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EX-32.2 - DIEGO PELLICER WORLDWIDE, INCex32-2.htm
EX-32.1 - DIEGO PELLICER WORLDWIDE, INCex32-1.htm
EX-31.2 - DIEGO PELLICER WORLDWIDE, INCex31-2.htm
EX-31.1 - DIEGO PELLICER WORLDWIDE, INCex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2016

 

Commission File Number: 333-189731

 

DIEGO PELLICER WORLDWIDE, INC.

(Name of registrant as specified in its charter)

 

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

 

9030 Seward Park Ave, S, #501, Seattle, WA 98118

(Address of principal executive offices) (Zip Code)

 

(516) 900-3799

(Registrant’s telephone number, including area code)

 

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 [X] No [  ]

 

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

 

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

 

Large accelerated Filer [  ] Accelerated Filer [  ]
Non-accelerated Filer [  ] Small Reporting Company [X]
(Do not check if smaller reporting company)    

 

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

 

As of November 1, 2016 there were 44,764,436 shares of common stock issued and outstanding.

 

 

 

   

 

TABLE OF CONTENTS

 

    Page
     
  PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
     
  PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 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 19

 

  2 
   

 

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.

 

  3 
   

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

DIEGO PELLICER WORLDWIDE, INC.

BALANCE SHEETS

(Unaudited)

 

   September 30, 2016   December 31, 2015 
Assets          
           
Current Assets:          
Cash and equivalents  $29,844   $36,001 
Accounts receivable   152,982    1,110 
Prepaid expenses   543,522    651,713 
Inventory   89,067    80,971 
Other receivable   51,119    17,817 
Total current assets   866,534    787,612 
           
Property and Equipment, net   623,620    838,754 
           
Other Assets:          

Investments, at cost, net of impairment of $508,900 and $408,900, respectively

   16,667    116,667 
Security deposits   170,000    173,000 
Deposits - end of lease   150,000    150,000 
Total other assets   336,667    439,667 
           
Total assets  $1,826,821   $2,066,033 
           
Liabilities and Stockholders’ Deficiency          
           
Current liabilities:          
Accounts payable and accrued expense  $1,144,508   $585,997 
Accrued expenses - related party   438,220    511,454 
Accrued compensation   447,085    6,250 
Liabilities for equity shares to be issued   350,000    - 
Deferred rent   49,216    120,234 
Deferred revenue   53,000    53,000 

Notes payable

   1,316,628    846,628 

Notes payable - related parties

   307,312    - 
Convertible debt   335,548    300,000 
Derivative liabilities   337,246    208,795 
Total current liabilities   4,778,763    2,632,358 
           
Deferred revenue   329,500    370,000 
           
Total liabilities   5,108,263    3,002,358 
           
Stockholders’ Deficiency          
Series A and B Preferred Stock, $0.0001 par value, 5,000,000 shares authorized, 0 share issued and outstanding as of March 31, 2016 and December 31, 2015   -    - 
Common Stock, $0.000001 par value, 95,000,000 shares authorized, 44,764,436 and 37,805,416 shares were issued and outstanding as of June 30, 2016 and December 31, 2015, respectively   45    38 
Additional paid-in capital   23,304,265    20,111,077 
Accumulated deficit   (26,585,752)   (21,047,440)
Total stockholders’ deficiency   (3,281,442)   (936,325)
           
Total liabilities and stockholders’ deficiency  $1,826,821   $2,066,033 

 

See accompanying notes to financial statements.

 

  4 
   

 

DIEGO PELLICER WORLDWIDE, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months
Ended
   Three Months
Ended
   Nine Months
Ended
   Nine Months
Ended
 
   September 30, 2016   September 30, 2015   September 30, 2016   September 30, 2015 
Revenues                    
Rental income  $393,404   $393,319   $1,142,172   $1,027,051 
Licensing revenue   13,500    13,500    40,500    40,500 
Provision for uncollectible rents   (303,070)   (175,369)   (828,970)   (809,101)
Total Revenues   103,834    231,450    353,702    258,450 
                     
Operating expenses:                    
General and administrative expenses   743,541    511,786    4,086,469    8,329,503 
Rent expense   257,599    240,685    831,262    848,538 
Write-off credit line receivable   -    -    -    200,000 
Total operating expenses   1,001,140    752,471    4,917,731    9,378,041 
                     
Loss from operations   (897,306)   (521,021)   (4,564,029)   (9,119,591)
                     
Other (expense):                    
Interest expense   (111,254)   (345,407)   (216,910)   (353,092)
Impairment of investments   

(100,000

)   -    

(100,000

)   - 

Impairment of property and equipment

   (627,224)   -    (627,224)   - 
Change in fair value of derivative liabilities   (136,485)   -    (30,149)   - 
Total other (expense)   (974,963)   (345,407)   (974,283)   (353,092)
                     
Loss before provision for taxes   (1,872,269)   (866,428)   (5,538,312)   (9,472,683)
Provision for taxes   -    -    -    - 
Net Loss  $(1,872,269)  $(866,428)  $(5,538,312)  $(9,472,683)
                     
Loss per share - basic and fully diluted  $(0.04)  $(0.03)  $(0.14)  $(0.41)
                     
Weighted average common shares outstanding - basic and fully diluted   43,505,355    29,371,298    40,891,947    22,942,716 

 

See accompanying notes to financial statements.

 

  5 
   

 

DIEGO PELLICER WORLDWIDE, INC.

STATEMENTS OF CASH FLOW

(Unaudited)

 

   Nine Months Ended   Nine Months Ended 
   September 30, 2016   September 30, 2015 
Operating Activities          
Net Loss  $(5,538,312)  $(9,472,683)
Adjustments to reconcile Net Loss to net cash provided by Operations:          
Amortization of deferred revenue   (40,500)   (40,500)
Amortization of debt discount   58,850    259,864 
Amortization of deferred financing cost   -    63,000 
Impairment of investments   

100,000

    - 
Impairment of property and equipment   627,224    - 
Accrued expenses - related party   234,078    271,121 
Change in derivative   30,149    - 
Fair value of warrants and options issued for services   104,433    - 
Non-cash stock compensation   2,558,271    7,001,160 
Write-off credit line receivable   -    200,000 
Changes in operating assets and liabilities:          
Prepaid expenses and other receivable   108,191    (91,054)
Liabilities for equity shares to be issued   350,000    - 
Deferred rent   (71,018)   - 
Inventory   (8,096)   - 
Other receivable   (33,302)   - 
Accrued compensation   440,835    - 
Accounts receivable   (151,872)   (2,520)
Accounts payable   583,511    105,304 
Net cash used in operating activities   (647,558)   (1,706,308)
           
Investing Activities          
Acquisition of property and equipment   (412,090)   (172,264)
Security deposits   3,000    - 
Advances under line of credit   -    (200,000)
Net cash used in investing activities   (409,090)   (372,264)
           
Financing Activities          
Proceeds from sale of preferred stock and warrants   -    1,129,999 
Proceeds from note payable   470,000    711,628 
Proceeds from convertible note payable   50,000    300,000 
Proceeds from sale of common stock   530,491    - 
Net cash provided by financing activities   1,050,491    2,141,627 
           
Net (Decrease) increase in Cash   (6,157)   63,055 
Cash - beginning of period   36,001    33,101 
Cash - end of the period  $29,844   $96,156 

 

See accompanying notes to financial statements.

 

  6 
   

 

Note 1 - Organization and Basis of Presentation

 

History

 

On March 13, 2015 (“closing date”), Diego Pellicer Worldwide, Inc. (f/k/a Type 1 Media, Inc.) (the “Company”) closed on a merger and share exchange agreement (the “Merger 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 (the “Majority Shareholder”). Pursuant to the terms of the Merger Agreement, Diego was merged with and into the Company, with the Company to continue as the surviving corporation (the “Surviving Corporation”) in the Merger, and the Company succeeding to and assuming all the rights, assets, liabilities, debts, and obligations of Diego (the “Merger”).

 

Prior to the merger, 62,700,000 shares of Type 1 Media, Inc. were issued and outstanding. The principal owners of the Company agreed to transfer their 55,000,000 issued and outstanding shares to a third party in consideration for $169,000 and cancellation of their 55,000,000 shares. The remaining issued and outstanding shares are still available for trading in the marketplace. At the time of the Merger, Type 1 Media, Inc. had no assets or liabilities. Accordingly, the business conducted by Type 1 prior to the Merger is not being operated by the combined entity post-Merger.

 

At the closing of the Merger, Diego common stock issued and outstanding immediately prior to the closing of the Merger was exchanged for the right to receive 1 share of the surviving legal entity. An aggregate of 21,632,252 common shares of the surviving entity were issued to the holders of Diego in exchange for their common shares, representing approximately 74% of the combined entity.

 

The Merger has been accounted for as a reverse merger and recapitalization in which Diego is treated as the accounting acquirer and Diego Pellicer Worldwide, Inc. (f/k/a Type 1 Media, Inc.) is the surviving legal entity.

 

Business Operations

 

The Company leases real estate to licensed marijuana operators, including but not limited to, 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 Company does not and will not, until such time as Federal law allows, grow, harvest, process, distribute or sell marijuana or any other substances that violate the laws of the United States of America, or any other country.

 

Note 2 - Summary of Significant Accounting Policies

 

The Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result 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 Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Principles of Consolidation

 

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

 

New accounting pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on the Company’s accounting and reporting. The Company believes that such 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 
   

 

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, determining the fair value of the warrants received for the licensing agreement, the collectability of accounts receivable and deferred taxes and related valuation allowances.

 

Certain of our 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 have an effect on our estimates that could cause actual results to differ from our estimates. We re-evaluate all of our 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 condensed 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 or not 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 and September 30, 2016 and December 31, 2015. 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.

 

Cash

 

The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation, or ​​​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.

 

Property and equipment and depreciation policy

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided for on a straight-line basis over the useful lives of the assets. Expenditures for additions and improvements are capitalized; repairs and maintenance are expensed as incurred.

 

The Company intends to take depreciation or amortization on a straight-line basis for all properties, beginning when they are put into service, using the following life expectancy:

 

Equipment – 5 years

Leasehold Improvements – 10 years, or the term of the lease, whichever is shorter

Buildings – 20 years

 

  8 
   

 

Property, leasehold improvements and equipment are tested for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable in accordance with SFAS No. 144. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized if the sum of the expected discounted cash flows relating to the asset or asset group is less than the corresponding carrying value.

 

Inventory

 

The Company’s inventory is stated at the lower of cost or estimated realizable value, with cost primarily determined on a weighted-average cost basis on the first-in, first-out (“FIFO”) method.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are presented at their face amount, less an allowance for doubtful accounts, on the balance sheets. Accounts receivable consist of revenue earned and currently due from sub lessee. The Company evaluates the collectability of accounts receivable based on a combination of factors, and will recognize reserves for bad debts based on estimates developed using standard quantitative measures that incorporate historical write-offs and current economic conditions. As of September 30, 2016 and December 31, 2015, the outstanding balance allowance for doubtful accounts is $148,466 and $10,080, respectively.

 

The policy for determining past due status is based on the contractual payment terms of each customer. Once collection efforts by the Company and its collection agency are exhausted, the determination for charging off uncollectible receivables is made.

 

Revenue recognition

 

The Company recognizes revenue from rent, tenant reimbursements, and other revenue sources once all of the following criteria are met in accordance with SEC Staff Accounting Bulletin 104, Revenue Recognition, (“SAB 104”): (a) the agreement has been fully executed and delivered; (b) services have been rendered; (c) the amount is fixed or determinable; and (d) the collectability of the amount is reasonably assured.

 

In accordance with ASC 840 (“Leases”), as amended and interpreted, minimum annual rental revenue is recognized in rental revenues on a straight-line basis over the term of the related lease. Rental revenue recognition commences when the tenant takes possession or controls the physical use of the leased space. In order for the tenant to take possession, the leased space must be substantially ready for its intended use. To determine whether the leased space is substantially ready for its intended use, management evaluates whether the Company or the tenant is the owner of tenant improvements for accounting purposes. When management concludes that the Company is the owner of tenant improvements, rental revenue recognition begins when the tenant takes possession of the finished space, which is when such tenant improvements are substantially complete. In certain instances, when management concludes that the Company is not the owner (the tenant is the owner) of tenant improvements, rental revenue recognition begins when the tenant takes possession of or controls the space.

 

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

 

In January 2014, the Company entered into an agreement to license certain intellectual property to a third party. In consideration, the Company received warrants to purchase shares of common stock, which were valued based on an appraisal of the warrants by an independent third party appraiser. The revenue from the licensing agreement, which is initially recorded as deferred revenue, is being amortized over the ten year term of the licensing agreement.

 

The Company records rents due from the tenants on a current basis. However, as part of the Line of Credit Agreement, the Company has deferred collection of such rents until the tenants receive the proper governmental licenses to begin operation. It is anticipated that such licenses should be obtained prior to the end of 2016. Management has decided to take the approach and reserve these amounts due to the contingency factor and experience with typical delays in governmental action.

 

  9 
   

 

Leases as Lessor

 

The Company currently leases properties in locations that would be acceptable for regulatory purposes and acceptable to sub-lessees for the manufacturing and development of their products. The Company evaluates the lease to determine its appropriate classification as an operating or capital lease for financial reporting purposes. The Company currently has a number of leases, which are all classified as operating leases.

 

Minimum base rent for the Company’s operating leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term. The initial rent term includes the build-out, or may include a short rent holiday period, for the Company’s leases, where no rent payments are typically due under the terms of the lease.

 

Leases

 

For lease agreements that provide for escalating rent payments or free-rent occupancy periods, the Company recognizes rent expense on a straight-line basis over the non-cancelable lease term and option renewal periods where failure to exercise such options would result in an economic penalty in such amount that renewal appears, at the inception of the lease, to be reasonably assured. The lease term commences on the date that the Company takes possession of or controls the physical use of the property. Deferred rent is presented on current liabilities section on the consolidated balance sheets.

 

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.

 

Research and Development Costs

 

Research and development costs are charged to the statement of operations as incurred.

 

Preferred Stock

 

The Company applies the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. It classifies conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity. At all other times, it classifies its preferred shares in stockholders’ equity. Preferred shares do not feature any redemption rights within the holders’ control or conditional redemption features not within our control. Accordingly all issuances of preferred stock are presented as a component of consolidated stockholders’ equity (deficit).

 

Common Stock Purchase Warrants and Other Derivative Financial Instruments

 

We classify 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 815-40 (“Contracts in Entity’s Own Equity”). We classify 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 (physical settlement or net-share settlement). We assess classification of our 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. For employee stock-based awards, it calculates the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. For non-employee stock-based awards, it calculates the fair value of the award on the date of grant in the same manner as employee awards, however, the awards are revalued at the end of each reporting period and the pro rata compensation expense is adjusted accordingly until such time the nonemployee award is fully vested, at which time the total compensation recognized to date equals the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance is complete. 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.

 

  10 
   

 

Loss per common share

 

Net loss per share is provided in accordance with ASC Subtopic 260-10. We present basic loss per share (“EPS”) and diluted EPS on the face of statements of operations. Basic EPS is computed by dividing reported losses by the weighted average shares outstanding. Loss per common share has been computed using the weighted average number of common shares outstanding during the year.

 

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 $3,912,229 and has a stockholders’ deficiency of $3,281,442 at September 30, 2016. These factors, among others raise substantial doubt about its ability to continue as a going concern. The 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 from its stockholders. The Company’s inability to obtain 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.

 

The Company intends to continue to raise additional capital to be used for ongoing preopening expenses. Once the tenants commence operations and generate profits, rental revenues should exceed rental expense for the four properties.

 

Note 4 - Investment

 

In January 2014, the Company entered into an Agreement with Plandai Biotechnology, Inc. (a publicly traded company) to license to them certain intellectual property rights in exchange for warrants to purchase 1,666,667 shares of Plandai Biotechnology, Inc. (“Plandai”) common stock. This license agreement carries a 10-year term with an exercise price of $0.01 per share. The Company is to obtain certain Trademark rights certified by the government (expected by the end of 2016). On October 10, 2014 the Company filed its Notice of Exercise to execute the warrants to acquire the shares of Plandai, in which the shares have not yet been issued. The sale of such shares has a “leak out” restriction on them requiring that the sale of such shares must reach a certain traded price of $0.50 per share. The Company used a third party appraisal firm to ascertain the fair value of warrants held by the company, which was determined to be $525,567. With the Plandai shares trading at $.07 per share, the Company recorded an impairment loss of $408,900 during the year ended December 31, 2015. During nine months ended September 30, 2016, The company recorded an impairment loss of $100,000 based on the trading price of $0.01 per share as of September 30, 2016. The Company accounts for its investment under the cost method of accounting.

 

Note 5 - Property and Equipment

 

The Company has incurred expenses in the build out of one of its leased properties and acquired a large POD equipment for use in growing operations by lessee. Since the facility and equipment have not yet been put into service, no amortization on the leasehold improvement nor depreciation on the equipment has been provided.

 

As of September 30, 2016 and December 31, 2015, fixed assets and the estimated lives used in the computation of depreciation are as follows:

 

    Estimated            
    Useful Lives   September 30, 2016     December 31, 2015  
Machinery and equipment   5 years   $ 39,145     $ 174,145  
Leasehold Improvements   10 years     584,475       664,609  
          623,620       838,754  
                     
Less: Accumulated depreciation and amortization         -       -  
                     
Property and Equipment, net       $ 623,620     $ 838,754  

 

During nine months ended September 30, 2016, we recorded an impairment loss for $627,224 to leasehold improvements to adjust the carrying value to the estimated fair value. The fair value was estimated at 30% discounted cash flow from sublease revenues net of lease cost.

 

  11 
   

 

Note 6 – Other Assets

 

Security deposits

 

These deposits reflect the deposits the various property leases, most of which require two months of the rent expense in the form of a security deposit. In January 2016, the Company expensed $3,000 rent when exiting lease of property in Oregon .

 

Deposits – end of lease

 

These deposits represent an additional two months of rent on various property leases that apply to the “end-of-lease” period.

 

Note 7 - Related Party

 

As of September 30, 2016 and December 31, 2015, the Company has accrued and unpaid consulting fees to related parties in the amount of $438,220 and $511,454, respectively. For the nine months ended September 30, 2016 and 2015, the consulting fees expense was $722,500 and $652,500, respectively to related parties. These amounts are included in general and administrative expenses in the accompanying financial statements.

 

On April 14, 2016, the Company issued 1,900,000 shares of common stock to Phoenix Consulting Enterprises valued at $1,577,000, a company owned by Mr. Throgmartin for services.

 

On August 12, 2016, we entered into an agreement for the balance of accrued compensation payable to Alan Valdes in the amount of $332,709 as of June 1, 2016 to be converted (a) 50% of the accrued amount ($166,355) will be converted into restricted common stock at the price of $0.30 per share (554,517 shares), and; (b) 50% of the accrued amount ($166,355) will be converted into Company promissory notes, accruing interest at the rate of eight (8%) percent, per annum, and payable upon the earlier date of (i) the second anniversary date of the promissory notes, (ii) the date all of the current investor notes, in the outstanding aggregate principal and accrued interest amount of approximately $1,480,000, at June 30, 2016, have been paid in full and the Company has achieved gross revenues of at least $3,000,000 over any consecutive 12-month period.

 

On August 12, 2016, we entered into an agreement for the balance of accrued compensation payable to Mr. Throgmartin in amount of $237,714 as of June 1, 2016 to be converted (a) 50% of the accrued amount ($118,857) will be converted into restricted common stock at the price of $0.30 per share (396,190 shares), and; (b) 50% of the accrued amount ($118,857) will be converted into Company promissory notes, accruing interest at the rate of eight (8%) percent, per annum, and payable upon the earlier date of (i) the second anniversary date of the promissory notes, (ii) the date all of the current investor notes, in the outstanding aggregate principal and accrued interest amount of approximately $1,480,000, at June 30, 2016, have been paid in full and the Company has achieved gross revenues of at least $3,000,000 over any consecutive 12-month period.

 

Note 8 - Note Payable

 

On May 20, 2015, the Company entered into notes in total amount of $450,000 with third parties for use as operating capital. The notes payable agreements required the Company to repay the principal, together with 10% annual interest by the maturity date of November 17, 2015, or the date the Company raises capital whether through the issuance of debt, equity or any other securities. The Company will not raise this capital unless either (a) the proceeds of such Financing are being directed at the closing of such financing to irrevocably repay this note in full, or (b) Investor consents to an alternative use of proceeds from such financing. The Company received a waiver from investor for the convertible note entered into May 29, 2015 (see Note 11). As of September 30, 2016, the outstanding principle balance of the note is $450,000.

 

On July 8, 2015, the Company entered into notes in total amount of $135,628 with third parties for use as operating capital. The notes payable agreements required the Company to repay the principal, together with 10% annual interest by the maturity date of October 6, 2015 or the date the Company raises capital whether through the issuance of debt, equity or any other securities, the Company will not raise this capital unless either (a) the proceeds of such financing are being directed at the closing of such financing to irrevocably repay this note in full, or (b) Investor consents to an alternative use of proceeds from such financing. In connection with the issuance of these notes, the Company issued warrants to purchase its common stock. The Company allocated the proceeds of the notes and warrants based on the relative fair value at inception. The Company allocated $90,563 to the warrants and $45,065 to the debt. The difference between the face value of the notes and the allocated value has been accreted to interest expense over the life of the loan. As of September 30, 2016, the outstanding principle balance of the note is $135,628.

 

On August 31, 2015, the Company entered into notes in total amount of $126,000 with third parties for use as operating capital. The notes payable agreements required the Company to repay the principal, together with 5% annual interest by the maturity date of October 31, 2015 or the closing of a financing whereby the company receives a minimum of $126,000. In connection with the issuance of these notes, the Company issued 126,000 shares of common stock. The Company allocated the proceeds of the notes and warrants based on the relative fair value at inception. The Company allocated $84,000 to the common stock and $42,000 to the debt. The difference between the face value of the notes and the allocated value has been accreted to interest expense over the life of the loan. As of September 30, 2016, the outstanding principal balance of the note is $126,000.

 

  12 
   

 

On November 27, 2015, the Company entered into notes in total amount of $135,000 with third parties for purchasing a fixed asset. The notes payable agreements require the Company to repay the principal, together with $15,000 interest by the maturity date of January 26, 2016. As of September 30, 2016, the outstanding principle balance of the note is $135,000.

 

On February 8, 2016, the Company entered into notes in total amount of $470,000 with third parties, bearing interest at 12% per annum with a maturity date of February 7, 2017. As of September 30, 2016, the outstanding principle balance of the note is $470,000.

 

Note 9 - Convertible Note Payable

 

On May 29, 2015, the Company entered into convertible notes in total amount of $300,000 with third parties for use as operating capital. The convertible notes require the Company to repay the principal, together with 10% annual interest by the maturity date of November 26, 2015. In the event that the Note is not paid on the maturity date and the common stock price has a set price below $1.50, then the note holder shall have the right to convert the amount outstanding into shares of common stock at a price of ninety percent of the lowest trade VWAP (Volume Weighted Average Price) of twenty days prior to conversion. The Company evaluated the conversion feature embedded in the notes in amount of $342,604 on default. In connection with the issuance of these notes, the Company issued warrants to purchase its common stock. The Company allocated the proceeds of the notes and warrants based on the relative fair value at inception. The Company allocated $225,920 to the warrants and $74,080 to the convertible debt. The difference between the face value of the notes and the allocated value has been accreted to interest expense over the life of the loan. On November 26, 2015, pursuant to the original terms of the note, the holder received the rights to convert the principal balance into common shares of the Company. The conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative liability of $342,604 as of the measurement date. As of September 30, 2016, the outstanding principle balance of the note is $300,000.

 

On April 1, 2016, the Company converted outstanding invoice due to a convertible note in total amount of $25,000 with a third party. The convertible notes require the Company to repay the principal, together with 8% annual interest by the maturity date of October 1, 2016. This note is currently at default. The convertible notes can be converted into common stock of the Company valued at 80% of the lowest closing price for the Company’s common stock during the five (5) trading days immediately preceding a conversion date, as reported by OTC Markets. In any event, the conversion price for this Note can never be less than $0.30 per share. The conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative liability of $12,608 as of the measurement date. As of September 30, 2016, the outstanding principle balance of the note is $25,000.

 

On July 11, 2016, the Company entered into convertible notes in total amount of $50,000 with third parties for use as operating capital. The convertible notes require the Company to repay the principal, together with 12% annual interest by the maturity date of April 11, 2017. The convertible notes can be converted into common stock of the Company at the lower of (i) a 45% discount to the lowest trading price during the previous twenty (20) trading days to the date of a Conversion Notice; or (ii) a 45% discount to the lowest trading price during the previous twenty (20) trading days before the date that this note was executed. The conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative liability of $85,274 as of the measurement date. As of September 30, 2016, the outstanding principle balance of the note is $50,000.

 

The table below provides a reconciliation of the beginning and ending balances for the liabilities measured using fair significant unobservable inputs (Level 3):

 

Balance at January 1, 2016   $ 208,795  
Issuance of embedded conversion features on convertible note     98,302  
Change in fair value during period     30,149  
Balance at September 30, 2016   $ 337,246  

 

The fair value of embedded conversion feature of convertible note determined using a Black Scholes Simulation. This model requires the input of highly subjective assumptions, including the expected price volatility, which is based on the historical volatility of a peer group of publicly traded companies. Changes in the subjective input assumptions can materially affect the estimate of fair value of the warrants and the Company’s results of operations could be impacted.

 

The following assumptions were used in calculations of the Black Scholes model for the nine months ended September 30, 2016 and 2015

 

    Nine months ended September 30,  
    2016     2015  
Risk-free interest rates     0.29-0.59 %     - %
Expected life     0.25-1 year       -  
Expected dividends     0 %     - %
Expected volatility     142-356 %     -  
Diego Pellicer Worldwide, Inc. Common Stock fair value   $ 0.20 -0.77     $ -  

 

  13 
   

 

Note 10 - Stockholders’ Equity

 

On April 14, 2016, the Company issued Mr. Throgmartin 1,900,000 shares of common stocks valued at $1,577,000 for services.

 

On September 13, 2016, the Company issued Mr. Steve Norris 150,000 shares of common stocks valued at $61,500 for services.

 

During nice months ended September 30, 2016, the Company issued Mr. Strachan for 88,667 shares of common stocks valued at $26,600 for services.

 

During nine months ended September 30,2016, the Company issued 1,187,388 shares of common stocks to various third parties valued at $893,171 for services.

 

During nine months ended September 30, 2016, the Company issued to various investors 3,632,965 shares of common stocks for cash received in amount of $530,491.

 

There are currently 1,991,172 warrants outstanding relating to the former Diego shareholders in varying amounts.

 

The following represents a summary of all common stock warrant activity:

 

    Number of
Warrants
    Weighted Average
Exercise
Price
    Weighted Average
Remaining
Contractual Term
 
Balance outstanding, December 31, 2015     1,901,426     $ 1.21       4.40  
Granted     89,746       -       -  
Exercised     -       -       -  
Forfeited     -       -       -  
Expired     -       -       -  
Balance outstanding, September 30, 2016     1,991,172     $ 1.18       3.85  
Exercisable, September 30, 2016     1,991,172     $ 1.18       3.85  

 

The Company maintains an Equity Incentive Plan pursuant to which 2,480,000 shares of Common Stock are reserved for issuance thereunder. This Plan was established to award certain founding members, who were instrumental in the development of the Company, as well as key employees, directors and consultants, and to promote the success of the Company’s business. The terms allow for each option to vest immediately, with a term no greater than 10 years from the date of grant, at an exercise price equal to par value at date of the grant. As of September 30, 2016, 1,775,000 shares had been granted, with 200,000 of those shares granted with warrants attached. There remain 705,000 shares available for future grants.

 

Note 11 - Commitments and Contingencies

 

The Company’s business is to lease property in appropriate and desirable locations, and to make available such property for sub-lease to specifically assigned businesses that grow, process and sell certain products to the general public. Currently the Company has four (4) separate properties under lease in the states of Colorado and Washington.

 

In Colorado, there are three properties leased in 2014 and 2015. Properties were leased for a three (3) to five (5) year period with an option for an additional five (5) years, and carry terms requiring triple net (NNN) conditions. Each of the properties, except for one, have fixed monthly rentals (exclusive of the triple net terms). As of September 30, 2016, the aggregate remaining minimal annual lease payments under these operating leases were as follows:

 

2016   $ 249,799  
2017     985,200  
2018     867,828  
2019     346,566  
Total   $ 2,449,393  

 

In Washington, there is one (1) property leased in 2014. The property was leased for a five (5) year period with an option for an additional five (5) years, and carry terms requiring triple net (NNN) conditions. The property has an escalating annual rental (exclusive of the triple net terms). As of September 30, 2016, the aggregate remaining minimal annual lease payments due under these operating leases were as follows:

 

2016   $ 21,496  
2017     87,723  
2018     67,365  
Total   $ 176,584  

 

Rent expense for the Company’s operating leases for the nine months ended September 30, 2016 and 2015 was $573,664 and $607,853, respectively.

 

Note 12 - Subsequent Events

 

The Company has evaluated subsequent events through the date the financial statements were available to be issued. Based on this evaluation, the Company has identified no reportable subsequent events.

 

  14 
   

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS

 

The following discussion and analysis of the results of operations and financial condition of Diego Pellicer Worldwide, Inc. (the “Company”, “we”, “us” or “our”) should be read in conjunction with the financial statements of Diego Pellicer Worldwide, Inc. and the notes to those financial statements that are included elsewhere in this Form 10-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/A filed on May 6, 2016 for the year ended December 31, 2015. Words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements.

 

Overview

 

Diego Pellicer Worldwide, Inc. was established on August 26, 2013 to provide commercial support services, retail and grow facilities, and accessories to the market created by the legislation allowing for the legalization of cannabis operations for recreational use in several states. These markets currently include Colorado, Washington and with a number of other states giving consideration to this market as well. It is expected that the industry will operate under stringent regulations within the various state jurisdictions.

 

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

 

Results of Operations

 

Three months ended September 30, 2016 compared to three months ended September 30, 2015

 

    Three Months Ended     Three Months Ended   Increase (Decrease)
    September 30, 2016     September 30, 2015     $    %
Revenues                    
Rental income $ 393,404   $ 393,319   $ 85   0%
Licensing revenue   13,500     13,500      -   0%
Provision for uncollectible rents   (303,070)     (175,369)     (127,701)   73%
Total Revenues $ 103,834   $ 231,450   $ (127,616)   -55%

 

For the three months ended September 30, 2016 and 2015, the Company had leased four facilities as follows: Colorado (3) and Washington (1).

 

Total revenue for the three months ended September 30, 2016 was $103,834, as compared to $231,450 for the three months ended September 30, 2015, a decrease of $127,616, and represents recognition of income on the Plandai Biotechnology license of $13,500 for both period and rental income of $393,404 and $393,319, respectively. In January 2014, the Company entered into a licensing agreement with Plandai Biotechnology, a publicly traded company, to license their Diego Pellicer brand in exchange for 1,666,667 warrants with a 10-year term, to purchase Plandai’s common stock. At the time of the licensing agreement, the publicly traded shares in Plandai were valued at $525,567. In October 2014, the Company filed a Notice of Exercise to obtain the shares, and have recorded their value as deferred income. For the three months ended September 30, 2016 and 2015, $13,500 was recognized as licensing revenue.

 

For the three months ended September 30, 2016 and 2015, rental income of $393,404 and $393,319 a derived from the Colorado sub-leases, $303,070 and $175,369 of which has been reserved as uncollectible from the tenant, pending the latter receiving final approval of licenses from the government to allow them to continue to progress on its growing, processing and retailing facilities.

 

    Three Months Ended     Three Months Ended   Increase (Decrease)
    September 30, 2016     September 30, 2015     $    %
Operating expenses                    
General and administrative $ 743,541   $ 511,786   $ 231,755   45%
Rent   257,599     240,685     16,914   7%
Total costs and expenses $ 1,001,140   $ 752,471   $ 248,669   33%

 

  15 
   

 

General and administrative. Our general and administrative expenses for the three months ended September 30, 2016 were $743,541, compared to $511,786 for the three months ended September 30, 2015. The increase of $231,755, which was mostly attributable stock compensation and operation during three months ended September 30, 2016.

 

Rent expense. We incurred rent expense from four separate facilities leased during 2015 and 2016. The rent incurred from these properties during the three months ended September 30, 2016 and 2015 was $257,599 and $240,685.

 

    Three Months Ended     Three Months Ended   Increase (Decrease)
    September 30, 2016     September 30, 2015     $    %
Other income (expense):                    
Interest expense $ (111,254)   $ (345,407)   $  234,153   (68%)
Impairment of investments   (100,000)     -     (100,000)   *
Impairment of property and equipment   (627,224)      -     (627,224)   *
Change in fair value of derivative liabilities   (136,485)      -      (136,485)   *
Total costs and expenses $ (974,963)   $ (345,407)   $ (629,556)   182%

 

* Not divisible by zero

 

Impairment of investment. With the Plandai shares currently trading at $.01 per share, the Company impaired $100,000 during three months ended September 30, 2016.

 

Impairment of property and equipment. During three months ended September 30, 2016, we impaired $627,224 in leasehold improvements to Market at 30% discounted cash flow from sublease net of lease cost.

 

Nine months ended September 30, 2016 compared to nine months ended September 30, 2015

 

    Nine Months Ended     Nine Months Ended   Increase (Decrease)
    September 30, 2016     September 30, 2015     $    %
Revenues                    
Rental income $ 1,142,172   $ 1,027,051   $ 115,121   11%
Licensing revenue   40,500     40,500      -   -
Provision for uncollectible rents   (828,970)     (809,101)     (19,869)   2%
Total Revenues $ 353,702   $ 258,450   $ 95,252   37%

 

For the nine months ended September 30, 2016 and 2015, the Company had leased four facilities as follows: Colorado (3) and Washington (1)

 

Total revenue for the nine months ended September 30, 2016 was $353,702, as compared to $258,450 for the nine months ended September 30, 2015, an increase of $95,252, and represents recognition of income on the Plandai Biotechnology license of $40,500 for both period and rental income of $1,142,172 and $1,027,051, respectively. In January 2014, the Company entered into a licensing agreement with Plandai Biotechnology, a publicly traded company, to license their Diego Pellicer brand in exchange for 1,666,667 warrants with a 10-year term, to purchase Plandai’s common stock. At the time of the licensing agreement, the publicly traded shares in Plandai were valued at $525,567. In October 2014, the Company filed a Notice of Exercise to obtain the shares, and have recorded their value as deferred income. For the nine months ended September 30, 2016 and 2015, $40,500 was recognized as licensing revenue.

 

For the nine months ended September 30, 2016 and 2015, rental income of $1,142,172 and $1,027,051 derived from the Colorado sub-leases, $828,970 and $809,101 of which has been reserved as uncollectible from the tenant, pending the latter receiving final approval of licenses from the government to allow them to continue to progress on its growing, processing and retailing facilities.

 

  Nine Months Ended   Nine Months Ended   Increase (Decrease)
  September 30, 2016   September 30, 2015     $    %
Operating expense                    
General and administrative expenses $ 4,086,469   $ 8,329,503   $ (4,243,034)   (51%)
Rents expense   831,262     848,538     (17,276)   (2%)
Write-off credit line receivable    -     200,000     (200,000)   -100%
Total costs and expenses $ 4,917,731   $ 9,378,041   $ (4,460,310)   (48%)

 

  16 
   

 

General and administrative. Our general and administrative expenses for the nine months ended September 30, 2016 were $4,086,469, compared to $8,329,503 for the nine months ended September 30, 2015. The decrease of $4,243,034, which was mostly attributable to non-employee stock compensation and operation during nine months ended September 30, 2015.

 

Rent expense. We incurred rent expense from four separate facilities leased during 2015 and 2016. The rent incurred from these properties during the nine months ended September 30, 2016 and 2015 was $831,262 and $848,538.

 

Write-off of line of credit receivable. Bad debt expense represented a reserve of $200,000 against the $2.5 million line of credit to the sub-lessee of the Colorado facilities for operating and development costs for the nine months ended September 30, 2015.

 

    Nine Months Ended     Nine Months Ended   Increase (Decrease)
    September 30, 2016     September 30, 2015     $   %
Other income (expense):                    
Interest expense $ (216,910)   $ (353,092)   $ 136,182   (39%)
Impairment of investments   (100,000)           (100,000)   *
Impairment of property and equipment   (627,224)      -     (627,224)   *
Change in fair value of derivative liabilities   (30,149)      -     (30,149)   *
Total costs and expenses $ (974,283)   $  (353,092)   $ (621,191)   176%

 

* Not divisible by zero

 

Impairment of investment. With the Plandai shares currently trading at $.01 per share, the Company impaired $100,000 during nine months ended September 30, 2016.

 

Impairment of property and equipment. During nine months ended September 30, 2016, we impaired $627,224 in leasehold improvements to Market at 30% discounted cash flow from sublease net of lease cost.

 

LIQUIDITY AND CAPITAL RESOURCES

 

    Nine Months Ended     Nine Months Ended   Increase (Decrease)
    September 30, 2016     September 30, 2015     $    %
Net Cash provide (used) in operating activities $  (647,558)   $  (1,706,308)      1,058,750   (62%)
Net Cash used in investing activities    (409,090)      (372,264)   $  (36,826)   10%
Net Cash used in financing activities    1,050,491      2,141,627      (1,091,136)   (51%)
Net Increase in Cash    (6,157)      63,055      (69,212)   (110%)
Cash - beginning of period    36,001      33,101      2,900    
Cash - end of period $  29,844   $  96,156   $  (66,312)   (69%)

 

Operating Activities. The net cash used for the nine months ended in September 30, 2016 was $ 647,558, which is primarily attributable to the net loss of $5,538,312. For the nine months ended September 30, 2015, the net cash used of $1,706,308 was also due to a net loss of $9,472,683 and partially offset by an increase in the amount of payables.

 

Investing Activities. The cash used for investing activities for the nine months ended September 30, 2016 of $409,090, includes $412,090 on acquisition of property and equipment and $3,000 reduction of security deposit. For the nine months ended September 30, 2015, cash used for investing activities amounted to $372,264, which includes $172,264 on acquisition of property and equipment, $200,000 on advances under line of credit.

 

Financing Activities. Funds provided from financing activities for the nine months ended September 30, 2016 and September 30, 2015 of $1,050,491 and $2,141,627 respectively. During the nine months ended September 30, 2016, proceeds from note payable is $470,000 proceeds from note payable is $50,000 and proceeds from sales of common stocks is $530,491. During the nine months ended September 30, 2016, we received $1,129,999 from sales of preferred stock and warrants, $711,628 from proceeds from note payable and $300,000 from entering convertible note payable.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

  17 
   

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

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

 

ITEM 4. CONTROLS AND PROCEDURES.

 

We carried out an evaluation required by Rule 13a-15 of 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 Report.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures. Our principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of the end of the period covered by this Annual Report (the “Evaluation Date”), pursuant to Rule 13a-15(b) under the Exchange Act.

 

Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, due to material weaknesses in our control environment and financial reporting process.

 

Limitations on the Effectiveness of Controls

 

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

 

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

 

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

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the nine months ended September 30, 2016 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are currently 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.

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

On April 14, 2016, the Company issued Mr. Throgmartin 1,900,000 shares of common stocks valued at $1,577,000 for services.
   
On September 13, 2016, the Company issued Mr. Steve Norris 150,000 shares of common stocks valued at $61,500 for services.
   
During nine months ended September 30, 2016, the Company issued Mr. Strachan for 88,667 shares of common stocks valued at $26,600 for services.
   
During nine months ended September 30,2016, the Company issued 1,187,388 shares of common stocks to various third parties valued at $893,171 for services.
   
During nine months ended September 30, 2016, the Company issued to various investors 3,632,965 shares of common stocks for cash received in amount of $530,491.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibits    
     
31.1   Certification of Principal Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Principal Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification of Principal Executive Officer pursuant to 18U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification of Principal Financial Officer of the Registrant pursuant to 18U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Schema
     
101.CAL   XBRL Taxonomy Calculation Linkbase
     
101.DEF   XBRL Taxonomy Definition Linkbase
     
101.LAB   XBRL Taxonomy Label Linkbase
     
101.PRE   XBRL Taxonomy Presentation Linkbase

 

*In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.

 

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SIGNATURES

 

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

 

  DIEGO PELLICER WORLDWIDE, INC.
     
Date: November 14, 2016 By: /s/ Ron Throgmartin
    Ron Throgmartin, Chief Executive Officer
    (Principal Executive Officer)

 

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