Company Quick10K Filing
Diego Pellicer
Price0.02 EPS-0
Shares547 P/E-12
MCap11 P/FCF-26
Net Debt0 EBIT1
TEV11 TEV/EBIT8
TTM 2019-09-30, in MM, except price, ratios
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DPWW 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Items
Item 2. Location
Item 3. Legal Proceedings
Item 4. Mine Safety
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Note 1 - Organization and Operations
Note 2 - Significant and Critical Accounting Policies and Practices
Note 3 - Going Concern
Note 4 - Property and Equipment
Note 5 - Other Assets
Note 6 - Accounts Receivables and Other Receivables
Note 7 - Related Party Transactions
Note 8 - Notes Payable
Note 9 - Convertible Notes Payable
Note 10 - Stockholders' Equity (Deficit)
Note 11 - Commitments and Contingencies
Note 12 - Deferred Tax Assets and Income Tax Provision
Note 13 - Subsequent Events
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
EX-23.1 e1959_23-1.htm
EX-23.2 e1959_23-2.htm
EX-31.1 e1959_31-1.htm
EX-31.2 e1959_31-2.htm
EX-32.1 e1959_32-1.htm
EX-32.2 e1959_32-2.htm

Diego Pellicer Earnings 2019-12-31

Balance SheetIncome StatementCash Flow
10.05.00.0-5.0-10.0-15.02014201620182020
Assets, Equity
10.06.02.0-2.0-6.0-10.02012201420162019
Rev, G Profit, Net Income
1.30.80.4-0.1-0.5-1.02014201620182020
Ops, Inv, Fin

10-K 1 e1959_10k.htm FORM 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

or

 

TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transitional period from _____________ to ______________

 

Commission file number 333-189731

 

DIEGO PELLICER WORLDWIDE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   33-1223037
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

6160 Plumas Street, Suite 100, Reno, NV 89519

(Address of principal executive offices) (Zip Code)

 

(516) 900-3799

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class registered:   Name of each exchange on which registered:
None   None

 

Securities registered pursuant to section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act: Yes No

 

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 day. Yes No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 if the Exchange Act.

 

Large Accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No

 

There was no active public trading market as of the last business day of the Company's second fiscal quarter, so there was no aggregate market value of common stock held by non-affiliates.

 

As of May 26, 2020, the registrant had 130,247,932 shares issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

   

 

TABLE OF CONTENTS

 

    Page
PART I  
     
Item 1. Business 5
Item 1A. Risk Factors 17
Item 1B. Unresolved Staff Comments 17
Item 2. Location 17
Item 3. Legal Proceedings 17
Item 4. Mine Safety Disclosures 17
     
PART II  
     
Item 5. Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 18
Item 6. Selected Financial Data 18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34
Item 9A. Controls and Procedures 34
Item 9B. Other Information 35
     
PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 37
Item 13. Certain Relationships and Related Transactions, and Director Independence 37
Item 14. Principal Accountant Fees and Services 38
     
PART IV  
     
Item 15. Exhibits and Financial Statement Schedules 39

 

 

 2 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This Annual Report on Form 10-K (the "Annual Report") contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “anticipate,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

 

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Annual Report on Form 10-K and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the Annual Report on Form 10-K. All subsequent written and oral forward-looking statements concerning other matters addressed in this Annual Report on Form 10-K and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Annual Report on Form 10-K.

 

Unless otherwise provided in this Annual Report, references to the “Company,” “Diego,” “we,” “us” and “our” refer to Diego Pellicer Worldwide, Inc.

 

 3 

 

 

Explanatory Note

 

Diego Pellicer Worldwide, Inc. (the “Company”) disclosed in its Form 8-K filed on March 30, 2020 that it would be relying on the March 4, 2020 Securities and Exchange Commission Order under Section 36 of the Securities Exchange Act of 1934 Granting Exemptions from Specified Provisions of the Exchange Act and Certain Rules Thereunder, the Partnership (as superseded by the order dated March 25, 2020) delayed the filing of this Annual Report on Form 10-K, originally due Monday, March 30, 2020. The primary reasons for the delay were due to the circumstances related to COVID-19. COVID-19-related shelter-in-place orders and office closures severely affected transportation and limited access to the facilities of the Company and staff. This resulted in disruptions to the Company’s staff which delayed our ability to complete our audit and the Company’s ability to prepare the Report. The Company was unable, without unreasonable effort or expense, to file its Annual Report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”) by the May 29, 2020 extended deadline (which is 60 days from the Report’s original filing deadline of March 30, 2020).

 

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PART I

 

Item 1. Business

 

Overview of the Market

 

The cannabis market has a multi-billion dollar potential. The industry is in its infancy and is rapidly being propelled towards its potential by the state legalization and the rush by suppliers to meet the pent-up demand. Most suppliers are small unsophisticated but capable operators. The federal legal constraints provide an opportunity to those companies early to the market to gain a first mover advantage and to the successful ones, an opportunity to be a consolidator in the industry. How can a company establish itself as a prestigious national brand when federal laws prohibit the sale of these products? How can a legitimate company respect these laws and be the first mover in the retail and wholesale trade in this industry?

 

What is Diego's Strategy, Phases One and Two?

 

Diego is a real estate and a consumer retail development company that is focused on high quality recurring revenues resulting from leasing real estate to licensed cannabis operators, and the management of operations for these and other third party cannabis operators deriving income from management and royalty fees. Diego provides a competitive advantage to these operators by developing “Diego Pellicer” as the world’s first premium marijuana brand and by establishing the highest quality standards for its facilities and products.

 

The Company's first phase strategy is to lease and develop the most prominent and convenient real estate locations for the purposes of leasing them to state licensed operators in the cannabis industry. Diego's first phase revenues result from leasing real estate and selling non-cannabis related accessories to our tenants. The Company has developed a brand name strategy, providing training, design services, branded accessories, systems and systems training, locational selection, and other advisory services to their tenants. We enter into branding agreements with our tenants. In addition, part of the vetting process in finding the proper tenant is selecting a tenant that shares the Company's values and strictly complies with state laws, follows strict safety and testing requirements and provides consistent, high-quality products. If the tenants do not comply, they will not be allowed to use the brand.

 

The second phase of our strategy is to secure options to purchase the tenant's operations. When mutually advantageous for Diego and the tenant, Diego will negotiate acquisition contracts with selected Diego operators/tenants. When it becomes federally legal to do so, Diego will execute the acquisition contracts, consolidate our selected tenants and become a nationally branded marijuana retailer and producer concurrent with the change of federal law. 

 

Diego Pellicer Management Company, will license the upscale Diego Pellicer brand to qualified operators and receive royalty payments, while providing expertise in retail, product and manufacturing from Diego’s accomplished management team with extensive industry experience 

 

Value Proposition

 

Value proposition 1: By providing branding, management experience, training, unique accessories, purchasing services, locational experience, standardized design, and experienced construction supervision, the tenant reduces his startup time, reduces cash drain, increases his efficiency, and builds his gross margin. Diego provides the capital for preopening lease costs and tenant improvements. This results in a turnkey retail location for the tenant. Thus, Diego’s real estate, management, consulting and accessory sales are positioned to deliver a premium return on our investment.

 

Value proposition 2: With each lease, Diego negotiates an acquisition contract with selected licensed tenants to acquire their operations. This contract will be executed at Diego's option, and upon changes to federal law , introduces our second value proposition-ownership of operations in an industry that is projected to exceed $8 billion by 2019.

 

Revenue Generation and Growth

 

Diego generates current revenue and stages future revenue streams through the following processes:

 

  Acquire target properties to be improved for the growing, processing, distribution, and sale of medical and recreational marijuana, extracts and ancillary products.

 

  Build and lease turnkey Retail, Processing and/or Growing facilities.

 

  The Company may choose to secure management contracts with other retail and grow facilities to manage the business the “Diego Way.” This will generate additional revenue with which we can further expand our network of stores.

 

 5 

 

 

 

  Negotiate merger agreements with favored partners that will trigger when marijuana commerce becomes legal federally.

 

  Own DP Brands and other intellectual property.

 

  Charge reasonable rents and management fees to tenants or operators to recover all build-out, start-up investment plus profit margin, and management expertise over the lease term.

 

  Sell non-cannabis branded products lines such as apparel and edibles to Diego stores.

 

  Create an e-commerce platform selling non-cannabis branded merchandise

 

  Continue to build and market the brand utilizing all forms of media including traditional and digital media, social media, e-commerce, and strategic partners.

 

Why We Believe this is a Winning Strategy

 

When the US and countries around the world legalize the commerce of marijuana on a national and international platform, Diego is positioning itself to be a dominate player in the marijuana marketplace. Diego will accomplish this by being a fully integrated marijuana retail operation and premium brand, capitalizing on the beautifully designed retail stores offering the finest quality products at competitive prices.

 

Most industries evolve through the same business cycle. Many small independent companies initially operate in fragmented markets in the early stages. Then there is a consolidation of the industry, with the consolidators thriving and the independent companies dwindling. The larger companies have access to cheaper capital, lower costs, better merchandising, brand name recognition, and more efficient operations. This what we offer out tenants when negotiating the lease: an agreement to acquire them when marijuana is legalized. This gives the tenant the ultimate opportunity to participate in the rapid consolidation that we believe will happen when marijuana is legalized. This consolidation will result in companies that have heretofore been unable to participate in the rapidly growing industry to be scrambling to enter the space. Diego and its tenants will already be established and consolidated. As an exit strategy, we want to position Diego to be a likely candidate for acquisition or a major player in the marketplace.

 

What we accomplished in 2019

 

2019 was a time of continued growth and a change of focus for the Company. An effective and experienced team was assembled from within our operators to develop our newly formed management company, and to complement the current executives with knowledge and experience in real estate operations, banking, site selection, branding, facility design, corporate finance, investor relations, store management, and grow expertise, Additional capital needed to be raised in order to have sufficient capital to help support our operators expand within their markets, and to begin the expansion into different markets in the US. Much of the Company’s debt was renegotiated, and additional commitments were formalized for the expansion in the Colorado market. New markets had to be explored, new alliances forged, and opportunities prioritized.

     

New markets were explored. Three facilities continued to see year upon year increases in revenues, which lead to increased rental revenue cash-flow to the Company. In 2019, Diego focused on our Colorado operations, and divested itself from the Washington tenant, citing restrictive rules and regulations for public company involvement in any part of the Washington State marijuana industry. Diego received revenues from three Colorado facilities, and the first quarter for our Washington store. Diego now had four facilities generating rent in 2019 for the year and we have actively been expanding in the Colorado markets with potential acquisitions for our tenants, and our management company. The tenants growing their sales and improving operational efficiency. Diego worked with these tenants, partially forbearing on their rent so as to allow these operators to strengthen their position and become capable of paying full rents. The properties generating rents in 2019 are as follows:

 

Table 1: Property Portfolio

 

Purpose     Size       City       State  
Retail store (recreational and medical)     3,300 sq.       Denver       CO  
Cultivation warehouse     18,600 sq.       Denver       CO  
Cultivation warehouse     14,800 sq.       Denver       CO  
Retail store (recreational and medical) - Sold     4,500 sq.       Seattle       WA  

 

Diego’s Washington tenant opened our first flagship store in Seattle in October 2016. On May 6, 2019, the Company entered into an agreement with a third party, which the Company sold the Seattle leased location 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. The Colorado tenant opened the Diego Denver branded flagship store in February 2017. In addition, Diego’s two cultivation facilities in Denver, CO began production in late 2016. The retail facilities have shown steady growth in sales since their opening. The three Colorado properties were subleased to a single entity. The Company is currently is exploring the acquisition of this entity.

 

 

 6 

 

 

 

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Diego Pellicer Denver

 

 

 

 7 

 

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Diego will continue this strategy in states where recreational or medical marijuana sales and cultivation is legal under state law. Our business model is recurring lease revenue, royalties, management fees, and is entirely scalable. Our success will dependent upon continuing to raise capital for expansion, continual improvement of our business model, standardizing store design, controlling costs, new store management opportunities, and continuing to develop the brand.

 

What does our premium branding accomplish?

 

A very important aspect of our marketing plan is to build Diego Pellicer as a luxury brand. This not only enables us to establish a premium brand, but also to generate significant revenues from non- cannabis products.

 

 

 8 

 

 

  

 

The Company is establishing several levels of branding and will use these to appeal to the various segments of the marketplace depending upon the location, competition, legal constraints, and budget. Standard store templates are being developed, complimentary accessories selectively designed, and customer preferences and segments analyzed.

 

 9 

 

 

Our Seattle and Denver stores have been met with enthusiastic demand growing revenues quickly. This is proving the initial Diego concept.

 

The Industry: Retail Sales Continue to Rise Rapidly

 

Legalization of marijuana is a very recent movement. California was the first to legalize in 1996 when medical marijuana was approved. Nine states and the District of Columbia have legalized the drug for recreational purposes, according to the National Conference of State Legislatures. More than half the states (31) – plus the District of Columbia, Guam and Puerto Rico – have legalized it for medical purposes. The list of states that have legalized marijuana could expand this November. Voters in Michigan and North Dakota will decide whether to allow recreational use. Marijuana remains illegal under U.S. federal law.

 

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Source: 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc.

 

 

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DESCRIPTION: A CLOSE UP OF A MAP

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The growth in public support for legal marijuana comes as a growing number of states have legalized the drug for medical or recreational purposes in recent years.

  

About six-in-ten Americans (62%) say the use of marijuana should be legalized, reflecting a steady increase over the past decade, according to a new Pew Research Center survey. The share of U.S. adults who support marijuana legalization is little changed from about a year ago – when 61% favored it – but it is double what it was in 2000 (31%).

 

 

 12 

 

 

 

As in the past, there are wide generational and partisan differences in views of marijuana legalization. Majorities of Millennials (74%), Gen Xers (63%) and Baby Boomers (54%) say the use of marijuana should be legal. Members of the Silent Generation continue to be the least supportive of legalization (39%), but they have become more supportive in the past year.

  

Source: Pew Research Center

 

Annual cannabis retail sales continue to grow year-over-year as new markets emerge and more states legalize medical and recreational marijuana. Sales in 2018 are projected to increase by roughly 35% from 2017, on pace to reach more than $8 billion by the end of the year.

 

By 2022, annual retail marijuana sales in the United States could top $22 billion, which would represent more than a 250% increase from 2017.

 

 13 

 

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Source: 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc.

 

The retail and medical marijuana industry brought in an estimated $39 - $48 billion of economic impact in 2019 just in the USA. By 2023, we expect the potential for the industry to surpass $100 billion in annual economic benefit.

 

Estimates for economic impact are based on an impact multiplier of 3.5. This means that for every $1 a consumers spend at dispensaries or recreational stores, another $2.50 in economic benefit will be created in the cities, states and ultimately the nation.

 

Here are some of the factors in this overall economic impact:

·The launch of new businesses
·Hundreds of millions of dollars in state and local taxes
·Real estate investments
·Visiting tourists spending money to legally consume
·Marijuana employees circulating earnings back into the economy

 

Overall the marijuana labor market has increased about 34% over last year with marijuana industry supporting about 175,000-215,000 employees. A majority of this growth has come in California, which is the next market Diego is focusing it’s attention on acquisitions, and branding agreements. In 2019, marijuana employment surpassed that of the technology industry of web developers and is fast approaching the number of clergy in the USA.

 

The continued growth in the cannabis market, including legalizing the growing and retailing of hemp based products has boosted the rapid growth in employees and retail sales. The industry is expected to add more than 235,000 full-time jobs between now and 2023 with compounding annual growth rates of 22% and should lead to over 475,000 jobs by 2023.

 

 

Outside of California, however, sales are expected to continue climbing, bolstered by ongoing growth in mature markets like New Mexico and Arizona, increased patient access in Florida and new MMJ programs coming online in Maryland and Pennsylvania. The transition to fully regulated, state-licensed MMJ sales in Michigan has caused some short-term instability, but it remains one of the largest medical markets in the country and will likely continue to form the foundation of the MMJ industry for years to come.

 

As more states continue to legalize medical and recreational marijuana sales, an ever increasing number of adults are introduced, or re-introduced to the product. Continued research into the benefits of CBD derived from both the Marijuana and hemp plants, has catapulted the cannabis industry into the mainstream media. Legal sales of recreational and medical marijuana reached about $8.6 - $10 billion in sales for 2018, about twice that spent on tobacco cigarettes. It is estimated that total demand for cannabis including legally produced product is in excess of $50 - $60 billion

 

By 2023, we project total retail and medical marijuana sales in the United States will reach approximately $28 billion annually - more than a threefold increase from estimated annual sales in 2017. Our estimates account for the fact that more states will likely legalize medical or adult-use marijuana in the coming years - though it's difficult to predict when that will happen and how big those markets will be. Using a range of estimates that incorporate several factors - such as the likelihood of a given state passing a legalization measure, the size of the customer/patient base and time frame for the launch of sales - helps account for this uncertainty. Our approach is refined over time as more information becomes available.

 

It's important to point out that the marijuana industry has a big and growing impact on the economy at large as the revenue it generates ripples across a community, city and/ or state - as well as the nation. To understand an industry's economic impact, traditional macroeconomic multipliers can range anywhere from 10 to 20 times the original dollar spent. Based on new data from other industries, we've settled on a standard multiplier of 3.5 for the marijuana industry - a slight revision from last year's multiplier of four.

 

In other words, for every $1 consumers/patients spend at dispensaries and rec stores, an additional $2.50 of economic value will be injected into the economy - much of it at the local level.

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Source: 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc. (Note that our goal is to provide conservative, realistic financial forecasts that reflect the high degree of uncertainty in the industry. Total cannabis sales in any given calendar year are highly dependent upon progress made - or not made - in each individual state. California is currently the big wild card, as the slow rollout of its statewide regulatory system makes it difficult to get a handle on the exact size of this enormous market. As more information comes to light over time, it could change our estimates for California and, therefore, the industry at large.)

 

Where are the Greatest Market Opportunities?

 

All eyes are on California.

 

That's the reality for nearly everyone involved in the global marijuana market. Companies around the world - from Europe to Canada to Israel and beyond - want a piece of the California market. But there are plenty of practical ramifications. No other state or federal government in the world has tried to implement such a wide-ranging regulatory system that affects tens of thousands of existing black- and gray-market businesses.

The bottom line: The sheer immensity of the California cannabis market is topped only by its complexity. And that complexity has led to major struggles and big wait times for entrepreneurs looking to tap the California market potential. California's MJ regulatory system covers a population of 40 million and includes incentives for existing businesses to transition to the licit tax-paying industry.

 

There are plenty of other hurdles for existing and future businesses as well, including local license caps from towns and counties that are hesitant to grant permits to any type of cannabis companies. As of early October 2018, only a fraction of local governments had opted to allow rec companies to set up shop within their borders, and state business permits are dependent on a company first obtaining local authorization of some sort. Plenty of companies are striving to play by the rules, but they're often unable to stay in business while doing so because they haven't been able to find locations that fit all the legal parameters for licensing.

 

The same is true for thousands of small-scale growers in California, as well as edibles makers, concentrate producers and other plant-touching businesses. One option for such companies, at least for now, is to focus on the medical marijuana market instead of rec. Far more local governments allow limited medical companies than adult-use businesses. Obtaining such permits could be a stopgap move, because as time goes on, it's likely that more and more local governments will decide to permit rec. Another option could be to pivot into an alternate cannabis sector, such as distribution or testing labs, given that there's a dearth of both key business types in the state.

 

Hemp and CBD

 

Hemp was once prized for making rope. Two hundred years later, the plant still has us tied in knots. From a patchwork of state hemp rules to confusion among cannabis entrepreneurs about the definition of hemp, uncertainty reigns in the hemp industry. Hemp has long been bedeviled by its conflation with marijuana, and the Controlled Substances Act banned its production for decades. That changed in 2014, when the U.S. Farm Bill opened the door for a hemp revival in states willing to experiment (and control) the crop's return to legal production. The federal government defines hemp as cannabis sativa with a THC content at or below 0.3%.

 

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The Farm Bill set off an explosion of hemp production and experimentation and has given cannabis entrepreneurs new opportunities to grow, sell and buy cannabis in a nonintoxicating form. As of October 2018, hemp production is legal under at least limited circumstances in 41 states. The Farm Bill allows limited interstate commerce for hemp - something still off-limits to marijuana entrepreneurs. And hemp businesses report fewer banking and regulatory headaches (though barriers certainly exist in these areas), compared to their marijuana-producing colleagues.

 

The U.S. hemp experiment is still unfolding. Market conditions vary widely. Some states ban all hemp production; others allow some but not all farmers to grow it; and a handful of states invite all farmers to try hemp and even offer to help market the crop and find companies to process it. U.S. agriculture authorities consider hemp legal only if it is grown as part of a state-backed pilot project, so the USDA keeps no records of the nation's nascent hemp industry.

 

Not all U.S. states use the federal THC guidelines to define hemp, and the 0.3% THC threshold has little basis in science, meaning that scientists don't agree how much THC a plant needs to produce a high when heated and consumed. Cannabis plants have more than 100 cannabinoids, of which THC is only one, and hemp products with no detectable THC can still be considered psychoactive if they contain cannabinoids that relieve anxiety or depression. At least one state, Iowa, explicitly dictates that cannabidiol is legal but highTHC marijuana is not legal - then goes on to say it accepts cannabidiol with a THC limit 10 times higher than the federal threshold for legal hemp.

 

Still, the 0.3% THC threshold is a useful metric for dividing marijuana from hemp, and it is the standard used in this Factbook.

Longtime hemp prohibition in the United States has left the industry frozen in time. There is little modern agricultural equipment appropriate for hemp harvesting and processing, and the crop likely won't match the market share it enjoyed before the Industrial Revolution, when hemp fibers were commonly used in commercial fabrics. Today, hemp's value comes mostly from its flower, rich in cannabinoids beyond THC. The most valuable as of this report is CBD, a cannabinoid with established therapeutic uses including pain relief and reducing muscle spasms associated with epilepsy or muscular sclerosis.

 

Hemp Industry Daily estimates that the U.S. market for hemp-derived CBD will hit approximately $500 million in 2018, with the potential to eclipse $3 billion annually by 2022 - a 500% increase in just four years.

Expect hemp-derived cannabinoid products low in THC to take increasing market share (and media attention) in the overall cannabis industry.

 

Source: 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc. 

 

What Benchmarks could Diego be Measured Against?

 

Diego was one of the first to the market with a real estate holding and branding business model; however, other companies have since adopted similar strategies. Key differentiators between Diego and its competitors are superior branding, optimized build-out and turnkey grow and retail development, pre-negotiated acquisition contracts, and most importantly a branded management company. Table 4 provides a financial benchmark of other cannabis. 

 

  

Table 4: Financial Benchmark-millions

 

    Market Cap at 5/28/2020     Most Recent Revenue     Cost of Revenue     Gross Margin %     Net Profit     For the year ended
General Cannabis Corp(CANN)   $ 21.60 M   $ 3,666     $ 2,467       33 %   $ (12,462 )   12/31/2019
                                             
Mountain High Acquisitions Corp. (MYHI)     3.35 M     141       0       100 %     (5,434 )   3/31/2019
                                             
Innovative Industrial Properties, Inc.(IIPR)     1,461.32 M     44,667       1,315       97 %     (23,475 )   12/31/2019
                                             

M J Holdings Inc.(MJNE)

    11.83 M     8       10       N/A       (5,007 )   12/31/2018
                         

 

 

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Status of Federal Law

 

While marijuana is legal under the laws of several U.S. States, at the present time the concept of “medical marijuana” and “retail marijuana” do not exist under U.S. federal law. The United States Federal Controlled Substance Act classifies marijuana as a Schedule I drug. As defined under U.S. federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States, and a lack of safety for the use of the drug under medical supervision.

 

The United States Supreme Court has ruled in several cases that the federal government does not violate the federal constitution by regulating and criminalizing cannabis, even for medical purposes. Therefore, federal law criminalizing the use of marijuana pre-empts state laws that legalizes its use for medicinal and recreational purposes.

 

Attorney General Jeff Sessions' January 2018 decision to rescind the Cole Memo raised some concerns in the marijuana industry that federal officials may try to interfere with legal cannabis. Those concerns, for the most part, haven't materialized, but the scare did get many marijuana businesses thinking about the possibility of federal interference and what could be done about it.

 

The memo was drafted during the Obama administration by former U.S. Deputy Attorney General James Cole in 2013 as a way to minimize the threat of federal crackdowns against legal marijuana businesses. The document essentially instructed federal law enforcement not to interfere with state-licensed marijuana businesses complying with state laws and certain conditions, such as not selling product to minors or into the black market.

 

While the Cole Memo clearly expressed an Obama administration policy of leaving legal marijuana businesses alone, it was not a legal change - which only Congress can do. Therefore, the Cole Memo technically allowed U.S. attorneys to go after marijuana businesses if they wanted. With the sending of the Cole Memo to the proverbial shredder, U.S. attorneys no longer have guidelines on how to deal with state-licensed marijuana businesses. But in an April 2018 conversation with Republican U.S. Sen. Cory Gardner, President Donald Trump pledged to keep the Department of Justice from interfering with state cannabis laws and, perhaps more significantly, support legislation protecting state-legal marijuana businesses. White House officials later confirmed the president's policy stance.

 

The news is being celebrated by advocates working to reform marijuana laws, but many are wary of taking President Trump at his word as nothing has been codified that would prevent him from reversing course.

 

Several bills have been introduced to Congress seeking to reform federal marijuana laws in different ways, including the removal of cannabis from the list of controlled substances, allowing MJ companies to access traditional banking services and amending the IRS code to more fairly tax cannabis businesses. Similar bills have been introduced in previous sessions of Congress, but none have gained significant traction. This time, however, may be different, as marijuana reform has become a bipartisan issue that has the support of many prominent Republicans.

 

Senate Majority Leader Mitch McConnell, for example, introduced a bill in April to remove federal barriers on hemp, while former Republican House Speaker John Boehner recently disclosed his involvement with a large, multistate cannabis company.

 

Whether any significant reform of federal marijuana policy happens in 2018 and what shape it could take remains an open question, but it's clear that attitudes toward cannabis on Capitol Hill are shifting.  

 Source: 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc.

 

Item 1A. Risk Factors

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

Item 1B. Unresolved items

 

None.

 

Item 2. Location

 

Our principal executive office is located at 9030 Seward Park Ave S. #501, Seattle, Washington 98118.

 

Item 3. Legal proceedings

 

We currently are not a party to any material litigation or other material legal proceedings. From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

Item 4. Mine Safety

 

Not applicable.

 

 

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PART II

 

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

There is no established public trading market for our common stock. As of the date of this Report, there are outstanding options and warrants to purchase 374,305 shares of common stock of the Registrant.

 

The table below sets forth the range of quarterly high and low closing sales prices for its common stock for 2019 and 2018. The quotations below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions:

  

    High     Low  
Year ended December 31, 2019            
First Quarter   $ 0.02     $ 0.01  
Second Quarter   $ 0.03     $ 0.01  
Third Quarter   $ 0.06     $ 0.02  
Fourth Quarter   $ 0.12     $ 0.05  

 

    High     Low  
Year ended December 31, 2018            
First Quarter   $ 1.80     $ 0.58  
Second Quarter   $ 0.50     $ 0.17  
Third Quarter   $ 0.24     $ 0.11  
Fourth Quarter   $ 0.25     $ 0.02  

  

Record Holders

 

As of April 30, 2020, there were approximately 201 shareholders of record holding a total of 127,693,963 shares of common stock. The holders of the common stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock.

 

Dividends

 

The Registrant has not declared any cash dividends since inception and does not anticipate paying any dividends in the foreseeable future. The payment of dividends is within the discretion of the Board of Directors and will depend on the Company's earnings, capital requirements, financial condition, and other relevant factors. There are no restrictions that currently limit the Registrant's ability to pay dividends on its common stock other than those generally imposed by applicable state law.

 

Unregistered Sale of Equity Securities 

 

During the year ended December 31, 2019, $842,712 of notes and $60,627 of accrued interest was converted into 48,684,667 shares of common stock.

 

We issued 4,987,610 shares of common stock, valued at $170,348, for services.

 

We issued 24,566,400 shares of common stock, valued at $732,029, for related party services.

 

During the year ended December 31, 2019, 8,071,000 shares were issued for cashless warrant exercise.

 

During the year ended December 31, 2019, we issued 5,000 shares for $2,648, which were authorized in prior period.

 

In connection with the issuances of the foregoing securities, the Company relied on the exemptions from registration provided by Section 4(a) (2) of, and Rule 506 of Regulation D promulgated under, the Securities Act of 1933, as amended, for transactions not involving a public offering. 

 

Item 6. Selected Financial Data

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

 

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of the results of operations and financial condition of Diego Pellicer Worldwide, Inc. (the “Company”, “we”, “us” or “our”) should be read in conjunction with the financial statements of Diego Pellicer Worldwide, Inc. and the notes to those financial statements that are included elsewhere in this Form 10-K This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those under sections in the financial statements and footnotes included in the Company’s Form 10-K filed on June 2, 2020 for the year ended December 31, 2019. Words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements.

 

Overview

 

Diego Pellicer Worldwide, Inc. was established on August 26, 2013 to take advantage of growing market for legalized cannabis being made possible by the escalating legislation allowing for the legalization of cannabis operations in the majority of states:

 

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The industry is operating under stringent regulations within the various state jurisdictions. The Company’s primary business plan is twofold: First to lease various properties to licensed operators in these jurisdictions to grow, process and sell cannabis and related products, and the second the Diego Pellicer Management Company, will license the upscale Diego Pellicer brand to qualified operators and receive royalty payments, while providing expertise in retail, product and manufacturing from Diego’s accomplished management team with extensive industry experience, The Company will also provide educational training, compliance consultation, branding, and related accessories to their tenants. These leases and management agreements are expected to provide substantial streams of income. We believe that as laws evolve, it is possible that we will have the opportunity to participate directly in these operations. Accordingly, the Company will selectively negotiate an option on our tenants’ operating company.

 

The Company has already established four facilities in markets that have experienced high growth, Washington and Colorado. This growth is illustrated in the tables below:

  

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Source: Headset & 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc. 

 

The legalization taking place in other states such as California and Florida present opportunities many times that of Washington and Colorado. The Company is exploring opportunities in Oregon, California and Florida and is getting inquiries from other potential operators in other jurisdictions.

 

This market is projected to grow rapidly in the future as this chart below illustrates:

 

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Source: Marijuana Business Daily

 

Summary

 

The Company’s primary business objective is to lease various properties to licensed operators to grow, process and retail cannabis and related products. By developing a premium brand name, building upscale facilities, and providing quality accessories to a market where financing is difficult to obtain, these subleases are designed to provide a substantial stream of income. We believe that as laws evolve, it is possible that we will have the opportunity to participate directly in these operations as well.

 

2018 was a year of growth for Diego Pellicer Worldwide. All tenants were open and generating lease revenue. The tenants were showing steady revenue increases and operating improvements. The business model was being proven. The brand name was getting national recognition and garnered the “Most Valuable Brand of the Year” at the 2018 National Cannabis Business Awards beating out tough national competition including MedMen™, The Clinic, Lightshade and Olio. Diego was also honored as the “Best Retail Center” for the second year in a row, defeating other highly regarded names including LiveWell, The Clinic, The Green Solutions, Euflora and Kind Love.

 

2019 was a time of continued growth and a change of focus for the Company. An effective and experienced team was assembled from within our operators to develop our newly formed management company, and to complement the current executives with knowledge and experience in real estate operations, banking, site selection, branding, facility design, corporate finance, investor relations, store management, and grow expertise, Additional capital needed to be raised in order to have sufficient capital to help support our operators expand within their markets, and to begin the expansion into different markets in the US. Much of the Company’s debt was renegotiated, and additional commitments were formalized for the expansion in the Colorado market. New markets had to be explored, new alliances forged, and opportunities prioritized.

 

Diego is exploring opportunities in California, Colorado, Nevada, Washington and other states. The Company will continue to raise capital to finance that expansion. This should result in increased revenues for the future and increased opportunities into new markets.

 

Opportunity in an untapped industry with multi-billion-dollar potential

 

The demand for marijuana products is a multi-billion-dollar market that has only recently begun to become mainstream. Many challenges face the marijuana entrepreneur. Therein lies the opportunity.

 

Regulation and reality

 

Total demand for marijuana in the United States, including the black market, is around $52.5 billion, according to the estimates. That becomes a very conservative estimate of the size of the market in the United States. Distribution was driven underground for years by the Controlled Substance Act passed by Congress nearly 50 years ago. The favorable public opinion towards the legalization is rapidly changing the political attitude toward marijuana not only on the state level but on the federal level. If the Federal Government legalized marijuana nationwide, sales might start out around that level, but would likely rise as cannabis gained mainstream acceptance and the market evolved. Eventually, marijuana could surpass cigarette sales with the potential to rival beer in terms of overall sales.

 

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Financing and banking

 

As doubts remain, financing is still a challenge for this industry with banks in many states not only avoiding lending to these businesses but also refusing deposits because of complicated FDIC requirements. Financing has been largely equity raises, vendor financing, and expensive convertible debt. However, with the legalization and subsequent public capital raises in Canada and the change in the political attitude, there has been an indication of more interest by institutional investors in providing capital to this industry and more banks are accepting deposits.

 

A fragmented industry

 

Most industries evolve through the same business cycle. Many small independent companies initially operate in fragmented markets in the early stages. Then there is a consolidation of the industry, with the consolidators thriving and the independent companies dwindling. The larger companies have access to less expensive capital, lower costs, better merchandising, brand name recognition, and more efficient operations. This what we offer our tenants when negotiating the lease: an agreement to acquire them when marijuana is federally legalized. This gives the tenant the ultimate opportunity to participate in the rapid consolidation that we believe will happen when marijuana is federally legalized. This consolidation will result in companies that have heretofore been unable to participate in the rapidly growing industry to be scrambling to enter the space. Diego and its tenants will already be established and consolidated. As an exit strategy, we want to position Diego to be a likely candidate for acquisition or a major player in the marketplace.

 

The opportunity

 

The first mover advantage will continue to be possible for those willing to deal with the regulatory, banking, and financial challenges in today’s market. The fragmented market, the shortage of executives skilled in challenges of the industry, scarcity of brand names, provides a company like Diego, who has proven their business model, to be a consolidator in this industry.

 

States with legalized marijuana

 

Thirty three states and the District of Columbia have laws broadly legalizing marijuana in some form. Ten states and the District of Columbia have legalized marijuana for recreational use with the largest market by far, California, becoming legal.

 

The majority of all states allow for use of medical marijuana under certain circumstances. Some states have also decriminalized the possession of small amounts of marijuana. The industry is operating under stringent regulations within the various state jurisdictions.

 

This map shows current state laws and recently approved ballot measures legalizing marijuana for medical or recreational purposes.    2

 

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There are 9,397 active licenses for marijuana businesses in the U.S., according to Ed Keating, chief data officer for Cannabiz Media, which tracks marijuana licenses. This includes cultivators, manufacturers, retailers, dispensaries, distributors, deliverers and test labs. Now 306 million Americans live in a jurisdiction that has legalized some form of cannabis use.3    BDS Analytics estimates that the industry paid $1 billion in state taxes in 2016 and owes another $1.4 billion for 2017.4

 

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1    “Illegal Pot Sales Topped $46.4 Billion in 2016, and that’s Good News for Marijuana Entrepreneurs,” Inc., January 17, 2017, Will Yakowicz.

2    CNN Money   , “The Legal Marijuana Market is Booming,” January 31, 2018, by Aaron Smith

3    Frontier Financial Group, ‘The Cannabis Industry Annual Report: 2017 Legal Marijuana Outlook,”

4    CNN Money   , “The Legal Marijuana Market is Booming,” January 31, 2018, by Aaron Smith

 

The recent legalization in states such as California and probable legalization in Florida present opportunities many times that of Washington and Colorado. The Company is exploring opportunities in Oregon, California and Florida and is getting inquiries from other potential operators in other jurisdictions such as Michigan.

 

States introducing and expanding legalized marijuana laws

 

The legalized cannabis market has grown considerably bigger, with Canada federally legalizing recreational marijuana in 2018 and Eastern states in the U.S. rushing towards legalization.

 

In May 2019, Colorado Governor Polis signed into law House Bill 19-1090. It is generally referred to as the "Public Company" bill because it allows public companies to own Colorado marijuana licenses for the first time. This law went into effect on November 1, 2019.

 

Recent developments at the federal level   

 

Pressures from the states with legalized cannabis industries have been exerted by those state’s Senators and Congressmen. Both informal and formal efforts have been increased by these states. The following are the most recent:

 

In an April 2018 conversation with Republican U.S. Sen. Cory Gardner, President Donald Trump pledged to keep the Department of Justice from interfering with state cannabis laws and, perhaps more significantly, support legislation protecting state-legal marijuana businesses. White House officials later confirmed the president's policy stance.

 

Several bills have been introduced to Congress seeking to reform federal marijuana laws in different ways, including the removal of cannabis from the list of controlled substances, allowing MJ companies to access traditional banking services and amending the IRS code to more fairly tax cannabis businesses.

  

Similar bills have been introduced in previous sessions of Congress, but none have gained significant traction. This time, however, may be different, as marijuana reform has become a bipartisan issue that has the support of many prominent Republicans.

 

Senate Majority Leader Mitch McConnell, for example, introduced a bill in April to remove federal barriers on hemp, while former Republican House Speaker John Boehner recently disclosed his involvement with a large, multistate cannabis company.

 

Whether any significant reform of federal marijuana policy happens in 2018 and what shape it could take remains an open question, but it's clear that attitudes toward cannabis on Capitol Hill are shifting.  

 

New York Democratic Senator Chuck Schumer introducing legislation to remove cannabis from the DEA’s list of controlled substances, to decriminalize pot at a federal level and effectively allow states to decide how to regulate the use of medical or recreational marijuana without concern for federal law.

 

President Trump cut a deal with Colorado Senator Corey Gardner, R-Colo. to allow states to decide what to do about cannabis.

 

Former Speaker of the House John Boehner became a director with cannabis company Acreage Holdings.

 

The Food and Drug Administration setting up for an approval of the first cannabis-based drug from GW Pharmaceuticals Plc (“ GWPH” )

 

The Veteran’s Administration now wants to study the effectiveness of cannabis for chronic pain and PTSD. (The Street, “Cannabis Industry Sits on Precipice of Major Expansion, March 28, 2018, by Bill Meagher) 

 

 Source: 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc. 

 

The projected U.S. cannabis industry’s growth

 

The Cannabis Industry’s Annual Report for 2018 projects  the following robust growth of legal marijuana sales:  

 

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New Frontier, “The Cannabis Industry Annual Report: 2018 Legal Marijuana Outlook,”

   

What is Diego's Strategy, Phases One and Two?

 

Diego is a real estate and a consumer retail development company that is focused on high quality recurring revenues resulting from leasing real estate to licensed cannabis operators, and the management of operations for these and other third party cannabis operators deriving income from management and royalty fees. Diego provides a competitive advantage to these operators by developing “Diego Pellicer” as the world’s first premium marijuana brand and by establishing the highest quality standards for its facilities and products.

 

The Company's first phase strategy is to acquire or lease and develop the most prominent and convenient real estate locations for the purposes of leasing them to state licensed operators in the cannabis industry. Diego's first phase revenues result from leasing real estate and selling non-cannabis related accessories to our tenants. The Company has developed a brand name strategy, providing training, design services, branded accessories, systems and systems training, locational selection, and other advisory services to their tenants. We enter into branding agreements with our tenants. In addition, part of the vetting process in finding the proper tenant is selecting a tenant that shares the Company's values and strictly complies with state laws, follows strict safety and testing requirements and provides consistent, high-quality products. If the tenants do not comply, they will not be allowed to use the brand.

 

 

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The second phase of our strategy is to secure options to purchase the tenant's operations. When mutually advantageous for Diego and the tenant, Diego will negotiate acquisition contracts with selected Diego operators/tenants. When it becomes federally legal to do so, Diego will execute the acquisition contracts, consolidate our selected tenants and become a nationally branded marijuana retailer and producer concurrent with the change of federal law. 

 

Diego Pellicer Management Company, will license the upscale Diego Pellicer brand to qualified operators and receive royalty payments, while providing expertise in retail, product and manufacturing from Diego’s accomplished management team with extensive industry experience 

 

Value Proposition

 

Value proposition 1: By providing branding, management experience, training, unique accessories, purchasing services, locational experience, standardized design, and experienced construction supervision, the tenant reduces his startup time, reduces cash drain, increases his efficiency, and builds his gross margin. Diego provides the capital for preopening lease costs and tenant improvements. This results in a turnkey retail location for the tenant. Thus, Diego’s real estate, management, consulting and accessory sales are positioned to deliver a premium return on our investment.

 

Value proposition 2: With each lease, Diego negotiates an acquisition contract with selected licensed tenants to acquire their operations. This contract will be executed at Diego's option, and upon changes to federal law ,, introduces our second value proposition-ownership of operations in an industry that is projected to exceed $8 billion by 2019.

 

What does our premium branding accomplish?

 

A very important aspect of our marketing plan is to build Diego Pellicer as a luxury brand. This not only enables us to establish a premium brand, but also to generate significant revenues from non- cannabis products. 

  

 

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The Company is establishing several levels of branding and will use these to appeal to the various segments of the marketplace depending upon the location, competition, legal constraints, and budget. Standard store templates are being developed, complimentary accessories selectively designed, and customer preferences and segments analyzed. 

 

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Denver stores have been met with enthusiastic demand growing revenues quickly. This is proving the initial Diego concept.

 

We have proven this to be a winning strategy

 

Diego is positioning itself to be a dominate player in the marijuana marketplace. Diego has proven this by being a fully integrated marijuana retail operation and premium brand, capitalizing on beautifully designed retail stores offering the finest quality products at competitive prices.

 

What we accomplished in 2019

 

2019 was a time of continued growth and a change of focus for the Company. An effective and experienced team was assembled from within our operators to develop our newly formed management company, and to complement the current executives with knowledge and experience in real estate operations, banking, site selection, branding, facility design, corporate finance, investor relations, store management, and grow expertise, Additional capital needed to be raised in order to have sufficient capital to help support our operators expand within their markets, and to begin the expansion into different markets in the US. Much of the Company’s debt was renegotiated, and additional commitments were formalized for the expansion in the Colorado market. New markets had to be explored, new alliances forged, and opportunities prioritized.

     

New markets were explored. Three facilities continued to see year upon year increases in revenues, which lead to increased rental revenue cash-flow to the Company. In 2019, Diego focused on our Colorado operations, and divested itself from the Washington Tenant, citing restrictive rules and regulations for public company involvement in any part of the Washington State marijuana industry. Diego received revenues from three Colorado facilities, and the first quarter for our Washington store. Diego now had four facilities generating rent in 2019 for the year and we have actively been expanding in the Colorado markets with potential acquisitions for our tenants, and our management company. The tenants growing their sales and improving operational efficiency. Diego worked with these tenants, partially forbearing on their rent so as to allow these operators to strengthen their position and become capable of paying full rents. The properties generating rents in 2019 are as follows:

  

Table 1: Property Portfolio

 

Purpose     Size       City       State  
Retail store (recreational and medical)     3,300 sq.       Denver       CO  
Cultivation warehouse     18,600 sq.       Denver       CO  
Cultivation warehouse     14,800 sq.       Denver       CO  
Retail store (recreational and medical) - Sold     4,500 sq.       Seattle       WA  

 

Diego’s Washington tenant opened our first flagship store in Seattle in October 2016. On May 6, 2019, the Company entered into an agreement with a third party, which the Company sold the Seattle leased location 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. The Colorado tenant opened the Diego Denver branded flagship store in February 2017. In addition, Diego’s two cultivation facilities in Denver, CO began production in late 2016. The retail facilities have shown steady growth in sales since their opening. The three Colorado properties were subleased to a single entity. The Company is currently is exploring the acquisition of this entity.

 

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Diego Pellicer Denver

 

 

 

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Diego will continue this strategy in states where recreational or medical marijuana sales and cultivation is legal under state law. Our business model is recurring lease revenue, royalties, management fees, and is entirely scalable. Our success will dependent upon continuing to raise capital for expansion, continual improvement of our business model, standardizing store design, controlling costs, new store management opportunities, and continuing to develop the brand.

 

RESULTS OF OPERATIONS

 

Year ended December 31, 2019 compared to year ended December 31, 2018

 

After rental expense the gross margins on the lease were as follows:

 

    Year Ended     Year Ended   Increase (Decrease)
    December 31, 2019     December 31, 2018     $    %
Revenues                    
Net rental revenue $              1,646,369   $              1,456,939   $         189,430   13%
Rental expense               (1,189,352)                 (1,130,135)              (59,217)   5%
Gross profit                   457,017                     326,804             130,213   40%
General and administrative expenses                2,521,649                  2,786,615            (264,966)   -10%
Selling expense                     52,605                       66,511             (13,906)   -21%
Depreciation expense                   139,595                     498,400            (358,805)   -72%
Loss from operations $             (2,256,832)   $             (3,024,722)   $         767,890   -25%

 

Revenues.  For the year ended December 31, 2019 and 2018, the Company leased three facilities to licensees in Colorado. The year ended December 31, 2019 is the beginning of the second year of operations for these licensees. Diego, however, is still forbearing on the partial premium rents contractually due from the tenant as a result of the cost of leasehold improvements and the deferral of preopening rents. These will become recorded as revenue when the Company considers the premium rents collectible considering the relative success of the tenant’s operations. These licensees have now had their opening year behind them and are experiencing increasing revenues in the second year of operations. This is a significant event for the Company. As a result, total revenue for the year ended December 31, 2019 was $1,646,369, as compared to $1,456,939 for the year ended December 31, 2018, an increase of $189,430.

 

 29 

 

 

Gross profit.  Rental revenue for the periods ended December 31, 2019 increased over the prior year ended December 31, 2018, resulting in a gross profit of $457,017.

 

General and administrative expense.  Our general and administrative expenses for the year ended December 31, 2019 were $2,521,649, compared to $2,786,615 for the year ended December 31, 2018. The decline of $264,966 was largely attributable a reduction in executive stock compensation and consulting fees during year ended December 31, 2019.

 

Selling expense.  Our selling expenses for the year ended December 31, 2019 were $52,605, compared to $66,511 for the year ended December 31, 2018. The decline of $13,906 was due to reduction of services used related to selling and marketing 

 

    Year Ended   Year Ended   Increase (Decrease)
    December 31, 2019   December 31, 2018   $   %
Other income (expense)                                
Other income (expense)   $ 153,782     $ 2,984     $ 150,798       5054 %
Interest expense     (3,184,951 )     (2,758,160 )     (426,791 )     15 %
Loss on debt issuance     —         (2,892,033 )     2,892,033       -100 %
Write off of accounts receivable     —         (23,966 )     23,966       -100 %
Gain on sale of lease     534,649       —         534,649       N/A  
Extinguishment of debt     218,196       121,217       96,979       80 %
Change in derivative liabilities     1,948,643       1,493,962       454,681       30 %
Change in value of warrants     15,609       175,774       (160,165 )     -91 %
Total other income (loss)   $ (314,072 )   $ (3,880,222 )   $ 3,566,150       -92 %

    

The Net Other Income was the effect of the decline in market value of the Company’s stock had on the derivative liability of $5,024,321 offset by recording the cost of triggering technical default penalties on certain convertible notes and the financing costs of new debt incurred by the Company. Our other income for the year ended December 31, 2019 were $153,782, compared to $2,984 for the year ended December 31, 2018. The increase of $150,798 was due to income from the receivables owed by the our sublease tenant of the Company’s Colorado properties and affiliates of the tenant.

 

LIQUIDITY AND CAPITAL RESOURCES   

 

    Year Ended   Year Ended   Increase (Decrease)
    December 31, 2019   December 31, 2018   $   %
Net Cash provided (used) in operating activities   $ (1,183,991 )   $ (1,201,618 )   $ 17,627       -1 %
Net Cash used in investing activities     550,000       —         550,000        N/A  
Net Cash used in financing activities     891,000       1,103,353       (212,353 )     -19 %
Net Increase in Cash     257,009       (98,265 )     355,274       -362 %
Cash - beginning of period     60,437       158,702       (98,265 )        
Cash - end of period   $ 317,446     $ 60,437     $ 257,009       425 %

  

Operating Activities.   For the year ended December 31, 2019, the net cash used of $1,183,991 was an increase over the same period of the prior year of $1,201,618. The loss from operations after non-cash adjustments increased by $243,975 over the prior year, and an increase in net assets and liabilities of $261,602.

 

Investing Activities.  For the year ended December 31, 2019, proceeds from sale of Seattle lease was $550,000. There was no investing activities for the year ended December 31, 2018.

 

Financing Activities.  During the year ended December 31, 2019, $897,725 in proceeds were from convertible notes payable and $130,000 from the sale of preferred stock. Payments of convertible notes payable was $120,500 and debt cost was $16,225. For the year ended December 31, 2018, $1,173,750 in proceeds were from convertible notes payable and $20,872 from the sale of common stock. Payments of convertible notes payable was $135,000 and debt cost was $16,000. In 2020, we raised $117,000 from sales of preferred stocks.

 

 30 

 

 

 

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 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.

 

Critical Accounting Policies

 

The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, and related disclosures of contingent liabilities. The following are the areas that we believe require the greatest amount of judgments or estimates in the preparation of the financial statements: deferred income tax assets, accrued expenses, fair value of equity instruments and reserves for any other commitments or contingencies. Management reviews critical accounting estimates on an ongoing basis and as needed prior to the release of annual financial statements. See also Note 2 to our consolidated financial statements, which discusses the significant assumptions used in applying accounting policies.

 

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.

 

Prior to the adoption of ASC Topic 842, Leases , the Company recognized lease revenue when the collectability is reasonably assured, in accordance with ASC Topic 840, Leases , as amended and interpreted, minimum annual rental revenue is recognized for rental revenues on a straight-line basis over the term of the related lease.

 

When management concludes that the Company is the owner of tenant improvements, management records the cost to construct the tenant improvements as a capital asset. In addition, management records the cost of certain tenant improvements paid for or reimbursed by tenants as capital assets when management concludes that the Company is the owner of such tenant improvements. For these tenant improvements, management records the amount funded or reimbursed by tenants as deferred revenue, which is amortized as additional rental income over the term of the related lease. When management concludes that the tenant is the owner of tenant improvements for accounting purposes, management records the Company’s contribution towards those improvements as a lease incentive, which is amortized as a reduction to rental revenue on a straight-line basis over the term of the lease.

 

The Company has adopted the new revenue recognition guidelines in accordance with ASC 606, Revenue from Contracts with Customers (ASC 606), commencing from the period under this report. The adoption of ASU 2016-10 did not have a material impact on the financial statements and related disclosures since the Company is primarily a lessor for revenue purposes and recognizes rent income under ASC 842, Leases.

  

 31 

 

 

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.

 

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.

 

Recent accounting pronouncements.    

 

Leasing

 

Effective January 1, 2019 the Company adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Update No. 2016-02, “Leases (Topic 842)” which superseded previous lease guidance ASC 840, Leases. Topic 842 is a new lease model that requires a company to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet. The Company adopted the standard using the modified retrospective approach that does not require the restatement of prior year financial statements. The adoption of Topic 842 did not have a material impact on the Company’s consolidated income statement or consolidated cash flow statement. The adoption of Topic 842 resulted in the recognition of ROU assets of $4,069,296 and corresponding lease liabilities of $4,151,427 as of January 1, 2019 for leases classified as operating leases. In addition, the deferred rent liability as of January 1, 2019, was reclassified as a reduction in the ROU assets. Topic 842 also applies to the Company's sub-lease revenues, however, the adoption of Topic 842 did not have a significant impact on the Company's accounting for its sub-lease agreements.

 

The Company adopted the package of practical expedients and transition provisions available for expired or existing contracts, which allowed the Company carryforward its historical assessments of 1) whether contracts are or contain leases, 2) lease classification and 3) initial direct costs. Additionally, for real estate leases, the Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. The Company also elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases. Further, the Company elected the short-term lease exception policy, permitting it exclude the recognition requirements for leases with terms of 12 months or less. See Note 10 for additional information about leases.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 7A. Quantitative and Qualitative Disclosure about Market Risk.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

 

 32 

 

 

Item 8. Financial Statements and Supplementary Data.

 

Diego Pellicer Worldwide, Inc.

December 31, 2019 and 2018

Index to the Consolidated Financial Statements

 

 

 

 33 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of

Diego Pellicer Worldwide, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Diego Pellicer Worldwide, Inc. (the “Company”), as of December 31, 2018 , and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the year ended December 31, 2018 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for each of the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

The Company’s Ability to Continue as a Going Concern

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the accompanying consolidated financial statements, the Company has suffered recurring losses from operations, generated negative cash flows from operating activities, has an accumulated deficit and that raised substantial doubt exists about Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans in regarding these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provides a reasonable basis for our opinion.

 

We have served as the Company’s auditor form 2017 till 2018

/s/ RBSM LLP

 

RBSM LLP

 Larkspur, CA

April 16, 2019

 

 F-1 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of Diego Pellicer Worldwide, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Diego Pellicer Worldwide, Inc. (the “Company”) as of December 31, 2019, and the related consolidated statement of operations, stockholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the accompanying consolidated financial statements, the Company has suffered recurring losses from operations, generated negative cash flows from operating activities, and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on the entity’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ Hall & Company CPAs
We have served as the Company's auditor since 2019.
Irvine, CA
June 2, 2020

 

 F-2 

 

 

Diego Pellicer Worldwide, Inc.

Consolidated Balance Sheets

 

   December 31,  December 31,
   2019  2018
       
Assets          
           
Current assets:          
Cash and cash equivalents  $317,446   $60,437 
Accounts receivable   391,273    148,859 
Prepaid expenses   12,111    54,170 
           
Total current assets   720,830    263,466 
           
Property and equipment, net   —      139,595 
Other receivables   788,177    344,761 
Security deposits   150,000    270,000 
Right of Use Assets   3,009,163    —   
           
Total assets  $4,668,170   $1,017,822 
           
           
Liabilities and deficiency in stockholders' equity          
           
Current liabilities:          
Accounts payable  $514,196   $612,580 
Accrued payable - related party   1,293,238    414,106 
Accrued expenses   587,707    354,121 
Notes payable - related party   140,958    140,958 
Notes payable   133,403    133,403 
Convertible notes, net of discount and costs   2,352,530    1,173,319 
Deferred rent   —      178,210 
Derivative liabilities   5,024,321    6,000,830 
Contingent liabilities   —      257,910 
Lease Liabilities   676,336    —   
Warrant liabilities   967    16,576 
           
Total current liabilities   10,723,656    9,282,013 
           
Lease Liabilities, net of current portion   2,299,152    —   
           
Total liabilities   13,022,808    9,282,013 
           
Redeemable convertible preferred stock, Series C, par value $.00001 per share; 1,500,000 shares authorized, 140,000 and nil shares issued and outstanding, net of discount of $131,250 and $0, respectively,   8,750    —   
           
Deficiency in stockholders' equity:          
           
Preferred stock, Series A and B, par value $.0001 per share; 5,000,000 shares authorized, none issued and outstanding   —      —   
Common stock, par value $.000001 per share; 840,000,000 shares authorized, 113,926,332 and 28,287,414 shares issued, respectively   114    28 
Additional paid-in capital   43,478,139    40,378,973 
Stock to be issued   127,261    710,838 
Accumulated deficit   (51,968,902)   (49,354,030)
           
Total deficiency in stockholders' equity   (8,363,388)   (8,264,191)
           
Total liabilities and deficiency in stockholders' equity  $4,668,170   $1,017,822 

 

The accompanying notes are integral to these consolidated financial statements

 

 

 F-3 

 

 

Diego Pellicer Worldwide, Inc.

Consolidated Statements of Operations

   Year Ended  Year Ended
   December 31, 2019  December 31, 2018
       
Revenues          
Net rental revenue  $1,646,369    1,456,939 
Rental expense   (1,189,352)   (1,130,135)
Gross profit   457,017    326,804 
           
Operating expenses:          
General and administrative expenses   2,521,649    2,786,615 
Selling expense   52,605    66,511 
Depreciation expense   139,595    498,400 
Loss from operations   (2,256,832)   (3,024,722)
           
Other income (expense)          
Other income (expense)   153,782    2,984 
Interest expense   (3,184,951)   (2,758,160)
Gain on sale of lease   534,649    —   
Loss on debt issuance   —      (2,892,033)
Write off of accounts receivables   —      (23,966)
Extinguishment of debt   218,196    121,217 
Change in derivative liabilities   1,948,643    1,493,962 
Change in value of warrants   15,609    175,774 
Total other expense, net   (314,072)   (3,880,222)
           
Provision for taxes   —      —   
Net loss   (2,570,904)   (6,904,944)
Deemed dividend on preferred stock   (43,968)   —   
Net loss attributable to common stockholders  $(2,614,872)  $(6,904,944)
           
Loss per share - basic  $(0.04)  $(0.45)
Loss per share - diluted  $(0.04)  $(0.45)
           
Weighted average common shares outstanding - basic   59,828,096    15,301,015 
Weighted average common shares outstanding - diluted   59,828,096    15,301,015 

 

The accompanying notes are integral to these consolidated financial statements

 

 

 F-4 

 

 

Diego Pellicer Worldwide, Inc.

Consolidated Statements of Stockholders' Deficit

For the Years Ended December 31, 2019 and 2018 

 

   Redeemable Convertible Preferred Stock  Common Stock  Preferred Stock  Additional  Accumulated  Common Stock   
   Shares  Amount  Shares  Amount  Shares  Amount  Paid-in Capital  Deficit  to be issued  Total
Balance - December 31, 2017   —     $—      7,128,849   $7    —     $—     $34,422,474   $(42,449,086)  $2,397,218   $(5,629,387)
Sale of common stock   —      —      41,054    —      —      —      19,770    —      1,102    20,872 
Issuance of common shares for services   —      —      1,780,074    2    —      —      1,045,569    —      (427,039)   618,532 
Issuance of common shares for services - related parties   —      —      5,041,044    5    —      —      2,108,064    —      (1,295,342)   812,727 
Common stock issued upon conversion of notes payable   —      —      16,172,750    16    —      —      2,771,543    —      143,020    2,914,579 
Fair value of warrants and options granted for services   —      —      —      —      —      —      279,528    —      —      279,528 
Shares Issued to settle accounts payable   —      —      75,000    —      —      —      47,254    —      —      47,254 
Issuance of common shares for inducement of lease extension   —      —      125,000    —      —      —      20,500    —      —      20,500 
Security shares   —      —      40,500    —      —      —      —      —      —      —   
Shares cancelled for convertible note   —      —      (2,116,857)   (2)   —      —      (335,729)   —      (108,121)   (443,852)
Net loss   —      —      —      —      —      —      —      (6,904,944)   —      (6,904,944)
Balance - December 31, 2018   —      —      28,287,414    28    —      —      40,378,973    (49,354,030)   710,838    (8,264,191)
Sale of common stock   —      —      5,000    —      —      —      2,648    —      (2,648)   —   
Issuance of common shares for services   —      —      4,987,610    5    —      —      481,179    —      (310,836)   170,348 
Issuance of common shares for services - related parties   —      —      24,566,400    25    —      —      977,200    —      (245,196)   732,029 
Common stock issued upon conversion of notes payable   —      —      48,684,667    48    —      —      1,583,887    —      (133,018)   1,450,917 
Shares cancelled for convertible note   —      —      (675,759)   —      —      —      (108,121)   —      108,121    —   
Cashless warrant exercise    —      —      8,071,000    8    —      —      (8)   —      —      —   
Series C preferred stock issued for cash, net of costs and discounts   140,000    —      —      —      —      —      —      —      —      —   
Accretion of conversion feature  on Series C preferred stock        8,750    —      —      —      —      —      (8,750)        (8,750)
Fair value of warrants and options granted for services   —      —      —      —      —      —      162,381    —      —      162,381 
Deemed dividends related to conversion feature of Series C preferred stock   —      —      —      —      —      —      —      (35,218)   —      (35,218)
Net loss   —      —      —      —      —      —      —      (2,570,904)   —      (2,570,904)
Balance - December 31, 2019   140,000   $8,750    113,926,332   $114    —     $—     $43,478,139   $(51,968,902)  $127,261   $(8,363,388)

 

   

The accompanying notes are integral to these consolidated financial statements  

 

 

 F-5 

 

 

Diego Pellicer Worldwide, Inc.

Consolidated Statements of Cash Flows

    Year Ended   Year Ended
    December 31, 2019   December 31, 2018
         
Cash flows from operating activities:                
Net loss   $ (2,570,904 )   $ (6,904,944 )
Adjustments to reconcile net loss to net cash used in operating activities                
  Depreciation     139,595       498,400  
  Impairment     —            
  Change in fair value of derivative liability     (1,948,643 )     (1,493,962 )
  Change in value of warrants     (15,609 )     (175,774 )
  Write off of inventory     —         (23,966 )
  Write off of accounts receivable     —         23,966  
  Amortization of debt related costs     2,833,612       2,518,134  
  Extinguishment of debt     (218,196 )     (121,217 )
  Loss on debt issuance     —         2,892,033  
  Stock-based compensation     1,014,756       1,731,267  
  Gain on sale of lease     (534,649 )     —    
Changes in operating assets and liabilities:                
Accounts receivable     (222,414 )     45,784  
Inventory     —         8,979  
Prepaid expenses     42,059       (32,549 )
Other assets     (463,416 )     (294,761 )
Accounts payable     (98,385 )     23,069  
Accrued liability - related parties     879,132       83,262  
Accrued expenses     294,217       (163,581 )
Lease liabilities     (107,236 )     (73,668 )
Contingent liabilities     (207,910 )     257,910  
                 
Cash used in operating activities     (1,183,991 )     (1,201,618 )
                 
Cash flows from investing activities:                
    Proceeds from sale of lease     550,000       —    
                 
Cash provided by investing activities     550,000       —    
                 
Cash flows from financing activities:                
Debt costs     (16,225 )     (16,000 )
Proceeds from convertible notes payable     897,725       1,173,750  
Repayments of convertible notes payable, net     (120,500 )     (75,269 )
Repayments of notes payable     —         —    
Proceeds from sale of preferred stock, net     130,000       —    
Proceeds from sale of common stock     —         20,872  
                 
Cash provided by financing activities     891,000       1,103,353  
                 
Net increase (decrease) in cash     257,009       (98,265 )
Cash, beginning of period     60,437       158,702  
Cash, end of period   $ 317,446     $ 60,437  
                 
Cash paid for interest   $ —       $ —    
Cash paid for taxes   $ —       $ —    
                 
                 
Supplemental schedule of noncash financial activities:                
  Notes converted to stock   $ 842,712     $ 1,019,933  
  Accrued interest converted to stock   $ 60,627     $ 78,107  
  Value of common stock to be issued for conversion of notes and accrued interest   $ —       $ 168,862  
  Value of derivative liability extinguished upon conversion and pay off of notes and accrued interest   $ 891,922     $ 1,807,899  
  Accounts payable and accrued expenses paid with common stock   $ 50,000     $ 165,474  
  Note issue discount   $ 905,500     $ —    
  Leasehold improvements paid by tenant   $ —       $ 228,866  
  Debt issuance costs deducted from proceeds of notes   $ 16,225     $ 35,250  

 

 

The accompanying notes are integral to these consolidated financial statements

 

 

 F-6 

 

 

 

Diego Pellicer Worldwide, Inc.

December 31, 2019 and 2018

Notes to the Consolidated Financial Statements

 

Note 1 - Organization and Operations

 

History

 

On March 13, 2015, Diego Pellicer Worldwide, Inc. (the Company) (f/k/a Type 1 Media, Inc.) closed on a merger and share exchange agreement by and among (i) the Company, and (ii) Diego Pellicer World-wide 1, Inc., a Delaware corporation, (“Diego”), and (iii) Jonathan White, the majority shareholder of the Company. Diego was merged with and into the Company with the Company to continue as the surviving corporation in the merger. The Company succeeded to and assumed all the rights, assets, liabilities, debts, and obligations of Diego.

 

Prior to the merger, 3,135,000 shares of Type 1 Media, Inc. were issued and outstanding. The principal owners of the Company agreed to transfer their 2,750,000 issued and outstanding shares to a third party in consideration for $169,000 and cancellation of their 2,750,000 shares. The remaining issued and outstanding shares are still available for trading in the marketplace. At the time of the merger, Type 1 Media, Inc. had no assets or liabilities. Accordingly, the business conducted by Type 1 prior to the merger is not being operated by the combined entity post-merger.

 

At the closing of the merger, Diego common stock issued and outstanding immediately prior to the closing of the merger was exchanged for the right to receive one share of the surviving corporation for each share of Diego. An aggregate of 1,081,613 common shares of the surviving corporation were issued to the holders of Diego in exchange for their common shares representing approximately 74% of the combined entity.

 

The merger has been accounted for as a reverse merger and recapitalization in which Diego is treated as the accounting acquirer and Diego Pellicer Worldwide, Inc. is the surviving corporation. 

 

Business Operations

 

The Company leases real estate to licensed marijuana operators providing complete turnkey growing space, processing space, recreational and medical retail sales space and related facilities to licensed marijuana growers, processors, dispensary and recreational store operators. Additionally, the Company plans to explore ancillary opportunities in the regulated marijuana industry as well as offering for wholesale distribution branded non-marijuana clothing and accessories.

 

The properties generating rents in 2019 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     4,500 sq.       Seattle       WA  

 

The Company’s three properties 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 its 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 is exploring the acquisition of this entity, and the parties are in negotiation.

 

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).

 

Principles of Consolidation

 

The financial statements include the accounts of Diego Pellicer Worldwide, Inc., and its wholly-owned subsidiary Diego Pellicer World-wide 1, Inc. Intercompany balances and transactions have been eliminated in consolidation.

   

Reclassifications

 

$344,761 of other receivable of prior year amounts were reclassified from current assets to long term assets to conform to the manner of presentation in the current period. These reclassifications had no effect on the Company's balance sheet, net loss or stockholders' equity.

 

 

 F-7 

 

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 6), 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 December 31, 2019 and December 31, 2018. 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 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  

 

 

As of December 31, 2018   Fair Value Measurement Using    
    Level 1   Level 2   Level 3   Total
Derivative Liabilities   $ —       $ —       $ 6,001     $ 6,001  
Stock warrant Liabilities     —         —         17       17  
    $ —       $ —       $ 6,018     $ 6,018  

 

Derivative liabilities and stock warrant liberties were valued use Binomial Option Pricing Model in calculating the embedded conversion features for the year ended December 31, 2019 and Black-Scholes Option Pricing Model in calculating the embedded conversion features and current liabilities for the year ended December 31, 2018.

 

 F-8 

 

 

 

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. 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.

 

Prior to the adoption of ASC Topic 842, Leases , the Company recognized lease revenue when the collectability is reasonably assured, in accordance with ASC Topic 840, Leases , as amended and interpreted, minimum annual rental revenue is recognized for rental revenues on a straight-line basis over the term of the related lease.

 

When management concludes that the Company is the owner of tenant improvements, management records the cost to construct the tenant improvements as a capital asset. In addition, management records the cost of certain tenant improvements paid for or reimbursed by tenants as capital assets when management concludes that the Company is the owner of such tenant improvements. For these tenant improvements, management records the amount funded or reimbursed by tenants as deferred revenue, which is amortized as additional rental income over the term of the related lease. When management concludes that the tenant is the owner of tenant improvements for accounting purposes, management records the Company’s contribution towards those improvements as a lease incentive, which is amortized as a reduction to rental revenue on a straight-line basis over the term of the lease.

 

The Company has adopted the new revenue recognition guidelines in accordance with ASC 606, Revenue from Contracts with Customers (ASC 606), commencing from the period under this report. The adoption of ASU 2016-10 did not have a material impact on the financial statements and related disclosures 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 year ended December 31, 2019 and 2018, advertising expense was $52,605 and $66,511, 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.

   

 

 F-9 

 

 

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 631,737,597 and 60,158,160 common stock equivalents at December 31, 2019 and 2018, respectively. For the year ended December 31, 2019, the potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.

 

Legal and regulatory environment

 

The cannabis industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, and different taxation between federal and state. Federal government activity may increase in the future with respect to companies involved in the cannabis industry concerning possible violations of federal statutes and regulations.

 

Management believes that the Company is in compliance with local, state and federal regulations, while no regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

 

Recent accounting pronouncements.    

 

Leasing

 

Effective January 1, 2019 the Company adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Update No. 2016-02, “Leases (Topic 842)” which superseded previous lease guidance ASC 840, Leases. Topic 842 is a new lease model that requires a company to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet. The Company adopted the standard using the modified retrospective approach that does not require the restatement of prior year financial statements. The adoption of Topic 842 did not have a material impact on the Company’s consolidated income statement or consolidated cash flow statement. The adoption of Topic 842 resulted in the recognition of ROU assets of $4,069,296 and corresponding lease liabilities of $4,151,427 as of January 1, 2019 for leases classified as operating leases. In addition, the deferred rent liability as of January 1, 2019, was reclassified as a reduction in the ROU assets. Topic 842 also applies to the Company's sub-lease revenues, however, the adoption of Topic 842 did not have a significant impact on the Company's accounting for its sub-lease agreements.

 

The Company adopted the package of practical expedients and transition provisions available for expired or existing contracts, which allowed the Company carryforward its historical assessments of 1) whether contracts are or contain leases, 2) lease classification and 3) initial direct costs. Additionally, for real estate leases, the Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. The Company also elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases. Further, the Company elected the short-term lease exception policy, permitting it exclude the recognition requirements for leases with terms of 12 months or less. See Note 10 for additional information about leases.

 

Stock Compensation

 

In June 2018, the FASB issued ASU No. 2018-07 “Improvements to Non-employee Share-based Payment Accounting" ("ASU 2018-07"). ASU 2018-07 amends ASC 718, "Compensation - Stock Compensation" ("ASC 718"), with the intent of simplifying the accounting for share-based payments granted to non-employees for goods and services and aligning the accounting for share-based payments granted to non-employees with the accounting for share-based payments granted to employees. The Company adopted ASU 2018-07 on January 1, 2019 using the modified retrospective approach as required. ASU 2018-07 replaced ASC 505-50, "Equity-Based Payments to Non-employees" ("ASC 505-50") which was previously applied by the Company for warrants granted to consultants and non-employees.

 

 F-10 

 

In July 2018, the FASB issued ASU 2018-09,    Codification Improvements.    The amendments in ASU 2018-09 affect a wide variety of Topics in the FASB Codification and apply to all reporting entities within the scope of the affected accounting guidance. The Company has evaluated ASU 2018-09 in its entirety and determined that the amendments related to Topic 718-740,    Compensation-Stock Compensation-Income Taxes,   are the only provisions that currently apply to the Company. The amendments in ASU 2018-09 related to Topic 718-740,    Compensation-Stock Compensation-Income Taxes,    clarify that an entity should recognize excess tax benefits related to stock compensation transactions in the period in which the amount of the deduction is determined. The amendments in ASU 2018-09 related to Topic 718-740 are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The adoption of the new standard did not have a material impact on the Company’s Consolidated Financial Statements. 

Income Taxes

 

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This standard amends Accounting Standards Codification 740, Income Taxes (ASC 740) to provide guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the Tax Reform Act) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. As described in the footnotes to the Annual Report on Form 10-K, the Company’s accounting for the tax effects of enactment of the Tax Reform Act is being assessed; however, in certain cases, as described below, we made a reasonable estimate of the effects on our existing deferred tax balances and valuation allowance.

The Company believes that other recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations and cash flows when implemented.

  

Note 3 - Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses since inception, its current liabilities exceed its current assets by $10,002,826, and has an accumulated deficit of $ 51,968,902 at December 31, 2019. 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 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 December 31, 2019 and December 31, 2018, fixed assets and the estimated lives used in the computation of depreciation are as follows:

 

    Estimated        
    Useful Lives   December 31, 2019   December 31, 2018
Leasehold improvements   10 years     515,450       1,082,280  
Less: Accumulated depreciation and amortization         (515,450 )     (942,685 )
Property and equipment, net       $ —       $ 139,595  

 

On May 6, 2019, the Company entered into an agreement with a third party, which the Company sold the Seattle leased location for $550,000 in cash. The Company plans to allocate to its efforts in a new location and cannabis grow facilities in Colorado. In connection with the that, full amortized leasehold improvements with a historical cost of $566,830 were sold during the sale.

 

During the years ended December 31, 2019 and 2018, the Company recorded depreciation expense of $139,595 and $498,400, respectively.

  

 

 F-11 

 

 

Note 5 – 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 December 31, 2019 and December 31, 2018, the remaining balance was $150,000 and $170,000, respectively.

 

Deposits – end of lease:   These deposits represent an additional two months of rent on various property leases that apply to the “end-of- lease” period. During 2018, we applied $50,000 deposit against monthly rent. During the year ended December 31, 2019, we adopted ASC Topic 842, Leases, as the result we applied remaining balance of prepaid rent to right of use assets and leases liabilities. As of December 31, 2019 and December 31, 2018, the remaining balance was $0 and $100,000.

 

Note 6 – Accounts Receivables and Other Receivables

 

As disclosed in Note 1, the Company subleases three properties in Colorado to Royal Asset Management. At December 31, 2019, the Company had outstanding receivables from the subleases totaling $391,273, and during 2019 the Company’s subleases with Royal Asset Management accounted for 93% 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 December 31, 2019, the outstanding balance of these notes receivable total $1,017,143, including accrued interest of $153,509. The amount presented in our balance sheet is $788,177, which represents the $1,017,143 due to us, less $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.

If we do acquire Royal Asset Management, part of the purchase price will be paid through receivables that are owed to us.

Note 7 – Related Party Transactions

 

As of December 31, 2019 and 2018, the Company has accrued compensation to CEO, CFO and Director in the amount of $155,841, and $414,106, respectively. As of December 31, 2019 and 2018, accrued payable due to former officers were $1,137,397 and $0. For the years ended December 31, 2019 and 2018, total cash-based compensation to related parties was $507,430  and $716,753, respectively. For the years ended December 31, 2019 and 2018, total share-based compensation to related parties was $894,408 and $960,915 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 December 31, 2019, 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 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 December 31, 2019 and December 31, 2018, respectively. As of March 31, 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 December 31, 2019 and December 31, 2018 the outstanding principal balance of the note was $133,403. As of December 31, 2019, the note was past the maturity date, however the Company has not yet received a default notice.

 

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 $4,834,190 at December 31, 2019 and using Black-Scholes Option Pricing Model that resulted in a derivative liability of $6,000,830 at December 31, 2018. 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 stock during the year ended December 31, 2019. The table below provides the note payable activity for the year ended December 31, 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 year ended December 31, 2019:

 

    Convertible Notes   Discount   Convertible Notes, Net of Discount   Derivative Liabilities
Balance, December 31, 2018   $ 3,324,487     $ 2,151,168     $ 1,173,319     $ 6,000,830  
Issuance of convertible notes     905,500       905,500       —         1,803,495  
Conversion of convertible notes     (842,712 )     (233,571 )     (609,141 )     (940,382 )
Repayment of convertible notes     (120,500 )     (3,659     (116,841 )     (56,197 )
Change in fair value of derivatives     —         —         —         (1,973,556 )
Amortization     —         (1,905,193  )     1,905,193       —    
Balance December 31, 2019   $ 3,266,775     $ 914,245     $ 2,352,530     $ 4,834,190  

     

     

 F-12 

 

 

During the year ended December 31, 2019, the Company entered into several convertible notes in an aggregate amount of $905,500, bearing interest ranging from 10% to 12% per annum.

 

During the year ended December 31, 2019, $120,500 of notes principal and $14,195 of accrued interest were repaid to a debt holder.

 

During the year ended December 31, 2019, $842,712 of notes and $60,627 of accrued interest was converted into 48,684,667 shares of common stock and 434,783 shares were issued which were authorized as of December 31, 2018. A gain on extinguishment of debt of $159,233, extinguishment of debt discount of $233,571 and reduction of derivative liabilities of $940,382 have been recorded related to these conversions. As of December 31, 2019, several convertible notes in aggregate principal of $217,500 were past their maturity dates, however the Company has not yet received a default notice.    

 

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 current liabilities for the year ended December 31, 2019 and Black-Scholes Option Pricing Model in calculating the embedded conversion features and current liabilities for the year ended December 31, 2018.

 

    December 31, 2019     December 31, 2018  
Risk-free interest rates   1.53 – 2.60 %     1.89-2.33 %
Expected life (years)   0.08 – 1.25       0.03-2.00  
Expected dividends   0 %     0 %
Expected volatility   70-557 %     100-233  %

 

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 Decembers 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.

 

The following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current liabilities for the year ended December 31, 2019.

 

    December 31, 2019    
Risk-free interest rates   1.58 – 1.66 %  
Expected life (years)   1.95 – 2.00    
Expected dividends   0 %  
Expected volatility   248-250 %  

 

Common Stock

 

During the year ended December 31, 2019:

 

During the year ended December 31, 2019, $842,712 of notes and $60,627 of accrued interest was converted into 48,684,667  shares of common stock and 434,783 shares were issued which were authorized as of December 31, 2018. A gain on extinguishment of debt of $159,233, extinguishment of debt discount of $233,571 and reduction of derivative liabilities of $940,382 have been recorded related to these conversions. As of December 31, 2019, 35,844 shares, valued at $35,844 for debt conversion were authorized, but not issued as of December 31, 2019.

 

We issued 4,987,610 shares of common stock, valued at $170,348, for services. As December 31, 2019, 209,782 shares, valued at $11,598 for services were authorized, but not issued as of December 31, 2019, and included in stock to be issued in the accompanying condensed consolidated balance sheet. In connection with Debt Restructure Agreements dated on July 17, 2018, 675,759 shares of common stock were cancelled, valued at $108,121.

 

We issued 24,566,400 shares of common stock, valued at $732,029 , for related party services. As December 31, 2019,  3,299,665  shares, valued at $79,817  for services were authorized, but not issued as of December 31, 2019.

 

During the year ended December 31, 2019, 8,071,000 shares were issued for cashless warrant exercise.

 

During the year ended December 31, 2019, we issued 5,000 shares for $2,648, which were authorized in prior period.

 

During the year ended December 31, 2018:

 

 F-13 

 

 

We sold 41,054 shares of common stock and received proceeds of $20,872. Additionally, 5,000 valued at $2,648 were not issued as of December 31, 2018. We issued 16,804 shares of common stock that were sold in 2017 and classified as shares to be issued at December 31, 2017.

 

Holders of convertible notes converted $1,019,933 of notes and $78,107 of accrued interest into 15,230,423 shares of common stock valued at $2,726,567. Additionally, 85,110 shares, valued at $168,862, for the conversion of notes, were authorized but not issued as of December 31, 2018.

 

2,116,857 shares of common stock were returned in connection with Debt Restructure Agreements dated On July 17, 2018, additionally 675,759 shares of common stock, valued at $108,121, were agreed to be cancelled, has not been returned as of December 31, 2018.

 

We issued 40,500 common shares as security for the payment of convertible notes. The shares, valued at $26,730 are held in escrow, are refundable and are recorded in a contra equity account.

 

We issued 1,780,074 shares of common stock, valued at $618,532, for services. Additionally, 1,980,179 shares, valued at $322,433 for services, were authorized but not issued as of December 31, 2018.

 

We issued 669,082 shares of common stock for payment of a former employee note in the amount of $166,354, plus accrued interest of $21,658. In addition, 273,245 excessive shares of common stock were issued, these shares are in the process of being cancelled.

 

We issued 75,000 shares of common stock, valued at $47,254, to settle accounts payable to a consultant. 

 

We issued 125,000 shares of common stock, valued at $20,500, for an inducement of extension of sublease.

 

We issued 2,308,938 shares of common stock, valued at $202,443 as share-based compensation to related parties. Additionally, 29,486 shares, valued at $95,983 were authorized to be issued for related party services, but were not issued as of December 31, 2018.

 

As a condition of management employment, the Board of Directors approved employment agreements with two key executives. This agreement provided that additional shares will be granted each year at February 1 over the term of the agreement should their shares as a percentage of the total shares outstanding fall below prescribed ownership percentages. The CEO received an annual grant of additional shares each year to maintain his ownership percentage at 10% of the outstanding stock. The other two executives receive a similar grant to maintain each executive’s ownership percentage at 7.5% of the outstanding stock. During the year ended December 31, 2018, 2,732,106 shares were issued. At December 31, 2018, there is $229,031 accrued for the annual grants, representing 649,541 shares authorized not issued. The Company recorded compensation expense of $610,284 for the year ended December 31, 2018.

 

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 year ended December 31, 2019:

 

Balance at December 31, 2018   $ 16,576  
Issuance of warrants     —    
Change in fair value during period     (15,609 )
Balance at December 31, 2019   $ 967  

  

The following assumptions were used in calculations of the Binomial Option Pricing Model for the periods ended December 31, 2019 and the Black-Scholes Option Pricing Model in calculating the embedded conversion features and current liabilities for the periods ended December 31, 2018.

 

    December 31, 2019     December 31, 2018  
Annual dividend yield     0 %     0 %
Expected life (years)     0.42 – 8.13       1.67 – 8.9  
Risk-free interest rate     1.56 – 2.40 %     2.52 – 3.05 %
Expected volatility     165 - 318 %     188 - 230 %

 

 

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, 2018       263,866     $ 12.04        3.62  
  Exercised       (12,500  )     2.95        2.55  
  Expired       (39,540 )     20.00       -  
  Balance outstanding, December 31, 2019       211,826     $ 10.08       3.51  
  Exercisable, December 31, 2019       211,826     $ 10.08       3.51  

 

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 December 31, 2019, 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 years ended December 31, 2019 and 2018, the Company recorded total option expense of $162,381 and $279,528, respectively. Unamortized stock option expense at December 31, 2019 is $86,606, which will be charged to expense in 2020. The aggregate intrinsic value of stock options outstanding at December 31, 2019 is $0.

 

 

 F-14 

 

 

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, 2018       294,959     $ 5.17       7.15  
  Granted       —         —            
  Forfeited       (122,480 )     5.00       7.09  
  Balance outstanding, December 31, 2019       172,479     $ 5.29       5.47  
  Exercisable, December 31, 2019       162,479     $ 5.25       5.72  

   

 

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 December 31, 2019 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 4.24 years.

As of December 31, 2019, the maturities of operating leases liabilities are as follows (in thousands):

 

  Operating Leases
2020 $ 985  
2021 863  
2022 719  
2023 733  
2024 445  
2025 and beyond 45  
Total 3,791  
Less: amount representing interest (816 )
Present value of future minimum lease payments 2,975  
Less: current obligations under leases 676  
Long-term lease obligations $ 2,299  

 

Rent expense is recognized on a straight-line basis over the life of the lease. Rent expense consists of the following:

 

  Year ended
  December 31, 2019
Operating lease costs $ 756,515  
Variable rent costs 432,837  
   Total rent expense $ 1,189,352  

  

Right of use assets obtained in exchange for lease liabilities:

 

Operating lease $                                                4,069,296  

 

 F-15 

 

 

As of December 31, 2018, the aggregate remaining minimal annual lease payments under these operating leases plus NNN were as follows: (in thousands):

 

2019   $ 1,258  
2020     1,099  
2021     964  
2022     809  
2023     801  
2024     498  
2025     264  
Total   $ 5,693  

 

Other information related to leases is as follows:

 

  Year ended
  December 31, 2019
Other information:  
Cash paid for amounts included in the measurement of lease liabilities:  
   Operating cash flows from operating leases $ 1,294,653  
Weighted-average remaining lease term - operating leases 4.24 yr
Weighted-average discount rate - operating leases 12 %

 

The Company recognized sublease income of $1,646,369 and $1,456,939 during the years ended December 31, 2019 and 2018, 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 NNN.

 

As of December 31, 2019, the maturities of expected base sublease income are as follows (in thousands):

 

  Operating Leases
2020 $ 1,256  
2021 1,079  
2022 855  
2023 868  
2024 550  
2025 and beyond 58  
Total $                         4,666  

 

Employment Agreements

  

As a condition of their employment, the Board of Directors approved employment agreements with three key executives. This agreement provided that additional shares will be granted each year over the term of the agreement should their shares as a percentage of the total shares outstanding fall below prescribed ownership percentages. The CEO received an annual grant of additional shares each year to maintain his ownership percentage at 10% of the outstanding stock. One other executive received a similar grant each to maintain his ownership percentage at 2% of the outstanding stock. During the year ended December 31, 2019, the Company accrued compensation expense of approximately $593,000 on 20,782,014 shares of common stock, of which 19,494,887 were issued, under these agreements.

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 year ended December 31, 2019, $9,450 were paid under this agreement. As of December 31, 2019, the outstanding balance was $196,800, 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 principle 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 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.

 

 F-16 

 

 

Note 12 – Deferred Tax Assets and Income Tax Provision   

 

The U.S. tax reform bill that Congress voted to approve December 20, 2017, also known as the “Tax Cuts and Jobs Act”, made sweeping modifications to the Internal Revenue Code, including a much lower corporate tax rate, changes to credits and deductions, and a move to a territorial system for corporations that have overseas earnings.

 

The act replaced the prior-law graduated corporate tax rate, which taxed income over $10 million at 35%, with a flat rate of 21%.

 

The reconciliation of income tax benefit at the U.S. statutory rate of 21% for the year ended December 31, 2019 and for the year ended December 31, 2018 respectively to the Company’s effective tax rate is as follows:

 

    Year Ended     Year Ended  
    December 31, 2019     December 31, 2018  
Statutory federal income tax rate     (21 )%     (21 )%
State income tax, net of federal benefits     (5 )%     (5 )%
Change in federal tax rate     —   %     —    %
Change in valuation allowance     26 %     26 %
Income tax provision (benefit)     —   %     —   %

 

The benefit for income tax is summarized as follows:

 

    Year Ended 
December 31, 2019
  Year Ended 
December 31, 2018
Federal                
Current   $ —       $ —    
Deferred     479,000       278,000  
State                
Current     —         —    
Deferred      105,000       51,775  
Change in valuation allowance     (584,000 )     (329,775 )
Income tax provision (benefit)   $ —       $ —    

   

 

Deferred tax assets (liabilities) consist of the following:

 

   Year Ended  Year Ended
   December 31,  2019  December 31, 2018
Net operating loss carry forwards  $(6,413,626)  $(5,934,619)
Warrants issued for services   1,417,025    1,232,477 
Impairment of investment   111,662    311,365 
Depreciation   101,728    95,159 
Interest expense on convertible notes   2,140,769    2,034,683 
Change in fair value of derivative liability          
Total gross deferred tax asset/liabilities   (2,642,442)   (2,260,935)
Valuation allowance   2,642,442    2,260,935 
Net deferred taxes  $—     $—   

 

As of December 31, 2019, the Company had accumulated Federal net operating loss carryovers (“NOLs”) of $30,541,077. These NOLs can be carried forward indefinitely and the utilization of NOLs may be subject to limitation under the Internal Revenue Code Section 382 should there be a greater than 50% ownership change as determined under the regulations.

 

The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. Among other things, the Act reduces the U.S. federal corporate tax rate from 34 percent to 21 percent, eliminates the alternative minimum tax (“AMT”) for corporations, and creates a one-time deemed repatriation of profits earned outside of the U.S. The tax rate reduction also resulted in a write-down of the net deferred tax asset of approximately $5 million. The write-down of the net deferred tax asset related to the rate reduction resulted in a corresponding write-down of the valuation allowance of approximately $4 million. The Company fully reserves its deferred tax assets as such there was no impact.

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management has established a full valuation allowance against the entire deferred tax asset relating to NOLs for every period because it is more likely than not that all of the deferred tax asset will not be realized.

 

The Company files U.S. Federal and various State tax returns that are subject to audit by tax authorities beginning with the year ended December 31, 2014. The Company’s policy is to classify assessments, if any, for tax and related interest and penalties as tax expense.  

 

Note 13 – Subsequent Events

 

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 Q1 2020, $89,000 of notes and $6,282 of accrued interest was converted into 13,767,631 shares of common stock.

 

On May 13, 2020, the company issued 2,049,386 shares of common stock to a former officer per separation agreement.

 

On May 13, 2020, the company issued 504,583 shares of common stock to Mr. Strachan for services rendered.

 

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.

 

 F-17 

 

 

 

Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

We carried out an evaluation required by Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's "disclosure controls and procedures” and “internal control over financial reporting” as of the end of the period covered by this Annual Report.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures. Our principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of the end of the period covered by this Annual Report (the “Evaluation Date”), pursuant to Rule 13a- 15(b) under the Exchange Act. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, due to material weaknesses in our control environment and financial reporting process.

 

Limitations on the Effectiveness of Controls

 

Our management, including our principal executive officer and principal financial officer, does not expect that our Disclosure Controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision- making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.

 

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Management's Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of the our management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. 

Based on our evaluation under the framework described above, our management concluded that we had “material weaknesses” (as such term is defined below) in our control environment and financial reporting process consisting of the following as of the Evaluation Date:

 

 18 

 

 

  1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our Board of Directors, resulting in ineffective oversight in the establishment and monitoring of required internal control and procedures;
     
  2) inadequate segregation of duties consistent with control objectives;
     
  3) ineffective controls over period end financial disclosure and reporting processes; and
     
  4) lack of accounting personnel with adequate experience and training.

 

A “material weakness” is defined under SEC rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis by the company's internal controls.

 

As of the date of this Annual Report, the Company does not intend to remedy the foregoing and therefore such material weaknesses in our control environment and financial reporting process will continue due to lack of available capital. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

Attestation report of the registered public accounting firm

 

This Annual Report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report on internal control in this Annual Report.

 

Changes in Internal Controls

 

There were no changes in our internal control over financial reporting during the fiscal year ended December 31, 2019 that have affected, or are reasonably likely to affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

None.

 

 19 

 

 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The following table sets forth the names and ages of all of our directors, executive officers and key employees; and all positions and offices held as of the date of this Report. The directors will hold such office until the next annual meeting of shareholders and until his or her successor has been elected and qualified.

 

Name   Age   Position
Nello Gonfiatini III   62   Chief Executive Officer, Director
Christopher Strachan   56   Chief Financial Officer

 

Business Experience

 

The following summarizes the occupation and business experience during the past five years for our officers, directors and key employees as of the date of this Report:

 

Officers and Directors

 

Nello Gonfiantini joined Diego