See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Notes to the Condensed Consolidated Financial Statements
March 31, 2021 and 2020
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.
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 2021 and 2020 are as follows:
Purpose
|
|
Size
|
|
City
|
|
State
|
Retail store (recreational and medical)
|
|
3,300 sq.
|
|
Denver
|
|
CO
|
Cultivation warehouse – terminated October 2020
|
|
18,600 sq.
|
|
Denver
|
|
CO
|
Cultivation warehouse
|
|
14,800 sq.
|
|
Denver
|
|
CO
|
The Company’s three
properties in Denver, CO (one terminated in October 2020) are leased to Royal Asset Management, LLC (“RAM”). RAM opened the
Diego Denver branded flagship store in February 2017. This store is known as “Diego Colorado”. The retail facilities have
shown steady growth in sales since opening. For the other two properties subleased (one terminated in October 2020), RAM 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 negotiations (see Note 4).
In October 2020, the master
lease and sublease associated with the 18,600 sq. cultivation warehouse in Denver were terminated (see Note 4).
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 for 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 of operations and that 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, 2020, 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 March 31, 2021 and for the three months ended March 31, 2021 and 2020 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, 2020 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 three months ended March 31, 2021 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2021 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 4), 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 and 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 March 31, 2021 and December 31,
2020. 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 March 31, 2021
|
|
Fair Value Measurement Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,714
|
|
|
$
|
5,714
|
|
Stock warrant liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
5
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,719
|
|
|
$
|
5,719
|
|
As of December 31, 2020
|
|
Fair Value Measurement Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,998
|
|
|
$
|
5,998
|
|
Stock warrant liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,999
|
|
|
$
|
5,999
|
|
Derivative liabilities and
stock warrant liabilities were valued using the Binomial Option Pricing Model in calculating the embedded conversion features for the
three months ended March 31, 2021 and the year ended December 31, 2020.
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. There were no uninsured balances at March 31,
2021. Uninsured balances were approximately $73,000 at December 31, 2020.
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.
As a result the Company been recognizing rents as they become payable.
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, the Company records the cost to construct the tenant improvements as a capital asset.
In addition, the Company 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, the Company 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, we record 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 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 three months ended
March 31, 2021 and 2020, advertising expense was $9,881 and $6,804, 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 common 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
132,973,796 and 926,023,386 common stock equivalents at March 31, 2021 and 2020, respectively. For the three months ended March 31, 2021
and 2020, these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would
reduce net loss per share.
Legal and regulatory environment
The cannabis industry is
subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited
to, matters such as licensure, accreditation, and different taxation between federal and state. Federal government activity may increase
in the future with respect to companies involved in the cannabis industry concerning possible violations of federal statutes and regulations.
Management believes that
the Company is in compliance with local, state and federal regulations and, 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.
The Company believes 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 $11,228,725 at March 31, 2021, and it has an accumulated deficit of $55,299,546 at March 31, 2021. 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.
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. There are other future noncash charges in connection
with financings 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 – Accounts
Receivables and Other Receivables
As disclosed in Note 1,
the Company subleases two properties in Colorado to Royal Asset Management at March 31, 2021. At March 31, 2021 and December 31, 2020,
the Company had outstanding receivables from the subleases totaling $520,974 and $523,958, respectively, and during the three months
ended March 31, 2021 and 2020 the Company’s subleases with RAM accounted for 100% of the Company’s revenues.
In addition to the receivables
from the subleases, the Company has agreed to provide RAM and affiliates of RAM up to an aggregate amount of $1,030,000 in financing.
These notes accrue interest at the rates ranging from 12% to 18% per annum. As of March 31, 2021 and December 31, 2020, the outstanding
balance of these notes receivable total $1,057,272 and $1,030,422, respectively, including accrued interest of $327,272 and $300,422,
respectively. The notes are secured by a UCC filing and also $400,000 of the balance is personally guaranteed by the managing member of
RAM. Our position is subordinate to the CEO’s note described in Note 6. We have recorded interest income of $26,850 and $32,846
during the three months ended March 31, 2021 and 2020, respectively.
If we do consummate any agreement
to acquire Royal Asset Management, part of the purchase price will be paid through receivables that are owed to us (see below).
On September 9, 2020, we
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 Bronco LLC is subject to the approval of the Colorado Marijuana Enforcement
Division. Necessary approval by governing authorities is expected to be received in the second quarter of 2021. Accrued interest receivable
of approximately $68,000 will be applied to the purchase of the membership interest upon approval of the purchase by the Colorado Marijuana
Enforcement Division.
Lease Termination
On October 1, 2020, the master
and sublease associated with the 18,600 sq. cultivation warehouse in Denver were terminated. In connection with that termination, we entered
into a Sublease Termination Agreement (“Termination Agreement”) with RAM and an affiliate of RAM Venture Product Consulting,
LLC (“VPC”). Pursuant to this agreement, RAM acknowledged a debt of deferred rent to the Company in the amount of $1,418,480
and VPC acknowledged a debt of deferred rent to the Company in the amount of $64,344. RAM and VPC executed promissory notes for these
amounts, respectively. The notes accrue interest on the unpaid balance at a rate equal to the Applicable Federal Rate for mid-term obligations
as published by the Internal Revenue Service. No payment under the promissory notes will be due to the Company until the earlier of (i)
the date on which RAM and the Company consummate a change of control event, which is defined as: the acquisition of RAM by the Company
or an affiliated entity by means of any transaction or series of related transactions to which RAM is a party (including, without limitation,
any membership interest acquisition, reorganization, merger or consolidation, (generally, a “Merger”), or, (ii) the date one
(1) business day following the earlier of (x) at any time, receipt by the Company from RAM or VPC of a written notice stating such party
no longer desires to pursue the Merger, or (y) beginning eighteen (18) months after the date of this Agreement, receipt by RAM or VPC
from the Company of a written notice stating that the Company no longer desires to pursue the Merger (the “Maturity Date”).
We have recorded the promissory
notes as long term notes receivable of $1,482,824 at March 31, 2021. Due to the uncertainty of the collectability, we have also recorded
a long term deferred credit in the same amount. We will record income under the deferred rent notes as payments are received or deemed
collectible. This asset and related credit have been netted on the accompanying condensed consolidated balance sheet.
Additionally, in connection
with the termination of the sublease, RAM will continue to pay the remaining future sublease premium payments due to the company on the
Denver sublease (the “Future Rent Debt”) beginning on the termination date, and until the earlier of the Maturity Date or
June 30, 2024, notwithstanding the termination of the Subleases. However, no payment under the Future Rent Debt agreement will be due
to the Company until the Maturity Date, at which time the entire Future Rent Debt shall be due and payable in full, except for any month
in which RAM earns $725,000 of gross sales revenue, including taxes, at its Alameda location, in which case RAM shall pay the Future Rent
Debt for the following month to the Company on or before the 5th day of the following month, and such amount will not accrue as a Future
Rent Debt. RAM shall continue to accrue debt to the company, assessed on the first day of each month, according to the schedule below:
Monthly Payments Accrued
|
|
|
October 1, 2020 to June 30, 2021
|
|
$
|
11,284
|
|
July 1, 2021 to June 30, 2022
|
|
|
11,622
|
|
July 1, 2022 to June 30, 2023
|
|
|
11,971
|
|
July 1, 2023 to June 30, 2024
|
|
|
12,330
|
|
We will record income pursuant
to the Future Rent Debt as payments are received based on the Company’s analysis of collectability including, but not limited to,
the potential application toward the purchase price. During 2021, we received three months of payments and have recorded $33,851 as Lease
Termination Payments in the Statement of Operations.
Note 5 – Other Assets
Security deposits:
Security deposits reflect the deposits on various property leases, most of which require two months’ rental expense in the form
of a deposit.
Note 6 – Related
Party Transactions
As of March 31, 2021 and
December 31, 2020, the Company has accrued compensation to its CEO and director and to its CFO aggregating $323,997 and $289,897, respectively.
As of March 31, 2021 and December 31, 2020, accrued payable due to former officers was $1,009,922 and $1,042,859, respectively. For each
of the three month periods ended March 31, 2021 and 2020, total cash-based compensation to related parties was $90,000. For the three
months ended March 31, 2021 and 2020, total share-based compensation to related parties was $24,843 and $67,621, 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 are 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 March 31, 2021 and December
31, 2020, the Company owed Mr. Throgmartin, former CEO (See Note 10), $140,958 pursuant to a promissory note dated August 12, 2016. This
note accrues interest at the rate of 8% per annum and was past the maturity date at March 31, 2021, however the Company has not yet received
a default notice. Accrued interest on the note was $52,181 and $49,401 at March 31, 2021 and December 31, 2020, respectively.
Note 7 – Notes Payable
On August 31, 2015, the Company
issued a note in the amount of $126,000 to a third party for use as operating capital. The note was amended to include accrued interest
on October 31, 2016 and extend the maturity date to October 31, 2018. As of March 31, 2021 and December 31, 2020 the outstanding principal
balance of the note was $133,403, and accrued interest on the note was $71,746 and $70,101 at March 31, 2021 and December 31, 2020, respectively.
As of March 31, 2021 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. The loan, which was in the form of a note dated April 22, 2020 issued by the Borrower, was
scheduled to mature on April 22, 2022 and bore 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 and accrued interest was forgiven in full during February
2021 and the Company recorded income of $56,908.
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. The loan, which is 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.
Note 8 – Convertible
Notes Payable
The Company has issued several
convertible notes which are outstanding. The note holders 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 features were recognized as embedded derivatives
and are valued using a Binomial Option Pricing Model that resulted in a derivative liability of $5,326,730 and $5,997,865 at March 31,
2021 and December 31, 2020, respectively. All notes accrue interest at 10% and the notes had all matured at March 31, 2021. 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 stock during the three months ended March 31, 2021 and 2020. The tables below provide the note
payable activity for the three months ended March 31, 2021 and 2020, and also a reconciliation of the beginning and ending balances for
the derivative liabilities measured using Level 3 fair value inputs for the three months ended March 31, 2021 and 2020:
|
|
Convertible
Notes
|
|
Discount
|
|
Convertible
Notes, Net of
Discount
|
|
Derivative
Liabilities
|
Balance, December 31, 2020
|
|
$
|
3,239,274
|
|
|
$
|
—
|
|
|
$
|
3,239,274
|
|
|
$
|
5,997,865
|
|
Issuance of convertible notes
|
|
|
2,000
|
|
|
|
—
|
|
|
|
2,000
|
|
|
|
115,160
|
|
Conversion of convertible notes
|
|
|
(100,000
|
)
|
|
|
—
|
|
|
|
(100,000
|
)
|
|
|
(661,087
|
)
|
Repayment of convertible notes
|
|
|
(200,000
|
)
|
|
|
—
|
|
|
|
(200,000
|
)
|
|
|
(302,452
|
)
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
177,244
|
|
Amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance March 31, 2021
|
|
$
|
2,941,274
|
|
|
$
|
—
|
|
|
$
|
2,941,274
|
|
|
$
|
5,326,730
|
|
|
|
Convertible
Notes
|
|
Discount
|
|
Convertible
Notes, Net of
Discount
|
|
Derivative
Liabilities
|
Balance, December 31, 2019
|
|
$
|
3,266,775
|
|
|
$
|
914,245
|
|
|
$
|
2,352,530
|
|
|
$
|
4,834,190
|
|
Issuance of convertible notes
|
|
|
103,000
|
|
|
|
103,000
|
|
|
|
—
|
|
|
|
232,013
|
|
Conversion of convertible notes
|
|
|
(89,000
|
)
|
|
|
(25,377
|
)
|
|
|
(63,623
|
)
|
|
|
(97,838
|
)
|
Repayment of convertible notes
|
|
|
(2,500
|
)
|
|
|
—
|
|
|
|
(2,500
|
)
|
|
|
(3,925
|
)
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(315,692
|
)
|
Amortization
|
|
|
—
|
|
|
|
(452,058
|
)
|
|
|
452,058
|
|
|
|
—
|
|
Balance March 31, 2020
|
|
$
|
3,278,275
|
|
|
$
|
539,810
|
|
|
$
|
2,738,465
|
|
|
$
|
4,648,748
|
|
During the three months ended March 31, 2021, $100,000 of notes was converted
into 4,444,444 shares of common stock with a value of $697,779. A gain on extinguishment of debt of $59,999 and reduction of derivative
liabilities of $657,778 have been recorded related to these conversions.
During the three months ended
March 31, 2021, $6,256 of accrued interest was converted into 581,969 shares of common stock with a value of $7,856. A gain on extinguishment
of debt of $1,709 and reduction of derivative liabilities of $3,309 have been recorded related to these conversions.
During the three months ended
March 31, 2021, we repaid an aggregate of $200,000 of note principal. A gain on extinguishment of debt of $177,116 and reduction of derivative
liabilities of $177,116 have been recorded related to these payments.
During the three months ended
March 31, 2021, we paid an aggregate of $70,000 in settlement of accrued interest in the amount of $95,390. A gain on extinguishment of
debt of $150,726 and reduction of derivative liabilities of $125,336 have been recorded related to these payments.
During the three months ended
March 31, 2021, we recorded noncash additions to convertible notes aggregating $2,000.
As of March 31, 2021, convertible
notes in the aggregate principal amount of $2,941,274 were past their maturity dates; however the Company has not yet received any default
notices. No default or penalty was paid or required to be paid.
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 March 31, 2021 and 2020:
|
|
March 31,
2021
|
|
March 31,
2020
|
Risk-free interest rates
|
|
|
0.02 – 0.09
|
%
|
|
|
0.11 – 1.58
|
%
|
Expected life (years)
|
|
|
0.25
|
|
|
|
0.25 – 1.0
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
164 – 544
|
%
|
|
|
179 – 214
|
%
|
Note 9 – Stockholders’
Equity (Deficit)
Series C Preferred Stock
On February 24, 2021, the
Company sold 179,850 of its Series C Convertible Preferred Shares, with an annual accruing dividend of 10%, to Geneva Roth Remark Holdings,
Inc. (“Geneva”), for $163,500 pursuant to a Series C Preferred Purchase Agreement with Geneva. The Company may redeem the
Series C Shares at various increased prices at time intervals up to the 6-month anniversary of the closing and must redeem any outstanding
shares on the 24-month anniversary. Geneva may convert the Series C Shares into our 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 associated with Series C Preferred
Shares of $1,082,441, valued using a Binomial Option Pricing Model. On March 16, 2021, the Company sold an additional 113,850 shares for
$103,500 and recorded a derivative of $177,231. The Series C Preferred Stock is classified as temporary equity due to the fact that the
shares are redeemable at the option of the holder. There were 293,700 shares outstanding at March 31, 2021, with an associated derivative
liability of $386.845.
The tables below provide
the preferred stock activity for the three months ended March 31, 2021 and 2020, and also a reconciliation of the beginning and ending
balances for the derivative liabilities measured using Level 3 fair value inputs for the three months ended March 31, 2021 and 2020:
|
|
Preferred
Stock and
Accrued
Dividends
|
|
Discount
|
|
Preferred
Stock and
Accrued
Dividends,
Net of
Discount
|
|
Derivative
Liabilities
|
Balance , December 31, 2020
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of Series C Preferred shares
|
|
|
293,700
|
|
|
|
293,700
|
|
|
|
—
|
|
|
|
1,259,672
|
|
Accretion of discount
|
|
|
—
|
|
|
|
(10,963
|
)
|
|
|
10,963
|
|
|
|
—
|
|
Accretion of dividend on Series C preferred stock
|
|
|
2,192
|
|
|
|
—
|
|
|
|
2,192
|
|
|
|
2,866
|
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(875,693
|
)
|
Balance March 31, 2021
|
|
$
|
295,892
|
|
|
$
|
282,737
|
|
|
$
|
13,155
|
|
|
$
|
386,845
|
|
|
|
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
|
|
|
55,800
|
|
|
|
55,800
|
|
|
|
—
|
|
|
|
88,868
|
|
Accretion of discount
|
|
|
—
|
|
|
|
(14,809
|
)
|
|
|
14,809
|
|
|
|
—
|
|
Accretion of dividend on Series C preferred stock
|
|
|
4,779
|
|
|
|
—
|
|
|
|
4,779
|
|
|
|
—
|
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,688
|
|
Balance March 31, 2020
|
|
$
|
200,579
|
|
|
$
|
172,241
|
|
|
$
|
28,338
|
|
|
$
|
292,687
|
|
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 March 31, 2021 and 2020:
|
|
2021
|
|
2020
|
Risk-free interest rates
|
|
|
0.12 – 0.16
|
%
|
|
|
0.23 – 0.71
|
%
|
Expected life (years)
|
|
|
1.9 – 2.0
|
|
|
|
1.7 – 2.0
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
188 – 196
|
%
|
|
|
246 – 251
|
%
|
Common Stock
2021 Transactions
During the three months ended March 31, 2021, $100,000
of notes and $6,256 of accrued interest and fees were converted into 5,026,413 shares of common stock with a value of $705,635.
During the three months ended March 31, 2021, 606,769
shares of common stock, valued at $24,843, were accrued for related party services. At March 31, 2021 and December 31, 2020, shares to
be issued for related party services were 2,338,456 and 1,731,687, respectively, and the value of shares to be issued at March 31, 2021
and December 31, 2020 was $38,207 and $13,364, respectively.
During the three months ended March 31, 2021, 31,696
shares of common stock, valued at $2,000, were accrued for services. At March 31, 2021 and December 31, 2020, shares to be issued for
services were 1,137,553 and 1,105,857, respectively, and the value of shares to be issued at March 31, 2021 and December 31, 2020 was
$16,000 and $14,000, respectively.
At March 31, 2021 and December 31, 2020, shares to
be issued for debt conversions were 31,960, and the value of shares to be issued was $21,861.
During the three months ended March 31, 2021, we issued
30,000 shares of common stock, valued at $1,915, for consulting services.
2020 Transactions
During the three months ended March 31, 2020, $89,000
of notes, $6,282 of accrued interest and $210 additional fee was converted into 13,767,631 shares of common stock. As of March 31, 2020,
35,844 shares, valued at $35,844 for debt conversion were authorized, but not issued as of March 31, 2020.
As March 31, 2020, 406,160 shares, valued at $13,601
for services were authorized, but not issued as of March 31, 2020. These were classified as shares to be issued at March 31, 2020.
As March 31, 2020, 4,951,781 shares, valued at $106,842
for related party services were authorized, but not issued as of March 31, 2020. These were classified as shares to be issued at March
31, 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 three months ended March 31,
2021 and 2020:
|
|
Three Months ended March 31,
|
|
|
2021
|
|
2020
|
Balance at beginning of year
|
|
$
|
476
|
|
|
$
|
967
|
|
Additions to derivative instruments
|
|
|
—
|
|
|
|
—
|
|
Loss (gain) on change in fair value of derivative liability
|
|
|
4,442
|
|
|
|
(97
|
)
|
Balance at end of year
|
|
$
|
4,918
|
|
|
$
|
870
|
|
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 March 31, 2021 and 2020:
|
|
March 31, 2021
|
|
March 31, 2020
|
Annual dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (years)
|
|
|
1.75 – 6.13
|
|
|
|
0.42 – 8.13
|
|
Risk-free interest rate
|
|
|
0.16 – 1.16
|
%
|
|
|
1.56 – 2.40
|
%
|
Expected volatility
|
|
|
198 – 243
|
%
|
|
|
165 – 318
|
%
|
Note 10 – 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 March 31, 2021 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 3.47 years.
As of March 31, 2021, the maturities of operating
leases liabilities are as follows (in thousands):
|
|
Operating Leases
|
|
2021
|
|
|
293
|
|
2022
|
|
|
270
|
|
2023
|
|
|
270
|
|
2024
|
|
|
270
|
|
2025
|
|
|
45
|
|
Total
|
|
|
1,148
|
|
Less: amount representing interest
|
|
|
(210
|
)
|
Present value of future minimum lease payments
|
|
|
938
|
|
Less: current obligations under leases
|
|
|
270
|
|
Long-term lease obligations
|
|
$
|
668
|
|
Rent expense is recognized on a straight-line basis over the life of the
lease. Rent expense consists of the following:
|
|
Three months ended March 31,
|
|
|
2021
|
|
2020
|
Operating lease costs
|
|
$
|
111,268
|
|
|
$
|
249,225
|
|
Variable rent costs
|
|
|
47,759
|
|
|
|
41,568
|
|
Total rent expense
|
|
$
|
159,027
|
|
|
$
|
290,793
|
|
As of March 31, 2021, the aggregate remaining minimal
annual lease payments under these operating leases plus NNN were as follows: (in thousands):
2021
|
|
|
$
|
223
|
|
2022
|
|
|
|
197
|
|
2023
|
|
|
|
222
|
|
2024
|
|
|
|
250
|
|
2025
|
|
|
|
46
|
|
Total
|
|
|
$
|
938
|
|
Other information related to leases is as follows:
|
|
Three Months ended
March 31, 2021
|
Other information:
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
104,843
|
|
Weighted-average remaining lease term - operating leases
|
|
|
3.47yr
|
|
Weighted-average discount rate - operating leases
|
|
|
12
|
%
|
The Company recognized sublease income of $191,753
and $384,031 during the three months ended March 31, 2021 and 2020, respectively.
These two leases have three months and 3.8 year terms
with optional extension, expiration dates range from July 2021 to June 2025, and monthly base rent approximately $22,000-$25,000 plus
variable NNN.
As of March 31, 2021, the maturities of expected base
sublease income are as follows (in thousands):
|
|
Operating Leases
|
|
2021
|
|
$
|
396
|
|
2022
|
|
|
346
|
|
2023
|
|
|
346
|
|
2024
|
|
|
346
|
|
2025 and beyond
|
|
|
58
|
|
Total
|
|
$
|
1,492
|
|
COVID-19
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 2021. 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 2021.
Employment Agreements
As a condition of their employment,
the Board of Directors approved employment agreements with three key executives. These agreements provided that additional shares
will be granted each year over the term of the agreements should their shares as a percentage of the total shares outstanding fall below
prescribed ownership percentages. Nello Gonfiantini 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. During the three months ended March 31, 2021,
the Company accrued compensation expense of approximately $25,000 on 606,769 shares of common stock under these agreements. During the
three months ended March 31, 2020, the Company accrued compensation expense of approximately $27,000 on 1,652.116 shares of common stock.
As of March 31, 2021 and December 31, 2020, the ending balance of accrued compensation was $38,207 and $13,364, respectively. The number
of shares accrued to be issued was 2,338,456 at March 31, 2021.
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 months
ended March 31, 2021 and 2020, $17,936 and $0, respectively, was paid under this agreement. As of March 31, 2021, the outstanding balance
was $144,326, and is included in Accrued payable – related party in the accompanying consolidated balance sheet.
On October 29, 2019, the
Company 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 the Company’s plan of operations, policies or management. On the same date, we appointed
Christopher D. Strachan, our Chief Financial Officer, to membership on our Board of Directors and appointed Nello Gonfiantini III, our
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 in principal and accrued interest of note payable,
salary and fees, accrued during the 5 years of his employment. In addition, the Company further acknowledged that it will pay Mr. Throgmartin
fifty (50%) percent of his compensation due under the remaining Employment Agreement, or $614,583 under certain conditions, which the
Company accrued in full as the date of Mr. Throgmartin’s separation. This agreement provides that the Company 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 our financial results attain certain EBITA benchmarks. The Company shall have the right to require Mr. Throgmartin
to provide consulting services to it for a per diem fee of $500. During the three months ended March 31, 2021 and 2020, $15,000 and $15,000,
respectively, were paid under this agreement. As of March 31, 2021, the outstanding balance was $865,597, and is included in Accrued payable
– related party in the accompanying consolidated balance sheet.
Note 11 – 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.
During the period from April 1, 2021 through May 15,
2021:
The Company issued 1,137,826 shares of common stock,
which had been included in shares to be issued at March 31, 2021.
The Company received payment of $400,000 of principal and $93,770 of accrued
interest related to one of the notes receivable described in Note 4.