2018-09,
Codification Improvements.
The amendments in ASU 2018-09 affect a wide variety
of Topics in the FASB Codification and apply to all reporting entities within the scope of the affected accounting guidance. The
Company has evaluated ASU 2018-09 in its entirety and determined that the amendments related to Topic 718-740,
Compensation-Stock
Compensation-Income Taxes,
are the only provisions that currently apply to the Company. The amendments in ASU 2018-09 related
to Topic 718-740,
Compensation-Stock Compensation-Income Taxes,
clarify that an entity should recognize excess tax benefits
related to stock compensation transactions in the period in which the amount of the deduction is determined. The amendments in
ASU 2018-09 related to Topic 718-740 are effective for fiscal years beginning after December 15, 2018, with early adoption permitted.
The Company does not expect the adoption of the new standard to have a material impact on the Company's Condensed Consolidated
Financial Statements.
In
June 2018, the FASB issued ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting,
to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services
from nonemployees and supersedes the guidance in Subtopic 505-50,
Equity - Equity-Based Payments to Non-Employees
. Under
ASU 2018-07, equity-classified nonemployee share-based payment awards are measured at the grant date fair value on the grant date.
The probability of satisfying performance conditions must be considered for equity-classified nonemployee share-based payment
awards with such conditions. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, with early adoption
permitted. The Company is currently evaluating the impact of the new standard on the Company's Condensed Consolidated Financial
Statements.
In
March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118. This standard amends Accounting Standards Codification 740, Income Taxes (ASC 740) to provide
guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the Tax Reform Act) pursuant to Staff Accounting Bulletin
No. 118, which allows companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act
enactment date. This standard is effective upon issuance. As described in the footnotes to the Annual Report on Form 10-K, the
Company’s accounting for the tax effects of enactment of the Tax Reform Act is being assessed; however, in certain cases,
as described below, we made a reasonable estimate of the effects on our existing deferred tax balances and valuation allowance.
The Company determined that the $62.9 million recorded in connection with the re-measurement of certain deferred tax
assets and liabilities, and corresponding valuation allowance was a provisional amount and a reasonable estimate at December 31,
2017. The Company has not completed the accounting with regard to the tax effects associated with an intra-entity transfer of
certain intellectual property rights with the enactment of Tax Reform Act. Our accounting for the intra-entity transfer reflects
the utilization of net operating losses on the basis of the laws in effect before the Tax Reform Act. The Company is evaluating
the impact under Tax Reform Act on the Company's global business structure. In all aspects, the Company will continue to make
and refine calculations as additional analysis is completed. The Company expects to complete the accounting assessment during
the one year measurement period provided by SAB 118.
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.
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 $7,226,765, and has an accumulated deficit
of $46,755,244 at September 30, 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 September
30, 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 September 30, 2018 and December 31, 2017, fixed assets and the estimated lives used in the computation of depreciation are
as follows:
|
|
Estimated
Useful Lives
|
|
September 30, 2018
|
|
December 31, 2017
|
Leasehold improvements
|
|
10 years
|
|
|
1,082,280
|
|
|
|
853,413
|
|
Less: Accumulated depreciation and amortization
|
|
|
|
|
(872,887
|
)
|
|
|
(444,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
$
|
209,393
|
|
|
$
|
409,128
|
|
Note
5 – Related Party
As
of September 30, 2018 and December 31, 2017, the Company has accrued fees to related parties in the amount of $439,120 and $449,064,
respectively. For the three months ended September 30, 2018 and 2017, total cash-based compensation to related parties was $177,099
and $196,799, respectively. For the three months ended September 30, 2018 and 2017, total share-based compensation to related
parties was $228,832 and $483,140, respectively. For the nine months ended September 30, 2018 and 2017, total cash-based compensation
to related parties was $557,954 and $501,995, respectively. For the nine months ended September 30, 2018 and 2017, total share-based
compensation to related parties was $874,471 and $2,010,853 respectively. These amounts are included in general and administrative
expenses in the accompanying financial statements.
During
the nine months ended September 30, 2018, we issued 669,082 shares of common stock for payment of a related party note in the
amount of $166,354, plus accrued interest of $21,658.
At
September 30, 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 September 30, 2018 and December 31, 2017, respectively.
Note
6 – Notes Payable
On
August 31, 2015, the Company issued a note in the amount of $126,000 with third parties for use as operating capital. The note
was amended to include accrued interest on October 31, 2016 and extended the maturity date to October 31, 2018. As of September
30, 2018 and December 31, 2017 the outstanding principal balance of the note was $133,403.
On
April 2, 2016, the Company issued a note in the amount of $262,500 for use as operating capital. Proceeds from the note were $250,000.
The note bears interest at 8% per year and matures on November 29, 2018.
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 $5,130,804 at September 30, 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 nine months ended September 30, 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 nine months ended September 30, 2018:
|
|
Convertible
notes
|
|
Discount
|
|
Convertible
Note Net of Discount
|
|
Derivative
Liabilities
|
Balance, December 31, 2017
|
|
|
971,454
|
|
|
|
503,339
|
|
|
|
468,116
|
|
|
|
4,106,521
|
|
Issuance of convertible notes
|
|
|
3,242,734
|
|
|
|
3,208,525
|
|
|
|
34,209
|
|
|
|
4,900,329
|
|
Conversion of convertible notes
|
|
|
(830,145
|
)
|
|
|
(175,000
|
)
|
|
|
(655,144
|
)
|
|
|
(1,267,049
|
)
|
Repayment of convertible notes
|
|
|
(75,269
|
)
|
|
|
|
|
|
|
(75,269
|
)
|
|
|
|
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,608,997
|
)
|
Amortization
|
|
|
—
|
|
|
|
(917,870
|
)
|
|
|
917,870
|
|
|
|
—
|
|
Balance September 30, 2018
|
|
$
|
3,308,774
|
|
|
$
|
2,618,994
|
|
|
$
|
689,782
|
|
|
$
|
5,130,804
|
|
During the nine months ended September 30,
2018, $830,145 of notes and $69,037 of accrued interest was converted into 6,673,717 shares of common stock. A gain on extinguishment
of debt of $47,918 has been recorded related to these conversions.
On July 17, 2018, the
Company entered into a certain Equity and Debt Restructure Agreement with two, long-time investors in the Company (the “Restructure
Agreement”). Pursuant to the material terms of the Restructure Agreement, the investors agreed to return and cancel their
collective 2,774,093 restricted Company common shares, which had been received from the prior conversion of their older convertible
notes, in exchange for the Company’s issue to them of recast convertible promissory notes. Accordingly, on the same date,
these investors were each issued a First Priority Secured Promissory Note (the “Note” or “Notes”), in
the principal amount of $1,683,557.77 and $545,606.96, respectively. In connection with this transaction, one of these investors
agreed to loan the Company an additional $700,000. To date the Company has received $200,000 cash proceeds of the additional $700,000
loan. Fair value of 2,774,093 restricted Company common shares were determined in the amount of $443,855 using market price and
fair value of the embedded conversion feature were determined in the amount of $3,527,513 using Black Sholes Merton Option Model.
As the result of the transaction, the Company recorded $2,883,658 in financing costs, and $2,429,275 as debt discount.
The
following assumptions were used in calculations of the Black Scholes model for the periods ended September 30, 2018 and December
31, 2017.
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Risk-free
interest rates
|
|
|
1.89
- 2.33
|
%
|
|
|
1.28-1.76
|
%
|
Expected
life (years)
|
|
|
0.03
- 2.00 years
|
|
|
|
0.02-1.23
year
|
|
Expected
dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
100
- 233
|
%
|
|
|
211-354
|
|
Diego
Pellicer Worldwide, Inc. Common Stock fair value
|
|
$
|
0.11
|
|
|
$
|
1.60
|
|
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.
On
June 25, 2018, the Company’s Board of Directors approved an amendment to our Certificate of Incorporation to increase
the number of authorized shares of common stock from 495,000,000 to 840,000,000 shares. In addition the Board of Directors
approved a 20 for 1 reverse split of the outstanding common shares of the Company.
Subsequent to September 30, 2018 and on
October 29, 2018, the Company effected a 20 for 1 reverse stock split on its shares of common stock. The par value and number
of authorized shares of the common and preferred stock were not adjusted as a result of the reverse stock split. Unless
otherwise noted, impacted amounts and share information included in the financial statements and notes thereto have been
retroactively adjusted for the stock split as if such stock split occurred on the first day of the first period presented.
Certain amounts in the notes to the financial statements may be slightly different than previously reported due to rounding
of fractional shares as a result of the reverse stock split.
During
the nine months ended September 30, 2018:
Holders of convertible notes converted $830,145
of notes and $69,037 of accrued interest into 6,673,717 shares of common stock valued at $1,938,819. Additionally, 3,884 shares,
valued at $13,983, for the conversion of notes, were authorized but not issued as of September 30, 2018. Shares authorized but
unissued at December 31, 2017 totaling 24,488 shares were issued during 2018.
We issued 40,500 common shares as security
for the payment of convertible notes. The shares, valued at $26,730 are held in escrow, are refundable and are recorded in a contra
equity account.
We sold 41,500 shares of common stock and received
proceeds of $20,872. Of these shares, 5,000 valued at $2,648, were not issued as of September 30, 2018. We issued 16,804 shares
of common stock that were sold in 2017 and classified as shares to be issued at December 31, 2017.
We issued 2,108,587 shares of common stock,
valued at $301,253 as share-based compensation to related parties. Additionally, 280,693 shares, valued at $130,868, were authorized
to be issued for related party services, but were not issued as of September 30, 2018. We issued 1,023,367 shares of common stock
that were authorized as share-based compensation to related parties in 2017 and classified as shares to be issued at December 31,
2017.
We issued 361,275 shares of common stock, valued
at $70,680, for services. Additionally, 22,306 shares, valued at $4,232 for services, were authorized but not issued as of September
30, 2018. We issued 98,417 shares of common stock that were authorized as share-based compensation in 2017 and classified as shares
to be issued at December 31, 2017.
We issued 669,082 shares of common stock for
payment of a related party note in the amount of $166,354, plus accrued interest of $21,658.
We issued an excess 273,245 shares of common
stock to a related party; these shares are in the process of being cancelled.
We issued 75,000 shares of common stock, valued
at $47,254, to settle accounts payable to a consultant.
We issued 125,000 shares of common stock, valued
at $20,500, for an inducement of extension of sublease.
As a condition of management 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 September 30, 2018, there is $392,998 accrued for the annual grants,
representing 1,849,091 shares. The Company recorded compensation expense of $544,647 for the nine months ended September 30, 2018.
The Company issued 748,896 shares that were accrued during 2018. The Company issued 1,161,065 shares of common stock that were
accrued in 2017 and classified as shares to be issued at December 31, 2017.
Common
stock warrant activity
:
The
Company has determined that certain of its warrants are subject to derivative accounting. The table below provides a reconciliation
of the beginning and ending balances for the warrant liabilities measured using fair significant unobservable inputs (Level 3)
for the nine months ended September 30, 2018:
Balance at December 31, 2017
|
|
$
|
192,350
|
|
Issuance of warrants
|
|
|
—
|
|
Change in fair value during period
|
|
|
(180,269
|
)
|
Balance at September 30, 2018
|
|
$
|
12,081
|
|
The
following assumptions were used in calculations of the Black Scholes model for the periods ended September 30, 2018 and December
31, 2017.
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Annual
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (years)
|
|
|
1.67
- 8.9 years
|
|
|
|
3
- 10
|
|
Risk-free interest
rate
|
|
|
2.52
- 3.05
|
%
|
|
|
1.50
– 2.40
|
%
|
Expected volatility
|
|
|
188
- 230
|
%
|
|
|
177
- 284
|
%
|
Common
stock option activity
:
During
the nine months ended September 30, 2018, the Company recorded total option expense of $238,599.
Note
9 – Subsequent Events.
Subsequent
to September 30, 2018, the Company issued 1,378,661 shares of common stock for the conversion of convertible notes and accrued
interest.