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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, 2021

 

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 10, 2021 there were 251,592,843 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

17

Item 4.

Controls and Procedures

18

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

19

Item 1A.

Risk Factors

19

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

19

Item 3.

Defaults Upon Senior Securities

19

Item 4.

Mine Safety Disclosures

19

Item 5.

Other Information

19

Item 6.

Exhibits

20

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 

  

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Diego Pellicer Worldwide, Inc.

Condensed Consolidated Balance Sheets

 

    September 30,     December 31,  
    2021     2020  
    (Unaudited)          
Assets                
                 
Current assets:                
Cash   $ 273,408     $ 327,864  
Accounts receivable     574,826       523,958  
Prepaid expenses           11,275  
                 
Total current assets     848,234       863,097  
                 
Other receivables     605,931       1,030,422  
Security deposits     90,000       90,000  
Right of use assets     1,360,775       1,062,592  
                 
Total assets   $ 2,904,940     $ 3,046,111  
                 
Liabilities and deficiency in stockholders' equity                
                 
Current liabilities:                
Accounts payable   $ 496,191     $ 526,377  
Accrued payable - related parties     1,204,175       1,332,756  
Accrued expenses     1,064,443       931,825  
Notes payable - related party     140,958       140,958  
Notes payable     133,403       133,403  
Convertible notes     2,941,274       3,239,274  
Derivative liabilities     3,560,066       5,997,865  
Lease liabilities     373,339       327,685  
Warrant liabilities     863       476  
                 
Total current liabilities     9,914,712       12,630,619  
                 
Notes payable - long term     150,000       206,444  
Lease liabilities, net of current portion     985,032       715,488  
                 
Total liabilities     11,049,744       13,552,551  
                 
Redeemable convertible preferred stock, Series C, par value $.00001 per share; 1,500,000 shares authorized, 113,850 and no shares issued and outstanding, net of discount of $82,970 and $0, respectively,     37,056        
                 
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, 239,129,265 and 217,271,495 shares issued and outstanding, respectively     238       216  
Additional paid-in capital     45,555,862       44,554,119  
Stock to be issued     164,714       49,225  
Accumulated deficit     (53,902,674 )     (55,110,000 )
                 
Total deficiency in stockholders' equity     (8,181,860 )     (10,506,440 )
                 
Total liabilities and deficiency in stockholders'                
equity   $ 2,904,940     $ 3,046,111  

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

1

 

 

Diego Pellicer Worldwide, Inc. 

Condensed Consolidated Statements of Operations 

(Unaudited)

 

    Three Months
Ended
September 30,
2021
    Three Months
Ended
September 30,
2020
    Nine Months
Ended
September 30,
2021
    Nine Months
Ended
September 30,
2020
 
                         
Revenues                                
Net rental revenue   $ 198,505     $ 351,502     $ 582,010     $ 1,080,382  
Rental expense     (157,466 )     (283,916 )     (475,521 )     (857,535 )
Gross profit     41,039       67,586       106,489       222,847  
                                 
Operating expenses:                                
General and administrative expenses     221,289       356,305       695,787       885,960  
Selling expense     8,870       9,552       26,679       24,593  
Loss from operations     (189,120 )     (298,271 )     (615,977 )     (687,706 )
                                 
Other income (expense)                                
Interest income     14,931       36,279       69,511       102,058  
Other income           7,839             7,839  
Forgiveness of debt income                 56,908        
Interest expense     (150,487 )     (207,427 )     (534,070 )     (1,502,058 )
Lease termination payments     33,851             101,554        
Extinguishment of debt           (677 )     389,550       1,255  
Change in derivative liabilities     1,093,766       (372,217 )     2,824,050       1,095,821  
Change in value of warrants     1,678       362       (387 )     334  
Total other income (loss), net     993,739       (535,841 )     2,907,116       (294,751 )
                                 
Provision for taxes                        
Net income (loss)     804,619       (834,112 )     2,291,139       (982,457 )
Deemed dividend on preferred stock     (34,053 )     (6,092 )     (1,083,813 )     (136,701 )
Net income (loss) attributable to common stockholders   $ 770,566     $ (840,204 )   $ 1,207,326     $ (1,119,158 )
                                 
Income (loss) per share - basic   $ 0.00     $ (0.01 )   $ 0.01     $ (0.01 )
Income (loss) per share - diluted   $ (0.00 )   $ (0.01 )   $ (0.00 )   $ (0.01 )
                                 
Weighted average common shares outstanding - basic     227,062,642       150,791,163       223,316,795       136,131,006  
Weighted average common shares outstanding - diluted     453,484,157       150,791,163       1,688,135,003       136,131,006  

 

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, 2021 and 2020 

(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, 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 )

 

    Redeemable Convertible
Preferred Stock
Shares
    Amount     Common Stock
Shares
    Amount                 Additional
Paid-in Capital
    Accumulated
Deficit
    Common Stock
to be issued
    Total  
Balance - December 31, 2019     140,000     $ 8,750       113,926,332     $ 114                 $ 43,478,139     $ (51,968,902 )   $ 127,261     $ (8,363,388 )
Issuance of common shares for services                                                     2,003       2,003  
Issuance of common shares for services - related parties                                                     27,026       27,026  
Common stock issued upon conversion of notes payable and accrued interest                 13,767,631       14                   169,723                   169,737  
Series C preferred stock issued for cash, net of costs and discounts     55,800                                                        
Accrued dividends and accretion of conversion feature  on Series C  preferred stock           19,588                                     (19,588 )           (19,588 )
Fair value of warrants and options granted for services                                         40,595                   40,595  
Deemed dividends related to conversion feature of Series C preferred stock                                               (38,868 )           (38,868 )
Net loss                                               (511,222 )           (511,222 )
Balance - March 31, 2020     195,800       28,338       127,693,963       128                   43,688,457       (52,538,580 )     156,290       (8,693,705 )
                                                                                 
Issuance of common shares for services                                                     10,200       10,200  
Issuance of common shares for services - related parties                 2,553,969       3                   65,630             (46,822 )     18,811  
Fair value of warrants and options granted for services                                         40,595                   40,595  
Conversion of preferred shares into common shares     (39,048 )     (12,176 )     4,939,759       5                   86,441                   86,446  
Series C preferred stock issued for cash, net of costs and discounts     55,800                                                        
Accrued dividends and accretion of conversion feature  on Series C  preferred stock           40,125                                     (40,125 )           (40,125 )
Deemed dividends related to conversion feature of Series C preferred stock                                               (32,028 )           (32,028 )
Net loss                                               362,855             362,855  
Balance - June 30, 2020     212,552       56,287       135,187,691       136                   43,881,123       (52,247,878 )     119,668       (8,246,951 )
                                                                                 
Issuance of common shares for services                 2,000,000       2                   25,598             25,600       51,200  
Issuance of common shares for services - related parties                                                     46,092       46,092  
Fair value of warrants and options granted for services                                         40,591                   40,591  
Common stock issued upon conversion of notes payable and accrued interest                                                     47,587       47,587  
Conversion of preferred shares into common shares     (156,752 )     (61,617 )     27,403,584       27                   262,215                   262,242  
Accrued dividends and accretion of conversion feature  on Series C  preferred stock           20,832                                     (20,832 )           (20,832 )
Deemed dividends related to conversion feature of Series C preferred stock                                               14,740             14,740  
Net loss                                               (834,108 )           (834,112 )
Balance - September 30, 2020     55,800     $ 15,502       164,591,275     $ 165           $     $ 44,209,527     $ (53,088,078 )   $ 238,947     $ (8,639,444 )

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

3

 

 

Diego Pellicer Worldwide, Inc. 

Condensed Consolidated Statements of Cash Flows 

(Unaudited)

 

    Nine Months
Ended
September 30,
2021
    Nine Months
Ended
September 30,
2020
 
             
Cash flows from operating activities:                
Net income (loss)   $ 2,291,139     $ (982,476 )
Adjustments to reconcile net income (loss) to net cash used in                
operating activities                
Change in fair value of derivative liability     (2,824,050 )     (1,095,821 )
Change in value of warrants     387       (334 )
Amortization of debt related costs           942,601  
Noncash finance cost     2,000        
Expense related to additional derivative liability     283,270       299,783  
Extinguishment of debt     (389,550 )     (1,255 )
Stock-based compensation     164,380       213,714  
Common stock payable issued for services             63,403  
Forgiveness of debt     (56,908 )      
Changes in operating assets and liabilities:                
Accounts receivable     (50,868 )     (107,357 )
Prepaid expenses     11,275       12,111  
Other assets     424,491       (315,152 )
Other current receivable - related parties           350,000  
Accounts payable     (30,186 )     (13,372 )
Accrued liability - related parties     (128,581 )     58,170  
Accrued expenses     164,730       246,705  
Lease liabilities     17,015       3,085  
                 
Cash used in operating activities     (121,456 )     (326,195 )
                 
Cash flows from investing activities:            
                 
Cash flows from financing activities:                
Proceeds from notes payable           206,444  
Proceeds from convertible notes payable           100,000  
Repayments of convertible notes payable, net     (200,000 )     (7,500 )
Proceeds from sale of preferred stock, net     267,000       100,000  
                 
Cash provided by financing activities     67,000       398,944  
                 
Net increase (decrease) in cash     (54,456 )     72,749  
Cash, beginning of period     327,864       317,446  
Cash, end of period   $ 273,408     $ 390,195  
                 
Cash paid for interest   $ 70,000     $  
Cash paid for taxes   $     $  
                 
                 
Supplemental schedule of noncash financial activities:                
Notes converted to stock   $ 100,000     $ 119,000  
Conversion of Preferred Stock for Common Stock   $ 187,044     $ 73,793  
Derivative liability related to convertible notes and convertible Preferred C shares   $ 1,259,672     $  
Accrued interest converted to stock   $ 6,256     $ 8,166  
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   $ 963,539     $ 128,582  
Value of derivative liability extinguished upon conversion of preferred stock and dividends   $ 193,152     $ 276,445  
Debt discount attributable to convertible notes and preferred stock   $ 267,000     $ 200,000  
Accrued interest extinguished with note payment   $ 25,390     $  
Debt discount extinguished with note conversion   $     $ 39,843  
Discount extinguished with preferred stock conversion   $ 129,403     $  
Accrued dividends and accretion of conversion feature on Series C preferred stock   $ 94,697     $ 80,545  
Deemed dividends related to conversion feature of Series C preferred stock   $ 989,116     $ 56,156  
Noncash increase in right of use asset   $ 627,500     $  

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

4

 

 

 

Diego Pellicer Worldwide, Inc.  

Notes to the Condensed Consolidated Financial Statements 

September 30, 2021 and 2020

 

Note 1 – Organization and Operations

 

History

 

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

 

Business Operations

 

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

 

The properties generating rents in 2021 and 2020 are as follows:

 

Purpose

 

Size

 

City

 

State

Retail store (recreational and medical)

 

3,300 sq.

 

Denver

 

CO

Cultivation warehouse – terminated October 2020

 

18,600 sq.

 

Denver

 

CO

Cultivation warehouse

 

14,800 sq.

 

Denver

 

CO

 

The Company’s three properties in Denver, CO (one terminated in October 2020) are leased to Royal Asset Management, LLC (“RAM”). RAM opened the Diego Denver branded flagship store in February 2017. This store is known as “Diego Colorado”. The retail facilities have shown steady growth in sales since opening. For the other two properties subleased (one terminated in October 2020), RAM uses these properties for its cultivation facilities in Denver, CO. Production at these facilities began in late 2016. 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 10).

 

In October 2020, the master lease and sublease associated with the 18,600 sq. cultivation warehouse were terminated (see Note 4).

 

Note 2 – Significant and Critical Accounting Policies and Practices

 

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

 

Basis of Presentation

 

The accompanying 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 (US GAAP).

 

The accompanying consolidated balance sheet at December 31, 2020, has been derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying unaudited condensed consolidated financial statements as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related notes to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the U.S. Securities and Exchange Commission (“SEC”). 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, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or any future periods.

 

Principles of Consolidation

 

The financial statements include the accounts of Diego Pellicer Worldwide, Inc., and its wholly-owned subsidiaries, Diego Pellicer World-wide 1, Inc. and DPWW Management Company, LLC, both of which are inactive at this time. Intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

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

 

5

 

 

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

 

Fair Value Measurements

 

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

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2021 and December 31, 2020. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, prepaid expenses and accounts payable. Fair values were assumed to approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2021

 

Fair Value Measurement Using

 

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Derivative liabilities

 

$

 

 

$

 

 

$

3,560

 

 

$

3,560

 

Stock warrant liabilities

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

 

$

 

 

$

 

 

$

3,561

 

 

$

3,561

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2020

 

Fair Value Measurement Using

 

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Derivative liabilities

 

$

 

 

$

 

 

$

5,998

 

 

$

5,998

 

Stock warrant liabilities

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

 

$

 

 

$

 

 

$

5,999

 

 

$

5,999

 

 

Derivative liabilities and stock warrant liabilities were valued using the Binomial Option Pricing Model in calculating the embedded conversion features for the three and nine months ended September 30, 2021 and the year ended December 31, 2020.

 

Cash

 

The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation, and the National Credit Union Share Insurance Fund, up to $250,000. The Company’s accounts at these institutions may, at times, exceed the federal insured limits. The Company has not experienced any losses in such accounts. Uninsured balances were approximately $20,000 and $73,000 at September 30, 2021 and December 31, 2020, respectively.

 

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.

 

6

 

 

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

 

Advertising 

 

Advertising expense was $8,870 and $9,552 for the three months ended September 30, 2021 and 2020, respectively, and was $26,679 and $24,593 for the nine months ended September 30, 2021 and 2020, 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 548,408,152 and 1,129,526,612 common stock equivalents at September 30, 2021 and 2020, respectively. For the three and nine months ended September 30, 2020, these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.

 

Legal and regulatory environment

 

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

 

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

 

Recent accounting pronouncements.

 

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

 

 

7

 

 

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 $9,066,478 at September 30, 2021, and it has an accumulated deficit of $53,902,674 at September 30, 2021. These factors raise substantial doubt about its ability to continue as a going concern over the next twelve months. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

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

 

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

 

Note 4 – Accounts Receivables and Other Receivables

 

As disclosed in Note 1, the Company subleases two properties in Colorado to Royal Asset Management at September 30, 2021. At September 30, 2021 and December 31, 2020, the Company had outstanding receivables from the subleases totaling $574,826 and $523,958, respectively, and during the nine months ended September 30, 2021 and 2020 the Company’s subleases with RAM accounted for 100% of the Company’s revenues.

 

In addition to the receivables from the subleases, the Company has agreed to provide RAM and affiliates of RAM up to an aggregate amount of $1,030,000 in financing. These notes accrue interest at the rates ranging from 12% to 18% per annum. As of September 30, 2021 and December 31, 2020, the outstanding balance of these notes receivable total $605,931 and $1,030,422, respectively, including accrued interest of $275,931 and $300,422, respectively. The notes are secured by a UCC filing and also $400,000 of the balance was personally guaranteed by the managing member of RAM. Our position was subordinate to the CEO’s note described in Note 6. We have recorded interest income of $14,850 and $36,199 during the three months ended September 30, 2021 and 2020, respectively. We have recorded interest income of $69,279 and $101,891 during the nine months ended September 30, 2021 and 2020, 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 first quarter of 2022 pending the resolution of a lawsuit between the Company 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

 

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

 

We have recorded the promissory notes as long term notes receivable of $1,482,824 at September 30, 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

 

 

8

 

 

We will record income pursuant to the Future Rent Debt as payments are received based on the Company’s analysis of collectability including, but not limited to, the potential application toward the purchase price. During 2021, we received nine months of payments and have recorded $101,554 as Lease Termination Payments in the Statement of Operations.

 

Note 5 – Other Assets

 

Security deposits: Security deposits reflect the deposits on various property leases, most of which require two months’ rental expense in the form of a deposit.

 

Note 6 – Related Party Transactions

 

As of September 30, 2021 and December 31, 2020, the Company has accrued compensation to its CEO and director and to its CFO aggregating $242,189 and $289,897, respectively. As of September 30, 2021 and December 31, 2020, accrued payable due to former officers was $961,986 and $1,042,859, respectively. For each of the three month periods ended September 30, 2021 and 2020, total cash-based compensation to related parties was $90,000. For each of the nine month periods ended September 30, 2021 and 2020, total cash-based compensation to related parties was $270,000. For the three months ended September 30, 2021 and 2020, total share-based compensation to related parties was $70,811 and $86,683, respectively. For the nine months ended September 30, 2021 and 2020, total share-based compensation to related parties was $156,465 and $213,714, respectively. These amounts are included in general and administrative expenses in the accompanying financial statements.

 

From 2017 to 2019, Mr. Gonfiantini, CEO, personally and through his Company, Crystal Bay Financial LLC, loaned an aggregate amount of $1,020,000 to Royal Asset Management. These notes accrue interest at 17% - 18% per annum, and require monthly payment approximately from $5,000 to $20,000. These notes are personally guaranteed by the managing member of Royal Asset Management, and are secured by certain equipment and other tangible properties of Royal Asset Management. Among these notes, $500,000 is 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, 2021 and December 31, 2020, the Company owed Mr. Throgmartin, former CEO (See Note 10), $140,958 pursuant to a promissory note dated August 12, 2016. This note accrues interest at the rate of 8% per annum and was past the maturity date at September 30, 2021, however the Company has not yet received a default notice. Accrued interest on the note was $57,835 and $49,401 at September 30, 2021 and December 31, 2020, respectively.

 

Note 7 – Notes Payable

 

On August 31, 2015, the Company issued a note in the amount of $126,000 to a third party for use as operating capital. The note was amended to include accrued interest on October 31, 2016 and extend the maturity date to October 31, 2018. As of September 30, 2021 and December 31, 2020 the outstanding principal balance of the note was $133,403, and accrued interest on the note was $75,090 and $70,101, respectively. As of September 30, 2021 the note was past the maturity date, however the Company has not yet received a default notice.

 

On April 22, 2020, the Company was granted a loan from Numerica Credit Union, in the aggregate amount of $56,444, pursuant to the Paycheck Protection Program, (the “PPP”) under Division A, Title I of the CARES Act. The loan, which was in the form of a note dated April 22, 2020 issued by the Borrower, was scheduled to mature on April 22, 2022 and bore interest at a rate of 1.0% per annum, payable monthly commencing October 22, 2020. There have not been any payments made towards this loan, as the full amount of the loan and accrued interest was forgiven in full during February 2021 and the Company recorded income of $56,908.

 

On June 30, 2020, the Company was granted a loan from the Small Business Association, in the aggregate amount of $150,000, pursuant to the Economic Injury Disaster Loan, (the “EIDL”) under Division A, Title I of the CARES Act. The loan, which is in the form of a note dated June 30, 2020 issued by the Borrower, matures on June 30, 2050 and bears interest at a rate of 3.75% per annum, payable monthly commencing July 1, 2022.

 

Note 8 – Convertible Notes Payable

 

The Company has issued several convertible notes which are outstanding. The note holders have the right to convert principal and accrued interest outstanding into shares of common stock at a discounted price to the market price of our common stock. The conversion features were recognized as embedded derivatives and are valued using a Binomial Option Pricing Model that resulted in a derivative liability of $3,422,900 and $5,997,865 at September 30, 2021 and December 31, 2020, respectively. All notes accrue interest at 10% and the notes had all matured at September 30, 2021. In connection with the issuance of certain of these notes, the Company also issued warrants to purchase its common stock.

 

Several convertible note holders elected to convert their notes to stock during the nine months ended September 30, 2021 and 2020. The tables below provide the note payable activity for the nine months ended September 30, 2021 and 2020, and also a reconciliation of the beginning and ending balances for the derivative liabilities measured using Level 3 fair value inputs for the nine months ended September 30, 2021 and 2020:

 

 

 

Convertible
Notes

 

 

Discount

 

 

Convertible
Notes, Net of
Discount

 

 

Derivative
Liabilities

 

Balance, December 31, 2020

 

$

3,239,274

 

 

$

 

 

$

3,239,274

 

 

$

5,997,865

 

Issuance of convertible notes

 

 

2,000

 

 

 

 

 

 

2,000

 

 

 

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

 

 

9

 

 

 

 

Convertible
Notes

 

 

Discount

 

 

Convertible
Notes, Net of
Discount

 

 

Derivative
Liabilities

 

Balance, December 31, 2019

 

$

3,266,775

 

 

$

914,239

 

 

$

2,352,530

 

 

$

4,834,190

 

Issuance of convertible notes

 

 

103,000

 

 

 

103,000

 

 

 

 

 

 

394,001

 

Conversion of convertible notes

 

 

(119,000

)

 

 

(39,843

)

 

 

(79,157

)

 

 

(128,583

)

Repayment of convertible notes

 

 

(7,500

)

 

 

 

 

 

(7,500

)

 

 

 

Change in fair value of derivatives

 

 

 

 

 

 

 

 

 

 

 

(1,084,517

)

Amortization

 

 

 

 

 

(942,602

)

 

 

942,601

 

 

 

 

Balance September 30, 2020

 

$

3,243,275

 

 

$

34,794

 

 

$

3,208,474

 

 

$

4,015,091

 

 

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.

 

As of September 30, 2021, convertible notes in the aggregate principal amount of $2,941,274 were past their maturity dates; however the Company has not yet received any default notices. No default or penalty was paid or required to be paid.

 

The following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current liabilities for the nine months ended September 30, 2021 and 2020

 

 

 

September 30,
2021

 

 

September 30,
2020

 

Risk-free interest rates

 

 

0.020.09

%

 

 

0.100.11

Expected life (years)

 

 

0.25

 

 

 

0.251.0

 

Expected dividends

 

 

0

%

 

 

0

%

Expected volatility

 

 

133544

%

 

 

147 214

%

 

  

Note 9 – Stockholders’ Deficit

 

Series C Preferred Stock

 

On February 24, 2021, the Company sold 179,850 of its Series C Convertible Preferred Shares, with an annual accruing dividend of 10%, to Geneva Roth Remark Holdings, Inc. (“Geneva”), for $163,500 pursuant to a Series C Preferred Purchase Agreement with Geneva. The Company may redeem the Series C Shares at various increased prices at time intervals up to the 6-month anniversary of the closing and must redeem any outstanding shares on the 24-month anniversary. Geneva may convert the Series C Shares into our common shares, commencing on the 6-month anniversary of the closing at a 30% discount to the public market price. The Company recorded a derivative liability associated with Series C Preferred Shares of $1,082,441, valued using a Binomial Option Pricing Model. On March 16, 2021, the Company sold an additional 113,850 shares for $103,500 and recorded a derivative of $177,231. The Series C Preferred Stock is classified as temporary equity due to the fact that the shares are redeemable at the option of the holder. The holder converted $179,850 of the February preferred shares plus accrued dividends of $7,194 into 13,695,817 shares of common stock during the three months ended September 30, 2021. There were 113,850 shares outstanding at September 30, 2021, with an associated derivative liability of $137,166.

 

The tables below provide the preferred stock activity for the nine months ended September 30, 2021 and 2020, and also a reconciliation of the beginning and ending balances for the derivative liabilities measured using Level 3 fair value inputs for the nine months ended September 30, 2021 and 2020:

 

 

 

Preferred
Stock and
Accrued
Dividends

 

 

Discount

 

 

Preferred
Stock and
Accrued
Dividends,
Net of
Discount

 

 

Derivative
Liabilities

 

Balance , December 31, 2020

 

$

 

 

 

 

 

 

 

 

 

 

Issuance of Series C Preferred shares

 

 

293,700

 

 

 

293,700

 

 

 

 

 

 

1,259,672

 

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

 

 

10

 

 

 

 

Preferred
Stock and
Accrued
Dividends

 

 

Discount

 

 

Preferred
Stock and
Accrued
Dividends,
Net of
Discount

 

 

Derivative
Liabilities

 

Balance , December 31, 2019

 

$

140,000

 

 

$

131,250

 

 

$

8,750

 

 

$

190,131

 

Issuance of Series C Preferred shares

 

 

111,600

 

 

 

111,600

 

 

 

 

 

 

170,896

 

Conversion of Series C Preferred shares

 

 

(206,561

)

 

 

(132,768

)

 

 

(73,793

)

 

 

(302,127

)

Accretion of discount

 

 

 

 

 

(67,201

 )

 

 

67,201

 

 

 

 

Accretion of dividend on Series C preferred stock

 

 

13,344

 

 

 

 

 

 

13,344

 

 

 

15,610

 

Change in fair value of derivatives

 

 

 

 

 

 

 

 

 

 

 

(11,304

 )

Balance September 30, 2020

 

$

58,383

 

 

$

42,881

 

 

$

15,502

 

 

$

63,206

 

 

The following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current liabilities for the nine months ended September 30, 2021 and 2020:

 

 

 

2021

 

 

2020

 

Risk-free interest rates

 

 

0.120.25

%

 

 

0.12 0.71

%

Expected life (years)

 

 

1.42.0

 

 

 

1.32.0

 

Expected dividends

 

 

0

%

 

 

0

%

Expected volatility

 

 

185196

%

 

 

172262

%

 

Common Stock

 

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

 

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.

 

2020 Transactions

 

During the nine months ended September 30, 2020, $119,000 of notes, $8,166 of accrued interest and $210 additional fee was converted into 19,501,028 shares of common stock. A gain on extinguishment of debt of $1,255, extinguishment of debt discount of $39,843 and reduction of derivative liabilities of $128,583 have been recorded related to these conversions. As of September 30, 2020, 5,733,397 shares were authorized, but not issued as of September 30, 2020. 

 

During the nine months ended September 30, 2020, 2,553,969 shares of common stock were issued for related party services valued at $65,633. These shares have been removed from shares to be issued as of September 30, 2020. As of September 30, 2020, 3,907,356 shares, valued at $28,296 for related party services, had not been issued. These were classified as shares to be issued at September 30, 2020.

 

During the nine months ended September 30, 2020, 5,196,378 shares of common stock, valued at $63,403 for services, were authorized. 2,000,000 of the shares were issued during the nine months ended September 30, 2020. As of September 30, 2020, 3,196,378 shares, valued at $37,803 for services, had not issued. These were classified as shares to be issued at September 30, 2020.

 

During the nine months ended September 30, 2020, 32,343,343 shares of common stock were issued as a result of the conversion of 195,800 shares of Series C Preferred stock.

 

11

 

 

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, 2021 and 2020:

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months ended September 30,

 

 

 

2021

 

 

2020

 

Balance at beginning of period

 

$

476

 

 

$

967

 

Additions to derivative instruments

 

 

 

 

 

 

(Gain) loss on change in fair value of derivative liability

 

 

387

 

 

 

(334

Balance at end of period

 

$

863

 

 

$

633

 

 

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 and 2020:

 

 

 

September 30, 2021

 

 

September 30, 2020

 

Annual dividend yield

 

 

0

%

 

 

0

%

Expected life (years)

 

 

 

 

 

 

Risk-free interest rate

 

 

0.09 1.16

%

 

 

0.131.83

%

Expected volatility

 

 

189243

%

 

 

190243

%

 

 

Note 10 – Commitments and Contingencies

 

Leases

 

The Company leases property under operating leases. Property leases include retail and warehouse space with fixed rent payments and lease terms ranging from three to five years. The Company is obligated to pay the lessor for maintenance, real estate taxes, insurance, and other operating expenses on certain property leases. These expenses are variable and are not included in the measurement of the lease asset or lease liability. These expenses are recognized as variable lease expense when incurred.

 

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.

 

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, 2021 was 12%. Leases often include rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. Lease expense is recognized on a straight-line basis over the lease term to the extent that collection is considered probable. As a result the Company been recognizing rents as they become payable. Our weighted-average remaining lease term is 3.1 years.

 

As of September, 2021, the maturities of operating leases liabilities are as follows (in thousands):

 

 

 

Operating Leases

 

2021

 

 

128

 

2022

 

 

513

 

2023

 

 

520

 

2024

 

 

419

 

2025

 

 

45

 

Total

 

 

1,625

 

Less: amount representing interest

 

 

(267

)

Present value of future minimum lease payments

 

 

1,358

 

Less: current obligations under leases

 

 

373

 

Long-term lease obligations

 

$

985

 

 

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,

 

 

 

2021

 

 

2020

 

Operating lease costs

 

$

330,000

 

 

$

508,199

 

Variable rent costs

 

 

145,521

 

 

 

349,336

 

 Total rent expense

 

$

475,521

 

 

$

857,535

 

 

12

 

 

As of September 30, 2021, the aggregate remaining minimal annual lease payments under these operating leases plus NNN were as follows: (in thousands)

 

 

 

 

 

 

2021

 

 

$

89

 

2022

 

 

 

386

 

2023

 

 

 

443

 

2024

 

 

 

395

 

2025

 

 

 

45

 

Total

 

 

$

1,358

 

 

Other information related to leases is as follows:

 

 

 

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

 

$

309,931

 

Weighted-average remaining lease term - operating leases

 

 

3.1yr

 

Weighted-average discount rate - operating leases

 

 

12

%

 

Right of use assets obtained in exchange for lease liabilities:

 

         
Operating lease asset   $ 627,500  
Lease liability   $ 625,129  

 

The Company recognized sublease income of $198,505 and $351,502 during the three months ended September 30, 2021 and 2020, respectively. The Company recognized sublease income of $582,010 and $1,080,382 during the nine months ended September 30, 2021 and 2020, respectively.

 

These two leases have 2.8 year and 3.3 year terms with optional extensions, expiration dates range from July 2024 to February 2025, and monthly base rent of approximately $20,000-$22,500 plus variable NNN.

 

As of September 30, 2021, the maturities of expected base sublease income are as follows (in thousands):

 

 

 

Operating Leases

 

2021

 

$

168

 

2022

 

 

678

 

2023

 

 

693

 

2024

 

 

555

 

2025 and beyond

 

 

59

 

Total

 

$

2,153

 

 

COVID-19

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency in response to a new strain of a coronavirus (the “COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the global situation and its effects on the Company’s industry, financial condition, liquidity, and operations. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2021. However, if the pandemic continues, it may have a material adverse effect on the Company’s results of future operations, financial position, and liquidity in fiscal year 2021.

 

Employment Agreements

 

As a condition of their employment, the Board of Directors approved employment agreements with two 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, 2021, the Company accrued compensation expense of approximately $156,000 on 4,799,258 shares of common stock under these agreements. During the nine months ended September 30, 2020, the Company accrued compensation expense of approximately $92,000 on 6,461,325 shares of common stock. As of September 30, 2021 and December 31, 2020, the ending balance of accrued compensation was $138,853 and $13,364, respectively. The number of shares accrued to be issued was 4,563,231 at September 30, 2021.

 

Departure of Executive Officer

 

On January 30, 2019, the Company executed a Separation Agreement and Release with David Thompson, its former Senior Vice President- Finance, finalizing his departure from the Company as an employee. Pursuant to its material terms, the Company agreed to pay Mr. Thompson aggregate cash payments of $206,250, based upon the Company’s receipt of certain gross sales receipts derived from its Alameda Store in Colorado, and certain stock grants based upon the Company’s outstanding common shares as of February 1, 2019, including a stock grant of 53,717 restricted common shares for accrued salary and 122,934 restricted common shares in exchange for his approximate 122,000 of stock options. During the nine months ended September 30, 2021 and 2020, $35,872 and $21,086, respectively, was paid under this agreement. As of September 30, 2021, the outstanding balance was $126,389, and is included in Accrued payable – related party in the accompanying consolidated balance sheet.

 

On October 29, 2019, the Company accepted the resignation of Ron Throgmartin from his positions as CEO, President and Director. Mr. Throgmartin’s resignation was not the result of any disagreements with the Company’s plan of operations, policies, or management. On the same date, we appointed Christopher D. Strachan, our Chief Financial Officer, to membership on our Board of Directors and appointed Nello Gonfiantini III, our Chief Operations Officer, to the additional post of Chief Executive Officer.

 

13

 

 

Ron Throgmartin signed a 5-year term Separation Agreement which, among other matters, terminated his Employment Agreement, as amended. On the date of the Separation Agreement, the Company acknowledged it owed Mr. Throgmartin the amount of $517,252 in principal and accrued interest of note payable, salary and fees, accrued during the 5 years of his employment. In addition, the Company further acknowledged that it will pay Mr. Throgmartin fifty (50%) percent of his compensation due under the remaining Employment Agreement, or $614,583 under certain conditions, which the Company accrued in full as the date of Mr. Throgmartin’s separation. This agreement provides that the Company will pay him $5,000 monthly against his accrued salary/fees and 50% of future compensation due under his terminated Employment Agreement, with certain accelerated payments in the event our financial results attain certain EBITA benchmarks. The Company shall have the right to require Mr. Throgmartin to provide consulting services to it for a per diem fee of $500. During the nine months ended September 30, 2021 and 2020, $45,000 and $45,000, respectively, were paid under this agreement. As of September 30, 2021, the outstanding balance was $835,597, and is included in Accrued payable – related party in the accompanying consolidated balance sheet.

 

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.

 

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, and the parties are now engaged in the discovery process.

 

Note 11 – Subsequent Events

 

The Company evaluated subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated financial statements are available to be issued. Any material events that occur between the balance sheet date and the date that the consolidated financial statements were available for issuance are disclosed as subsequent events, while the consolidated financial statements are adjusted to reflect any conditions that existed at the balance sheet date. Based upon this review, except as disclosed within the footnotes or as discussed below, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements.

 

During October, 2021, the remaining 113,850 outstanding shares of preferred stock and accrued dividends were converted into 12,463,578 shares of common stock.

 

 

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. (the “Company”, “we”, “us” or “our”) should be read in conjunction with the financial statements of Diego Pellicer Worldwide, Inc. and the notes to those financial statements that are included elsewhere in this Form 10-Q. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Business sections in the financial statements and footnotes included in the Company’s Form 10-K filed on April 12, 2021 for the year ended December 31, 2020. Words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements.

 

Overview 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 in its infancy and is rapidly being propelled towards its potential by the state legalization and the rush by suppliers to meet the pent-up demand. Most suppliers are small unsophisticated but capable operators. The federal legal constraints provide an opportunity to those companies early to the market to gain a first mover advantage and to the successful ones, an opportunity to be a consolidator in the industry.

 

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.

 

RESULTS OF OPERATIONS

 

Three months ended September 30, 2021 compared to three months ended September 30, 2020

 

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

 

Three Months
Ended

Three Months
Ended

Increase (Decrease)

September 30,
2021

September 30,
2020

$

%

Revenues

Net rental revenue

$

198,505

$

351,502

$

(152,997

)

-44

%

Rental expense

(157,466

)

(283,916

)

(126,450

)

-45

%

Gross profit

41,039

67,586

(26,547

)

-39

%

General and administrative expenses

221,289

356,305

(135,016

-38

%

Selling expense

8,870

9,552

(682

)

-7

%

Loss from operations

$

(189,120

)

$

(298,271

)

$

109,151

37

%

 

Revenues. For the three months ended September 30, 2021 and 2020, the Company leased two and three facilities, respectively, to licensees in Colorado (one lease was terminated October 1, 2020). Total revenue for the three months ended September 30, 2021 was $198,505, as compared to $351,502 for the three months ended September 30, 2020, a decrease of $152,997, primarily due to the lease termination in late 2020.

 

Gross profit. Rental revenue for the period ended September 30, 2021 decreased over the prior three months ended September 30, 2020, resulting in a gross profit of $41,039, a decrease of $26,547 from a gross profit of $67,586 for the three months ended September 30, 2020, resulting from the decrease in revenue due to a lease termination in October 2020.

 

15

 

 

General and administrative expense. Our general and administrative expenses for the three months ended September 30, 2021 were $221,289, compared to $356,305 for the three months ended September 30, 2020. The decrease of $135,016 was largely attributable to a decrease in professional fees during the three months ended September 30, 2021.

 

Selling expense. Our selling expenses for the three months ended September 30, 2021 were $8,870, compared to $9,552 for the three months ended September 30, 2020. The decrease of $682 was due to decreased website expense.

 

Three Months
Ended

Three Months
Ended

Increase (Decrease)

September 30,
2021

September 30,
2020

$

%

Other income (expense)

Interest income

$

14,931

$

36,279

$

(21,348

)

-59

%

Other income

7,839

(7,839

)

-100

%

Interest expense

(150,487

)

(207,427

)

(56,940

)

-28

%

Lease termination payments

33,851

33,851

100

%

Extinguishment of debt

(677

)

677

100

%

Change in derivative liabilities

1,093,766

(372,217

1,465,983

394

%

Change in value of warrants

1,678

362

1,316

364

%

Total other income (expense), net

$

993,739

$

(535,841

$

1,529,580

286

%

 

The increase 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 gain resulting from the extinguishment of derivative liabilities during the period, and from decreased financing costs of new debt incurred by the Company.

 

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020

 

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

 

Nine Months
Ended

Nine Months
Ended

Increase (Decrease)

September 30,
2021

September 30,
2020

$

%

Revenues

Net rental revenue

$

582,010

$

1,080,382

$

(498,372

)

-46

%

Rental expense

(475,521

)

(857,535

)

(382,014

)

-45

%

Gross profit

106,489

222,847

(116,358

)

-52

%

General and administrative expenses

695,787

885,960

(190,173

)

-22

%

Selling expense

26,679

24,593

2,086

8

%

Loss from operations

$

(615,977

)

$

(687,706

)

$

71,729

-10

%

 

Revenues. For the nine months ended September 30, 2021 and 2020, the Company leased two and three facilities, respectively, to licensees in Colorado (one lease was terminated October 1, 2020). Total revenue for the nine months ended September 30, 2021 was $582,010, as compared to $1,080,382 for the nine months ended September 30, 2020, a decrease of $498,372, primarily due to the lease termination in late 2020.

 

Gross profit. Rental revenue for the period ended September 30, 2021 decreased over the prior nine months ended September 30, 2020, resulting in a gross profit of $106,489, a decrease of $116,358 from a gross profit of $222,847 for the nine months ended September 30, 2020, resulting from the decrease in revenue due to a lease termination in October 2020.

 

General and administrative expense. Our general and administrative expenses for the nine months ended September 30, 2021 were $695,787, compared to $885,960 for the nine months ended September 30, 2020. The decrease of 190,173 was largely attributable to a reduction in executive stock compensation and professional fees during the nine months ended September 30, 2021.

 

Selling expense. Our selling expenses for the nine months ended September 30, 2021 were $26,679, compared to $24,593 for the nine months ended September 30, 2020. The increase of $2,086 was due to additional expenditures for services related to our website.

 

Nine Months
Ended

Nine Months
Ended

Increase (Decrease)

September 30,
2021

September 30,
2020

$

%

Other income (expense)

Interest income

$

69,511

$

102,058

$

(32,547

)

-32

%

Other income

7,839

(7,839

)

-100

%

Forgiveness of debt income

56,908

56,908

100

%

Interest expense

(534,070

)

(1,502,058

)

(967,988

)

-64

%

Lease termination payments

101,554

101,554

100

%

Extinguishment of debt

389,550

1,255

388,295

30,940

%

Change in derivative liabilities

2,824,050

1,095,821

1,728,229

158

%

Change in value of warrants

(387

)

334

(721

)

-216

%

Total other income (expense), net

$

2,907,116

$

(294,751

$

3,201,867

1,086

%

16

 

The increase 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 gain resulting from the extinguishment of derivative liabilities during the period, and from decreased financing costs of new debt incurred by the Company.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Nine Months
Ended

Nine Months
Ended

Increase (Decrease)

September 30,
2021

September 30,
2020

$

%

Net Cash used in operating activities

$

(121,456

)

$

(326,195

)

$

204,739

63

%

Net Cash provided by financing activities

67,000

398,944

(331,944

)

-83

%

Net Increase (Decrease) in Cash

(54,456

72,749

(127,205

-175

%

Cash - beginning of period

327,864

317,446

10,418

Cash - end of period

$

273,408

$

390,195

$

(116,787

-30

%

 

Operating Activities. For the nine months ended September 30, 2021, the net cash used of $121,456 was a decrease over the same period of the prior year of $204,739. Cash provided by operating assets and liabilities increased by $173,686, augmented by a decrease in loss from operations, after non-cash adjustments, of $31,053. In April 2021, we received a payment on other receivables of $493,770.

 

Financing Activities. During the nine months ended September 30, 2021, $267,000 in proceeds were received from the sale of preferred stock. Payments of convertible notes payable were $200,000. For the nine months ended September 30, 2020, we received $100,000 in proceeds from convertible notes payable and $100,000 from the sale of preferred stock. We also received a loan from Numerica Credit Union, in the amount of $56,444, pursuant to the Paycheck Protection Program and a loan from the Small Business Association, in the amount of $150,000, pursuant to an Economic Injury Disaster Loan. Payment of debt cost was $7,500.

 

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 $9,066,478 at September 30, 2021, and it has an accumulated deficit of $53,902,674 at September 30, 2021. These factors raise substantial doubt about its ability to continue as a going concern over the next twelve months. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

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

 

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

 

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.

 

17

 

 

ITEM 4. CONTROLS AND PROCEDURES.

 

(a) Disclosure Controls and Procedures

 

As of September 30, 2021, 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.

 

Based on our evaluation under the framework described above, as of September 30, 2021, 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 our third fiscal quarter that could materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.

 

18

 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Other than as listed below, the Company is not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self- regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

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.

 

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.

 

COVID-19

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency in response to a new strain of a coronavirus (the “COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the global situation and its effects on the Company’s industry, financial condition, liquidity, and operations. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2021. However, if the pandemic continues, it may have a material adverse effect on the Company’s results of future operations, financial position, and liquidity in fiscal year 2021.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On September 2, 2021, we issued 976,526 shares of common stock upon conversion of 20,000 shares of Series C Convertible Preferred Shares and accrued dividends.

 

On September 8, 2021, we issued 2,512,077 shares of common stock upon conversion of 50,000 shares of Series C Convertible Preferred Shares and accrued dividends.

 

On September 14, 2021, we issued 1,890,909 shares of common stock upon conversion of 30,000 shares of Series C Convertible Preferred Shares and accrued dividends.

 

On September 22, 2021, we issued 2,915,888 shares of common stock upon conversion of 30,000 shares of Series C Convertible Preferred Shares and accrued dividends.

 

On September 30, 2021, we issued 5,400,417 shares of common stock upon conversion of 49,850 shares of Series C Convertible Preferred Shares and accrued dividends.

 

The securities in the transactions described above were sold or issued in reliance on the exemption from registration provided in Section 4(a)(2) of the Securities Act for transactions not involving any public offering. All certificates evidencing the shares sold or issued bore a restrictive legend. No underwriter participated in the offer and sale of these securities, and no commission or other remuneration was paid or given directly or indirectly in connection therewith. The proceeds from these sales were used for general corporate purposes.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

As of September 30, 2021, 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, 2021, 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

 

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, and the parties are now engaged in the discovery process.

19

 

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

 

 

 

 

 

 

 

û

31.2

 

Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

û

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.

 

 

 

 

 

 

 

û

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

 

 

 

 

 

 

 

û

101.INS

 

XBRL Instance Document

 

 

 

 

 

 

 

û

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

û

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

 

 

 

 

û

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

û

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

 

 

û

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

û

 

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 12, 2021

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)

20

Diego Pellicer Worldwide (CE) (USOTC:DPWW)
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