UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
Commission File Number: 333-189731
DIEGO PELLICER WORLDWIDE, INC.
(Name of registrant as specified in its charter)
| Delaware | 33-1223037 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
3435 Ocean Park Blvd., #107-610, Santa Monica, CA 90405
(Address of principal executive offices) (Zip Code)
(516) 900-3799
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated Filer | [ ] | Accelerated Filer | [ ] |
| Non-accelerated Filer | [ ] | Small Reporting Company | [X] |
| (Do not check if smaller reporting company) | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 11, 2015 there were 31,176,585 shares of common stock issued and outstanding.
TABLE OF CONTENTS
| Page | ||
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements. | 4 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 14 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 16 |
| Item 4. | Controls and Procedures. | 16 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings. | 17 |
| Item 1A. | Risk Factors. | 17 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 17 |
| Item 3. | Defaults Upon Senior Securities. | 17 |
| Item 4. | Mine Safety Disclosures. | 17 |
| Item 5. | Other Information. | 17 |
| Item 6. | Exhibits. | 18 |
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.
We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.
These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.
Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.
Merger and Share Exchange Agreement
On March 13, 2015 (the “Closing Date”), Diego Pellicer Worldwide, Inc. (f/k/a Type 1 Media, Inc.) (the “Company” or “PubCo”) 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 shall be 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”).
In connection with the closing of the Merger, on the Closing Date, Jonathan White and Thomas Baxter submitted to the Company a resignation letter pursuant to which they resigned from their positions as officers and members of the Board of Directors of the Company. Messrs. White and Baxter’s resignations were not a result of any disagreements relating to the Company’s operations, policies or practices. On the Closing Date, the board of directors of the Company (the “Board”) and the majority stockholders of the Company (the “Shareholders”) accepted the resignations of Messrs. White and Baxter and, contemporaneously appointed: (i) Philip Gay to serve as the Chief Executive Officer and member of the Board of Directors, (ii) Ron Throgmartin to act as Chief Operating Officer, (iii) Nick Roberts to act as Chief Financial Officer; and (iv) Alan Valdes, Douglas Anderson, and Stephen Norris to serve as members of the Board of Directors.
Subsequent to the Merger and Share Exchange Agreement, on May 22, 2015, Philip Gay resigned as the Chief Executive Officer and as a member of the board of directors, and Nick Roberts resigned as Chief Financial Officer. Mr. Gay and Mr. Roberts resignations were not the result of any disagreement with the Company on any matter relating to its operation, policies (including accounting or financial policies), or practices. The board of directors of the Company appointed Ron Throgmartin, the Company’s Chief Operating Officer as the Chief Executive Officer and David R. Wells as the Company’s Interim Chief Financial Officer.
| 3 |
PART I – FINANCIAL INFORMATION
DIEGO PELLICER WORLDWIDE, INC.
BALANCE SHEETS
(Unaudited)
| September 30, 2015 | December 31, 2014 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and equivalents | $ | 96,156 | $ | 33,101 | ||||
| Accounts receivable | 2,520 | - | ||||||
| Prepaid expenses | 100,000 | 8,946 | ||||||
| Total current assets | 198,676 | 42,047 | ||||||
| Property and Equipment, net | 426,254 | 253,990 | ||||||
| Other Assets: | ||||||||
| Investments, at cost | 525,567 | 525,567 | ||||||
| Security deposits | 173,000 | 173,000 | ||||||
Deferred financing cost | 63,000 | - | ||||||
| Deposits - end of lease | 150,000 | 150,000 | ||||||
| Total other assets | 911,567 | 848,567 | ||||||
| Total assets | $ | 1,536,497 | $ | 1,144,604 | ||||
| Liabilities and Stockholder’s Equity (Deficiency) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expense | $ | 404,242 | $ | 298,939 | ||||
| Accrued expenses - related party | 395,454 | 124,333 | ||||||
| Accrued compensation | 375,000 | 1,176,563 | ||||||
| Deferred revenue | 53,000 | 53,000 | ||||||
| Note Payable | 599,295 | |||||||
| Convertible debt, net of discount | 229,714 | |||||||
| Total current liabilities | 2,056,705 | 1,652,835 | ||||||
| Deferred Revenue | 383,500 | 424,000 | ||||||
| Total liabilities | 2,440,205 | 2,076,835 | ||||||
| Stockholder’s Deficiency | ||||||||
| Series A and B Preferred Stock, $0.0001 par value, 5,000,000 shares authorized, 0 and 5,036,769 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively | - | 5 | ||||||
| Common Stock, $0.000001 par value, 95,000,000 shares authorized, 31,176,585 shares were issued and outstanding as of September 30, 2015, and 13,520,000 shares issued and outstanding as of December 31, 2014 | 32 | 14 | ||||||
| Treasury stock at cost, 0 and 58,200 shares as of September 30, 2015 and December 31, 2014, respectively | - | (87,300 | ) | |||||
| Additional paid-in capital | 13,749,709 | 4,335,816 | ||||||
| Accumulated deficit | (14,653,449 | ) | (5,180,766 | ) | ||||
| Total stockholder’s deficiency | (903,708 | ) | (932,231 | ) | ||||
| Total liabilities and stockholder’s deficiency | $ | 1,536,497 | $ | 1,144,604 | ||||
See accompanying notes to financial statements.
| 4 |
DIEGO PELLICER WORLDWIDE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
| For The Three | For The Three | For The Nine | For The Nine | |||||||||||||
| Months Ended | Months Ended | Months Ended | Months Ended | |||||||||||||
| September 30, 2015 | September 30, 2015 | September 30, 2015 | September 30, 2015 | |||||||||||||
| REVENUES | ||||||||||||||||
| Rental income | $ | 393,319 | $ | - | $ | 1,027,051 | $ | - | ||||||||
| Licensing revenue | 13,500 | 13,500 | 40,500 | 35,067 | ||||||||||||
| Provision for uncollectible rents | (175,369 | ) | - | (809,101 | ) | - | ||||||||||
| Total Revenues | 231,450 | 13,500 | 258,450 | 35,067 | ||||||||||||
| COSTS AND EXPENSES (other income) | ||||||||||||||||
| General and administrative expenses | 637,786 | 497,146 | 8,455,503 | 1,598,756 | ||||||||||||
| Rent expense | 240,685 | 154,705 | 848,538 | 154,705 | ||||||||||||
| Write-off credit line receivable (net of interest income) | - | - | 200,000 | - | ||||||||||||
| Interest Expense | 345,407 | - | 353,092 | |||||||||||||
| Total Costs and Expenses | 1,097,878 | 651,851 | 9,731,133 | 1,753,461 | ||||||||||||
| Loss before provision for taxes | (866,428 | ) | (638,351 | ) | (9,472,683 | ) | (1,718,394 | ) | ||||||||
| Provision for taxes | - | - | - | - | ||||||||||||
| NET LOSS | $ | (866,428 | ) | $ | (638,351 | ) | $ | (9,472,683 | ) | $ | (1,718,394 | ) | ||||
| Loss per share - basic and fully diluted | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.37 | ) | $ | (0.13 | ) | ||||
| Weighted average common shares outstanding - basic and fully diluted | 31,136,600 | 13,520,000 | 25,485,231 | 13,520,000 | ||||||||||||
See accompanying notes to financial statements.
| 5 |
DIEGO PELLICER WORLDWIDE, INC.
STATEMENTS OF CASH FLOW
(Unaudited)
| For The Nine | For The Nine | |||||||
| Months Ended | Months Ended | |||||||
| September 30, 2015 | September 30, 2014 | |||||||
| Operating Activities | ||||||||
| Net Loss | $ | (9,472,683 | ) | $ | (1,718,394 | ) | ||
| Adjustments to reconcile Net Loss to net cash provided by Operations: | ||||||||
| Amortization of deferred revenue | (40,500 | ) | (35,067 | ) | ||||
| Amortization of debt discount | 259,864 | - | ||||||
| Accrued expenses - related party | 271,121 | (17,000 | ) | |||||
| Write-off credit line receivable (includes interest income) | 200,000 | - | ||||||
Amortization of deferred financing cost | 63,000 | - | ||||||
| Non-cash stock compensation | 7,001,160 | - | ||||||
| Changes in operating assets and liabilities: | - | |||||||
| Prepaid Expenses | (91,054 | ) | (14,421 | ) | ||||
| Accounts Receivable | (2,520 | ) | - | |||||
| Accounts Payable | 105,304 | 87,349 | ||||||
| Net cash used in operating activities | (1,706,308 | ) | (1,697,533 | ) | ||||
| Investing Activities | ||||||||
| (Advances to) repayment from related party | - | 54,341 | ||||||
| Acquisition of property and equipment | (172,264 | ) | (39,145 | ) | ||||
| Warrants acquired | - | (525,567 | ) | |||||
| Security deposits | - | (966,647 | ) | |||||
| Advances under line of credit | (200,000 | ) | (70,000 | ) | ||||
| Net cash used in investing activities | (372,264 | ) | (1,547,018 | ) | ||||
| Financing Activities | ||||||||
| Proceeds from sale of Preferred stock and warrants | 1,129,999 | 3,309,472 | ||||||
| Proceed from note payable | 711,628 | - | ||||||
| Proceed from convertible note payable | 300,000 | - | ||||||
| Net cash provided by financing activities | 2,141,627 | 3,309,472 | ||||||
| Net Increase (Decrease) in Cash | 63,055 | 64,921 | ||||||
| Cash - beginning of period | 33,101 | 140,084 | ||||||
| Cash - end of the period | $ | 96,156 | $ | 205,005 | ||||
See accompanying notes to financial statements.
| 6 |
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Basis of presentation
The accompanying financial statements have been prepared in accordance with the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of regulation S-X, and in accordance with such rules and regulations, do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of the Company, the unaudited statements for the interim periods presented include all adjustments that are of a normal and recurring nature and necessary to fairly and consistently present the results for these periods. Results for interim periods are not necessarily indicative of full-year results. For further information, refer to the financial statements and footnotes included in the Company’s Form 8-K filed on March 19, 2015 for the year ended December 31, 2014.
History
On March 13, 2015 (“closing date”), Diego Pellicer Worldwide, Inc. (f/k/a Type 1 Media, Inc.) (the “Company” or “PubCo”) 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 shall be 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, Type 1 had 62,700,000 shares issued and outstanding. The principal owners of the company have 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 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.
Organization
Diego Pellicer Worldwide, Inc. (“the Company”) was incorporated on August 26, 2013, under the laws of the State of Delaware.
The Company acquires and leases real estate to licensed marijuana operators, including but not limited to, providing complete turnkey growing space, processing space, recreational and medical retail sales space and related facilities to licensed marijuana growers, processors, dispensary and recreational store operators. Additionally, the Company plans to explore ancillary opportunities in the regulated marijuana industry as well as offering for wholesale distribution branded non-marijuana clothing and accessories.
The Company does not and will not, until such time as Federal law allows, grow, harvest, process, distribute or sell marijuana or any other substances that violate the laws of the United States of America, or any other country.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
New accounting pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on the Company’s accounting and reporting. The Company believes that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations and cash flows when implemented.
| 7 |
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing transactions and share based payment arrangements, determining the fair value of the warrants received for the licensing agreement, the collectability of accounts receivable and deferred taxes and related valuation allowances.
Certain of our estimates, including evaluating the collectability of accounts receivable, could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. We re-evaluate all of our accounting estimates at least quarterly based on these conditions and record adjustments when necessary.
Fair value of financial instruments
As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of and September 30, 2015 and December 31, 2014. 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
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 FASB Statement of Financial Accounting Standards No. 13, Accounting for Leases (“SFAS 13”), as amended and interpreted, minimum annual rental revenue is recognized in rental revenues on a straight-line basis over the term of the related lease. Rental revenue recognition commences when the tenant takes possession or controls the physical use of the leased space. In order for the tenant to take possession, the leased space must be substantially ready for its intended use. To determine whether the leased space is substantially ready for its intended use, management evaluates whether the Company or the tenant is the owner of tenant improvements for accounting purposes. When management concludes that the Company is the owner of tenant improvements, rental revenue recognition begins when the tenant takes possession of the finished space, which is when such tenant improvements are substantially complete. In certain instances, when management concludes that the Company is not the owner (the tenant is the owner) of tenant improvements, rental revenue recognition begins when the tenant takes possession of or controls the space.
| 8 |
When management concludes that the Company is the owner of tenant improvements, for accounting purposes, management records the cost to construct the tenant improvements as a capital asset. In addition, management records the cost of certain tenant improvements paid for or reimbursed by tenants as capital assets when management concludes that the Company is the owner of such tenant improvements. For these tenant improvements, management records the amount funded or reimbursed by tenants as deferred revenue, which is amortized as additional rental income over the term of the related lease. When management concludes that the tenant is the owner of tenant improvements for accounting purposes, management records the Company’s contribution towards those improvements as a lease incentive, which is amortized as a reduction to rental revenue on a straight-line basis over the term of the lease.
In January 2014, the Company entered into an agreement to license certain intellectual property to a third party. In consideration, the Company received warrants to purchase shares of common stock, which were valued based on an appraisal of the warrants by an independent third party appraiser. The revenue from the licensing agreement, which is initially recorded as deferred revenue, is being amortized over the ten year term of the licensing agreement.
The Company records rents due from the tenants on a current basis. However, as part of the Line of Credit Agreement, the Company has deferred collection of such rents until the tenants receive the proper governmental licenses to begin operation. It is anticipated that such licenses should be obtained prior to the end of 2015. Management has decided to take the approach and reserve these amounts due to the contingency factor and experience with typical delays in governmental action.
Leases
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.
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
We apply 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. We classify 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, we classified our preferred shares in stockholders’ equity. Our preferred shares do not feature any redemption rights within the holders’ control or conditional redemption features not within our control. Accordingly all issuances of preferred stock are presented as a component of consolidated stockholders’ equity (deficit).
Common Stock Purchase Warrants and Other Derivative Financial Instruments
We classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC 815-40 (“Contracts in Entity’s Own Equity”). We classify as assets or liabilities any contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). We assess classification of our common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
| 9 |
Stock-Based Compensation
We recognize compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, we calculate 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, we calculate 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. We consider 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. We present basic loss per share (“EPS”) and diluted EPS on the face of statements of operations. Basic EPS is computed by dividing reported losses by the weighted average shares outstanding. Loss per common share has been computed using the weighted average number of common shares outstanding during the year.
NOTE 3 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. The Company has collected minimal revenue since inception. The Company has incurred losses since inception and its current liabilities exceed its current assets by $1,858,029 and has an accumulated deficit of $14,653,449 as of September 30, 2015.
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 and assist the leaseholder in obtaining the proper licenses in order to conduct their business in growing, processing and retailing cannabis products. Once the licenses are granted, we believe that a steady stream of income will be achieved and the repayment of our advances would begin.
NOTE 4 - REVOLVING CREDIT LINE
A certain tenant who intends to operate out of three separate properties leased to him by the Company, is required to obtain a state operating license to grow, process and sell cannabis products. Until the tenant receives such license, the Company has agreed and entered into a $2,500,000 revolving line of credit with the tenant. This line of credit was 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. Interest is accruing at the annual rate of 20% on the average monthly amount due on this line of credit.
On September 7, 2015, the Company entered into an agreement, and settled total amount owed for $200,000 cash. As of September 30, 2015 and December 31, 2014, the Company has advanced an aggregate of $907,250 and $707,250 respectively towards this line of credit, and has accrued interest of $206,523 and $70,596, respectively. The Company has recorded a reserve for the total advance and accrued interest.
NOTE 5 - 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 3,333,334 shares of Plandai Biotechnology, Inc. (“Plandai”) common stock. This license agreement carries a 10-year term with an exercise price of $0.01 per share. The Company is to obtain certain Trademark rights certified by the government (expected by early summer 2015). On October 10, 2014 the Company filed its Notice of Exercise to execute the warrants to acquire the shares of Plandai, in which the shares have not yet been issued. The sale of such shares has a “leak out” restriction on them requiring that the sale of such shares must reach a certain traded price of $0.50 per share. The Company used a third party appraisal firm to ascertain the fair value of warrants held by the company, which was determined to be $525,567. With the Plandai shares currently trading at $.24 per share, the Company believes there has been no impairment in the value of its investment. The Company accounts for its investment under the cost method of accounting.
NOTE 6 - PROPERTY AND EQUIPMENT
The Company has incurred expenses in the build out of one of its leased properties and acquired a large POD equipment for use in growing operations by lessee. Since the facility and equipment have not yet been put into service, no amortization on the leasehold improvement nor depreciation on the equipment has been provided.
| 10 |
NOTE 7 - OTHER ASSETS
Security deposits
These deposits reflect the deposits on various property leases, most of which call for two months of rental.
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 8 - RELATED PARTY
As of September 30, 2015 and December 31, 2014, the Company has unpaid consulting fees to related parties in the amount of $395454 and $124,333, respectively. For the nine months ended September 30, 2015 and September 30, 2014, the consulting fees expensed were $652,500 and $605,989, respectively to related parties. For the three months ended September 30, 2015 and September 30, 2014, the consulting fees expensed were $217,500 and $200,000, respectively to related parties. These amounts are included in general and administrative expenses in the accompanying financial statements.
NOTE 9 - NOTE PAYABLE
On May 20, 2015, the Company entered into notes in total amount of $450,000 with external parties for use as operating capital. The notes payable agreements require the Company to repay the principal, together with 10% annual interest by the maturity date of November 17, 2015 or the date the Company raises capitals whether through the issuance of debt, equity or any other securities, the Company will not effect a Financing 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 wavier from investor for the convertible note entered into May 29, 2015 (see Note 10). As of September 30, 2015, the outstanding principle balance of the note is $450,000.
On July 8, 2015, the Company entered into notes in total amount of $135,628 with external parties for use as operating capital. The notes payable agreements require the Company to repay the principal, together with 10% annual interest by the maturity date of October 6, 2015 or the date the Company raises capitals whether through the issuance of debt, equity or any other securities, the Company will not effect a Financing 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. As of September 30, 2015, the outstanding principle balance of the note is $135,628. 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 will be accreted to interest expense over the life of the loan. As of September 30, 2015, the outstanding principle balance of the note is $135,628 and $42,263 has been accreted to interest expense for the nine months ended September 30, 2015.
On August 31, 2015, the Company entered into notes in total amount of $126,000 with external parties for use as operating capital. The notes payable agreements require 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. As of September 30, 2015, the outstanding principle balance of the note is $126,000. In connection with the issuance of these notes, the Company issued 126,000 shares of common stock, valued at $252,000, which is recorded as $126,000 debt discount and $126,000 deferred financing cost, amortized over the life of the note. As of September 30, 2015, the outstanding principle balance of the note is $126,000 and $61,967 of debt discount has been amortized to interest expense for the nine months ended September 30, 2015.
NOTE 10 - CONVERTIBLE NOTE PAYABLE
On May 29, 2015, the Company entered into convertible notes in total amount of $300,000 with external 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 for derivative treatment and determined that they do not qualify for derivative treatment. 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 will be accreted to interest expense over the life of the loan. As of September 30, 2015, the outstanding principle balance of the note is $300,000 and $115,634 has been accreted to interest expense for the nine months ended September 30, 2015.
| 11 |
NOTE 11 - STOCKHOLDERS’ EQUITY
The Company has authority to issue up to 100,000,000 shares, of which 5,000,000 shares reserved as Preferred shares and 95,000,000 are designated as Common shares. As of September 30, 2015, there were 7,743,333 unrestricted common shares issued and outstanding, with another 21,632,252 restricted common shares exchanged for the common shares held by the former shareholders of Diego Pellicer Worldwide 1 Inc. (“Diego”), 1,675,000 shares of common stock issued for services provided, and 126,000 shares of common stock issued in connection with $126,000 promissory note (see Note 9). For the nine months ended September 30, 2015, 753,333 Preferred shares were issued and subsequently converted to common shares in the reverse merger. As of September 30, 2015, there were no Preferred shares outstanding. The common shares and the preferred shares, have a par value of $0.000001.
At the completion of the merger, 21,632,252 restricted common shares of the new Company were issued to the former Diego shareholders in varying amounts:
| (a) | The original Founders of the Company converted their 13,520,000 into restricted common shares on a 1:1 basis. | |
| (b) | The Series A and B Preferred shareholders converted 5,841,097 shares into restricted common shares on a 1:1 basis. | |
| (c) | Non-employees, which consisted of founding members and others were awarded a total of 2,329,355 shares, at a value of $0.9375 per share. | |
| (d) | 58,200 shares of common stock were returned to treasure stock. |
There are currently 1,901,426 warrants outstanding relating to the former Diego shareholders in varying amounts:
| (a) | In March 2014, a single large investor was granted 640,000 warrants attached to his initial common stock purchase at an exercise price of $1.24 share, and expire in 5 years from grant date. | |
| (b) | During 2014, several preferred stockholders were granted a total of 150,798 warrants attached to their initial common stock purchase at an exercise price of $1.40 per share, and expire in 5 years from grant date. | |
| (c) | In January 2015, an investor in the Equity Incentive group was granted 200,000 warrants for the purchase of common shares at an exercise price at $0.000001, and expire in 5 years from grant date valued at $900,000. | |
| (d) | In February 2015, certain preferred stockholders were granted 475,000 warrants for the purchase of common shares at an exercise price of $1.50 per share, and expire in 5 years from grant date. | |
| (e) | On May 2015, the Company granted 300,000 warrants to a convertible note holder at an exercise price of $1.50 per share, and expire in 5 years from grant date. The warrant was valued at $914,902 using the Black-Scholes fair value option-pricing model and $225,920 proceed was allocated to warrant, amortized over 180 days.
| |
| (f) | On July 2015, the Company granted 135,628 warrants to a promissory note holder at an exercise price of $1.00 per share, and expire in 5 years from grant date. The warrant was valued at $272,557 using the Black-Scholes fair value option-pricing model and $90,563 proceed was allocated to warrant, amortized over 90 days. |
The Company maintains an Equity Incentive Plan pursuant to which 2,480,000 shares of Common Stock are reserved for issuance thereunder. This Plan was established to award certain founding members, who were instrumental in the development of the Company, as well as key employees, directors and consultants, and to promote the success of the Company’s business. The terms allow for each option to vest immediately, with a term no greater than 10 years from the date of grant, at an exercise price equal to par value at date of the grant. As of September 30, 2015, 1,775,000 shares had been granted, with 200,000 of those shares granted with warrants attached. There remains 705,000 shares available for future grants.
All of the underlying shares issued to stockholders of Diego have been sold or awarded pursuant to SEC Rule 144 or may be sold pursuant to SEC Rule 144 without the requirement for the Company to be in compliance with the current public information required under SEC Rule 144. The restrictive holding period is nine months following the effective date of the Company’s merger into a public shell, and declared effective by the United States Securities and Exchange Commission (the “SEC”).
| 12 |
NOTE 12 - 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 five (5) separate properties under lease in the states of Colorado, Washington and Oregon.
In Colorado, there are three properties leased in 2014 and 2015. Properties were leased for a three (3) to five (5) year period with an option for an additional five (5) years, and carry terms requiring triple net (NNN) conditions. Each of the properties, except for one, have fixed monthly rentals (exclusive of the triple net terms). As of September 30, 2015, the aggregate remaining minimal annual lease payments under these operating leases were as follows:
| 2015 | $ | 199,788 | |||
| 2016 | 1,101,716 | ||||
| 2017 | 1,020,000 | ||||
| 2018 | 888,128 | ||||
| 2019 | 346,566 | ||||
| Total | $ | 3,556,198 |
In Washington, there is only 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, 2015, the aggregate remaining minimal annual lease payments due under these operating leases were as follows:
| 2015 | $ | 20,766 | |||
| 2016 | 84,999 | ||||
| 2017 | 87,723 | ||||
| 2018 | 67,365 | ||||
| Total | $ | 260,853 |
In Oregon, there is only 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, 2015, the aggregate remaining minimal annual lease payments due under these operating leases were as follows:
| 2015 | $ | 23,010 | |||
| 2016 | 90,264 | ||||
| 2017 | 92,040 | ||||
| 2018 | 93,870 | ||||
| 2019 | 64,105 | ||||
| Total | $ | 363,289 |
Rent expense for the Company’s operating leases for the nine months ended September 30, 2015 was $848,538.
NOTE 13 - LEGAL PROCEEDINGS
On May 23, 2014 Diego Pellicer Worldwide Inc. received a subpoena from the United States Department of Justice, represented by the United States Attorney’s Office for the Western District of Washington, requesting the production of the Company’s banking records and documents and records relating to: the structure and organization of the Company; communications between the Company and its affiliates, including Diego Pellicer, Inc., with potential investors; securities offerings; applications submitted by Diego Pellicer, Inc. to the Washington State Liquor Control Board in connection with its application to become a retail seller of cannabis in Washington State; and the Company’s relationship with Plandai Biotechnology.
Based on limited discussions with the Department of Justice, the Company believes this subpoena was issued in order to determine: (i) if the Company is or has been engaged in the production, processing or sale of cannabis; (ii) how the Company is related to Diego Pellicer, Inc.; and (iii) whether investors or potential investors in the Company believed they were investing in a company that would be engaged in the production, processing or sale of cannabis.
The Company believes that it has complied fully with all applicable laws, rules and regulations, and intends to cooperate fully with the government’s investigation.
Depending on the extent to which the Department of Justice pursues this matter, the Company may be required to suspend or cease its operations, which could lead to the possible loss of investors’ entire investment in the Company.
Further, in the event the Company, its officers or its directors are determined to have taken any unlawful action with respect to these matters, such officers and directors may be barred from performing services on behalf of the Company and/or incarcerated, the Company may be required to pay fines, and/or the Company may be required to return investors’ investments in the Company. There can be no guarantee that the Company will have sufficient funds to pay all or any portion of such fines and/or return all or any portion of such investments made in the Company.
NOTE 14 - SUBSEQUENT EVENTS
The Company has evaluated events after the date of these financial statements through the date that these financial statements were issued and there were no material subsequent events, which would require adjustment to or disclosure in the financial statements.
| 13 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS
The following discussion and analysis of the results of operations and financial condition of Diego Pellicer Worldwide, Inc. (the “Company”, “we”, “us” or “our”) should be read in conjunction with the financial statements of Diego Pellicer Worldwide, Inc. and the notes to those financial statements that are included elsewhere in this Form 10-Q. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Business sections in the financial statements and footnotes included in the Company’s Form 8-K filed on March 19, 2015 for the year ended December 31, 2014. Words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements.
Overview
Diego Pellicer Worldwide, Inc. was established on August 26, 2013 to take advantage of legislation allowing for the legalization of cannabis operations in several states, currently including Colorado, Washington and Oregon, and with a number of other states giving consideration to this market as well. It is expected that the industry will operate under stringent regulations within the various state jurisdictions.
Our primary business plan is to lease various properties and develop them in a manner that would allow others to grow, process and retail cannabis and related products. These leases were designed to provide a substantial stream of income. We believe that as laws evolve, it is possible that we will have the opportunity to participate directly in these operations as well.
Results of Operations
Three months ended September 30, 2015 compared to three months ended September 30, 2014
| Three Months Ended | Three Months Ended | Increase (Decrease) | ||||||||||||||
| September 30, 2015 | September 30, 2014 | $ | % | |||||||||||||
| Revenue | ||||||||||||||||
| Rental income | $ | 393,319 | $ | - | $ | 393,319 | * | |||||||||
| Licensing revenue | 13,500 | 13,500 | - | * | ||||||||||||
| Provision for uncollectible rents | (175,369 | ) | - | (175,369 | ) | * | ||||||||||
| Total Revenue | $ | 231,450 | $ | 13,500 | $ | 217,950 | 1614 | % | ||||||||
* Not divisible by zero
Total revenue for the three months ended September 30, 2015 was $231,450, as compared to $13,500 for the three months ended September 30, 2014, represents recognition of income on the Plandai Biotechnology license and rental revenue of $17,950 and a settlement income of $200,000. In October 2014, the Company filed a Notice of Exercise to obtain the shares, and have recorded their value as deferred income. For the quarter ended September 30, 2015, $13,500 was recognized as licensing revenue.
For the three months ended September 30, 2015, rental income of $175,369 derived from the Colorado sub-leases has been reserved as uncollectible from the tenant, pending the latter receiving final approval of licenses from the government to allow them to continue to progress on its growing, processing and retailing facilities.
| Three Months Ended | Three Months Ended | Increase (Decrease) | ||||||||||||||
| September 30, 2015 | September 30, 2014 | $ | % | |||||||||||||
| Costs and expenses (other income) | ||||||||||||||||
| General and administrative expenses | $ | 637,786 | $ | 497,146 | $ | 140,640 | 28 | % | ||||||||
| Rents expense | 240,685 | 154,705 | 85,980 | 56 | % | |||||||||||
| Interest expense | 345,407 | - | 345,407 | * | ||||||||||||
| Write-off credit line receivable (net of interest income) | - | - | - | * | ||||||||||||
| Total costs and expenses | $ | 1,097,878 | $ | 651,851 | $ | 572,027 | 88 | % | ||||||||
* Not divisible by zero / being largely a development company in early 2014, the comparisons may not be meaningful.
| 14 |
General and administrative. Our general and administrative expenses for the three months ended September 30, 2014 were $637,786, compared to $497,146 for the three months ended September 30, 2014. The increase of $140,640, which was mostly attributable to non-employee stock compensation and unusual high costs for professional fees (legal and accounting) related to the reverse merger transaction.
Rent expense. The Company incurred rent expense from five separate facilities leased during 2014. The rent incurred from these properties during the three months ended September 30, 2015 and 2014 was $240,685 and $154,705.
Bad debt expense. Bad debt expense for the three months ended September 30, 2015 was reverse by a collection of $200,000 (see Note 4).
Nine months ended September 30, 2015 compared to nine months ended September 30, 2014
| Nine months Ended | Nine months Ended | Increase (Decrease) | ||||||||||||||
| September 30, 2015 | September 30, 2014 | $ | % | |||||||||||||
| Revenues | ||||||||||||||||
| Rental income | $ | 1,027,051 | $ | - | $ | 1,027,051 | * | |||||||||
| Licensing revenue | 40,500 | 35,067 | 5,433 | 15 | % | |||||||||||
| Provision for uncollectible rents | (809,101 | ) | - | (809,101 | ) | * | ||||||||||
| Total Revenues | $ | 258,450 | $ | 35,067 | $ | 223,383 | 637 | % | ||||||||
* Not divisible by zero
For the nine months ended September 30, 2014 and 2015, the Company had already leased five facilities in Colorado (3), in Washington (1) and in Oregon (1). Only the Colorado facilities have been sublet to date.
Total revenue for the nine months ended September 30, 2015 was $258,450, as compared to $35,067 for the nine months ended September 30, 2014, an increase of $223,383, and represents recognition of income on the Plandai Biotechnology license, rental income of 17,950 and a settlement income of $200,000. 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 3,333,334 warrants with a 10-year term, to purchase Plandai’s common stock. At the time of the Agreement, the publicly traded shares in Plandai were valued at $525,567. In October 2014, the Company filed a Notice of Exercise to obtain the shares, and have recorded their value as deferred income. For the nine months ended September 30, 2015, $40,500 was recognized as licensing revenue.
For the nine months ended September 30, 2015, rental income of $809,101 derived from the Colorado sub-leases has been reserved as uncollectible from the tenant, pending the latter receiving final approval of licenses from the government to allow them to continue to progress on its growing, processing and retailing facilities.
| Nine months Ended | Nine months Ended | Increase (Decrease) | ||||||||||||||
| September 30, 2015 | September 30, 2014 | $ | % | |||||||||||||
| Costs and expenses (other income) | ||||||||||||||||
| General and administrative expenses | $ | 8,455,503 | $ | 1,598,756 | $ | 6,856,747 | 429 | % | ||||||||
| Rents expense | 848,538 | 154,705 | 693,833 | 448 | % | |||||||||||
| Interest expense | 353,092 | - | 353,092 | * | ||||||||||||
| Write-off credit line receivable (net of interest income) | 200,000 | - | 200,000 | * | ||||||||||||
| Total costs and expenses | $ | 9,731,133 | $ | 1,753,461 | $ | 8,103,672 | 462 | % | ||||||||
* Not divisible by zero / being largely a development company in early 2014, the comparisons may not be meaningful.
General and administrative. Our general and administrative expenses for the nine months ended September 30, 2015 were $8,455,503, compared to $1,598,756 for the nine months ended September 30, 2014. The increase of $6,856,747, which was mostly attributable to non-employee stock compensation and unusual high costs for professional fees (legal and accounting) related to the reverse merger transaction.
Rent expense. We incurred rent expense from five separate facilities leased during 2014 and 2015. The rent incurred from these properties during the nine months ended September 30, 2015 and 2014 was $848,538 and 154,705, because the leases started on the third quarter of 2014.
Bad debt expense. Bad debt expense for the nine months ended September 30, 2015 was $200,000, all amount owed against 2.5M line of credit is settled for $200,000. We advanced funds for their operational costs to develop these specific properties, as the tenant awaits final licensing from the state in order to begin full operations.
| 15 |
LIQUIDITY AND CAPITAL RESOURCES
| Nine months Ended | Nine months Ended | |||||||
| September 30, 2015 | September 30, 2014 | |||||||
| Net Cash provide (used) in operating activities | $ | (1,706,308 | ) | $ | (1,697,533 | ) | ||
| Net Cash used in investing activities | (372,264 | ) | (1,547,018 | ) | ||||
| Net Cash used in financing activities | 2,141,627 | 3,309,472 | ||||||
Operating Activities. The net cash used for the nine months ended in September 30, 2015 was $1,706,308, which is primarily attributable to the net loss of $9,472,683. For the nine months ended September 30, 2014, the net cash used of $1,697,533 was also due to a net loss of $1,718,394 and partially offset by an increase in the amount of payables.
Investing Activities. The cash used for investing activities for the nine months ended September 30, 2015 of $372,264 was due primarily to acquisition of property and equipment. For the nine months ended September 30, 2014, cash used for investing activities amounted to $1,547,018, which was essentially related to warrants for the Licensing Agreement with Plandai Biotechnology and security deposit for rental of properties.
Financing Activities. Funds provided from financing activities for the nine months ended September 30, 2015, and September 30, 2014 of $2,141,627 and $3,309,472 respectively, resulting solely from the sale of Preferred stock and warrants.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2015.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES.
We carried out an evaluation required by Rule 13a-15 of the Exchange Act under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” and “internal control over financial reporting” as of the end of the period covered by this Report.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures. Our principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of the end of the period covered by this Annual Report (the “Evaluation Date”), pursuant to Rule 13a-15(b) under the Exchange Act.
Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, due to material weaknesses in our control environment and financial reporting process.
Limitations on the Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, does not expect that our Disclosure Controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the nine months ended September 30, 2015 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| 16 |
With the exception of the subpoena disclosed in Part I, Item 1, Note 13, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As of September 30, 2015, we issued 21,632,252 shares of our common stock to the former stockholders of Diego, pursuant to the terms of the Exchange Agreement, 1,675,000 shares of common stock issued for services provided, and 126,000 shares of common stock issued in connection with $126,000 promissory note (see Note 9).
During three month ended September 30, 2015, we issued 1,675,000 shares of common stock issued for services provided, and 126,000 shares of common stock issued in connection with $126,000 promissory note (see Note 9 of the Financial Footnotes).
On July 2015, the Company granted 135,628 warrants to a promissory note holder at an exercise price of $1.00 per share, and expire in 5 years from grant date. The warrant was valued at $272,557 using the Black-Scholes fair value option-pricing model and $90,563 proceed was allocated to warrant, amortized over 90 days.
The securities issued in these transactions were not registered under the Securities Act, or the securities laws of any state, and were offered and sold pursuant to the exemption from registration under the Securities Act provided by Section4(2) and Regulation D (Rule 506) under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
| 17 |
| Exhibits | ||
| 31.1 | Certification of Principal Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Principal Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1* |
Certification of Principal Executive Officer pursuant to 18U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Principal Financial Officer of the Registrant pursuant to 18U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Schema | |
| 101.CAL | XBRL Taxonomy Calculation Linkbase | |
| 101.DEF | XBRL Taxonomy Definition Linkbase | |
| 101.LAB | XBRL Taxonomy Label Linkbase | |
| 101.PRE | XBRL Taxonomy Presentation Linkbase |
*In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.
| 18 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| DIEGO PELLICER WORLDWIDE, INC. | ||
| Date: November 16, 2015 | By: | /s/ Ron Throgmartin |
| Ron Throgmartin, Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| 19 |
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Ron Throgmartin, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Diego Pellicer Worldwide, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; | |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; | |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
| Date: November 16, 2015 | By: | /s/ Ron Throgmartin |
| Ron Throgmartin, President | ||
| (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, David R. Wells, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Diego Pellicer Worldwide, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; | |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; | |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
| Date: November 16, 2015 | By: | /s/ David R. Wells |
| David R. Wells, Chief Financial Officer | ||
| (Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Diego Pellicer Worldwide, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Ron Throgmartin, President of the Company, certifies, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: November 16, 2015 | By: | /s/ Ron Throgmartin |
| Ron Throgmartin, Chief Executive Officer | ||
| (Principal Executive Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Diego Pellicer Worldwide, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), David R. Wells, Interim Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: November 16, 2015 | By: | /s/ David R. Wells |
| David R. Wells, Chief Financial Officer | ||
| (Principal Financial Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request ..