Notes
to the Condensed 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.
The
properties generating rents in 2019 and 2020 are as follows:
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) - Sold in May 2019
|
|
4,500 sq.
|
|
Seattle
|
|
WA
|
The Company’s three properties in
Denver, CO are leased to Royal Asset Management, LLC (“Royal Asset Management”). Royal Asset Management opened the
Diego Denver branded flagship store in February 2017. This store known as “Diego Colorado”. The retail facilities have
shown steady growth in sales since opening. For the other two properties subleased, Royal Asset Management uses these properties
for its cultivation facilities in Denver, CO. Production at these facilities began in late 2016. The Company is currently exploring
the acquisition of this entity, and the parties are in negotiation. In October 2020, the master and sublease associated with
the 18,600 sq. Cultivation warehouse in Denver were terminated.
In
regards to the Seattle property, on May 6, 2019, the Company entered into an agreement with a third party, and sold the Seattle
leased location. The sale provided $550,000 in capital and executive resources for expansion which the company allocated to its
efforts in a new location and cannabis grow facilities in Colorado.
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 consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”) and presented in accordance with accounting principles generally
accepted in the United States of America (US GAAP).
The
accompanying consolidated balance sheet at December 31, 2019, has been derived from audited consolidated financial statements,
but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.
GAAP”). The accompanying unaudited condensed consolidated financial statements as of September 30, 2020 and for the nine
months ended September 30, 2020 and 2019, have been prepared in accordance with U.S. GAAP for interim financial information and
with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial statements, and should be read in conjunction with the audited consolidated
financial statements and related notes to the financial statements included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2019 as filed with the U.S. Securities and Exchange Commission (“SEC”) on the opinion
of management, all material adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation
have been made to the condensed consolidated financial statements. The condensed consolidated financial statements include all
material adjustments (consisting of normal recurring accruals) necessary to make the condensed consolidated financial statements
not misleading as required by Regulation S-X Rule 10-01. Operating results for the nine months ended September 30, 2020 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any future periods.
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.
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, the collectability of accounts receivable and other receivables (See Note 5),
valuation of right of use assets and lease liabilities and deferred taxes and related valuation allowances.
Certain
estimates, including evaluating the collectability of accounts receivable, could be affected by external conditions, including
those unique to our industry, and general economic conditions. It is possible that these external factors could influence our
estimates that could cause actual results to differ from our estimates. The Company intends to re-evaluate all its accounting
estimates at least quarterly based on these conditions and record adjustments when necessary.
Fair
Value Measurements
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
Fair
Value of Financial Instruments
As
required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level
1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or
liabilities;
Level
2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially
the full term of the asset or liability; and
Level
3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable
(supported by little or no market activity).
Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as
of September 30, 2020 and December 31, 2019. The respective carrying value of certain on-balance-sheet financial instruments approximated
their fair values. These financial instruments include cash, prepaid expenses and accounts payable. Fair values were assumed to
approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate
fair values or they are payable on demand.
The
following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands):
As of September 30, 2020
|
|
Fair Value Measurement Using
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,078
|
|
|
$
|
4,078
|
|
Stock warrant liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,786
|
|
|
$
|
4,786
|
|
As of December 31, 2019
|
|
Fair Value Measurement Using
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,024
|
|
|
$
|
5,024
|
|
Stock warrant Liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,025
|
|
|
$
|
5,025
|
|
Derivative
liabilities and stock warrant liabilities were valued using the Binomial Option Pricing Model in calculating the embedded conversion
features for the nine months ended September 30, 2020 and the year ended December 31, 2019.
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
In
accordance with ASC 842, Leases , the Company recognizes rent income on a straight-line basis over the lease
term to the extent that collection is considered probable.
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
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 has adopted the new revenue recognition guidelines in accordance with ASC 606, Revenue from Contracts with Customers (ASC
606), commencing from January 1, 2019. The adoption of ASU 2016-10 did not have a material impact on the financial statements
and related disclosures since the Company is primarily a lessor for revenue purposes and recognizes rent income under ASC 842, Leases.
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.
Advertising
During
the nine months ended September 30, 2020 and 2019, advertising expense was $24,593 and $42,406, respectively.
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.
The adoption of new standard did not have a material impact on the Company’s Consolidated Financial Statements.
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 1,129,526,612 and 533,059,641 common stock equivalents at September 30, 2020 and 2019, respectively.
For the nine and three months ended September 30, 2020, the potential shares were excluded from the shares used to calculate diluted
earnings per share as their inclusion would reduce net loss per share. There are 840,000,000 shares authorized resulting in 289,076,612
insufficient shares as of September 30, 2020.
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.
Note
3 - Going Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has
incurred losses since inception, its current liabilities exceed its current assets by $ 10,235,550, and has an accumulated
deficit of $53,088,078 at September 30, 2020. These factors raise substantial doubt about its ability to continue as a going concern
over the next twelve months. The financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
There
are 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, 2020 and December 31, 2019, fixed assets and the estimated lives used in the computation of depreciation are
as follows:
|
|
Estimated Useful
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Lives
|
|
2020
|
|
|
2019
|
|
Leasehold improvements
|
|
10 years
|
|
|
515,450
|
|
|
|
515,450
|
|
Less: Accumulated depreciation and amortization
|
|
|
|
|
(515,450
|
)
|
|
|
(515,450
|
)
|
Property and equipment, net
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
During
the nine months ended September 30, 2020 and 2019, the Company recorded depreciation expense of $0 and $139,595, respectively.
Note
5 – Accounts Receivables and Other Receivables
As
disclosed in Note 1, the Company subleases three properties in Colorado to Royal Asset Management. At September 30, 2020, the
Company had outstanding receivables from the subleases totaling $498,630, and during the three months ended September 30, 2020,
the Company’s subleases with Royal Asset Management accounted for 100% of the Company’s revenues.
In addition to the receivables from the subleases, the Company
has agreed to provide Royal Asset Management and affiliates of Royal Asset Management up to aggregate amount of $1,030,000 in financing.
These notes accrue interest at the rates ranging from 12% to 18% per annum. As of September 30, 2020 and December 31, 2019, the
outstanding balance of these notes receivable total $753,331 and $788,177, respectively, including accrued interest of $252,047
and $153,509. The amount presented in our balance sheet is $755,331 and $788,177, which represents the $982,047 and $1,017,143
due to us, less $228,966 and $228,966 that we owe to Royal Asset Management for leasehold improvements. The notes are secured by
a UCC filing and also $400,000 of the balance is personally guaranteed by the managing member of Royal Asset Management. During
the nine months ended September 30, 2020, we loaned an additional net $204,448 under these contracts.
If
we do acquire Royal Asset Management, part of the purchase price will be paid through receivables that are owed to us.
On September 9,
2020, Diego Pellicer Worldwide, Inc. (“Registrant”) closed on a Membership Interest Purchase Agreement dated September
4, 2020, and obtained the right to acquire a 15.13% membership interest in Blue Bronco, LLC. The purchase of the 15.13% interest
in Blue LLC, is subject to the approval of the Colorado Marijuana Enforcement Division. Necessary approval by governing authorities
is expected to be received in Q4 2020. As part of these transactions, Registrant received full payment of E2T2, LLC’s promissory
note receivable, dated November 1, 2018, in the principal amount of $300,000, made by E2T2, LLC, as maker, and Registrant, as payee,
as well as full payment of its outstanding promissory note receivable, dated February 27, 2020, in the principal amount of $50,000.
Upon receipt of this payment of $50,000 plus accrued interest, Registrant made a payment of $34,264.84 to E2T2, LLC in order to
“true up” its obligations under that certain E2T2, LLC promissory note, dated July 25, 2019, in the principal amount
of $400,000 made in favor of Registrant.
Note
6 – Other Assets
Security
deposits: Security deposits reflect the deposits on various property leases, most of which require for two
months’ rental expense in the form of a deposit. On May 6, 2019, $20,000 security deposit related to the Seattle leased
location were expensed due to the sale of the Seattle leased location. As of September 30, 2020 and December 31, 2019, the remaining
balance was $150,000 and $150,000, respectively.
Note
7 – Related Party Transactions
As of September 30, 2020 and December 31,
2019, the Company has accrued compensation to CEO, CFO and Director in the amount of $280,097, and $155,841, respectively, of which
$94,060 and $5,245 are included in stock payable. As of September 30, 2020 and December 31, 2019, accrued payables due to former
officers were $1,071,311 and $1,137,397. For the three months ended September 30, 2020 and September 30, 2019, total cash-based
compensation to related parties was $90,000 and $122,099 respectively. For the nine months ended September 30, 2020 and 2019, total
cash-based compensation to related parties was $270,000 and $379,597, respectively. For the three months ended September 30,
2020 and September 30, 2019, total share-based compensation to related parties was $86,687 and $136,616, respectively. For the
nine months ended September 30, 2020 and 2019, total share-based compensation to related parties was $213,714 and $661,742 respectively.
These amounts are included in general and administrative expenses in the accompanying financial statements.
From
2017 to 2019, Mr . Gonfiantini, CEO, personally and through his Company, Crystal Bay Financial LLC, loaned an aggregate amount
of $1,020,000 to Royal Asset Management. These notes accrue interest at 17%-18% per annum, and require monthly payment approximately
from $5,000 to $20,000. These notes are personally guaranteed by the managing member of Royal Asset Management, and secured by
certain equipment and other tangible properties of Royal Asset Management. Among these notes, $500,000 note was also secured by
the medical marijuana licenses held by Royal Asset Management.
At
September 30, 2020, the Company owed Mr. Throgmartin, former CEO (See Note 11), $140,958 pursuant to a promissory note dated August
12, 2016. This note accrued interest at the rate of 8% per annum and was 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 September 30, 2016, have been paid in full and the Company has achieved gross revenues
of at least $3,000,000 over any consecutive 12-month period. The balance of related party note was $140,958 and $140,958 at September
30, 2020 and December 31, 2019, respectively. As of September 30, 2020, the note was past the maturity date, however the Company
has not yet received a default notice.
Note
8 – 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, 2020 and
December 31, 2019 the outstanding principal balance of the note was $133,403. As of September 30, 2020, the note was past the maturity
date, however the Company has not yet received a default notice.
On April 22, 2020,
the Company was granted a loan from Numerica Credit Union, in the aggregate amount of $56,444, pursuant to the Paycheck Protection
Program, (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The loan, which
was in the form of a note dated April 22, 2020 issued by the Borrower, matures on April 22, 2022 and bears interest at a rate of
1.0% per annum, payable monthly commencing October 22, 2020. There have not been any payments made towards this loan, as the full
amount of the loan expects to be forgiven when the company applies for forgiveness. Application for loan forgiveness is due ten
months from the last day of the twenty-four week window that the company has to spend the money from the disbursement date of the
loan on April 22, 2020. The loan may be prepaid by the Borrower at any time prior to maturity with no prepayment penalty. Funds
from the Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities,
and interest on other debt obligations incurred before February 15, 2020. The Company used the entire Loan amount for qualifying
expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described
in the CARES Act.
On June 30, 2020, the Company was granted a loan from the Small
Business Association, in the aggregate amount of $150,000, pursuant to the Economic Injury Disaster Loan, (the “EIDL”)
under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The Company received the net funds of $149,900 on
July 2, 2020. The loan, which was in the form of a note dated June 30, 2020 issued by the Borrower, matures on June 30, 2050 and
bears interest at a rate of 3.75% per annum, payable monthly commencing June 30, 2021. The loan may be prepaid by the Borrower
at any time prior to maturity with no prepayment penalty. Funds from the Loan may be used solely for working capital to alleviate
economic injury caused by disaster occurring in the month of January 31, 2020 and continuing thereafter and to pay Uniform Commercial
Code (UCC) lien filing fees and a third-party UCC handling charge of $100 which will be deducted from the loan amount stated above.
The Company intends to use the entire Loan amount for qualifying expenses.
Note
9 – 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 Binomial Option Pricing Model that resulted in a derivative
liability of $4,015,091, and $4,834,190 at September 30, 2020 and December 31, 2019, respectively. All notes accrue interest ranging
from 8% to 12% and will mature in 2020. In connection with the issuance of certain of these notes, the Company also issued
warrants to purchase its common stock.
Several convertible
note holders elected to convert their notes to common stock during the nine months ended September 30, 2020, and the nine months
ended September 30, 2019. The tables below provides the note payable activity for the nine months ended September 30, 2020, and
the nine months ended September 30, 2019, and also a reconciliation of the beginning and ending balances for the derivative liabilities
measured using fair significant unobservable inputs (Level 3) for the nine months ended September 30, 2020 and for the nine months
ended September 30, 2019:
|
|
Convertible Notes
|
|
|
Discount
|
|
|
Convertible Notes, Net of Discount
|
|
|
Derivative Liabilities
|
|
Balance, December 31, 2019
|
|
$
|
3,266,775
|
|
|
$
|
914,239
|
|
|
$
|
2,352,530
|
|
|
$
|
4,834,190
|
|
Issuance of convertible notes
|
|
|
103,000
|
|
|
|
103,000
|
|
|
|
—
|
|
|
|
394,001
|
|
Conversion of convertible notes
|
|
|
(119,000
|
)
|
|
|
(39,843
|
)
|
|
|
(79,157
|
)
|
|
|
(128,583
|
)
|
Repayment of convertible notes
|
|
|
(7,500
|
)
|
|
|
—
|
|
|
|
(7,500
|
)
|
|
|
—
|
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,084,517
|
)
|
Amortization
|
|
|
—
|
|
|
|
(942,602
|
)
|
|
|
942,601
|
|
|
|
—
|
|
Balance September 30, 2020
|
|
$
|
3,243,275
|
|
|
$
|
34,794
|
|
|
$
|
3,208,474
|
|
|
$
|
4,015,091
|
|
|
|
Convertible Notes
|
|
|
Discount
|
|
|
Convertible Notes, Net of Discount
|
|
|
Derivative Liabilities
|
|
Balance, December 31, 2018
|
|
$
|
3,324,487
|
|
|
$
|
2,151,167
|
|
|
$
|
1,173,319
|
|
|
$
|
6,000,830
|
|
Issuance of convertible notes
|
|
|
870,500
|
|
|
|
886,725
|
|
|
|
(16,225
|
)
|
|
|
1,656,840
|
|
Conversion of convertible notes
|
|
|
(767,533
|
)
|
|
|
(210,217
|
)
|
|
|
(557,316
|
)
|
|
|
(835,725
|
)
|
Repayment of convertible notes
|
|
|
(122,500
|
)
|
|
|
—
|
|
|
|
(120,500
|
)
|
|
|
(56,197
|
)
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,873,119
|
)
|
Amortization
|
|
|
—
|
|
|
|
(1,409,516
|
)
|
|
|
1,409,516
|
|
|
|
—
|
|
Balance September 30, 2019
|
|
$
|
3,306,954
|
|
|
$
|
1,418,159
|
|
|
$
|
1,888,795
|
|
|
$
|
4,892,629
|
|
During the nine months ended September 30, 2020, the Company entered
into a convertible note in an aggregate amount of $103,000 which is a twelve months maturity, bearing 12% interest per annum. The
note is convertible at 35% discount to the average of the two lowest Volume Weighted Average Prices (VWAPs) during the previous
ten (10) trading days to the date of a Conversion Notice. This note was partially converted to common stock in the amount of $30,000
on September 28, 2020 along with accrued interest in the amount of $2,042, for a total of 5,733,397 shares converted. A loss on
extinguishment of debt of $1,884, extinguishment of debt discount of $14,466 and reduction of derivative liabilities
of $25,485 have been recorded related to this conversions The remaining balance on this convertible loan is $73,000 at
the end of the quarter, with accrued interest of $4,968. The conversion features related were determined in the amount of $60,362
using Binomial Option Pricing Model.
During the nine
months ended September 30, 2020, $7,500 of note principal and $819 of accrued interest were repaid to a debt holder.
During the nine months ended September 30, 2020, $89,000 of
notes unrelated to the above mentioned $30,000 conversion, $6,282 of accrued interest and $210 additional fee was converted into
13,767,631 shares of common stock. A loss on extinguishment of debt of $1,931, extinguishment of debt discount of $25,377 and reduction
of derivative liabilities of $97,838 have been recorded related to these conversions. As of September 30, 2020, several convertible
notes in aggregate principal of $3,175,275 were past their maturity dates, however the Company has not yet received a default notice.
No default or penalty was paid or required to be paid.
On
July 17, 2018, the Company entered into a certain Equity and Debt Restructure Agreement with two, long-time investors in the Company
(the “Restructure Agreement”). Pursuant to the material terms of the Restructure Agreement, the investors agreed to
return and cancel their collective 2,774,093 restricted Company common shares, which had been received from the prior conversion
of their older convertible notes, in exchange for the Company’s issue to them recast convertible promissory notes. Accordingly,
on the same date, these investors were each issued a First Priority Secured Promissory Note (the “Note” or “Notes”),
in the principal amount of $1,683,558 and $545,607, respectively. In connection with this transaction, one of these investors
agreed to loan the Company an additional $700,000. In 2018, the Company has received $220,000 cash proceeds of the additional
$700,000 loan. Fair value of 2,774,093 restricted Company common shares were determined in the amount of $443,855 using market
price and fair value of the embedded conversion feature were determined in the amount of $3,555,888 using Black Sholes Merton
Option Model. As the result of the transaction, the Company recorded $2,892,033 in financing costs, and $2,449,275 as debt discount
during year ended December 31, 2018. On March 29, 2019, the Company received $100,000 cash proceeds from the additional $700,000
loan. The conversion feature related to $100,000 were determined in the amount of $154,861 using Binomial Option Pricing Model.
During year ended December 31, 2019, the Company received $380,000 cash proceeds from the additional $700,000 loan. The conversion
feature related to $380,0000 were determined in the amount of $586,710 using Binomial Option Pricing Model. During the year ended
December 31, 2019, we recorded $206,710 loss related to financing costs and $380,000 as debt discount.
The following
assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and related fair values
for the nine months ended September 30, 2020 and 2019.
|
|
September 30,
2020
|
|
September 30,
2019
|
Risk-free interest rates
|
|
0.10-0.11%
|
|
1.92%
|
Expected life (years)
|
|
0.25 – 0.50
|
|
0.08 – 1.25
|
Expected dividends
|
|
0%
|
|
0%
|
Expected volatility
|
|
147 - 165%
|
|
70 - 557%
|
Note
10 – Stockholders’ Equity (Deficit)
Series
C Preferred Stock
On December
16, 2019, Diego Pellicer Worldwide sold 140,000 of its Series C Convertible Preferred Shares, with an annual accruing
dividend of 10%, to Geneva Roth Remark Holdings, Inc. (“Geneva”), for $130,000 pursuant to a Series C Preferred
Purchase Agreement with Geneva. To accommodate this transaction, Registrant’s Board of Directors approved and filed a
certain Certificate of Designations with the Secretary of State of Delaware, designating 1,500,000 of its available preferred
shares as Series C Preferred Convertible Stock, Stated Value of $1.00 per share, and with a par value of $0.0001 per share.
This Certificate of Designations provides Registrant with the opportunity to redeem the Series C Shares at various increased
prices at time intervals up to the 6-month anniversary of the closing and mandates full redemption on the 24-month
anniversary. Geneva may convert the Series C Shares into Registrant’s common shares, commencing on the 6-month
anniversary of the closing at a 30% discount to the public market price. The Company recorded a derivative liability of
$165,218, valued using a Binomial Option Pricing Model, associated with Series C Preferred Shares. On December 31, 2019, the
fair value of the conversion feature was a derivative liability of $190,131, valued using a Binomial Option Pricing Model,
associated with Series C Preferred Shares. The Series C Preferred Stock is classified as temporary equity due to that the
shares are immediately convertible at the option of the note holder. During the year ended December 31, 2019, we recorded
$8,750 accretion of discount. As of December 31, 2019, there were 140,000 shares outstanding and a discount of $131,250. For the nine
months ended September 30, 2020, the company converted 140,000 shares of series C preferred stock along with related discount
to 21,744,479 shares of Common Stock per the terms of the Agreement. As of September 30, 2020, there were 0
shares outstanding related to this issuance.
On March 3, 2020, Diego Pellicer Worldwide sold 55,800 of its Series
C Convertible Preferred Shares, with an annual accruing dividend of 10% to Geneva Roth Remark Holdings, Inc. (“Geneva”),
for $50,000 pursuant to a Series C Preferred Purchase Agreement with Geneva. The Company recorded a derivative liability of $88,868
valued using a Binomial Option Pricing Model, associated with Series C Preferred Shares. During the nine months ended September
30, 2020, the company converted 55,800 shares of series C preferred stock along with related discount to 10,598,864 shares of
Common Stock per the terms of the Agreement. As of September 30, 2020, there were 0 shares outstanding related to this issuance.
On April 14, 2020,
Diego Pellicer Worldwide sold 55,800 of its Series C Convertible Preferred Shares, with an annual accruing dividend of 10%, to
Geneva Roth Remark Holdings, Inc. (“Geneva”), for $50,000 pursuant to a Series C Preferred Purchase Agreement with
Geneva. The Company recorded a derivative liability of $82,028 valued using a Binomial Option Pricing Model, associated with Series
C Preferred Shares. On September 30, 2020, the fair value of the conversion feature was a derivative liability of $63,206, valued
using a Binomial Option Pricing Model, associated with Series C Preferred Shares. The Series C Preferred Stock is classified as
temporary equity due to that the shares are immediately convertible at the option of the note holder. During the nine months ended
September 30, 2020, we recorded $67,201 accretion of discount and $2,583 of accrued dividend. As of September 30, 2020, there were
55,800 shares outstanding and a discount of $42,882.
|
|
Preferred Stock and Accrued Dividends
|
|
|
Discount
|
|
|
Preferred Stock and Accrued Dividends, Net of
Discount
|
|
|
Derivative Liabilities
|
|
Balance, December 31, 2019
|
|
$
|
140,000
|
|
|
$
|
131,250
|
|
|
$
|
8,750
|
|
|
$
|
190,131
|
|
Issuance of Series C Preferred shares
|
|
|
111,600
|
|
|
|
111,600
|
|
|
|
—
|
|
|
|
170,896
|
|
Conversion of Series C Preferred shares and
accrued dividend
|
|
|
(206,561
|
)
|
|
|
(132,768
|
)
|
|
|
(73,793
|
)
|
|
|
(302,127
|
)
|
Accretion of conversion feature on Series C preferred stock
|
|
|
13,345
|
|
|
|
(67,200
|
)
|
|
|
80,545
|
|
|
|
15,610
|
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,304
|
)
|
Balance September 30, 2020
|
|
$
|
58,324
|
|
|
$
|
42,882
|
|
|
$
|
15,502
|
|
|
$
|
63,206
|
|
The
following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current
liabilities for the three months ended September 30, 2020 and the year ended December 31, 2019.
|
|
September 30,
2020
|
|
September 30,
2019
|
Risk-free interest rates
|
|
0.12 – 0.14%
|
|
1.53 – 2.60%
|
Expected life (years)
|
|
1.2 – 1.54
|
|
0.08 – 1.25
|
Expected dividends
|
|
0%
|
|
0%
|
Expected volatility
|
|
171.7 – 180.1%
|
|
70 - 557%
|
Common
Shares
During the nine months ended September
30, 2020, $119,000 of notes, $8,166 of accrued interest and $210 additional fee was converted into 19,501,028 shares
of common stock. A gain on extinguishment of debt of $1,255, extinguishment of debt discount of $39,843 and reduction of derivative
liabilities of $128,583 have been recorded related to these conversions. As of September 30, 2020, 5,733,397 shares were authorized,
but not issued as of September 30, 2020.
During the nine months ended September
30, 2020, 2,553,969 shares of common stock were issued for related party services valued at $65,633. These shares have been removed
from shares to be issued as of September 30, 2020. As of September 30, 2020, 3,907,356 shares, valued at $28,296 for related party
services, had not been issued. These were classified as shares to be issued at September 30, 2020.
During the nine months ended September
30, 2020, 32,343,343 shares of common stock were issued as a result of the conversion of 195,800 shares of Series C Preferred shares.
During the nine months ended September
30, 2020, 5,196,378 shares of common stock, valued at $63,403 for services, were authorized. 2,000,000 of the shares were issued
during the nine months ended September 30, 2020. As of September 30, 2020, 3,196,378 shares, valued at $37,803 for services, had
not issued. These were classified as shares to be issued at September 30, 2020.
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, 2020:
Balance at December 31, 2019
|
|
$
|
967
|
|
Issuance of warrants
|
|
|
—
|
|
Change in fair value during period
|
|
|
334
|
|
Balance at September 30, 2020
|
|
$
|
633
|
|
The
following assumptions were used in calculations of the Binomial Option Pricing Model for the periods ended September 30, 2020
and the year ended December 31, 2019.
|
|
September 30,
2020
|
|
December 31,
2019
|
Annual dividend yield
|
|
0%
|
|
0%
|
Expected life (years)
|
|
0.17-7.13
|
|
0.42 – 8.13
|
Risk-free interest rate
|
|
0.11 – 0.55%
|
|
1.56 – 2.40%
|
Expected volatility
|
|
234.4 - 239.7%
|
|
165 - 318%
|
The
following represents a summary of all common stock warrant activity:
|
|
Number of
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual Term
|
|
Balance outstanding, December 31, 2019
|
|
|
211,826
|
|
|
$
|
10.08
|
|
|
|
3.51
|
|
Expired
|
|
|
(78,031
|
)
|
|
$
|
30.00
|
|
|
|
-
|
|
Balance outstanding, September 30, 2020
|
|
|
133,795
|
|
|
$
|
10.08
|
|
|
|
3.22
|
|
Exercisable, September 30, 2020
|
|
|
133,795
|
|
|
$
|
10.08
|
|
|
|
3.22
|
|
Common
stock option activity:
The
Company maintains an Equity Incentive Plan pursuant of which 124,000 shares of Common Stock are reserved for issuance thereunder.
This Plan was established to award certain founding members, who were instrumental in the development of the Company, as well
as key employees, directors and consultants, and to promote the success of the Company’s business. The terms allow for each
option to vest immediately, with a term no greater than 10 years from the date of grant, at an exercise price equal to par value
at date of the grant. As of September 30, 2020, 88,750 shares had been granted, with 10,000 of those shares granted with warrants
attached. There remain 35,250 shares available for future grants.
During the nine
months ended September 30, 2020 and 2019, the Company recorded total option expense of $121,785. Unamortized stock option
expense at September 30, 2020 is $5,416, which will be charged to expense in remaining months of 2020. The aggregate intrinsic
value of stock options outstanding at September 30, 2020 is $0.
The
following represents a summary of all common stock option activity:
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Term
|
|
Balance outstanding, December 31, 2019
|
|
|
172,479
|
|
|
$
|
5.29
|
|
|
|
5.47
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Balance outstanding, September 30, 2020
|
|
|
172,479
|
|
|
$
|
5.25
|
|
|
|
5.22
|
|
Exercisable, September 30, 2020
|
|
|
172,479
|
|
|
$
|
5.25
|
|
|
|
5.22
|
|
Note
11 – COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases property under operating leases. Property leases include retail and warehouse space with fixed rent payments and
lease terms ranging from three to five years. The Company is obligated to pay the lessor for maintenance, real estate taxes, insurance
and other operating expenses on certain property leases. These expenses are variable and are not included in the measurement of
the lease asset or lease liability. These expenses are recognized as variable lease expense when incurred.
The Company records
the lease asset and lease liability at the present value of lease payments over the lease term. The leases typically do not provide
an implicit rate; therefore, the Company uses its estimated incremental borrowing rate at the time of lease commencement to discount
the present value of lease payments. The Company’s discount rate for operating leases at September 30, 2020 was 12%. Leases
often include rental escalation clauses, renewal options and/or termination options that are factored into the determination of
lease payments when appropriate. Lease expense is recognized on a straight-line basis over the lease term to the extent that collection
is considered probable. As a result, the Company been recognizing rents as they become payable. Our weighted-average remaining
lease term is 3.64 years.
As
of September 30, 2020, the maturities of operating leases liabilities are as follows (in thousands):
|
|
Operating Leases
|
|
2020 remaining
|
|
$
|
241
|
|
2021
|
|
|
863
|
|
2022
|
|
|
719
|
|
2023
|
|
|
733
|
|
2024
|
|
|
445
|
|
2025 and beyond
|
|
|
45
|
|
Total
|
|
|
3,046
|
|
Less: amount representing interest
|
|
|
(576
|
)
|
Present value of future minimum lease payments
|
|
|
2,470
|
|
Less: current obligations under leases
|
|
|
678
|
|
Long-term lease obligations
|
|
$
|
1,793
|
|
The Company has executed a series of agreements that will cancel
the master lease on it Elizabeth street cannabis cultivation facility in Denver on October 21, 2020. It will allow the Company
to reduce its liability exposure in the Elizabeth Street cultivation facility while securing deferred rents due and future sublet
payments for 3 years and 9 months, valued at $1,325,443. In addition, a $120,000 deposit on the property is being returned to the
Company. This is a disclosed subsequent event, see Note 13.
Rent
expense is recognized on a straight-line basis over the life of the lease. Rent expense consists of the following:
|
|
Nine months ended
|
|
|
|
September 30,
2020
|
|
Operating lease costs
|
|
$
|
508,199
|
|
Variable rent costs
|
|
|
349,336
|
|
Total rent expense
|
|
$
|
857,535
|
|
Other
information related to leases is as follows:
|
|
Nine months ended
|
|
|
|
September 30,
2020
|
|
Other information:
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
118,577
|
|
Weighted-average remaining lease term - operating leases
|
|
|
3.64
|
yr
|
Weighted-average discount rate - operating leases
|
|
|
12
|
%
|
The
Company recognized sublease income of $1,080,382 and $1,257,255 during the nine months ended September 30, 2020 and 2019, respectively.
These
three leases have three to five years terms with optional extension, expiration dates range from July 2021 to June 2025, and monthly
base rent approximately $20,000-$40,000 plus variable triple net.
As
of September 30, 2020, the maturities of expected base sublease income are as follows (in thousands):
|
|
Operating Leases
|
|
Remaining of 2020
|
|
$
|
328
|
|
2021
|
|
|
1,154
|
|
2022
|
|
|
930
|
|
2023
|
|
|
944
|
|
2024
|
|
|
588
|
|
2025 and beyond
|
|
|
58
|
|
Total
|
|
$
|
4,002
|
|
The Master Lease and Sublease Agreements
of the property located at Elizabeth St in Colorado have been terminated as of October 21, 2020. The sublease income associated
with that property, constituting approximately $2,139,000 of the above projected income for 2020 through 2025 and beyond. This
is a disclosed subsequent event, see Note 13.
Employment
Agreements
As
a condition of their employment, the Board of Directors approved employment agreements with three key executives. These agreement
provided that additional shares will be granted each year over the term of the agreement should their shares as a percentage
of the total shares outstanding fall below prescribed ownership percentages. Nello Gofiniatini III, who became the Company’s
CEO in October 2019 receives an annual grant of additional shares each year to maintain his ownership percentage at 10% of the
outstanding stock. The Company’s CFO received a similar grant each to maintain his ownership percentage at 2% of the
outstanding stock. In addition, prior to his departure in October 2019, Ron Throgmartin, the Company’s previous CEO,
would receive a grant of additional shares to maintain his ownership at 7.5% of the Company’s outstanding stock. During
the nine months ended September 30, 2020, the Company accrued compensation expense of approximately $92,034 on 6,461,325 shares
of common stock under these agreements. During the year ended December 31, 2019, the Company accrued compensation expense of approximately
$593,000 on 20,782,014 shares of common stock under these agreements. As of September 30, 2020 and December 31, 2019, the
ending balance of accrued compensation was $60,022 and $79,817, respectively.
During
the three and nine months ending September 30, 2020 and 2019, the Company accrued compensation expenses as follows:
|
|
Three Months ending September 30,
2020
|
|
|
Three Months ending September 30,
2019
|
|
|
Nine Months ending September 30,
2020
|
|
|
Nine Months ending September 30,
2019
|
|
Compensation
|
|
$
|
46,092
|
|
|
$
|
224,941
|
|
|
$
|
92,034
|
|
|
$
|
539,957
|
|
Number of Shares
|
|
|
4,216,438
|
|
|
|
6,518,625
|
|
|
|
6,461,325
|
|
|
|
15,233,729
|
|
Departure
of Executive Officer
On
January 30, 2019, the Company executed a Separation Agreement and Release with David Thompson, its former Senior Vice President-
Finance, finalizing his departure from the Company as an employee. Pursuant to its material terms, the Company agreed to pay Mr.
Thompson aggregate cash payments of $206,250 , based upon the Company’s receipt of certain gross sales receipts derived
from its Alameda Store in Colorado, and certain stock grants based upon the Company’s outstanding common shares as of February
1, 2019, including a stock grant of 53,717 restricted common shares for accrued salary and 122,934 restricted common shares in
exchange for his approximate 122,000 of stock options. During the three and nine months ended September 30, 2020, $13,452 and
$21,086 was paid under this agreement, respectively. During the three and nine months ended September 30, 2019 no amounts were
paid under this agreement. As of September 30, 2020 and December 31, 2019, the outstanding balance was $175,714 and $196,800,
respectively, and is included in Accrued Payable – Related Party in the accompanying Consolidated Balance Sheet.
On
October 29, 2019, Diego Pellicer Worldwide, Inc. (“Registrant”) accepted the resignation of Ron Throgmartin from his
positions as CEO, President and Director. Mr. Throgmartin’s resignation was not the result of any disagreements with
Registrant’s plan of operations, policies or management. On the same date, Registrant appointed Christopher D. Strachan,
Registrant’s Chief Financial Officer, to membership on Registrant’s Board of Directors and appointed Nello Gonfiatini
III, Regiatrant’s Chief Operations Officer, to the additional post of Chief Executive Officer.
Ron
Throgmartin signed a 5-year term Separation Agreement which, among other matters, terminated his Employment Agreement, as amended.
On the date of the Separation Agreement, the Company acknowledged it owed Mr. Throgmartin the amount of $517,252.06 in principal
and accrued interest of note payable, salary and fees, accrued during the 5 years of his employment. In addition, the Corporation
further acknowledged that it will pay Mr Throgmartin fifty (50%) percent of his compensation due under the remaining Employment
Agreement, or $614,583.33 under certain condition, which the Company accrued in full as of the date of Mr Throgmartin’s
separation. This agreement provides that the Registrant will pay him $5,000 monthly against his accrued salary/fees and 50% of
future compensation due under his terminated Employment Agreement, with certain accelerated payments in the event Registrant’s
financial results attain certain EBITA benchmarks. Registrant shall have the right to require Mr. Throgmartin to provide consulting
services to Registrant for a per diem fee of $500. As of September 30, 2020 and December 31, 2019, the outstanding balance
was $895,597 and $940,597, respectively.
Note
13 – Subsequent Events
The Company evaluated subsequent events
and transactions that occur after the balance sheet date up to the date that the consolidated financial statements are available
to be issued. Any material events that occur between the balance sheet date and the date that the consolidated financial statements
were available for issuance are disclosed as subsequent events, while the consolidated financial statements are adjusted to reflect
any conditions that existed at the balance sheet date. Based upon this review, except as disclosed within the footnotes or as discussed
below, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure
in the consolidated financial statements.
On October 1, 2020, the company issued
5,769,230 shares of common stock for the stock payable due to JSJ as of September 30, 2020.
On October 12,
2020, the company converted $30,921.59 of the JSJ Convertible Note into 8,345,908 shares of common stock.
On October 14,
2020, the company converted 15,000 shares of series C preferred stock into 3,841,463 shares of common stock.
On October 21,
2020, the company converted 17,000 shares of series C preferred stock into 4,697,368 shares of common stock.
On October 22,
2020, the company converted 23,800 shares of series C preferred stock into 6,754,054 shares of common stock.
On October 29,
2020, the company converted $10,000 of principal and $2,072 of interest of the GS Capital Convertible Note into 4,432,759 shares
of common stock.
On October 21,
2020, both the Master Lease and Sublease agreements at Elizabeth St were terminated. The termination of the Lease, and the obligations
of Lessee thereunder, is subject to, and conditioned upon, Westward Summit, LLC, a Colorado limited liability company, whose address
is 4242 Elizabeth Street, Denver, Colorado 80216 (as “Tenant”), Royal Asset Management, LLC, a Colorado limited liability
company (as “Guarantor”), and Venture Product Consulting, LLC, a Colorado limited liability company (as “Guarantor”),
entering into a present, valid, unconditional and fully enforceable Lease and Guaranty Agreement with Lessor for the Premises.
The date of said Lease and Guaranty Agreement shall be the “Lease Termination Date” of the Lease which is the subject
of this Agreement. Upon the Lease Termination Date, and in consideration of the Recitals, covenants, agreements, representations
and warranties contained herein, the Lease shall be terminated and canceled and the term thereof is brought to an end as of said
Lease Termination Date, with the same force and effect as if the term of said Lease was, by the terms and provisions thereof, fixed
to expire on said Lease Termination Date, except as otherwise provided herein. Until said Lease Termination Date Lessee shall remain
fully obligated and liable to Lessor for all obligations, covenants, warranties and conditions under the Lease. Per the termination
agreement dated October 21, 2020 the Lessor was to return the $120,000.00 security deposit and prepaid rent to Lessee, plus a $55,000
commission for the releasing of the facility to Westward Summit, LLC, less $38,558 of deferred rents owed by the Lessee to Lessor
from June 2017 through August 2017, for a total of $136,442. As of the date of this report, no such transactions have occurred.
No settlement payments were exchanged in the termination of the master and sublease agreements.
On January 30, 2020, the World Health Organization
(“WHO”) announced a global health emergency in response to a new strain of a coronavirus (the “COVID-19 outbreak”).
In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally. The full
impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the global
situation and its effects on the Company’s industry, financial condition, liquidity, and operations. Given the daily evolution
of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19
outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020. However, if the pandemic continues,
it may have a material adverse effect on the Company’s results of future operations, financial position, and liquidity in
fiscal year 2020.