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UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2022

 

or

 

  TRANSITION 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:   Trading Symbol(s):    Name of each exchange on which registered:
N/A   N/A    N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  

Yes ☒ No ☐

 

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

 

Large accelerated Filer   Accelerated Filer  
Non-accelerated Filer   Small Reporting Company  
      Emerging growth company     

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes ☐ No

 

As of November 4, 2022 there were 261,332,926 shares of common stock issued and outstanding.

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
  PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
     
  PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 20
Item 1A. Risk Factors 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Mine Safety Disclosures 20
Item 5. Other Information 20
Item 6. Exhibits 20

 

 

  

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Diego Pellicer Worldwide, Inc.

Condensed Consolidated Balance Sheets

 

   September 30,   December 31, 
   2022   2021 
    (Unaudited)      
Assets          
           
Current assets:          
Cash  $591,287   $49,149 
Accounts receivable   652,630    598,667 
Notes receivable, net of allowance of $82,781 and $0, respectively   82,781    112,800 
           
Total current assets   1,326,698    760,616 
           
Other receivables, net   665,331    620,781 
Security deposits   90,000    90,000 
Right of use assets   574,290    1,269,113 
           
Total assets  $2,656,319   $2,740,510 
           
Liabilities and deficiency in stockholders' equity          
           
Current liabilities:          
Accounts payable  $436,388   $441,625 
Accrued payable - related parties   1,227,675    1,210,275 
Accrued expenses   1,394,349    1,144,521 
Notes payable - related party   140,958    140,958 
Notes payable   133,403    133,403 
Convertible notes, net   3,176,684    2,941,274 
Derivative liabilities   5,432,165    2,733,803 
Lease liabilities   215,966    386,488 
Warrant liabilities   304    438 
           
Total current liabilities   12,157,892    9,132,785 
           
Notes payable - long term   150,000    150,000 
Lease liabilities, net of current portion   353,652    882,976 
           
Total liabilities   12,661,544    10,165,761 
           
Commitments and contingencies (See Note 9)   -    - 
           
Redeemable convertible preferred stock, Series C, par value $.00001 per share; 1,500,000 shares authorized,  no shares issued and outstanding   -    - 
           
Deficiency in stockholders' equity:          
           
Preferred stock, Series A, par value $.0001 per share; 13,000,000 shares authorized, none issued and outstanding   -    - 
Common stock, par value $.000001 per share; 840,000,000 shares authorized, 261,332,926 and 257,261,121 shares issued and outstanding, respectively   261    256 
Additional paid-in capital   44,717,436    44,681,028 
Stock to be issued   93,728    31,447 
Accumulated deficit   (54,816,650)   (52,137,982)
           
Total deficiency in stockholders' equity   (10,005,225)   (7,425,251)
           
Total liabilities and deficiency in stockholders' equity  $2,656,319   $2,740,510 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

1 

 

 

Diego Pellicer Worldwide, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

   Three Months Ended   Three Months Ended   Nine Months Ended   Nine Months Ended 
   September 30, 2022   September 30, 2021   September 30, 2022   September 30, 2021 
                 
Revenues                    
Net rental revenue  $188,084   $198,505   $561,096   $582,010 
Rental expense   (148,364)   (157,466)   (445,155)   (475,521)
Gross profit   39,720    41,039    115,941    106,489 
                     
Operating expenses:                    
General and administrative expenses   228,481    221,289    586,888    695,787 
Selling expense   6,453    8,870    19,389    26,679 
Loss from operations   (195,214)   (189,120)   (490,336)   (615,977)
                     
Other income (expense)                    
Interest income   14,856    14,931    49,299    69,511 
Forgiveness of debt income   -    -    -    56,908 
Allowance for loss on notes receivable   -    -    (82,781)   - 
Interest expense   (376,845)   (150,487)   (1,191,348)   (534,070)
Lease termination payments   35,913    33,851    105,645    101,554 
Gain on termination of lease   489,771         489,771      
Extinguishment of debt   31,246    -    75,590    389,550 
Change in derivative liabilities   598,492    1,093,766    (1,634,642)   2,824,050 
Change in value of warrants   107    1,678    134    (387)
Total other income (loss), net   793,540    993,739    (2,188,332)   2,907,116 
                     
Provision for taxes   -    -    -    - 
Net income (loss)   598,326    804,619    (2,678,668)   2,291,139 
Deemed dividend on preferred stock   -    (34,053)   -    (1,083,813)
Net income (loss) attributable to common stockholders  $598,326   $770,566   $(2,678,668)  $1,207,326 
                     
Income (loss) per share - basic  $0.00   $0.00   $(0.01)  $0.01 
Income (loss) per share - diluted  $0.00   $(0.00)  $(0.01)  $(0.00)
                     
Weighted average common shares outstanding - basic   261,332,926    227,062,642    260,633,766    223,316,795 
Weighted average common shares outstanding - diluted   1,673,349,204    453,484,157    260,633,766    1,688,135,003 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

2 

 

 

DIEGO PELLICER WORLDWIDE, INC

Condensed Consolidated Statements of Stockholders' Deficit

For the Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

 

   Redeemable Convertible Preferred Stock Shares   Amount   Common Stock Shares   Amount   Preferred Stock Shares   Amount   Additional Paid-in Capital   Accumulated Deficit   Common Stock to be issued   Total 
Balance - December 31, 2021   -   $-    257,261,121    256    -   $-   $44,681,028   $(52,137,982)  $31,447   $(7,425,251)
Issuance of common shares for services   -    -    -    -    -    -    -    -    2,000    2,000 
Issuance of common shares for services - related parties   -    -    -    -    -    -    -    -    8,183    8,183 
Issuance of common shares for finance cost   -    -    3,400,000    4    -    -    29,576    -    -    29,580 
Net loss   -    -    -    -    -    -    -    (3,534,658)   -    (3,534,658)
Balance - March 31, 2022   -    -    260,661,121    260    -    -    44,710,604    (55,672,640)   41,630    (10,920,146)
                                                   
Issuance of common shares for services   -    -    -    -    -    -    -    -    2,000    2,000 
Issuance of common shares for services - related parties   -    -    671,805    1    -    -    6,832    -    (1,792)   5,041 
Issuance of common shares for finance cost   -    -    -    -    -    -    -    -    16,500    16,500 
Net income   -    -    -    -    -    -    -    257,664    -    257,664 
Balance - June 30, 2022   -    -    261,332,926    261    -    -    44,717,436    (55,414,976)   58,338    (10,638,941)
                                                   
Issuance of common shares for services   -    -    -    -    -    -    -    -    2,000    2,000 
Issuance of common shares for services - related parties   -    -    -    -    -    -    -    -    5,040    5,040 
Issuance of common shares for finance cost   -    -    -    -    -    -    -    -    28,350    28,350 
Net income   -    -    -    -    -    -    -    598,326    -    598,326 
Balance - September 30, 2022   -   $-    261,332,926   $261   $-   $-   $44,717,436   $(54,816,650)  $93,728   $(10,005,225)
                                                   
   Redeemable Convertible Preferred Stock Shares   Amount   Common Stock Shares   Amount   Preferred Stock Shares   Amount   Additional Paid-in Capital   Accumulated Deficit   Common Stock to be issued   Total 
Balance - December 31, 2020   -   $-    217,271,495    216    -   $-   $44,554,119   $(55,110,000)  $49,225   $(10,506,440)
Issuance of common shares for services   -    -    30,000    -    -    -    1,915    -    2,000    3,915 
Issuance of common shares for services - related parties   -    -    -    -    -    -    -    -    24,843    24,843 
Common stock issued upon conversion of notes payable and accrued interest   -    -    5,026,413    5    -    -    705,630    -    -    705,635 
Series C preferred stock issued for cash, net of costs and discounts   293,700    -    -    -    -    -    -    -    -    - 
Accrued dividends and accretion of conversion feature  on Series C  preferred stock   -    13,155    -    -    -    -    -    (13,155)   -    (13,155)
Deemed dividends related to conversion feature of Series C preferred stock   -    -    -    -    -    -    -    (992,671)   -    (992,671)
Net income   -    -    -    -    -    -    -    816,280    -    816,280 
Balance - March 31, 2021   293,700    13,155    222,327,908    221    -    -    45,261,664    (55,299,546)   76,068    (9,961,593)
                                                   
Issuance of common shares for services   -    -    1,137,826    1    -    -    15,999    -    (14,000)   2,000 
Issuance of common shares for services - related parties   -    -    1,967,714    2    -    -    30,974    -    29,835    60,811 
Accrued dividends and accretion of conversion feature  on Series C  preferred stock   -    43,934    -    -    -    -    -    (43,934)   -    (43,934)
Net income   -    -    -    -    -    -    -    670,240    -    670,240 
Balance - June 30, 2021   293,700    57,089    225,433,448    224    -    -    45,308,637    (54,673,240)   91,903    (9,272,476)
                                                   
Issuance of common shares for services   -    -    -    -    -    -    -    -    2,000    2,000 
Issuance of common shares for services - related parties   -    -    -    -    -    -    -    -    70,811    70,811 
Conversion of preferred shares into common shares   (179,850)   (57,642)   13,695,817    14    -    -    247,225    -    -    247,239 
Accrued dividends and accretion of conversion feature  on Series C  preferred stock   -    37,609    -    -    -    -    -    (34,053)   -    (34,053)
Net income   -    -    -    -    -    -    -    804,619    -    804,619 
Balance - September 30, 2021   113,850   $37,056    239,129,265   $238    -    -   $45,555,862   $(53,902,674)  $164,714   $(8,181,860)

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

3 

 

 

Diego Pellicer Worldwide, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine Months Ended   Nine Months Ended 
   September 30, 2022   September 30, 2021 
         
Cash flows from operating activities:          
Net income (loss)  $(2,678,668)  $2,291,139 
Adjustments to reconcile net income (loss) to net cash used in
operating activities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in fair value of derivative liability   1,634,642    (2,824,050)
Change in fair value of warrants   (134)   387 
Amortization of debt related costs   280,746    - 
Noncash finance cost   -    2,000 
Expense related to additional derivative liability   650,369    283,270 
Extinguishment of debt   (75,590)   (389,550)
Allowance for loss on notes receivable   82,781    - 
Stock-based compensation   24,264    164,380 
Forgiveness of debt   -    (56,908)
Changes in operating assets and liabilities:          
Accounts receivable   (53,963)   (50,868)
Prepaid expenses   -    11,275 
Other receivables   (44,550)   424,491 
Accounts payable   (5,237)   (30,186)
Accrued liability - related parties   17,400    (128,581)
Accrued expenses   249,828    164,730 
Lease liabilities   (5,023)   17,015 
           
Cash provided by (used in) operating activities   76,865    (121,456)
           
Cash flows from financing activities:          
Notes receivable   (120,000)   - 
Repayments of notes receivable   67,238    - 
Proceeds from convertible notes payable   620,000    - 
Repayments of convertible notes payable, net   (101,965)   (200,000)
Proceeds from sale of preferred stock, net   -    267,000 
           
Cash provided by financing activities   465,273    67,000 
           
Net increase (decrease) in cash   542,138    (54,456)
Cash, beginning of period   49,149    327,864 
Cash, end of period  $591,287   $273,408 
           
Cash paid for interest  $8,033   $70,000 
Cash paid for taxes  $-   $- 
           
           
Supplemental schedule of noncash financial activities:          
Notes converted to stock  $-   $100,000 
Conversion of Preferred Stock for Common Stock  $-   $187,044 
Derivative liability related to convertible notes and convertible Preferred C shares  $883,009   $1,259,672 
Accrued interest converted to stock  $-   $6,256 
Value of common stock issued for conversion of notes and accrued interest  $-   $705,635 
Value of common stock issued for conversion of Preferred Stock and dividends  $-   $247,239 
Value of derivative liability extinguished upon conversion and pay off of notes and accrued interest  $132,219   $963,539 
Value of derivative liability extinguished upon conversion of preferred stock and dividends  $-   $193,152 
Debt discount extinguished upon payment of notes  $56,630   $- 
Debt discount extinguished upon preferred stock conversion  $-   $129,403 
Debt discount attributable to convertible notes and preferred stock  $660,000   $267,000 
Accrued interest extinguished with note payment  $-   $25,390 
Accrued dividends and accretion of conversion feature on Series C preferred stock  $-   $94,697 
Deemed dividends related to conversion feature of Series C preferred stock  $-   $989,116 
Noncash increase in right of use asset  $-   $627,500 
Noncash decrease in right of use asset upon termination  $405,466   $- 
Noncash decrease in lease liability upon termination  $415,414   $- 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

4 

 

 

Diego Pellicer Worldwide, Inc. 

Notes to the Condensed Consolidated Financial Statements

September 30, 2022 and 2021

(Unaudited)

 

Note 1 – Organization and Operations

 

History

 

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

 

Business Operations

 

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

 

The properties generating rents in 2022 and 2021 are as follows:

 

Purpose   Size   City   State
Retail store (recreational and medical)   3,300 sq.   Denver   CO
Cultivation warehouse (terminated September 2022)   14,800 sq.   Denver   CO

 

The Company’s two properties in Denver, CO are leased to Royal Asset Management, LLC (“RAM”). RAM opened the Diego Denver branded flagship store in February 2017. This store is known as “Diego Colorado”. The retail facilities have shown steady growth in sales since opening. For the two properties subleased, RAM uses these properties for its cultivation facilities in Denver, CO. Production at these facilities began in late 2016. On July 27, 2021, the Company filed a lawsuit against Royal Asset Management, LLC (“RAM”) and Neil Demers (“Demers”) in the District Court, City and County of Denver, State of Colorado, alleging breach of contract on four subleases for which RAM has failed to make the required payments to the Company pursuant to the respective sublease agreements (see Note 4).

 

In August 2021, the master lease and sublease associated with the 14,800 sq. cultivation warehouse were extended through July 31, 2024 (see Note 9). On June 6, 2022, the Company, the lessor and the sublessee entered into termination agreements to terminate the master lease and the sublease for the cultivation warehouse property. The termination agreements were conditioned upon the closing of the sublessee’s sale of its assets at the location. The closing occurred in September 2022. Upon closing, the Company received $650,000 from the sublessee, in settlement of past deferred rents and receivables of $377,568 and $272,432 in future rents and fees.

 

Note 2 – Significant and Critical Accounting Policies and Practices

 

The management of the Company is responsible for the selection and use of appropriate accounting policies and for the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results of operations and that require management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below, as required by generally accepted accounting principles.

 

Basis of Presentation

 

The accompanying unaudited condensed 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 (U.S. GAAP).

 

The accompanying consolidated balance sheet at December 31, 2021 has been derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. The accompanying unaudited condensed consolidated financial statements as of September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021 have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related notes to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC. In the opinion of management, all material adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been made to the condensed consolidated financial statements. The condensed consolidated financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the condensed consolidated financial statements not misleading as required by Regulation S-X Rule 10-01. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or any future periods.

 

Principles of Consolidation

 

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

 

Use of Estimates

 

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing transactions and share based payment arrangements, the collectability of accounts receivable and other receivables (see Note 4), valuation of right of use assets and lease liabilities and deferred taxes and related valuation allowances.

 

5 

 

 

Certain estimates, including evaluating the collectability of accounts receivable and notes receivable, could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could influence our estimates and could cause actual results to differ from our estimates. The Company intends to re-evaluate all its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.

 

Accounts Receivable

 

Accounts receivable consist of rents receivable from the Company’s sublessee as disclosed in Note 4. Management periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. Accounts determined to be uncollectible are charged to operations when that determination is made. The Company usually does not require collateral. We have not recorded an allowance for doubtful accounts as of September 30, 2022 and December 31, 2021. 

 

Fair Value Measurements

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

Fair Value of Financial Instruments

 

As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2022 and December 31, 2021. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable, prepaid expenses, notes receivable, accounts payable and notes payable. Fair values were assumed to approximate carrying values for cash, receivables, notes receivable, payables and notes payable because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.

 

The following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands): 

 

                           
As of September 30, 2022  Fair Value Measurement Using     
   Level 1   Level 2   Level 3   Total 
Derivative liabilities  $   $   $5,432   $5,432 
Stock warrant liabilities                
 Total  $   $   $5,432   $5,432 

 

                           
As of December 31, 2021  Fair Value Measurement Using     
   Level 1   Level 2   Level 3   Total 
Derivative liabilities  $   $   $2,734   $2,734 
Stock warrant liabilities           1    1 
 Total  $   $   $2,735   $2,735 

  

Derivative liabilities and stock warrant liabilities were valued using the Binomial Option Pricing Model in calculating the embedded conversion features for the three and nine months ended September 30, 2022 and the year ended December 31, 2021.

 

Cash  

 

The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation, and the National Credit Union Share Insurance Fund, up to $250,000. The Company’s accounts at these institutions may, at times, exceed the federal insured limits. The Company has not experienced any losses in such accounts. There were no uninsured balances at September 30, 2022 and December 31, 2021.

 

6 

 

 

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 has been recognizing rents as they become payable.

 

During the initial term of the lease, management has a policy of partial rent forbearance when the tenant first opens the facility to assure that the tenant has the opportunity for success. Management may be required to exercise considerable judgment in estimating revenue to be recognized.

 

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

 

The Company analyzes its contracts to assess that they are within the scope and in accordance with ASC 606. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, whether for goods and services or licensing, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

 

Leases

 

We have elected the practical expedient provided by ASC 842 that allows lessees to choose to not separate lease and non-lease components by class of underlying asset and are applying this expedient to all relevant asset classes. We have also elected the practical expedient package to not reassess at adoption (i) expired or existing contracts for whether they are or contain a lease, (ii) the lease classification of any existing leases or (iii) initial indirect costs for existing leases.

 

Advertising

 

Advertising expense was $6,453 and $8,870 for the three months ended September 30, 2022 and 2021, respectively, and was $19,389 and $26,679 for the nine months ended September 30, 2022 and 2021, respectively.

 

Income Taxes

 

Income taxes are provided for using the liability method of accounting in accordance with the Income Taxes Topic of the FASB ASC. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized and when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The computation of limitations relating to the amount of such tax assets, and the determination of appropriate valuation allowances relating to the realizing of such assets, are inherently complex and require the exercise of judgment. As additional information becomes available, the Company continually assesses the carrying value of their net deferred tax assets.

 

Common Stock Purchase Warrants and Other Derivative Financial Instruments

 

The Company classifies as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC Topic 815-40 “Contracts in Entity’s Own Equity.” The Company classifies as assets or liabilities any contracts that require net-cash settlement including a requirement to net cash settle the contract if an event occurs and if that event is outside our control or give the counterparty a choice of net-cash settlement or settlement in shares. The Company assesses classification of its common stock purchase warrants and other free-standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.

 

Stock-Based Compensation

 

The Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. The Company calculates the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for common shares; the expense is recognized over the service period for awards expected to vest. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.

 

Income (loss) per common share

 

The Company utilizes ASC 260, “Earnings per Share” for calculating the basic and diluted loss per share. In accordance with ASC 260, the basic and diluted loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per share is computed similar to basic loss per share except that the denominator is adjusted for the potential dilution that could occur if stock options, warrants, and other convertible securities were exercised or converted into common stock. Potentially dilutive securities are not included in the calculation of the diluted loss per share if their effect would be anti-dilutive. The Company has 1,696,579,187 and 548,408,152 common stock equivalents at September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share. There are 840,000,000 shares authorized resulting in 1,117,912,113 insufficient shares as of September 30, 2022. Substantially all of these excess shares are included in the derivative liability calculations for convertible notes payable and warrants and are therefore accounted for at fair value.

 

7 

 

 

Legal and regulatory environment

 

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

 

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

 

Recent accounting pronouncements.     

 

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

 

 

Note 3 – Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses since inception, its current liabilities exceed its current assets by $10,831,194 at September 30, 2022, and it has an accumulated deficit of $54,816,650 at September 30, 2022. These factors raise substantial doubt about its ability to continue as a going concern over the next twelve months. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

The Company believes that it has sufficient cash on hand and cash generated by real estate leases to sustain operations provided that management and board members continue to agree to be paid company stock in exchange for accrued compensation. There are other future noncash charges in connection with financings such as a change in derivative liability that will affect income but have no effect on cash flow.

 

Although the Company has been successful raising additional capital, there is no assurance that the company will sell additional shares of stock or borrow additional funds. The Company’s inability to raise additional cash could have a material adverse effect on its financial position, results of operations, and its ability to continue in existence. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management believes that the Company’s future success is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional financing. There is no assurance that the Company will be able to generate sufficient cash from operations, sell additional shares of stock or borrow additional funds. However, cash generated from lease revenues is currently exceeding lease costs, but is insufficient to cover operating expenses.

 

Note 4 – Accounts Receivables and Other Receivables

 

As disclosed in Note 1, the Company subleases one property in Colorado to Royal Asset Management at September 30, 2022. One sublease was terminated in September, 2022. At September 30, 2022 and December 31, 2021, the Company had outstanding receivables from the subleases totaling $652,630 and $598,667, respectively, and during the three and nine months ended September 30, 2022 and 2021 the Company’s subleases with RAM accounted for 100% of the Company’s revenues.

 

In addition to the receivables from the subleases, the Company has agreed to provide RAM and affiliates of RAM up to an aggregate amount of $1,030,000 in financing. These notes accrue interest at the rates ranging from 12% to 18% per annum. As of September 30, 2022 and December 31, 2021, the outstanding balance of these notes receivable total $665,331 and $620,781, respectively, including accrued interest of $335,331 and $290,781, respectively. A note of $400,000 was personally guaranteed by the managing member of RAM. Our position was subordinate to the CEO’s note described in Note 5. We have recorded interest income of $14,850 and $14,850 during the three months ended September 30, 2022 and 2021, respectively. We have recorded interest income of $44,550 and $69,279 during the nine months ended September 30, 2022 and 2021, respectively. In April 2021, we received a payment of $400,000 of note principal and $93,770 of related accrued interest.

 

On September 9, 2020, we closed on a Membership Interest Purchase Agreement dated September 4, 2020, and obtained the right to acquire a 15.13% membership interest in Blue Bronco, LLC. The purchase of the 15.13% interest in Blue Bronco LLC is subject to the approval of the Colorado Marijuana Enforcement Division. Necessary approval by governing authorities is expected to be received in the fourth quarter of 2022 or first quarter of 2023, pending the resolution of a lawsuit between the RAM and other parties related to the transaction. Accrued interest receivable of approximately $68,000 will be applied to the purchase of the membership interest upon approval of the purchase by the Colorado Marijuana Enforcement Division.

 

Lease Termination September 2022

 

On June 6, 2022, the Company, the lessor and the sublessee entered into termination agreements to terminate the master lease and the sublease for the 14,800 square foot cultivation warehouse property. The termination agreements were conditioned upon the closing of the sublessee’s sale of its assets at the location. The closing occurred in September 2022. Upon closing, the Company received $650,000 from the sublessee, in settlement of past deferred rents and receivables of $377,568 and $272,432 in future rents and fees, pursuant to the Sublease Termination Agreement with RAM.

 

Lease Termination October 2020

 

On October 1, 2020, the master and sublease associated with the 18,600 sq. cultivation warehouse in Denver were terminated. In connection with that termination, we entered into a Sublease Termination Agreement (“Termination Agreement”) with RAM and an affiliate of RAM Venture Product Consulting, LLC (“VPC”). Pursuant to this agreement, RAM acknowledged a debt of deferred rent to the Company in the amount of $1,418,480 and VPC acknowledged a debt of deferred rent to the Company in the amount of $64,344. RAM and VPC executed promissory notes for these amounts, respectively. The notes accrue interest on the unpaid balance at a rate equal to the Applicable Federal Rate for mid-term obligations as published by the Internal Revenue Service. No payment under the promissory notes will be due to the Company until the earlier of (i) the date on which RAM and the Company consummate a change of control event, which is defined as: the acquisition of RAM by the Company or an affiliated entity by means of any transaction or series of related transactions to which RAM is a party (including, without limitation, any membership interest acquisition, reorganization, merger or consolidation, (generally, a “Merger”), or, (ii) the date one (1) business day following the earlier of (x) at any time, receipt by the Company from RAM or VPC of a written notice stating such party no longer desires to pursue the Merger, or (y) beginning eighteen (18) months after the date of this Agreement, receipt by RAM or VPC from the Company of a written notice stating that the Company no longer desires to pursue the Merger (the “Maturity Date”).

 

8 

 

 

We have recorded the promissory notes as long term notes receivable of $1,482,824 at June 30, 2022 and December 31, 2021. Due to the uncertainty of the collectability, we have also recorded a long term deferred credit in the same amount. We will record income under the deferred rent notes as payments are received or deemed collectible. This asset and related credit have been netted on the accompanying condensed consolidated balance sheet.

 

Additionally, in connection with the termination of the sublease, RAM will continue to pay the remaining future sublease premium payments due to the company on the Denver sublease (the “Future Rent Debt”) beginning on the termination date, and until the earlier of the Maturity Date or June 30, 2024, notwithstanding the termination of the Subleases. However, no payment under the Future Rent Debt agreement will be due to the Company until the Maturity Date, at which time the entire Future Rent Debt shall be due and payable in full, except for any month in which RAM earns $725,000 of gross sales revenue, including taxes, at its Alameda location, in which case RAM shall pay the Future Rent Debt for the following month to the Company on or before the 5th day of the following month, and such amount will not accrue as a Future Rent Debt. RAM shall continue to accrue debt to the company, assessed on the first day of each month, according to the schedule below:

 

Monthly Payments Accrued    
October 1, 2020 to June 30, 2021  $11,284 
July 1, 2021 to June 30, 2022   11,622 
July 1, 2022 to June 30, 2023   11,971 
July 1, 2023 to June 30, 2024   12,330 

 

We will record income pursuant to the Future Rent Debt as payments are received based on the Company’s analysis of collectability including, but not limited to, the potential application toward the purchase price. We have recorded $35,913 and $33,851 as Lease Termination Payments in the Statement of Operations for the three months ended September 30, 2022 and 2021, respectively, and $105,645 and $101,554 as Lease Termination Payments for the nine months ended September 30, 2022 and 2021, respectively.

 

Notes Receivable

 

During 2022 and 2021, the Company entered into four promissory notes with an unrelated party, aggregating $244,000 (see Note 9). The notes all mature 11 months after issuance and have an effective interest rate of 8.33%. Payments of principal and interest are due monthly, beginning 30 days after the date of issuance. Principal repayments of $67,238 were received during the nine months ended September 30, 2022. Payments on the notes are in arrears at September 30, 2022, and we have recorded an allowance for uncollectable notes receivables of $82,781 at September 30, 2022.

 

Note 5 – Related Party Transactions

 

As of September 30, 2022 and December 31, 2021, the Company has accrued compensation to its CEO and director and to its CFO aggregating $325,689 and $263,289, respectively. As of September 30, 2022 and December 31, 2021, accrued payable due to former officers was $901,986 and $946,986, respectively. For each of the nine months ended September 30, 2022 and 2021, total cash-based compensation to related parties was $270,000. For the three months ended September 30, 2022 and 2021, total share-based compensation to related parties was $5,040 and $70,811, respectively. For the nine months ended September 30, 2022 and 2021, total share-based compensation to related parties was $18,264 and $156,465, 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 accrued interest at 17% - 18% per annum, and required monthly payments of approximately $5,000 to $20,000. These notes were personally guaranteed by the managing member of Royal Asset Management, and were secured by certain equipment and other tangible properties of Royal Asset Management. Among these notes, $500,000 was also secured by the medical marijuana licenses held by Royal Asset Management. As of October 20, 2021 these notes were fully paid by Royal Asset Management and the security was released.

 

At September 30, 2022 and December 31, 2021, the Company owed Mr. Throgmartin, former CEO (See Note 9), $140,958 pursuant to a promissory note dated August 12, 2016. This note accrues interest at the rate of 8% per annum and was past the maturity date, however the Company has not yet received a default notice. The balance of related party note was $140,958 at September 30, 2022 and December 31, 2021 and accrued interest on the note was $69,112 and $60,677 at September 30, 2022 and December 31, 2021, respectively.

 

The Company leases its office space from an entity controlled by its CEO. The lease may be terminated by either party with 30 days’ notice. Rent expense pursuant to the lease was $4,500 for each of the three month periods ended September 30, 2022 and 2021 and was $13,500 for each of the nine month periods ended September 30, 2022 and 2021. 

 

Note 6 – Notes Payable

 

On August 31, 2015, the Company issued a note in the amount of $126,000 to a third party for use as operating capital. The note was amended to include accrued interest on October 31, 2016 and extend the maturity date to October 31, 2018. As of September 30, 2022 and December 31, 2021, the outstanding principal balance of the note was $133,403, and accrued interest on the note was $81,760 and $76,772 at September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022 the note was past the maturity date, however the Company has not yet received a default notice.

 

On April 22, 2020, the Company was granted a loan from Numerica Credit Union, in the aggregate amount of $56,444, pursuant to the Paycheck Protection Program, (the “PPP”) under Division A, Title I of the CARES Act. The loan, which was in the form of a note dated April 22, 2020 issued by the Borrower, was scheduled to mature on April 22, 2022 and bore interest at a rate of 1.0% per annum, payable monthly commencing October 22, 2020. No payments made towards this loan, as the full amount of the loan and accrued interest was forgiven in full during February 2021 and the Company recorded income of $56,908.

 

On June 30, 2020, the Company was granted a loan from the Small Business Association, in the aggregate amount of $150,000, pursuant to the Economic Injury Disaster Loan, (the “EIDL”) under Division A, Title I of the CARES Act. The loan, which is in the form of a note dated June 30, 2020 issued by the Borrower, matures on June 30, 2050 and bears interest at a rate of 3.75% per annum, payable monthly commencing July 1, 2023.

 

9 

 

 

Note 7 – Convertible Notes Payable

 

The Company has issued several convertible notes which are outstanding. The note holders have the right to convert principal and accrued interest outstanding into shares of common stock at a discounted price to the market price of our common stock. The conversion features were recognized as embedded derivatives and are valued using a Binomial Option Pricing Model that resulted in a derivative liability of $5,432,165 and $2,733,803 at September 30, 2022 and December 31, 2021, respectively. The notes accrue interest at 8% - 10% and the majority of the notes had matured at September 30, 2022.

 

Several convertible note holders elected to convert their notes to stock during the nine months ended September 30, 2021. The tables below provide the note payable activity for the nine months ended September 30, 2022 and 2021, and also a reconciliation of the beginning and ending balances for the derivative liabilities measured using fair significant unobservable inputs (Level 3) for the nine months ended September 30, 2022 and 2021:

 

   Convertible
Notes
   Discount   Convertible
Notes, Net of
Discount
   Derivative
Liabilities
 
Balance, December 31, 2021  $2,941,274   $   $2,941,274   $2,733,803 
Issuance of convertible notes   660,000    660,000        1,195,939 
Conversion of convertible notes                
Repayment of convertible notes   (101,965)   (56,629)   (45,336)   (132,219)
Change in fair value of derivatives               1,634,642 
Amortization       (280,746)   280,746     
Balance September 30, 2022  $3,499,309   $322,625   $3,176,684   $5,432,165 

 

   Convertible
Notes
   Discount   Convertible
Notes, Net of
Discount
   Derivative
Liabilities
 
Balance, December 31, 2020  $3,239,274   $   $3,239,274   $5,997,865 
Issuance of convertible notes   2,000        2,000    266,166 
Conversion of convertible notes   (100,000)       (100,000)   (661,087)
Repayment of convertible notes   (200,000)       (200,000)   (302,452)
Change in fair value of derivatives               (1,877,592)
Amortization                
Balance September 30, 2021  $2,941,274   $   $2,941,274   $3,422,900 

 

During the nine months ended September 30, 2022, the Company entered into four convertible promissory notes with an investor in the aggregate amount of $660,000, and received aggregate proceeds of $620,000, after deducting OID and costs. The notes mature one year from issue and bear interest at 8% per year. Upon a default, the holder shall have the right from time to time, and at any time following an event of default, and ending on the date of payment of the default amount (as defined), to convert all or any part of the outstanding and unpaid principal, interest, penalties, and all other amounts under the notes into fully paid and non-assessable shares of common stock at a conversion price equal to 65% of the three lowest trading prices of the Company common stock for the 15 trading days immediately preceding the delivery of a notice of conversion resulting from such default, for two of the notes, and at 65% of the lowest price for the preceding 15 days for the two other notes. The Company issued a total of 3,400,000 shares of common stock, valued at $29,580, to the investor in connection with the issuance of two of the notes, and the Company is to issue 7,000,000 shares of common stock, valued at $44,850, for the third and fourth notes (these shares have not been issued and are recorded as shares to be issued at September 30, 2022) . The Company recorded a derivative liability associated with the notes of $883,010, valued using a Binomial Option Pricing Model, of which $545,570 was recorded as debt discount and $337,440 was charged to expense. We have recorded a total debt discount of $660,000 related to the notes, which will be amortized over the one year term of each note. During the three and nine months ended September 30, 2022, we amortized $131,654 and $280,746, respectively, of debt discount to interest expense.

 

As of September 30, 2022, convertible notes in the aggregate principal amount of $2,941,274 were past their maturity dates; however, the Company has not yet received any default notices. No default or penalty was paid or required to be paid.

 

During the nine months ended September 30, 2022, we repaid an aggregate of $101,965 of note principal and $8,033 of accrued interest. A gain on extinguishment of debt of $75,590 and reduction of derivative liabilities of $132,219 and reduction of discount of $56,629 have been recorded related to these payments.

 

During the nine months ended September 30, 2021, $100,000 of notes were converted into 4,444,444 shares of common stock with a value of $697,779. A gain on extinguishment of debt of $59,999 and reduction of derivative liabilities of $657,778 have been recorded related to these conversions.

 

During the nine months ended September 30, 2021, $6,256 of accrued interest was converted into 581,969 shares of common stock with a value of $7,856. A gain on extinguishment of debt of $1,709 and reduction of derivative liabilities of $3,309 have been recorded related to these conversions.

 

During the nine months ended September 30, 2021, we repaid an aggregate of $200,000 of note principal. A gain on extinguishment of debt of $177,116 and reduction of derivative liabilities of $177,116 have been recorded related to these payments.

 

During the nine months ended September 30, 2021, we paid an aggregate of $70,000 in settlement of accrued interest in the amount of $95,390. A gain on extinguishment of debt of $150,726 and reduction of derivative liabilities of $125,336 have been recorded related to these payments. 

 

During the nine months ended September 30, 2021, we recorded noncash additions to convertible notes aggregating $2,000.

 

The following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current liabilities for the nine months ended September 30, 2022 and 2021:

 

   September 30,
2022
   September 30,
2021
 
Risk-free interest rates   0.524.05 %   0.020.09
Expected life (years)   0.251.0     0.25  
Expected dividends   0 %   0 %
Expected volatility   123 - 196 %   133 - 544

 

 

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Note 8 – Stockholders’ Equity (Deficit)

 

Series C Preferred Stock

 

On February 24, 2021, the Company sold 179,850 of its Series C Convertible Preferred Shares, with an annual accruing dividend of 8%, to Geneva Roth Remark Holdings, Inc. (“Geneva”), for $163,500 pursuant to a Series C Preferred Purchase Agreement with Geneva. The Company may redeem the Series C Shares at various increased prices at time intervals up to the 6-month anniversary of the closing and must redeem any outstanding shares on the 24-month anniversary. Geneva may convert the Series C Shares into our common shares, commencing on the 6-month anniversary of the closing at a 25% discount to the public market price. The Company recorded a derivative liability associated with Series C Preferred Shares of $1,208,971, valued using a Binomial Option Pricing Model. On March 16, 2021, the Company sold an additional 113,850 shares for $103,500 and recorded a derivative of $165,142. The Series C Preferred Stock is classified as temporary equity due to the fact that the shares are redeemable at the option of the holder. The holder converted the entire amount of $293,700 of the February and March preferred shares plus accrued dividends of $11,748 into 26,159,396 shares of common stock during the year ended December 31, 2021. As of June 30, 2022 and December 31, 2021, there were no shares of Series C Convertible Preferred Stock outstanding.

 

The table below provides the preferred stock activity for the nine months ended September 30, 2021 (there was no preferred stock activity during the nine months ended September 30, 2022), and also a reconciliation of the beginning and ending balances for the derivative liabilities measured using Level 3 fair value inputs for the nine months ended September 30, 2021.

 

   Preferred
Stock and
Accrued
Dividends
   Discount   Preferred
Stock and
Accrued
Dividends,
Net of
Discount
   Derivative
Liabilities
 
Balance , December 31, 2020  $             
Issuance of Series C Preferred shares   293,700    293,700        1,259,672 
Conversion of Series C Preferred shares   (187,044)   (129,402)   (57,642)   (193,152)
Accretion of discount       (81,328)   81,328     
Accretion of dividend on Series C preferred stock   13,370        13,370    17,104 
Change in fair value of derivatives               (946,458)
Balance September 30, 2021  $120,026   $82,970   $37,056   $137,166 

 

The following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current liabilities for the nine months ended September 30, 2021:  

 

    2021  
Risk-free interest rates     0.120.25 %
Expected life (years)     1.4 2.0  
Expected dividends     0 %
Expected volatility     185 - 196 %

 

Common Stock

 

2022 Transactions

 

During the nine months ended September 30, 2022, we issued 3,400,000 shares of common stock, valued at $29,580, in connection with the issuance of convertible notes payable. 

 

During the nine months ended September 30, 2022, 463,637 shares of common stock, valued at $18,264, were accrued for related party service, and 671,805 shares of common stock, valued at $6,833, were issued. At September 30, 2022 and December 31, 2021, shares to be issued for related party services were 386,364 and 594,532, respectively, and the value of shares to be issued at September 30, 2022 and December 31, 2021 was $15,017 and $3,586, respectively.

 

During the nine ended September 30, 2022, 826,990 shares of common stock, valued at $6,000, were accrued for services. At September 30, 2022 and December 31, 2021, shares to be issued for services were 1,322,106 and 495,116, respectively, and the value of shares to be issued at September 30, 2022 and December 31, 2021 was $12,000 and $6,000, respectively.

 

During the nine ended September 30, 2022, 7,000,000 shares of common stock, valued at $44,850, were accrued for financing cost. At September 30, 2022 and December 31, 2021, shares to be issued for financing cost were 7,000,000 and 0, respectively, and the value of shares to be issued at September 30, 2022 and December 31, 2021 was $44,850 and $0, respectively.

 

At September 30, 2022 and December 31, 2021, shares to be issued for debt conversions were 31,960, and the value of shares to be issued was $21,861.

 

2021 Transactions

 

During the nine months ended September 30, 2021, $100,000 of notes and $6,256 of accrued interest and fees were converted into 5,026,413 shares of common stock with a value of $705,635

 

11 

 

 

During the nine months ended September 30, 2021, 4,799,258 shares of common stock, valued at $156,465, were accrued for related party services, and 1,967,714 shares of common stock, valued at $30,976, were issued. At September 30, 2021 and December 31, 2020, shares to be issued for related party services were 4,563,231 and 1,731,687, respectively, and the value of shares to be issued at September 30, 2021 and December 31, 2020 was $138,853 and $13,364, respectively.

 

During the nine months ended September 30, 2021, 241,098 shares of common stock, valued at $6,000, were accrued for services, and 1,137,553 shares of common stock, valued at $16,000, were issued. At September 30, 2021 and December 31, 2020, shares to be issued for services were 209,402 and 1,105,857, respectively, and the value of shares to be issued at September 30, 2021 and December 31, 2020 was $4,000 and $14,000, respectively.

 

At September 30, 2021 and December 31, 2020, shares to be issued for debt conversions were 31,960, and the value of shares to be issued was $21,861.

 

During the nine months ended September 30, 2021, 13,695,817 shares of common stock were issued as a result of the conversion of 179,850 shares of Series C Preferred stock and $7,194 of related accrued dividends.

 

During the nine months ended September 30, 2021, we issued 30,000 shares of common stock, valued at $1,915, for consulting services.

 

Common stock warrant activity:

 

The Company has determined that certain of its warrants are subject to derivative accounting. The table below provides a reconciliation of the beginning and ending balances for the warrant liabilities measured using fair significant unobservable inputs (Level 3) for the nine months ended September 30, 2022 and 2021: 

 

               
   Nine Months ended September 30, 
   2022   2021 
Balance at beginning of period  $438   $476 
Additions to derivative instruments        
Loss (gain) on change in fair value of derivative liability   (134)   387 
Balance at end of period  $304   $863 

 

The following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current liabilities for the nine months ended September 30, 2022 and 2021:

    September 30, 2022     September 30, 2021  
Annual dividend yield     0 %     0 %
Expected life (years)     0.255.13       1.255.88  
Risk-free interest rate     1.354.06 %     0.091.16 %
Expected volatility     122217 %     189243 %

   

 

Note 9 – 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.

 

In August 2021, the master lease and sublease associated with the 14,800 sq. cultivation warehouse were extended through July 31, 2024. Monthly base rent payments range from $20,000 to $21,118. Monthly sublease base rent payments range from $26,300 to $28,622. On June 6, 2022, the Company, the lessor and the sublessee entered into termination agreements to terminate the master lease and the sublease for the cultivation warehouse property. The termination agreements were conditioned upon the closing of the sublessee’s sale of its assets at the location. The closing occurred in September 2022. Upon closing, the Company received $650,000 from the sublessee, in settlement of past deferred rents and receivables of $377,568 and $272,432 in future rents and fees.

 

The Company records the lease asset and lease liability at the present value of lease payments over the lease term. The leases typically do not provide an implicit rate; therefore, the Company uses its estimated incremental borrowing rate at the time of lease commencement to discount the present value of lease payments. The Company’s discount rate for operating leases at September 30, 2022 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 has been recognizing rents as they become payable. Our remaining lease term is 2.42 years.

 

As of September 30, 2022, the maturities of operating leases liabilities are as follows (in thousands):

 

   Operating Leases 
2022 (Three months)  $68 
2023   270 
2024   270 
2025   45 
Total   653 
Less: amount representing interest   (83)
Present value of future minimum lease payments   570 
Less: current obligations under leases   216 
Long-term lease obligations  $354 

 

12 

 

 

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

 

               
   Nine Months ended September 30, 
   2022   2021 
Operating lease costs  $289,356   $330,000 
Variable rent costs   155,799    145,521 
 Total rent expense  $445,155   $475,521 

 

As of September 30, 2022, the aggregate remaining minimal annual lease payments under these operating leases plus NNN were as follows: (in thousands):  

 Schedule of the aggregate remaining minimal annual lease payments under these operating leases

       
2022 (Three months)   $ 52  
2023     222  
2024     251  
2025     45  
Total   $ 570  

 

Other information related to leases is as follows:  

 

    Nine Months ended
September 30,
2022
    Nine Months ended
September 30,
2021
 
Other information:                
Cash paid for amounts included in the measurement of lease liabilities:                
Operating cash flows from operating leases   $ 284,432     $ 309,931  
Weighted-average remaining lease term - operating leases     2.42 yr     3.1 yr
Weighted-average discount rate - operating leases     12 %     12 %

 

Right of use assets and lease liabilities terminated:

 

           
    Nine Months ended September 30,  
    2022     2021  
Operating lease asset   $ 405,466     $  
Lease liability   $ 415,414     $  

 

Right of use assets obtained in exchange for lease liabilities:

 

           
    Nine Months ended September 30,  
    2022     2021  
Operating lease asset   $     $ 627,500  
Lease liability   $     $ 625,129  

 

The Company recognized sublease income of $188,084 and $198,505 during the three months ended September 30, 2022 and 2021, respectively. The Company recognized sublease income of $561,096 and $582,010 during the nine months ended September 30, 2022 and 2021, respectively.

 

The remaining lease has a 2.4 year term with optional extensions, expiration date of February 2025, and monthly base rent of approximately $22,500 plus variable NNN.

 

As of September 30, 2022, the maturities of expected base sublease income are as follows (in thousands): 

 

   Operating Leases 
2022 (Three months)  $89 
2023   355 
2024   355 
2025   59 
Total  $858 

 

Legal Proceedings

 

On May 10, 2021, a lawsuit was filed against the Company, along with other defendants, by plaintiff Erin Turoff in the District Court, City and County of Denver, State of Colorado. The specific allegations against the Company include civil theft and civil conspiracy and the plaintiff is seeking actual and compensatory damages. No specific monetary amount was demanded in the lawsuit. On July 8, 2021, the Company filed an answer to the complaint, denying the allegations. The proceedings are ongoing and the Company believes that the suit is without merit and that it will ultimately prevail in any litigation.

 

13 

 

 

On July 27, 2021, the Company filed a lawsuit against Royal Asset Management, LLC (“RAM”) and Neil Demers (“Demers”) in the District Court, City and County of Denver, State of Colorado, alleging breach of contract on subleases for which RAM has failed to make the required payments to the Company pursuant to the respective sublease agreements. The alleged damages under the sublease terms and other ancillary agreements amount to $1,480,881, $377,568, $1,027,635, and $1,418,480, respectively. In addition, the lawsuit alleges that RAM failed to make payments pursuant to a promissory note (the “Note”) in which the Company and RAM entered into on April 3, 2018. The Note was for the principal amount of $330,000 with interest at 18% per annum. The Note had a maturity date of April 2, 2019. The lawsuit seeks payment from RAM and Demers for the total balance due on the Note of $330,000 plus the interest due therein. On October 8, 2021, RAM and Demers filed a joint answer to the lawsuit.

 

On June 6, 2022, the Company, the lessor and RAM entered into termination agreements to terminate the master lease and the sublease for the cultivation warehouse property. The termination agreements were conditioned upon the closing of the sublessee’s sale of its assets at the location. The closing occurred in September 2022. Upon closing, the Company received $650,000 from RAM, in settlement of the past $377,568 in deferred rents and receivables on the claim listed above and $272,432 in future rents and fees.

 

On August 15, 2022 the Company filed with the court an expert report to include damages in the amount of $3,086,416 caused by the finance costs related to the breach of contracts by RAM and financing activities. The trial date has been set for November 28, 2022

 

Equity Purchase Agreement

 

On February 8, 2022, the Company entered into an Equity Purchase Agreement (the “Purchase Agreement”), with Hemp Choice Distribution, LLC, a Colorado limited liability company (“HCD”), its owners (the “Sellers”), and Gabriela Vergara (the “Sellers’ Representative”), pursuant to which Purchaser has agreed to acquire all of the issued and outstanding equity interests of HCD (“Membership Interests”). On April 22, 2022, the Company sent a termination notice of the Purchase Agreement to HCD, the Sellers and the Sellers' Representative pursuant to the terms of the Purchase Agreement. The Company has made loans to HCD in the aggregate original amount of $244,000, as described in Note 4. The balance due to the Company on the loans is $165,561 at September 30, 2022. Payments on the notes are in arrears at September 30, 2022, and we have recorded an allowance for uncollectable notes receivables of $82,781 at September 30, 2022.

 

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 2022. 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 2022.

 

Employment Agreements

 

As a condition of their employment, the Board of Directors approved employment agreements with three key executives. These agreements provided that additional shares will be granted each year over the term of the agreements should their shares as a percentage of the total shares outstanding fall below prescribed ownership percentages. Nello Gonfiantini III, who became the Company’s CEO in October 2019 receives an annual grant of additional shares each year to maintain his ownership percentage at 10% of the outstanding stock. The Company’s CFO received a similar grant each to maintain his ownership percentage at 2% of the outstanding stock. During the nine months ended September 30, 2022, the Company accrued compensation expense of approximately $18,000 on 463,637 shares of common stock under these agreements. During the nine months ended September 30, 2021, the Company accrued compensation expense of approximately $156,000 on 4,799,258 shares of common stock.  As of September 30, 2022 and December 31, 2021, the ending balance of accrued compensation was $15,017 and $3,586, respectively. The number of shares accrued to be issued was 386,364 at September 30, 2022.

 

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. During the nine months ended September 30, 2022 and 2021, $0 and $35,872, respectively, was paid under this agreement. As of September 30, 2022 and December 31, 2021, the outstanding balance was $126,389, and is included in Accrued payable – related party in the accompanying condensed consolidated balance sheet.

 

On October 29, 2019, the Company accepted the resignation of Ron Throgmartin from his positions as CEO, President and Director. Mr. Throgmartin signed a 5-year term Separation Agreement which, among other matters, terminated his Employment Agreement, as amended. On the date of the Separation Agreement, the Company acknowledged it owed Mr. Throgmartin the amount of $517,252 in principal and accrued interest of note payable, salary and fees, accrued during the 5 years of his employment. In addition, the Corporation further acknowledged that it will pay Mr. Throgmartin fifty (50%) percent of his compensation due under the remaining Employment Agreement, or $614,583 under certain conditions, which the Company accrued in full as the date of Mr. Throgmartin’s separation. This agreement provides that the 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. The Company shall have the right to require Mr. Throgmartin to provide consulting services to the Company for a per diem fee of $500. During the nine months ended September 30, 2022 and 2021, $45,000 and $45,000, respectively, was paid under this agreement. As of September 30, 2022 and December 31, 2021, the outstanding balance was $775,597 and $820,597, respectively, and is included in Accrued payable – related party in the accompanying condensed consolidated balance sheet.

 

 

Note 10 – 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.

 

14 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS

 

Special Note Regarding Forward-Looking Information

 

The following discussion and analysis of the results of operations and financial condition of Diego Pellicer Worldwide, Inc. should be read in conjunction with the financial statements of Diego Pellicer Worldwide, Inc. and the notes to those financial statements that are included elsewhere in this Form 10-Q. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer to the Company. This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based.

 

Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. Except as required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

 

U.S. Dollars are denoted herein by “USD,” “$” and “dollars”.

 

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 COVID-19 pandemic is a highly fluid situation and it is not currently possible for us to reasonably estimate the impact it may have on our financial and operating results. We will continue to evaluate the impact of the COVID-19 pandemic on our business as we learn more and the impact of COVID-19 on our industry becomes clearer. We are complying health guidelines regarding safety procedures, including, but are not limited to, social distancing, remote working, and teleconferencing. The extent of the future impact of the COVID-19 pandemic on our business is uncertain and difficult to predict. Adverse global economic and market conditions as a result of COVID-19 could also adversely affect our business. If the pandemic continues to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be adversely impacted. 

 

Overview of the Market

 

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. The cannabis market has a multi-billion dollar potential. The industry is still in a development stage, and is being rapidly 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.

 

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 respective 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, a wholly owned subsidiary, will license the upscale Diego Pellicer (“DP”) brand to qualified operators and receive royalty payments, while providing expertise in retail, product and manufacturing from Diego’s management team.

 

Recent Developments

 

During the fiscal quarter, the Company continued its focus on seeking complimentary acquisitions that are additive to the Company’s overall strategic plan.

 

On June 6, 2022, the Company, the lessor, and the sublessee entered into termination agreements to terminate the master lease and the sublease for our 14,800 square foot cultivation warehouse property. The termination agreements were conditioned upon the closing of the sublessee’s sale of its assets at the location. The closing occurred in September 2022. Upon closing, the Company received $650,000 from the sublessee, in settlement of past deferred rents and receivables of $377,568 and $272,432 in future rents and fees.

 

15 

 

 

RESULTS OF OPERATIONS

 

Three months ended September 30, 2022 compared to three months ended September 30, 2021

 

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

 

   Three Months
Ended
   Three Months
Ended
   Increase (Decrease) 
   September 30,
2022
   September 30,
2021
   $   % 
Revenues                    
Net rental revenue  $188,084   $198,505   $(10,421)   -5%
Rental expense   (148,364)   (157,466)   (9,102)   -6%
Gross profit   39,720    41,039    (1,319)   -3%
General and administrative expenses   228,481    221,289    7,192    3%
Selling expense   6,453    8,870    (2,417)   -27%
Loss from operations  $(195,214)  $(189,120)  $(6,094)   -3%

 

Revenues. For the three months ended September 30, 2022 and 2021, the Company leased two facilities to a licensee in Colorado. Total revenue for the three months ended September 30, 2022 was $188,506, as compared to $198,505 for the three months ended September 30, 2021, a decrease of $10,421, primarily due to a lease extension in the third quarter of 2021. During September of 2022, one of our two leases was terminated. As a result, future rental revenue will decrease by approximately 50%.

 

Gross profit. Rental revenue and rental expense for the period ended September 30, 2022 decreased over the prior three months ended September 30, 20201 resulting in a gross profit of $39,720, a decrease of $1,319 from a gross profit of $41,039 for the three months ended September 30, 2021, resulting from a lease extension in the third quarter of 2021 which reduced both sublease income and rental expense. During September of 2022, one of our two leases was terminated. As a result, future rental revenue and expense will decrease by approximately 50%.

 

General and administrative expense. Our general and administrative expenses for the three months ended September 30, 2022 were $228,481, compared to $221,289 for the three months ended September 30, 2021. The increase of $7,192 was largely attributable to increases in professional fees, travel, and public company expense, partially offset by a decrease in executive stock compensation expense during the three months ended September 30, 2022.

 

Selling expense. Our selling expenses for the three months ended September 30, 2022 were $6,453, compared to $8,870 for the three months ended September 30, 2021. The decrease of $2,417 was due to reduced brand development costs.

 

   Three Months
Ended
   Three Months
Ended
   Increase (Decrease) 
   September 30,
2022
   September 30,
2021
   $   % 
Other income (expense)                    
Interest income  $14,856   $14,931   $(75)   -1%
Interest expense   (376,845)   (150,487)   (226,358)   -150%
Lease termination payments   35,913    33,851    2,062    6%
Gain on termination of lease   489,771        489,771    100%
Extinguishment of debt   31,246        31,246    100%
Change in derivative liabilities   598,492    1,093,766    (495,274)   -45%
Change in value of warrants   107    1,678    (1,571)   -94%
Total other income (loss)  $793,540   $993,739   $(200,199)   -20%

 

The decrease in net other income resulted primarily from the effects that the changes in market value of the Company’s stock had on the derivative liability associated with our convertible debt and preferred stock, including a reduction in gain resulting from the extinguishment of derivative liabilities during the period, and from increased financing costs of new debt incurred by the Company. These decreases were partially offset by a gain realized on the termination of one of our leases and the related sublease.

 

Nine months ended September 30, 2022 compared to nine months ended September 30, 2021

 

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

 

   Nine Months
Ended
   Nine Months
Ended
   Increase (Decrease) 
   September 30,
2022
   September 30,
2021
   $   % 
Revenues                
Net rental revenue  $561,096   $582,010   $(20,914)   -4%
Rental expense   (445,155)   (475,521)   (30,366)   -6%
Gross profit   115,941    106,489    9,452    9%
General and administrative expenses   586,888    695,787    (108,899)   -16%
Selling expense   19,389    26,679    (7,290)   -27%
Loss from operations  $(490,336)  $(615,977)  $125,641    20%

 

16 

 

 

Revenues. For the nine months ended September 30, 2022 and 2021, the Company leased two facilities to a licensee in Colorado. Total revenue for the nine months ended September 30, 2022 was $561,096, as compared to $582,010 for the nine months ended September 30, 2021, a decrease of $20,914, primarily due to a lease extension in the third quarter of 2021. During September of 2022, one of our two leases was terminated. As a result, future rental revenue will decrease by approximately 50%.

 

Gross profit. Rental revenue and rental expense for the period ended September 30, 2022 decreased over the prior nine months ended September 30, 20201 resulting in a gross profit of $115,941, an increase of $9,451 from a gross profit of $106,489 for the nine months ended September 30, 2021, resulting from a lease extension in the third quarter of 2021 which reduced both sublease income and rental expense. During September of 2022, one of our two leases was terminated. As a result, future rental revenue and expense will decrease by approximately 50%.

 

 General and administrative expense. Our general and administrative expenses for the nine months ended September 30, 2022 were $586,888, compared to $695,797 for the nine months ended September 30, 2021. The decrease of $108,899 was largely attributable to a decrease in executive stock compensation expense during the nine months ended September 30, 2022, partially offset by increases in professional fees and travel expense.

 

Selling expense. Our selling expenses for the nine months ended September 30, 2022 were $19,389, compared to $26,679 for the nine months ended September 30, 2021. The decrease of $7,290 was primarily due to reduced brand development costs.

 

   Nine Months
Ended
   Nine Months
Ended
   Increase (Decrease) 
   September 30,
2022
   September 30,
2021
   $   % 
Other income (expense)                    
Interest income  $49,299   $69,511   $(20,212)   -29%
Forgiveness of debt income       56,908    (56,908)   -100%
Allowance for loss on notes receivable   (82,781)       (82,781)   -100%
Interest expense   (1,191,348)   (534,070)   (657,278)   -123%
Lease termination payments   105,645    101,554    4,091    4%
Gain on termination of lease   489,771        489,771    100%
Extinguishment of debt   75,590    389,550    (313,960)   -81%
Change in derivative liabilities   (1,634,642)   2,824,050    (4,458,692)   -158%
Change in value of warrants   134    (387)   521    135%
Total other income (loss)  $(2,188,332)  $2,907,116   $(5,095,448)   -175%

 

The increase in net other expense resulted primarily from the effects that the changes in market value of the Company’s stock had on the derivative liability associated with our convertible debt and preferred stock, including a reduction in gain resulting from the extinguishment of derivative liabilities during the period, and from increased financing costs of new debt incurred by the Company. These increases were partially offset by a gain realized on the termination of one of our leases and the related sublease.

 

LIQUIDITY AND CAPITAL RESOURCES

 

   Nine Months
Ended
   Nine Months
Ended
   Increase (Decrease) 
   September 30,
2022
   September 30,
2021
   $   % 
Net Cash provided by (used in) operating activities  $76,865   $(121,456)  $198,321    163%
Net Cash provided by financing activities   465,273    67,000    398,273    594%
Net Increase (Decrease) in Cash   542,138    (54,456)   596,594    1,096%
Cash - beginning of period   49,149    327,864    (278,715)     
Cash - end of period  $591,287   $273,408   $317,879    116%

 

Operating Activities. For the nine months ended September 30, 2022, the net cash provided by operations of $76,865 was an increase over the same period of the prior year of $198,321. A decrease in loss from operations after non-cash adjustments of $447,742 was partially offset by a decrease in cash provided by operating assets and liabilities of $249,421.

 

Financing Activities. During the nine months ended September 30, 2022, we loaned an aggregate of $120,000 to an entity and received repayments of principal of $67,238. We received $620,000 from the issuance of convertible notes payable and made repayments of convertible notes of $101,965. During the nine months ended September 30, 2021, we received $267,000 in proceeds from the sale of preferred stock and we made $200,000 of principal repayments of convertible notes payable.

 

Going Concern Qualification

 

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 $10,831,194 at September 30, 2022, and it has an accumulated deficit of $54,816,650 at September 30, 2022. 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.

 

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.

 

17 

 

 

Critical Accounting Policies

 

Our critical accounting policies are included in Note 2 – “Summary of Significant Accounting Policies” of Notes to Condensed Consolidated Financial Statements included in this Quarterly Report.

 

Recently Issued Accounting Standards

 

Our recently issued accounting standards are included in Note 2 – “Summary of Significant Accounting Policies” of Notes to Consolidated Financial Statements included in this Quarterly Report.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

(a) Disclosure Controls and Procedures

 

As of September 30, 2022, being the end of the period covered by this Report, 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 Quarterly Report.

 

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 quarterly 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.

 

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.

 

(b) Management’s Quarterly 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.

 

18 

 

 

Based on our evaluation under the framework described above, as of September 30, 2022, 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:

 

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 Quarterly 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.

 

(c) Change in Internal Control over Financial Reporting

 

There were no significant changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter that could materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.

 

19 

 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On May 10, 2021, a lawsuit was filed against the Company, along with other defendants, by plaintiff Erin Turoff in the District Court, City and County of Denver, State of Colorado. The specific allegations against the Company include civil theft and civil conspiracy and the plaintiff is seeking actual and compensatory damages. No specific monetary amount was demanded in the lawsuit. On July 8, 2021, the Company filed an answer to the complaint, denying the allegations. The Company believes that the suit is without merit and that the Company will ultimately prevail in any litigation.

 

Other than as listed above. we are currently not aware of any legal proceedings or claims against the Company that we believe will have a material adverse effect on our business, financial condition, or operating results.

 

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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

As of September 30, 2022, a convertible note in the principal amount of $515,607 was past its maturity date. The Company has not yet received any default notices. The convertible note is in the process of being renegotiated.

 

As of September 30, 2022, a convertible note in the principal amount of $2,383,667 was past its maturity date. The Company has not yet received any default notices. The convertible note is in the process of being renegotiated.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

        Incorporated by Reference   Filed or Furnished
Exhibit
Number
  Exhibit Description   Form   Exhibit   Filing Date   Herewith
                     
31.1   Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002               x
31.2   Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002               x
32.1   Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.               x
32.2   Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002               x
101.INS   XBRL Instance Document               x
101.SCH   XBRL Taxonomy Extension Schema Document               x
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.               x
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document               x
101.LAB   XBRL Taxonomy Extension Label Linkbase Document               x
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document               x

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  DIEGO PELLICER WORLDWIDE, INC.
     
Date: November 10, 2022 By: /s/ Nello Gonfiantini III
    Nello Gonfiantini III, Chief Executive Officer
    (Principal Executive Officer)
     
    /s/ Christopher Strachan
    Christopher Strachan, Chief Financial Officer
    (Principal Financial and Accounting Officer)

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