UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2016

 

or

 

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

 

For the transitional period from _____________ to ______________

 

Commission file number 333-189731

 

DIEGO PELLICER WORLDWIDE, INC.

(Exact name of registrant as specified in its charter)

 

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

 

9030 Seward Park Ave S. #501, Seattle, Washington 98118

(Address of principal executive offices) (Zip Code)

 

(516) 900-3799

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Large Accelerated filer	[  ]	Accelerated filer	[  ]
Non-accelerated filer	[  ]	Smaller reporting company	[X]

 

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

 

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

 

As of April 16, 2017, the registrant had 49,712,731 shares issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

TABLE OF CONTENTS

 

			Page
PART I
Item 1.	Business		4
Item 1A.	Risk Factors		16
Item 1B.	Unresolved Staff Comments		16
Item 2.	Properties		16
Item 3.	Legal Proceedings		16
Item 4.	Mine Safety Disclosures		16
PART II
Item 5.	Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities		17
Item 6.	Selected Financial Data		17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		19
Item 8.	Financial Statements and Supplementary Data		20
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		21
Item 9A.	Controls and Procedures		21
Item 9B.	Other Information		22
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		23
Item 11.	Executive Compensation		24
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		25
Item 13.	Certain Relationships and Related Transactions, and Director Independence		26
Item 14.	Principal Accountant Fees and Services		26
PART IV
Item 15.	Exhibits and Financial Statement Schedules		27

 

 

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

 

PART I

 

Item 1. Business

 

Overview of the Market

 

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

 

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

 

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

 

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

 

The second phase of our strategy is to secure options to purchase the tenant’s operations when it becomes legal on a federal level to operate cannabis distribution 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.

 

Value Proposition

 

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

 

Value proposition 2: With each lease, Diego negotiates an acquisition contract with selected licensed tenants to acquire their operations. This contract will be executed at Diego’s option, and upon changes to federal law, introduces our second value proposition—ownership of operations in an industry that is projected to exceed $8 billion by 2018.

 

Revenue Generation and Growth

 

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

 

	●	Acquire via lease or purchase, target properties to be improved for the growing, processing, distribution, and sale of medical and recreational marijuana, extracts and ancillary products.
	●	Sub-leases or leases these properties to state licensed operators.

 

 

	●	Capitalizes, where possible, on the build-out and leases turnkey Retail, Processing and/or Growing facilities.
	●	Creates future merger agreements with those operators deem capable of carrying the Diego brand.
	●	Hold Merger Agreements with Diego and other favored partners that will trigger when marijuana commerce becomes legal (or not illegal) federally.
	●	Own DP Brands and other Intellectual Property (IP) in all places filed.
	●	Charge reasonable Market Net-Rents to the store owners/Operators to recover all build-out and start-up investment plus profit margin over the first lease term (generally five years.)
	●	Sell non-cannabis branded products lines such as apparel and edibles at wholesale to leased stores.
	●	Create an e-commerce platform selling non-cannabis branded merchandise
	●	Continue to build and market the brand utilizing all forms of media including traditional and digital media, social media, e-commerce, and strategic partners.

 

Why We Believe this is a Winning Strategy

 

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

 

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

 

What we accomplished in 2016:

 

In 2016, Diego Pellicer focused on opening its two retail facilities and maximizing rent in the two grow facilities. We were successful in accomplishing this.

 

Table 1: Property Portfolio

 

Purpose		Size		City		State
Retail (recreational and medical)		3,300 sq.ft.		Denver		CO
Grow Warehouse		18,600 sq.ft.		Denver		CO
Grow Warehouse		14,800 sq.ft.		Denver		CO
Flagship recreational MJ store w/café and apparel		4,500 sq.ft.		Seattle		WA

 

Diego’s Washington tenant opened our first flagship store in Seattle in October, 2016. The Colorado tenant opened the Diego Denver branded flagship store in February, 2017. In addition, Diego’s two cultivation facilities in Denver, CO began production in late 2016.

 

Recurring lease revenues from signed agreements are amenable to forecast. Likewise, forecasting expenses of lease obligations for which Diego has signed contracts are also amenable to forecasting. As executed, by this summer Diego’s leases will be generating cash of over $120,000 monthly net of lease costs. After amortization of construction costs, gross income from leases will be over $100,000. In addition to this, there will be income from accessory sales.

 

 

 

Diego Pellicer Seattle

 

 

 

Diego Pellicer Denver

 

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

 

 

What does our premium branding accomplish?

 

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

 

 

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

 

Our Seattle and Denver stores have been met with enthusiastic demand generating revenues many times that of the average store in the same marketplace. This is proving the initial Diego concept.

 

 

The Industry: What is the Evidence of Rapid Growth?

 

Legalization of marijuana is a very recent movement. California was the first to legalize in 1996 when medical marijuana was approved. Even more recently, in 2012, recreational marijuana began to be legalized. The huge market is recreational marijuana. The following is the history:

 

Medical Marijuana Begins

 

1996: California legalized medical cannabis. (California Proposition 215)

1996: First marijuana dispensary, Marin Alliance for Medical Marijuana appears in Fairfax, California, USA.

1998: Oregon, Alaska, and Washington legalized medical cannabis

1999: Maine legalized medical cannabis

2000: Hawaii, Nevada, and Colorado legalized medical cannabis. Hawaii became the first state to do so by state legislature.

2004: Montana and Vermont legalized medical cannabis.

2007: New Mexico legalized medical cannabis.

2008: Michigan legalized medical cannabis. Massachusetts decriminalized cannabis.

2010: New Jersey and Arizona legalized medical cannabis. (Arizona’s proposition 203)

2010: California decriminalizes possession to a civil infraction

2012: Massachusetts legalized medical cannabis. (Massachusetts Medical Marijuana Initiative)

 

Recreational Marijuana begins

 

2012: Colorado and Washington legalized recreational marijuana for adults 21 years of age or older.

2014: Minnesota and New York legalized medical

2014: Utah legalizes CBD oil, becoming the first state to legalize a cannabis-based medicine without legalizing medical cannabis entirely.

2014: Oklahoma legalizes trials of CBD oil.

2014: Alaska and Oregon legalized recreational cannabis. Alaska’s law took effect on February 25, 2015. Oregon’s initiative began on July 1, 2015.

2015: Georgia and Texas legalized CBD oil.

2015: Louisiana legalized medical cannabis.

2015: Delaware decriminalized cannabis.

2016: Ohio and Pennsylvania legalized medical cannabis via state legislature.

2016: Illinois decriminalized cannabis.

2016: California, Nevada, Maine and Massachusetts legalized recreational cannabis via ballot initiative.

2016: Florida, North Dakota, and Arkansas legalized medical cannabis via ballot initiative.

 

 

 

Support for medical and recreational marijuana use has increased significantly over the past 20 years. According to a recent CNN poll, greater than 50% of the US population supports marijuana legalization. Figure 1 illustrates a select set of CNN poll results.

 

 

Figure 1: CNN/ORC Poll Results on Marijuana Use in the US

 

¹ CNN 2015

² Marijuana Business Daily, November 14, 2016

 

 

The US state-sanctioned medical and recreational marijuana market generated a total revenue of $5.4 billion in 2015, boosted by an incredible growth in the recreational sector of sales, from $351M to $998M, an estimated increase of 184% over 2014. By comparison, the marijuana market is less than 3% of the US tobacco market, a $144 billion market that has no medicinal value, and less than 3% of the alcohol market, which valued at $113.5 billion in 2014³.

 

Legalization resulted in rapid revenue growth in the U.S. Recreational is the big growth market. Most of the states that have legalized it for recreational use do not yet have the first store open. The marijuana secondary and tertiary markets have not yet been analyzed as sources of revenue; however, emerging secondary markets such as marijuana tourism could become a significant source of income for recreational legal states. As a point of comparison, Holland earns $48.55 billion per year in tourist dollars. Of the 10 million tourists, 5.5 million or 55% of tourists visit bars and cafes, generating a total of nearly $27 billion and 220,000 jobs.⁴ This equals roughly 30% of all business revenue generated in Washington state in 2012.⁵

 

Marijuana has become a major issue in state elections as voters are seeking politicians that support legalization.⁶ As states legalize marijuana, and international markets develop, the emerging legalized marijuana industry will begin to rival that of tobacco and alcohol. Table 1 summarizes 2016 estimated revenues generated by marijuana retail sales based on a number of sources, including state marijuana program reports.

 

 

Table 1⁷

 

The performance of the market is forecast to accelerate, with an anticipated growth of an average of 27% over the next four years to an expected market value greater than $45 billion by the end of

 

³ Marijuana Business Daily 2016, 2016 Brain Research Institute

⁴ NBTC Holland Marketing, 2009

⁵ Washington State Department of Revenue, 2014

⁶ Drug Policy Alliance, Steven Gutwillig, 2014

⁷ USA Today May 21, 2016

 

 

Where are the Greatest Market Opportunities?

 

Market distribution can be measured indirectly with registered medical consumers and dispensaries. As expected, California has the largest number of marijuana patients at more than 775,000, followed by Michigan at 344,000 and Colorado with 107,000. Washington is at 125,000 registered patients as listed in Table 2 and illustrated in Figure 3. There are currently an estimated 1.5 million medical marijuana patients in the US.

 

Table 2: Registered Medical Marijuana Patients 2015⁸

 

		Registered
State		Patients
Arizona		$	87,733
California			775,000
Colorado			107,534
Connecticut			8,201
DC			3,577
Delaware			776
Hawaii			13,150
Illinois			4,400
Maine			20,000
Massachusetts			19,000
Michigan			344,000
Montana			30,000
New Hampshire			1,600
New Jersey			6,354
New Mexico			19,629
Nevada			13,561
Oregon			77,620
Rhode Island			12,815
Vermont			2,477
Washington			125,000
Estimated Total Patients		$	1,508,594

 

⁸ Marijuana Business Daily 2016

 

 

Another indirect measure of market distribution is the number of medical marijuana dispensaries. Table 3 provides the distribution of dispensaries across the US.

 

Table 3: Registered Medical Marijuana Dispensaries⁹

 

State		Registered Dispensaries
Alaska			0
Arizona			98
California			2,000
Colorado			516
Connecticut			6
DC			5
Delaware			1
Hawaii			0
Illinois			28
Maine			8
Massachusetts			4
Michigan			325
Montana			60
New Hampshire			4
New Jersey			5
New Mexico			29
Nevada			12
Oregon			400
Rhode Island			3
Vermont			4
Washington			800
Estimated Total Dispensaries			4,308

 

Although this is a good indicator of demand but it is limited as a predictor because of current legal constraints. In our estimation, the most important indicator of future demand for cannabis is the population in various states that have recently legalized recreational cannabis. This is Diego’s conclusion. We are therefore targeting California, Florida, and Nevada.

 

⁹ Source: (Marijuana Business Daily 2016; Illinois Cannabis Patients Association, 2010; Leal, 2014; Marijuana Business Daily, 2013)

 

 

What Benchmarks could Diego be Measured Against?

 

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

 

Table 4: Real Estate Holding and Branding Financial Benchmark-$000¹⁰

 

						Most
		Market				Recent																For the
		Cap at				Year's				Cost of				Gross								year
		3/24/16				Revenue				Revenue				Margin %				Net Profit				ended
General Cannabis Corp(CANN)		$	33.05M			$	1,762,978			$	1,423,029				19	%		$	(8,786,277	)		12/31/2015
Mountain High Acquisitions Corp.(MYHI)			12.19M				23,057				2,204				90	%			(2,938,475	)		3/3/2016
Agritek Holdings, Inc.(AGTK)			9.49M				7,221				40,916				-467	%			(2,115,828	)		12/31/2015
Innovative Industrial Properties, Inc.(IIPR)*			57.64M				321,000				87,000				73	%			(4,392,000	)		12/31/2016

 

*Innovative Industrial Properties is for 2016, having completed an IPO in December 2016.

 

Status of Federal Law

 

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

 

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

 

In a memorandum dated August 29, 2013, addressed to “All United States Attorneys” from James M. Cole, Deputy Attorney General (“Cole Memo”), the U.S. Department of Justice acknowledged that certain U.S. States had enacted laws relating to the use of marijuana and outlined the U.S. federal government’s enforcement priorities with respect to marijuana notwithstanding the fact that certain U.S. States have legalized or decriminalized the use, sale and manufacture of marijuana:

 

	●	Preventing the distribution of marijuana to minors;
	●	Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
	●	Preventing the diversion of marijuana from U.S. states where it is legal under state law in some form to other U.S. states;
	●	Preventing U.S. state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
	●	Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
	●	Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
	●	Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
		Preventing marijuana possession or use on U.S. federal property.

 

¹⁰ Finance Yahoo and EDGAR

 

 

Newsweek recently reported:

 

“Representative Jared Polis (D-Colo.) recently introduced a bill that would make marijuana federally legal and allow the plant to be regulated as alcohol is in the U.S. Under the new bill, called the Regulate Marijuana Like Alcohol Act, the plant would be removed from its Schedule I listing on the Controlled Substances List and would be regulated by the Bureau of Alcohol, Tobacco, Firearms and Explosives. Adults 21 and up would be able to purchase and consume cannabis legally across the nation. Advertising rules similar to those regarding alcohol would also apply to marijuana under the bill.

 

The Regulate Marijuana Like Alcohol Act is part of a package of three cannabis-related bills introduced Thursday by members of the Cannabis Caucus in the House of Representatives, of which Polis is a member along with Sen. Ron Wyden, D-Ore. and Rep. Earl Blumenauer, D-Ore., who also sponsored the measures.”¹¹

 

There is no guarantee that the current presidential administration will not change its stated policy regarding the low priority enforcement of U.S. federal laws that conflict with state laws. Additionally, the new U.S. federal government administration could change this policy and decide to enforce the U.S. federal laws vigorously. Any such change in the U.S. federal government’s enforcement of current U.S. federal laws could cause adverse financial impact to the Company’s business.

 

The Washington Post reported this after Jeff Session’s confirmation hearing for Attorney General on January 10, 2017:

 

“In his Senate confirmation hearing on Tuesday, Sen. Jeff Sessions, President-elect Trump’s nominee for attorney general, declined to say whether he’d adhere to the more lenient marijuana enforcement guidelines adopted by the Obama administration’s Justice Department in states that have legalized medicinal or recreational marijuana use. “Would you use our federal resources to investigate and prosecute sick people who are using marijuana in accordance with their state laws, even though it might violate federal laws?” Senator Patrick Leahy (D.-Vermont) asked. “I won’t commit to never enforcing federal law, Senator Leahy,” Sessions replied. “I think some of [the Obama-era guidelines] are truly valuable in evaluating cases,” he added. “Using good judgment about how to handle these cases will be a responsibility of mine. I know it won’t be an easy decision, but I will try to do my duty in a fair and just way.” Under Obama, the Department of Justice largely adopted a hands-off approach to marijuana enforcement in states that legalized the drug for medical or recreational use, provided that certain criteria — like keeping the drug out of the hands of children — were met under state laws. That policy was outlined in a Justice Department document that came to be known as the Cole Memo, for former U.S. Deputy Attorney General James Cole, who drafted the memo.

 

Drug policy experts have said that this tacit green light from the Obama administration was instrumental in Colorado and Washington’s decisions to fully follow through on recreational marijuana laws passed by voters in 2012. In November 2016, four more states including California voted to make the recreational use of marijuana legal, bringing the total to eight states plus the District. Medicinal marijuana has been legalized in 28 states.

 

In prior public statements, Sessions was harshly critical of the Justice Department ‘s approach on the issue. In an April 2016 Senate drug hearing, Sessions said, “I think one of [Obama’s] great failures, it’s obvious to me, is his lax treatment in comments on marijuana. It reverses 20 years almost of hostility to drugs that began really when Nancy Reagan started ‘Just Say No.’”

 

Sessions also said at the time that “the Department of Justice needs to be clearer” on marijuana legalization and enforcement. Sessions didn’t appear to commit to providing such clarity today. He neither voiced support for the Obama-era rules, nor signaled that he was eager to throw them away altogether. Marijuana legalization advocate Tom Angell called it a “good sign that Sen. Sessions seemed open to keeping the Obama guidelines, if maybe with a little stricter enforcement of their restrictions.”

 

“It is notable that Sen. Sessions chose not to commit to vigorously enforcing federal prohibition laws in states that have reformed their marijuana laws,” said Robert Capecchi of the Marijuana Policy Project in a statement. “He was given the opportunity to take an extreme prohibitionist approach and he passed on it.”

 

Marijuana industry leaders voiced similar notes of cautious optimism. “Though it is possible that a slightly more restrictive ‘Sessions Memo’ will replace the existing Cole Memo,” said Frank Lane, Vice President of financial services company CannabisFN, “we do not believe an AG Sessions will disrupt the long-term growth prospects of the U.S. cannabis industry.”

 

¹¹ Newsweek, “Marijuana Could Soon Be Regulated Like Alcohol in All 50 States,”

By Janice Williams on 3/31/17 AT 9:56 AM

 

 

Later in the hearing, Sessions noted that “the U.S. Congress has made the possession of marijuana in every state, and distribution of it, an illegal act. So if that’s not desired any longer, Congress should pass a law to change the rule.” Those words echo remarks by President Obama, who has repeatedly rebuffed calls to reschedule marijuana by saying that it is properly Congress’ job to change the nation’s drug laws.

 

President-elect Trump has himself given mixed signals on marijuana laws. He has spoken out about the negative effects of making marijuana recreationally available, but has said that changes to marijuana law should be handled on a state-by-state basis.

 

In a reminder of the low salience of marijuana reform for many lawmakers and voters, the questions to Sessions on marijuana law came roughly six hours into his first day of hearings. By that time, many of the Senators had already left the room.”

 

In February 2014, FinCEN issued guidelines allowing banks to legally provide financial services to Licensed Operators that hold a valid License (“FinCEN Memo”). The rules re-iterated the guidance provided by the Cole Memo, stating that banks can do business with Licensed Operators and “may not” be prosecuted. The guidelines provide that “it is possible [for the banks] to provide financial services” to Licensed Operators and while remaining in compliance with federal anti- money laundering laws. The guidance falls short of the explicit legal authorization that banking industry officials anticipated and the outcome of the banks relying on this guidance in transacting with Licensed Operators is currently unclear.

 

Employees

 

We presently have four full-time employees and no part-time employee. We consider our relationship with our employees to be excellent. We also had independent consultants under contract to provide financial management services, business development services, and sales management services. In addition to the diverse technical, intellectual property, legal, financial, marketing and business expertise of our professional team, from time to time we rely on advice from outside specialists to fulfill unique technology and other needs.

 

Item 1A. Risk Factors

 

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

 

Item 1B. Unresolved items

 

None.

 

Item 2. Location

 

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

 

Item 3. Legal proceedings

 

On February 22, 2017, through his Counsel, Douglas Anderson, the Company’s founder, made a demand against the Company for arbitration of his claim that he is a current member of the Company’s Board of Directors. On March 10, 2017, Anderson’s Counsel filed an arbitration demand with the American Arbitration Association as well as demanding that the Company pay his legal fees. The Company had previously accepted Anderson’s resignation from the Company’s Board of Directors and intends to vigorously defend Anderson’s arbitration proceedings which, the Company believes is without merit.

 

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

 

Item 4. Mine Safety

 

Not applicable.

 

 

PART II

 

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

 

There is no established public trading market for our common stock. As of the date of this Report, there are outstanding options and warrants to purchase 1,991,172 shares of common stock of the Registrant.

 

Record Holders

 

As of April 16, 2017, there were approximately 183 shareholders of record holding a total of 49,712,731 shares of common stock. The holders of the common stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock.

 

Dividends

 

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

 

Unregistered Sale of Equity Securities

 

●	During three months ended December 31, 2016, the Company issued Mr. Steve Norris 88,333 shares of common stock valued at $26,500 for services.
●	During three months ended December 31, 2016, the Company issued Mr. Ron Throgmartin 528,193 shares of common stock valued at $$158,457 for services
●	During three months ended December 31, 2016, the Company issued Mr. Alan Valdes 671,181 shares of common stock valued at $201,354 for services
●	During three months ended December 31, 2016, the Company issued Mr. Strachan for 39,666 shares of common stock valued at $11,900 for services.
●	During three months ended December 31, 2016, the Company issued 1,040,909 shares of common stock to various third parties valued at $366,773 for services.
●	During three months ended December 31, 2016, the Company issued to various investors 1760,753 shares of common stock for cash received in amount of $335,000.
●	During three months ended December 31, 2016, the Company issued to 255,074 shares of common stock for debt conversion in amount of $76,522

 

Item 6. Selected Financial Data

 

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

 

 

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

 

The following discussion and analysis of the results of operations and financial condition of Diego Pellicer Worldwide, Inc. (the “Company”, “we”, “us” or “our”) should be read in conjunction with the financial statements of Diego Pellicer Worldwide, Inc. and the notes to those financial statements that are included elsewhere in this Form 10-K. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those 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 and Washington, 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

 

Year ended December 31, 2016 compared to year ended December 31, 2015

 

		Year Ended				Year Ended				Increase (Decrease)
		December 31, 2016				December 31, 2015				$				%
Revenues
Rental income		$	310,220			$	50,530			$	259,690				514	%
Product income			9,959				-				9,959				*
Licensing revenue			54,000				54,000				-				0	%
Total Revenues		$	374,179			$	104,530			$	269,649				258	%

* Not divisible by zero

 

For the year ended December 31, 2016 and 2015, the Company had leased four facilities as follows: Colorado (3) and Washington (1).

 

Total revenue for the year ended December 31, 2016 was $374,179, as compared to $104,530 for the year ended December 31, 2015, an increase of $269,649, and represents recognition of income on the Plandai Biotechnology license of $54,000 for both periods, and licensing income of $54,000 and $54,000, 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 year ended December 31, 2016 and 2015, $54,000 was recognized as licensing revenue.

 

For the year ended December 31, 2016 and 2015, rental income of $310,220 and $50,530 was derived from the Colorado sub-leases.

 

		Year Ended				Year Ended				Increase (Decrease)
		December 31, 2016				December 31, 2015				$				%
Operating expense
General and administrative expenses			5,021,058				13,616,359				(8,595,301	)			(63	)%
Rents expense			1,103,824				1,228,028				(124,204	)			(10	)%
Write-off interest income			-				153,523				(153,523	)			*
Total costs and expenses		$	6,124,882			$	14,997,910			$	(8,873,028	)			(59	)%

* Not divisible by zero

 

 

General and administrative. Our general and administrative expenses for the year ended December 31, 2016 were $5,021,058, compared to $13,616,359 for the year ended December 31, 2015. The decrease of $8,595,301, which was primarily attributable to non-employee stock compensation and operation during the year ended December 31, 2015.

 

Rent expense. We incurred rent expense from four separate facilities leased during 2015 and 2016. The rent incurred from these properties during the year ended December 31, 2016 and 2015 was $1,103,824 and $1,228,028.

 

Write-off of interest income. We wrote-off $0 and $153,523 interest income accrued on our line of credit for the year ended December 31, 2016, and 2015, respectively.

 

		Year Ended				Year Ended				Increase (Decrease)
		December 31, 2016				December 31, 2015				$				%
Other income (expense):
Interest expense		$	(298,696	)		$	(811,726	)		$	513,030				(63	)%
Interest expense - related party			(9,474	)			-				(9,474	)			*
Interest income			-				153,523				(153,523	)			(100	)%
Impairment of investment			(73,334	)			(408,900	)			335,566				(82	)%
Write-off note receivable			-				(40,000	)			40,000				(100	)%
Impairment of fixed assets			(931,664	)			-				(931,664	)			*
Change in fair value of derivative liabilities			5,359				133,809				(128,450	)			(96	)%
Total costs and expenses		$	(1,307,809	)		$	(973,294	)		$	(334,515	)			34	%

 

* Not divisible by zero

 

Write-off of note receivable. During the year ended December 31, 2015 we determined that monies loaned to an unrelated third party became uncollectible. Accordingly we wrote off $40,000 past due principal balance of note receivable in 2015. There was no interest that had been accrued or was written off.

 

Impairment of Investment. The shares of Plandai are currently trading at $.026 per share. Accordingly, the Company impaired $73,334 and $408,900 during the years ended December 31, 2016 and 2015.

 

Impairment of property and equipment. During year ended December 31, 2016, we impaired $931,664 in leasehold improvements to market at a 30% discounted cash flow from sublease net of lease cost.

 

LIQUIDITY AND CAPITAL RESOURCES

 

		Year Ended				Year Ended				Increase (Decrease)
		December 31, 2016				December 31, 2015				$				%
Net Cash used in operating activities		$	(557,240	)		$	(2,813,338	)		$	2,256,098				(80	)%
Net Cash used in investing activities			(857,469	)			(624,764	)			(232,705	)			37	%
Net Cash provided by financing activities			1,430,041				3,441,002				(2,010,961	)			(58	)%
Net Increase in Cash			15,332				2,900				12,432				429	%
Cash - beginning of period			36,001				33,101				2,900
Cash - end of period		$	51,333			$	36,001			$	15,332				43	%

 

Operating Activities. For the year ended December 31, 2016, we used net cash in operations of $557,240, which includes $9,447 on the depreciation and amortization, $54,000 on the amortization of deferred revenue, $6,667 on beneficial conversion feature, $82,458 on amortization of debt discount, $16,044 on initial derivative liabilities exceed convertible note principal, $73,334 on impairment of investments, $931,664 on impairment of property and equipment, $305,153 on accrued expenses related party, ($5,539) on change in fair value of derivative liability, $145,362 fair value of warrants and options issued for services, $3,323,257 on non-cash stock compensation and $1,675,419 on changes in operating assets and liabilities. The net cash used for the year ended in December 31, 2015 was $ 2,813,338, which includes $54,000 on amortization of deferred revenue, $743,087 on non-cash interest, ($153,523) on interest income, $408,900 on impairment of investments, $387,121 on accrued expenses related party, ($133,809) on change in fair value of derivative liability, $13,167,722 on non-cash stock compensation, $40,00 on write-off note receivable, $153,523 on write-off interest income and $1,505,685 on changes in operating assets and liabilities.

 

Investing Activities. For the year ended December 31, 2016, cash used for investing activities amounted to $857,469, which includes $860,469 on the acquisition of property and equipment, and $3,000 for a security deposit. The cash used for investing activities for the year ended December 31, 2015 of $624,764 includes $584,764 for the acquisition of property and equipment, $200,000 advanced and repaid under line of credit, and $40,000 related to a note receivable.

 

Financing Activities. Funds provided from financing activities for the year ended December 31, 2016 and 2015 were $1,430,041 and $3,441,002 respectively. During the year ended December 31, 2016, we received $464,050 from advances under a note payable, and $120,500 from a convertible note payable, and received $845,491 from sale of common stock. During the year ended December 31, 2015 our net cash proceed from sales of preferred stock and warrants was $1,129,999, proceeds from note payable were $846,628, $300,000 from a convertible note payable and 1,164,375 from the sale of common stock

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 7A. 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 8. Financial Statements and Supplementary Data.

 

Diego Pellicer Worldwide, Inc.

December 31, 2016 and 2015

Index to the Consolidated Financial Statements

 

Contents		Page(s)
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets at December 31, 2016 and 2015		F-2
Consolidated Statements of Comprehensive Loss for the Year Ended December 31, 2016 and 2015		F-3
Consolidated Statement of Changes in Stockholders’ Deficit for the Year Ended December 31, 2016 and 2015		F-4
Consolidated Statements of Cash Flows for the Year Ended December 31, 2016 and 2015		F-5
Notes to the Consolidated Financial Statements		F-6

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

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

 

We have audited the accompanying consolidated balance sheets of Diego Pellicer Worldwide, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive loss, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2016. Diego Pellicer Worldwide, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Diego Pellicer Worldwide, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has recurring losses since inception, its current liabilities exceed its current assets by $4,411,156, and has an accumulated deficit of $28,114,125 at December 31, 2016. These factors, among others raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Hackensack, NJ
April 29, 2017

 

 

Diego Pellicer Worldwide, Inc.

Consolidated Balance Sheets

 

		December 31, 2016				December 31, 2015
Assets
Current assets:
Cash and equivalents		$	51,333			$	36,001
Accounts receivable			-				1,110
Prepaid expenses			482,765				651,713
Inventory			47,025				80,971
Other receivables			-				17,817
Total current assets			581,123				787,612
Property and equipment, net			758,112				838,754
Other assets:
Investments, at cost, net of impairment of $482,234 and $408,900			43,333				116,667
Security deposits			170,000				173,000
Deposits - end of lease			150,000				150,000
Total other assets			363,333				439,667
Total assets		$	1,476,041			$	2,066,033
Liabilities and Stockholder’s Deficit
Current liabilities:
Accounts payable and accrued expense		$	2,031,600			$	585,997
Accrued expenses - related party			509,294				511,454
Accrued compensation			-				6,250
Deferred rent			107,957				120,234
Deferred revenue			53,000				53,000
Notes payable			1,310,678				846,628
Notes payable - related parties			307,312				-
Convertible notes payable			334,156				300,000
Derivative Liabilities			338,282				208,795
Total current liabilities			4,992,279				2,632,358
Deferred revenue			316,000				370,000
Total liabilities			5,308,279				3,002,358
Stockholder’s deficit
Series A and B preferred stock, $0.0001 par value, 5,000,000 shares authorized, 0 share issued and outstanding as of December 31, 2016 and 2015			-				-
Common stock, $0.000001 par value, 95,000,000 shares authorized, 49,081,878 and 37,805,416 shares were issued and outstanding as of December 31,2016 and 2015, respectively			49				38
Additional paid-in capital			24,508,365				20,111,077
Accumulated deficit			(28,114,125	)			(21,047,440	)
Total stockholder’s deficit			(3,605,711	)			(936,325	)
Total liabilities and stockholder’s deficit		$	1,702,568			$	2,066,033

 

See accompanying notes to the consolidated financial statements

 

 

Diego Pellicer Worldwide, Inc.

Consolidated Statements of Comprehensive Loss

 

		Year Ended				Year Ended
		December 31, 2016				December 31, 2015
Revenues
Rental income		$	310,220			$	50,530
Product income			9,959				-
Licensing revenue			54,000				54,000
Total revenues			374,179				104,530
Cost of revenues			8,173				-
Operating expenses:
General and administrative expenses			5,021,058				13,616,359
Rent expense			1,103,824				1,228,028
Write-off interest income			-				153,523
Total operating expenses			6,124,882				14,997,910
Loss from operations			(5,758,876	)			(14,893,380	)
Other income (expense):
Interest expense			(298,673	)			(811,726	)
Interest expense – related party			(9,497	)			-
Interest income			-				153,523
Impairment of investment			(73,334	)			(408,900	)
Write-off note receivable			-				(40,000	)
Impairment of property and equipment			(931,664	)			-
Change in fair value of derivative liabilities			5,359				133,809
Total other income (expense)			(1,307,809	)			(973,294	)
Loss before benefit for taxes			(7,066,685	)			(15,866,674	)
Benefit for taxes			-				-
Net loss		$	(7,066,685	)		$	(15,866,674	)
Loss per share - basic and fully diluted		$	(0.17	)		$	(0.62	)
Weighted average common shares outstanding - basic and fully diluted			42,436,405				25,485,231

 

See accompanying notes to the consolidated financial statements

 

 

Diego Pellicer Worldwide, Inc.

Consolidated Statement of Stockholders’ Deficit

For the Years Ended December 31, 2016 and 2015

 

		SHARES												$
		Common				Treasury				Preferred				Common				Treasury				Preferred				Additional				Accumulated
		Shares				Shares				Shares				Shares				Shares				Shares				Paid-in Capital				Deficit				Total
Balance - December 31, 2014			13,520,000				(58,200	)			5,036,769			$	14			$	(87,300	)		$	5			$	4,335,817			$	(5,180,766	)		$	(932,230	)
Sale of preferred stock			-				-				753,332				-				-				75				1,129,916				-				1,129,991
Sale of common stock			3,881,251				-				-				4												1,164,371								1,164,375
Effect of reverse merger			7,743,333				-				50,996				8				-				-				-				-				8
Cancellation of treasury shares			(58,200	)			58,200				-				-				87,300				-				(87,300	)			-				-
Conversion of preferred shares to common			5,841,097				-				(5,841,097	)			6				-				(80	)			74				-				-
Issuance of common shares for consulting services			4,699,355				-				-				3				-				-				9,523,905				-				9,523,908
Common stock issued for note payable			126,000				-				-				-				-				-				84,000				-				84,000
Non-employee stock compensation			2,052,580				-				-				3				-				-				3,069,561				-				3,069,564
Warrants issued for services			-				-				-				-				-				-				574,250				-				574,250
Warrants issued for note			-				-				-				-				-				-				316,483				-				316,483
Net loss			-				-				-				-				-				-				-				(15,866,674	)			(15,866,674	)
Balance - December 31, 2015			37,805,416				-				-				38				-				-				20,111,077				(21,047,440	)			(936,325	)
Sale of common stock			5,327,051				-				-				5				-				-				845,486				-				845,491
Issuance of common shares for consulting services			2,228,297				-				-				2				-				-				1,259,943				-				1,259,945
Non-employee stock compensation			3,466,040				-				-				4				-				-				2,063,308				-				2,063,312
Common stock issued for note payable conversion			255,074								-				-				-				-				76,522				-				76,522
Fair value of warrant and option issued for services			-				-				-				-				-				-				145,362				-				145,362
Beneficial conversion feature			-				-				-				-				-				-				6,667				-				6,667
Net loss			-				-				-				-				-				-				-				(7,066,685	)			(7,066,685	)
Balance - December 31, 2016			49,081,878				-				-				49			$	-			$	-			$	24,508,365			$	(28,114,125	)		$	(3,605,711	)

 

See accompanying notes to the consolidated financial statements

 

 

Diego Pellicer Worldwide, Inc.

Consolidated Statements of Cash Flows

 

		Year Ended				Year Ended
		December 31, 2016				December 31, 2015
Operating Activities
Net Loss		$	(7,066,685	)		$	(15,866,674	)
Adjustments to reconcile Net Loss to net cash provided by Operations:
Depreciation and amortization			9,447				-
Amortization of deferred revenue			(54,000	)			(54,000	)
Non-cash interest			-				743,087
Beneficial conversion feature			6,667				-
Interest income			-				(153,523	)
Amortization of debt discount			82,458				-
Non-cash interest			16,044				-
Impairment of investments			73,334				408,900
Impairment of property and equipment			931,664				-
Accrued expenses - related party			305,152				387,121
Change in fair value of derivative liability			(5,359	)			(133,809	)
Fair value of warrants and options issued for services			145,362				-
Non-cash stock compensation			3,323,257				13,167,722
Write-off note receivable			-				40,000
Write-off interest income			-				153,523
Changes in operating assets and liabilities:
Prepaid expenses and other receivable			186,765				(660,584	)
Liabilities for Equity Shares to be Issued			-				-
Deferred rent			(12,277	)			120,234
Inventory			33,946				(80,971	)
Accrued compensation			(6,250	)			(1,170,313	)
Accounts Receivable			1,110				(1,110	)
Accounts Payable			1,472,125				287,059
Net cash used in operating activities			(557,240	)			(2,813,338	)
Investing Activities
Acquisition of property and equipment			(860,469	)			(584,764	)
Security deposits			3,000				-
Issuance of note receivable			-				(40,000	)
Repayment under line of credit			-				200,000
Advances under line of credit			-				(200,000	)
Net cash used in investing activities			(857,469	)			(624,764	)
Financing Activities
Proceeds from sale of Preferred stock and warrants			-				1,129,999
Proceeds from note payable			464,050				846,628
Proceeds from convertible note payable			120,500				300,000
Proceeds from sale of common stock			845,491				1,164,375
Net cash provided by financing activities			1,430,041				3,441,002
Net Increase (Decrease) in Cash			15,332				2,900
Cash - beginning of period			36,001				33,101
Cash - end of the period		$	51,333			$	36,001
Non-Cash Investing & Financing Disclosure
Derivative liability recognized as debt discount		$	118,802			$	225,920

 

 

See accompanying notes to the consolidated financial statements

 

 

Diego Pellicer Worldwide, Inc.

December 31, 2016 and 2015

Notes to the Consolidated Financial Statements

 

Note 1 – Organization and Operations

 

History

 

On March 13, 2015 (the “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 – Significant and Critical Accounting Policies and Practices

 

The Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often 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 World-wide 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.

 

 

Reclassifications

 

Financial statement amounts for the year ended December 31, 2015 have been reclassified to conform to current period presentation.

 

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 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. The Company intends to re-evaluate all of 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 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 December 31, 2016 and 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 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

 

 

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. We evaluate the collectability of accounts receivable based on a combination of factors. We recognize reserves for bad debts based on estimates developed using standard quantitative measures that incorporate historical write-offs and current economic conditions. As of December 31, 2016, the outstanding balance allowance for doubtful accounts is zero.

 

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 for 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. Management has decided to reserve these deferred amounts due to the contingency factor and experience with typical delays in governmental action.

 

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

 

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 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 (physical settlement or net-share settlement). 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. 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.

 

Loss per common share

 

Net loss per share is provided in accordance with ASC Subtopic 260-10. The Company presents 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 $4,411,156, and has an accumulated deficit of $28,114,125 at December 31, 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 – Revolving Credit Line

 

In 2014 the Company entered into an agreement with a tenant who intended to operate their business out of three separate properties leased to him by the Company. He was required to obtain a state operating license to grow, process and sell cannabis products. Until the tenant received such license, the Company provided the tenant a $2,500,000 revolving line of credit established to provide funding to the tenant, consisting of two separate elements: (a) to fund operating costs until the development is completed, and (b) to underwrite the rent due on the sublease agreements (the “Line”). Interest was accruing at the annual rate of 20% on the average monthly amount due on advances under the Line.

 

During 2014 the Company had extended $707,250 in advances against the Line to underwrite rent due during that period under the lease agreements. As well, the Company incurred accrued and unpaid interest expenses of $70,596 for the period. The total amount, $777,846 was written off as the Company believed these amounts to be uncollectable.

 

During the year ended December 31, 2015, further advances under the Line of $200,000 were made and interest was recorded in the amount of $153,523. On September 7, 2015, the Company entered into an agreement terminating the Line in exchange for a one-time payment of $200,000. The remaining accrued interest as of that date, $153,523 was written off pursuant to the agreement.

 

Note 5 – Note Receivable

 

During 2015 the Company advanced $40,000 to an unrelated third party. The note was non-interest bearing and due on November 10, 2015. The Company determined that the amount was uncollectable as of December 31, 2015 and wrote off the amount as uncollectible.

 

Note 6 – 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 licensing 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, as of December 31, 2016 the shares had 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 at the date of issuance. 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 the year ended December 31, 2016, the Company recorded an additional impairment loss of $73,334 based on the trading price of $0.026 per share as of December 31, 2016. The Company accounts for its investment under the cost method of accounting.

 

Note 7 – 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.

 

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

 

		Estimated
		Useful Lives		December 31, 2016				December 31, 2015
Machinery and equipment		5 years		$	39,145			$	174,145
Leasehold improvements		10 years			728,414				664,609
					767,559				838,754
Less: Accumulated depreciation and amortization					(9,447	)			-
Property and equipment, net				$	758,112			$	838,754

 

During the year ended December 31, 2016, the Company recorded an impairment loss of $1,066,664 for 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.

 

 

Note 8 – Other Assets

 

Security deposits

 

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

 

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 9 – Related Party

 

As of December 31, 2016 and December 31, 2015, the Company has accrued and unpaid consulting fees to related parties in the amount of $509,294 and $511,454, respectively. For the year ended December 31, 2016 and 2015, the consulting fees expense was $715,533 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, the Company 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, the Company entered into an agreement for the balance of accrued compensation payable to Mr. Throgmartin in amount of $281,914 as of June 1, 2016 to be converted (a) 50% of the accrued amount ($140,957) 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 ($140,957) 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 10 – Notes 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 upon earlier of (i) the maturity date of November 17, 2015 and (ii) the date the Company raises capital whether through the issuance of debt, equity or any other securities, whichever occurs first. 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 December 31, 2016 and December 31, 2015, the outstanding principle balance of the note is $450,000.

 

Subsequent to the period ended December 31, 2016 and on April 11, 2017, this note was consolidated into a convertible note due April 10, 2019.

 

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 upon earlier of (i) the maturity date of October 6, 2015 and (ii) the date the Company raises capital whether through the issuance of debt, equity or any other securities , whichever occurs first. 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 December 31, 2016, the outstanding principle balance of the note is $135,628.

 

Subsequent to the period ended December 31, 2016 and on April 11, 2017, this note was consolidated into a convertible note due April 10, 2019.

 

 

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 December 31, 2016, the outstanding principal balance of the note is $126,000.

 

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. During the year ended December 31, 2016, the Company paid $15,000 towards accrued interest and $5,950 towards principal.

 

As of December 31, 2016, the outstanding principle balance of the note is $129,050.

 

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 December 31, 2016, the outstanding principle balance of the note is $470,000.

 

Subsequent to the period ended December 31, 2016 and on April 11, 2017, this note was consolidated into a convertible note due April 10, 2019.

 

Note 11 – 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 December 31, 2016 and December 31, 2015, 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.

 

On December 31, 2016, principle balance of $25,000 and accrued interest of $1,522 were converted into 88,407 shares of common stock.

 

On July 11, 2016, the Company entered into a convertible note in total amount of $50,000 with third parties for use as operating capital. The convertible note requires the Company to repay the principal, together with 12% annual interest by the maturity date of April 11, 2017. The convertible note 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 December 31, 2016, the outstanding principle balance of the note is $50,000.

 

On October 17, 2016, the Company entered into convertible notes in total amount of $2,500 with third parties for use as operating capital. The convertible note requires the Company to repay the principal, together with 10% annual interest by the second anniversary date of this note. The convertible note can be converted into common stock of the Company at the lower of (A) fifty (50%) percent of the 10-day trailing average closing price of the Company’s Common Stock, calculated on the Conversion Date, or (B) $0.20 (the “Fixed Price Component”) (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company’s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events and issuances of securities at specified lower prices). The conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative liability of $4,905 as of the measurement date. $2,500 was recorded as debt discount and the remaining $2,405 was expensed immediately.

 

As of December 31, 2016, the outstanding principle balance of the note is $2,500.

 

On October 21, 2016, the Company entered into convertible notes in total amount of $50,000 with third parties for use as operating capital. The convertible note requires the Company to repay the principal, together with 10% annual interest by the second anniversary date of this note. The convertible note can be converted into common stock of the Company at the lower of (A) fifty (50%) percent of the 10-day trailing average closing price of the Company’s Common Stock, calculated on the Conversion Date, or (B) $0.20 (the “Fixed Price Component”) (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company’s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events and issuances of securities at specified lower prices). The Company recorded beneficial conversion feature in amount of $6,667.

 

As of December 31, 2016, the outstanding principle balance of the note is $50,000.

 

 

On October 24, 2016, the Company entered into convertible notes in total amount of $3,000 with third parties for use as operating capital. The convertible note requires the Company to repay the principal, together with 10% annual interest by the second anniversary date of this note. The convertible note can be converted into common stock of the Company at the lower of (A) fifty (50%) percent of the 10-day trailing average closing price of the Company’s Common Stock, calculated on the Conversion Date, or (B) $0.20 (the “Fixed Price Component”) (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company’s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events and issuances of securities at specified lower prices). The conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative liability of $5,273 as of the measurement date. $3,000 was recorded as debt discount and the remaining $2,273 was expensed immediately.

 

As of December 31, 2016, the outstanding principle balance of the note is $3,000.

 

On October 24, 2016, the Company entered into convertible notes in total amount of $15,000 with third parties for use as operating capital. The convertible note requires the Company to repay the principal, together with 10% annual interest by the second anniversary date of this note. The convertible note can be converted into common stock of the Company at the lower of (A) fifty (50%) percent of the 10-day trailing average closing price of the Company’s Common Stock, calculated on the Conversion Date, or (B) $0.20 (the “Fixed Price Component”) (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company’s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events and issuances of securities at specified lower prices). The conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative liability of $26,366 as of the measurement date. $15,000 was recorded as debt discount and the remaining $11,366 was expensed immediately.

 

As of December 31, 2016, the outstanding principle balance of the note is $15,000.

 

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, 2015		$	-
Issuance of embedded conversion features on convertible note			342,604
Change in fair value during period			(133,809	)
Balance at December 31, 2015			208,795
Issuance of embedded conversion features on convertible note			134,846
Change in fair value during period			(5,359	)
Balance at December 31, 2016		$	338,282

 

The following assumptions were used in calculations of the Black Scholes model for the year ended December 31, 2016 and 2015

 

		Year ended December 31,
		2016				2015
Risk-free interest rates			0.29-1.20	%			0.52-0.65	%
Expected life			0.25-1 year				1 year
Expected dividends			0	%			0	%
Expected volatility			142-356	%			345-348
Diego Pellicer Worldwide, Inc. Common Stock fair value		$	0.20 -0.77			$	$0.75 -$1.24

 

Note 12 – Stockholders’ Equity (Deficit)

 

During the year ended December 31, 2016, the Company issued Mr. Throgmartin 2,428,193 shares of common stock valued at $1,735,455 for services.

 

During the year ended December 31, 2016, the Company issued Mr. Valdes 671,181 shares of common stock valued at $201,354 for services.

 

 

During the year ended December 31, 2016, the Company issued Mr. Norris 238,333 shares of common stock valued at $88,000 for services.

 

During the year ended December 31,2016, the Company issued Mr. Strachan for 128,333 shares of common stock valued at $38,500 for services.

 

During the year ended December 31,2016, the Company issued 2,228,297 shares of common stock to various third parties valued at $1,259,944 for services.

 

During the year ended December 31,2016, the Company issued to various investors 5,393,718 shares of common stock for cash received in amount of $865,491.

 

For the year ended December 31, 2015, the Company issued 37,805,416 shares of common stock as follows

 

●	At the completion of the merger, 29,498,165 restricted common shares of the new Company were issued to the former Diego shareholders as follows:

 

	o	The original Founders of the Company converted their 13,520,000 shares into restricted common shares on a 1:1 basis.
	o	7,743,333 shares were issued to former Diego shareholders.
	o	The Series A and B Preferred shareholders converted 5,841,097 shares into restricted common shares on a 1:1 basis.
	o	Non-employees, which consisted of founding members and others were awarded a total of 2,451,935 shares, at a value of $0.9375 per share.
	o	58,200 shares of common stock were returned as treasury stock.

 

●	4,300,000 shares of common stock issued for services provided.
●	3,881,251 shares issued for $1,164,375.
●	126,000 shares of common stock issued in connection with $126,000 promissory note (see Note 10).

 

For the year ended December 31, 2015, 753,333 Preferred shares were issued and subsequently converted to common shares in the reverse merger. As of December 31, 2015, there were no Preferred shares outstanding. The common shares and the preferred shares, have a par value of $0.000001.

 

As of December 31, 2016, there are currently 1,991,172 warrants outstanding relating to the former Diego shareholders.

 

The following table presents our warrants and embedded conversion features which have no observable market data and are derived using Black-Scholes measured at fair value on a recurring basis, using Level 3 inputs, as of December 31, 2016 and 2015:

 

		For the Year Ended December 31, 2016				For the Year Ended December 31, 2015
Annual dividend yield			0	%			0	%
Expected life (years)			5				1-10
Risk-free interest rate			0.90	%			0.52% – 2.14 %
Expected volatility			266	%			323%-354 %

 

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, January 31, 2015			790,798				0.26				4.03
Granted			1,110,628				1.17				5.18
Balance outstanding, December 31, 2015			1,901,426			$	1.21				4.40
Granted			125,887				-				-
Balance outstanding, December 31, 2016			2,027,313			$	1.18				3.43
Exercisable, December 31, 2016			1,991,172			$	1.18				3.43

 

 

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 December 31, 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 13 – 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 2016 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 December 31, 2016, the aggregate remaining minimal annual lease payments under these operating leases were as follows:

 

2017		$	1,055,472
2018			868,038
2019			346,566
Total		$	2,270,076

 

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:

 

2017		$	87,723
2018			67,365
Total		$	155,088

 

Rent expense for the Company’s operating leases for the year ended December 31, 2016 and 2015 was $1,103,824 and $1,228,028, respectively.

 

Note 14 – Deferred Tax Assets and Income Tax Provision

 

The reconciliation of income tax benefit at the U.S. statutory rate of 34% for the year ended December 31, 2016 and for the year ended December 31, 2015 respectively to the Company’s effective tax rate is as follows:

 

		Year Ended				Year Ended
		December 31, 2016				December 31, 2015
Statutory federal income tax rate			-34	%			-34	%
State income tax, net of federal benefits			-6	%			-6	%
Change in valuation allowance			40	%			40	%
Income tax provision (benefit)			-	%			-	%

 

The benefit for income tax is summarized as follows:

 

		Year Ended December 31, 2016				Year Ended December 31, 2015
Federal
Current		$	--			$	--
Deferred			(2,353,000	)			(5,395,000	)
State
Current			-				--
Deferred			(415,000	)			(952,000	)
Change in valuation allowance			2,769,000				6,347,000
Income tax provision (benefit)		$	-			$	-

 

 

Deferred tax assets (liabilities) consist of the following

 

		Year Ended				Year Ended
		December 31, 2016				December 31, 2015
Net operating loss carry forwards		$	(11,1880,000	)		$	(8,419,000	)
Warrants issued for services			288,000				230,000
Impairment of investment			620,000				164,000
Interest expense on convertible notes			413,000				297,000
Change in fair value of derivative liability			(52,000	)			(54,000	)
Total gross deferred tax asset/liabilities			(10,064,069	)			(7,782,000	)
Valuation allowance			10,064,069				7,782,000
Net deferred taxes		$	-			$	-

 

As of December 31, 2016, the Company had accumulated Federal net operating loss carryovers (“NOLs”) of $25,160,000. These NOLs begin to expire in 2033, and the utilization of NOLs may be subject to limitation under the Internal Revenue Code Section 382 should there be a greater than 50% ownership change as determined under the regulations.

 

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

 

The Company files U.S. Federal and various State tax returns that are subject to audit by tax authorities beginning with the year ended December 31, 2013. The Company’s policy is to classify assessments, if any, for tax and related interest and penalties as tax expense.

 

Note 15 – Subsequent Events

 

Subsequent to the year ended December 31, 2016, the Company issued 161,593 shares of common stock for services of $41,659 and 469,260 shares of common stock for conversion $50,000 of debt.

 

Subsequent to the year ended December 31, 2016 and on April 11, 2017, the Company agreed with one of its lenders to amend the terms of several of its loans. See Note 10, Notes Payable.

 

 

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

 

None.

 

Item 9A. Controls and Procedures.

 

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

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Limitations on the Effectiveness of Controls

 

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

 

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

 

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

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework Company to confirm what framework was used in connection with its evaluation of internal controls over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of the our management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

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

 

 

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

 

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

 

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

 

Attestation report of the registered public accounting firm

 

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

 

Changes in Internal Controls

 

There were no changes in our internal control over financial reporting during the fiscal year ended December 31, 2016 that have affected, or are reasonably likely to affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

None.

 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

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

 

Name		Age		Position
Ron Throgmartin		52		Chief Executive Officer, Director
Christopher Strachan		52		Chief Financial Officer
Alan Valdes		57		Chairman of the Board
Steve Norris		65		Director

 

Business Experience

 

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

 

Officers and Directors

 

Ron Throgmartin joined as CEO of Diego Pellicer Worldwide Inc. in August 2013. In May 2010 Mr. Throgmartin began serving as an independent consultant for a medical marijuana company in Colorado where he managed State licensing, compliance, retail operations and production. From 2003-2008 Mr. Throgmartin was involved with the largest privately owned cattle producers in the United States with operations that encompassed 11 states. In 1989, Mr. Throgmartin started his own commercial development company, where over a span of 20 years he developed over 3 million square feet of commercial projects, working with some of the top rated retailers in the country, including Lowes, Home Depot, HH Gregg, Staples, McDonalds, Steak-n-Shake. From 1981-1989 Mr. Throgmartin worked for his family business HH Gregg, where he served in many roles including Operations and new and store development. Today HH Gregg (HHG) is a publicly owned and operated appliance and electronics retailer covering 16 states, and over $2.4 billion in annual sales. Mr. Throgmartin is a graduate of Ball State University with a Bachelor of Science degree. We believe that Mr. Throgmartin should serve as a member of the board of directors due to the perspective and experience he brings as our COO and his experience in the medical marijuana industry.

 

Christopher Strachan joined as CFO of Diego Pellicer Worldwide Inc. in January 2016. Mr. Strachan is an accomplished CFO, CEO, and manager with 30 years in corporate operations, marketing, securities, finance and 20 years of executive management experience. He has worked largely with developing and startup corporations, where he has honed his skills. For the past five years, Mr. Strachan has served as the President of Helisports LLC, a business development consulting company. In addition, he served as the CEO of Rhodes Architectural Stone from 2011 to 2012, the Director of Marketing and Sales of Glasair Aviation from 2012 to 2014 and the Director of Flight Operations and R&D at RotorWay Helicopters from 2009 to 2011.

 

Alan Valdes has operated as Chairman of the Company since inception Mr. Valdes has over 35 years’ experience on Wall Street. He appears regularly on television giving market comments on such networks as CNN, CNBC, CCTV and many other domestic and foreign media outlets. Since 2013, Mr. Valdes has worked as a senior partner at SilverBear Capital Inc., where he is in charge investment and development projects in the United States and Canada. Additionally, Mr. Valdes is currently a partner at Wall Street Capital Partners, a boutique Wall Street consultant that assists clients in accomplishing what the best and largest firms do within a fraction of the cost and time. He is also a co-founder and partner of the Louisiana International Gulf Terminal project, a $1.5 billion port project, the largest in the United States. He is also currently a board member of the World Air League and the Strang Cancer Prevention Center. Mr. Valdes is a graduate on Seton Hall University, New York University and Harvard University. We believe that Mr. Valdes should serve as a member of the board of directors due to his experience working for the Company since inception and the with early stage corporations, like the Company.

 

Steve Norris was elected a director of the Company in October 2015. Currently serving as Chairman of Stephen Norris Capital Partners, LLC, Mr. Norris has substantial expertise in structuring, negotiating and implementing leveraged buy-outs, cash-flow-based investments and financing strategies in the public and private capital markets. Mr. Norris is one of five co-founders of the Carlyle Group, a major merchant bank based in Washington, D.C. From 1988-1997, Mr. Norris served as Carlyle’s President. He was a principal participant and key advisor in Carlyle’s numerous investments in various public and private companies. While at Carlyle, Mr. Norris, along with other senior members of the Carlyle team, participated in the acquisition, disposition, strategic focusing and financing (in public and private markets) of numerous companies involving several billion dollars of equity capital. Carlyle invested in leveraged buyouts (LBOs), venture capital (particularly telecommunications and wireless companies in the pre-Internet days), and real estate. Today, Carlyle is one of the largest and most successful private equity firms in the world. Prior to co-founding Carlyle, Mr. Norris was a Corporate Vice President of Marriott Corporation in Washington, D.C. He was a principal strategist and advisor for Marriott’s substantial public and private financings, limited partnerships, acquisitions and divestitures from 1981 to mid-1987. In 1992, Mr. Norris was appointed by President George Bush, and confirmed by the U.S. Senate, as one of the five board members of the approximately (at the time) $68 billion Federal Retirement Thrift Investment Board. During his tenure (1992-1995), Mr. Norris successfully advocated for the right of Federal employees to allocate a greater portion of their savings into public equities. Until late 1996, Mr. Norris served on the Advisory Committee of SEAG, Inc., which advises the Saudi Government on economic development and diversification within the Kingdom of Saudi Arabia. Mr. Norris was a Fellow at Yale Law School (1977) and received a B.S. and J.D. (1972, 1975) with honors from the University of Alabama, and an L.L.M. from New York University (1976). Management believes that Mr. Norris’ past experience qualifies him for his position with the Company.

 

 

Family Relationships

 

No family relationship has ever existed between any director, executive officer of the Company, and any person contemplated to become such.

 

Committees

 

The board of directors has no standing committees. However, the Company intends to implement a comprehensive corporate governance program, including establishing various board committees and adopting a Code of Ethics in the future.

 

Section 16(a) of the Securities Exchange Act of 1934

 

As of the date of this report, we are not subject to Section 16(a) of the Securities Exchange Act of 1934.

 

Item 11. Executive Compensation

 

The following table shows for the period ended December 31, 2016, the compensation awarded (earned) or paid by the Company to its named executive officers or acting in a similar capacity as that term is defined in Item 402(a)(2) of Regulation S-K. There are no understandings or agreements regarding compensation that our management will receive after a business combination that is required to be included in this table, or otherwise.

 

Name and Principal Position		Fiscal Year				Salary ($)				Bonus				Option Awards				All Other Compensation				Total ($)
Ron Throgmartin - CEO		2016		Accrued		$	280,125				1,645,833				-				-				1,925,958
				Paid		$	224,458				1,577,000				-				-				1,801,458
		2015		Accrued		$	250,000				-				-				-				250,000
				Paid		$	129,414				-				-				-				129,414
Christopher Strachan - CFO		2016		Accrued		$	67,200				-				-				-				67,200
				Paid		$	63,110				-				-				-				63,110
		2015		Accrued		$	-				-				-				-				-
				Paid		$	-				-				-				-				-

 

Employment and Director Agreements

 

Mr. Ron Throgmartin and Mr. Alan Valdes entered into agreements with identical terms to that of Mr. Anderson, for the position of Chief Executive Officer and Chairman of the Board respectively. Following the Merger, Mr. Throgmartin’s position was changed to Chief Operating Officer. The other terms of his agreement remained in place.

 

On October 4, 2016, Alan Valdes, the Chairman of the Board of Directors of Diego Pellicer Worldwide, Inc. (the “Company”) and Ronald Throgmartin, the Chief Executive Officer and a Director of the Company, executed Deferred Compensation Agreements pursuant to which they agreed to convert 50% of their accrued salaries into restricted Company securities at a conversion rate of $0.30, and 50 % of these accruals into Company promissory notes. The Company promissory notes accrue interest at the rate of eight (8%) percent, per annum, and are payable upon the earlier date of (i) the second anniversary date of the Promissory notes, (ii) the date all current investor notes in the aggregate principal and accrued interest amount of approximately $1,480,000, at June 30, 2016, are paid in full and the Company has achieved gross revenues of at least $3,000,000 over any 12-month period, provided further that the Company shall not make any payments against the Chairman Valdes note or the CEO Throgmartin note until the Company pays the $100,000 in accrued fees due to the independent director of the Company, Steve Norris, in full.

 

In the case of Chairman Alan Valdes, the Company converted 50% ($166,354) of his accrued salary of $332,708 into Company securities and issued Chairman Valdes a promissory note in the outstanding principal amount of $166,355. In addition, Chairman Valdes agreed to amend his employment agreement, lowering his annual salary from $250,000 to $120,000, payable (a) $5,000 in cash, and (b) $5,000, at the executive’s election, in the form of (i) a grant of 16,667 shares of the Company’s restricted common shares (calculated at the rate of $0.30 per share), or (ii) a 5-year stock option to purchase 5,000 restricted common shares at the exercise price of $0.30 per share, or (iii) a 5-year Warrant to purchase 5,000 restricted common shares at the exercise price of $0.30 per share. Chairman Valdes also agreed to eliminate his employment agreement right to have his annual salary increase to $280,000 per year.

 

 

CEO Ron Throgmartin converted 50% ($140,958) of his accrued salary of $281,916 into Company securities and the Company issued to CEO Throgmartin a promissory note in the principal amount of $140,958.

 

Each of Chairman Valdes and CEO Throgmartin has a choice to elect to receive their Company securities from the conversion of 50% of their accrued salaries in the form of a restricted common share grant, at the conversion rate of $0.30 per share, or a stock option or common stock purchase warrant, at the exercise price of $0.30 per underlying restricted common share.

 

In exchange for Mr. Norris’ service on the Board, he received 50,000 warrants with an exercise price of $0.0001. In addition, Mr. Norris currently receives $10,000 per month in exchange for his services on the Board.

 

Option Plan

 

The Company established an Equity Incentive Plan to provide additional incentive to key employees, directors and consultants, and to promote the success of the Company’s business. The terms of each option shall be no more than 10 years from the date of grant at an exercise price equal to the Fair Market Value on the date of the grant.

 

Director Compensation

 

On October 4, 2016 the Board of Directors also adopted a resolution, establishing a payment plan for all members of the Company’s Board of Directors, except Chairman Valdes, fixing the monthly payment at $5,000, payable $2,500 in cash and $2,500 in the form of a restricted common share grant, at the conversion rate of $0.30 per share, or a stock option or common stock purchase warrant, at the exercise price of $0.30 per underlying restricted common share.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth certain information as of March xx, 2017, with respect to the holdings of: (1) each person known to us to be the beneficial owner of more than 5% of our Common Stock; (2) each of our directors, nominees for director and named executive officers; and (3) all directors and executive officers as a group. To the best of our knowledge, each of the persons named in the table below as beneficially owning the shares set forth therein has sole voting power and sole investment power with respect to such shares, unless otherwise indicated.

 

Name of Beneficial Owner and Address (1)		Amount and Nature of Beneficial Ownership of Common Stock				Percent of Common Stock (2)
Douglas Anderson			5,941,800				12.13	%
Alan Valdes (4)			4,571,181				9.33	%
Stephen Norris			288,333				0.59	%
Ron Throgmartin (4)			4,748,193				9.69	%
Christopher Strachan			128,333				0.26	%
All directors and officers as a group (4 people)							32.00	%
5% Shareholders
TMK Holdings LLC (3)			3,840,000				6.53	%
Formar Investments LP			4,252,687				8.68	%
Wall Street Capital Partners LLC (4)			7,020,000				14.33	%

 

(1)	Unless otherwise noted, the address of each beneficial owner is c/o 9030 Seward Park Ave S. #501, Seattle, Washington 98118.
(2)	Based on 49,779,398 shares of Common Stock issued and outstanding as of April 12, 2017.
(3)	TMK Holdings holds 3,200,000 shares of common stock and 640,000 warrants.
(4)	7,020,000 shares of Wall Street Capital Partners LLC are beneficially owned as follows: (a) 3,900,000 by Alan Valdes; (b) 1,160,000 Ron Throgmartin, (c) 910,000 Julie Throgmartin, the wife of Ron Throgmartin, and (d) 1,300,000 by Steve Hubbard.
*	Less than 1 percent

 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

Except as disclosed below, none of the following persons has any direct or indirect material interest in any transaction to which we are a party since our incorporation or in any proposed transaction to which we are proposed to be a party:

 

(A)	Any of our directors or officers;
(B)	Any proposed nominee for election as our director;
(C)	Any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to our Common Stock; or
(D)	Any relative or spouse of any of the foregoing persons, or any relative of such spouse, who has the same house as such person or who is a director or officer of any parent or subsidiary of our company.

 

Director Independence

 

Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:

 

●	the director is, or at any time during the past three years was, an employee of the company;
●	the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);
●	a family member of the director is, or at any time during the past three years was, an executive officer of the company;
●	the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
●	the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit.

 

We do not have any independent directors. We do not have an audit committee, compensation committee or nominating committee. We currently do not have a code of ethics that applies to our officers, employees and director.

 

Item 14. Principal Accounting Fees and Services

 

Audit Fees

 

For the Company’s fiscal years ended December 31, 2016 and 2015, we were billed approximately $35,145 and $15,000 for professional services rendered for the audit and quarterly reviews of our financial statements.

 

Audit Related Fees

 

None.

 

Tax Fees

 

None.

 

All Other Fees

 

None.

 

 

PART IV

 

Item 15. Exhibits and Financial Statement Schedules

 

EXHIBIT NUMBER		DESCRIPTION
3.1		Articles of Incorporation (1)
3.2		By-Laws (1)
10.1		Form of Sponsor Agreement (1)
10.2		Animas Canada Sponsorship Agreement dated April 9, 2012 (2)
31.1		Certification of Principal Executive Officer and Principal Financial Officer, 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 and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document .
101.SCH		XBRL Taxonomy Extension Schema Document .
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

 

(1)	Incorporated by reference to the Company’s Registration Statement on Form S-1 filed on July 1, 2013.
(2)	Incorporated by reference to the Company’s Registration Statement on Form S-1 filed on August 12, 2013.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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: May 3, 2017	By:	/s/ Ron Throgmartin
		Ron Throgmartin
		Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Ron Throgmartin		Chief Executive Officer		May 3, 2017
Ron Throgmartin
/s/ Christopher Strachan		Chief Financial Officer		May 3, 2017
Christopher Strachan